The Downside of Creative Repurposing

By Dawn Causey

We all like to support the environment by recycling, reusing and repurposing. It is good for the country and business. Unfortunately, when it comes to statutes, repurposing can be bad for both and for banking in particular. Recent government efforts to repurpose a decades-old statute into a statutory pretzel have produced a series of court actions that have the banking industry concerned.

When FDIC and Department of Justice attorneys are faced with statutory deadlines, they get creative. They look for ways to extend, enhance and just expand the statute causing the problem. Case in point, repurposing a Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) statutory provision intended and used sparingly for decades to protect banks from third-party misconduct into a lightsaber attacking the bank for the bank’s own conduct. FIRREA was passed by Congress in 1989 to combat the fraud and insider abuse responsible for the savings and loan crisis of the 1980s. There is no private right of action, but whistleblowers whose information leads to successful FIRREA actions may collect up to $1.6 million. In 2010, the DOJ repurposed and reactivated FIRREA without considering the statute’s legal and practical limits.

The first cases from the approximately 22 FIRREA lawsuits filed against banks from May 2011 through August 2014 are now moving to the appellate level. The case of Bank of America v. U.S., an appeal from the decision of District Court Judge Jed Rakoff, is before the Second Circuit. Under the traditional view of FIRREA, individuals are subject to civil liability when they engage in fraud that “affect[s] a federally insured financial institution.” Previously, courts had not interpreted that particular section of FIRREA, adding mail and wire fraud as predicates for penalties, as being tripped by the bank’s own conduct. However, Rakoff held that a federally insured financial institution can “affect” itself, and that such an “effect” automatically occurs anytime the bank commits fraud. If upheld, that ruling would convert a FIRREA provision designed to protect federally insured financial institutions from third-party actions into a powerful weapon for the government to prosecute banks for heightened penalties up to 10 years after the fraudulent act. Repurposing with a vengeance!

Similarly, the FDIC is using FIRREA’s longer statute of limitations to circumvent the three-year statute of repose contained in the 1933 Securities Act in the case of FDIC v. Chase Mortgage Finance Corp. Also before the Second Circuit Court of Appeals, the FDIC is arguing that FIRREA statute of limitation extender provisions displace state or federal statutes of repose in specific acts. The case involves the FDIC, acting as receiver, pursuing claims against issuers and sellers of residential mortgage-back securities that the failed institution bought in 2007. Under the Securities Act, the claims would be time-barred. A 2014 Supreme Court case, CTS Corp. v. Waldburger, held that a similar extender provision in the Comprehensive Environmental Response, Compensation, and Liability Act did not preempt statutes of repose. However, the FDIC, along with the Second and Tenth Circuits, have apparently ignored Waldburger and allege that under FIRREA, the claims are still valid. Again, repurposing with a vengeance!

ABA and other national trade groups have filed friend of the court briefs in both actions seeking a return to the common sense use of FIRREA and its many protective and enforcement-minded provisions. Repurposing for the sake of longer statutes of limitation and higher penalties does nothing to move the industry or the country forward. Rather, it maintains uncertainty and open liability. Hopefully, the appellate courts will put this type of creative repurposing back into the statutory framework that the industry and the governments previously understood.