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ITG, INC. v. PRICE WATERHOUSE

September 7, 1988

ITG, INC. and ROY GOLDBERG
v.
PRICE WATERHOUSE



The opinion of the court was delivered by: DITTER

 DITTER, UNITED STATES DISTRICT JUDGE

 This action is the latest, and hopefully the last filed, in a series of actions arising from the demise of AIA Industries, Inc. See e.g., Gruber v. Price Waterhouse, No. 86-3976 (E.D. Pa.); Begier v. Price Waterhouse, No. 86-6096 (E.D. Pa.); K.B. Equities, Inc. v. Price Waterhouse, No. 86-4295 (E.D. Pa.); In re AIA Industries, Inc. Securities Litigation, Master File No. 84-2276 (E.D. Pa.). Here, the plaintiffs are ITG, Inc. and its president and sole shareholder, Roy Goldberg, both of whom were substantial customers and major investors in AIA. For a short period of time, Roy Goldberg also sat on the AIA board of directors. They brought this action against Price Waterhouse for its role in the preparation of AIA financial statements for 1982 and 1983 and for the issuance of unqualified opinions as to the accuracy of these statements. They principally allege that transactions between AIA and ITG were erroneously recorded thus overstating the revenues of AIA. Defendant now moves for summary judgment on the ground that plaintiffs' claims are barred by the statute of limitations.

 Plaintiffs claims arise from their purchases of AIA common stock in 1982, 1983, and 1984 *fn1" and are brought pursuant to section 10(b) of the Securities Act of 1934, 15 U.S.C. ยง 78j(b) and rule 10b-5, common law fraud and deceit, and common law negligence. Before examining the facts of record, it is necessary to determine the appropriate limitations period for the claims. For the reasons that follow, I conclude that all the claims are governed by a two-year statute of limitations.

 I. Governing Legal Standards

 A. Applicable Statutes of Limitations

 The parties agree that plaintiffs' common law fraud claims arising from their 1984 purchases, as well as the negligence claims, are governed by a two-year statute of limitations measured from the date plaintiff knew or should have known by the exercise of reasonable diligence of the existence of their injury and its cause. See 42 Pa. Cons. Stat. Ann. 5524(2),(7); Urland v. Merrell-Dow Pharmaceuticals, Inc., 822 F.2d 1268 (3d Cir. 1987). The parties disagree as to the applicable limitations period for the common law fraud claims arising from the 1982 and 1983 purchases and their section 10(b) and rule 10b-5 claims.

 In an en banc decision, the Third Circuit recently held that the limitations period governing various claims brought under the Securities Act of 1933 also governs the implied causes of action under section 10(b) and rule 10b-5; thus, such claims are barred if plaintiffs knew or should have known of them in the exercise of reasonable diligence more than one year before suit was filed or within three years after the securities were purchased, whichever is earlier. In re Data Access Systems Securities Litigation, 843 F.2d 1537, 1550 (3d Cir. 1988). In Gruber v. Price Waterhouse, 697 F. Supp. 859 (1988), I held that Data Access did not apply retroactively to the circumstances of that case. My analysis in Gruber is equally applicable here; therefore, I will apply the common law statute of limitations for fraud to plaintiffs' federal securities claims. Appended to this opinion is a copy of my decision in Gruber and the portion dealing with the retroactivity of Data Access is incorporated by reference.

 B. Accrual of the Statutes of Limitations

 For purposes of their federal securities and common law fraud and deceit claims arising from the 1982 and 1983 statements, plaintiffs have moved to strike the statute of limitations defense on the ground that a six-year statute governs because these claims accrued before February 18, 1983 *fn2" and therefore, the complaint filed in 1986 *fn3" was timely. It is clear, however, that federal law governs commencement of the limitations period for the section 10(b) and rule 10b-5 claims and under federal law plaintiffs' claims did not accrue until they knew or should have known of the basis for their claims. See e.g., Jensen v. Snellings, 841 F.2d 600 (5th Cir. 1988); Maggio v. Gerard Freezer & Ice Co., 824 F.2d 123 (1st Cir. 1987); Volk v. D.A. Davidson & Co., 816 F.2d 1406 (9th Cir. 1987). Here, there has been no allegation that plaintiffs could have known of defendant's alleged misconduct by February 18, 1983; *fn4" therefore, all the federal claims are governed by a two-year limitations period.

 The result is the same for the common law fraud and deceit claim. Under Pennsylvania law, a statute of limitations does not being to run until the cause of action accrues. An action accrues when a party has a legal right to institute suit and can maintain a successful action. E.g., Kapil v. Association of Pennsylvania State College and University Facilities, 504 Pa. 92, 470 A.2d 482 (1983); Bell v. Brady, 346 Pa. 666, 31 A.2d 547 (1943). Before an action may be successfully maintained, a plaintiff must be aware of the injury and what caused it. See Ayers v. Morgan, 397 Pa. 282, 290, 154 A.2d 788 (1959); see also Ross v. Johns-Manville Corp., 766 F.2d 823, 827 (3d Cir. 1985)(cause of action arising from asbestos exposure accrued "when the decedent first discovered his initial asbestos-related injury."). Since plaintiffs could not have seen any audits performed by Price Waterhouse and thus have been injured or aware of any harm caused by the alleged improper audits until after February, 1983, they could not have maintained a successful action until after this date. I will, therefore, apply the two-year statute of limitations for fraud to their common law claims arising from the 1982 and 1983 purchases.

 II. Running of the Statute of Limitations Prior to October 29, 1984

 Once a statute of limitations defense is pleaded, plaintiffs bear the burden of showing that their complaint was timely filed. See e.g., Cook v. Avien, Inc., 573 F.2d 685, 695 (1st Cir. 1978). Defendant, in moving for summary judgment, bears the burden of showing that their are no genuine questions of material fact. Sorba v. Pennsylvania Drilling Co., Inc., 821 F.2d 200 (3d Cir. 1987), cert. denied, 484 U.S. 1019, 108 S. Ct. 730, 98 L. Ed. 2d 679 (1988). Because I find defendant has satisfied its burden, I will enter summary judgment in its favor.

 While state law provides the statute of limitations for the section 10(b) and rule 10b-5 claims since Data Access does not apply retroactively, federal law determines when the limitations period on these actions begins to run. *fn5" This period runs from the date plaintiffs discovered or in the exercise of reasonable diligence should have discovered the basis for their claims against Price Waterhouse. See e.g., Hobson v. Wilson, 237 U.S. App. D.C. 219, 737 F.2d 1, 34 n. 103 (D.C. Cir. 1984)(collecting cases), cert. denied, 470 U.S. 1084, 85 L. Ed. 2d 142, 105 S. Ct. 1843 (1985); Tobacco and Allied Stocks, Inc. v. Transamerica ...


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