An update on class actions from GE Law
Not long after the bankruptcy of Lehman Brothers in 2008, an investor in Lehman filed a federal class action complaint.
It claimed that underwriters of Lehman’s securities offerings (the defendants) were liable, under Section 11 of the Securities Act of 1933, for false and misleading statements in the registration statements for those offerings (the class action).
In 2011, before the District Court decided whether to grant class certification, the California Public Employees’ Retirement System (the plaintiff), a member of the putative class, filed its own Section 11 action against the defendants. Later that year, the parties to the class action settled the case, and the District Court certified a class for settlement purposes. The plaintiff opted out of the class action settlement in order to pursue its claims individually.
The District Court, however, found that plaintiff’s claims were time-barred by the three-year statute of repose in Section 13 of the Securities Act because they were filed more than three years after the securities offerings at issue. The plaintiff argued that, pursuant to the Supreme Court’s 1974 opinion in American Pipe & Construction Co v Utah, the statute of repose was paused or ‘tolled’ by the filing of the Class Action, and therefore its action was timely. The District Court rejected this argument, applying the Second Circuit’s holding in Police and Fire Retirement System of Detroit v IndyMac MBS, Inc that American Pipe tolling does not affect Section 13’s statute of repose. The Second Circuit affirmed.
Previously, in 2014, the Supreme Court agreed to review the lower court’s decision in IndyMac to resolve a circuit split regarding whether Section 13’s statute of repose was subject to American Pipe tolling. Just one week before oral argument, however, in light of a settlement in IndyMac, the Supreme Court dismissed the writ of certiorari (request to review the decision) as improvidently granted, leaving the issue unresolved.
The plaintiff in the present case petitioned the Supreme Court for a writ of certiorari to review the Second Circuit’s opinion, which hewed to its earlier IndyMac decision. The Supreme Court granted certiorari on 13 January, 2017.
In American Pipe, the Supreme Court held that: “The commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class who would have been parties had the suit been permitted to continue as a class action.”
Section 13 of the Securities Act provides that “in no event shall any such action be brought to enforce a liability created under section 11 or section 12(a)(1) more than three years after the security was bona fide offered to the public, or under section 12(a)(2) more than three years after the sale”. Section 13 is considered a “statute of repose,” which extinguishes a cause of action after a fixed time period, in contrast to a “statute of limitations”, which establishes a period within which a lawsuit may be filed after a cause of action has accrued.
In IndyMac, the Second Circuit held that to allow a complaint to be filed after the statute of repose expired would “modify a substantive right” in violation of the Rules Enabling Act. Two other circuits – the Sixth and the Eleventh – have recently agreed with the Second Circuit’s holding.
By contrast, in 2000 the Tenth Circuit held that a class action complaint should be viewed as asserting the claims of all putative class members at the time of filing. Therefore, according to the Tenth Circuit, application of American Pipe simply recognises that the filing of a putative class action satisfies Section 13 for all members of the putative class.
If the Supreme Court agrees with the Second Circuit, then class members in all circuits will need to consider filing individual cases to protect themselves in the event that class certification is denied after the statute of repose has run. Opt-out rights may well be rendered illusory in protracted securities cases. Furthermore, while the instant case involves only claims filed under the Securities Act, whatever the Supreme Court decides likely will be applied in the future to the statute of repose applicable to Rule 10b-5 securities claims, and possibly those in other, non-securities statutes.
Column sponsored and supplied by Grant & Eisenhofer
Grant and Eisenhofer