SCOTUS repose opinion is good news for securities defendants
As of April, the Federal Housing Finance Agency has recovered about $15 billion from 15 big banks that supposedly misrepresented the quality of the mortgage-backed securities they peddled to Fannie Mae and Freddie Mac. FHFA is expecting more to come: The conservator still has cases under way against Goldman Sachs, HSBC, Nomura and Royal Bank of Scotland. The National Credit Union Administration, meanwhile, has netted more than $330 million in settlements with banks that duped since-failed credit unions into buying deficient MBS. NCUA is also still litigating against several other defendants, some of which it sued only last September. When you add in MBS suits by the Federal Deposit Insurance Corporation on behalf of failed banks, there are about four dozen ongoing cases, involving some $200 billion in rotten mortgage-backed securities, brought by congressionally created stewards.
Just about all of those cases are alive only because of so-called “extender statutes” in which Congress lengthened the time frame for the agencies to bring claims under the Securities Act of 1933. (The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 addressed claims by NCUA and FDIC; the Housing and Economic Recovery Act of 2008, which created FHFA, gave it extra time for Fannie and Freddie claims.) As you know if you’re a faithful reader, bank defendants have tried to argue that the nearly identical extender provisions in FIRREA and HERA only addressed the Securities Act’s one-year statute of limitations, not the law’s three-year statute of repose. Unfortunately for them, both the 2nd U.S. Circuit Court of Appeals, in an FHFA case against UBS, and the 10th Circuit, in an NCUA case against Nomura, concluded that when Congress enacted the FIRREA and HERA extender provisions, it intended to lift both time bars, the statutes of limitations and repose.
On Monday, in a case called CTS Corporation v. Waldburger, the U.S. Supreme Court gave the banks that have stuck it out in litigation against FHFA, NCUA and FDIC a glimmer of hope. The Waldburger case presented the question of whether an extender statute in the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 pre-empts the statute of repose under North Carolina tort law. Seven justices, in an opinion by Justice Anthony Kennedy, ruled that it does not. More broadly, though, the court drew a clear line between the statutes of limitation and repose — which is what bank defendants in MBS litigation have long argued for. It’s going to be very interesting to see now what the justices do about Nomura’s pending petition for certiorari in the NCUA case in which 10th Circuit rejected its statute of repose defense. The petition was first scheduled to be considered back in March but the justices haven’t yet issued an order, presumably because they’ve been waiting to rule in Waldburger.
The court’s opinion “offers a baseline recognition of the difference between limitations and repose,” said Timothy Bishop of Mayer Brown, who was not involved in the Waldburger case. According to the opinion, “there is considerable common ground in the policies underlying the two types of statute. But the time periods specified are measured from different points, and the statutes seek to attain different purposes and objectives.” The statute of repose, the opinion said, reflects the legislative judgment that a defendant should be free from liability after a set amount of time, like a discharge in bankruptcy or double jeopardy protection for criminal defendants. Historically, there’s been some confusion between the two sorts of time bars, Kennedy wrote. But fundamentally, the statute of limitations is aimed at plaintiffs, who are obliged to bring their claims in a timely manner, and the statute of repose addresses defendants, who, after a certain period of time, have the right to put the past behind them.
The Waldburger opinion emphasized that there’s no equitable tolling of the statute of repose, referring back to the Supreme Court’s 1991 ruling in Lampf, Pleva v. Gilbertson. That defendant-friendly view of the time limit does not bode well for investors in the In re IndyMac case, which the Supreme Court has already agreed to hear next term. The IndyMac appeal involves a 2nd Circuit holding that the filing of a class action does not toll the statute of repose for Securities Act claims, despite the Supreme Court’s 1974 ruling in American Pipe v. Utah that class actions toll the statute of limitations. David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel, who represents some of the IndyMac investors who want to overturn the 2nd Circuit, contended in a May 21 brief for the Mississippi public employees’ pension fund that the Supreme Court had never identified a substantive right under the statute of repose that is distinct from rights under the statute of limitations. The Waldburger opinion obliterates that argument.
The ruling’s impact on the remaining FHFA, NCUA and FDIC cases doesn’t seem to me to be as clear, but at the very least, it should give bank defendants another shot at arguing that both state and federal claims against them are time-barred. The Supreme Court said in Monday’s Waldburger opinion that courts must look first at statutory language — that’s hardly a surprise — and if that’s not the end of the inquiry, at other evidence of what legislators intended. Before the environmental liability law was passed, a Senate working group issued a report on the issues that specifically noted the potential conflict between state-law statutes of repose and the long latency of environmental injuries. Yet when the federal law was passed, Congress extended only the statute of limitations and did not address the statute of repose. The Waldburger majority read that evidence to show that whatever confusion existed about the distinction between the statutes of limitations and repose at the time the environmental law was enacted, Congress was warned about the statute of repose and didn’t mention it in the law.
Based on Nomura’s reply brief in its Supreme Court appeal of the 10th Circuit’s NCUA ruling, I don’t think the bank defendants have very strong evidence that Congress was specifically on notice about the statute of repose when it passed FIRREA. On the other hand, neither FIRREA nor HERA says in so many words that the laws extend the statute of repose for securities claims — and there’s no doubt that the Securities Act imposes both kinds of time bars. Moreover, the banks in the FHFA litigation are also facing state-law claims, and can argue based on Waldburger that HERA does not pre-empt the time limit on their exposure to state-law liability.
I reached out to defense lawyers in the FHFA and NCUA cases — Jenner & Block for Nomura in the NCUA litigation; Simpson Thacher & Bartlett for RBS and Sullivan & Cromwell for Goldman Sachs in the FHFA litigation — but didn’t hear from them about how they intend to make use of the Waldburger opinion. Mayer Brown’s Bishop, however, said that the decision leaves the government agencies “in trouble.” His prediction: The Supreme Court will hold Nomura’s cert petition until it decides IndyMac.
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