In billion-dollar MBS litigation, repose issue just won’t go away

March 25, 2015

Will bank defendants come to regret shelling out nearly $20 billion to the Federal Housing Finance Agency and about $350 million to the National Credit Union Administration to resolve allegations that they misrepresented mortgage-backed securities peddled to government-regulated entities? In the not-too-distant future, the 2nd U.S. Circuit Court of Appeals is going to be looking again at an issue that might have wiped out most of the FHFA and NCUA claims. The 2nd Circuit sided against the banks when it first looked at the defense in 2013 – which is one big reason why FHFA and NCUA have been able to squeeze so much money from them. But this time around, the appeals court is going to have to figure out what to do about a 2014 U.S. Supreme Court case that has persuaded two federal district judges in Manhattan to disregard the 2nd Circuit’s 2013 precedent.

You’ve probably figured out that I’m (once again!) talking about the statute of repose, the obscure cousin of the statute of limitations that sets an absolute time bar on a defendant’s potential liability. Bank defendants in MBS cases brought by FHFA, NCUA and the Federal Deposit Insurance Corporation have been arguing for years that when Congress extended the statute of limitations for the agencies to bring securities claims – in a so-called extender provision in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and a nearly identical clause in the Housing and Economic Recovery Act of 2008 – it neglected specifically to address the statute of repose. A couple of trial courts agreed and dismissed cases as untimely, but both the 10th Circuit (in an NCUA case against Nomura) and the 2nd Circuit (in an FHFA case against UBS) concluded that the relevant extender provisions covered both types of time bars, limitations and repose.

Last June, in CTS Corp v. Waldburger, the Supreme Court gave hope to the banks when it ruled that an extender provision in the Comprehensive Environmental Response, Compensation and Liability Act of 1980 applied only to the statute of limitations, which the law specifically mentioned, and not to the statute of repose, on which the law was silent. But when the 10th Circuit, at the direction of the Supreme Court, reconsidered its decision in the NCUA case against Nomura, it again concluded that the extender clause for the agency’s securities claims encompasses both time bars. In January, the Supreme Court refused Nomura’s bid to review the 10th Circuit’s ruling. That seemed to spell the end of the banks’ statute of repose defense.

But it wasn’t. On Tuesday, U.S. District Judge Laura Taylor Swain of Manhattan dismissed an FDIC case against Bear Stearns and a long list of other bank defendants involved in the sale of about $140 million in mortgage-backed securities to a pair of small banks that later went into receivership. Judge Swain agreed with bank lawyers at Simpson Thacher & Bartlett, Cravath Swaine & Moore, and Mayer Brown that under the Supreme Court’s analysis in Waldburger, the extender provision addressing FDIC’s securities claims does not apply to the statute of repose. The Waldburger decision, she wrote, held that courts are bound by the text of extender provisions, not by whatever the law is intended to accomplish. When the 2nd Circuit ruled in the UBS case, according to Judge Swain, it inferred that Congress implicitly extended the statute of repose along with the statute of limitations from Congress’s intent to give FHFA additional time to bring securities claims. That inference, Swain said, “appears to have taken an analytical path inconsistent with the Supreme Court’s new guidance” in Waldburger.

Swain’s ruling follows a parallel decision by U.S. District Judge Louis Stanton of Manhattan, who dismissed an FDIC suit against JPMorgan Chase and several other banks last September. FDIC lawyers from Grais & Ellsworth have appealed Stanton’s ruling to the 2nd Circuit, arguing that the circuit court’s precedent from the UBS case remains good law because the extender provision the Supreme Court addressed in Waldburger is fundamentally different from the clauses at issue in the FDIC, NCUA and FHFA cases.

“The plain language (of those provisions) supports only one natural and correct reading: that the extender statutes set comprehensive time periods to bring suit that displace all prior limitation periods, including periods of repose,” the FDIC brief said.

Last month, FHFA (represented by Quinn Emanuel Urquhart & Sullivan) and NCUA (represented by Kellogg Huber Hansen Todd Evans & Figel) filed an amicus brief in the FDIC appeal, similarly asserting that the extender provision at issue in the Waldburger case had a “fundamentally different structure and purpose” than the clauses in their litigation. The banks’ brief to the 2nd Circuit is due in April.

Assuming that FDIC also appeals Judge Swain’s decision, the 2nd Circuit may end up with three simultaneous appeals involving the statute of repose and extender provisions. That’s because Nomura and RBS are right now defending themselves against FHFA claims in a bench trial before U.S. District Judge Denise Cote in Manhattan. I haven’t been in court for the proceedings, which my Reuters colleague Nate Raymond has been covering. But given the strength of the case FHFA’s lawyers have assembled – as well as Judge Cote’s long-running skepticism about the conduct of MBS defendants – I’m doubtful that Nomura and RBS will walk away from the trial with complete exoneration. If Judge Cote finds the banks liable, you can be sure they will argue to the 2nd Circuit that FHFA’s claims were time-barred under Waldburger.

Back in the early years of this century, before any government regulator ever filed a suit over mortgage-backed securities, bank defendants agreed to surrender more than $5 billion to Enron investors for their role in Enron’s accounting scandal. Three banks, however, refused to settle with the shareholder class. Credit Suisse, Merrill Lynch and Barclays appealed the class certification to the 5th Circuit. In 2007, years after the other banks settled, Credit Suisse, Merrill and Barclays won a 5th Circuit decision decertifying the class – vindicating their decision to hold out against settlement.

If the 2nd Circuit ends up changing its mind about the statute of repose – an unlikely prospect, to be sure – it’s going to make the second-guessing of bank settlements in the Enron case seem like a parlor game.

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