On September 2, 2021, the United States Court of Appeals for the
Third Circuit affirmed the decision by a district court to permit
plaintiffs to file a third amended complaint, on behalf of a
putative class, against a bank (the "Company") and
certain of its former officers, its underwriters, and its
independent auditors, alleging violations of Sections 11, 12(a) and
15 of the Securities Act of 1933, as well as Sections 10(b) and
20(a) of the Securities Exchange Act of
1934. Southeastern Penn. Trans. Authority v.
Orrstown Financial, No. 20-2829 (3d Cir. Sept. 2, 2021).
Plaintiffs' Third Amended Complaint was filed after the
applicable repose period had expired, and after certain defendants
had successfully moved for dismissal. Defendants argued the
relation back doctrine under Rule 15(c) of the Federal Rules of
Procedure—which allows an amended pleading under certain
circumstances to be treated as if filed on the date of an initial
pleading despite any applicable statute of limitations—should
not similarly apply against the statute of repose, which bars
claims after a certain period of time. The Third Circuit held
the district court did not err in granting plaintiffs leave to
amend under Rule 15(a)(2), because the relation back doctrine was
not in conflict with the statute of repose, and because defendants
had not yet had a vested substantive right to repose as the action
was still ongoing and plaintiffs sought only to amend to reassert
claims they originally brought against the same parties.
In 2012, plaintiffs filed suit bringing securities claims against
the Company on behalf of (i) investors who purchased stock
traceable to the Company's 2010 initial public offering and
(ii) investors who purchased stock in the open market between March
2010 and October 2011, alleging defendants failed to make certain
disclosures concerning the Company's financial health.
Before defendants moved to dismiss, plaintiffs filed their First
Amended Complaint as of right. Defendants successfully moved
to dismiss the First Amended Complaint for failure to meet pleading
requirements, but the district court permitted plaintiffs to file a
Second Amended Complaint, which they did in February 2016.
Defendants successfully moved to dismiss several claims against
several defendants; the remaining claims were Exchange Act claims
against a sub-set of defendants. In April 2019, after a
period of discovery, plaintiffs moved for leave to file a Third
Amended Complaint, which reasserted previously dismissed claims
from the Second Amended Complaint, including claims against certain
parties against whom all claims had previously been
dismissed. Defendants opposed plaintiffs' motion, arguing
that such claims were time-barred since plaintiffs sought to assert
them after the three-year repose period under the Securities Act
and the five-year repose period under the Exchange Act. The
district court granted plaintiffs' motion, holding that the
statutes of repose did not bar the reasserted claims. The
district court opined that (i) the statutes of repose limited the
time within which an "action" must be brought, and (ii)
plaintiffs were not seeking to bring a new action, because the
dismissal of certain claims in the Second Amended Complaint had not
ended the action, per FRCP Rule 54(b), which provides that
"any order . . . that adjudicates fewer than all claims or the
rights and liabilities of fewer than all the parties does not end
the action as to any of the claims or parties." The
district court also held, however, that Rule 15(c) did not apply
as, according to the court, it "concerned only the addition of
an entirely new party or claim" and plaintiffs sought only to
reassert previously dismissed claims. Defendants requested
certification of the district court's order which the court
granted, and defendants filed an interlocutory appeal shortly
after.
First, the Third Circuit held that Rule 15 governed plaintiffs'
amendment, based on other Third Circuit precedent and the Supreme
Court's approach which, the Court of Appeals stated, has
"long applied the relation-back doctrine to amendments that
'merely expand[] or amplif[y]' claims in the initial
proceeding."
The Court further disagreed with defendants' arguments that
Rule 15(c) could not be applied when the statute of repose had run,
holding that this would "present enormous practical
difficulties," including that "a plaintiff could not
make any changes—no matter how
small—to its complaint after expiration of the repose
period." In response to defendants' argument that
the repose statute applied to the dismissed claims and that such
claims were "extinguished" once the repose period
expired, the Court stated that the language of the statutes applied
to "actions" rather than "claims." The
Court also stated that, even if the statutes of repose applied
against claims—which the Court recognized was suggested by
Supreme Court and Third Circuit precedent—the claims had not
yet "ended" as to all parties, under Rule 54(b).
Next, the Court held that the relation-back doctrine was consistent
with the purpose of the statutes of repose. The Court noted
that while it agreed with defendants that a repose statute's
purpose is to give defendants protection after a certain amount of
time, the Court's view was that this purpose would not be
defeated where plaintiffs reinstate dismissed claims against
dismissed defendants, because this did not "constitute the
filing of a new action until a court has decided all claims against
all parties to the initial action." The Court observed
that a court may still deny leave to amend even if the
relation-back doctrine applies given the independent analyses
within Rule 15—such as subsection (a)'s "undue
delay" analysis.
Finally, the Court addressed defendants' argument that allowing
relation back "to defeat statutes of repose would violate the
Rules Enabling Act," which prohibits interpretation of the
FRCP in a way that would modify any substantive right. The
Court took the view that the statute of repose "creates a
vested right to be free from liability only as against those
plaintiffs who do not have a pending action under the statute at
the same time . . . because statutes of repose create a deadline
for filing actions, rather
than resolving them."
The Court emphasized that its holding is limited to this context
where plaintiffs were not "bringing any new legal claims or
adding new parties that were not included" in the First
Amended Complaint and that its holding "does not address
whether an entirely new claim . . . may relate back [or] whether a
plaintiff may use relation back in this context to add new
parties."
The Court recognized that other Circuits have come to contrary
conclusions as to several aspects of its approach in this
case. This includes the Second Circuit's analysis and
holding that the Rules Enabling Act barred any interpretation of
Rule 23 that would permit tolling of the Securities Act's
statute of repose, in Police & Fire Ret. Sys. v.
IndyMac MBS, Inc., 721 F.3d 95, 109 (2d Cir. 2013), which a
number of courts in the Second Circuit has relied on to conclude
that the Rules Enabling Act also prohibits relation back against
statutes of repose. The Court also acknowledged that other
district courts have previously declined to permit relation back
with statutes of repose, but the Third Circuit contended that those
decisions involved defendants who had substantive rights, whereas,
under the Court's view, defendants did not have such a right
because plaintiff had brought an action against defendants
containing the claims at issue within the repose period.
Southeastern Penn. Trans. Authority v. Orrstown Financial
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