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Federal Deposit Insurance Corp. v. First Horizon Asset Securities Inc.

United States District Court, S.D. New York

March 1, 2018

FEDERAL DEPOSIT INSURANCE CORPORATION as receiver for Colonial Bank, Plaintiff,
v.
FIRST HORIZON ASSET SECURITIES INC.; FIRST HORIZON HOME LOAN CORPORATION; CREDIT SUISSE SECURITIES USA LLC; DEUTSCHE BANK SECURITIES INC.; FTN FINANCIAL SECURITIES CORP.; HSBC SECURITIES USA INC.; RBS SECURITIES INC.; UBS SECURITIES LLC; and WELLS FARGO ASSET SECURITIES CORPORATION, Defendants.

          OPINION & ORDER

          LOUIS L. STANTON U.S.D. JUDGE.

         Defendants move under Federal Rule of Civil Procedure 12(b)(6) to dismiss the first five counts in the Second Amended Complaint ("SAC") for failure to state a claim upon which relief can be granted. For the reasons that follow, the motion is granted in part and denied in part.

         BACKGROUND

         Plaintiff Federal Deposit Insurance Corporation ("FDIC") commenced this action as receiver for Colonial Bank ("Colonial") seeking to recover damages incurred by Colonial from misrepresentations made by the defendants in connection with Colonial's purchase of residential mortgage backed securities issued or underwritten by the defendants in violation of the Securities Act of 1933 (the "1933 Act").

         The SAC alleges that the "defendants issued, underwrote, and/or sold eight securities known as "certificates" (the Certificates) which were backed by collateral pools of residential mortgage loans." SAC (Dkt. No. 178) SI 1. Colonial, located in Montgomery, Alabama, purchased those certificates between June and September of 2007 through a wholly owned Nevada based subsidiary. Id. ¶ 2, Schedules 1-11, Item 37(b). As the housing market collapsed many of the loans backing the certificates defaulted and Colonial incurred heavy losses. On August 14, 2009, Alabama regulators closed Colonial and appointed FDIC as receiver.

         The certificates were created in a process known as securitization. Id. ¶ 24. That process begins when an originator issues loans to borrowers to finance the purchase of homes. Id. Those loans are issued pursuant to the originator's underwriting standards which ensure that the borrower will be able to repay the loan. Id. The originator then takes a large number of similar type loans, known as a collateral pool, and sells them, along with the right to cash flow from those loans, to a trust. Id. SI 26. The trust pays for those collateral pools by issuing securities, known as certificates, which are sold to investors. Id. Each certificate entitles its holder to an agreed part of the cash flow from the collateral pools. Id.

         The prime mover of the securitization is known as the sponsor. Id. ¶ 31. Sometimes, the sponsor is the originator of the loans. Id. Other times, the sponsor is an investment bank. Id. The investment bank purchases loans from one or more originator, aggregates them into a collateral pool, and sells the collateral pool to an entity known as a depositor. Id. The depositor then sells the collateral pool to the trust. Id. The trust does not sell its certificates directly to the investing public. Rather, investment banks known as underwriters prepare, sign, and file necessary disclosure documents with the United States Securities and Exchange Commission ("SEC"), purchase the certificates from the trust, and then sell those certificates to investors. Id. ¶ 33.

         Because potential investors do not have access to the loan files, they rely on the information contained in the disclosure documents that the underwriters file with the SEC. Id. ¶ 35. Those documents contain information compiled by the underwriters about the loans in the collateral pools backing the various securities. Id.

         Specifically, the SAC alleges that defendants Credit Suisse Securities (USA) LLC, RBS Securities Inc., HSBC Securities (USA) Inc., and Deutsche Bank Securities Inc. (collectively the "underwriter defendants") underwrote and sold to Colonial five of the certificates at issue. See id. ¶¶ 118-33. Defendants FTN Financial Securities Corp. and UBS Securities LLC underwrote two of the securities that Colonial purchased. See id. ¶¶ 230-31. Defendants First Horizon Asset Securities Inc. and Wells Fargo Asset Securities Corporation (collectively the "depositor defendants") were the depositors for four of the certificates that Colonial purchased. See id. ¶¶ 134-43. Defendant First Horizon Home Loan Corporation controlled First Horizon Asset Securities Inc. during the time period covered by the SAC. Id. ¶ 14.

         FDIC alleges that the underwriters for the eight certificates at issue filed prospectus supplements with the SEC that contained many statements that were material to Colonial in deciding to purchase the certificates, but were untrue or misleading. Id. ¶¶ 36-104.

         The SAC asserts seven claims to relief. Count A seeks to recover damages incurred by Colonial against the underwriter and depositor defendants for untrue or misleading statements in the sale of securities under Section 8-6-19(a)(2) of the Alabama Securities Act. Id. ¶¶ 117-47. Count B seeks to recover damages from First Horizon Home Loan Corporation under Section 8-6-19(c) of the Alabama Securities Act which imposes liability on entities that control those who make untrue or misleading statements in the sale of securities. Id. ¶¶ 148-51. Count C seeks to recover damages incurred by Colonial against the underwriter and depositor defendants for untrue or misleading statements in the sale of securities under Sections 90.570(2) and 90.660(1)(d) of the Nevada Uniform Securities Act. Id. ¶¶ 152-82. Count D seeks to recover damages from First Horizon Home Loan Corporation under Section 90.660(4) of the Nevada Uniform Securities Act which imposes liability on entities that control those who make untrue or misleading statements in the sale of securities. Id. ¶¶ 183-86. Count E seek to recover damages incurred by Colonial against the underwriter and depositor defendants for untrue or misleading statements in the sale of securities under Section 12(a)(2) of the 1933 Act. Id. ¶¶ 187-222. Count F seek to recover damages incurred by Colonial against the underwriter and depositor defendants, FTN Financial Securities Corp., and UBS Securities LLC for untrue or misleading statements in a registration statement under Section 11 of the 1933 Act. Id. ¶¶ 223-38. Lastly, count G seeks to recover damages from First Horizon Home Loan Corporation under Section 15 of the 1933 Act which imposes liability on entities that control those who make untrue or misleading statements in violation of Sections 11 and 12 of the 1933 Act. Id. ¶¶ 239-42.

         Procedural History

         FDIC filed its initial complaint in this matter on August 10, 2012, asserting claims to relief under Sections 11 and 15 of the 1933 Act which prohibit untrue or misleading statements in a registration statement, and impose liability on entities that control those who make untrue or misleading statements in a registration statement. See Compl. (Dkt. No. 1). In response to the defendants' motion to dismiss, FDIC filed an amended complaint on December 4, 2012, again, only seeking relief under Sections 11 and 15 of the 1933 Act. See Am. Compl. (Dkt. No. 72).

         After initially denying defendants' motion to dismiss the amended complaint, see FDIC v. Chase Mortg. Fin. Corp., No. 12 Civ. 6166 (LLS), 2013 WL 5434633, at *1 (S.D.N.Y. Sept. 27, 2013) (Dkt. No. 86), on August 29, 2014, I granted their motion for judgment on the pleadings, finding that FDICs claims were barred by the 1933 Act's statute of repose, see FDIC v. Chase Mortg. Fin. Corp., 42 F.Supp.3d 574 (S.D.N.Y. 2014) (Dkt. No. 150). On May 19, 2016, a panel of the United States Court of Appeals for the Second Circuit vacated that judgment and remanded the case for further proceedings consistent with its opinion. See FDIC v. First Horizon Asset Sec, Inc., 821 F.3d 372 (2d Cir. 2016) (Dkt. No. 153). On January 9, 2017, the United States Supreme Court denied the defendants' certiorari petition. See First Horizon Asset Sec, Inc. v. FDIC, 137 S.Ct. 628 (2017).

         On June 8, 2017, FDIC informed defendants' counsel of its intention to move for leave to amend its complaint to add additional facts regarding Colonial's investment processes and to assert additional claims under Alabama and Nevada law and Section 12(a)(2) of the 1933 Act. Valdes Decl. (Dkt. No. 198) Ex. 2. Defendants' counsel replied that defendants would not oppose the motion for leave to amend, and that they would raise what they saw as defects in the SAC in a motion to dismiss. Id. FDIC notified the court by letter dated June 14, 2017 that it intended to move for leave to file a SAC. At a conference held on June 16, 2017, I granted FDIC's unopposed motion to file the SAC, while reserving the defendants' rights to move to dismiss the claims in the SAC. See Tr. of June 16, 2017 Conference (Dkt. No. 181) at 3-4.

         On June 21, 2017, FDIC filed and served the SAC, [1]reasserting its two claims under Sections 11 and 15 of the 1933 Act (Counts F and G), and adding five new claims (Counts A and B under Alabama law, Counts C and D under Nevada law, and Count E under Section 12(a)(2) of the 1933 Act).

         Defendants now move to dismiss the five new claims brought under the securities laws of Alabama and Nevada and Section 12(a)(2) of the 1933 Act as time-barred by the relevant statutes of repose and limitations. They also argue that the newly added claims should be dismissed because FDIC unduly delayed in bringing them.

         Additionally, they move to dismiss the claims against the depositor defendants for untrue or misleading statements in the sale of securities under Alabama and Nevada law because the SAC does not allege that those defendants sold certificates to Colonial.

         DISCUSSION

         Time-barred Claims

         The statute of repose for claims under Section 12(a) (2) of the 1933 Act is three years from the sale of the security. 15 U.S.C. § 77m. The statute of repose for the claims under the Nevada Uniform Securities Act is five years from the sale of the security. Nev. Rev. Stat. § 90.670. The Alabama Securities Act claims are not subject to a statute of repose but are subject to a two year statute of limitations from the time the violation is discovered or should have been discovered by the exercise of reasonable care. Ala. Code § 8-6-19(f). The FDIC extender statute extends FDIC s time to sue by three years from when it is appointed receiver, if that period is longer than the otherwise applicable period. 12 U.S.C. § 1821(d) (14) (A) (ii)-(B) .

         Colonial purchased the certificates at issue between June 5, .2007 and September 24, 2007. See SAC Schedules 1-11, Item 37(b). The claim under Section 12(a)(2) of the 1933 Act for the last security purchased expired on September 24, 2010, and the claims under the Nevada Uniform Securities Act for the last security purchased expired on September 24, 2012.

         As for the Alabama Securities Act claims, the SAC alleges that the misstatements at issue could first have been discovered on August 15, 2008, the day after the files compiled by the loan originators and the records maintained by the loan servicers became available to Colonial. Id. St 106. Indeed, the rating agencies downgraded their ratings for each of the eight certificates at issue approximately four to eight months after that date. Id. ¶ 110. Accordingly, the two year statute of limitations on the Alabama Securities Act claims expired on August 15, 2010.

         FDIC was appointed receiver for Colonial on August 14, 2009. Id. SI 12. Its time to bring a claim under Section 12(a) (2) of the 1933 Act and under the Nevada Uniform Securities Act for securities purchased before August 14, 2007 was extended to August 14, 2012. Its time to bring a claim under the Nevada Uniform Securities Act for securities purchased after August 14, 2007 was unaffected. Its time to bring claims under the Alabama Securities Act was extended to August 14, 2012.

         FDIC filed its complaint on August 10, 2012, and filed its amended complaint on December 4, 2012. Both the complaint and the amended complaint only asserted claims to relief under Sections 11 and 15 of the 1933 Act. By the time FDIC filed its amended complaint, all the new claims at issue here were time-barred. The new claims were not brought until June 21, 2017, approximately ten ...


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