Avoiding The Toll

And now for something a bit technical (but still important). The federal securities laws have statutes of repose (suit barred after a fixed number of years from the time the defendant acts in some way) and statutes of limitations (establishing a time limit for a suit based on the date when the claim accrued). Does the existence of a class action toll the statute of repose for a federal securities claim?

Under what is known as American Pipe tolling, “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.” American Pipe & Construction Co. v. Utah, 414 U.S. 538, 554 (1974). The Supreme Court found that its rule was “consistent both with the procedures of [Federal Rule of Civil Procedure] 23 and with the proper function of limitations statutes.” Id. at 555. In a later case, however, the Supreme Court also found that federal statutes of repose are not subject to equitable tolling. Lampf, Pleva, Lipkind, Prupis & Pettigrow v. Gilbertson, 501 U.S. 350, 364 (1991). In attempting to reconcile these two cases, the majority of lower courts have concluded that American Pipe tolling applies to statutes of repose for federal securities claims because it is based on FRCP 23 and, therefore, is a type of legal (as opposed to equitable) tolling.

In Footbridge Ltd. Trust v. Countrywide Financial Corp., 2011 WL 907121 (S.D.N.Y. March 16, 2011), however, the court strongly disagreed with this analysis. The court addressed claims subject to the ’33 Act’s one-and-three-year limitations and repose provision that were brought more than three years after the relevant acts. The plaintiffs argued that the repose period was tolled by certain class actions asserting similar claims. The court concluded that “nowhere in American Pipe does the Court read the text of [FRCP] 23 as having embedded within it language that creates a class action tolling rule.” In the court’s view, American Pipe tolling is best understood as a judicially-created rule based on equitable considerations and, as a result, cannot extend a statute of repose. The court granted defendants’ motion for summary judgment.

Whether other courts will agree with the Footbridge decision remains to be seen. The potential impact of the ruling, however, is significant, especially in light of how long it can take a securities class action to get through the class certification stage (although securities fraud claims have a longer, five-year statute of repose). Could it lead to more individual suits?

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