Ask Not for Whom the Securities Exchange Act’s Statute of Repose Tolls; It Doesn’t.

Is a statute of repose subject to tolling? Although its holding was limited to the applicability of American Pipe tolling, created by the commencement of a class action, to the five-year statute of repose under Section 20(a) of the Securities Exchange Act of 1934, the Eleventh Circuit discussed the issue in broad terms in its August 10 opinion in Dusek v. JPMorgan Chase & Co., 832 F.3d 1243 (11th Cir. 2016), affirming the district court’s dismissal of two federal claims.  The case concerned the liability of JPMorgan Chase & Co. and two of its employees stemming from their banking relationship with Bernie Madoff and his company and the defendants’ access to the company’s accounts.  The district court had granted the defendants’ motion to dismiss plaintiffs’ second amended complaint, dismissing with prejudice an alleged violation of Section 20(a) of the Securities Exchange Act as barred by the statute of repose and a federal RICO claim as barred by the Private Securities Litigation Reform Act.  The district court then declined to exercise supplementary jurisdiction over the only remaining claims, all based in state law claims, dismissing them without prejudice.

The plaintiffs (“Dusek”) argued that the statute of repose was tolled by the pendency of another class action filed against JPMorgan in the Southern District of New York. Dusek sought to apply the Supreme Court’s decision in American Pipe & Construction Co. v. Utah, 414 U.S. 538, 554 (1974) (holding commencement of a class action suspends the applicable statute of limitations as to all asserted members), to the statute of repose in the Securities Exchange Act.  To do so though, Dusek needed to distinguish recent Supreme Court precedent in CTS Corp. v. Waldburger, 134 S. Ct. 2175, 2183 (2014), which differentiated statutes of repose from statutes of limitations based on their “different purposes and objectives” and stated that statutes of repose “generally may not be tolled, even in cases of extraordinary circumstances beyond a plaintiff’s control.”  Dusek argued that American Pipe had addressed legal tolling as opposed to equitable tolling and their claims, therefore, were not precluded by CTS, the present case being more analogous to American Pipe because both addressed the effect of Rule 23 on limitations periods applied to later suits brought by members or would-be members in an earlier class action.

The court identified conflicting precedent as to whether the rule in American Pipe relied (1) on a theory of legal tolling, effectively created by Rule 23 because without tolling the principal function of the class suit—to avoid a multiplicity of activity—would be frustrated or (2) on a theory of equitable tolling, whereby courts have the equitable authority to toll statutes of limitations.  Dusek assumed that, if American Pipe established a rule of legal tolling, then the same rationale, protecting the principal function of Rule 23, would apply to statutes of repose as much as to statutes of limitations.  This conclusion, Dusek argued, was supported by the Tenth Circuit’s holding in Joseph v. Wiles, 223 F.3d 1155, 1166–68 (10th Cir. 2000), that American Pipe tolling applied to the statute of repose in Section 13 of the Securities Act because it was a rule of legal tolling derived from Rule 23.

JPMorgan argued, however, that precedent from the Second Circuit was more persuasive. The Second Circuit, in Police & Fire Retirement System of the City of Detroit v. IndyMac MBS, Inc., 721 F.3d 95, 109 (2d Cir. 2013), held that it did not matter whether the rule in American Pipe was one of legal or equitable tolling because, even if it was a legal tolling rule, the Rules Enabling Act, 28 U.S.C. § 2072(b), bars courts from enlarging or modifying substantive rights, so Rule 23 cannot form the basis for allowing an untimely complaint after the period of repose has run.  The Eleventh Circuit also cited “a well-reasoned discussion of why the Rules Enabling Act would prohibit tolling of a statute of repose” in Stein v. Regions Morgan Keegan Select High Income Fund, Inc., 821 F.3d 780, 794–95 (6th Cir. 2016).  There, the Sixth Circuit found “[t]hat statutes of repose vest a substantive right in defendants to be free of liability is underscored by the Supreme Court’s analogies in CTS between statutes of repose and the ability to discharge debts in bankruptcy or to be free of double jeopardy in criminal proceedings.” Id. at 794.  The court here also quoted the Stein court’s remark that the Tenth Circuit’s decision in Joseph pre-dated the Supreme Court’s CTS analysis of the differences between statutes of repose and statutes of limitations.

Despite discussing this conflicting precedent at some length and apparently favoring the Second and Sixth Circuit cases that would not allow any tolling of a statute of repose based on a court-created rule like Rule 23, the court went on to affirm the district court’s narrower rulings that American Pipe created a rule of equitable tolling and that it does not apply to the statute of repose in Section 20(a) of the Securities Exchange Act.  Because the statute of repose was never tolled, it expired, at the latest, on December 11, 2013, five years after Madoff was arrested and his company closed.  The statute, therefore, ran before Dusek filed their complaint in March of 2014.

The Eleventh Circuit also summarily affirmed the district court’s ruling that the Private Securities Litigation Reform Act barred Dusek’s RICO claim because the alleged conduct was actionable as securities fraud, which is conduct specifically exempted from the RICO Act by PSLRA.

Posted by Danny Wells.

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