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Big Banks Argue that Shorter Limitations Period Should Apply to MBS (Mortgage Backed Securities) Claims

Recently, the defendants in FDIC as Receiver for Colonial Bank v. Chase Mortgage Finance Group, et al (Civ No. 1:12-cv-06166) filed a motion for judgment on the pleadings, asking the court to dismiss as time-barred the securities violations alleged against them by the FDIC.  In light of the Supreme Court’s holding in CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014), the defendants (which include J.P. Morgan, various Citi entities, Deutsche BankHSBC, and Credit Suisse, among others) argued that the three-year statute of repose found in Section 13 of the 1933 Act, 15 U.S.C. § 77m, which applies “whether or not the investor could have discovered the violation,” trumps the FDIC’s Extender Statute 12 U.S.C. § 1821(d)(14), enacted as part of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

The defendants’ position exposes a fundamental conflict.  In their countless loan repurchase/indemnification suits against the originators from whom they purchased large quantities of loans that they resold and/or securitized, these same entities (and other big banks like them) have vehemently defended the timeliness of claims based on purported violations that occurred as early as, or earlier than, the ones at issue here. In this action, they have distinctly changed their tunes.

Bull Statue on Street

This is not the first time that these defendants’ tactics have called their level of sincerity in other actions into question.  In a November 13, 2012 motion to dismiss, the defendants argued that Colonial Bank should have been aware of the deficiencies of which the FDIC now complains at least as early as 2008, due to a “constant barrage of mainstream news articles criticizing RMBS products.”  Defendants cited numerous news articles and press releases from several prominent publications and institutions that referred by name to certain defendants, and discussed trends like the lax underwriting standards for mortgages, alarming delinquency and foreclosure rates, erosion of market discipline in the securitization process, and flaws in credit rating agencies’ assessments of borrower capacity. Given the amount of negative publicity pertaining to RMBSs at that time, the defendants urged that “no reasonable investor could claim ignorance in August 2008 of the claims that the FDIC is belatedly attempting to assert here.”  But “ignorance” of the possibility of defects is exactly what these entities and others like them have repeatedly claimed when filing repurchase/indemnification claims.

This case is a fascinating window into the psyche of these financial titans, who are all too happy to feign naiveté when it serves them, but then rail against plaintiffs who similarly buried their heads in the sand. If these entities employed the same level of common sense and candor in their own actions against the correspondent originators from whom they purchased loans, there would be far fewer such actions.

© 2022 Bilzin Sumberg Baena Price & Axelrod LLPNational Law Review, Volume IV, Number 195
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About this Author

Philip R. Stein, Complex Commercial Litigation Attorney Bilzin Sumberg, Law Firm
Partner

Philip R. Stein, a Partner in Bilzin Sumberg's Litigation Group, focuses his practice on complex commercial litigation. He regularly acts as lead counsel to mortgage companies, financial services companies, and large national homebuilders on a broad range of issues of importance to companies in those industries. Phil is currently devoting a substantial part of his practice to representing originators and sellers of mortgage loans throughout the country as they defend against loan repurchase claims made by banks and other investors. He also regularly assists companies...

305-350-7220
Shalia Sakona, LItigation Attorney, Bilzin Sumberg Law Firm
Associate

Shalia Sakona is an associate in the Litigation Group. Her practice is focused on complex commercial litigation, including the representation of sellers and originators of mortgage loans against major financial institutions in mortgage repurchase and indemnification suits throughout the U.S. 

While attending law school, Shalia interned with the general counsel of a commercial real estate investment and development company. She also served as a notes and comments editor...

305-350-7216
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