Issues
Does the filing of a putative class action serve, under the American Pipe rule, to suspend the three-year time limitation in § 13 of the Securities Act with respect to the claims of putative class members?
The Securities Act of 1933 (“Securities Act”) requires companies issuing a security to create offering documents that adequately outline the security’s risks to potential investors. Section 13 of the Securities Act requires a plaintiff to file a Securities Act claim within three years to allege the existence of material misstatements or omissions in these offering documents. In American Pipe & Construction Co. v. Utah, however, the Supreme Court held that many statutory time limits could be “tolled” or stopped when plaintiffs are potential members of an existing class action dealing with the same legal claim. This case should decide whether or not the time limitation in § 13 is the sort of limit subject to this “American Pipe rule.” The decision has implications for the efficiency of courts and stock issuers alike.
Questions as Framed for the Court by the Parties
Does the filing of a putative class action serve, under the American Pipe rule, to suspend the three-year time limitation in § 13 of the Securities Act with respect to the claims of putative class members?
Facts
Respondent IndyMac MBS, Inc. (“IndyMac”) is an issuer of a type of security known as mortgage pass-through certificates. The Securities Act of 1933 (“Securities Act”) requires IndyMac to create offering documents that adequately outline the pass-through certificates’ risks to potential investors. The Police and Fire Retirement System of the City of Detroit (“DetroitPFRS”) and the Wyoming Retirement System (“Wyoming”) filed two separate class actions on behalf of potential class members, who had purchased these pass-through certificates and relied on the certificates’ offering documents. Both DetroitPFRS and Wyoming claimed that the pass-through certificates’ offering documents contained material misrepresentations and omissions that violated §§ 11, 12(a)(2), and 15 of the Securities Act. Both of these class actions were eventually consolidated, and Wyoming proceeded as the lead plaintiff. The district court, however, soon dismissed these claims because Wyoming had not purchased the pass-through certificates at issue.
Meanwhile, five potential class members who did purchase the pass-through certificates, including Petitioner Public Employees’ Retirement System of Mississippi (“MissPERS”), moved to join the class action. The district court, however, also denied this motion. The district court reasoned that § 13 of the Securities Act prohibited the commencement of a claim under the Securities Act after a maximum of three years. In so holding, the district court disagreed with MissPERS, who had argued that American Pipe & Construction Co. v. Utah (“American Pipe”) suspended a potential class member’s statutory requirement under the Securities Act to either join the pending class action within three years or file his or her own securities claim within three years. The district court held that American Pipe did not apply to the Securities Act and thus the three-year statute of limitations cannot be “tolled” or stopped. Further, the district court reasoned that permitting tolling under Federal Rule of Civil Procedure 15(c) would abridge or modify a substantive right and, therefore, violate the Rules Enabling Act.
Three of the five potential class members, including MissPERS, filed an appeal to the Second Circuit Court of Appeals (“Second Circuit”) on July 20, 2011. The Second Circuit, however, affirmed the district court’s decision. Subsequently, MissPERS appealed the lower court rulings to the Supreme Court of the United States, which granted a writ of certiorari on March 10, 2014.
Analysis
The Supreme Court will decide whether the holding in American Pipe extends to § 13 of the Securities Act so that the filing of a Securities Act class action suspends a potential class member’s statutory requirement to either join the pending class action within three years or file his or her own securities claim within three years.
Section 13 of the Securities Act permits legal action to be brought within one year after discovery of a violation of the Securities Act has been or should have been made. Section 13, however, also provides that “[i]n no event shall any such action be brought to enforce a liability created . . . more than three years after the security was bona fide offered to the public, or . . . more than three years after the sale.”
MissPERS claims that the Second Circuit erred in holding that American Pipe does not extend to § 13 of the Securities Act because the section is a statute of limitation. MissPERS further maintains that the Rules Enabling Act does not preclude applying American Pipe to § 13 of the Securities Act.
IndyMac counters that the Second Circuit was correct in holding that American Pipe does not extend to § 13 of the Securities Act because the section is a statute of repose. IndyMac also claims that the Rules Enabling Act does preclude applying American Pipe to § 13 of the Securities Act.
STATUTE OF LIMITATION OR STATUTE OF REPOSE?
Both a statute of limitation and a statute of repose are mechanisms that restrict the maximum time after a given event that legal proceedings may be initiated; however, the two mechanisms have their differences. A statute of limitation begins to run after the discovery of a defendant’s illegal act and can be “tolled” or stopped. On the other hand, a statute of repose begins to run after a defendant’s illegal act and cannot be tolled. Thus, a statute of repose may create a situation where the allotted maximum time period during which a party may initiate a case can expire before the harmed party even becomes aware of the defendant’s illegal act.
MissPERS contends that the three-year limitation period in § 13 of the Securities Act is a statute of limitation and that the Second Circuit erred in holding that American Pipe does not extend to this section of the Securities Act. MissPERS explains that there are no textual differences that would distinguish § 13 from other limitation periods to which American Pipe applies. MissPERS also argues that the Second Circuit’s justifications for declining to apply American Pipe are in conflict with prior case law. More specifically, MissPERS asserts that the Second Circuit erroneously applied Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson because Lampf addressed the tolling of a time limitation period due to fairness concerns whereas American Pipe focused on efficiency concerns. MissPERS claims that, when viewed in this context, the suspension of § 13’s three-year limitation is necessary to make the class-action procedure of Federal Rules of Civil Procedure 23 properly function. MissPERS reasons that, if § 13’s three-year limitation period cannot be tolled, the limitation period would lead putative class-action members to file duplicative motions and thus undermine procedural efficiency. Finally, MissPERS explains that the American Pipe holding is consistent with the purpose of § 13’s three-year time limitation because a class action will give defendants sufficient notice of all potential claims.
IndyMac counters that the three-year limitation period in § 13 of the Securities Act is a statute of repose and that the Second Circuit was correct in holding that American Pipe does not extend to this section of the Securities Act. IndyMac explains that determining whether a statutory time limit is subject to tolling depends on an interpretation of the statute in question. IndyMac argues that prior case law, such as Lampf, establishes that Congress intended § 13 of the Securities Act to be a period of repose that serves as a strict cutoff for all potential claims. IndyMac further asserts that MissPERS is attempting to re-characterize the holding in American Pipe by claiming the court based its decision on efficiency rather than fairness. IndyMac argues that the Supreme Court has already previously iterated that American Pipe is grounded in fairness concerns.
Finally, IndyMac asserts that the text, structure, and purpose of § 13 preclude the possibility of stopping the three-year limitation period. In support of its argument on intent, IndyMac first points to the use of the phrase “[i]n no event” as indicating the intent to completely bar any claim after three years. Second, Indy Mac contends the two-tiered time bar, which includes a one-year period of limitation after discovery and a three-year year period of limitation for private suits, indicates Congress’s intent to be flexible within a certain time period but to cut off all claims after the three-year period.
POTENTIAL VIOLATION OF THE RULES ENABLING ACT
The Rules Enabling Act states that the Supreme Court can create procedural rules for cases in federal court so long as these procedural rules do not alter any party’s substantive rights.
MissPERS claims that the Rules Enabling Act does not prohibit extending the holding of American Pipe to § 13 of the Securities Act because § 13 does not affect the substantive rights of any party. MissPERS argues that § 13 is a procedural provision that only dictates when a plaintiff may begin an action. Also, MissPERS explains that the American Pipe court believed that suspending even a substantive time limitation would not violate the Rules Enabling Act. Further, MissPERS adds that the provision at issue in American Pipe was virtually identical to § 13.
IndyMac, however, claims that the Rules Enabling Act does preclude extending the holding of American Pipe to § 13 of the Securities Act because § 13 impacts the substantive rights of parties. IndyMac argues that § 13 is a substantive provision because the three-year period gives a defendant the right to be free from liability after three years. IndyMac reasons that extending the American Pipe § 13 of the Securities Act would negatively impact this substantive right. Furthermore, IndyMac argues that a plaintiff’s right will also be altered because a plaintiff will now potentially have a greater amount of time to commence a legal action.
Discussion
This case presents the Supreme Court with the opportunity to resolve whether the filing of a class action under the Securities Act suspends a potential class member’s statutory requirement to either join the pending class action within three years or file his or her own securities claim within three years. Petitioner MissPERS argues that the American Pipe holding—that the commencement of a class action suspends a potential class member’s requirement to file a claim within a statutorily defined time period—extends to § 13 of the Securities Act. In opposition, Respondent IndyMac claims that American Pipe does not extend to § 13 of the Securities Act because § 13 is immune to judicial alterations. The Supreme Court’s resolution of this case will likely affect judicial efficiency and business efficiency.
JUDICIAL EFFICIENCY
MissPERS and supporting amici argue that judicial efficiency will suffer if the American Pipe holding does not extend to § 13 of the Securities Act. Several civil procedure and securities law professors contend that potential class members, who do not have complete confidence that a potential class action will be successful, will likely file individual suits to protect their interests even though one class action would suffice. These professors explain that, if the commencement of a potential class action does not suspend the time limitation in § 13, then § 13’s strict time limitation will likely expire prior to a court deciding whether to permit the class action to proceed. Based on this reasoning, the professors contend that potential class action members would have to commence individual suits or motions to intervene to prohibit § 13’s time limitation from extinguishing their claims. Several public and private pension funds also claim that institutional investors will likely have to commence individual suits or motions to intervene, which will cause unnecessary and wasteful litigation.
IndyMac and supporting amici argue that judicial efficiency will not suffer even if the American Pipe holding does not extend to § 13 of the Securities Act. Business Roundtable counters the professors’ arguments by explaining how federal courts have become more aware of whether a class action can proceed prior to the expiration of § 13’s time limitation. In accord with the Business Roundtable’s view, the Securities Industry and Financial Market Association provides empirical evidence that suggests motions to intervene seldom impose a significant burden on the judicial system.
BUSINESS EFFICIENCY
Supporting amici for MissPERS contend that the American Pipe holding’s extension to § 13 of the Securities Act will result in increased business efficiency. The American Association for Justice (“AAJ”) contends that the tolling of § 13’s time limitation will help businesses by incentivizing the aggregation of stakeholders’ claims into a single action, which will facilitate settlement. Further, the AAJ claims that this aggregation permits “defendants to minimize their future liabilities and avoid the transaction costs of future litigation.”
Supporting amici for IndyMac, however, argue that the American Pipe holding’s extension to § 13 of the Securities Act will not increase business efficiency. Business Roundtable claims that, if § 13’s time limitation is not absolute, then a defendant will not know its potential liability exposure and thus cannot appropriately prepare for litigation. Moreover, the Securities Industry and Financial Markets Association asserts that if class actions toll § 13’s time limitation, the efficiency and stability of securities will decrease, thereby increasing the costs of § 13’s intended beneficiaries—company investors.
Conclusion
In this case, the Supreme Court will decide whether the holding in American Pipe extends to § 13 of the Securities Act so that the filing of a Securities Act class action suspends a potential class member’s statutory requirement to either join the pending class action within three years or file his or her own securities claim within three years. MissPERS claims that the Second Circuit erred in holding that American Pipe does not extend to § 13 of the Securities Act. MissPERS also contends that the Rules Enabling Act does not preclude applying American Pipe to § 13 of the Securities Act. In opposition, IndyMac argues that the Second Circuit was correct in holding that American Pipe does not extend to § 13 of the Securities Act because the section is a statute of repose, not a statute of limitation. IndyMac also maintains that the Rules Enabling Act does preclude applying American Pipe to § 13 of the Securities Act. The Supreme Court’s decision in this case will likely affect judicial efficiency and business efficiency.
Written by
Edited by
Acknowledgments
Additional Resources
- Lyle Denniston: Another Look at Class-Action Cases, SCOUSblog (Mar. 10, 2014).
- Lawrence Hurley: U.S. Supreme Court to Decide if IndyMac MBS Plaintiff Filed Too Late, Reuters (Mar. 10, 2014).
- Kevin LaCroix: Supreme Court to Decide Securities Act Statute of Repose Issue in IndyMac MBS Case, The D & O Diary (Mar. 11, 2014).
- Stephanie Russell-Kraft: IndyMac Case Could Reset Securities Class Action Timetable, Law360 (Mar. 10, 2014).