National Credit Union Administration Board v. Morgan Stanley & Co. Incorporated et al

Filing 27

MEMORANDUM AND ORDER granting in part and denying in part 19 Defendants' Motion to Dismiss. The motion is denied with respect to plaintiffs claim under federal law relating to one certificate (Morgan Stanley Mortgage Loan Trust 2006-13ARX). The motion is granted with respect to all other claims, which are hereby dismissed. Defendants Morgan Stanley ABS Capital I Inc. and Saxon Asset Securities Co. are dismissed from the case. Signed by District Judge John W. Lungstrum on 12/27/2013. (ses)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS

NATIONAL CREDIT UNION
ADMINISTRATION BOARD,

)
)
)
Plaintiff,
)
)
v.
)
)
MORGAN STANLEY & CO.,
)
INCORPORATED;
)
MORGAN STANLEY ABS CAPITAL I INC.; )
MORGAN STANLEY CAPITAL I INC.; and )
SAXON ASSET SECURITIES COMPANY, )
)
Defendants.
)
)
_______________________________________)

Case No. 13-2418-JWL

MEMORANDUM AND ORDER
This matter is presently before the Court on defendants’ motion to dismiss (Doc.
# 19).

The Court concludes that certain of plaintiff’s claims are time-barred.

Accordingly, the motion is granted in part and denied in part, as set forth more
specifically herein.

I.

Background

Plaintiff National Credit Union Administration Board brings this suit as
conservator and liquidating agent of U.S. Central Federal Credit Union (“U.S. Central”)
and Western Corporate Federal Credit Union (“WesCorp”). The suit relates to 21

different residential mortgage-backed securities (“RMBS” or “certificates”), each
purchased by one of the credit unions between December 2004 and June 2007. By the
present suit, filed on August 16, 2013, plaintiff brings claims under the federal Securities
Act of 1933 and under California and Kansas statutes, based on alleged untrue
statements or omissions of material facts relating to each RMBS. Defendant Morgan
Stanley & Co., Incorporated was the underwriter or seller for the certificates, while the
other three defendants issued the certificates. Defendants have moved to dismiss all
claims.
Plaintiff brought eight other similar suits, involving different certificates, in this
district, which cases were re-assigned to the undersigned judge. In one of those actions,
Case No. 12-2648, by Memorandum and Order dated April 8, 2013, the Court granted
in part and denied in part the motion to dismiss filed by the Credit Suisse defendants
(“Credit Suisse”). See National Credit Union Admin. Bd. v. Credit Suisse Sec. (USA)
LLC, 939 F. Supp. 2d 1113 (D. Kan. 2013) (“Credit Suisse”). In that opinion, the Court
held as follows: (1) Credit Suisse did not show that the Court lacked venue over
plaintiff’s claims asserted on behalf of certain credit unions; (2) plaintiff’s claims were
not untimely as a matter of law with respect to the applicable one- and two-year
discovery limitations periods; (3) the so-called Extender Statute, 12 U.S.C. §
1787(b)(14), which provides the limitations period for claims brought by plaintiff as
conservator or liquidator, applies to federal and statutory claims; (4) the Extender Statute
displaces both limitations periods in the otherwise-applicable federal (Section 13, 15
2

U.S.C. § 77m) and state statutes; (5) plaintiff’s three-year limitations period under the
Extender Statute was triggered by plaintiff’s appointment as conservator for a credit
union, not by its later appointment as liquidator; (6) the Extender Statute’s three-year
limitations period may not be extended by a tolling agreement; (7) plaintiff’s assertion
of American Pipe tolling with respect to its federal claims based on some certificates did
not fail as a matter of law at this stage; and (8) plaintiff’s substantive allegations were
sufficient to state plausible and cognizable claims against Credit Suisse.
In some of its rulings in Credit Suisse, the Court followed the reasoning of Judge
Rogers in ruling on a motion to dismiss in another of these nine similar cases (before the
case was reassigned). See id. (citing National Credit Union Admin. Bd. v. RBS Sec., Inc.,
900 F. Supp. 2d 1222 (D. Kan. 2012) (“RBS”)). On August 27, 2013, in an interlocutory
appeal in RBS, the Tenth Circuit affirmed Judge Rogers with respect to two of the issues
listed above, holding that the Extender Statute does apply to federal and statutory claims
and does displace Section 13’s three-year limitations period. See National Credit Union
Admin. Bd. v. Nomura Home Equity Loan, Inc., 727 F.3d 1246 (10th Cir. 2013), petition
for cert. filed, 82 U.S.L.W. 3307 (U.S. Nov. 8, 2013).
After issuing its opinion in Credit Suisse, the Court invited the parties in the other
seven similar cases (this case had not yet been filed) to submit briefs addressing (a) the
application of the Court’s rulings in Credit Suisse to the motions to dismiss filed by the
defendants in those cases and (b) the specific issue of the enforceability of plaintiff’s
tolling agreements. The Court subsequently reaffirmed its ruling in Credit Suisse that
3

the tolling agreements are not enforceable, and it ruled on motions to dismiss filed in
each of those seven cases. The Court dismissed one of those actions in its entirety, see
Memorandum and Order of July 10, 2013, National Credit Union Admin. Bd. v. Barclays
Capital Inc., Case No. 12-2631, and that case is presently on appeal to the Tenth Circuit.

II.

Timeliness of Claims
A.

Initial Application of Credit Suisse and Nomura

Defendants argue that plaintiffs’ claims are untimely. Like their counterparts in
the similar cases, defendants argue that the Extender Statute does not displace the
otherwise-applicable federal and state limitations period and that the Extender Statute
does not apply to federal and statutory claims. As noted above, however, those
arguments have been rejected by this Court (in RBS and Credit Suisse) and by the Tenth
Circuit (in Nomura, on interlocutory appeal in RBS).
Defendants also argue that plaintiff’s claims were already time-barred, pursuant
to the one-year federal and two-year state discovery limitations periods, at the time that
plaintiff was appointed conservator and the Extender Statute was triggered. The Court
also rejected that argument in RBS and Credit Suisse. Defendants argue that the Court
has not yet considered that argument in the specific context of these certificates.
Nevertheless, for the same reasons stated in the other similar cases, the Court cannot
conclude at this stage as a matter of law that plaintiff’s claims became time-barred under
the discovery rule.
4

In the alternative, defendants seek dismissal of plaintiff’s claims as time-barred
pursuant to the three-year limitations period imposed by the Extender Statute. Absent
some form of tolling, plaintiff was required to file those claims by March 20, 2012, three
years after its appointment as conservator for those credit unions, but plaintiff did not
initiate this action until August 16, 2013. Nor may plaintiff rely on the Extender
Statute’s alternative reference to the applicable state-law limitations periods, as this case
was filed more than five years (the applicable repose period for both states) after the
purchases of these certificates.
Plaintiff notes that it entered into a tolling agreement with these defendants, but
the Court, in Credit Suisse, reaffirmed its ruling that plaintiff may not rely on such an
agreement to avoid application of the Extender Statute’s limitations period, and that
ruling will also be applied in the present case. Thus, with respect to certificates for
which plaintiff has not asserted some other form of tolling, plaintiff’s federal and state
claims on behalf of U.S. Central and WesCorp would be time-barred and subject to
dismissal. Based on plaintiff’s complaint and the parties’ briefs, such claims include
those based on the following certificates:

5

CUSIP

Purchaser

Issuing Entity

45071KCP7
61750MAF2
61750SAF9
61749BAE3
61748HGT2
80556AAD9
026935AD8
669884AD0
669884AE8
749228AM4
749228AM4
81744HAD5
81744HAE3

WesCorp
U.S. Central
U.S. Central
U.S. Central
WesCorp
U.S. Central
WesCorp
U.S. Central
U.S. Central
U.S. Central
U.S. Central
U.S. Central
U.S. Central

Ixis Real Estate Capital Trust 2005-HE4
Morgan Stanley ABS Capital I Inc. Trust 2006-HE7
Morgan Stanley ABS Capital I Inc. Trust 2006-HE8
Morgan Stanley ABS Capital I Inc. Trust 2006-NC5
Morgan Stanley Mortgage Loan Trust 2004-11AR
Saxon Asset Securities Trust 2006-3
American Home Mortgage Assets Trust 2007-3
NovaStar Mortgage Funding Trust, Series 2006-1
NovaStar Mortgage Funding Trust, Series 2006-1
RALI Series 2006-QS4 Trust (8/10/06)
RALI Series 2006-QS4 Trust (9/15/06)
Sequoia Mortgage Trust 2007-1
Sequoia Mortgage Trust 2007-1

Plaintiff has not disputed that, assuming the Court reaffirms and applies its prior rulings,
those claims would be subject to dismissal. Accordingly, defendants’ motion is granted
with respect to those claims based on the listed certificates, which claims are hereby
dismissed.
B.
1.

Claims for Which American Pipe Tolling Has Been Asserted

In its complaint, plaintiff asserts American Pipe tolling for its claims based

on eight certificates. With respect to its claims relating to six of those certificates,
however, plaintiff does not dispute that the possible amount of such tolling is not
sufficient to cover the nearly seventeen months that passed between the expiration of the
Extender Statute and the filing of this suit. Such claims include those based on the
following certificates:

6

CUSIP

Purchaser

Issuing Entity

61751TAE9
61751GAE7
45661HBD8
75114TAG6
75115EAB9
75115EAB9

WesCorp
WesCorp
WesCorp
U.S. Central
U.S. Central
U.S. Central

Morgan Stanley Mortgage Loan Trust 2007-2AX
Morgan Stanley Mortgage Loan Trust 2007-5AX
IndyMac INDX Mortgage Loan Trust 2006-AR25
RALI Series 2006-QS5 Trust
RALI Series 2006-QS11 Trust (9/8/06)
RALI Series 2006-QS11 Trust (11/29/06)

Accordingly, those claims are time-barred, and defendants’ motion is granted with
respect to those claims based on the listed certificates, which claims are hereby
dismissed.
2.

These rulings leave only plaintiff’s claims based on two certificates: a

federal claim based on Alternative Loan Trust 2006-28CB (“the 28CB certificate”), and
federal and California claims based on Morgan Stanley Mortgage Loan Trust 200613ARX (“the 13ARX certificate”).

In a footnote, defendants incorporate their

counterparts’ argument in the similar suits that plaintiff may not use American Pipe
tolling here because the named plaintiffs in the particular class actions lacked standing.
The Court has already rejected that argument, see Memorandum and Order of Sept. 3,
2013, NCUAB v. Bear Stearns & Co., Inc. (“Bear Stearns”), Case No. 12-2781, and
because defendants do not attempt to distinguish that ruling, the Court will apply the
ruling in this case as well.
3.

Defendants also argue that American Pipe tolling should not apply to the

Extender Statute. The Court rejected that argument in Bear Stearns. In this case,
however, defendants make the additional argument (not raised in Bear Stearns) that the

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purpose of American Pipe tolling—to avoid a multiplicity of suits—would not be
furthered in this case because plaintiff has a duty to pursue claims held by the credit
unions for which it acts as conservator.
The Court rejects this argument. Defendants have not cited any authority to
support denying American Pipe tolling to a governmental agency acting on behalf of
other parties. Defendants cite only In re Urethane Antitrust Litigation, 663 F. Supp. 2d
1067 (D. Kan. 2009), in which this Court, in declining to apply American Pipe tolling,
noted that the purpose of such tolling would not be served in that case. See id. at 108283. In that case, however, the Court was deciding whether courts in the State of Indiana
would import American Pipe-type tolling into its state limitations law in a crossjurisdictional context, and in deciding that Indiana would not adopt a minority position,
the Court noted that the doctrine’s rationale in favor of efficiency would not be served
in that case. See id. In the present case, federal law supplies the limitations period, and
application of the federal doctrine of American Pipe tolling is therefore appropriate. The
Supreme Court has not limited that doctrine in the manner urged by defendants, nor has
any other court identified by defendants. Thus, the Court also declines to prohibit
plaintiff from using the doctrine.
Moreover, defendants have not shown that the purpose of avoiding a multiplicity
of actions could not be served in the context of a claim asserted by plaintiff on behalf of
a credit union. Defendants cite to 12 C.F.R. § 702.204(c)(4), which states that plaintiff
“may not delegate its authority under paragraph (c) of this section.” Defendants argue
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that that language prohibits plaintiff from delegating its authority to bring claims on
behalf of credit unions, for instance by participating in a class action as a mere class
member. The cited regulation, however, does not prohibit plaintiff from delegating any
authority it has, only its authority under 12 C.F.R. § 702.204(c), and that paragraph
relates only to the requirement that plaintiff assume conservatorship over and liquidate
credit unions. Thus, defendants have not provided any authority, either by regulation or
by caselaw, supporting the argument that plaintiff may not participate in a class action
as a class member.
4.

Defendants argue that plaintiff’s claim based on the 28CB certificate is

time-barred because plaintiff may not base American Pipe tolling on a class action filed
in state court. Defendants argue that such tolling should only be triggered by class
actions in federal court.
The Seventh Circuit rejected such an argument in Sawyer v. Atlas Heating and
Sheet Metal Works, Inc., 642 F.3d 560 (7th Cir. 2011). The court permitted such “crossjurisdictional tolling” on the basis that the plaintiff’s “reliance interests were the same
as if the first suit had been filed in federal court.” See id. at 562. In FDIC v.
Countrywide Financial Corp., 2012 WL 5900973 (C.D. Cal. Nov. 21, 2012), however,
the court declined to follow Sawyer. See id. at *12-14; see also In re Countrywide Fin.
Corp. Mortg.-Backed Sec. Litig., 934 F. Supp. 2d 1219, 1230-34 (C.D. Cal. 2013)
(reaffirming decision in FDIC v. Countrywide). In Countrywide, the court noted that
federal courts have limited power, and it concluded that American Pipe tolling was a
9

form of legal tolling derived from Fed. R. Civ. P. 23. See 2002 WL 5900973, at *13
(citing, inter alia, Joseph v. Wiles, 223 F.3d 1155, 1166-68 (10th Cir. 2000)). That
conclusion was significant to the court because state-court class actions need not meet
the requirements of federal Rule 23, and a state’s procedural rules cannot alter federal
statutes of limitations. See id. The court noted that one justification for American Pipe
tolling was that the class action will provide the defendant with the essential information
necessary to appreciate prospective litigation; that justification may not be met in the
case of a state-court class action, however, because the state’s procedural rules may not
require the disclosure of as much essential information as is required in federal court.
See id. As an example, the court noted that the pleading and certification requirements
of the federal PSLRA would not apply in a state-court class action. See id. at * 14.
Finally, the court noted that only a small minority of jurisdictions allow for crossjurisdictional tolling, and that the reason for most courts’ rejection of such tolling would
apply in this context as well, as the federal government has no interest in furthering the
efficiency of class action procedures of state courts. See id. (citing Wade v. Danek Med.,
Inc., 182 F.3d 281, 287 (4th Cir. 1999)).
The Court finds the reasoning of the Countrywide court to be persuasive. The
Court has previously refused to import cross-jurisdictional tolling into a state’s
limitations law. See Urethane, 663 F. Supp. 2d 1067, 1082-83 (D. Kan. 2009)
(Lungstrum, J.) (citing Wade in noting that only a small minority of jurisdictions have
adopted cross-jurisdictional tolling). Similarly in this case, the Court will follow the
10

majority rule and thus will not import cross-jurisdictional tolling into federal limitations
law in the absence of controlling authority permitting such tolling. Accordingly, the
Court concludes that American Pipe tolling is limited to prior class actions in federal
court. Because plaintiff’s claim relating to the 28CB certificate is based on tolling from
a state-court class action (which was successfully removed to federal court only after
expiration of the Extender Statute), that claim is time-barred and is hereby dismissed.
5.

Finally, defendants seek dismissal of plaintiff’s claim under California law

based on the 13-ARX certificate. Defendants argue that plaintiff is not entitled to
American Pipe tolling to save that claim because the class actions on which plaintiff
relies for sufficient tolling did not include claims under California law. Defendants
argue that American Pipe tolling requires that the prior and present actions involve
identical claims.1
Courts have split on this issue of whether identical claims are required. Plaintiff
cites to Tosti v. City of Los Angeles, 754 F.2d 1485 (9th Cir. 1985), in which the Ninth
Circuit rejected a rule requiring an identity of claims. See id. at 1489. The court stated
that such a rule would be illogical because “one of the primary reasons a member will
opt out of a class suit is that she has strong individual claims against the defendant that
she believes will not be redressed by the overall class settlement.” See id. The court
further reasoned that because the suits involved the same allegations, the defendant had

1

In Bear Stearns, the Court declined to resolve this issue, based on an absence of
argument from the parties.
11

ample notice of the nature of the claim and thus had been alerted to make appropriate
investigations. See id.
Similarly, in Cullen v. Margiotta, 811 F.2d 698 (2d Cir. 1987), the Second Circuit
rejected an identity rule and held instead that “American Pipe tolling is properly
extended to claims of absent class members that involve the same evidence, memories,
and witnesses as were involved in the initial putative class action.” See id. at 720. The
court relied on the Supreme Court’s statement in American Pipe that the purpose of a
statute of limitations is to prevent stale suits, that is, suits after “evidence has been lost,
memories have faded, and witnesses have disappeared.” See id. (quoting American Pipe
& Constr. Co. v. Utah, 414 U.S. 538, 554 (1974)). The court further reasoned: “Indeed,
limiting American Pipe tolling to the identical ‘causes of action’ asserted in the initial
class action would encourage and require absent class members to file protective motions
to intervene and assert their new legal theories prior to class certification, thereby
producing the very results the . . . courts seek to prevent by such tolling, i.e., court
congestion, wasted paperwork and expense.” See id. at 721 (internal quotation and
citations omitted).
Defendants, on the other hand, rely on In re Copper Antitrust Litig., 436 F.3d 782
(7th Cir. 2006). In that case, the Seventh Circuit refused to permit tolling of federal
claims asserted in federal court based on a state class action involving state-law claims.
See id. at 793-97. The court noted that American Pipe tolling’s purpose in promoting
efficiency would not be served because an additional suit was required in any event to
12

assert claims not asserted in the class action. See id. at 794. The court further stated that
mere similarity between the claims asserted in the two actions would be a “murky
standard for a matter as needful of certainty as the statute of limitations.” See id. at 796.
Finally, the court noted that, if such functional equivalence were sufficient, then such
tolling should apply also in the event of joined actions, outside the class action context,
which is not the case. See id.; see also Raie v. Cheminova, Inc., 336 F.3d 1278, 1283
(11th Cir. 2003) (no American Pipe tolling permitted because present wrongful death
claim was not included in prior product liability class action); Spann v. Community Bank
of N. Va., 2004 WL 691785, at *5-7 (N.D. Ill. Mar. 30, 2004) (requiring identity of
claims for American Pipe tolling).
The Court concludes that an identity of claims is required, and it thus resolves this
issue in favor of defendants. In Urethane, this Court, in concluding that Indiana would
not recognize cross-jurisdiction tolling under American Pipe, followed the reasoning of
the Seventh Circuit in Copper, as follows:
Finally, the Court notes that the rationale for the American Pipe tolling
rule would not actually be served in the present case because the class
action did not include the state law claims; class members wishing to
assert such claims would need to file individual suits whether or not the
state limitations periods were tolled, and therefore no added efficiency
would be achieved by tolling.
See Urethane, 663 F. Supp. 2d at 1082-83 (citing Copper, 436 F.3d at 793-94). The
Court is still persuaded that American Pipe tolling is not appropriate in this context
because its purpose would not be served, as in the present case the state-law claims were

13

not asserted in the prior class actions.
Moreover, Supreme Court precedent suggests that an identity of claims is required
for American Pipe tolling. In Johnson v. Railway Express Agency, Inc., 421 U.S. 454
(1975), the Court held that the filing of an EEOC claim did not toll the statute of
limitations for a Section 1981 claim. See id. As its final point, the Court rejected an
argument based on American Pipe and another case, as follows:
Finally, and perhaps most importantly, the tolling effect given to the
timely prior filings in American Pipe and in Burnett depended heavily on
the fact that those filing involved exactly the same cause of action
subsequently asserted. This factor was more than a mere abstract or
theoretical consideration because the prior filing in each case necessarily
operated to avoid the evil against which the statute of limitations was
designed to protect.
See id. at 467 (footnote omitted). The Court so ruled, despite the plaintiff’s argument
that the EEOC filing had the effect of placing the defendant on notice of a claim of
discrimination and thus giving the defendant “the opportunity to protect itself against the
loss of evidence, the disappearance and fading memories of witnesses, and the unfair
surprise that could result from a sudden revival of a claim that long has been allowed to
slumber.” See id. at 467 n.14. In response to that argument, the Court stated that “[o]nly
where there is complete identity of the causes of action will the protection suggested by
petitioner necessarily exist and will the courts have an opportunity to assess the influence
of the policy of repose inherent in a limitation period.” See id. (citation omitted). Thus,
although the plaintiff in Johnson did not seek tolling directly under American Pipe, the
Supreme Court described American Pipe tolling as requiring an identity of causes of
14

action, while rejecting the same argument involving lost evidence and fading memories
on which the Second Circuit relied in Cullen.
In light of that language by the Supreme Court and that fact that the purpose of
American Pipe tolling would not be served in this case, the Court concludes that the
Tenth Circuit would reject such tolling for plaintiff’s state-law claim, which was not
asserted in the prior class actions. Accordingly, plaintiff’s claim under California law
based on the 13-ARX certificate is time-barred, and that claim is hereby dismissed.
6.

In summary, the Court concludes that all of plaintiff’s claims are time-

barred, with the exception of plaintiff’s claim under federal law relating to one
certificate, the 13-ARX certificate. That claim is asserted only against defendants
Morgan Stanley & Co., Incorporated and Morgan Stanley Capital I Inc.; according,
defendants Morgan Stanley ABS Capital I Inc. and Saxon Asset Securities Co. are
dismissed from the case.

III.

Sufficiency of Allegations

Defendants also argue that plaintiff’s allegations are not sufficient to state a claim
with respect to the remaining certificate as a matter of law. The Court has previously
ruled that similar allegations in the related cases were sufficient to state a claim, and the
Court finds the allegations in this case to be sufficient as well, for the same reasons
stated by this Court and by Judge Rogers in the related cases. Accordingly, the Court
denies defendants’ motion to dismiss on this basis.
15

IT IS THEREFORE ORDERED BY THE COURT THAT defendants’ motion
to dismiss (Doc. # 19) is granted in part and denied in part. The motion is denied
with respect to plaintiff’s claim under federal law relating to one certificate (Morgan
Stanley Mortgage Loan Trust 2006-13ARX). The motion is granted with respect to all
other claims, which are hereby dismissed. Defendants Morgan Stanley ABS Capital I
Inc. and Saxon Asset Securities Co. are dismissed from the case.

IT IS SO ORDERED.

Dated this 27th day of December, 2013, in Kansas City, Kansas.

s/ John W. Lungstrum
John W. Lungstrum
United States District Judge

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