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Mortgage Securities|Case Loses Steam

(CN) - In the first ruling of its kind from the mortgage-backed securities scandals, a federal judge sidelined claims that expired before a bank went into receivership.

As receiver for Security Savings Bank, which failed in February 2009, the FDIC filed two lawsuits in Nevada pertaining to six residential mortgage-backed certificates that Security Savings had bought.

One of the complaints eyed Banc of America Securities, Barclays Capital and Morgan Stanley & Company LLC for their role in selling or underwriting five of the certificates. The second complaint took issue with Countrywide Securities, CWALT Inc., Countrywide Financial and Bank of America for selling, underwriting and issuing the sixth certificate, as well as for controlling and succeeding to the liabilities of the primary actors.

After the case was removed to the U.S. District Court for the Central District of California, the banks insisted that the statute of limitations on the FDIC's claims had already run by the time it became the receiver for Security Savings.

Noting that the FDIC gets a three-year extension under federal law from the date of its appointment as receiver, U.S. District Judge Mariana Pfaelzer said that any claims still viable on Feb. 27, 2009, "could be brought by the FDIC until February 27, 2012."

"Three of the FDIC's claims, though, were clearly not live on February 27, 2009," she continued. "Those claims were brought for violations of Section 11 and are based on three securities issued pursuant to shelf registration statements filed before December 1, 2005.

The remaining claims then present a novel question of whether the one-year statute of limitations starts running once credit-rating agencies downgrade certificates.

Ultimately she concluded that federal claims accrued for two of the securities before Feb. 27, 2008, because those certificates were downgraded below investment level on Dec. 13, 2007.

"The court rules that when combined with the type of information available here about an investment, a claim accrues soon after the downgrade of a security below investment levels," Pfaelzer wrote. "Before that date, investors must act reasonable to determine whether the offering documents related to their certificates contained misstatements. As numerous courts have recognized, credit rating downgrades give specific information about the documents behind a security. Reasonable investors, armed with information about downgrades, media sources of problems in underwriting, and other lawsuits, could craft a particularly well-pled complaint that states the offering documents contained misrepresentations, because they have both general information about problems with their originator of their loans and specific information about the securities they purchased.

"The Section 13 statute of limitations had expired before February 27, 2009, when the FDIC became receiver. The Section 11 and 12(a)(2) claims on those securities are time-barred unless the statute of limitations was tolled on another ground."

Though Pfaelzer found no reason to toll the statute of limitations for claims over those certificates, the FDIC fared better as to the sixth certificate, CWALT 2006-21CB B-2.

"The three-year statute of repose for that certificate commenced, at the earliest, on March 6, 2006, and the one-year statute of limitations began after February 27, 2008," she wrote. "Section 11 claims based on CWALT 2006-21CB B-2 were therefore timely on February 27, 2009. The FDIC had at least three years from that date to bring its claims. 12 U.S.C. § 1821(d)(14). Therefore, the Section 11 claim was timely when filed on February 24, 2012."

Though the court also found that the FDIC had timely filed its claims under the Nevada Securities Act, it said dismissed the claims against Barclays "because Nevada would not have personal jurisdiction over [that] bank."

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