Merrill Lynch Ltd. Partnerships Litigation, In re

• Citation: 154 F.3d 56
• Decision Date: 31 August 1998
• Docket Number: Docket No. 97-9205
• Parties: RICO Bus.Disp.Guide 9551 In re: MERRILL LYNCH LIMITED PARTNERSHIPS LITIGATION. Louis LANZA; Stephen Guido and Victoria Scala, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. MERRILL LYNCH & COMPANY, INC.; Merrill Lynch Pierce Fenner & Smith Incorporated and John Does 1 through 20, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 56

154 F.3d 56

RICO Bus.Disp.Guide 9551

In re: MERRILL LYNCH LIMITED PARTNERSHIPS LITIGATION.

Louis LANZA; Stephen Guido and Victoria Scala, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. MERRILL LYNCH & COMPANY, INC.; Merrill Lynch Pierce Fenner

& Smith Incorporated and John Does 1 through 20,

Defendants-Appellees.

Docket No. 97-9205.

United States Court of Appeals, Second Circuit.

Argued May 4, 1998.

Decided Aug. 31, 1998.

Arthur R. Miller, Harvard Law School, Cambridge, MA (Melvyn I. Weiss, Michael C. Spencer, Salvatore J. Graziano, Milberg Weiss Bershad Hynes & Lerach LLP, New York, NY, Kevin P. Roddy, Los Angeles, CA, Nicholas E. Chimicles, M. Katherine Meermans, Chimicles Jacobsen & Tikellis, Haverford, PA, of counsel), for Plaintiffs-Appellants.

Robert F. Serio, New York, NY (Wesley G. Howell, Jr., Peter J. Beshar, Gibson, Dunn & Crutcher LLP, New York, NY, Edward J. Yodowitz, Ira Brad Matetsky, Skadden, Arps, Slate, Meagher & Flom, New York, NY, of counsel), for Defendants-Appellees.

Before: FEINBERG, PARKER and PHILLIPS ^*, Circuit Judges.

PER CURIAM:

I. BACKGROUND

A. Facts

Investors in a series of Merrill Lynch real estate limited partnerships ("investors") appeal from a judgment of the United States District Court for the Southern District of New York (Michael B. Mukasey, Judge ), entered August 26, 1997, dismissing pursuant to Rule 12(b)(6) their civil Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961-68, claims on statute of limitations grounds, and declining to exercise supplemental jurisdiction over their state law claims.

Investors claim that defendants Merrill Lynch & Co, and its wholly owned subsidiary, Merrill Lynch, Pierce Fenner & Smith (collectively "Merrill Lynch") engaged in a fraud designed to promote the sale of units in nine real estate limited partnerships between 1979 and 1987. The partnership units represented capital contributions by investors in limited partnerships which were created and controlled by Merrill Lynch. Merrill Lynch invested the capital contributions in real estate selected according to Merrill Lynch's particularized criteria. In late 1995, groups of investors filed four claims against Merrill Lynch in federal courts relating to the limited partnerships. By order of Judge Mukasey dated February 25, 1996 the cases were consolidated into this action. The investors were then given a month to file an amended complaint. Further, the order provided that the investors would have the opportunity to file a second amended complaint after they had a reasonable opportunity to take document discovery.

On March 29, 1996, investors filed their first class action complaint. Specifically, the investors alleged violations of RICO, 18 U.S.C. §§ 1962(a), (c) and (d). As predicate acts for their RICO claims, investors alleged mail, wire and securities fraud. After a period of discovery (during which investors allege Merrill Lynch was not forthcoming with all documents), Merrill Lynch moved to dismiss the complaint. Investors were given an opportunity to either respond to the motion or to file a second amended complaint ("SAC"). They chose the latter course.

The SAC, based again on RICO, asserts that Merrill Lynch made fraudulent representations and omissions to induce investors to invest in the partnerships. The specific allegations of the SAC are described in detail in the district court's decision. See In Re Merrill Lynch Ltd. Partnerships Litig., 7 F.Supp.2d 256, 259-60 (S.D.N.Y.1997). Merrill Lynch moved to dismiss the SAC on February 14, 1997, asserting both that the claims were barred by the applicable four-year statute of limitations, and that the claims were subject to dismissal under the "bespeaks caution" doctrine.

In support of their motion to dismiss, Merrill Lynch attached the prospectuses relating to the partnerships and the annual reports distributed to the investors. It is undisputed that these documents could be considered by the district court even on a Rule 12(b)(6) motion because they are documents filed with the Securities and Exchange Commission and are integral to the complaint. See San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Cos., 75 F.3d 801, 808-09 (2d Cir.1996); Kramer v. Time Warner Inc., 937 F.2d 767, 773-74 (2d Cir.1991). The investors moved to convert the 12(b)(6) motion to a summary judgment motion and to obtain further discovery.

B. The District Court's Decision

The district court granted the motion to dismiss, holding that the RICO claims were barred by the statute of limitations. In Re Merrill Lynch, at 274. The court found that the investors sustained their RICO injury at the time they purchased their limited partnership interests (1987 at the latest). Id. at 264. The court noted that the complaint alleged that the limited partnerships were fraudulent because even at the outset it was clear that they could not achieve their promised returns. Id. at 263. Further, the court found that statements in the prospectuses and annual reports put investors on inquiry notice of the fraudulent scheme before November 1991. Id. at 274. The district court also found that the investors had not properly pleaded their exercise of due diligence in pursuing the discovery of the claim and thus could not be heard to claim fraudulent concealment. Id. at 275. The investors requested an opportunity to amend the SAC to cure that omission. The court denied the request.

Investors also argued that Merrill Lynch's pattern of misrepresentations in the annual reports constituted "separate and independent" injuries which occurred after the purchase of the partnership units and within the limitations period. The district court found that the alleged misrepresentations were, at most, efforts to conceal the alleged fraud and did not result in new and independent losses to the investors. Id. at 265. The court then denied the investors' motion to convert the 12(b)(6) motion into a summary judgment motion because Merrill Lynch was entitled to dismissal on the pleadings. The court held that no further documents could save the investors' claims from dismissal. Id. at 276. Finally, the district court decided not to retain supplemental jurisdiction over the state law claims. Id. at 276.

II. DISCUSSION

A. Standard of Review

We review the district court's Rule 12(b)(6) dismissal de novo, taking as true all allegations in the complaint, and drawing all reasonable inferences therefrom in the investors' favor. Olkey v. Hyperion 1999 Term Trust, Inc., 98 F.3d 2, 4-5 (2d Cir.1996)(Parker, J.). We review for abuse of discretion the denial of leave to amend the SAC, the denial of the investors' motion to convert the 12(b)(6) motion to a summary judgment motion and to reopen discovery, and the refusal to retain jurisdiction over investors' state law claims.

B. The Statute of Limitations

Civil RICO claims are subject to a four-year statute of limitations. Agency Holding Corp. v. Malley-Duff & Assocs., 483 U.S. 143, 156, 107 S.Ct. 2759, 97 L.Ed.2d 121 (1987). The limitations period begins to run when the plaintiff discovers or should have discovered the RICO injury. Bankers Trust Co. v. Rhoades, 859 F.2d 1096, 1102 (2d Cir.1988). The initial complaint filed against Merrill Lynch in this matter was filed November 29, 1995. Thus, if the investors were on inquiry notice of the alleged injury before November 29, 1991, their RICO claims are time-barred unless an exception to the limitations period applies. For example, this Court recognizes a "separate accrual" rule under which a new claim accrues and the four-year limitation period begins anew each time a plaintiff discovers or should have discovered a new and independent injury. Id. at 1103.

1. The Injury

The first step in the statute of limitations analysis is to determine when the investors sustained the alleged injury for which they seek redress. Id. at 1102. We then determine when they discovered or should have discovered the injury and begin the four-year statute of limitations period at that point. Id.

Investors rely on Bankers Trust, First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 767 (2d Cir.1994), and Cruden v. Bank of New York, 957 F.2d 961, 977-78 (2d Cir.1992) for the proposition that the RICO injury does not become ripe until the "amount of damages becomes clear and definite." First Nationwide, 27 F.3d at 768 (citing Bankers Trust ). Their damages were not definite, they argue, until at least 1994 when Merrill Lynch made clear in its annual report that the partnerships had suffered permanent impairments in value, and that the previously promised returns would not be met.

We find Bankers Trust, Cruden and First Nationwide inapplicable in this case. They hold that when a creditor alleges he has been defrauded RICO injury is speculative when contractual or other legal remedies remain which hold out a real possibility that the debt, and therefore the injury, may be eliminated or significantly reduced. The RICO claim is, thus, not ripe until those remedies are exhausted and the damages are clear. In this case, investors allege that the partnerships were fraudulent at the outset because they could never achieve the promised objectives. Accepting that allegation as true, the investors sustained recoverable out-of-pocket losses when they invested; namely, the difference between the value of the security they were promised and the one they received which could not meet those objectives. As investors have no contractual or other legal remedies which could assuage the injury, the amount of damages was "clear and definite," and the injury was ripe, at the time of investment. First Nationwide, 27 F.3d at 768 (citing Bankers Trust ). ¹

2. The Question of "New and Independent" Injuries

We turn next to the question of whether any actions taken by Merrill Lynch after November 1991 constituted "new and independent" RICO violation...