Opinion

Alison Frankel

SCOTUS repose opinion is good news for securities defendants

Alison Frankel
Jun 9, 2014 21:37 UTC

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.

Asbestos plaintiffs lawyers: Garlock is the bad guy, not us

Alison Frankel
Jun 6, 2014 22:12 UTC

Last January, U.S. Bankruptcy Judge George Hodges of Charlotte, N.C., issued a doozy of a ruling in the Chapter 11 of the gasket maker Garlock Sealing Technologies. Lawyers for asbestos claimants wanted Garlock to set aside more than $1 billion in a trust for thousands of current and future victims of asbestos exposure. Garlock, which maintains that anyone exposed to its long-ago products was also exposed to more potent products manufactured by other companies, argued that its liability was no more than $125 million. Plaintiffs lawyers based their estimate on Garlock’s settlement history; Garlock contended that it was manipulated into overpaying in settlements with plaintiffs lawyers who withheld evidence that their clients were exposed to other manufacturers’ products.

To test Garlock’s allegations, Hodges ordered discovery on 15 closed product liability cases in which Garlock paid out significant settlements. He held a 17-day hearing that included testimony from 29 witnesses and hundreds of exhibits. In all 15 of the settled cases, Hodges said, Garlock was able to show that lawyers for asbestos plaintiffs withheld evidence that their clients were exposed to asbestos products from other companies. “The fact that each and every one of (the surveyed cases) contains such demonstrable misrepresentation is surprising and persuasive,” Hodges wrote. He concluded that the “startling pattern of misrepresentation” so inflated Garlock’s settlements that the company’s settlement history was not a reliable gauge of its future liability. Hodges sided with the company and pegged Garlock’s asbestos liability at $125 million.

Other asbestos defendants seized on the ruling to argue that plaintiffs lawyers were monkeying with evidence. Some, including Ford and Volkswagen, moved for access to records from the estimation hearing, arguing that they deserved to know whether plaintiffs who settled with Garlock later turned around and sued them. The U.S. Chamber of Commerce, meanwhile, called Hodges’ opinion “a watershed” in exposing wrongdoing by asbestos lawyers, and suggested that Congress take note of it. The U.S. House of Representatives had already passed a bill to boost disclosure requirements for asbestos bankruptcy trusts before Hodges issued his Garlock opinion, but in May 2014, Senator Jeff Flake (R-Ariz.) introduced a Senate version of the bill.

How GM’s legal department failed the company and its customers

Alison Frankel
Jun 5, 2014 23:16 UTC

There’s a heartbreaking moment deep in the internal investigation report GM released Thursday, detailing the company’s botched response to a sometimes fatal defect in Cobalt ignition switches. A young lawyer named Nabeel Peracha, who had joined GM in April 2012, was at a meeting just a few months later with other GM lawyers. Their topic was the settlement of a West Virginia product liability case stemming from a crash in 2009 of a Chevrolet Cobalt that skidded on black ice, ran off the road and hit two trees. The front-seat passenger sustained head injuries when the Cobalt’s airbag failed to deploy.

The crash investigation showed that the car’s ignition switch was off at the time of the impact. That was potentially a big problem for GM, according to its outside defense lawyers at Eckert Seamans, because the victim’s expert had turned up a 2007 Indiana University study identifying a link between Cobalt ignition switch defects and air-bag deployment failures, as well as a GM service bulletin from 2006 that noted the Cobalt’s unexplained stalling problem. Moreover, the lawyers from Eckert Seamans warned, the plaintiff’s lawyer knew about other Cobalt crash cases in which ignition switches were in the off position and the air bags never deployed. If GM didn’t settle, the lawyers said, it risked seven-figure punitive damages.

The in-house lawyers at the weekly Roundtable meeting to discuss important settlements agreed that GM’s litigation posture was only going to get worse, so it made sense to settle. Peracha, the rookie lawyer, piped up: Considering the Eckert Seamans evaluation of Cobalt problems, why hadn’t GM issued a recall on the cars? According to the GM report, “The response from the other attorneys was that engineering did not know how to fix the problem, that the incident rate was low, and that ‘we told engineering and they’re looking into it.’” Almost two years later — after the Cobalt defect exploded into a huge corporate scandal — Peracha told GM investigator Anton Valukas of Jenner & Block that the other GM lawyers at the 2012 meeting, who’d been at the company longer than he had and had been hearing about these Cobalt ignition-switch cases since 2006, conveyed the impression that they had already done everything they could.

DOJ: Fannie, Freddie shareholder demands endanger housing market

Alison Frankel
Jun 4, 2014 22:28 UTC

The Justice Department really, really, really does not want to turn over documents disclosing the government’s projection of profits at Fannie Mae and Freddie Mac, nor its policy plans for the mortgage giants. In a filing this week in the U.S. Court of Federal Claims, the head of Fannie and Freddie’s conservator, Melvin Watt of the Federal Housing Finance Agency, warned that if FHFA has to produce that material to preferred shareholders suing for a share of Fannie and Freddie’s profits, the entire housing market — nay, the entire U.S. economy! — will be destabilized. That’s an awfully dire prediction for what amounts to a discovery dispute.

The government is asking Judge Margaret Sweeney for a protective order restricting the discovery it must produce to preferred shareholders of Fannie Mae and Freddie Mac, who contend that the Treasury Department illegally appropriated their fair allocation of profits when FHFA and Treasury agreed in August 2012 to amend the terms of Treasury’s bailout investment in Fannie and Freddie. The so-called “net worth sweep” diverted all Fannie and Freddie profits back to the government, leaving nothing for preferred shareholders. Led by the hedge funds Fairholme and Perry Capital, those shareholders have sued the United States in both federal district court in Washington, where they’re trying to block the alleged appropriation, and in the Court of Claims, where they’re hoping to recover some of the tens of billions of dollars they claim they will be due when Fannie and Freddie are liquidated. (The litigation, to be clear, doesn’t involve common stock in Fannie and Freddie, in which activist investor Carl Icahn has just sunk about $50 million, apparently in the hope that common shareholders will recover something when Congress figures out how to reform the mortgage investment market.)

The preferred shareholders, as I’ve reported, have already turned up in their federal district court case what they regard as evidence that Treasury planned all the way back in 2010 to wipe out the value of their shares. But Fairholme and its lawyers at Cooper & Kirk believed they’d won the right to much newer and more sweeping materials in February, when Judge Sweeney ruled in the Court of Claims that preferred shareholders are entitled to see government documents that would help them refute the Justice Department’s arguments for tossing the case. Among other things, Sweeney wrote, shareholders needed to know whether FHFA was acting as an arm of the U.S. government when it agreed to divert all Fannie and Freddie profits to Treasury and whether the government expects the mortgage entities to continue to generate profits.

Delaware Supreme Court strikes (light) blow for open access

Alison Frankel
Jun 3, 2014 20:32 UTC

Remember the hullabaloo in the last couple of years over Delaware’s plan to permit corporations to resolve their disputes in secret arbitration before Chancery Court judges? It was quite an idea, giving businesses the opportunity to present their arguments to the most experienced corporate jurists in the land without the inconvenience of public exposure. Unfortunately for its proponents, the secret arbitration regime didn’t take the U.S. Constitution into quite enough account. The plan was shot down by the 3rd U.S. Circuit Court of Appeals, which found that under the “logic and experience” test for public access, the Delaware scheme ran afoul of the First Amendment. In March, the U.S. Supreme Court declined to review the 3rd Circuit decision, which meant that corporations no longer have the right to arbitrate in secret in Chancery Court.

And after a ruling Monday by the Delaware Supreme Court, businesses shouldn’t count on litigating in secret, either. Justices Randy Holland, Carolyn Berger, Jack Jacobs and Henry Ridgely and Superior Court Judge Richard Cooch (sitting in for recused Chief Justice Leo Strine) dismissed an interlocutory appeal by Al Jazeera of an order requiring it to file a mostly unredacted version of its 2013 complaint against AT&T. The state Supreme Court didn’t explain why it abruptly tossed an appeal that was already briefed and argued before it. But the dismissal leaves intact Vice-Chancellor Sam Glasscock‘s Al Jazeera opinion as Delaware’s operative precedent on confidentiality designations — and Glasscock pays considerable deference to open access.

“When sensitive information that the parties wish to keep confidential directly impacts the public’s basic knowledge of particular court proceedings,” Glasscock wrote, “the interest of the public in accessing this information outweighs the economic harm to the parties that disclosure may cause.” (Hat tip on the Supreme Court order to Kyle Wagner Compton of The Chancery Daily.)

Did Argentina lie to the U.S. Supreme Court?

Alison Frankel
Jun 2, 2014 20:38 UTC

I may have been too quick to believe that Argentina actually intended to follow through on a pledge to the U.S. Supreme Court.

Last Friday, I credited the Argentine government with an historic concession in its May 27 brief to the court, in which Argentina pledged to comply with an injunction from the 2nd U.S. Circuit Court of Appeals prohibiting it from making payments to holders of its restructured debt before paying off hedge funds that refused to exchange defaulted bonds. Argentina is trying to persuade the Supreme Court to grant review of the 2nd Circuit’s so-called pari passu (or equal footing) injunction, and I believed that the promise of compliance from a country notorious for defying bondholder judgments against it was a show of good faith.

But NML Capital, one of the hedge funds opposing Argentina at the Supreme Court, presented evidence Friday afternoon to a Manhattan federal judge suggesting that the country is secretly planning to evade U.S. court orders in the event that the justices refuse to hear its case. NML told U.S. District Judge Thomas Griesa, who has been presiding over the Argentine bond litigation for more than a decade, about a newly surfaced May 2 memo from Argentina’s lawyers at Cleary Gottlieb Steen & Hamilton to the country’s Minister of Economy and Public Finance. The five-page memo lays out various scenarios for resolving Argentina’s dispute with the hedge fund holdouts and concludes that if the Supreme Court denies cert, the government’s “best option” would be to default “and then immediately restructure all of the external bonds so that the payment mechanism and the other related elements are outside of the reach of American courts.” (NML didn’t file the confidential memo because of privilege concerns, but The Financial Times’s FTAlphaville blog has an English translation of the entire document, which has also been reported in the Argentine press.)

In new SCOTUS brief, Argentina pledges to comply with U.S. courts

Alison Frankel
May 30, 2014 20:44 UTC

The most notorious deadbeat in the U.S. courts made an historic concession this week.

In a May 27 response brief at the U.S. Supreme Court, Argentina said that, contrary to the accusations of its hedge fund foes, it will comply with directives from the 2nd U.S. Circuit Court of Appeals to pay renegade sovereign debtholders if the Supreme Court refuses to hear its appeal. That pledge marks a big departure from the outright defiance Argentina showed last year at the 2nd Circuit, when its lawyers informed the court that the government “would not voluntarily obey” a U.S. court order it disagreed with. Even after the appeals court ruling — which upheld an injunction that bars Argentina from making payments to holders of its restructured debt before it pays more than $1 billion it owes to the hedge fund holdouts — the Argentine government vowed that it would never negotiate with the rapacious hedge funds. Argentina now seems to be reconsidering that vow, both outside of the courts, as Reuters reported Thursday, and within the U.S. litigation, as the May 27 filing indicates.

In the new brief, Argentina’s lawyers — Paul Clement of Bancroft, who is counsel of record and a recent addition to Argentina’s team, and the country’s longtime advisers Jonathan Blackman and Carmine Boccuzzi from Cleary Gottlieb Steen & Hamilton — repeated their arguments that the Supreme Court should grant certiorari and ask New York’s highest state court to interpret the pari passu, or “equal footing,” provision in Argentina’s sovereign debt contracts. Argentina also suggested that this case is of such overwhelming importance to foreign sovereigns and to foreign debt markets that the Supreme Court might want to invite the views of the U.S. government, which (as I noted in March) didn’t file an amicus brief supporting Argentina’s cert petition.

What BP doesn’t want you to know about its oil spill claims appeal

Alison Frankel
May 29, 2014 22:22 UTC

Poor besieged BP. As you know if you’ve seen the full-page newspaper ads BP has been running for the last year, or watched a 60 Minutes report earlier this month, BP — the company whose well spewed millions of gallons of oil into the Gulf of Mexico in the 2010 disaster that killed 11 workers on the Deepwater Horizon rig — considers itself a victim, too. As BP tells it, the company has been martyred over and over again: by trickster trial lawyers who forced it into an open-ended class action settlement; by the administrator of the settlement, Patrick Juneau, who misinterpreted the terms of the deal in a way that permitted claims by people who weren’t even harmed by the oil spill; by U.S. District Judge Carl Barbier of New Orleans, who threw in with the plaintiffs lawyers and approved Juneau’s interpretation; and, most recently, by the 5th U.S. Circuit Court of Appeals, which just refused BP’s last plea for mercy.

Now the company’s only hope for salvation from billions of dollars in supposedly unwarranted claims lies with the U.S. Supreme Court, which BP petitioned on Wednesday to halt all payments to businesses harmed in the spill while it pursues its final appeals. BP wants all of us to know, however, that “this legal fight has not in any way changed our commitment to the Gulf,” as it said in its latest ad in The New York Times, which ran Thursday.

Here is what BP isn’t so eager to publicize: New rules promulgated by settlement administrator Juneau and approved by Judge Barbier will effectively block the very claims BP was so worried about when it launched its campaign against its own settlement a year ago. According to Joseph Rice of Motley Rice, a member of the plaintiffs steering committee in the BP class action and one of the lead negotiators of the original deal, the new policies will decimate payouts to construction, education, professional services and agriculture businesses — four industries BP initially targeted for filing unwarranted claims. In addition, Rice said, the new rules — which Barbier on Wednesday ordered the claims administrator to apply retroactively to all claims that haven’t yet been paid — will drastically reduce BP’s remaining liability.

After Halliburton, SCOTUS has another securities litigation puzzler

Alison Frankel
May 28, 2014 22:52 UTC

In a matter of weeks, the securities class action industry — I’m talking here about both plaintiffs and defense lawyers — will find out whether the U.S. Supreme Court has ended business as they know it. As you know, the justices will decide by the end of this term, in Halliburton v. Erica P. John Fund, if investors may continue to take advantage of the fraud-on-the-market doctrine the Supreme Court established in the 1988 decision Basic v. Levinson, which codified shareholders’ right to sue as a class. At oral arguments in March, the justices seemed to be reluctant to conduct radical surgery on the existing regime for class actions brought under the fraud provisions of the Exchange Act of 1934, but that’s no guarantee of the outcome.

Halliburton has cast such an enormous shadow that the court’s next big securities case hasn’t gotten much attention. In March, the justices granted certiorari to Mississippi’s public employees’ pension fund in a case presenting the issue of whether the filing of a shareholder class action suspends the three-year time limit on claims under the Securities Act of 1933. The 2nd U.S. Circuit Court of Appeals held last June that it does not, finding that the Supreme Court’s landmark 1974 ruling on class actions and tolling of the statute of limitations, American Pipe v. Utah, doesn’t apply to the time limit known as the statute of repose. Last week, MissPERS and two other public pension funds filed their merits briefs arguing that the 2nd Circuit drew a misguided distinction between the statute of limitations and the statute of repose. According to the briefs, the principles that led the court in the American Pipe case to conclude that the filing of a class action puts defendants on notice of liability should apply regardless of whether the time limit at issue is the one-year statute of limitations in the Securities Act or the three-year statute of repose.

The 2nd Circuit had concluded in its IndyMac decision that defendants have a “substantive right” to be free of exposure to investors’ Securities Act suits once three years have elapsed from the offering date. According to the 2nd Circuit opinion, written by Judge Jose Cabranes, the Supreme Court’s American Pipe ruling — which addressed extending the one-year deadline for investors to bring claims after they’ve discovered evidence of issuer wrongdoing — was “equitable tolling” rooted in Rule 23 of the Federal Rules of Civil Procedure, which governs class actions. The 2nd Circuit said that under Supreme Court precedent in the 1991 decision Lampf, Pleva v. Gilbertson, equitable tolling doesn’t apply to the three-year statute of repose in the Securities Act. It also said that the Rules Enabling Act forbids using a federal rule to preclude substantive rights, so courts can’t curtail a defendant’s right to be free of liability via Rule 23.

Justice Department sides with Madoff’s banks on SCOTUS review

Alison Frankel
May 27, 2014 20:02 UTC

Not every shred of hope is lost for Bernard Madoff trustee Irving Picard in his quest to recover billions from the international banks he has accused of abetting Madoff’s fraud. But it’s looking bleak for the Madoff trustee after the Justice Department filed a brief Friday at the U.S. Supreme Court. In response to the court’s request for the government’s view of Picard’s petition for a writ of certiorari, Solicitor General Donald Verrilli advised the justices to reject Picard’s appeal.

The dismissal in 2013 of Picard’s fraud suits by the 2nd U.S. Circuit Court of Appeals “does not conflict with any decision of (the Supreme Court) or of another court of appeals,” the SG’s brief said. “The decision below also does not preclude customers from pursuing their own actions against (the banks) based on the same alleged conduct that forms the basis of (Picard’s) claims. Further review is not warranted.”

The brief is an arduous trudge through the deep weeds of the law on federal pre-emption of state contribution claims; subrogation rights of the Securities Investor Protection Corporation; and the Bankruptcy Code standing of securities trustees to bring common-law claims on behalf of brokerage customers. If you are in the extremely small group of people for whom these are consequential questions, perhaps you’ll find illumination in the SG’s discussion of the intersection of Picard’s claims with such precedent as Caplin v. Marine Midland and Redington v. Touche Ross. For the rest of us, the brief is notable for the many different ways in which the Justice Department and its co-signer, the Securities and Exchange Commission, undercut Picard’s arguments for Supreme Court review.

  •