Gatto v. Meridian Medical Associates, Inc.

• Decision Date: 10 August 1989
• Docket Number: No. 89-5206,89-5206
• Citation: 882 F.2d 840
• Parties: Blue Sky L. Rep. P 73,011, 58 USLW 2164, Fed. Sec. L. Rep. P 94,558 Michael GATTO, Richard Gatto, Stanford J. Heller, Laurence Kramer, Ralph Nappi, Nat Sorkin, Sam Zuckerman, Sandy Zuckerman, Hyman Silkes, Leff & Wolf Co., a New York unincorporated association, and O. George Philipp, Appellants, v. MERIDIAN MEDICAL ASSOCIATES, INC., 1680 Meridian Corp., Mast Property Investors, Inc. Consolidated Mast Corporation, Mast Property Investors, Inc. and Affiliated Companies Employee Profit Sharing Trust, NWN Capital Ltd., Marks, Shron & Company, Norman W. Nick, Marvin E. Greenfield, Gerald Silverman, John Doe and Richard Roe Inc. . Submitted Under Third Circuit Rule 12(6)
• Court: U.S. Court of Appeals — Third Circuit

Page 840

882 F.2d 840

Blue Sky L. Rep. P 73,011, 58 USLW 2164,

Fed. Sec. L. Rep. P 94,558

Michael GATTO, Richard Gatto, Stanford J. Heller, Laurence Kramer, Ralph Nappi, Nat Sorkin, Sam Zuckerman, Sandy Zuckerman, Hyman Silkes, Leff & Wolf Co., a New York unincorporated association, and O. George Philipp, Appellants, v. MERIDIAN MEDICAL ASSOCIATES, INC., 1680 Meridian Corp., Mast Property Investors, Inc. Consolidated Mast Corporation, Mast Property Investors, Inc. and Affiliated Companies Employee Profit Sharing Trust, NWN Capital Ltd., Marks, Shron &amp Company, Norman W. Nick, Marvin E. Greenfield, Gerald Silverman, John Doe and Richard Roe Inc.

No. 89-5206.

United States Court of Appeals Third Circuit.

Submitted Under Third Circuit Rule 12(6)

Aug. 10, 1989.

Decided Aug. 24, 1989.

Robert H. Jaffe, Jaffe & Schlesinger, P.A., Springfield, N.J., for appellants.

Lawrence N. Lavigne, Hanlon, Herzfeld & Rubin, Edison, N.J., for appellees (Mast Property Investors, Inc., Consol. Mast Corp., Mast Corp., Mast Property Investors, Inc., Affiliated Companies Employee Profit Sharing Trust, NWN Capital Ltd., Norman W. Nick & Marvin E. Greenfield & Meridian Medical Associates, Inc.).

Padraic B. Deighan, Marlton, N.J., and Clifford B. Hark, Miami, Fla., co-counsel for appellees Gerald Silverman and 1680 Meridian Corp.

David B. Hamm, Herbert Rubin, Herzfeld & Rubin, P.C., New York City, for appellees (Mast Property Investors, Inc., Consolidated Mast Corp., Mast Corp., Mast Property Investors, Inc., Affiliated Companies Employee Profit Sharing Trust, NWN Capital, Ltd., Norman W. Nick and Marvin E. Greenfield).

James M. Kaplan, Wilson, Elser, Moskowitz, Edelman & Dicker, New York City, for appellees, Marks Shron & Co.

Before SLOVITER and GREENBERG, Circuit Judges, and VAN ANTWERPEN, District Judge. ^*

OPINION OF THE COURT

SLOVITER, Circuit Judge.

I.

Appellants are plaintiffs in a suit alleging violations of federal securities laws and state common law in connection with their purchase on or about December 30, 1981 of limited partnership interests in a medical building, a transaction structured to shelter income from federal taxation. Appellees were various parties connected with the sale of the limited partnership interests. Meridian Medical Associates, Inc. (MMA) was the issuer of the securities; 1680 Meridian Corp. was a corporation organized to obtain a lease on the office building; Consolidated Mast Corporation was the sole shareholder of MMA; Mast Property Investors, Inc. and Affiliated Companies Employee Profit Sharing Trust provided financing; NWN Capital Ltd. was the broker-dealer which sold the securities; and Marks, Shron & Co. was an accounting partnership which prepared financial projections used in the offering. The individual defendants were principal shareholders and/or control persons of the various corporate defendants.

Appellants filed suit in federal court on December 28, 1987 after learning that the Internal Revenue Service had disallowed the tax deductions which formed the raison d'etre of their investments. Appellants' federal claim was based on allegations that they were induced to purchase the limited partnership interests by fraudulent misrepresentations and omissions constituting violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), (1982), and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5 (1988). Appellants contended that these violations gave them a right under section 29(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78cc(b) (1982), to rescind the limited partnership agreements. Appellants also included various state law claims.

The district court granted defendants' motions to dismiss on the ground that the federal cause of action was barred by the statute of limitations. The court, applying the rule announced by this court in In re Data Access Sys. Sec. Litig., 843 F.2d 1537 (3d Cir.) (in banc ), cert. denied, --- U.S. ----, 109 S.Ct. 131, 102 L.Ed.2d 103 (1988), held that the appellants were required to file suit within one year from the time of discovery and within three years from the time the violation occurred. The district court also found that the Data Access rule applied retroactively and dismissed the amended complaint, including the pendent state law claims.

II.

Appellants contend that the district court erred in applying the limitations period for section 10(b) and Rule 10b-5 violations to their claim under section 29(b), and, alternatively, that if Data Access does apply to claims under section 29(b) it should not apply retroactively in this case.

Section 29(b) provides in pertinent part that:

Every contract made in violation of any provision of this chapter or of any rule or regulation thereunder, and every contract ... heretofore or hereafter made, the performance of which involves the violation of, or the continuance of any relationship or practice in violation of, any provision of this chapter or any rule or regulation thereunder, shall be void (1) as regards the rights of any person who, in violation of any such provision, rule, or regulation, shall have made or engaged in the performance of any such contract.

15 U.S.C. Sec. 78cc(b) (1982) (emphasis added).

Appellants claim that the applicable limitations period for claims under section 29(b), other than claims against brokers or dealers under section 15(c)(1) of the Securities Exchange Act, 15 U.S.C. Sec. 78o (c)(1), is the statute of limitations governing the rescission of contracts in the state in which the contract was made. They contend that the six year New York state limitations period for contract actions applies because rescission is a traditional contract remedy, and that therefore their complaint was timely. ¹

There appears to be no precedent covering precisely the issue before us. ² It is evident, however, that appellants' federal claim is not based on any contract violations but on allegations of fraudulent inducement. Thus the argument that state contract limitations periods apply to suits seeking relief under section 29(b) is unpersuasive.

Instead we must determine under federal law the applicable statute of limitations for a suit seeking a section 29(b) remedy. We note that Section 29(b) does itself contain a statute of limitations governing certain limited situations. Suits against brokers or dealers based on violations of section 15(c)(1) must be brought "within one year after the discovery that such sale or purchase involves such violation and within three years after such violation." 15 U.S.C. Sec. 78cc(b). This provision is inapplicable here because the appellants' suit is not seeking rescission of a transaction for violation of section 15(c)(1) of the statute which prohibits use of manipulative, deceptive, or fraudulent devices by brokers or dealers.

Our holding in Data Access counsels that judicially identified limitations periods for federal securities law violations are to be selected by reference to analogous areas of federal securities law. See Data Access, 843 F.2d at 1545-49. We relied on three Supreme Court cases opting for a uniform limitation period under other statutes, see Agency Holding Corp. v. Malley-Duff & Assocs., 483 U.S. 143, 107 S.Ct. 2759, 97 L.Ed.2d 121 (1987) (civil RICO); DelCostello v. International Bhd. of Teamsters, 462 U.S. 151, 103 S.Ct. 2281, 76 L.Ed.2d 476 (1983) (suits for violation of collective bargaining agreement, 29 U.S.C. Sec. 185); cf. Wilson v. Garcia, 471 U.S. 261, 105 S.Ct. 1938, 85 L.Ed.2d 254 (1985) (applying uniform state statute for civil rights suits under 42 U.S.C. Sec. 1983), to support application of a uniform federal statute of limitations in cases involving securities claims. Then, in selecting the appropriate statute of limitations we noted that Congress used a clear pattern within the provisions of the Securities Exchange Act to require suit to be brought within one year of discovery and within three years after the occurrence of the violation. 843 F.2d at 1545-46. ³ Thus, even if we were to conclude that the limitations period for the underlying section 10(b) and Rule 10b-5 violations does not govern a suit under section 29(b), we would adopt the one year/three year limitations period as matter of federal law for the same reasons outlined in Data Access.

III.

Appellants argue next that even if Data Access applies, it should not apply retroactively. ⁴ When we directly confronted that issue in Hill v. Equitable Trust Co., 851 F.2d 691 (3d Cir.1988), cert. denied, --- U.S. ----, 109 S.Ct. 791, 102 L.Ed.2d 782 (1989), we upheld retrospective application of the Data Access rule. Of course, it does not follow that this is necessarily the result in all cases. Instead we must apply the three criteria set forth by the Supreme Court in Chevron Oil Co. v. Huson, 404 U.S. 97, 106-07, 92 S.Ct. 349, 355, 30 L.Ed.2d 296 (1971), which govern when a decision will apply prospectively only. Those criteria are:

(1) The holding must establish a new principle of law, either by overruling clear past precedent on which litigants may have relied, or by deciding an issue of first impression whose resolution was not clearly foreshadowed;

(2) The merits and demerits in each case must be weighed by looking to the history of the rule in dispute, its purpose and effect, and whether retrospective operation will further or retard the rule's operation;

(3) Retrospective application must create the risk of producing substantially inequitable results.

Hill, 851 F.2d at 696.

As to the first criterion, appellants claim that Data Access overruled clear past precedent. They argue that this court's prior decisions in Biggans v. Bache Halsey Stuart Shields, Inc., 638 F.2d 605 (3d Cir.1980), and Roberts v. Magnetic Metals Co., 611 F.2d 450 (3d Cir.1979), clearly established that the applicable limitations period for Rule 10b-5 actions was to be determined by looking to the state securities laws and, if the state's blue sky law...