A group of banks has asked the U.S. Court of Appeals for the Second Circuit to dismiss a lawsuit filed by the Federal Deposit Insurance Corporation (FDIC) over claims that the banks sold shoddy mortgage-backed securities to an FDIC-insured bank.
Defendants First Horizon, Credit Suisse, Deutsche Bank, HSBC, Royal Bank of Scotland, UBS, and Wells Fargo asked the Second Circuit court in a brief filed earlier this week to uphold a district court's ruling in September 2014 that the FDIC waited too long to file suit against the banks.
At the heart of the FDIC's claim is that the banks misled Alabama-based Colonial Bank, an FDIC-insured institution, as to the quality of $300 million worth of mortgage-backed securities they sold to Colonial in the run-up to the financial crisis. As a result of the soured securities, Colonial suffered huge losses and went into receivership in 2009. FDIC sued the banks three years later in 2012, claiming the banks violated the Securities Act of 1933.
The Securities Act contains a provision that sets a three-year statute of repose, but there is also an extender provision in the Financial Institutions Reform Recovery and Enforcement Act (FIRREA) which the FDIC claims applies to the statute of repose as well as to the statute of limitations established by the Securities Act. The banks' defense is that FIRREA applies only to the statute of limitations and not the statute of repose, which would invalidate FDIC's claim since the suit was filed five years after the mortgage-backed securities were sold to Colonial (two years after the statute of repose expired).
"If Congress had wanted to set aside the Securities Act’s established repose period for a particular set of claims—i.e., securities claims brought by the FDIC as receiver—Congress needed to do so clearly and unmistakably," the lawyers for the banks said in the brief filed Monday. "Instead, Congress elected to say nothing at all in FIRREA about displacing, extending, or altering any statutes of repose."
The U.S. Supreme Court ruled in 2013 in the case of CTS v. Waldburger that a federal law extending a statute of limitations did not affect the statute of repose. U.S. District Judge Louis Stanton cited the CTS case in his ruling in September 2014, stating that the FDIC did not file the lawsuit against the banks in time. In a similar FDIC case in March 2015, District Judge Laura Swain made the same ruling. The FDIC made a motion in January to have Stanton's ruling thrown out.