A Problem For Congress

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). There is a significant district court split, however, over whether the existence of a class action tolls 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 the statute 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. Other recent decisions, however, have concluded that because FRCP 23 does not expressly create a class action tolling rule, 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.

In Police and Fire Retirement System of City of Detroit v. IndyMac MBS, Inc., 2013 WL 3214588 (2d Cir. June 27, 2013), the Second Circuit has resolved the split by holding that the statue of repose cannot be tolled even if the American Pipe tolling rule is “legal.” The court noted that statutes of repose “create a substantive right in those protected to be free from liability after a legislatively-determined period of time.” Meanwhile, FRCP 23 is a product of the Rules Enabling Act, which specifically states that the rules it authorizes “shall not abridge, enlarge or modify any substantive right.” Accordingly, the court held, “[p]ermitting a plaintiff to file a complaint or intervene after the repose period . . . has run would therefore necessarily enlarge or modify a substantive right and violate the Rules Enabling Act.”

Holding: Affirming denial of motions to intervene.

Quote of note: “We are cautioned by some of the proposed intervenors that a 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. We are not persuaded. Given the sophisticated, well-counseled litigants involved in securities fraud class actions, it is not apparent that such adverse consequences will inevitably follow our holding. But even if the decision causes some such problem, it is a problem that only Congress can address; judges may not deploy equity to avert the negative effects of statutes of repose.”

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