Gruber v. Price Waterhouse

• Citation: 911 F.2d 960
• Decision Date: 24 September 1990
• Docket Number: No. 89-1656,89-1656
• Parties: Fed. Sec. L. Rep. P 95,438 GRUBER, Oscar L., Shatz, Raymond and Greenstein, Larry, Suing on Behalf of Themselves and All Other Similarly Situated v. PRICE WATERHOUSE, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 960

911 F.2d 960

Fed. Sec. L. Rep. P 95,438

GRUBER, Oscar L., Shatz, Raymond and Greenstein, Larry Suing on Behalf of Themselves and All Other Similarly Situated v. PRICE WATERHOUSE, Appellant.

No. 89-1656.

United States Court of Appeals, Third Circuit.

Argued April 4, 1990.

Decided Aug. 23, 1990.

Rehearing and Rehearing In Banc

Denied Sept. 24, 1990.

John G. Harkins, Jr. (argued), Patricia L. Freeland, Robert L. Hickok, Robert S. Natalini, Pepper, Hamilton & Scheetz, Philadelphia, Pa. (Rodman W. Benedict, Associate Gen. Counsel, New York City, of counsel), for appellant.

Richard B. Dannenberg (argued), David C. Harrison, Jill Rosell, Lowey, Dannenberg, Bemporad, Brachtl & Selinger, P.C., New York City, Leonard Barrack, Gerald Rodos, Anthony J. Bolognese, Barrack, Rodos & Bacine, Philadelphia, Pa., for appellees.

Before MANSMANN and SCIRICA, Circuit Judges, and SMITH, District Judge. ^*

OPINION OF THE COURT

MANSMANN, Circuit Judge.

By a certified question from the district court, we are asked to address, once again, the question of whether the one-year/three-year limitations period established for section 10(b) and rule 10b-5 claims in In re Data Access Systems Securities Litigation, 843 F.2d 1537 (3d Cir.) (in banc), cert. denied, 488 U.S. 849, 109 S.Ct. 131, 102 L.Ed.2d 103 (1988) should be applied retroactively or prospectively only, this time in an action by a purchaser of securities against an accounting firm, Price Waterhouse, a non-seller of the securities, for its preparation of the seller's financial reports. Because we hold that the factors enunciated by the Supreme Court in Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971) are satisfied, we concur with the district court's prospective only application of Data Access in this particular case. We will therefore affirm the district court's judgment granting in part and denying in part Price Waterhouse's motion for summary judgment.

I.

AIA Industries, Inc., is a holding company for several subsidiaries involved in the transportation industry. In its initial public offering on July 21, 1983, AIA utilized a prospectus that contained representations that it was involved primarily in providing charter airline service to the gaming industry in Atlantic City, New Jersey. Soon after the public offering, AIA underwent a change in the major thrust of its business. Instead of focusing on the specialized airline services indicated in its prospectus, AIA attempted to compete with regularly scheduled air carriers by providing regional scheduled flights operating out of Philadelphia and Atlantic City. Commencing the last quarter of fiscal 1983, the company experienced substantial losses apparently attributable to the change in business to a regularly scheduled airline. AIA incurred a loss from operations of nearly 9 million dollars for the 1983 fiscal year ending November, 1983. AIA was also unable to pay its excise and employment taxes for the fourth quarter of 1983. In July 1984, AIA filed for reorganization under Chapter 11 of the Bankruptcy Code.

Arising out of the initial public offering and the subsequent chain of events, in May 1984, several class action complaints were filed against AIA, various officers and directors and the stock underwriters by purchasers of common stock bought in the public offering. ¹ In their complaints, the plaintiffs focused on AIA's alleged failure to disclose, in the public offering documents, its change of services from a specialized carrier to a regularly scheduled regional carrier. Also alleged was the failure to account for the increased expenses as a result of the change in business. The class action suits were consolidated as In Re AIA Industries, Inc. Securities Litigation, Master File No. 84-2276 (E.D.Pa.). The suits were ultimately settled.

Approximately two years after filing the original complaints in the class actions, a class of shareholders of common stock of AIA Industries, Inc., (whom we will refer to collectively as "Gruber"), brought this action against Price Waterhouse ("PW") for its role in the preparation of AIA's audited financial reports and a comfort letter in connection with the July 21, 1983 initial public offering of AIA stock. The complaint asserted claims pursuant to section 11 of the Securities Act of 1933, section 10(b) of the Securities Act of 1934 and rule 10b-5, and common law fraud and deceit. Gruber alleged that the financial statements prepared by Price Waterhouse were false in that they contained deficiencies in AIA's accounting procedures in regard to receivables from ITG, AIA's primary customer and from Roy Goldberg, ITG's sole shareholder and principal officer. Gruber contends that Price Waterhouse recklessly failed to discover or disclose the discrepancies as well as a variety of other fraudulent transactions that materially overstated the financial picture of AIA in the prospectus accompanying the public offering.

Relying upon a Stipulation of Facts, Price Waterhouse moved for summary judgment on all of Gruber's claims on the basis that each was time-barred by applicable statutes of limitations. The district court granted PW's motion for summary judgment on the section 11 claim, noting that the parties agreed that the controlling statute of limitations for the section 11 claim was one year from the time Gruber discovered or, after the exercise of reasonable diligence, should have discovered the untrue statements or omissions. ² Gruber v. Price Waterhouse, 697 F.Supp. 859, 861 (E.D.Pa.1988). Hence, Gruber must have discovered or by reasonable diligence should have discovered the alleged fraud within one year of July 3, 1986, the filing date of the complaint.

For the common law claim under Pennsylvania law, the district court held that the appropriate time period was two years from the date Gruber knew or should have known of the injury and its cause. ³ Thus, since the complaint was filed on July 3, 1986, discovery of the facts supporting the common law claim must not have occurred prior to July 3, 1984. The district court also applied this two year state statute of limitations to the section 10(b) and the rule 10b-5 claims, concluding that our holding in Data Access of a one-year/three-year federal statute of limitations should be applied prospectively to the case of a non-seller accountant. Upon finding that a genuine issue of material fact existed as to whether Gruber was on inquiry notice of PW's alleged wrongdoing more than two years prior to July 3, 1986, the district court denied PW's motion for summary judgment on both the common law and section 10(b) and rule 10b-5 claims.

Arguing for a retroactive application of the statutes of limitations for the section 10(b) and the rule 10b-5 claims, Price Waterhouse moved to have this interlocutory order certified for immediate appeal under 28 U.S.C. Sec. 1292(b). Pursuant to this request, the district court certified the following question for appeal:

Should the limitations period established by the Third Circuit in In re Data Access Systems Securities Litigation, 843 F.2d 1537 (3d Cir.1988), cert. denied, 488 U.S. 849, 109 S.Ct. 131, 102 L.Ed.2d 103 (1988), for claims filed under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b) (1982), be applied retroactively?

Utilizing our discretion granted in 28 U.S.C. Sec. 1292(b), we permitted an appeal to be taken from the interlocutory order and accepted the question certified by the district court.

II.

We exercise de novo review of the district court's decision denying PW's motion for summary judgment on its section 10(b), rule 10b-5 and common law claims and granting summary judgment on the section 11 claim; we utilize the same test as the district court. Waldorf v. Shuta, 896 F.2d 723, 728 (3d Cir.1990), citing Hynson By and Through Hynson v. City of Chester Legal Dept., 864 F.2d 1026, 1028-29 (3d Cir.1988). The test for deciding a summary judgment motion requires that

[i]nferences to be drawn from the underlying facts contained in the evidential sources must be viewed in the light most favorable to the party opposing the motion. The nonmovant's allegations must be taken as true, and when these assertions conflict with those of the movant, the former must receive the benefit of the doubt.

Goodman v. Mead Johnson & Co., 534 F.2d 566, 573 (3d Cir.1976), cert. denied, 429 U.S. 1038, 97 S.Ct. 732, 50 L.Ed.2d 748 (1977), quoted in Laborers' International Union v. Foster Wheeler Corp., 868 F.2d 573, 575 (3d Cir.1989) (per curiam). When the statute of limitations is raised as a defense, we have recognized that it "is an affirmative defense, and the burden of establishing its applicability to a particular claim rests with the defendant." Van Buskirk v. Carey Canadian Mines, Ltd., 760 F.2d 481, 487 (3d Cir.1985), quoted in Bradford-White Corp. v. Ernst & Whinney, 872 F.2d 1153, 1161 (3d Cir.1989). The factual nature of this inquiry requires this burden to be heavy. Van Buskirk, 760 F.2d at 498.

Our scope of review is generally governed by the controlling questions of law set forth in the district court's certification order under 28 U.S.C. Sec. 1292. Nevertheless, since we review orders and not isolated legal questions, Juzwin v. Asbestos Corp., Ltd., 900 F.2d 686, 691 (3d Cir.1990) (citing Miller v. Bolger, 802 F.2d 660, 666 (3d Cir.1986)) we may consider all grounds that might require reversal of the order. Data Access, 843 F.2d at 1539.

III.

In Data Access, we considered the limitations period applicable to a securities fraud action where the defendants, a law firm and an accounting firm, were non-sellers. As we noted in Data Access, "the Supreme Court has yet to rule on the applicable limitations period for a section 10(b) and rule 10b-5 action." Data Access, 843 F.2d at 1539. We examined existing Third Circuit precedent and concluded that it was based on the Supreme Court's "normal rule of looking to state statutes" as...