Eckstein v. Balcor Film Investors

• Decision Date: 20 August 1993
• Docket Number: Nos. 92-1851,92-2510,s. 92-1851
• Citation: 8 F.3d 1121
• Parties: , Fed. Sec. L. Rep. P 97,712, 27 Fed.R.Serv.3d 422 Robert ECKSTEIN, et al., Plaintiffs-Appellants, v. BALCOR FILM INVESTORS, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1121

8 F.3d 1121

62 USLW 2144, Fed. Sec. L. Rep. P 97,712,

27 Fed.R.Serv.3d 422

Robert ECKSTEIN, et al., Plaintiffs-Appellants, v. BALCOR FILM INVESTORS, et al., Defendants-Appellees.

Nos. 92-1851, 92-2510.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 25, 1993.

Decided Aug. 20, 1993.

Robert S. Schachter, Robin F. Zwerling (argued), Zwerling, Schachter & Zwerling, Jules Brody, Mellisa R. Emert, Stull, Stull & Brody, New York City, Michael S. Glassman, Clemens, Glassman & Clemens, Los Angeles, CA, for Robert and Sylvia Eckstein in No. 92-1851.

Mary Ellen Hennessy, Amy E. Smith, Katten, Muchin & Zavis, Chicago, IL, Dennis M. Perluss, Pauline Levy, Hufstedler, Kaus & Ettinger, Los Angeles, CA, John A. Lawrence, Richman, Lawrence, Mann, Greene, Arbiter & Chizever, Beverly Hills, CA, for Balcor Film Investors in No. 92-1851.

Steven L. Bashwiner (argued), Mary Ellen Hennessy, Amy E. Smith, Katten, Muchin & Zavis, Chicago, IL, Dennis M. Perluss, Pauline Levy, Hufstedler, Kaus & Ettinger, Los Angeles, CA, John A. Lawrence, Richman, Lawrence, Mann, Greene, Arbiter & Chizever, Beverly Hills, CA, for Balcor Entertainment Co., Balcor Co., Balcor Securities, Jerry M. Reinsdorf, Robert A. Judelson, James E. Finley, Gregory Junkin, Barry Jackson, Joseph A. Kruszynski and New World Entertainment Ltd. in No. 92-1851.

W. Stuart Parsons, Quarles & Brady, Milwaukee, WI, Steven L. Bashwiner, Mary Ellen Hennessy, Amy E. Smith, Katten, Muchin & Zavis, Chicago, IL, Dennis M. Perluss, Pauline Levy, Hufstedler, Kaus & Ettinger, Los Angeles, CA, John A. Lawrence, Richman, Lawrence, Mann, Greene, Arbiter & Chizever, Beverly Hills, CA, for Lawrence Kuppin, Robert Rehme in No. 92-1851.

Colleen A. Scherkenbach, W. Stuart Parsons, Quarles & Brady, Milwaukee, WI, Steven L. Bashwiner (argued), Mary Ellen Hennessy, Amy E. Smith, Katten, Muchin & Zavis, Chicago, IL, Dennis M. Perluss, Pauline Levy, Hufstedler, Kaus & Ettinger, Los Angeles, CA, John A. Lawrence, Richman, Lawrence, Mann, Greene, Arbiter & Chizever, Beverly Hills, CA, for Harry Sloan in No. 92-1851.

David B. Kahn, Mark E. King, Chicago, IL, for Plaintiff Class amicus curiae.

George P. Kersten (argued), E. Campion Kersten, Bruce J. Landgraf, Kersten & McKinnon, Milwaukee, WI, Jerry H. Friedland, Maria Lazar, Galanis & Friedland, K. Scott Wagner, Hale & Lein, Milwaukee, WI, for Ralph Majeski, Joseph Yach, Janice Waisman, Larry R. Peterson, Thomas Weil, Lee Aldridge, Randy Karpinsky, Kenneth Kulas, Robb S. Elliott and Raymond Harding in No. 92-2510.

Steven L. Bashwiner (argued), Mary Ellen Hennessy, Amy E. Smith, Katten, Muchin & Zavis, Chicago, IL, for Balcor Entertainment Co., Balcor Co., Balcor/American Exp. Inc., Balcor Securities in No. 92-2510.

Terry E. Mitchell, Mitchell, Baxter & Zieger, Milwaukee, WI, H. Nicholas Berberian, Jerry M. Santangelo, Robert J. Mandel, Neal, Gerber & Eisenberg, Chicago, IL, for Shearson Lehman Hutton, Inc. in No. 92-2510.

Before CUMMINGS, COFFEY, and EASTERBROOK, Circuit Judges.

EASTERBROOK, Circuit Judge.

By late 1984 New World Entertainment, Ltd. (New World) had experienced some success making and distributing low-budget movies. New World approached Balcor Entertainment Company, Ltd. (BEC), a subsidiary of Shearson Lehman/American Express, Inc., to solicit working capital. New World wanted to expand; BEC wanted some of the profits to be made in movies. There were the makings of a deal: BEC would obtain financing for New World's films in exchange for part of the films' profits. Because BEC didn't want to accept the risk of being the sole source of capital, it recruited outside investors. Balcor Film Investors (BFI) is a limited partnership formed to raise money for eight to twelve low budget movies that New World would produce and distribute.

Early in 1985 BFI registered partnership interests under the Securities Act of 1933 and commenced public solicitation. Subscriptions received were to be held in escrow until $50 million had been secured. Failing to raise this amount by the deadline, BFI reduced the minimum to $35 million, offered to refund the investors' money, and began soliciting anew. By the end of 1985 $48 million was on deposit, and BFI closed the offering. During the first two years BFI supplied the tax benefits for which the investors had hoped. But New World's films flopped. In 1988 BFI told its limited partners that they were likely to lose some of their capital. Investors then filed class action suits against Shearson (now known as Shearson Lehman Hutton, Inc.), BFI, BEC, the other Balcor entities that had put together the offering, and their officers and directors (collectively Balcor). There are two groups of plaintiffs: a class of investors who read the prospectus (the Majeski plaintiffs) and a class of those who did not (the Eckstein plaintiffs). The Majeski plaintiffs assert a standard fraud theory: they purchased the limited partnership interests in reliance on the misrepresentations in the prospectus and its omissions of material facts. The Eckstein plaintiffs, whose defining characteristic is failure to read the prospectus, contend that but for the misrepresentations and omissions the offering would not have been successful. This group, in other words, asserts causation in lieu of reliance.

Although errors and omissions in the offering documents usually lead to liability under §§ 11 and 12(2) of the '33 Act, 15 U.S.C. §§ 77k, l (2), the plaintiffs feared that their suits would be untimely under § 13 of that Act, the statute of limitations applicable to actions under §§ 11 and 12. So they invoked § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and the SEC's Rule 10b-5, 17 C.F.R. § 240.10b-5. This avenue is available even though the investors complain about an initial public offering rather than a transaction in the aftermarket. See Herman & MacLean v. Huddleston, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). Section 10(b) and Rule 10b-5 require the investors to show fraud, not just material errors and omissions. In exchange they get a longer statute of limitations--or so they thought.

The Majeski plaintiffs filed in October 1988 and the Eckstein plaintiffs in February 1989. When they began the litigation, courts throughout the nation derived from state law the periods of limitations in § 10(b) cases. On July 30, 1990, this court overruled opinions that had looked to state law and announced that § 13 of the '33 Act supplies the statute of limitations. Short v. Belleville Shoe Manufacturing Co., 908 F.2d 1385 (7th Cir.1990). On June 20, 1991, the Supreme Court agreed with Short that the federal securities laws are the source of the period of limitations, but the Court selected § 9(e) of the '34 Act, 15 U.S.C. § 78i(e), as the most appropriate rule. Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, --- U.S. ----, ---- n. 9, 111 S.Ct. 2773, 2782 n. 9, 115 L.Ed.2d 321 (1991). Both § 13 of the '33 Act and § 9(e) of the '34 Act give an investor one year from discovering the facts constituting the violation, but no more than three years from the violation, to begin suit. The advantage of using § 10(b) disappeared.

Congress responded to Lampf by enacting stopgap legislation. A new § 27A of the '34 Act, 15 U.S.C. § 78aa-1(a), provides that "[t]he limitation period for any private civil action implied under section [10(b) of the '34 Act] that was commenced on or before June 19, 1991, shall be the limitation period provided by the laws applicable in the jurisdiction, including principles of retroactivity, as such laws existed on June 19, 1991." Plaintiffs believe that this law saves their suits. The district court disagreed, dismissing both as untimely. 786 F.Supp. 1458 (E.D.Wis.1992). Although § 27A avoided Lampf, the district court held, it did not disturb Short, which was the law in the seventh circuit on June 19, 1991. And Short, the district court held, is fully retroactive. It concluded that Short governs the Eckstein plaintiffs, who filed in California, as well as the Majeski plaintiffs, who filed in Wisconsin. The Panel on Multidistrict Litigation had transferred the Eckstein case to Wisconsin under 28 U.S.C. § 1407 for consolidated pretrial proceedings, and the district court then completed the transfer by invoking 28 U.S.C. § 1404(a) to make the transfer permanent. After the transfer the whole case was in Wisconsin, which the district court believed is "the jurisdiction" to which § 27A refers. Both groups of plaintiffs have appealed.

I

Whether the Eckstein plaintiffs have appealed correctly is another matter. The Majeski plaintiffs may have destroyed the Eckstein plaintiffs' notice of appeal, leaving us without appellate jurisdiction to review the appeal of the Eckstein class. At the heart of the matter is the question: was the Eckstein case fully consolidated with the Majeski case? If the cases were fully consolidated the Eckstein appellants have problems.

Here is what happened. On March 11, 1992, the district court entered judgments dismissing both actions. The Majeski plaintiffs filed a timely motion under Fed.R.Civ.P. 59. Shortly thereafter, the Eckstein plaintiffs filed a notice of appeal. The district court denied the Rule 59 motion, and the Majeski plaintiffs filed a timely notice of appeal. Then the Eckstein plaintiffs filed what they called a "Supplemental Notice of Appeal". The clerk of this court treated that document as another notice of appeal and assigned it a new number. It did not last long: the Eckstein plaintiffs failed to pay the docketing fee, and as a notice of appeal this paper was at all events untimely, coming 34 days after the district court denied the Rule 59 motion--four more than Fed.R.App.P. 4(a)(1) permits. Thus our jurisdiction over the Eckstein plaintiffs' case depends on their notice of appeal filed before the district court acted on the Majeski plaintiffs' Rule 59 motion.

If the district court fully consolidated the...