McKowan Lowe & Co., Ltd. v. Jasmine, Ltd.

• Decision Date: 26 June 2002
• Docket Number: No. 00-3728.,00-3728.
• Citation: 295 F.3d 380
• Parties: McKOWAN LOWE & CO., LTD. v. JASMINE, LTD., Irving Mangel, James Stewart, Jack Aezen, Lujaco, Ltd., Fishbein & Company, P.C., Samuel J. Mangel, United Jersey Bank, Marvin Weiss, Arthur Andersen, L.L.P. Harry Berger, individually and on behalf of a class similarly situated; Bernard L. Cutler, individually and on behalf of a class similarly situated v. Jasmine Ltd., Irving M. Mangel, Melvin Twersky, Edward W. Maskaly, Samuel J. Mangel, Steven B. Sands, Martin Sands, Thomas Ciocco, Sands Brothers & Co., McKowan Lowe & Company, Ltd., Evelyn Wong, Tony Ngai, Lujaco, Ltd. Harry Berger and Bernard Cutler, individually and on behalf of a class similarly situated, Appellants.
• Court: U.S. Court of Appeals — Third Circuit

295 F.3d 380

McKOWAN LOWE & CO., LTD. v. JASMINE, LTD., Irving Mangel, James Stewart, Jack Aezen, Lujaco, Ltd., Fishbein & Company, P.C., Samuel J. Mangel, United Jersey Bank, Marvin Weiss, Arthur Andersen, L.L.P.

Harry Berger, individually and on behalf of a class similarly situated; Bernard L. Cutler, individually and on behalf of a class similarly situated v. Jasmine Ltd., Irving M. Mangel, Melvin Twersky, Edward W. Maskaly, Samuel J. Mangel, Steven B. Sands, Martin Sands, Thomas Ciocco, Sands Brothers & Co., McKowan Lowe & Company, Ltd., Evelyn Wong, Tony Ngai, Lujaco, Ltd Harry Berger and Bernard Cutler, individually and on behalf of a class similarly situated, Appellants.

No. 00-3728.

United States Court of Appeals, Third Circuit.

Argued October 29, 2001.

Filed June 26, 2002.

Lowell E. Sachnoff, (argued), M. Marshall Seeder, John W. Moynihan, Sachnoff & Weaver, Ltd. Chicago, IL, Bryan L. Clobes, Miller, Faucher Cafferty and Wexler LLP, Philadelphia, PA, Michael I. Behn, Futterman & Howard, Chtd. Chicago, IL, for appellants.

Stephen L. Dreyfuss, Hellring, Lindeman, Goldstein & Siegal, LLP, Newark, NJ, for appellees Irving Mangel and Samuel J. Mangel.

Richard G. Placey, Montgomery, McCracken, Walker & Rhoads, LLP, Cherry Hill, NJ, for appellee Fishbein & Company, P.C.

Richard A. Roth Littman, Krooks, Roth & Ball New York City, for appellees Steven B. Sands, Martin Sands, Sands Brothers & Co., Evelyn Wong, Tony Ngai.

Joseph M. Feeney, Cherry Hill, NJ, for appellee Thomas Ciocco.

John M. George, Jr., (argued), Lisa M. Cipriano, John H. Mulhern Sidley, Austin, Brown & Wood Chicago, IL, Nicholas M. Kouletsis, Ralph R. Smith III, Pepper Hamilton, LLP, Cherry Hill, NJ, Barbara A. Mather, Pepper Hamilton, LLP, Philadelphia, PA for appellee Arthur Andersen, LLP.

Meyer Eisenberg, Deputy General Counsel, Mark R. Pennington, Assistant General Counsel, David M. Becker, General Counsel, Jacob H. Stillman, Solicitor Securities & Exchange Commission, Washington, D.C., for Securities and Exchange Commission appellants Amicus-Curiae.

BEFORE: SLOVITER, NYGAARD and AMBRO, Circuit Judges.

SLOVITER, Circuit Judge.

This interlocutory appeal of the District Court's order denying class certification is before us on this court's grant of a petition for review pursuant to Rule 23(f) of the Federal Rules of Civil Procedure. The issue framed by the petition is

[w]hether the commencement of a class action tolls the limitations period for intervening class members to bring claims on behalf of a class where a determination has not been made whether those claims are appropriate for class certification?

App. at 75.

Plaintiff-appellant Bernard Cutler appeals from the District Court's order granting summary judgment against Cutler's class claims alleging violations of Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k (2002), which creates a private right of action for claims of material misrepresentation or omission in a registration statement. The District Court concluded that although the statute of limitations was tolled for Cutler's individual claims, his claims on behalf of the class were time-barred.

Under the Supreme Court's decision in American Pipe & Construction Co. v. Utah, 414 U.S. 538, 94 S.Ct. 756, 38 L.Ed.2d 713 (1974), the filing of a class action complaint tolls the statute of limitations for all members of the putative class who, following the denial of certification, intervene or file an independent action. See also Crown, Cork & Seal Co. v. Parker, 462 U.S. 345, 350, 103 S.Ct. 2392, 76 L.Ed.2d 628 (1983). It is therefore established that American Pipe tolling applies to intervenors who assert claims in their individual capacity, but this court has not yet decided whether American Pipe tolling applies to an intervenor as a proposed class representative where the class has neither been certified nor definitively rejected.

I. BACKGROUND

In December 1993, Jasmine, Ltd., a shoe importer headquartered in New Jersey, completed an initial public offering (IPO) of common stock. In November 1995 Harry Berger, a shareholder, filed suit in federal court on behalf of himself and a class of similarly situated purchasers alleging violations of federal and state securities laws in connection with the IPO.¹ According to Berger, Jasmine and members of its management, Irving Mangel, Samuel Mangel, Melvin Twersky, Edward Maskaly and Thomas Ciocco, Jasmine's auditors, Arthur Andersen LLP and Fishbein & Co., P.C., the IPO underwriter, Sands Brothers & Co., Ltd. and two of its principals, Jasmine's buying agent in Hong Kong, McKowan Lowe & Co., Ltd., and two of its officers, Evelyn Wong and Tony Ngai, and a corporation controlled by the Mangels, Lujaco, Ltd., all participated in a scheme to misstate Jasmine's financial statements to conceal Jasmine's substantial debt to McKowan Lowe. Based on similar charges, in 1997 the SEC had obtained consent judgments against members of Jasmine's former management, under which they agreed to pay fines ranging from $100,000 to $7,293. Securities & Exchange Commission v. Irving M. Mangel, No. 97-1977 (D.D.C.), Litigation Release No. 15465, 65 S.E.C. Docket 645 (Aug. 28, 1997), available at http://www.sec.gov/litigation/litreleases/lr15465.txt. Tony Ngai and Evelyn Wong of McKowan Lowe also settled with the SEC. Ngai King Tak, Securities Act of 1933 Release No. 7443, 65 S.E.C. Docket 540 (Aug. 28, 1997), available at http://www.sec.gov/litigation/admin/3438988.txt. Jasmine itself is currently in Chapter 7 liquidation proceedings.

The statute of limitations for liability created under Section 11, the only claim implicated in this appeal, is "one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence." 15 U.S.C. § 77m. The District Court found that "Berger was first given inquiry notice [by Jasmine's] May 19, 1995 form 8-K which disclosed irregularities discovered by BDO Seidman, and that warnings in the prospectus by themselves did not create notice." App. at 31. Berger's complaint was filed in November, 1995 and was thus within the applicable statute of limitations. The District Court found a class would present common questions of law and fact, and would be sufficiently numerous, but it rejected Berger's motion for class certification in August of 1998 based on its determination that Berger's claims failed to meet Rule 23's typicality requirement and because Berger would not provide adequate representation of the class. App. at 15.

On September 9, 1998, promptly after the District Court's opinion was filed, Bernard Cutler successfully moved to intervene. Absent tolling, Cutler's claims would be time-barred, as he did not intervene until well over the expiration of the one-year statute of limitations. The District Court determined that Cutler could maintain his individual claims because "from November 17, 1995 [when Berger filed his complaint,] until August 6, 1998 when [Berger's motion for] class certification was denied, the statute of limitations was tolled" under American Pipe. App. at 31. The District Court declined to evaluate Cutler's qualifications to represent a subclass of the original Berger class, as it rejected Cutler's proposed Section 11 class claim only on the ground that it was barred by the statute of limitations.

II. JURISDICTION AND STANDARD OF REVIEW

The District Court had jurisdiction pursuant to 15 U.S.C. § 77v. On November 27, 2000, this court granted Cutler's Rule 23(f) petition. Rule 23(f) was "adopted under the power conferred by 28 U.S.C. § 1292(e)." Fed.R.Civ.P. 23(f) advisory committee's notes. The parties agree that this court reviews de novo the District Court's summary judgment dismissal of Cutler's class claims for failure to comply with the statute of limitations. See, e.g., Lusardi v. Xerox Corp., 975 F.2d 964, 974 (3d Cir.1992); Davis v. Thornburgh, 903 F.2d 212, 213 n. 2 (3d Cir.1990).

III. DISCUSSION

On appeal, Cutler asserts that the District Court erred in refusing to toll the statute of limitations for his class claims. He contends that tolling his class claims is most consistent with the policies undergirding American Pipe, and is supported by the authority of the majority of the courts to consider the issue. Cutler concedes that his case would be considerably more problematic if the District Court had conclusively determined that this case were inappropriate for resolution via class action. To distinguish his own circumstances from that situation he points out that the District Court rejected Berger's prior motions to certify a class based entirely on its perception of Berger's inadequacies as the proffered representative. He suggests that this case, like many securities actions, presents a paradigmatic example of the sort of claims the class device was designed to help vindicate — those claims too numerous and small to warrant individual action but conjoined representing a substantial case. See, e.g., Eisenberg v. Gagnon, 766 F.2d 770, 785 (3d Cir.1985) (observing "[c]lass actions are a particularly appropriate and desirable means to resolve claims based on the securities laws, `since the effectiveness of the securities laws may depend in large measure on the application of the class action device'") (quoting Kahan v. Rosenstiel, 424 F.2d 161, 169 (3d Cir.1970)); John C. Coffee, Jr., Understanding the Plaintiff's Attorney: The Implications of Economic Theory for Private Enforcement of Law Through Class and Derivative Actions, 86 Colum.L.Rev. 669, 681-83 (1986) (applying economic theory to explain frequent use of class procedure in securities litigation).

The Supreme Court has enunciated two rationales for the American Pipe rule, which tolls the statute of limitations for putative members of a class pending denial of class certification. First, class actions are "designed to avoid, rather than encourage, unnecessary filing of...