Russell Dusek v. JPMorgan Chase & Co. , 832 F.3d 1243 ( 2016 )

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[PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
________________________
No. 15-14463
________________________
D.C. Docket No. 2:14-cv-00184-JES-CM
RUSSELL DUSEK,
MARSHA PESHKIN, et al.,
Plaintiffs-Appellants,
versus
JPMORGAN CHASE & CO.,
JPMORGAN CHASE BANK N.A., et al.,
Defendants-Appellees.
________________________
Appeal from the United States District Court
for the Middle District of Florida
________________________
(August 10, 2016)
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Before ED CARNES, Chief Judge, TJOFLAT, Circuit Judge, and TITUS, * District
Judge.
TITUS, District Judge:
For twenty years, Bernard Madoff ran the largest known Ponzi scheme in
history through his investment advisory business, Bernard L. Madoff Investment
Securities LLC (“BLMIS”) and its predecessors and affiliates. Dusek v. JPMorgan
Chase & Co., 132 F. Supp. 3d 1330, 1336 (M.D. Fla. 2015). The house of cards
collapsed on December 11, 2008, when Madoff was arrested, and the Securities
and Exchange Commission (“SEC”) filed a civil complaint against him and
BLMIS. 1 Id. at 1344–45. The U.S. District Court for the Southern District of New
York appointed a trustee for the liquation of BLMIS. Id. at 1345. The trustee
calculated customer claims using the “Net Investment Method,” which credited the
amount of cash deposited into a customer’s BLMIS account, less any amount
withdrawn from it. Id. Customers who had deposited more than they had
withdrawn, excluding appreciation, had a positive net investment and were deemed
“net losers.” The trustee limited claims to these customers. Id.
In the wake of the SEC and bankruptcy proceedings, several class actions
were filed against JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P.
*
Honorable Roger W. Titus, Senior United States District Judge for the District of
Maryland, sitting by designation.
1
The district court’s Opinion and Order provides a thorough history of the scheme, how
it was perpetrated, and the relationship between Madoff and Appellees. See Dusek v. JPMorgan
Chase & Co., 132 F. Supp. 3d 1330, 1336–46 (2015).
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Morgan Securities LLC, and J.P. Morgan Securities, Ltd. (collectively
“JPMorgan”) in the Southern District of New York by customers who directly had
capital invested with BLMIS as of December 2008. BLMIS maintained a series of
accounts at JPMorgan that received the majority of funds that Madoff’s victims
“invested.” Id. at 1346. The cases were consolidated on December 5, 2011 as
Shapiro v. JPMorgan Chase & Co., Case No. 1:11-cv-8331-CM, 2014 WL
1224666 (S.D.N.Y. Mar. 24, 2014). The Consolidated Amended Class Complaint
alleged nine common law claims against JPMorgan. Id. at *1. No federal claims
were asserted. Id.
JPMorgan entered a global resolution on January 6, 2014, involving three
settlements. See Dusek, 132 F. Supp. 3d at 1346. First, it entered into a Deferred
Prosecution Agreement with the U.S. Attorney for the Southern District of New
York. Id. Second, it paid the trustee $325 million in settlement of the bankruptcy
claims. Id. Finally, JPMorgan paid $218 million in settlement of the Shapiro class
action, for which the court certified a class whose definition was intended to
include only “net losers,” thus excluding investors who withdrew more than they
had invested (“net winners”) before the scheme collapsed. Id.; see Shapiro, 2014
WL 1224666, at *13.
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The legal fallout then moved to the south 2 when, on March 28, 2014, this
putative class action was filed in the U.S. District Court for the Middle District of
Florida. Dusek, 132 F. Supp. 3d at 1334. Appellants’ Second Amended
Complaint sought to hold liable JPMorgan and two JPMorgan employees: John
Hogan, who served as Chief Risk Officer and later Chairman of Risk for
JPMorgan, and Richard Cassa, who served as Client Relationship Manager for one
of Madoff’s accounts. Id. at 1335. Appellants argued that JPMorgan and the two
employees were liable as control persons under federal securities laws given their
banking relationship with Madoff and BLMIS and their access to BLMIS’s bank
accounts. Id. at 1347. Appellants also asserted a federal RICO claim for
JPMorgan’s investments in BLMIS feeder funds and failure to report suspicious
banking activities to the SEC. Id. at 1353. Appellants sought to recover the value
of the securities listed on account statements issued by BLMIS on November 30,
2008—totaling nearly $64.8 billion in net investments and related fictitious gains.
Id. at 1338.
On September 17, 2015, the district court granted Appellee/Defendants’
Motion to Dismiss the Second Amended Complaint. Id. at 1354. It dismissed
Count One, alleging violations of Section 20(a) of the Securities Exchange Act of
2
It also moved across the Hudson River to New Jersey, where an action parallel to this
case was filed by the same attorneys filing the Florida action now before this Court. See
Friedman v. JPMorgan Chase & Co., No. 2:14-CV-1988, 2015 WL 1003887, at *5 (D.N.J. Mar.
2, 2015) (transferring that action from the District of New Jersey to the Southern District of New
York).
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1934, and Count Nine, the federal RICO claim, with prejudice, and declined
supplementary jurisdiction for the remaining counts brought under state law,
dismissing them without prejudice. 3 Id.
Because this Court finds that Appellants’ Section 20(a) claim was untimely
and their federal RICO claim was barred by the Private Securities Litigation
Reform Act, we affirm the judgment of the district court.
I.
Review of a district court’s decision to grant a motion to dismiss is
conducted de novo. Spain v. Brown & Williamson Tobacco Corp., 363 F.3d 1183,
1187 (11th Cir. 2004). In deciding a Rule 12(b)(6) motion to dismiss, the court
must accept all factual allegations in a complaint as true and take them in the light
most favorable to plaintiff, Erickson v. Pardus, 551 U.S. 89, 94, 127 S. Ct. 2197,
2200 (2007), but “[l]egal conclusions without adequate factual support are entitled
to no assumption of truth,” Mamani v. Berzain, 654 F.3d 1148, 1153 (11th Cir.
2011) (citations omitted). The motion is granted only when the movant
3
On May 19, 2016, eight months after the decision below in this case, the U.S. District
Court for the Southern District of New York dismissed a parallel class action brought on behalf
of Madoff net winners with claims similar to those in this case. See Friedman v. JPMorgan
Chase & Co., No. 15-cv-5899, 2016 WL 2903273, at *1 (S.D.N.Y. May 18, 2016). There, the
court dismissed the claims as time-barred under the Exchange Act’s five-year statute of repose
and further held that the net winner plaintiffs were never members of the Shapiro class (which
included only net losers) and their claims were not substantially similar to the claims in the
Shapiro class action. Id. at *8–9. Finally, like the district court here, the court held that the
plaintiffs failed to plead that JPMorgan controlled Madoff, id. at *10–13, and also dismissed the
federal RICO claim. Id. at *13–14.
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demonstrates “beyond doubt that the plaintiff can prove no set of facts in support
of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41,
45–46, 78 S. Ct. 99, 102 (1957); see also Flint v. ABB, Inc., 337 F.3d 1326, 1328–
29 (11th Cir. 2003).
II.
A. Tolling
A private action under Section 20(a) of the Exchange Act4 must be filed
within the earlier of “(1) 2 years after the discovery of the facts constituting the
violation; or (2) 5 years after such violation.” 28 U.S.C. § 1658(b) (2014). 28
U.S.C. § 1658(b) is construed by courts as having a two-year statute of limitations
and a five-year period of repose. See Lampf, Pleva, Lipkind, Prupis & Petigrow v.
Gilberston, 501 U.S. 350, 363, 111 S. Ct. 2773, 2782 (1991) (construing the
previous version of the statute that had a one- and three-year structure). See also
Dekalb Cty. Pension Fund v. Transocean Ltd., 817 F.3d 393, 398 (2d Cir. 2016),
as amended (Apr. 29, 2016); McCann v. Hy-Vee, Inc., 663 F.3d 926, 930–32
(7th Cir. 2011).
4
Section 20(a) provides that “[e]very person who, directly or indirectly, controls any
person liable under any provision of this chapter or of any rule or regulation thereunder shall also
be liable jointly and severally with and to the same extent as such controlled person to any
person to whom such controlled person is liable . . . unless the controlling person acted in good
faith and did not directly or indirectly induce the act or acts constituting the violation or cause of
action.” 15 U.S.C. § 78t(a). Appellants allege that the primary violation underlying the § 20(a)
claim was Madoff and BLMIS’s violation of § 10(b) of the Exchange Act and Rule 10b-5.
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The Supreme Court in CTS Corp. v. Waldburger discussed at length the
difference between statutes of limitation and statutes of repose, both of which
“seek to attain different purposes and objectives.” 573 U.S. ___, ___, 134 S. Ct.
2175, 2182 (2014). While a statute of limitations is intended to “require plaintiffs
to pursue ‘diligent prosecution of known claims’” by limiting the time to bring suit
based on the date when the cause of action accrued, id. (quoting Black’s Law
Dictionary 1546 (9th ed. 2009)), a statute of repose “puts an outer limit on the right
to bring a civil action” based on the “date of the last culpable act or omission of the
defendant,” whether or not an injury even occurred or was discovered, id. “The
repose provision is therefore equivalent to a cutoff, in essence an absolute bar on a
defendant’s temporal liability.” Id. at 2183 (internal citation and quotation marks
omitted).
The Court went on to state that statutes of repose are distinct from statutes of
limitation in that they are not subject to equitable tolling, “even in cases of
extraordinary circumstances beyond a plaintiff’s control.” Id. (citing Lampf, 501
U.S. at 363, 111 S. Ct. at 2782 (“[A] period of repose [is] inconsistent with
tolling”); 4 C. Wright & A. Miller, Federal Practice and Procedure § 1056 (3d ed.
2002) (“[A] critical distinction is that a repose period is fixed and its expiration
will not be delayed by estoppel or tolling”)). See also Tello v. Dean Witter
Reynolds, Inc., 410 F.3d 1275, 1279 n.5 (11th Cir. 2005).
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Appellants contend that under American Pipe & Construction Co. v. Utah,
414 U.S. 538, 94 S. Ct. 756 (1974), the statute of repose was nevertheless tolled by
the pendency of the Shapiro class action. They argue that American Pipe involved
“legal”—not equitable—tolling, and tolling is therefore not foreclosed by CTS.
Appellants rely on the Tenth Circuit’s decision in Joseph v. Wiles, 223 F.3d 1155
(10th Cir. 2000), to support their contention that their claims are timely because of
the pendency of the Shapiro class action.
In American Pipe, the Supreme Court held 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.” American Pipe, 414 U.S. at 554, 94 S. Ct. at 766. In
Crown, Cork & Seal Co., Inc. v. Parker, 462 U.S. 345, 353–54, 103 S. Ct. 2392,
2397–98 (1983), the Supreme Court extended American Pipe tolling to would-be
class members who filed separate actions after the denial of class certification.
Courts have disagreed over the basis for the Supreme Court’s decision in
American Pipe—whether it relied mainly on (a) Fed. R. Civ. P. 23 in allowing
tolling because otherwise it would “frustrate the principal function of a class suit”
and create a “multiplicity of activity which Rule 23 was designed to avoid,”
American Pipe, 414 U.S. at 551, 94 S. Ct. at 765, or (b) the equitable power of
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courts to toll statutes of limitations, id. at 557–59, 94 S. Ct. at 768–69. 5 In Joseph,
the Tenth Circuit held that American Pipe tolling applied to the statute of repose in
Section 13 of the Securities Act because it was a rule of legal tolling derived from
Rule 23. 223 F.3d at 1166–68.
Appellees argue that the decision in Police and Fire Retirement System of
the City of Detroit v. IndyMac MBS, Inc., 721 F.3d 95 (2d Cir. 2013), is the more
persuasive. There, the Second Circuit found that it did not matter whether the
American Pipe tolling rule was legal or equitable in nature: either way, there can
be no tolling for statutes of repose. Id. at 109. The court reasoned that the Rules
Enabling Act, 28 U.S.C. § 2072(b), which bars courts from enlarging or modifying
substantive rights, precludes a court from relying upon Rule 23 as a basis for
permitting a plaintiff to file an otherwise untimely complaint (or intervene in a
pending timely filed action) after the period of repose has run. Id. The Second
Circuit has recently reaffirmed its conclusion in a case in which, like this one,
plaintiffs sought to invoke American Pipe tolling for an untimely action brought
under Section 20(a). SRM Glob. Master Fund Ltd. P’ship v. Bear Stearns Cos.
L.L.C., ___ F.3d ___, No. 14-507-CV, 2016 WL 3769735, at *2 (2d Cir. July 14,
2016). The court rejected this contention, holding that “For the reasons we
5
Courts have also noted that, in the past and including during the time of American Pipe,
courts used the term “statute of limitations” to refer to statutes of repose, thus adding to the
confusion on this issue. See, e.g., Police and Fire Retirements System of the City of Detroit v.
IndyMac MBS, Inc., 721 F.3d 95, 106 n.13 (2d Cir. 2013).
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provided in IndyMac, . . . American Pipe tolling does not apply to § 1658(b)(2)’s
five-year state of repose.” Id. at 2.
Like the Second Circuit, the Sixth Circuit has also applied the Supreme
Court’s reasoning in CTS and followed the Second Circuit’s decision in IndyMac,
declining to toll a statute of repose for, inter alia, a Section 20(a) claim. Stein v.
Regions Morgan Keegan Select High Income Fund, Inc., 821 F.3d 780, 783 (6th
Cir. 2016). In Stein, the Sixth Circuit provided a well-reasoned discussion of why
the Rules Enabling Act would prohibit tolling of a statute of repose:
Statutes of repose arguably affect rights, remedies, and rules of
decision: they confer on defendants a right to be free of liability by
imposing an absolute temporal bar on claims, prevent recovery by
plaintiffs after the repose period, and impose the additional decision
rule that courts must rule in defendants’ favor if plaintiffs delay
beyond the statutory period to bring suit. That statutes of repose vest
a substantive right in defendants to be free of liability is underscored
by the Supreme Court’s analogies in CTS between statutes of repose
and the ability to discharge debts in bankruptcy or to be free of double
jeopardy in criminal proceedings. Because statutes of repose give
priority to defendants’ right to be free of liability after a certain
absolute period of time (rather than plaintiffs’ ability to bring claims),
we cannot endorse the Tenth Circuit’s view—expressed prior to
CTS—that “[d]efendants’ potential liability should not be
extinguished simply because the district court left the class
certification issue unresolved.” Joseph, 223 F.3d at 1168. We
therefore join the Second Circuit in holding that, regardless of
whether American Pipe tolling is derived from courts’ equity powers
or from Rule 23, it does not apply to statutes of repose.
821 F.3d at 794–75.
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Despite the ongoing controversy, both the Supreme Court and the Eleventh
Circuit have described the American Pipe rule as one of equitable, not “legal,”
tolling. See Smith v. Bayer Corp., 564 U.S. 299, 313 n.10, 131 S. Ct. 2368, 2379
n.10 (2011) (referring to the holding in American Pipe as “specifically grounded in
policies of judicial administration”); Young v. United States, 535 U.S. 43, 49, 122
S. Ct. 1036, 1040 (2002) (citing American Pipe for the proposition that limitations
periods are “customarily subject to equitable tolling”); Irwin v. Dep’t of Veterans
Affairs, 498 U.S. 89, 96 & n.3, 111 S. Ct. 453, 458 & n.3 (citing American Pipe as
a case in which “equitable tolling” was used); Raie v. Cheminova, Inc., 336 F.3d
1278, 1283 (11th Cir. 2003) (per curiam) (referencing the rule of “equitable tolling
under American Pipe”). In American Pipe itself, the Supreme Court described the
power to toll that it was applying as a “judicial power,” 414 U.S. at 558, 94 S. Ct.
at 768, and specifically noted that class certification had not been denied “for
reasons of bad faith or frivolity,” but for lack of numerosity, id. at 553, 94 S. Ct. at
766 (internal quotation marks omitted).
Other circuits have similarly described the rule as one of equitable tolling.
See, e.g., Bridges v. Dep’t of Md. State Police, 441 F.3d 197, 211 (4th Cir. 2006)
(referencing the “American Pipe . . . equitable tolling rule”); Youngblood v.
Dalzell, 925 F.2d 954, 959 n.3 (6th Cir. 1991) (same). See also Barryman-Turner
v. District of Columbia, 115 F. Supp. 3d 126, 132 (D.D.C. 2015) (collecting cases
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and noting that “district courts in the Fourth, Fifth, Seventh, and Eleventh Circuits
have treated American Pipe as an equitable tolling doctrine”).
The district court ultimately relied on these decisions in determining that the
American Pipe rule is one of equitable tolling. See Dusek, 132 F. Supp. 3d at
1350. We affirm and hold that American Pipe tolling does not apply to the statute
of repose at issue in this case. Appellants’ right to bring the Section 20(a) claim
expired, at the latest, on December 11, 2013, five years after Madoff was arrested
and BLMIS was closed. See 28 U.S.C. § 1658(b)(2). They did not file their claim
until March 28, 2014. Accordingly, their claims are time-barred and were properly
dismissed. 6
B. RICO Claim
Under the Private Securities Litigation Reform Act (“PSLRA”), “no person
may rely upon any conduct that would have been actionable as fraud in the
purchase or sale of securities to establish a violation of section 1962 [of the federal
RICO Act].” 18 U.S.C. § 1964(c) (2014). A plaintiff may not dodge this bar by
pleading other offenses as predicate acts in a civil RICO action if the claim is
based on conduct that would have been actionable as securities fraud. See MLSMK
Inv. Co. v. JP Morgan Chase & Co., 651 F.3d 268, 277 (2d Cir. 2011) (finding
6
In light of this conclusion, the Court need not address or decide Appellees’ contentions
that they were not “control persons” or that the Appellants lack standing and were not part of the
class in Shapiro.
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Madoff-related RICO claim based on alleged conduct that would have been
actionable as securities fraud barred by the PSLRA).
Appellees’ claims of mail and wire fraud are clearly based upon the
fraudulent conduct of Madoff and BLMIS relating to securities investments. The
district court was therefore correct in dismissing the federal RICO claim because it
is precluded by the PSLRA. See Dusek, 132 F. Supp. 3d at 1353.
Accordingly, the judgment of the district court is AFFIRMED.
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