N.Y. top court considers banks' duel over mortgage-backed securities

By Daniel Wiessner

ALBANY, N.Y., April 29 (Reuters) - HSBC Bank asked New York's top state court on Thursday to revive a lawsuit against a Deutsche Bank (Xetra: 514000 - news) unit over the sale of mortgage-backed securities, in a case that could impact billions of dollars of claims stemming from the financial crisis.

HSBC's attorney Paul Clement told the Court of Appeals in White Plains that New York's six-year statute of limitations on these types of lawsuits should begin to run when issuers of securities refuse to buy back or replace shoddy mortgages and not when investors first purchase them.

Clement said that would allow investors to recoup losses that resulted from pervasive mortgage fraud in the years leading up to the crisis.

"This contract extends for 30 years ... and it would be very odd for investors to leave themselves unprotected for the last 24," he said.

HSBC is the trustee of $500 million in securities backed by residential mortgages that were sold to investors in 2006 by Deutsche Bank Structured Products Inc. Two investors sued in 2012 and were later replaced by HSBC, claiming Deutsche Bank misrepresented the quality of the mortgages.

A state judge rejected Deutsche Bank's claim that the statute of limitations had expired, but a Manhattan appeals court in 2013 reversed and dismissed the suit.

David Woll, who represents the Deutsche Bank unit, said on Thursday that reviving HSBC's claims would create uncertainty and instability in financial markets, since issuers of securities could be sued for decades after closing a deal.

"If you adopt (HSBC's) theory ... our grandchildren could be here in 2042," Woll told the court.

However the Court of Appeals rules, it will likely have a decisive impact on similar cases collectively worth billions of dollars, according to the dozen friend-of-the-court briefs filed by various industry groups.

A decision in Deutsche Bank's favor, according to a brief from the Association of Mortgage Investors, would foreclose many multimillion-dollar claims by investors who purchased securities backed by faulty loans and did not file suit within six years.

The six-judge panel on Thursday expressed concerns about both arguments. Judge Eugene Pigott told Woll that issuers "would be less inclined to put bad loans in these (securities) if 15 years down the road it had be to cured or repurchased."

Woll countered that six years is enough time for issuers and investors to determine the quality of mortgages.

The case is ACE Securities Corp v. DB Structured Products Inc, New York State Court of Appeals No. 85. (Editing by Alexia Garamfalvi and Ted Botha)