No tolling occurs during the pendency of an arbitration that precedes the filing of a lawsuit alleging federal securities claims.
Zarecor vs. Morgan Keegan & Co., Inc., No. 13-3315 (8th Cir., 9/1/15).
When the RMK mutual funds collapsed and Morgan Keegan, as the underwriter and a primary seller of the funds, was named in a class action in Tennessee federal court, the Zarecors, who owned three of the four funds in question, opted out. The class action was filed in December 2007 and the Zarecors filed their FINRA arbitration in July 2009. The Zarecors relied on state securities law (AR & NJ), not federal law, as the class action did. They won a $541,000 Award (FINRA ID #09-04501 (Little Rock, 10/28/10)), which was later vacated in decisions we covered in SLA 2011-48.
Other Tolling Issues: Reasonable Diligence and American Pipe
Undeterred, they filed an individual action in Arkansas state court in November 2011, alleging, in addition to state securities law violations, fraud under Rule 10b-5 and market manipulation. The District Court determined that all of their claims were time-barred. On appeal, the Zarecors argue that the arbitration and the class action both served to toll the statutes of limitations. Starting with the 1934 Act claim, the Court states that the “federal discovery rule” established in Merck & Co. v. Reynolds, 559 U.S. 633 (2010), relies upon “reasonable diligence” and a limitations period that is triggered by discovery of “facts constituting the violation.” Certainly by July 2009, when the Zarecors filed their arbitration, they had reached that level of understanding.
The Court considers the applicability of American Pipe tolling for the class action, but tolling under that doctrine is limited to claims that are identical with those in the class action. The doctrine is designed to avoid encouraging plaintiffs to file splinter actions, in order to preserve their rights, while the class litigation is underway. “A broader rule [encompassing other claims based on the same facts] would not enhance the ‘efficiency and economy’ of Rule 23 class actions.
The Arbitration and Tolling
What about the period of time between the start of the arbitration in July 2009 and the District Court’s final vacatur judgment? No tolling there either, rules the Court. FINRA never had jurisdiction over the claim, according to the final judgment of the District Court. The vacatur was based upon an arbitrability issue that nullified any right to arbitrate before FINRA. Moreover, the Court holds, FINRA’s tolling provision in its Customer Code, Rule 12206(c), only permits tolling “where permitted by applicable law.” In the Court’s view, “’applicable law’ did not permit tolling while an arbitral proceeding was pending.”
From a federal policy standpoint, tolling during arbitration is not necessary, either. According to the Court, a plaintiff who pursues arbitration is not constrained from also bringing a court action. The Fifth Circuit, for instance, has ruled that a plaintiff may file a case in court within the statute of limitations and then seek a stay pending arbitration. Nothing prevents an arbitration from existing in parallel with a court action. For these reasons, the federal claims are deemed time-barred. The New Jersey courts would likely rule differently, the Court acknowledges. “New Jersey law is very generous to a plaintiff who pursues his claim in the wrong forum.”
The Arkansas claim also falls, since, in the Court’s reading of the case law, no discovery rule applies to toll the three-year statute of limitations applicable to that’s state securities law. “We see no basis in the Arkansas statute for applying a discovery rule.”
(ed: FINRA Rule 12209 is observed primarily in the breach, It states: “During an arbitration, no party may bring any suit, legal action, or proceeding against any other party that concerns or that would resolve any of the matters raised in the arbitration.” Yet, parties regularly seek stays of pending arbitrations and resort to the courts for other relief. This ruling provides another reason why Rule 12209 should be revoked or, at least, revised to achieve its original intent.)
(SLC Ref. No. 2015-37-03)
NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.
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