WASHINGTON -- The Supreme Court refused yesterday to review a lower court ruling that upheld a 1991 law designed to give bondholders who were allegedly defrauded extra time to file lawsuits.
But the impact of the action is muted because the justices, acting on a case arising from the default of $38.2 million of municipal bonds issued by a Colorado special district, did not issue a formal ruling in the case.
A national legal precedent is set only when the court issues a formal opinion. When the court merely leaves a ruling intact, the lower court decision is binding only within the jurisdiction of that lower court.
In this case, Dean Witter Reynolds Inc. v. Rosenthal, the lower court ruling is binding only within territory covered by the U.S. Court of Appeals for the 10th Circuit, which comprises Colorado, Wyoming, Utah, New Mexico, Kansas, and Oklahoma.
The law in question was passed as part of the Federal Deposit Insurance Corp. Improvement Act in response to a 1991 Supreme Court ruling in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson. In that decision, the justices said the statute of limitations for securities fraud claims expired one year after discovery of the fraud but no more than three years after the violations giving rise to the claims.
Because the ruling was applied retroactively to pending cases, many securities fraud cases were tossed out of court because they were filled too long after the alleged violations. For example, the First Humanics Corp. nursing home bond case was dismissed in October 1991 because most of the federal claims were filed more than three years after the fraud alleged by bondholders occurred.
Opponents of the Lampf Pleva ruling warned that the decision could have a particularly negative effect on municipal bond investors, who often do not learn of pending defaults until several years after purchasing bonds.
Fearing that a number of meritorious claims were being dismissed on a technicality, lawmakers added Section 27A to the Securities Exchange Act, under which cases that were dismissed as a result of Lampf Pleva were reinstated.
However, attempts to codify a new statute of limitations period for securities fraud cases fizzled. House lawmakers would have given investors up to three years after discovery of potential fraud to file laawsuits, while a Senate bill would have allowed up to two years. Both bills would have given investors an outer limit of five years after the violation occurred to bring suit.
When efforts to reach common ground on a new statute of limitations broke down, lawmakers in late 1991 settled for the legislation reinstating cases thrown out in the wake of Lampf Pleva.
The dispute in yesterday's case arose after Howard W. Rosenthal bought $25,000 of municipal bonds in 1986 issued by the Castle Pines North Metropolitan District in Colorado from a Dean Witter broker.
The bonds later defaulted, and Rosenthal in 1991 filed suit against Dean Witter and others alleging federal securities law violations. While the case was pending, the Supreme Court issued its Lampf Pleva decision. Rosenthal's federal suit was then dismissed.
Following passage of the law allowing such suits to be reinstated, Rosenthal asked a federal district court to renew his federal fraud suit. But the district court ruled Section 27A was unconstitutional. On appeal, the 10th Circuit appeals court reversed the district court, reinstating Rosenthal's suit.
The court's action could help bondholder efforts to settle a 1990 default that has so far cost investors $13.5 million in missed payments. To resolve workouts and settle litigation, some underwriters have been known to put money into settlements to repay investors.
So far, however, Dean Witter has not been actively involved in a contentious legal fight between bondholders and Castle Pines North to resolve how investors will be paid.
"I would be surprised if it's going to have much of a role," said Jon Stevens, vice president and manager of corporate trust at Central Bank in Denver, trustee for the 1986 issue. "Dean Witter hasn't really been at the table anyway."
Just last week, a Colorado judge ordered the district to levy a property tax to settle missed, payments and bring future payments current.