The opinion of the court was delivered by: TENNEY
This case is before the Court on the motion of defendants Andre Meyer and Lazard Freres & Co. (hereinafter "Lazard") for summary judgment pursuant to Fed. R. Civ. P. 12(b) and 56(a). For the reasons set out infra, the motion is granted.
Plaintiff, Edward M. Gilbert, at all relevant times, was president and largest shareholder of E.L. Bruce Co., Inc. (hereinafter "Bruce"). Defendant Lazard is a major international investment banking institution and, at all relevant times, defendant Meyer was one of its leading partners. The complaint alleges two causes of action: (1) a violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1970), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1971), promulgated thereunder; and (2) a breach of fiduciary duty resulting in a constructive fraud upon plaintiff based upon the law of the state of New York. Jurisdiction is alleged pursuant to § 27 of the Securities Exchange Act, 15 U.S.C. § 78aa (1970), and this Court's pendent jurisdiction over state law claims.
The complaint recounts a complex and questionable scheme to merge Celotex Corporation (hereinafter "Celotex") into Bruce to the great profit of both Gilbert (then an officer of Bruce) and his alleged partners Meyer and Lazard, and of the ultimate "double-cross" of Gilbert by Meyer and Lazard. Briefly, the facts adduced are as follows.
Sometime in early 1960, Lazard, through Meyer, became financial adviser to both Bruce and Gilbert. Plaintiff asserts that this relationship gave rise to fiduciary obligations and responsibilities. Late that same year, Lazard, at Meyer's direction, exchanged $2,000,000 for Bruce convertible debentures in that amount. In the fall of 1961, Gilbert devised a plan to personally acquire control of Celotex by making purchases of its common stock on the open market and then to merge Celotex into Bruce. At this point Gilbert attempted to obtain financial support for his project.
It is then alleged that as a result of the confidential and fiduciary relationship existing between plaintiff and defendants, Gilbert divulged his plan to Meyer and Lazard. They considered the plan financially sound and agreed to provide all the necessary financial support on the condition that Gilbert exclude all other investors from the scheme. All three parties then allegedly agreed to the details of the plan: that Gilbert would personally purchase the 500,000 shares of Celotex required to gain control; that Meyer and Lazard would provide funding up to an amount equal to the total cost of the first 250,000 shares purchased by Gilbert; that after acquisition of the Celotex shares, Gilbert, Meyer and Lazard would convince the Bruce Board of Directors to authorize the tender of new Bruce convertible debentures for all of the outstanding shares of Celotex; and that the new Bruce convertible debentures would be valued at least 50% in excess of Lazard's investment in the purchase of the first 250,000 shares of Celotex. It allegedly was further agreed that all of the Celotex shares acquired would be voted in favor of the merger and that, understandably, the venture would not be reduced to writing and would remain known only to Gilbert, Meyer and Lazard.
The object of the plan was, naturally, profit. Meyer and Lazard stood to gain at least 50% over their investment. Gilbert, since he was barred by law from dealing at a profit with himself (as an officer of Bruce), would profit nonetheless, and not insubstantially, from the increase of his equity in Bruce resulting from an exchange of his Celotex stock (at Gilbert's cost) for the New Bruce convertible debentures.
Having agreed upon the terms of the venture, Gilbert set the plan in motion by purchasing more than $10,000,000 worth of Celotex common stock between late 1961 and May 28, 1962. The complaint alleges that when Gilbert asked defendants to supply the promised funds they assured him of their support but first required him to purchase, for $2,000,000, one-half of the Bruce debentures they had acquired in 1960 (thus realizing a profit of $1,000,000). Then, plaintiff claims, after he agreed to this new condition and paid defendants $1,350,000 in cash (and gave two $325,000 notes), defendants purchased from him, at his cost, 87,000 of the Celotex shares he had already acquired.
Despite the lack of financial support, Gilbert claims he had no choice but to continue with the plan. In May 1962, Gilbert again asked defendants for their promised support and again he was assured of that support only after buying the second half of the Bruce debentures, this time paying $2,347,354 ($1,347,354 over defendants' cost). Defendants then purchased an additional 36,000 of Gilbert's Celotex shares at his cost.
On May 28, 1962, Gilbert received margin calls in the approximate amount of $3,900,000. When defendants allegedly refused to help him meet these calls, Gilbert panicked and "without authority borrowed $1,900,000 from Bruce to meet the calls" (Complaint P23). Thereafter, plaintiff alleges, on information and belief, that defendants further violated their fiduciary obligations by arranging for, and aiding in, the merger of Celotex into Jim Walter Corporation rather than Bruce.
Plaintiff requests the following relief: (1) an accounting of profits realized by defendants' sale of the Celotex shares to Jim Walter Corporation; (2) an accounting of, and a constructive trust imposed upon, profits obtained by defendants in facilitating the sale of Celotex shares to Jim Walter Corporation; (3) a constructive trust imposed on all monies obtained by defendants to their unjust enrichment as a result of plaintiff's "forced" purchases of $2,000,000 of Bruce debentures; (4) an order, pursuant to § 29(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78cc(b) (1970), declaring defendants' sale to plaintiff of the $2,000,000 of Bruce debentures null and void and directing restitution of the purchase price; (5) $25,000,000 in damages as a result of defendants' constructive fraud; and (6) an accounting of plaintiff's losses sustained as a result of defendants' violation of their fiduciary duties in violation of the securities laws under the joint venture and as plaintiff's investment advisors.
The instant suit is not the first litigation resulting from the alleged plan to acquire Celotex. Gilbert was first convicted for embezzling the funds he "borrowed" from Bruce. After his release from prison, he commenced an action in the New York Supreme Court against the very same defendants for breach of a joint venture agreement. In that action, defendant's motion for summary judgment was granted on the grounds that plaintiff's claim was time barred. Both the Appellate Division and the Court of Appeals affirmed. In addition to the instant suit, plaintiff has now filed a second action in the New York Supreme Court against the very same defendants for breach of fiduciary duty and constructive fraud.
Defendants now move this Court for summary judgment on three grounds: (1) the 10b-5 claim is barred by the statute of limitations; (2) the action is barred by res judicata and collateral estoppel; (3) the complaint fails to state a claim upon which relief may be granted.
Defendants contend that the 10b-5 claim asserted by plaintiff is time barred because it was not brought within six years in accordance with N.Y.C.P.L.R. § 213 (McKinney 1972). Plaintiff, on the other hand, claims that the proper limitation period is ten years in accordance with N.Y.C.P.A. § 53 (1939) and N.Y.C.P.L.R. § 218(b) (McKinney 1972) and that, therefore, the action is timely. The cause of this dispute is the lack of designated time limitation within either § 10(b) or Rule 10b-5.
The law is well settled, however, that
". . . when Congress created a federal right but did not prescribe a period for its enforcement, Federal courts will borrow the period of limitation prescribed by the state where the court sits . . .." Moviecolor Limited v. Eastman Kodak Co., 288 F.2d 80, 83 (2d Cir.), cert. denied, 368 U.S. 821, 82 S. Ct. 39, 7 L. Ed. 2d 26 (1961).
This principle applies to actions under § 10(b) and Rule 10b-5. See, e.g., Fischman v. Raytheon Mfg. Co., 188 F.2d 783, 787 (2d Cir. 1951).
To this Court's knowledge, the only New York statute of limitations held applicable to 10b-5 actions in this circuit has been the six-year limitation contained in either N.Y.C.P.A. § 48 (1939) or N.Y.C.P.L.R. § 213 (McKinney 1972). See, e.g., Klein v. Auchincloss, Parker & Redpath, 436 F.2d 339, 341 (2d Cir. 1971); Klein v. Bower, 421 F.2d 338, 343 n. 4 (2d Cir. 1970); Fischman v. Raytheon Mfg. Co., supra, 188 F.2d at 787; Marth v. Industrial Incomes Inc. of North America, 290 F. Supp. 755 (S.D.N.Y. 1968). Plaintiff contends, however, that since his cause of action arose prior to the effective date of the C.P.L.R. -- this was determined by the Appellate Division in Gilbert v. Meyer & Lazard Freres, 37 A.D. 2d 938, 939, 325 N.Y.S. 2d 881, 882 (1971) -- and since his claim is equitable in nature, the proper limitation period is 10 years as provided for by N.Y.C.P.A. § 53 (1939). The Court disagrees.
Plaintiff relies heavily on the recent case of Klein v. Bower, 421 F.2d 338 (2d Cir. 1970). That action was a private damage suit for, inter alia, damages resulting from a violation of § 7 of the Securities Exchange Act of 1934, 15 U.S.C. § 78(g) (1970). Although defendant had pleaded New York's six-year statute of limitations as a bar to the action, plaintiff apparently argued that the ten-year equity statute applied because the prayer for relief requested ...