Pacific Mut. Life Ins. v. First Republicbank

• Decision Date: 13 July 1992
• Docket Number: Civ. No. 3:91-CV-0441-H.
• Citation: 806 F. Supp. 108
• Court: U.S. District Court — Northern District of Texas
• Parties: PACIFIC MUTUAL LIFE INSURANCE CO., Plaintiff, v. FIRST REPUBLICBANK CORPORATION, IFRB Corporation, Morgan Stanley and Co., Inc., Goldman Sachs & Co., Ernst & Young & Co., and Salomon Brothers Inc., Defendants.

806 F. Supp. 108

PACIFIC MUTUAL LIFE INSURANCE CO., Plaintiff, v. FIRST REPUBLICBANK CORPORATION, IFRB Corporation, Morgan Stanley and Co., Inc., Goldman Sachs & Co., Ernst & Young & Co., and Salomon Brothers Inc., Defendants.

Civ. No. 3:91-CV-0441-H.

United States District Court, N.D. Texas, Dallas Division.

July 13, 1992.

Stewart M. Weltman, Chicago, Ill., Harold E. Vanberg, Jr., Burleson Pate & Gibson, Dallas, Tex., and Michael B. Hyman and Carol V. Gilden, Much Shelist Freed Denenberg Ament & Eiger, Chicago, Ill., for plaintiff.

Gerald C. Conley, Jackson & Walker, James L. Truitt, Hutcheson & Grundy, Dallas, Tex., for Morgan Stanley & Co.

Bruce W. Collins, Fletcher L. Yarbrough, Marvin S. Sloman, Barry R. Bell, Jeffrey B. Lane, Lyman G. Hughes, Carrington Coleman Sloman & Blumenthal, Dallas, Tex., for Goldman Sachs & Co.

Jonathan M. Hoff, Weil Gotshal & Manges, New York City, Morton L. Susman, Weil Gotshal & Manges, Houston, Tex., Robert G. Cohen and Carl D. Liggio, Ernst & Young, New York City, for Ernst & Young & Co.

Donald Colleluori and Ernest Figari, Jr., Figari & Davenport, Dallas, Tex., Theodore Gewertz, Wachtell Lipton Rosen & Katz, New York City, for Salomon Bros., Inc.

Paula M. Billingsley, Asst. U.S. Atty., Dallas, Tex., and Robin Rosenbaum, U.S. Dept. of Justice, Civ. Div., Washington, D.C., for SEC.

MEMORANDUM OPINION AND ORDER

SANDERS, Chief Judge.

Before the Court are Plaintiff's Motion to Reinstate Action and supporting memorandum, filed January 31, 1992; Defendants' Response in Opposition to Plaintiff's Motion, filed February 20, 1992; Plaintiff's Reply Memorandum, filed March 2, 1992; Plaintiff's letter to the Court, dated March 5, 1992; Defendants' letter to the Court, dated March 9, 1992; Plaintiff's letter to the Court, dated March 10, 1992; Defendants' letter to the Court, dated April 3, 1992; Plaintiff's letter to the Court, dated April 16, 1992; and Plaintiff's letter to the Court, dated April 29, 1992.

On June 8, 1992, pursuant to 28 U.S.C. § 2403(a), the Court certified its intent to find unconstitutional the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), Pub.L. No. 102-242, § 476, 105 Stat. 2236 (1991), and directed the United States to file any pleadings in support of the constitutionality of this statute by July 8, 1992. Accordingly, there is also before the Court the Statement of Interest of the United States and the Securities and Exchange Commission, filed July 6, 1992.

I. Factual Summary

This is a securities fraud case brought by Plaintiff Pacific Mutual Life Insurance Co. ("Pacific Mutual") on March 1, 1991. The lawsuit arises from Pacific Mutual's purchase in July and September 1987 of Inter-First 12¾% Notes due October 1, 1989. Pacific Mutual seeks compensatory damages under Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and compensatory and punitive damages for common law fraudulent misrepresentation. Pacific Mutual's claims are based on allegedly false and misleading statements that were made no later than December 1987.

On August 16, 1991 the Court granted Defendants' motions and dismissed with prejudice Plaintiff's federal-law claims as time-barred, and dismissed without prejudice Plaintiff's pendent state-law claims. See Memorandum Opinion and Order, dated August 16, 1991 ("MOOP"). The Court's ruling was premised on the Supreme Court decision in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, ___ U.S. ___, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991), which established that claims arising under Section 10(b) of the Exchange Act must be governed by a federal statute of limitations. To this end, the Supreme Court selected as the governing standard for an action under Section 10(b) the language of Section 9(e) of the Exchange Act, and concluded that such action must be commenced within one year after discovery of the facts constituting the violation and within three years after such violation ("1-and-3 year statute of limitations" or simply the "Lampf rule"). Id. ___ U.S. at ___ and n. 9, 111 S.Ct. at 2782 & n. 9.

Retroactive application of Lampf to this case was justified by the fact that the Supreme Court itself had applied the newly articulated statute of limitations in Lampf retroactively to the circumstances then pending before it. In a decision issued the same day as Lampf, the Supreme Court required retroactive application of the 1-and-3 year statute of limitations to Section 10(b) actions, stating,

once retroactive application is chosen for any assertedly new rule, it is chosen for all others who might seek its prospective application. The applicability of rules of law are not to be switched on and off according to individual hardship. ...

. . . . .

When the Court has applied a rule of law to litigants in one case it must do so with respect to all others not barred by procedural requirements or res judicata.

James B. Beam Distilling Co. v. Georgia, ___ U.S. ___, ___ - ___, 111 S.Ct. 2439, 2447-48, 115 L.Ed.2d 481 (1991). Although a plurality opinion, six Justices in Beam agreed in the judgment of the Court that once a new rule of law is applied retroactively in one case it must also be applied to all other pending cases involving the same issue. For a detailed discussion of the Justices' positions on this issue, see MOOP at 4-6.

A final judgment has been entered in this case, and it has not been appealed. Pacific Mutual instead has initiated an action in the 192nd District Court of Dallas County asserting its common-law fraud claims.

Congress responded to the Supreme Court's ruling in Lampf with passage of the FDICIA which was signed into law by the President on December 19, 1991. FDICIA specifically amended the Exchange Act by adding Section 27A which provides in relevant part,

(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 plaintiff not later than 60 days after the date of enactment of this section.

Pub.L. No. 102-242, § 476, 105 Stat. 2236. With passage of FDICIA, Congress aimed to remove the retroactive application of Lampf, and correct "the most adverse effects" of the decision. 178 Cong.Rec. S18624 (daily ed. Nov. 27, 1991) (statement of Sen. Bryan). Congress left untouched the prospective application of the Lampf rule.

Pacific Mutual now argues that reinstatement of its federal securities claims in this action is warranted, because Section 27A requires application of the statute of limitations prevailing in the relevant jurisdiction on June 19, 1991; and that accordingly, the statute of limitations in the Fifth Circuit for Section 10(b) actions at that time was four years. See Sioux Ltd., Sec. Litigation v. Coopers & Lybrand, 914 F.2d 61, 64 (5th Cir.1990). Commencement of this action on March 1, 1991 falls within this four year period. Pacific Mutual further urges this Court to exercise pendent jurisdiction, and reinstate as well its common law fraud claims.

Defendants Ernst & Young, Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated, and Salomon Brothers Inc. (collectively "Defendants") oppose reinstatement on the grounds that Section 27A is unconstitutional.

The United States speaks only in support of the constitutionality of Section 27A.

II. Analysis

There appears to be no dispute that if the terms of Section 27A are applied to this case, Pacific Mutual is entitled to reinstatement of its federal securities claims. Consequently, the sole issue before the Court is the constitutionality of Section 27A. Several district courts have had occasion to consider the constitutionality of Section 27A¹. Yet, the diversity of their opinions combined with the fast changing field of jurisprudence surrounding Section 27A make the constitutional inquiry before the Court a live and contested one².

A particularly apt predicate to the Court's analysis in this case is the fundamental principle that a statute approved by both Houses of the Congress and signed by the President should be invalidated only "for the most compelling constitutional reasons," Bowsher v. Synar, 478 U.S. 714, 736, 106 S.Ct. 3181, 3192, 92 L.Ed.2d 583 (1986), after having resorted to every reasonable construction capable of saving the statute from constitutional infirmity, Communications Workers v. Beck, 487 U.S. 735, 762, 108 S.Ct. 2641, 2657, 101 L.Ed.2d 634 (1988). Courts, however, cannot sustain a congressional enactment that contravenes established constitutional principles. Id.

Defendants challenge the constitutionality of Section 27A on two grounds. First, Defendants argue that Section 27A improperly prescribes a limitation period for the select group of Section 10(b) securities cases filed on or before June 19, 1991 without changing the underlying law, and thus it violates the separation of powers doctrine. Second, Defendants argue that Section 27A improperly invades the province of the judiciary by requiring Article III courts to reinstate dismissed actions, and thus eviscerate the principle of finality.

The Court is in agreement that Section 27A is unconstitutional for it violates established separation of powers principles, but not for the reasons articulated in Defendants' first argument. As discussed below, Section 27A in fact does effectuate a change in the law, and thus does not entail outcome determinative directions to the judiciary in a select group of cases. Section 27A, however, offends the separation of power principles in abolishing the retroactive application of the Lampf rule mandated as a matter of...