In Footbridge Ltd. Trust v. Countrywide Fin. Corp., No. 10 Civ. 367 (PKC) (S.D.N.Y. 2011), the United States District Court for the Southern District of New York recently dismissed claims brought under Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 on the grounds that the filing of a class action regarding the securities at issue did not toll the statute of repose for claims under that statute. In so holding, the Court determined that the tolling available under the United States Supreme Court decision in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974) for statutes of limitation does not apply to the Securities Act’s statute of repose. A statute of repose limits the time during which a specified cause of action exists, whereas a statute of limitation limits the time within which a suit can be brought. Thus, a statute of repose is considered a stricter deadline than a statute of limitation.

The Footbridge Action

Plaintiffs in the Footbridge action were two hedge funds that allegedly purchased residential mortgage-backed securities issued by Countrywide. The securities, CWABS Asset Backed Certificates, Series 2006-SPS1 and CWABS Asset Backed Securities, Series 2006-SPS2, were offered pursuant to registration certificates filed with the Securities and Exchange Commission (SEC) on February 21, 2006 and August 8, 2006. The prospectus supplements detailing these particular series of certificates were registered with the SEC on June 26, 2006 and August 28, 2006. Plaintiffs purchased the SPS1 certificates on June 27, 2006 and the SPS2 certificates on August 29, 2006, September 12, 2006, and October 3, 2006.

Plaintiffs’ complaint alleged that the registration statements and the prospectus supplements for the Countrywide securities that plaintiffs purchased contained false statements and omissions of material fact regarding the quality of the mortgage loans contained in the securitizations and the underwriting guidelines used to issue those loans. Defendants moved for summary judgment.

The Securities Act of 1933

The Securities Act of 1933 allows investors to bring claims based on false statements in the offering documents of securities offered for sale in interstate commerce. See 15 U.S.C. §§ 77k & 77l. Section 11 establishes a cause of action against directors of the issuer — and those who signed or certified a registration statement, or acted as an underwriter of the relevant security — if the registration statement contains “an untrue statement of a material fact or omit[s] to state a material fact required to be stated therein or necessary to make the statements therein not misleading.” 15 U.S.C. § 77k. Section 12(a)(2) creates a cause of action against one who offers or sells a security, where the prospectus or any statements in support of the sale contain “an untrue statement of a material fact or omit[] to state a material fact necessary in order to make the statements . . . not misleading.” 15 U.S.C. § 77l(a)(2). Those actions, however, are subject to a “statute of repose,” which places an outer limit on the time that a cause of action exists for violations of those statutes:  

In no event shall any such action be brought to enforce a liability created under section 77k or 77l(a)(1) of this title more than three years after the security was bona fide offered to the public, or under section 77l(a)(2) of this title more than three years after the sale. 15 U.S.C. § 77m.

Application of the Statute of Repose

In analyzing Defendants’ motion for summary judgment, the Footbridge Court focused entirely on whether the action was timely. The Court applied the Securities Act’s statute of repose to determine that, without the application of any tolling, the suit against Countrywide would be untimely. The suit was filed more than three years from both the offering date of the securities and the date of sale of the securities, which all took place in 2006. The Court then considered whether the Supreme Court decision in American Pipe tolled the running of the statute of repose under the Securities Act, such that Plaintiffs’ claims should be allowed.  

American Pipe Tolling

In American Pipe, the Supreme Court considered the application of statutes of limitation under the Sherman Act in connection with a class action filed under Rule 23 of the Federal Rules of Civil Procedure. In that case, the Supreme Court held that the institution of a class action tolled the statute of limitations under the Sherman Act as to the members of that class, at least until an order was entered refusing to certify the class. American Pipe tolling has been applied in a variety of contexts to toll the statute of limitations.

Class Actions Involving Countrywide Securities

Two class actions were filed in California State Court in 2007 regarding residential mortgage-backed securities issued by Countrywide. The first, Luther v. Countrywide Home Loans Servicing LP, BC380698 (Cal. Super. Ct.), was filed on November 14, 2007. The second, Washington State Plumbing & Pipefitting Pension Trust v. Countrywide Fin. Corp., BC392571 (Cal. Super. Ct.), was filed on June 12, 2008. The actions were consolidated on October 16, 2008 and dismissed by the California State Superior Court on the basis of the Securities Litigation Uniform Standards Act on January 6, 2010. If the filing of those class actions tolled the statute of repose under the Securities Act, the Footbridge Action would be timely.  

American Pipe Tolling Does Not Apply to the Securities Act’s Statute of Repose

The Footbridge Court began its tolling analysis by examining the plain language of the Securities Act’s statute of repose. It noted that the language was “absolute,” as it provided that “in no event” could an action be initiated following the running of the statute of repose. The court reasoned that the ordinary meaning of those words “precludes the application of American Pipe tolling.”  

As a secondary reason for its decision, the court determined that the Securities Act’s statute of repose could not be tolled under American Pipe, because equitable tolling is not available for such a statute. Citing the Supreme Court decision in Lampf, Pleva, Lopkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363 (1991), the court noted that it is “well settled” that a statute of repose is “not subject to equitable tolling.” The court then moved on to determine whether the tolling created in American Pipe was equitable or, as some courts have concluded, statutory or legal.  

Noting that the tolling available through American Pipe is not explicitly permitted under the Securities Act or any other statute, the court determined that American Pipe tolling is not statutory. The court then considered whether the tolling could be a type of legal tolling established by Rule 23. Focusing again on the plain text, the court noted that the rule’s text does not specifically provide for — and the American Pipe court did not suggest otherwise — a class action tolling rule. Moreover, the court noted that the Rules Enabling Act, 28 U.S.C. § 2072(b), prevents procedural rules, such as Rule 23, from trumping a statutory enactment, such as the Securities Act’s statute of repose.

The court also found support for its conclusion in the text of the American Pipe decision itself and other Supreme Court jurisprudence. The court noted that the American Pipe court analogized its tolling rule to other equitable tolling doctrines, and that the rule was judicially created and “premised on ‘traditional and equitable considerations’ of fairness, judicial economy and needless multiplicity of lawsuits.” Moreover, the court determined that the Supreme Court itself, based on dicta from opinions examining American Pipe tolling, “appears to view” the tolling rule it created as a form of equitable, rather than legal or statutory tolling.

Finally, the court noted the similarity in policy considerations between the tolling of statutes of limitations under American Pipe and the tolling of statutes of repose that the Footbridge plaintiffs sought. The court noted, however, that “the issue presented is not one of policy but of enforcement of the statute as written. Lawmakers are free to adjust the repose period as they have in the past.”

Based on these conclusions, the court granted summary judgment to defendants on all claims, because their complaint was “barred by the running of [the Securities Act’s] three-year statute of repose, which is not subject to tolling under American Pipe.” The court entered judgment in favor of defendants, and the Footbridge plaintiffs have appealed.  

Importance of Statutes of Repose

The Footbridge decision demonstrates that a litigant seeking to bring a claim under the Securities Act of 1933 should determine not only whether a statute of limitation might apply to its claim, but also whether the Securities Act’s statute of repose will eliminate that claim after a specified period of time. Moreover, based on the Footbridge decision, the litigant should not rely on the filing of a class action regarding the security in question to preserve its cause of action after the statute of repose has run. Instead, the litigant must file its own action if it believes that the class action will be dismissed.