Kilmartin v. HC Wainwright & Co.

• Decision Date: 15 February 1984
• Docket Number: Civ. A. No. 82-3905-C.
• Citation: 580 F. Supp. 604
• Parties: John D. KILMARTIN, Jr., et al., Plaintiffs, v. H.C. WAINWRIGHT & CO., et al., Defendants.
• Court: U.S. District Court — District of Massachusetts

580 F. Supp. 604

John D. KILMARTIN, Jr., et al., Plaintiffs, v. H.C. WAINWRIGHT & CO., et al., Defendants.

Civ. A. No. 82-3905-C.

United States District Court, D. Massachusetts.

February 15, 1984.

Edward F. Haber, Charles W. Rankin, Boston, Mass., for plaintiffs.

Andrew J. McElaney, Jr., Nutter, McClennen & Fish, Boston, Mass., for defendants Chapin, Int'l Coal Mining Co., Int'l Coal Mgmt. Co. and Int'l Coal Co.

Robert T. Gill, James L. Polianites, Parker, Coulter, Daley & White, Boston, Mass., for defendants Rich,May, Bilodeau and Flaherty.

Thomas J. Urbelis, Withington, Cross, Park & Groden, Boston, Mass., for defendants H.C. Wainwright & Co., Robert L. Clark and Charles A. Garvin.

Duncan S. Payne, Peabody & Brown, Boston, Mass., for defendant Harvey White.

Jean M. Kelley, Morrison, Mahoney & Miller, Boston, Mass., for defendants William Griffin and Samuel Perkins.

MEMORANDUM

CAFFREY, Chief Judge:

This is a civil action alleging violations of federal and state securities statutes, breach of contract and fiduciary duty, negligence and fraud. The case is before the Court on defendants' motions to dismiss.¹ Jurisdiction is claimed under 15 U.S.C. §§ 77v and 78aa and 28 U.S.C. § 1331. Jurisdiction over the state claims is predicated on the doctrine of pendent jurisdiction.

When considering a motion to dismiss, a court must take as admitted the material allegations of the complaint and must construe the complaint liberally in favor of the plaintiff. Jenkins v. McKeithen, 395 U.S. 411, 421, 89 S.Ct. 1843, 1848, 23 L.Ed.2d 404 (1969). The amended complaint in this case states the following factual basis for plaintiffs' claims. In December 1979, the defendant mining company issued a "Confidential Offering Memorandum." By this memorandum, defendants H.C. Wainwright & Co. (a partnership comprised of defendants Clark and Garvin), White, Chapin, Coal Company and Mining Company offered for sale limited partnership units in Long Run Coal Associates I ("Long Run"). Between December 1979 and February 1980, plaintiffs Kilmartin, Sinclair, Scher, Henderson, Talmage, Market, and International Packaging Corporation purchased limited partnership units in Long Run. In making these purchases, plaintiffs relied on the "honesty, accuracy and completeness of the memorandum." In particular, plaintiffs relied on the statement in the memorandum that Long Run already had a buyer (defendant Coal Company) that had agreed to purchase from Long Run the projected output of the mine at a minimum price of $33 per ton. The memorandum failed to state, among other things: that the purchase agreement required that the coal mined by Long Run meet specific quality standards; that tests had shown Long Run coal to be substantially below the quality standards specified; and that coal similar to the sample tested would likely have to be sold at substantially less than $33 per ton.

Because of Long Run's inability to receive $33 per ton for the coal it produced, the inexperience of its management, its inadequate financial resources, and other problems, Long Run did not perform as projected and suffered losses. The reasons for and extent of Long Run's losses were withheld from the plaintiffs for approximately three years. When they discovered Long Run's poor financial condition, plaintiffs' initiated this lawsuit. Long Run has since ceased all mining operations and is currently insolvent.

Plaintiffs commenced this action on December 22, 1982, against defendants H.C. Wainwright & Co., Clark, Garvin, Chafin, White, Int'l Coal Mining Co., Int'l Coal Management Co., and Int'l Coal Company.² Plaintiffs amended their complaint on July 29, 1983, adding as defendants the law firm of Rich, May, Bilodeau and Flaherty ("Rich, May") and Attorney William Griffin, Jr. Griffin, a partner at Rich, May at the time of the securities transaction, had represented several of his fellow defendants relative to the creation and sale of the limited partnership units in Long Run. Plaintiffs now claim they were misled by the defendants and they seek to recover the amount of their investment, related business expenses, and interest.

Fraudulent Concealment

A number of plaintiffs' claims require a showing that defendants fraudulently concealed information from plaintiffs concerning Long Run. In particular, the sufficiency of plaintiffs' pleading of fraudulent concealment is relevant to defendants' assertion, discussed below, that certain of plaintiffs' claims are barred by the applicable statutes of limitations. Fraudulent concealment by a defendant tolls the statute of limitations until the plaintiff discovers the existence of facts giving rise to a cause of action. Tomera v. Galt, 511 F.2d 504, 510 (7th Cir.1975).

Defendants claim that the plaintiffs are not in compliance with the requirement of Fed.R.Civ.P. 9(b) that "in all averments of fraud ... the circumstances constituting fraud ... shall be stated with particularity." Rule 9 is generally interpreted so as to fulfil its major purpose: namely, to give the defendant adequate notice of the plaintiff's claim. It should also be read, however, in a manner consistent with Rule 8, which requires that averments in pleadings be clear, concise and direct. McGinty v. Beranger Volkswagen, Inc., 633 F.2d 226 (1st Cir.1980).

There are at least two types of fraudulent behavior which will suspend the running of the statute of limitations:

In the first type, the most common, the fraud goes undiscovered even though the defendant after commission of the wrong does nothing to conceal it and the plaintiff has diligently inquired into its circumstances. The plaintiffs' due diligence is essential here. Citations omitted. In the second type, the fraud goes undiscovered because the defendant has taken positive steps after commission of the fraud to keep it concealed. Citations omitted. This type of fraudulent concealment tolls the limitations period until actual discovery by the plaintiff.

Tomera v. Galt, 511 F.2d at 510. See, also, Robertson v. Seidman & Seidman, 609 F.2d 583, 593 (2d Cir.1979).

Plaintiffs' amended complaint alleges the second type of fraudulent concealment with sufficient particularity. Plaintiffs outline in detail in paragraphs 16 and 19-28A the facts alleged to have been fraudulently concealed by defendants. Paragraph 17 alleges the manner in which defendants were able to keep the plaintiffs from learning of the concealed facts until as late as November 1982. And, in paragraph 18, plaintiffs list more than thirty documents dated from February 1980 to November 1982 by which defendants conveyed information and explanations allegedly intended to perpetuate the deception. Plaintiffs allege specifically that they discovered the misstatements and omissions in the memorandum after the last communication from defendants on November 10, 1982, and prior to the filing of this suit on December 22, 1982. Plaintiffs could have pleaded the time and circumstances of their discovery of the concealed facts with more particularity. But the complaint alleges sufficient facts on the basis of which to determine the timeliness of the suit. Plaintiffs' allegations of fraudulent concealment, therefore, meet the requirements of Fed.R.Civ.P. 9(b).

Count I

Count I of plaintiffs' amended complaint alleges that the defendants' conduct violated § 12(2) of the 1933 Act, 15 U.S.C. § 77l (2). Defendants challenge this count on three grounds: first, that the claim is time barred; second, that plaintiffs failed to plead a justiciable cause of action; and, third, that plaintiffs failed to plead sufficient facts supporting allegations that defendants Griffin and Rich, May were aiders and abettors.

A claimed violation of § 12(2) is subject to the one year statute of limitations requirement set forth in § 13 of the 1933 Act, 15 U.S.C. § 77m. It is the plaintiffs' burden to plead and prove facts showing that they are within this statute of limitations. Cook v. Avien, Inc., 573 F.2d 685, 695 (1st Cir.1978). Plaintiffs have met their burden of pleading here. Plaintiffs filed this lawsuit on December 22, 1982, and amended their complaint on July 23, 1983. As ruled above, plaintiffs' amended complaint alleges with sufficient particularity that defendants fraudulently concealed material facts from plaintiffs until as late as November 1982. Fraudulent concealment will toll the running of the limitations period in § 12(2) actions until discovery. See Cook v. Avien, Inc., 573 F.2d at 695. Therefore, plaintiffs have shown that their § 12(2) claim was brought within the time required.

Defendants also assert that Count I should be dismissed because plaintiffs failed to plead a justiciable cause of action based on § 12(2). Specifically, defendants claim that plaintiffs do not allege (1) that they did not know of the alleged omissions and misrepresentations at the time they were made, and (2) that the securities were tendered. Paragraphs 9, 10, and 11 of the amended complaint state that plaintiffs "purchased the partnership units in reliance upon the honesty, accuracy and completeness of the memorandum." Paragraph 19 recites that "this action was commenced within one year after the discovery by the plaintiffs of the untrue statements and omissions." Construing the complaint in favor of the plaintiffs, I rule that these allegations adequately plead the plaintiffs' lack of knowledge. Similarly, viewing the complaint in the light most favorable to plaintiffs, the Court can infer that plaintiffs have tendered their securities to defendants. See Wigand v. Flo-Tek, Inc., 609 F.2d 1028, 1034-35 (2nd Cir.1979). Paragraphs 9, 10, 11, 12 and 13 set forth the consideration paid by plaintiffs for their units, the fact that the partnership is presently insolvent, and the fact that plaintiffs have lost their entire investment plus interest. Also, plaintiffs have attached to the amended complaint as exhibits letters sent by plaintiffs' counsel to defendants demanding the...