Securities Regulation Daily Grappling over statutes of ‘limitation’ versus ‘repose’ results in revived suit against RMBS issuer
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Thursday, May 19, 2016

Grappling over statutes of ‘limitation’ versus ‘repose’ results in revived suit against RMBS issuer

By Matthew Garza, J.D.

The FDIC, acting as receiver for an Alabama bank sunk by bad investments in residential mortgage-backed securities, won a victory allowing it to continue its litigation against the issuer of those RMBS. The Second Circuit held that an intervening opinion of the Supreme Court in CTS Corp. v. Waldburger did not alter the Circuit’s controlling authority on a limitations issue and vacated the District Court’s dismissal of the case (Federal Deposit Insurance Corporation v. First Horizon Asset Securities, Inc., May 19, 2016, Lynch, G.).

The Montgomery bank invested $300 million in nine RMBS backed by First Horizon Asset Securities in 2007, an investment that led to its closing by the Alabama State Banking Department in 2009. The FDIC filed suit against the RMBS issuer more than three years later, outside of the Securities Act’s statute of repose, but within the limitations period provided by the FDIC’s extender statute.

Controlling authority. First Horizon moved to dismiss the complaint on several grounds, including that it was barred by the Securities Act’s statute of repose. During pendency of the motion, the Second Circuit decided a case filed by the Federal Housing Finance Agency against UBS, which found that a materially identical extender statute for FHFA actions displaced the Securities Act’s statute of repose. Recognizing UBS as controlling, First Horizon withdrew that argument and lost the motion on the remaining grounds, but reasserted the statute of repose argument after the Supreme Court’s decision in CTS Corp. v. Waldburger, which held that a federal limitations-extending provision in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) preempted state statutes of limitations, but not state statutes of repose. The district court agreed that CTS altered the controlling authority and dismissed the case against First Horizon, prompting an FDIC appeal.

The Second Circuit wrote that First Horizon made no attempt to distinguish the FDIC extender statute from the FHFA extender statute in UBS, so it must show that the Supreme Court’s decision in CTS overruled the rationale applied by the Second Circuit in UBS. It failed to do so, held the court.

Repose v. limitations. CTS did not hold that a federal statute extending statutes of limitations must always be read to leave in place existing statutes of repose, wrote the court. The Supreme Court explained, in a nod to the confusion over how to distinguish the phrases, that the use of “statutes of limitations” “is instructive, but it is not dispositive.” The Supreme Court did not lay out a novel framework for examining this question, said the court.

Other courts have grappled with the challenge of distinguishing the phrases. The Tenth Circuit in National Credit Union Administration Board v. Nomura Home Equity Loan, Inc. (August 27, 2013) pointed out that the Supreme Court in United States v. Kubrick, 444 U.S. 111, 117 (1979) used “statute of limitations” and “statute of repose” synonymously, and the Fifth edition of Black’s Law Dictionary did not provide a definition for statutes of repose, instead referring readers in the entry for “Repose statutes” to the entry for “Limitation (Statute of limitation).” That entry also said “[s]tatutes of limitations are statutes of repose,” and “Also sometimes referred to as ‘statutes of repose.”

CTS cited legislative history to establish that Congress in passing CERCLA explicitly noted a distinction between statutes of limitations and statutes of repose, but First Horizon pointed out no materials making the same distinction in the FDIC extender statute’s history. The Supreme Court in CTS firmly rooted its holding in an analysis of the text, structure, and legislative history of CERCLA, which is precisely why it has limited bearing on the instant case, wrote the court. Congress intended the FDIC extender statute to supersede any and all other time limitations, including statutes of repose, concluded the court, and because of the differences in the FDIC extender statute and its CERCLA cousin, the reasoning in CTS is not applicable.

Dissent. Judge Parker, in a dissent, wrote that the Supreme Court in CTS discussed the considerable differences between statutes of limitation and statutes of repose, and its analysis was directly relevant to the current case. “The Supreme Court held that CERCLA’s reference to a ‘statute of limitations’ means exactly what is says: it extends only to limitations periods, not repose periods,” he wrote.

The case is No. 14-3648-cv.

Attorneys: Jaclyn Chait Taner for the FDIC. Bruce Edward Clark (Sullivan & Cromwell LLP) for First Horizon Asset Securities, Inc. and First Horizon Home Loan Corp. Richard W. Clary (Cravath, Swaine & Moore LLP) for Credit Suisse Securities [USA] LLC. Thomas C. Rice (Simpson Thatcher & Bartlett LLP) for Deutsche Bank Securities Inc.

Companies: First Horizon Asset Securities, Inc.; First Horizon Home Loan Corp.; Credit Suisse Securities [USA] LLC; Deutsche Bank Securities Inc.

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