Salgado v. Piedmont Capital Corp.

• Decision Date: 30 December 1981
• Docket Number: Civ. No. 77-826.
• Citation: 534 F. Supp. 938
• Parties: Victor Valles SALGADO, et al., Plaintiffs, v. PIEDMONT CAPITAL CORPORATION, et al., Defendants.
• Court: U.S. District Court — District of Puerto Rico

534 F. Supp. 938

Victor Valles SALGADO, et al., Plaintiffs, v. PIEDMONT CAPITAL CORPORATION, et al., Defendants.

Civ. No. 77-826.

United States District Court, D. Puerto Rico.

December 30, 1981.

Harvey B. Nachman, Eduardo Morales Coll, Santurce, P. R., for plaintiffs.

Woods & Woods, Santurce, P. R., Robert N. Baker, Baker & Quinn, Los Angeles, Cal., Rafael Perez Bachs, McConnell, Valdes, Kelley, Sifre, Griggs & Ruiz Suria, San Juan, P. R., O'Neill & Borges, Hato Rey, P. R., for defendants.

OPINION AND ORDER

PEREZ-GIMENEZ, District Judge.

Plaintiffs seek to maintain this action both in their individual capacities and on behalf of a putative class under F.R.C.P. 23 for alleged fraud in connection with the sale of an investment program by defendants. Defendants move for summary judgment on the grounds that the plaintiffs' federal securities law claims and certain commonwealth claims are barred by the applicable statutes of limitation.

The Court finds that plaintiffs have failed to set forth specific facts showing there is a genuine issue for trial as required by F.R.C.P. 56(e). The Court further finds there is no triable issue of fact with respect of defendants' statute of limitations defense to the federal securities law claims; those claims are barred by the applicable statute of limitations and summary judgment must be entered in favor of defendants. Accordingly, the commonwealth claims must also be dismissed for want of pendent jurisdiction.

Prior Proceedings

This suit was commenced on June 1, 1977, by the filing of the original complaint. Prior to defendants' motion for summary judgment, the breadth of this action was narrowed by defendants' motion to dismiss.

Defendants first moved to dismiss the original complaint pursuant to F.R.C.P. 9(b) and 12(b)(6). Plaintiffs responded with an amended complaint, dated April 4, 1978. Defendants then moved to dismiss the amended complaint. On June 6, 1978, the Court granted that motion in part and dismissed plaintiffs' claims under Sections 5, 12(1) and 12(2) of the Securities Act of 1933, 15 U.S.C. 77e, 77l(1), (2) (1976) (the "1933 Act"); under the Investment Company Act of 1940, 15 U.S.C. 80a-1, et seq. (1976); and under the Investment Companies Act of Puerto Rico, 10 L.P.R.A. 661 et seq. (1978). Valles Salgado v. Piedmont Capital Corp., 452 F.Supp. 853 (D.P.R., 1978). On defendants' motion for reconsideration, by Order filed August 2, 1978, the Court also dismissed plaintiffs' claim under Section 11 of the 1933 Act, 15 U.S.C. 77k (1976).

Two federal securities law claims remain. The Court, in its June 6, 1978, Opinion and Order, held that plaintiffs had stated causes of actions under Section 17(a) of the 1933 Act and under Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 78j (1976) (the "1934 Act"), and Rule 10b-5, 17 C.F.R. 240.10b-5, promulgated thereunder.¹ In addition, four substantive claims for relief under Puerto Rico law survived the motion to dismiss. Those claims are based upon the same allegations as the federal claims.

Prior to the determination of defendants' motion to dismiss the amended complaint, a pre-trial schedule was established by Magistrate Simonpietri to govern the discovery regarding the hearing and determination of whether this case should proceed as a class action. On November 14, 1977, the Magistrate ordered that "(t)he parties will see that strict compliance with the approved time table occurs.". That time table required that "(p)laintiffs' motion for a class determination ... be served not later than fifteen (15) working days after the completion of ... discovery" on the class determination issue.

Defendants took discovery concerning the class determination issues, including depositions of each of the remaining named plaintiffs, interrogatories and requests for production of documents.² Plaintiffs sought no discovery either in connection with the class determination issues or defendants' motion for summary judgment. Although discovery was completed on or about July 3, 1980, plaintiffs did not move for a class determination as required by the Magistrate's Order.

Defendants thereafter brought on the instant motion for summary judgment, or in the alternative for an order that this suit not proceed as a class action.

I. Findings of Fact

A. The Defendants

Defendants Piedmont Capital Corporation (Piedmont Capital), Piedmont Management Company, Inc. (Piedmont Management), and Piedmont Funding Corporation (Piedmont Funding), at all times material herein, were corporations organized under the laws of Delaware, with their principal places of business in California.

Defendant Pacific Fidelity Life Insurance Company (Pacific Fidelity), at all times material herein, was a corporation organized under the laws of California, with its principal place of business also in California.

Defendant Lexington Management Corporation, at all times material herein, was a corporation organized under the laws of Delaware, with a place of business in California, and was an investment advisor, as defined under the provisions of the Investment Company Act of 1940, 15 U.S.C. 80a-1 through 80a-64, and the Investment Advisers Act of 1940, 15 U.S.C. 80b-1 through 80b-21.

Defendants Lexington Research Fund, Inc., Lexington Growth Fund, Inc., and Lexington Income Fund, Inc., at all times material herein, were investment companies registered under the Investment Company Act of 1940, for whom Lexington Management Corporation served as an investment advisor. Lexington Growth Fund, Inc., and Lexington Income Fund, Inc., were organized under the laws of Maryland and had their principal places of business in New Jersey. Lexington Research Fund, Inc., was organized under the laws of the State of New Jersey, and had its principal place of business there.

Piedmont Management was the sole shareholder of Piedmont Capital, Piedmont Funding, Pacific Fidelity, and Lexington Management Corporation.

B. The Investment Program

The security that is the subject of plaintiffs' claims is the Piedmont Funding Investment Program. It was first offered for sale in the early 1970's. The Program was registered under the federal securities laws and a prospectus for the Program was provided to each investor.

Under the Program, mutual fund shares were used as collateral for loans to pay premiums on the investor's life insurance policies. Investors with pre-existing whole life policies borrowed against the cash value of those policies and used the proceeds to purchase mutual fund shares. In some cases the preexisting insurance policies were also placed on "minimum deposit", which meant that the insureds paid only that portion of the regular premium necessary to keep in effect the "risk portion" of the policy. With their policies on minimum deposit, the insureds continued to have the same amount of insurance coverage under their existing policies, but without further buildup of cash values in those policies. The money saved over time on reduced premium payments was used to buy additional mutual fund shares in connection with the Piedmont Funding Investment Program.

The mutual fund shares thus purchased, together with any existing shares already owned, would be used as collateral for loans from Piedmont Funding to the investor. The loan proceeds were used to pay the premiums on new life insurance policies taken out for the investor's benefit, usually with Pacific Fidelity. There was no requirement that any particular mutual fund's shares be purchased, and the investor was free to use shares already owned.

As annual premium payments on the life insurance policy became due, the size of the loan balance with Piedmont Funding would be increased by the amount of the new premium plus interest on the loan. These additional loans were to be collateralized by the value of mutual fund shares purchased over time by the investor and/or by any increase in the market value of shares already pledged. At no time was the total value of the pledged shares to be less than 150 percent of the amount of the outstanding loan balance. The entire accumulated loan balance was to be repaid at the time the investment program was terminated.

Using the cash values of existing policies and the amounts saved by placing those policies on minimum deposit, it was the goal of the Program to allow investors to obtain greater life insurance coverage and to enable them to purchase mutual fund shares that, it was hoped, would increase in value over time. The assumption that the mutual fund shares selected by the investors would continue to increase in value as they had in previous years was the fundamental premise upon which the success of the Program rested.³

On June 1, 1975, the programs were effectively terminated when Piedmont Funding determined that it would no longer make loans to participants to finance the payment of insurance premiums (e.g., Mark Ex. 25). The principal consequences to the investors was that they were required to pay off their outstanding loan balances to Piedmont Funding.⁴

C. The Representative Plaintiffs

Dr. Victor Valles Salgado is a physician who has practiced in Puerto Rico since 1958 (Valles Salgado, Tr. 7-8). Prior to the time he purchased the Piedmont Funding Investment Program, he was experienced in mutual fund investments (id. Tr. 23-26). Dr. Valles Salgado agreed in June 1971 to purchase the Investment Program, and did so in September 1971 (see Valles Salgado Tr. 42, 56, 58, and Ex. 5).

Dr. Anthony J. Mark is an ophthalmologist who has practiced in Puerto Rico since 1960 (Mark Tr. 7). Prior to the time he purchased the Piedmont Funding Investment Program, he too was experienced in mutual fund investments (id., Tr. 9). Dr. Mark purchased the Investment Program in March 1972 (id., Tr. 20-22, 32).

Dr. Frederick González, an anesthesiologist, had practiced in Puerto Rico since 1947 and like the others, prior to the time he purchased the Piedmont Funding...