Delaware courts are frequently called upon to address disputes arising under contracts governed by the laws of other states. While Delaware courts will apply the substantive law of the chosen jurisdiction in interpreting the contract unless the Restatement of Conflicts of Laws would require it to apply the law of some other jurisdiction, Delaware statute of limitations rules will apply to such claims regardless of what law applies to the substantive dispute. Several recent decisions of the Court of Chancery demonstrate the sometimes unanticipated consequences that can arise where the Delaware statute of limitations is different than that of the law governing the contract at issue, and in particular, the effect of the Delaware Borrowing Statute (10 Del. C. § 8121) (the “Borrowing Statute”) in such situations. One of these recent decisions, however, also concludes that the recent amendment to Section 8106(c) of the Delaware Code permitting parties to a contract involving at least $100,000 to extend the statute of limitations period for claims under such contract for up to 20 years effectively allows the parties to address this issue contractually.
Delaware’s Borrowing Statute
When a Delaware court considers claims arising under a contract governed by the laws of a foreign jurisdiction, it will not automatically apply Delaware’s statute of limitations to the claim. Instead, the court will first determine whether the contract itself expressly provides a limitations period for the type of claims brought and will generally apply that limitations period to the claims, provided the limitations period does not exceed the otherwise applicable statute of limitations. If the contract does not specify a limitations period, the court will apply Delaware’s choice of law rules, and in particular the Borrowing Statute, to determine which jurisdiction’s statute of limitations is applicable to the claims – Delaware or the jurisdiction where the claims arose. The Borrowing Statute provides, in relevant part:
Where a cause of action arises outside of this State, an action cannot be brought in a court of this State to enforce such cause of action after the expiration of whichever is shorter, the time limited by the law of this State, or the time limited by the law of the state or country where the cause of action arose, for bringing an action upon such cause of action. Where the cause of action originally accrued in favor of a person who at the time of such accrual was a resident of this State, the time limited by the law of this State shall apply.
An exception to the applicability of the Borrowing Statute in determining the appropriate statute of limitations was set forth by the Delaware Supreme Court in Saudi Basic Industries Corp. v. Mobil Yanbu Petrochemical Co., Inc., 866 A.2d 1 (Del. 2005). In Saudi Basic, the plaintiff filed suit in Delaware against its joint venture partners related to claims arising under a joint venture agreement governed by the laws of Saudi Arabia. In response, the defendants filed counterclaims against the plaintiff alleging, among other things, breach of the joint venture agreement. While the defendants’ counterclaims would have been barred as untimely under Delaware’s three-year statute of limitations, they would not have been so barred in Saudi Arabia, which had no statute of limitations applicable to the counterclaims. The literal application of the Borrowing Statute, which applies the shorter statute of limitations to the claims, thus would have applied Delaware’s statute of limitations and the defendants’ counterclaims would have been barred as untimely. The Delaware Supreme Court noted, however, that in most cases the Borrowing Statute seeks to prevent a plaintiff from shopping for the forum with the longer statute of limitations to ensure that its claims will be not barred as untimely. Saudi Basic, however, involved an unusual circumstance where the plaintiff chose to file its lawsuit in Delaware in order to obtain a shorter statute of limitations to prevent the defendants from prevailing on its counterclaims. As a result, the Supreme Court held that application of the Borrowing Statute to bar counterclaims that would have been timely under the laws of Saudi Arabia would subvert the purposes of the Borrowing Statute, and thus allowed the counterclaims to proceed. As demonstrated by the Bear Stearns and TrustCo cases discussed below, the Supreme Court’s ruling in Saudi Basic has led to some uncertainty regarding the application of the Borrowing Statute where claims are brought in Delaware that would be barred by the Delaware statute of limitations, but would not be barred by the statute of limitations of the jurisdiction under whose laws the claim arises.
Bear Stearns Mortgage Funding Trust 2006-SL1 v. EMC Mortgage LLC
In Bear Stearns Mortgage Funding Trust 2006-SL1 v. EMC Mortgage LLC, C.A. No. 7701-VCL (Del. Ch. Jan. 12, 2015), EMC Mortgage LLC, a subsidiary of Bear Stearns Companies LLC), created and sold residential mortgage-backed securities. On July 28, 2006, through a series of transactions, EMC sold 8,477 mortgage-backed loans to Bear Stearns Mortgage Funding Trust 2006-SL1, a common law trust governed by the laws of New York, pursuant to a loan purchase agreement. In 2011, based on the poor performance of the loans, the trustee of the trust sought to examine EMC’s documentation related to the loans. Upon review of the documentation provided by EMC, in December 2011 the trustee notified EMC that certain of the loans did not comply with the representations and warranties made by EMC in the purchase agreement and requested that EMC comply with the remedial procedures set forth in the purchase agreement, which required EMC to, among other things, repurchase the nonconforming loans. While EMC agreed repurchase certain loans, it refused to repurchase most of the loans identified by the trustee as nonconforming.
As a result, on July 16, 2012, almost six years after the closing of the securitization, the trustee filed a complaint in Delaware alleging that EMC intentionally securitized nonconforming loans. Although the complaint was filed almost six years after the closing of the securitization, the defendants did not initially argue that the complaint was untimely. The court inferred that this was because the purchase agreement included an accrual provision that provided that any cause of action arising out of a breach of a representation or warranty made by EMC shall accrue only upon discovery of the breach or notice thereof by the party discovering the breach and EMC’s failure to take remedial action related to the breach. Two years later, however, in April 2014, following two intervening decisions of the New York courts, the defendants moved to dismiss the complaint as untimely. One New York decision held that any breach of representations and warranties related to mortgage-backed loans accrued at closing, and the other decision held that an accrual provision may not lengthen the applicable statute of limitations.
In addressing the defendants’ motion to dismiss the complaint, the court began by considering whether the statute of limitations from New York or Delaware applied to the trustee’s claims. If the New York six-year statute of limitations applied, then the trustee’s claims would be timely regardless of whether the accrual provision extended the statute of limitations. On the other hand, if the Delaware three-year statute of limitations applied and the accrual provision could not extend the statute of limitations, then the trustee’s claims would be barred as untimely.
In its initial ruling on the trustee’s claims, the court held that, based on the plain language of the Borrowing Statute, the Borrowing Statute required application of the Delaware three-year statute of limitations. Upon reargument of the trustee’s claims, however, the court considered whether the exception to the application of the Borrowing Statute set forth in Saudi Basic applied to the trustee’s claims.
The court interpreted the Saudi Basic decision as holding that the Borrowing Statute only applies when a party brings a claim in Delaware, seeking to take advantage of a longer Delaware statute of limitations, which would be time-barred under the laws of the jurisdiction governing the claim. Although the court acknowledged that the application of the Borrowing Statute to determine the statute of limitations applicable to the trustee’s claims better reflected the plain language of the Borrowing Statute, the court held that it was bound to follow the Delaware Supreme Court’s ruling in Saudi Basic. Thus, relying on Saudi Basic, the court found that because the trustee’s claims would not have been barred by the statute of limitations in New York, the Borrowing Statute did not apply to determine the applicable statute of limitations. Instead, Delaware’s general choice of law rules require the application of the “most significant relationship test” as forth in Restatement (Second) of the Conflicts of Law. Applying the test, the court determined that the jurisdiction with the most significant relationship to the trustee’s claims was New York. Because New York’s six-year statute of limitations applies, the trustee’s claims were timely.
In addition, the court found that even if Delaware’s three-year statute of limitations applied to the trustee’s claims under the Borrowing Statute, the trustee’s claims were timely based on two alternative theories. First, the court held that the accrual provision in the purchase agreement operated as a condition precedent to when the claims arose and the statute of limitations began to run. The condition precedent was not met until early 2012 when EMC failed to repurchase all of the loans identified by the trustee as nonconforming, and thus the trustee’s claims were brought within Delaware’s three-year statute of limitations.
Second, the court held that the recent amendments to Section 8106(c) of the Delaware Code, which allow parties to a written agreement to extend the statute of limitations period for up to a maximum of 20 years and became effective on August 1, 2014, is a procedural limitation on remedies and thus under Delaware law is given retrospective construction. The court found that the accrual provision in the contract set forth a specific limitations period for purposes of Section 8106(c). In particular, because the accrual provision did not provide an outside date for the bringing of such claims, the court found that the contract had extended the statute of limitations to the maximum of 20 years permitted under Section 8106(c). In setting forth this alternative holding, the court noted that the recent amendment to Section 8106(c) was “intended to allow parties to contract around Delaware’s otherwise applicable statute of limitations” and provides for a “flexible framework” for defining the limitations period during which claims under the contract can be brought.
TrustCo Bank v. Mathews
In July 2006, TrustCo Bank loaned $9.3 million to StoreSmart of North Ft. Pierce, LLC for the purpose of constructing a facility in Florida, which loan was personally guaranteed by Susan Mathews, a manager and member of StoreSmart. In January 2007, Ms. Mathews transferred certain of her assets to trusts that she established. StoreSmart defaulted on the loan in April 2011, and the foreclosure action filed by TrustCo in Florida state court resulted in an agreed-upon deficiency judgment against StoreSmart and Ms. Mathews of $2.3 million. TrustCo claimed that it discovered the transfers around July 19, 2011. On March 1, 2013, TrustCo filed suit in Delaware alleging, among other things, that the transfers constituted fraudulent transfers.
In addressing the parties’ motion for partial summary judgment on the issue of the applicable statute of limitations to TrustCo’s claims, the court assumed, without deciding, that the transfers were fraudulent and that TrustCo discovered the allegedly fraudulent transfers on July 19, 2011 (even though the defendants credibly argued that TrustCo had notice of the transfers as early as June 2010). TrustCo Bank v. Mathews, C.A. No. 8374-VCP (Del. Ch. Jan. 22, 2015). TrustCo argued that its claims were subject to the New York statute of limitations, which provides that a claim for fraudulent transfer is timely if it is brought by the later of six years from the date the cause of action accrued, or two years from the date the plaintiff discovered the fraud or with reasonable diligence could have discovered it. The defendants argued that the claims were subject to the Delaware statute of limitations, which provides that a claim for fraudulent transfer is timely if it is brought by the later of four years after the date the transfer was made, or one year from the date the plaintiff discovered the transfer or reasonably could have discovered the transfer. Because TrustCo filed its initial complaint more than six years after the transfer, its claims would only be timely under the New York statute of limitations, assuming a July 19, 2011, discovery date.
Because the statutes of limitations for a fraudulent transfer claim are different in New York and Delaware, the court began its analysis with the Borrowing Statute. Applying the plain language of the Borrowing Statute, the court noted that Delaware’s shorter statute of limitations should be applicable to TrustCo’s claims. The court further noted, however, that the Delaware Supreme Court held in Saudi Basic that, notwithstanding the plain language of the Borrowing Statute, there are certain circumstances where the Borrowing Statute does not apply.
The court acknowledged that the Saudi Basic decision has led to some uncertainty regarding the applicability of the Borrowing Statute. While recognizing that some decisions, such as Bear Stearns, broadly interpreted the holding of Saudi Basic to conclude that the Borrowing Statute only applies when a party seeks to take advantage of a longer statute of limitations in Delaware in order to bring a claim that would be barred in the jurisdiction governing the claim, the court held that the plain and unambiguous language employed by the legislature in the Borrowing Statute should be afforded appropriate deference, and thus the Saudi Basic decision should not be expanded beyond its limited holding. That limited holding, according to the court, was a result of the Supreme Court’s conclusion that application of the Borrowing Statute to the specific and “unusual” facts at issue in the case would have caused “an absurd and unjust result” whereby application of the Borrowing Statute would have allowed the plaintiff, who chose to bring claims governed by the laws of Saudi Arabia in Delaware, to prevail on the defendant’s counterclaims based on application of Delaware’s three-year statute of limitations to the counterclaims. Thus, the court in TrustCo found that the Borrowing Statute presumptively applies to determine the applicable statute of limitations whenever the claim arises out of state and only “where an absurd outcome or a result that subverts the Borrowing Statute’s fundamental purpose otherwise would occur, will a party be able to avoid the Borrowing Statute’s unambiguous language.”
In order to determine whether the Borrowing Statute applied to TrustCo’s claims, the court considered whether the cause of action arose outside of Delaware using the “most significant relationship test” set forth in the Restatement (Second) of Conflict of Laws. Based on the fact that, among other things, the conduct causing the injury occurred mostly in Florida and the parties’ relationship centered in Florida, the court found that Florida had the most significant relationship to TrustCo’s claims. Because Florida and Delaware have the same statute of limitations, the Borrowing Statute did not apply. Applying Florida’s four-year statute of limitations, TrustCo claims would be barred as untimely. In the alternative, the court noted that, even if New York had the most significant relationship to the claims, there was nothing in the facts for the court to conclude that application of the Borrowing Statute would cause an absurd or unjust result. In that case, the Borrowing Statute would apply to determine whether the New York or Delaware statute of limitations applied and would result in the application of Delaware’s four-year statute of limitations. Therefore, even under the alternative scenario, TrustCo’s claims would be barred as untimely.
The Bear Stearns and TrustCo cases demonstrate the uncertainty that can arise in determining the applicable statute of limitations when a Delaware court is asked to consider contractual claims that have arisen under the laws of a foreign jurisdiction. The Bear Stearns case further demonstrates that contracting parties can avoid these issues by utilizing the “flexible framework” set forth in the recently amended Section 8106(c) of the Delaware Code by including a provision in the contract that provides for a specific limitations period of up to 20 years for claims that arise under the contract. In drafting such a provision, the parties should provide for a specific period of time, preferably in years, months, or days (up to 20 years) during which claims arising under the agreement must be brought, rather than referencing an “indefinite” period, “x” months from the expiration of the applicable statute of limitations, or other adjectives to describe the applicable limitations period that may be susceptible to more than one meaning. As long as the period chosen does not exceed 20 years or the applicable statute of limitations of the jurisdiction whose law governs the contract, there should be no interpretive issues for a court to decide if a time period in years, months, or days is chosen.
While these recent cases demonstrate the unanticipated issues that can arise when Delaware courts are asked to consider contractual claims that have arisen under the law of another jurisdiction, a recent amendment to the Delaware Code has provided a way for contracting parties to address those issues at the time of contracting. By agreeing up front to the applicable limitations periods for claims arising under the contract, contracting parties can avoid uncertainties that may arise concerning the applicable statute of limitations in the event of future claims brought under the contract.