The opinion of the court was delivered by: ELFVIN
Plaintiffs have filed a four-count
complaint. The First Count alleges violations of sections 11 and 12(2) of the Securities Act of 1933, as amended, 15 U.S.C. §§ 77k and 77L(2) and of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j and of the Securities and Exchange Commission's rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder. The Second Count sets forth claims under these same sections against Marine Midland Bank, Inc. - Western ("Marine") individually and as agent for certain other lender banks under an aiding and abetting theory of liability. The Third Count alleges a shareholders' derivative cause of action on behalf of Dominion Mortgage & Realty Trust ("Dominion") against its controlling persons. The Fourth Count sets forth pendent state law causes of action based upon negligence, breach of contract and breach of fiduciary duty.
Dominion, an unincorporated Massachusetts business trust, and certain individual defendants
move to dismiss plaintiffs' First Count to the extent that it is premised upon alleged violations of sections 11 and 12(2) on the grounds that plaintiffs lack standing to assert such claims and that such claims are time-barred by section 13 of said Act, 15 U.S.C. § 77m.
In general, section 11 creates a civil cause of action in favor of a person who acquires a security where any part of the registration statement contained an untrue statement of a material fact or omitted to state a material fact necessary to make the registration statement not misleading. Section 12(2) provides that a person who purchases a security has a cause of action against the seller where the seller's prospectus or oral communication included such untrue statement or omission. Section 13, the limitations of actions provision, provides:
"No action shall be maintained to enforce any liability created under section 77k  or 77L(2)
[12(2)] of this title unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence, or, if the action is to enforce a liability created under section 77L(1) [12(1)] of this title, unless brought within one year after the violation upon which it is based. In no event shall any such action be brought to enforce a liability created under section 77k or 77L(1) of this title more than three years after the security was bona fide offered to the public, or under section 77L(2) of this title more than three years after the sale."
Paragraph 3 of the First Count of the complaint recites:
"On November 6, 1972, [Dominion] through a public offering sold $11,000,000 of 8% Subordinated Debentures, due 1987 and 550,000 detachable warrants to purchase 550,000 shares of beneficial interest, by means of a public offering of securities registered with the Securities and Exchange Commission under the Securities Act of 1933."
Plaintiffs' complaint was not filed until October 6, 1976, more than three years after the debentures were offered to the public. Under these circumstances, the clear and unambiguous language of section 13 would appear to bar plaintiffs' claims based upon section 11.
The cases which have addressed this issue have concluded that the three-year time limitation pertaining to claims bottomed on section 11 is an absolute outer limit beyond which no complaint may be entertained. In an early case dealing with the question whether section 13 was satisfied by instituting suit within three years even if not within one year of actual or constructive discovery, Shonts v. Hirliman, 28 F. Supp. 478 (S.D.Cal.1939), the court commented:
"The maximum time provision in Section 13, to the effect that, in no event, shall an action be brought more than three years after the security was offered to the public, does not extend the limitation period. This provision means that if discovery is not made within three years, no action lies, under any circumstances. Otherwise put, if more than three years have elapsed since the offer of the security, the discovery of defendant's fraud comes too late. The object of this clause is merely to set the maximum period during which a person might be held liable, under any circumstances, by reason of any false statements in the registration statement. It does not dispense with the requirement that any person who brings an action within the three year period, must do so also within one year after the discovery of the falsity of the statement or the omission." Id., at 486.
In Fischer v. International Telephone & Tel. Corp., 391 F. Supp. 744 (E.D.N.Y.1975), plaintiff alleged that defendants' registration statement was false and misleading and omitted material facts in violation of section 11. Plaintiff's complaint was filed three years and two days after the date when, according to the court's determination, the stock in question had been bona fide offered to the public. The court concluded that, because such occurred more than three years prior to the commencement of the action, plaintiff's claims were time-barred by section 13.
In Ingenito v. Bermec Corporation, 376 F. Supp. 1154 (S.D.N.Y.1974), the court dismissed plaintiffs' claims alleging violations of section 12(1) for failure to plead compliance with the one-year and three-year periods of limitations contained in section 13. The court interpreted such section as requiring that an action based on section 12(1) be brought both within one year of actual or constructive discovery of the alleged violation and within three years after the security was bona fide offered to the public, whichever date was the earlier. This case, although dealing with violations of section 12(1) rather than claims bottomed on section 11, is of precedential value in the case now before me because the absolute three-year period of limitations contained in section 13 commences to run from the date the security was bona fide offered to the public for both alleged violations of section 11 and section 12(1). In Direction Assoc., Inc. v. Programming & Systems, 412 F. Supp. 714, 717 (S.D.N.Y.1976), the end of the period of three years after the date of sale of an unregistered security was termed "the outer limits" for commencing an action. The United States District Court for the Middle District of Louisiana has held section 13 to be "clear and unambiguous" and "absolute" concerning actions to which it pertains. Cowsar v. Regional Recreations, Inc., D.C., 65 F.R.D. 394 (1974).
Plaintiffs contend that the fraudulent concealment doctrine is applicable and tolls the running of such three-year period of limitations. They place heavy reliance on Holmberg v. Armbrecht, 327 U.S. 392, 66 S. Ct. 582, 90 L. Ed. 743 (1946), and Public Service Co. of New Mexico v. General Electric Co., 315 F.2d 306 (10th Cir.), cert. denied, 374 U.S. 809, 83 S. Ct. 1695, 10 L. Ed. 2d 1033 (1963). In Holmberg, suit was commenced pursuant to section 16 of the Federal Farm Loan Act, 12 U.S.C. § 812, and, such legislation not containing a statute of limitations, it was necessary to borrow the appropriate period of limitations of the forum state. Plaintiffs alleged that they did not commence their action within the state time limit because an individual had concealed his ownership of certain stock. It was held that the equitable doctrine of fraudulent concealment applied and tolled the running of the adopted period of limitations. In so holding, Mr. Justice Frankfurter framed the parameters of inquiry to determine when such equitable doctrine will toll a federal statute of limitation. Although he stated, 327 U.S. at page 397, 66 S. Ct. at page 585, as a general proposition that "[this] equitable doctrine is read into every federal statute of limitation," he had stressed, at page 395, 66 S. Ct. at page 584, that "[if] Congress explicitly puts a limit upon the time for enforcing a right which it created, there is an end of the matter. The Congressional statute of limitation is definitive."
In Atlantic City Electric Co. v. General Electric Co., 312 F.2d 236 (2d Cir. 1962), the court held that the doctrine of fraudulent concealment applied to the period of limitations set forth in section 4B of the Clayton Act, as amended, 15 U.S.C. § 15b, because it found that Congress did not intend to enact an absolute period of limitations which would not be subject to tolling in cases of fraudulent concealment and did intend the doctrine of fraudulent concealment to apply to private civil antitrust actions. In its decision, the Court interpreted the decision in Holmberg v. Armbrecht, supra, as holding that defendant's fraudulent concealment will toll a federal statute of limitations unless Congress expressly provides to the contrary in clear and unambiguous language.
Similarly, the courts in Public Service Co. of New Mexico v. General Electric Co., supra, and Kansas City, Missouri v. Federal Pacific Electric Co., 310 F.2d 271 (8th Cir.), cert. denied, 371 U.S. 912, 83 S. Ct. 256, 9 L. Ed. 2d 171 (1962), held that the fraudulent concealment doctrine applied to the four-year statute of limitations contained in section 4B of the Clayton Act. Both courts, however, recognized that this equitable doctrine does not apply to a federal limitations period where Congress has provided for such by clear and unambiguous language. Thus, the initially controlling factor in making such a determination is Congressional intent. I find that Congress intended section 13's three-year period of limitations to be an absolute time bar to which the equitable doctrine of fraudulent concealment does not apply. Therefore, plaintiffs' claims based upon alleged violations of section 11 of the Securities Act of 1933 are hereby dismissed as time-barred.
With respect to plaintiffs' causes of action based upon section 12(2) of the Securities Act of 1933, section 13 requires that all such claims be brought within one year after the actual or constructive discovery of the untrue statement or material omission and within three years of the sale of the securities to a particular plaintiff. In Re Caesars Palace Securities Litigation, 360 F. Supp. 366 (S.D.N.Y.1973). Paragraphs 3(a) & (b) of plaintiffs' complaint list the sales of units of debentures and shares of beneficial interests sold to various plaintiffs and the dates upon which those transactions occurred. Some of the sales occurred prior to three years before commencement of this action, while others took place subsequently. As set forth above, the fraudulent concealment doctrine does not apply to the three-year period of limitations contained in section 13. Therefore, those plaintiffs who purchased either units of debentures or shares of beneficial interests prior to October 6, 1973 may not pursue their section 12(2) claims and such claims are hereby dismissed as time-barred.
Plaintiffs' claims predicated upon section 12(2) which arise from sales which occurred on or after such date have satisfied the three-year period of limitation. However, section 13 also requires that such claims be brought within one year after the discovery of the untrue statement or omission, or after such discovery should have been made by the exercise of reasonable diligence. Osborne v. Mallory, 86 F. Supp. 869 (S.D.N.Y.1949). Compliance with the one-year period of limitations set forth in section 13 is an essential substantive ingredient of a private cause of action based upon section 12(2). In Re Caesars Palace Securities Litigation, supra; Kroungold v. Triester, 407 F. Supp. 414 (E.D.Pa.1975); Kramer & Harrison v. Scientific Control Corp., 352 F. Supp. 1175 (E.D.Pa.1973). Plaintiffs must affirmatively plead sufficient facts to demonstrate that the requirements of section 13 have been satisfied; otherwise their claims are subject to dismissal. Premier Industries v. Delaware Valley Financial Corp., 185 F. Supp. 694 (E.D.Pa.1960).
A complaint that alleges violations of section 12(2) must set forth the time and circumstances of the discovery of the untrue statement or omission, the reasons why such was not discovered earlier (if more than one year has elapsed), and plaintiff's diligent efforts in such situation in making or seeking such discovery. Kroungold v. Triester, supra, at 419. Therein, the plaintiffs' amended complaint merely stated that:
"Due to the fraudulent concealment practiced by the defendants, the plaintiff Kroungold was unaware, in the exercise of due diligence, of the fraudulent and deceptive acts and conduct of the defendants until March, 1974, and the plaintiff Bochey was unaware, in the exercise of due diligence, of the fraudulent and deceptive acts and conduct of the defendants until June, 1974."
Such allegation was held to be inadequate to satisfy the pleading requirements of section 13.
In the case at hand, plaintiffs attempt to show compliance with the one-year time period by asserting in paragraph 23 of their complaint:
"Any statute of limitations applicable to the prospectuses and to the misstatements of material facts are tolled by the reason of the concealment of the fraud by the defendants."
This allegation is insufficient to show that plaintiffs' action was instituted in a timely fashion under the one-year time limitation. The complaint does not allege the date on which plaintiffs discovered the allegedly untrue statements or material omissions. There are no allegations setting forth what efforts plaintiffs made to discover such misrepresentations. Therefore it is impossible to ascertain, based upon the complaint in its present form, whether the instant action was filed within one year after plaintiffs discovered or should have discovered the alleged untrue statements or the omissions of material fact. Plaintiffs' complaint fails to allege sufficient facts to conform to the one-year period of limitations of section 13. In such situations, absolute dismissal of section 12(2) claims is usually not warranted and leave to amend should be granted unless such claims are subject to dismissal upon other grounds. See, In Re Caesars Palace Securities Litigation, supra; Kramer & Harrison v. Scientific Control Corp., supra.
Dominion contends that leave to amend should not be granted with respect to plaintiffs' section 12(2) claims arising from sales occurring within three years prior to the filing of the instant complaint and that such claims should be dismissed because there are no allegations establishing that the person who offered such securities or from whom such securities were purchased was a defendant or that such offeror or seller had conspired with or was aided and abetted by a defendant. It is true that section 12(2) only creates a private cause of action on behalf of a purchaser of securities against his immediate offeror or seller or those who conspire with or aid and abet him or who significantly participate in such transaction to warrant imposition of liability. Katz v. Amos Treat & Co., 411 F.2d 1046 (2d Cir. 1969); Demarco v. Edens, 390 F.2d 836 (2d Cir. 1968); Hill York Corp. v. American Internat'l Franchises, Inc., 448 F.2d 680 (5th Cir. 1971).However, for purposes of ruling on a motion to dismiss, the allegations in the complaint must be accepted as true and construed favorably to the plaintiffs. Heit v. Weitzen, 402 F.2d 909, 913 (2d Cir. 1968). A motion to dismiss should not be granted unless it is clear that plaintiffs could not prove any set of facts in support of their claim which would entitle them to relief. Conley v. Gibson, 355 U.S. 41, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957). Paragraph 9 of the Third Court of the complaint alleges that defendant Gross, prior to disclosure of Dominion's losses, sold approximately 29,000 shares of Dominion which he owned. It is unclear whether such alleged sales involved both units of debentures and shares of beneficial interests or merely the latter. Defendants have not contended that only one type of security interest was involved in such sales. Under these circumstances, such allegation should be liberally construed to include both types of securities. Although the dates on which Gross sold his interests in Dominion are not alleged, a liberal reading of the complaint indicates that certain plaintiffs may have purchased units of debentures or shares of beneficial interests in Dominion within three years prior to the filing of the instant complaint from Gross or from other defendants. Whether this is so must await discovery or trial on the merits. The inability of plaintiffs to know at this stage of litigation from whom they purchased their securities warrants a denial of the requested dismissal of those section 12(2) claims based upon sales occurring within three years prior to the commencement of their action. It cannot yet be stated that beyond doubt plaintiffs could not prove any set of facts which would entitle them to relief. Dominion's motion to dismiss plaintiffs' section 12(2) claims on the ground that the complaint does not allege that defendants offered or sold those securities to plaintiffs or that the offeror or seller had conspired with or was aided and abetted by defendants is hereby denied; but such denial is conditioned on plaintiffs amending their complaint within twenty days following the entry of this Memorandum and Order with respect to their claims bottomed on section 12(2) arising from sales of securities occurring within three years prior to the filing of the instant complaint so as to allege specifics showing that the one year period of limitations has been satisfied. If such amendment be not so made, defendants' said motion shall hereby be deemed granted.
Dominion and three of its trustees
move to dismiss the derivative claims set forth in the Third Count for failure to comply with the pleading requirements of Fed.R.Civ.P. rule 23.1 and of the common law of the State of Massachusetts. Rule 23.1 provides in pertinent part:
"In a derivative action brought by one or more shareholders or members to enforce a right of a corporation or of an unincorporated association, the corporation or association having failed to enforce a right which may properly be asserted by it, the complaint shall * * * allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for his failure to obtain the action or for not making the effort. * * *."
Plaintiffs attempt to satisfy such pleading requirements by alleging in paragraph 5 of the Third Count of the complaint that:
"Plaintiffs have brought to the attention of Gordon Gross and members of his law firm, the allegations in this Complaint. The nature of this Complaint is that the controlling persons of Dominion have participated in a fraudulent device and scheme and, therefore, it would be futile to request Dominion and its controlling persons to sue themselves."
It should be initially noted that Fed.R.Civ.P. rule 23.1 does not mandate that a demand be made upon the business entity's controlling authority, but only requires that, if none was made, the complaint allege with particularity the reasons for not making the effort. Merely bringing the allegations of the complaint to the attention of the Chairman of the Board of Trustees
does not constitute an adequate demand for board action to enforce the rights plaintiffs are attempting to assert derivatively. Other than this allegation of notice, plaintiffs have not otherwise alleged in their complaint that they made any demand on Dominion's controlling authority, but claim that such request should be excused because it would have been a futile and useless gesture to expect those comprising or constituting such authority to sue themselves and it would have been an unreasonable burden to solicit the combined action of Dominion's numerous shareholders or members. Dominion contends that plaintiffs have failed to allege with particularity, as required by rule 23.1, the reasons for not making such demands.
A determination whether a complaint has sufficiently pleaded reasons to excuse making such demand lies within the sound discretion of the district court judge. Nussbacher v. Continental Ill. Nat. B. & T. Co., Chicago, 518 F.2d 873, 878 (7th Cir. 1975); deHass v. Empire Petroleum Company, 435 F.2d 1223, 1228 (10th Cir. 1970). In ruling on such question, the factual allegations in the entire complaint should be considered in conjunction with the particular paragraph in which plaintiffs assert that the demand would be futile. Citrin v. Greater New York Industries, 79 F. Supp. 692, 697 (S.D.N.Y.1948); Cohen v. Industrial Finance Corporation, 44 F. Supp. 491, 495 (S.D.N.Y.1942). In Cathedral Estates v. Taft Realty Corporation, 228 F.2d 85, 88 (2d Cir. 1955), the court in construing Fed.R.Civ.P. rule 23(b), the predecessor to present rule 23.1, stated:
"* * * It is clear that under Rule 23(b) and its predecessors a demand need not be made on the directors or shareholders where such demand would be 'futile', 'useless,' or 'unavailing' * * *. And where the directors and controlling shareholders are antagonistic, adversely interested, or involved in the transaction attacked, a demand on them is presumptively futile and need not be made. * *." (Emphasis added.)
The court in Liboff v. Wolfson, 437 F.2d 121 (5th Cir. 1971), reversed a dismissal of a derivative action by the district court which had concluded that the complaint failed to comply with rule 23.1. The complaint had merely alleged that:
"Demand by plaintiff that the Board of Directors of the Corporation bring this action would have been futile. The majority of said directors, participated, approved of and acquiesced in said transaction and are liable therefor. The directors of the Corporation would not and could not diligently prosecute this action because they would ...