Celsion Corp. v. Stearns Management Corp.

• Decision Date: 13 August 2001
• Docket Number: No. 01 C 478.,01 C 478.
• Citation: 157 F.Supp.2d 942
• Parties: CELSION CORP, a Maryland Corporation, Plaintiff, v. STEARNS MANAGEMENT CORP., an Illinois Corporation, Warren C. Stearns, Warren R. Stearns, Charles A. Stearns, Anthony Riker, Ltd., an Illinois Corporation, John T. Horton, Individually and as Trustee of the George T. Horton Trust, and the George T. Horton Trust, Defendants.
• Court: U.S. District Court — Northern District of Illinois

157 F.Supp.2d 942

CELSION CORP, a Maryland Corporation, Plaintiff, v. STEARNS MANAGEMENT CORP., an Illinois Corporation, Warren C. Stearns, Warren R. Stearns, Charles A. Stearns, Anthony Riker, Ltd., an Illinois Corporation, John T. Horton, Individually and as Trustee of the George T. Horton Trust, and the George T. Horton Trust, Defendants.

No. 01 C 478.

United States District Court, N.D. Illinois, Eastern Division.

August 13, 2001.

COPYRIGHT MATERIAL OMITTED

Paul E. Freehling, Andrea L. Caplan, D'Ancona & Pflaum, Chicago, IL, Paul N. Murphy, Tighe, Patton et al., Washington, DC, for Plaintiff.

Jeffrey A. Schulman, Wolin and Rosen, Chicago, IL, Robert R. Bowie, Jr., Teresa K. LaMaster, Bowie and Jensen, Towson, MD, Theresa M. Moore, Solomon Pearl Blum Heymann & Stich LLP, Denver, CO, for Defendants.

MEMORANDUM OPINION AND ORDER

BUCKLO, District Judge.

Celsion Corporation ("Celsion"), brought this action under Section 29(b) of the Securities Exchange Act of 1934 ("the Act"), 15 U.S.C. § 78cc(b), and the Declaratory Judgment Act, 28 U.S.C. § 2201, for rescission of a series of common stock purchase warrants that Celsion issued to the defendants, Stearns Management Corporation ("SMC"), Warren C. Stearns ("Stearns"), Warren R. Stearns, Charles A. Stearns, Anthony Riker, Ltd., John T. Horton, and the George T. Horton Trust. Celsion claims that Stearns and SMC solicited potential investors to purchase Celsion's securities without the assistance of any broker-dealer registered with the Securities Exchange Commission ("SEC"), as required by § 15(a)(1) of the Act, 15 U.S.C. 78o(a)(1). Original jurisdiction over this matter exists pursuant to Section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa. The defendants move to dismiss the action, and I grant their motion.

I.

Celsion researches and develops patented treatments of cancer and other diseases. Warren C. Stearns is the president, director, and majority shareholder of SMC, which provides consulting and financial advisory services to Celsion. Warren R. Stearns, Charles A. Stearns, Anthony Riker Ltd., John T. Horton, and the George T. Horton Trust are all holders of Celsion common stock purchase warrants, which entitle them to Celsion stock at a purchase price of sixteen cents per share.

In 1996, Celsion sought to raise capital for its business operations, and Stearns proposed a plan to raise capital, including bridge financing, followed by a private placement offering and a secondary offering of Celsion equity securities. Celsion alleges that, at a May 1996 meeting, Stearns repeatedly represented to Celsion's officer that he and SMC regularly raised funds through the sales of his clients' securities, and that he would raise funds for Celsion through the private placement of equity securities. Celsion entered into a consulting agreement with SMC on May 28, 1996, in which SMC agreed to provide recommendations concerning offerings of securities in private transactions and public transactions. In return, Celsion agreed to pay SMC's fees and issue common stock purchase warrants to SMC's designated assignees. The warrants included anti-dilution provisions, and granted the holders the right to demand that, when they exercised the warrants, the underlying shares of Celsion stock that they purchased would be registered with the SEC and could be publicly traded.

In August 1996, Celsion issued common stock purchase warrants to Warren R. and Charles A. Stearns, Anthony Riker, Ltd., John T. Horton, and the George T. Horton Trust. In August 1997, under the terms of the May 1996 agreement, Celsion issued new warrants substituting the original warrants. In March 1999, SMC demanded that Celsion register with the SEC all the underlying shares that the warrant holders would receive upon exercise of their warrants. This included a total of 3,460,587 shares at a purchase price of sixteen cents per share. Celsion refused to register the shares with the SEC. The present value of the common stock purchase warrants held by the defendants exceeds $15 million. Celsion seeks rescission of the common stock purchase warrants that Celsion issued to defendants. Defendants move to dismiss on statute of limitations grounds, among others.

II.

I grant a motion to dismiss for failure to state a claim only if it appears beyond a doubt that the plaintiff can prove no set of facts in support of its claim that would entitle it to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). In determining this, I accept as true all well-pleaded factual allegations and draw all reasonable inferences in favor of the plaintiff. Chaney v. Suburban Bus Div. of Reg'l Transp. Auth., 52 F.3d 623, 626-27 (7th Cir.1995).

Defendants argue that Celsion's action for rescission of the common stock purchase warrants is time-barred by the statute of limitations provided in section 29(b) of the Act. Celsion argues that a federal limitations period does not apply, and even if it did, this action was brought within the requisite time period. Therefore, I must determine whether a federal or state statute of limitations applies to claims brought under section 29(b), and whether the statute of limitations has expired here.

Section 15(a)(1) of the Act prohibits any broker from using interstate commerce to effect a transaction in securities or to induce or attempt to induce the purchase or sale of any security unless the broker is registered with the SEC. 15 U.S.C. § 78o(a)(1). Section 29(b) permits a party to a contract to seek its rescission if performance of the contract "involves the violation of or the continuance of any relationship or practice in violation of" any provision of the Act. 15 U.S.C. § 78cc(b). The Supreme Court has found an implied, private cause of action for rescission of a contract under section 29(b), 15 U.S.C. § 78cc(b). Mills v. Electric Auto-Lite Co., 396 U.S. 375, 388, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970); see also Regional Props., Inc. v. Financial and Real Estate Consulting Co., 678 F.2d 552, 558 (5th Cir.1982).

Defendants argue that the action is time barred by the limitations provision of section 29(b)(2)(B), which states that:

no contract shall be deemed to be void by reason of this subsection in any action maintained in reliance upon this subsection, by any person to or for whom any broker or dealer sells, or from or for whom any broker or dealer purchases, a security in violation of any rule or regulation prescribed pursuant to paragraph (1) or (2) of subsection (c) of section 78o of this title, unless such action is brought within one year after the discovery that such sale or purchase involves such violation and within three years after such violation.

15 U.S.C. § 78cc(b)(2)(B) (emphasis added). This provision provides an express limitation for the rescission of a transaction for violation of the antifraud provisions in section 15(c), but not for the broker-dealer registration requirements of section 15(a). Therefore, I must determine the applicable statute of limitations for rescission of a contract for a violation of section 15(a).

Generally, when Congress has failed to provide a statute of limitations for a federal cause of action, I "borrow" or "absorb" the local state law time limitation most analogous to the case at hand. Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 355, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991). However, I look to federal law "when a rule from elsewhere in federal law clearly provides a closer analogy than available state statutes, and when the federal policies at stake and the practicalities of litigation make that rule a significantly more appropriate vehicle for interstitial lawmaking." Id. at 356, 111 S.Ct. 2773. In Lampf, the Supreme Court was faced with the question of which statute of limitations to apply to a private suit brought pursuant to section 10(b) of the Act. Id. at 361, 111 S.Ct. 2773. The Court held that the uniform federal period (one-and-three-year limitations period) in the Act's original remedial provisions applied. Id.¹ The Court stated that "where the claim asserted is one implied under a statute that also contains an express cause of action with its own time limitation, a court should look first to the statute of origin to ascertain the proper limitations period." Id. at 359, 111 S.Ct. 2773. There is no clearer indication of how Congress would have balanced the policy considerations implicit in any limitations provision than the balance struck by the same Congress in limiting similar and related provisions. Id.

Celsion argues that there is no analogous provision in the federal securities laws, and urges the adoption of a state limitations period. However, I need not consider state-law alternatives where Congress has provided an express limitations period for correlative remedies within the same enactment. Id. at 360, 111 S.Ct. 2773. The 1934 Act contains a number of express causes of action, each with an explicit limitations period, and, with only one exception, each of these includes some variation of a one-year period after discovery combined with a three-year period of repose. Id. In adopting the 1934 Act, Congress amended the limitations provision of the 1933 Act, adopting the one-and-three-year structure for each cause of action contained therein. Id. The inclusion of the one-and-three-year structure in the broad range of express securities actions contained in the 1933 and 1934 Acts suggests that a one-and-three-year period would not frustrate the policies underlying the Acts for similar implied actions. Id. at 361, 111 S.Ct. 2773.

Celsion argues that the uniform federal period should not be applied because, unlike other antifraud provisions in the 1934 Act, such as section 10(b), section 15(a) imposes strict liability for failure to register with the SEC. See SEC v. Randy, 38 F.Supp.2d 657, 667 (N.D.Ill.1999) (scienter is not an element of a violation of Section...