July 2014: Securities and Structured Finance Litigation Update

by Quinn Emanuel Urquhart & Sullivan, LLP

U.S. Supreme Court to Review Tolling of Securities Act Claims. In Police & Fire Retirement System of the City of Detroit v. IndyMac MBS, Inc. 721 F.3d 95 (2d Cir. 2013) (“IndyMac”), the Second Circuit addressed the reach of the Supreme Court’s decision in American Pipe & Construction Co. v. Utah (“American Pipe”), 414 U.S. 538 (1974). American Pipe 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.” Id. at 554. The Second Circuit held in IndyMac that the tolling rule set forth in American Pipe does not apply to the three-year statute of repose in Section 13 of the Securities Act of 1933 (the “Securities Act”), 15 U.S.C. § 77m. See IndyMac, 721 F.3d at 101. In March 2014, the U.S. Supreme Court agreed to review the Second Circuit’s IndyMac decision. How the Supreme Court resolves the applicability of so-called “American Pipe tolling” to Securities Act claims could have significant implications for investors, underwriters, and issuers of securities.

In IndyMac, the lead plaintiff and other potential class members alleged that the issuer and underwriters of certain residential mortgage-backed securities misrepresented the quality of the mortgages collateralizing the securities, in violation of Sections 11, 12, and 15 of the Securities Act. 721 F.3d at 101-03. Although the Securities Act generally provides that such claims are timely only if brought within three years of the issuance of the securities (with respect to Section 11 claims) or within three years of the sale of the securities (with respect to Section 12 claims), several potential plaintiffs sought to join the ongoing class action outside of the three-year statute of limitations set forth in Section 13, which is sometimes referred to as a “statute of repose.” Id. at 103. In support of the timeliness of their claims, the potential IndyMac class action plaintiffs argue that the tolling principle announced in American Pipe also applies to Section 13’s statute of repose. 721 F.3d at 103. The District Court (and, subsequently, the Second Circuit) ruled that it did not. Id. at 103, 109.

In American Pipe, the Supreme Court analyzed Federal Rule of Civil Procedure 23, which provides the procedures for class actions. The Supreme Court reasoned that a failure to permit a putative class action to toll the statute of limitations for all potential class members would encourage a multiplicity of suits (since each potential plaintiff might feel compelled to bring suit to ensure the timeliness of its claims), which is precisely what the class action mechanism was designed to avoid. The Supreme Court therefore held that filing a putative class action tolled the applicable statute of limitations for all potential class members until the court decided class certification or otherwise disposed of the case. American Pipe, 414 U.S. at 553-54.

In IndyMac, the Second Circuit initially considered whether American Pipe tolling was an “equitable,” judicially created doctrine (which could not toll Section 13’s statute of repose), or whether it was a form of “legal” tolling (and therefore could toll a statutory statute of repose). 721 F.3d at 107-08. The court did not answer this question, however, holding that even if the tolling principle in American Pipe were grounded in Rule 23 (and therefore constituted “legal,” rather than “equitable,” tolling), Rule 23 could not toll a statute of repose since the Rules Enabling Act, 28 U.S.C. § 2072(b), prohibits a federal rule from “abridge[ing], enlarge[ing] or modify[ing] any substantive right.” 721 F.3d at 109. Because the Second Circuit held that Section 13 created a substantive right to be free from liability after a legislatively determined period, the court reasoned that Rule 23 could not abridge a defendant’s right under a statute of repose to be free from liability from plaintiffs that had not brought suit within three years of the alleged violation. Id. Accordingly, the court dismissed the putative plaintiffs’ claims as untimely. Id. at 112-13.

In their petition for a writ of certiorari, the IndyMac plaintiffs argued that IndyMac conflicted with a decision from the Tenth Circuit, which had ruled that American Pipe tolling does apply to Section 13’s statute of repose. See Joseph v. Wiles, 223 F.3d 1155 (10th Cir. 2000). In Joseph, the Tenth Circuit held that “[i]f all class members were required to file claims in order to ensure the limitations period would be tolled, the point of Rule 23 would be defeated.” Id. at 1167. One point raised in Joseph, and cited by the petitioners in IndyMac, is whether “American Pipe tolling” even constitutes tolling. See Joseph, 223 F.3d at 1168 (“Indeed, in a sense, application of the American Pipe tolling doctrine to cases such as this one does not involve ‘tolling’ at all. Rather, Mr. Joseph has effectively been a party to an action against these defendants since a class action covering him was requested but never denied.”). Under this reading of American Pipe, that case did not actually turn on tolling, but instead relied on the representative nature of the class action vehicle, as the class members were effectively parties to the action once class action treatment was requested. Under this theory, the putative class action effectively asserted the IndyMac plaintiffs’ claims, and therefore no resort to “tolling” is required for their claims to be timely under Section 13’s statute of repose.

The petitioners in IndyMac, however, face a threshold obstacle that may prevent the Supreme Court from reaching the American Pipe tolling question at all. In their briefing to the Supreme Court opposing certiorari, the IndyMac respondents challenged the petitioners’ ability to benefit from American Pipe tolling because the putative class representative in the underlying class action lacked standing to assert the petitioners’ claims. See Brief in Opposition for Respondents, IndyMac, No. 13-640, at 9 (Jan. 24, 2014). The petitioners, in response, have pointed to their own standing to bring the class action claims as evidence that the Court should reach the question of whether American Pipe renders their claims timely. See Reply Brief for Petitioner, IndyMac, No. 13-640, at 10-11 (Feb. 12, 2014). To the extent the Supreme Court considers this standing issue dispositive, it may not reach the merits of the petitioners’ timeliness claim, thus leaving this important issue undecided.

Whether, and how, the Supreme Court addresses the reach of American Pipe tolling of Securities Act class actions may have a significant impact on the fortunes of securities issuers, underwriters, and investors. The Court’s decision is expected in late 2014 or the first half of 2015.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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