FDIC Case Over Worthless Securities Revived

     MANHATTAN (CN) — A recent Supreme Court decision did not spell the death of the government’s case against major banks that underwrote worthless mortgage-backed securities, the Second Circuit ruled Thursday..
     The suit at issue grew from the 2009 collapse of Montgomery, Alabama-based Colonial Bank, which had invested roughly $300 million in nine residential mortgage-backed securities.
     Within three years of its appointment as receiver, the Federal Deposit Insurance Corp. filed suit against the entities that either issued or underwrote the securities — namely JP Morgan Chase & Co., Citigroup Global Markets, Ally Securities and Merrill Lynch, Pierce, Fenner & Smith.
     Citing the Securities Act’s statute of repose, however, U.S. District Judge Louis Stanton in Manhattan found that the complaint was filed more than three years after the securities at issue were offered to the public.
     A 2014 decision by the Supreme Court had been critical to Stanton’s dismissal of the case.
     In CTS Corp. v. Waldburger, the justices distinguished a state’s statute of repose from a statute of limitations to torpedo litigation over environmental contamination.
     Despite this precedent, a divided three-judge panel of the Second Circuit revived the FDIC’s case Thursday.
     Citing its 2013 decision, Federal Housing Finance Agency v. UBS Americas Inc., the majority said the FDIC Extender Statute displaces otherwise applicable statutes of limitations.
     “The defendants have not identified any aspect of the Supreme Court’s decision in CTS that requires us to revisit our UBS holding,” Judge Gerard Lynch wrote for the court. “Accordingly, that holding controls this case, and mandates the conclusion that the FDIC’s complaint was timely. The judgment of the district court is vacated, and the case is remanded for further proceedings consistent with this opinion.”
     Writing in dissent, Judge Barrington Parker blasted the majority for failing “perpetuat[ing] the confusion surrounding the two types of statutes that existed before CTS.”
     “Even were I persuaded by the majority’s theory that the Extender Statute creates a statute of limitations that displaces statutes of repose, this contention is insufficient to overcome the plain text of the statute, which offers no textual clues suggesting that ‘statute of limitations’ should be read to broadly encompass any applicable limitations period,” Parker wrote. “Courts are not at liberty to selectively pick apart statutes. When two statutes are capable of co-existence, it is our obligation, absent a clearly expressed congressional intention to the contrary, to regard each as effective. No such intention exists here.”
     Parker said the majority also violated the presumption against implied repeals by holding “that Congress, without ever saying so, passed a statute of limitations that somehow eliminated a widely relied on and widely applied statute of repose.”
     “As this law makes clear, if Congress had intended to do away with a statute of repose, it had to say so clearly and unmistakably,” the dissent continues. “But it didn’t. Instead, Congress chose to remain silent, and we are not at liberty to infer displacement from silence.”
     Parker conceded that his reading “means that the FDIC is able to pursue fewer claims.”
     But “we are not authorized to fix that problem because we are obligated to read the statute as it is written,” Parker added.
     Indeed the conversation belongs in Congress, he said.
     “I suppose that there may be compelling policy arguments that receivers should be given relief from periods of repose, and I can imagine a robust debate on that topic,” the dissent states. “But the resolution of competing policy choices is for Congress, not for us.”
     Judge Susan Carney rounded out the panel.
     Under the FDIC’s receivership, Colonial Bank was sold to Branch Banking and Trust (BB&T) of Winston-Salem, North Carolina.
     Defendant-appellees named in the decision included First Horizon Asset Securities, , Credit Suisse Securities, Deutsche Bank Securities, FTN Financial Securities, HSBC Securities, RBS Securities, UBS Securities and Wells Fargo Asset Securities.
     Representatives from FDIC declined to comment. The FDIC is represented in the case by James Watson, of Arlington, Virginia.
     Sullivan & Cromwell represents First Horizon, FTN Financial Securities and UBS.
     Cravath, Swaine & Moore represents Credit Suisse.
     Simpson Thacher & Bartlett represents Deutsche Bank and RBS.
     Munger, Tolles & Olson, of Los Angeles, represents Wells Fargo.
     Mayer Brown represents HSBC Securities (USA) Inc.

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