BREAKING NEWS: Supreme Court Affirms 3 Year Limit in CalPERS v. ANZ

June 26, 2017

An issue that had divided the federal circuit courts was whether the filing of a putative class action satisfies the three-year time limitation in Section 13 of the Securities Act with respect to the class members' claims. The United States Supreme Court ("SCt") granted cert as follows:

16-373 CA PUBLIC EMPLOYEES' RETIREMENT V. ANZ SECURITIES, INC. 

DECISION BELOW: 655 Fed.Appx. 13 

LOWER COURT CASE NUMBER: 15-1879

QUESTION PRESENTED: 

This case presents two questions about whether, under American Pipe & Construction Co. v. Utah, 414 U.S. 538, 554 (1974), a member of a putative damages class can opt out of the class action and pursue its individual claims if the class action was timely, but the individual class member's complaint was filed more than three years after the offending conduct such that it could arguably be barred by a three-year statute of repose. The Second Circuit affirmed the dismissal of petitioner's claims as untimely, applying circuit precedent from a case in which this Court granted certiorari but did not reach the merits because the case settled. See Police & Fire Ret. Sys. of Detroit v. IndyMac MBS, Inc., 721 F.3d 95 (2d Cir. 2013), cert. granted sub nom., Pub. Emps.' Ret. Sys. of Miss. v. IndyMac MBS, Inc., 134 S. Ct. 1515 (2014), cert. dismissed as improvidently granted , 135 S. Ct. 42 (2014). Here, the court of appeals acknowledged a circuit split, and stated that "the Supreme Court is in the best position to resolve" these questions, which "implicate[] the very nature of American Pipe tolling." 

The Questions Presented are: 

1. Does the filing of a putative class action serve, under the American Pipe rule, to satisfy the three-year time limitation in Section 13 of the Securities Act with respect to the claims of putative class members? (Question granted in IndyMac ) 

2. May a member of a timely filed putative class action file an individual suit on the same causes of action before class certification is decided, notwithstanding the expiration of the relevant time limitations? 

LIMITED TO QUESTION 1 PRESENTED BY THE PETITION. 

CERT. GRANTED 1/13/2017 

Supreme Court Opinion

In California Public Employees' Retirement System v. ANZ Securiteis, Inc., et al. (Opinion, Supreme Court, 16-373; 582 U. S. ____ (2017)/June 26, 2017), Justice Kennedy delivered the Opinion of the United States Supreme Court ("SCt") joined by Roberts, Thomas, Alito and Gorsuch; Justice Ginsburg filed a Dissent joined by Breyer, Sotomayor, and Kagan.  The genesis of the case was presented as follows:

In September 2008, Lehman filed for bankruptcy. Around the same time, a putative class action concerning Lehman securities was filed against respondents in the United States District Court for the Southern District of New York. The operative complaint raised claims under §11, alleging that the registration statements for certain of Lehman's 2007 and 2008 securities offerings included material misstatements or omissions. The complaint was filed on behalf of all persons who purchased the identified securities, making petitioner a member of the putative class. Petitioner, however, was not one of the named plaintiffs in the suit. The class action was consolidated with other securities suits against Lehman in a single multidistrict litigation. 

In February 2011, petitioner filed a separate complaint against respondents in the United States District Court for the Northern District of California. This suit was filed more than three years after the relevant transactions occurred. The complaint alleged identical securities law violations as the class-action complaint, but the claims were on petitioner's own behalf. The suit was transferred and consolidated with the multidistrict litigation in the Southern District of New York. Soon thereafter, a proposed settlement was reached in the putative class action. Petitioner, apparently convinced it could obtain a more favorable recovery in its separate suit, opted out of the class. 

Respondents then moved to dismiss petitioner's individual suit alleging §11 violations as untimely under the 3-year bar in the second sentence of §13. Petitioner countered that its individual suit was timely because that 3- year period was tolled during the pendency of the class action filing. The principal authority cited to support petitioner's argument that the 3-year period was tolled was American Pipe & Constr. Co. v. Utah, 414 U. S. 538  (1974). 

The District Court disagreed with petitioner's argument, holding that the 3-year bar in §13 is not subject to tolling. The Court of Appeals for the Second Circuit affirmed. In agreement with the District Court, the Court of Appeals held that the tolling principle discussed in American Pipe is inapplicable to the 3-year time bar. In re Lehman Brothers Securities and ERISA Litigation, 655 Fed. Appx. 13, 15 (2016). As the Court of Appeals noted, there is disagreement about whether the tolling rule of American Pipe applies to the 3-year time bar in §13. Compare Joseph v. Wiles, 223 F. 3d 1155, 1166-1168 (CA10 2000), with Stein v. Regions Morgan Keegan Select High Income Fund, Inc., 821 F. 3d 780, 792-795 (CA6 2016), and Dusek v. JPMorgan Chase & Co., 832 F. 3d 1243, 1246-1249 (CA11 2016). 

The Court of Appeals also rejected petitioner's alternative argument that its individual claims were "essentially 'filed' in the putative class complaint," so that the filing of the class action within three years made the individual claims timely. 655 Fed. Appx., at 15. . .

Pages 3 - 4 of the SCt Opinion

As set forth in the Syllabus to SCt Opinion:

Section 11 of the Securities Act of 1933 gives purchasers of securities "a right of action against an issuer or designated individuals," including securities underwriters, for any material misstatements or omissions in a registration statement. Omnicare, Inc. v. Laborers Dist. Council Constr. Industry Pension Fund, 575 U. S. ___, ___; see 15 U. S. C. §77k(a). Section 13 provides two time limits for §11 suits. The first sentence states that an action "must be brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence . . . ." The second sentence provides that "[i]n no event shall any such action be brought . . . more than three years after the security was bona fide offered to the public . . . ." §77m. 

In 2007 and 2008, Lehman Brothers Holdings Inc. raised capital through several public securities offerings. Petitioner, the largest public pension fund in the country, purchased some of those securities; and it is alleged that respondents, various financial firms, are liable under the Act for their participation as underwriters in the transactions. In 2008, a putative class action was filed against respondents in the Southern District of New York. The complaint raised §11 claims, alleging that the registration statements for certain of Lehman's 2007 and 2008 securities offerings included material misstatements or omissions. Because the complaint was filed on behalf of all persons who purchased the identified securities, petitioner was a member of the putative class. 

In February 2011, more than three years after the relevant securities offerings, petitioner filed a separate complaint against respondents in the Northern District of California, alleging violations identical to those in the class action on petitioner's own behalf. Soon thereafter, a proposed settlement was reached in the putative class action, but petitioner opted out of the class. Respondents then moved to dismiss petitioner's individual suit, alleging that the §11 violations were untimely under the 3-year bar in the second sentence of §13. Petitioner countered that the 3-year period was tolled during the pendency of the class-action filing, relying on American Pipe & Construction Co. v. Utah, 414 U. S. 538. The trial court disagreed, and the Second Circuit affirmed, holding that American Pipe's tolling principle is inapplicable to the 3-year bar. It also rejected petitioner's alternative argument that the timely filing of the class action made petitioner's individual claims timely as well. 

Held: Petitioner's untimely filing of its individual complaint more than three years after the relevant securities offering is ground for dismissal. Pp. 4-17. 

(a) Section 13's 3-year time limit is a statute of repose not subject to equitable tolling. Pp. 4-14. 

(1) The two categories of statutory time bars-statutes of limitations and statutes of repose-each have "a distinct purpose." CTS Corp. v. Waldburger, 573 U. S. ___, ___. Statutes of limitations are designed to encourage plaintiffs " 'to pursue diligent prosecution of known claims,' " id., at ___, while statutes of repose "effect a legislative judgment that a defendant should 'be free from liability after the legislatively determined period of time,' " id., at ___. For this reason, statutes of limitations begin to run "when the cause of action accrues," while statutes of repose begin to run on "the date of the last culpable act or omission of the defendant." Id., at ___. 

From the structure of §13, and the language of its second sentence, it is evident that the 3-year bar is a statute of repose. The instruction that "[i]n no event" shall an action be brought more than three years after the relevant securities offering admits of no exception. The statute also runs from the defendant's last culpable act (the securities offering), not from the accrual of the claim (the plaintiff's discovery of the defect). 

This view is confirmed by §13's two-sentence structure. The pairing of a shorter statute of limitations and a longer statute of repose is a common feature of statutory time limits. See, e.g., Gabelli v. SEC, 568 U. S. 442, 453. Section 13's history also supports the classification. The 1933 Securities Act's original 2-year discovery period and 10-year outside limit were shortened a year later. The evident design of the shortened period was to protect defendants' financial security by reducing the open period for potential liability. Pp. 4-7. 

(2) The determination that the 3-year period is a statute of repose is critical here, for the question whether a tolling rule applies to a given statutory time bar is one "of statutory intent." Lozano v. Montoya Alvarez, 572 U. S. 1, ___. In light of the purpose of a statute of repose, the provision is in general not subject to tolling. Tolling is permissible only where there is a particular indication that the legislature did not intend the statute to provide complete repose but instead anticipated the extension of the statutory period under certain circumstances. A statute of repose implements a " 'legislative decisio[n] that . . . there should be a specific time beyond which a defendant should no longer be subjected to protracted liability.' " CTS, 573 U. S., at ___. The unqualified nature of that determination supersedes the courts' residual authority and forecloses the extension of the statutory period based on equitable principles. Thus, the Court repeatedly has stated that statutes of repose are not subject to equitable tolling. See, e.g., id., at ___-___. Pp. 7-8. 

(3) The tolling decision in American Pipe derived from equity principles and therefore cannot alter the unconditional language and purpose of the 3-year statute of repose. The source of the tolling rule applied in American Pipe is the judicial power to promote equity, not the power to interpret and enforce statutory provisions. Nothing in the decision suggests that its tolling rule was mandated by a statute or federal rule. Moreover, the Court relied on cases that are paradigm applications of equitable tolling principles, see 414 U. S., at 559. Thus, the Court has previously referred to American Pipe as "equitable tolling." See, e.g., Irwin v. Department of Veterans Affairs, 498 U. S. 89, 96, and n. 3. Pp. 8-11. 

(4) Petitioner's counterarguments are unpersuasive. First, petitioner contends that this case is indistinguishable from American Pipe, but the statute there was one of limitations, which may be tolled by equitable considerations even where a statute of repose may not. Second, petitioner argues that the timely filing of a class-action complaint fulfills the purposes of a statutory time limit with regard to later filed suits by individual members of the class. But by permitting a class action to splinter into individual suits, the application of American Pipe tolling here would threaten to alter and expand a defendant's accountability, contradicting the substance of a statute of repose. Third, petitioner contends that dismissal of its individual suit as untimely would eviscerate its ability to opt out, but it does not follow from any privilege to opt out that an ensuing suit can be filed without regard to mandatory time limits. Fourth, petitioner argues that declining to apply American Pipe tolling to statutes of repose will create inefficiencies, but this Court "lack[s] the authority to rewrite" the statute of repose or to ignore its plain import. Baker Botts L. L. P. v. ASARCO LLC, 576 U. S. ___, ___. And petitioner's practical concerns likely are overstated. Pp. 11-14.

(b) Also unpersuasive is petitioner's alternative argument: that §13's requirement that an "action" be "brought" within three years of the relevant securities offering is met here because the filing of the class-action complaint "brought" petitioner's individual "action" within the statutory time period. This argument presumes that an "action" is "brought" when substantive claims are presented to any court, rather than when a particular complaint is filed in a particular court. The term "action," however, refers to a judicial "proceeding," or perhaps a "suit"-not to the general content of claims. Taken to its logical limit, petitioner's argument would make an individual action timely even if it were filed decades after the original securities offering-provided a class-action complaint had been filed within the initial 3-year period. Congress would not have intended this result. This argument is also inconsistent with the reasoning in American Pipe itself. If the filing of a class action made all subsequent actions by putative class members timely, there would be no need for tolling at all. Pp. 14-15. 

(c) The final analysis is straightforward. Because §13's 3-year time bar is a statute of repose, it displaces the traditional power of courts to modify statutory time limits in the name of equity. And because the American Pipe tolling rule is rooted in those equitable powers, it cannot extend the 3-year period. Petitioner's untimely filing of its individual action is thus ground for dismissal. Pp. 16-17. 

655 Fed. Appx. 13, affirmed. 

In summing up its rationale, the Court explains that:

Tolling may be of great value to allow injured persons to recover for injuries that, through no fault of their own, they did not discover because the injury or the perpetrator was not evident until the limitations period otherwise would have expired. This is of obvious utility in the securities market, where complex transactions and events can be obscure and difficult for a market participant to analyze or apprehend. In a similar way, tolling as allowed in American Pipe may protect plaintiffs who anticipated their interests would be protected by a class action but later learned that a class suit could not be maintained for reasons outside their control. 

The purpose of a statute of repose, on the other hand, is to allow more certainty and reliability. These ends, too, are a necessity in a marketplace where stability and reliance are essential components of valuation and expectation for financial actors. 

The statute in this case reconciles these different ends by its two-tier structure: a conventional statute of limitations in the first clause and a statute of repose in the second. The statute of repose transforms the analysis. In a hypothetical case with a different statutory scheme, consisting of a single limitations period without an additional outer limit, a court's equitable power under American Pipe in many cases would authorize the relief petitioner seeks. Here, however, the Court need not consider how equitable considerations should be formulated or balanced, for the mandate of the statute of repose takes the case outside the bounds of the American Pipe rule. 

The final analysis, then, is straightforward. The 3-year time bar in §13 of the Securities Act is a statute of repose. Its purpose and design are to protect defendants against future liability. The statute displaces the traditional power of courts to modify statutory time limits in the name of equity. Because the American Pipe tolling rule is rooted in those equitable powers, it cannot extend the 3- year period. Petitioner's untimely filing of its individual action is ground for dismissal . . .

Pages 16 - 17 of the SCt Opinion

The Dissent argues, in part, that [Ed: footnotes omitted]:

Today's decision disserves the investing public that §11 was designed to protect. The harshest consequences will fall on those class members, often least sophisticated, who fail to file a protective claim within the repose period. Absent a protective claim filed within that period, those members stand to forfeit their constitutionally shielded right to opt out of the class and thereby control the prosecution of their own claims for damages. See Wal-Mart Stores, Inc. v. Dukes, 564 U. S. 338, 363 (2011) ("In the context of a class action predominantly for money damages," the "absence of . . . opt-out violates due process."). Because critical stages of securities class actions, including the class-certification decision, often occur years after the filing of a class complaint, the risk is high that class members failing to file a protective claim will be saddled with inadequate representation or an inadequate judgment.

Pages 3 -4 of the SCt Dissent