Time bar for class action opt-outs continues to divide trial courts

September 11, 2015

(Reuters) – It has been just about a year since the U.S. Supreme Court abruptly tossed In re IndyMac, a case in which the justices were poised to resolve a split between the 2nd and 10th U.S. Circuit Courts of Appeal on time limits for securities fraud plaintiffs. The 10th Circuit had said in Joseph v. Wiles in 2000 that under the U.S. Supreme Court’s 1974 holding in American Pipe v. Utah, the filing of a class action stops the clock on both the statute of limitations and the statute of repose for plaintiffs who later decide to sue on their own. The 2nd Circuit disagreed in its 2013 IndyMac ruling, which concluded that because the statute of repose gives defendants a substantive right to be free from prospective liability after the specified time period, it cannot be tolled.

IndyMac was supposed to be one of the first cases the Supreme Court heard last term, but last September, most of the bank defendants in the underlying mortgage-backed securities class action reached a $340 million proposed settlement with investors. Both sides subsequently assured the justices that the statute of repose controversy remained alive in their litigation because not every potential defendant had settled. The court nevertheless dismissed the case.

It has become clear in the year since then, most recently in a ruling Thursday in which U.S. District Judge Laura Swain of Manhattan dismissed some opt-out securities fraud claims against AIG, that lower courts are still divided about whether the filing of a class action tolls the statute of repose. I don’t know which case will next present that question to the Supreme Court – perhaps Judge Swain’s AIG decision or trial judges’ contrary holdings in securities litigation against BP and Merck – but arguments for certiorari have only grown stronger since the justices agreed to hear IndyMac.

In the AIG opt-out litigation in New York, Judge Swain said the 2nd Circuit decided IndyMac properly so investors suing AIG on their own can’t evade the statute of repose by pointing to a previously filed class action. Meanwhile, Santa Ana, California, federal district judge David Carter ruled in June that another AIG opt-out, Pimco, can return to state court in Orange County with its securities fraud case against the company. AIG had removed the Pimco suit to federal court and asked that it be transferred to Judge Swain. Pimco countered with a remand motion. Judge Carter’s opinion suggested that if the case went to New York, it would be dismissed under IndyMac precedent, a hypothesis borne out by Judge Swain’s ruling on Thursday. Carter’s decision to send the case back to state court instead should be clear evidence for some future cert petition writer that nearly identical claims were handled differently because of the federal jurisdictions in which they were filed.

More evidence comes from a September 2014 ruling by U.S. District Judge Keith Ellison of Houston in consolidated opt-out litigation against BP and an August 2015 opinion from U.S. District Judge Freda Wolfson of Trenton, New Jersey, in an opt-out case against Merck. Neither the 5th nor 3rd Circuit has issued an opinion on whether the filing of a class action stops the clock on the statute of repose, so, without guidance from their own courts of appeals or the Supreme Court, Ellison and Wolfson were left to choose between the reasoning of the 2nd Circuit or the 10th.

Both rejected the 2nd Circuit’s IndyMac analysis and refused to dismiss the opt-out suits – cases that would have died had they been brought in New York, Connecticut or Vermont. “Viewing the filing of a class action as a ‘prefiling’ of all unnamed class members’ claims means that the concern identified by the 2nd Circuit in IndyMac-that applying American Pipe tolling somehow abridges a defendant’s substantive right to be free from suit after a specific period of time-is illusory,” wrote Judge Ellison, in language quoted by Judge Wolfson. “So long as the defendant has fair notice of the type and number of claims that could be asserted against it, which should be required for American Pipe tolling in the first instance, then there is no unfair surprise when a class member assumes responsibility for its own individual claim.”

It will be a while before the Supreme Court has another chance to take up the IndyMac question, since there hasn’t been a federal appellate decision on the issue since the 2nd Circuit’s. But it’s a good bet you haven’t heard the last word about class actions and tolling of the statute of repose.

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