Opinion

Alison Frankel

The last, best chance for besieged bank defendants

By Alison Frankel
July 10, 2014

Goldman Sachs has a little more than two months for a miracle to happen.

Otherwise, on Sept. 29, the bank will go to trial in federal court in Manhattan against the Federal Housing Finance Agency to defend claims that Goldman deceived Fannie Mae and Freddie Mac about the quality of the mortgage-backed securities it was peddling before the financial crash.

For defendants in the FHFA litigation, trying to explain to jurors — and to a deeply skeptical judge — that you’re not responsible for woefully deficient securities is so unappealing a prospect that 15 other big banks have coughed up a collective $15 billion to Fannie and Freddie’s conservator. Only Goldman and three other banks have stuck out three years of lopsided litigation in which U.S. District Judge Denise Cote has consistently ruled against them on matters large and small.

These four holdouts have only one possible advantage over the defendants that have already capitulated: the U.S. Supreme Court’s ruling last month in an environmental case called CTS Corporation v. Waldburger.

The day that decision came down, I pointed out that it was good news for securities defendants because it cast doubt on the timeliness of fraud claims by the Federal Housing Finance Agency, the Federal Deposit Insurance Corporation and the National Credit Union Administration.

Waldburger addressed whether Congress extended state-law statutes of repose along with statutes of limitations when it passed a federal environmental cleanup law in 1980. (Both of those set time limits for when injury suits must be filed, but the statute of limitations depends on such factors as when the injury was discovered and whether the parties have agreed to stop the clock. The statute of repose, by contrast, is generally longer but sets an absolute time bar on a defendant’s potential liability.)

The majority’s opinion in Waldburger concluded that by 1980, Congress understood the difference between the two time limits but only specified an extension of one, the statute of limitations. The same reasoning, I said last month, could also apply to provisions extending time limits for securities suits by FDIC, NCUA and FHFA. So-called extender provisions in FIRREA, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (which applies to FDIC and NCUA claims) and HERA, the Housing and Economic Recovery Act of 2008 (which established FHFA) specifically mentioned the statute of limitations but not the statute of repose — just like the environmental law the Supreme Court considered in Waldburger.

Since Waldburger came down on June 9, there’s been quite a lot of action. The Supreme Court granted a motion for certiorari by Nomura in an NCUA case and instructed the 10th U.S. Circuit Court of Appeals to reconsider, in light of Waldburger, its ruling that FIRREA extended the statute of repose. The appeals court has expedited the case, ordering both sides to submit new briefs this week on how the justices’ analysis in Waldburger should guide its interpretation of FIRREA’s extender language.

Last week, meanwhile, in the FDIC’s suit as receiver for the failed Colonial Bank, JPMorgan Chase, Citigroup, Credit Suisse, Deutsche Bank and several other bank defendants moved for summary judgment based on Waldburger. They argued that the Supreme Court’s opinion means the FIRREA extender provision is limited to the statute of limitations — and that the justices probably agreed with that argument or they wouldn’t have remanded the Nomura case to the 10th Circuit.

In the FHFA litigation, the remaining bank defendants contended in a June 20 brief (incorporated by Goldman in a separate filing) that if Congress understood the distinction between the statutes of limitations and repose in 1980, when it passed the law at issue in Waldburger, then it certainly was aware in 2008, when it enacted the housing recovery law establishing FHFA, that the two time limits are different. Under Waldburger, according to the banks, Congress’s failure explicitly to extend the statute of repose in HERA means that FHFA’s securities suits fall outside the time limits.

If you’ve been following the FHFA litigation, you know that the banks have already tried — and failed – to persuade Judge Cote that FHFA’s claims are barred by the statute of repose. UBS, the very first bank sued by Fannie and Freddie’s conservator, raised that defense back in 2012. Judge Cote rejected it, ruling that when Congress passed HERA, it meant to give FHFA broad power to pursue claims against banks that supposedly wronged Fannie and Freddie. Even though HERA’s extender language didn’t specifically mention the statute of repose, Cote said, the law’s extension of the statute of limitations should be understood to cover both sorts of time bars.

In April 2013, Cote was affirmed by the 2nd Circuit. With a trial date closing in, UBS settled with FHFA. The other banks asked the Supreme Court to review the 2nd Circuit decision, but the justices denied cert.

In their post-Waldburger briefs, the remaining bank defendants (RBS, HSBC and Nomura, in addition to Goldman) asked Judge Cote to grant them summary judgment and toss FHFA’s claims. Even if she’s not willing to go that far, the bank briefs said, she should ask the 2nd Circuit to reconsider its previous ruling in UBS’s statute of repose appeal.

In a response brief filed Wednesday night, FHFA’s lawyers at Quinn Emanuel Urquhart & Sullivan and Kasowitz, Benson, Torres & Friedman said there are several critical distinctions between the 1980 law at issue in the Waldburger case and the HERA extender statute. One of the express purposes of the 2008 law, for instance, was to establish FHFA and give it the power to investigate and prosecute securities claims.

So according to FHFA, it wouldn’t have made sense for Congress to have enacted the law — and taken care to extend the statute of limitations — if it had intended to limit FHFA’s time under the statute of repose. (Moreover, the brief said, the Supreme Court was persuaded in Waldburger that Congress was thinking about the two different time bars because a committee report explicitly cited the statute of repose; there’s no similar indication in the HERA legislative record that lawmakers distinguished between the statutes of repose and limitations.)

FHFA claimed that Waldburger actually supports previous statute of repose rulings by Cote and the 2nd Circuit. “The Supreme Court agreed with the 2nd Circuit that Congress has used ‘statute of limitations’ to encompass periods of repose, and that this language must therefore be interpreted in the context of the specific statute in which it appears,” the brief said. “The 2nd Circuit performed that statute-specific analysis (as did this court) when it deemed FHFA’s claims timely.”

It seems to me like more than a bit of a stretch to argue that Waldburger — which counsels a strict reading of the text of the extender statute at issue in the case — somehow also calls for a broad examination of the law’s intentions. But then again, FHFA lawyers Philippe Selendy and Kathleen Sullivan of Quinn Emanuel could probably talk a snowman into a beach vacation. And Judge Cote has certainly been a receptive audience for FHFA’s arguments in this litigation.

Goldman, in other words, is going to need the aforementioned miracle to escape unscathed from FHFA’s claims before its September trial date: a change of heart from Cote; or rulings in the FDIC or NCUA cases that prompt the 2nd Circuit to issue a stay. Those eventualities are all extremely unlikely, but at least they’re within the remote realm of post-Waldburger possibility.

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