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SHAMROCK ASSOCIATES v. SLOANE

May 18, 1990

SHAMROCK ASSOCIATES, PLAINTIFF,
v.
DEAN L. SLOANE, SALVATORE ALTERNATIVE, STANLEY EISER, BRIAN REACH, AND PEAT, MARWICK, MAIN & CO., DEFENDANTS.



The opinion of the court was delivered by: Robert P. Patterson, Jr., District Judge.

OPINION AND ORDER

These are motions for summary judgment and to dismiss the complaint brought by all defendants pursuant to Federal Rules of Civil Procedure 12(b)(1), 12(b)(6) and 56. Although discovery has not commenced, the parties have presented the Court with certain documents outside of the pleadings; thus, the Court applies the summary judgment standard where appropriate. To grant a motion for summary judgment a court must find that there is no genuine issue as to any material fact, and that the moving party is entitled to judgment as a matter of law because, after sufficient time for discovery, the non-moving party has failed to make a sufficient showing of an essential element of its case as to which it has the burden of proof. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

Background

Shamrock Associates, a limited partnership from New Jersey, seeks monetary damages for violations of Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5; for violations of the common law of fraud; and for violations of the common law of negligent misrepresentation. See Amended Complaint (filed June 2, 1989). The defendants are former directors and officers of Prime Medical Services, Inc. (Prime Medical), a Delaware corporation whose common shares are traded on the New York Stock Exchange, and Peat, Marwick, Main & Co. (Peat Marwick), the independent auditor for Prime Medical.

Plaintiff alleges damages stemming from its purchases of Prime Medical stock, from April 1986 through April 1987, in reliance upon Prime Medical's fraudulent misrepresentations in financial statements filed with the SEC. As far back as May 1986, plaintiff filed a Schedule 13D with the SEC indicating that plaintiff was considering the possibility of a takeover of Prime Medical because the activities of Prime Medical's management was having a depressing effect on the market value of its shares. In that Schedule 13D, Shamrock stated that it believed the resources of Prime Medical were being wasted to benefit certain members of the Prime Medical's Board of Directors and expressed particular concern about Prime Medical's purchase of minority stock positions in two companies in which Prime Medical directors were principal stockholders and directors. A similar Schedule 13D was filed in January 1987 asserting that Prime Medical's management had engaged "in a continuum of . . . self-dealing, self-entrenchment and self-enrichment." Ex. 7 to Wailand Aff.

In February 1987, Shamrock filed a complaint in the Southern District of New York in connection with its attempt to gain control of Prime Medical. In that action, Shamrock alleged that the defendants — some of whom were then Prime Medical's management and are defendants in this action — had violated Sections 10(b) and 13(d) of the Exchange Act, as well as the common law of tort and contract, by failing to disclose information pertinent to defendants' intentions to ward off Shamrock's attempt to gain control of Prime Medical. On March 2, 1987, Shamrock filed an amended complaint expanding on its 10(b) and 13(d) claims.

Plaintiff alleges that after it took over Prime Medical, upon examination of the internal books and records, it discovered that the market value of Prime Medical's stock had been inflated by fraud and misrepresentations in financial statements: including, the concealment of a pattern of self-dealing; the concealment of substantial and material payments made, at least in part, for the benefit of defendants Sloane and Alternative, their families or affiliates; and material overstatements of the value of Prime Medical's investment in National HMO Corp. Am. Comp. ¶¶ 45, 63, 82.

On August 11, 1988, the plaintiff signed an agreement with Peat Marwick tolling the statute of limitations with respect to the claims asserted in this action.*fn1 On October 31, 1988, plaintiff filed suit against the individual defendants. On May 31, 1989, the tolling period between plaintiff and Peat Marwick expired. On June 2, 1989, plaintiff amended the complaint to add Peat Marwick as a defendant. On September 6, 1989, the Court rejected the management defendants' argument that they were entitled to summary judgment on the basis of the Stock Purchase Agreement's "release" provision. Pl.Ex. G, App. II. The Court held that there were genuine issues of material fact as to whether the Agreement was obtained by fraud, defendants' intent to deceive and plaintiff's fulfillment of its duty of reasonable inquiry. On January 4, 1990, the Court heard oral argument on the motions currently at issue.

Discussion

Defendants' motion is premised upon (1) the expiration of the statute of limitations, (2) the applicability of principles of res judicata, (3) the failure of allegations of misrepresentations in connection with purchases after the signing of the Stock Purchase Agreement to state a claim under Section 10(b), and (4) the failure to state a claim of negligent misrepresentation.

I. Statute of Limitations

Defendants contend that plaintiff's Section 10(b) and Rule 10b-5 claim should be dismissed because of the expiration of the statute of limitations. Neither Congress nor the Supreme Court has designated a uniform limitations period for Section 10(b) actions. To determine the applicable statute of limitations, the Court must look for guidance to law of the forum state, New York. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210 n. 29, 96 S.Ct. 1375, 1389 n. 29, 47 L.Ed.2d 668 (1976); In re Data Access Systems Securities Litigation, 843 F.2d 1537, 1540-41 (3d Cir.) (en banc), cert. denied sub nom., Vitiello v. I. Kahlowsky & Co., 488 U.S. 849, 109 S.Ct. 131, 102 L.Ed.2d 103 (1988); Stull v. Bayard, 561 F.2d 429, 431 (2d Cir. 1977), cert. denied, 434 U.S. 1035, 98 S.Ct. 769, 54 L.Ed.2d 783 (1978); Arneil v. Ramsey, 550 F.2d 774, 779 (2d Cir. 1977).

Defendants submit that the New York borrowing statute, CPLR § 202, requires that the New Jersey statute of limitations govern here. Both parties agree that the conditions precedent to invoking the law of New Jersey under the New York borrowing statute are (1) that the plaintiff is a resident of New Jersey and (2) that the cause of action accrued in New Jersey.*fn2 The principal place of business determines residency under CPLR ยง 202. See McMahan & Co. v. Donaldson, Lufkin & Jenrette Securities Corp., 727 F. Supp. 833 (S.D.N.Y. 1989) [hereinafter McMahan II]. Plaintiff concedes that it is a New Jersey resident. Tr. at 43 (Jan. 4, 1990) ("You ...


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