The Federal Deposit Insurance Corp. on Thursday won the right to pursue a lawsuit against several large financial institutions accused of selling tainted mortgage securities to a company that has since failed.
In a 2-1 decision, the Second U.S. Circuit Court of Appeals found the FDIC had not waited too long to file its suit against 11 banks, including Credit Suisse and Wells Fargo.
The FDIC claimed in the case that Colonial BancGroup, a Montgomery, Ala., company, had bought $388 million in toxic debt from the banks in 2007, leading to its collapse two years later. The bank went into FDIC receivership in August 2009.
In these transactions, the 11 banks had violated federal securities laws and sold Colonial risky assets, the FDIC charged.
But the banks argued that the case, filed in 2012, was brought too late in violation of state law. In 2014, a lower court sided with the banks and dropped the case.
At issue is whether the FDIC Extender Statute — a law that allows the agency to pursue securities-related lawsuits within three years of being appointed a bank's receiver — pre-empts an obscure type of state law called the "statute of repose."
The banks' lawyers have argued that the FDIC Extender Statute only applies to cases that trigger the statute of limitation, and not actions that fall under the statute of repose, such as the securities sales.
If the banks sold the securities in 2007, according to the banks, the FDIC would have had to file suit in 2010 — three years after the incident.
Courts across the country are still litigating whether or not federal statutes can pre-empt statutes of repose, which exist in only a certain number of states.