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Supreme Court Rejects Banks’ Request to Review FDIC Suit

courtroom-justicescalesThe U.S. Supreme Court [1] this week decided it will not review a decision handed down by the 5th Circuit Court of Appeals in August 2015 that revived a lawsuit filed by the Federal Deposit Insurance Corporation (FDIC [2]) accusing three large financial institutions of fraud with regard to $2.1 billion worth of residential mortgage-backed securities.

The FDIC claimed in the suit that Goldman Sachs, Deutsche Bank, and Royal Bank of Scotland misrepresented the quality of the securities it sold in 2004 and 2005 to Guaranty Bank, a Texas-based bank that failed and was taken into receivership by the FDIC in 2009.

A judge in Austin, Texas, dismissed the lawsuit filed by the FDIC in 2014 against the financial institutions, stating that a Texas law that required lawsuits to be filed within five years of the sale of the mortgage-backed securities superseded the federal law. The lawsuits were filed in 2014, nine and 10 years after the securities were sold.

In August 2015, the 5th Circuit Court [3]—citing a federal law passed in 1989 following the savings and loan crisis—revived the lawsuit. The 5th Circuit Court ruled that the FDIC had an extended amount of time to file lawsuits on behalf of institutions it insures that went into receivership.

Circuit Judge Carolyn Dineen King wrote in that August ruling that it was "highly unlikely" that Congress would have applied the time limit in some cases but not all, according to a report from Reuters [4]. She wrote in her ruling that the federal law allowed the FDIC to focus on handling bank failures instead of worrying about whether or not there is a potential statute of limitations and what that time limit might be.

The 5th Circuit Court held that the FDIC had been granted a three-year grace period by Congress, allowing the agency three years within being appointed as receiver of an institution to investigate whether any litigation or claims should be brought—and that the grace period should pre-empt all state statutes. In particular, the 5th Circuit Court said that the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) should supersede any law that would interfere with the three-year grace period.

Goldman, Deutsche, and RBS subsequently petitioned the U.S. Supreme Court to review the 5th Circuit’s decision to revive the FDIC’s lawsuit, noting that the land’s highest court has held in the past that courts may not preempt state laws unless Congress’s intent to preempt the state law is clear. The final institutions contended in their petition to the Supreme Court that the 5th Circuit decision created uncertainty that would expose financial institutions to hundreds of billions of dollars in litigation.