Class Action Defense Cases–Newby v. Enron: Fifth Circuit Partially Partially Affirms District Court Order Denying Law Firm Leave To File New State Law Claims Involving Enron But Reverses As To Claims Governed By Four-Year Limitations Period

Sep 17, 2008 | By: Michael J. Hassen

Pursuant to District Court Order Enjoining Law Firm from Filing Further Lawsuits Involving Collapse of Enron Absent Leave of Court, District Court Properly Denied Leave to File 24 New Lawsuits in Texas State Court Seeking to Assert 7 New Claims, but only as to those Claims Subject to Two-Year or Three-Year Statutes of Limitation, Requiring Reversal of District Court Order as to Proposed New Claims Subject to Four-Year Limitations Periods Fifth Circuit Hold, but only as to those Claims Subject to Two-Year or Three-Year Statutes of Limitation, Requiring Reversal of District Court Order as to Proposed New Claims Subject to Four-Year Limitations Periods

In 2001, a Houston law firm (Fleming & Associates) filed several individual and class action lawsuits in Texas state courts against Enron, its accounting firm, and various officers; the class action and individual complaints were brought on behalf of shareholders and arose of the collapse of Enron’s stock price. Newby v. Enron Corp., 542 F.3d 463, 2008 WL 4113964, *1 (5th Cir. 2008). Enron filed for bankruptcy protection in December 2001, and “[s]even years later, litigation involving the Enron collapse endures.” Id. The Fleming firm has played a central role in that litigation, and repeatedly has “sought ex parte temporary restraining orders to prevent the defendants from destroying Enron-related documents.” Id. The Circuit Court explained, “Based on the Fleming Firm’s conduct in seeking ex parte orders in state court, on February 15, 2002, the district court issued a memorandum and order enjoining the Fleming Firm from filing any new Enron-related actions without leave of the court (the ‘February 15, 2002, injunction’).” The Fleming Firm challenged this order but the Fifth Circuit affirmed the injunction, holding that district courts have the authority under the All Writs Act to issue “narrowly tailored” injunctions to “enjoin[] repeatedly vexatious litigants from filing future state court actions.” See Newby v. Enron Corp., 302 F.3d 295, 302 (5th Cir. 2002). The Fifth Circuit there explained, “The district court in this case was attempting to rein in a law firm that represents over 750 plaintiffs …. The problem is Fleming’s unjustified and duplicative requests for ex parte temporary restraining orders, without notice to lawyers already across the counsel table from Fleming and engaged in the prosecution and defense of virtually identical claims in federal suits.” 2008 WL 4113964 at *2 (quoting Newby, 302 F.3d at 302). In October 2003, the Fleming Firm sought and obtained leave of court to file two more Enron-related actions in state court. Id., at *2. In July 2003, “the district court issued a scheduling order in the Newby securities class action,” and three years later, in July 2006, the district court granted plaintiffs’ motion to certify the litigation as a class action. Id.

In October 2005, before it obtained class action status in Newby, the Fleming Firm sought leave to file 24 more Enron-related lawsuits in Texas state courts. 2008 WL 4113964 at *2. The lawsuits sought to represent 1200 shareholders and to seek recovery against “several financial institutions and Enron outside officers and directors” under seven theories – “common law fraud and fraud-on-the-market, negligence, statutory fraud, aiding and abetting liability under the Texas Securities Act, civil conspiracy, aiding and abetting common law fraud, and negligent misrepresentation.” Id. The district court denied the motion on the ground that each of the proposed claims were time-barred and that the applicable statutes of limitation had not been tolled. Id. The Fleming Firm appealed, and the Fifth Circuit affirmed in part and reversed in part.

We do not discuss the Fifth Circuit’s reasoning in detail. At bottom, the Circuit Court held that the district court properly denied leave to file suit as to claims subject to two- or there-year statutes of limitation, unless the time period for filing such claims had been tolled, but the district improperly denied leave to file suit as to claims subject to a four-year statute of limitations. 2008 WL 4113964 at *3-*5. The Fleming Firm filed its motion on October 14, 2005: “Given that the Fleming Firm’s clients had notice of their claims on October 17, 2001, the longest statute of limitations at issue here (four years) would have expired on October 17, 2005, unless a tolling doctrine applies.” Id. at *3. The district court had held that even claims subject to a four-year limitations period were time-barred because, under the district court’s local rules, the Fleming Firm could not have filed suit “until twenty days after the Fleming Firm filed the motion, or until November 3, 2005.” Id. The Fifth Circuit disagreed, and held that “it is up to the state court to determine how to proceed” as to those claims. Id., at *5. In sum, the district court improperly denied the motion for leave to file the claims “involving common law fraud and fraud-on-the-market (Count I), statutory fraud (Count III), and aiding and abetting common law fraud (Count VI), because these claims all have a four-year statute of limitations, and the Fleming Firm submitted its motion for leave to file suit before that limitations period expired.” Id.

The Fifth Circuit then addressed whether any tolling doctrine applied to save claims subject to two- or three-year statutes of limitation. 2008 WL 4113964 at *5. The Fleming Firm alternatively argued that a district court scheduling order in the Newby MDL class action tolled the limitations period, that the February 15, 2002, injunction tolled the statutes of limitation, and that the tolling doctrine set forth in American Pipe & Construction v. Utah, 414 U.S. 538 (1974). Id. The Circuit Court rejected each of these arguments. See id., at *5-*7. Accordingly, the Court affirmed the district court’s order to the extent it denied leave to amend as to those claims barred by the two-year or three-year statutes of limitation, but reversed as to those claims governed by a four-year limitations period. Id., at *10.

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