Despite losing over and over and over again, banks facing securities claims by the Federal Housing Finance Agency and the National Credit Union Administration never stopped arguing that the government agencies didn’t meet their deadlines to sue. Now—after most of the banks have given up and settled—a judge has adopted their basic argument in an unrelated suit brought by the Federal Deposit Insurance Corporation in its capacity as receiver for now-defunct Colonial Bank.
In a 12-page decision issued on Tuesday, U.S. District Judge Louis Stanton in Manhattan dismissed claims by the FDIC that Royal Bank of Scotland Group plc, Deutsche Bank AG, Credit Suisse Group AG and other financial institutions duped Colonial into investing in toxic mortgage-backed securities. In a holding that’s sure to be cited in the FHFA litigation, Stanton ruled that the FDIC didn’t bring suit within the relevant statute of repose. (A statute of repose is like a statute of limitations, but it begins running earlier and is less easily tolled.)
Through the Housing and Economic Recovery Act of 2008, Congress established the FHFA to serve as conservator for Fannie Mae and Freddie Mac. One of FHFA’s main tasks has been to sue banks for allegedly misrepresenting the risks of billions of dollars in mortgage-backed securities they sold to Fannie and Freddie.
To buy FHFA time, Congress stuck a so-called extender provision in HERA that explicitly extended the statute of limitations the agency would normally face in a suit alleging violations of federal securities laws. Congress has included similar extender provisions in past statutes, including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). The provisions have all been silent as to whether they also extend applicable statutes of repose.
After the FHFA launched its litigation campaign in 2011, the banks moved to dismiss on statute of repose grounds. They argued that Congress could have explicitly extended the statute of repose along with the statute of limitations for the FHFA, and its failure to do so should be interpreted in their favor.
U.S. District Judge Denise Cote in Manhattan rejected the argument in 2012, ruling that the legislative history makes clear that Congress also intended HERA to extend the statute of repose for claims brought under the Securities Act of 1933. Cote allowed the banks to immediately appeal her argument to the U.S. Court of Appeals for the Second Circuit, which affirmed her in 2013. The Supreme Court later refused to take up the case. In parallel litigation brought by the NCUA, meanwhile, the banks raised the same argument to no avail.
It seemed like that was the last we’d heard about the statute of repose defense. The FHFA and its lawyers at Quinn Emanuel Urquhart & Sullivan and Kasowitz Benson Torres & Friedman went on to rack up more than $20 billion in combined settlements from the likes of JPMorgan Chase & Co. and Bank of America Corporation.
The plot thickened in in June, however, when the U.S. Supreme Court decided a case called CTS v. Waldburger, which involved CERCLA’s extender provision. The high court ruled that the extender provision only applies to the relevant statute of limitations, so the environmental cleanup claims at issue are barred by the statute of repose. The banks that haven’t yet settled with the FHFA and the NCUA quickly seized on CTS, arguing that it vindicates their position.
Cote rejected that argument last week, and once again refused to dismiss what remains of the FHFA litigation. The U.S. Court of Appeals for the Tenth Circuit similarly denied a renewed motion to dismiss the NCUA litigation.
The FDIC, however, got a much less sympathetic response from Judge Stanton, who made clear in Tuesday’s ruling that he disagrees with Cote. In the case before him, the FDIC argued that FIRREA’s extender provision ensured that its claims are timely. Citing CTS, the judge disagreed, ruling that the agency’s claims are barred by the statute of repose.
“When faced with a statute which presented both a statute of limitations and a statute of repose, Congress chose language which focused on and changed the statute of limitations, and left the statute of repose untouched,” Stanton wrote. “That gives no support to the FDIC’s argument that it intended to replace both.”
The FDIC, which is represented by Grais & Ellsworth, will surely appeal Stanton’s ruling. That could give the Second Circuit a chance to weigh in on whether CTS is really a game-changer—and perhaps offer the banks some vindication, better late than never.
Simpson Thacher & Bartlett’s Andrew Frankel, who represents RBS, declined to comment.