District Court Erred in Denying American Pipe Tolling to Individual Plaintiffs who had Filed Lawsuits Prior to Court Ruling on Class Certification Motion in Securities Class Action, because as Matter of First Impression Class Action Complaint Tolled Statute of Limitations even as to Claims by all Putative Class Members Regardless of Whether They had Filed Individual Lawsuits Second Circuit Holds
Hundreds of individual and class action lawsuits were filed in state and federal courts against WorldCom and various bond underwriters, each of which ultimately found their way to the United States District Court for the Southern District of New York. In re WorldCom Sec. Litig., 496 F.3d 245, 2007 WL 2127874, *1 (2d Cir. 2007). After the district court certified a class action, defense attorneys for certain bond underwriters moved to dismiss the individual actions on the ground that they were time-barred because they had been added as named defendants after the limitations period had expired, id. Plaintiffs argued that the limitations period was tolled as to later-named defendants even though they had filed individual actions prior to a court ruling on whether to certify a class action, id. The district court agreed with defense attorneys, ruling that the plaintiffs’ claims were not tolled. The Second Circuit reversed, holding that even though plaintiffs had filed their individual lawsuits prior to the district court’s ruling on class certification, their claims were tolled under American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), during the pendency of the class action litigation.
The district court summarized the facts underlying this litigation as follows: “For many years, WorldCom grew by acquisitions. By 1998, it had acquired more than sixty companies in transactions valued at over $70 billion…. In early 2000, however, its attempt to acquire Sprint collapsed. During this period of acquisition-driven expansion, WorldCom had used accounting devices to inflate its reported earnings. Senior WorldCom management instructed personnel in the company’s controller’s office on a quarterly basis to falsify WorldCom’s books to reduce WorldCom’s reported costs and thereby to increase its reported earnings. When the pace of acquisitions slowed, it added new strategies to disguise a decline in its revenues. In 2002, however, the scheme collapsed.” In re WorldCom, Inc. Sec. Litig., 294 F.Supp.2d 392, 400 (S.D.N.Y. 2003). In April 2002, the first class action lawsuit was filed against WorldCom, and a few months later, on June 25, “WorldCom admitted publicly that it had previously issued false and misleading financial statements” and that “it had overstated earnings and had falsely reported ordinary costs as capital expenditures.” In re WorldCom, 2007 WL 2127874 at *2. Soon after making these admissions WorldCom filed bankruptcy. Id. These admissions spawned dozens of securities class action lawsuits – transferred in August 2002 to the Southern District of New York by the Judicial Panel on Multidistrict Litigation – and hundreds of individual lawsuits. Id. Between July 2002 and October 2003, more than 100 pension funds filed individual lawsuits against WorldCom in state courts; the actions were ultimately removed to federal court under 28 U.S.C. § 1452(a) by virtue of WorldCom’s bankruptcy filing; in May 2003, these individual actions were consolidated with the class actions id.
A state-court class action was filed on April 21, 2003, in Alaska state court against several underwriters of WorldCom bonds; the class action was removed to the Southern District of New York in August 2003, and the following month, on September 24, 2003, the class action complaint was amended to name additional bond underwriters as defendants, among these the “Caboto defendants,” for violations of § 11 of the Securities Act but these allegations were “not based on fraud, but rather on negligence and strict liability for registration statements containing untrue statements of material fact.” In re WorldCom, 2007 WL at *3.
The district court certified a securities class action against WorldCom on October 24, 2003; the underlying class action complaint encompassed Section 11 claims against bond underwriters, including Caboto. In re WorldCom, 2007 WL 2127874 at *3. Defense attorneys for the bond underwriters in the Alaska action moved to dismiss the class action complaint based on the one-year statute of limitations set forth in § 13 of the Securities Act, id. In granting the defense motion, the district court rejected plaintiffs’ argument that the longer statute of limitations provided by Sarbanes-Oxley applied, holding that plaintiffs “had expressly disavowed relying on allegations of fraud or intentional misconduct, basing their Section 11 claims entirely on theories of negligence and strict liability,” id., at *4. The district court rejected also plaintiffs’ argument that under American Pipe their claims were tolled by the filing of the April 30, 2002 class action against WorldCom. Id., at *5. The Circuit Court explained that if the class action lawsuits tolled the statutes of limitation under the Securities Act, then the claims against the additional bond underwriters, including Caboto, would be timely, id. The district court held that the limitations periods were not tolled because American Pipe did not apply: the court reasoned that American Pipe extended only to lawsuits filed after a ruling on the class certification motion, not to individual lawsuits that had been filed prior to a court decision on class certification, id. Based on this ruling, the district court dismissed with prejudice all claims against the additional bond underwriters, id., at *6.
For reasons not relevant here, the only defendants involved on appeal were the Caboto defendants. The Second Circuit summarized the issue at page *6 as follows:
The question is 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. We agree with the Appellants that their time to file should have been tolled upon the filing of a class action purporting to assert their claims, regardless of their having also filed individual actions asserting the same claims.
While the facts require considerable explanation, the Second Circuit’s holding is straightforward. American Pipe held that if a class action complaint tolled the statute of limitations as to the named plaintiff, then it tolled the limitations period for putative class members as well because they are considered parties to the class action “until and unless they received notice thereof and chose not to continue.” 414 U.S. at 551. A contrary holding would “frustrate the principal function of a class suit, because then the sole means by which members of the class could assure their participation in the judgment if notice of the class suit did not reach them until after the running of the limitation period would be to file earlier individual motions to join or intervene as parties-precisely the multiplicity of activity which Rule 23 was designed to avoid,” id. American Pipe summarized its holding at page 554 as follows:
We are convinced that the rule most consistent with federal class action procedure must be that the commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class who would have been parties had the suit been permitted to continue as a class action.
The Second Circuit discussed American Pipe and other Supreme Court authority. See In re WorldCom, 2007 WL 2127874 at *7-*9. As a matter of first impression, the Circuit Court held that American Pipe tolling applied to putative class members who had filed individual lawsuits prior to the class action court’s ruling on a class certification motion. Id., at *9. The Second Court therefore reversed the judgment, explaining at page *10: “We hold that because Appellants were 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.”