The opinion of the court was delivered by: SHAPIRO
NORMA L. SHAPIRO, District Judge.
This is a class action on behalf of shareholders in a Real Estate Investment Trust ("REIT"), pursuant to § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Pennsylvania common law, to recover damages for alleged misrepresentations and omissions by the REIT's advisor and the parent company. Defendants moved for summary judgment on the ground that plaintiff's action is time barred. The motion has previously been denied without prejudice and this is a statement of the reasons.
There is no statute of limitations stated for private actions under § 10(b) of the 1934 Act; therefore, "an appropriate limitations period from the law of Pennsylvania, the forum state" applies. Biggans v. Bache Halsey Stuart Shields, 638 F.2d 605, 607 (3d Cir. 1980). Defendants contended the governing period of limitations was that of the Pennsylvania Securities Act (the shorter of three years from the date of violation or one year after the plaintiff receives actual or construtive notice); 70 P.S. § 1-504(a). Plaintiff contended the period is that for common law fraud; it is presently unsettled which Pennsylvania statute applies to such actions. Defendants argued that the two-year limitation found in 42 Pa.C.S.A. § 5524(3) covers actions for fraud. Plaintiff argued that this subsection, pertaining to any "action for taking, detaining, or injuring personal property . . .," does not cover fraud, nor does such other specific section, and therefore the six-year catch-all limitation found at 42 Pa.C.S.A. § 5527(6) governs. We have held that the limitation period of the Pennsylvania Securities Act does not apply and that § 5524(3) rather than § 5527(6) provides a two-year limitation period for fraud actions.
The Court of Appeals has ruled on the first issue. In Roberts v. Magnetic Metals Co., 611 F.2d 450 (3d Cir. 1979), Biggans, supra and Sharp v. Coopers & Lybrand, 649 F.2d 175 (3d Cir. 1981), actions under the 1934 Act, the limitations period of the state Blue Sky statute was held inapplicable.
In Roberts, plaintiff, a selling shareholder, bringing an action against the corporation, its merger partner and their broker, alleged material misrepresentations and omissions in connection with defendants' solicitation of shareholder approval of a merger. The Court of Appeals held that such an action filed in New Jersey was governed by the six-year statute of limitations applicable to actions for common law fraud rather than the two-year statute provided by the New Jersey Uniform Securities Act.
In Biggans, a Rule 10b-5 action against a broker for "churning," filed in Pennsylvania, the Court of Appeals held that the six-year statute of limitations applicable to actions for common law fraud governed rather than the one-year limitation of the Pennsylvania Securities Act. The Pennsylvania statute proscribes churning and the Pennsylvania Securities Commission can enjoin a broker's activities or subject it to criminal penalties, but the Pennsylvania statute grants a private remedy only against a buyer or seller, not against a broker. Therefore, the most analogous state action was not one under the Pennsylvania Securities Act but an action for common law fraud.
Similarly, in Sharp, plaintiff, purchaser of a limited partnership interest, brought a Rule 10b-5 action against the accounting firm which had prepared an opinion letter dealing with tax treatment of investors. The court, following Biggans, found that there could not have been an action under the Pennsylvania Securities Act because defendant was not the seller of the securities. The only state remedy being one for common law fraud, the court held the common law fraud period of limitations to be applicable.
Defendants attempted to distinguish these cases. First, defendants suggested that this plaintiff would not be barred from bringing a Pennsylvania Securities Act action in spite of the lack of privity because § 501 of the Act has a broad scope and remedial purpose.
However, Judge Sloviter, speaking for the court, has stated that § 501 provides the " sole source of civil liability" for violations of § 401 (the section modelled after § 10(b) of the 1934 Act), and that, "it only gives the seller or buyer the right to sue the person purchasing or selling the security." Biggans, supra at 609-10. Privity is required under the Pennsylvania Securities Act and there is no privity here.
Defendants also contended that plaintiff does not state a cause of action for common law fraud on these alleged facts. But it is not necessary to find that Pennsylvania courts would in fact permit plaintiff to recover for fraud; we must only determine that plaintiff's allegations reasonably state such a claim. Biggans, supra at 610; Sharp, supra at 192.
Defendants advanced three reasons why plaintiff has not stated a cause of action for fraud. First, such an action demands proof that is clear and convincing, Snell v. Commonwealth of Pennsylvania, State Examining Board, 490 Pa. 277, 416 A.2d 468, 470 (1980); an action under § 10(b) must be proved only by a fair preponderance of the evidence. See, Healey v. Catalyst Recovery of Pennsylvania, Inc., 616 F.2d 641, 648 n.5 (3d Cir. 1980). This distinction is of no significance here. It might bear on the policy considerations in choosing an appropriate § 10(b) statute of limitations, see, Roberts, supra at 458, but that choice has already been made in this Circuit after a comparison of § 10(b) with relevant Pennsylvania statutory and common law remedies. That lack of privity precludes a private action under the Pennsylvania Securities Act was deemed determinative in holding the common law fraud limitations period applicable. Biggans, supra at 609-10; Sharp, supra at 192. Because the burden of proof affects not plaintiff's ability to get to trial but the standard to be applied at trial, it does not suggest retreat from the result reached in Roberts, Biggans, and Sharp.
Second, defendants argued that in a class action the statute of limitations for fraud is inappropriate because the Pennsylvania Supreme Court has stated that an action for fraud "is not generally appropriate for resolution in a plaintiff-class action," Klemow v. Time, Inc., 466 Pa. 189, 197 n.17, 352 A.2d 12, 16 n.17, cert. denied, 429 U.S. 828, 50 L. Ed. 2d 91, 97 S. Ct. 86 (1976). But the facts of a particular case sounding in fraud may sometimes support its certification as a class action. In Sharp v. Coopers & Lybrand, Order of February 19, 1976 (Docket Entry #20, Civil Action No. 75-1313, E.D.Pa.), aff'd in part and vacated in part on other grounds, 649 F.2d 175, 192 (3d Cir. 1981), a Rule 10b-5 class action with one count stating a common law claim for fraudulent misrepresentations, certification of a class was held not to be an abuse of discretion.
Finally, defendants asserted that common law fraud requires proof of reliance but private Rule 10b-5 actions for "fraud on the market" and "omissions" do not. Cf., Thomas v. Seaman, 451 Pa. 347, 304 A.2d 134 (1973) and Affiliated Ute Citizens v. United States, 406 U.S. 128, 153, 31 L. Ed. 2d 741, 92 S. Ct. 1456 (1972). In Sharp, the Court of Appeals stated that the "proper approach to the problem of reliance is to analyze the plaintiff's allegations, in light of the likely proof at trial, and determine the most reasonable placement of the burden of proof of reliance;" the court held that in the circumstances of that case plaintiffs were not required affirmatively to prove reliance as to misrepresentations or fraudulent omissions. Sharp, supra at 188-89. The court there nonetheless also held that where the defendant is not the seller, "a state securities action will ...