Finkel v. Stratton Corp.

• Citation: 962 F.2d 169
• Decision Date: 20 April 1992
• Docket Number: D,No. 1057,1057
• Parties: Paul FINKEL, Paul Magnuson, Glenn Yarnis, and Harvey Watkins, Individually and as Representatives of all persons similarly situated, Plaintiffs-Appellants, v. The STRATTON CORPORATION, a Vermont Corporation; Moore & Munger, Inc., a Delaware Corporation, Stig Albertsson, Lovick Suddath, David A. Rosow, Sherman T. Van Esselstyn, Victor C. Braun, Jr., Henry L. Levkoff, Wayne G. Granquist, Robert H. Kelso, and Dowmar Securities Inc., a New York Corporation, Defendants-Appellees. ocket 91-9252.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 169

962 F.2d 169

Paul FINKEL, Paul Magnuson, Glenn Yarnis, and Harvey

Watkins, Individually and as Representatives of

all persons similarly situated, Plaintiffs-Appellants, v. The STRATTON CORPORATION, a Vermont Corporation; Moore &

Munger, Inc., a Delaware Corporation, Stig Albertsson,

Lovick Suddath, David A. Rosow, Sherman T. Van Esselstyn,

Victor C. Braun, Jr., Henry L. Levkoff, Wayne G. Granquist,

Robert H. Kelso, and Dowmar Securities Inc., a New York

Corporation, Defendants-Appellees.

No. 1057, Docket 91-9252.

United States Court of Appeals,

Second Circuit.

Argued March 10, 1992.

Decided April 20, 1992.

Kenneth J. Wilbur, New York City (Shanley & Fisher, P.C., of counsel), for plaintiffs-appellants.

Jeremy Dworkin, South Londonderry, Vt. (Richard J. Wiener, Cadwalader, Wickersham & Taft, New York City, George Brooks, Montpelier, Vt., Gregory S. Mertz, Burlington, Vt., of counsel), for defendants-appellees.

Before: OAKES, Chief Judge, ALTIMARI and WALKER, Circuit Judges.

WALKER, Circuit Judge:

Plaintiffs Paul Finkel, Paul Magnuson, Glenn Yarnis, and Harvey Watkins appeal from the dismissal of their purported federal securities law class action. Plaintiffs alleged below that the Stratton Corporation ("StratCorp"), along with the individual officers and directors of StratCorp, Moore & Munger, Inc., StratCorp's parent company, and Dowmar Securities, Inc., ("Dowmar"), StratCorp's investment adviser (collectively, "Stratton") made false and misleading statements in connection with the sale of units in "The Stratton Mountain Village Lodge", a development located at the Stratton Mountain ski resort. Plaintiffs brought suit pursuant to §§ 11, 12(2) and 17(a) of the Securities Act of 1933 (" '33 Act"), 15 U.S.C. §§ 77k, 77l (2) and 77q(a); § 10(b) of the Securities Exchange Act of 1934 (" '34 Act"), 15 U.S.C. § 78j(b); the Racketeer Influenced and Corrupt Organizations Act of 1970 ("RICO"), 18 U.S.C. § 1961 et seq.; and a host of state statutory and common law rules.

On defendants' motion, the district court dismissed plaintiffs' claims. The court held that the § 11 and § 12(2) claims were time barred, and that no private right of action exists under § 17(a). The court also concluded that plaintiffs' § 10(b) and RICO claims were inadequate because plaintiffs had not pled fraud with particularity. The district court granted plaintiffs leave to replead the § 10(b) and RICO claims, but plaintiffs failed to do so. Finally, the court declined to exercise pendent jurisdiction over plaintiffs' state law claims. This appeal from the dismissal of the § 11, § 12(2) and § 17(a) claims followed.

Background

Plaintiffs sued on their own behalf and as representatives of the approximately 70 individuals who acquired the 91 condominium units designated as "Phase I" of the Village Lodge. The parties agree that the units, sold subject to a mandatory management agreement under which Stratton contracted to operate the units collectively as lodging accommodations, constitute securities within the meaning of the federal securities laws. See United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852-53, 95 S.Ct. 2051, 2060-61, 44 L.Ed.2d 621 (1975).

Stratton filed with the Securities and Exchange Commission (SEC) a registration statement and prospectus, dated June 21, 1984, describing the development in great detail. Stratton planned to build and sell the lodge units in two phases. Phase I consisted of the 91 units at issue here. In Phase II, Stratton planned to offer an additional 83 units. The prospectus represented that these lodge units would form an integral part of an "inter-related resort village" called Stratton Mountain Village, to contain, in addition to the condominium units, a 16-18,000 square foot conference center. The prospectus acknowledged quite clearly that the conference center might never be built:

Though future development of facilities at Stratton Mountain is master planned or being planned for municipal approval, such future development is neither financed or approved by the appropriate public authorities, but neither Stratcorp nor any of its affiliates make any representation or commitment as to the construction or availability of any recreational, commercial, or other facilities at Stratton Mountain or Bromley Ski Area beyond those already in place or under construction, and purchase of a condominium security offered hereby should not be made in reliance on any facility not already in place or under construction at Stratton Mountain and Bromley. Registrant has no reason to believe that all necessary consents, permits and approvals will not be received. The foregoing is set forth herein not as a promise of future facilities but rather to inform a prospective investor of Stratcorp's plans and intentions.

Lack of Meeting Facilities. The Lodge will have no facilities for meeting or conference business until the Conference Center is built nearby. No assurance can be given that the conference center ever will be built and certainly, at present, financing for such center is not available. (emphasis added).

Despite these impressive disclaimers, the plaintiffs contend that they purchased their units in the expectation of reaping profits from customers attracted by the forthcoming conference center.

The prospectus also detailed the terms of the offering. Potential purchasers would initially deposit with Dowmar an amount up to 10% of the purchase price. An investor could withdraw that downpayment without penalty at any time until "all 91 units in Phase I have been subscribed." Once Phase I was fully subscribed, Dowmar would request each investor to increase her deposit to a full 10% of the purchase price. Upon depositing the full 10%, the investor lost the ability to withdraw from the offering and became obligated for the remaining 90% of the purchase price. The prospectus provided that if a purchaser attempted to renege after the cancellation rights terminated, Stratton would be entitled to damages equal to "the down payment plus such additional damages that StratCorp can establish in any action or suit."

On or about October 24, 1984, Dowmar informed the purchasers that Phase I was fully subscribed. Dowmar also sent the purchasers a news release, dated October 11, 1984, that indicated that the conference center would be built during the summer of 1986. Most of the purchasers completed their 10% downpayments in November and December of 1984. Plaintiff Magnuson apparently did not make his downpayment (indeed, was not even solicited) until September of 1985.

On July 12, 1985, Stratton filed a post-effective amendment to the registration statement, incorporating a supplemental prospectus, with the SEC. The supplemental prospectus principally concerned the impact of certain changes in the tax laws on the investment. The supplemental prospectus also disclosed that Stratton did not plan to offer Phase II in the near future but would instead operate the Lodge as a 91 unit facility. The supplemental prospectus made no mention of the conference center.

Thirteen days after the filing of the supplemental prospectus, on July 25, 1985, Stratton and most of the purchasers closed the deal. The purchasers turned over the remaining 90% of the purchase price, in exchange for which Stratton transferred title to the condominium units. The record does not indicate precisely when Magnuson purchased his unit.

Plaintiffs allege that between the closing and June 13, 1987, Stratton concealed the fact that Stratton did not intend to construct the conference center. On that date, in a meeting with Phase I purchasers, Stratton announced that the conference center would not be built.

On June 1, 1988, three and one half years after the plaintiffs' cancellation rights terminated, plaintiffs filed suit in the District Court for the Southern District of New York, alleging a host of violations of state and federal law. The central thrust of the complaint was that Stratton had never intended to build the conference center, and that both the initial prospectus and subsequent representations by Stratton concealed that fact.

On December 26, 1990, 754 F.Supp. 318, the district court dismissed the complaint, granting plaintiffs leave to replead only the § 10(b) and RICO claims. Plaintiffs declined the offer to replead, and on October 23, 1991 the district court dismissed with prejudice all of plaintiffs' federal causes of action and refused to exercise jurisdiction over plaintiffs' pendent state law claims. This appeal followed.

Discussion

On appeal, plaintiffs have abandoned their § 10(b) and RICO claims. They challenge, however, the district court's dismissal, on statute of limitations grounds, of their § 11 and § 12(2) claims. In addition, plaintiffs assert that the district court erred in ruling that there is no private right of action under § 17(a). We will consider these claims in turn, putting aside for the moment plaintiff Magnuson's claims, which involve different factual issues.

1. § 12(2).

Section 12(2) of the '33 Act prohibits offering and selling securities by means of untrue statements or misleading omissions. Section 13 of the '33 Act imposes a special, two tiered statute of limitations onto § 12(2) claims. First, § 13 bars § 12(2) claims brought more than "one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence." 15 U.S.C. § 77m. Even where this one year limit is satisfied, the plaintiff must also bring the action within "three years after the sale." Id. Section 2 of the '33 Act provides that "[t]he term 'sale' ... shall include every contract of sale or disposition of a security or interest in a security, for value." 15 U.S.C. § 77b(3). The question here is whether the statute of limitations runs from the "contract of sale" or from the "disposition of [the] security."

The district court dismissed the § 12(2) cla...