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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