CMFG Life Ins. Co. v. RBS Sec., Inc.

Decision Date21 August 2015
Docket NumberNo. 14–2904.,14–2904.
Citation799 F.3d 729
PartiesCMFG LIFE INSURANCE CO., Cumis Insurance Society, Inc., and Members Life Insurance Co., Plaintiffs–Appellants, v. RBS SECURITIES, INC., Defendant–Appellee.
CourtU.S. Court of Appeals — Seventh Circuit

799 F.3d 729

CMFG LIFE INSURANCE CO., Cumis Insurance Society, Inc., and Members Life Insurance Co., Plaintiffs–Appellants
v.
RBS SECURITIES, INC., Defendant–Appellee.

No. 14–2904.

United States Court of Appeals, Seventh Circuit.

Argued April 1, 2015.
Decided Aug. 21, 2015.


799 F.3d 733

David Charles Frederick, Attorney, Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, DC, Stephen M. Tillery, Attorney, Korein Tillery, St. Louis, MO, for Plaintiffs–Appellants.

David Horowitz, Attorney, R. Alexander Pilmer, Attorney, Kirkland & Ellis LLP, Los Angeles, CA, for Defendant–Appellee.

Before WOOD, Chief Judge, FLAUM, Circuit Judge, and KENNELLY, District Judge.1

Opinion

KENNELLY, District Judge.

Between 2004 and 2007, CUNA Mutual, an insurance company, purchased fifteen residential mortgage-backed securities from RBS Securities, Inc. Then the housing market crashed, and the securities with it. CUNA now wants out of the deals. CUNA alleges that RBS induced it to purchase the securities by materially misrepresenting that the underlying mortgages complied with underwriting guidelines. The district court granted summary judgment on all but one of CUNA's rescission claims, and CUNA appealed. We reverse in part and affirm in part.

I. Background

The plaintiffs in this case are CMFG Life Insurance Co., CUMIS Insurance Society, Inc., and Members Life Insurance Co., collectively called CUNA Mutual. CUNA sells insurance and other investment products to credit unions. In addition to selling investment products, CUNA maintains its own investment portfolio. Between 2004 and 2007, CUNA purchased a number of residential mortgage-backed securities from RBS Securities, Inc. This case involves fifteen of those securities.

During the time period at issue in this case, creation of a mortgage-backed security began with origination of individual mortgage loans. In deciding whether to make a loan, originators evaluated credit risk using underwriting guidelines. These guidelines were “designed to gauge two crucial factors of credit risks: (1) borrower ability to pay and (2) sufficiency of collateral (the mortgaged property) if the borrower defaults.”2 Appellant's Br. at 5.

799 F.3d 734

Through a complicated process involving several intermediaries, hundreds or thousands of mortgages would be purchased from originators and bundled into securities. Securities underwriters—here, RBS—then sold these securities to investors. The mortgage payments (or, in the event of default, foreclosure sale proceeds) provided a stream of income to investors.

Underwriting guidelines were important to investors for determining the value of securities: the lower the borrower's ability to pay (or the lower the property value), the greater the risk of default (and more defaults, of course, means less income for investors). Written representations of guidelines compliance were also important to investors because such representations created a legally-enforceable duty. Because originators did not keep the mortgages on their books, they did not bear any risk of default by the mortgagors. Thus, aside from reputational consequences, litigation was the primary deterrent against lax compliance with underwriting guidelines.

The fifteen securities RBS sold to CUNA were registered under SEC Form S–3, known as “shelf” registration. Shelf registration permitted the issuer to “register asset-backed securities to be offered on a delayed basis in the future through one or more offerings, or ‘takedowns,’ of securities off of the shelf registration statement.” Final Rule, Asset–Backed Securities, 70 Fed.Reg. 1506, 1512 (Jan. 7, 2005) ; see also 17 C.F.R. § 230.415.3 If registered in this manner, “the registration statement [was] often presented through the use of two primary documents: the ‘base’ or ‘core’ prospectus and the prospectus supplement.” Id. The base prospectus “outline[d] the parameters of the various types of [asset-backed securities] offerings that may be conducted in the future”; the prospectus supplement “outline[d] the format of deal-specific information that [would] be disclosed at the time of each takedown.” Id. at 1512–13. “At the time of a takedown, a final prospectus supplement [was] prepared which describe[d] the specific terms of the takedown, and the base prospectus and the final prospectus supplement together form[ed] the final prospectus....” Id. at 1513 ; see also 17 C.F.R. § 230.430B ; 17 C.F.R. § 229.512(a)(1). After a Form S–3 registration was filed, the SEC permitted issuers to sell securities using term sheets-even before availability and delivery of the final prospectus supplement. Id. at 1554–55. As we will discuss in greater detail below, investors in the mortgage-backed securities market often made purchase decisions on term sheets alone.

Following the housing market crash, the fifteen securities at issue in this case declined in value. CUNA commissioned a forensic study of the loan pools underlying the securities. The study found that approximately 40.8 percent of the loans were materially defective, meaning that “they violated applicable underwriting guidelines in a manner that materially increased the credit risk of the loan and that was not justified by sufficient compensating factors.” App. at 1681.

CUNA now alleges that RBS induced it to purchase the securities by materially misrepresenting that the underlying loans

799 F.3d 735

complied with underwriting guidelines. First, CUNA alleges that RBS repeatedly assured CUNA's mortgage-backed securities trader, Mark Prusha, that extensive due diligence was conducted on the loan pools. Second, CUNA alleges that the relevant base and supplemental prospectuses expressly represented that the loans complied with the guidelines. Absent these misrepresentations, CUNA asserts, it would not have purchased the securities.

CUNA sued RBS in Wisconsin state court for rescission based on these alleged misrepresentations. Defendants removed the case to federal court in 2012. Two years later, the parties cross-moved for summary judgment. The district court granted summary judgment in RBS's favor on all but one of CUNA's rescission claims. The district court also held that CUNA's claims with regard to nine of the fifteen securities were time-barred and denied CUNA's motion for leave to amend. CUNA stipulated to judgment on the remaining claim and appealed.

II. Discussion

CUNA has appealed the district court's decisions granting summary judgment in favor of RBS and denying CUNA leave to amend its complaint. We review the district court's grant of summary judgment de novo, construing all facts and reasonable inferences in the light most favorable to CUNA. Ripberger v. Corizon, Inc., 773 F.3d 871, 876 (7th Cir.2014). We also review summary judgment based on a statute of limitations de novo. Bernstein v. Bankert, 733 F.3d 190, 199 (7th Cir.2013). We review denial of leave to amend a complaint for abuse of discretion. Johnson v. Cypress Hill, 641 F.3d 867, 871 (7th Cir.2011).

A. Statute of Limitations

Section 893.43 of the Wisconsin Statutes provides that “[a]n action upon any contract, obligation or liability, express or implied ... shall be commenced within 6 years after the cause of action accrues or be barred.” Wis. Stat. § 893.43. The district court held that this statute of limitations governed claims for rescission and, accordingly, that CUNA's claims regarding nine of the fifteen certificates at issue in this case were time-barred. CMFG Life Ins. Co. v. RBS Sec. Inc., No. 12–cv–037–wmc, 2014 WL 3696233, at *26 (W.D.Wis. July 23, 2014). CUNA has appealed this determination. Although CUNA acknowledges that rescission is a contractual remedy, it contends that a claim for rescission is not an action “upon” a contract, as required by the section 893.43. Rather, CUNA contends, “rescission seeks to disaffirm a contract, not sue ‘upon’ it.” Appellant's Br. at 29.

“To avoid the danger of subverting the legislative intent,” the Wisconsin Supreme Court “interpret[s] statutes of limitation so that no person's cause of action will be barred unless clearly mandated by the legislature.” Saunders v. DEC Int'l, Inc., 85 Wis.2d 70, 74, 270 N.W.2d 176, 177 (1978) ; see also Erdman v. Jovoco, Inc., 181 Wis.2d 736, 760, 512 N.W.2d 487, 495 (1994) (citing Saunders with approval). Where a cause of action is not “clearly within” a statute of limitations, the statute “should not be extended by construction.” Green v. Granville Lumber & Fuel Co., Inc., 60 Wis.2d 584, 590, 211 N.W.2d 467, 470 (1973). This standard accords with a “general philosophy of insuring that litigants shall have their day in court unless clearly barred.” Saunders, 85 Wis.2d at 74, 270 N.W.2d at 178.

The Wisconsin Supreme Court has not ruled on whether section 893.43 applies to claims for rescission. We must therefore predict how the court would decide this question.

799 F.3d 736

We begin with Wisconsin precedent. Although not a statute of limitations case, the Wisconsin Supreme Court's decision in Beers v. Atlas Assurance Co., 231 Wis. 361, ...

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