Early ripples from 2nd Circuit decision on tolling statute of repose
Three weeks ago, the 2nd Circuit Court of Appeals ruled in a case called In re IndyMac Mortgage-Backed Securities Litigation that the filing of a class action does not stop the clock on the three-year time bar for federal securities claims. According to the appeals court, the U.S. Supreme Court’s famous 1974 ruling in American Pipe v. Utah, which said that the statute of limitations can be tolled by the filing of a class action, does not apply to the statute of repose because that absolute time bar gives defendants substantive rights that cannot be abridged. The 2nd Circuit’s decision, as I’ve reported, was at odds with a 13-year-old ruling from the 10th Circuit, which found in Joseph v. Q.T. Wiles that a pending class action tolls the statute of repose as well as the statute of limitations.
When plaintiffs lawyers on the losing side of the 2nd Circuit’s IndyMac decision ask the Supreme Court to take their case (as I’m pretty sure they will), they might want to point to a just-released exchange of letters in a securities class action against Transocean in federal court in Manhattan. Transocean and the Georgia pension fund suing it over allegedly false statements in a 2007 proxy filing are fighting over whether the 2nd Circuit’s ruling disposes of the fund’s claims. That, of course, is of great interest to them. But of more general significance is that tolling of the statute of repose has so quickly shown itself to be an issue, even outside the context of mortgage-backed securities litigation. The broader the impact of the ruling, the likelier it is to be reviewed by the Supreme Court.
In the Transocean case, the statute of repose reared its head when the original lead plaintiff in the securities class action was dismissed for lack of standing. That plaintiff, a union pension fund, filed a class action making claims based on the Transocean proxy in September 2010, three days before the three-year anniversary of the proxy filing date in 2007. The DeKalb County Pension Fund made its first appearance in the union fund’s class action in December 2010, when its lawyers at Scott + Scott moved for DeKalb’s appointment as lead plaintiff. In March 2012, the union fund was tossed from the case, leaving DeKalb as the only remaining name plaintiff.
Transocean’s lawyers at Munger, Tolles & Olson and Allen & Overy claimed that the three-year statute of repose had expired before DeKalb showed up in the case. Last October, with In re IndyMac pending at the 2nd Circuit, they asked for a stay of the securities class action until the appeals court determined whether American Pipe tolling applied to the statute of repose. DeKalb, which had already survived two defense dismissal motions and was understandably eager to start discovery, opposed the stay. The fund argued, among other things, that its claims dated back to the union fund’s filing because it was a member of the class from the beginning. Swapping one name plaintiff for another, DeKalb said, isn’t the same thing as filing a new suit, so the 2nd Circuit’s consideration of American Pipe tolling wouldn’t be dispositive.
The case was stayed over DeKalb’s objections. “Were the 2nd Circuit to adopt (Transocean’s) position that an action is not considered ‘commenced’ for American Pipe tolling purposes until it is brought by a party with standing, plaintiff’s claims would be subject to dismissal as a matter of law because no party with standing filed a complaint in this action until after the statute of repose had run,” U.S. District Judge Laura Taylor Swain wrote at the time.
Transocean certainly believes that’s what the 2nd Circuit held. On July 16, its counsel sent a letter to Chief U.S. District Judge Lorna Schofield, who recently took over the case. Transocean said it had asked DeKalb’s lawyers to dismiss the class action in light of the 2nd Circuit’s IndyMac decision, but DeKalb had refused. It asked Judge Schofield to lift the stay and allow the company to file a new motion to dismiss on timeliness grounds. (The letter was dated July 16 but was only made public on the court docket on Monday.)
In DeKalb’s response, its lawyers argued that the fund’s claims were filed in time: Under the Exchange Act provision for claims based on proxy misrepresentations, the fund said, the statute of repose begins on the date of accrual, not the date of the proxy. In this case, according to the fund, the statute of repose was triggered by the 2010 Deepwater Horizon disaster, which led to a federal investigation that allegedly disproved representations in Transocean’s 2007 proxy.
Judge Schofield lifted the stay and ordered a hearing for Aug. 2. So one way or another, we’ll get some interpretation of the 2nd Circuit’s ruling. (In the only other case in which it has so far been an issue, according to Westlaw, U.S. District Judge Victor Marrero refused to reconsider a ruling permitting an investor to proceed with fraud and breach of duty claims against Ezra Merkin, finding that the statute of repose isn’t at issue in the suit.) Resolving the circuit split, however, will take a higher authority.
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