Gordon & Co. v. Ross

• Decision Date: 03 September 1999
• Docket Number: No. 87 CIV. 7105(MGC).,87 CIV. 7105(MGC).
• Parties: GORDON & CO., Plaintiff, v. Arthur H. ROSS, Defendant.
• Court: U.S. District Court — Southern District of New York

63 F.Supp.2d 405

GORDON & CO., Plaintiff, v. Arthur H. ROSS, Defendant.

No. 87 CIV. 7105(MGC).

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

September 3, 1999.

Steven L. Herrick, Mineola, NY, for Plaintiff.

Serchuk & Zelermyer, LLP, White Plains, NY, by Benjamin Zelermyer, for Defendant.

OPINION

CEDARBAUM, District Judge.

Gordon & Co. ("Gordon") sues Arthur H. Ross, the former Chief Executive Officer of Hanover Square Securities Group, Inc. ("Hanover Square"), for allegedly fraudulent representations that led Gordon to make two loans to Hanover Square.

Gordon's amended complaint was dismissed by then Magistrate Judge Gershon, based on a grant of partial summary judgment and a verdict following a bench trial. The Second Circuit vacated the judgment and remanded the case, holding that the magistrate judge did not follow established principles of New York law with respect to fraud and misapplied the test of reliance. Ross now moves to amend his answer to assert a statute of limitations defense based on New York's borrowing statute and, on that ground, seeks summary judgment dismissing the amended complaint.

UNDISPUTED FACTS

The following facts are undisputed except where otherwise noted.

Gordon, a broker-dealer, is a Massachusetts limited partnership, whose sole office is in Newton, Massachusetts. (Def. & Pl. 56.1 Stmt. ¶ 1). All of Gordon's partners are residents of Massachusetts. (Id. ¶ 2).

Ross was the CEO of Hanover Square, a New York broker-dealer, at all times relevant to this suit. Id. ¶ 4). He was a New York resident at all relevant times. (Id. ¶ 5).

Gordon maintained a margin account with Hanover Square. (Id. ¶ 6). On October 17, 1983, Gordon alleges that the New York Stock Exchange informed Hanover Square's principals that their brokerage business would be closed on Friday, October 21, unless they raised substantial capital, stopped hypothecating fully-paid securities, and corrected shoddy bookkeeping practices. On October 21, 1983, Gordon's CEO, Michael B. Salke, heard a rumor that Hanover Square was having financial problems and allegedly requested that Hanover Square transfer to Gordon the full available cash balance in its margin account. He was told that Hanover Square could not comply with this request. (Salke Aff. ¶ 3).

Salke traveled to New York to meet with Hanover Square representatives over the weekend of October 22-23, 1983. (Salke Aff. ¶ 4). Gordon agreed to advance $1,950,000 to Hanover Square by increasing the debit balance (the amount Gordon owed to Hanover Square) in its margin account by that amount. (Def. & Pl. 56.1 Stmt. ¶ 8).

Gordon claims that it was induced to make loans to Hanover Square by allegedly fraudulent representations made by Ross and others that Gordon's securities in Hanover Square had not been pledged by Hanover Square to secure loans for more than the amount owed by Gordon to Hanover Square. Gordon also claims that Ross and others represented that if Hanover Square opened for business on Monday, October 24, it would deliver Gordon's securities to Gordon's account at Bear Stearns upon payment of the debit balance. (Def. & Pl. 56.1 Stmt. ¶ 9).

Although Hanover Square did open for business on October 24, it did not deliver any of Gordon's securities until October 26 and did not complete deliveries until November 7, when Gordon (through Bear Stearns) advanced additional money to two banks holding the remainder of Gordon's securities hypothecated by Hanover Square. (Pl. & Def. 56.1 Stmt. ¶ 10).

Gordon knew that Ross's representations were false no later than November 7, 1983. (Id. ¶ 11).

Gordon commenced this action in New York State Supreme Court on approximately August 31, 1987, and the action was subsequently removed to the Southern District of New York.

DISCUSSION

"[P]laintiff concedes the procedural point that the defendant may amend his answer to assert the limitations defense." (Pl. Memo. of Law 1 n. 1). Accordingly, the only issue on these motions is whether summary judgment should be granted in favor of defendant on timeliness grounds.

A motion for summary judgment is granted when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

A. Place Where Cause of Action Accrued

The New York statute of limitations for fraud is six years, C.P.L.R. § 213[8] (McKinney 1990), while the Massachusetts statute of limitations is three years, Mass. Gen. Laws Ann. ch. 260, § 2A (West 1998). Ross argues that the Massachusetts statute of limitations applies because the cause of action accrued in Massachusetts for purposes of the New York borrowing statute.

In a diversity case, a federal court must look to the law of the forum state to determine which statute of limitations applies. Stafford v. International Harvester Co., 668 F.2d 142, 147 (2d Cir.1981). New York law includes a "borrowing" statute, C.P.L.R. § 202 (McKinney 1990), which states:

"An action based upon a cause of action accruing without the state cannot be commenced after the expiration of the time limited by the laws of either the state or the place without the state where the cause of action accrued, except that where the cause of action accrued in favor of a resident of the state the time limited by the laws of the state shall apply."

If Gordon's fraud claims "accrued" in Massachusetts, the New York borrowing statute would apply since the claims would have accrued "without the state," and the plaintiff is not a New York resident. In such a case, under the New York borrowing statute, the shorter statute of limitations governs. Since Gordon brought suit more than three years after it discovered the allegedly fraudulent representations, Massachusetts's shorter three-year statute of limitations would bar the present action absent any tolling.

Ross argues that for purposes of applying New York's borrowing statute, fraud claims accrue where the economic impact of the loss is felt, and that the economic impact of the loss is felt where the plaintiff resides. Under Ross's theory, Gordon's claims accrued in Massachusetts, since that is the state in which all the partners of Gordon reside.

Ross states that he did not assert this defense initially because, for purposes of the New York borrowing statute, the Second Circuit had ruled that a cause of action could not accrue in a state that could not exercise jurisdiction over the defendant. Stafford v. International Harvester Co., 668 F.2d 142 (2d Cir.1981). This holding was consistent with the supposed purpose of the borrowing statute: to prevent forum-shopping by a plaintiff who may be barred by the limitations period of one forum but not another. Id. at 152; see also Arneil v. Ramsey, 550 F.2d 774, 779-80 (2d Cir.1977); Antone v. General Motors Corp., 64 N.Y.2d 20, 27-28, 484 N.Y.S.2d 514, 473 N.E.2d 742 (1984). "Since Ross is and was a New York resident, and did not appear to have sufficient contacts with ... Massachusetts to subject him to jurisdiction in that state, he did not plead the statute of limitations as a defense because to do so would have been futile" under Stafford. (Zelermyer (Def.) Aff. ¶ 19).

In Insurance Co. of North America v. ABB Power Generation, Inc., 91 N.Y.2d 180, 668 N.Y.S.2d 143, 690 N.E.2d 1249 (1997), the New York Court of Appeals held that Stafford misconstrued the borrowing statute and that an available out-of-state forum is not necessary. With this ruling, the borrowing statute acquired greater reach, and Ross asserted the limitations defense.

For purposes of the New York borrowing statute, a cause of action accrues where the injury is sustained rather than where the defendant committed the wrongful acts. Global Financial Corp. v. Triarc Corp., 93 N.Y.2d 525, 693 N.Y.S.2d 479, 715 N.E.2d 482 (1999) (to be published at 93 N.Y.2d 525, 693 N.Y.S.2d 479, 715 N.E.2d 482); Sack v. Low, 478 F.2d 360, 365-67 (2d Cir.1973).

When an injury is purely economic, the place of injury for purposes of the borrowing statute is where the economic impact of defendant's conduct is felt, which is usually the plaintiff's place of residence. Global, 93 N.Y.2d 525, 693 N.Y.S.2d 479, 715 N.E.2d 482; Gorlin v. Bond Richman & Co., 706 F.Supp. 236, 240 (S.D.N.Y. 1989); Appel v. Kidder, Peabody & Co., 628 F.Supp. 153, 156 (S.D.N.Y.1986). In this case, all of Gordon's partners are Massachusetts residents.

Nevertheless, Gordon contends that the place of injury is New York. In Sack, Judge Friendly stated that if an out-of-state plaintiff maintained an open account at a New York brokerage firm, and a loss was reflected in this account, it "might make some difference" in determining the place of injury and hence accrual. 478 F.2d at 367-68. Gordon might argue that because the loans were made to Hanover Square by increasing its debit accounts in New York, the loss was suffered in New York.

This argument, however, is not persuasive. In securities fraud cases in which the plaintiff investor ordinarily has maintained an account at defendant brokerage and the loss is reflected in that account, courts have regularly held that the place of accrual for borrowing statute purposes is where the plaintiff resides. See, e.g., Gorlin, supra; Appel, supra; Klock v. Lehman Bros., Kuhn Loeb Inc., 584 F.Supp. 210 (S.D.N.Y.1984). Moreover, the New York Court of Appeals recently reiterated the general applicability of the residence standard and also stated that that standard is consistent with the purpose of the borrowing statute. In explaining why the state with the greatest contacts is not the place of accrual for purposes of the borrowing statute, the court stated: "[A]s we underscored in ABB Power, `CPLR 202 is designed to add clarity to the law and to...