Rescission Decision on Securitization

from Wisconsin Lawyer

Wisconsin Contract Law

Rescission was at issue in CMFG Life Insurance Co. v. RBS Securities Inc.14 A purchaser of residential mortgage-backed securities sued the seller, alleging that the seller materially misrepresented that the underlying mortgages complied with underwriting guidelines. The district court granted summary judgment for the seller. Because the Wisconsin Supreme Court has not ruled on whether Wisconsin’s contract statute of limitation applies to claims for rescission, the U.S. Court of Appeals for the Seventh Circuit predicted how Wisconsin’s high court would decide the question.

The Seventh Circuit considered Wisconsin precedent, including a number of older cases, that drew a distinction between an action on contract and an action to rescind a contract.15 Based on that distinction, the federal appellate court determined that the Wisconsin Supreme Court would hold that rescission is not an “action upon a contract” as used in Wisconsin’s six-year statute of limitation.16

The Seventh Circuit also concluded that while rescission is invoked in a contractual setting, as a remedy it is not “upon” the contract.”17 “Claims for rescission do not ‘stand upon’ the rights and obligations established by the contract; they seek to put the contract ‘out of existence.’”18 Accordingly, the court of appeals reversed the district court’s grant of summary judgment on a statute-of-limitation defense.

The alternative to applying Wisconsin’s contract statute of limitations was that no limitation period applied. While Wisconsin has a “catch-all” statute of limitations, Wisconsin does not have an equivalent limitations period for equitable remedies such as rescission.19 Therefore, the Seventh Circuit concluded that the rescission claim was not time-barred.

The Seventh Circuit also considered the case’s facts under Wisconsin law on representations in the securities context. The court concluded that the seller’s allegedly false due-diligence representations were not “non-actionable puffery” under Wisconsin law.20 Both parties understood the representations to have definite meanings that conveyed specific facts about the securitization process and underlying loans, and the representations were offered as corroborating evidence of testimony by the purchaser’s trader

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