Banks Take Losses in MBS Case Appeals; Is Supreme Court Next?

WASHINGTON — Banks that sold faulty mortgage-backed securities right before the crisis have suffered a string of legal defeats over the timing of government lawsuits, but some experts believe the industry may still have a shot in the Supreme Court.

Since the crisis regulators have brought a slew of actions against big banks for assets they sold to acquirers that ultimately failed. But in some cases, the parties have tussled over whether the government missed the statutory deadline for bringing a claim.

Appeals courts lately have disagreed with banks that plaintiffs missed court filing deadlines imposed by state law and other regimes, which are stricter than deadlines in federal law. Most recently, the U.S. Court of Appeals for the 5th Circuit ruled in favor of the Federal Deposit Insurance Corp. in the agency's case against RBS Securities and other issuers related to the 2009 failure of Guaranty Bank.

Still, other cases are pending and some say banks may be emboldened after the Supreme Court last year favored state-mandated timelines in an environmental case.

"I would expect that [banks] would continue to try to pursue the issue and get relief from the Supreme Court," said Paul Rugani, a partner at Orrick, Herrington & Sutcliffe LLP based in Seattle.

The government has sought billions from MBS issuers that officials say misrepresented the quality of securities leading up to the crisis. The FDIC and National Credit Union Administration sued companies that had sold assets to institutions that ultimately failed, and the Federal Housing Finance Agency brought claims over securities sold to Fannie Mae and Freddie Mac.

But many banks have fought the agencies over whether they could bring the suits in the first place. Defendants seemed to gain ground in the lower courts and when the Supreme Court handed down its decision last year in a North Carolina environmental case.

In that case, plaintiffs argued they complied with a federal statute of limitations — typically between when a claimant learns of a violation and then brings suit — which they said preempted the state's shorter statute of "repose." But the high court ruled there was no preemption since "limitations" and "repose" are different concepts, the latter being from when the alleged violation actually occurred.

The environmental statute "is best read to encompass only statutes of limitations," wrote Justice Anthony Kennedy in the court's opinion.

That decision gave financial service companies momentum in defending against the MBS claims. The case decided by the 5th Circuit had originally gone in the banks' favor. (Other defendants included Deutsche Bank Securities and Goldman Sachs.)

The FDIC relies on a three-year statute of limitations from when the agency seizes a failed bank, inheriting its legal claims. But a lower court judge in Texas cited the Supreme Court decision in ruling that the state's statute of repose — five years from when the securities were sold — superseded the federal deadline. Since the state timeline predated the FDIC suit, the case was dismissed.

But the 5th circuit overruled that decision, saying the environmental statute at issue in the Supreme Court case is not applicable and the state's deadline is superseded by cases where the FDIC is appointed receiver. The banking agency's so-called "extender statute" was mandated by the 1989 Financial Institutions Reform, Recovery, and Enforcement Act.

"The text, structure, and purpose of the FDIC Extender Statute all evince a Congressional intent to grant the FDIC a three-year grace period after its appointment as receiver to investigate potential claims," Carolyn Dineen King, a judge of the 5th circuit, wrote in the opinion.

Regulators have previously won similar victories. In 2013, the 10th Circuit sided with the NCUA's use of an extender statute. After the Supreme Court instructed the 10th Circuit to reconsider in light of the high court's ruling in the North Carolina environmental case, the appeals court said it was ruling in favor of the NCUA. The Supreme Court denied a further appeal by defendants to hear the case.

The 10th Circuit decided another such case in the NCUA's favor earlier this year. Meanwhile, the 2nd Circuit ruled in favor of the FHFA in a 2013 case.

Some experts noted that issues where there is complete agreement among multiple appeals courts rarely reach the Supreme Court.

"The Supreme Court generally does not take a case where there isn't a split among different circuit appeals courts, and the 5th and 10th circuits are in agreement," said an attorney familiar with the situation.

But other decisions are still pending. Rulings have yet to come from the 9th circuit as well as a separate case still to be decided in the 2nd circuit. Both involve the FDIC's extender statute related to MBS losses at the failed Colonial Bank.

"I would think that the parties that lost the case would wait for the 2nd and 9th circuits to decide and then hope that either of them disagrees with the 5th circuit before deciding to take the case up to the Supreme Court," said Sanford "Sandy" Brown, a partner at Bracewell & Giuliani LLP.

Others said the extender statute in the law at issue in the Supreme Court's environmental decision — the Comprehensive Environmental Response, Compensation, and Liability Act — is different enough from the extender statute in FIRREA that the justices on the high court may want to weigh in.

The 5th circuit decision "is a well-reasoned opinion, but there is no question that such an interpretation could be challenged in an appeal to the Supreme Court," said David Reiss, a professor at Brooklyn Law School. "While circuit courts have had a consistent interpretation of the FIRREA extender statute, there is enough interpretation going on that the Supreme Court could come up with a reasonable alternative to the courts of appeal that have ruled on this issue."

Rugani said it is unlikely that defendants at the losing end of an appeals court decision have thrown in the towel.

"It's a significant issue and has ramifications for cases brought not just by the FDIC but also brought by other agencies," he said. "It is likely that if the Supreme Court takes up this issue with respect to any of … [the claims] that are out there, the court's decision would ultimately be controlling for all of those claims."