Bloch v. Prudential-Bache Securities

• Citation: 707 F. Supp. 189
• Decision Date: 28 February 1989
• Docket Number: Civ. A. No. 88-935.
• Parties: Claire M. BLOCH, Dante J. Casali, William L. Connelly, Jr. and Shirley J. Connelly, Ursula M. Corso, Robert J. Kuhn, Joseph C. Larkin, and Bernard A. Woods, Plaintiffs, v. PRUDENTIAL-BACHE SECURITIES, Robert M. Kolaczynski, Thomas McKewon, Ronald W. Theoret, Mark Lucero, Horse Power, Inc., Ralph J. Guyton, Sr., Ralph Guyton, Jr., Patrick Guyton, Melvin Pirchesky, Jeffrey W. Letwin, and Finkel, Lefkowitz, Ostrow & Woolridge, Defendants.
• Court: U.S. District Court — Eastern District of Pennsylvania

707 F. Supp. 189

Claire M. BLOCH, Dante J. Casali, William L. Connelly, Jr. and Shirley J. Connelly, Ursula M. Corso, Robert J. Kuhn, Joseph C. Larkin, and Bernard A. Woods, Plaintiffs, v. PRUDENTIAL-BACHE SECURITIES, Robert M. Kolaczynski, Thomas McKewon, Ronald W. Theoret, Mark Lucero, Horse Power, Inc., Ralph J. Guyton, Sr., Ralph Guyton, Jr., Patrick Guyton, Melvin Pirchesky, Jeffrey W. Letwin, and Finkel, Lefkowitz, Ostrow & Woolridge, Defendants.

Civ. A. No. 88-935.

United States District Court, W.D. Pennsylvania.

February 28, 1989.

Richard A. Finberg, Ellen M. Doyle, Berger Kapetan Malakoff & Meyers, P.C., Pittsburgh, Pa., for plaintiffs.

Ralph J. Kelly, Philadelphia, Pa., for defendant Prudential-Bache.

Thomas McKewon, pro se.

Richard R. Nelson, II, Pittsburgh, Pa., for Ronald W. Theoret.

S. Michael Streib, Pittsburgh, Pa., for defendant Mark Lucero.

Henry E. Rea, Jr., Pittsburgh, Pa., for defendant Horse Power, Inc. & Guytons.

Leonard Marsico, Pittsburgh, Pa., for defendant Pirchesky.

Arthur J. Murphy, Jr., James R. Schadel, and William R. Haushalter, Pittsburgh, Pa., for defendant Jeffrey Letwin.

Vincent J. Grogan, Kathryn L. Simpson, Pittsburgh, Pa., for defendant Finkel, et al.

MEMORANDUM OPINION

MENCER, District Judge.

The plaintiffs in this action are investors who are asserting securities fraud and RICO claims against the defendants. Prudential-Bache Securities has filed a motion to dismiss based on the statute of limitations, failure to plead fraud with particularity, failure to allege a pattern of racketeering activity, and failure to state a claim. Finkel, Lefkowitz, Ostrow & Woolridge has filed a motion to dismiss based on failure to plead fraud with particularity and failure to allege a pattern of racketeering. Jeffrey Letwin joined the law firm's motions. These motions are presently before this court.

I. Facts

The defendants in this case were all involved in the sale of limited partnership interests in a horse breeding operation known as Linden Creek Farms 1984-2, Limited Partnership (LCF). Horse Power, Inc. (HP) was the general partner of LCF, and four of the individual defendants were the principals of HP. Officers and brokers of the Pittsburgh office of Prudential-Bache Securities (Pru-Bache) promoted and sold units of LCF.

The plaintiffs allege that, in the course of promoting LCF, Pru-Bache brokers made misrepresentations designed to lure potential investors. Specifically, they allege that the brokers asserted that an investment in LCF was better than most limited partnership horse investments because LCF had herd insurance to protect investors. They allege that the brokers misrepresented both the purchase price of the horses and the amount of insurance for each horse. The plaintiffs also assert claims of kickbacks and distributions of proceeds that were not disclosed in the Private Placement Memorandum.

In 1986, a series of incidents triggering insurance liability led to the surfacing of the alleged misrepresentations. In May, one of the newly born colts had to be destroyed because it broke its leg. In July, one of the brood mares died of illness while in foal. In August, three of the brood mares died in an automobile accident under allegedly suspicious circumstances on the last day of insurance coverage. The plaintiffs assert that they first received notice of the deficiencies in insurance coverage in September, 1986 when they were informed of the amount of insurance proceeds from the deaths. They filed their Complaint on April 26, 1988.

II. Legal Analysis

A. Statute of Limitations for § 10(b)

Pru-Bache asserts that the statute of limitations for actions under § 10(b) of the 1934 Act and Rule 10b-5 is one year from discovery with a maximum of three years from the violation. Pru-Bache argues that the plaintiffs have not alleged sufficient facts to toll the statute under the discovery rule, so the statute should begin to run when the Private Placement Memorandum was disseminated, November 15, 1984. Consequently, the statute would have run in November, 1987 at the latest. Even if the court invokes the discovery rule and tolls the statute until September, 1986, the statute would have run in September, 1987. Under either scenario, Pru-Bache argues, the Complaint is untimely.

In support of its arguments, Pru-Bache relies on In re Data Access Systems Securities Litigation, 843 F.2d 1537 (3d Cir.) (in banc), cert. denied, Vitiello v. Kuhlowsky and Co., ___ U.S. ___, 109 S.Ct. 131, 102 L.Ed.2d 103 (1988). In Data Access, the Third Circuit held that "the proper period of limitations for a complaint charging violation of section 10(b) and Rule 10b-5 is one year after the plaintiff discovers the facts constituting the violation, and in no event more than three years after such violation." Id. at 1550.

The issue left unsettled in Data Access is whether courts should apply the statute of limitations retroactively to cases accruing before April 8, 1988, when Data Access was decided. The majority did not address the issue of retroactivity, apparently because it concluded that the issue was not before the court. Id. at 1551.¹

The general rule is that a court's decision acts retroactively. Hill v. Equitable Trust Co., 851 F.2d 691, 695 (3d Cir.1988), cert. denied, Data Controls North, Inc. v. Equitable Bank Nat. Assoc., ___ U.S. ___, 109 S.Ct. 791, 102 L.Ed.2d 782 (1989). Indeed, the structure of our legal system dictates that a decision is applied retroactively to the dispute it resolves; courts apply statutes, legal principles, and precedent to events that have already transpired. Id. Acknowledging that retroactivity may sometimes result in injustice, the Supreme Court created an exception to the general rule. In Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971), the Court outlined the conditions under which a decision would be applied only prospectively:

First, the decision to be applied nonretroactively must establish a new principle of law, either by overruling clear past precedent on which litigants may have relied, or by deciding an issue of first impression whose resolution was not clearly foreshadowed. Second, it has been stressed that "we must weigh the merits and demerits in each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective application will further or retard its operation." Finally, we have weighed the inequity imposed by retrospective application, for "where a decision of this Court could produce substantial inequitable results if applied retroactively, there is ample basis in our cases for avoiding the `injustice or hardship' by a holding of non-retroactivity."

Id. at 106-07, 92 S.Ct. at 355-56 (citations omitted). We will apply the three factors of the Chevron test to the facts before the court.

1. Status of the Law pre Data Access

At both the time of the alleged misrepresentations and the time by which the plaintiffs were on inquiry notice of those misrepresentations, the Third Circuit had issued two important cases on the statute of limitations for § 10(b) actions. The issue was one of first impression in Roberts v. Magnetic Metals Co., 611 F.2d 450 (3d Cir. 1979). In the opinion of the court, Judge Gibbons wrote that courts should determine what state action is violated by the alleged behavior of the defendant, then apply the statute of limitations for that action. In the case sub judice, Judge Gibbons found that the facts stated a cause of action for New Jersey's common law fraud, so he applied the six year statute of limitations for fraud. In a concurring opinion, Judge Sloviter arrived at the same result under different reasoning. Judge Sloviter opined that the proper state statute to borrow was the one which best effectuated federal policies. Id. at 458. In dissent, Chief Judge Seitz favored an analysis that examined both the most analogous state action and whether the statute of limitations for that action effectuated federal policy. He found that the two year limitation under New Jersey's blue sky laws best satisfied both criteria. Id. at 461-63.

The other important Third Circuit case is Biggans v. Bache Halsay Stuart Shields, 638 F.2d 605, (3d Cir.1980). In Biggans, the majority again determined what causes of action were available to the plaintiff under state law, then determined which statute of limitations to apply. Under this analysis, the majority selected the six year limitation attendant with a common law fraud action. Judge Weis, dissenting, argued for application of the limitation from the state blue sky laws. Thus, the two important decisions in the Third Circuit both apply the six year statute of limitations for common law fraud.²

The difficulty with concluding that these cases establish "clear precedent on which litigants may have relied" is twofold. First, both Roberts and Biggans involved narrow factual situations; Roberts involved a "squeeze-out" merger and Biggans involved the "churning" of an account. Second, both opinions had strong dissents. Of the four judges who considered the issue, two (Gibbons and Sloviter) favored the limitation for common fraud and two (Seitz and Weis) favored the limitation for the state blue sky laws. Thus, the plaintiffs were not building their case on the most solid foundation if they were relying on Third Circuit precedent.

Several courts have already addressed the clarity of precedent predating Data Access. Of primary importance for this court is the Third Circuit opinion in Hill v. Equitable Trust Co., 851 F.2d 691 (3d Cir. 1988). Writing for a unanimous court, Judge Weis conducted a full Chevron analysis and held that Data Access applied retroactively. He based this finding in large part on his determination that Roberts and Biggans did not create the requisite "clear precedent." Id. at 697-98. District courts in the Third Circuit have conducted independent analyses and arrived at the same result as...