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(Article from Securities Law Alert, July 2016) 

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In American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), the Supreme Court held “the 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.”

On July 14, 2016, the Second Circuit determined “American Pipe tolling does not apply to” 28 U.S.C. § 1658(b)(2), which establishes a five-year statute of repose for securities fraud claims brought under Section 10(b) and Rule 10b-5. SRM Global Master Fund Ltd. P’ship v. Bear Stearns Cos., 2016 WL 3769735 (2d Cir. 2016) (Lohier, J.).

The Second Circuit explained that in Police & Fire Ret. Sys. of City of Detroit v. IndyMac MBS, 721 F.3d 95 (2d Cir. 2013) (IndyMac), it previously held American Pipe tolling inapplicable to the three-year statute of repose set forth in Section 13 of the Securities Act of 1933, which governs claims brought under Sections 11 and 12(a) of that Act. The IndyMac court reasoned that if American Pipe tolling is “viewed as a form of equitable tolling,” then it “does not apply to Section 13 because ‘a statute of repose is subject only to legislatively created exceptions, and not to equitable tolling.’” SRM Global, 2016 WL 3769735 (quoting IndyMac, 721 F.3d 95).

The IndyMac court further determined American Pipe tolling could not apply to Section 13 if it were “legal in nature and based on Rule 23 of the Federal Rules of Civil Procedure.” Id. (discussing IndyMac, 721 F.3d 95). The IndyMac court found that applying American Pipe tolling to Section 13 would violate the Rules Enabling Act, which “forbids interpreting Rule 23 to ‘abridge, enlarge, or modify any substantive right.’” Id. (quoting IndyMac, 721 F.3d 95). The IndyMac court emphasized that “statutes of repose create a substantive right in those protected to be free from liability after a legislatively-determined period of time.” Id. The IndyMac court found that “[p]ermitting a plaintiff to file a complaint . . . after the repose period set forth in Section 13 of the Securities Act has run would therefore necessarily enlarge or modify a substantive right and violate the Rules Enabling Act.” Id.

For the same reasons set forth in IndyMac, the Second Circuit held “American Pipe tolling does not apply to § 1658(b)(2)’s five-year statute of repose.” The court explained that “as a statute of repose,  § 1658(b)(2) is not subject to equitable tolling.” Moreover, the court found § 1658(b)(2) “creates a substantive right in defendants to be free from liability after five years—a right that American Pipe tolling cannot modify without running afoul of the Rules Enabling Act.”

Notably, the Second Circuit rejected plaintiff’s contention that IndyMac was distinguishable because of “textual differences between Section 13 and § 1658(b)(2)— in particular, Section 13’s ‘in no event’ language.”[1] The court found IndyMac was not based on Section 13’s “in no event” language, and therefore applied with equal force to § 1658(b)(2).