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Mathews v. Kidder

November 16, 1998

JOHN W. MATHEWS; CAROLE ANN NUCKTON; PATRICIA LESTER; JORDAN BRODSKY; THOMAS C. CHESTNEY; DEBORAH W. TROEMNER; WILLIAM J. WATERMAN, JR.; VERNON L. SCHATZ; MELVIN H. ROOTS; ROBERT J. HOLTON; JAMES J. BOYLE; DAVID L. ROBINSON; VINCENT J. PANEPINTO; DOMINIC A. MARTELL; FRANCIS B. BORCATO; JOHN J. DOUGHERTY, TRUSTEES OF THE OPERATIVE PLASTERERS & CEMENT MASONS LOCAL UNION OFFICER & EMPLOYEE PENSION FUND; LEE CROSSMAN; SUSANNE DIANE ANDERSON; LARRY C. ANDERSON; GEORGE P. ARNOLD; ANN M. ARNOLD; DONALD J. AIBEL, ON BEHALF OF THEMSELVES A ND ALL OTHERS SIMILARLY SITUATED
v.
KIDDER, PEABODY & CO., INC., A DELAWARE CORPORATION; KP REALTY ADVISERS, A DELAWARE CORPORATION; HSM, INC., A TEXAS CORPORATION; HENRY S. MILLER CO., HENRY S. MILLER MANAGEMENT; HENRY S. MILLER APPRAISAL CORPORATION; HSM REAL ESTATE SECURITIES CORPORATION; MILLER REAL ESTATE SERVICES CORPORATION, A TEXAS CORPORATION, APPELLANTS



Before: Becker, Chief Judge, Aldisert and Weis, Circuit Judges.

The opinion of the court was delivered by: Becker, Chief Judge.

On Appeal From the United States District Court For the Western District of Pennsylvania (D.C. Civ. 95-cv-00085)

Argued: June 11, 1998

OPINION OF THE COURT

The Private Securities Litigation Reform Act of 1995 ("Reform Act" or "PSLRA"), amends 18 U.S.C. § 1964(c) to eliminate, as a predicate act for a private cause of action under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), any conduct actionable as fraud in the purchase or sale of securities. See Pub. L. No. 104-67, § 107, 109 Stat. 737, 758. This civil RICO case was brought by plaintiff John W. Mathews ("Mathews"), a disappointed investor, alleging misconduct--including securities fraud-- by several investment houses in connection with the sale of limited partnerships in real estate. The question presented in this interlocutory appeal by Kidder, Peabody & Co. and the other defendants is whether the relevant portion of the Reform Act (hereinafter the "RICO Amendment") applies retrospectively to eliminate securities fraud-based RICO claims such as the present one, which were pending when Congress enacted the Reform Act. The defendants argue that it does. We hold that it does not.*fn1 I. Facts and Procedural History

This action arises out of Mathews's failed investment in one of three related real estate limited partnerships-- KP/Miller Realty Growth Fund I, L.P. ("Fund I"); KP/Miller Realty Growth Fund II, L.P. ("Fund II"); and KP/Miller Realty Growth Fund III, L.P. ("Fund III")--organized, marketed, and managed by the defendants in the 1980s.*fn2 On June 7, 1984, Mathews purchased 40 units of Fund II from the defendants for $500 per unit, representing a total investment of $20,000. Almost eleven years later, on January 23, 1995, Mathews filed a class action complaint against the defendants to recover his losses and the losses of a putative class of persons who purchased partnership units in all three Funds. The complaint asserted federal RICO claims and state claims for breach of fiduciary duty and negligent misrepresentation.

Mathews alleges that the defendants organized the Funds for the purported purpose of making sound investments in commercial real estate projects in the United States, but that the true purpose of the Funds, and the object of the defendants' fraudulent scheme, was to generate excessive fees and income for the defendants who sponsored the Funds. Mathews further alleges that the defendants engaged in the predicate acts of securities fraud, mail fraud, and wire fraud in the organization, marketing, and management of these Funds and that this constituted a cognizable pattern of racketeering activity.*fn3 The factual predicates for Mathews's theory are as follows.

First, he alleges that Kidder, using interstate wire communications, advised its retail brokers in branch offices around the country that units in the Funds were available for sale, but (mis)represented that they were safe, non-speculative investments, suitable for customers with conservative investment objectives and a low tolerance for risk. Further, in light of Kidder's characterization of the Funds, the brokers between 1982 and 1986 made an "oral uniform sales pitch" to more than 6,000 potential investors in the Funds, who purchased units in the Funds in reliance on these misrepresentations. Mathews alleges that defendants "concealed the true value of the investments" and "deliberately misrepresented the value of these investments on monthly account statements" that were mailed to investors. These misrepresentations allegedly continued until February 1, 1994, when Kidder purportedly sent account statements to investors that, for thefirst time, "alerted investors that the value of the KP-Miller partnerships may have depreciated."

Mathews asserted RICO claims with respect to all three Funds, although he had only invested in Fund II, seeking to represent "a class of persons which includes all persons residing in the United States who purchased partnership units in KP/Miller Realty Growth Funds I, II, and III in the initial offering of such securities." The defendants moved to dismiss the complaint, contending, inter alia, that Mathews had no standing to assert claims as to Funds I and III in which he had never invested, and that his claims were barred by the statutes of limitations applicable to securities claims and RICO claims. On December 19, 1995, the district court held that Mathews could pursue his claims with respect to Fund II, but dismissed his individual claims with respect to Funds I and III, concluding that Mathews lacked standing to bring them. See Dist. Ct. Op. & Order (Dec. 19, 1995) at 13-16. The court reserved judgment on whether Mathews could serve as a class representative for the class of persons who invested in all three of the Funds. See id. at 13-14 n.4.

Three days after this Order, on December 22, 1995, the Reform Act became law when the Senate overrode President Clinton's veto. See 141 Cong. Rec. S19180 (daily ed. Dec. 22, 1995). As noted above, the Act forecloses civil RICO claims that are based upon conduct that would have been actionable as securities fraud. See Pub. L. No. 104-67, § 107, 109 Stat. 737, 758 (1995) (amending 18 U.S.C. § 1964(c) (1994)). After passage of the Act and the district court's dismissal of Mathews's individual Funds I- and III-based causes of action, Mathews sought leave tofile a First Amended Class Action Complaint. He sought to add twelve new plaintiffs who had invested in Funds I or III, or both. The defendants opposed the motion on the ground that the Reform Act should apply retrospectively to Mathews's action.

That same day, Mathews moved for class action determination, requesting certification of a class embracing investors in Funds I, II, and III, and designation of Mathews as class representative. The defendants opposed the Class Certification Motion arguing, inter alia, that Mathews could not satisfy the typicality requirement of Rule 23(a): (1) with respect to a class of investors in Funds I and III since he had no standing to pursue such claims, and (2) because he was subject to particularized defenses on his Fund II claims since he had transferred his Fund II investment out of Kidder in May 1987 and had not received the account statements that he claimed were the basis for the alleged misrepresentations underlying his RICO claim. In addition, defendants contended that Mathews could not satisfy the predominance requirement of Rule 23(b)(3) because his RICO claims were grounded on oral representations by a multitude of brokers that would require highly individualized showings of broker representations and customer reliance.

The district court rejected most of defendants' arguments and granted both of Mathews's motions. First, in an unpublished opinion and order, the court granted the Class Certification Motion, concluding that Mathews had met his burden of establishing the requirements of Rule 23 for class certification. See Mathews v. Kidder, Peabody & Co., No. 95-85, 1996 WL 665729, at *5 (W.D. Pa. Sept. 26, 1996). Simultaneously, the court filed an opinion in which it held that the Reform Act did not retrospectively bar Mathews's previously filed RICO claims that otherwise would be proscribed under the amended RICO Act. See Mathews v. Kidder, Peabody & Co., 947 F. Supp. 180, 185-86 (W.D. Pa. 1996). The court also ruled that Mathews could file the Proposed First Amended Complaint adding the new plaintiffs, because the class-action RICO claims relating to Funds I and III had not previously been dismissed and were likewise not barred by the Reform Act. See id. at 187-89.

Recognizing that the defendants' position on the retrospective application of the Reform Act presented a serious issue, the district court certified an interlocutory appeal from the opinion and order, regarding the application of the Reform Act to this case. See Dist. Ct. Modified Order (Jan. 22, 1997). We granted defendants' petition for permission to appeal. See 28 U.S.C. § 1292(b).

II. Retrospective Application of Statutes Under Landgraf and Lindh

The defendants contend that the district court erred when it refused to apply the Reform Act retrospectively to bar Mathews's pending RICO claims, which were based upon allegations of securities fraud. The relevant section of the Reform Act, section 107, provides 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 [RICO]." Defendants base their argument on a reading of Landgraf v. USI Film Products, 511 U.S. 244 (1994), and Lindh v. Murphy, 117 S. Ct. 2059 (1997), the preeminent recent cases addressing the retrospective application of statutes.

A. Landgraf

In Landgraf, the Court set out a two-step analysis for considering the temporal reach of new federal statutes:

"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." Landgraf, 511 U.S. at 280.

Under the two-step analysis, a court must first ask a threshold question: has Congress expressly provided that the statute in question should or should not apply retrospectively? If the answer to this question is "yes," then we follow Congress' express prescription and apply the statute accordingly. *fn4 If the answer to this question is "no," then we move on to the second step in the analysis.

The second step requires us to ask whether the statute has a "retroactive effect."*fn5 If the answer to this question is "yes," there is a traditional, strong presumption against retrospective application. Thus, we ask a subsidiary question: Is there a "clear congressional intent" to apply the statute retrospectively? If the answer to this question is "yes," then Congress's clear intent trumps the default presumption, and we apply the statute retrospectively. Otherwise, if this clear intent to apply the statute retrospectively is absent, the default rule applies, and we do not apply the statute retrospectively. If, on the other hand, the answer to the second question--does the statute have "retroactive effect"?--is "no," courts are to use normal rules of statutory construction along with traditional methods of determining a statute's temporal reach to establish whether a statute is to be applied retrospectively.*fn6

B. Lindh

In 1997, the Supreme Court added a new twist to the Landgraf two-part analysis:

"In determining whether a statute's terms would produce a retroactive effect, however, and in determining a statute's temporal reach generally, our normal rules of construction apply. Although Landgraf's default rule would deny application when a retroactive effect would otherwise result, other construction rules may apply to remove even ...


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