Gruber v. Price Waterhouse

• Decision Date: 26 August 1988
• Docket Number: Civ. A. No. 86-3976.
• Citation: 697 F. Supp. 859
• Parties: Oscar L. GRUBER, Raymond Shatz and Larry Greenstein, suing on behalf of themselves and all others similarly situated v. PRICE WATERHOUSE.
• Court: U.S. District Court — Eastern District of Pennsylvania

697 F. Supp. 859

Oscar L. GRUBER, Raymond Shatz and Larry Greenstein, suing on behalf of themselves and all others similarly situated v. PRICE WATERHOUSE.

Civ. A. No. 86-3976.

United States District Court, E.D. Pennsylvania.

August 26, 1988.

Anthony J. Bolognese, Leonard Barrack, Richard B. Dannenberg, Philadelphia, Pa., Jill Raskin, New York City, for plaintiffs.

John G. Harkins, Patricia L. Freeland, Philadelphia, Pa., Rodman W. Benedict, New York City, for defendant.

MEMORANDUM AND ORDER

DITTER, District Judge.

Defendant, an accounting firm, has moved for summary judgment in this class-action securities case on the ground that plaintiffs' claims against it are barred by the statute of limitations. The motion involves consideration of the retroactivity of the Third Circuit's en banc decision, In re Data Access Systems Securities Litigation, 843 F.2d 1537, 1550 (3d Cir.1988), and when plaintiffs' claims accrued.

On July 3, 1986, plaintiffs, a class of shareholders of the common stock of AIA Industries, Inc., brought this action against Price Waterhouse for its role in the preparation of audited financial reports and a comfort letter in connection with the July 21, 1983, initial public offering of AIA stock. They assert claims pursuant to Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k; Section 10(b) of the Securities Act of 1934, 15 U.S.C. § 78j(b) and rule 10b-5; and common law fraud and deceit. Simply stated, plaintiffs allege that Price Waterhouse knew of deficiencies in AIA's accounting procedures yet recklessly failed to discover or disclose a variety of fraudulent transactions that materially overstated the financial picture of AIA in the prospectus accompanying the public offering. In the complaint, plaintiffs identify those allegedly fraudulent transactions as primarily involving loan balances, account receivables, and other transactions between AIA and a major customer, ITG, Inc., and its sole shareholder and principal officer, Roy Goldberg.

In May, 1984, several class action complaints were filed against AIA, some of its officers and directors, and the stock underwriters arising from the July 21, 1983, public offering. In the offering materials, AIA reported that it was primarily engaged in providing charter and scheduled airline service for the gaming industry in Atlantic City, New Jersey.¹ The company stated that its primary customers were several casinos and travel groups and that it occupied a dominant position in this growing market. While AIA had historically incurred losses, the audited financial reports disclosed a decrease in losses² as of November, 1982, and the unaudited report for the four month period ending March 31, 1983, showed net income in excess of $718,000, with operating income of $371,378.

After the public offering, AIA announced that it was undergoing a change in its business to a predominantly scheduled air carrier with a significant de-emphasis in gaming charters. Commencing with the last quarter of fiscal 1983, the company began to incur substantial losses attributed to expenditures for the establishment of scheduled airline service. For fiscal year 1983 ending November 30, 1983, AIA announced a loss from operations of $8,948,363 and a loss for the fourth quarter of 1983 totalling $13,399,000. It was later disclosed that AIA had not paid excise and employment taxes for the fourth quarter. In July, 1984, AIA and its subsidiaries filed for reorganization under Chapter 11 of the Bankruptcy Code.

In their complaints against the company, its officers and directors, and the underwriters of the public offering, plaintiffs primarily alleged that defendants fraudulently failed to disclose in the public offering materials the transformation of AIA from a gaming charter airline to a scheduled air carrier. Plaintiffs also made general allegations that the financial information in the prospectus was false or misleading principally for failing to account for the expenses incurred with the change of business. The individual class action complaints were eventually consolidated into In Re AIA Industries, Inc. Securities Litigation, Master File No. 84-2276 (E.D.Pa.).

Once a statute of limitations defense is pleaded, plaintiffs bear the burden of showing that their complaint was timely filed. See e.g. Cook v. Avien, Inc., 573 F.2d 685, 695 (1st Cir.1978). Defendant, however, in moving for summary judgment, must show that accepting all facts of record and inferences reasonably drawn from the facts in the light most favorable to plaintiffs, there are no genuine questions of material fact. E.g. Sorba v. Pennsylvania Drilling Co., Inc., 821 F.2d 200 (3d Cir.1987), cert. denied, ___ U.S. ___, 108 S.Ct. 730, 98 L.Ed. 2d 679 (1988). In the context of the statute of limitations defense, where contrary inferences may reasonably be drawn from the facts which are material to when the cause of action accrued, defendants bear a heavy burden of showing that the claims are untimely as a matter of law. See e.g. Van Buskirk v. Carey Canadian Mines Ltd., 760 F.2d 481, 487 (3d Cir.1985); Mosesian v. Peat, Marwick, Mitchell & Co., 727 F.2d 873, 877 (9th Cir.), cert. denied, 469 U.S. 932, 105 S.Ct. 329, 83 L.Ed.2d 265 (1984).

I. Governing Legal Standards

A. Applicable Statute of Limitations

The parties agree that plaintiffs' common law claim is governed by a two-year statute of limitations from the date plaintiff knew or should have known of the injury and its cause. See 42 Pa. Cons.Stat. Ann. 5524(7); Urland v. Merrell-Dow Pharmaceuticals, Inc., 822 F.2d 1268 (3d Cir.1987). In contrast, the section 11 claim is barred if plaintiffs knew or should have known by the exercise of reasonable diligence of the untrue statements or omissions more than one year before July 3, 1986. 15 U.S.C. § 77m.³ The parties disagree as to the applicable limitations period for the section 10(b) and rule 10b-5 claims.

In an en banc decision, the Third Circuit recently held that the limitations period found in the Securities Act of 1933, which applies to the section 11 claim, also governs the implied causes of action under section 10(b) and rule 10b-5. In re Data Access Systems Securities Litigation, 843 F.2d 1537, 1550 (3d Cir.1988). Prior to Data Access, the court of appeals had employed a case by case approach to this question which required a court

to examine each contention of a federal securities complaint with great particularity to determine whether the state blue sky statute tracks the particular federal claim, and if not, to determine claim-by-claim which other state limitations period will apply depending upon the resemblance between the precise federal claim and those based in state or common law actions.

Id. at 1541. See Biggans v. Bache Halsey Stuart Shields, Inc., 638 F.2d 605 (3d Cir. 1980); Roberts v. Magnetic Metals Co., 611 F.2d 450 (3d Cir.1979). Defendant now advocates a retroactive application of Data Access which plaintiffs oppose.

Generally, the law applied is the law in force on the date the case is decided. Whether a decision that would legally and factually control a case should only be applied prospectively requires consideration of three factors:

1. Whether the decision to be applied establishes a new principle of law, either by overruling clear past precedent on which litigants may have reasonably relied, or decides an issue of first impression that was not clearly foreshadowed.

2. Whether retroactive application will further or retard the rule's operation as determined by an examination of the history, purpose, and effect of the rule.

3. Whether retroactive application will produce substantially inequitable results. Chevron Oil Co. v. Huson, 404 U.S. 97, 106-07, 92 S.Ct. 349, 355, 30 L.Ed.2d 296 (1971); Hill v. Equitable Trust Co., 851 F.2d 691 (3d Cir.1988). In Hill, the court applied Data Access retroactively after finding that the first and third factors did not favor limiting the en banc decision to prospective application.⁴ In this particular case, however, I conclude that the first and third factors require prospective application of Data Access. Thus, I will apply a two-year statute of limitations to plaintiffs' section 10(b) and rule 10b-5 claims.

Under the first factor, prior precedent must be "`sufficiently clear that a plaintiff could have reasonably relied upon it in delaying suit, a criteria that was not met where the law was erratic and inconsistent.'" Hill, at 696 (quoting Fitzgerald v. Larson, 769 F.2d 160 (3d Cir.1985)). Here, unlike Hill, there was clear precedent, directly on point, on which plaintiffs could reasonably have relied. In 1981, a unanimous panel of the Third Circuit, on the basis of Biggans, summarily held that in Pennsylvania, section 10(b) and rule 10b-5 claims by a purchaser of a security against an accountant were governed by the Pennsylvania common law statute of limitations for fraud. Sharp v. Coopers & Lybrand, 649 F.2d 175, 191-92 (3d Cir.1981). In Hill, to the contrary, the court found the law unsettled because of the lack of consensus as to the proper application of the Roberts and Biggans analysis to different factual scenarios, which as the district court had previously commented in a related action, made it "difficult to predict what effect these opinions hold for the circumstances posed by the present complaint." Hill v. Der, 521 F.Supp. 1370, 1382-83 (D.Del. 1981) (emphasis added). The Third Circuit found that this district court decision:

placed these very plaintiffs on notice that, at least as of their filing date, the law in the circuit on this issue was in ferment. Although the majority opinions in Biggans and Roberts were precedential, the factual situations in each case left considerable room for variation as Der demonstrated. Clear holdings on which plaintiffs could reasonably rely, as in Al-Khazraji v. St. Francis College, 784 F.2d 505 (3d Cir.1986), aff'd, 481 U.S. 604, 107 S.Ct. 2022, 95 L.Ed.2d 582 (1987) and its

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