If bank defendants in the Federal Housing Finance Agency's 15 cases before U.S. District Judge Denise Cote in Manhattan federal court weren't already thinking about what it might cost to settle securities claims by Fannie Mae and Freddie Mac's conservator, now would be a good time to start.

On Friday, in a 66-page opinion that wipes out strong defense arguments in all of the FHFA cases before her, Cote denied UBS' motion to dismiss any of the agency's federal securities claims (though she did toss the state-law negligent misrepresentation claim). Most significantly, the judge brushed aside UBS' argument that the FHFA's claims were time-barred under both the statute of limitations and the more obscure statute of repose.

As I've reported, if Cote had agreed with UBS' lawyers at Skadden, Arps, Slate, Meagher & Flom that Congress neglected to account for the three-year statute of repose when it enacted the law placing Fannie Mae and Freddie Mac in conservatorship, that would have spelled the end of the agency's sweeping litigation over hundreds of billions of dollars of toxic mortgage-backed securities. Instead, Cote's ruling, in combination with her previous orders on how she will apply it, means that the FHFA's lawyers at Quinn Emanuel Urquhart & Sullivan and Kasowitz Benson Torres & Friedman can dig into fact discovery against MBS issuers in all of the cases the judge oversees. (FHFA's claims against Countrywide are before U.S. District Judge Mariana Pfaelzer in Los Angeles federal court.) The UBS dismissal motion didn't address the state-law fraud claims FHFA has asserted in a couple of cases, so those defendants will presumably still have an opportunity to argue that the agency's pleadings don't meet the high bar for fraud. But with that exception, Cote's UBS decision is expected to govern the New York FHFA litigation.

Skadden had argued that when Congress rushed to enact the Housing and Economic Recovery Act (HERA) -- the 2008 law that created the FHFA and placed Fannie Mae and Freddie Mac under its control -- legislators expressly extended the statute of limitations for FHFA to bring federal securities claims but didn't address the statute of repose at all. (Under ordinary circumstances, the statute of repose sets an absolute three-year time limit on federal securities claims, unlike the more flexible one-year statute of limitations, which depends on when the plaintiff should have recognized its potential claim.) UBS asserted that Congress' silence on the statute of repose meant that FHFA's claims, which came more than four years after Fannie and Freddie bought supposedly deficient mortgage-backed notes, were too late.

Cote said UBS was drawing an unwarranted distinction between the statute of limitations and the statute of repose. Congress was acting hurriedly when it passed HERA, she said, and clearly meant to give the FHFA sufficient time to evaluate its potential claims. (She cited the U.S. Supreme Court's April 2012 ruling in Caraco Pharmaceutical v. Novo Nordisk for the proposition that "context matters.") The bank was mistakenly assuming that Congress deliberately left intact the three-year statute of repose even as it gave FHFA extra time on the statute of limitations, Cote said.

"The more natural reading of the provision, the one that is both in line with everyday usage and consistent with the objectives of the statute overall, is that by including in HERA a provision explicitly setting out the 'statutes of limitations' applicable to claims by FHFA, Congress intended to prescribe comprehensive time limitations for 'any action' that the agency might bring as conservator, including claims to which a statute of repose generally attaches," Cote wrote. She did not address UBS' briefing on Congress' specific extension of the statute of repose in other pieces of legislation.

UBS had also put forward more standard statute-of-limitations arguments, asserting that Fannie Mae and Freddie Mac were on notice of potential deficiencies in mortgage underwriting standards by 2007, yet waited until 2011 to file claims. Cote said the appropriate question isn't when the government housing giants learned of underwriting problems, but when those problems were linked to mortgage-backed securities they had purchased. She said the clock began ticking much later, after Fannie and Freddie-owned MBS were downgraded and the agencies conducted their own loan audits.

The judge also sided with FHFA and Quinn Emanuel on the specifics of the agency's claims that UBS is liable because the mortgage pools underlying the MBS the bank sold didn't meet representations about loan-to-value and owner-occupied ratios. UBS argued that the loan-to-value ratio is a matter of the appraiser's opinion, so it's not responsible. It also said it's not responsible for mortgage orignators' failures to verify other representations about the underlying loan pools. Cote said that, for the purposes of a motion to dismiss, FHFA had plausibly argued for UBS' liability.

Clearly, the judge wants FHFA to be able to test its theories with discovery against the banks and simply wasn't willing to knock out important litigation on technicalities. (The banks can reassert fact-specific statute-of-limitations arguments later on, in summary judgment motions.) A motion to dismiss ruling isn't ordinarily appealable, though UBS could ask Cote for permission to file an interlocutory appeal.

UBS counsel from Skadden and FHFA counsel from Quinn Emanuel declined to comment.

(Reporting by Alison Frankel)

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