Reviving Time-Barred Financial Litigation In State Courts
Appeared in Law360 on February 29, 2016. Originally appeared in the Kaye Scholer Securities & Derivative Litigation Report.
—by Daphne Morduchowitz, Catherine Schumacher and Joseph Clark» Click here to read more articles from our latest Securities & Derivative Litigation Report.
With the events of the global financial crisis many years in the past, any resulting litigation would be expected to have dried up, as any potential claims should be time-barred by statutes of limitations. However, enterprising plaintiffs are attempting to skirt statutes of limitations by relying upon the common law doctrine nullum tempus occurrit regi, which provides that statutes of limitations are inapplicable to actions brought by a state in certain circumstances. For example, the Texas County and District Retirement System (TCDRS), a pension fund for government employees in Texas, sued in Texas state court[1] a group of 11 investment banks alleging that they were fraudulently sold residential mortgage-backed securities (RMBS). While TCDRS did not bring suit until 2014, well after the applicable statutes of limitations had likely run, it has asserted that its untimeliness is excused by nullum tempus. While the issue is yet to be decided, if TCDRS is successful, additional plaintiffs may try to follow suit and attempt to revive stale claims.
Background on Nullum Tempus
Nullum tempus occurrit regi — literally, no time runs against the king — is a common law doctrine related to sovereign immunity, which provides that actions brought by a state are not bound by statutes of limitations. Accordingly, a state may bring an action years — or even decades — after the statute of limitations would have otherwise lapsed. While the doctrine had its origins in the idea that the king should not have his rights suffer due to the negligence of his agents to timely assert them, the current policy underlying nullum tempus is that the government should be able to pursue those who have wronged the public without regard to lapse of time. While a few states have abolished the doctrine (including New York), either through the legislature or the courts, it remains alive and well in the majority of state jurisdictions today.
Limitations of Nullum Tempus
However, the doctrine is not without limitations in most states. A threshold limitation is whether the doctrine applies to lawsuits brought by any entities other than the state itself, such as by state agencies, subdivisions or municipalities. This is of particular interest to financial companies since a potential plaintiff may often be a state pension fund, rather than the state itself. Indeed, defendants have argued in the TCDRS litigation that the plaintiff is not the “state” and therefore not entitled to invoke nullum tempus. While the issue is yet to be decided in the TCDRS litigation, the courts of at least two states — Kansas and Pennsylvania — have held that state pension funds are covered by nullum tempus and may bring actions against the financial institutions they do business with, even if those actions would otherwise be time-barred.[2]
A second related limitation, in some jurisdictions, is that nullum tempus only applies to actions where the plaintiff is acting in a governmental capacity and seeking to vindicate a public right, rather than acting in a proprietary or commercial capacity or seeking to benefit private parties. While this seemingly provides a bright-line distinction as to when nullum tempus applies, in practice the line is blurred. For example, is making investment decisions for a pension fund acting in a governmental or private capacity? On the one hand, it is a commercial transaction that generally benefits private parties (the pensioners) but on the other, it is also a necessary part of fulfilling the obligations of a state to manage its pension funds. With no clear distinction, the courts have come out in both directions on this issue.[3]
Strategies for Defending Against Nullum Tempus
Besides not doing any business with state entities (or potential state entities), there are a couple of strategies to attempt to lessen the chance that a plaintiff will be successful in asserting nullum tempus. First, when doing business with a state entity or state pension fund, one should attempt either to create a contractually defined time limit for potential claims or to have nullum tempus waived. While the success of contractual overrides of nullum tempus will be dependent on the specific state law, some states have recognized the ability of state actors (such as Pennsylvania) to waive the protections of nullum tempus.[4] However, other states (such as Connecticut) have found that government officials lack the ability to waive nullum tempus in the absence of explicit legislation authorizing them to do so, voiding attempted contractual waivers.[5]
Second, a party facing a suit from a plaintiff asserting nullum tempus should attempt to remove the action to federal court. The most obvious reason for removal is to try to avoid a “home state” decision in favor of the state entity plaintiff by a state court judge. The exact contours of the doctrine have not been defined in many jurisdictions and a federal court may be more willing to make a defendant-friendly decision. This is precisely what happened in Kansas, where, under similar facts, the federal courts (including the Eighth Circuit), have held that the doctrine does not protect state pension plans, while the Kansas state courts have ruled that it does.[6]
However, removal on diversity grounds is difficult in many instances, since a state plaintiff is generally insufficient to create diversity. This was the issue faced by defendants in the TCDRS litigation — while defendants initially removed to federal court, the plaintiff was successful in having the case remanded back to state court. During the action’s brief stay in federal court, defendants moved to dismiss on statute-of-limitations grounds, only to have their motion mooted when the case was remanded. Defendants opted not to move to dismiss in state court and the case remains ongoing.
Conclusion
The ability of plaintiffs to use nullum tempus to revive old claims will ultimately depend on the specific state law at issue, and the doctrine remains relatively undeveloped in most states. While the doctrine contains limitations that could prevent its use in financial services litigation, financial institutions should be cognizant of this potential risk when doing business with state entities.
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[1] TCDRS v. J.P. Morgan Sec. LLC, et al., No. D-1-GN-14-000998 (Dist. Ct. Travis Cty. Tex.).
[2] Kan. Pub. Employees Retire. Sys. v. Reimer & Koger Assocs., 262 Kan. 635 (1997); Springfield Township v. Mellon Bank, N.A., 139 Montg. Co. L. R. Part II 177 (2002).
[3] Compare Kan. Pub. Employees Retire. Sys. v. Blackwell Sanders Matheny Weary & Lombardi LC, 114 F.3d 679 (8th Cir. 1997) with Springfield Township v. Mellon Bank NA, 139 Montg. Co. L. R. Part II 177 (2002).
[4] Selinsgrove Area Sch. Dist. v. Lobar Inc., 2011 Pa. Commw. LEXIS 475 (Sept. 27, 2011).
[5] Connecticut v. Lombardo Brothers Mason Contractors Inc., 307 Conn. 412 (2012).
[6] Compare Kan. Pub. Employees Retire. Sys. v. Blackwell Sanders Matheny Weary & Lombardi LC, 114 F.3d 679 (8th Cir. 1997) with Kan. Pub. Employees Retire. Sys. v. Reimer & Koger Assocs., 262 Kan. 635 (1997).
