Article The New York Law Journal

Fate of Financial Crisis Litigation Hangs on Knotty Legal Question

An obscure question of statutory interpretation and civil procedure has found its way to the U.S. Court of Appeals for the Second Circuit on interlocutory appeal from the high-stakes litigation over the financial crisis currently brewing in the Southern District of New York. When Congress announces a new "statute of limitations" for bringing suit, does it displace the otherwise applicable "statute of repose"?

It's a question involving not only the seemingly arcane distinction between a statute of repose and one of limitations but also how courts should identify congressional intent. The answer could have enormous consequences because of the case in which it arises—the first of 18 lawsuits brought by the Federal Housing Finance Agency against the world's largest financial institutions. The agency, which acts as the regulator and conservator of mortgage giants Fannie Mae and Freddie Mac,   seeks damages related to more than $196 billion in mortgage-backed securities that Fannie and Freddie bought between 2005 and 2008 from defendants such as Bank of America,   Citigroup,   JPMorgan Chase,   and Goldman Sachs.   The FHFA alleges that the banks violated the securities laws by misrepresenting the soundness of those investments, leading to the substantial losses Fannie and Freddie suffered when the housing market collapsed.

The agency brought the first suit against UBS last July, seeking damages based on purchases of more than $6.4 billion in mortgage-backed securities sponsored or underwritten by UBS between 2005 and 2007. In its defense, UBS argued that while the FHFA may have brought its suit within the "statute of limitations" defined by Congress when it created the agency, the suit remains barred under the applicable "statute of repose."

For those who don't readily grasp the distinction, the Second Circuit has recently explained that "[s]tatutes of repose and statutes of limitations are often confused, though they are distinct. A statute of limitations creates an affirmative defense where plaintiff failed to bring suit within a specified period of time after his cause of action accrued, often subject to tolling principles. By contrast, a statute of repose extinguishes a plaintiff's cause of action after the passage of a fixed period of time, usually measured from one of the defendant's acts."

The Securities Act, under which the FHFA has brought its claims, contains both a statute of limitations and a statute of repose. The act provides that suit must be brought (a) within one year of the date the plaintiff discovered the violation and (b) within three years of the date the security was offered to the public. In the UBS case, all parties agree that the suit was brought more than three years after the last security at issue was offered to the public, so under normal circumstances the statute of repose would bar the claims brought by the FHFA under the Securities Act.

However, the Housing and Economic Recovery Act, passed in 2008, not only empowered the FHFA to act as a conservator of Fannie and Freddie but also extended the time period in which the agency may bring suit on the companies' behalf. Under the law, "the applicable statute of limitations with regard to any action brought by the Agency as conservator" is "the 3-year period beginning on the date on which the claim accrues," which the law defines as "the date of the appointment of the Agency as conservator." Because the FHFA brought suit within three years of being appointed conservator, the agency argues, its suit was timely.

UBS, however, has said that because the HERA defines only "the applicable statute of limitations," it displaces the one-year statute of limitations in the Securities Act but leaves in place the three-year statute of repose. UBS urged the district court to dismiss the FHFA's claims as time-barred by the statutes of repose in the Securities Act and the corresponding state securities laws.

Historical Meanings

Judge Denise Cote of the Southern District of New York rejected that argument. In her view, the term "statute of limitations" sometimes refers to statutes of limitations as well as repose, and Congress, in defining the applicable statute of limitations, intended that provision to be the exclusive time limit for actions brought by the FHFA. As Cote saw it, UBS based its argument on an overly technical distinction that doesn't always correspond to how language is understood in everyday usage.

But last month Judge Cote certified the question for immediate interlocutory appeal to the Second Circuit. In doing so, she recognized that this is the sort of issue for which interlocutory appeal exists: a threshold legal question with potentially dispositive implications for a large and costly litigation battle. She also recognized that there was substantial ground for a difference of opinion over the question.

In fact, other courts considering the same issue have reached the opposite conclusion. In an ongoing Securities Act case involving mortgage-backed securities in the Central District of California, the court interpreted an identical time-extension provision in the Federal Credit Union Act. "[T]he Extender statute clearly does not apply to statutes of repose," the court concluded. "The statute plainly refers to statutes of limitation. It makes no mention whatsoever of statutes of repose." Accordingly, the court said, the three-year statute of repose of the Securities Act remains operable even for claims brought by a conservator under the Federal Credit Union Act.

Similarly, in 1991, the U.S. District Court for the District of Arizona interpreted an identical extender provision contained in the Financial Institutions Reform, Recovery, and Enforcement Act. The court decided the statute dealt "only with procedural statutes of limitations and not substantive statutes of repose," leaving the applicable statutes of repose in place.

These courts found the plain statutory language to be decisive. In their view, the terms "statute of limitations" and "statute of repose" must be understood to have distinct meanings because, as the California court put it, courts "have repeatedly distinguished the two over the past 70-plus years."

In a recent case, Judge Lewis Kaplan of the Southern District said that "[s]tatutes of limitations are fundamentally different from statutes of repose." A statute of limitations starts running when a claim accrues, such as when an injury is suffered or discovered. The statute of limitations bears on the availability of a remedy, so it may be subject to tolling or equitable defenses. A statute of repose, by contrast, extinguishes the claim after a fixed period of time regardless of when the cause of action accrued. The statute of repose defines the availability of the underlying right, so it runs without interruption once the relevant product is delivered or the relevant work is completed—even if equitable considerations would warrant tolling or the plaintiff has not yet discovered the injury.

This is a real distinction between two legal concepts with long historical meanings. The question to be answered by the Second Circuit is whether Congress should be deemed to have understood the meaning of the term it used. The competing view is that we can understand what Congress was trying to accomplish even if the direct application of the language it chose would have a different result.

For its part, UBS hasn't been willing to concede that Congress' words, when passing HERA, were at variance with its purpose. The bank has argued that statutes of limitations and of repose serve different functions. So it makes sense that Congress would want to extend the statute of limitations, so that the FHFA is not limited by when Fannie or Freddie discovered the alleged violations, while maintaining the applicable statute of repose—so that, at a given time following the sale of certain securities, everyone can be confident that litigation is at an end. In support of its view, UBS points out that Congress has passed other legislation that refers to periods of both "limitation" and "repose," and it could have done so in the HERA as well.


Should the Second Circuit hold Congress to the words it used, the decision could have dramatic consequences. The timeliness of claims against the other big banks in the 17 pending actions brought by the FHFA will turn on whether the HERA extends the applicable statutes of repose. The issue also has implications for litigation brought by the Federal Deposit Insurance Corporation alleging other violations of the Securities Act related to mortgage-backed securities. In those cases, the FDIC relies on the identical extender provision of the FIRREA to maintain those suits—and to avoid the otherwise applicable statute of repose.

So by holding that by "statute of limitations" Congress meant just that, the Second Circuit might avoid the substantial cost of litigating the government's billion-dollar claims related to securities it purchased seven years ago. At some point, potential litigants need to receive some semblance of repose.