United States: Federal Appellate Courts Hold That Statutes Of Repose For Securities Claims Are Not Tolled By Filing Of Related Class Action

In re Lehman Brothers Securities & ERISA Litigation; SRM Global Master Fund Limited Partnership v. Bear Stearns Companies; Dusek v. JPMorgan Chase & Co.: Federal Appellate Courts Hold That Statutes of Repose for Securities Claims Are Not Tolled by Filing of Related Class Action

In 1974, in American Pipe & Construction Co. v. Utah, the US Supreme Court held that the filing of a class action tolls (or suspends) the running of the statute of limitations for all members of the proposed class during the pendency of the case. In recent years, courts around the country have debated whether this same principle applies to statutes of repose under the federal securities laws. Three recent decisions by federal appellate courts address this issue: on 8 and 14 July 2016, the federal appellate court based in New York, in In re Lehman Brothers Securities & ERISA Litigation and SRM Global Master Fund Limited Partnership v. Bear Stearns Companies, respectively, and on 22 August 2016, the federal appellate court based in Atlanta, Georgia, in Dusek v. JPMorgan Chase & Co., all held that statues of repose under various provisions of the federal securities laws are not tolled during the pendency of a class action.

The courts in Dusek and SRM both addressed whether the applicable statute of repose was tolled by class actions brought under the Exchange Act. Dusek dealt with claims against various JPMorgan entities and employees arising out of Bernard L. Madoff's Ponzi scheme, which came to light in December 2008. SRM dealt with claims related to the collapse of Bear Stearns in 2008. Lehman Brothers addressed claims brought under the Securities Act of 1933 (the "Securities Act") growing out of offerings by Lehman Brothers in 2007. The plaintiffs in all of these cases filed their claims past the applicable statutory repose period (five years under the Exchange Act and three years under the Securities Act), but sought to rely on earlier-filed class actions raising similar claims to toll these repose periods. The courts in all three cases held, following a 2013 ruling by the federal appellate court based in New York, in a case called Police & Fire Retirement System of City of Detroit v. IndyMac MBS, Inc. (which this memorandum covered at the time), that the filing of a prior class action did not toll the applicable statute of repose.

The courts in these three cases held that regardless of whether the tolling of the statute of limitations is equitable or legal in nature, it does not apply to the statutes of repose under the Securities Act and the Exchange Act. Whereas statutes of limitations merely limit the availability of remedies to plaintiffs, statutes of repose create a substantive right for potential defendants to be free from liability after a legislatively-determined period of time. As the IndyMac decision (and now these three new cases) held, if the tolling of statutes of limitations is equitable in nature, it cannot modify a legislatively-enacted repose period. And if the tolling principle is legal in nature because it is rooted in the laws governing class actions, it cannot apply to the securities laws' statutes of repose because doing so would modify the substantive right to be free from suit after the repose period expires. This modification would not be permitted under a statute known as the Rules Enabling Act, which prohibits the interpretation of the class action rules in a way that would "abridge, enlarge or modify any substantive right." These new decisions extend this prior reasoning to the statute of repose under the Exchange Act and explain that it applies regardless of whether the plaintiffs in the prior class action had standing to properly bring those claims.

While the three new decisions, and a decision earlier this year by the federal appellate court based in Cincinnati, Ohio, all held that the tolling principle does not apply to statutes of repose under the federal securities laws, the federal appellate court based in Denver, Colorado has held that the Securities Act's statute of repose can be tolled by a prior class action. The Supreme Court had agreed in early 2014 to review the IndyMac case in order to resolve the conflict between the appeals court opinions, but dismissed the case after the parties settled their dispute. In the Lehman Brothers case, the court noted the split among federal appellate courts about the fundamental nature of American Pipe tolling, and suggested that the question may therefore "be ripe for resolution by the Supreme Court."

For additional information about this case, please see our client notes:

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