Houlihan v. Anderson-Stokes, Inc., Civ. A. No. 75-0555.

• Decision Date: 28 June 1977
• Docket Number: Civ. A. No. 75-0555.
• Citation: 434 F. Supp. 1319
• Parties: David P. HOULIHAN et al., Plaintiffs, v. ANDERSON-STOKES, INC., et al., Defendants.
• Court: U.S. District Court — District of Columbia

434 F. Supp. 1319

David P. HOULIHAN et al., Plaintiffs, v. ANDERSON-STOKES, INC., et al., Defendants.

Civ. A. No. 75-0555.

United States District Court, District of Columbia.

June 28, 1977.

James Hamilton, Martha Jane Shay, Michael I. Sanders, Philip L. Cohan, Washington, D.C., for plaintiffs.

Jacob A. Stein, James F. Jordan, Fred W. Geldon, Henry R. Berliner, Washington, D.C., for defendants.

MEMORANDUM OPINION OF UNITED STATES

CHARLES R. RICHEY, District Judge.

This case is before the Court on plaintiffs' motion to amend the complaint in order to rectify certain pleading deficiencies in Count I which the Court specified in its Memorandum issued herein on May 11, 1977. After due consideration of plaintiffs' motion and defendants'¹ opposition thereto, the Court has decided to grant the motion to amend the complaint.² The Court has concluded further that plaintiffs have properly pleaded a case of fraudulent concealment of their cause of actions specified in Count I, by virtue of the amendment to the complaint. Accordingly, the Court will vacate its prior orders granting defendants' motions for judgment on the pleadings as to Count I.

I. BACKGROUND

Count I alleges that defendants sold to plaintiffs certain limited partnership interest in November 1972 without filing a registration statement with the Securities and Exchange Commission, in alleged violation of §§ 5, 12(1), and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77e, 77l(1), and 77o. Defendants' position at the time of sale was apparently that the securities were exempt from the registration requirements of the Act, pursuant to the exemption for "private offerings" found in § 4(2), 15 U.S.C. § 77d(2). The Supreme Court has stated, however, that the applicability of the private offering exemption is determined by "the need of the offerees for the protections afforded by registration.... and whether the offerees are shown to have access to the kind of information which registration would disclose." SEC v. Ralston Purina Co., 346 U.S. 119, 127, 73 S.Ct. 981, 985, 97 L.Ed. 1494 (1953). See General Life of Missouri Investment Co. v. Shamburger, 546 F.2d 774 (8th Cir. 1976). Plaintiffs maintain that defendants fraudulently concealed from them "access to the kind of information which registration would disclose."

Under section 13 of the Act, 15 U.S.C. § 77m, plaintiffs' cause of action is subject to a one-year statute of limitations. Plaintiffs admit that they knew in November 1972 that the securities in question had not been registered. Plaintiffs also admit that, even taking into account certain tolling agreements made between plaintiffs and defendants, suit was not instituted until after the one-year statute of limitations had expired. Plaintiffs seek to escape the effect of the statute, however, by alleging, as noted above, that the facts underlying their cause of action were fraudulently concealed from them by defendants; thus, the plaintiffs allege, the statute of limitations should not be considered to have run, under the federal tolling doctrine, "until plaintiffs discovered, or by reasonable diligence could have discovered, the basis of the lawsuit." Fitzgerald v. Seamans, No. 75-1032, 553 F.2d 220 at 228 (D.C. Cir. 1977).

On January 28, 1977, at a hearing on defendants' motions for judgment on the pleadings, this Court ruled that the allegations of fraud contained in Count I had not been alleged with the specificity required by Fed.R.Civ.P. 9(b). Appropriate written orders granting defendants' motions were entered on February 7, 1977. In denying plaintiffs' motion for reconsideration, this Court wrote in the aforementioned Memorandum of May 11 that plaintiffs' allegations of fraudulent concealment failed because:

Nowhere in Count I or in the paragraphs referenced therein do plaintiffs specify exactly what information, or even what type of information, had been concealed from them.

In light of the Court's disposition of the motion for reconsideration, the Court did not consider defendants' additional contention that, in any case, the statute of limitations on Count I had expired.

II. THE MOTION TO AMEND THE COMPLAINT

By their proposed amendment, plaintiffs would add the following sentence to ¶ 25 of the Third Amended Complaint, which is incorporated by reference into Count I:

The information any prudent investor would desire to have before investing— which should have been included in a registration statement had one been filed with the Securities and Exchange Commission—and the material representations and omissions plaintiffs were subjected to are specified in paragraphs 43-50 of this Complaint.

This Court has previously indicated its intention to deny any further motions for amendment of plaintiffs' complaint herein: Plaintiffs have had four opportunities already. Nevertheless, the proposed amendment at issue makes it clear that the flaw identified by the Court in its Memorandum of May 11 was entirely technical: Plaintiffs simply failed to refer to and incorporate into Count I the specific allegations which form the basis of numerous other counts of the complaint.

In light of the liberal amendment policies of Fed.R.Civ.P. 15(a), the Court is thus convinced that granting leave to amend the complaint herein would serve the ends of justice. See Freedman v. Beneficial Corp., 406 F.Supp. 917, 925 (D.Del.1975). In this connection, the Court notes that defendants, each of whom is named in other Counts herein, will not be prejudiced by amendment: Since plaintiffs are adding no new factual allegations to the complaint, the amendment is not one which would serve to apprise defendants belatedly of the claims against them.

The Court wishes to make it clear, however, that its decision to exercise its discretion in favor of amendment should not be taken as an invitation for plaintiffs to seek further amendments, either with respect to Count IV, which is disposed of by Memorandum and Order issued of even date, or as to any other portion of the complaint.

III. APPLICATION OF THE FEDERAL TOLLING DOCTRINE

Because of the Court's original disposition on specificity grounds of defendants' motions for judgment on the pleadings and plaintiffs' motion for reconsideration, the Court did not previously have an opportunity to consider carefully defendants' claim that plaintiffs' cause of action is barred by the applicable statute of limitations. In light of this Court's decision to allow plaintiffs to amend the complaint, the Court now turns to a full consideration of the statute of limitations question, as raised in defendants' original motion for judgment on the pleadings.

Section 13 of the Act, 15 U.S.C. § 77m, provides that "no action shall be maintained to enforce ... a liability created under section 12(1) of this title, unless brought within one year after the violation upon which it is based." Plaintiffs allege that the sales of the limited partnership units at issue were made to plaintiffs in November 1972. Plaintiffs allege further that in October 1974, each of the moving defendants signed agreements tolling the applicable statute of limitations for six months. Each of the moving defendants was subsequently sued in April 1975, with the exception of defendant Content, who was named as a defendant in July 1975. Defendants maintain that since the tolling agreements were not signed until nearly two years after the sale of the securities involved, the one-year statute of limitations bars plaintiffs' claim contained in Count I of the Third Amended Complaint.

Plaintiffs seek to escape the effect of the statute of limitations by invoking the federal tolling doctrine. That doctrine, which has been the law in the federal courts "since the case of Bailey v. Glover, 21 Wall. 342, 88 U.S. 342, 22 L.Ed. 636 (1875) states that in cases involving elements of fraud neither a statute of limitations nor the equitable doctrine of laches can be said to begin to run until the fraud is or should have been discovered." Vanderboom v. Sexton, 422 F.2d 1233, 1240 (8th Cir.), cert. denied, 400 U.S. 852, 91 S.Ct. 47, 27 L.Ed.2d 90 (1970). See Fitzgerald v. Seamans, No. 75-1032, 553 F.2d 220 at 228-229 (D.C. Cir. 1977). Plaintiffs point out that Count I of their Third Amended Complaint is grounded in fraud: The gist of their allegations is that defendants fraudulently misrepresented that registration of the limited partnership units was unnecessary and that plaintiffs had been provided access to all relevant information concerning the partnership which would have been included in a registration statement. Thus, plaintiffs claim, their case presents an appropriate situation for application of the tolling doctrine, which has been applied in the past in actions brought under section 12(1) of the Act. See Katz v. Amos Treat & Co., 411 F.2d 1046 (2d Cir. 1969); Competitive Associates, Inc. v. Fantastic Fudge, Inc., 58 F.R.D. 121 (S.D.N.Y.1973); Dyer v. Eastern Trust and Banking Co., 336 F.Supp. 890 (D.Me.1971).

The Court is convinced that the federal tolling doctrine should be applied to the instant case. The authority most directly in support of the Court's conclusion is Dyer v. Eastern Trust and Banking Co., supra. In Dyer, the plaintiff sued under section 12(1), alleging that defendants made false assurances to plaintiff that the sale of the securities there in question did not require registration under the Securities Act. As in this case, the sale in question had been made more than a year before suit was instituted. Judge Gignoux indicated that the case would have been appropriate for the application of the federal tolling doctrine but for the absence of a crucial element:

The rule depends, however, upon a clear allegation of fraudulent concealment or fraud ... and fraud `means that the wrongdoer has contrived to deceive his victim' .... The ... cases establishing the federal tolling principle all entailed explicit, conscious deception, concealment and bad faith on

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