Although it decided the class action suit against UBS alleging that the bank misled investors about mortgage-backed securities is time-barred, the U.S. Court of Appeals for the Third Circuit split with three other circuits by ruling that plaintiffs need not plead compliance with the statute of limitations in the Securities Act.
The pleading issue is a matter of first impression in the circuit, as is the court's decision to replace the inquiry-notice standard previously held in the circuit with a discovery standard for starting the clock on the statute of limitations for Securities Act claims.
These two precedents came from a union pension fund's appeal from the U.S. District Court for the District of New Jersey in which it argued that the trial judge had erred in holding it to pleading compliance with the one-year statute of limitations in Section 13 of the Securities Act.
"We agree with the Seventh Circuit's analysis in Tregenza, which is consistent with our statute of limitations precedent," Third Circuit Judge D. Michael Fisher wrote on behalf of the three-judge panel, referring to the 1993 opinion in Tregenza v. Great American Communications, where the Seventh Circuit threw out the pleading rule followed elsewhere.
"We have also repeatedly held that because a statute of limitations is an affirmative defense, 'the burden of establishing its applicability to a particular claim rests with the defendant,'" Fisher said, quoting from his own court's 2010 opinion in Drennen v. PNC Bank.
"Indeed, requiring a plaintiff to plead compliance with a statute of limitations would effectively ensure that a timeliness issue would always appear on the face of a complaint, thereby shifting the burden to the plaintiff to negate the applicability of the affirmative defense. Therefore, we hold that a Securities Act plaintiff need not plead compliance with Section 13," Fisher said.
Weighing the point at which the plaintiffs should have been aware of potential fraud, the district court had looked to existing Third Circuit precedent and applied an inquiry-notice standard.
"In applying this standard, the district court refused to extend the Supreme Court's holding in Merck that a discovery standard applies to the Exchange Act's statute of limitations," Fisher said, referring to the U.S. Supreme Court's 2010 opinion in Merck & Co. v. Reynolds. "The court reasoned that the discovery standard 'applied to a securities fraud action under [the Exchange Act], and not to … claims under the Securities Act,' and that 'while some other circuits have adopted the Merck standard for [Securities Act] claims, the Third Circuit has yet to do so.'"
It made that change with this opinion.
Explaining the U.S. Supreme Court's reasoning in adopting the discovery standard, Fisher said, "The court explained that inquiry notice 'is not necessarily the point at which the plaintiff would already have discovered … "facts constituting the violation."'"
"For this reason, the inquiry notice standard conflicts with the text of the statute, which 'says that the plaintiff's claim accrues only after the "discovery" of [the facts constituting the violation],' and 'contains no indication that the limitations period should occur at some earlier moment before "discovery," when a plaintiff would have begun investigating,'" he said.
Examining the facts of this case under those standards, the court held that the plaintiffs would have reasonably become aware of the statements and omissions from UBS in 2008, after a similar suit was filed in the California Superior Court. So, the statute of limitations would have run by 2009, making this suit, filed in 2010, untimely.
Fisher concluded the opinion with the court's new standards: "In sum, we hold that a Securities Act plaintiff need not plead compliance with Section 13, and that the timeliness of Securities Act claims under Sections 11, 12(a)(2), and 15 should be measured against a discovery standard.
"We conclude, however, that the claims in the original complaint were untimely. Therefore, we will affirm the district court's order dismissing the second amended complaint with prejudice," he said.
Also on the panel were Judges Julio M. Fuentes and Michael A. Chagares.
Douglas Wilens, of Robbins Geller Rudman & Dowd in Boca Raton, Fla., represented the pension fund and couldn't be reached for comment.
Lawrence Zweifach, of Gibson Dunn in New York, represented UBS and couldn't be reached for comment.
(Copies of the 37-page opinion in Pension Trust Fund v. UBS, PICS No. 13-2680, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.)