Appeal from the United States District Court for the District of New Jersey, Camden, D.C. Civil No. 81-1923.
Gibbons, Chief Judge and Seitz, Weis, Higginbotham, Sloviter, Becker, Mansmann, Greenberg, Hutchinson, Scirica and Aldisert, Circuit Judges.
We visit again the troublesome question presented in Biggans v. Bache Halsey Stuart Shields, Inc., 638 F.2d 605 (3d Cir. 1980), and Roberts v. Magnetic Metals Co., 611 F.2d 450 (3d Cir. 1979), to determine the applicable limitations period for complaints charging violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5 (1987). We are required to decide two important issues: whether subsequent Supreme Court decisions in Agency Holding Corp. v. Malley-Duff & Assocs., Inc., 483 U.S. 143(55 U.S.L.W. 4952, 97 L. Ed. 2d 121, 107 S. Ct. 2759, June 22, 1987), Wilson v. Garcia, 471 U.S. 261, 85 L. Ed. 2d 254, 105 S. Ct. 1938 (1985), and DelCostello v. International Bhd. of Teamsters, 462 U.S. 151, 103 S. Ct. 2281, 76 L. Ed. 2d 476 (1983), and our decision in Malley-Duff & Assocs., Inc. v. Crown Life Ins. Co., 792 F.2d 341 (3d Cir. 1986), aff'd sub nom. Agency Holding Corp. v. Malley-Duff & Assocs., Inc., supra, require us to re-examine both the reasoning and holdings in Biggans and Roberts; if so, we must determine the proper limitations period. We may make this re-examination freely and without constraint of panel precedents because we are assembled in a court in banc.
The district court determined that the limitations period for this case should be borrowed from New Jersey's six-year statute encompassing common law fraud actions. N.J.S.A. § 2A:14-1. Contending that the shorter, two-year statute of limitations under New Jersey's blue sky law, N.J.S.A. § 49:3-71, should apply, the defendants successfully moved for certification of the district court's determination pursuant to 28 U.S.C. § 1292(b). The court stayed its proceedings pending review by us. The defendants subsequently filed a petition for review with this court, which was granted on March 23, 1987. Jurisdiction was proper in the district court based on 15 U.S.C. § 78aa, 28 U.S.C. § 1331, as the case involves claims under section 10(b) of the 1934 Act and Rule 10b-5. We have jurisdiction under 28 U.S.C. § 1292(b).
This certified class-action lawsuit was brought on behalf of those who purchased common stock of Data Access Systems, Inc. from October 31, 1978, through June 22, 1981. These shareholders filed their initial complaint on June 23, 1981, immediately following certain public disclosures of fraudulent business and stock trading activities involving Data Access. On October 29, 1981, the Securities and Exchange Commission filed a complaint seeking injunctive and other relief against Data Access, related companies, and several individuals alleging that they violated federal securities laws. Data Access subsequently filed for protection under Chapter 11 of the federal bankruptcy code.
The plaintiffs proceeded to file second and third amended complaints. The case at hand relates to the third amended complaint, which named the defendants relevant to the present appeal: Roger Tolins, a New York attorney; Tolins & Lowenfels, his law firm; Peter Cunicelli, an accountant; and I. Kahlowsky, Cunicelli's accounting firm. The third amended complaint stated that Data Access retained Tolins and his firm to represent the company in connection with a February 1979 public offering and to assist it in preparing and filing Form 10-Ks for fiscal years ending August 31, 1978, 1979, and 1980. The plaintiffs alleged that in the registration statement and Form 10-Ks, Data Access represented, in language drafted by Tolins, that it had no potential liability in connection with certain "sales" to its "affiliated" companies, Mark Serv Co., Transnet Corp., and Olympic International Leasing Co. Mark Serv is a partnership owned by, inter alia, certain officers, shareholders, and associated persons of Data Access.
The plaintiffs contend that Tolins and his firm knew or reasonably should have known that the representations contained in the prospectus and Form 10-Ks were materially inaccurate, because they represented that Data Access had no ongoing liabilities in connection with the cluster transactions between the company and its affiliates. The complaint alleged that Tolins ignored or disregarded clear evidence that such representations were false, and further stated that attorney Tolins participated in, aided and abetted, and conspired with the principals of Data Access and others to defraud the shareholder-plaintiffs. Plaintiffs alleged that Tolins and his firm violated section 10(b) of the 1934 Act and Rule 10b-5, and committed common law fraud and negligence.
The third amended complaint also named as defendants Cunicelli and his accounting firm, who were auditors for Mark Serv. The complaint noted that Touche Ross & Co., Data Access' auditors, requested Cunicelli and his company to provide information concerning Mark Serv's business dealings with Data Access. In response, "Kahlowsky and Cunicelli advised Touche Ross, inter alia, that there were no liabilities and guarantees on the part of [Data Access] to the Mark Serv lending banks, and that said banks were not relying upon [Data Access] or upon any obligation undertaken by [Data Access] as security for their loans to Mark Serv." App. at Vol. I, 183a. Plaintiffs contend that when Cunicelli and I. Kahlowsky made their representations to Touche Ross, they knew that Data Access was contingently liable to the Mark Serv lending banks. The complaint stated that Cunicelli and Kahlowsky fraudulently and recklessly misrepresented and failed to disclose to Touche Ross the material facts with respect to Data Access' obligations to Mark Serv and to Mark Serv's lending banks; it alleged that the accountants participated in, aided and abetted, and conspired with the principals of Data Access and others to defraud the shareholder-plaintiffs. Here too, plaintiffs allege that the accountant appellants violated section 10(b) of the 1934 Act and Rule 10-5, and committed common law fraud and negligence.
Because this appeal involves the selection, interpretation, and application of legal precepts, the standard of review is plenary. Dent v. Cunningham, 786 F.2d 173, 175 (3d Cir. 1986). The scope of this court's review is generally governed by the controlling questions of law set forth in the district court's certification order under 28 U.S.C. § 1292(b). Akerly v. Red Barn Sys., Inc., 551 F.2d 539, 543 (3d Cir. 1977). However, this court may consider all grounds that might require reversal of the order appealed from. Merican, Inc. v. Caterpillar Tractor Co., 713 F.2d 958, 962 n.7 (3d Cir. 1983), cert. denied, 465 U.S. 1024, 79 L. Ed. 2d 682, 104 S. Ct. 1278 (1984).
The district court certified two questions for review pursuant to section 1292(b):
a) For the statute of limitations found in the New Jersey Blue Sky law to apply to plaintiffs' security claims herein, need plaintiffs' claims state a viable cause of action under said blue sky law?
b) If the answer to the foregoing question is in the affirmative, does plaintiffs' Third Considered Amended Class Action Complaint, alleging that defendants substantially participated and/or aided and abetted in the sale of securities to plaintiffs, state a viable cause of action against defendants as "sellers" under the applicable liability provision of the New Jersey Blue Sky law?
App. at 225. (Technically speaking, the district court certified three questions. Because the wording of the second question embraces both the issues and parties in the third question, we proceed as if the court certified two questions.)
Depending upon our answers to these questions, we are required to affirm or reverse the district court's determination as to the limitations period. The first certified question squarely presents us with occasion to consider the effect of the subsequent Supreme Court decisions in Malley-Duff, Wilson, and DelCostello on our holdings in Biggans and Roberts. The second certified question asks whether plaintiffs' allegations against the defendant accountants and lawyers state a claim under New Jersey's blue sky law, and therefore are governed by the statute of limitations set forth in that law. Our approach to the second question will depend upon our answer to the first.
At the outset we recognize that the Supreme Court has yet to rule on the applicable limitations period for a section 10(b) and Rule 10b-5 action. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210, 47 L. Ed. 2d 668, 96 S. Ct. 1375 n.29 (1976); Roberts v. Magnetic Metals Co., 611 F.2d 450, 461 (3d Cir. 1979) (Seitz, C.J., dissenting). The absence of a uniform limitations period in such actions has been described by Judge Easterbrook as "one tottering parapet of a ramshackle edifice. Deciding what features of state periods of limitation to adopt for which federal statutes wastes untold hours." Norris v. Wirtz, 818 F.2d 1329, 1332 (7th Cir.), cert. denied, 484 U.S. 943, 108 S. Ct. 329, 98 L. Ed. 2d 356 (1987). Judge Easterbrook has lamented:
Never has the process been more enervating than in securities law. There are many potentially analogous state statutes, with variations for different kinds of securities offenses and different circumstances that might toll the period of limitations. Both the bar and scholars have found the subject vexing and have pleaded, with a unanimity rare in the law, for help. E.g., Louis Loss, Fundamentals of Securities Regulation 1164-75 (1983); Thomas Lee Hazen, The Law of Securities Regulation § 13.8 & n.2 (1985) (collecting authority); Report of the Task Force on Statute of Limitations for Implied Actions, 41 Bus.Law. 645 (1986). As the ABA's Committee on Federal Regulation of Securities observed, id. at 646-47, 656-57, the courts of appeals disagree on every possible question about limitations periods in securities cases. Only Congress or the Supreme Court can bring uniformity and predictability to this field[.]
Id. Yet we first must review the reasoning and holdings of our court in Biggans v. Bache Halsey Stuart Shields, Inc., 638 F.2d 605 (3d Cir. 1980), and Roberts, 611 F.2d 450.
We faced for the first time in Roberts the question now before us. There, a selling shareholder brought suit against a corporation, its merger partner, and their broker agent alleging that the defendants violated sections 10(b) and 14(a) of the Securities Exchange Act by making material misrepresentations and omissions in connection with the solicitation of shareholder approval of a merger. There were three opinions in the case. Two judges, in separate opinions, decided that the suit was governed by the six-year statute of limitations that New Jersey applied to actions for common law fraud, and not by the two-year statute provided in New Jersey's blue sky law.
In Roberts, Judge Gibbons was of the view that in federal securities litigation, the absence of a federal statute of limitations required that we defer to the forum state's policy of repose. If the state court would entertain an action for the relief sought, no state policy of repose was implicated. The relevant inquiry under Judge Gibbons' analysis was whether the lawsuit would be time barred if brought in state court. Significantly, Judge Gibbons stated that "the Supreme Court has announced the rule that we must look not for an analogous federal limitations period, but for an analogous forum state limitations period . . . . Much can be said, perhaps, for a different rule in a different context directing a federal court to statutes of limitations governing analogous federal causes of action. But the rule has been otherwise for many years, and an inferior court is not free to change it." Roberts, 611 F.2d at 454. Judge Sloviter had a different approach. She stressed the need to identify the state statute of limitations that best comports with the policy behind the federal cause of action.
Writing in dissent, then Chief Judge Seitz expanded upon Judge Gibbons' reference to a federal statute of limitations. Noting that several commentators have argued that federal courts should look to the most analogous federal statute for a Rule 10b-5 limitations period, Chief Judge Seitz stated: "Were I writing on a clean slate, I would be inclined to adopt that approach. The Supreme Court, however, has rarely deviated from the normal rule of looking to state statutes." Id. Subsequent to the statements by Judge Gibbons and Chief Judge Seitz, the Supreme Court in Agency Holding Corp. v. Malley-Duff & Assocs., Inc., 483 U.S. 143 (55 U.S.L.W. 4952, 107 S. Ct. 2759, 97 L. Ed. 2d 121, June 22, 1987), and DelCostello v. International Bhd. of Teamsters, 462 U.S. 151, 103 S. Ct. 2281, 76 L. Ed. 2d 476 (1983), did deviate. The Court directed us to apply the most analogous federal statute of limitations to certain federal causes of action.
Our court's latest position in section 10(b) and Rule 10b-5 cases, announced prior to DelCostello, Wilson, and Malley-Duff, was set forth in Biggans v. Bache Halsey Stuart Shields, Inc., 638 F.2d 605, 610 (3d Cir. 1980):
We therefore conclude that the reasoning which underlay the decision of this court to apply the New Jersey common law fraud statute of limitations in Roberts compels a similar result in this case. Where the state Blue Sky law does not provide the plaintiff with a cause of action for the relief requested, but common law does, and where the state legislature framed its statute to supplement, rather than supplant, available common law remedies, it is the common law limitations period which must be applied in federal securities actions.
In dissent, Judge Weis commented:
The fact that the majority approach depends upon a detailed analysis of the underlying facts in the case at hand, as well as an uncertain prediction of state statutory interpretation, reveals the difficulties with utilizing an "exact match" approach. I believe it would be far preferable in a suit under § 10(b) of the Securities Act to look to the statute of limitations of the state's Blue Sky law. It not only furnishes a guidepost to the public, but gives some certainty to what is now a confused and inconsistent body of law.
Id. at 612 (Weis, J., dissenting). Judge Weis also expressed certain discomforts with case law then present in our court. He observed that because the plaintiff had alleged churning in securities practices, he was entitled to the state catch-all general fraud statute of limitations because the Pennsylvania blue sky statute provided no relief for such a private right of action. But had he based his claim on a sale to or purchase from another, then the one-year limitation of the state's securities law would apply because the Pennsylvania statute specifically authorized such a private right of action. "Even though both suits would be brought under Section 10(b), therefore, one would have to be filed within one year -- the other within two or six years. This continues the pattern of inconsistency begun in Roberts, where a seller of securities in New Jersey has six years to bring his suit under § 10(b), but a buyer presumably has only two years under the same statute. Thus, under this court's construction, no uniform statute of limitations for all Section 10(b) cases exists even within the same state." Id.
Our present case law calls for difficult interpretations of state limitations periods. We are required to examine each contention of a federal securities complaint with great particularity to determine whether the state blue sky statute tracks the particular federal claim, and if not, to determine claim-by-claim which other state limitations period will apply depending upon the resemblance between the precise federal claim and those based in state or common law actions. We are informed that our decisions have not provided bright-line guidance to our district courts in all section 10(b) and Rule 10b-5 cases. The district judge here said that "the Third Circuit has not settled the statute of limitations issue."
App. at 226a. Chief Judge Latchum, a veteran jurist extremely experienced in securities matters, has commented:
Because of the narrow ground upon which both Roberts and Biggans were decided and the lack of a firm consensus as to the proper guidelines to be applied, it is difficult to predict what effect these opinions hold for the circumstances posed by the present complaint. Some limited guidance, however, can be extrapolated from the various opinions. It is safe to assume that the Third Circuit adheres to the rudimentary principle that when alternative limitations periods are supplied by state law, the court must select that state statute of limitations which best comports with the substantive federal policies advanced by Rule 10b-5. Likewise the Court of Appeals has indicated that the concurrent operation of the federal and state securities statutes makes the Blue Sky statute of limitations in most cases the logical candidate for regulating 10b-5 claims. This presumption, however, is subject to one significant exception. If the underlying state Blue Sky law does not afford a civil damage action to remedy the behavior challenged by the 10b-5 claim and the plaintiff would be relegated to a common law fraud action for state relief, the courts must apply the fraud limitations provision to the 10b-5 action. Accord Sharp v. Coopers & Lybrand, 649 F.2d 175, 191-92 (C.A.3, 1981); McNeal v. Paine, Webber, Jackson & Curtis, Inc., 598 F.2d 888, 894 (C.A.5, 1979). Beyond these constraints, however, the district courts are free to fill the interstices left open by Congress' failure to enact a limitations provision for remedies implied under the securities laws.
Hill v. Der, 521 F. Supp. 1370, 1382-83 (D. Del. 1981).
It is against this backdrop that we examine the teachings contained in recent relevant Supreme Court opinions.
In Agency Holding Corp. v. Malley-Duff & Assocs., Inc., 483 U.S. 143 (55 U.S.L.W. 4952, 97 L. Ed. 2d 121, 107 S. Ct. 2759, June 22, 1987), the Court provided us with a formula to approach our present problem. In Malley-Duff, the Court stated that "[a]lthough it has been suggested that federal courts always should apply the state statute of limitations most analogous to each individual case whenever a federal statute is silent on the proper limitations period, see Wilson v. Garcia, [471 U.S.] at 280 (dissent); DelCostello v. Teamsters, 462 U.S. 151, 174, 103 S. Ct. 2281, 76 L. Ed. 2d 476 (1983) (O'Connor, J., dissenting), a clear majority of the Court [in DelCostello] rejected such a single path." U.S. at , 55 U.S.L.W. at 4953 (emphasis added). The Court then outlined the procedure to be followed in determining the appropriate statute of limitations for a federal claim. The first step involves characterizing the federal claim; this is generally a question of federal law. Id.; see Wilson v. Garcia, 471 U.S. 261, 269-70, 85 L. Ed. 2d 254, 105 S. Ct. 1938 (1985). In this initial step, we must determine whether all claims arising out of the federal statute should be characterized in the same way, or whether they should be evaluated differently depending upon the varying factual circumstances and legal theories presented in each individual case. Malley-Duff, U.S. at , 55 U.S.L.W. at 4953; see Wilson, 471 U.S. at 268.
Once this characterization is made, the next inquiry is whether a federal or state statute of limitations should be used. The Supreme Court has held that the Rules of Decision Act, 28 U.S.C. § 1652, requires application of state statutes of limitations to federal statutory actions not covered by an express limitations period unless "a timeliness rule drawn from elsewhere in federal law should be applied." DelCostello v. International Bhd. of Teamsters, 462 U.S. 151, 159 n.13, 103 s. Ct. 2281, 76 L. Ed. 2d 476 (1983). In some circumstances, the characterization of a federal claim has led the Court to conclude that "state statutes of limitations can be unsatisfactory vehicles for the enforcement of federal law. In those instances, it may be inappropriate to conclude that Congress would choose to adopt state rules at odds with the purpose or operation of federal substantive law." DelCostello, 462 U.S. at 161. The Court in DelCostello determined that when a rule from elsewhere in federal law clearly provides a closer analogy than available state statutes, and when federal policies at stake and the practicalities of litigation make that rule a significantly more appropriate vehicle for interstitial lawmaking, "we have not hesitated to turn away from state law." Id. at 171-72; see also Malley-Duff, U.S. at , 55 U.S.L.W. at 4956 (four-year statute of limitations governing Clayton Act civil enforcement suits applies to RICO civil enforcement actions); Occidental Life Ins. Co. v. EEOC, 432 U.S. 355, 53 L. Ed. 2d 402, 97 S. Ct. 2447 (1977) (adopting federal statute of ...