Kahn v. Kohlberg, Kravis, Roberts & Co.
| Decision Date | 30 June 1992 |
| Docket Number | D,No. 1373,1373 |
| Citation | 970 F.2d 1030 |
| Parties | , Fed. Sec. L. Rep. P 96,889 Phyllis KAHN and Steven G. Thorne, Plaintiffs-Appellants, v. KOHLBERG, KRAVIS, ROBERTS & CO., a New York Limited Partnership, KKR Associates, a New York Limited Partnership, and Whitehall Associates, L.P., a Delaware Limited Partnership, Defendants- Appellees. ocket 92-7028. |
| Court | U.S. Court of Appeals — Second Circuit |
Sidney B. Silverman, New York City (Silverman, Harnes, Obstfeld & Harnes, of counsel), for plaintiffs-appellants.
F.J. Zepp, New York City (Latham & Watkins, of counsel), for defendants-appellees.
Before: PRATT and ALTIMARI, Circuit Judges, and KELLEHER, District Judge. *
Plaintiffs Phyllis Kahn and Steven G. Thorne appeal from the dismissal by the United States District Court for the Southern District of New York, John S. Martin, Jr., Judge, of their complaint pursuant to Federal Rules of Civil Procedure (Fed.R.Civ.P.) 12(b)(6) on the ground that the action was barred by the statute of limitations. We affirm.
Plaintiffs commenced this direct and derivative action on August 21, 1991, seeking rescission of an investment advisory agreement entered into on September 25, 1987, by the Minnesota State Board of Investment (the "State Board"), as trustee for certain state employee pension funds (the "Retirement Funds"), and the defendant Kohlberg, Kravis, Roberts & Co. ("KKR"), on the grounds that the agreement violates the Investment Advisers Act of 1940, 15 U.S.C. § 80b-1 et seq. (the "IAA"), in several ways.
The 1987 Agreement provided that the Board was irrevocably committed to investing $146.6 million with KKR for investments that KKR chose and to paying KKR for its investment advisory services. At KKR's direction, the Board would invest as a limited partner in certain limited partnerships established by KKR in order to acquire target businesses. Defendant KKR Associates, which is controlled by KKR, would act as the general partner. Defendant Whitehall, Associates, L.P., was the limited partnership created to facilitate the takeover of RJR Nabisco in 1988/89.
The Complaint alleges that the agreement violates the IAA in that KKR has failed to register as an investment adviser, 15 U.S.C. § 80b-3, that pursuant to it, in relation to the RJR transaction, KKR is to receive performance-based compensation which is prohibited, 15 U.S.C. § 80b-5, and that it fails to disclose the nature of the compensation to be received by KKR, 15 U.S.C. § 80b-6.
Plaintiffs sought a declaration that the 1987 Agreement, the "Whitehall Agreements," and the "KKR-Whitehall Agreements" are void as well as a restitution of KKR, KKR Associates, and Whitehall moved to dismiss the Complaint pursuant to Fed.R.Civ.P. 12(b)(6) and 12(b)(7) on the grounds that (a) plaintiffs lacked standing to assert their claims, (b) plaintiffs had failed to join an indispensable party, (c) plaintiffs' claims were barred by the statute of limitations, and (d) plaintiffs were guilty of laches. The district court granted defendants' motion on the ground that the claims were barred by the statute of limitations and found it unnecessary to reach the other issues.
all fees paid to KKR pursuant to the agreements. These additional agreements are the partnership agreements used to facilitate the takeover
The jurisdiction of this Court is based upon 28 U.S.C. § 1291.
The Investment Advisers Act regulates the conduct of investment advisers and provides that it may be enforced by the Securities and Exchange Commission through an action for injunctive relief. Section 215 of the IAA provides that contracts whose formation or performance would violate the act are void. In Transamerica Mortgage Advisors, Inc. (TAMA) v. Lewis, 444 U.S. 11, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979), the Supreme Court held that this created an implied private cause of action for rescission of the void contract and restitution and that this was the sole private remedy available under the Advisers Act. Id. at 24, 100 S.Ct. at 247, 249.
Since the cause of action for rescission pursuant to the IAA is implied, the court must determine the appropriate limitations period. This determination is a matter of law and thus is decided by this court de novo.
When Congress has failed to provide a statute of limitations for a federal cause of action, courts generally borrow the state statute of limitations most analogous to the case at hand. Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, --- U.S. ----, 111 S.Ct. 2773, 2778, 115 L.Ed.2d 321 (1991). Because this rule has been followed for so long, if Congress is silent it is ordinarily assumed that it intends for the court to engage in state borrowing. Id.
The Court has recognized "a closely circumscribed exception" when it finds that "a state limitations period would frustrate the policies embraced by the federal enactment." Id. (citations omitted). Federal borrowing is followed "when a rule from elsewhere in federal law clearly provides a closer analogy than available state statutes, and when the federal policies at stake and the practicalities of litigation make that rule a significantly more appropriate vehicle for interstitial lawmaking." Id. (citations omitted).
State legislatures do not devise their limitations periods with national interests in mind, and it is the duty of the federal courts to assure that the importation of state law will not frustrate or interfere with the implementation of national policies.
Del Costello v. International Bhd. of Teamsters, 462 U.S. 151, 103 S.Ct. 2281, 2289, 76 L.Ed.2d 476 (1983) (citation omitted).
The "delicate" determination of the appropriate limitations period is made by following a "hierarchical inquiry," most recently summarized in Lampf.
limitations should be uniform:
Where a federal cause of action tends in practice to "encompass numerous and diverse topics and subtopics," ... such that a single state limitations period may Lampf, 111 S.Ct. at 2779 (citations omitted).
not be consistently applied within a jurisdiction, we have concluded that the federal interests in predictability and judicial economy counsel the adoption of one source, or class of sources, for borrowing purposes.
Thus the Court has determined that a uniform statute of limitations should apply for all RICO cases since RICO claims could be analogized to an endless number of state actions on the basis of the great variety of possible predicate acts for RICO claims. Agency Holding Corp. v. Malley-Duff Associates, Inc., 483 U.S. 143, 107 S.Ct. 2759, 2763-64, 97 L.Ed.2d 121 (1987). The Court also noted that many of the concepts and elements of RICO claims, such as a "RICO enterprise" and a "pattern of racketeering activity" had no analogue at common law. Id. at 150, 107 S.Ct. at 2764.
Likewise the Court determined that claims under 42 U.S.C. § 1983 should have a uniform statute of limitations since "every § 1983 claim can be favorably analogized to more than one of the ancient common-law forms of action ... [or to] one arising under a statute," each of which could have a different statute of limitations. Wilson v. Garcia, 471 U.S. 261, 273-75, 105 S.Ct. 1938, 1945-47, 85 L.Ed.2d 254 (1985). Not only would this create uncertainty for all parties, but scarce resources would be dissipated on "unproductive and ever-increasing litigation." Id. at 275, 105 S.Ct. at 1946. 1
The second step, assuming that the court decides to apply a uniform period, is to determine whether this period should be derived from a state or federal source. Lampf, 111 S.Ct. at 2779. In making this determination, "the court should accord particular weight to the geographic character of the claim." Id. If the federal action has links to more than one state it poses the "danger of forum shopping and at the very least ... guarante[es] ... complex and expensive litigation over what should be a straightforward matter." Id. (citations omitted). Additionally, borrowing from state sources poses the risk of "the application of [an] unduly short state statute of limitations that would thwart the legislative purpose of creating an effective remedy." Agency Holding, 483 U.S. at 154, 107 S.Ct. at 2766 (citations omitted).
a. If the court finds that the interstate character of the action supports federal borrowing, the "presumption of state borrowing requires that [it] determine that an analogous federal source truly affords a 'closer fit' with the cause of action at issue than does any available state-law source." Lampf, 111 S.Ct. at 2779. The relevant considerations will include, but not be limited to, "commonality of purpose and similarity of elements," id., which period will further the policies behind the federal law, practicalities of application, the interest in uniformity, and the interest in having clearly defined, easily applied rules.
b. Examples of Steps Two and Three
Thus, in Occidental Life Ins. Co. v. EEOC, 432 U.S. 355, 97 S.Ct. 2447, 53 L.Ed.2d 402 (1977), the Court decided that enforcement suits brought by the EEOC under Title VII of the 1964 Civil Rights Act should not be subject to a state limitations period since those limitations might unduly hinder the policy behind the Act by placing too great an administrative burden on the agency. 432 U.S. at 367-72, 97 S.Ct. at 2455-57; see also Del Costello, 462 U.S. at 172, 103 S.Ct. at 2294.
Similarly in Del...
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