Cohen v. McAllister, Civ. A. No. 87-90 Erie.
| Decision Date | 12 November 1987 |
| Docket Number | Civ. A. No. 87-90 Erie. |
| Parties | Edward COHEN, Alfred Cohen, Michael Cohen, the Estate of Judson Cohen, the Estate of Arthur Shapiro, Helen Shapiro, William Russell Shapiro, Alice Russell Shapiro, David Robbins and Lucille Robbins, Individually and as Limited Partners of certain California Limited Partnerships, Plaintiffs, v. Bruce McALLISTER and BMI Energy, Ltd., Individually and as General Partners of BMI/Washington 1980-II, BMI/Martha 1980-III, BMI/George 1981-I and BMI/Adams 1981-II, California Limited Partnerships, Defendants. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Andrew J. Conner, Dunn & Conner, Erie, Pa. (Hodgson Russ Andrews Woods & Goodyear, of counsel, Buffalo, N.Y.), for plaintiffs.
Gilmur R. Murray, San Francisco, Cal., John G. Gent, Erie, Pa., Ralph L. Halpern, Buffalo, N.Y., for defendants.
This suit concerns alleged misrepresentations made to the plaintiffs regarding the purchase of limited partnership interests in partnerships formed to explore for and develop oil and gas properties in Erie and Crawford counties. The plaintiffs allege that they first discussed investment in these partnerships, sponsored by defendants Bruce McAllister and BMI Energy, Ltd. "BMI Energy", in 1980. They made their first investments in September, 1980. They made subsequent investments in the defendants' other limited partnerships in November of 1980, as well as in March and June of 1981.
The plaintiffs allege that before and after their purchases, defendant Bruce McAllister repeatedly misrepresented the risks inherent in their investments. McAllister allegedly assured the plaintiffs that the limited partnerships had entered into contracts with two gas purchasers, National Fuel Gas Supply Corporation "National Fuel" and Columbia Gas Transmission Corporation "Columbia Gas". McAllister allegedly represented that these gas purchase contracts included "take-or-pay" provisions which eliminated "marketing risk." This meant that while there were "exploration risks," i.e., that the partnerships' wells might not strike gas in economically producible quantities, there were no "marketing risks" that the partnerships would not be able to find a purchaser for its gas at a price sufficient to generate an acceptable return on investment. The plaintiffs claim that while they were willing to accept "exploration risk," they relied on McAllister's oral representations that there would be no "marketing risk." They assert that they would not have made these investments if they had been aware that there were "marketing risks."
In 1982 and early 1983, the market for natural gas weakened and National Fuel allegedly informed the defendants that it would not take any more gas from partnership wells. National Fuel also refused to pay for partnership gas not taken. Amended Complaint, par. 30. In early 1983, National Fuel offered to resume gas purchases only if the partnerships would agree to reduce prices and modify the gas purchase contract to permit renegotiation of the price in the event of gas deregulation. Amended Complaint at par. 31. McAllister and BMI Energy acceded to these demands. Amended Complaint at par. 32. Columbia Gas, the partnerships' other gas purchaser, demanded and received similar concessions. Amended Complaint at par. 33. Plaintiffs allege that the interruptions in gas sales and the later concessions caused a drastic decline in partnership revenues and the value of their limited partnership interests.
Plaintiffs' complaint alleges that McAllister and BMI Energy made no attempt to enforce the "take-or-pay" provision in the gas purchase contract for the payments due for the period when National Fuel refused to take the partnerships' gas. Amended Complaint at par. 32. Plaintiffs assert that this was because there were in fact no "take-or-pay" provisions in the gas purchase agreements, and that McAllister had no reasonable basis for making such a representation. Amended Complaint at par. 34-35. McAllister wrote two letters to partnership investors on January 20 and February 9, 1983 informing them of National Fuel's demands and his decision on behalf of the partnerships to agree to the concessions. Amended Complaint at par. 40. In these letters, McAllister represented that National Fuel's demands were a flagrant breach of the valid and binding "take-or-pay" provision in the gas purchase contract, but that business conditions required the partnerships to accede. Id.
The plaintiffs filed their complaint on April 15, 1987. The amended complaint includes causes of action under: (1) Pennsylvania common law of fraud; (2) section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange Commission; (3) section 352-c of the New York General Business Law (); (4) section 25401 of the Corporate Code of the California Corporate Securities Law (BMI Energy and the limited partnerships were allegedly organized under California law); (5) title 70, section 1-401 of the Pennsylvania statutes; (6) breach of fiduciary duty; and (7) breach of contract.
Defendants Bruce McAllister and BMI Energy have yet to answer the plaintiffs' amended complaint. Defendants have moved to dismiss the action under federal rule 12(b)(6) on the grounds that: (1) plaintiffs' section 10(b) and Rule 10(b)-5 claims are barred by a one year statute of limitations; (2) the section 10(b) and Rule 10(b)-5 claims of plaintiffs Lucille Robbins and David Robbins fail to allege fraud with the particularity required under Rule 9(b) of the Federal Rules of Civil Procedure; (3) if the court dismisses the plaintiffs' section 10(b) and Rule 10(b)-5 claims, then all the remaining pendant state claims should be dismissed for lack of jurisdiction; (4) the California securities law claim and the claim under title 70, section 1-401 of the Pennsylvania statutes are barred by their respective statutes of limitations; and, (5) the claims of the estates of Millard Cohen, Judson Cohen and Arthur Shapiro should be dismissed because the estate of a deceased person is not a proper party under Pennsylvania law.
The plaintiffs have made a cross-motion to further amend their complaint: (1) to substitute Andrew M. Cohen and Jacob Falkenstein, executors of the Estate of Millard Cohen, as plaintiffs in place of the Estate of Millard Cohen; (2) to substitute Howard Klein, Murray Cohen and Janice Cohen, executors of the Estate of Judson Cohen, as plaintiffs in place of the Estate of Judson Cohen (this Court has subsequently approved the voluntary dismissal of the Estate of Judson Cohen as a party to this action); (3) to substitute William Russell Shapiro and Helen Shapiro, executors of the Estate of Arthur Shapiro, as plaintiffs in place of the Estate of Arthur Shapiro; (4) to set forth specific facts describing the manner in which plaintiffs David Robbins and Lucille Robbins became aware of the alleged misrepresentations.
The defendants move for dismissal of the section 10(b) and Rule 10(b)-5 claims on the grounds they are barred by a one year statute of limitations applicable under Pennsylvania's blue sky securities law. Plaintiffs insist that these claims enjoy a six year limitation under the Pennsylvania common law of fraud, and that the defendant's fraudulent concealment of their fraud tolled the statute of limitations until such time as the plaintiffs had actually discovered the fraud.
Federal law does not specify a limitation on actions brought under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), or Rule 10(b)-5, 17 C.F.R. § 240.10(b)-5, promulgated thereunder. Because federal law does not provide a statute of limitations, this Court looks to the law of the forum state, Pennsylvania, to "borrow" the appropriate period of limitation.1 Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210 n. 29, 96 S.Ct. 1375, 1389 n. 29, 47 L.Ed.2d 668 (1976). A federal court must determine which state limitations period is most analogous to the federal claim. Johnson v. Railway Express Agency, 421 U.S. 454, 464, 95 S.Ct. 1716, 1722, 44 L.Ed. 2d 295, 303 (1975).
Determining which forum state limitations period is most analogous to the federal claim requires an analysis fraught with ambiguity. The Third Circuit has held that a court must begin this determination by inquiring "whether, assuming the operative facts alleged in the complaint, a state court would entertain an action for the relief sought." Roberts v. Magnetic Metals Co., 611 F.2d 450, 452 (3rd Cir.1979). Courts have since endeavored to pour the alleged facts underlying federal § 10(b) claims into the vessels of analogous state causes of action. Because there is no precise counterpart in Pennsylvania law to § 10(b), any analogy is bound to be imperfect. The result is uncertainty among potential plaintiffs and defendants as to the timeliness of § 10(b) claims, this threshold issue left unsettled until the attorneys complete their arguments by analogy and the courts sift the facts of each case to discern the state law which would most closely govern the plaintiffs' claim.
The United States Supreme Court has recognized the problems inherent in borrowing state limitations periods when the federal claim differs from the state cause of action. In Wilson v. Garcia, the Supreme Court had to choose the proper limitations period for an action filed in a federal court in New Mexico under 42 U.S.C. § 1983. 471 U.S. 261, 105 S.Ct. 1938, 85 L.Ed.2d 254 (1985). The Court noted that the case-by-case, fact-based analysis "inevitably breeds uncertainty and time-consuming litigation...." Id. at 272, 105 S.Ct. at 1945, 85 L.Ed.2d...
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