Barr v. McGraw-Hill

• Decision Date: 16 July 1991
• Docket Number: 88 Civ. 2446 (KC),No. 87 Civ. 6259 (KC),89 Civ. 3730 (KC) and 90 Civ. 6938 (KC).,88 Civ. 2498 (KC),87 Civ. 6259 (KC)
• Citation: 770 F. Supp. 855
• Parties: Irving BARR, et al., Plaintiffs, v. McGRAW-HILL, et al., Defendants. David B. HANNA, et al., Plaintiffs, v. McGRAW-HILL, et al., Defendants. Tom L. KINZENBAW, et al., Plaintiffs, v. McGRAW-HILL, et al., Defendants. Philip BENNETT, et al., Plaintiffs, v. McGRAW-HILL, Defendant. Bruce VOMACKA, et al., Plaintiffs, v. McGRAW-HILL, Defendant.
• Court: U.S. District Court — Southern District of New York

770 F. Supp. 855

Irving BARR, et al., Plaintiffs, v. McGRAW-HILL, et al., Defendants.

David B. HANNA, et al., Plaintiffs, v. McGRAW-HILL, et al., Defendants.

Tom L. KINZENBAW, et al., Plaintiffs, v. McGRAW-HILL, et al., Defendants.

Philip BENNETT, et al., Plaintiffs, v. McGRAW-HILL, Defendant.

Bruce VOMACKA, et al., Plaintiffs, v. McGRAW-HILL, Defendant.

Nos. 87 Civ. 6259 (KC), 88 Civ. 2498 (KC), 88 Civ. 2446 (KC), 89 Civ. 3730 (KC) and 90 Civ. 6938 (KC).

United States District Court, S.D. New York.

July 16, 1991.

James Cohen, New York City, Carl Genberg, Columbus, Ohio, for plaintiffs.

Sullivan & Cromwell, Michael Savage, Gersten Savage Kaplowitz Zukerman & Liebman, New York City, for defendants.

OPINION AND ORDER

CONBOY, District Judge:

Defendant McGraw-Hill, Inc. ("McGraw-Hill") moves for an order, pursuant to Fed. R.Civ.P. 12(c),¹ dismissing plaintiffs' federal securities claims as time-barred. For the reasons set forth below, the motion is granted.

BACKGROUND

These five related actions, which have been consolidated for certain purposes, all arise out of the syndication and marketing, in the years 1979 to 1983, of approximately 30 limited partnerships that were intended to acquire and market videotapes to be used in the field of continuing medical education. Each of the limited partnerships was to finance the production of tapes within a given medical subject matter, such as oncology, pharmacology, infectious diseases, and so on. The partnerships were organized by World Video Corporation, whose principals were various individuals located in New York City. They arranged with Hahnemann Medical College in Philadelphia to produce the tapes, which would then be marketed under the auspices of World Video or entities with which it had arranged to perform marketing activities.

World Video contracted to have McGraw-Hill provide appraisals of the master videotapes to be produced by Hahnemann and purchased by the limited partnerships. (See, e.g., Bennett Complaint ¶ 8.) The appraisals were all delivered during the years 1979 to 1983. (See Barr Second Amended Complaint ¶ 15(b); Vomacka Complaint ¶ 13(b); Bennett Complaint ¶¶ 8-10; Hanna First Amended Complaint ¶ 10; Kinzenbaw First Amended Complaint ¶ 9.) The last appraisal was delivered on August 15, 1983. (Vomacka Complaint ¶ 18; see also Kinzenbaw First Amended Complaint ¶ 9.)

The earliest complaint was filed in the Kinzenbaw action in the United States District Court for the Southern District of Ohio (Eastern Division) on December 8, 1986. On June 15, 1987, however, the Kinzenbaw plaintiffs filed a notice of voluntarily dismissal without prejudice, and then filed a new action, on July 29, 1987, in the Western Division of the same court. The Kinzenbaw action was transferred to this Court on March 30, 1988. The Bennett action was commenced in the Western District of Michigan on April 20, 1987, and transferred to this Court in May 1989. The Barr action was commenced in this Court on August 2, 1987. On October 30, 1987, the Hanna plaintiffs commenced their action in the Southern District of Ohio; the action was transferred along with Kinzenbaw on March 30, 1988. Finally, on July 12, 1989, the Vomacka action was commenced in South Dakota; it was transferred to this Court in late 1990.

The complaints do not allege with complete clarity the dates when the plaintiffs allegedly purchased limited partnership units, but as well as one can tell from the complaints, all of the units had been purchased by December, 1983 and most of them had been purchased in the years 1980 through 1982. See Barr Second Amended Complaint, Exhibit A (all units purchased by December 30, 1981); Vomacka Complaint, Exhibit A (latest purchase date December 1983); Bennett Complaint ¶¶ 8-10 (latest purchase date December 31, 1981); Hanna First Amended Complaint ¶ 6 (no dates given), ¶ 10 (latest McGraw-Hill report rendered August 15, 1983), ¶ 20 (plaintiffs identified as "investors in the partnerships" by fall of 1983); Kinzenbaw First Amended Complaint ¶ 6 (no dates given), ¶ 9 (latest McGraw-Hill report rendered August 15, 1983), ¶ 18 (plaintiffs referred to as "investors in the partnerships" by fall of 1983).

Plaintiffs' allegations as to when they had notice of their claims against McGraw-Hill vary from complaint to complaint. See Barr Second Amended Complaint ¶ 54 (no notice of any claim until April 1987); Vomacka Complaint ¶ 20 ("Plaintiffs had no reason to suspect that they had been victims of a fraud until after January 1, 1987."); Bennett Complaint ¶ 16 (plaintiffs did not have "inquiry notice" until after 1984); Hanna First Amended Complaint ¶ 31 (no "inquiry notice" until March 1985 at the earliest); Kinzenbaw First Amended Complaint ¶ 29 ("The earliest a limited partner received notification from the IRS disallowing deductions and asserting that the appraisal was `grossly overvalued' was in March of 1984. Most of the investors were not so notified until 1985 and some not until the past few months. Thus Plaintiffs were not put on `inquiry notice' until — at the earliest March of 1984....").

McGraw-Hill now moves to dismiss plaintiffs' securities fraud claims, brought pursuant to § 10(b) of the Securities Exchange Act of 1934 ("the 1934 Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, on the ground that they are barred by the statute of limitations. McGraw-Hill initially moved in the wake of the Second Circuit's decision in Ceres Partners v. GEL Associates, 918 F.2d 349 (2d Cir.1990), in which the Court adopted a uniform federal statute of limitations for § 10(b) and Rule 10b-5 claims. The Court held that such claims must be brought within one year after the discovery of the facts constituting the violation and in no event later than three years after such violation (the "one-year/three-year" rule). Id. at 364. The Court's ruling set aside the longstanding practice in this Circuit of borrowing the most closely analogous state statute of limitation. The Court expressly left open the question of whether its newly announced rule should be applied retroactively. Id.

Shortly after the Ceres decision was announced, McGraw-Hill filed its motion to dismiss, arguing that the new one-year/ three-year rule should be applied retroactively in this action. McGraw-Hill applied the three-part test set out in Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971), for determining whether a newly announced rule of decision should be applied retroactively. The test is as follows:

First, the decision to be applied nonretroactively must establish a new principle of law, either by overruling clear past precedent on which litigants may have relied ... or by deciding an issue of first impression whose resolution was not clearly foreshadowed.... Second, it has been stressed that we must ... weigh the merits and demerits of each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective operation will further or retard its operation.... Finally, we have weighed the inequity imposed by retroactive application, for where a decision of this Court could produce substantial inequitable results if applied retroactively, there is ample basis in our cases for avoiding the injustice or hardship by a holding of nonretroactivity.

Id. at 106-07, 92 S.Ct. at 355 (citations and internal quotations omitted).

McGraw-Hill argued that all three factors favor retroactive application of the new one-year/three-year rule. First, McGraw-Hill contended that plaintiffs cannot establish that Ceres overrules "clear past precedent on which litigants may have relied" because, according to McGraw-Hill, none of the plaintiffs can demonstrate that they had claims timely under Ceres which became stale because they relied on a longer state statute of limitations and acted accordingly. Second, McGraw-Hill argued that retrospective application to this action would further the purpose of the new one-year/three-year rule because it would avoid having this Court apply numerous inconsistent state statutes of limitations to plaintiffs in the various actions. Third, McGraw-Hill suggested that the equities favor retroactivity because the parties have engaged in a relatively small amount of discovery, and because "it is not inequitable to apply a statute of limitations which, by plaintiffs' own admission, would have barred plaintiffs' claims if it had been known to be the rule at the time plaintiffs say they discovered their claims." Def. Mem. at 17.

Before plaintiffs had a chance to respond to McGraw-Hill's motion, the Second Circuit announced its decision in Welch v. Cadre Capital, 923 F.2d 989 (2d Cir.), vacated and remanded sub. nom. Northwest Savings Bank, PaSA v. Welch, ___ U.S. ___, 111 S.Ct. 2882, 115 L.Ed.2d 1048 (1991), which addressed the question left open in Ceres: whether the one-year/three-year rule should apply retroactively. Turning to the three-part Chevron test, the Court observed at the outset that, while a proponent of a prospective-only application of a new rule must satisfy the first Chevron factor, once "the proponent of nonretroactivity clears the first hurdle, the court then proceeds to the `balancing process demanded by the second and third factors.'" Id. at 994 (quoting Kremer v. Chemical Construction Corp., 623 F.2d 786, 789 (2d Cir. 1980)). The Court then concluded that Ceres, which overrules well-established precedent, meets the threshold requirement for nonretroactive application. Id. at 994. The Court emphasized that "the first prong of the Chevron test requires only a prior rule on which plaintiffs `may' have relied, and does not create a test of actual reliance." Id. at 993 n. 5.

As to the second Chevron factor, the Second Circuit concluded that retroactive application of the new and shorter limitations period did not further the purpose of the new rule. Id. at 995. The Court rejected a mechanical approach by which...