Nat'l Credit Union Admin. Bd. v. Morgan Stanley & Co.
| Decision Date | 22 January 2014 |
| Docket Number | 13 Civ. 6705 (DLC) |
| Court | U.S. District Court — Southern District of New York |
| Parties | NATIONAL CREDIT UNION ADMINISTRATION BOARD, as Liquidating Agent of Southwest Corporate Federal Credit Union and Members United Corporate Federal Credit Union, Plaintiff, v. MORGAN STANLEY & CO., INC. and MORGAN STANLEY CAPITAL I INC., Defendants. |
For the Plaintiff:
David Fredrick, Wan J. Kim, Gregory G. Rapawy, and Andrew C.
Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C.
Erik Haas, Peter W. Tomlinson, Phillip R. Forlenza, and Michelle
W. Cohen
Paterson Belknap Webb & Tyler LLP
George A. Zelcs
Stephen M. Tillery, Greg G. Gutzler, Peter H. Rachman, and
Korein Tillery LLC
For the Defendants:
James P. Rouhandeh, Paul S. Mishkin, Daniel J. Schwartz, and
Davis Polk & Wardwell LLP
This is one of nine actions brought by the National Credit Union Administration Board ("NCUA" or "the Board"), as liquidating agent of Southwest Corporate Federal Credit Union ("Southwest") and Members United Corporate Federal Credit Union ("Members United") (collectively, the "Credit Unions"), against various financial institutions involved in the packaging, marketing, and sale of residential mortgage-backed securities that the Credit Unions purchased in the period from 2005 to 2007.1 NCUA filed this case against Morgan Stanley & Co., Inc. and Morgan Stanley Capital I Inc. (collectively "Morgan Stanley") on September 23, 2013. The complaint asserts claimsunder Sections 11 and 12(a)(2) of the Securities Act of 1933, 15 U.S.C. §§ 77k, 1(a)(2) (2012) ("Securities Act"); the Illinois Securities Law of 1953, 815 Ill. Comp. Stat. Ann. 5/12 & 13 (2013) ("Illinois Blue Sky Law"); and the Texas Securities Act, Tex. Rev. Civ. Stat. Ann. art. 581, § 33 (2013) ("Texas Blue Sky Law"). On November 13, Morgan Stanley filed a motion to dismiss the complaint. For the reasons that follow, the motion is granted in part.
The complaint includes the following allegations. The Credit Unions purchased over $400 million in residential mortgage-backed securities ("RMBS") issued, underwritten, or sold by Morgan Stanley entities during the period between December 2005 and June 2007. At the time they were issued, all but three of these securities were rated triple-A.
RMBS are securities entitling the holder to income payments from pools of residential mortgage loans that are held by a trust. For each of the securities at issue here, the offering process began with a "sponsor," which acquired the mortgage loans that were to be included in the offering. The sponsor transferred a portfolio of loans to a trust that was created specifically for that securitization; this task was accomplishedthrough the involvement of an intermediary known as a "depositor." The trust then issued Certificates to an underwriter, in this case Morgan Stanley, which in turn, sold them to the Credit Unions. The Certificates were backed by the underlying mortgages. Thus, their value depended on the ability of mortgagors to repay the loan principal and interest and the adequacy of the collateral in the event of default.
Each of the Certificates implicated in this case was issued pursuant to registration statements, prospectuses, prospectus supplements, term sheets, free writing prospectuses, and other written materials (referred to in this Opinion as "offering documents" or "offering materials"). These offering documents were prepared by Morgan Stanley.
Generally, NCUA asserts that the offering documents for the twenty-eight securities identified in the complaint contained materially "untrue statements and omissions."2 Moreparticularly, the complaint alleges that statements in the offering documents concerning the following subjects were untrue when made:
(1) That the loans adhered to the applicable underwriting guidelines (including reduced documentation programs), and that exceptions to those guidelines would only be granted when warranted by compensating factors; and
(2) that appraisals were accurate, that loans had certain "loan-to-value" ratios individually and in the aggregate, that a certain percentage of the properties were owner-occupied, and that the borrowers had certain debt-to-income (DTI) ratios.
NCUA asserts that these misrepresentations were material, and that because the market value of the RMBS purchased by the Credit Unions has declined, the "Credit Unions have sufferedsignificant losses from those RMBS purchased despite the NCUA Board's mitigation efforts."
On September 24, 2010, the NCUA, an independent executive agency that oversees and regulates corporate credit unions, placed the Credit Unions into conservatorship, pursuant to the Federal Credit Union Act, 12 U.S.C. § 1751. On October 31, it placed the Credit Unions into involuntary liquidation. As conservator and liquidator of the Credit Unions, NCUA assumed all rights and privileges of the Credit Unions, including the ability to bring suit for pending claims. Just under three years from the date of the conservatorship, on September 23, 2013, NCUA filed these actions in the Southern District of New York.
These actions were marked as "related" to a series of actions before this Court filed by the Federal Housing Finance Agency ("FHFA"), as conservator of the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") (collectively, the "Government Sponsored Enterprises" or "GSEs"), against various financial institutions involved in the packaging, marketing, and sale of RMBS that the GSEs purchased in the period from 2005 to 2007.3The Assignment Committee of the Southern District of New York decided that the NCUA cases should be assigned to this Court. As will be evident throughout this Opinion, this Court's prior analysis in the FHFA cases has direct bearing on many of the issues raised in the present motion.
On October 11, most of the defendants in these NCUA cases moved, before the Multi-District Litigation Panel ("MDL Panel"), to transfer these actions to the District of Kansas, where NCUA has filed securities claims on behalf of these and other corporate credit unions. The MDL Panel will hear argument on the motion on January 31, 2014. Pending the MDL Panel's decision, this Court has continued to supervise these cases, of which seven remain active.4
On October 9, NCUA wrote to request that this Court adopt a process in this litigation that it had utilized in the related FHFA litigation, wherein the case with the lowest docket number is designated the lead case, the remaining cases are stayed, and the motion to dismiss in the lead action is promptly adjudicated. Because the first filed action here was brought against Morgan Stanley, it would be designated as the lead case. After all defendants were given an opportunity to be heard on this proposal, and no other defendant opposed the designation of the Morgan Stanley case as the lead case,5 an Order of October 23 designated the Morgan Stanley case as the lead case and scheduled briefing on its motion to dismiss.
On November 13, Morgan Stanley moved to dismiss the complaint.6 The motion was fully submitted on December 16.
To survive a motion to dismiss, "a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted). Applying this plausibility standard is "a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 679. When considering a motion to dismiss under Rule 12(b)(6), a trial court must "accept all allegations in the complaint as true and draw all inferences in the non-moving party's favor." LaFaro v. New York Cardiothoracic Group, PLLC, 570 F.3d 471, 475 (2d Cir. 2009). A complaint must do more, however, than offer "naked assertions devoid of further factual enhancement," and a court is not "bound to accept as true a legal conclusion couched as a factual allegation." Iqbal, 556 U.S. at 678.
Motions to dismiss based on a statute of limitations defense may be properly brought under Rule 12(b)(6). McKenna v. Wright, 386 F.3d 432, 436 (2d Cir. 2004); Ghartey v. St. John's Queens Hosp., 869 F.2d 160, 162 (2d Cir. 1989). Although "[t]he lapse of a limitations period is an affirmative defense that a defendant must plead and prove, . . . a defendant may raise an affirmative defense in a pre-answer Rule 12(b)(6) motion if thedefense appears on the face of the complaint." Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d 406, 425 (2d Cir. 2008). In addition to the four corners of the complaint, the court may also consider "documents appended to the complaint or incorporated in the complaint by reference, as well as [] matters of which judicial notice may be taken." Automated Salvage Transp., Inc. v. Wheelabrator Envtl. Sys., Inc., 155 F.3d 59, 67 (2d Cir. 1998).
For ten of the twenty-nine securities at issue in this suit, NCUA alleges claims under Section 11 or Section 12(a)(2) of the Securities Act of 1933 ().7 Although the parties agree that these claims are untimely under current Second Circuit precedent, a brief discussion of the Securities Act claims is relevant to the state law claims discussed below.
Section 13 of the Securities Act sets forth the time limitations that generally apply to claims under Section 11 or Section 12(a)(2). Titled "Limitation of Actions," Section 13provides:
No action shall be maintained to enforce any liability created under section 77k [Section 11] or 771(a)(2) [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...
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