Brick v. Dominion Mortg. & Rlty. Trust

• Decision Date: 29 November 1977
• Docket Number: Civ. No. 76-605.
• Citation: 442 F. Supp. 283
• Parties: Marion Stratton BRICK et al., Plaintiffs, v. DOMINION MORTGAGE & REALTY TRUST, a Massachusetts Real Estate Investment Trust et al., Defendants.
• Court: U.S. District Court — Western District of New York

442 F. Supp. 283

Marion Stratton BRICK et al., Plaintiffs, v. DOMINION MORTGAGE & REALTY TRUST, a Massachusetts Real Estate Investment Trust et al., Defendants.

Civ. No. 76-605.

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

November 29, 1977.

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Eugene W. Landy, Landy & Spector, Eatontown, N. J., Francis J. Offermann, Jr., Offermann, Fallon, Mahoney, Cassano & Geller, Buffalo, N. Y., for plaintiffs.

James J. Maloney, Gene M. Bauer, Rogers & Wells, New York City, Gary F. Kotaska, Moot, Sprague, Marcy, Landy, Fernbach & Smythe, Buffalo, N. Y., for Dominion and certain individual defendants.

Howard G. Kristol, J. Joseph Bainton, Reboul, MacMurray, Hewitt, Maynard & Kristol, New York City, Thomas L. David, Gross, Shuman, Laub & David, Buffalo, N. Y., for Great Lakes Advisory, Gross, David & Gross, Shuman, Laub & David.

Alexander C. Cordes, Phillips, Lytle, Hitchcock, Blaine & Huber, Buffalo, N. Y., for Marine Midland Bank.

MEMORANDUM and ORDER

ELFVIN, District Judge.

Plaintiffs have filed a four-count¹ complaint. The First Count alleges violations of sections 11 and 12(2) of the Securities Act of 1933, as amended, 15 U.S.C. §§ 77k and 77l(2) and of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j and of the Securities and Exchange Commission's rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. The Second Count sets forth claims under these same sections against Marine Midland Bank, Inc. — Western ("Marine") individually and as agent for certain other lender banks under an aiding and abetting theory of liability. The Third Count alleges a shareholders' derivative cause of action on behalf of Dominion Mortgage & Realty Trust ("Dominion") against its controlling persons. The Fourth Count sets forth pendent state law causes of action based upon negligence, breach of contract and breach of fiduciary duty.

Dominion, an unincorporated Massachusetts business trust, and certain individual defendants² move to dismiss plaintiffs' First Count to the extent that it is premised upon alleged violations of sections 11 and 12(2) on the grounds that plaintiffs lack standing to assert such claims and that such claims are time-barred by section 13 of said Act, 15 U.S.C. § 77m.³

In general, section 11 creates a civil cause of action in favor of a person who acquires a security where any part of the registration statement contained an untrue statement of a material fact or omitted to state a material fact necessary to make the registration statement not misleading. Section 12(2) provides that a person who purchases a security has a cause of action against the seller where the seller's prospectus or oral communication included such untrue statement or omission. Section 13, the limitations of actions provision, provides:

"No action shall be maintained to enforce any liability created under section 77k 11 or 77l(2)⁴ 12(2) of this title unless brought within 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, or, if the action is to enforce a liability created under section 77l(1) 12(1) of this title, unless brought within one year after the violation upon which it is based. In no event shall any such action be brought to enforce a liability created under section 77k or 77l(1) of this title more than three years after the security was bona fide offered to the public, or under section 77l(2) of this title more than three years after the sale."

Paragraph 3 of the First Count of the complaint recites:

"On November 6, 1972, Dominion through a public offering sold $11,000,000 of 8% Subordinated Debentures, due 1987 and 550,000 detachable warrants to purchase 550,000 shares of beneficial interest, by means of a public offering of securities registered with the Securities and Exchange Commission under the Securities Act of 1933."

Plaintiffs' complaint was not filed until October 6, 1976, more than three years after the debentures were offered to the public. Under these circumstances, the clear and unambiguous language of section 13 would appear to bar plaintiffs' claims based upon section 11.

The cases which have addressed this issue have concluded that the three-year time limitation pertaining to claims bottomed on section 11 is an absolute outer limit beyond which no complaint may be entertained. In an early case dealing with the question whether section 13 was satisfied by instituting suit within three years even if not within one year of actual or constructive discovery, Shonts v. Hirliman, 28 F.Supp. 478 (S.D.Cal.1939), the court commented:

"The maximum time provision in Section 13, to the effect that, in no event, shall an action be brought more than three years after the security was offered to the public, does not extend the limitation period. This provision means that if discovery is not made within three years, no action lies, under any circumstances. Otherwise put, if more than three years have elapsed since the offer of the security, the discovery of defendant's fraud comes too late. The object of this clause is merely to set the maximum period during which a person might be held liable, under any circumstances, by reason of any false statements in the registration statement. It does not dispense with the requirement that any person who brings an action within the three year period, must do so also within one year after the discovery of the falsity of the statement or the omission." Id., at 486.

In Fischer v. International Telephone & Tel. Corp., 391 F.Supp. 744 (E.D.N.Y.1975), plaintiff alleged that defendants' registration statement was false and misleading and omitted material facts in violation of section 11. Plaintiff's complaint was filed three years and two days after the date when, according to the court's determination, the stock in question had been bona fide offered to the public. The court concluded that, because such occurred more than three years prior to the commencement of the action, plaintiff's claims were time-barred by section 13.

In Ingenito v. Bermec Corporation, 376 F.Supp. 1154 (S.D.N.Y.1974), the court dismissed plaintiffs' claims alleging violations of section 12(1) for failure to plead compliance with the one-year and three-year periods of limitations contained in section 13. The court interpreted such section as requiring that an action based on section 12(1) be brought both within one year of actual or constructive discovery of the alleged violation and within three years after the security was bona fide offered to the public, whichever date was the earlier. This case, although dealing with violations of section 12(1) rather than claims bottomed on section 11, is of precedential value in the case now before me because the absolute three-year period of limitations contained in section 13 commences to run from the date the security was bona fide offered to the public for both alleged violations of section 11 and section 12(1). In Direction Assoc., Inc. v. Programming & Systems, 412 F.Supp. 714, 717 (S.D.N.Y.1976), the end of the period of three years after the date of sale of an unregistered security was termed "the outer limits" for commencing an action. The United States District Court for the Middle District of Louisiana has held section 13 to be "clear and unambiguous" and "absolute" concerning actions to which it pertains. Cowsar v. Regional Recreations, Inc., D.C., 65 F.R.D. 394 (1974).

Plaintiffs contend that the fraudulent concealment doctrine is applicable and tolls the running of such three-year period of limitations. They place heavy reliance on Holmberg v. Armbrecht, 327 U.S. 392, 66 S.Ct. 582, 90 L.Ed. 743 (1946), and Public Service Co. of New Mexico v. General Electric Co., 315 F.2d 306 (10th Cir.), cert. denied, 374 U.S. 809, 83 S.Ct. 1695, 10 L.Ed.2d 1033 (1963). In Holmberg, suit was commenced pursuant to section 16 of the Federal Farm Loan Act, 12 U.S.C. § 812, and, such legislation not containing a statute of limitations, it was necessary to borrow the appropriate period of limitations of the forum state. Plaintiffs alleged that they did not commence their action within the state time limit because an individual had concealed his ownership of certain stock. It was held that the equitable doctrine of fraudulent concealment applied and tolled the running of the adopted period of limitations. In so holding, Mr. Justice Frankfurter framed the parameters of inquiry to determine when such equitable doctrine will toll a federal statute of limitation. Although he stated, 327 U.S. at page 397, 66 S.Ct. at page 585, as a general proposition that "this equitable doctrine is read into every federal statute of limitation," he had stressed, at page 395, 66 S.Ct. at page 584, that "if Congress explicitly puts a limit upon the time for enforcing a right which it created, there is an end of the matter. The Congressional statute of limitation is definitive."

In Atlantic City Electric Co. v. General Electric Co., 312 F.2d 236 (2d Cir. 1962), the court held that the doctrine of fraudulent concealment applied to the period of limitations set forth in section 4B of the Clayton Act, as amended, 15 U.S.C. § 15b, because it found that Congress did not intend to enact an absolute period of limitations which would not be subject to tolling in cases of fraudulent concealment and did intend the doctrine of fraudulent concealment to apply to private civil antitrust actions. In its decision, the Court interpreted the decision in Holmberg v. Armbrecht, supra, as holding that defendant's fraudulent concealment will toll a federal statute of limitations unless Congress expressly provides to the contrary in clear and unambiguous language.

Similarly, the courts in Public Service Co. of New Mexico v. General Electric Co., supra, and Kansas City, Missouri v. Federal...