2nd Circuit’s repose opinion vindicates banks’ billion-dollar MBS settlements

May 19, 2016

(Reuters) – I’d bet big law firms across New York read a split opinion issued Thursday by the 2nd U.S. Circuit Court of Appeals with an enormous sense of relief.

The opinion, to be clear, went against the interests of their client base. The majority held that the U.S. Supreme Court’s 2014 decision in CTS v. Waldburger, which elucidated the difference between statutes of limitation and repose, does not change the 2nd Circuit’s 2013 conclusion that Congress intended to extend both timeframes in statutes granting government agencies such as the FDIC and Federal Housing Finance Administration the right to sue over bad investments. The ruling leaves intact 2nd Circuit precedent that has allowed the federal government to collect billions of dollars in settlements with banks that allegedly peddled deficient mortgage-backed securities to Fannie Mae, Freddie Mac and banks and credit unions that failed in the 2008 economic collapse.

So why the relief for bank lawyers? Because now they can tell their clients they were smart to settle with FHFA, FDIC and the National Credit Union Administration (NCUA) instead of holding out hope that appellate courts would decide the government agencies waited too long to bring their claims. If the 2nd Circuit had gone the other way, a lot of lawyers would be left trying to explain why they advised clients to shell out billions despite the government’s flawed legal theory.

That very nearly happened.

In the case before the 2nd Circuit, the FDIC was appealing a decision by U.S. District Judge Louis Stanton of Manhattan to dismiss MBS claims as untimely under the Securities Act’s statute of repose. The agency, suing on behalf of the failed Colonial Bank, argued that Congress extended the statute of repose in 1989, when it passed a law lengthening the “statute of limitations” for the FDIC to bring claims as a receiver for failed banks.

Congress used virtually the same wording in the extender statutes for claims by FHFA and NCUA, and the 2nd Circuit ruled in 2013, in FHFA’s mortgage-backed securities fraud case against UBS, that Congress intended the extensions to apply to both the statute of limitations and the statute of repose. (Quick refresher on the two: The statute of limitations says plaintiffs must file suit within a certain amount of time after they know or should know of their claims; the statute of repose says defendants have an absolute right to be free of potential liability within a certain amount of time after their alleged wrong.) Lawmakers used “statute of limitations” as a catch-all phrase to address both time limits, the 2nd Circuit said in UBS. If Congress had intended to leave the statute of repose independently intact, it would have said so explicitly, according to the UBS opinion.

In the FDIC’s Colonial Bank case, Judge Stanton said the 2nd Circuit’s UBS precedent was no longer good law after the Supreme Court’s CTS decision, which addressed a limited exception in the federal Superfund cleanup law’s to state-law time limits on environmental tort suits. The justices ruled Congress knows the difference between the statute of limitations and the statute of repose and laws should be presumed to mean what they say. In light of CTS, Stanton held, the FDIC extender statute applies only to the statute of limitations, not the statute of repose.

Thursday’s 2nd Circuit opinion, written by Judge Gerard Lynch for himself and Judge Susan Carney, said Judge Stanton was wrong: CTS doesn’t make UBS bad law. The statutes at issue in the two cases are “structured and worded in fundamentally different ways,” the majority said. “Because of the differences in the statutes, much of CTS’s reasoning is simply inapplicable to the extender statute.” The majority said that because UBS remains good precedent it need not address whether it would have reached the same result as the judges on the UBS panel – but it added in a footnote, for good measure, “Both federal courts of appeals that have addressed the issue since CTS have concluded, even in the absence of binding circuit precedent, that the extender statutes displace otherwise applicable statutes of repose.”

In a dissenting opinion, Judge Barrington Parker disagreed on both points. He said CTS displaces the 2nd Circuit’s precedent from the UBS case because of its holding that Congress has been aware since at least the early 1980s of the difference between the statutes of limitations and repose. And under CTS, Judge Parker said, the FDIC and FHFA extender provisions did not account for the statute of repose. “Given these pellucid textual markers, I conclude that when Congress referred in the extender statute to the type of time limit that accrues and targets plaintiffs’ diligence, it could only have meant a statute of limitations,” he wrote.

If one of the other panel members had sided with Parker, bank defendants would have billions of reasons to second-guess their MBS settlements. Instead, government agencies and their lawyers, including FHFA counsel Kathleen Sullivan of Quinn Emanuel Urquhart & Sullivan, who argued at the 2nd Circuit along with James Watson of the FDIC, get to say they were right all along.

For now, at least. Bank counsel Robert Giuffra of Sullivan & Cromwell suggested in an interview that we may still not have heard the last of the MBS statute of repose defense. “Judge Parker’s dissent is powerful,” he told me. “We are evaluating all of our options.”

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