Bradford-White Corp. v. Ernst & Whinney

• Decision Date: 12 September 1988
• Docket Number: Civ. A. No. 83-3371.
• Citation: 699 F. Supp. 1085
• Parties: BRADFORD-WHITE CORPORATION v. ERNST & WHINNEY.
• Court: U.S. District Court — Eastern District of Pennsylvania

699 F. Supp. 1085

BRADFORD-WHITE CORPORATION v. ERNST & WHINNEY.

Civ. A. No. 83-3371.

United States District Court, E.D. Pennsylvania.

September 12, 1988.

Patrick W. Kittredge, Joseph M. Donley, Gardenia L. Brooman, Philadelphia, Pa., for plaintiff.

Raymond K. Denworth, Philadelphia, Pa., for defendant.

MEMORANDUM OF DECISION

McGLYNN, District Judge.

Presently before the court is the defendant's motion for summary judgment. Plaintiff initiated this action in July, 1983 alleging a cause of action under § 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and pendent state law claims for intentional misrepresentation, negligent misrepresentation and professional malpractice. Following a 13-day trial, the jury answered special interrogatories from which the court molded a verdict and entered judgment in favor of Bradford-White in the amount of $1,242,151.

In disposing of several post-trial motions, I granted the defendant's motion to amend judgment in the defendant's favor with respect to the pendent state law claims. I also granted the defendant's motion for a new trial with respect to the plaintiff's securities claims. The defendant now moves for summary judgment contending that in light of the Third Circuit's recent decisions in In re: Data Access Systems Securities Litigation, 843 F.2d 1537 (3d Cir.1988) and Hill v. Equitable Trust Co., 851 F.2d 691 (3d Cir.1988), the plaintiff's claims are time-barred.

Background

The factual background giving rise to this litigation has been detailed in previously filed memoranda and only the facts necessary to a determination of the pending motion will be recited here.

The plaintiff, Bradford-White Corporation, is a Tennessee corporation which manufactures and distributes domestic and commercial water heaters. The defendant, Ernst & Whinney, is a national accounting firm which prepared financial statements which the plaintiff alleges contained material misrepresentations and omissions.

In June 1981, the plaintiff was interested in acquiring the W.L. Jackson Company ("Jackson Company"), a private Tennessee corporation which operated a water heater manufacturing plant in Chattanooga, Tennessee, and with the approval of the U.S. Justice Department arranged a meeting attended by representatives of both corporations. Due to time constraints imposed by Citicorp, the Jackson Company's primary lender, the acquisition had to be completed by June 22, 1981. Accordingly, the parties entered into a week of intense negotiations which culminated in the execution of a stock purchase agreement. Signed on June 21, 1981, but dated June 20, 1981, the agreement provided that the price of the Jackson Company stock would be determined by an audit of the company as of June 30, 1981.

Prior to executing this agreement, a consultant for the Jackson Company provided the plaintiff with the Jackson Company's financial statements, which had been prepared by the defendant and dated December 31, 1980, as well as interim financial statements through April 30, 1981. These statements were characterized as being prepared in accordance with generally accepted accounting principles and to fairly and accurately portray the financial condition of the Jackson Company. The statements disclosed a working capital deficiency, a potential warranty liability problem, a net operating loss of $1,097,427 in 1980 and a net worth of $1,793,203 in 1980.

The record reveals that, subsequent to executing the agreement, the plaintiff became aware that the financial health of the Jackson Company was worse than pictured. In August, 1981, when the results of the June audit were made available, the defendant issued an opinion of the Jackson Company's financial condition which was significantly different from that contained in the December 31, 1980 financial statements. Nevertheless, the plaintiff continued to abide by the terms of the agreement. In October, 1981, the financial problems proved to be too great and the plaintiff filed a voluntary petition in bankruptcy on behalf of the Jackson Company. There was no improvement and plaintiff was forced to liquidate the Jackson Company in April, 1982. The plaintiff filed this action on July 14, 1983.

Discussion

In In re: Data Access Securities Litigation, 843 F.2d 1537 (3d Cir.1988), the Third Circuit answered the "troublesome question," faced several times earlier in this circuit, of determining the correct statute of limitations for causes of action arising under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder. Data Access, 843 F.2d at 1537. The court held that the limitations period for "a complaint charging violation of section 10(b) and Rule 10b-5 is one year after the plaintiff discovers the facts constituting the violation and in no event more than three years after such violation." Id. at 1550. In deciding the defendant's motion for summary judgment, I am required to decide whether the Third Circuit's decision in Data Access should be applied retroactively to the facts of this case, and if so, when the plaintiff discovered the facts which constituted the securities violation, thus giving rise to its cause of action.

A. The Chevron Factors: Retroactive application of DATA ACCESS

In Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971) the Supreme Court summarized three factors to be considered in determining whether to apply a judicial decision retroactively. In applying these factors to this case, however, I am not writing on a clean slate. In Hill v. Equitable Trust Co., 851 F.2d 691 (3d Cir.1988), a Third Circuit panel unanimously applied Data Access retroactively to bar the plaintiffs' § 10(b) and Rule 10b-5 claims. Although Hill does not dictate the result here, the court's analysis of the Chevron factors is instructive.

1. Did Data Access Change Prior Law?

The first Chevron factor is whether a decision establishes a new principle of law, either by overruling clear past precedent or by deciding an issue of first impression whose resolution was not clearly foreseeable. In answering this question, I must look to the state of the law when the plaintiff's cause of action arose. See Hill, at 697; Al-Khazraji v. Saint Francis College, 784 F.2d 505, 512 & n. 9 (3d Cir.1986), aff'd, 481 U.S. 604, 107 S.Ct. 2022, 95 L.Ed.2d 582 (1987); Perez v. Dana Corp., 718 F.2d 581, 585 (3d Cir.1983); see also Data Access, 843 F.2d at 1557 (Seitz, J., dissenting) (looking to state of law when third amended complaint was filed but noting that date of filing is not relevant date in all cases). In this case, the state of the law at the time the plaintiff's claim arose can be gleaned from the Third Circuit's opinions in Roberts v. Magnetic Metals Co., 611 F.2d 450 (3d Cir.1979); Biggans v. Bache Halsey Stuart Shields, Inc., 638 F.2d 605 (3d Cir.1980); and Sharp v. Coopers & Lybrand, 649 F.2d 175 (3d Cir. 1981), cert. denied, 455 U.S. 938, 102 S.Ct. 1427, 71 L.Ed.2d 648 (1982).

If I were deciding this case without the benefit of the Third Circuit's recent analysis in Hill, the plaintiff's argument that the law was clearly established when its claim accrued would be more persuasive. In fact, the plaintiff's position is supported by Judges Seitz, Sloviter and Mansmann in the dissenting opinion of Data Access, 843 F.2d at 1553. Although at the time the plaintiff's claim accrued the Third Circuit had not selected one specific limitations period, it did take an ad hoc, functional, claim-matching approach by first determining whether the action could have been brought under the state Blue Sky Laws. If the plaintiff could not bring a cause of action under the state Blue Sky Laws, then the court was to apply the statute of limitations for common law fraud. Id. (Seitz, J., dissenting); see also Sowell v. Butcher & Singer, Inc., No. 87-0714 Slip Op., at 9 n. 4 (E.D.Pa. May 12, 1987) available on WESTLAW, 1987 WL10712 (Judge Scirica stating he was bound by Biggans); Dofflemyer v. W.F. Hall Printing Co., 558 F.Supp. 372, 377 (D.Del.1983) (opinion by Judge Stapleton implying a clear result from application of Roberts and Biggans); cf. Ging v. Parker-Hunter Inc., 544 F.Supp. 49, 51 (W.D.Pa.1982) (characterizing Biggans as "controlling" under facts of that case).

After reviewing the Roberts and Biggans opinions, along with (then) Chief Judge Latchum's opinion in Hill v. Der, 521 F.Supp. 1370 (D.Del.1981), the Hill court concluded that "clear holdings on which plaintiffs could rely, as in Al-Khazraji and its progeny, were absent when plaintiffs decided to begin this suit in (April) 1982." Even if I assume, arguendo, that the plaintiff's claim here did not accrue until it filed suit in 1983¹, I find no decisions in the Third Circuit between April 1982 and July 1983 when this suit was filed which settled the law with respect to the statute of limitations in 10b-5 cases. In fact, the lack of clarity surrounding the appropriate statute of limitations for claims alleging violations of § 10(b) and Rule 10b-5 has been noted by numerous district courts within the Third Circuit since the Biggans case was decided. See, e.g., Cohen v. McAllister, 673 F.Supp. 733, 736 (W.D.Pa.1987) (describing Biggans analysis as "fraught with ambiguity" resulting in "uncertainty among potential plaintiffs and defendants as to the timeliness of § 10(b) claims"); Steinberg v. Shearson Hayden Stone, Inc., 598 F.Supp. 273 (D.Del.1984) (applying Biggans and Roberts but noting disagreement among judges); Goodman v. Moyer, 523 F.Supp. 35, 37 (E.D.Pa.1981) (quoting Biggans, 638 F.2d at 607 (Weis, J., dissenting)) (characterizing Biggans limitation selection process as "confused and inconsistent body of law").

In 1981, in Sharp v. Coopers & Lybrand, 649 F.2d 175 (3d Cir.1981), a case not discussed by the Hill court, a unanimous panel of the Third Circuit applied Biggans to hold a § 10b and Rule 10b-5 claim to be...