Walsche v. First Investors Corp., Civ. No. 2:91CV00178(AHN).

• Decision Date: 01 April 1992
• Docket Number: Civ. No. 2:91CV00178(AHN).
• Citation: 793 F. Supp. 395
• Parties: Kenneth L. WALSCHE and Mary Audree Walsche v. FIRST INVESTORS CORP.
• Court: U.S. District Court — District of Connecticut

793 F. Supp. 395

Kenneth L. WALSCHE and Mary Audree Walsche v. FIRST INVESTORS CORP.

Civ. No. 2:91CV00178(AHN).

United States District Court, D. Connecticut.

April 1, 1992.

L. Douglas Shrader, Beverly Stauffer Knapp, Zeldes, Needle & Cooper, Bridgeport, Conn., for plaintiff.

Larry R. Lavoie, Kirkpatrick & Lockhart, Washington, D.C., Benjamin H. Green, Kelley, Drye & Warren, Stamford, Conn., for defendants.

RULING ON MOTION TO DISMISS

NEVAS, District Judge.

In this securities fraud action grounded in federal and state law, Kenneth L. Walsche and Mary Audree Walsche (the "Walsches") sue their stockbroker, First Investors Corporation ("First Investors"), to recover a substantial portion of their life savings they claim they lost when First Investors fraudulently sold them shares of a mutual fund that consisted of junk bonds. Pursuant to Rules 9(b) and 12(b)(6), Fed. R.Civ.P., First Investors now moves for dismissal of the entire complaint. The motion raises a unique issue: Whether to apply the new rule of law announced in Ceres Partners v. GEL Assocs., 918 F.2d 349 (2d Cir.1990), to a cause of action that arose prior to the date of that decision but was not filed until after that case was decided? For the reasons that follow, the court grants the motion to dismiss (filing no. 10) in its entirety.

Applicable Legal Standard

When considering a motion to dismiss the court accepts as true all factual allegations in the complaint and draws inferences from these allegations in the light most favorable to the plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974); Corcoran v. American Plan Corp., 886 F.2d 16, 17 (2d Cir.1989). Dismissal is not warranted unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of the claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); Patton v. Dole, 806 F.2d 24, 30 (2d Cir. 1986). "The issue is not whether a plaintiff's success on the merits is likely but rather whether the claimant is entitled to proceed beyond the threshold in attempting to establish his claims." De La Cruz v. Tormey, 582 F.2d 45, 48 (9th Cir.1978), cert. denied, 441 U.S. 965, 99 S.Ct. 2416, 60 L.Ed.2d 1072 (1979). Thus, the question for the court to decide is "whether or not it appears to a certainty under existing law that no relief can be granted under any set of facts that might be proved in support of plaintiff's claims." Id. at 48.

Background

In the summer of 1985, the Walsches were in their early sixties, semi-retired and had placed their savings in passbook accounts and bank certificates of deposit. (Compl. ¶ 5). The Walsches were approached by a friend's son, Randolph Ross ("Ross"), who was a sales representative for First Investors. (Compl. ¶ 4). Ross advised the Walsches to invest their savings in the First Investors Fund for Income ("the Fund"), a "very secure" mutual fund that consisted of high grade corporate bonds. (Compl. ¶ 6). A division manager, Donald LeBlanc ("LeBlanc") also represented to the Walsches that the Fund was comprised of approximately 95% "grade A" corporate bonds and 5% "grade B" corporate bonds. (Compl. ¶ 7). Contrary to these representations, the Fund did not contain high grade corporate bonds. Instead, the Fund emphasized investment in non-investment grade or unrated bonds, i.e., "junk bonds." (Compl. ¶ 10). Ultimately, in three installments between July 24, 1985 and May 2, 1987, the Walsches purchased a fifty-thousand dollar interest in the Fund. (Compl. ¶ 8).

In May 1987, LeBlanc informed the Walsches that First Investors was "capping off" the Fund in order to make it more secure, and encouraged them to invest more of their savings in the Fund. They did, bringing their total investment to in excess of ninety-five thousand dollars. (Compl. ¶¶ 9-10).

In February 1990, the Walsches received a First Investors newsletter that indicated that First Investors was modifying the Fund's portfolio by replacing lower-rated bonds with bonds with a stronger credit rating. The Walsches allege that the newsletter was misleading because it did not disclose the Fund's emphasis in high-risk junk bonds. (Compl. ¶ 19). In early March 1990, the Walsches' dividend checks began to decrease in amount and when they questioned First Investors branch manager about the decline they were told that the decrease was a fluctuation that would correct itself. (Compl. ¶ 20).

On March 7, 1990, the Walsches instructed First Investors to liquidate their shares in the Fund. They allege that they sustained a loss in excess of $60,000. (Compl. ¶¶ 21-22 & 26). In September 1990 the Walsches read an article in the Wall Street Journal that described the Fund as a "junk bond mutual fund" and revealed that state securities administrators were investigating allegations that First Investors salespersons committed fraudulent sales practices. This action was initiated on February 20, 1991.

Discussion

I. Lampf, Welch I and II, Ceres Partners and the Act

In Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, ___ U.S. ___, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991), the Supreme Court held that actions brought pursuant to Section 10(b) of the Securities Exchange Act of 1934 ("`34 Act"), 15 U.S.C. § 78j(b) and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1991), must be brought within one year after the discovery of the facts constituting the violation and within three years of the violation. The three year limit serves as "`an outside limit'" or "cutoff" for Rule 10b-5 claims, thereby rendering "unnecessary" the applicability of the equitable tolling doctrine. Id. 111 S.Ct. at 2782. Prior to Lampf, in Ceres Partners, 918 F.2d at 359, the Second Circuit also adopted a uniform one-year/three-year federal statute of limitations for Rule 10b-5 claims.¹ However, in Ceres Partners the Second Circuit explicitly refrained from addressing the retroactive effect of its holding. Id. at 364.

The Second Circuit was presented with the opportunity to address the retroactive effect of Ceres Partners in Welch v. Cadre Capital, 923 F.2d 989 (2d Cir.1990), vacated, ___ U.S. ___, 111 S.Ct. 2882, 115 L.Ed.2d 1048 (1991) ("Welch I"). In Welch I, the Second Circuit conducted the three-prong analysis set forth in Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d 296 (1971),² and held that the one-year/three-year federal statute of limitations did not apply retroactively to the facts in that case. See also Levine v. NL Indus. Inc., 926 F.2d 199, 201-02 & n. 1 (2d Cir.1991). More specifically, the Second Circuit determined that (1) Ceres Partners overruled long-established precedent and thus was not foreseeable; (2) the suit would not impair the purposes of the `34 Act; and (3) the balance of the equities favored giving the plaintiffs their day in court. Welch I, 923 F.2d at 994-5. Subsequently, the Supreme Court granted certiorari in Welch I.

In light of its decisions in Lampf and James B. Beam Distilling Co. v. Georgia, ___ U.S. ___, 111 S.Ct. 2439, 115 L.Ed.2d 481 (1991) ("Jim Beam"), the Supreme Court vacated and remanded Welch I to the Second Circuit.³ In Welch v. Cadre Capital, 946 F.2d 185 (2d Cir.1991) ("Welch II"), the Second Circuit reconsidered and vacated its ruling in Welch I, thereby reinstating the district court's judgment dismissing the plaintiffs' complaint on statute of limitations grounds. In doing so, the Second Circuit held that the one-year/three-year federal statute of limitations announced in Lampf applied retroactively even though the underlying action was timely filed under clearly settled preexisting law.

On December 19, 1991, President Bush signed the Federal Deposit Insurance Corporation Improvement Act of 1991. Pub.L. No. 102-242, § 476, 105 Stat. 2236 (to be codified at Securities Exchange Act of 1934, § 27A, 15 U.S.C. § 78aa-1) ("the Act" or "Section 27A").⁴ The Act amends the `34 Act by inserting a new Section 27A:

(a) EFFECT ON PENDING CAUSES OF ACTION. — 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.

Section (a) of the Act affects precedent in two ways. First, it appears that Lampf is not applicable to actions pending when it was handed down. Indeed, Judge Sweet noted in Ades v. Delloitte & Touche, 1992 WL 6142, *1, 1992 U.S.Dist. LEXIS 12, *1 (S.D.N.Y. Jan. 3, 1992), that the Act "effectively bars the retroactive applicability of Lampf." Second, it appears that the Act vitiates Welch II. See Alfadda v. Fenn, 1992 WL 44369, *1, 1992 U.S.Dist. LEXIS 1958, *3 (S.D.N.Y. Feb. 21, 1992) (McKenna, J.) (the Act "`rendered Welch II a nullity'"); Ades, 1992 WL 6142 *4 n. 2, 1992 U.S.Dist. LEXIS 12 *7 n. 2 ("in view of the effect of the new legislation on Lampf, the relevance of Welch II appears to have been nullified"). As Judge Sweet noted recently in Ahmed v. Trupin, 781 F.Supp. 1017, 1022 & n. 2 (S.D.N.Y.1992):

The effect of Congress's recent pronouncement is to render Welch II a nullity. ... Section 27A of the `34 Act provides that the applicable limitations law shall be "as such laws existed on June 19, 1991." It would appear then that Welch I has been "revived" and that the rule of the Second Circuit is that the uniform federal statute of limitations announced in Ceres and Lampf applies only to those cases filed on or after November 8, 1990.

These interpretations of the Act were confirmed by the Second Circuit in Henley v. Slone, 961 F.2d 23, (2d Cir.1992) (Newman, J.). In Henley, the plaintiff brought his Rule 10b-5 securities action on September 12, 1989 for improper margin transactions that occurred in April 1987 and continued through October 1987. Henley v. Slone, 774 F.Supp. 98, 100-102 (D.Conn. 1991) (Daly, J.), ...