By Anne Sherry, J.D.
Two new petitions for certiorari ask the Supreme Court to look again at the effect of American Pipe tolling on statutes of repose. The petitioners opted out of class actions against Bear Stearns and the underwriters of Lehman Brothers debt offerings, respectively, for allegedly fraudulent activity during the financial crisis. The Second Circuit dismissed their individual claims as time-barred by the statute of repose, following its IndyMac decision, with which other circuits disagree (SRM Global Master Fund L.P. v. The Bear Sterns Companies LLC and CalPERS v. Moody Investors Service, Inc., September 22, 2016).
The Supreme Court granted cert in the IndyMac case in 2014, but withdrew it as improvidently granted after learning that the district court was reviewing a tentative settlement. According to the petitioners, the need for resolution to the circuit split has only grown since IndyMac last appeared on the Court’s docket. SRM Global Master Fund asks whether the timely filing of a class action tolls the five-year period of repose in 28 U.S.C. §1658(b)(2). CalPERS asks whether a class action satisfies Securities Act Section 13’s three-year limitation. Also, the pension fund, which filed its individual suit before a class was certified, presents the question of whether a class member may file an individual suit prior to class certification, notwithstanding the expiration of the relevant time limitations.
Second Circuit bars tolling. In IndyMac, several putative class members sought to intervene in an action in order to revive dismissed claims, arguing that American Pipe preserved their right to sue. Affirming the district court’s denial of intervention, the Second Circuit noted that courts have repeatedly recognized that Section 13’s three-year limitations period is a statute of repose, an absolute period not subject to equitable tolling. The court reasoned that it did not matter whether American Pipe’s tolling rule was equitable or legal: if equitable, it would not toll a repose period; if legal, the Rules Enabling Act would bar its extension to the Section 13 limitations period. The court recently issued a summary order reiterating its position.
Circuit split should be resolved in favor of tolling. Courts of appeal for the Tenth, Seventh, and Federal Circuits have held that American Pipe applies to statutes of repose, while the Sixth and Eleventh Circuits joined the Second in refusing to apply tolling. IndyMac is wrongly decided, however, according to the petitioners. Congress could not have intended the flood of protective motions that would result if statutes of repose were not tolled during the pendency of a class certification action, the petitioners point out. The Second Circuit’s rule also dramatically increases the cost of litigation by requiring every potential opt-out plaintiff to retain counsel, file an individual complaint, and monitor the entire litigation, while the defendants pay their lawyers to monitor and respond to duplicative and redundant pleadings and briefs. The petitioners also hint that the Second Circuit’s construction of American Pipe is not entirely friendly to defendants, which may have to shoulder the costs of unnecessary litigation if a fee-shifting statute applies.
Tolling does not frustrate purposes of the repose periods. The petitioners add that applying American Pipe tolling to Section 13 comports with the legislative purposes of the Securities Act. Quoting Crown, Cork & Seal (U.S. 1983), they note that the limitations period is intended to put defendants on notice of adverse claims and prevent plaintiffs from sleeping on their rights—ends that are met when a class action is commenced. American Pipe also respects the purpose of statutes of repose that a defendant should be free from liability after the legislatively determined period. “American Pipe is entirely consistent with that purpose because it guarantees that after the limitations period has expired, no liability will be imposed beyond that claimed in lawsuits filed on or before that date.”
No tolling makes opt-out meaningless. The petitioners also argue that the IndyMac rule has grave constitutional implications. Members of a class cannot opt out in part—for example, if a class action states some claims on which the limitations period has run and others that are still viable. A class member cannot opt out of the viable claims while preserving their presence in the class for purposes of the time-barred claims. SRM itself opted out of a settlement that would have extinguished its swap-based claims for no consideration; when the Second Circuit held its individual claims to be time-barred, it “retroactively transform[ed] SRM’s constitutionally protected opt-out into litigation suicide.” A rule permitting class members to opt out, but not to pursue their own individual claims, is as destructive to due process as simply prohibiting plaintiffs from opting out at all, SRM submits.
CalPERS’ pre-certification action meant there was no interruption. CalPERS adds that the Court should decide whether a limitations period can bar an individual action by a class member during the pendency of a timely class action. In both American Pipe and IndyMac, it notes, the class member waited until class certification was denied before pursuing an individual action. But CalPERS filed its own action after the statute of repose had expired but before the district court ruled on class certification. “In such circumstances, tolling is not required because the class member’s action was timely commenced and maintained without interruption.”
The cases are No. 16-372 and No. 16-373.