The U.S. Supreme Court's decision last week not to review a mortgage-backed securities lawsuit renewed interest in a long-brewing legal conflict over the mandate of the Financial Institutions Reform, Recovery, and Enforcement Act.

The Federal Deposit Insurance Corp. used the 1989 law, which was updated after the current financial crisis, to sue Deutsche Bank, Goldman Sachs and the Royal Bank of Scotland over the sale of $804 million in securities to Guaranty Bank.

In the 2012 lawsuit, the companies were accused of making false statements tied to the 2004 and 2005 MBS sales to the Texas bank, which later failed and was placed under FDIC receivership.

The suit rests on an obscure legal argument that could have an impact beyond the securities industry. It involves a type of state law called the statute of repose, a more lenient version of the statute of limitation in which the clock starts ticking when the alleged act is committed, instead of when it is first brought to light.

These types of laws are "meant to give the person who conducted the allegedly wrong conduct some peace of mind," said Dan Terzian, a Duane Morris associate in Los Angeles.

The question is whether federal statutes like FIRREA are bound by statutes of repose in the states that have them, even when they explicitly address statutes of limitations.

"FIRREA preempts other statutes of limitations," said Terzian. "Most people would agree that it's clear."

But it might be a different story for the statutes of repose.

In June 2014, the Supreme Court ruled in favor of a company making the same argument with respect to an environmental law called the Comprehensive Environmental Response, Compensation, and Liability Act. Like FIRREA, CERCLA does not explicitly mention statutes of reposes, though it does refer to statutes of limitations.

The case was cited, Reuters reported, in a September 2014 court ruling that sided with Deutsche Bank, Goldman Sachs and RBS in and dismissed the FDIC's lawsuit.

But in August, the Fifth Circuit Court of Appeals found the prospect that the U.S. Congress did not mean to include statutes of repose under FIRREA’s preemption "highly unlikely," according to Reuters.

The Supreme Court's refusal to review the case might be only temporary — either because the court is short one Justice, or because it wants to see how other lawsuits pan out, said Terzian.

Other cases involving the FDIC are currently pending in appeals courts in California and New York. Lawsuits filed by the Federal Housing Finance Agency and National Credit Union Administration invoking the same legal argument are also in play.

"The Supreme Court's not hearing this doesn't mean the Fifth Circuit got it right" in this case, said Terzian. "Usually [the Supreme Court will] wait a while and give...more courts the chance to address [a case]."

Subscribe Now

Authoritative analysis and perspective for every segment of the mortgage industry

30-Day Free Trial

Authoritative analysis and perspective for every segment of the mortgage industry