In MBS litigation, NCUA is FHFA’s Mini Me
The next time Congress creates a conservator for failed government-backed entities such as credit unions and mortgage finance outfits, it would sure be nice if lawmakers were specific about just how long the bailout groups have to bring litigation to recover for their members’ losses. You already know about the statute of repose question looming over the Federal Housing Finance Authority’s cases against 18 banks that sold supposedly deficient mortgage-backed securities to Fannie Mae and Freddie Mac. With the 2nd Circuit Court of Appeals now weighing UBS’s Hail Mary argument that FHFA’s suits are time-barred under the statute of repose, which was not explicitly extended in the law creating the FHFA, most of the other banks in the litigation are waiting for an appellate ruling before they buckle down and settle the conservator’s billions of dollars of claims. (The exception, as my Reuters colleague Nate Raymond was the first to report, is GE, which had relatively small exposure to FHFA and settled last month.)
You may not have been aware that the same congressional language that created a wedge for defendants in the FHFA cases has also led to tussling in a series of suits against MBS sponsors and arrangers by the National Credit Union Administration, which oversees failed credit unions. Those institutions weren’t MBS investors on the order of Fannie Mae and Freddie Mac – no one was – but NCUA’s lawyers at Kellogg, Huber, Hansen, Todd, Evans & Figel and Korein Tillery have quietly filed suits against more than a dozen banks that sold mortgage-backed securities to failed credit unions. NCUA touts itself as the “the first federal regulatory agency for depository institutions to recover losses from investments in faulty securities on behalf of failed financial institutions,” citing the $170 million in MBS settlements it has reached with Deutsche Bank, Citigroup and HSBC.
But there’s a little something standing in the way of additional NCUA settlements: that pesky statute of repose, which Congress didn’t explicitly address in language that extended the NCUA’s time to sue on behalf of its members. The so-called “extender statute” of the Federal Credit Union Act includes a specific extension of the statute of limitations, and the credit union authority has fared well in federal court in Kansas with arguments that Congress clearly intended the law to apply also to the statute of repose. Defendants argue otherwise – JPMorgan’s lawyers at Cravath, Swaine & Moore asserted this week in a motion to dismiss the NCUA’s case against the bank in Kansas that, among other things, the credit union overseer’s case is time-barred – but Kansas federal judges have resisted that argument.
Defendants in the NCUA cases nevertheless have their own Hail Mary appeal under way. As the JPMorgan briefpoints out, a statute-of-repose appeal that exactly parallels the FHFA case at the 2nd Circuit is now before the 10th Circuit in an NCUA case. A big group of defendants led by Nomura, RBS and Novastar are arguing the credit union administrator’s suit falls outside the statute of repose for federal securities claims. They assert that there’s no reference to the statute of repose in the extender statute, which doesn’t even refer to federal securities claims but only to state-law tort and contract claims.
At least one federal judge has agreed with the defendants. U.S. District Judge George Wu of Los Angeles has twice found that the language of the Federal Credit Union Act’s extender statute does not encompass the statute of repose. “The statute plainly refers to the statutes of limitation. It makes no mention whatsoever of statutes of repose,” Wu wrote last March in a ruling in the NCUA’s case against Goldman Sachs. “If Congress wanted to alleviate that effect it could very easily have done so clearly.” (Wu also chastised Congress for passing an “exceedingly poorly-worded statute” that has created so much confusion about time bars for federal securities claims.)
UBS’s statute-of-repose appeal in the FHFA litigation at the 2nd Circuit is several months ahead of the banks’ appeal to the 10th Circuit in the NCUA cases. (The NCUA’s deadline to file its brief is in March.) Presumably the 2nd Circuit’s analysis of extender language that’s almost identical with regard to both government regulators will inform the 10th Circuit. But there’s no guarantee the two appeals courts will agree.
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