Pucci v. Litwin

• Citation: 828 F. Supp. 1285
• Decision Date: 20 July 1993
• Docket Number: No. 88 C 10923.,88 C 10923.
• Parties: Ralph O. PUCCI, et al., Plaintiffs, v. Gerald H. LITWIN, et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

828 F. Supp. 1285

Ralph O. PUCCI, et al., Plaintiffs, v. Gerald H. LITWIN, et al., Defendants.

No. 88 C 10923.

United States District Court, N.D. Illinois, E.D.

July 20, 1993.

COPYRIGHT MATERIAL OMITTED

Roseanne J. Faraci, Stanley J. Parzen, John M. Touhy, Mayer, Brown & Platt, Chicago, IL, for plaintiffs.

Randall S. Rapp, Foley & Lardner, Chicago, IL, Ronald M. Wawrzyn, Foley & Lardner, Milwaukee, WI, for Gerald H. Litwin, Berg/Harquel Assoc., Berg/Harmon, Clapp & Eisenberg.

Howard J. Swibel, Michael R. Turoff, Arnstein & Lehr, Chicago, IL, Chester H. Foster, Jr., Homewood, IL, for Harmon Envicon Assoc., Harquel Assoc. II, Robert T. Harmon and Pennsylvania Realty Consultants.

Paul Joseph Komyatte, Greenberger, Krauss & Tenenbaum, Chtd., Susan Getzendanner, Hilary K. Krane, Skadden, Arps, Slate, Meagher & Flom, Howard J. Swibel, Michael R. Turoff, Arnstein & Lehr, Charles Louis Glick, Hedlund and Hanley, Chicago, IL, Chester H. Foster, Jr., Homewood, IL, for Inc. Berg Enterprises.

MEMORANDUM OPINION AND ORDER

ALESIA, District Judge.

Before the court is the motion to dismiss plaintiffs' Second Amended Complaint filed by defendants Litwin and Clapp & Eisenberg (the "Litwin defendants"). The court previously dismissed Counts I and II of the Second Amended Complaint sua sponte in its order dated April 23, 1993. The court dismissed nearly identical counts in the First Amended Complaint in a Memorandum Opinion and Order dated February 18, 1993. That opinion was vacated when plaintiffs sought, and the court granted, leave to amend their complaint to introduce new allegations regarding fraudulent coal mining investment schemes. Accordingly, the court will reiterate its reasons for dismissing Counts I and II here.¹ In addition, the court will address the merits of defendants' instant motion to dismiss the remaining counts of the Second Amended Complaint.²

I. FACTS

This action arises out of plaintiffs' investment in a real estate tax shelter. Plaintiffs purchased limited partnerships in Wilkes Barre Associates ("WBA"), which were purportedly investment opportunities designed to generate significant tax deductions for plaintiffs. Subsequently, however, the entire transaction became the subject of an Internal Revenue Service audit, which apparently resulted in the disallowance of many of plaintiffs' deductions. Plaintiffs initially filed this action December 29, 1988, claiming they were defrauded as a result of allegedly material misrepresentations and omissions defendants made in connection with the offer of WBA limited partnerships in September, 1981. Subsequently, plaintiffs amended their complaint to add allegations about other fraudulent schemes to defraud investors in connection with multiple sales of partnership and other interests related to coal mining.

The Second Amended Complaint consists of eight counts. In Count I, plaintiffs allege that defendants violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1990). In Count II, plaintiffs claim that defendants' conduct in connection with the sales of limited partnership interests in Wilkes Barre entitles them to redress under the provisions of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-68. Count VIII alleges a RICO violation based on the Wilkes Barre limited partnership and various coal mining transactions. The remaining counts allege state law claims over which the court has supplemental jurisdiction. Plaintiffs allege breach of fiduciary duty (Count III); fraud, fraudulent inducement and fraudulent misrepresentation (Count IV); negligent misrepresentation and malpractice (Count V); consumer fraud and deceptive business practices (Count VI); and constructive trust (Count VII).

II. DISCUSSION

A. Counts I and II of the Second Amended Complaint

The court dismissed Counts I and II of the Second Amended Complaint sua sponte because those counts were nearly identical to Counts I and III of the First Amended Complaint, respectively, which the court had previously dismissed in its Memorandum Opinion and Order dated February 18, 1993. Since the court vacated that opinion, in which the court adopted Magistrate Judge Bobrick's Report and Recommendation, the court will reiterate its reasoning below.

1. Count I: Section 10(b) and Rule 10b-5 Claim

The Litwin defendants argued that Count I of the First Amended Complaint (also Count I of the Second Amended Complaint), alleging violations of Section 10(b) and Rule 10b-5, was time-barred according to the statute of limitations announced in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. ___, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991). Plaintiffs contended that Lampf, which the Supreme Court decided well after plaintiffs filed their complaint, could not be applied retroactively. Although plaintiffs subscribed to their limited partnership interests in Wilkes Barre in 1981, they filed their original complaint in 1988. See Second Amended Complaint, ¶¶ 19-20. The plaintiffs alleged that they first learned of the fraudulent nature of the transaction in 1988, when the IRS challenged many of the plaintiffs' tax deductions. Id. at ¶ 31. Since the law in this area has been in a state of flux, the court reviewed the Magistrate Judge's Report and Recommendation and plaintiffs' objections in light of recent changes to determine the appropriate statute of limitations.

In Lampf, the Supreme Court held that litigation instituted pursuant to Section 10(b) and Rule 10b-5 must be commenced within one year after discovery of the facts constituting the violation. 501 U.S. at ___, 111 S.Ct. at 2782. The court selected the language of Section 9(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78i(e) as the governing standard. See Lampf, 501 U.S. at ___, 111 S.Ct. at 2782 n. 9. In Lampf, however, the Court did not explicitly address whether the holding should be applied retroactively but did apply the newly announced limitations period to the parties in that case. Id. at ___, 111 S.Ct. at 2782. Furthermore, in James B. Beam Distilling Co. v. Georgia, ___ U.S. ___, 111 S.Ct. 2439, 115 L.Ed.2d 481 (1991), decided the same day as Lampf, the Supreme Court decided that if a new rule has been applied to the parties before a federal court, that rule must apply to all cases then pending on direct review. Id. at ___, 111 S.Ct. at 2448. See also Harper v. Virginia Department of Taxation, ___ U.S. ___, ___, 113 S.Ct. 2510, ___, 125 L.Ed.2d 74 (1993). Thus, it would appear that Lampf should apply retroactively to the parties in the instant case.

Congress, however, has limited the retroactivity of the Supreme Court's decision in Lampf by enacting a provision to amend the 1934 Act to do away with the combined effect of Lampf and James Beam with respect to cases commenced before June 19, 1991, the day before Lampf and James Beam were decided.³ The new Section 27A provides:

The limitation period for any private civil action implied under Section 10(b) of this Act that was commenced on or before June 19, 1991, shall be the limitation period provided by the laws applicable in the jurisdiction, including principles of retroactivity, as such laws existed on June 19, 1991.

15 U.S.C. § 78aa-1(a). Thus, the limitation period provided by Illinois law on June 19, 1991 controls. According to McCool v. Strata Oil Co., 972 F.2d 1452, 1458 (7th Cir.1992), the applicable Illinois law on June 19, 1991 is stated in Short v. Belleville Shoe Manufacturing Co., 908 F.2d 1385, 1389 (7th Cir. 1990), cert. denied, ___ U.S. ___, 111 S.Ct. 2887, 115 L.Ed.2d 1052 (1991).

In Short, the Seventh Circuit rejected the practice of borrowing the limitations period for Section 10(b) claims from state law and established a federal limitations period based on Section 13 of the Securities Act of 1933, 15 U.S.C. § 77m (1988). Short, 908 F.2d at 1392. According to the statute of limitations announced in Short, plaintiffs have one year from the date they discover or should have discovered a fraud to bring suit, but in no event may plaintiffs bring suit after three years from the sale of the securities. Id. at 1391. Since the instant case was filed prior to the decision in Short, however, the court had to decide whether Short applies retroactively to the parties in the instant case. Although the Seventh Circuit applied the new federal statute of limitations to the parties before it in Short, the court left "for the future all questions concerning retroactive application of this decision." Id. at 1389.

James Beam would have provided a simple answer to the question of retroactive application of Short to the parties, but Congress pursuant to Section 27A instructed the court to use "principles of retroactivity" as they stood on June 19, 1991, the day before the court decided James B. Beam. See McCool, 972 F.2d at 1458. Therefore, the court applied the analysis set forth in Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971), the controlling precedent on that date. Chevron required a case-by-case balancing of three factors to decide whether a new rule will be applied retroactively:

1 The decision to be applied nonretroactively must establish a new principle of law, either by overruling clear past precedent on which litigants may have relied, or by deciding an issue of first impression whose resolution was not clearly foreshadowed.

. . . . . .

2 The court must "weigh the merits and demerits in each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective operation will further or retard its operation."

3 The court must weigh the inequity imposed by retroactive application, for "where a decision of this Court could produce substantial inequitable results if applied retroactively, there is ample basis in our cases for avoiding the `injustice or hardship' by a holding

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