Hill v. Equitable Trust Co.
| Decision Date | 04 August 1988 |
| Docket Number | No. 87-3575,87-3575 |
| Citation | 851 F.2d 691 |
| Court | U.S. Court of Appeals — Third Circuit |
| Parties | Blue Sky L. Rep. P 72,762, 57 USLW 2116, Fed. Sec. L. Rep. P 93,919 John T. HILL, Descomp, Inc., Data Controls North, Inc., Virgil and Marie Scott, Thomas L. and Patricia A. Ruger, and James R. Stritzinger, Appellants, v. The EQUITABLE TRUST COMPANY and Merchantile Safe Deposit & Trust Company, Appellee. |
Douglas Clark Hollmann (argued), Richard I. Kovelant, Goldman, Kovelant, Kruger, Hurtt, Hollmann & Kaiser, Laurel, Md., for appellants.
Michael D. Colglazier (argued), Ty Cobb, Miles & Stockbridge, Baltimore, Md., for appellee.
Before WEIS, GREENBERG and ALDISERT, Circuit Judges.
*
The principal issue here is whether our in banc decision in In Re: Data Access Sys. Sec. Litig., 843 F.2d 1537 (3d Cir.1988), should be applied in this appeal from a judgment based on two earlier, inconsistent panel opinions of this court. Because plaintiffs had no reasonable basis for reliance on our then-existing precedent, we will apply the in banc holding retroactively. Although it adopted a different rationale, the district court reached the same ultimate result that our in banc ruling requires. Accordingly, we will affirm.
The district court entered summary judgment on several counts of a multi-claim complaint and, in accordance with the jury's answers to interrogatories, granted judgment for defendant on the remaining counts. Plaintiffs have appealed the judgments on some, but not all, counts.
This litigation is an outgrowth of the plaintiffs' unsuccessful investments in two limited partnerships. The factual background is complex, and the various legal issues have led to five published opinions by the district court. Hill v. Equitable Trust Co., 562 F. Supp. 1324 (D.Del.1983); Hill v. Equitable Bank, Nat'l Ass'n, 599 F. Supp. 1062 (D.Del.1984); Hill v. Equitable Bank, N.A., 642 F.Supp. 1013 (D.Del.1986); Hill v. Equitable Bank, 655 F. Supp. 631 (D.Del.1987), amended by separate opinion, 655 F. Supp. 653 (D.Del.1987).
The events relevant to this appeal, however, need only be summarized. In November 1977, plaintiffs John T. Hill, Thomas and Patricia Ruger, Virgil and Marie Scott, and Descomp, Inc. subscribed to purchase shares in Wilmington House. This limited partnership was organized under the laws of Maryland for the purpose of acquiring and renting a garden apartment complex in Wilmington, Delaware. Plaintiffs made cash down payments and, as security for subsequent installments, obtained irrevocable letters of credit from defendant, Equitable Trust Company of Baltimore, Maryland. A fire occurred a month after the partnership acquired the property, and Wilmington House suffered disastrous losses.
In November 1978, the Rugers, the Scotts, James Stritzinger, and Data Controls North, Inc. subscribed to shares in another limited partnership, Eagle Associates. This organization was formed as a resyndication of a West Virginia coal mining business. Before investing in this venture, plaintiffs met with Equitable officials who reported favorably on the mine's prospects. Only Stritzinger obtained financing through Equitable for his Eagle Associates investment; the others were unable to do so.
Like Wilmington House, the Eagle venture proved to be unprofitable. Later, plaintiffs learned that Equitable had extended substantial loans to the mining business' predecessor, had been engaged in litigation with the predecessor's limited partner, and had agreed to the company's restructuring as a means to retire outstanding debts to the bank.
Debilitatingly high partnership losses, along with indications of misrepresentations and kickbacks, led plaintiffs to suspect that they had been defrauded by Equitable employees working in collusion with Lee P. Der, the promoter of both investments. Suits were filed against Equitable in April 1982 in the United States District Court for the District of Delaware asserting claims under the Securities Act of 1933, 15 U.S.C. Secs. 77l, 77o, the Securities Exchange Act of 1934, 15 U.S.C. Secs. 78j, 78t, regulations of the Securities Exchange Commission, primarily Rule 10b-5, 18 C.F.R. Sec. 240. 10b-5, the federal RICO statute, 18 U.S.C. Secs. 1961-68, as well as counts under state law. Equitable counterclaimed for the amounts still owed by plaintiffs on their obligations to the bank.
As the litigation proceeded, a number of the counts were resolved and have not been included in this appeal. Plaintiffs have challenged, however, the district court's application of the statute of limitations to bar their claims under section 10(b) of the Securities Exchange Act and SEC Rule 10b-5.
Because the Exchange Act counts are not governed by a statutory limitations provision, the district judge, complying with this court's precedent, searched for the state law cause of action most analogous to the plaintiffs' claims. For the plaintiffs who were Delaware residents, the court ruled that the Delaware general fraud statute was most analogous to the plaintiffs' claims and appropriated that statute's three-year time limitation. 1 Hill I, 562 F. For the other plaintiffs, who were not Delaware residents, the court decided that the Maryland Blue Sky law applied, providing for a maximum period of three years after sale or one year after discovery of the fraud, whichever came sooner. Id. at 1333-36 (applying Md. Corp. & Ass'ns Code Ann. Sec. 11-703(f)). Because more than three years had elapsed since plaintiffs subscribed to both the Wilmington House and Eagle Associates transactions, the court held that the section 10(b) and Rule 10b-5 claims were barred as to all non-Delaware residents. Hill V, 655 F. Supp. at 653.
Supp. at 1337-39 (applying Del Code Ann. tit. 10, Sec. 8106) (1975).
The remaining counts proceeded to a jury trial. The jurors' responses to a comprehensive set of special interrogatories included a finding that plaintiffs had not exercised due diligence in investigating their claims. Based on that answer and others, the court entered judgment for defendant on the plaintiffs' outstanding claims. At the conclusion of a subsequent bench trial on the bank's counterclaim, judgment was entered in Equitable's favor.
Plaintiffs appeal the district court's selection of the proper statute of limitations to govern the section 10(b) and Rule 10b-5 claims, the entry of summary judgment on a Wilmington House count, and various evidentiary rulings at trial. We will discuss these issues in turn.
The principal argument on appeal focuses on the applicable statute of limitations for the non-Delaware Eagle investors' section 10(b) and Rule 10b-5 claims. Plaintiffs argue that the district court erred in applying the Maryland Blue Sky statute of limitations in place of the Delaware general fraud law, or at least in rejecting their request for an equitable tolling of the Maryland statute.
In ascertaining the proper limitations period for the non-Delaware investors, the district court preliminarily consulted the borrowing statute of Delaware, the forum state. Hill I, 562 F. Supp. at 1333. As that statute applies to nonDelaware residents, the jurisdiction where the cause of action arose supplies the rule of decision on the statute of limitations. Del. Code Ann. tit. 10, Sec. 8121 (1975). Because the bank's alleged improper activity occurred in Maryland, the court concluded that the law of that state governed.
Maryland law offered two alternatives: its general fraud statute or its Blue Sky law. Not long before the present litigation began, the Court of Appeals for the Fourth Circuit reiterated its earlier holding that the statute of limitations found in the state's Blue Sky laws would apply to section 10(b) and Rule 10b-5 claims brought in the United States District Court in Maryland. See O'Hara v. Kovens, 625 F.2d 15, 18 (4th Cir.1980), cert. denied, 449 U.S. 1124, 101 S.Ct. 939, 67 L.Ed.2d 109 (1981). Acknowledging that the purpose of the Delaware borrowing statute was to prevent forum shopping, see Pack v. Beech Aircraft Corp., 50 Del. 413, 132 A.2d 54, 57 (1957), the district court here followed the rationale of O'Hara and adopted the three years from sale/one year from discovery limitations period of the Maryland Blue Sky law.
Although the Exchange Act does not provide for a private cause of action under section 10(b), one has been judicially implied. Not surprisingly, the Act itself contains no limitations period governing such a lawsuit. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210 n. 29, 96 S.Ct. 1375, 1389 n. 29, 47 L.Ed.2d 668 (1976). Nor has the Supreme Court yet determined the appropriate limitations time.
When the district court made its ruling here, this court's decisional law required application of the most analogous state limitations statute comporting with the policy behind section 10(b) and Rule 10b-5. 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). Our precedents held that, depending on the circumstances of the dispute, we would refer to either a state's Blue Sky laws or its general fraud statute to determine the applicable statute of limitations.
After argument before the panel in this case, the entire court convened in banc in another appeal to again consider the proper limitations period for section 10(b) and Rule 10b-5 claims. In a comprehensive opinion written by Judge Aldisert, the court abandoned its previous precedents adopting analogous state statutes of repose. Instead, we found the most appropriate limitations statute for these cases in related provisions of the federal Securities Exchange Act. In Re: Data Access Sys. Sec. Litig., 843 F.2d 1537 (3d Cir.1988) (in banc). Accordingly, we adopted for ...
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