UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA
September 16, 1988
ROBERT S. ADELAAR, SAMUEL G. BARNES, SUSAN H. BARNES, JOSEPH V. BATTISTA, JR., ROBERT B. BELL, RONALD F. CALKINS, MOHAN L. CHAUDHURI, JEN WEN CHEN, ALI AZAM CHOUDHURY, BONIFACE S. COSTA, JOHN DOMMISSE, TALLY H. EDDINGS, II, WILLIAM F. HOLTZ, STEPHEN HOOPER, MAX R. ISRAELSON, SURINDER K. KALLAR, Executor of the Estate of Baltej S. Kallar, BARBARA T. KINGHORN, S.R. KINGHORN, JOHN D. KRISTOFIC, MANIKOTH G. KURUP, ELAINE M. LANTZ, JOSEPH D. LANTZ, DANIEL J. MELKER, RALSTON W. MERCHANT, JR., PRAMOD K. MOHANTY, MICHAEL MORCHOWER, MARTHA R. PATTERSON, E. NORMAN PETERSON, JR., JOE M. PHILLIPS, JR., MARION W. PINES, SAMUEL R. PINES, S. JAIKAR RAO, ROBERT T. SCOTT, JOHN A. STRAKA, ROBERT J. A. THACKER, LOUISE H. THACKER, (ADDED BY 2ND AMENDED COMPLT.), DONALD C. TRAPP, JOSEPH R. VILSEK, JR., BARRY Q. WALKER, DAVID W. WILDER, MARY A. YENNEY, THOMAS M. YENNEY, SIMON YOUNG, WALTER J. ZPEVAK, Plaintiffs,
LAUXMONT FARMS, INC., LAUXMONT FARMS II, INC., LAUXMONT FARMS III, INC., RONALD C. KOHR, BRADLEY D. KOHR, JAMES D. KOHR, JAMES JOSEPH CLARK, ANDREWS DAVIS LEGG BIXLER MILSTEN & MURRAH, An Oklahoma Professional Corporation, TIMOTHY M. LARASON, JOSEPH G. SHANNONHOUSE, IV, RICHARD G. INGHAM, JOSEPH J. SCHOPEN, W.Z.W. FINANCIAL SERVICES, INC., d/b/a Cornerstone Financial Services, Inc., ANCHOR NATIONAL FINANCIAL SERVICES, INC., RUSSELL W. STERLING, BETTY GRIFFIN, Executor of the Estate of E. Exum Griffin, RAYMOND T. WALLER, ADVEST, INC., RICHARD E. THOMPSON, BERNARD A. ROSNER, PROFESSIONAL PLANNING ASSOCIATES, INC., DORTHEA M. CULLEN, (DISM'D PER ORDER DTD. 2/10/88), Executor of the Estate of Richard S. Cullen, J.I.I. SECURITIES, INC., THOMAS K. MERCER, MERCER DIVERSIFIED SECURITIES, INC., KENNETH P. MULVANEY, CHARLES MITCHELL, MHA FINANCIAL CORPORATION, HOWARD W. LEEB, GARY SPRUNGER, HOWARD W. LEEB & ASSOCIATES, PETER STIPANOVICH, WILLIAM R. SCHMIDT, INVESTMENTS, INCORPORATED, A. R. MORGANTHAU & ASSOCIATES, ANTHONY R. MORGANTHAU, Defendants
The opinion of the court was delivered by: CALDWELL
WILLIAM W. CALDWELL, UNITED STATES DISTRICT JUDGE
Defendants, Andrews Davis Legg Bixler Milsten & Murrah, Timothy M. Larason and Richard G. Ingham, have filed a motion for judgment on the pleadings, contending that count II of the plaintiffs' complaint, a claim pursuant to section 10(b) of the Securities and Exchange Act of 1934 (the 1934 Act), 15 U.S.C. § 78j(b), and its corresponding rule, 17 C.F.R. § 240.10(b)-5, and count IV, an aiding and abetting claim based upon the securities claim set forth in count II, are barred by the statute of limitations recently adopted by the Third Circuit in In Re Data Access Systems Securities Litigation, 843 F.2d 1537 (3d Cir. 1988) (en banc), cert. denied, Vitiello v. I. Kahlowsky & Co., 488 U.S. 849, 57 U.S.L.W. 3233, 102 L. Ed. 2d 103, 109 S. Ct. 131 (1988) (No. 88-54). Defendants, Advest, Inc., Betty Griffin, Raymond T. Waller, Russell W. Sterling, Investments Incorporated, William Schmidt, Peter Stipanovich, Mercer Diversified Securities, Inc., Thomas K. Mercer and J.I.I. Securities, Inc., have also filed a motion for judgment on the pleadings on the same ground. Most of the other defendants have filed statements joining the Andrews Davis motion. Plaintiffs have opposed the motions. They have been fully briefed and are now ripe for disposition.
In Data Access, supra, the Third Circuit adopted for use in section 10(b) and Rule 10(b)-5 actions (hereinafter "10(b)-5 claims") the express statutes of limitations already found in the 1934 Act. Such claims must now be brought within "one year after plaintiff discovers the facts constituting the violation, and in no event more than three years after such violation." 843 F.2d at 1550. The Third Circuit made clear that the three year period was an absolute limit, a "period of repose", id. at 1546, which was not subject to any equitable tolling doctrine suspending the running of the statute during the time a plaintiff could not have reasonably known about violations.
The sales of the limited partnerships at issue in the instant case all took place from 1978 through 1981. Under Data Access, this lawsuit would therefore be untimely as to 10(b)-5 claims since it was filed in January of 1987, more than three years after the last possible sale.
Plaintiffs argue, however, that the circumstances of the instant case, in light of the three part test in Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S. Ct. 349, 30 L. Ed. 2d 296 (1971), indicate that Data Access should not be applied retroactively. Conversely, defendants urge us to apply the general rule that a court should look to the law in effect at the time of its decision. See Mineo v. Port Authority, 779 F.2d 939 (3d Cir. 1986), cert. denied, 478 U.S. 1005, 106 S. Ct. 3297, 92 L. Ed. 2d 712 (1986). They also argue that retroactive application is proper here under Chevron.1
The parties originally argued without the benefit of Hill v. Equitable Trust Co., 851 F.2d 691 (3d Cir. 1988), but they have filed supplemental briefs addressing that decision. The Court in Hill, after considering the Chevron test, applied Data Access retroactively. We will therefore begin our analysis with Hill, bearing in mind, however, that the circumstances of the individual case must be considered. See Al-Khazraji v. Saint Francis College, 784 F.2d 505 (3d Cir. 1986), aff'd, 481 U.S. 604, 107 S. Ct. 2022, 95 L. Ed. 2d 582 (1987). In Hill, the District Court of Delaware had held that the 10(b)-5 claims of non-Delaware residents were subject to the Maryland statute of limitations, the state of the defendant bank's improper activities. The limitations period was one yearfrom discovery or three years from sale. The non-Delaware residents' claims were therefore barred since the relevant transactions had taken place in November of 1978 and the filing of the lawsuit in April of 1982. During the pendency of the Hill appeal, Data Access was decided. The issue then became whether that decision should be applied retroactively in Hill. Referring to the Chevron test, the Third Circuit noted that nonretroactive application of a decision depends upon the following considerations:
(1) The holding must establish a new principle of law, either by overruling clear past precedent on which litigants may have relied, or by deciding an issue of first impression whose resolution was not clearly foreshadowed;
(2) The merits and demerits in each case must be weighed by looking to the history of the rule in dispute, its purpose and effect, and whether retrospective operation will further or retard the rule's operation;
(3) Retrospective application must create the risk of producing substantially inequitable results.
Hill, supra, 851 F.2d at 696 (citing Chevron, supra).
A. The Clearness of Past Precedent.
Plaintiffs argue that the first consideration has been satisfied here; that at the time they contemplated filing suit the law in the Third Circuit clearly and unambiguously applied the Pennsylvania common law fraud statute of limitations to federal securities claims against non-sellers and that the federal equitable tolling doctrine tolled the statute against all defendants, including sellers, until a plaintiff knew, or could have reasonably known, about the claim. Plaintiffs point to Sharp v. Coopers & Lybrand, 649 F.2d 175 (3d Cir. 1981), cert. denied, 455 U.S. 938, 102 S. Ct. 1427, 71 L. Ed. 2d 648 (1982) and Biggans v. Bache Halsey Stuart Shields, Inc., 638 F.2d 605 (3d Cir. 1980). They also note our own reference to how the Third Circuit had "already emphatically spoken in Biggans and Sharp." (memorandum, dated Aug. 18, 1987, at p.10).
As noted, plaintiffs' purchases of the limited partnerships at issue in the instant case occurred between 1978 and 1981. Plaintiffs allege, and we accept as true for the purposes of these motions, that they discovered their causes of action in April of 1986. This lawsuit was initiated on January 17, 1987. In Hill, the plaintiffs were aware as early as June of 1979 that they had a potential claim against the defendant, Equitable, and filed suit in April of 1982. Despite the different time frames, the Hill analysis is equally applicable here since the main cases available from the Third Circuit for guidance, Roberts v. Magnetic Metals Co., 611 F.2d 450 (3d Cir. 1979), and Biggans, are the same ones the Third Circuit concluded in Hill, as to the first Chevron factor, were "uncertain" precedent, whose "factual situations . . . left considerable room for variation . . . ." 851 F.2d at 697. This holding forecloses any independent analysis we could undertake, see McCarter v. Mitcham, 693 F. Supp. 349, 1988 WL 90547 (W.D. Pa. 1988), despite the court's failure to refer to Sharp. See Prospect Purchasing Co. v. Weber, Lipshie & Co., 694 F. Supp. 1149, 1988 WL 81218 (D. N.J. 1988). But see Gruber v. Price Waterhouse, 1988 Wl 89873 (E.D. Pa. Aug. 26, 1988).
Plaintiffs further argue, aside from the state of the law on the statute of limitations, that the law on equitable tolling was certainly clear enough that they should be entitled to rely upon it. They cite Holmberg v. Armbrecht, 327 U.S. 392, 66 S. Ct. 582, 90 L. Ed. 743 (1946). That case is distinguishable, however, because it dealt simply with tolling a statute of limitations. In this case, we are dealing with a split statute, providing a one year limitations period and a three year statute of repose. While plaintiffs have also cited cases from other circuits, including Hudak v. Economic Research Analysts, Inc., 499 F.2d 996 (5th Cir. 1974), cert. denied, 419 U.S. 1122, 95 S. Ct. 805, 42 L. Ed. 2d 821 (1975), which have applied the tolling doctrine to statutes of repose, they have directed us to no Third Circuit decisions doing the same. Plaintiffs have referred to Biggans, supra, which did cite Hudak for the general proposition that "state law provides the limitations period [but] federal law determines when the period commences to run." Biggans, supra, 638 F.2d at 607 n.3 (brackets added). But in the same footnote the court in Biggans expressly left open the precise issue of whether the federal equitable tolling doctrine should apply to a borrowed state statute of limitations containing an absolute time period for bringing suit. Hence, Biggans and Hudak offer plaintiffs no support.
Plaintiffs also cite a number of cases on page 24 of their supplemental brief on the Hill case. Significantly, however, all of these cases are from the Eastern District of Pennsylvania and two of them, as noted by plaintiffs themselves, decided the issue adversely to plaintiffs. Thus, it cannot be said these cases were clear precedent upon which plaintiffs could rely for a favorable ruling from a court in the Middle District of Pennsylvania or the Third Circuit. We conclude that the first Chevron factor militates against only prospective application of Hill.2
B. Furthering Or Retarding the Rule's Operation.
Plaintiffs contend that the court in Hill concluded that this aspect of the Chevron test was neutral only because the outcome was the same in that case under either the district court's analysis or the Data Access holding. The plaintiffs' claims were still barred in any event. Here, they insist that retroactive application will bar claims that were timely under the previous law and that this factor operates in their favor.
We disagree with plaintiffs' interpretation of this aspect of the court's ruling in Hill. That the outcome would be the same under either analysis only came into play in the court's consideration of the third Chevron criterion. The court's brief discussion of the second factor consists solely of the following:
We may assume on these facts, as we did in Al-Khazraji, 784 F.d at 513, and Fitzgerald, [v. Larson] 769 F.2d  at 164 [3d Cir. 1985], that resolution of the second Chevron criteria - whether retrospective operation would further or retard the rule's function - is neutral.
Hill, 851 F.2d at 698.
This follows a recent pattern in Third Circuit decisions dealing with retroactive application of statutes of limitations. In those cases, starting with Smith v. City of Pittsburgh, 764 F.2d 188 (3d Cir.), cert. denied, 474 U.S. 950, 106 S. Ct. 349, 88 L. Ed. 2d 297 (1985), the court has usually concluded that the second factor is neutral. We will do the same here. See also Prospect Purchasing, supra.
Plaintiffs argue that retroactivity is not favored simply because prospective application would allow an existing suit to proceed when it would be time barred under the new rule. They quote Cohn v. G. D. Searle & Co., 784 F.2d 460, 465 (3d Cir.), cert. denied, 479 U.S. 883, 107 S. Ct. 272, 93 L. Ed. 2d 248 (1986), as part of the following argument:
As the Third Circuit stated in Cohn, "although it is possible that prospective invalidation will permit maintenance of some suits that would not have been timely," such a burden is marginal and should not deny a plaintiff relying on prior law from pursuing his claim. Cohn, 784 F.2d at 465. Thus, the second Chevron factor also weighs in favor of nonretroactivity.
Plaintiffs' opposition brief at p.17.
Cohn dealt with retroactive application of a New Jersey tolling statute which would toll a statute of limitations for personal injury actions against corporations during the time they were not represented in New Jersey by an agent for service of process. During the pendency of the action in federal court, the New Jersey Supreme Court held, in part, that the tolling statute violated the commerce clause. The district court in the federal action granted defendant Searle's subsequent motion for summary judgment, reaching a similar conclusion and holding that the new rule would be applied retroactively to bar the plaintiffs' action. In doing so, the district court stated that retroactive application of the rule would further the operation of the commerce clause. On appeal the Third Circuit reversed and stated the following in connection with the second Chevron factor:
Assuming arguendo that the district court correctly stated the purpose of the Commerce Clause rule in this case, we think the burden on interstate commerce that it perceived might result from nonretroactive application of that rule is largely illusory. Certainly, any inhibiting effect the statute might have had on foreign corporations and others contemplating doing business in New Jersey vanishes once the statute is invalidated, whether or not that invalidation is retroactive. Moreover, had there been no tolling statute, the probability is that the Cohns and most other plaintiffs similarly situated would have filed suit within the two-year statutory period. Although it is possible that prospective invalidation will permit maintenance of some suits that would not have been timely filed absent the tolling statute, we do not think that this slight marginal burden, if any, does violence to the Commerce Clause.
Id. at 465 (footnote omitted) (emphasis added).
Thus, the full context of the quoted phrase indicates that plaintiffs' reliance upon Cohn is misplaced. Cohn dealt with the effect of the tolling statute on the operation of the commerce clause which the Third Circuit found to be marginal if the statute were applied only prospectively. Here, only the purposes of the statute of limitations is at issue and the second Chevron factor is neutral in that regard. If anything, retroactive application would further the goal of the limitations statute. See Perez v. Dana Corp., 718 F.2d 581 (3d Cir. 1983) (application of statutory limitations period retroactively would further goal of uniformity of treatment of similar claims).
C. The Equities of Retroactive Application.
Plaintiffs contend that the equities favor non-retroactive application since they relied upon clear past precedent in filing their lawsuit when they did. They also argue, citing Smith, supra, that the massive discovery already undertaken in this action favors permitting the federal securities claims to proceed.
We have already decided that the prior precedent was not sufficiently clear for the plaintiffs to have reasonably relied upon it. This first consideration overlaps with the third one, Fitzgerald v. Larson, 769 F.2d 160 (3d Cir. 1985), and when established precedent does not warrant reliance upon the plaintiffs' choice of a limitations period, it is not inequitable or harsh to apply the new rule retroactively. Id.
In connection with the amount of discovery conducted here, discovery is but one factor to be considered. In Chevron, the Supreme Court relied upon it but only when plaintiff had depended upon clear past precedent which had been changed during the pendency of his action. Despite the amount of discovery already conducted, we will apply Data Access retroactively to the instant case.
See Prospect Purchasing, supra.
We will issue an appropriate order.
AND NOW, this 16th day of September, 1988, upon consideration of the various motions for judgment on the pleadings, it is ordered that:
1. The motions are granted.
2. Counts II and IV are hereby dismissed as against the following defendants:
a. Andrews Davis Legg Bixler Milsten & Murrah, Timothy M. Larason, Richard Ingham.
b. Advest, Inc., Betty Griffin, Executrix, Raymond T. Waller, Russell W. Sterling, Investments Incorporated, William Schmidt, Peter Stipanovich, Mercer Diversified Securities, Inc., Thomas K. Mercer, J.I.I. Securities, Inc.
c. Anchor National Financial Services, Inc., Joseph J. Schopen, Joseph G. Shannonhouse IV, James Joseph Clark.
d. Howard W. Leeb and Associates, Howard W. Leeb, Gary Sprunger, A. R. Morganthau & Associates, Anthony R. Morganthau.
e. Lauxmont Farms, Inc., Lauxmont Farms II, Inc., Lauxmont Farms III, Inc., Ronald C. Kohr, Bradley D. Kohr, James D. Kohr.
3. The motion of the Andrews Davis defendants for a stay of discovery pending the decision on the instant motion is dismissed as moot.
4. The request of the Andrews Davis defendants to limit future discovery to the RICO statute of limitations issue is dismissed as having been improperly raised for the first time in defendants' reply brief. The request may be renewed in a properly filed motion.