On Tuesday, the 2nd Circuit Court of Appeals agreed to hear UBS's interlocutory appeal in the Federal Housing Finance
Agency's securities case accusing the bank of misrepresenting
the quality of mortgage-backed securities purchased by Fannie
Mae and Freddie Mac, which are now under the FHFA's
conservatorship. The appellate court's action breathes a whisper
of life into an argument that could decimate the FHFA's
megabillions claims against 17 banks that issued mortgage-backed
notes Fannie and Freddie invested in.
As I've explained, the issue in UBS's appeal is the statute
of repose, which sets an absolute time limit on when securities
claims must be brought (in contrast to the statute of
limitations, which can be stretched by, say, tolling agreements
or class action filings). UBS, which was the first defendant
sued by the FHFA and its lawyers at Quinn Emanuel Urquhart &
Sullivan, argued in a motion to dismiss last winter that when
Congress created the FHFA in 2008, it explicitly extended the
statute of limitations on Fannie and Freddie's state law tort
and contract claims but ignored the statute of repose. According
to UBS's lawyers at Skadden, Arps, Slate, Meagher & Flom, that
gap in the Housing and Economic Recovery Act (HERA) means that
just about all of the claims in the FHFA's MBS suits -- which
were nearly filed four years after the last MBS purchase by
Fannie Mae or Freddie Mac -- are time-barred.
U.S. District Judge Denise Cote of Manhattan, who is
overseeing almost all of the FHFA's MBS cases, brushed aside UBS's statute of repose argument in May, ruling that when
Congress extended the statute of limitations, it clearly meant
to give the FHFA extra time to evaluate Fannie and Freddie's
potential claims. So even if the law did not specifically
address the more obscure statute of repose, she said, UBS was
wrongly interpreting its meaning. "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," Cote
wrote, "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."
Nevertheless, when UBS asked Cote in June to certify her
statute of repose ruling for an interlocutory appeal, she agreed to do so. The judge said that she still didn't think UBS and its
fellow bank defendants had a chance of winning the statute of
repose argument, but that even a sliver of uncertainty -- in the
shape of rulings by two other federal judges who distinguished
between the statute of limitations and the statute of repose in
interpreting statutes similar to the one that created the FHFA
-- could affect settlement negotiations. Cote instructed UBS to
seek an expedited appeal.
Skadden filed UBS's petition to the 2nd Circuit on June 25.
Its essential argument on the statute of repose didn't change,
but the bank took the opportunity to remind the appeals court
that if it agreed with UBS on the time bar, it "would prevent
the expenditure of hundreds of millions of dollars -- including
U.S. taxpayer dollars -- in combined legal, expert and
professional fees by the parties to 17 actions brought in this
circuit by FHFA."
Quinn Emanuel responded on July 5, arguing in a 28-page brief that Cote's ruling in May was "thoroughly reasoned" and
that Congress has repeatedly used the broad term "limitations"
to encompass the statute of repose. "Against this great weight
of authority, UBS's only authority in its favor is two decisions
by district courts outside this circuit -- one a mere tentative
ruling and the other a discredited decision over twenty years
old, and neither involving HERA," the brief said. "UBS's
construction of HERA, moreover, would frustrate Congress's
intent by barring FHFA from asserting the very claims Congress
tasked FHFA with pursuing."
As is customary, the three 2nd Circuit judges who granted
UBS's petition, Denny Chin, Susan Carney and Christopher Droney,
did not offer any explanation for why they decided to take the
case, so it would be a mistake to assume they have any
particular view of the merits of UBS's argument. (They're also
not the panel that will hear the merits case.) Perhaps the
appeals judges, like Cote, just want to resolve any uncertainty
so this enormous litigation can move ahead. (FHFA spokeswoman
Stefanie Johnson declined comment.)
But for UBS and the other banks, even a sliver of hope is
better than none.
(Reporting by Alison Frankel)
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