In re Professional Financial Management, Ltd., Civ. No. 4-85-1600.

• Decision Date: 19 January 1989
• Docket Number: Civ. No. 4-85-1600.
• Citation: 703 F. Supp. 1388
• Parties: In re PROFESSIONAL FINANCIAL MANAGEMENT, LTD.—Master Docket.
• Court: U.S. District Court — District of Minnesota

703 F. Supp. 1388

In re PROFESSIONAL FINANCIAL MANAGEMENT, LTD.—Master Docket.

Civ. No. 4-85-1600.

United States District Court, D. Minnesota, Fourth Division.

January 19, 1989.

COPYRIGHT MATERIAL OMITTED

Jeff Ross and Richard I. Diamond, Estes, Parsinen & Levy, and Alonzo B. Seran, Olson, Gunn & Seran, Minneapolis, Minn., for plaintiffs.

Richard G. Wilson, Maslon Edelman Borman & Brand, Minneapolis, Minn., for defendants Preeshl, Helstad Shoup & Co., Michael J. Bruder, Robert Shoup, Mary Glubka and Earl Engelson.

Thomas J. Shroyer and Beth M. Timm, Moss & Barnett, Minneapolis, Minn., for defendants Professional Financial Management, Ltd., J. Kmetz & Associates, Joseph Kmetz, and James Kmetz.

Wade R. Wacholz, Gislason, Dosland, Hunter & Malecki, Minnetonka, Minn., for defendants Arthur Olstead and Olstead & Associates.

MEMORANDUM OPINION AND ORDER

DIANA E. MURPHY, District Judge.

I. Background

The general background of this complex litigation is set forth in the court's April 15, 1987 Memorandum Opinion and Order in Nielsen v. Professional Financial Management, Ltd., 682 F.Supp. 429 (D.Minn.1987). Plaintiffs' claims in Nielsen relate to the "Energy Brain" leasing and tax shelter plan. Now before the court are several motions. The PHS defendants¹ seek partial summary judgment against the Winona plaintiffs² on two counts. They contend that the remaining federal securities claims asserted against them, counts III and IV, should be dismissed with prejudice, and that the pendent state claims should be dismissed for lack of jurisdiction. The Winona plaintiffs seek summary judgment against the PFM and PHS defendants on two state law claims. They claim that summary judgment should be entered in their favor on count VII, the Minnesota Securities Act, Minn.Stat. § 80A.23; and count XIII, the Minnesota Consumer Fraud Act, Minn.Stat. § 325F.69.³

Many of the background facts regarding the PHS defendants and the Winona plaintiffs are undisputed. PHS is an accounting firm with an office in Winona, Minnesota. Its first contact with the Energy Brain program occurred approximately in November, 1982, when plaintiff David Culver and defendant Michael Bruder attended a presentation of the Energy Brain program in Minneapolis, conducted by PFM. In December 1982, PHS invited PFM to Winona to present the Energy Brain program at a meeting organized by PHS. PHS invited many of its local clients to the presentation and prepared individual tax projections for the invitees. These projections analyzed each person's financial and tax status and described the tax advantages which would accrue to each person if he or she invested in an Energy Brain before the end of 1982. Several of the people who attended this presentation decided to invest; most of the Winona plaintiffs are among this group. Many were assisted by PHS in completing the lease documents and in reviewing the offering material. The extent of PHS's participation is disputed. Plaintiffs portray PHS as an aggressive promoter of the program, and allege that it received payments from PFM for its efforts which constituted more than merely providing accounting and tax advice. The PHS defendants contend that their activities were limited to professional accounting services and that their fees were only for those services. They acknowledge, however, that the amounts PHS billed in relation to the Energy Brain exceeded its normal fees.

Each of the Winona plaintiffs invested in an Energy Brain by executing a lease before the end of 1982. The allegations against the PHS defendants were made on September 24, 1986 when plaintiffs W. Kent and Patricia Nielsen filed an amended complaint naming the PHS defendants as additional parties.

II. § 12(2) of the Securities Act of 1933

Count III of the second amended complaint alleges that defendants violated § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2) by promoting securities through false and misleading facts. The PHS defendants urge that this claim be dismissed as untimely since it was not filed within three years of the date when the security was sold.

Section 13 of the Securities Act of 1933, 15 U.S.C. § 77m requires that § 12(2) claims be brought within one year of discovery of the untrue statement upon which the claim is made, or in no event more than three years after the sale of the security.⁴ The parties focus on the three year absolute limit. They agree that each of the Winona plaintiffs received title to their Energy Brain unit before the end of December 1982, and that that constituted the date of "sale" of the security. See Appelbaum v. Ceres Land Co., 687 F.2d 261, 263 (8th Cir.1982) (limitations period begins when investment is completed and there is transfer of interest). Plaintiffs acknowledge that the amended complaint which first named the PHS defendants was filed more than three years after the date of sale. They argue, however, that their claims against the PHS defendants should relate back to the date they filed the initial complaint against PFM, pursuant to Fed.R.Civ. P. 15(c). They claim that their claim was therefore timely brought.⁵

The court has previously addressed the relation back of causes of action asserted against the PHS defendants. See Nielsen v. Professional Financial Management, 682 F.Supp. 429, 435-36 (D.Minn.1987). The court noted that "in determining whether an amendment adding a party should relate back, the linchpin is notice, and notice within the statute of limitations period." Id. at 435, quoting Schiavone v. Fortune, 477 U.S. 21, 106 S.Ct. 2379, 91 L.Ed.2d 18 (1986). Plaintiffs at that time had made no showing that the PHS defendants had notice of claims against them when the original complaint was filed, but further discovery was permitted on that issue. 682 F.Supp. at 435.

Extensive discovery has now been conducted. Plaintiffs point to the deposition of Robert Shoup, a defendant and former PHS officer, as evidence that PHS defendants knew of claims against them within three years of the sale. Shoup testified that he became aware of the lawsuit filed against PFM sometime, "probably in 1985 ... before he retired." Shoup deposition, p. 229. Plaintiffs premise their entire claim for relation back on this statement. Shoup's comment is not sufficient, however, to allow relation back under Rule 15(c).

The mere fact that a PHS officer knew that PFM was being sued by plaintiffs other than the Winona plaintiffs does not give reasonable notice of claims against PHS. Moreover, before relation back is permitted, plaintiffs must also show that the failure earlier to include PHS defendants was due to "a mistake concerning the identity of the proper party." Fed.R.Civ.P. 15(c). See McCurry v. Allen, 688 F.2d 581, 585 (8th Cir.1982). Plaintiffs have made no such showing. Relation back of plaintiffs' § 12(2) claims against the PHS defendants should not be allowed in these circumstances, and the PHS defendants' motion to dismiss the § 12(2) claims against them should be granted.

III. Section 10(b) of the Securities Act of 1934, and Rule 10b-5

Count IV of the second amended complaint alleges that defendants engaged in manipulative and deceptive practices in regard to the Energy Brain and thereby violated § 10(b) of the Securities Act of 1934, 15 U.S.C. § 78j(b), (§ 10(b)), and Rule 10b-5 promulgated thereunder. 17 C.F.R. § 240.10b-5 (Rule 10b-5). The PHS defendants seek dismissal of that count against them on three grounds. They argue first that the court should adopt a different limitations period for § 10(b) and Rule 10b-5 claims and dismiss count IV as untimely. Second, they claim that the § 10(b) and 10b-5 claim asserted against the PHS defendants should not be equitably tolled and is thus time-barred. Third, they seek dismissal on the grounds that plaintiffs have failed to make any reasonable showing that defendants acted with scienter.

A. Statute of Limitations for 10b-5 Claims in Minnesota

The court has previously ruled that the three-year statute of limitations in Minn.Stat. § 80A.23 subd. 7 applies to the § 10(b) and Rule 10b-5 claims in this case. 682 F.Supp. at 438. Defendants now argue that this ruling should be changed in light of Agency Holding Corp. v. Malley-Duff Associates, Inc., 483 U.S. 143, 107 S.Ct. 2759, 97 L.Ed.2d 121 (1987).

Agency Holding Corp. v. Malley-Duff discussed the statute of limitations which should apply to claims brought under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1964 (RICO). Like § 10(b) and Rule 10b-5, the RICO statute does not specify any limitations period applicable to private actions, and the practice had been to adopt the limitations period from the most analogous state statute in which the action arose. In Agency Holding Corp. v. Malley-Duff that rule was changed for civil RICO claims, and the limitations period which now applies is borrowed from the Clayton Act, 15 U.S.C. § 15. Id. 107 S.Ct. at 2764. Defendants urge this court to make a similar ruling for the Rule 10b-5 claim. They urge that the "better" limitations period for claims under § 10(b) and Rule 10b-5 is the absolute three year limit contained in § 13 of the Securities Act of 1933.⁶Accord In re Data Access Systems Securities Litigation, 843 F.2d 1537, 1550 (3d Cir.), cert. denied, ___ U.S. ___, 109 S.Ct. 131, 102 L.Ed.2d 103 (1988).

The position urged by defendants should not be adopted, however. It would upset the well-settled rule in this circuit that the limitations period for § 10(b) and Rule 10b-5 claims is borrowed from the most analogous state statute. Vanderboom v. Sexton, 422 F.2d 1233, 1237-38 (8th Cir.), cert. denied, 400 U.S. 852, 91 S.Ct. 47, 27 L.Ed.2d 90 (1970); see also TCF Banking and Savings F.A. v. Arthur Young & Co., 697 F.Supp. 362 (D.Minn.1988) (continue applying statute of limitations from Minn. Stat. § 80A.23 subd. 7 for Rule 10b-5 claims arising in Minnesota). The reasoning stated in Agency Holding Corp. v. Malley-Duff does not...