The opinion of the court was delivered by: McCLURE, District Judge.
This action was commenced by plaintiffs on November 26, 1988.
In response to the defendants' motions to dismiss the
complaint, plaintiffs filed an amended complaint on March 7,
1989, pursuant to Fed.R.Civ.P. 15(a). Once again, all of the
defendants have filed motions to dismiss the complaint.
This action arises from the acquisition of PacStar
Corporation, Inc., ("PacStar"), by a corporation known as
Coated Sales, Inc., ("Coated Sales"). The plaintiffs, Richard
Pell, James Miller and James O'Brien, were all shareholders in
PacStar at the time of its acquisition. The complaint alleges
that Coated Sales' acquisition of PacStar was completed
through, and accompanied by, violations of federal and state
securities laws, federal criminal statutes and other tortious
The facts as alleged in the amended complaint may be
summarized as follows:
PacStar and Coated Sales were in the textile business. Coated
Sales publicly touted a corporate strategy of acquiring other
textile companies and approached PacStar for that purpose.
Subsequently, Coated Sales acquired PacStar through three
agreements: an Agency Agreement dated July 1, 1986; an
Employment Agreement dated July 1, 1986; and an Agreement and
Plan of Merger ("Merger Agreement") dated March 2, 1987
(collectively "the Agreements").
Pursuant to the Agency Agreement, PacStar was to act as
Coated Sales' exclusive sales agent for certain products. The
Agency Agreement also granted Coated Sales the option to merge
PacStar into Coated Sales or an affiliate by purchasing the
PacStar stock for cash and 100,000 shares of Coated Sales
restricted common stock. Coated Sales' option was exercisable
at its discretion, throughout the term of the Agency Agreement,
which expired on June 30, 1988.
At the time the Agency Agreement was entered into, plaintiff
Richard Pell was the sole shareholder of PacStar. Pell agreed
that his PacStar stock would remain subject to Coated Sales'
option, that he would not dispose of his stock in any manner
which would preclude the option and, in the event Pell chose to
use his PacStar stock to compensate Timothy Lafferty and
plaintiffs James Miller and James O'Brien, Pell agreed to
transfer the stock to these employees "subject to the option".
On January 13, 1987 Coated Sales notified plaintiffs of its
intention to exercise the option and sometime thereafter
provided the plaintiffs with Coated Sales' Prospectus, dated
July 10, 1986, and Form 10-Q for the period ending November 30,
1986. Pursuant to the Merger Agreement, on March 2, 1987,
Coated Sales acquired from the plaintiffs and Lafferty the
PacStar stock for cash and 100,000 shares of restricted Coated
Sales common stock, as provided in the Agency Agreement. In or
about May of 1988 plaintiffs first became aware of the
existence of some amount of fraudulent activity in the internal
operation of Coated Sales. Subsequently, on November 26, 1988,
plaintiffs initiated this action.
The plaintiffs claim that they were induced into entering
this obligation by misrepresentations contained in Coated
Sales' Prospectus and Form 10-Q, and that the sale violated,
inter alia, the Securities Act 1933 ("1933 Act"), the
Securities and change Act of 1934 ("1934 Act") and state
securities law. The plaintiffs maintain that each defendant
occupied a key position or relationship with Coated Sales that
facilitated the alleged scheme. Defendants Michael Weinstein,
Ernest Glantz, Richard Bober, Bruce Bloom, Philip Kagan and
Philip Erard ("officer/director defendants") were officers
and/or directors of Coated Sales during the relevant periods.
The remaining defendants, Finkle & Ross and Denis Lustig, were
involved in the preparation and dissemination of Coated Sales'
III. SALE OF UNREGISTERED SECURITIES
Counts I and III allege violations of Section 12(1) of the
1933 Act, 15 U.S.C. § 77l(1), by the officer/director
defendants and Denis Lustig, as an aider and abettor,
respectively. Section 12(1) creates civil liability for the
offer or sale of an unregistered security in violation of
Section 5 of the 1933 Act, 15 U.S.C. § 77e. Section 5 prohibits
the use of any means or instruments of transportation or
communication in interstate commerce or of the mails for the
purpose of delivering or selling an unregistered security. The
defendants maintain that this claim is barred by the relevant
Section 13 of the 1933 Act, 15 U.S.C. § 77m, provides:
No action shall be maintained . . . to enforce a
liability created under section 77l(1) of this
title, unless brought within one year after the
violation upon which it is based. In no event shall
any such action be brought to enforce a liability
created under section . . . 77l(1) of this title
more than three years after the security was bona
fide offered to the public.
Courts have interpreted the date of the violation as the later
of the offer, sale or delivery of the stock. See Doran v.
Petroleum Management Corp., 576 F.2d 91, 93 (5th Cir. 1978).
In the instant case, the limitations period began to run on
March 2, 1987, when the securities were delivered to the
plaintiffs, and the original complaint was not filed until
November 22, 1988, more than one and a half years later.
However, plaintiffs claim that the statute should be equitably
tolled because they did not discover the alleged fraud until
after the limitations period had expired. This argument lacks
At no time were the plaintiffs led to believe that the
securities were registered. In fact, the plaintiffs knew from
the outset that the securities would not be registered.
Moreover, although there is a split of authority concerning the
application of the discovery rule and equitable tolling to the
one-year limitation period governing nonregistration claims, a
vast majority of the cases have concluded that the limitations
period runs from the date of the violation regardless of
whether the plaintiff knew of the violation. See Cook v. Avien,
573 F.2d 685, 691 (1st Cir. 1978); Gridley v. Cunningham,
550 F.2d 551, 552-53 (8th Cir. 1977); McCullough v. Leede Oil &
Gas, Inc., 617 F. Supp. 384, 387 (W.D.Okl. 1985); Felts v.
National Account System Assoc., Inc., 469 F. Supp. 54, 64 (N.D.
Miss. 1978); Mason v. Marshall, 412 F. Supp. 294, 299 (N.D.Tex.
1974), aff'd, 531 F.2d 1274 (5th Cir. 1976); Ferland v. Orange
Groves of Florida, Inc., 377 F. Supp. 690, 703 (M.D.Fla. 1974);
Shuman v. Sherman, 356 F. Supp. 911, 912-13 (D.Md. 1973);
Moerman v. Zipco, Inc., 302 F. Supp. 439, 445 (E.D.N.Y. 1969),
aff'd, 422 F.2d 871 (2d Cir. 1970).
Based on these cases, this Court also concludes that neither
the discovery rule nor equitable tolling are applicable to the
one-year limitation period governing nonregistration claims
because the language of the statute militates against such an
application, and there is little justification for the
application of this rule outside fraud-based causes of action.
See McCullough v. Leede Oil & Gas, Inc., 617 F. Supp. at
Therefore, since these claims were not asserted within the
applicable limitations period, Counts I and III of the amended
complaint will be dismissed.
IV. SALE OF SECURITIES BY MEANS OF PROSPECTUS OR ORAL
Counts II and IV allege violations of Section 12(2) of the
1933 Act, 15 U.S.C. § 771(2), by the officer/director
defendants and Denis Lustig, as an aider and abettor,
respectively. The officer/director defendants and Lustig have
made motions to dismiss these counts for failure to state a
claim upon which relief can be granted, pursuant to
A motion to dismiss under Fed.R.Civ.P. 12(b)(6) admits the
well pleaded allegations of the complaint, but denies their
legal sufficiency. Hospital Building Co. v. Trustees of the Rex
Hospital, 425 U.S. 738, 740, 96 S.Ct. 1848, 1850, 48 L.Ed.2d
338, 341 (1976). "It is the settled rule that `a complaint
should not be dismissed for failure to state a claim unless it
appears beyond doubt that the plaintiff can prove no set of
facts in support of his claim which would entitle him to
relief.'" Leone v. Aetna Cas. & Sur. Co., 599 F.2d 566, 567
(3rd Cir. 1979), quoting Conley v. Gibson, 355 U.S. 41, 45-46,
78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957).
The complaint must be read in a light most favorable to the
plaintiff with every doubt resolved in plaintiff's favor.
In Re Arthur Treacher's Franchisee Litigation, 92 F.R.D. 398,
422 (E.D.Pa. 1981).*fn3
Section 12(2) of the 1933 Act, 15 U.S.C. § 77l(2) imposes
liability upon any person who:
offers or sells a security . . . by the use of any
means or instruments of transportation or
communication in interstate commerce or of the
mails, by means of a prospectus or oral
communication, which includes an untrue statement
of a material fact or omits to state a material
fact necessary in order to make the statements, in
light of the circumstances under which they were
made, not misleading (the purchaser not knowing of
such untruth or omission), and who shall not
sustain the burden of proof that he did not know,
and in the exercise of reasonable care could not
have known, of such untruth or omission.*fn4
Plaintiffs' amended complaint does not refer to any oral
communication. They claim that untrue material facts were
contained in and material facts were omitted from the
prospectus, dated July 10, 1986, and Form 10-Q, for the period
ending November 30, 1986, which were provided to them after
January 13, 1987, the date Coated Sales notified the plaintiffs
of its intention to exercise the option.
The plaintiffs argue that the sale did not occur until March
2, 1987, when the Merger Agreement was signed and the exchange
The date of the "sale" of securities occurs when the parties
become obligated to perform. Radiation Dynamics, Inc. v.
Goldmuntz, 464 F.2d 876, 891 (2d Cir. 1972).
`Commitment' is a simple and direct way of
designating the point at which, in the classical
sense, there was a meeting of the minds of the
parties; it, marks the point at which the parties
obligated themselves to perform even if the formal
performance of their agreement is to be after a
lapse of time.
Plaintiffs contend that the Agency Agreement was fully
revocable and, as such, could not be considered a "sale" of
securities as a matter of law. They argue that the Agency
Agreement did not obligate them to purchase Coated Sales stock,
but merely created an option allowing Coated Sales to merge
with PacStar upon the occurrence of various conditions. The
only conditions plaintiffs refer to are contained in paragraphs
6(B), 12 and 13(H) of the Agency Agreement.
Paragraph 13(H) states, "The option contained herein shall
terminate upon termination of the Agency Agreement or default."
The Agency Agreement states at paragraph 13(A) that the
termination date was June 30, 1988; however, it does not
contain any specific default provisions. Since Coated Sales
exercised the option before the termination date, the
plaintiffs were not empowered to renege on the transaction
under this paragraph.
Likewise, paragraph 6(B) of the Agency Agreement did not
release the plaintiffs from their binding commitment. Paragraph
For the calendar year ended December 31, 1987,
Coated Sales shall provide audited results of
Booked Sales Orders, not later than February 28,
1988. PacStar shall have 30 days to review said
results and to avail itself of Audit and
Accounting procedures provided for in Paragraph 12
below. In the event that booked orders are less
than Fifteen Million Dollars ($15,000,000) for the
period from the date of this Agreement through
December 31, 1987, then either party shall have
the right to terminate ...