The opinion of the court was delivered by: BARTELS
Plaintiff Ben Rickel, a limited partner in a real estate partnership designated Clinton Hill Associates ("Clinton"), sues on behalf of himself and others similarly situated, Sydney V. Levy ("Levy") as a general partner, and his wife Miriam S. Levy as a limited partner. In all, 800 limited partners in Clinton invested a total of $3,886,000 in the syndicate.
Plaintiff alleges that defendants,
in connection with the prospectus and offering documents used in the sale of partnership participations, engaged in wilful and intentional fraud, made various material misrepresentations and misstatements and omitted to state material facts, in violation of the Securities Act of 1933 § 17(a), 15 U.S.C. § 77q(a); the Securities Exchange Act of 1934 § 10(b), 15 U.S.C. § 78j(b) and Rule X-10b-5 thereunder, 17 C.F.R. § 240.10b-5; N.Y. Gen. Bus. L. § 352-c and 3 (McKinney's 1968); and the common law of fraud and deceit, upon all of which plaintiff relied to his damage.
Defendants Levy and Miriam S. Levy move for summary judgment to dismiss plaintiff's claim pursuant to F.R. Civ. P. Rule 56, 28 U.S.C., on the ground that there was no genuine issue of fact concerning the bar of the statute of limitations with respect to each and every claim asserted in the complaint. Alternatively, defendants request a separate trial on their statute of limitations defense
in the event summary judgment is denied. At the argument plaintiff attacked the validity of his deposition which prompted the Court to have an evidentiary hearing to enable plaintiff to demonstrate by his own testimony and, if necessary, by the testimony of Levy, the principal defendant, that a genuine issue of fact did exist on the statute of limitations claim. Hearings were held, at which plaintiff and Levy testified and at which plaintiff's deposition, which the Court found in all respects valid, was also considered.
Plaintiff invested $20,000 in Clinton by the purchase of a syndicate interest in 1960. In his complaint he premises his action for misrepresentation and fraud on the following acts and failures of Levy: (1) inaugurating an erroneous advertising campaign in the New York Times asserting that a certain union had invested $100,000 in Clinton and causing a certain advertising brochure bearing the name of A. George Golden Corp., to be circulated, containing reprints of newspaper stories with false information and misleading statements to the effect that certain pension funds and unions had invested large sums in Clinton; (2) misrepresenting that Clinton was located in a "traditionally fine" section of Brooklyn while failing to disclose that the property was located in a deteriorating neighborhood requiring larger than normal maintenance and security costs; (3) failing to disclose that the leaseback of the Clinton property to Pierpont Associates, Inc. ("Pierpont") was a sham leaseback to a financially irresponsible corporation with rights to assign the same without liability, and failing to disclose that the lease would soon be defaulted requiring Clinton to undertake the burdens of operating the property at a high cost, thus inflating the purchase price of the property by more than $1,000,000 over its true market price; (4) failing to disclose that the attorneys and accountants did not independently represent the investors but favored Levy's interest, and failing to ascertain whether the financial data obtained from Pierpont was correct; (5) failing to disclose that there was no market for a limited partner's interest in Clinton and that there was no chance to sell the same when Clinton became financially involved; (6) failing to disclose that after five years of accelerated depreciation the tax shelter for the investor would begin to disappear so that an increasingly greater proportion of distributions would be declarable as income; and (7) failing to disclose that the partnership raised $700,000 more from the investors than the purchase price of the property, the difference being profit to Levy and the cost of selling the syndicate participations, all resulting in a dilution of the investors' interest in the property, and in that connection failing to inform investors that the "liquidation value" of the property was less by $700,000 than the amount paid for the same by the partnership.
The following facts are undisputed. Clinton bought the Clinton Hill property, the sole asset of the partnership, from Pierpont by paying $3,500,000 and assuming a first mortgage of $9,600,000. As part of the same transaction, Clinton leased the property back to Pierpont for a period of twenty-one years, the latter to pay a net rent of $450,000 plus all taxes, charges and expenses. For two years, the full rent was paid and the limited partners received their forecasted return of 10.5%. On January 10, 1963, Pierpont defaulted on the lease and refused to make any further payments to the mortgagee, to the government for taxes, to utility companies or to Clinton for net rent. Clinton thereupon took over the operation of the Clinton Hill Apartments after giving Pierpont a general release from its obligations. Shortly thereafter, a notice of the default, stating also that distributions would be suspended during 1963 and that a general meeting would be held, was sent to all the partners. The meeting, which was held at Town Hall in New York City on March 11, 1963, was attended by over 400 persons. At this meeting the default of Pierpont as well as other difficulties facing the partnership and the operation of the premises was discussed. After Levy made a long speech, the partners were given an opportunity to ask questions about any matter concerning the partnership. In October, 1964, Rickel and Levy met privately in Levy's office and further discussed the problems facing Clinton, and after that meeting Clinton paid out a small distribution. From 1965-70 distributions of from 4 to 6% per year were made, but in 1971, the year in which this action was instituted, distributions were reduced to 3%.
The present action was begun on June 24, 1971, eleven years after plaintiff purchased his interest. N.Y. CPLR § 213(9) (McKinney's 1972) provides that an action based upon fraud must be brought within six years after the time the plaintiff "discovered the fraud, or could with reasonable diligence have discovered it." However, this language is modified by N.Y. CPLR § 203(f) (McKinney's 1972), which states that:
". . . where the time within which an action must be commenced is computed from the time when facts were discovered or from the time when facts could with reasonable diligence have been discovered, or from either of such times, the action must be commenced within two years after such actual or imputed discovery or within the period otherwise provided, computed from the time the cause of action accrued, whichever is longer."
These two sections taken together have been interpreted to mean that fraud actions must be commenced within six years from commission of the fraud or two years from discovery, whichever is longer. Hoff Research & Dev. Lab., Inc. v. Philippine Nat. Bank, 426 F.2d 1023 (2d Cir. 1970); McCabe v. Gelfand, 57 Misc. 2d 12, 291 N.Y.S.2d 261, vacated, 58 Misc. 2d 497, 295 N.Y.S.2d 583 (Sup. Ct., Kings Co., 1968); 1 Weinstein-Korn-Miller, N.Y. Civ. Prac. P203.35 (1972). The fact that the plaintiff raises claims under the federal securities laws does not render the New York limitation statutes inapplicable. When no statute of limitations is specifically provided in the federal legislation, the state time limits apply to federal claims as well as state claims. Klein v. Shields & Co., 470 F.2d 1344, 1346 (2d Cir. 1972); see Moviecolor Limited v. Eastman Kodak Co., 288 F.2d 80 (2d Cir. 1961). Since the alleged misstatements and omissions occurred about eleven years before commencement of the action, and thus are therefore barred, the central inquiry under the New York statute becomes: "When did plaintiff discover or could have with reasonable diligence discovered the fraud?"
Plaintiff insists that even though his federal claims are subject to the New York period of limitations, the statute is tolled under the federal equitable tolling doctrine which tolls the running of the statute during periods in which there is fraudulent concealment by the defendant of the alleged wrong. However, the doctrine proves to be of no additional help to plaintiff for even under it, the statute is not tolled from the time when plaintiff discovered or could with reasonable diligence have discovered the wrong. Saylor v. Lindsley, 391 F.2d 965 (2d Cir. 1968); Moviecolor Limited v. Eastman Kodak Co., supra. As stated in Morgan v. Koch, 419 F.2d 993, 997 (7th Cir. 1969): "The party seeking protection under this doctrine must have exercised reasonable care and diligence in seeking to learn the facts which would disclose fraud." Thus, under both federal and state law, defendants' motion for summary judgment must be granted on any claim in which they can establish that there is no genuine issue of fact that plaintiff could have discovered the acts of fraud prior to June 24, 1969. When plaintiff knew or should have known sufficient facts to recognize the alleged fraud, the statutory period begins and does not await the "leisurely discovery of the full details of the alleged scheme." Klein v. Bower, 421 F.2d 338 (2d Cir. 1970); see Sielcken-Schwarz v. American Factors Ltd., 265 N.Y. 239, 192 N.E. 307 (1934).
In considering the claims, we realize that the question of whether reasonable diligence to discover facts was exercised often turns on the interpretation to be given to differently perceived events; such factors often make the granting of summary judgment inappropriate. Azalea Meats, Inc. v. Muscat, 386 F.2d 5 (5th Cir. 1967). However, in particularly clear cases summary judgment may be granted. Klein v. Shields & Co., supra. This is especially true where plaintiff's own version of the facts demonstrates without any doubt that he could have discovered the fraud within the time to bring the suit had he used reasonable diligence. Klein v. Bower, supra. Further, where plaintiff's own sworn admissions indicate that he was "suspicious generally" of defendants' activities in a particular matter as of a particular time, summary judgment may be appropriately granted for failure to bring an action within two years after such time because even "If these suspicions did not constitute actual discovery, they surely would have prompted a man of reasonable diligence to conduct further investigations." Klein v. H. N. Whitney, Goadby & Co., 341 F. Supp. 699 (S.D.N.Y. 1971).
Rickel stated twice in his deposition that he had become suspicious that something was wrong with Clinton shortly after the distributions had been suspended in 1963. In the 1964 private meeting with Levy, plaintiff, after complaining to Levy for wastefully expending money on fountains for tenants who were unworthy of such improvements while making no distributions to the partners, stated, according to the same deposition: "I'm going to look into this matter very clearly, very thoroughly. I have a lot of money invested with you." At the hearing on this motion he stated that he "questioned the authenticity" and need for many of the expenses he saw in the financial statements he received from Levy beginning with the 1963 financial statement dated January 30, 1964. When one realizes that there were no significant events occurring in the period from 1965 to 1971 other than the payment of smaller than promised dividends, there is no explanation why the plaintiff could not have discovered the alleged fraud in 1964 rather than in 1971. We cannot escape the conclusion that there is no genuine issue regarding the fact that plaintiff had sufficient knowledge of certain information which would lead a reasonably diligent man to discover any fraud in the alleged misrepresentations and omissions in the prospectus, the partnership affairs or otherwise within the required time rather than wait for another seven years. However, there is no need to base summary judgment for defendants solely on the basis of plaintiff's lack of diligence in exploring a situation ...