AIG’s $6 billion in mortgage-backed securities claims against Countrywide survived a near-death experience late Wednesday, when U.S. District Judge Mariana Pfaelzer of Los Angeles issued her ruling on Countrywide’s statute of limitations defense. In a 25-page opinion, Pfaelzer tossed AIG’s federal securities claims, as well as some fraud and negligent misrepresentation claims by AIG subsidiaries. But AIG said in an email statement that the ruling leaves alive “more than 98 percent of the recovery it seeks.” For a plaintiff that feared the worst – as AIG most certainly did, thanks to a silver bullet Pfaelzer handed to Countrywide in February – the judge’s ruling is a stunning reprieve.
Here’s why. Pfaelzer has not been a particularly good friend to investors in Countrywide mortgage-backed securities, particularly when it comes to the statute of limitations on their claims. In a ruling last August, Pfaelzer said that MBS investors were on notice of potential federal securities claims against Countrywide as of Feb. 14, 2008. Given the three-year time limit on those federal claims – and Pfaelzer’s role overseeing all Countrywide MBS litigation in federal court – her ruling meant that any Countrywide investor who hadn’t filed a complaint by Feb. 14, 2011, or who didn’t have a tolling agreement was too late.
Countrywide MBS plaintiffs had an alternative route to recovery, though, through fraud and negligent misrepresentation claims under state laws, some of which have less restrictive time limits. New York, for instance, has particularly generous laws, giving plaintiffs up to six years to file fraud cases. So the New York-based insurer AIG didn’t completely despair when its Countrywide MBS claims were severed from its $10 billion suit against Bank of America and transferred to Pfaelzer in Los Angeles. (AIG doesn’t think any part of its MBS case belongs in federal court, but that’s another story.) The insurer had to expect that in Pfaelzer’s court its federal securities case wouldn’t survive Countrywide’s statute of limitations defense. But it also had reason to be confident that its New York state fraud claims would be fine.
Then Pfaelzer came up with the aforementioned silver bullet for Countrywide. At the end of February, in a different Countrywide MBS case, she dug up an old New York Court of Appeals ruling called Wydallis v. United States Fidelity and Guaranty, which addressed New York’s so-called “borrowing statute” to prevent forum shoppers from taking advantage of the state’s generous statute of limitations. The state high court had ruled that a corporation is resident in New York if it is incorporated in the state. Pfaelzer invited Countrywide and AIG to brief whether, under Wydallis, AIG is resident in New York – and thus able to benefit from the six-year statute of limitations – or is resident in Delaware, its state of incorporation. Delaware has only a three-year statute.
Countrywide’s lawyers at Reed Smith (as you might expect) said that if a corporation is resident when it’s incorporated in New York, then it’s not resident if it’s incorporated elsewhere. But in Wednesday’s ruling Pfaelzer instead agreed with AIG’s lawyers at Quinn Emanuel Urquhart & Sullivan, holding that AIG is resident in New York, at least for the purposes of the statute of limitations. The judge concluded that there’s no case law directly on point, and most of the relevant precedent is either very old or related to individuals, not corporations. Nevertheless, “establishment of a principal place of business in New York is a sufficiently ‘significant connection’ to New York to qualify as a resident,” she wrote. “Accordingly, the court will not apply the borrowing statute if a plaintiff is either incorporated in New York or maintains its principal place of business there.”