Pending before the court is the motion of defendant, David S. Shapira, to dismiss counts I and III of the complaint of plaintiff, Richard Trio, or in the alternative, for summary judgment on those counts. Plaintiff initiated this action by filing a class action complaint in the United States District Court for the Northern District of Ohio on April 21, 1994. Pursuant to the order of the Judicial Panel on Multidistrict Litigation, the action was transferred to this court as part of the above-captioned consolidated securities litigation.
The MDL arises out of the fraud which occurred at defendant, Phar-Mor, Inc., a deep discount drugstore chain. The fraudulent activity occurred over a period of years and was publicly disclosed by Phar-Mor management on August 3, 1992. The fraudulent scheme conveyed a false picture of the profitability of the company and artificially inflated the value of Phar-Mor stock by concealing substantial operating losses and grossly overstating income. Shortly after public disclosure of the fraud, Phar-Mor filed a voluntary petition under chapter 11 of the Bankruptcy Code. See In re: Phar-Mor, Inc., Case Nos. 92-41599 to 41614 (N.D. Ohio 1992).
Defendant Michael I. Monus was the Chief Operating Officer of Phar-Mor during the period of the fraud, and is alleged to be a participant in the fraudulent activities. Monus also filed a voluntary petition under chapter 11 of the Bankruptcy Code. Defendant David S. Shapira was the Chief Executive Officer of Phar-Mor during the period of the fraud. Plaintiff alleges that Shapira and others engaged in the "deceptive scheme" at Phar-Mor "at the expense of Plaintiff and others similarly situated". Complaint, P37.
Defendant Coopers & Lybrand ("Coopers") is an independent public accounting firm and had been engaged by Phar-Mor to audit its financial statements during the period of the fraud. Plaintiff alleges that Coopers negligently failed to uncover the fraud and issued unqualified audit opinions, to the detriment of plaintiff and others similarly situated. Id. at PP29-34.
Plaintiff Richard Trio was formerly employed by Phar-Mor as the Vice-President of Human Resources. Id. at P2. In that position, plaintiff was a stock optionee under the Phar-Mor, Inc. 1984 Stock Option Plan and was entitled to and did receive stock options. Id. As a result of the fraud and resultant diminution in the value of Phar-Mor stock, the stock options held by plaintiff have likewise substantially diminished in value. Trio brings the instant action on his own behalf and on behalf of all similarly situated stock optionees. Id. at 11.
Count I of the complaint asserts a claim against Shapira, Monus and Phar-Mor under section 14(a) of the Securities Exchange Act of 1934 (the "Securities Act"). Count II contains a negligence claim against Coopers only. Count III asserts a claim against Shapira, Monus, Phar-Mor and Coopers under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. ("RICO").
As rehearsed, Shapira's motion challenges counts I and III of the complaint. Shapira attacks these claims on three fronts. First, he alleges that the claims must be dismissed in the face of a Settlement Agreement and Release entered into between Phar-Mor and Trio at the time of Trio's separation from employment with Phar-Mor. Shapira contends that the Agreement establishes that Trio waived his right to bring the instant claims. Second, Shapira contends that the Securities Act claim is barred by the applicable statute of limitations. Finally, Shapira asserts that Trio lacks standing to assert the RICO claim set forth in count III.
Before we begin our analysis of defendant's motion, we note that Trio has improperly asserted claims against both Phar-Mor and Michael Monus. Because both of these parties are in bankruptcy, the commencement and continuation of this action against them is in violation of the automatic stay provision of the Bankruptcy Code, 11 U.S.C. § 362. We have no jurisdiction to entertain such claims and they will be dismissed sua sponte.
We now turn to Shapira's motion. On a motion to dismiss, we must presume that all factual allegations of the complaint are true and draw all reasonable inferences from the stated facts in favor of the non-moving party. Rose v. Bartle, 871 F.2d 331, 342 (3d Cir. 1989); Rocks v. City of Philadelphia, 868 F.2d 644, 645 (3d Cir. 1989). We cannot grant a 12(b)(6) motion "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." Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974) (citing Conley v. Gibson, 355 U.S. 41, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)).
Shapira first contends that plaintiff's claims must be dismissed as a result of the Settlement Agreement and Release that Trio entered into with Phar-Mor on August 23, 1993.
We disagree. Shapira asserts that, pursuant to the terms of the Agreement, Trio expressly released Shapira ". . . from any and all rights, claims and demands [of plaintiff], . . . arising out of or relating to Trio's employment with Phar-Mor . . .". Id. at P3. Read in isolation, the above language appears to support Shapira's argument. However, we must examine the entire document to determine the intention of the parties. Paragraph 7 of the Agreement provides that:
This Agreement and Release is not intended to and shall not release Phar-Mor from any claims Trio may have to compensation and/or benefits under any plan or arrangement with Phar-Mor . . ..
Examining the facts in the light most favorable to plaintiff, as we must, we conclude that Trio's claims arise out of a stock option plan which was intended as a form of compensation or benefit. Therefore, the Agreement does not deprive plaintiff of the right to bring the claims asserted in this action.
Shapira next contends that the Securities Act claim should be dismissed because it is time-barred. In Westinghouse Electric Corp. v. Franklin, 993 F.2d 349 (3d Cir. 1993), the Court of Appeals held that the applicable statute of limitations for claims brought under § 14(a) is the same as the limitations period for claims brought pursuant to § 10(b) of the Act. A § 14(a) claim must be brought within "one year after the plaintiff discovers the facts constituting the violation, and in no event more than three years after such violation." Id. at 353 (quoting In re Data Access Systems Securities Litigation, 843 F.2d 1537, 1550 (3d Cir. 1988), cert. denied, 488 U.S. 849, 109 S. Ct. 131, 102 L. Ed. 2d 103 (1988)); see also, Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 115 L. Ed. 2d 321, 111 S. Ct. 2773 (1991) (applying the "1-and-3-year" limitations period to a § 10(b) claim).
Trio filed his class action complaint on April 21, 1994, more than one year following Phar-Mor's August 3, 1992 public disclosure of the fraud, and more than one year after plaintiff received a letter from Shapira, dated October 29, 1992, notifying him of the bankruptcy reorganization of Phar-Mor and the continuing fraud adjustments. Complaint, P24. Therefore, we agree with Shapira and hold that plaintiff's § 14(a) claim is untimely and must be dismissed.
Plaintiff argues in his brief that the limitations period is either one year after discovery of the facts underlying the fraud or within three years of the occurrence of the fraud, and asserts that, because his claim was filed within three years of the fraud, it is timely. Plaintiff misinterprets the applicable law. The Westinghouse and Lampf decisions made clear that a § 10(b) or § 14 (a) claim must be brought, in the first instance, within one year of the discovery of the facts underlying the violation. On the other hand, the three-year limitations period acts as an absolute bar and cuts off any claims that are lodged more than three years after the violation occurs, regardless when the underlying facts are discovered. See, Lampf, at 363. Thus, a claimant must file a claim both within one year of the discovery of the violation and within three years of the occurrence of the violation. Because plaintiff knew or should have known of the fraud on August 3, 1992, or at the latest October 29, 1992, his § 14(a) claim is time-barred because he did not file the claim within one year of the discovery of the alleged violation. Count I will be dismissed.
Shapira next asserts that Trio lacks standing to bring the RICO claim asserted in count III. In that count, plaintiff alleges that Shapira and the other defendants "entered into a conspiracy, scheme, and plan unlawfully to manipulate the financial statements, or information relative to the financial statements, of Phar-Mor, at the expense of Plaintiff and others similarly situated . . . in violation of 18 U.S.C. Section 1961(b)." Complaint, P42. We agree with Shapira that plaintiff has no standing to assert a RICO claim and we will dismiss count III.
To state a RICO claim, a private plaintiff must allege that he or she suffered an injury "in his business or property by reason of a violation of [ 18 U.S.C. § 1962]". 18 U.S.C. § 1964(c). The requirements of injury and causation "are aspects of RICO standing." In re: Sunrise Securities Litigation, 916 F.2d 874, 878-79 (3d Cir. 1990) (citing Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496, 87 L. Ed. 2d 346, 105 S. Ct. 3275 (1985)). Because plaintiff's claim is based on a federal statute, the issue of standing is a federal question. However, as the Court of Appeals explained in Sunrise Securities, state law should be applied unless it is inconsistent with federal policy. 916 F.2d at 879.
Neither party has addressed the choice of law issue and we find that a determination as to whether Ohio or Pennsylvania law is most applicable is unnecessary since both states recognize the general proposition that a shareholder does not have an independent cause of action where an injury to a corporation also results in an injury common to the corporation's shareholders. See, Adair v. Wozniak, 23 Ohio St. 3d 174, 492 N.E.2d 426 (Ohio 1986); Burdon v. Erskine, 264 Pa. Super. 584, 401 A.2d 369 (Pa.Super. 1979); Jordan v. Fox, Rothschild, O'Brien & Frankel, 20 F.3d 1250, 1278 (3d Cir. 1994) (applying Pennsylvania law).
In Adair, the Ohio Supreme Court held that:
A plaintiff-shareholder does not have an independent cause of action where there is no showing that he has been injured in any capacity other than in common with all other shareholders as a consequence of the wrongful actions of a third party directed towards the corporation.
492 N.E.2d at 427. The court noted that:
Where the defendant's wrongdoing has caused direct damage to corporate worth, the cause of action accrues to the corporation, not to the shareholders, even though in an economic sense real harm may well be sustained by the shareholders as a result of reduced earnings, diminution in the value of ownership, or accumulation of personal debt and liabilities from the company's financial decline. The personal loss and liability sustained by the shareholder is both duplicative and indirect to the corporation's right of action.