Engl v. Berg, Civ. A. No. 80-4065.

• Decision Date: 24 March 1981
• Docket Number: Civ. A. No. 80-4065.
• Parties: Michael S. ENGL and Franz Hummert and Paul Walstad, individually, and on behalf of Plymouth Plaza Associates v. John G. BERG and Fidelity America Mortgage Company and Plymouth Plaza Office Building Associates and Montgomery County Industrial Development Authority and Plymouth Plaza Associates.
• Court: U.S. District Court — Eastern District of Pennsylvania

511 F. Supp. 1146

Michael S. ENGL and Franz Hummert and Paul Walstad, individually, and on behalf of Plymouth Plaza Associates v. John G. BERG and Fidelity America Mortgage Company and Plymouth Plaza Office Building Associates and Montgomery County Industrial Development Authority and Plymouth Plaza Associates.

Civ. A. No. 80-4065.

United States District Court, E. D. Pennsylvania.

March 24, 1981.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Arthur R. Littleton, Philadelphia, Pa., for plaintiffs.

William T. Hangley, Philadelphia, Pa., for PPOBA.

Michael L. Temin, Philadelphia, Pa., for Berg, Fid. Am. & PPA.

MEMORANDUM AND ORDER

HUYETT, District Judge.

This action arises out of two separate transactions incident to the financing, syndication and resyndication of the Plymouth Plaza Project, a commercial office building constructed on previously unimproved property near the Plymouth Meeting Mall in Plymouth Meeting, PA (the property). Plaintiffs are the sole limited partners of defendant Plymouth Plaza Associates (PPA), a limited partnership organized under the laws of Pennsylvania. Defendants have filed motions to dismiss pursuant to Fed.R.Civ.P. 12(b)(1) and (6), advancing various arguments addressed to different counts of the complaint.

In 1973 defendant John Berg (Berg) entered into an agreement with the Plymouth Meeting Mortgage Corporation (PMMC) whereby he acquired a thirty year lease on the property with an option to purchase at the end of the lease period, 2003. On March 28, 1974, Berg assigned his rights under the lease agreement to defendant Montgomery County Industrial Development Authority (MCIDA), who then mortgaged the assigned interest to First Federal Savings and Loan Association of Philadelphia (First Federal) as security for a loan given by First Federal to finance the construction of the Plymouth Plaza Project. Simultaneously, MCIDA and Berg entered into an installment sales agreement (the ISA), pursuant to which Berg acquired the First Federal loan proceeds to construct the building and agreed to pay all amounts due and owing by MCIDA under the mortgage, including the obligation of continuing rental payments on the leased property. The ISA also provided that MCIDA's interest in the leasehold would terminate upon Berg's satisfaction of the First Federal mortgage obligations and MCIDA would convey to Berg its interests in the office building and any other improvements on the property.

In September, 1974, Berg organized PPA, establishing himself as general partner. On September 30, 1975, after the office building was constructed, Berg assigned to PPA his rights under the ISA. According to the complaint, plaintiffs purchased all of the limited partnership interests in PPA in December, 1975, based upon information received from Berg and a "project synopsis" which Berg distributed, for a total of $125,000 contribution to capital and $225,000 in promissory notes made out to Berg personally (the 1975 transaction). Plaintiffs allege that, in connection with that transaction, Berg made false and misleading representations to them as to the nature of the interests in the property which he had assigned to PPA.

At an unspecified time after the 1975 transaction defendant Fidelity America Mortgage Company (FAMCO), of which Berg is president, purported to succeed Berg as general partner of PPA. On December 1, 1979, Berg and FAMCO organized a new limited partnership, defendant Plymouth Plaza Office Building Associates (PPOBA), with FAMCO as general partner and twenty-six individuals as limited partners. Berg and FAMCO, acting as general partner for PPA, then conveyed PPA's interests in the ISA and the leasehold to PPOBA. In return, PPOBA granted FAMCO a "purchase money wrap-around mortgage", and FAMCO assigned a "senior participating certificate" to PPA (the 1979 transaction). Plaintiffs contend that the 1979 transaction occurred without their knowledge or approval and that it amounts to a forced sale of their interests. Plaintiffs also contend that the mortgage is inadequate in that it is non-recourse, sets the interest rate below the market rate, will not begin to amortize until 1997, and will not fully amortize until 2017, fourteen years after the lease terminates. Thus plaintiffs allege that the 1979 transaction defrauded them and PPA, and that it constituted a breach of Berg's and FAMCO's fiduciary and contractual duties.

In counts I, II, and III of the complaint, plaintiffs allege that the 1975 transaction is actionable under various provisions of the federal securities laws. Count I alleges the making of false representations in connection with plaintiffs' purchases of partnership interests in PPA, and seeks rescission pursuant to section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2). Defendants assert that Count I is time barred pursuant to section 13 of the Securities Act of 1933, 15 U.S.C. § 77m, which provides in pertinent part:

No action shall be maintained to enforce any liability created under ... section 12(2) unless brought within one year after the discovery of the untrue statement or the omission, or after discovery should have been made by the exercise of reasonable diligence .... In no event shall any action be brought to enforce a liability ... under section 12(2) more than three years after the sale.

Plaintiffs contend that the three year time limitation of section 13 was tolled due to fraudulent concealment by defendants, arguing that I should consider section 13's time limitation inapplicable in this instance in order to effectuate the congressional purpose manifested in section 12(2). However, the plain language of section 13 militates to the contrary. Where the statute states that an action shall "in no event ... be brought ... more than three years after the sale," 15 U.S.C. § 77m (emphasis added), the Supreme Court's general statement that fraudulent concealment "is read into every federal statute of limitation", Holmberg v. Ambrecht, 327 U.S. 392, 397, 66 S.Ct. 582, 585, 90 L.Ed. 743 (1946), cannot be considered controlling. Moreover, the overwhelming weight of authority holds that the three year limitation is absolute, equitable considerations notwithstanding. E. g., Brown v. Producers Livestock Loan Co., 469 F.Supp. 27, 33 (D.Utah 1978); Turner v. First Wisconsin Mortgage Trust, 454 F.Supp. 899, 911 (E.D.Wis.1978); Brick v. Dominion Mortgage & Realty Trust, 442 F.Supp. 283, 289-91 (W.D.N.Y.1977); Payne v. Fidelity Homes of America, Inc., 437 F.Supp. 656, 657-58 (W.D.Ky.1977). I recognize that one court has held to the contrary. See In re Home-Stake Production Co. Securities Litigation, 76 F.R.D. 337, 344-45 (N.D.Okla.1975). However, Home-Stake is the sole exception to the otherwise unbroken line of cases holding section 13's time limitation absolute, has been ignored in numerous subsequent opinions, and is factually distinguishable from the case at bar in light of the extent and duration of the concealment there involved. See 76 F.R.D. at 341-42. In light of section 13's unequivocal language and the plethora of decisions holding its three year time limitation absolute, I must reject plaintiffs' contention that the statute was tolled due to fraudulent concealment. Because count I makes allegations concerning events which occurred in 1975 and the complaint was not filed until 1980, count I is time barred, and I shall grant defendants' motion as to count I.

In count II of the complaint, plaintiffs allege that Berg and FAMCO violated section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a) in connection with the 1975 transaction. Count III, brought under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5 (1980), alleges fraud with respect to both the 1975 and the 1979 transactions. Defendants contend that these allegations are time barred with respect to the 1975 transaction, citing the three year statute of limitations contained in section 504(a) of the Pennsylvania Securities Act of 1972, 70 Pa.Stat.Ann. § 1504(a) (Purdon Supp.1980-81). Plaintiffs contend that the statute was tolled due to fraudulent concealment, to which defendants respond that fraudulent concealment was improperly alleged. While it is well settled that state law determines the limitations period for the causes of action alleged in counts II and III, the question of when that limitations period begins to run is an issue to be determined under federal law. Arneil v. Ramsey, 550 F.2d 774, 780 (2d Cir. 1977); Moviecolor Ltd. v. Eastman Kodak Co., 288 F.2d 80, 83 (2d Cir.), cert. denied, 368 U.S. 821, 82 S.Ct. 39, 7 L.Ed.2d 26 (1961). Cf. Cope v. Anderson, 331 U.S. 461, 464, 67 S.Ct. 1340, 1341, 91 L.Ed. 1602 (1947). "Under the federal tolling doctrine, the active concealment of fraudulent conduct tolls the statute of limitations in favor of the defrauded party until such time as he actually knew of the fraudulent conduct of the opposing party." Robertson v. Seidman & Seidman, 609 F.2d 583, 593 (2d Cir. 1979), citing Atlantic City Electric Co. v. General Electric Co., 312 F.2d 236, 239 (2d Cir. 1972) (en banc), cert. denied, 373 U.S. 909, 83 S.Ct. 1298, 10 L.Ed.2d 411 (1963). Absent active concealment, the limitations period begins to run when plaintiff, through due diligence, could reasonably have discovered the fraud. Sperry v. Barggren, 523 F.2d 708, 711 (7th Cir. 1975). Thus the presence or absence of active concealment is an issue of fact raised by allegation of fraudulent concealment. Id. Assuming arguendo that active concealment is disproved, "issues of due diligence and constructive knowledge depend on inferences drawn from the facts of each particular case." Robertson v. Seidman & Seidman, 609 F.2d at 591. As such the fraudulent concealment allegation raises genuine issues of material fact, rendering resolution through summary judgment inappropriate. See id. at 593; ...