In re Taxable Mun. Bond Securities Litigation

• Citation: 796 F. Supp. 954
• Decision Date: 20 May 1992
• Docket Number: Civ. A. No. MDL 863.
• Parties: In re TAXABLE MUNICIPAL BOND SECURITIES LITIGATION.
• Court: United States District Courts. 5th Circuit. United States District Court (Eastern District of Louisiana)

796 F. Supp. 954

In re TAXABLE MUNICIPAL BOND SECURITIES LITIGATION.

Civ. A. No. MDL 863.

United States District Court, E.D. Louisiana.

May 20, 1992.

Jack C. Benjamin, Gainsburgh, Benjamin, Fallon, David & Ates, New Orleans, La., Liaison Counsel for plaintiffs.

Gene W. Lafitte, Liskow & Lewis, New Orleans, La., Liaison Counsel for defendants.

MEMORANDUM AND ORDER

SEAR, Chief Judge.

The taxable municipal bond was created in response to the Tax Reform Act of 1986, which limited the availability of the tax-free status previously afforded municipal bonds. Drexel Burnham Lambert Inc. ("Drexel Burnham") played a significant role in promoting the taxable municipal bond. From July through October 1986, Drexel Burnham underwrote seven substantial bond issues offered by six different municipal authorities.¹ The offering materials stated that the bond proceeds would be used to raise money for salutary public purposes, such as financing the construction or acquisition of low to moderate income housing or multifamily housing or providing funds for agricultural purposes.² Instead, the bond trustees used a substantial portion of the proceeds to purchase Guaranteed Investment Contracts ("GICs") issued by Executive Life Insurance Company ("Executive Life"). Executive Life then invested the proceeds from the sale of the GICs in "junk" bonds, an "industry expression for bonds with a credit rating of BB or lower."³ Junk bonds generally offer high rates of return as compensation for the high risk. The junk bond market collapsed in the early months of 1989. Standard & Poors, Inc. then downgraded Executive Life's rating and the rating of the taxable municipal bond, which caused the value of the municipal bonds to decline.⁴

Numerous purchasers of these bonds, most of whom are individual investors or small community banks,⁵ filed lawsuits seeking relief for alleged violations of federal and state law in connection with the issuance of these taxable municipal bonds. Because similar or identical lawsuits were filed in several judicial districts, they have been consolidated for pretrial proceedings by the Judicial Panel on Multidistrict Litigation and transferred to the Eastern District of Louisiana. In these consolidated actions, plaintiffs seek relief from the issuers, underwriters, certain brokers, trustees, and law firms involved in the issuance of the bonds.

The seven municipal authorities that offered the eight taxable municipal bond issues were: Louisiana Housing Finance Authority ("LHFA"), Southeast Texas Housing Finance Corp. ("SETHFC"), Louisiana Agricultural Finance Authority ("LAFA"), Memphis Health, Education & Housing Facility Board ("Memphis"), Adams County Ind. Development Authority ("Adams County"), Nebraska Investment Financial Authority ("NIFA"), and El Paso Housing Finance Corp. ("EPHFC").

Drexel Burnham and Howard, Weil, Labouisse & Friedrichs, Inc. ("Howard, Weil") acted as co-lead underwriters for seven of the eight bond offerings. The eighth offering, the Adams County bonds, was underwritten by the First Boston Corporation and Capital Markets Corporation, although plaintiffs allege that the underwriting syndicate for this bond issue included Drexel Burnham as well.⁶ Additionally, plaintiffs have sued certain individuals involved in underwriting these bonds: Alan Arnold, former President of Howard Weil; Michael Milken, former heard of Drexel Burnham's High Yield Convertible Bond Department;⁷ and Peter Avalone, former head of Drexel Burnham's Municipal Bond Department. Plaintiffs also seek relief from each member of the underwriting syndicate for his alleged liability directly as a seller of the bonds and vicariously for the conduct of the co-lead underwriters, who the sellers allegedly designated to represent them. Certain plaintiffs also have asserted claims against the brokers who directly sold the bonds to them. Some of these brokers were members of the underwriting syndicates involved in the sale of the bonds; others apparently only sold the bonds in the secondary market.⁸

Additionally, plaintiffs name the trustees for each bond issue as defendants: Commercial National Bank (LHFA bonds); NCNB — Texas (SETHFC bonds); Premiere Bank, successor to Louisiana National Bank, and Sunburst Bank, successor to Capital Bank and Trust, (LAFA bonds); First Tennessee Bank (Memphis bonds); First Interstate Bank of Denver (Adams County bonds); Norwest Bank (NIFA bonds); and Texas Commerce Bank (EPHFC bonds).

Also named as defendants are the law firms of Kutak Rock & Campbell ("Kutak") and Diamond Rash Leslie Smith & Samaniego ("Diamond Rash"). Kutak allegedly served as counsel to the underwriters and participated in structuring the bonds, in obtaining a favorable rating from Standard & Poor's, Inc. and in making disclosures to the investing public. Diamond Rash served as counsel for EPHFC, an issuer.

Finally, plaintiffs name Executive Life Insurance Company, its parent company First Executive Corporation ("First Executive"), Fred Carr, Chairman of the Board and Chief Executive Officer of both First Executive and Executive Life, and Public Financial Management, Inc., a consultant on the Memphis bond issue, as defendants.

The underwriter defendants, certain issuer defendants, and certain other defendants⁹ filed a motion to dismiss plaintiffs' federal securities claims alleged under section 10(b) of the Securities Exchange Act of 1934 ("the 1934 Act"). Defendants contend that plaintiffs filed their claims after the statute of limitations period had expired and therefore must be dismissed.

Analysis

Neither section 10(b) nor Rule 10b-5 promulgated thereunder contains a statute of limitations period for actions alleging violations of these provisions. Accordingly, federal courts, when considering the timeliness of the commencement of a section 10(b) action, applied borrowed state or federal limitations periods. Those circuits borrowing a state limitations period looked to the law of the state in which the action was commenced, and generally borrowed the limitations period applicable to the state cause of action that substantively most resembled the federal § 10(b) action.¹⁰ Similarly, those circuits applying a borrowed federal limitations period borrowed the limitations period from the federal cause of action most analogous to the § 10(b) action, specifically, the limitations period expressly provided in the Securities Act of 1933¹¹ and the Securities Exchange Act of 1934¹² for other causes of action created by those acts.¹³ The adoption of state limitations periods by some circuits and the adoption of the federal limitations period by others resulted in the application of inconsistent limitations periods among the circuits.

On June 20, 1991, the Supreme Court resolved the conflict among the circuits by adopting a uniform federal statute of limitations period for § 10(b) and Rule 10b-5 actions. The Court applied the same limitation period for violation of section 10(b) and Rule 10b-5 as prescribed for other causes of action under the 1933 and 1934 Securities Acts and held that an action "must be commenced within one year after the discovery of the facts constituting the violation and within three years after such violation." Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, ___ U.S. ___, 111 S.Ct. 2773, 2782, 115 L.Ed.2d 321 (1991). On the same day that Lampf was decided, the Court also decided James B. Beam Distilling Co. v. Georgia, ___ U.S. ___, 111 S.Ct. 2439, 2448, 115 L.Ed.2d 481 (1991), and held that, when a court in a civil case applies a new rule of law to the parties before it, that rule of law must be applied retroactively in all other cases.

Because these actions were filed before the Lampf decision and because the Lampf Court applied the new statute of limitations period to the parties before it, defendants argued that Beam dictated that the limitations period adopted in Lampf applied retroactively to this action.¹⁴ Defendants contended that the application of this limitations period to plaintiffs' § 10(b) claims would bar them.

Before defendants' contention was resolved, Congress enacted legislation that precluded retroactive application of the Lampf statute of limitation. Section 476 of the Federal Deposit Insurance Corporation Improvement Act of 1991, was added as a new section to the Securities and Exchange Act of 1934, and 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.

In enacting this provision, Congress accomplished two things. First, it declared that the limitations period for pending § 10(b) actions that were commenced on or before June 19, 1991, the day before the Supreme Court issued its opinions in Lampf and Beam, would be that limitations period applicable in the relevant jurisdiction as of June 19, 1991. Second, it declared that the law of retroactivity in force in a given jurisdiction on June 19, 1991 likewise would govern all § 10(b) claims pending on June 19, 1991. The cumulative effect of these declarations is: that jurisdictions that had borrowed state limitations periods before Lampf must continue to apply the borrowed state limitations ...