In In re IndyMac Mortgage-Backed Securities Litigation, No. 11-2998-CV, 2013 WL 3214588 (2d Cir. June 27, 2013), the United States Court of Appeals for the Second Circuit held that the tolling rule established by the United States Supreme Court in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), which suspends the applicable statute of limitations for putative class members upon the commencement of a class action, does not apply to the three-year statute of repose contained in Section 13 of the Securities Act of 1933 (“1933 Act”), 15 U.S.C. § 77m. The Court also held that the “relation back” doctrine of the Federal Rule of Civil Procedure 15(c) does not permit putative class members to intervene in the class action as named parties to revive claims that were previously dismissed for want of jurisdiction. This decision thus holds that litigants cannot circumvent Section 13’s statute of repose for 1933 Act claims by invokingAmerican Pipe or Rule 15(c).

The case began as two securities class actions alleging that IndyMac MCS, Inc., an issuer of mortgage-backed securities, violated Sections 11 and 12(a) of the 1933 Act, 15 U.S.C. §§ 77k, 77l, by making fraudulent misrepresentations and omissions in the offering and sale of certain financial instruments in 2006 and 2007. The United States District Court for the Southern District of New York consolidated the cases and appointed a lead plaintiff pursuant to the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. §§ 78u-4, et seq.

The district court dismissed all claims arising from the offerings of securities not purchased by the lead plaintiff. Because the lead plaintiff failed to demonstrate injury arising from offerings of securities that plaintiff did not purchase, it could not demonstrate standing to assert the claims.

Several putative class members sought to intervene to assert the dismissed claims. By this time, however, more than three years had passed since the issuances of the securities. Under Section 13’s statute of repose, actions to enforce a liability created by Sections 11 or 12(a) of the 1933 Act cannot be filed more than three years after the security was offered to the public or was sold. The intervenors nevertheless asserted two theories for why the claims were not time-barred under Section 13. First, they argued thatAmerican Pipe’s tolling rule, which explicitly applies to statutes of limitations, applies equally to Section 13’s statute of repose. American Pipe’s tolling rule dictates that the commencement of a class action suspends the applicable statute of limitations as to all putative class members who would have become parties had the class action continued. Second, the proposed intervenors argued that their claims could “relate back” the previously dismissed claims to the Amended Consolidated Complaint through Rule 15(c) even though the repose period had passed. Rule 15(c) provides that an amendment to a pleading is considered to have been filed on the date of the original pleading to avoid potential time bars. The district court denied the motions to intervene holding that the Section 13 repose period had expired and could not be tolled underAmerican Pipe or effectively extended by Rule 15(c). See In re IndyMac Mortgage-Backed Sec. Litig., 793 F. Supp. 2d 637 (S.D.N.Y. 2011). The proposed intervenors appealed.

The Second Circuit affirmed. The Court noted that although courts have used the terms “statute of limitations” and “statute of repose” interchangeably, these concepts are distinct. Statutes of limitations limit the availability of remedies and may be subject to equitable considerations such as tolling. Statutes of repose, in contrast, create substantive rights and run without the interruption of equitable considerations (such as tolling). They are subject only to legislatively created exceptions. The Court observed that the three-year limitation period in Section 13 has been repeatedly recognized as a statute of repose, not a statute of limitations.

The Second Circuit held that American Pipe’s tolling rule does not apply to Section 13’s statute of repose. The Court noted that it is unsettled whether the tolling rule is “judicial tolling,” which is an equitable concept, or “legal tolling” based upon Rule 23 of the Federal Rules of Civil Procedure. However, the Court explained that the application of the American Pipetolling rule to Section 13 is barred regardless of whether it is viewed as judicial or legal tolling. If the tolling rule is judicial, then its application is barred by the Supreme Court’s decision in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991), which holds that equitable principles do not apply to Section 13’s statute of repose. If the tolling rule is legal, then its application is barred by the Rules Enabling Act, 28 U.S.C. § 2072(b), which prevents the Federal Rules of Civil Procedure from modifying substantive rights, because statutes of repose create substantive rights.

While the proposed intervenors argued that failing to extend American Pipeto Section 13’s statute of repose would burden the courts and disrupt the function of class action litigation, the Court reasoned that the sophisticated, well-counseled litigants in securities class actions will prevent such negative consequences. The Court also held that it is an issue that the legislature, not the judiciary, should address.

The Second Circuit also held that absent circumstances which would render the newly asserted claims independently timely, the Rule 15(c) “relation back” doctrine does not permit members of a putative class, who are not named parties, to intervene as named parties and revive claims that were dismissed for lack of jurisdiction. The Court reasoned that it is a long recognized rule that if jurisdiction is lacking at the commencement of a suit, it cannot be aided by the intervention of a plaintiff with a sufficient claim.

The Court also explained that its holding is consistent with the PSLRA. Nothing indicates that district courts must choose a lead plaintiff with standing to sue on every claim. Standing only requires the existence of a named plaintiff sufficient to establish jurisdiction over each claim.

Thus, the Court affirmed the partial denial of motions to intervene. The proposed intervenors could have avoided the operation of Section 13’s statute of repose by making timely motions to intervene as named plaintiffs, or by filling their own timely actions and, if prudent, seeking to join their claims under Rule 20 of the Federal Rules of Civil Procedure.

This Second Circuit decision puts potential class members on notice that the substantive right to assert a Section 11 claim extinguishes after three years, pursuant to its statute of repose, unless the claim is asserted by a named plaintiff in a class action suit or by an individual plaintiff in its own suit. Litigants cannot avoid Section 13’s statute of repose by invokingAmerican Pipe or Rule 15(c).