An Appeal from the United States District Court for the Eastern District of Pennsylvania
Civil Action No. 95-CV-7224
Before: MANSMANN, NYGAARD and ROSENN, Circuit Judges.
This appeal raises two important issues of first impression in this court relating to commercial promissory obligations and securities. First, whether the obligors on unmatured promissory notes can obtain declaratory relief against the obligees of those notes and have the notes declared void and unenforceable, when the concurrent legal remedy underlying the request for declaratory relief would be barred by the statute of limitations. Second, whether transactions involving investment securities are covered under section 9.2(a) of the Pennsylvania Unfair Trade Practices and Consumer Protection Law ("UTP/CPL"), which creates a private right of action for consumers injured in the purchase or lease of goods or services. The United States District Court for the Eastern District of Pennsylvania held that the action for declaratory relief was time-barred because the corollary legal actions were based on conduct for which the statute of limitations had run. The court also held that investment securities are not "goods" under the UTP/CPL. The plaintiffs timely appealed. We affirm.
Taking the facts in the light most favorable to the plaintiffs, as did the district court, it appears that in 1986 the defendants organized Evergreen Valley Nurseries Limited Partnership ("Evergreen") to acquire, grow and sell nursery stock. The nursery stock consisted of approximately 950,000 evergreen trees ("nursery stock") on two leased properties in Pennsylvania, one in Lehigh County (called "Raven Valley") and one in Tioga County (called "the Tioga Farm"). In July 1986, the Parkinson Pension Trust ("Trust"), at the direction of Dr. William L. Parkinson, its sole trustee, purchased the Raven Valley nursery stock from Van Pines of Pennsylvania ("Van Pines") and its general partners for approximately $3.6 million. E. Wayne Pocius and Russell Dimmick are the general partners of Van Pines and are also the sole shareholders of Unique Garden Center ("Unique"), the general partner of Evergreen. The Trust then purchased the Tioga Farm nursery stock from Pocius and Dimmick for approximately $600,000.
Following the acquisition of the nursery stock by the Trust, Evergreen then purchased an undivided 91.2% interest in the Trust's nursery stock for the price of $10.4 million. Evergreen financed the purchase of the nursery stock by a $13.5 million offering of Evergreen limited partnership units, pursuant to a private placement memorandum ("PPM"). A substantial number of these units purchased by the plaintiffs are the genesis of this lawsuit. They paid $150,000 for each unit under the terms of the PPM; the purchase price consisted of a $70,000 cash payment, a $9,500 subscription note due on January 20, 1997, and a $70,500 promissory note ("investor note") payable to the Trust, which became due and payable on July 1, 1996.
The PPM issued by Evergreen did not disclose that Evergreen was to pay the Trust approximately $10.4 million for 91.2% of the nursery stock which the Trust had purchased from Evergreen for about $4.2 million. Thus, it failed to disclose that the purchase price for the interest in land had more than doubled in two months. The PPM did not mention the intricate entanglement of the parties involved in the underlying transactions or the self-dealing in the purchase of the nursery stock.
In 1989, the Internal Revenue Service ("IRS") issued a report concluding that the price of the nursery stock had been significantly overvalued. Although Evergreen initially contested the IRS report, in 1993 Evergreen and the IRS entered into a closing agreement in which Evergreen admitted that the nursery stock had been over-valued by at least $3.2 million. On October 11, 1993, the plaintiffs obtained a copy of the closing agreement between the IRS and Evergreen.
The plaintiffs filed their complaint in the district court on November 16, 1995, raising four claims. The first three claims sought a declaratory judgment that certain Investor Notes were void and unenforceable because they had been procured through fraud: (I) declaratory relief under Section 29(b) of the Securities Exchange Act of 1934, 15 U.S.C. Section(s) 78cc(b) (Supp. 1997); (II) declaratory relief under Section 508 of the Pennsylvania Securities Act, 70 Pa. Cons. Stat. Section(s) 1-508 (1994); and (III) declaratory relief based on common law fraud. Count IV alleged a violation of the UTP/CPL. The plaintiffs asserted that because of the Trust's expressed intent to collect on the investor notes in July 1996, they were compelled to bring this action to declare the notes void and unenforceable.
The defendants moved to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failing to state a claim upon which relief could be granted. The district court dismissed Counts I, II, and III as time-barred and dismissed Count IV for failing to state a claim on which relief can be granted. The plaintiffs appealed from the dismissal of all four claims.
When reviewing a motion to dismiss under Rule 12(b)(6) on statute of limitations grounds, the court exercises plenary review to determine "whether `the time alleged in the statement of a claim shows that the cause of action has not been brought within the statute of limitations.' " Cito v. Bridgewater Township Police Dep't, 892 F.2d 23, 25 (3d Cir. 1989) (citations and emphasis omitted). This court exercises plenary review over a district court order dismissing a complaint pursuant to Rule 12(b)(6) for failure to state a claim upon which relief can be granted. Moore v. Tartler, 986 F.2d 682, 685 (3d Cir. 1993).
Because actions for declaratory relief do not have their own statute of limitations, the district court concluded that the plaintiffs' causes of action are governed by the period of limitations applicable to the substantive claims underlying the action, citing Cope v. Anderson, 331 U.S. 461, 463-64 (1947). Thus, the district court held that the statute of limitations to be applied would be the same regardless of the posture of the case, whether offensive or defensive. Accordingly, if the underlying action is time-barred, so is the action for declaratory relief. Judge Huyett, the trial judge, then perceptively determined that Counts I, II, and III were all barred by the applicable statutes of limitations.
Although this court of appeals has not yet spoken on the issue, a number of other courts have. The First, Sixth, Ninth and Tenth Circuit Courts of Appeals have all held that an action for declaratory relief will be barred to the same extent the applicable statute of limitations bars the concurrent legal remedy. International Ass'n of Machinists & Aerospace Workers v. Tennessee Valley Authority, 108 F.3d 658, 668 (6th Cir. 1997); Levald, Inc. v. City of Palm Desert, 998 F.2d 680, 688-89 (9th Cir. 1993); Gilbert v. City of Cambridge, 932 F.2d 51, 57-58 (1st Cir. 1991); Clulow v. Oklahoma, 700 F.2d 1291, 1302 (10th Cir. 1983)."It is settled, therefore, that where legal and equitable claims coexist, equitable remedies will be withheld if an applicable statute of limitations bars the concurrent legal remedy." Gilbert, 932 F.2d at 57. The Court of Appeals for the Second Circuit, applying state law, has also held that when 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." Town of Orangetown v. Gorsuch, 718 F.2d 29, 41-42 (2d Cir. 1983) (applying New York law). As the district court found in this case, see infra at p. 10-12, the plaintiffs' claims could have been resolved by available timely legal remedies, including an action to rescind under the federal Securities Exchange Act of 1934. See Gatto v. Meridian Medical Associates, Inc., 882 F.2d 840, 842 (3d Cir. 1989).
The aforementioned courts which applied federal law relied on analogous Supreme Court precedent to reach this conclusion. In Russell v. Todd, 309 U.S. 280, 289 (1940), the Court recognized the long-standing doctrine that"when the jurisdiction of the federal court is concurrent with that at law, or the suit is brought in aid of a legal right, equity will withhold its remedy if the legal right is barred by the local statute of limitations." In Cope v. Anderson, 331 U.S. at 464, the Court reiterated this position, stating that "equity will withhold its relief in such a case where the applicable statute of limitations would bar the concurrent legal remedy." We have followed this proposition. See Gruca v. United States Steel Corp., 495 F.2d 1252, 1257 (3d Cir. 1974). However, neither the Supreme Court nor this court has addressed the question in the posture in which it is presented in the instant case.
The plaintiffs argue that the statute of limitations does not bar an action for declaratory relief based on a claim that is purely defensive in nature. For this proposition, they rely heavily on this court's opinion in Silverman v. Eastrich Multiple Investor Fund, L.P., 51 F.3d 28 (3d Cir. 1995). In Silverman, the plaintiff moved in federal court for injunctive and declaratory relief to proclaim a guaranty void after the defendants confessed judgment in state court against the loan guarantors, including the plaintiff. Id. at 30. The defendants moved for dismissal, asserting that the claim was time-barred under the Equal Credit Opportunity Act ("ECOA") on which the plaintiff guarantor relied. Id. at 31. The trial court granted the motion. Id. On appeal, we held that when the creditor endeavors to enforce the guaranty the claim could be asserted "as a defense to the state confession of judgment." Id. at 32. In Silverman, the defendants had not only obtained judgment, in contrast to this case where no action has yet begun on the notes, but enforcement of the judgment was imminent. Thus, there the plaintiffs' challenge to the confession of judgment was defensive.
Although Silverman did allow the assertion of a defensive claim after the statute of limitations on the underlying violation had run, the holding was definitely moored to the plaintiff 's defensive position in response to the state confession of judgment. The court stated:
There are numerous circumstances under which a guarantor may institute an action to declare his or her guaranty void and seek damages or other relief. The expiration of the statute of limitations calculated from the execution of said guaranty may bar the institution of such independent action. No such bar exists, however, to the utilization of such grounds as a defense.
51 F.3d at 32. The court noted that "plaintiff retained the right to assert the violation when efforts were made to collect and enforce the Guaranty." Id. (emphasis added).
In Silverman, the plaintiff had no prior opportunity to respond to the state court confession of judgment, thus limiting her available remedies to the equitable claim she pursued. Id. The court noted that "[the plaintiff's] ECOA claim was raised in direct response to Eastrich's state court confession of judgment, which did not require or provide for an answering pleading. . . . Thus, in essence, plaintiff's alleged ECOA violation is asserted as a defense to the state confession of judgment." Id. Accordingly, despite plaintiffs' assertions in the instant case, Silverman does not stand for the proposition that an independent action offensively for declaratory relief from potential liability on a note may be brought even though the plaintiff had a legal remedy before the statute of limitations on the concurrent legal remedy had run. On the contrary, Silverman holds only that where judgment has been confessed, a purported obligor may assert as a defense to its enforcement a statutory violation which would have been time-barred if asserted offensively in an independent action. *fn1 In this instant case, however, the creditors have taken no legal action to collect on the Investors Notes, plaintiffs have no voidable judgment, and recoupment is not now before us.
The Supreme Court set forth in Bull v. United States, 295 U.S. 247 (1935), a rationale similar to Silverman. Bull, a partner in a ship-brokering business, died in February and his estate continued to receive the profits of his partnership for one year after his death. Id. at 251. His estate valued the partnership only by the profits received up to Bull's death. The United States, however, declared all profits received by the estate to be corpus under the estate tax and taxed the property accordingly. The estate did not challenge the assessment at the time. Id. at 251-52. Four years later, the United States notified the estate that the same property was income and taxable as such. Id. at 252. The estate then pursued the administrative remedies to challenge the double taxation of the same property. When the final administrative appeal had been rejected, the estate brought an action in the Court of Claims, seeking a refund of the amount paid as income tax or, in the alternative, a refund for the tax paid on the same property when the estate tax was paid. Id. at 253. The Court of Claims found that the statute of limitations barred the second ground for relief, seeking correction of the estate tax. Id. at 254.
The Court in Bull first determined that the portion of the profits paid the estate was income, not corpus, and thus wrongly subjected to the estate tax as such. Id. at 257. The Court then held that the claim for refund of the estate tax was not barred by the statute of limitations. The Court noted that, prior to the institution of proceedings to collect income tax on the same property, the estate had no grounds to seek a refund of the money as a product of double taxation. Additionally, the Court noted that, under the law, "[p]ayment precedes defense" when challenging a tax assessment. Id. at 260. Therefore, the estate was entitled to raise the claim only as a defense after paying the income tax on the same profits.
If the claim for income tax deficiency had been the subject of a suit, any counter demand for recoupment of the overpayment of estate tax could have been asserted by way of defense and credit obtained notwithstanding the statute of limitations barred an independent suit against the Government therefor. This is because recoupment is in the nature of a defense arising out of some feature of the transaction upon which the plaintiff's action is grounded. Such a defense is never barred by the statute of limitations so long as the main action itself is timely.
Bull, 295 U.S. at 262. The Court then determined that "[the Government] has given [the estate] a right of credit or refund, which though he could not assert it in an action brought by him in 1930, had accrued and was available to him since it was actionable and not barred in 1925, when the Government proceeded against him for the collection of income tax. The pleading was sufficient to put in issue the ...