The opinion of the court was delivered by: HUYETT
This action arises out of two separate transactions incident to the financing, syndication and resyndication of the Plymouth Plaza Project, a commercial office building constructed on previously unimproved property near the Plymouth Meeting Mall in Plymouth Meeting, PA (the property). Plaintiffs are the sole limited partners of defendant Plymouth Plaza Associates (PPA), a limited partnership organized under the laws of Pennsylvania. Defendants have filed motions to dismiss pursuant to Fed.R.Civ.P. 12(b)(1) and (6), advancing various arguments addressed to different counts of the complaint.
In 1973 defendant John Berg (Berg) entered into an agreement with the Plymouth Meeting Mortgage Corporation (PMMC) whereby he acquired a thirty year lease on the property with an option to purchase at the end of the lease period, 2003. On March 28, 1974, Berg assigned his rights under the lease agreement to defendant Montgomery County Industrial Development Authority (MCIDA), who then mortgaged the assigned interest to First Federal Savings and Loan Association of Philadelphia (First Federal) as security for a loan given by First Federal to finance the construction of the Plymouth Plaza Project. Simultaneously, MCIDA and Berg entered into an installment sales agreement (the ISA), pursuant to which Berg acquired the First Federal loan proceeds to construct the building and agreed to pay all amounts due and owing by MCIDA under the mortgage, including the obligation of continuing rental payments on the leased property. The ISA also provided that MCIDA's interest in the leasehold would terminate upon Berg's satisfaction of the First Federal mortgage obligations and MCIDA would convey to Berg its interests in the office building and any other improvements on the property.
In September, 1974, Berg organized PPA, establishing himself as general partner. On September 30, 1975, after the office building was constructed, Berg assigned to PPA his rights under the ISA. According to the complaint, plaintiffs purchased all of the limited partnership interests in PPA in December, 1975, based upon information received from Berg and a "project synopsis" which Berg distributed, for a total of $ 125,000 contribution to capital and $ 225,000 in promissory notes made out to Berg personally (the 1975 transaction). Plaintiffs allege that, in connection with that transaction, Berg made false and misleading representations to them as to the nature of the interests in the property which he had assigned to PPA.
At an unspecified time after the 1975 transaction defendant Fidelity America Mortgage Company (FAMCO), of which Berg is president, purported to succeed Berg as general partner of PPA. On December 1, 1979, Berg and FAMCO organized a new limited partnership, defendant Plymouth Plaza Office Building Associates (PPOBA), with FAMCO as general partner and twenty-six individuals as limited partners. Berg and FAMCO, acting as general partner for PPA, then conveyed PPA's interests in the ISA and the leasehold to PPOBA. In return, PPOBA granted FAMCO a "purchase money wrap-around mortgage", and FAMCO assigned a "senior participating certificate" to PPA (the 1979 transaction). Plaintiffs contend that the 1979 transaction occurred without their knowledge or approval and that it amounts to a forced sale of their interests. Plaintiffs also contend that the mortgage is inadequate in that it is non-recourse, sets the interest rate below the market rate, will not begin to amortize until 1997, and will not fully amortize until 2017, fourteen years after the lease terminates. Thus plaintiffs allege that the 1979 transaction defrauded them and PPA, and that it constituted a breach of Berg's and FAMCO's fiduciary and contractual duties.
In counts I, II, and III of the complaint, plaintiffs allege that the 1975 transaction is actionable under various provisions of the federal securities laws. Count I alleges the making of false representations in connection with plaintiffs' purchases of partnership interests in PPA, and seeks rescission pursuant to section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l (2). Defendants assert that Count I is time barred pursuant to section 13 of the Securities Act of 1933, 15 U.S.C. § 77m, which provides in pertinent part:
No action shall be maintained to enforce any liability created under ... (section 12(2)) unless brought within one year after the discovery of the untrue statement or the omission, or after discovery should have been made by the exercise of reasonable diligence .... In no event shall any action be brought to enforce a liability ... (under section 12(2)) more than three years after the sale.
Plaintiffs contend that the three year time limitation of section 13 was tolled due to fraudulent concealment by defendants, arguing that I should consider section 13's time limitation inapplicable in this instance in order to effectuate the congressional purpose manifested in section 12(2). However, the plain language of section 13 militates to the contrary. Where the statute states that an action shall "in no event ... be brought ... more than three years after the sale," 15 U.S.C. § 77m (emphasis added), the Supreme Court's general statement that fraudulent concealment "is read into every federal statute of limitation", Holmberg v. Armbrecht, 327 U.S. 392, 397, 66 S. Ct. 582, 585, 90 L. Ed. 743 (1946), cannot be considered controlling. Moreover, the overwhelming weight of authority holds that the three year limitation is absolute, equitable considerations notwithstanding. E. g., Brown v. Producers Livestock Loan Co., 469 F. Supp. 27, 33 (D.Utah 1978); Turner v. First Wisconsin Mortgage Trust, 454 F. Supp. 899, 911 (E.D.Wis.1978); Brick v. Dominion Mortgage & Realty Trust, 442 F. Supp. 283, 289-91 (W.D.N.Y.1977); Payne v. Fidelity Homes of America, Inc., 437 F. Supp. 656, 657-58 (W.D.Ky.1977). I recognize that one court has held to the contrary. See In re Home-Stake Production Co. Securities Litigation, 76 F.R.D. 337, 344-45 (N.D.Okla.1975). However, Home-Stake is the sole exception to the otherwise unbroken line of cases holding section 13's time limitation absolute, has been ignored in numerous subsequent opinions, and is factually distinguishable from the case at bar in light of the extent and duration of the concealment there involved. See 76 F.R.D. at 341-42. In light of section 13's unequivocal language and the plethora of decisions holding its three year time limitation absolute, I must reject plaintiffs' contention that the statute was tolled due to fraudulent concealment. Because count I makes allegations concerning events which occurred in 1975 and the complaint was not filed until 1980, count I is time barred, and I shall grant defendants' motion as to count I.
In count II of the complaint, plaintiffs allege that Berg and FAMCO violated section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) in connection with the 1975 transaction. Count III, brought under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5 (1980), alleges fraud with respect to both the 1975 and the 1979 transactions. Defendants contend that these allegations are time barred with respect to the 1975 transaction, citing the three year statute of limitations contained in section 504(a) of the Pennsylvania Securities Act of 1972, 70 Pa.Stat.Ann. § 1-504(a) (Purdon Supp.1980-81). Plaintiffs contend that the statute was tolled due to fraudulent concealment, to which defendants respond that fraudulent concealment was improperly alleged. While it is well settled that state law determines the limitations period for the causes of action alleged in counts II and III, the question of when that limitations period begins to run is an issue to be determined under federal law. Arneil v. Ramsey, 550 F.2d 774, 780 (2d Cir. 1977); Moviecolor Ltd. v. Eastman Kodak Co., 288 F.2d 80, 83 (2d Cir.), cert. denied, 368 U.S. 821, 82 S. Ct. 39, 7 L. Ed. 2d 26 (1961). Cf. Cope v. Anderson, 331 U.S. 461, 464, 67 S. Ct. 1340, 1341, 91 L. Ed. 1602 (1947). "Under the federal tolling doctrine, the active concealment of fraudulent conduct tolls the statute of limitations in favor of the defrauded party until such time as he actually knew of the fraudulent conduct of the opposing party." Robertson v. Seidman & Seidman, 609 F.2d 583, 593 (2d Cir. 1979), citing Atlantic City Electric Co. v. General Electric Co., 312 F.2d 236, 239 (2d Cir. 1972) (en banc), cert. denied, 373 U.S. 909, 83 S. Ct. 1298, 10 L. Ed. 2d 411 (1963). Absent active concealment, the limitations period begins to run when plaintiff, through due diligence, could reasonably have discovered the fraud. Sperry v. Barggren, 523 F.2d 708, 711 (7th Cir. 1975). Thus the presence or absence of active concealment is an issue of fact raised by allegation of fraudulent concealment. Id. Assuming arguendo that active concealment is disproved, "(issues) of due diligence and constructive knowledge depend on inferences drawn from the facts of each particular case." Robertson v. Seidman & Seidman, 609 F.2d at 591. As such the fraudulent concealment allegation raises genuine issues of material fact, rendering resolution through summary judgment inappropriate. See id. at 593; Sperry v. Barggren, 523 F.2d at 711.
Defendants' assertion that plaintiffs' allegation of fraudulent concealment is improper due to failure to adequately set forth that allegation in the complaint must be rejected as well. Read as a whole, the complaint adequately puts defendants on notice that fraudulent concealment is alleged, as defendants' motion addressing that issue evinces.
Alternatively, defendants argue that count II must be dismissed because there is no private right of action under section 17(a) of the Securities Act of 1933. Citing an Eighth Circuit and an Eastern District of Louisiana opinion, they contend that the modern trend supports this position. However, this court has uniformly held that a private right of action does exist under section 17(a). E. g., Wulc v. Gulf & Western Industries, Inc., 400 F. Supp. 99, 103 (E.D.Pa.1975); B & B Investment Club v. Kleinert's, Inc., 391 F. Supp. 720, 726 (E.D.Pa.1975); Crowell v. Pittsburgh & Lake Erie R.R. Co., 373 F. Supp. 1303, 1311 (E.D.Pa.1974); Dorfman v. First Boston Corp., 336 F. Supp. 1089 (E.D.Pa.1972). Moreover, other courts have adopted this view. See In re Gap Stores Securities Litigation, 457 F. Supp. 1135, 1142 (N.D.Calif.1978) and cases cited therein. I decline to adopt defendants' position in light of the above-cited precedent.
Defendants also make an alternative argument concerning the portion of count III attacking the 1979 transaction. Because only a purchaser or seller of a security may bring an action under section 10(b) or rule 10b-5, Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S. Ct. 1917, 44 L. Ed. 2d 539 (1975), they argue that plaintiffs do not have standing to sue because they were neither purchasers nor sellers in the 1979 transaction. Plaintiffs claim that they have standing under the "forced seller" doctrine. Initially, it is clear that Blue Chip did not refute the "forced seller" doctrine. Alley v. Miramon, 614 F.2d 1372, 1385-87 (5th Cir. 1980). To determine the applicability of the "forced seller" doctrine, a court must "(focus) on the economic reality of the transaction" and make an "economic determination as to whether in reality the transaction constitutes a "... transformation of a securityholder's investment from an interest in a going enterprise into a right solely to receive payment in exchange for such interest.' " McCloskey v. McCloskey, 450 F. Supp. 991, 995 (E.D.Pa.1978), quoting Murphey v. Hillwood Villa Assoc., 411 F. Supp. 287, 292 (S.D.N.Y.1976); Valente v. Pepsico, Inc., 454 F. Supp. 1228, 1237 n.10 (D.Del.1978). Because this issue comes before me on defendants' motion to dismiss, I must accept as true all well pleaded allegations of the complaint, and decide all inferences pertinent to material facts which flow from those allegations in favor of plaintiffs. Adickes v. Kress & Co., 398 U.S. 144, 90 S. Ct. 1598, 26 L. Ed. 2d 142 (1970); United States v. Diebold, Inc., 369 U.S. 654, 82 S. Ct. 993, 8 L. Ed. 2d 176 (1962). Viewed in this light, plaintiffs' allegations picture the 1979 transaction as one in which plaintiffs' interests in PPA were transformed from interests in a going partnership with valuable, tangible assets to interests in a shell with only highly speculative and unsecured property rights, and, as a practical matter, merely illusory rights to receive mortgage proceeds in the future. Thus the 1979 transaction must be viewed at this point as creating a "forced sale" of plaintiffs' interests in PPA, pursuant to which plaintiffs have standing to attack that transaction in count III of the complaint.
In count XII of the complaint, plaintiffs sue derivatively on behalf of PPA for violations of sections 10(b) and 20 of the Securities Exchange Act of 1934 in connection with the 1979 transaction. Other derivative claims under Pennsylvania law are set forth in counts XIII through XVI of the complaint. Defendants seek dismissal of these counts on the ground that plaintiffs may not sue derivatively on behalf of the partnership. They argue, in essence, that Pennsylvania law contains an implied prohibition against such suits because the Uniform Limited Partnership Act (ULPA) has been adopted in Pennsylvania, and because the ULPA has been interpreted in other states to prohibit derivative suits by limited partners. I note initially that the cases upon which defendants rely are at best ambiguous on the issue of the propriety of derivative suits by limited partners, as the conflicting construction urged by plaintiffs and defendants reveal. Further, Pennsylvania law does not clearly prohibit such suits. Section 545 of the Pennsylvania Uniform Limited Partnership Act, 59 Pa.Cons.Stat.Ann. § 545 (Purdon Supp.1980-81),
can be interpreted either way. Indeed, other courts which have addressed this issue concluded that the framers of the ULPA did not focus on the problem of derivative claims in promulgating the above-cited provision, but rather intended the statute merely to prevent limited partners from interfering with the right of general partners to conduct the business of the partnership. See Klebanow v. New York Produce Exchange, 344 F.2d 294, 298-99 (2d Cir. 1965) (Friendly, J.) and cases cited therein. It has also been held that "the object of the derivative action is, in essence, to enforce the limited partners' rights against the Partnership, albeit by an action against the general partner, to protect their interest in the Partnership .... This interpretation is consistent with the purpose of the (ULPA), which is to insulate the limited partners from third parties dealing with the partnership. Smith v. Bader, 458 F. Supp. 1184, 1186-87 (S.D.N.Y.1978). In addition, it is established that the question of "standing in a Rule 23.1 case to assert a derivative claim based on federal law is a federal question ..." In re Pittsburgh & L.E.R. Co. Securities and Antitrust Litigation, 543 F.2d 1058, 1067 (3d Cir. 1976). Unfortunately the federal rule is unclear as well. Nevertheless, guidance can be found in Judge Friendly's opinion in Klebanow, in which he found limited partner standing because of the confluence of the above-noted factors (standing is a federal question, law of the forum is unclear and evinces no clear policy against such standing) and by analogy to the law of trusts, which permits a cestui que trust to sue to enforce a claim of the trust when the trustee has wrongfully refused to do so. 344 F.2d at 296-99. Defendants argue that Klebanow is inapposite because it is based on New York law which is contrary to Pennsylvania law. However, I do not view New York law as do defendants, and note further that the Third Circuit has cited Klebanow as the leading case on this issue. McClune v. Shamah, 593 F.2d 482, 487 (3d Cir. 1979). The equities of the situation also militate in favor of permitting a derivative suit, because "preclud(ing) the derivative claims would effectively bar the Partnership, and possibly the limited partners, from obtaining judicial relief as a result of the general partner's alleged self-dealing, conversion of assets and opportunities and breach of fiduciary duty." Smith v. Bader, 458 F. Supp. at 1168. Finally, I note that, where state law is unclear, "federal judges are entitled to resolve the doubt in a way that permits the assertion of a federal claim." Klebanow v. New York Produce Exchange, 344 F.2d at 299. For all of these reasons I decline to dismiss counts XI through XVI for lack of standing.
PPOBA argues alternatively that the derivative claims must be dismissed because the 1979 transaction did not involve the purchase or sale of a security. Plaintiffs argue that the "senior participating certificate" involved therein is a security. In considering PPOBA's contention I am guided by the Supreme Court's admonition that federal securities laws are remedial in nature, and must be construed broadly. Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S. Ct. 548, 553, 19 L. Ed. 2d 564 (1967). I must consider the economic realities of the transaction rather than the name assigned the documents involved, United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 849, 95 S. Ct. 2051, 2059, 44 L. Ed. 2d 621 (1975), bearing in mind that "the federal courts ought to interpret the 1934 Act with a presumption of coverage of any transaction which Congress did not expressly exclude." Weaver v. Marine Bank, 637 F.2d 157 at 165 (3d Cir. 1980). In determining what constitutes a security, "(t)he test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others." S.E.C. v. Howey Co., 328 U.S. 293, 301, 66 S. Ct. 1100, 1104, 90 L. Ed. 1244 (1946); United Housing Foundation, Inc. v. Forman, 421 U.S. at 852, 95 S. Ct. at 2060.
Applying this test in light of the above-noted policy considerations to the 1979 transaction, it is clear that the "senior participating certificate" constitutes a security. Moreover, "every Court to consider the status of loan participations ... has agreed that a loan participation was, or could be, a "security.' " Commercial Discount Corp. v. Lincoln First Commercial Corp., 445 F. Supp. 1263, 1267 (S.D.N.Y.1978) (emphasis in original). In addition, the Weaver court's conclusion that a certificate of deposit constitutes a security, Weaver v. Marine Bank, 637 F.2d 157 at 163-164, compels the conclusion that the ...