A lower court’s ruling against the Federal Deposit Insurance Corp. has been overturned on appeal, paving the way for the regulator to pursue losses from residential mortgage-backed securities.
In August 2009, the Alabama State Banking Department seized Colonial Bank and named the FDIC as receiver. Most of Colonial’s $25 billion in assets were sold to Branch Banking and Trust.
Colonial’s failure was
primarily the result of losses tied to fraud at the now-defunct Taylor, Bean and Whitaker Mortgage Corp. The bank had served as the warehouse lender for Taylor Bean.
Also contributing to the financial institution’s demise was $300 million it invested in RMBS — suffering heavy losses following the financial crisis.
In August 2012, the FDIC filed a complaint in federal court in New York on behalf of Colonial Bank under the Securities Act of 1933. It claimed that Colonial was misled about the securities.
Among the companies named as defendants were Chase Mortgage Finance Corp., CitiMortgage Inc. and First Horizon Home Loan Corp. In addition, investment-banking affiliates of the companies, as well as other investment bankers, were named as defendants.
The FDIC brought the action
within the limitations period provided by the FDIC Extender Statute, which allows such litigation within three years of FDIC becoming receiver.
But the defendants argued that
under the Securities Act of 1933, the FDIC had only three years after the issuance of the RMBS to file its lawsuit.
“Although they recognize that the FDIC Extender Statute displaces otherwise applicable statutes of limitations, the defendants argue that it does not displace the Securities Act’s statute of repose, and that the complaint should be dismissed as untimely,” the appellate court decisions states.
U.S. District Judge Louis L. Stanton agreed with the defendants and dismissed the case.
So the FDIC appealed the decision to the Second Circuit U.S. Court of Appeals.
In a May 19 decision, the appeals court ruled in favor of the FDIC, vacated the district court’s decision and remanded the case.
The court cited its previous ruling in
Federal Housing Finance Agency v. UBS Americas Inc., where it determined that a materially identical extender statute for actions brought by the FHFA displaced the Securities Act’s statute of repose.
