Walsche v. First Investors Corp.

• Decision Date: 14 December 1992
• Docket Number: D,No. 92-7527,No. 206,206,92-7527
• Citation: 981 F.2d 649
• Parties: , Fed. Sec. L. Rep. P 97,231 Kenneth L. WALSCHE and Mary Audree Walsche, Plaintiffs-Appellants, v. FIRST INVESTORS CORPORATION, Defendant-Appellee. ocket
• Court: U.S. Court of Appeals — Second Circuit

Page 649

981 F.2d 649

61 USLW 2386, Fed. Sec. L. Rep. P 97,231

Kenneth L. WALSCHE and Mary Audree Walsche, Plaintiffs-Appellants, v. FIRST INVESTORS CORPORATION, Defendant-Appellee.

No. 206, Docket No. 92-7527.

United States Court of Appeals Second Circuit.

Argued Sept. 14, 1992.

Decided Dec. 14, 1992.

Beverly Stauffer Knapp, Bridgeport, CT (L. Douglas Shrader, Zeldes, Needle & Cooper, PC, of counsel), for plaintiffs-appellants.

Larry R. Lavoie, Washington, DC (Gregory K. Conway, Kirkpatrick & Lockhart, of counsel), for defendant-appellee.

Before MINER, ALTIMARI, and WALKER, Circuit Judges.

ALTIMARI, Circuit Judge:

Plaintiffs-appellants Kenneth L. Walsche and Mary Audree Walsche ("the Walsches") appeal from a judgment of the United States District Court for the District of Connecticut (Alan H. Nevas, Judge ), dismissing their complaint, 793 F.Supp. 395, which alleged violations of federal and state securities laws as well as breaches of various common law duties. The district court dismissed the Walsches' federal securities claims as untimely under Ceres Partners v. GEL Associates, 918 F.2d 349 (2d Cir.1990), and dismissed their state-based statutory and common law claims for lack of pendent jurisdiction.

On appeal, the Walsches contend that the uniform federal limitations period announced in Ceres three months prior to the filing of their complaint should not be applied to their cause of action. Specifically, the Walsches contend that despite the fact that Ceres preceded the initiation of their suit, its application would be "retroactive" because their cause of action accrued before the new rule was announced. In addition, the Walsches contend that the district court erred in dismissing their state and common law claims for lack of pendent jurisdiction since their complaint had alleged jurisdiction based on diversity of citizenship. In contrast, defendant-appellee First Investors Corporation ("First Investors") argues that because the new limitations period was announced before the Walsches filed their complaint, its application to bar this cause of action is "prospective" and not "retroactive." First Investors concedes that the district court erred in dismissing the state-based diversity claims for want of pendent jurisdiction but maintains that this dismissal should be sustained because the claims were also time-barred under applicable state periods of limitation.

For the reasons set forth below, we affirm that portion of the judgment dismissing the federal securities claims as time-barred, vacate that portion of the judgment dismissing the state-based diversity claims, and remand for further proceedings.

BACKGROUND

Kenneth and Mary Walsche are a couple in their sixties who in the summer of 1985 were searching for an investment alternative to the passbook accounts and certificates of deposits they had previously used. Upon the advice of Randolph Ross, a friend's son, the Walsches invested a substantial portion of their life savings in the First Investors Fund for Income ("the Fund"), a mutual fund administered by First Investors Corporation ("First Investors"). According to the Walsches, Ross, a sales representative for First Investors, assured them that the Fund was "very secure" and consisted only of high grade corporate bonds. The Walsches also contend that another First Investors representative told them the Fund was comprised of approximately 95% "grade A" corporate bonds and approximately 5% "grade B" corporate bonds. The Walsches invested $50,000 in three installments between July 24, 1985 and May 2, 1986. In May 1987, the Walsches, again acting on the advice of a First Investors representative, increased their total investment in the Fund to in excess of $95,000.

Contrary to the representations upon which the Walsches claim to have relied, the First Investors Fund for Income was not comprised only of high grade bonds but in fact had a heavy emphasis on high-risk "junk bonds." In February 1990, First Investors In September 1990, the Walsches read an article in the Wall Street Journal that described the Fund as a "junk bond mutual fund," which was under state investigation for fraudulent sales practices. The Walsches claim that it was at this time that they discovered the purported fraud.

                Management Company, the Fund's investment advisor, sent the Walsches a newsletter in which it was revealed that managers had begun to replace lower-rated bonds with those having a stronger credit rating.   The newsletter explained that the shift was necessary to "help stabilize the Fund's asset value."   The Walsches contend that the newsletter was misleading in that it did not reveal the Fund's already heavy investment in junk bonds.   In March 1990, the Walsches' dividend checks decreased in value, an occurrence which a First Investors representative explained was a minor fluctuation.   On March 7, 1990, the Walsches liquidated their shares in the Fund and sustained a loss, which they approximate at $60,000
                

On February 20, 1991, the Walsches filed suit in the United States District Court for the District of Connecticut (Alan H. Nevas, Judge ) alleging violations of: (1) Section 10(b) of the Securities and Exchange Act of 1934 ("the 1934 Act"), 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1991); (2) Connecticut Uniform Securities Act, Conn.Gen.Stat. §§ 36-472, 36-498(a)(2); and, (3) various common law duties, including fraud, breach of fiduciary duty and negligence. The Walsches alleged diversity of citizenship as an additional basis of jurisdiction over the state-based statutory and common law claims. On April 11, 1991, First Investors moved to dismiss the action, alleging, inter alia, that the federal claims were time-barred under the limitations period announced in Ceres Partners v. GEL Associates, 918 F.2d 349 (2d Cir.1990).

In Ceres, issued on November 8, 1990--three months prior to the initiation of the Walsches' action--this Court held that a private right of action under § 10(b) of the 1934 Act would be barred unless brought within one year of discovery of the fraud and within three years of the violation ("the one-year/three-year period"). In so holding, this Court abandoned its prior practice of borrowing analogous state statutes of limitations in actions arising under § 10(b). Ceres "le[ft] for the future all questions concerning [its] retroactive application." 918 F.2d at 364. Retroactive application of Ceres was subsequently addressed by this Court on January 22, 1991, in Welch v. Cadre Capital, 923 F.2d 989 (2d Cir.) ("Welch I "), vacated, --- U.S. ----, 111 S.Ct. 2882, 115 L.Ed.2d 1048 (1991), where we held that the one-year/three-year rule would not automatically apply retroactively to cases already pending when Ceres was announced. Rather, in Welch I we applied the three-part analysis set forth in Chevron Oil Co. v. Huson, 404 U.S. 97, 106-07, 92 S.Ct. 349, 355-56, 30 L.Ed.2d 296 (1971), and determined that the one-year/three-year period did not apply retroactively on the facts of that case. See Welch I, 923 F.2d at 994-95; see also Levine v. NL Indus., 926 F.2d 199, 201-02 & n. 1 (2d Cir.1991).

The Walsches claim to have discovered the fraud on the part of First Investors in September 1990, when they read an article in the Wall Street Journal that characterized the Fund as a "junk bond mutual fund" and revealed that First Investors was under investigation for a variety of improper sales practices. Both parties agree that if the one-year/three-year period of Ceres applies to this cause of action, the Walsches' claim is time-barred since it was filed over three years from the date of the violation, i.e., the sale of shares.

On June 20, 1991, while First Investors' motion to dismiss was still pending, the Supreme Court announced its decision in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, --- U.S. ----, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991). Lampf adopted the one-year/three-year limitations period, previously adopted by this Court in Ceres, for all actions brought pursuant to § 10(b) of the 1934 Act and corresponding Rule 10b-5. Significantly, Lampf applied the one-year/three-year period to the case before it. Lampf, --- U.S. at ---- - ----, 111 S.Ct. at 2782-83. In James B. Beam In light of the rapid changes in this area of law, the district court stayed First Investors' motion to dismiss pending this Court's reconsideration of Welch I on remand. Subsequently, this Court reversed its position in Welch I, and held that in accordance with Lampf and Jim Beam, the one-year/three-year federal statute of limitations announced in Ceres and Lampf would apply retroactively to all cases regardless of whether a case was timely filed under pre-existing law. See Welch v. Cadre Capital, 946 F.2d 185 (2d Cir.1991) ("Welch II "). This did not, however, end the matter.

                Distilling Co. v. Georgia, --- U.S. ----, ---- - ----, 111 S.Ct. 2439, 2447-48, 115 L.Ed.2d 481 (1991) (plurality) ("Jim Beam "), decided on the same day, the Supreme Court held that its prior decision applying a tax ruling retroactively to the case in which it was announced, Bacchus Imports v. Dias, 468 U.S. 263, 104 S.Ct. 3049, 82 L.Ed.2d 200 (1984), also applied to all cases then pending on direct review.  Jim Beam established that once a ruling in a civil case is applied in the case in which it is announced, it must be applied retroactively to all cases pending on direct review.  Jim Beam, --- U.S. at ---- - ----, 111 S.Ct. at 2447-48.   Thereafter, the Supreme Court remanded Welch I for reconsideration of the retroactivity issue in light of Lampf and Jim Beam.   See Northwest Sav. Bank, PaSa v. Welch, --- U.S. ----, 111 S.Ct. 2882, 115 L.Ed.2d 1048 (1991)
                

On December 19, 1991, Congress enacted Section 27A of the Securities Exchange Act, to remove the retroactive application of Lampf. Federal Deposit Insurance Corporation Improvement Act of 1991, Pub.L. No. 102-242, § 476...