U.S. District Judge Mariana Pfaelzer of federal court in Los Angeles is poised to deliver a ruling in AIG's mortgage-backed securities case against Countrywide that could have an impact on just about every company headquartered in New York. The issue: How long do N.Y. businesses have to bring fraud claims? Are they entitled to the benefit of the state's generous six-year statute of limitations? Or, as Countrywide argues in a supplemental motion to dismiss filed on March 23, are companies headquartered in New York instead restricted to the generally stingier time limits in their states of incorporation?
To understand how this question arose in AIG's MBS case, we have to back up a few steps. It's no secret that in MBS litigation, there's no more potent defense than arguments that investors waited too long to file suit. It's a quick, clean way to excise big chunks of a plaintiff's case, particularly because federal securities claims, with exceptions for American Pipe tolling (if you don't know, don't ask), are generally time-barred after three years under the statute of limitations or the more-obscure-until-MBS-litigation statute of repose. That's why we've seen so many MBS plaintiffs -- including AIG and the satellite insurance companies that are also plaintiffs in its Countrywide suit -- assert state-law fraud claims in addition to federal securities claims.
New York has a notably generous six-year statute of limitations for fraud. It also has what's known as a "borrowing" provision to prevent forum shoppers from taking advantage of that big window for fraud claims. The provision isn't exactly a model of clarity, but it holds that other states' time limits generally apply unless "the cause of action accrued in favor of a resident of the state." You have to be a New York resident, in other words, to benefit from the state's statute of limitations.
Countrywide cited the borrowing statute in its initial motion to dismiss the state-fraud claims in the AIG case, arguing that the AIG co-plaintiffs that are not headquartered in New York are bound by the statutes of limitations in their home states. (The statutes Countrywide's lawyers at Reed Smith pointed to as appropriate alternatives to New York's six-year window bar fraud claims after three or four years.)
But soon after that brief was filed on Feb. 27, Pfaelzer issued a decision in yet another Countrywide MBS case, Western and Southern Life v. Countrywide, that addressed the issue of forum shopping for an advantageous statute of limitations. Pfaelzer looked at New York's borrowing statute in the light of a 1984 ruling by the state's highest court, Wydallis v. United States Fidelity and Guaranty. She concluded that under Wydallis, a company is "resident" in New York -- and thus able to take advantage of the generous statute of limitations -- when it is incorporated in New York, even if its headquarters are elsewhere.
The judge invited Countrywide to submit a supplemental motion to dismiss the AIG case, addressing Wydallis. Countrywide's brief in response to that invitation extended Pfaelzer's reasoning: If New York incorporation means that a company is a New York resident, its brief argued, then companies incorporated outside of the state are not residents. AIG is incorporated in Delaware, the bank said. So it should be bound by Delaware's three-year fraud statute of limitations -- even though its headquarters and base of operations is in Manhattan.
AIG's lawyers at Quinn Emanuel Urquhart & Sullivan haven't yet filed a response, and Michael Carlinsky of Quinn declined my request for comment. But I wouldn't be surprised if AIG argues that Countrywide's new theory would upend the expectations of New York businesses that have long operated with the expectation that they have up to six years to assert fraud, regardless of where they're incorporated. If Pfaelzer, whose statute rulings have usually favored Countrywide and its parent, Bank of America (see here and here, for example), endorses Countrywide's new interpretation of the borrowing statute, AIG is far from the only MBS plaintiff whose state-law fraud claims against Countrywide will be tossed. And if other judges agree, untold billions in New York fraud claims will be left on the table.
A Bank of America spokesperson declined to comment.
(Reporting by Alison Frankel)
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