Sack v. Low

• Decision Date: 13 April 1973
• Docket Number: Docket 72-2327.
• Citation: 478 F.2d 360
• Parties: Barbara B. SACK et al., Plaintiffs-Appellants, v. V. T. LOW, et al., doing business as a partnership under the name of Bear, Stearns & Co., and Richard W. Silverman, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

478 F.2d 360 (1973)

Barbara B. SACK et al., Plaintiffs-Appellants, v. V. T. LOW, et al., doing business as a partnership under the name of Bear, Stearns & Co., and Richard W. Silverman, Defendants-Appellees.

Docket 72-2327.

United States Court of Appeals, Second Circuit.

Argued February 13, 1973.

Decided April 13, 1973.

Gordon T. Walker, Boston, Mass. (Hale & Dorr, Boston, Mass., and Kurtz & Vassallo, New York City, of counsel), for plaintiffs-appellants.

Arnold S. Anderson, New York City (A. Edward Grashof, and Winthrop, Stimson, Putnam & Roberts, New York City, of counsel), for defendants-appellees.

Before FRIENDLY, Chief Judge, OAKES, Circuit Judge, and DAVIS,^* Judge.

FRIENDLY, Chief Judge:

The plaintiffs, Barbara B. Sack, a resident of Massachusetts, and three other residents of that state, acting as trustees of a Massachusetts profit sharing trust, brought this action in the District Court for the Southern District of New York in March 1972 against the partners of Bear, Stearns & Co., a brokerage firm which has its principal place of business in New York City, and Richard W. Silverman, an employee having the title of Vice President, alleging that defendants had committed various violations of federal securities laws. Defendants immediately moved for summary judgment on the ground that a previous action between the same parties on the identical claim had been dismissed by the District Court for Massachusetts because of the running of the statute of limitations; defendants argued that this was a dismissal "on the merits" which barred relitigation here under the principle of res judicata. The late Judge McLean granted summary judgment, and plaintiffs appealed. For an understanding of the issues, we must set out the procedural history of this litigation in some detail.

In July 1969 the Bay State Smelting Co., a Massachusetts corporation, brought an action in the District Court for Massachusetts against the same defendants alleging essentially the same violations of the securities laws on the basis of the same course of conduct as is involved here. Bay State moved in December 1970 for leave to join the Sack plaintiffs, who were represented by the same counsel as Bay State, as additional plaintiffs in its action and to file a "consolidated, substitute bill of complaint." These motions were denied by Judge Murray in September 1971.

Shortly thereafter, on October 13, 1971, the Sack plaintiffs filed a separate complaint in the District Court for Massachusetts. After stating that "the acts and transactions complained of occurred in substantial part within the District of Massachusetts," the complaint alleged that in February 1969 defendants had purchased shares of Armour & Co. common stock for plaintiffs' accounts; that defendants had failed to sell these shares when payment had not been received within a week, as required by § 4(c) of Regulation T of the Board of Governors of the Federal Reserve System, 12 C.F.R. § 220.4(c), although Barbara Sack was six days and the Trust was four days late in making payment; that, also in violation of said Regulation, defendants purchased the Armour shares with the intent to exchange them for debentures and warrants of General Host Corporation, pursuant to a tender offer then outstanding, before payment was received from the plaintiffs, and in fact did so; that the General Host securities subsequently declined in value; and that some of the General Host securities were sold at a substantial loss and others are still being held with a market value lower than the amount paid. The complaint also alleged that Silverman had falsely represented in a telephone call from New York City to the plaintiffs in Massachusetts that the purchase was a riskless arbitrage transaction since the General Host securities, which were selling at a higher price than the Armour shares, would be sold promptly, and that defendants failed to reveal they were making a market in the Armour and General Host securities and were trading in them for their own account, in violation of sections 9, 10, and 15 of the Securities Exchange Act and Rules 10b-5 and 15c-1 through 7. The complaint further alleged that defendants' failure to sell the General Host securities promptly was a breach of their agreement with plaintiffs. Somewhat inconsistently with the allegations that the purchases were made on the basis of Silverman's misrepresentations and an agreement, the complaint also alleged that the purchases were made by Silverman in the exercise of a discretionary power which, in violation of Rule 408 of the New York Stock Exchange, was not in writing.

Defendants then moved for summary judgment dismissing the complaint on the ground that it sounded in tort and was barred by the two-year Massachusetts statute of limitations, Mass.Gen. Laws ch. 260, § 2A, which had run while the motion to intervene in the Bay State action had been pending, since the last transactions in plaintiffs' accounts took place prior to March 31, 1969 and the last of the General Host securities were sent to the plaintiffs not later than April 15, 1969. Not disputing the facts, the plaintiffs asserted that the six-year contract statute of limitations applied. On January 4, 1972, Judge Murray held that the tort statute of limitations applied, and granted summary judgment for the defendants.

On March 22, 1972, the plaintiffs filed the instant action in the Southern District of New York. The complaint was substantially identical with that filed in Massachusetts except for an allegation that "the acts and transactions complained of occurred in substantial part within the Southern District of New York." On April 14, defendants moved for summary judgment, claiming that the Massachusetts judgment was a bar. Judge McLean granted the motion on September 28, on the authority of Bertha Building Corp. v. National Theatres Corp., 248 F.2d 833, 840 (2 Cir. 1957), cert. denied, 356 U.S. 936, 78 S.Ct. 777, 2 L.Ed.2d 811 (1958), which, relying on the provisions of F.R.Civ.P. 41(b), stated that dismissal of a complaint on the basis of the statute of limitations "operates as an adjudication upon the merits" unless the district judge specifies otherwise, and Murphy v. A/S Sobral, 187 F. Supp. 163 (S.D.N.Y.1960), which applied this reasoning to bar on grounds of res judicata an action brought here if a previous action in another forum had been dismissed on the basis of the statute of limitations.

Plaintiffs appealed to this court. At the same time, they also moved before Judge Murray in the District of Massachusetts for an amendment of his order of January 14, 1972. On January 9, 1973, Judge Murray entered the following order:

Summary judgment for defendants ordered on January 14, 1972 is not an adjudication upon the merits and is without prejudice to plaintiffs\' rights to bring another action in another jurisdiction based upon the transactions or occurrences which are the subject matters of their claims herein subject to the appropriate statute of limitations of such other jurisdiction.

Plaintiffs thereupon moved that we remand to the District Court to enable it to vacate its order of September 28, 1972, on the basis of the subsequent Massachusetts order.¹ Defendants moved for summary affirmance, claiming that the amendment of the Massachusetts order was without legal effect in the Southern District of New York and that in any event the action was barred by the New York "borrowing statute," C.P.L.R. § 202, which reads as follows:

An action based upon a cause of action accruing without the state cannot be commenced after the expiration of the time limited by the laws of either the state or the place without the state where the cause of action accrued, except that where the cause of action accrued in favor of a resident of the state the time limited by the laws of the state shall apply.

I.

Prior to the Bertha Building decision, the law in this circuit, as set out by Judge A. N. Hand for our court's "first team" in Warner v. Buffalo Drydock Co., 67 F.2d 540 (2 Cir. 1933), cert. denied, 291 U.S. 678, 54 S.Ct. 529, 78 L. Ed. 1066 (1934), was that dismissal of a complaint in another forum on the ground that the statute of limitations had run was not an adjudication on the merits and did not bar a subsequent action on the same claim here. The court adopted the traditional reasoning that unless the statute of limitations was intended to extinguish the right (i. e., if it were an integral part of the statute which created the right), a defense on the basis of the statute was a procedural question on which each forum state would apply its own law and therefore dismissal on that ground represented only a determination that the particular remedy the plaintiff had sought to pursue was unavailable, leaving him free to seek to enforce the right in another forum if the limitations of that forum allowed. This is still the general rule. See 1B Moore, Federal Practice ¶ 0.409 6, at 1035-36 (1965). The Restatement of Judgments § 49, comment (a) (1942), explains that dismissal on the ground of the statute of limitations operates as a bar to the extent that it will prevent a future action in the state where the judgment was rendered, but not so far as other states are concerned.

The issue in Bertha Building concerning the effect of a dismissal on the basis of the statute of limitations arose in a rather peculiar way. The precise question, as stated by the court, was whether, in a treble damage action brought in the Eastern District of New York under the antitrust laws for an injury suffered in California, it was "proper for the judge instead of a jury to decide whether the defendant could have been sued in the Southern District of California between July 20, 1935 and July 20, 1938," 248 F.2d 833, at 834. This was important because if the defendant could have been so sued, the California statute of limitations would not have been tolled and the action would be barred...