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BADER v. FLESCHNER

December 27, 1978

Nathan BADER, Plaintiff,
v.
Malcolm K. FLESCHNER, William J. Becker and Harold B. Ehrlich, Defendants and Third-Party Plaintiffs, v. HARRY GOODKIN & CO., Third-Party Defendant. Irving BADER, Plaintiff, v. Malcolm K. FLESCHNER, William J. Becker and Harold B. Ehrlich, Defendants and Third-Party Plaintiffs, v. HARRY GOODKIN & CO., Third-Party Defendant. PRIME FUNDING CO., Custom Shop Corp., 198-204 Main Street Corp., Custom Shop 55th Street Corp., Custom Shop Dallas Corp. and Mortimer Levitt, Plaintiffs, v. FLESCHNER BECKER ASSOCIATES, Malcolm K. Fleschner, William J. Becker, Harold B. Ehrlich, Leon Pomerance and Arctos Corporation, Defendants. Irving BADER, Plaintiff, and Lawrence A. Tisch and Preston R. Tisch, Intervenor Plaintiffs, v. William J. BECKER, Malcolm K. Fleschner, Harold B. Ehrlich, Leon Pomerance, Arctos Corporation, Fleschner Becker Associates and Harry Goodkin & Co., Defendants



The opinion of the court was delivered by: TENNEY

The motions before this Court are brought with regard to portions of four actions individual and derivative which have been consolidated for purposes of trial. All derivative and individual claims allege, essentially, irregularities in the activities of the general partners of Fleschner Becker Associates, an investment partnership of which the plaintiffs were limited partners. Defendants' motion pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure ("Rules") is addressed to individual actions seeking rescission of the Agreement of Limited Partnership ("partnership agreement"). Plaintiffs' motion and defendants' cross-motion for partial summary judgment, brought pursuant to Rule 56, are addressed to claims for damages arising out of breach of fiduciary responsibility asserted in the derivative action. Federal jurisdiction is based upon section 22 of the Securities Act of 1933, 15 U.S.C. § 77v, upon section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa, and upon section 214 of the Investment Advisers Act of 1940, 15 U.S.C. § 80b-14. For the reasons discussed below, all motions are denied.

The Facts

Fleschner Becker Associates ("FBA") was formed by defendants Malcolm K. Fleschner and William J. Becker in April 1966 for the purpose of investing in stocks, bonds and other securities through private management of a common pool of assets. *fn1" On October 1, 1968, the partnership agreement was revised and entered into between Fleschner, Becker and defendant Harold J. Ehrlich *fn2" as general partners and 66 other persons and entities as limited partners. Among these were plaintiffs Irving Bader, his brother Nathan Bader, Laurence A. Tisch, Preston R. Tisch, Prime Funding Company, Mortimer Levitt, Custom Shop Corporation, 198-204 Main Street Corporation, Custom Shop 55th Street Corporation and Custom Shop Dallas Corporation.

 A limited partner of FBA had no role in investment management, which was vested exclusively with the general partners. A limited partner could, however, withdraw all or part of his capital account at the close of any fiscal year (September 30) provided that he complied with certain notice requirements set out in the partnership agreement. He could also borrow up to 25% Against his capital account at any time during the year subject to the discretion of a general partner a loan which, if not repaid with interest by the end of the fiscal year, would be debited against his account.

 The general partners of FBA not only were empowered with management of the partnership and broad discretionary investment authority; they also were charged with the mailing of monthly reports to the limited partners. These reports represented FBA's investment policy as conservative and of low risk. However, between September 1968 and September 1969, the firm's investment in restricted securities *fn3" ranged from 72% To 88% Of its portfolio. The monthly reports of this period did not disclose this fact. The first notice to the limited partners of FBA's sizable investment in unregistered securities was made in the September 30, 1969 report, received in January 1970. In July 1972, FBA was placed in liquidation as a result of its financial problems, although distribution of FBA's assets has been delayed by litigation. *fn4"

 The saga of Fleschner Becker Associates has been before the courts of the Southern District of New York since 1974, when Nathan Bader sued in his individual capacity for rescission of the partnership agreement and return of his investments thereunder with interest. Nathan Bader v. Malcolm K. Fleschner, et al., No. 74 Civ. 4129 (S.D.N.Y. filed Sept. 23, 1974). Irving Bader commenced a similar action in this court two days later. Irving Bader v. Malcolm K. Fleschner, et al., No. 74 Civ. 4208 (S.D.N.Y. filed Sept. 25, 1974). In June 1975, six other limited partners Prime Funding Company, Mortimer Levitt, Custom Shop Corporation, 198-204 Main Street Corporation, Custom Shop 55th Street Corporation and Custom Shop Dallas Corporation commenced a derivative action on behalf of FBA. Prime Funding Co., et al. v. Fleschner Becker Associates, et al., No. 75 Civ. 3178 (S.D.N.Y. filed June 30, 1975). In September 1975, Irving Bader commenced a derivative action on behalf of FBA. Irving Bader v. William J. Becker, et al., No. 75 Civ. 4765 (S.D.N.Y. filed Sept. 29, 1975). *fn5" In July 1976, the four actions were consolidated for purposes of trial by stipulation of the parties. The Irving Bader derivative action and the derivative counts of the Prime Funding Company complaint were consolidated for all purposes; the second amended complaint in the Irving Bader action was substituted as the complaint in that consolidation.

 The Rule 12(b)(6) Motion

 The first motion which this Court must consider is addressed to the complaints brought by plaintiffs Nathan and Irving Bader in their individual capacities. These complaints, which are virtually identical, allege violations of the Securities Act of 1933 (the "1933 Act"), particularly section 17, 15 U.S.C. § 77q; the Securities Exchange Act of 1934 (the "1934 Act"), particularly section 10(b), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, promulgated thereunder; and the Investment Advisers Act of 1940, particularly section 206, 15 U.S.C. § 80b-6. Plaintiffs allege that they sustained damages as a result of their participation as limited partners in FBA through, Inter alia, defendants' nondisclosure of the insolvency of FBA in October 1968; defendants' failure to inform them of FBA's sizable investment in unregistered securities, and defendants' concealment of the fact that from October 1978 defendants, as well as friends and relatives who were limited partners, withdrew substantial portions of their capital investments from FBA.

 Defendants moved under Rule 12(b)(6) to dismiss the individual complaints. They contend that since plaintiffs learned about FBA's investments in restricted securities by January 1970 and waited for over four and a half years from this discovery and for almost six years from their last capital investments in FBA (October 1, 1968) to assert claims under section 17 of the 1933 Act, section 10(b) of the 1934 Act, and Rule 10b-5, plaintiffs should be barred by a three-year federal statute of limitations to be judicially implied and imposed as a matter of first impression by this Court. Defendants next contend that the claims asserted under the Investment Advisers Act should be dismissed because: (1) the Advisers Act does not confer jurisdiction upon the federal courts to entertain actions at law; (2) there is no private right of action under section 206 of the Advisers Act; and (3) defendants were not "investment advisers" as that term is defined in section 202 of the Act.

 We need not discuss at length defendants' Advisers Act argument. The Second Circuit recently held that there is an implied private right of action under section 206 of the Advisers Act and that jurisdiction over such actions at law is similarly implied. Abrahamson v. Fleschner, 568 F.2d 862, 876 (2d Cir. 1977), cert. denied, 436 U.S. 913, 98 S. Ct. 2253, 56 L. Ed. 2d 414 (1978). The Abrahamson case, which involves the same partnership and identical defendants, binds this Court to reject defendants' Advisers Act contentions under principles of stare decisis and collateral estoppel. *fn6" Accordingly, defendants' motion to dismiss the claims brought under the Advisers Act is denied.

 The next issue before the Court is whether plaintiffs' claims under the federal securities laws should be barred by a judicially implied three-year statute of limitations. Plaintiffs' claims rest on section 17 of the 1933 Act, section 10(b) of the 1934 Act, and Rule 10b-5 provisions of the federal securities laws for which there are no specific limitations periods. In actions alleging violations of these provisions, the courts of this circuit have traditionally looked to the applicable state statute of limitations for actions based on common-law fraud. *fn7" See, e. g., Stull v. Bayard, 561 F.2d 429, 431 (2d Cir. 1977), cert. denied, 434 U.S. 1035, 54 L. Ed. 2d 783, 98 S. Ct. 769 (1978); Klein v. Shields & Co., 470 F.2d 1344, 1346 (2d Cir. 1972); Klein v. Auchincloss, Parker & Redpath, 436 F.2d 339, 341 (2d Cir. 1971); Hoff Research & Development Laboratories, Inc. v. Philippine National Bank, 426 F.2d 1023 (2d Cir. 1970); Saylor v. Lindsley, 391 F.2d 965 (2d Cir. 1968), on remand, 302 F. Supp. 1174 (S.D.N.Y.1969); Fischman v. Raytheon Manufacturing Co., 188 F.2d 783 (2d Cir. 1951). In New York, claims of fraud must be brought within two years from the time plaintiff discovered, or could with the exercise of reasonable diligence have discovered, the fraud, or within six years of the fraud itself whichever is later. N.Y.C.P.L.R. §§ 203(f), 213(8); Stull v. Bayard, supra, 561 F.2d at 432; Klein v. Shields & Co., supra, 470 F.2d at 1346. By this standard, the claims asserted by plaintiffs Nathan and Irving Bader arose within the six-year provision and are timely.

 In urging that the individual complaints of the Baders should be time-barred, defendants point out some of the difficulties inherent in the standard discussed above namely, choice of law between states with different limitations periods (especially for purposes of a borrowing statute) and inconsistent application of varying state limitations periods *fn8" and invite this Court to accept an argument that has consistently been rejected by the courts of this circuit: that the maximum three-year limitations imposed by section 13 of the 1933 Act, 15 U.S.C. § 77m, and by sections 9(e)(3), 18(c) and 29(b) of the 1934 Act, 15 U.S.C. §§ 78i(e), 78r, 78cc, should apply equally to private rights of action recognized by judicial implication under those Acts. *fn9"

 Admittedly, the adoption of an implied federal statute of limitations which conforms to those expressly set forth in the federal securities laws might discourage forum-shopping and promote uniformity and predictability nationwide. However, in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210 n.29, 96 S. Ct. 1375, 1389, 47 L. Ed. 2d 668 (1976), the Supreme Court noted without criticism the disparity inherent in the application of the state standards:

 
Since no statute of limitations is provided for civil actions under § 10(b), the law of limitations of the forum State is followed as in other judicially implied remedies. See Holmberg v. Armbrecht, 327 U.S. 392, 395, 66 S. Ct. 582, 90 L. Ed. 743 (1946), and cases cited therein. Although it is not always certain which state statutes of limitations should be ...

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