Fed. Hous. Fin. Agency v. Countrywide Fin. Corp. (In re Countrywide Fin. Corp. Mortg.-Backed Sec. Litig.), Case Nos. 2:11–ML–02265–MRP (MANx), 2:12–CV–1059 MRP (MANx).

• Decision Date: 18 October 2012
• Docket Number: Case Nos. 2:11–ML–02265–MRP (MANx), 2:12–CV–1059 MRP (MANx).
• Court: U.S. District Court — Central District of California
• Parties: In re COUNTRYWIDE FINANCIAL CORP. MORTGAGE–BACKED SECURITIES LITIGATION. Federal Housing Finance Agency, as conservator for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., Plaintiff, v. Countrywide Financial Corporation, et al., Defendants.

900 F.Supp.2d 1055

In re COUNTRYWIDE FINANCIAL CORP. MORTGAGE–BACKED SECURITIES LITIGATION.Federal Housing Finance Agency, as conservator for the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., Plaintiff,

v.Countrywide Financial Corporation, et al., Defendants.

Case Nos. 2:11–ML–02265–MRP (MANx), 2:12–CV–1059 MRP (MANx).

United States District Court, C.D. California.

Oct. 18, 2012.

Brian Charles Devine, Brian E. Pastuszenski, Inez H Friedman-Boyce, Goodwin Procter LLP, Boston, MA, David Martin Halbreich, Reed Smith LLP, Los Angeles, CA, for Countrywide Financial Corp. Mortgage-Backed Securities Litigation.

Order Re Motions to Dismiss the First Amended Complaint

MARIANA R. PFAELZER, District Judge.

The Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) are government-sponsored enterprises (“GSE,”) private corporations chartered by Congress to provide stability in the United States mortgage market, assist in the provision of affordable housing and increase liquidity of mortgage investments. On July 30, 2008, in the midst of the housing crisis, Congress passed the Housing and Economic Recovery Act of 2008 (“HERA,”) which created the Plaintiff Federal Housing Finance Agency (“FHFA”). Under that statute, the Director of the FHFA could place the GSEs into conservatorship and appoint the Agency as conservator. 12 U.S.C. § 4617(a)(1). The Director did so on September 6, 2008. As conservator, FHFA has succeeded to all of the legal rights of Fannie Mae and Freddie Mac.

On September 2, 2011, FHFA sued the defendants listed below and other issuers of mortgage-backed securities in New York state court. The matter was removed to federal court on September 30, 2011. The portion of the case involving these defendants was transferred to this Court as related to the Countrywide Multidistrict Litigation proceedings in February 2012. After the Court rejected the plaintiff's motion to remand the case to state court, FHFA filed an amended complaint. On July 13, 2012, the defendants moved to dismiss the amended complaint.

In its First Amended Complaint (“FAC,”) FHFA asserts that between August 30, 2005 and January 23, 2008, the GSEs purchased approximately $26.6 billion in residential mortgage-backed securities (“RMBS,”) sponsored by Countrywide Financial Corporation, Countrywide Home Loans, Inc., Countrywide Capital Markets, LLC, Countrywide Securities Corporation, CWALT, Inc., CWABS, Inc. and CWMBS, Inc. (the last three are the “Depositor Defendants,” and collectively all seven are “Countrywide” or the “Countrywide Defendants”). The FAC also asserts that the securities were underwritten by Banc of America Securities LLC, Citigroup Global Markets, Inc., Deutsche Bank Securities, RBS Securities, Inc., UBS Securities, LLC (collectively, with Countrywide Securities Corporation, the “Underwriter Defendants”).

The RMBS were created through a process called “securitization.” Securitization involves the creation of pools of residential mortgage loans, each of which produce cash-flows from the payment on the loans. The rights to the cash-flows of these pools are sold to investors as “certificates.” Here, Countrywide Home Loans, Inc. originated or acquired thousands of mortgage loans. It sold the loans to the Depositor Defendants, which then transferred the loans to trusts pursuant to a contract called the Pooling and Servicing Agreement. The trusts issued separate securities in the form of certificates for purchase by investors. The certificate entitled the holder to a portion of the cash-flow from the pool of underlying mortgages. The certificates were sold in “tranches,” slices of the loan pool with different priorities of payment, interest rates and credit protection. Upon issuance, the tranches were assigned credit ratings by the credit rating agencies. Investors could select riskier certificates in “lower” tranches with higher interest payments but lower credit ratings than the more “senior” tranches.

The Depositor Defendants filed “shelf” registration statements with the SEC, which entitled them to issue certificates to investors at a later date. Each certificate issued once a “prospectus” that explained the general structure of the investment, and a “prospectus supplement” which included detailed descriptions of the mortgage groups underlying the certificate, were filed with SEC. Investors purchased certificates pursuant to all of the documents filed with the SEC, which were the shelf registration statements, prospectuses, and prospectus supplements (collectively, the “Offering Documents.”)

Fannie Mae and Freddie Mac sued the defendants on September 2, 2011, on the grounds that the Offering Documents included false statements regarding the rate of occupancy by the owners of the homes whose mortgage loans backed the certificates, the ratio of the value of the loans to the underlying value of the homes, and underwriting standards Countrywide adhered to in originating the loans. FHFA brings twelve causes of action based on federal and state securities and common law for the injuries it allegedly suffered from false statements included in the Offering Documents. The suit is brought against the Countrywide Defendants, the Underwriter Defendants, and individual defendants N. Joshua Adler, Ranjit Kripalani, Stanford Kurland, Jennifer S. Sandefur, Eric Sieracki, and David A. Spector (the “Individual Defendants”) for their participation, assistance and control over the filing of misstatements in the Offering Documents. FHFA also sues Bank of America Corporation, Bank of America, N.A., and NB Holdings Corporation (together, “Bank of America” or the “Bank of America Defendants”) as Countrywide's successor. All of the defendants have filed motions to dismiss the complaint on the basis of jurisdiction and timeliness.

I. The Claims Against all Defendants are Timely

Countrywide ¹ moves to dismiss counts 1 through 7 as untimely. The Countrywide Defendants argue that the first three counts in the FAC were not brought within the time limit required by Section 13 of the Securities Act of 1933. Section 13, which is entitled “Limitation of actions,” provides that:

No action shall be maintained to enforce any liability created under [Section 11] or [Section 12(a)(2) ] of this title unless brought within 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 ... In no event shall any such action be brought to enforce a liability created under section [Section 11] or [Section 12(a)(1) ] of this title more than three years after the security was bona fide offered to the public, or under section [Section 12(a)(2) ] of this title more than three years after the sale.

15 U.S.C. § 77m. The first two counts of the FAC are for violations of Section 11 and Section 12(a)(2), which create civil penalties for false information in a registration statement or prospectus. The third alleges a violation of Section 15, which extends liability to the controllers of violators of Sections 11 and 12(a)(2).

All of the RMBS purchased by Fannie Mae and Freddie Mac were offered to the public and bought by the plaintiffs before September 2, 2008, more than three years before the filing of this action.² FAC ¶ 2, 44, 53. Countrywide also suggests that Fannie Mae and Freddie Mac should have discovered any false information in the Offering Documents more than a year before September 6, 2008, meaning that the claims had expired by the time FHFA was appointed conservator.³

Counts 4 and 5 of the FAC are brought under Virginia state law on behalf of Freddie Mac. The Virginia Securities Act requires any claims to be brought “within two years after the transaction upon which it is based.” Va. Code Ann. § 13.1–522(D). Freddie Mac purchased all of its securities before January 23, 2008, more than two years before the filing of the complaint. FAC ¶ 257.⁴

Counts 6 and 7 are brought under the District of Columbia Securities Act on behalf of Fannie Mae. Actions under the D.C. Securities Act must be brought within “3 years after the contract of sale or purchase, or ... within one year after the discovery of the untrue statement or omission or after the discovery should have been made by the exercise of reasonable diligence.” D.C. Code § 31–5606.05(f). The D.C. Securities Act is a close analogue to the federal 1933 Act. Hite v. Leeds Weld Equity Partners, IV, LP, 429 F.Supp.2d 110, 114 (D.D.C.2006).

In other words, Countrywide argues that since FHFA did not sue with three years of purchase, Section 13 and the Virginia and D.C. Securities Act bar the first seven counts. FHFA asserts in response that the claims are timely under a provision of HERA. As stated, Congress passed HERA in the midst of the housing crisis of 2008. Besides creating the FHFA, the statute also extends some limitations periods for the agency. The relevant language from HERA states:

(12) Statute of limitations for actions brought by conservator or receiver

(A) In general. Notwithstanding any provision of any contract, the applicable statute of limitations with regard to any action brought by the Agency as conservator or receiver shall be—

(i) in the case of any contract claim, the longer of—

(I) the 6–year period beginning on the date on which the claim accrues; or

(II) the period applicable under State law; and

(ii) in the case of any tort claim, the longer of—

(I) the 3–year period beginning on the date on which the claim accrues; or

(II) the period applicable under State law.

12 U.S.C. § 4617(b)(12)(A). The crux of this motion to dismiss is the interpretation of this statute (“HERA” or the “extender statute”) as to three issues. First, does the statute apply to “statutes of repose” as well as to “statutes of limitation?” Second, does HERA extend federal law claims along with state law claims? Third, does the...