Cooperativa Ahorro v. Kidder, Peabody & Co.

• Decision Date: 31 October 1991
• Docket Number: Civ. No. 89-1706 (JAF).
• Citation: 777 F. Supp. 153
• Court: U.S. District Court — District of Puerto Rico
• Parties: COOPERATIVA AHORRO y CREDITO AGUADA, Plaintiff, v. KIDDER, PEABODY & CO., Paine Webber, Incorporated, Ramon M. Almonte, Jane Doe, and the Property Partnership existing between them, Defendants.

777 F. Supp. 153

COOPERATIVA AHORRO y CREDITO AGUADA, Plaintiff, v. KIDDER, PEABODY & CO., Paine Webber, Incorporated, Ramon M. Almonte, Jane Doe, and the Property Partnership existing between them, Defendants.

Civ. No. 89-1706 (JAF).

United States District Court, D. Puerto Rico.

October 31, 1991.

Roberto Boneta, Munoz Boneta Gonzalez Arbona Benitez & Peral, San Juan, P.R., for plaintiff.

Harry E. Woods, Woods & Woods, San Juan, P.R., for Almonte.

Richard Graffam, McConnell Valdes Kelley Sifre Griggs & Ruiz-Suria, San Juan, P.R., for Kidder.

Carlos Bobonis González, Bobonis Bobonis & Rodriguez Poventud, San Juan, P.R., for Paine Webber.

OPINION AND ORDER

FUSTE, District Judge.

The plaintiff, Cooperativa Ahorro y Crédito Aguada ("Coop"), is a single-branch savings and loan institution, which brought claims under the Federal Securities Acts, local law fraud statutes, and the Racketeer Influenced and Corrupt Organization Act (RICO) against its account representative, Almonte, and his employers Kidder, Peabody & Co. ("Kidder") and Paine Webber Incorporated ("Paine Webber") during the period he handled Coop's account. In an earlier opinion, Cooperativa de Ahorro y Crédito Aguada v. Kidder, Peabody & Co., 758 F.Supp. 64, 75 (D.P.R.1991), this court dismissed some of plaintiff's claims and stayed the disposition of the remaining claims pending decision by the Supreme Court in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, ___ U.S. ___, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991). The facts were extensively discussed in an earlier opinion; however, we will reiterate the essentials here.

Plaintiff Coop claims that defendant Almonte, while working for Kidder, fraudulently induced the Coop to invest more than three and a half million dollars in Drexel Burnham "junk bond funds." Plaintiff bought Drexel Burnham Lambert Unit Trust Series 10 and 2 ("Drexel assets") through Almonte over a period of seven months, from June 1986 to December 16, 1986. When Almonte moved from Kidder to Paine Webber in June 1987, he took the Coop account with him. On December 3, 1988, the plaintiff, responding to general rumors that Drexel "junk bond" investments were increasingly unstable, requested information about the value of its Drexel assets. Coop claims Almonte sent it a letter in which he intentionally misstated the value of those assets. Coop further claims that all account statements sent to plaintiff thereafter omitted the value of the Drexel assets or falsely stated that the value was not available to Paine Webber. The claim is that these misrepresentations induced Coop to hold the Drexel assets until the trusts were liquidated by the trustee, in July 1989, having fallen below 50% of their original principal value.

In the previous opinion, this court dismissed all claims brought against Paine Webber alleging securities violations for failure to state a claim upon which relief could be granted. All RICO claims brought against Paine Webber and Kidder were also dismissed for failure to state a claim, as was the 18 U.S.C. § 1962(b) RICO claim against Almonte. The remaining 18 U.S.C. § 1962(c) RICO claim against Almonte, along with the securities claims against Almonte and Kidder, and the pendent local law fraud claims against the three defendants were stayed pending resolution of Lampf.¹

I. The Implications of Lampf

In Lampf, the Supreme Court found that the federal statute of limitations applicable to the express causes of action in section 13 of the Securities Act of 1933, 15 U.S.C. § 77m, and to certain of the express actions in the 1934 Act, 15 U.S.C. §§ 78i(e), 78r(c), and 78cc(b), should also be applied to causes of action under section 10(b) of the 1934 Securities Act, 15 U.S.C. § 78j(b). By adopting this particular statute of limitations, the Supreme Court resolved the unstable situation created by its earlier decisions in Del Costello v. International Brotherhood of Teamsters, 462 U.S. 151, 103 S.Ct. 2281, 76 L.Ed.2d 476 (1983), and Agency Holding Corp. v. Malley-Duff & Associates, Inc., 483 U.S. 143, 107 S.Ct. 2759, 97 L.Ed.2d 121 (1987), which had suggested that the adoption of an analogous state statute of limitations might no longer be appropriate where there existed a suitable federal limitations period. The instability resulted from the lower court response, for while some lower courts began to apply the federal standard, others continued to borrow the state standard.² The new federal statute of limitations for section 10(b) actions, which derives from other provisions of the 1934 Act, was adopted in Lampf because it was "designed to accommodate a balance of interests very similar to that at stake in this litigation." Lampf, 111 S.Ct. at 2775. The "one and three year" structure allows the plaintiff one year from discovery of the deception and three years from the actual commission of the fraud to file. While the absolute bar of three years might seem strict, it was adopted by the Court because it more clearly reflects the remedial purposes of the statute.

An application of the Lampf standard to the instant case would bar the plaintiff's claims under section 10(b). With the federal limitations period, the predicate acts necessary to prove a claim under section 10(b) must have been committed within the three-year period preceding the date of filing. According to the Birnbaum rule, a "predicate act" is limited to the actual purchase or sale of a security, Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2nd Cir.), cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952) (adopted by the Supreme Court in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975)). Therefore, the relevant predicate acts in this case for all claims under the Securities Acts are the purchases of Drexel Burnham Lambert Unit Trust Series 10 and 2 ("Drexel assets") by Coop through Almonte. These purchases all took place before December 28, 1986, or more than three years before the filing of the action on December 28, 1989.

Plaintiff, however, argues that the federal statute of limitations period should not be applied in the instant case. An application of the federal statute of limitations to the instant case would entail retroactive application of a new rule, violating the standards established in Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971).³ Under Chevron Oil, when a new statute of limitations period is established by the Supreme Court, it should be applied prospectively if "it overrules clearly established Circuit precedent on which the complaining party was entitled to rely, ... retroactive application would be inconsistent with the purpose of the underlying substantive statute, and ... such application would be manifestly inequitable," St. Francis College v. Al-Khazraji, 481 U.S. 604, 608-09, 107 S.Ct. 2022, 2025-26, 95 L.Ed.2d 582 (1987).

However, Chevron Oil was never even mentioned by the majority in Lampf. Their cursory treatment of a seemingly important precedent can only be explained by the decision in James B. Beam Distilling Company v. Georgia, ___ U.S. ___, 111 S.Ct. 2439, 115 L.Ed.2d 481 (1991), a case decided on the same day as Lampf. There, the Supreme Court ruled that "selective prospectivity" was contrary to the "principles of equality and stare decisis." The Court stated that decisions may be either retroactively or prospectively applied, but the application must be uniform.⁴Beam prevents lower courts from using Chevron Oil as they have in the past, by applying the equitable principles of Chevron Oil to decide whether a new statute of limitations handed down from the Supreme Court should work retroactively.⁵ Now, after Beam, lower courts must apply the statute of limitations adopted by the Supreme Court to all pending cases, unless the Court mandates a prospective application.

This court stayed its decision in anticipation of the result of Lampf and now that the result is clear, it must be applied. In so doing, we follow Beam and apply the new federal statute of limitations for section 10(b) actions retroactively as it was applied by the Court in Lampf. In sum, we find plaintiff's claims against defendants Kidder and Almonte under section 10(b) of the 1934 Securities Act, Rule 10b5, 15 U.S.C. § 78j(b), for fraud in the sale of securities to be time-barred.

Although the court's decision in Lampf only explicitly referred to section 10(b) actions, we believe the same statute of limitations period should be applied to section 17(a) of the 1933 Act, 15 U.S.C. § 77q(a), for fraud in the sale of securities. Not only is the language of section 10(b) modeled directly on section 17(a), but the treatment for statute of limitations purposes has always been the same. Verrecchia v. Paine, Webber, Jackson & Curtis, 563 F.Supp. 360, 367 (D.D.C.1982); Bath v. Bushkin, Gaims, Gaines and Jonas, 695 F.Supp. 1156, 1162 (D.Wyo.1988). If this court were to apply a different statute of limitations period to section 17(a), such application would become a means of circumventing the federal limitations period applied to section 10(b) actions, since the two actions are substantively similar. Furthermore, the Supreme Court has ruled that, "when the statute of origin contains comparable express remedial provisions, the inquiry usually should be at an end. Only where no analogous counterpart is available should a court then proceed to apply state-borrowing principles." Lampf, 111 S.Ct. at 2780. For these reasons, we now apply the "one and three year" period to plaintiff's claim under section 17(a) and find such cause of action to be time-barred.

The same reasoning should be applied to claims under sections 15(c)(1) and (2) of the 1934 Act, 15 U.S.C. § 78o(c)(1) & (2), for the use of manipulative or deceptive devices by a broker. Although the question of whether this provision even provides a private right of action is still open in our circuit,⁶ we bypass that issue...