Banks try, try again at SCOTUS for time limits on regulators’ suits

November 11, 2014

Last August, when the 10th U.S. Circuit Court of Appeals affirmed its previous decision that the National Credit Union Administration is not barred from proceeding with a suit alleging that Nomura duped a failed credit union into buying misrepresented mortgage-backed securities, Nomura wasn’t the only bank crushed by the ruling.

If you recall, the 10th Circuit took a second look at the case at the direction of the U.S. Supreme Court, which wanted the appeals court to reconsider its holding that when Congress extended the statute of limitations for NCUA to bring securities suits, it implicitly extended the statute of repose as well. In a decision last term involving an extender provision in an environmental law, CTS Corp v. Waldburger, the justices clearly distinguished between the statute of limitations, which begins to run when the alleged injury occurs, and the related-but-different statute of repose, which dates to a defendant’s last culpable act. (I’m pulling those thumbnail descriptions from the Waldburger opinion.)

When the Supreme Court remanded the Nomura case to the 10th Circuit for reconsideration in light of Waldburger, banks that had been sued by the Federal Housing Finance Agency and the Federal Deposit Insurance Corporation cheered right alongside defendants in NCUA cases. The statutory language that extended the time for all three agencies to bring securities suits on behalf of the failed institutions they oversee is just about the same – and none of the extender statutes explicitly addresses the statute of repose. As I’ve explained, defendants in MBS suits by all three regulators hoped that the 10th Circuit would rule that under the Supreme Court’s decision in Waldburger, none of the extender statutes grant the agencies extra time from the date the securities were issued.

The 10th Circuit decision dashed those hopes – but banks and business groups are now urging the Supreme Court to come to their rescue. Nomura’s lawyers at Jenner & Block filed a petition for certiorari last month. Last week, the bid for Supreme Court review received amicus support from UBS and Morgan Stanley, the Securities Industry and Financial Markets Association and the Financial Markets Roundtable, and the Business Roundtable. All of them argue that the 10th Circuit ignored the Supreme Court’s precedent in Waldburger, to the detriment of present and future securities defendants.

The banks, which are represented by Skadden Arps Slate Meagher & Flom and Davis Polk & Wardwell, made an interesting argument that the 10th Circuit’s interpretation of the statute of repose will discourage securities dealers from engaging in transactions with all but the healthiest counterparties. Financial institutions, the brief said, need to be able to estimate their liability exposure, and the long tail of potential liability to federal regulators that take over failed banks, credit unions and other government-sponsored entities impedes those estimates.

The likeliest reason for the Supreme Court to take the case, though, is that two trial courts have reached different conclusions than the 10th Circuit about Waldburger and the statute of repose. On Aug. 18, U.S. District Judge Sam Sparks of Austin dismissed an FDIC suit involving more than $2 billion in MBS underwritten by Goldman Sachs and Deutsche Bank, finding that the FDIC was too late under the statute of repose. And on Sept. 2, U.S. District Judge Louis Stanton of Manhattan tossed FDIC claims against JPMorgan Chase and other defendants, finding that the FDIC’s extender law did not apply to the statute of repose. Stanton’s ruling was especially notable because the 2nd U.S. Circuit Court of Appeals has held that similar language in the law that created FHFA extended the statute of repose. Stanton did not opine that the 2nd Circuit decision is no longer good law after Waldburger, but did base his analysis entirely on the Supreme Court’s decision.

Is that enough uncertainty to entice the Supreme Court? The odds are always against cert petitions, but the justices freed up some room on their securities docket when they dismissed a previously granted appeal involving class action tolling. So who knows? Maybe at this very late stage of MBS litigation, the Supreme Court will change the rules.

(This post has been updated to add Davis Polk as counsel to UBS and Morgan Stanley.)

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