July 8, 2013
On June 27, 2013, the United States Court of Appeals for the Second Circuit issued an opinion addressing the "unsettled question" of whether the tolling principles of American Pipe & Construction Co. v. Utah, 414 U.S. 538, 554 (1974), extend to the three-year statute of repose for claims under the Securities Act of 1933. In In re IndyMac Mortgage-Backed Securities Litigation, the Second Circuit held that (i) American Pipe tolling does not apply to the statute of repose; and (ii) neither Rule 24 intervention nor the Rule 15(c) "relation back" doctrine permits absent class members to intervene as named plaintiffs to revive claims that were dismissed from a class complaint for lack of jurisdiction.
As a result of the In re IndyMac decision, absent class members can no longer wait indefinitely to see how a putative class action develops before deciding whether to file their own actions, as any individual claims would need to be filed within Section 13’s three-year statute of repose. This could make for easier claims assessment by defendants and serve to simplify the class action settlement process, as the potential of absent class members to opt-out strategically years after the filing of a class action will be curtailed by the repose period. Moreover, while the decision specifically addresses only Section 13 of the Securities Act, its reasoning arguably applies to all statutes of repose, meaning that absent class members in other types of class actions need to act to assert their claims before the running of the applicable statutes of repose or risk losing the ability to assert their individual claims should the putative class action fail to result in a certified class.
The In re IndyMac decision arises out of a series of putative class actions asserting Securities Act claims relating to offerings of residential mortgage-backed securities ("RMBS") sponsored by the now defunct IndyMac Bank, F.S.B. After consolidation, Lead Plaintiffs Wyoming State Treasurer and Wyoming Retirement System (the "Wyoming Funds") filed a complaint on behalf of a putative class of investors in 106 different offerings of IndyMac RMBS. The Wyoming Funds were the sole named plaintiffs in the complaint.
On June 21, 2010, the district court dismissed for lack of standing those claims in the complaint arising from offerings of RMBS in which the Wyoming Funds did not invest. Following that decision, six different pension funds moved to intervene as additional named plaintiffs to assert class claims relating to offerings that had been dismissed for lack of standing. Defendants opposed the intervention motions as barred by the three-year statute of repose in Section 13 of the Securities Act. In response, the proposed intervenors argued that their otherwise untimely claims should be deemed timely because Section 13’s statute of repose was tolled under the American Pipe doctrine by the filing of the Wyoming Funds’ complaint and because under Rule 15(c) their claims related back to the Wyoming Funds’ complaint. On June 21, 2011, the district court issued an order that, while acknowledging that a number of courts "have reached a different result," held that "neither American Pipe nor any other form of tolling may be invoked to avoid the three-year statute of repose set forth in Section 13 of the Securities Act of 1933" and that "Rule 15 may not be construed to permit relation back because such a construction would conflict with the Rules Enabling Act." In re IndyMac Mortgage-Backed Sec. Litig., 793 F. Supp. 2d 637, 642-43 (S.D.N.Y. 2011).
American Pipe Tolling Does Not Apply To Statutes Of Repose
In American Pipe, the Supreme Court held that 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." 414 U.S. at 554. In reaching this conclusion, the Supreme Court relied heavily on an analysis of Rule 23, reasoning that a contrary holding would "frustrate the principal function of a class action" and create a "multiplicity of activity which Rule 23 was designed to avoid." Id. at 551. The Court also noted that, "[i]n recognizing judicial power to toll statutes of limitation in federal courts, we are not breaking new ground." Id. at 558. Since the Supreme Court’s decision in 1974, most lower courts to have considered the question have extended the tolling principles of American Pipe, which involved a statute of limitations, to statutes of repose on the ground that American Pipe tolling is a form of "legal tolling," rather than equitable tolling.
The Second Circuit concluded that it did not matter whether American Pipe tolling was viewed as a form of equitable or legal tolling as neither form of tolling could stop the running of the statute of repose: "If [the American Pipe] tolling rule is properly classified as ‘equitable,’ then application of the rule to Section 13’s three-year repose period is barred by [Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363 (1991)], which states that equitable tolling principles do not apply to that period. Even assuming, arguendo, that the American Pipe tolling rule is ‘legal’ — based upon Rule 23, which governs class actions — we nonetheless hold that its extension to the statute of repose in Section 13 would be barred by the Rules Enabling Act, 28 U.S.C. § 2072(b)." Slip Op. at 15.
The Rule 15(c) Relation Back Doctrine Does Not Permit Absent Class Members To Intervene As Named Plaintiffs To Revive Claims That Were Dismissed From A Class Complaint For Lack Of Jurisdiction
The Second Circuit also held that the proposed intervenors could not rely on Rule 15(c) to salvage their claims. The proposed intervenors had argued that their claims should be deemed to relate back to the Wyoming Funds’ complaint, notwithstanding the Wyoming Funds’ lack of standing to assert the claims. The Second Circuit observed that the proposed intervenors were never named plaintiffs and that their ability to join the suit as a named plaintiff was "foreclosed by the long recognized rule that if jurisdiction is lacking at the commencement of a suit, it cannot be aided by intervention of a plaintiff with a sufficient claim." Slip Op. at 18. Because "[t]he District Court lacked jurisdiction over certain claims of the [Wyoming Funds] — the very claims now asserted by the proposed intervenors — . . . that defect may not be cured by later intervention." Id. at 19.
The Second Circuit’s ruling continues a recent trend in the caselaw making clear that Rule 23 is not a trump card that can override the substantive rights of defendants. See, e.g., Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011); Comcast v. Behrend, 133 S. Ct. 1426 (2013); American Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013). In rejecting the application of American Pipe tolling to Section 13’s three-year statute of repose, the Second Circuit found unpersuasive proposed intervenors’ arguments that the "failure to extend American Pipe tolling to the statute of repose in Section 13 could burden the courts and disrupt the functioning of class action litigation." Slip Op. at 16. In so doing, the Second Circuit made clear the duty of sophisticated parties to "be diligent and keep abreast of developments in the case, especially when the class is not certified." Slip Op. at 20. The Second Circuit’s decision curbs the ability of absent class members to wait indefinitely for developments in the class action to unfold before deciding whether to participate or file their own action, as Section 13’s three-year statute of repose will bar absent class members from opting-out or otherwise independently asserting their Securities Act claims after the statute of repose has run. Moreover, while the In re IndyMac decision focuses on the three-year statute of repose in Section 13, its reasoning would apply to other statutes of repose as well. Thus, absent class members must decide, within the applicable repose periods, whether to pursue individual claims or risk losing the right ever to pursue such claims.
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Gibson Dunn represents the underwriters in In re IndyMac Mortgage-Backed Securities Litigation. Robert F. Serio argued the case in the United States Court of Appeals for the Second Circuit on December 5, 2012.
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