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Litigation Update: The Supreme Court Clarifies Securities Act Statute of Repose Not Tolled by Filing of Class Action

In a bout of déjà vu, the Supreme Court decided to hear California Public Employees’ Retirement System v. ANZ Securities, Inc., et al. to settle the issue of whether the Securities Act of 1933's (the "Securities Act") three-year statute of repose is subject to tolling.[1]  On June 26, 2017, the Supreme Court made the following noteworthy and defendant-friendly holdings:

  1. The textual interpretation, purpose, structure, and legislative history of § 13 of the Securities Act[2] all suggest that the three-year limitations period is a statute of repose rather than a statute of limitations.
  2. Section 13's statute of repose is not susceptible to tolling because the legislature intended to completely bar defendant liability after the stated time period. Moreover, this same legislative intent rejects granting the court with the equitable power of tolling as had been done in American Pipe & Construction Co. v. Utah.[3]
  3. The filing of an individual complaint more than three years after the relevant securities offering by a member of a separate timely class-action lawsuit regarding the same issue may not piggyback on the timeliness of the class-action even when the member opted out of the class-action.

I.  Background

This case stems from litigation concerning Lehman Brothers Holdings, Inc.'s issuance of debt securities throughout 2007 and 2008. Shortly after Lehman Brothers filed for bankruptcy in September of 2008, a putative class-action was filed by and for all persons who purchased the identified securities against underwriters (the "Respondents") of the transactions.  The suit alleged the Respondents were liable under § 11 of the Securities Act.[4]  Section 11 of the Securities Act gives purchasers of securities a right of action against a number of individuals, including underwriters, for any material misstatements or omissions in a registration statement.  As a purchaser of the securities, the California Public Employees' Retirement System (hereinafter "CalPERS") was a member of the putative class but not a named plaintiff in the lawsuit.

CalPERS filed an individual complaint on its own behalf in February 2011—more than three years after the relevant transactions occurred—alleging the same causes of action asserted by the class-action. The individual suit was consolidated with the multi-district litigation.  However, CalPERS opted out of the putative class-action when settlement was reached because it believed it could receive a more favorable outcome in the individual suit.

Respondents moved to dismiss CalPERS's individual suit alleging the § 11 claims were barred by the § 13 three-year limitations period. CalPERS argued that the individual suit was timely because the three-year period was tolled during the pendency of the class-action suit as confirmed in American Pipe.  Both the district court and Second Circuit agreed that § 13 was not subject to tolling.

II.  Issue on Appeal

The question presented in CalPERS's petition for certiorari was whether the timely filing of a putative class-action serves, under the American Pipe tolling rule, to satisfy the three-year time limitation in § 13 of the Securities Act with respect to the individual claims of putative class members.

III.  The Supreme Court Analysis

In a 5-4 decision written by Justice Kennedy, the Court focused on the nature and purpose of § 13 and the American Pipe tolling rule in deciding to dismiss CalPERS's complaint as untimely because § 13's statute of repose was not subject to tolling.

a.  Section 13 involves a statute of limitations and statute of repose.

First, the Court determined that § 13 of the Securities Act contains both a statute of limitations and statute of repose. The Court reasoned that the first sentence of § 13 is considered a statute of limitations because it maintains that claims under § 11 of the Securities Act must be brought "within one year after discovery of the untrue statement or the omission or after such discovery should have been made by the exercise of reasonable diligence."[5]  A statute of limitations "encourage[s] plaintiffs to pursue diligent prosecution of known claims" by filing a suit between the time the cause of action accrues—when the injury occurred or was discovered—and the end of the stated limitations period.

On the other hand, the Court found that the second sentence of § 13 acts as a statute of repose because it prohibits asserting a claim "more than three years after the security was bona fide offered to the public."[6]  This fixed bar represents the characteristics of a statute of repose because it begins to run on the "date of the last culpable act" and serves to free a defendant from liability after the determined time period.  Notably, the statute does not create an exception to the time period.

Here, the "two periods work together: The discovery rule[7] gives leeway to a plaintiff who has not yet learned of a violation, while the rule of repose protects the defendant from an interminable threat of liability."  Thus, the language, structure, and legislative history of § 13 indicate a three-year statute of repose.

b.  Section 13's statute of repose is not subject to tolling.

Second, the Court held that the three-year statute of repose was not subject to the American Pipe tolling rule. The American Pipe tolling rule provided that timely commencement of a class action suspended 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 to the class action.  Notably, the Court stated the determination that § 13 involved a three-year statute of repose was critical to determining whether the tolling rule applied.  The purpose of § 13's statute of repose, "to grant complete peace to defendants [(i.e. provide defendants with certainty and reliability)], supersedes the application of a tolling rule based in equity."  Statutes of repose displace the traditional power of courts to modify statutory time limits in the name of equity.  Moreover, because the Court found that American Pipe's tolling rule hinged on the court's equitable powers, the tolling rule was not applicable to § 13's three-year statute of repose.  The court also noted the following:

  1. American Pipe involved the tolling of a statute of limitations rather than a statute of repose.
  2. The timely filing of the class-action complaint does not fulfill the purposes of the statutory time limit with regards to later filed suits by individual members of the class, nor does it fulfill the requirements of notifying Respondents of the claims against it as American Pipe suggested. As mentioned above, this is contrary to the purpose of the statute of repose.
  3. Although CalPERS has the privilege to opt out of a class-action, this does not mean that CalPERS has the right to disregard mandatory statutory time limits.

c.  The timeliness of CalPERS's individual lawsuit may not hinge on the timeliness of the separate class-action.

Finally, the Court rejected CalPERS's argument that its individual action was timely filed because the class-action complaint brought CalPERS individual action within the three-year statute of repose. The Court noted the argument was implausible as well as contradictory to the principles in American Pipe:

Whether or not petitioner's individual complaint alleged the same securities law violations as the class-action complaint, it defies ordinary understanding to suggest that its filing—in a separate forum, on a separate date, by a separate named party—was the same 'action,' 'proceeding,' or 'suit.'

IV.  Implications of the Supreme Court's Holding

This defendant-friendly decision benefits defendants in suits alleging § 11 Securities Act violations because it provides them with notice of the exact time liability will be extinguished. But this means that plaintiffs must be extremely cognizant of the statute or repose deadline in order to prevent dismissal of claims.  The holding also leads to the reasonable determination that other statutes of repose may not be tolled, such as the five-year statute of repose for claims brought under Section 10(b) of the Securities Exchange Act of 1934.[8]  Finally, the decision will likely be applicable to circumstances where a non-party member of a class-action attempts to intervene in a certified class-action after the running of the statute of repose, as seen in Indy Mac.

[1] The Court had previously granted certiorari to decide the aforementioned issue in Public Employees’ Retirement System of Mississippi v. IndyMac MBS, Inc., but later dismissed the case. See Police & Fire Ret. Sys. Of Detroit v. IndyMac MB, Inc., 721 F.3d 95 (2d Cir. 2013), cert. granted sub nom., Pub. Emps.' Ret. Sys. of Miss. v.IndyMac MBS, Inc., 134 S. Ct. 1515 (2014), cert. dismissed as improvidently granted, 135 S. Ct. 42 (2014).

[2] 11 U.S.C. § 77m.

[3] 414 U.S. 538 (1974).

[4] 11 U.S.C. § 77k.

[5] 11 U.S.C. § 77m.

[6] 11 U.S.C. § 77m ("In no event shall any such action be brought to enforce a liability created under section 77k [§ 11] . . . more than three years after the security was bona fide offered to the public . . . .") (emphasis added).

[7] Referring to the one-year statute of limitations in the first sentence in § 13.

[8] 15 U.S.C. § 78j(b).