Farr v. Shearson Lehman Hutton, Inc.

• Decision Date: 21 January 1991
• Docket Number: No. 89 Civ. 6806 (KC).,89 Civ. 6806 (KC).
• Parties: Richard S. FARR, as personal representative of the Estate of Sarah E. Farr, Plaintiff, v. SHEARSON LEHMAN HUTTON, INC., as successor in interest to E.F. Hutton & Company, Inc. and E.F. Hutton Group, Inc. and Hutton Energy Services II, Inc., Defendants.
• Court: U.S. District Court — Southern District of New York

755 F. Supp. 1219

Richard S. FARR, as personal representative of the Estate of Sarah E. Farr, Plaintiff, v. SHEARSON LEHMAN HUTTON, INC., as successor in interest to E.F. Hutton & Company, Inc. and E.F. Hutton Group, Inc. and Hutton Energy Services II, Inc., Defendants.

No. 89 Civ. 6806 (KC).

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

January 21, 1991.

Lawrence Gelber, Beigel & Sandler, Ltd., New York City, Jim Ecklestein, Beigel & Sandler, Chicago, Ill., for plaintiff.

Brian F. McDonough, Shanley & Fisher, P.C., New York City, for defendants.

ORDER

CONBOY, District Judge:

Plaintiff, Richard Farr ("Farr"), as personal representative for the estate of his mother, Sarah Farr, brings this action seeking damages for violations of federal security statutes and for state-law torts against Shearson Lehman Hutton, Inc., the successor in interest to E.F. Hutton & Company, Inc.¹ This action centers on Sarah Farr's investment of $125,000 in two oil and gas limited partnerships, the Hutton/Indian Wells 1983 Energy Income Fund, Ltd. ("Indian Wells '83") and the Hutton/Indian Wells 1984 Energy Income Fund, Ltd. ("Indian Wells '84"). Farr claims that a broker employed by defendant recommended these investments to Mrs. Farr, with knowledge that they were unsuitable for her stated investment strategy, and that the Funds have performed very poorly, failing to return the initial investment. The Complaint alleges violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, (Count One), Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), (Count Two), and state common-law claims for fraud (Count Three), negligence (Count Four), and breach of fiduciary duty (Count Five). Because Sarah Farr was a citizen of Alaska,² and defendant is a citizen of New York, diversity jurisdiction exists as a separate jurisdictional basis for the state-law claims.

Defendant now moves for summary judgment contending that the written offering materials adequately disclosed all relevant risks of the investments, that there is no evidence of any oral misrepresentations made to Mrs. Farr, that there is no private cause of action under Section 17(a), and that the statute of limitations bars the Section 10(b) and the state law claims. Because we believe there is no private cause of action under Section 17(a) and because the statute of limitations bars the other claims, we grant defendant's motion.

I. Factual Background

The following facts are not in dispute. Sarah Farr moved to Anchorage, Alaska in 1980. Defendant's Rule 3(g) Statement of Undisputed Material Facts ("3(g) Stmt.") ¶ 12. In 1981, she opened an account with Todd Gerber, an account executive in the Anchorage office of E.F. Hutton, Inc. In the Fall of 1983, Gerber recommended that Sarah Farr invest a portion of her portfolio in Indian Wells '83. Gerber Affid. ¶¶ 5, 6. At that time Mrs. Farr's portfolio was worth approximately $462,000, not including an earlier $100,000 investment in a limited partnership. Ex. E to Gerber Affid. On November 17, 1983 Sarah Farr purchased 100 units of Indian Wells '83 for a purchase price of $50,000. 3(g) Stmt. ¶ 1. Prior to making this investment, Mrs. Farr was provided with the Prospectus for Indian Wells '83. 3(g) Stmt. ¶ 2. She was also supplied with a January 1984 Supplement to the Indian Wells 1983 Prospectus in early 1984. 3(g) Stmt. ¶ 6.³ In 1984, after receiving a letter from Indian Wells informing her of the creation of Indian Wells '84, Mrs. Farr contacted Gerber with an unsolicited order to invest in Indian Wells '84. 3(g) Stmt. ¶ 7. Mrs. Farr requested Gerber to invest $100,000 in Indian Wells '84. Gerber attempted to persuade her that she should not invest that large a sum in Indian Wells '84 and tried to convince her that she should invest no more than $50,000. Gerber Dep. at 145-148. Mrs. Farr agreed to purchase 150 units of Indian Wells '84 for $75,000, which she did on October 19, 1984. 3(g) Stmt. ¶ 9. Prior to investing in Indian Wells '84, Mrs. Farr received the prospectus for Indian Wells '84. 3(g) Stmt. ¶ 8.

Mrs. Farr died in May 1985, and Richard Farr was named the personal representative of her estate. 3(g) Stmt. ¶ 12; Farr Dep. at 17. Correspondence about the Indian Wells investments was forwarded to Farr at his home in Alabama, where it was received and read by Farr. Farr dep. at 67, 70, 82. Indian Wells '83 and '84 sent to its limited partners quarterly and annual reports, which Farr began receiving no later than May 8, 1986. Farr dep. 69-70, 78-80. These reports disclosed the amount of quarterly distribution, if any. See McDonough Affid. Exs. F, G, H, I, J, K. For Indian Wells '83 the distribution per $500 unit for the first quarter of 1986 was $7.76; for the second quarter there was no distribution; for the third quarter there was a net distribution of $1.20. Exs. F, G, H. In annual reports dated May 19, 1987, Exs. J and K, Indian Wells '83 and '84 listed the price at which they would buy back units from the limited partners, as provided in the prospectus. The buy-back (or "presentment") price, established by an independent appraiser, was $34.36 per $500.00 unit for Indian Wells '83, and $314.92 per $500 unit for Indian Wells '84. Id. The annual report also disclosed that total distributions through the end of 1986 for Indian Wells '83 had been $150.00, but distributions for 1986 had been only $12.34—a 2.46% annual distribution rate for 1986. Farr received these reports, but did not read them in detail. Farr Dep. at 82.

Because of the correspondence from Indian Wells, Farr knew that the investments were not doing well, and he felt a continuing concern about the investments. Farr Dep. at 70-72. He made no inquiry of Gerber or anyone else however, until he received a letter from Beigel & Sandler, now his attorneys in this action, which had been sent out to purchasers of Indian Wells units, apparently informing them of the possibility of joining in litigation against the sellers of the units. Farr Dep. at 34-39, 70-73, 82-83. After receiving this letter, Farr contacted Gerber for advice on whether to join the litigation. Farr Dep. at 34-39. Farr requested from Gerber a copy of each prospectus, which he never received. Farr Dep. at 58-59. This action was filed on October 13, 1989.

The complaint sets out allegations that Gerber made certain fraudulent statements and omissions to Mrs. Farr at the time of her purchase of Indian Wells units. (See Cmpl't ¶ 24 at 6-7). Defendant in this motion for summary judgment contends that there is no factual basis for plaintiff's claim of misrepresentation, pointing to the deposition testimony of Mr. Farr (at 31, 47-54) which reveals that this complaint was filed before he had read it, and that Farr has no real basis for believing the specified statements were made. Plaintiff has tacitly conceded the point, and instead now promotes his claim as one for "unsuitability" — i.e. a claim that the Indian Wells investments were unsuitable for Mrs. Farr's investment needs, and that Gerber, knowing that they were unsuitable, recommended them to her anyway. We will address this action as one based on a claim of unsuitability.

II. Discussion

A. Section 17(a)

Defendant contends that no private right of action should be recognized under Section 17(a), 15 U.S.C. § 77q(a), and that plaintiff's second claim should therefore be dismissed. Plaintiff relies upon Kirshner v. United States, 603 F.2d 234 (2d Cir.1978) in contending the opposite. As we have previously held, we do not believe that there is a private right of action under Section 17(a). Friedman v. Arizona World Nurseries, 730 F.Supp. 521, 545 (S.D.N.Y.1990), aff'd, 927 F.2d 594 (2d Cir. 1991); Tobias v. City National Bank and Trust Co., 709 F.Supp. 1266, 1274-76 (S.D. N.Y.1989). We see no reason to change that view at this time, and plaintiff's second claim is dismissed with prejudice.

B. Statute of Limitations

1. "One Year/Three Year" Rule

The Second Circuit has recently held that the uniform statute of limitations applicable to actions brought under Section 10(b), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, is one year from the date of discovery of the claim, but in no event more than three years from the date of accrual (the "one year/three year" rule). Ceres Partners v. GEL Associates, 918 F.2d 349 (2nd Cir.1990). Under the Ceres rule, plaintiff's Section 10(b) claim is clearly time-barred here. That claim accrued no later than November 17, 1983 with respect to the 1983 Fund, and October 19, 1984 with respect to the 1984 Fund, the dates on which Mrs. Farr purchased her limited partnership units. This action was filed on October 13, 1989, well over three years from both of those dates, and thus would be time-barred under the one-year/three-year rule.

The Ceres court expressly declined, however, to address the issue whether the rule should apply retroactively. 918 F.2d at 364. It is quite possible that the rule announced in Ceres should not be applied retroactively in this action. The Ceres decision overruled the "consistent" holding of the Second Circuit that the statute of limitations in Section 10(b) cases "should be adopted by reference to the pertinent laws of the forum state." 918 F.2d at 352-53. Where a decision applying a new statute of limitations overrules a "clearly established circuit precedent on which the complaining party was entitled to rely," and where retroactive application of the new limitations period would "be inconsistent with the purpose of the underlying substantive statute, and ... would be manifestly inequitable," the new limitations period should not be applied retroactively. Saint Francis College v. Al-Khazraji, 481 U.S. 604, 608-09, 107 S.Ct. 2022, 2025-26, 95 L.Ed.2d 582 (1987); see also, Chevron Oil Co. v. Huson, 404 U.S. 97, 105-109, 92 S.Ct. 349, 355-56, 30 L.Ed.2d 296 (1971); Welyczko v....