They say that the early bird catches the worm and it seems that courts in the US definitely agree. A recent decision by a court of appeals in Philadelphia could serve as a wakeup call for any noteholders or issuers and servicers that might have claims to bring in relation to, respectively, the disclosure of risks in offering materials or the valuation of underlying assets that they need to be diligent with regard to their filings. The facts of the case highlight why interested noteholders, issuers and servicers should scrutinise the relevant materials on which they have relied and investigate any claims in order to take relevant action in a timely manner.
Two weeks ago, the Court of Appeals for the Third Circuit (Philadelphia) (the “Court”) affirmed the dismissal, as time barred, of a class action led by the Operating Engineers Pension Trust Fund (the “Operating Engineers”) against UBS over $ 2.5 billion worth of losses in crisis-hit RMBS securities (Pension Trust Fund for Operating Engineers, 12-03454, U.S. Court of Appeals for the Third Circuit (Philadelphia)). The mortgage backed securities in this case, known as the MASTR Pass-Through Certificates, Series 2007-3, were offered to the public on 14 May 2007, towards the end of the real estate bubble. The transaction, sponsored by UBS Real Estate Securities, was backed by underlying loans originated by, amongst others, Countrywide Home Loans, Inc. and IndyMac Bank, FSB. According to the plaintiffs, disclosure by UBS in the offering materials had been “materially false and misleading” and, as a result, the certificates were substantially more risky than disclosed in the offering documents. Applying a one year statute of limitations under federal law, the Court found that the plaintiffs should have investigated their losses in the relevant securities as early as 2008, and should not have waited until 22 February 2010 (one year after Moody’s downgraded the rating of the relevant certificates) to file the original complaint.
This is but only one among the increasing number of lawsuits that have emerged in recent years in the US and Europe driven by noteholders alleging inadequate disclosure of risks or issuers and services similarly alleging improper valuation of underlying portfolios. Even though some of these claims are bound to have merit, they could be dismissed due to statutory time limitations, as was the lawsuit in this case. Certainly, the statute of limitation applicable in this case was exceedingly short at one year (15 U.S.C. § 77m which requires actions to be 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”) and other jurisdictions might not be so punitive. Nonetheless, comparable claims in European based RMBS and CMBS transactions might date back to the pre-July 2007 period and the real estate bubble. Which means that, for example, the relevant limitation period on professional negligence claims against valuers in the UK for issuers, noteholders and servicers willing to take enforcement action (at six years) is likely to expire soon, in many cases before the end of 2013.
The case also serves to prove how a diligent defendant can use the investigation of previous court filings against a plaintiff to prove that the relevant statute of limitations has run out. Indeed, the Court looked into a separate complaint which had been filed in 2008 by a class of plaintiffs including the Operating Engineers in the California Superior Court against both Countrywide and UBS Securities, asserting claims under Sections 11, 12(a)(2), and 15 of the U.S. Securities Act that were substantially similar to those in this case. This led the Court in the instant case to hold that “a reasonably diligent plaintiff who had purchased mortgage-backed securities from UBS Securities based on loans that were largely originated by Countrywide would have noticed [the California] complaint” and dismiss the claim. In other words, the Court held that a reasonable plaintiff would have inquired about its certificates at or around the date of the California complaint (9 September 2008) thus discovering the untrue statements or omissions underlying its claim at that time.
The lessons here are clear: plaintiffs, don’t assume courts will be sympathetic to complaints that aren’t timely brought (even if they have merit) and don’t ignore your claims for too long as time limitation statutes are often shorter than one would assume and might bar your relief. Equally, underwriters and service providers, you should audit your exposures carefully to ensure you understand the risks related to your disclosures and/or valuations so as to be better prepared to fight off such claims.