Delaware Court of Chancery Holds Newly-Enacted 20-Year Statute of Limitations for Certain Contracts Applies Retroactively

In 2014, Section 8106(c) of Title 10 of the Delaware Code was enacted to permit contracting parties to specify a contractual limitations period of up to 20 years in written contracts involving at least $100,000. In the absence of such specification, a three-year statute of limitations applies to most contract claims. In the first judicial opinion to interpret the new statute, Bear Stearns Mortgage Funding Trust 2006-SL1 v. EMC Mortgage LLC, the Delaware Court of Chancery held that Section 8106(c) applies retroactively to contracts entered into before the statute took effect on August 1, 2014. The Court also provided important guidance regarding claim accrual and the application of Delaware’s borrowing statute.

Background

Bear Stearns involved allegations that EMC, which had sold mortgage loans to a securitization trust in 2006, breached its obligations under the purchase agreement. In relevant part, the purchase agreement provided that:

• The representations and warranties as to the loans survived closing;

• The trust’s sole remedy in connection with a breach of the loan representations was EMC’s obligation to cure the breach, repurchase the non-conforming loans, or substitute new loans (the “Repurchase Provision”);

• Causes of action for breach of the loan representations would accrue upon (i) discovery of the breach and (ii) failure by EMC to perform under the Repurchase Provision (the “Accrual Provision”); and

• The agreement would be governed by New York law.

After EMC failed to repurchase the non-conforming loans in 2011, the trust commenced litigation in Delaware in July 2012.

Retroactive Application of Section 8106(c)

Most significantly, the Court held that, assuming Delaware’s statute of limitations governed the breach of contract claims, Section 8106(c) applies to the agreement, despite the fact that Section 8106(c) took effect eight years after the contract was signed. Because “a modification of a limitations period is a procedural matter,” “[o]rdinary presumptions against retroactivity do not apply, and the modification applies to ongoing suits absent a showing of manifest injustice.” According to the Court, retroactive application was not unjust in this case because the complaint was filed within New York’s six-year limitations period, the case was pending when the statute took effect so it did not revive extinguished claims, and EMC contractually agreed that the Repurchase Provision and Accrual Provision were binding.

Applying Section 8106(c) to the agreement, the Court reasoned that the Accrual Provision’s deferral of accrual of a cause of action until a breach was discovered and EMC refused to take remedial action “constituted a period of time defined by reference to the occurrence of some other event or action that is a sufficient 'period specified' for purpose of Section 8106(c).” Thus, the Accrual Provision “operated to extend the statute of limitations to the statutory maximum of twenty years.”

Alternative Bases for Denying EMC’s Motion to Dismiss

In discussing two alternative bases for denying EMC’s motion to dismiss, the Court also provided important guidance regarding claim accrual and the application of Delaware’s borrowing statute.

Claim Accrual

Regarding claim accrual, the Court observed that a breach of representation ordinarily accrues at closing, but noted that numerous Delaware decisions treat “a contractual accrual provision as a condition precedent to a plaintiff’s ability to sue such that the statute of limitations does not begin to run until the condition precedent is met.” Thus, the Accrual Provision “postponed the point when a claim arose and the statute of limitations would begin to run” until EMC failed to comply with the Repurchase Provision, after which the trust timely filed its complaint. Notwithstanding the Court’s favorable treatment of the Accrual Provision here, the full extent to which parties can rely on a negotiated provision to define for themselves when a cause of action accrues without running afoul of the prohibition against extending statutes of limitations remains to be seen.

Borrowing Statute

As to the borrowing statute, the Court relied on Delaware Supreme Court precedent to find that the statute’s intent to deter forum shopping makes it applicable only “when a party seeks to take advantage of a longer Delaware statute of limitations to bring a claim that would be time-barred under the law of the jurisdiction governing the claim.” Because the trust brought its claim within New York’s longer limitations period (six years), the borrowing statute did not apply to require application of Delaware’s shorter limitations period and the Court instead applied New York’s statutory period. Interestingly, in reaching this conclusion, the Court determined that New York’s six year statute of limitations applied to the breach of contract claims based on the Court’s application of the “most significant relationship” test from the Restatement; the Court did not treat the statute of limitations as procedural and thus governed by the law of the forum as several Delaware cases have done. In this regard, however, we note that in cases where Section 8106(c) applies, it expressly takes precedence over the borrowing statute.

Takeaways

Bear Stearns reflects the first judicial application of Section 8106(c), which was intended for private M&A agreements that often provide for representation and warranty survival periods in excess of three years. The Bear Stearns Court’s discussion of Section 8106(c), accrual concepts and the borrowing statute highlights the many issues that drafters must consider when negotiating complex commercial contracts.

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