Pell v. Weinstein
| Decision Date | 20 March 1991 |
| Docket Number | No. 3:CV-88-1905.,3:CV-88-1905. |
| Citation | 759 F. Supp. 1107 |
| Parties | Richard M. PELL, James R. Miller and James O'Brien, Plaintiffs, v. Michael WEINSTEIN, Ernest Glanz, Richard Bober, Bruce M. Bloom, Philip Kagan, Philip Erard, Finkle & Ross, Certified Public Accountants, and Denis Lustig, a Certified Public Accountant, Defendants. |
| Court | U.S. District Court — Middle District of Pennsylvania |
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Norman D. Namey, Rosenn Jenkins & Greenwald, Wilkes-Barre, Pa., for plaintiffs.
Martin G. Roseman, Garman & Amdur, Rutherford, N.J., for defendant Bruce M. Bloom.
Stephen N. Dratch, Kenneth J. Isaacson, Greenberg Margolis Ziegler Schwartz Dratch Fishman Franzblau & Falkin, Roseland, N.J., for defendant Richard Bober.
Ralph E. Kates, III, The Sterling-Mezzanine, Wilkes-Barre, Pa., Usher Winslett, Thacher Proffitt & Wood, New York City, for defendant Philip Erard.
Jeffrey R. Lerman, Philadelphia, Pa., for defendant Finkle & Ross.
Jonathan L. Goldstein, Hellring Lindeman Goldstein Siegal Stern & Greenberg, Newark, N.J., for defendant Ernest Glantz.
Philip Kagan, Clifton, N.J., pro se.
Phil H. Leone, McKenny Liska & Leone, Red Bank, N.J., for defendant Denis Lustig.
Gerard A. Riso, Ruffa & Riso, New York City, Arthur H. Rainey, Dechert Price & Rhoads, Philadelphia, Pa., for defendant Michael Weinstein.
This action was commenced by plaintiffs on November 26, 1988. In response to the defendants' motions to dismiss the complaint, plaintiffs filed an amended complaint on March 7, 1989, pursuant to Fed.R. Civ.P. 15(a). Once again, all of the defendants have filed motions to dismiss the complaint.
This action arises from the acquisition of PacStar Corporation, Inc., ("PacStar"), by a corporation known as Coated Sales, Inc., ("Coated Sales"). The plaintiffs, Richard Pell, James Miller and James O'Brien, were all shareholders in PacStar at the time of its acquisition. The complaint alleges that Coated Sales' acquisition of PacStar was completed through, and accompanied by, violations of federal and state securities laws, federal criminal statutes and other tortious activities.
The facts as alleged in the amended complaint may be summarized as follows:
PacStar and Coated Sales were in the textile business. Coated Sales publicly touted a corporate strategy of acquiring other textile companies and approached PacStar for that purpose. Subsequently, Coated Sales acquired PacStar through three agreements: an Agency Agreement dated July 1, 1986; an Employment Agreement dated July 1, 1986; and an Agreement and Plan of Merger ("Merger Agreement") dated March 2, 1987 (collectively "the Agreements").
Pursuant to the Agency Agreement, PacStar was to act as Coated Sales' exclusive sales agent for certain products. The Agency Agreement also granted Coated Sales the option to merge PacStar into Coated Sales or an affiliate by purchasing the PacStar stock for cash and 100,000 shares of Coated Sales restricted common stock. Coated Sales' option was exercisable at its discretion, throughout the term of the Agency Agreement, which expired on June 30, 1988.
At the time the Agency Agreement was entered into, plaintiff Richard Pell was the sole shareholder of PacStar. Pell agreed that his PacStar stock would remain subject to Coated Sales' option, that he would not dispose of his stock in any manner which would preclude the option and, in the event Pell chose to use his PacStar stock to compensate Timothy Lafferty and plaintiffs James Miller and James O'Brien, Pell agreed to transfer the stock to these employees "subject to the option".
On January 13, 1987 Coated Sales notified plaintiffs of its intention to exercise the option and sometime thereafter provided the plaintiffs with Coated Sales' Prospectus, dated July 10, 1986, and Form 10-Q for the period ending November 30, 1986. Pursuant to the Merger Agreement, on March 2, 1987, Coated Sales acquired from the plaintiffs and Lafferty the PacStar stock for cash and 100,000 shares of restricted Coated Sales common stock, as provided in the Agency Agreement. In or about May of 1988 plaintiffs first became aware of the existence of some amount of fraudulent activity in the internal operation of Coated Sales. Subsequently, on November 26, 1988, plaintiffs initiated this action.
The plaintiffs claim that they were induced into entering this obligation by misrepresentations contained in Coated Sales' Prospectus and Form 10-Q, and that the sale violated, inter alia, the Securities Act of 1933 ("1933 Act"), the Securities and Exchange Act of 1934 ("1934 Act") and state securities law. The plaintiffs maintain that each defendant occupied a key position or relationship with Coated Sales that facilitated the alleged scheme. Defendants Michael Weinstein, Ernest Glantz, Richard Bober, Bruce Bloom, Philip Kagan and Philip Erard ("officer/director defendants") were officers and/or directors of Coated Sales during the relevant periods. The remaining defendants, Finkle & Ross and Denis Lustig, were involved in the preparation and dissemination of Coated Sales' financial information.1
Counts I and III allege violations of Section 12(1) of the 1933 Act, 15 U.S.C. § 77l(1), by the officer/director defendants and Denis Lustig, as an aider and abettor, respectively. Section 12(1) creates civil liability for the offer or sale of an unregistered security in violation of Section 5 of the 1933 Act, 15 U.S.C. § 77e. Section 5 prohibits the use of any means or instruments of transportation or communication in interstate commerce or of the mails for the purpose of delivering or selling an unregistered security. The defendants maintain that this claim is barred by the relevant limitations period.
Section 13 of the 1933 Act, 15 U.S.C. § 77m, provides:
No action shall be maintained ... to enforce a liability created under section 77l(1) of this title, unless brought within one year after the violation upon which it is based. In no event shall any such action be brought to enforce a liability created under section ... 77l(1) of this title more than three years after the security was bona fide offered to the public.
Courts have interpreted the date of the violation as the later of the offer, sale or delivery of the stock. See Doran v. Petroleum Management Corp., 576 F.2d 91, 93 (5th Cir.1978).
In the instant case, the limitations period began to run on March 2, 1987, when the securities were delivered to the plaintiffs, and the original complaint was not filed until November 22, 1988, more than one and a half years later. However, plaintiffs claim that the statute should be equitably tolled because they did not discover the alleged fraud until after the limitations period had expired. This argument lacks merit.
At no time were the plaintiffs led to believe that the securities were registered. In fact, the plaintiffs knew from the outset that the securities would not be registered. Moreover, although there is a split of authority concerning the application of the discovery rule and equitable tolling to the one-year limitation period governing non-registration claims, a vast majority of the cases have concluded that the limitations period runs from the date of the violation regardless of whether the plaintiff knew of the violation. See Cook v. Avien, 573 F.2d 685, 691 (1st Cir.1978); Gridley v. Cunningham, 550 F.2d 551, 552-53 (8th Cir. 1977); McCullough v. Leede Oil & Gas, Inc., 617 F.Supp. 384, 387 (W.D.Okl.1985); Felts v. National Account System Assoc., Inc., 469 F.Supp. 54, 64 (N.D.Miss.1978); Mason v. Marshall, 412 F.Supp. 294, 299 (N.D.Tex.1974), aff'd, 531 F.2d 1274 (5th Cir.1976); Ferland v. Orange Groves of Florida, Inc., 377 F.Supp. 690, 703 (M.D. Fla.1974); Shuman v. Sherman, 356 F.Supp. 911, 912-13 (D.Md.1973); Moerman v. Zipco, Inc., 302 F.Supp. 439, 445 (E.D.N.Y.1969), aff'd, 422 F.2d 871 (2d Cir. 1970).
Based on these cases, this Court also concludes that neither the discovery rule nor equitable tolling are applicable to the one-year limitation period governing nonregistration claims because the language of the statute militates against such an application, and there is little justification for the application of this rule outside fraud-based causes of action. See McCullough v. Leede Oil & Gas, Inc., 617 F.Supp. at 386-88.2
Therefore, since these claims were not asserted within the applicable limitations period, Counts I and III of the amended complaint will be dismissed.
Counts II and IV allege violations of Section 12(2) of the 1933 Act, 15 U.S.C. § 77l(2), by the officer/director defendants and Denis Lustig, as an aider and abettor, respectively. The officer/director defendants and Lustig have made motions to dismiss these counts for failure to state a claim upon which relief can be granted, pursuant to Fed.R.Civ.P. 12(b)(6).
A motion to dismiss under Fed.R.Civ.P. 12(b)(6) admits the well pleaded allegations of the complaint, but denies their legal sufficiency. Hospital Building Co. v. Trustees of the Rex Hospital, 425 U.S. 738, 740, 96 S.Ct. 1848, 1850, 48 L.Ed.2d 338, 341 (1976). "It is the settled rule that `a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Leone v. Aetna Cas. & Sur. Co., 599 F.2d 566, 567 (3rd Cir.1979), quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957).
The complaint must be read in a light most favorable to the plaintiff with every doubt resolved in plaintiff's favor. In Re Arthur Treacher's Franchisee Litigation, 92 F.R.D. 398, 422 (E.D.Pa.1981).3
Section 12(2) of the 1933 Act, 15 U.S.C. § 77l(2) imposes liability upon any person who:
offers or sells a security ... by...
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