Shuman v. Sherman

• Decision Date: 29 March 1973
• Docket Number: Civ. No. 71-1141.
• Parties: Irving SHUMAN and Sidney Heyman v. Murray H. SHERMAN et al.
• Court: U.S. District Court — District of Maryland

356 F. Supp. 911

Irving SHUMAN and Sidney Heyman v. Murray H. SHERMAN et al.

Civ. No. 71-1141.

United States District Court, D. Maryland.

March 29, 1973.

Jacob Sheeskin, Robert E. Reiver, and Sheeskin, Hillman & Berry, Langley Park, Md., for plaintiffs.

James L. Thompson and Miller, Miller & Canby, Rockville, Md., for defendant Sherman.

Nelson Deckelbaum and Deckelbaum & Wolpert, Rockville, Md., for all other defendants.

FRANK A. KAUFMAN, District Judge.

Plaintiffs instituted the instant suit on October 15, 1971, alleging that the sale by defendants to plaintiffs on or about October 17, 1968¹ of limited partnership interests in a real estate development violated both the Federal Securities Act of 1933² and the laws of Maryland. At the time suit was filed the partnership interests were conceded to be worthless.

I.

The threshold obstacle which plaintiff must surmount in order to maintain this action is the bar of limitations, pleaded by defendants. Determination of the applicability vel non of the appropriate statutes of limitation herein requires analysis of all three counts of the original complaint.

Plaintiffs have moved for summary judgment. Defendants have moved for dismissal, or in the alternative for summary judgment, asserting, inter alia, that plaintiffs' federal claims are barred by limitations. They first directed those motions to plaintiffs' original complaint and subsequently to their amended complaint.³ Because "matters outside the pleadings" (Federal Civil Rule 12(b)) have been presented and are considered herein, all of those pending motions and the principal issues raised by them, i. e., limitations,⁴ are treated and disposed of pursuant to Federal Civil Rule 56.

Count I asserts jurisdiction pursuant to Section 22(a) of the Securities Act of 1933, 15 U.S.C. § 77v, and alleges, inter alia:

* * * No registration statement was ever filed with the Securities and Exchange Commission or was in effect with respect to said securities, partnership interest and investment contracts at any time.⁵

Violation of the registration requirements of the '33 Act subjects the offender to civil liability under Section 12(1) of the 1933 Securities Act (15 U.S.C. § 77l(1)).⁶ However, liability predicated upon a violation of Section 12(1) is subject to the limitations provisions of Section 13 of the '33 Act, 15 U.S.C. § 77m, which provides a one-year period with relation to Section 12(1) suits.⁷ Thus, the statute of limitations for the Section 12(1) offense charged by Count I, i. e., sale of an unregistered stock through the mails, grants only a one-year period after the offense (sale) in which suit must be instituted. Since this suit was instituted but two days short of three years after the sale, Count I is barred by limitations.

II.

Count III of the complaint both incorporates and follows the language of Count I, but has as its gravamen the failure of the defendants to register the securities as required by the Maryland Securities Act (Md.Ann.Code art. 32A, §§ 1-44).⁸ Section 19 of Article 32A requires registration of all securities sold in Maryland not specifically exempted by Section 26, and Section 34(a)(1) subjects those who violate the registration requirement to civil liability. However, Section 34(e)'s limitation provisions are, in relevant part, identical to their federal counterpart, i. e., Section 13 of the '33 Act, and require that any suit to enforce the civil liability imposed by Section 34(a)(1) be commenced within one year of the alleged violation. Therefore, Count III is barred by the applicable statute of limitations, as is Count I.

III.

There remains Count II in which plaintiffs allege:

* * * Pursuant to * * * the Agreement of Limited Partnership for COLUMBIA DEVELOPMENT ASSOCIATES, all books of account were to be open and available to the Plaintiffs, however, after repeated requests the Plaintiffs were never given an explanation of many transactions that occurred between the Defendants and other entities under their control.

After subsequent paragraphs in which it is alleged that plaintiffs did not receive an explanation of six transactions entered into by the partnership at a time subsequent to plaintiffs' purchases of their partnership interests, Count II concludes with the allegation that—

The Defendants breached their fiduciary and trust relationship with the Plaintiffs by not disclosing vital information to the Plaintiffs. This amount sic to substantial and irreparable harm to the Plaintiffs.

The limited partnership agreement required the partnership to maintain books and records and to make them, plus reports, available to all parties. In essence, Count II is a demand for an accounting. Such an action, based on Maryland law, is not barred in this case by the applicable statute of limitations, for Md.Ann.Code art. 57, § 1 provides a period of three years in which such suits may be filed. Thus, there is a state law claim presented by Count II which is not barred by limitations.

This Court would exercise pendent jurisdiction over the above-mentioned state law claim, even though diversity does not exist, if there were a viable federal claim presented in this case. United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966); Hurn v. Oursler, 289 U.S. 238, 53 S.Ct. 586, 77 L.Ed. 1148 (1933). However, in Gibbs, Mr. Justice Brennan stressed that where all federal claims are dismissed before trial, the federal court should not exercise pendent jurisdiction over the remaining state law contentions.⁹ Accordingly, viewing Count II as based only upon state law, this Court will not exercise pendent jurisdiction herein.

IV.

But, plaintiffs additionally contend that Count II alleges a claim grounded upon Section 12(2) of the Securities Act of 1933.¹⁰ The only language to which plaintiffs point in suggesting that a violation of Section 12(2) has been stated is the language of Count II (quoted supra at p. 913), which includes a reference to violation of the "fiduciary and trust relationship" which arose out of the execution of the partnership agreement. Such violation has no relation, as a Section 12(2) claim must, to the sale of the limited partnership interests to plaintiffs. All of the information defendants are alleged not to have disclosed relates to conduct of the affairs of the partnership occurring well after the sale was consummated. Further, plaintiffs have made no allegation that that conduct was contemplated by defendants, or any of them, at the time of sale and thus should have been disclosed prior thereto.

V.

Plaintiffs' amended complaint does state a cause of action under Section 12(2) of the Securities Act of 1933. Plaintiffs seek to have such amendment relate back to the date of the institution of this suit.¹¹ If such relation back is permitted, the alleged 12(2) cause of action would not be barred by the three-year maximum limitations period of Section 13.¹² However, in order for the amended complaint to receive relation back treatment, it must comply with Rule 15(c) of the Federal Rules of Civil Procedure, which provides:

(c) Relation Back of Amendments. Whenever the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading, the amendment relates back to the date of the original pleading.

In Jackson v. Airways Parking Company, 297 F.Supp. 1366 (N.D.Ga.1969), Judge Edenfield charted the landmarks of Rule 15(c) and emphasized that an amended complaint, in order to relate back, must relate to "a certain range of matters . . . in controversy" concerning which the original complaint "put the defendant on notice . . ." (at 1382).¹³

Count II of the original complaint did not put defendants on notice that plaintiffs were attacking statements made in a pre-sale proposal sent to them seven to eighteen months prior to the events complained of in Count II. In the amended complaint which plaintiffs have filed they confine themselves to allegations of alleged untrue statements and misleading material omissions, which occurred prior to sale. But there is no reference to those statements or omissions in any count of the original complaint, and certainly not in Count II. Accordingly, the amended complaint cannot be related back on the basis of the contentions plaintiffs have advanced.

V.

The question remains as to whether Count I's allegation of failure to register the securities involved was sufficient to put defendants on notice that "a certain range of matters was in controversy", and that the misstatements or omissions now alleged to constitute the Section 12(2) claim were fairly within that ambit of notice. Plaintiffs have not specifically made such contention. However, in any event, the answer to that question must be in the negative. Judge Edenfield's recognition (at 1382) that:

* * * if the original pleading gives fair notice of the general fact situation out of which the claim arises, the defendant cannot be heard to complain of the amended complaint arising out of the same transaction¹⁴

requires that a defendant be fairly put on notice of the general fact situation involved. In this case, plaintiffs' original Count I referred specifically to activities within the time frame of October 15-17, 1968 only.¹⁵ In the amended complaint, the alleged Section 12(2) violation recites activities occurring in the time frame of January/February, 1968, ten months prior to the activities complained of in the original complaint.¹⁶ Further, the amended complaint sets forth allegations which are not only different in time and kind from those in the original complaint, but which also are more general than the original complaint's particularized claim of lack of registration. Thus, this case presents the obverse of the situation in United States ex rel. Ross v. Somers Construction Co., 184 F.Supp. 563, 567 (D.Del. 1960), in which the Court wrote: "The ...