In re First American Center Securities Litigation

• Decision Date: 13 October 1992
• Docket Number: No. MDL No. 869 (CLB).,MDL No. 869 (CLB).
• Citation: 807 F. Supp. 326
• Parties: In re FIRST AMERICAN CENTER SECURITIES LITIGATION (All Actions). Robert D. DILLEY and Richard A. Biorn, On Behalf Of Themselves And All Others Similarly Situated, Plaintiffs, v. FIRST AMERICAN CENTER LIMITED PARTNERSHIP, Shearson Lehman Brothers Inc., Formerly Known as Shearson Lehman Hutton Inc., Shearson Lehman First American Center, Inc., A. George Kallop, Paul W. Perkins, Gary D. Gallagher, William M. Kahn, Robert F. Greenwald, and Marshall and Stevens Incorporated, Defendants.
• Court: U.S. District Court — Southern District of New York

807 F. Supp. 326

In re FIRST AMERICAN CENTER SECURITIES LITIGATION (All Actions) Robert D. DILLEY and Richard A. Biorn, On Behalf Of Themselves And All Others Similarly Situated, Plaintiffs, v. FIRST AMERICAN CENTER LIMITED PARTNERSHIP, Shearson Lehman Brothers Inc., Formerly Known as Shearson Lehman Hutton Inc., Shearson Lehman First American Center, Inc., A. George Kallop, Paul W. Perkins, Gary D. Gallagher, William M. Kahn, Robert F. Greenwald, and Marshall and Stevens Incorporated, Defendants.

No. MDL No. 869 (CLB).

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

October 23, 1992.

Issued Nunc Pro Tunc October 13, 1992.

Andrew Lamis, Lieff Cabraser & Heimann, San Francisco, CA, for plaintiffs.

William D. Gallagher, McMahon, Martine & Merritt, New York City, for defendants.

MEMORANDUM & ORDER

BRIEANT, Chief Judge.

On July 10, 1991, defendants Shearson Lehman Brothers Inc., Shearson Lehman Hutton Inc., First American Center Limited Partnership, Shearson Lehman First American Center Inc., A. George Kallop, Paul W. Perkins, Gary D. Gallagher, William M. Kahn, and Robert F. Greenwald (hereinafter referred to as the "Shearson defendants") moved to dismiss the Consolidated Class Action Complaint (hereinafter "the Complaint") pursuant to Rule 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. By separate motion, filed on July 11, 1991, defendant Marshall & Stevens Incorporated sought the same relief pursuant to Rules 9(b), 12(b)(1) and 12(b)(6).

This Court heard oral argument on the motions on August 5, 1991 and decision on the motions was deferred pending our Court of Appeals reexamination of its decision in Welch v. Cadre Capital, 923 F.2d 989 (2d Cir.1991) ("Welch I"), which the Supreme Court remanded sub nom. Northwest Savings Bank PaSa v. Welch, ___ U.S. ___, 111 S.Ct. 2882, 115 L.Ed.2d 1048 (1991), for reconsideration in light of its decisions in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, ___ U.S. ___, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991), and James B. Beam Distilling Co. v. Georgia, ___ U.S. ____, 111 S.Ct. 2439, 115 L.Ed.2d 481 (1991).¹

This litigation arises out of the sale of approximately $14 million dollars of units in First American Center Limited Partnership, a failed real estate limited partnership whose principal asset was a 28-story commercial office building, First American Center, in Nashville, Tennessee. Complaint, ¶ 24. The property was financed in part through a $35 million non-recourse first mortgage loan. Complaint, ¶ 26. The total debt-financing for the acquisition exceeded $40 million dollars. Complaint, ¶ 27. Limited partnership interests were sold by defendant Shearson Lehman Brothers Inc. through the distribution of a Private Placement Memorandum dated March 31, 1986 that contained among others statements, an appraisal of the value of First American Center prepared by defendant Marshall and Stevens, Incorporated. See Complaint ¶ 30.

On November 3, 1989, unit investors were notified in writing that First American Bank of Nashville, which occupied 53% of the property's rentable square footage, had terminated its lease and vacated its space in First American Center. Complaint, ¶ 70. By letter dated February 16, 1990, the unit holders were notified that "the potential loss of the Property put the LIMITED PARTNERS' investment `at serious risk of total loss.'" Complaint, ¶ 74. On July 13, 1990, investors in First American Center Limited Partnership were informed that all of the partnership's assets had been lost, and that title to the First American Center property had been transferred to the first mortgage lender effective July 1, 1990. Complaint, ¶ 78.

Plaintiffs in the Complaint allege that First American Center Limited Partnership units were offered and sold to the investing public by way of misrepresentations and omissions of material fact which concealed from purchasers important information regarding the operation and performance of First American Center and the potential profitability and true risks of the investment. In particular, plaintiffs assert claims against the Shearson defendants for violations of federal securities law, Section 10(b) of the Securities Exchange Act of 1934 15 U.S.C. § 78j(b) and Rule 10b-5 thereunder (Count I), and the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1962(c) and (d) (Count II), as well as claims for common law fraud (Count III), negligent misrepresentations (Count IV), negligence (Count V) and breach of fiduciary duty (Count VI), arising out of the offer and sale of limited partnership interests in First American Center Limited Partnership.

The substantive allegations with respect to defendant Marshall and Stevens are that Marshall and Stevens prepared an appraisal for the property by which it represented that First American had a fair market value of $54,000,000 million dollars as of January 6, 1986 and that this appraisal was knowingly and/or recklessly inflated. Based on these factual allegations, plaintiffs allege that defendant Marshall and Stevens is liable for violating Section 10(b) of the Securities Exchange Act of 1934 (Count I), as well for the common law torts of fraud (Count III), negligent misrepresentation (Count IV), negligence (Count V) and professional negligence (Count VIII).

Originally named in the Complaint as a defendant was KPMG Peat Marwick, alleged to be the independent auditor of First American Center Limited Partnership. By letter dated July 3, 1991, plaintiffs voluntarily dismissed this defendant from the action without prejudice and, by Memorandum & Order dated July 10, 1991, this Court concluded that the dismissal of Peat Marwick would not prejudice the class. See Doc. Nos. 7, 8.

On August 31, 1992, this Court provisionally certified a plaintiff class² and preliminary approved a Class Action Settlement Agreement between the proposed Settlement Class, represented by plaintiffs Robert D. Dilley and Richard A. Biorn, and the Shearson defendants. See Doc. No. 31. On October 21, 1992, the Court held a hearing to consider final approval of the proposed settlement and an Order and Judgment of Final Settlement Approval was filed on the same date. See Doc. No. 41. The Settlement Agreement is not global, as it fails to address the claims pleaded against Marshall and Stevens.

By letters dated August 14 and August 18, 1992, counsel for plaintiffs and defendant Marshall and Stevens, Inc., respectively, request that this Court rule on defendant Marshall and Stevens' motion to dismiss. See Doc. Nos. 32, 33. The motion was marked fully submitted, decision reserved on September 15, 1992, the date of the last submission by counsel. This constitutes the decision of the Court.

The initial complaint in this group of actions was filed on August 9, 1990. On November 8, 1990, our Court of Appeals held for the first time that the appropriate statute of limitations for actions arising under Section 10(b) of the Exchange Act was the one-year/three-year limitations period found in Section 9(e) and 18(c) of the Exchange Act, 15 U.S.C. § 78i(e) and 78r(c), which requires that actions be brought within one year after discovery of the conduct alleged to constitute the violation, but in no event more than three years after the occurrence of the violation. Ceres Partners v. GEL Associates, 918 F.2d 349 (2d Cir.1990).

On November 27, 1991, however, Congress enacted Section 27A of the Exchange Act, Federal Deposit Insurance Corporation Improvement Act of 1991, § 476, Publ.L. No. 102-242, 105 Stat. 2236, which was signed into law by the President on December 19, 1991. Section 27A provides:

(a) Effect on Pending Causes of Action. The limitation period for any private civil action implied under Section 10(b) of this Act that was commenced on or before June 19, 1991, shall be the limitation period provided by the laws applicable in the jurisdiction, including principles of retroactivity, as such laws existed on June 19, 1991.

(b) Effect on Dismissed Causes of Action. Any private civil action implied under Section 10(b) of this Act that was commenced on or before June 19, 1991 —

(1) which was dismissed as time-barred subsequent to June 19, 1991, and

(2) which would have been timely filed under the limitation period provided by the laws applicable in the jurisdiction, including principles of retroactivity, as such laws existed on June 19, 1991,

shall be reinstated on motion by the plaintiff not later than 60 days after the date of enactment of this section.

Federal Deposit Insurance Corporation Improvement Act of 1991, § 476, Publ.L. No. 102-242, 105 Stat. 2236, 2387.

Defendant Marshall and Stevens argues that plaintiffs' Section 10(b) claim should be dismissed on the ground that it is barred by the statute of limitations. Defendant argues further that Section 27A of the Securities Exchange Act of 1934 violates the separation of powers principle and due process clause of the Fifth Amendment because its sole purpose and effect is to eliminate the binding precedential effect of the Supreme Court's decision in Lampf, ___ U.S. at ___, 111 S.Ct. 2773 and James B. Beam Distilling Co., ___ U.S. ___, 111 S.Ct. 2439.

Before reaching the constitutional issue, this Court must first determine what the applicable statute of limitations was as of June 19, 1991, the day before the Supreme Court decided Lampf and Beam. Defendant maintains that as of June 19, 1991, litigants in the Second Circuit were bound by a one-year/three year period of limitations as stated in Ceres, 918 F.2d at 359, and applied retroactively in Welch I. As such, defendant contends that the offering of interests in First American Center commenced on March 31, 1986, the date of the Private Placement Memorandum, and under the terms of the Private Placement Memorandum ended on or before March 1, 1987. Defendant, applying the one-year/ three year limitations, concludes that the statute of limitations on the Section 10(b) claim had run when...