Fed. Deposit Ins. Corp. v. Countrywide Fin. Corp., 2:12-CV-4354 MRP (MANx).

• Decision Date: 21 November 2012
• Docket Number: No. 2:12-CV-4354 MRP (MANx).,2:12-CV-4354 MRP (MANx).
• Citation: 2012 WL 5900973
• Court: U.S. District Court — Central District of California
• Parties: FEDERAL DEPOSIT INSURANCE COROPORATION as Receiver for Strategic Capital Bank, Plaintiff, v. COUNTRYWIDE FINANCIAL CORPORATION, et al., Defendants.

2012 WL 5900973

FEDERAL DEPOSIT INSURANCE COROPORATION as Receiver for Strategic Capital Bank, Plaintiff, v. COUNTRYWIDE FINANCIAL CORPORATION, et al., Defendants.

No. 2:12-CV-4354 MRP (MANx).

United States District Court, C.D. California.

November 21, 2012

Only the Westlaw citation is currently available.

Attorneys and Law Firms

David J. Grais, Mark B. Holton, Mary G. Menge, Grais and Ellsworth LLP, New York, NY, Gabriel E. Drucker, Michael R. Matthias, Baker And Hostetler LLP, Los Angeles, CA, for Plaintiff.

Brian E. Pastuszenski, Adam Slutsky, Inez H. Friedman-Boyce, Goodwin Procter LLP, Boston, MA, Daniel P. Roeser, Goodwin Procter LLP, Jonathan Rosenberg, William J. Sushon, O'Melveny and Myers LLP, New York, NY, Lloyd Winawer, Goodwin Procter LLP, Matthew W. Close, O'Melveny and Myers LLP, Alexander K. Mircheff, Dean J. KitchensGibson Dunn and Crutcher LLP, Los Angeles, CA, for Defendants.

Order Re Motions to Dismiss the Amended Complaint

MARIANA R. PFAELZER, District Judge.

I.Background

*1 In 2007 and 2008, Strategic Capital Bank ("SCB") purchased four residential mortgage-backed securities, called "certificates," for $62.6 million.Those certificates were issued and underwritten by the defendants, Countrywide Financial Corporation("CFC,") Countrywide Securities Corporation ("CSC,") CWALT, Inc. ("CWALT,")(these three entities are "Countrywide,") Bank of America Corporation and Citigroup Global Markets Inc.(collectively, "the Defendants").On May 22, 2009, the Federal Deposit Insurance Corporation("FDIC") was appointed receiver over SCB as a failed bank.As receiver, the FDIC brought the instant lawsuit on May 18, 2012.The FDIC filed an Amended Complaint ("AC") on August 6, 2012.¹The AC alleges that the registration statements and prospectuses filed with the Securities and Exchange Commission regarding the four securities included untrue and misleading statements of material fact, and that SCB has suffered a loss on the certificates, in violation of Section 11 of the Securities Act of 1933.AC¶ 158, 163.According to the AC, CFC violated Section 15 of the Securities Act through its control of CWALT and CSC.AC¶ 169.Bank of America Corporation is allegedly liable as the legal successor to the Countrywide entities.AC¶ 173.

The residential mortgage-backed securities ("RMBS") at issue here were produced by securitization of pools of loans.In securitization, the entity that extends the loans is called the "originator," the process of choosing to make certain loans known as "underwriting," and the guidelines the originator follows to ensure that loans are extended to borrowers that can repay them are called "underwriting standards."The originator may choose to hold the loans it issues, receiving payment on the interest and principal of the loan, or may choose to sell the loans through securitization.This process has been detailed in this Court's prior orders.See, e.g., Me. State Ret. Sys. v. Countrywide Fin. Corp., 722 F.Supp.2d 1157, 1161-62(C.D.Cal.2010)("Maine State I" ).That process will not be explained at length here except to state that the pool of loans is sold to a trust which issues certificates entitling the holders to receive cash flows from the pool.These certificates are sold to investors like SCB.The certificates are sold in tiers, called "tranches," portions of the loan pool with different characteristics, like priority of payment, interest rate, or credit protection.In the securitizations at issue here, the most senior class is usually entitled to be paid in full before the next most senior class.Upon issuance, each tranche is assigned a credit rating by the credit rating agencies.Investors can select certificates in the tranches depending on their preferences as to the degree of risk and rate of return.

The certificates that SCB purchased were issued after CWALT filed three registration statements with the SEC on form S-3, which entitled CWALT to issue securities on a later date.Each certificate issued after Countrywide filed a "prospectus supplement ."The prospectus supplements explain in detail the characteristics of the certificates.Investors purchased certificates based on all of the documents filed with the SEC, including the S-3 registrations, prospectuses and prospectus supplements (collectively, the "Offering Documents").According to the AC, SCB purchased four certificates,² pursuant to three S-3 registration statements.All of the certificates were senior, and had AAA ratings or its equivalent, from the credit rating agencies.

*2 The FDIC sued the defendants on May 18, 2012 claiming that the Offering Documents included false statements regarding the ratio of the value of the loans to the underlying value of the homes ("LTV ratios,") the appraisal of the homes, the rate of occupancy by the owners of the properties and the underwriting standards, in violation of Section 11 of the Securities Act.

The Defendants move to dismiss on the basis that the complaint was untimely.The statute of limitations for claims under the Securities Act is "one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence."15 U.S.C. § 77m.The Defendants assert that the Plaintiff discovered or should have discovered any false statements in the materials filed with the SEC by May 22, 2008, one year before the FDIC was appointed receiver, so that the claims had expired.Further, the Defendants argue that the statute of limitations for the claims in the AC was not "tolled."³

II.SCB Discovered or Should have Discovered the Alleged Misrepresentations Before May 22, 2008

The statute of limitations runs "one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence."15 U.S.C. § 77m.The FDIC contends it had at least three years to bring any live claims SCB had on May 22, 2009, when it was appointed receiver.12 U.S.C. § 1821(d)(14)(extending the statute of limitations for "any action brought by the Corporation as conservator or receiver" by at least three years from "the date of the appointment of the Corporation as conservator or receiver").⁴However, if SCB discovered or should have discovered the misstatements before May 22, 2008,⁵ then the claims here were not live when the FDIC was appointed receiver, and are untimely now.

A. Merckapplies to Securities Act claims.

The parties dispute the legal standard for "discovery" and "reasonable diligence" within Section 77m.This Court has previously defined "discovery" as occurring when the plaintiff is on "inquiry notice," when a reasonably diligent investor should have noticed something was amiss with the security, and began to investigate further.Mass. Mut. Life Ins. Co. v. Countrywide Fin. Corp., No. 2:11-cv-10414-MRP, 2012 WL 1322884, at *3(C.D.Cal.Apr.16, 2012);Stichting Pensioenfonds ABP v. Countrywide Financial Corp., 802 F.Supp.2d 1125, 1140(C.D.Cal.2011)(discovery begins when "plaintiff suspected or should have suspected that an injury was caused by wrongdoing")(citation omitted).Both cases, however, were decided under state discovery rules.This case is brought solely on the basis of the Securities Act.

In 2010, the Supreme Court analyzed the date a plaintiff discovers his or her rights under the Securities Exchange Act.Merck & Co., Inc. v. Reynolds, —U.S. —, 130 S.Ct. 1784, 176 L.Ed.2d 582(2010).Claims under the Exchange Act must be brought within "2 years after the discovery of the facts constituting the violation."28 U.S.C. § 1658(b)(1).In Merck, the Supreme Court concluded that the limitations period cannot begin to run until the "plaintiff did discover or a reasonably diligent plaintiff would have 'discover[ed] the facts constituting the violation.' "Merck, 130 S.Ct. at 1798.The majority rejected the proposition that the statute commenced at the earlier "inquiry notice" date.Id.

*3Merck interprets the word "discovery," which is common to both the Exchange and Securities Actstatutes of limitation.Therefore, the one year period of limitation begins to run only when the plaintiff did or should have actually discovered that the defendant made an "untrue statement or omission," not when it should have begun investigating.See, e.g., Fed. Hous. Fin. Agency v. UBS Ams., Inc., 858 F.Supp.2d 306, 319-320(S.D.N.Y.2012);In re Bear Stearns Mortg. Pass-Through Certificates Litig., 851 F.Supp.2d 746, 762-63(S.D.N.Y.2012).⁶

Plaintiffs are considered to have discovered a fact when a "reasonably diligent plaintiff would have sufficient information about that fact to adequately plead it in a complaint ... with sufficient detail and particularity to survive a 12(b)(6) motion to dismiss."City of Pontiac Gen. Emps.' Ret. Sys. v. MBIA, Inc., 637 F.3d 169, 175(2d Cir.2011);Allstate Ins. Co. v. Countrywide Fin. Corp., 824 F.Supp.2d 1164, 1179(C.D.Cal.2011).If SCB could have filed a complaint for violations of Section 11 that would survive a motion to dismiss before May 22, 2008, then the claim accrued before that date.

B. SCB had sufficient public information to allege misstatements in the Offering Documents before May 22, 2008.

Though the burden of showing "what a reasonably prudent investor should have known" is particularly high at the pleading stage, the Court can "take judicial notice of publications introduced to indicate what was in the public realm at the time" that would indicate "no other plausible inference than that a reasonably diligent plaintiff should have discovered facts sufficient to state a claim."Stichting, 802 F.Supp.2d at 1136.The Defendants have submitted ten complaints filed against Countrywide entities before May 22, 2008, along with 15 news and opinion articles, to show public information that could have enabled SCB to state a claim under the Securities Act.

Three complaints filed against Countrywide before May 22, 2008 are...