Ambling v. Blackstone Cattle Co., Inc., 86 C 6485.

• Decision Date: 28 April 1987
• Docket Number: No. 86 C 6485.,86 C 6485.
• Citation: 658 F. Supp. 1459
• Parties: David and Donna AMBLING, et al., Plaintiffs, v. BLACKSTONE CATTLE COMPANY, INC., et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

658 F. Supp. 1459

David and Donna AMBLING, et al., Plaintiffs, v. BLACKSTONE CATTLE COMPANY, INC., et al., Defendants.

No. 86 C 6485.

United States District Court, N.D. Illinois, E.D.

April 28, 1987.

COPYRIGHT MATERIAL OMITTED

Eugene R. Wedoff, Jenner & Block, Chicago, Ill., on behalf of the plaintiffs.

James D. Scott, pro se.

Michael J. Freed, Michael B. Hyman, Steven A. Kanner, Much Shelist Freed Denenberg Ament & Eiger, P.C., Chicago, Ill., on behalf of defendant Morrison.

James M. Livergood c/o Ober Livergood, pro se.

Donald L. Johnson, Johnson & Schwartz, Chicago, Ill., on behalf of defendant Schlegel.

MEMORANDUM ORDER

BUA, District Judge.

Plaintiffs brought this action seeking redress for losses they sustained as a result of their investment in Blackstone Cattle Company, Ltd., an Illinois limited partnership. The limited partnership was promoted, formed and managed by the defendants. This action arises under § 12(2) of the Securities Act of 1933, § 10(b) of the Securities Exchange Act of 1934, Rule 10b-5, and several common claims.

Presently before this court is defendants Morrison, Scott and Livergood's motion to dismiss plaintiffs' complaint. Defendants argue that plaintiffs' securities claims are time-barred. In addition, defendants contend that plaintiffs failed to state a § 12(2) claim. Finally, defendants maintain that plaintiffs failed to meet the specificity requirement of Rule 9(b) of the Federal Rules of Civil Procedure. Jurisdiction is based on § 22 of the Securities Act of 1933, 15 U.S.C. § 77v, § 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, and §§ 28 U.S.C. 1331 and 1337. For the reasons stated below, this court denies defendants' motion to dismiss plaintiffs' complaint.

FACTS

All well-pled facts are considered true for the purposes of this motion.

Defendants formed a corporation in 1982 named Blackstone, Inc., for the purpose of serving as the general partner in a limited partnership. The limited partnership was subsequently formed and named Blackstone, Ltd. Before the limited partnership was formed, defendants sold their breeding cattle to the corporation, Blackstone, Inc. That corporation sought prospective buyers to invest in the cattle breeding business as limited partners.

On December 31, 1982, defendants prepared and distributed to plaintiffs an original prospectus which contained financial projections on future cattle sales. Also, plaintiffs received from defendants a revised prospectus on July 1, 1983. Relying on the information and projections contained in these prospectuses, plaintiffs purchased limited partnership interests in Blackstone, Ltd. The limited partnership was formed on September 1, 1983, and operated for almost two and one-half years. During that time plaintiffs did not receive any return on their investments. Plaintiffs filed suit after learning that Blackstone, Ltd. was improperly run. Having invested in the cattle breeding business with high expectations of profit, plaintiffs soon realized they had purchased a "bum steer."

DISCUSSION

When resolving a motion to dismiss, a court is required to view the facts alleged in the complaint in the light most favorable to the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974). A motion to dismiss will not be granted merely because the complaint does not state every element necessary for recovery with precision. Southwest Investments I v. Midland Energy Co., 596 F.Supp. 219, 221 (E.D.Mo.1984); 4 Wright & Miller, Federal Practice and Procedure: Civil § 1216 at 120 (1969). A complaint is sufficient if it "contains allegations from which an inference fairly may be drawn that evidence on these material points will be introduced at trial." 5 Wright § Miller, Federal Practice and Procedure: Civil § 1216 at 122-23. A complaint should not be dismissed for failure to state a claim unless it "appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957).

A. The Statute of Limitations

1. Alleging Compliance with § 13 of the Securities Act of 1933

Count I of the complaint alleges a violation of § 12(2) of the Securities Act of 1933. 15 U.S.C. § 77l (2). Section 12 imposes civil liability upon any person who makes an untrue statement of material fact in the offer or sale of a security. Section 13 establishes the statutory limitation period for a § 12(2) violation as one year from the discovery of the violation, but no more than three years after the security was sold. 15 U.S.C. § 77m.

Defendants challenge the sufficiency of the allegations in Count I. Defendants argue that Count I fails to state a claim because it does not affirmatively plead compliance with the applicable statute of limitation. Defendants rely on § 13 of the Securities Act of 1933, 15 U.S.C. § 77m, to support their argument that such an allegation is essential to a cause of action under § 12(2) of the 1933 Act.

Section 13 is not an ordinary statute of limitations. The courts have repeatedly held that compliance with the time provisions of § 13 of the Securities Act, in contrast to other limitations statutes, is an essential element of a cognizable § 12(2) claim. Thus, unlike other situations, compliance with the statute must be affirmatively pled in § 12(2) actions and is not merely an affirmative defense to be raised by defendants. Southwest Investments I v. Midland Energy Co., 596 F.Supp. 219, 222 (E.D.Mo.1984). Adair v. Hunt International Resources Corp., 526 F.Supp. 736, 748-49 (N.D.Ill.1981); McMerty v. Burtness, 72 F.R.D. 450 (D.Minn.1976).

In the instant case, the plaintiffs affirmatively pled facts which indicate that this action has been timely brought under § 12(2). The complaint avers that the sale of securities involved here (interests in a limited partnership for cattle breeding) concluded on September 1, 1983 (¶ 27); that defendants fraudulently concealed the value of the partnership cattle from the investors (¶ 37); that some cattle were sold during the first quarter of 1986 (¶ 33); and that plaintiffs first learned the true value of the cattle during the period April-August 1986 (¶ 37). The complaint was filed shortly thereafter on August 28, 1986. Thus, plaintiffs effectively pled that the complaint was filed within one year of the discovered fraud which was no later than three years after the sale. Therefore, this court concludes that plaintiff complied with § 13 of the Securities Act and stated a cognizable § 12(2) claim.

2. Filing Counts I and II Within the Three-Year Limitation Period

Count II alleges a violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and S.E.C. Rule 10b-5. Section 10(b) and Rule 10b-5 provide a person a private right of action to seek damages for fraud or material misstatements in connection with the purchase or sale of a security.

The statute of limitation period for a violation of § 10(b) of the 1934 Act is not defined by federal statute. Instead, the limitation period is controlled by the forum state. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210 n. 29, 96 S.Ct. 1375, 1389 n. 29, 47 L.Ed.2d 668 (1976). Illinois is alleged to be the forum state for this action. In Illinois, the three-year limitation period contained in § 13 of the Securities Law of 1953, Ill.Rev.Stat. ch. 121½, ¶ 137.13, subd. D, applies to actions brought under § 10(b) of the 1934 Act and Rule 10b-5. See Schaefer v. First National Bank of Lincolnwood, 509 F.2d 1287, 1295 (7th Cir. 1975). Consequently, this court will apply a three-year statute of limitation period to plaintiffs' § 10(b) claim.

Plaintiff's complaint was filed on August 28, 1986. According to the Securities Law of 1953, the statutory limitations period must have begun prior to August 28, 1983, for plaintiffs' § 12(2) and § 10(b) securities claims to be time-barred.

The fundamental dispute revolves around the date the limitation period began running. All parties agree that the limitation period started upon the "sale" of the security. However, the opposing parties present conflicting views of the sale date. Defendants argue that the sale date is the date plaintiffs parted with the final payment necessary to obtain title to their limited partnership interest. This date is prior to September 1, 1983, when the limited partnership was formed. That final payment date is more than three years before the complaint was filed. Therefore, defendants believe that plaintiffs' complaint is time-barred by the three-year limitations period applicable to § 12(2) of the 1933 Act, § 10(b) of the 1934 Act and Rule 10b-5. In contrast, plaintiffs contend that the securities sale was not completed until September 1, 1983, when the partnership was formed and plaintiffs received the limited partnership interest for which they paid. This date is less than three years from the date the complaint was filed and would not time-bar the securities claims.

In Silverman v. Chicago Ramada Inn, Inc., 63 Ill.App.2d 96, 211 N.E.2d 596 (1965), the Illinois Appellate Court was confronted by a similar dispute. The Silverman plaintiffs purchased an interest in a hotel chain from defendants. The first payment was made on March 6, 1959; the last payment was made on October 20, 1959. Upon final payment, plaintiffs received the stock and debentures evidencing their interest in the defendants' corporation. In July 1962, the plaintiffs filed suit based on the alleged sale of unregistered securities.

The parties in Silverman could not agree on the date the three-year statute of limitation period began running. Defendants alleged it was the date of the agreement and first payment in March 1959. The plaintiffs insisted that the limitations period started when they made their final payment and received the securities in October 1959.

The Silverman court resolved the dispute by first examining the...