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MAIO v. ADVANCED FILTRATION SYS.

June 17, 1992

CARL ANTHONY MAIO, et al.
v.
ADVANCED FILTRATION SYSTEMS, LTD., et al.



The opinion of the court was delivered by: LOUIS H. POLLAK

 POLLAK, J.

 In 1986, Carl Anthony Maio, William H. Eastburn, III, Thomas F.J. MacAniff, Jordan-Barthmaier Associates, and others initiated a civil action against Advanced Filtration Systems, Ltd., Control Fluidics, Inc., R. L. Biller, Walter O. Heinze, Touche Ross & Co., Niessen, Dunlap & Pritchard, and others. The suit arose from the difficulties that befell Advanced Filtration, a Pennsylvania limited partnership in which the plaintiffs had purchased limited partnership interests in 1981 and 1982. Alleging manifold frauds attendant both on the marketing of the limited partnership interests and on the post-investment management of Advanced Filtration's business, Maio and his co-plaintiffs invoked the Securities Act of 1933, the Securities Exchange Act of 1934, RICO, the Pennsylvania Securities Act, and Pennsylvania common law, in a nine-count complaint. Control Fluidics filed counterclaims.

 On November 7, 1988, this court dismissed count two -- claims arising under the Exchange Act's § 10(b) and Rule 10b-5 -- as time barred. Section 10(b) does not in terms create a cause of action: the cause of action is a matter of judicial implication. Accordingly, there is no statutory language establishing a limitation period, and, as a result, formulation of an appropriate limitation period has also been a judicial construct. In a bench opinion concurrent with the November 7, 1988 order, I explained the rationale for dismissal:

 The question whether dismissal was mandated turned on the applicability to the Maio amended complaint of In Re Data Access Systems Securities Litigation, 843 F.2d 1537 (3d Cir. 1988), cert. denied sub. nom. Vitiello v. I. Kahlowsky & Co., 488 U.S. 849 (1988), an en banc decision handed down by the Court of Appeals in the spring of 1988. In Data Access, the Court of Appeals determined that the limitation period applicable to § 10(b) claims should be measured by a uniform federal standard rather than -- as had theretofore been the prevailing practice in the Third Circuit and most other circuits -- by what federal courts deemed to be the most analogous state statute of limitations. The federal standard fashioned by the Third Circuit was modelled on the one-year/three-year limitation period Congress had prescribed in 1934 for most of the private causes of action expressly created by the Exchange Act. Said the court in Data Access, "We have decided that the proper period of limitation for a complaint charging violation of section 10(b) and Rule 10b-5 is one year after the plaintiff discovers the facts constituting the violation, and in no event more than three years after such violation." 843 F.2d at 1550. Since the Maio plaintiffs did not commence suit until at least four years after consummation of the allegedly fraudulent sales of limited partnership interests, their § 10(b) claims were barred if Data Access was to be given retroactive effect so as to apply to suits begun before Data Access was decided -- a question the Data Access court expressly declined to address. *fn1" I determined that whether Data Access should be so applied depended on the principles of retroactivity announced by the Supreme Court in 1971 in Chevron Oil Co. v. Huson, 404 U.S. 97 (1971). Under Chevron, retroactive application of a newly announced appellate rule can be avoided only if the new rule is so sharp and unanticipated a break with a well established past rule that the party who would lose under a retroactive application of the new rule could be shown to have had a clear entitlement to rely on the old rule. *fn2" Examining plaintiffs' claims in the light of Chevron I found (1) that, with respect to Pennsylvania § 10(b) claims allegedly accruing in 1981 and 1982, one who contemplated bringing suit had every reason to expect the applicable statute of limitations to be the Pennsylvania limitation period governing common law fraud actions, but (2) whether at that time that limitation period was two years or six years was unsettled. Accordingly, I held that plaintiffs would not have been warranted in assuming that they had more than two years after their purchases of the partnership interests in which to bring a § 10(b) suit. Since the plaintiffs were not entitled to rely on a six-year limitation period, I concluded that, pursuant to Chevron, the Data Access limitation period should be given retroactive application to their § 10(b) claims. Accordingly, I held that their § 10(b) claims were time barred.

 In the ensuing two years and four months, in a series of orders, I granted summary judgment in favor of various defendants on other aspects of plaintiffs' suit. Finally, on March 29, 1991, concluding, pursuant to Federal Rule of Civil Procedure 54(b), that the issues that had been fully determined were separable from other issues relating to other defendants that were not yet determined, I directed the entry of (1) "final judgment in favor of defendants Control Fluidics, Inc., Rudolph Biller, the Estate of Walter O. Heinze, Neissen, Dunlap & Pritchard and Touche Ross & Co. and against plaintiffs with respect to plaintiffs' claims," and (2) "final judgment on the counterclaims of Control Fluidics, Inc. against plaintiffs."

 Plaintiffs Maio, Eastburn, MacAniff and Jordan-Barthmaier Associates appealed from the March 29, 1991 order. On June 20, 1991, before the Third Circuit heard argument, the Supreme Court decided Lampf v. Gilbertson, 111 S. Ct. 2773 (1991).

 Lampf was a consolidation of two § 10(b) suits, growing out of the purchase of interests in limited partnerships, initiated in the District Court for the District of Oregon in 1986 and 1987. The suits were dismissed by the district court as time barred. Relying on settled Ninth Circuit precedent that the statute of limitations governing § 10(b) claims was that provided by state law for the most analogous state cause of action, the district court determined that under Oregon law the relevant limitation period was for fraud -- two years from the date the fraud was, or should reasonably have been, discovered. The partnership interests were purchased in 1979 to 1981. Applying the two-year limitation period, the district court found the suits untimely. The Ninth Circuit reversed, holding that certain material issues of fact with respect to when plaintiffs should have discovered the alleged fraud remained to be explored. The Supreme Court granted certiorari "in view of the divergence of opinion among the Circuits regarding the proper limitations period," 111 S. Ct. at 2777, for § 10(b) suits. The "divergence of opinion among the Circuits" was resolved in favor of a uniform federal standard -- an approach taken by seven members of the Court. Five of the seven -- Justice Blackmun, joined by the Chief Justice and Justices White, Marshall and Scalia -- chose the one-year/three-year standard selected by the Third Circuit in Data Access. Accordingly, the Ninth Circuit's judgment was reversed, since "there is no dispute that the earliest of plaintiff-respondents' complaints was filed more than three years after petitioner's alleged misrepresentations. . . ." Id. at 2782. Justice Kennedy, joined by Justice O'Connor, agreed that it was sensible to have a uniform federal standard but dissented from adoption of the Data Access one-year/three-year formulation: the two Justices felt that a one-year/five-year limitations structure would be more conductive to effectuating § 10(b)'s purposes. *fn3" Moreover, the two Justices, in an opinion by Justice O'Connor, took strong exception to the Court's application of the new rule to bar the plaintiffs' claims: As of the time suit was brought, said Justice O'Connor, "a solid wall of binding Ninth Circuit authority dating back more than thirty years," 111 S. Ct. at 2785, on which plaintiffs placed "entirely proper reliance," id. at 2786, dictated that resort should be had to the most analogous state law limitation period. Therefore, under Chevron and similar cases, wrote Justice O'Connor, "the federal statute of limitations announced today should not be applied retroactively." Id. at 2788. Justice Stevens, joined by Justice Souter, dissented from judicial creation of a federal limitations period for § 10(b) claims after more than forty years of borrowing from state statutes of limitation. Justice Stevens observed that "the policy choices that the Court makes today may well be wise," id. at 2785, but "in my opinion the Court has undertaken a lawmaking task that should properly be performed by Congress." Id. at 2783. *fn4"

 On September 4, 1991, the appeals of Messrs. Maio, Eastburn and MacAniff, and Jordan-Barthmaier Associates, from this court's March 29, 1991, order were argued before the Third Circuit. On September 12, 1991, that court, by judgment order,

 ORDERED and ADJUDGED that the judgments of the district court, be and are hereby affirmed. This order is without prejudice to Control Fluidics Inc. making application to the district court for reasonable attorneys fees and costs of collection for this appeal.

 None of the Maio plaintiffs has petitioned for certiorari to review the decision of the Third Circuit. However, on February 14, 1992, Messrs. Maio, Eastburn and MacAniff, together with Roger F. Barthmaier and Alvin W. Jordan (the principals of Jordan-Barthmaier Associates), "moved this Court to reinstate plaintiffs claims under section 10(b) of the Exchange Act and, accordingly, to reverse the court's judgment dismissing those claims." The movants filed an essentially identical motion in the Court of Appeals; *fn5" that motion was, on March 20, 1991, "denied" without opinion.

 The predicate for the motion to reinstate the movants' § 10(b) claims is section 476 of the Federal Deposit Insurance Corporation Improvement Act of 1991, a statute signed into law by the President on December 19, 1991. Section 476 amends the Exchange Act by adding after section 27, 15 U.S.C. § 78aa, a new section 27A, denominated a "Special Provision Relating to Statute of Limitations on Private Causes of Action:"

 (b) Effect on Dismissed Causes of Action. -- Any private civil action implied under section 10(b) of this Act that was commenced on or before June 19, 1991--

 "(1) which was dismissed as time barred subsequent to June 19, 1991, and

 "(2) which would have been timely filed under the limitation period provided by the laws applicable in the jurisdiction, including principles of retroactivity, as such laws existed on June 19, 1991,

 shall be reinstated on motion by the plaintiff not later than 60 days after the date of enactment of this section.

 June 19, 1991, the date which is the fulcrum of the new statutory provision, is the day before Lampf was decided. Congress's evident, and avowed, purpose was to withdraw from Lampf any retroactive application. Congressman Markey, a principal champion of § 27A, on November 26, 1991 advised his colleagues that the new provision, just agreed upon by a Senate-House conference committee, rights at least the most egregious wrong of last summer's Supreme Court decisions, Lampf versus Gilbertson. This section would reverse the Court's retroactive application of that decision to dozens of cases brought in the Federal courts by defrauded investors. . . .

 . . . With one stroke of the pen last spring, the Supreme Court of the United States plunged a sword directly at the heart of victims of securities fraud. . . .

 The language of Section 476 [§ 27A] unambiguously reverses the Lampf ruling's application of the 1-year and 3-year statute of limitations period to thousands of cases which were filed prior to June 19, 1991, and which were pending on that date. Furthermore, it permits the reinstatement of any suit which may have been dismissed post-Lampf as a result of the Lampf decision.

 137 Cong. Rec. H 11812-813 (daily ed. Nov. 26, 1991).

 The movants perceive the dismissal of their § 10(b) claims as falling exactly within the contours of the new legislation. They posit that so much of the Third Circuit's judgment order of September 12, 1991, affirming this court's March 29, 1991 order, as sustained this court's dismissal of the § 10(b) claims, was based on Lampf. In short, the movants contend that their § 10(b) claims were, to use Congressman Markey's formulation, "dismissed post-Lampf as a result of the Lampf decision," and hence should be reinstated.

 I.

 Before examining the merits of plaintiffs' contention that the newly-enacted provision of the Exchange Act -- § 27A -- mandates reinstatement of their § 10(b) claims, I will address three defense contentions any one of which, if valid, would require denial of plaintiffs' motion without consideration of the applicability of § 27A to this case.

 A. Is Plaintiffs' Motion Moot?

 In a letter to the court dated April 16, 1992, counsel for defendant Niessen, Dunlap & Pritchard state that, in view of the Court of Appeals' order of March 20, 1992 denying the § 27A motion plaintiffs filed in that court, "we contend that plaintiffs' motion in the District Court is moot."

 Plaintiffs' § 27A motion in the Court of Appeals, like plaintiffs' § 27A motion here, was filed in February of 1992, some five months after the Court of Appeals' September 12, 1991 judgment order of affirmance. The motion filed in the Court of Appeals asked that court to reinstate the § 10(b) claims, or, in the alternative, to recall its mandate and vacate the judgment order. The motion was denied without opinion. For this reason one cannot tell whether the denial was a judgment that the motion failed on the merits, or was a discretionary determination that the motion should first be considered by the court of first instance, or was a holding that the court lacked jurisdiction after so long an interval since the court's judgment order. *fn6" Given the very real possibility that the denial was not on the merits, I am not persuaded that the Court of Appeals' action precludes consideration of the motion plaintiffs filed here.

 B. Is Plaintiffs' Motion Barred by Principles of Res Judicata?

 Defendants Control Fluidics, R. L. Biller and Estate of Walter O. Heinze contend that this court's series of orders granting summary judgment on the non-§ 10(b) claims are res judicata with respect to the merits of the § 10(b) claims, and hence that the § 10(b) claims ...


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