One of the many tools of the FDIC in resolving failed banks is the Extender Statute which, by its terms, replaces existing statutes of limitation under state law by a period of years. In simple terms, the Extender Statute creates a longer statute of limitations for bringing a lawsuit on behalf of the now defunct bank. The technical nature, and the amount in contest has led some defendants in FDIC lawsuits to argue that the Extender Statute of 12 U.S.C § 1821(d)(14) applies only to statutes of limitation, and not to statutes of repose. This argument has recently been declined in the 5th Circuit and, in doing so the 5th Circuit has allowed lawsuits against RBS Securities, Deutsche Bank Securities and Goldman Sachs with damages of almost a billion dollars to proceed despite state law.
In short, Guaranty Bank failed after investing about $840 million into residential mortgage backed securities offered by the defendants RBS Securities, Inc., Deutsche Bank Securities, Inc. and Goldman Sachs & Co. After Guaranty Bank failed the FDIC was appointed receiver and sued all of the defendants on a number of securities claims, including claims under Texas securities laws. In response, the defendants asserted that the claims were barred by statute of repose in Texas.
I. The Extender Statute
Following the Savings and Loan scandal and failure of the 1980’s, the U.S. Congress passed the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”). FIRREA did a lot of things beyond the scope of this post. However, one of the things FIRREA did was create the Extender Statute.
“The FDIC Extender Statute works by hooking any claims that are live at the time of the FDIC’s appointment as receiver and pulling them forward to a new, federal, minimum limitations period…”
At a minimum, the Extender Statute gives the FDIC 3 years from the date it is appointed receiver over a failed bank to decide whether to sue anyone for bad acts related to the failed bank.
In the case cited above, Guaranty Bank in Texas had failed, the FDIC had taken over and within three years of appointment as receiver, the FDIC sued RBS Securities, Deutsche Bank Securities and Goldman Sachs & Co. on claims related to alleged bad mortgage backed securities investments.
The issues in the appeal is that under Texas Securities Law (Tex. Rev. Civ. State. Art. 581-33(H)(2)(b)) the claims brought by the FDIC were barred by a statute of repose which ran shortly after the appointment of the FDIC as receiver.
II. Statutes of Limitations v. Repose
While the FDIC Extender Statute refers to a “statute of limitation”, the Texas Securities Law is a statute of repose. Ordinarily the distinction is important, but not in this case.
To paraphrase the 5th Circuit: A statute of limitations creates a deadline for suing in a civil case based on the accrual of claim – which is typically when the damage is discovered or should have been discovered. On the other hand, a statute of repose creates a deadline for suing in a civil case based on the last bad act – without regard to damage.
In the case, everyone agrees that the Texas Securities Law is a statute of repose and everyone agrees that the FDIC Extender Statute only references statutes of limitation.
III. The Holding
In 36 pages of dense and technical reasoning, the 5th Circuit holds that the Federal Extender Statute applies to extend statutes of limitation and the statute of repose under state law, such as the Texas Securities Law.
The statutory construction analysis is worthy of an attorney’s only blog post. I will do you the favor of omitting the analysis here. However, it is sufficient to say the opinion is comprehensive in its analysis.
IV. Why it Matters
Why does it matter? RBS Securities, Deutsche Bank Securities and Goldman Sachs were all sued by the FDIC based on a failed bank’s investments into their residential mortgage backed securities trusts outside of state law prohibited time period.
When quantifying risk, the monetary exposure is just as important as the burn time of the limitations period. Concerning this securities issue, the FDIC as managed to extend the otherwise applicable five year statute of repose to a eight year state of limitation in a case with damages near $1 billion.
If you are a lender and your counter-party is an FDIC insured bank, the statute of limitations on risk might be significantly longer than anticipated if the counter-party bank fails.
FDIC v. RBS Securities, Inc., case no. 14-51055 (cons w/ 51066), In the United States Court of Appeals for the Fifth Circuit.