Supreme Court Limits The Time For Filing SA §11 Suits

The Supreme Court concluded that the three year limitation period applicable to Securities Act Section 11 claims cannot be extended or tolled. California Public Employees’ Retirement System v. Anz Securities, Inc., No. 16-373 June 26, 2017). The ruling contrasts with the one year statute of limitations applicable to the same Section which can at times be extended. The three year limitation period thus barred a suit by Petitioner who opted out of a timely filed class action.

The suit centered on the fall of Lehman Brothers Holding Inc. in 2008 during the market crisis. In 2007 and 2008 the firm raised capital through a number of public securities offerings. Petitioner, the largest public pension fund in the United States, purchased securities in some of those offerings. Respondents are the securities firm that conducted the offerings. The complaint claimed that the securities offerings contained material misstatements and omission.

Shortly after Lehman filed for bankruptcy a securities class action was filed. The suit alleged that the registration statements were defective. CALPERS was included in the suit but not a lead plaintiffs. In 2011 the pension fund opted out and filed a separate action that was identical to the initial case. It was eventually consolidated with the initial case.

Following the settlement of the initial case respondents moved to dismiss the CALPERS suit as time barred under three year statute of repose included in Securities Act Section 13. The district court granted the motion. The Second Circuit affirmed.

The Supreme Court, in a 5-4 decision authored by Justice Kennedy, affirmed. There are two types of time bars. One is a statute of limitations; the second is a statute of repose. Both are designed to limit the extent or duration of liability but each is different. The statute of limitations, begins when the cause of action accrues. Stated differently, when the plaintiff can obtain relief or when the injury is discovered the statute begins to run. The purpose of the statute is to encourage the diligent prosecution of the action.

In contrast, statutes of repose place a flat time limit on the filing of the suit. The time begins with the last culpable act. Such a statute reflects a “legislative judgment that a defendant should be free from liability after the legislatively determined period of time.” [internal quotations omitted]. These statutes constitute a complete defense. Here the language of Section 13 which provides that “In no event shall any such action be brought . . .” makes it clear that this is a statute of repose the Court concluded.

This reading of the statute is confirmed by the two sentence structure of Section 13 as well as its history. The Section provides in one sentence a one year statute of limitations which begins essentially on discovery of the claim. The second sentence provide for a flat three year time limit for filing an action. This structure was written into the Act at inception, although the time periods initially selected by Congress were 2 years for discovery and 10 years for an outside limited, both shortened to the current form the next year.

In view of the purpose of a statute of repose, such provisions are generally not subject to tolling. Rather, tolling is only permitted where there is an indication that that Congress did not intend the statute to provide a complete repose. The purpose of a statute of repose however “is to override customary tolling rules arising from the equitable powers of courts. Thus statutes of repose are not subject to tolling

Petitioners claim that the Court’s decision in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974) supports their position. It does not. There class certification was denied in a timely filed antitrust action. Members of the class were permitted to intervene in the action subsequent to a denial of class certification over objections that such claims were time barred. The Court reasoned that the initial suit was filed in a timely manner and that under equitable principles the statute was effectively tolled. The source of that tolling authority was the “judicial power to promote equity” rather than the statute. Indeed, the decision, based on a statute of limitations rather than one of repose, is referred to as equitable tolling.

Finally, petitioner’s claim that the suit was timely filed because an “action” was brought within the time limits of Section 13, although not this one, is incorrect. The argument “rests on the premise that an ‘action’ is ‘brought’ when substantive claims are presented to a court, rather than when a particular complaint is filed . .. The term ‘action,’ however, refers to a judicial ‘proceeding,’ or perhaps to a ‘suite’ – not to the general content of claims.” This contention “defies ordinary understanding” the Court concluded. In the end, the analysis here is “straightforward” the Court stated – Section 13 provides a flat 3 year bar which protects defendants from future liability.

Justice Ginsburg, joined by Justices Bryer, Sotomayor and Kagan, dissented. Justice Ginsburg argued that here the initial suit was timely filed within the dictates of Section 13. That commenced an action for everyone within the class, including plaintiff CALPERS. Rule 23(c)(2)(B)(v) gave petitioners the right to opt out. “Given the due process underpinnings of the opt-out right . . . I resist rendering the right illusory . . . I would therefore reverse the judgment of the Second Circuit . .. “ Justice Ginsburg wrote.