What’s Up with HERA’s Statute of Limitations?

On May 4, 2012, the Southern District of New York denied in part, and granted in part UBS’s motion to dismiss the Federal Housing Finance Agency’s (“FHFA”) federal securities and state law misrepresentation claims stemming from pre-2008 securitizations.  This opinion is noteworthy because of its analysis regarding the Housing and Economic Recovery Act of 2008’s impact on the relevant statute of limitations.

In July 2011, FHFA, as Fannie Mae’s (“Fannie”) and Freddie Mac’s (“Freddie) federal conservator, sued UBS regarding $6.4 billion in residential mortgage-backed securities purchased by the two government sponsored entities between September of 2005 and August 2007.  FHFA alleged that UBS violated, inter alia, Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (“33 Act”) by preparing and distributing offering documents which contained material misrepresentations regarding the securities underlying mortgage loans.

UBS moved to dismiss the claims arguing, among other things, that that FHFA’s claims were time-barred under the applicable statute of limitation.  Federal Housing Finance Agency v. UBS Americas, Inc, Case no. 1:11-cv-05201-DLC (S.D.N.Y. May 4, 2012).  It asserted that Section 13 of the 33 Act governed FHFA’s claims, requiring it to bring suit within one year of discovery of the purportedly false or misleading statements, and in no event later than three years from the date the security was offered to the public.  The securities were offered to the public through August 2007 and FHFA did not bring suit until July 27, 2011, thus UBS argued the claims were barred under the three year period of repose.  It also argued that the claims were barred under the one year discovery period because Fannie and Freddie were on inquiry notice of the challenged loan practices as early as September 2007.

FHFA argued that the Housing and Economic Recovery Act of 2008 (HERA), as opposed to Section 13 of the 33 Act, established the applicable statute of limitations. HERA requires a conversator to bring a federal tort claim within three years of appointment.  FHFA was appointed as a conversator on September 6, 2008, thus, it argued that its claims were timely under HERA.

District Judge Denise Cote agreed with FHFA, applying HERA’s three year period of limitations even though the claims would otherwise have been barred under Section 13.  Judge Cote found that this was consistent with the legislative intent and a plain reading of HERA’s provision, holding that UBS’s interpretation would undermine Congress’s intent for HERA to “maximize the ability of FHFA to ‘put the [conservatees] in a sound and solvent condition.’”

Judge Cote also rejected UBS’s argument that the claims were time-barred under Section 13’s one year statute of limitations.  She found that Fannie and Freddie could not have reasonably discovered sufficient facts during the relevant time period to plead a 33 Act claim based upon questionable loan practices.

As to the merits of the federal securities claims, Judge Cote found that FHFA had sufficiently pled material misstatements or omissions regarding appraisal values, owner-occupancy rates, and compliance with underwriting guidelines, and accordingly denied UBS’s motion to dismiss these claims.  The court granted UBS’s motion to dismiss the state law negligent misrepresentation claims, finding that there was no “special relationship” between UBS and Fanny and Freddie that would give rise to a duty to provide accurate information.