NEW YORK (Reuters) - The U.S. government on Thursday won a victory in its effort to hold big banks liable for selling older toxic debt as a divided federal appeals court in New York revived a Federal Deposit Insurance Corp lawsuit over the 2009 collapse of Alabama’s Colonial BancGroup Inc.
In a 2-1 decision on Thursday, the 2nd U.S. Circuit Court of Appeals said the FDIC did not wait too long to sue Credit Suisse Group AG, First Horizon National Corp, Royal Bank of Scotland Group Plc, Wells Fargo & Co and seven other banks for selling or underwriting toxic mortgage securities that Colonial bought.
The 2-1 decision on Thursday confirmed the authority of federal agencies to pursue older claims, often predating the financial crisis, concerning the sale of shoddy debt to banks, finance companies and credit unions they oversee as receivers or conservators.
Banks have agreed to pay tens of billions of dollars to settle litigation by the agencies, which include the FDIC; the Federal Housing Finance Agency, the conservator for Fannie Mae and Freddie Mac; and the National Credit Union Administration.
Colonial, based in Montgomery, Alabama, went into FDIC receivership in August 2009 after struggling from losses tied to mortgage securities and an aggressive foray into Florida.
Three years later, the FDIC sued the 11 banks, claiming they violated federal securities law by selling $388 million in toxic debt to Colonial in 2007. It said the lawsuit was timely because it had three years from the start of the receivership to sue.
A lower court judge threw out the case, accepting the banks’ argument that the clock ran out in 2010, three years after Colonial bought its securities.
But in the reversal, Circuit Judge Gerard Lynch said Congress intended that an “extender statute” giving the FDIC more time to pursue some legal claims covered the Colonial case.
Circuit Judge Barrington Parker dissented. He said Congress did not design the statute to bring “dead claims back to life,” and that the three-year clock provides certainty as to when companies can stop worrying about being sued.
“Few compromises in the securities law are as integral to the operation of the nation’s capital markets as this compromise,” he wrote.
Robert Giuffra of Sullivan & Cromwell who represents the banks in the FDIC appeal, said: “Judge Parker’s dissent is powerful, and we are considering our options for further review.”
The FDIC declined to comment.
The case is FDIC v First Horizon Asset Securities Inc et al, 2nd U.S. Circuit Court of Appeals, No. 14-3648.