The Tenth Circuit Court of Appeals published its opinion in National Credit Union Administration Board v. Nomura Home Equity Loan on Tuesday, August 27, 2013.
U.S. Central Federal Credit Union (“U.S. Central”) was the largest federally chartered credit union in the country before it failed in 2009. In 2006 and 2007, U.S. Central invested in RMBS. RMBS are created through securitization by pooling residential mortgage loans and offering prospective investors the opportunity to invest in a loan pool through purchase of RMBS certificates granting ownership of a slice of the loan pool. Investors can buy, sell, or hold RMBS certificates. When homebuyers pay back their loans, investors receive a positive return through payment of dividends and the increased value of the certificates.
U.S. Central purchased 29 RMBS certificates. When U.S. Central made these purchases, nearly all certificates were assigned the highest possible investment rating, indicating they were low-risk investments. But over the next four years, most of the certificates performed so poorly that their credit ratings were downgraded to well below investment grade. In other words, the certificates were reclassified to a credit rating commonly referred to as “junk” grade.
The RMBS of Corporate Federal Credit Union (“WesCorp”) were also highly rated at the time of purchase, but experienced a surge in borrower delinquencies and defaults, resulting in significant losses and a collapse of their credit ratings. This resulted in staggering losses for both credit unions, and losses from these failed investments contributed to the demise of both organizations.
After taking over the credit unions, The National Credit Union Administration (“NCUA”) investigated the RMBS. NCUA concluded that the offering documents contained materially false and misleading statements about the credit worthiness of the mortgage borrowers and the underwriting practices used by originators of the mortgages. NCUA claimed these materially false and misleading statements concealed underwriters’ shoddy practices and systematic disregard of the guidelines and industry standards.
NCUA placed the two credit unions into conservatorship and sued 11 defendants on behalf of U.S. Central, alleging federal and state securities violations. In a separate case, NCUA sued one defendant on behalf of U.S. Central and WesCorp, alleging similar violations.
The cases were consolidated in the United States District Court for the District of Kansas. Defendants moved for dismissal, arguing that NCUA’s claims were time-barred. The district court denied the motion, concluding that the so-called Extender Statute applied to NCUA’s claims. See 12 U.S.C. § 1787(b)(14). Defendants moved for an interlocutory appeal for the Tenth Circuit to determine whether the Extender Statute applied to NCUA’s claims.
In the wake of the savings and loan crisis of the 1980s, Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”). FIRREA’s purpose is to strengthen government regulation of federally chartered or insured financial organizations. FIRREA contains provisions often referred to as “extender statutes,” which extend the time period for a government regulator to bring “any action” on behalf of a failed financial organization. One applies to NCUA, 12 U.S.C. § 1787(b)(14). It reads in part:
(A) In general
Notwithstanding any provision of any contract, the applicable statute of limitations with regard to any action brought by the Board as conservator or liquidating agent shall be—
(i) in the case of any contract claim, the longer of—
(I) the 6-year period beginning on the date the claim accrues; or
(II) the period applicable under State law; and
(ii) in the case of any tort claim, the longer of—
(I) the 3-year period beginning on the date the claim accrues; or
(II) the period applicable under State law.
Further, Sections 11 and 12(a)(2) of the Securities Act of 1933 impose liability on certain participants in a registered securities offering that involves material misstatements or omissions. Section 11 applies to registration statements, and Section 12(a)(2) applies to prospectus materials and oral communications. For private litigants bringing a claim under Sections 11 or 12(a)(2), two deadlines must be satisfied. Both appear in Section 13 of the Securities Act. First, a claim must be brought within one year from the date the violation is discovered or should have been discovered through the exercise of reasonable diligence. Second, a claim is subject to a three-year limit, which provides that “[i]n no event” shall a claim under Section 11 be filed “more than three years after the security was bona fide offered to the public,” and no “more than three years after the sale” in the case of a Section 12(a)(2) claim.
Defendants made two arguments that NCUA’s claims were untimely. First, they argued that the Extender Statute did not apply to repose periods and that Section 13’s three-year period was a repose period. A statute of repose is a fixed, statutory cutoff date, usually independent of any variable, such as claimant’s awareness of a violation. In a statute of repose, the bar is tied to an independent event.
The court applied a plain meaning analysis. The Tenth Circuit concluded that the Extender Statute time periods’ application to “any action” indicated that the Statute supplanted any other time periods that otherwise would apply to NCUA claims. The court held that the Extender Statute applied to Section 13’s three-year repose period and affirmed the district court’s conclusion on this issue.
Second, Defendants argued that the Extender Statute covered only state common law claims. Under this theory, the Extender Statute would not apply to any of NCUA’s claims—all of which were statutory. The court held that applying the Extender Statute to statutory claims served the statute’s purpose by providing NCUA sufficient time to investigate and file all potential claims once it assumes control of a failed credit union. For the same reasons, statutory purpose supported the Extender Statute’s application to federal actions. FIRREA’s stated purpose includes facilitating recoveries by NCUA on behalf of failed credit unions.