As Matter of First Impression, Second Circuit Holds that American Pipe Tolling Applies to Putative Class Members of Class Action who File Individual Lawsuits Prior to Decision on Class Action Certification
Prior to the filing of putative class action lawsuits and within one year after plaintiffs discovered “the untrue statement or the omission,” see 15 U.S.C. § 77m, certain pension funds filed individual lawsuits against underwriters of WorldCom bonds under Section 11 of the federal Securities Act of 1933 alleging that they had purchased bonds based on registration statements that contained false and misleading information. In re WorldCom Sec. Litig., ___ F.3d ___, 2007 WL 2127874, *1 (2d Cir. July 26, 2007). Numerous putative class action lawsuits also were filed against WorldCom and its bond underwriters, including Caboto-Gruppo Intensa and Caboto Holdings Sim, and these alleged inter alia violations of Section 11, id. After the expiration of the one-year limitations period, the pension funds amended the individual complaints to add Caboto as party-defendants, id. Caboto defense attorneys moved to dismiss the individual actions as time-barred; plaintiffs countered that the class actions tolled the running of the statute of limitations. Id. The district court granted the defense motion, ruling that the class action complaints did not toll the limitations period because plaintiffs had filed suit before a decision on class certification in the class action lawsuits. Id. The Second Circuit reversed.
Briefly, WorldCom falsified financial records to paint an inaccurate picture of the company’s profitability, but in 2002 “the scheme collapsed.” In re WorldCom, at *2. A class action complaint was filed against WorldCom in April 2002, and numerous other class actions soon followed. More than 120 individual lawsuits also were filed against the company, all of which were removed to federal court based on WorldCom’s petition for bankruptcy protection. Id. By May 2003, the individual actions had been consolidated with the class action complaints, id. In October 2003, the district court certified a class action against WorldCom alleging securities violations; that class action complaint included Section 11 claims against Caboto and other bond underwriters. Id., at *3. In analyzing Caboto’s motion to dismiss the class action and individual claims, the district court found that the statute of limitations began to run no later than June 25, 2002, but that Caboto and certain other bond underwriters were not named as defendants until September 24, 2003 – three months after the expiration of the one year limitations period. Id., at *4.
Below and before the Second Circuit, plaintiffs argued that the limitations period was tolled under American Pipe & Construction Co. v. Utah, 414 U.S. 538, 554 (1974), which held that “the commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class.” In re WorldCom, at *5. The Second Circuit noted that the Supreme Court subsequently extended American Pipe to cover “class members who opted out after the certification motion was granted, see Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 176 n.13 (1974), and to class members who filed separate suits after class certification was denied, see Crown, Cork & Seal Co. v. Parker, 462 U.S. 345, 353-54 (1983).” Id., at *5. The district court had held that American Pipe tolling did not apply because its purpose was “to avoid the filing of numerous suits by individual class members” and so did not apply to class members who already had filed suit before a decision of class certification, id., at *5-*6.
The Circuit Court defined the issue as “whether a plaintiff, which is identified as a member of the plaintiff class in a class action suit, is deprived of the benefit of the tolling provided by the American Pipe doctrine if it filed its own individual action before the motion for class certification was resolved.” In re WorldCom, at *6. The Court identified this as a matter of first impression in the Second Circuit, id., at *9, and concluded that such tolling applies “regardless of [plaintiffs] having also filed individual actions asserting the same claims,” id., at *6. The Circuit Court explained that the purpose of American Pipe is to treat putative class members as “parties to the class action,” and rejected the suggestion that a different rule applies to putative class members who has filed an individual action, id., at *9. The Second Circuit at page 810 rejected the district court’s belief that American Pipe intended to avoid “multiplicity of actions,” reduce reasoning:
The district court may be correct that its conception of the American Pipe rule would reduce the number of individual suits filed by class members. But this is beside the point. While reduction in the number of suits may be an incidental benefit of the American Pipe doctrine, it was not the purpose of American Pipe either to reduce the number of suits filed, or to force individual plaintiffs to make an early decision whether to proceed by individual suit or rely on a class representative. Nor was the purpose of American Pipe to protect the desire of a defendant “not to defend against multiple actions in multiple forums.” Crown, 462 U.S. at 353. The American Pipe tolling doctrine was created to protect class members from being forced to file individual suits in order to preserve their claims. It was not meant to induce class members to forgo their right to sue individually.
Accordingly, the Second Circuit reversed and remanded, holding that as “members of a class asserted in a class action complaint, their limitations period was tolled under the doctrine of American Pipe until such time as they ceased to be members of the asserted class, notwithstanding that they also filed individual actions prior to the class certification decision.”