In the past few years, institutional investors and others seeking to enforce their rights in court have been hit with several negative legal decisions concerning statutes of limitation issues. In 2015, the New York Court of Appeals held in ACE Securities that a claim for breaches of representations and warranties in an RMBS contract accrues when the representations are made, not when a sponsor refuses to cure or repurchase the breaching mortgage loans, rendering certain contractual put-back claims in connection with early-vintage RMBS time-barred under New York’s six-year statute of limitations. Then, last year, the Supreme Court ruled in CalPERS v. ANZ Securities, Inc. that the filing of a securities class action did not toll the three-year statute of repose (the law’s absolute bar to bringing suit) set forth in the Securities Act with respect to direct claims brought by investors “opting-out” of the related class.

Last week, however, plaintiffs scored a small but meaningful victory when the Supreme Court held that the statute of limitations clock stops running on state law claims (like fraud and other misrepresentation claims) when the plaintiff files those claims in federal court. This has the practical effect of extending, in some cases significantly, the amount of time in which some plaintiffs can file suit to enforce their rights.

The case is Artis v. District of Columbia. The issue was simple. The so-called “supplemental jurisdiction statute,” which gives investors the ability to bring state law claims along with federal claims in one federal lawsuit, says that any state claim included in a federal suit “shall be tolled while the claim is pending (in federal court) and for a period of 30 days after it is dismissed.” Relaying on this language, investors and other plaintiffs often bring state claims in connection with their federal claims with the belief that if the federal claims are dismissed and the federal court does not reach the merits of the state claims, those claims can be refiled in a timely manner in state court.

Analyzing the language, the Supreme Court was faced with two competing readings – the first approach would hold the state law statute of limitations in abeyance (or “stop the clock”) until 30 days after the federal court dismissed the case, at which point the statute would begin to run again; the second approach treated the 30 days set forth in the statute as a “grace period” within which the effects of an expired statute of limitations would be defeated and the plaintiff could refile its suit. In other words, under the second, “grace period” approach, any state lawsuit commenced more than 30 days after dismissal from federal court would fail on timeliness grounds and could never be heard on the merits. In a victory for plaintiffs, the Supreme Court adopted the “stop the clock” interpretation, rejecting the notion that Congress intended to give plaintiffs only an arbitrary 30-day period within which to refile. This has the practical effect (in the words of Justice Ruth Bader Ginsburg, who wrote for the majority) of giving plaintiffs “breathing space” beyond 30 days to commence potentially meritorious claims.

The decision, while narrow, can have significant impact on aggrieved investors. For instance, many investors bring common law negligence claims in addition to their federal fraud claims, like securities fraud and RICO. If those federal, fraud-based claims fail, Artis ensures that investors can preserve their negligence-based, state law claims without fear of dismissal for a technicality like a statute of limitations. Of course, even before yesterday’s decision, diligent counsel were well-advised to refile within the 30-day grace period to avoid the risk of an adverse ruling on timeliness grounds. But now, investors and other plaintiffs who do not refile their state law claims within 30 days can rest assured that those claims will be heard on the merits.

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