$ 4.5 million in cash and $ 6.2 million in notes from Evergreen, all for nursery stock originally purchased by the Trust for about $ 4.2 million.
The private placement memorandum failed to disclose the amounts the Trust actually paid for the nursery stock and omitted to mention, among other things, the self-dealing surrounding the Raven Valley and Tioga purchases and the nursery stock's inflated value.
In 1993, the IRS and Evergreen entered into a Closing Agreement in which Evergreen admitted that the original amount set for the value of the nursery stock was false and that the true value of the nursery stock (for income tax purposes in 1986) was $ 7,150,000. Plaintiffs obtained a copy of the closing agreement between the IRS and Evergreen on October 11, 1993.
Because of the Trust's expressed intent to collect on the investor notes in July of 1996, plaintiffs filed the instant Complaint on November 16, 1995 -- more than 2 years after receiving the Closing Agreement.
The Complaint is framed in four counts. Counts I-III seek a declaration that the investor notes are void and unenforceable because they were procured by fraud. Count I requests declaratory relief under Section 29(b) of the Securities and Exchange Act of 1934 ("'34 Act"). Count II seeks declaratory and rescissory relief pursuant to Section 508 of the Pennsylvania Securities Act ("PSA"). Count III demands declaratory relief based upon common law fraudulent inducement. Count IV alleges that defendants have violated the Pennsylvania Unfair Trade Practices and Consumer Protection Law ("UTPL") and seeks treble damages.
A. Statutes of Limitations Applicable to Declaratory Judgment Actions.
Actions for declaratory relief do not have their own statutes of limitations: "declaratory relief is a mere procedural device by which various types of substantive claims may be vindicated, and limitations statutes do not apply to declaratory judgments as such." Hoagy Wrecker Service, Inc. v. Fort Wayne, 776 F. Supp. 1350, 1359 (N.D. Ind. 1991).
Of course, the absence of a specific limitations statute does not mean that actions for declaratory relief may be brought at any time. See Gilbert v. Cambridge, 745 F. Supp. 42, 47 (D. Mass. 1990), affirmed, 932 F.2d 51, cert. denied, 502 U.S. 866, 116 L. Ed. 2d 153, 112 S. Ct. 192 (1991)(discussing Town of Orangetown v. Gorsuch, 718 F.2d 29, 42 (2d Cir. 1983)). Instead, the declaratory judgment action must be brought within the limitations period applicable to the substantive claim underlying the request for declaratory relief.
Typically, then, the statute of limitations "applicable to ordinary action at law and suits in equity should be applied in like manner to actions for declaratory relief." In re Downingtown Indus. & Agricultural School, 172 Bankr. 813, 824 (Bankr. E.D. Pa. 1994). Stated differently, the right sued upon -- not the form of action -- supplies the relevant limitations period. Town of Orangetown, 718 F.2d at 42 (If a "claim for declaratory relief could have been resolved through another form of action which has a specific limitations period, the specific period of time will govern."); Hoagy Wrecker Service, 776 F. Supp. at 1359 (action for declaratory relief subject to limitations period applicable to corresponding damages action).
Here, each right sued upon in Counts I-III has a discrete limitations period. Each claim plaintiffs raise in Counts I-III could have been vindicated in an action for damages or other relief. Thus, plaintiffs' causes of action are governed by the limitations periods associated with the legal remedy underlying, or corollary to, plaintiffs' declaratory judgment claims. If the underlying action is time-barred, so to is the supervening declaratory judgment claim. See Cope v. Anderson, 331 U.S. 461, 463-64, 91 L. Ed. 1602, 67 S. Ct. 1340 (1947)("Equity will withhold its relief . . . where the applicable statute of limitations would bar the concurrent legal remedy."); Nemkov v. O'Hare Chicago Corp., 592 F.2d 351, 355 (7th Cir. 1979)(10b-5 action for recision was untimely because corollary action for damages was time-barred).
Plaintiffs protest the imposition of any limitations periods, reasoning that they are in an essentially defensive posture and are emphatically not seeking damages. However, statutes of limitation reflect the legislature's considered judgment as to the proper time-frame in which to commence a cause of action. Resolution Trust Corp. v. Farmer, 865 F. Supp. 1143, 1152 (E.D. Pa. 1994)(Rendell, J.). That judgment cannot be evaded by opportunistic pleading: the substance of the claim matters, not the form of action. To hold otherwise would permit
a party seeking to vitiate a contract for fraud [to] circumvent the applicable statute of limitations by characterizing his claim as one for a declaratory judgment that the contract is unenforceable at the time he seeks to avoid the application of its terms, [and] the statute of limitations would soon have little meaning.
Swecker v. Rau, No. 88-8653, 1990 WL 33944 at * 5 (E.D. Pa. March 22, 1990)(Waldman, J.); Gilbert, 745 F. Supp. at 47 ("The statute of limitations may not be sidestepped simply by labelling an action one for declaratory or injunctive relief, rather than one for damages.").
Accordingly, this Court will impose the statute of limitations applicable to the "substance" of plaintiffs claims for declaratory relief. See Town of Orangetown, 718 F.2d at 42.
B. Counts I-III Are Untimely; Count IV is Timely
Accepting as true the facts alleged in the Complaint and all reasonable inferences which can be drawn from it, Rocks, 868 F.2d at 645, this Court finds that the applicable limitations periods began to run no later than October 11, 1993. On that date, plaintiffs obtained copies of the IRS Closing Agreement which disclosed defendants' fraudulent activities. Compl. PP 39, 48-9. The Complaint was filed on November 29, 1995.
Count I seeks declaratory relief under Section 29(b) of the '34 Act which provides that "contracts made in violation of any provision of this chapter . . . shall be void." 15 U.S.C. § 78cc(b). Because this case does not involve broker/dealer fraud, the express limitations period provided in Section 29(b) does not apply. Nonetheless, the Third Circuit has imposed a one/three year limitations period upon non broker/dealer claims brought under Section 29(b). Gatto v. Meridian Medical Assoc., 882 F.2d 840, 842 (3d Cir. 1989), cert. denied, 493 U.S. 1080, 107 L. Ed. 2d 1041, 110 S. Ct. 1136 (1990)(limitation period runs one year after discovery of fraud or three years after alleged violation occurred). Plaintiffs could have brought an action under Section 29(b) for, inter alia, recision, damages, restitution, specific performance. See Gruenbaum & Steinberg, Section 29(b) of the Securities and Exchange Act of 1934: A Viable Remedy Awakened, 48 Geo. Wash. L. Rev. 1 (1980). See also Gatto, 882 F.2d at 842. If plaintiffs had presented such claims, they would have been time-barred as this action was commenced more than one year after plaintiffs' discovery of the facts revealing fraud. Accordingly, plaintiffs' corollary Section 29(b) declaratory judgment claim is also time-barred. Count I must be dismissed. See, e.g., Nemkov, 592 F.2d at 355.
Count II seeks recision of the investor notes, rescissory damages and a declaration that the notes are void under Section 508 of the PSA. Section 508 provides that "no person may base any suit on any contract in violation of this act." 70 P.S. § 1-508. Damages actions may be maintained against persons who violate various provisions of the PSA. 70 P.S. § 1-501. If plaintiffs had presented such claims, they would be barred by the one/four limitations period provided in Section 504 of the PSA.
70 P.S. § 1-504. Accordingly, the corollary action for declaratory relief (and recision) is also untimely. Count II must be dismissed. See e.g., Town of Orangetown, 718 F.2d at 42.
Count III, grounded on common law fraudulent inducement, seeks to have the investor notes declared void. In Count III, plaintiffs essentially assert a defense of fraudulent inducement. Of course, such a defense is properly raised only by defendants. Plaintiffs' apparent purpose for asserting such a "defense" here (rather than a claim for damages) is to evade the limitations period applicable to claims for fraud -- two years -- which applies to any "action to recover damages . . . including deceit or fraud." 42 P.S. § 5524(7). Because an action for damages would be time-barred, plaintiffs' corollary declaratory judgment action is also untimely.
Count III must be dismissed. See e.g., Swecker, 1990 WL 33944 at *5.
Count IV requests relief pursuant to the UTPL which is governed by Pennsylvania's six year "catch-all" statute of limitations. Gabriel v. O'Hara, 368 Pa. Super. 383, 534 A.2d 488 (Pa. Super. Ct. 1987)(applying 42 P.S. § 5527(6) to the UTPL). This Court rejects defendants' invitation to predict that the Supreme Court of Pennsylvania would disagree with the appellate court's decision in Gabriel, and will apply the catch-all limitations period. See McNasby v. Crown Cork & Seal Co., Inc., 888 F.2d 270, 281 (3d Cir. 1989), cert. denied, 494 U.S. 1066, 108 L. Ed. 2d 784, 110 S. Ct. 1783 (1990)(holding that Superior Court decisions "'are indicia of how the Pennsylvania Supreme Court would decide' the issue" (quoting McGowan v. University of Scranton, 759 F.2d 287, 291 (3rd Cir. 1985))).
Because plaintiffs commenced this action more than six years after the putative fraudulent conduct of defendants, the action would be barred absent application of the "discovery rule" which "tolls the statute of limitation when a plaintiff, despite the exercise of due diligence, is unable to know the existence of the injury and its cause." Bohus v. Beloff, 950 F.2d 919, 924 (3d Cir. 1991). Plaintiffs have pled facts -- when coupled with favorable inferences -- sufficient to demonstrate, for the purposes of this Motion, that defendants prevented the discovery of their alleged defalcations through further acts of fraud and concealment up until 1993. Compl. PP 37, 47, 49. Thus, the statute of limitations was tolled until 1993 and Count IV is therefore timely.
C. The UTPL Does Not Afford a Private Action for Securities Transactions
Defendants offer a number of forceful arguments against the application of the UTPL to the purchase and sale of securities. In particular, defendants urge that the definition of "goods" as used in the act must be interpreted to exclude securities. Their position is buttressed, in part, by the absence of any reported Pennsylvania decisions applying the UTPL to the sale of securities. Reading the UTPL as a whole and against the backdrop of similar legislation, this Court finds that the UTPL does not apply to the mere purchase of securities.
The UTPL affords a private right of action to any
person who purchases or leases goods or services primarily for personal, family or household purposes and thereby suffers any ascertainable loss . . . as a result of the use or employment by any person of a method, act or practice declared unlawful by Section 3 of this act. . . .