New York law gives investors who say they were duped into buying flawed mortgage bonds six years to sue. But does the clock start ticking on the day the bonds were packaged or after problems with the loans came to light?
On Thursday, New York's highest court confronted that question as it considered an appeal by investors seeking to force a Deutsche Bank AG unit to buy back bad loans packaged into securities before the financial crisis. The eventual ruling by the state Court of Appeals could open the door to many more such cases if the investors' trustee prevails.
Paul Clement, a lawyer for the trustee, told the court that the six-year statute of limitations begins to run only after the flaws are discovered — and not, as the bank argued, when the bonds were packaged and sold years earlier.
"This is a contract that extends for 30 years," Clement said, referring to a legal agreement related to the bonds. "It would be odd for investors to put themselves in a position where they would be unprotected for the last 24 years."
Not so, said David Woll, a lawyer for DB Structured Products, which provided the mortgages packaged into bonds in 2006. He told the court that reviving the lawsuit would "change what's been the law for a century" regarding such contracts.
"We could be here in 2042" if the court adopts the investors' interpretation of the time limits, he told the panel, which was convening for the day in White Plains, N.Y.
The lawsuit over losses of more than $330 million on nonperforming loans has divided lower-court judges. DB Structured won a dismissal of the case in 2013 after an appeals court determined the six-year period began to run when the deal closed.
A four-judge appellate panel unanimously reversed a decision by a Manhattan trial judge who found that the clock began when DB Structured failed to cure or repurchase defective loans in a timely manner. The Court of Appeals then agreed to hear the case.
Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s. The housing market collapsed and the crisis swept up lenders and investment banks as the market for the securities evaporated.
Investors sued DB Structured in March 2012 seeking more than $250 million in damages. According to the complaint, the company breached its obligations to repurchase loans in a pool of more than 8,000 that didn't conform with statements about their characteristics and quality. A trustee, HSBC Bank USA, later replaced the investors in the suit.
The loans were bought by DB Structured from at least three originators and sold to Ace Securities Corp., another unit of Deutsche Bank. It then deposited the loans into the trust, according to the suit, and the loans were securitized through the issuance of more than $500 million of certificates under a pooling and servicing agreement.
The trust had more than $330 million in losses on nonperforming loans by September 2012, according to a court filing.
