Tag Archives: statute of limitations

FIRREA Wall

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Courts have read the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) very broadly, giving the federal government a powerful weapon in its lawsuits against financial institutions regarding events relating to the financial crisis. Judge Swain (SDNY) has issued a rare Opinion and Order limiting the reach of FIRREA, FDIC v. Bear Stearns Asset Backed Securities I LCC et al. (No. 12CV4000, Mar. 24, 2015), a suit over allegedly rotten residential mortgage-backed securities.

The limitation derives from a pretty technical Supreme Court opinion, CTS Corp. v. Waldburger. In CTS, the Supreme Court held that statutes of repose were not preempted by a statute that has identical language as the FDIC Extender Provision found in FIRREA and at issue in FDIC v. Bear Stearns.

I warned you that this is technical, so here is what is at issue:

Claims brought under Section 11 of the 1933 Act are subject to the two-pronged timing provision of Section 13 of that Act, which is codified as 15 U.S.C. § 77m. The first prong of Section 13 is a statute of limitations, which provides that Section 11 claims must be brought within one year of “the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence.” 15 U.S.C.S. § 77m (LexisNexis 2012). The statute of limitations may be tolled based on equitable considerations, but not beyond three years from the date of the relevant offering, at which point a plaintiff’s claim is extinguished by Section 13’s second prong – a statute of repose – which provides that “[i]n no event shall any such action be brought . . . more than three years after the security was bona fide offered to the public.” Id.

The FDIC asserts that its claims are timely, notwithstanding the three-year Section 13 statute of repose, because the statute of repose is preempted by the FDIC Extender Provision . . .. (6)

Relying on CTS Corp. v. Wadburger, the Judge Swain concludes that “the FDIC Extender Provision does not preempt the statute of repose set forth in Section 13 of the 1933 Act.” (14-15)

The reasoning in FDIC v. Bear Stearns does not apply to all FIRREA claims, but it would apply to some meaningful subset of them. One of the most powerful things about FIRREA is its very long statute of limitations. If other courts follow FDIC v. Stearns, it could have a meaningful impact on the reach of FIRREA.

Georgia Court Dismisses RESPA, TILA, and HOEPA Claims

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The court in deciding Mitchell v. Deutsche Bank Nat’l Trust Co., 2013 U.S. Dist. (N.D. Ga., 2013) granted the defendant’s motion to dismiss.

Plaintiffs Reginald and Jamela Mitchell claimed that the defendants Deutsche Bank National Trust Co. and MERS violated the Truth-in-Lending Act (“TILA”), the Real Estate Settlement Procedures Act (“RESPA”), the Home Ownership Equity Protection Act (“HOEPA”) and state law by commencing foreclosure proceedings against Plaintiffs’ home.

After consideration of the plaintiff’s assertions, the court concluded that the complaint failed to state a claim upon which relief could be granted.

Running CERCLA around FIRREA

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Law360 quoted me in High Court Environmental Ruling Could Clear Air For Banks (behind a paywall). The article reads in part,

A recent U.S. Supreme Court ruling that a federal environmental law does not preempt state statutes of repose has inspired banks and other targets of Wall Street enforcers to test the decision’s power to finally fend off lingering financial crisis-era cases on timeliness grounds.

The high court on June 9 found that the Comprehensive Environmental Response, Compensation and Liability Act could not extend the 10-year statute of repose in a North Carolina environmental cleanup suit in the in CTS Corp. v. Waldburger case. Although the decision pertained to a case outside of the financial realm, attorneys say it could limit the ability of federal financial regulators to bring claims on behalf of failed financial institutions under two of their favored tools: the Financial Institutions Reform, Recovery and Enforcement Act and the Housing and Economic Recovery Act.

That’s because the defendants in those cases, including banks but others as well, will now be able to argue that regulators like the National Credit Union Administration, the Federal Housing Finance Agency and the Federal Deposit Insurance Corp. missed their chance to bring claims on behalf of institutions in receivership.

Given the Supreme Court’s interpretation, the regulators may be on shaky ground.

“The government is going to have a much more difficult time sustaining the arguments it’s been making after CTS,” said Jeffrey B. Wall, a partner with Sullivan & Cromwell LLP and a former assistant solicitor general.

In its CTS ruling, the Supreme Court found that CERCLA does not preempt state statutes of repose like the one in North Carolina, citing CERCLA’s exclusive use of the phrase “statute of limitations.”

Statutes of repose and statutes of limitations are distinct enough terms in their usage that it’s proper to conclude that Congress didn’t intend to preempt statutes of repose when it crafted CERCLA, Justice Anthony M. Kennedy said in the majority opinion. The justice cited a 1982 congressional report on CERCLA that recommended repealing state statutes of limitations and statutes of repose but acknowledged that they were not equivalent.

According to a memo released June 10 by Sullivan & Cromwell, both FIRREA and HERA are susceptible to similar readings by courts.

Both statutes include extenders that allow government agencies suing on behalf of failed financial institutions to move beyond statutes of limitations on state law claims. However, much like CERCLA, both say nothing about extending statutes of repose, the memo said.

And that could make a major difference for a large number of defendants trying to fend off claims from the FDIC, NCUA and FHFA, Wall said.

*    *    *

The CTS ruling is likely to play out in cases brought by financial regulators in smaller cases over losses incurred by failed financial institutions using FIRREA and HERA. But FIRREA has also become a favored tool in the U.S. Department of Justice’s big game hunts against ratings agency Standard & Poor’s and Bank of America.

Because those cases are largely predicated on federal claims, the CTS case is unlikely to be a help for those institutions, according to Brooklyn Law School professor David Reiss.

“I don’t read it as having an extension on the higher-profile FIRREA cases,” he said.

But even if CTS is limited to state law claims brought by financial regulators, that could have a major impact given the sheer number of cases the FDIC, NCUA and FHFA bring.

Georgia Court Dismisses TILA and RESPA Claims Brought by Plaintiff

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The court in deciding Mitchell v. Deutsche Bank Nat’l Trust Co., 2013 U.S. Dist. (N.D. Ga. Sept. 25, 2013) granted the motion to dismiss proffered by the defendant.

The first enumerated cause of action in Plaintiffs’ complaint was a claim for fraud. Plaintiffs argued that their original mortgage lender, Accredited, engaged in a practice of filing false prospectus supplements with the Securities and Exchange Commission. Plaintiffs’ complaint also included a claim for wrongful foreclosure.

Next, the plaintiffs asserted that Deutsche Bank and MERS had “unclean hands” as they failed to make certain disclosures required by TILA. Plaintiffs also asserted that the defendants or their predecessors in interest violated RESPA in a number of ways. Plaintiffs’ complaint also included a claim for fraud in the inducement. Moreover, the plaintiffs’ complaint raised a claim for quiet title under O.C.G.A. § 23-3-40 and O.C.G.A. § 23-3-60 et seq. Lastly, the plaintiffs’ complaint raised a claim for fraudulent assignment.

Ultimately the court concluded that the plaintiffs’ complaint failed to state a viable claim for relief. Accordingly, this court granted the defendants’ motion to dismiss the plaintiffs’ complaint.

Whitman on Servicer Lies

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Professor Dale Whitman posted a commentary on Quintana v. Bank of America, No. CV 11–2301–PHX, 2014 WL 690906 (D.Ariz. Feb. 24, 2014) (not reported in F.Supp.2d) on the Dirt listserv:

Synopsis: A borrowers who is “jerked around” by a mortgage servicer may have claims in fraud or on other theories.

Karoly Quintana’s home mortgage loan was serviced by Bank of America, When she began having difficulty making her payments in 2009, she was told by B of A that she would have to miss three payments to be considered for a loan modification, and that the servicer would forbear foreclosure while it did so. She missed the payments and applied for a modification, but (she alleged) B of A did not consider it, and instead accelerated her loan and commenced foreclosure.

Quintana filed a suit in federal court to stop the foreclosure. In March 2012 the suit was dismissed voluntarily on the assurance that B of A would again consider a loan modification, but again it did not do so. (Oddly, B of A’s counsel conceded these facts.)

The court held that the allegations of both the 2009 and 2012 conduct of B of A stated claims of fraud, sufficient to withstand a motion to dismiss. The statements that she would be considered for a modification were false, she relied upon them, and was damaged. Her damages were the expenditure of additional attorney’s fees, and the court found this sufficient, even though in general attorneys’ fees are not recoverable in a fraud action.

The court also held that the plaintiff’s count for breach of the implied covenant of good faith and fair dealing survived a motion to dismiss. While the loan documents did not require the servicer to consider the mortgage modification or to forbear foreclosure, when it promised to do so and then did not, it breached the implied covenant. The promise was only oral, and B of A asserted it was inadmissible under the Statute of Frauds, but the court found that Quintana’s detrimental reliance (in missing the payments) provided a basis for promissory estoppel, overcoming the Statute of Frauds defense.

However, the court dismissed Quintana’s claim under the Arizona Consumer Fraud Act (on the ground that it was barred by the 1-year statute of limitations). There’s a convoluted argument about whether B of A can be liable under the FDCPA, but the court ultimately refused to dismiss that claim.

Comment: Borrowers have often tried to claim that they should have received loan modifications, but have not in fact received them. In general, of course, there’s no legal right to a modification. But this court holds that a false promise to consider a modification is enough to make out a claim of fraud.

FIRREA Does the Hustle

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Judge Rakoff has issued another Opinion in U.S. v. Countrywide Fin. Corp. et al., 12 Civ. 1422 (Feb. 17, 2014).  Rakoff reconfirms his broad reading of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which covers fraudulent behavior that is self-affecting; that is, where the perpetrator and victim of the fraud are one and the same financial institution. This Opinion goes further, however, based on on developments in the litigation since that earlier opinion.

The Opinion notes that the defendants were found liable at trial and finds that

Based on the charge as given to the jury, the jury, by finding liability, necessarily found that the defendants intentionally induced two government-sponsored entities, the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), to purchase from the Bank Defendants thousands of loans that Fannie Mae and Freddie Mac would not otherwise have purchased. The defendants did so, the jury necessarily found, by misrepresenting that the loans they were selling were “investment quality” and that they knew of nothing that might cause investors to regard the mortgages as poor investments, when in fact the defendants knew that their underwriting process, known as the “High Speed Swim Lane,” “HSSL,” or “Hustle,” was calculated to produce loans that were not of investment quality. (3)

The Court had previously found that “the fraud here in question, perpetrated by the Countrywide defendants and Ms. Mairone, had a huge effect on Bank of America defendants, which, as a result of Bank of America’s purchase of Countrywide, paid, directly or through affiliates, billions of dollars to settle repurchase claims brought by Fannie Mae and Freddie Mac.” (4) The opinion concludes that

It is highly improbable that Congress would have intended to place beyond the reach of FIRREA those defendants whose misconduct “affects” federally insured banks that have the great fortune to be fully insured [by their affiliates] for such losses. Even less so can it be imagined that the device of having BAC [the BoA parent holding company] indemnify BANA [the BoA federally insured bank] for losses that otherwise would result from Countrywide’s fraud immunizes Countrywide from liability under FIRREA. Indeed, defendants’ labeling of this theory of liability as the “self-affecting” theory is something of a misnomer; Countrywide’s fraud, which culminated before the merger with BANA, directly affected, not just Countrywide, but its merger partner, BANA, as well. While the effect on Countrywide might be “self-affecting,” the effect on BANA was not. (5)

This Opinion seems to bolster Rakoff’s broad reading of FIRREA.  As of now, FIRREA gives the federal government a powerful tool to pursue alleged wrongdoing affecting federally insured financial institutions.  The caselaw reads FIRREA broadly and the statute’s ten-year statute of limitations means that additional suits may still be coming down the pike.

Reiss in Bloomberg on CS Lawsuit

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Bloomberg quoted me in Credit Suisse Waits for $11 Billion Answer in N.Y. Fraud Suit.  It reads in part,

As Credit Suisse Group AG (CSGN) sees it, time has run out on New York Attorney General Eric Schneiderman’s pursuit of Wall Street banks for mortgage fraud that helped trigger the financial crisis.

Schneiderman sued Credit Suisse in 2012 as part of a wide-ranging probe into mortgage bonds. He claimed Switzerland’s second-largest bank misrepresented the risks associated with $93.8 billion in mortgage-backed securities issued in 2006 and 2007.

Credit Suisse asked a Manhattan judge in December to dismiss Schneiderman’s case, as well as his demand for as much as $11.2 billion in damages. The bank argued that New York, by waiting so long to file the lawsuit, missed a three-year legal deadline for suing. The state countered that it had six years to file its complaint.

If the bank wins, Schneiderman will face a new roadblock as he considers similar multibillion-dollar claims against a dozen other Wall Street firms. The judge in New York State Supreme Court could rule at any time.

“It would obviously tilt everything in the favor of Credit Suisse and similarly situated financial institutions,” said David Reiss, a professor at Brooklyn Law School, hindering New York’s remaining efforts to hold banks accountable for mistakes that spurred a recession.

*     *     *

Since the latest bonds cited in Schneiderman’s suit originated in 2006 and 2007, if the judge chooses the bank’s argument, the lawsuit may be dismissed. If the judge takes Schneiderman’s more expansive view, most or all of the suspect bonds may still be covered by the litigation.

“The entire case is time-barred,” Richard Clary, a lawyer for the bank, told Friedman at the December hearing. Lawyers for the state argued that such limits weren’t intended to apply to the attorney general.

“We’ve successfully resolved cases filed within six years,” Deputy Attorney General Virginia Chavez Romano said, citing last year’s JPMorgan accord. “It has been our decades-long practice.”

So far, New York’s courts have broadly interpreted the statute in finding a six-year period, Brooklyn Law School’s Reiss said. That may be changing as legal scholars and financial industry lawyers question its propriety.

“Having these incredibly long and ambiguous statutes of limitations is not particularly fair,” he said.

*     *     *

Friedman’s ruling in the Credit Suisse case may be crucial to Schneiderman’s probe of close to a dozen other banks, and whether he can sue them successfully.

New York agreed with the firms in October 2012 that any legal deadline for bringing fraud claims against them would be suspended while he continues his investigation, a person familiar with the matter said.

Such tolling agreements stopped the clock on any statute of limitations and ensured Schneiderman can bring fraud claims against banks for conduct going as far back as 2006, said the person.

Brooklyn Law School’s Reiss said the banks may have agreed to the delay to avoid forcing Schneiderman to file a “kitchen sink complaint with every possible allegation in it” just to beat the clock. Doing so also builds good will with regulators and may also facilitate a favorable settlement.

The agreements don’t necessarily mean that suits will be filed, the person said. If Schneiderman sues any of the banks, they may then assert the statute of limitations is three years, and not six, just as Credit Suisse has done.

*     *     *

This may be a more potent argument if Friedman rules for the Swiss bank in the pending case.

A three-year statute-of-limitations would mean they can’t be held responsible for transactions before 2009, while a six-year deadline would allow Schneiderman to reach back to 2006.

There’s “great uncertainty” about whether Schneiderman can move forward with the Credit Suisse case in light of the statute of limitations arguments, said James Cox, a corporate law professor at Duke University in Durham, North Carolina.

Reiss said that any ruling would probably be challenged all the way to the Court of Appeals in Albany, the state’s highest court.