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LEACH v. QUALITY HEALTH SERVS.

October 3, 1995

ELIZABETH A. LEACH and MEDICAL BENEFITS MANAGEMENT SERVICES, INC.
v.
QUALITY HEALTH SERVICES, INC., LIFEQUEST, INC., OCCUMED RESOURCES, AMERICAN HEALTH RESOURCES SYSTEMS, INC. and ROGER B. HISER AND LIFEQUEST, INC. v. ROBERT M. SCHERZER



The opinion of the court was delivered by: JOYNER

 JOYNER, J.

 Currently before this Court are four motions for summary judgment. Plaintiffs in this action are Elizabeth Leach and her wholly-owned company, Medical Benefits Management Services, Inc. (MBMSI). Defendants are an individual, Roger Hiser, and four companies, Quality Health Services, Inc., American Health Resources Systems, Inc. (AHRS), Lifequest, Inc. and OccuMed Resources.

 Plaintiffs' litigation arises out of two breached contracts between MBMSI, Leach and Quality Health. The first is an Employment Agreement, whereby Leach agreed to work for Quality Health. The second is an Asset Sale Agreement whereby Plaintiffs agreed to sell all of MBMSI's assets to Quality Health in exchange for installment payments of cash and stock in Quality Health. The Amended Complaint alleges that both Agreements have been breached. The Amended Complaint also alleges that as inducement for Plaintiffs to enter into the Agreements, Quality Health and Hiser, its officer, director and controlling shareholder, made several misrepresentations of material fact upon which Plaintiffs relied.

 In addition to Plaintiffs' Complaint, Defendant AHRS has counter-sued Plaintiffs for the money they did receive under the Agreements. Also, Lifequest has brought a third-party Complaint against Robert Scherzer. Scherzer was Quality Health's President and CEO until mid-1992 and negotiated the terms of the Agreements with Plaintiffs. In 1992, Scherzer left Quality Health and filed a suit against it and Hiser for breach of contract. Plaintiffs' original Complaint named Scherzer as a Defendant. However, Plaintiffs and Scherzer settled their differences and Plaintiffs' Amended Complaint does not include allegations against Scherzer.

 Plaintiffs' Amended Complaint brings claims against all defendants but OccuMed under the Securities and Exchange Act of 1934, 15 U.S.C. §§ 78a-78kk (1981). The Amended Complaint brings state claims against all Defendants for breach of contract, unpaid wages, fraudulent conveyance, fraud and misrepresentation.

 SUMMARY JUDGMENT STANDARD

 In considering a motion for summary judgment, a court must consider whether the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, show there is no genuine issue of material fact, and whether the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c). The court must determine whether the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986).

 In making this determination, all of the facts must be viewed in the light most favorable to the non-moving party and all reasonable inferences must be drawn in favor of the non-moving party. Id. at 256. Once the moving party has met the initial burden of demonstrating the absence of a genuine issue of material fact, the non-moving party must establish the existence of each element of its case. J.F. Feeser, Inc. v. Serv-A-Portion, Inc., 909 F.2d 1524, 1531 (3d Cir. 1990), cert. denied, 499 U.S. 921, 113 L. Ed. 2d 246, 111 S. Ct. 1313 (1991) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 323, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986)). A plaintiff must provide more than a "mere scintilla" of evidence to rebut the defendant's evidence. Anderson, 477 U.S. at 251.

 DISCUSSION

 Plaintiffs' primary causes of action lie under § 10(b) of the Securities Act of 1934. This section makes it unlawful for any person to "use or employ" any "manipulative or deceptive device or contrivance" in "the purchase or sale of any [registered] security." 15 U.S.C. § 78(j). A manipulative or deceptive device or contrivance is defined in part in Rule 10(b)(5) as "any untrue statement of a material fact."

 Defendants argue that Plaintiffs' claims are time-barred under the one-year statute of limitations for actions brought under § 10(b). Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363, 115 L. Ed. 2d 321, 111 S. Ct. 2773 (1991). *fn1" The Supreme Court has held that the "1-year period, by its terms, begins after discovery of the facts constituting the violation." Id.

 The starting date of the one-year period is determined by asking whether "plaintiffs [had] sufficient information of possible wrongdoing to place them on 'inquiry notice' or to excite 'storm warnings' of culpable activity." Gruber v. Price Waterhouse, 697 F. Supp. 859, 864 (E.D. Pa. 1988), aff'd, 911 F.2d 960 (3d Cir. 1990). At that point, "plaintiffs have a duty to exercise reasonable diligence to uncover the basis for their claims and are held to have constructive notice of all facts that could have been learned through diligent investigation during the limitation period." Id. In other words, inquiry notice starts to run when "'a person of ordinary intelligence would have suspected that he or she was being defrauded.'" Hirschfeld v. Total Health Sys., 775 F. Supp. 574, 578 (E.D.N.Y. 1991), aff'd. 978 F.2d 706 (2d Cir. 1992) (quoting Farley v. Baird, Patrick & Co., 750 F. Supp. 1209, 1213 (S.D.N.Y. 1990)).

 The evidence proffered by the parties on the issue of when Plaintiffs had notice of their claims consists of (1) a Memorandum authored by Leach in October, 1992, (2) a letter written on Plaintiffs' behalf by their attorney to Hiser on July 14, 1993, (3) Leach's deposition testimony ...


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