Second Circuit Affirms No Tolling of Three-Year Statute of Repose in Section 13 of the Securities Act

July 01, 2013

In a highly anticipated decision, the U.S. Court of Appeals for the Second Circuit, on June 27, 2013, resolved a split in authority within the Second Circuit, by affirming a decision by the U.S. District Court for the Southern District of New York in In re IndyMac Mortgage Backed Securities Litigation (“IndyMac”).1 The Second Circuit held that (1) the three-year statute of repose in Section 13 of the Securities Act of 1933 (“Securities Act”) may not be tolled by commencement of a class action under American Pipe & Construction Co. v. Utah (“American Pipe”), or otherwise, and (2) neither Rule 24 nor the “relation back” doctrine of Rule 15(c) of the Federal Rules of Civil Procedure allows members of a putative class, who are not named parties, to intervene to revive claims that were dismissed from a class complaint, if those claims are not otherwise timely. The decision confirms that the filing of a class action involving a security will not suspend the running of the statute of repose for putative class members.
At the heart of the decision is American Pipe, a 1974 decision in which the Supreme Court held that, once a class action is commenced, the statute of limitations is tolled for all putative members of the class until the court rules on class certification.2 In practice, this statute of limitations tolling allows opt-out plaintiffs more time to file individual actions. American Pipe did not address whether a class action also tolls the statute of repose in the Securities Act, which defines an absolute period of three years from the offering or sale of the security at issue within which a claim must be filed. In a later case, the Supreme Court held the statute of repose is not subject to equitable tolling,3 but American Pipe did not identify whether its class action tolling was equitable or legal in nature.


The underlying case in the U.S. District Court for the Southern District of New York is a consolidated action arising out of two putative class actions filed by Police and Fire Retirement System of the City of Detroit and the Wyoming State Treasurer (“Wyoming”) asserting that the offering documents for a number of mortgage-backed certificates contained misrepresentations and omissions in violation of the federal securities laws. The District Court appointed Wyoming lead plaintiff of the consolidated class action. Wyoming, the only named plaintiff, filed an amended consolidated class action complaint as to 106 offerings. In response, the defendants filed a motion to dismiss, and the District Court held Wyoming only had standing to sue with respect to the 15 offerings in which it had purchased certificates. As a result, Wyoming’s claims relating to the remaining 91 offerings were dismissed.

In an attempt to cure this lack of standing, six parties filed motions to intervene and assert claims with respect to the offerings for which Wyoming lacked standing to sue. The District Court denied these motions to the extent the claims were barred by the Securities Act’s three-year statute of repose, which states “[i]n no event shall any . . . action be brought . . . more than three years after” the offering or sale of the security at issue.4 Specifically, the District Court held the Securities Act’s three-year statute of repose is not subject to any form of tolling, including the tolling doctrine established by the Supreme Court in American Pipe, which holds that “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.”5 The District Court did acknowledge “some cases have reached a different result,” but nonetheless was persuaded by recent contrary decisions, which held American Pipe tolling is not applicable to the statute of repose.6

Additionally, the District Court held the statute of repose also cannot be avoided by a “relation back” theory under Rule 15(c) of the Federal Rules of Civil Procedure because the “in no event” language of the statute of repose allows for no exceptions. The Court noted that permitting relation back under Rule 15 would conflict with the Rules Enabling Act, which provides that rules prescribed by the Supreme Court “shall not abridge, enlarge or modify any substantive right.”7

The Court of Appeals’ Decision

In affirming the District Court’s decision, IndyMac settled what the Second Circuit called an “unsettled question of law”: whether the American Pipe tolling rule applies to the three-year statute of repose in Section 13 of the Securities Act. The Court held that it does not. The Second Circuit also held that putative intervenors in a securities class action could not circumvent the statute of repose by using the “relation back” doctrine of Federal Rule of Civil Procedure 15(c) to amend the class complaint.

The Court first determined that the three-year period in Section 13 is indeed a statute of repose, and as such, is not subject to equitable tolling. The Court then turned to the thornier issue of whether the Supreme Court’s decision in American Pipe could be classified as equitable tolling or statutory tolling. The Court concluded that even if American Pipe is a statutory tolling doctrine, it does not apply to Section 13’s statute of repose. In extinguishing claims after a three-year period, the statute of repose creates a substantive right, and the Rules Enabling Act does not allow a court to “abridge, enlarge or modify any substantive right” through Rule 23 or otherwise.

The Court held that the “relation back” doctrine was not available to the proposed intervenors because of the “long recognized rule that if jurisdiction is lacking at the commencement of a suit, it cannot be aided by the intervention of a plaintiff with a sufficient claim.” Since, prior to class certification, the District Court dismissed for lack of constitutional standing all claims arising from offerings that the named plaintiff had not purchased, a jurisdictional defect existed that could not be cured by later intervention. The Court concluded that “[a]bsent circumstances that would render the newly asserted claims independently timely,” neither tolling nor “relation back” permits members of a putative class to intervene and revive dismissed claims.9

Implications of the Decision

Opponents of the decision will argue, as plaintiffs did in IndyMac, that the decision will result in increased placeholder litigations by plaintiffs seeking to protect their claims in the event that the first-filed class action is not certified or the claims are dismissed. These opponents allege such a result is inefficient and contrary to the purposes of Rule 23. The Second Circuit was doubtful of such a result, but responded that, at any rate, such a problem is for Congress to address, not the courts.10 The proponents of this decision, on the other hand, will applaud the holding as one that prevents uncertainty for defendants who would otherwise lack an identifiable and fixed date for the expiration of potential claims under the Securities Act.

The Second Circuit holding has wide implications for several mortgage-backed securities class actions pending in the Second Circuit, and in some cases, calls into question earlier decisions based on a contrary reading of the Securities Act’s statute of repose.11 While IndyMac settles the issue in the Second Circuit, it is at odds with decisions from other Circuit Courts and therefore makes the issue ripe for Supreme Court consideration.12


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Kenneth Schacter
Susan DiCicco
Timothy Burke
Jordan Hershman

1 ___ F.3d ___, 2013 WL 3214588 (2d Cir. June 27, 2013).

2  414 U.S. 538, 554 (1974).

3 Lamph, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363 (1991).

4 15 U.S.C. § 77m.

5 414 U.S. 538, 554 (1974).

6 Footbridge Ltd. Trust v. Countrywide, 770 F. Supp. 2d 618 (S.D.N.Y. 2011); In re Lehman Brothers Securities Litigation, 800 F. Supp. 2d 477 (S.D.N.Y. 2011).

7 28 U.S.C. § 2072(b).

8 IndyMac at *3-6.

9 Id. at *8-9.

10 Id. at *7.

11 Id. at *6 n.16.

12 See, e.g., Joseph v. Wiles, 223 F.3d 1155 (10th Cir. 2000).

This article was originally published by Bingham McCutchen LLP.