UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA
September 26, 1996
JOHN W. MATHEWS, on behalf of himself and all others similarly situated, Plaintiff -vs- KIDDER, PEABODY & CO., INC., a Delaware corporation, KP REALTY ADVISERS, INC., a Delaware corporation, HSM, INC., a Texas corporation, HENRY S. MILLER CO., HENRY S. MILLER MANAGEMENT CORPORATION, HENRY S. MILLER APPRAISAL CORPORATION, HSM REAL ESTATE SECURITIES CORPORATION, and MILLER REAL ESTATE SERVICES CORPORATION, a Texas corporation, Defendants.
Donetta W. Ambrose, U.S. District Judge.
The opinion of the court was delivered by: AMBROSE
OPINION and ORDER OF COURT
Currently pending before the Court is the Motion for Leave to File First Amended Complaint (Docket #: 37) filed by Plaintiff John W. Mathews ("Plaintiff Mathews"). Plaintiff Mathews has alleged on behalf of himself and a putative class (excluding Defendants and their directors, officers, agents, servants and affiliates), encompassing "all persons residing in the United States who purchased partnership units in KP/Miller Realty Growth Fund I, KP/Miller Growth Fund II and KP/Miller Realty Growth Fund III in the initial offering of such securities," that the Defendants' actions violated 18 U.S.C. § 1962(b), (c) and (d) of the Racketeer Influenced and Corrupt Organization Act ("RICO") and as well has alleged state law claims of breach of fiduciary duty and negligent misrepresentation. The Defendants, Kidder, Peabody & Co. Incorporated, KP Realty Advisers, Inc., HSM, Inc., Henry S. Miller Co., Henry S. Miller Management Corporation, Henry S. Miller Appraisal Corporation; HSM Real Estate Securities Corporation; and Miller Real Estate Services Corporation (the "Defendants") oppose the Plaintiff's Motion and in addition, ask this Court to dismiss the Plaintiff's Complaint in its entirety pursuant to Fed. R. Civ. P. 12(h)(3) on the theory that the Private Securities Litigation Reform Act of 1995 (the "Reform Act") removes this Court's jurisdiction over the federal claims in this action. For the reasons set forth below, the Plaintiff's Motion for Leave to File First Amended Complaint is granted in part and denied in part.
I. The applicability of the Private Securities Litigation Reform Act of 1995 to this lawsuit.
Plaintiff Mathews seeks to amend his Complaint pursuant to Fed. R. Civ. P. 15 in the following manner: (1) add additional named plaintiffs and (2) add factual allegations. In response, the Defendants have raised numerous legal arguments regarding why the Plaintiff should not be permitted to amend the Complaint.
Section 107 of the Reform Act, the section of the Reform Act that contains the amendment relevant to this case, reads in pertinent part: "section 1964(c) of Title 18, United States Code, is amended by inserting before the period, 'except that no person may rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of section 1962 . . .'." 109 Stat. 737, 758 (December 22, 1995). Unamended, 28 U.S.C. § 1964(c) ("§ 1964(c)") read "any person injured in his business or property by reason of a violation of section 1962 of this chapter may sue therefor in any appropriate United States district court and shall recover threefold the damages he sustains and the cost of the suit, including a reasonable attorney's fee." 18 U.S.C. § 1964(c).
The RICO claim contained in the Proposed Complaint against the Defendants is based upon "conduct that would have been actionable as fraud in the purchase or sale of securities." Specifically, Plaintiff Mathews has alleged that in the 1980's, the Defendants devised a scheme to mislead a large number of unsophisticated "Mom and Pop" investors (in excess of 6000), through fraudulent conduct, into purchasing a series of limited partnerships in order to generate excessive fees and income for the Defendants. Ultimately, three limited partnership funds were organized to perpetuate the Defendants' scheme: KP/Miller Realty Growth Fund I; KP/Miller Realty Growth Fund II; and KP/Miller Realty Growth Fund III. Sales of these three funds raised approximately $ 85 million.
The Defendants argue that applying the analysis set forth by the United States Court in Landgraf v. USI Film Products, 511 U.S. 244, 114 S. Ct. 1483, 1497, 128 L. Ed. 2d 229 (1994), regarding whether newly enacted statutes should be applied to pending cases, § 107 of the Reform Act should be applied to the Plaintiff's RICO claim because (1) "Congress's elimination of civil RICO as a method of litigating securities fraud cases, the specific wording of the Applicability Provision of the Reform Act [§ 108]
and the legislative history surrounding the RICO Amendment and the Applicability Provision all demonstrate Congress's intent that the RICO Amendment should be generally applicable to all cases alleging 'conduct that would have been actionable' under the Securities Laws" and (2) even if the intent of Congress to apply § 107 retroactively is not clear, the application of § 107 to this case would not have a "retroactive effect" on Plaintiff Mathews' RICO claim because § 1964(c) is a jurisdictional statute. Defendants' Opposition Brief, pp. 19-20. Indeed, with respect to the Defendants' argument that § 1964(c) is a jurisdictional statute, the Defendants request that I dismiss the Plaintiff's Complaint in its entirety pursuant to Fed. R. Civ. P. 12(h)(3) on the grounds that once the Reform Act was enacted into law by Congress on December 22, 1995, jurisdiction over private civil RICO claims was divested from the district courts and therefore, I no longer have jurisdiction over the Plaintiff's civil RICO claim.
In the Landgraf decision, the Court addressed the standards to be applied when ascertaining the applicability/ retroactivity of a new law to cases pending when the law was enacted. Specifically, the Landgraf Court held that the following standard for determining retroactivity of new law to pending cases was to be applied:
when a case implicates a federal statute enacted after the events in suit, the court's first task is to determine whether Congress has expressly prescribed the statute's proper reach. If Congress has done so, of course, there is no need to resort to judicial default rules. When, however, the statute contains no such express command, the court must determine whether the new statute would have retroactive effect, i.e., whether it would impair rights a party possessed when he acted, increase a party's liability for past conduct, or impose new duties with respect to transactions already completed. If the statute would operate retroactively, our traditional presumption teaches that it does not govern absent clear congressional intent favoring such a result.
Id. at 1505. Significantly, for purposes of the case sub judice, in discussing the application of new legislation to pending cases and the issue of "retroactivity," the Landgraf Court further stated that "we have regularly applied intervening statutes conferring or ousting jurisdiction, whether or not jurisdiction lay when the underlying conduct occurred or when the suit was filed" and cited to a number of its previous decisions including Bruner v. United States, 343 U.S. 112, 116-117, 72 S. Ct. 581, 584-85, 96 L. Ed. 786 (1952);
Hallowell v. Commons, 239 U.S. 506, 508-09, 36 S. Ct. 202, 203-04, 60 L. Ed. 409 (1916);
The Assessors v. Osborne, 76 U.S. 567, 9 Wall. 567, 575, 19 L. Ed. 748 (1870);
Andrus v. Charlestone Stone Products Co., Inc., 436 U.S. 604, 607-08 n. 6, 98 S. Ct. 2002, 2005, 56 L. Ed. 2d 570 (1978);
United States v. Alabama, 362 U.S. 602, 604, 80 S. Ct. 924, 926, 4 L. Ed. 2d 982 (1960);
and Stephens v. Cherokee Nation, 174 U.S. 445, 478, 19 S. Ct. 722, 734, 43 L. Ed. 1041 (1899).
The Landgraf Court also noted that "application of a new jurisdictional rule usually 'takes away no substantive right but simply changes the tribunal that is to hear the case'." Id. at 1502, citing, Hallowell, 239 U.S. at 508. The Court continued, "present law normally governs in such situations because jurisdictional statutes 'speak to the power of the court rather than to the rights or obligations of the parties'." 114 S. Ct. at 1502, citing, Republic National Bank of Miami v. United States, 506 U.S. 80, 113 S. Ct. 554, 565, 121 L. Ed. 2d 474 (1992) (THOMAS, J., concurring).
In response to the Defendants' contention that the Reform Act bars this action altogether, Plaintiff Mathews argues that the Reform Act is not to be applied retroactively to this law suit, which was pending when the Reform Act was passed, because the Reform Act is not a jurisdictional statute but rather, one that alters substantial rights the Plaintiff and the other class members had when the suit was filed and in support thereof, cites to the United States Supreme Court's decision in Landgraf, supra. The Plaintiff also cites, inter alia, to two district court decisions which held that pursuant to the principles espoused in Landgraf, § 107 of the Reform Act is not to be applied retroactively to a RICO claim currently pending at the time the Reform Act was enacted because application of the Reform Act to the RICO claims would impair substantial rights possessed by the plaintiffs. See In Re Prudential Securities Incorporated Limited Partnerships Litigation, 930 F. Supp. 68 (S.D.N.Y. 1996) and District 65 Retirement Trust for Members of the Bureau of Wholesale Sales Reps. v. Prudential Securities. Inc., 925 F. Supp. 1551 (N.D. Ga. 1996).
After careful consideration of the submissions of the parties, I hold first that while I agree with the Defendants that § 1964(c) is, in part, a jurisdictional statute,
I also find that the effect of applying § 107 to the facts presented in this case is distinguishable from the effects obtained in those United States Supreme Court cases cited to in the Defendants' multiple briefs on this issue. For example, in Bruner v. United States, 343 U.S. 112, 72 S. Ct. 581, 96 L. Ed. 786 (1952), discussed in detail supra, and in the other cases where the effect of the intervening jurisdictional statutes did not completely eliminate the plaintiff's claim, but rather, merely altered the court which had jurisdiction over the matter, Plaintiffs were not deprived of their causes of action. Applying § 107 of the Reform Act to the case sub judice clearly will deprive Plaintiff Mathews and the other class members of their causes of action under § 1962 of RICO, which were viable at the time this lawsuit was filed. In other words, application of the Reform Act will not merely change the forum in which the Plaintiff and the class members can bring the RICO claims contained in the Proposed Complaint, but will actually deprive them of their day in court altogether. See Hartford Cas. Ins. Co. v. F.D.I.C., 21 F.3d 696, 700 (5th Cir. 1994) ("this Court has previously . . . [held] that amendments to statutes which affect procedural or remedial rights generally apply to pending cases, where such change does not deprive a party of its '"day in court"'. 'When Congress adopts statutory changes while a suit is pending, the effect of which is not to eliminate substantive right but rather to "change the tribunal which will hear the case," those changes--barring specifically expressed intent to the contrary--will have immediate effect'.") Thus, it is necessary to proceed to the analysis set forth in Landgraf and determine whether or not the Reform Act can properly be applied to the action now before me.
Upon consideration of the Landgraf analysis, contrary to the Defendants' position that based upon the plain language of § 108 of the Reform Act, the purpose of the Reform Act, the legislative history of the Reform Act and viewing the Reform Act as a whole there is clear Congressional intent that the Reform Act be applied retroactively to pending cases, I conclude first that no clear Congressional intent that § 107 be applied to cases pending when the Reform Act was passed exists.
Therefore, it is necessary to proceed to the second prong of the Landgraf analysis and determine whether application of the Reform Act to the RICO count would have a "retroactive" effect on the action such that the Reform Act should not govern in the instant matter. As stated above, a new statute has a retroactive effect on a pending case if it would impair rights a party possessed when he acted, increase a party's liability for past conduct, or impose new duties with respect to transactions already completed. Landgraf, 114 S. Ct. at 1505.
Clearly, applying the Reform Act retroactively to the case sub judice will impair rights Plaintiff Mathews and the class members possessed when this law suit was brought in that if applied, the Reform Act will deprive them of their RICO causes of action which were viable at the time this lawsuit was filed. See also In Re Prudential Securities, 930 F. Supp. at 79 (court held that the Reform Act impaired the plaintiffs' ability to recover for actions which may have violated federal law because it would strip the plaintiffs' complaint of RICO claims after the statute of limitations for securities fraud claims has likely expired and therefore, the statute should not function retroactively without a clear expression of congressional intent which the court did not find). Accordingly, I conclude that the Reform Act is inapplicable to the action at hand to the extent that the Defendants argue that it mandates the complete dismissal of the RICO count in this action. I do, however, recognize that the Defendants' arguments concerning the applicability of § 107 to this action are viable alternatives and therefore, in the event that Defendants decide that an interlocutory appeal of the applicability of the Reform Act to the case at hand is advisable, I will certify such an appeal.
II. Application of the Reform Act to the Request for Injunctive Relief.
In the "WHEREFORE" clause of Count I of the Proposed Complaint, injunctive relief is requested in the form of "the entry of an order enjoining the Defendants from continuing to act in an unlawful manner in connection with the partnerships . . ." The Defendants argue that (1) the Reform Act would bar this request for prospective relief, (2) the application of the Reform Act to the request for prospective relief does not have a retroactive effect under Landgraf because the Plaintiff has no vested right in future injunctive relief and (3) therefore, the request for injunctive relief stated in the Proposed Complaint should be disallowed. Defendants' Opposition Brief, p. 24, citing, Landgraf, supra., and Pic-A-State PA, Inc. v. Commonwealth of Pennsylvania, 42 F.3d 175 (3d Cir. 1994). Plaintiff Mathews responds summarily that "Defendants' Brief at 22-24 argues that the Reform Act applies prospectively to Mathews' claim for injunctive relief. Plaintiff does not concede that this argument has merit, but the Court should not now determine at this time the effect of the Reform Act on this claim for ancillary relief in an action that essentially seeks money damages." Plaintiff's Memorandum in Response to Defendants' Brief in Opposition to Plaintiff's Motion for Leave to File First Amended Complaint, p. 16.
In Landgraf, the Court stated:
Even absent specific legislative authorization, application of new statutes passed after the events in suit is unquestionably proper in many situations. When the intervening statute authorizes or affects the propriety of prospective relief, application of the new provision is not retroactive. Thus, in American Steel Foundries v. Tri-City Central Trades Council, 257 U.S. 184, 42 S. Ct. 72, 66 L. Ed. 189 (1921), we held that § 20 of the Clayton Act, enacted while the case was pending on appeal, governed the propriety of injunctive relief against labor picketing. In remanding the suit for application of the intervening statute, we observed that 'relief by injunction operates in futuro,' and that the plaintiff had no 'vested right' in the decree entered by the trial court. 257 U.S. at 201, 42 S. Ct. at 75-76.
Landgraf, 14 S. Ct. at 1501. The relevant provision of the Clayton Act reviewed in American Steel Foundries v. Tri-City Central Trade Council, supra., altered the standard for evaluating the propriety of injunctive relief against labor picketers.
In Pic-A-State PA. Inc. v. Commonwealth of Pennsylvania, 42 F.3d 175 (3d Cir. 1994), subsequent to the trial court declaring a Pennsylvania statute unconstitutional as violative of the Commerce Clause and entering an order permanently enjoining its enforcement, a federal statute was passed which made the conduct of a business that sells an interest in another state's lottery a federal crime. The Commonwealth of Pennsylvania then timely appealed the issuance of the permanent injunction and argued that the federal statute should be utilized by the appellate court in assessing the constitutionality of the state statute. The plaintiff disagreed and argued that to apply the federal statute would have a retroactive effect. Upon review, the appellate court held, in relevant part, that it was proper to apply the new statute in assessing the constitutionality of the state statute because, citing to Landgraf, to do so would not have a retroactive effect:
in the matter before us, application of the [federal statute] to the issue presented to this court attaches no new legal consequences to the activity engaged in by [the plaintiff] prior to the enactment of the [federal statute]. In its complaint, [the plaintiff] sought an injunction to bar the prospective enforcement of [the state statute] following its . . . effective date. As the Supreme Court has noted, "relief by injunction operates in futuro. When the intervening statute authorizes or affects the propriety of prospective relief, application of the new provision is not retroactive".
Pic-A-State, PA, Inc., 42 F.3d at 178 (internal citations omitted).
Contrary to Plaintiff Mathews' assertion that I should wait on the decision of whether the Reform Act is to be applied such that the request for injunctive relief can not be a part of the Proposed Complaint, I see no reason why this issue cannot be decided at this time. Therefore, based upon my review of Landgraf and Pic-A-State PA, Inc., I conclude that because the Reform Act affects the propriety of my awarding any prospective relief in this action, application of the new provision to the request for injunctive relief is proper and does not have a retroactive effect. Accordingly, to the extent that the request for injunctive relief in Count I of the Proposed Complaint seeks an order enjoining conduct that would have been actionable as fraud in the purchase or sale of securities, said remedial request contained in the "WHEREFORE" clause of Count I of the Proposed Complaint is no longer a viable request and therefore, Plaintiff Mathews may not amend his Complaint to include in the "WHEREFORE" clause of the RICO count a request for injunctive relief in the form of an order enjoining further conduct by the Defendants that would have been actionable as fraud in the purchase or sale of securities in connection with the partnership funds.
III. The Propriety of Plaintiff Mathews's Proposed Amendment to Add Additional Plaintiffs and Additional Facts.
The Defendants also argue that in his Proposed Complaint, Plaintiff Mathews improperly seeks to add new plaintiffs to the case and to assert through them, claims that have already been dismissed, i.e. the claims regarding Funds I and III. In support of this position, the Defendants first state:
two facts are beyond contest. First, Mathews originally brought claims with respect to Funds I and III that he had no standing to pursue. As of December 19, 1995, those claims had been dismissed, and this action contained no RICO claim with respect to those two Funds. See December 19 Order. Second, Mathews now seeks to add new plaintiffs who would themselves assert claims with respect to Fund I and III that he lacks standing to pursue.
Defendants' Brief in Opposition to Plaintiff's Motion for Leave to File First Amended Complaint ("Defendants' Opposition Brief"), p. 6. The Defendants then discuss the United States Court of Appeals for the Fifth Circuit decision in Summit Office Park, Inc. v. United States Steel Corp., 639 F.2d 1278 (5th Cir. 1981) and state that: "similarly [to the facts in Summit Office Park ], this Court has determined that Mathews has no standing to pursue RICO claims relating to Funds I and III. Accordingly, Mathews has no "identity of interest" with those plaintiffs he now improperly attempts to add by "amending" his Complaint in order to pursue claims relating to those Funds." Defendants' Opposition Brief, p. 7. The Defendants also cite to Turner v. First Wisconsin Mortgage Trust, 454 F. Supp. 899, 913 (E.D. Wis. 1978); Schwartz v. The Olympic, Inc., 74 F. Supp. 800, 801 (D. Del. 1947) and O'Donnell v. Kusper, 602 F. Supp. 619, 624 (N.D. Ill. 1985) for the proposition that "other courts have held that a plaintiff who lacks standing to pursue a claim has no right to amend the complaint to bring in other parties who will remain plaintiffs when the complaint is dismissed as to the original plaintiff." Defendants' Opposition Brief, pp. 7-8.
In addressing the Defendants' position on these issues, I first take the opportunity to clarify what effect my Opinion and Order dated December 19, 1995 meant to the posture of the case now before me. The Defendants apparently are of the opinion that by my Order dated December 19, 1995 wherein the Defendants' Motion to Dismiss was granted "as to the issue of Plaintiff's standing to pursue a RICO claim with respect to Funds I and III," this case is now limited to a single plaintiff and his claims relating to Fund II. See, for example, Defendants' Opposition Brief, p. 8 ("This Court has previously dismissed all claims with respect to Fund I and III."). To the contrary, as stated in my Opinion dated December 19, 1995, in ruling on the Defendants' Motion to Dismiss, I focused only upon those claims made by Plaintiff Mathews in his individual capacity and not the claims of the class with respect to Fund I, II and III. In other words, by my Opinion and Order dated December 19, 1995, I was clarifying that to the extent the Plaintiff was seeking to recover damages with respect to Funds I and III, he had suffered no such injury and therefore, could not recover any damages related to those funds.
Further, I find that all of the cases cited by the Defendants as dispositive on this issue are factually distinguishable from the case sub judice.11 Specifically, first, Plaintiff Mathews is still a plaintiff in this action and has standing to litigate the impropriety of the Defendants' conduct and thus, to assert the RICO claim contained in the Proposed Complaint against the Defendants which alleges a single scheme whereby all three funds were involved; he is merely limited in recovery to the injury he suffered with respect to Fund II, i.e. he does not have standing to recover for all injuries suffered as a result of the Defendants' unlawful conduct. Second, the parties sought to be named as parties plaintiff are and have been members of the class of investors who invested in the three KP/Miller funds since the Complaint was first filed. Third, the Proposed Complaint does not seek to change the causes of action stated in the original complaint. Thus, I find that the proposed amended complaint does not have "the characteristics of a new lawsuit rather than an amended complaint," and therefore, said amendment will not be futile and Plaintiff Matthews can amend his Complaint to add the additional named plaintiffs and to allege additional facts. Summit Office Park, 639 F.2d at 1284.
I will also address the Defendants' argument that the proposed Plaintiffs' Fund I, II and III claims are barred by the Reform Act because they are based upon conduct that would have been actionable as fraud in the purchase or sale of securities and were first advanced after the Reform Act was adopted. Defendants' Opposition Brief, pp. 11 and 12 n. 5. As indicated above, the claims of these additional plaintiffs are not new causes of action, but rather, are claims that have been a part of the action since Plaintiff Mathews first instituted this class action on behalf of both himself and those who invested in the KP/Miller funds and, therefore, this is not a "relation back" factual scenario as the Defendants argue. Simply stated, it would be illogical to hold that Plaintiff Mathews can sue in a representative capacity on behalf of the plaintiffs the Motion to Amend seeks to add and, if he is successful, to hold that these plaintiffs will recover damages from the Defendants, and, at the same time, conclude that these plaintiffs cannot be individually named as parties plaintiff in the action.
Accordingly, because I find that it would not be futile to allow Plaintiff Mathews leave to amend the Class Action Complaint to add these additional parties plaintiff and to add new factual allegations, Plaintiff Mathews' Motion for Leave to File First Amended Complaint is granted with the exception stated above that his amended Complaint shall not contain in the "WHEREFORE" clause of the RICO count, a request for injunctive relief in the form of an order enjoining further conduct by the Defendants that would have been actionable as fraud in the purchase or sale of securities in connection with the partnership funds.
ORDER OF COURT
AND NOW, this 26th day of September, 1996, after careful consideration of the submissions of the parties, and for the reasons set forth in the Opinion accompanying this Order, it is hereby ORDERED that Plaintiff John W. Mathews' Motion for Leave to File First Amended Complaint (Docket #: 37) is granted in part and denied in part:
Plaintiff Mathews is GRANTED leave to amend his Complaint to add the requested additional parties as named plaintiffs and to add the requested new factual allegations.
It is further ORDERED that Plaintiff Mathews is DENIED leave to amend his Complaint to request in the "WHEREFORE" clause of the RICO count a request for injunctive relief in the form of an order enjoining further conduct by the Defendants that would have been actionable as fraud in the purchase or sale of securities in connection with the partnership funds.
BY THE COURT:
Donetta W. Ambrose,
U.S. District Judge