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KIRSCHNER v. CABLE/TEL CORP.

November 14, 1983

ISADORE L. KIRSCHNER, MICHAEL S. KIRSCHNER, FREDERICK M. KIRSCHNER and MORTON GOODMAN
v.
CABLE/TEL CORP., CABLE/TEL SYSTEMS CORP., SIX STAR CABLEVISION HOLDING CO., INC., CABLE PROMOTIONS, INC., SIX STAR CABLEVISION CONSTRUCTION CO., INC. (as successor to Micro Constructors, Inc.), SIX STAR CABLEVISION MANAGEMENT CORP., COMMUNICATIONS FINANCE SYSTEMS, INC., SIX STAR CABLEVISION OF KANSAS CITY, KANSAS, INC., SIX STAR CABLEVISION OF BONNER SPRINGS, KANSAS, INC., SIX STAR CABLEVISION OF INGLEWOOD, INC., STUART C. HARRIS, ROGER H. MAGGIO, PAUL L. SKULSKY, MARTIN E. HECHT, SCHEKTER, ABER, RISHY & GOLDSTEIN, P.C. (as successor to SCHEKTER, ABER & HECHT, P.C.), INVESTORS PLANNING GROUP, INC., TOM KAYE, ARNOLD H. BRUCK



The opinion of the court was delivered by: BECHTLE

 BECHTLE, J.

 This case involves allegations of common law fraud, breach of contract, violation of section 10(b) of the Securities Exchange Act of 1934, and violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"). *fn1" Presently before the Court is a motion to dismiss on behalf of thirteen of eighteen defendants. *fn2" It is the contention of the moving defendants that the common law fraud claim (count II), the section 10(b) claim (count IV), and the RICO claims (count V), are time barred and allege fraud with insufficient particularity; the RICO claim fails to state a claim upon which relief can be granted; and the breach of contract claim fails to adequately set forth a statement of the claim. Defendants' motion to dismiss is granted in part and denied in part and plaintiffs are given leave to amend the complaint in accordance with the Court's Order.

 FACTS

 In or about December 1977 and December 1978, plaintiffs purchased investment interests in a business enterprise consisting of ten companies (Cable/Tel companies). The companies are in the business of providing subscribing households with television signals from networks. In return for their investments, plaintiffs and other investors were to receive an ownership interest in a cable television (CATV) system constructed by the Cable-Tel companies, municipal franchise rights, and all services necessary for the operation, management, promotion and maintenance of the investor's portion of the CATV system. The Cable/Tel companies are, directly or indirectly, commonly owned and controlled by individual defendants Harris, Maggio and Skulsky. In their complaint plaintiffs allege that in connection with the sale of the investment interests defendants made a number of fraudulent representations. Among these representations, which now form the bases of all plaintiffs' claims, were ones regarding the use of plaintiffs' investment monies, the cost of construction of the CATV systems, and potential tax benefits and profits. Plaintiffs also allege that defendants made misrepresentations as to the issuance of appraisal and completion certificates for systems not then in existence and as to the ownership of franchises and restrictions imposed on the franchises by municipal authorities. Defendants have raised a number of defenses to plaintiffs' claims. These will be addressed in the order set forth by defendants.

 DISCUSSION

 I. Statute of Limitations

 A. Common Law Fraud Claim

 Defendants contend that plaintiffs' common law fraud claim, based on the alleged fraudulent misrepresentations, is barred by the two year Pennsylvania statute of limitations which covers an action for taking, detaining or injuring personal property. 42 Pa. Cons. Stat. Ann. § 5524(3) (Purdon 1981). Plaintiffs contend that the applicable limitation statute for common law fraud is the six year residual statute. 42 Pa. Cons. Stat. Ann. § 5527(6) (Purdon 1981).

 Whether the Court accepts the six year or two year statute as being the appropriate one, plaintiffs' common law fraud claim is not untimely. For purposes of a motion to dismiss, the allegations of a complaint must be taken as true. Rogin v. Bensalem Township, 616 F.2d 680 (3d Cir. 1980). Plaintiffs have alleged that they could not have known of any facts which might have led, through the exercise of due diligence, to the discovery of any fraud committed by defendants, "prior to 1982." Since a cause of action for fraud does not accrue until a plaintiff knows of or has reason to know of or investigate the fraud, the earliest the cause of action for common law fraud could have accrued would be January 1, 1982. See Holmberg v. Armbrecht, 327 U.S. 392, 397, 90 L. Ed. 743, 66 S. Ct. 582 (1946); Gee v. CBS, Inc., 471 F. Supp. 600, 622-23 (E.D. Pa. 1979), aff'd 612 F.2d 572 (3d Cir. 1979). Applying either the two year or six year limitation to that date, plaintiffs' claim cannot be untimely, plaintiffs having filed their complaint on March 29, 1983. *fn3"

 B. Federal Securities Claim

 Plaintiffs have alleged that defendants' fraudulent activities in conjunction with the sale of the investment interests constitute a violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240, 10b-5, promulgated thereunder.

 Since there is no federal statute expressly providing a period of limitation for private actions based on section 10(b), the Court must choose the most analogous state law and apply the statute of limitation appropriate for that state law. Biggans v. Bache Halsey Stuart Shields, 638 F.2d 605 (3d Cir. 1980); Roberts v. Magnetic Metals Co., 611 F.2d 450 (3d Cir. 1979). The Pennsylvania law most analogous to section 10(b) is the antifraud section of the Pennsylvania Securities Act relating to the purchase and sale of securities. Pa. Stat. Ann. tit. 70 § 1-401 (Purdon Supp. 1982). *fn4" Under section 401 of the Pennsylvania Securities Act, in conjunction with section 501(a) of that Act, *fn5" and under section 10(b) of the Securities Exchange Act of 1934, a defrauded buyer may sue the seller of the securities. Ernst and Ernst v. Hochfelder, 425 U.S. 185, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976); see Biggans, supra, 638 F.2d at 610. In view of the similarity between the federal and state statutes, the Court will apply to the federal claim under section 10(b) the limitation period which governs an action brought by a defrauded buyer under the Pennsylvania Securities Act.

 Section 504(a) of the Pennsylvania Securities Act provides that such an action is barred unless it is brought before the expiration of three years after the act or transaction constituting the violation or the expiration of one year after the plaintiff receives notice or upon the exercise of reasonable diligence could have known of the facts constituting the violation, whichever shall first expire. Pa. Stat. Ann. tit. 70 § 1-504(a) (Purdon Supp. 1982). Thus, a plaintiff in Pennsylvania has, at most, three years from the date of the transaction within which to file suit. Strict application of this limitation period to plaintiffs' section 10(b) claim would bar the action as untimely, since plaintiffs allege that the sale of the investment interests occurred in or about December 1977 and 1978 (Complaint, para. 7). Nonetheless, further analysis is required because, while it is true that state law provides the limitation period, determination of when the period commences to run is a matter of federal law. E.G., Hudak v. Economic Research Analysts, Inc., 499 F.2d 996 (5th Cir. 1974), cert. denied, 419 U.S. 1122, 42 L. Ed. 2d 821, 95 S. Ct. 805 (1975). Under the federal equitable tolling doctrine the limitation period does not begin to run until plaintiffs knew or could have known of the alleged fraud. See e.g., Cook v. Avien, Inc., 573 F.2d 685 (1st Cir. 1978). Although the Pennsylvania statute has its own one year tolling provision, the better reasoning would suggest that such a tolling provision cannot preclude application of the federal equitable tolling doctrine to the fixed limitation period set out in the state statute. See United California Bank v. Salik, 481 F.2d 1012, 1015 (9th Cir. 1973), cert. denied, 414 U.S. 1004, 38 L. Ed. 2d 240, 94 S. Ct. 361 (1973); see also Biggans, supra, 638 F.2d at 607, n.3. Contrary reasoning would create the possibility of persons in plaintiffs' position being precluded from suing for the fraudulent purchase or sale of securities if that person does not discover the fraud until the fourth year after the transaction. Such preclusion from suit would be at odds with the purpose of the equitable tolling doctrine which seeks to avoid the harsh result occurring when a fixed limitation period expires during concealment of a fraud. Accordingly, the Court determines that in borrowing the limitation provisions of the Pennsylvania Securities Act it will simultaneously utilize the federal equitable tolling doctrine. *fn6"

 Having reached this conclusion, plaintiffs' securities fraud action is not untimely if the suit was filed within one year of the date upon which, with the exercise of reasonable diligence, plaintiffs could have known or discovered the facts constituting the violation. Plaintiffs allege that they could not have discovered any fraud "before 1982." Accepting this as true and noting that plaintiffs' complaint was filed on March 29, 1983, plaintiffs have left unaccounted for the period between January 1, 1982 and March 29, 1982. If during that period plaintiffs knew or could have known of the fraud, their claim would be untimely. Due to plaintiffs' omission, defendants' motion to dismiss the securities claim as time barred cannot be intelligently determined. The motion will therefore be denied without prejudice and plaintiffs will be given leave to amend their complaint to include the information which is necessary for this Court to determine whether plaintiffs' claim is barred by the one year limitation period. See Kroungold v. Triester, 407 F. Supp. 414, 419 (E.D. Pa. 1975). Failure to strictly comply with the leave to amend will result in dismissal of the securities fraud claim on defendants' motion. *fn7"

 C. RICO Claim

 Defendants next assert that plaintiffs' claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961, et seq. (Supp. 1982), are barred by the applicable statute of limitations. Since RICO does not contain its own limitation period, federal courts are to look to the most analogous state cause of action and apply the appropriate limitation period. D'Iorio v. Adonizio, 554 F. Supp. 222 (M.D. Pa. 1982). Defendants contend, alternatively, that the most analogous Pennsylvania state claim would be one for common law fraud (with a two year limitation); securities fraud; civil penalties or forfeitures; or injuries to property. *fn8" Plaintiffs agree to the extent that the most analogous state claim is one for common law fraud. However, they contend that Pennsylvania law requires a six year limitation period for such actions.

 The cases cited by the parties have found that a claim for common law fraud is the most analogous state claim to that of a civil claim under RICO. Eisenberg v. Gagnon, 564 F. Supp. 1347 (E.D. Pa. 1983); D'Iorio, supra, 554 F. Supp. at 232; State Farm Fire & Casualty Co. v. Estate of Caton, 540 F. Supp. 673 (N.D. Ind. 1982). This Court agrees that when, as here, a RICO claim is based on allegations of wire, mail and securities fraud, the most analogous state claim is one for common law fraud, since both claims depend upon the existence of a scheme or artifice to defraud. In view of the equitable tolling doctrine, however, the Court need not decide whether the two year statute or the six year statute is applicable. In either event, plaintiffs' RICO claim is not untimely. As stated previously, although this Court is required to look to the appropriate state statute of limitations, a cause of action under a federal statute based on allegations of fraud, like the RICO claim here, does not accrue until such time as the fraud has been revealed or should have been revealed by the exercise of due diligence. See Gee v. C.B.S., 471 F. Supp. 600, 622 (E.D. Pa. 1979), aff'd, 612 F.2d 572 (3d Cir. 1979) (referring to Holmberg v. Armbrecht, 327 U.S. 392, 397, 90 L. Ed. 743, 66 S. Ct. 582 (1946)). Accepting as true plaintiffs' allegations that they could ...


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