If there's any good that came out of the sale and subsequent collapse in value of mortgage-backed securities, it's the precedent set by MBS securities litigation. We've seen the revival of obscure case law, new appellate reasoning on standing in securities class actions and a star turn for the statute of repose, the heretofore unheralded understudy of the statute of limitations. I've written a lot about the statute of repose -- which sets an outside limit on federal securities claims of three years from the date of issue -- in the context of the Federal Housing Finance Authority's mega billion-dollar claims against MBS sponsors and underwriters. The 2nd Circuit is now deliberating UBS's appeal of U.S. District Judge Denise Cote's ruling that Congress intended to extend the statute of repose when it passed the 2008 law sending Fannie Mae and Freddie Mac into conservatorship. But last month the appeals court heard arguments on a much broader statute of repose question: Do class actions serve to extend the three-year time limit on securities claims?

If you follow class action litigation, you already know that the U.S. Supreme Court has answered that question with regard to the one-year statute of limitations. In its landmark 1974 ruling in American Pipe v. Utah, the court ruled that the filing of a class action tolls the statute for plaintiffs who aren't in the class (whether that's because the class isn't ultimately certified or they're excluded by the terms of certification). American Pipe involved an antitrust class action, but it applies just as well in securities cases. So as long as some enterprising class action lawyer filed a suit within one year of the discovery of alleged securities violations, investors are protected from statute of limitations defense.

The statute of repose, however, has been deemed much less elastic by the Supreme Court. Congress imposed the three-year time limit for securities claims in order to provide certainty to issuers wary of being socked by investor suits long after the fact. And in the high court's 1994 ruling in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, a majority of justices acknowledged that intent, ruling that the three-year statute of repose (unlike the one-year statute of limitations) is not subject to tolling. The dissenting minority called the decision an "absolute time bar" on investor suits.

Nevertheless, Lampf does not specifically mention American Pipe, and the Supreme Court's silence on reconciling the decisions has left uncertainty about the 1974 ruling's applicability to the statute of repose. In the last few years, several district court judges in Manhattan have found that American Pipe does indeed serve to toll the statute of repose, as well as the statute of limitations, for claims by MBS investors. Most recently, U.S. District Court Judge Harold Baer included a thoughtful discussion of Lampf, American Pipe and the statute of repose in a ruling last week that permits interveners in two MBS class actions. Baer agreed with defendant that there is "a clear theoretical distinction" between the statute of limitations and the statute of repose but sided with class arguments that American Pipe applies to both, since (I'm simplifying here) putative class members should be construed to have asserted their claims, regardless of whether they're subsequently excluded from the class.

Baer cited what he called the majority view of trial judges in the 2nd Circuit, but U.S. District Judges Lewis Kaplan and Kevin Castel have both ruled to the contrary, concluding that American Pipe does not apply to the statute of repose. Under their reasoning, any investor that missed the three-year cutoff for federal securities claims is out of luck.

Though it seems arcane, the tolling of the statute of repose could have enormous consequences in MBS litigation because judges have generally certified narrow MBS class actions, rather than the broad investor classes that plaintiffs' lawyers originally asserted. (As you know, the 2nd Circuit recently expanded the definition of standing in MBS cases, but the ruling came too late to make a big difference for investors in most MBS class actions.) Individual noteholders excluded from classwide cases have subsequently brought their own suits, with aggregate claims against MBS issuers totaling tens of billions of dollars, if not hundreds of billions. These cases generally assert fraud claims under New York law, which has a generous six-year statute of limitations. But parallel federal securities claims can only survive if the 2nd Circuit determines that noteholders met timeliness requirements through previously filed class actions.

The appellate panel of Judges Jose Cabranes, Reena Raggi and Susan Carney heard argument on Dec. 5 in two MBS statute of repose cases, one in which Kaplan granted a defense motion to dismiss on timeliness grounds and the other in which U.S. District Judge Sidney Stein found American Pipe applied and denied a similar motion. I'll let you know when the court issues a ruling.

(Reporting by Alison Frankel)

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