UBS ‘likely’ to settle with FHFA before January trial: bank co-defendants

By Alison Frankel
July 17, 2013

Remember UBS’s attempt to play what it considered a get-out-of-jail-free card in the megabillions litigation over mortgage-backed securities UBS and more than a dozen other banks sold to Fannie Mae and Freddie Mac? UBS’s lawyers at Skadden, Arps, Slate, Meagher & Flom came up with an argument that could have decimated claims against all of the banks: When Congress passed the Housing and Economic Recovery Act of 2008 and established the Federal Housing Finance Agency as a conservator for Fannie Mae and Freddie Mac, UBS said, lawmakers explicitly extended the one-year statute of limitations on federal securities claims – but neglected to extend, or even mention, the three-year statute of repose. UBS argued that FHFA’s suits, which in the aggregate asserted claims on more than $300 billion in MBS, were untimely because they were filed after the statute of repose expired.

The judge overseeing almost all of the FHFA MBS suits, U.S. District Judge Denise Cote, denied UBS’s motion to dismiss in 2012. The bank, she said, was splitting hairs: Congress clearly intended to give FHFA a chance to evaluate its potential causes of action and believed it was doing so when it extended the statute of limitations. The judge subsequently applied the same reasoning to other banks’ motions to dismiss FHFA suits on timeliness grounds, but she also granted UBS permission to take the issue to the 2nd Circuit Court of Appeals. Cote said that whichever way the appeals court ruled, its decision would help resolve the FHFA litigation. If she were reversed, FHFA’s claims would be drastically narrowed; if she were upheld, the banks would be more inclined to settle.

In April, as you probably recall, a three-judge 2nd Circuit panel affirmed Judge Cote. In the appeal, UBS stood alone among the FHFA bank defendants as a party, though the other banks filed an amicus brief endorsing UBS’s position that Congress failed to extend the statute of repose. Since the 2nd Circuit’s ruling, UBS and FHFA have been engaged in whirlwind discovery, which is scheduled to close in September. Judge Cote has set an inviolable January trial date for FHFA’s case against UBS.

That looming trial date has cause the other FHFA bank defendants to worry that UBS will settle with the conservator before the statute of repose issue hits the U.S. Supreme Court’s docket. In an emergency petition filed Monday at the 2nd Circuit (and first spotted by my Reuters colleague Karen Freifeld), the other banks with cases before Judge Cote asked the appeals court to permit them to intervene in the UBS case for the purposes of submitting a certiorari petition to the Supreme Court. The deadline for that petition is Sept. 3, the banks wrote. They want to intervene “to ensure that even if – as is likely – the UBS action is resolved before a petition is filed or before consideration of that case by the Supreme Court, (they) can still seek timely review.”

I thought it was rather bold of UBS’s fellow defendants to predict its imminent FHFA settlement, so I emailed UBS lawyers at Skadden for a reaction. Through a firm representative, they declined to comment. I also reached out to FHFA counsel at Quinn Emanuel Urquhart & Sullivan and to Barclays’ counsel at Sullivan & Cromwell, who took the lead on the other banks’ emergency petition at the 2nd Circuit. They didn’t get back to me.

And what about the banks’ chance of persuading the Supreme Court to take up the statute of repose question? It may well depend on the timing and outcome of a ruling by the 10th Circuit in a multibank appeal in a case involving MBS securities claims by the National Credit Union Administration, which oversees failed credit unions. Like the law that created FHFA, the law establishing NCUA extended the statute of limitations for securities claims but is silent on the statute of repose. (Congress used virtually identical language in the two laws’ so-called “extender” provisions.) District courts in Kansas, where many of the NCUA’s cases have been filed, have agreed with Judge Cote on congressional intent and denied motions to dismiss based on timeliness. Defendants in several cases have appealed. Nomura counsel Barry Levenstam of Jenner & Block and NCUA counsel David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel argued the issue before a three-judge 10th Circuit panel on May 8. If the appeals court issues a decision at odds with the 2nd Circuit’s before the end of the summer, banks in the FHFA cases will have a much stronger argument for Supreme Court review.

Meanwhile, as I’ve reported, there’s already a circuit split on a different statute of repose issue that may be of broader significance. The 2nd Circuit ruled last month in yet another MBS case that the statute of repose, unlike the statute of limitations, is not tolled by the filing of a class action under the Supreme Court’s 1974 ruling in American Pipe v. Utah. That decision is contrary to a 13-year-old holding from the 10th Circuit, and plaintiffs lawyers on the losing side of the 2nd Circuit decision told me that “this is too important an issue” to let the ruling go unchallenged.

My guess is that the Supreme Court – which sidestepped the complexities of standing in MBS class actions when it denied cert earlier this year in NECA-IBEW v. Goldman Sachs, despite defendants’ arguments about the high stakes of MBS litigation – is likelier to take up the American Pipe tolling question than the narrower question of statutory interpretation in the FHFA and NCUA cases. But I’m certainly rooting for the 2nd Circuit to grant the FHFA defendants permission to intervene in the UBS case and file a cert petition. I can’t wait to see what the defendants have to say.

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