The 2nd Circuit splits with 10th on tolling time bar in securities cases
Is the statute of repose – the once obscure cousin of the statute of limitations that burst into prominence as a defense in litigation over mortgage-backed securities – coming to the U.S. Supreme Court?
That’s the thrilling prospect now before us, thanks to a decision last week by the 2nd Circuit Court of Appeals in a case against the onetime mortgage securitizer IndyMac and underwriters of some of its MBS offerings. The 2nd Circuit panel – Judges Jose Cabranes, Reena Raggi and Susan Carney – ruled that the filing of a class action does not stop the clock for class members on the three-year statute of repose for federal securities claims. That holding is contrary to a ruling from the 10th Circuit, which found in Joseph v. Q.T. Wiles in 2000 that a pending class action tolls the statute of repose as well as the statute of limitations. The Roberts Court is known for granting review even of arcane issues that have split the federal circuits, and tolling of the statute of repose could impact the outcome of a lot more cases than, say, the intersection of appellate deadlines and awards for contractual legal fees, which the Supreme Court is already scheduled to hear next term.
Plaintiffs lawyer Joseph Tabacco of Berman DeValerio, who was on the wrong end of last week’s 2nd Circuit decision, told me his clients have not yet decided on their next step, which could be to ask the 2nd Circuit for en banc review or to ask the panel for a ruling that its holding applies only prospectively. The statute of repose isn’t as problematic in this particular case as it once seemed, Tabacco said, because some plaintiffs who had been excluded from the IndyMac MBS class action saw their claims revived after the 2nd Circuit remade the rules for MBS class standing in NECA-IBEW v. Goldman. Nevertheless, Tabacco told me, “this is too important an issue” to let the 2nd Circuit panel’s decision go unchallenged. “There are well-reasoned opinions on both sides,” he said. “Clearly, this is an open legal question.”
At the heart of the question is the U.S. Supreme Court’s famous 1974 ruling in American Pipe v. Utah, which established the principle that the clock stops ticking on the statute of limitations for all members of a purported class action, even if they’re later determined not to be part of the class or if the class action is subsequently dismissed. The Supreme Court reasoned that Rule 23 of the Rules of Civil Procedure provided for class actions in order to eliminate multiple suits raising the exact same claims, so it would “frustrate the principle function of a class action” to require potential class members to file their own suits to preserve their rights in the event that the class action cratered.
But as you probably know, the justices did not specifically address in American Pipe whether the same tolling applies to the statute of repose, which is supposed to extinguish a cause of action with finality after a certain period of time (three years from the offer date for federal securities claims). In its June 27 ruling, the 2nd Circuit described the statute of repose as a “substantive right” of defendants to be free from liability. According to Judge Cabranes, who wrote the panel’s opinion, American Pipe tolling of the statute of limitations is based on a court’s equitable powers, which cannot be used to take away a defendant’s substantive rights under the statute of repose.
By contrast, the 10th Circuit in Joseph v. Wiles said that the American Pipe decision was rooted in Rule 23, so the tolling it granted was statutory. Legal, or statutory, tolling, the 10th Circuit said, extends to the statute of repose as well as the statute of limitations. “Indeed, in a sense, application of the American Pipe tolling doctrine to cases such as this one does not involve ‘tolling’ at all,” the 10th Circuit said. “Rather, Mr. Joseph has effectively been a party to an action against these defendants since a class action covering him was requested but never denied. Defendants’ potential liability should not be extinguished simply because the district court left the class certification issue unresolved.”
The 2nd Circuit said that even if the 10th Circuit were correct that Rule 23 is the basis of American Pipe tolling, the Rules Enabling Act would bar extending such tolling to the statute of repose. The Supreme Court said in Wal-Mart v. Dukes that the Rules Enabling Act forbids Rule 23 from abridging a defendant’s substantive rights. So according to the 2nd Circuit, which deemed the statute of repose to be a substantive right, Rule 23 can’t justify taking impinging upon it. “Accordingly, our conclusion is straightforward: American Pipe’s tolling rule, whether grounded in equitable authority or on Rule 23, does not extend to the statute of repose,” the 2nd Circuit said.
The appeals court acknowledged plaintiffs’ arguments that its ruling “could burden the courts and disrupt the functioning of class action litigation.” It said it wasn’t persuaded “that such adverse consequences will inevitably follow our holding.” And besides, the court said, “even if the decision causes some such problem, it is a problem that only Congress can address; judges may not deploy equity to avert the negative effects of statutes of repose.”
The plaintiffs have until Thursday to petition for en banc review. Robert Serio of Gibson, Dunn & Crutcher, who argued at the 2nd Circuit for the defendants, declined comment.
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