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Second Circuit Holds Statute of Repose for Securities Claims Cannot Be Circumvented

Posted in SEC Enforcement Cases

The Second Circuit’s holding in Police & Fire Retirement Sys. of City of Detroit v. IndyMac MBS, Inc., Nos. 11-2998-cv(L) & 11-3036-cv(CON), 2013 WL 3214588 (June 27, 2013) confirms that Section 13’s three-year statute of repose is indeed iron-clad. The case originated as a putative class action brought against IndyMac for fraud in the sale of mortgage pass-through certificates. The Southern District of New York dismissed some of the claims on the basis that the named plaintiffs had not actually purchased the securities at issue and therefore lacked standing to sue. Other members of the putative class who had purchased the securities at issue then sought to intervene in the action to revive the dismissed claims.

Although the statute of repose had passed at this point, the proposed interveners invoked the tolling doctrine of American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974), in which the Supreme Court held that the filing of a class action tolled any applicable statute of limitations with respect to the claims of putative class members. The proposed interveners argued that the American Pipe rule should apply equally to a statute of repose. But the district court, as well as the Second Circuit, found this to be an apples-to-oranges comparison and rejected intervention.

The Second Circuit’s logic was as follows. Unlike a statute of limitations, which merely limits a plaintiff’s remedy while not affecting the underlying cause of action, a statute of repose extinguishes the underlying cause of action itself. In addition, because a statute of repose confers a “substantive right” on a defendant to be free from liability after a legislatively determined period of time, allowing Fed. R. Civ. P. 23 (which governs class actions) to extend the statute of repose would violate the Rules Enabling Act by “abridging or modifying” this substantive right.

Anticipating this reasoning, the proposed interveners offered an alternative ground for allowing intervention: Fed. R. Civ. P. 15(c), which under certain circumstances permits otherwise time-barred claims added by amendment to “relate back” to the filing of the original complaint. The Second Circuit rejected this argument too, holding that neither intervention nor the relation-back doctrine could be used to breathe new life into claims that had already been dismissed for want of jurisdiction.

The Second Circuit’s decision in IndyMac provides a powerful tool to potential defendants in any industry in which a statute of repose provides cover for liability. In the securities context, for instance, the court’s reasoning would apply equally to the five-year statute of repose governing claims under Section 10(b) of the Securities Exchange Act of 1934. Individuals and companies with potential liability under these securities laws may thus rest assured that after a specific date, no claims may be brought. In the class action context, the hard deadline of a statute of repose may also put pressure on the parties to brief class certification issues as soon as possible and incentivize large, institutional class members to accelerate their decision of whether to opt-out and pursue individual actions — thus facilitating early settlement before skyrocketing discovery and other costs have taken their toll.