Martell v. Trilogy Ltd.

Decision Date10 April 1989
Docket NumberNo. 88-1890,88-1890
Citation872 F.2d 322
PartiesEly A. MARTELL, Plaintiff-Appellant, v. TRILOGY LIMITED; Trilogy Systems Corp., Defendants-Appellees.
CourtU.S. Court of Appeals — Ninth Circuit

Robert A. Spanner and Karen L. Landau, Beckford & Spanner, Palo Alto, Cal., for plaintiff-appellant.

John W. Crittenden and Patrick J. Mahoney, Cooley Godward Castro Huddleson & Tatum, San Francisco, Cal., for defendants-appellees.

Appeal from the United States District Court for the Northern District of California.

Before HUG, HALL and O'SCANNLAIN, Circuit Judges.

CYNTHIA HOLCOMB HALL, Circuit Judge:

Ely A. Martell ("Martell") appeals the district court's order dismissing his complaint as time-barred. After the statute of limitations had expired, Martell attempted to amend his complaint to state a different theory of relief against Trilogy Limited and Trilogy Systems Corporation (collectively "Trilogy"). The district court concluded that this theory did not "relate back" to the original complaint and thus fell outside the statute of limitations.

I

Martell was a long-time client of Merrill, Lynch, Pierce, Fenner, and Smith, Inc. ("Merrill Lynch"). In 1981, allegedly upon the advice of his Merrill Lynch representative, Martell purchased two limited partnership units in Trilogy pursuant to a private offering.

In December 1982 Trilogy sought to raise additional capital to finance a particular project by selling preferred stock through a private placement ("1982 private placement"). Martell purchased almost $500,000 worth of this preferred stock. In November 1983 Trilogy initiated a public offering ("1983 public offering"), where it converted this preferred stock to common stock.

In June of 1984, it was publicly disclosed that the project Trilogy had been developing was a failure. The value of Trilogy stock declined markedly, causing Martell to lose a great deal of his investment.

On December 2, 1985, Martell filed his original complaint in federal court in the District of Massachusetts. The complaint stated four causes of action against Merrill Lynch arising out of the 1982 private placement. The complaint also named Trilogy as a defendant, alleging five violations of the securities laws in connection with the 1983 public offering of the common stock. In setting forth its claims against both Merrill Lynch and Trilogy, save one, Martell incorporated by reference the same facts underlying both the 1982 private placement and the 1983 public offering. 1 In April 1986 Martell filed his first amended complaint, which was substantially similar to the original and is not at issue on appeal.

In May 1986 Trilogy moved to dismiss the complaint, arguing that the claims were barred by a prior class action based on the 1983 public offering brought on behalf of Trilogy investors, which included Martell. Trilogy also moved to sever the claims against it from the claims against Merrill Lynch and to transfer the case against it to the Northern District of California. The Massachusetts district judge granted the severance and transfer motions.

In the Northern District of California, Martell sought leave to file a second amended complaint, which is the subject of this appeal. 2 The court granted the motion to the extent the claims were premised on the 1982 private placement, but denied it as to the claims based on the 1983 public offering finding them barred by the judgment in the class action. "[T]he thrust of the new pleading was that Merrill Lynch, who sold him the stock had failed to disclose that the investment was not suitable for him." Brief of Appellee 5. Martell sought relief from Trilogy by alleging that Merrill Lynch had acted as Trilogy's agent for the 1982 private placement.

Trilogy moved to dismiss the amended complaint based on the statute of limitations. The district court, ruling that the claims were barred, dismissed the action. This appeal followed.

II

The sole issue on appeal is whether the amended pleading relates back to the original complaint. 3 The relevant, three-year statute of limitations concerning the 1982 private placement began to run in December 1982. Since the amended complaint was filed in October of 1987, it is timely only if it relates back to the original complaint, which was undisputedly filed within the statutory limits.

Rule 15(c) of the Federal Rules of Civil Procedure provides in relevant part:

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. An amendment changing the party against whom a claim is asserted relates back if the foregoing provision is satisfied and, within the period provided by law for commencing the action against the party to be brought in by amendment, that party (1) has received such notice of the institution of the action that the party will not be prejudiced in maintaining his defense on the merits, and (2) knew or should have known that, but for a mistake concerning the identity of the proper party, the action would have been brought against the party.

Rule 15(c) thus establishes two different tests to be applied to two different situations. The first sentence provides the test to be applied when the amended pleading seeks to allege a new or different claim or defense. The court is to determine whether the amendment is transactionally related to the original pleading. The second sentence of the Rule addresses the situation in which the amended pleading attempts to "chang[e] a party against whom a claim is asserted." The litigant seeking amendment must satisfy more stringent requirements. In addition to the requirement that the amendment arise out of the same transaction, Rule 15(c) imposes greater notice demands and a showing of lack of prejudice.

In the present case, the district court concluded that the amended pleading did not relate back to the original complaint. The court reasoned:

The second amended complaint adds new claims against the defendants. Although similar claims were previously brought against Merrill Lynch in the original complaint, the Court has not found good cause for plaintiffs delay in naming Trilogy as a defendant to these claims. There has been no showing that a mistake in identifying the parties occurred. In addition, the Court finds that relating the complaint back at this late date would prejudice the defendants in their efforts to investigate the claims. Accordingly, the second amended complaint will not relate back to the original complaint.

The district court recognized that the amended complaint sought to add new claims, yet applied the more stringent standard in analyzing the relation back issue. Trilogy attempts to justify this analysis by focusing on the phrase "changing the party against whom a claim is asserted." In the original complaint, Martell asserted claims solely against Merrill Lynch concerning the 1982 private placement; the amended complaint seeks to assert those causes of action against Trilogy. Trilogy concludes that because those claims already were asserted against Merrill Lynch, Martell, in essence, attempted to "change the party against whom a claim [was] asserted."

Trilogy's novel construction of "changing parties against whom a claim is asserted" cannot withstand analysis. Trilogy attempts to interject ambiguity into an otherwise straightforward rule. Rule 15(c) distinguishes between two types of amendments: one that amends the claims against a party already named in the pleading and the other that amends the party to the original pleading. See Percy v. San Francisco General Hosp., 841 F.2d 975, 978 (9th Cir.1988) (first sentence of Rule 15(c) controls relation back of amendment seeking "to state a new claim against an original defendant"; second sentence applies to "an amendment that seeks to add a new party"); see also 6 C. Wright & A. Miller, Federal Practice and Procedure Sec. 1497, at 502 (1971) ("[A]n amendment that states an entirely new claim for relief will relate back as long as it satisfies the test embodied in the first sentence of Rule 15(c)."); 3 J. Moore, Moore's Federal Practice p 15.15, at 15-151 (2d ed. 1988). This distinction finds overwhelming case-law support. The Ninth Circuit, for example, unfalteringly has differentiated between pleadings attempting to amend the claims from those seeking to amend the parties. Compare Kilkenny v. Arco Marine Inc., 800 F.2d 853, 856 (9th Cir.1986) (applying more stringent test provided in second sentence when amended complaint attempts to bring in party not named in original pleading), cert. denied, 480 U.S. 934, 107 S.Ct. 1575, 94 L.Ed.2d 766 (1987); Koucky v. Department of Navy, 820 F.2d 300, 302 (9th Cir.1987) (same); Romain v. Shear, 799 F.2d 1416, 1418-19 (9th Cir.1986) (same), cert. denied, 481 U.S. 1050, 107 S.Ct. 2183, 95 L.Ed.2d 840 (1987); Korn v. Royal Caribbean Cruise Line Inc., 724 F.2d 1397, 1399-1401 (9th Cir.1984) (same) with Kern Oil & Refining Co. v. Tenneco Oil Co., 840 F.2d 730, 736 (9th Cir.) (applying transactional test provided in first sentence when amended pleader adds new claim), cert. denied, --- U.S. ----, 109 S.Ct. 378, 102 L.Ed.2d 367 (1988); Sierra Club v. Penfold, 857 F.2d 1307, 1316 (9th Cir.1988) (same); Percy, 841 F.2d at 979 (same); U.S. Dominator, Inc. v. Factory Ship Robert E. Resoff, 768 F.2d 1099, 1103 (9th Cir.1985) (same); Rural Fire Protection Co. v. Hepp, 366 F.2d 355, 361-62 (9th Cir.1966) (same). The Notes of the Advisory Committee also make apparent this division. Prior to 1966, Rule 15(c) provided only for amending claims or defenses. In that year, Rule 15(c) was expanded to cover pleading amendments changing the parties to the action. The Notes provide citations to cases the amended Rule sought to address. In each one, the amended...

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