United States District Court, Southern District of New York
April 30, 1991
STANLEY B. BLOCK, ET AL., PLAINTIFFS,
FIRST BLOOD ASSOCIATES, ET AL., DEFENDANTS.
The opinion of the court was delivered by: Sweet, District Judge.
Defendants First Blood Associates, A. Frederick Greenberg
and Richard M. Greenberg (collectively, "First Blood") have
moved for summary judgment dismissing the complaint of
plaintiff Stanley B. Block and others ("the Investors") on the
grounds that their claims are barred by the statute of
limitations. For the following reasons, the motion is granted.
The parties, the underlying facts and the tortuous history
of this dispute are described in detail in the prior opinions
in this matter, familiarity with which is assumed. Block v.
First Blood Associates, 663 F. Supp. 50 (S.D.N.Y. 1987) ("Block
I"); Block v. First Blood Associates, 691 F. Supp. 685 (S.D.N.Y.
1988) ("Block II"); Block v. First Blood Associates, 125
F.R.D. 39 (S.D.N.Y. 1989) ("Block III"); Block v. First Blood
Associates, 743 F. Supp. 194 (S.D.N.Y. 1990) ("Block IV").
The Present Motion
Following the Second Circuit's decision in Ceres Partners v.
GEL Associates, 918 F.2d 349 (2d Cir. 1990) to adopt a uniform
statute of limitations in securities actions brought under §
10(b) of the Securities Exchange Act of 1934, First Blood moved
on November 19, 1990 for summary judgment, seeking to apply the
new rule announced in Ceres, under which claims must be filed
within "one year of their discovery, but in no event more than
three years after their accrual." Id. at 351.
Once the Ceres issue had drawn First Blood's attention to the
limitations question, it recognized that even under pre-Ceres
law there was a question of the timeliness of the Investors'
claims. First Blood's reply papers therefore broadened the
argument to include this issue as well. Oral argument was heard
on January 14, 1991, and following further submission by the
parties, the matter was taken on submission on February 21,
1. The Investors Have Not Established Prejudice Which Would
Warrant Denying Amendment of the Answer.
Although First Blood has not in fact moved to amend its
answer, its invocation
of the statute of limitations must be considered as a motion
to amend under Fed.R.Civ.P. 15(a) to assert the statute as an
affirmative defense. See Williams v. Chase Manhattan Bank,
N.A., 728 F. Supp. 1004
, 1007 (S.D.N.Y. 1990). Rule 15(a)
provides that leave to amend "shall be freely given when
justice so requires." As the Second Circuit has often stated,
Reasons for a proper denial of leave to amend
include undue delay, bad faith, futility of the
amendment, and perhaps most important, the
resulting prejudice to the opposing party. Mere
delay, however, absent a showing of bad faith or
undue prejudice, does not provide a basis for a
district court to deny the right to amend.
State Teachers Retirement Board v. Fluor Corp., 654 F.2d 843
856 (2d Cir. 1981) (citing Foman v. Davis, 371 U.S. 178
83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962)); see also Richardson
Greenshields Securities, Inc. v. Lau, 825 F.2d 647
, 653 n. 6
(2d Cir. 1987); Howey v. United States, 481 F.2d 1187
(9th Cir. 1973) (Lumbard, J.).
The Investors assert that permitting First Blood to assert
the statute of limitations at this late date, nearly four
years after its original answer, constitutes "undue delay"
which should prevent First Blood from amending that answer.
Therefore, they contend, under Fed.R.Civ.P. 8(c), First Block
must be held to have waived the limitations defense, and its
motion must be denied.
However, as Fluor indicates, a party opposing a proposed
amendment on the basis of delay must also demonstrate either
the amending party's bad faith or the undue prejudice which
would result from the amendment. The Investors do not seriously
contend that First Blood's failure to avail itself of the
limitations argument prior to this time was the result of
anything but inadvertence, nor has any evidence been adduced
which would support a finding of bad faith.
The Investors do, however, assert that permitting the
amendment at this late stage of the litigation would cause
them substantial prejudice, primarily based on the extensive
discovery and motion practice which have taken place and the
substantial attorneys' fees and expenses which have
accumulated over the course of the lawsuit. They also allege
that First Blood's failure to raise the limitations issue
earlier denied them the opportunity to file their claims in a
jurisdiction in which they might not have been time-barred.
In order to resolve the issue, it is necessary to consider
the nature of the Fluor requirement of "prejudice." It seems
clear that a party opposing amendment cannot prove prejudice
merely by the fact that the amendment may make it more
difficult, or even impossible, for that party to prevail in the
litigation. This conclusion applies no matter how heavily the
party opposing amendment has invested in the litigation: a
claim or defense which is not itself meritorious cannot be
preserved simply by its proponent's expenditure of funds.
As the Investors correctly note, a plaintiff's assertion of
a time-barred claim is valid so long as the defendant does not
assert the defense. Nevertheless, a plaintiff may reasonably
be charged with knowledge of the limitations period applicable
to his complaint, and thus a plaintiff who incurs significant
expenses in pressing an untimely claim cannot thereafter rely
on those expenses to establish prejudice.
A review of the case law supports the conclusion that
payment of past expenditures which would not otherwise have
been incurred is not prejudice of the type required to prevent
amendment. In a typical case, such prejudice may be
established only where the proposed amendment would require
the opponent to expend significant additional amounts in order
to conduct discovery and prepare for trial, or where it would
significantly delay the resolution of the dispute. For
example, in Fluor the Second Circuit reversed the denial of
leave to amend the complaint, stating that "[t]his is not a
case where the amendment came on the eve of trial and would
result in new problems of proof." 654 F.2d at 856. In Calloway
v. Marvel Entertainment Group, 110 F.R.D. 45 (S.D.N.Y. 1986),
to amend was granted, although on the eve of trial, "since
there is no indication of undue delay, no need for additional
discovery on these issues, nor any indication that such
amendments would prejudice" the defendant. Id. at 48. In United
States v. Continental Illinois National Bank and Trust Co. of
Chicago, 889 F.2d 1248 (2d Cir. 1989), the court permitted
amendment, stating that "the adverse party's burden of
undertaking discovery, standing alone, does not suffice to
warrant denial of a motion to amend a pleading." Id. at 1255
(citing S.S. Silberblatt, Inc. v. East Harlem Pilot
Block-Building 1 Housing Dev. Fund Co., 608 F.2d 28, 43 (2d
Cir. 1979)). In the present case, while First Blood's amendment
may come shortly before trial, it will neither delay the
resolution of the case nor require the Investors to prepare to
address new issues at trial, but rather will obviate the need
for a trial.
Another line of cases raising issues of timeliness in
amending an answer are those cases dealing with the assertion
of the affirmative defense of arbitration. Cases in which such
amendments have been denied reflect the fact that this defense
does not in any way resolve the dispute, but merely transfers
it to a new non-judicial forum, in which the parties may be
forced to repeat many of the steps which they have already
completed in the litigation. See, e.g., Demsey & Associates,
Inc. v. S.S. Sea Star, 461 F.2d 1009, 1018 (2d Cir. 1972)
(rejecting amendment attempted after trial on merits); Bengiovi
v. Prudential-Bache Secur., Inc., 1985 Fed.Sec.L.Rep. (CCH) ¶
91,012, 1985 WL 2143 (D.D.C. 1985) (rejecting attempted
amendment four and a half weeks before trial). On the other
hand, where the plaintiff would face additional expenses,
courts are reluctant to find sufficient prejudice to deny the
amendment. Rush v. Oppenheimer & Co., 779 F.2d 885, 890 (2d
Cir. 1985); Sweater Bee by Banff, Ltd. v. Manhattan Indus.,
Inc., 754 F.2d 457, 463 (2d Cir.) ("[plaintiff] is no worse off
proceeding now to arbitration than had [defendant] moved for
arbitration immediately after being served with the amended
complaint"), cert. denied, 474 U.S. 819, 106 S.Ct. 68, 88
L.Ed.2d 55 (1985).
Thus there is no authority which supports the Investors'
contention that their disbursement of legal fees constitutes
the type of prejudice necessary to prevent First Blood from
asserting the statute of limitations.
As for the Investors' second argument that First Blood's
delay has resulted in prejudice, it is true that a defendant
will not be allowed to amend his answer to plead the statute
of limitations if the delay in asserting the defense has
prevented the plaintiff from bringing a timely action in
another jurisdiction. See, e.g., Strauss v. Douglas Aircraft
Co., 404 F.2d 1152, 1157 (2d Cir. 1968):
[T]he prejudice to Strauss resulting from
Douglas' silence [on the limitations issue] is
easily understood. If Douglas had pleaded the
California Statute of Limitations as a defense in
May, 1962, Strauss would have had ample time to
initiate his litigation in Florida, where the
[statute of limitations] would not have run until
However, the parties here disagree whether, if First Blood
had raised the statute of limitations issue in its original
answer in January 1987, the Investors could in fact have
refiled their action in another jurisdiction.*fn2
Investors suggest that at least Iowa and Maine have
limitations periods which would have allowed them to file
timely claims in those states if the defendants had moved to
amend earlier. First Block counters that, not only would
neither of those states have had personal jurisdiction over
the defendants, the statutes of limitations cited by the
Investors are not the ones which those states apply to § 10(b)
claims. Without delving too deeply into the limitations and
choice of law policies of every state in the nation, it can be
said that the Investors have not adduced evidence sufficient to
prove that their claim could have been filed elsewhere
and therefore have not established the prejudice necessary to
prevent First Blood's amendment.
2. The Statute of Limitations Began to Run in 1982.
In Block IV, First Blood's accounting firm moved to dismiss
the Investors' claims on statute of limitations grounds. After
analyzing the Investors' claims and the type of harm which they
alleged, it was held that the statute had begun to run in
October 1982 when the last Investor purchased shares in the
limited partnership in question. 743 F. Supp. at 197-200. While
that decision by its terms dealt only with the Investors'
claims against the accountants rather than First Blood, the
reasoning applies equally well here.
The Investors insist that the statute should not have
started to run until late 1984, when they first realized that
they were not receiving the expected return on their
investments. An analogous argument was explicitly rejected in
[I]t is not disputed here that whatever action
[the accounting firm] took, whatever part it
played in the entire scheme, took place at or
before the issuance of the Memorandum containing
the Report in 1982. The [IRS'] disallowance of
the [tax] benefits in 1987 simply confirmed the
effect noted in the allegations of the initial
complaint and in no way affected or altered
whatever it was that [the firm] had done.
Confirmation is not synonymous with discovery.
[A]ny alleged loss for a violation of § 10(b) that
was allegedly caused by [the accountants] was
caused in 1982 when [the firm] prepared its Report
and when Block invested in purported reliance
thereon. The statute of limitations began to run at
that time, and the claim is time barred now.
743 F. Supp. at 200. Similarly here the Investors' claims
against First Blood are all based on actions prior to the sale
of shares in the limited partnership. The fact that the
expected returns did not materialize in 1984 "in no way
affected or altered whatever it was that [First Blood] had
done." The Investors have not offered compelling reasons to
reconsider this conclusion, therefore the statute of
limitations must be held to have begun to run no later than
October 1982. As the Investors' class action complaint*fn3
was not filed until December 1986, the relevant limitations
period is a little over four years. Additionally, the
Investors concede that they should have discovered the fraud
in late 1984, and that the complaint was therefore filed
between two and three years after discovery. See Plaintiff's
January 10, 1991 Surreply Memorandum of Law in Opposition to
Motion to Dismiss at 20.
3. Under New York's Borrowing Statute the Investors' Claims
Were Time-Barred in December 1986.
As the Second Circuit explained the situation which existed
[T]his Circuit, like most others, has
consistently held that the statute of limitations
[in securities cases] should be adopted by
reference to the pertinent laws of the forum
state. . . .
In order to determine what statute of
limitations New York would apply, a district
court sitting in New York must consider the
borrowing rules found in N.Y. CPLR § 202. With
respect to nonresidents of New York, § 202
provides, in pertinent part, that:
[a]n action based upon a cause of action
accruing without the state cannot be commenced
after the expiration of the time limited by the
laws of either the state or the place without
the state where the cause of action accrued. .
We have construed this provision as meaning that
in a § 10(b) action, the cause of action accrues
"where `its economic
impact is felt, normally the plaintiff's
residence.'" Thus if a suit brought in the
"place" of the plaintiff's residence would be
time-barred, the suit in a New York federal court
Ceres, 918 F.2d at 352-53 (citations omitted, quoting Sack v.
Low, 478 F.2d 360
, 366 (2d Cir. 1973)).
First Blood asserts, without contradiction, that all of the
Investors are residents of the states of Alabama, California,
Colorado, Connecticut, Florida, Illinois, Pennsylvania, South
Carolina, Tennessee and Texas. It also cites authority
establishing that under the statutes of limitations applied to
§ 10(b) actions in each of those jurisdictions the Investors'
claims were untimely as of December 1986:
Alabama — 2 years. See White v.
Sanders, 650 F.2d 627, 629 (5th Cir. 1981).
California — 3 years. See Davis v.
Birr, Wilson & Co., 839 F.2d 1369, 1369-70 (9th
Colorado — 3 years. See Aldrich v.
McCulloch Properties, Inc., 627 F.2d 1036, 1041
(10th Cir. 1980).
Connecticut — 3 years at most. See
Klock v. Lehman Bros. Kuhn Loeb Inc., 584 F. Supp. 210,
216 (S.D.N.Y. 1984); see also Welch v. Cadre
Capital, 923 F.2d 989, 993 (2d Cir. 1991) (two
years from date of discovery).
Florida — 5 years from loss/2 years from
discovery. See Byrne v. Gulfstream First Bank &
Trust Co. of Boca Raton, 528 F. Supp. 692, 693-94
(S.D.Fla. 1981), aff'd, 720 F.2d 686 (11th Cir.
Illinois — 3 years. See Teamsters Local
282 Pension Trust Fund v. Angelos, 815 F.2d 452,
455-56 (7th Cir. 1987).
Pennsylvania — 3 years at most. See
Alfaro v. E.F. Hutton & Co., 606 F. Supp. 1100,
1105-06 (E.D.Pa. 1985).
South Carolina — 3 years. See
Mid-Carolina Oil, Inc. v. Klippel, 526 F. Supp. 694,
695-97 (D.S.C. 1981), aff'd mem.,
673 F.2d 1313 (4th Cir.), cert. denied, 457 U.S. 1107, 102
S.Ct. 2906, 73 L.Ed.2d 1315 (1982).
Tennessee — 3 years at most. See
Nichols v. Merrill Lynch, Pierce, Fenner &
Smith, 706 F. Supp. 1309, 1320-21 (M.D.Tenn.
Texas — 4 years at most. See Longden v.
Sunderman, 737 F. Supp. 968, 971 (N.D.Tex. 1990).
Thus under the New York borrowing statute applied in
securities cases prior to Ceres, all of the Investors' claims
were time-barred at the time the original class action
complaint was filed in December 1986.
4. Because the Investors Did Not Rely on Pre-Ceres Law, Ceres
Can Be Applied Retroactively.
Alternatively, even if First Blood's motion to amend its
answer were to be held untimely with respect to the
pre-Ceres statute of limitations, it could not be considered
untimely insofar as it seeks to apply the Ceres rule, as the
motion was filed only eleven days after Ceres was handed down.
Therefore, it is appropriate to consider whether Ceres should
be applied retroactively to the Investors' claims.
The major question left unresolved by Ceres was whether the
new limitations rule announced there would be applied to cases
which had been filed before that decision was handed down. See
Ceres, 918 F.2d at 364. The Second Circuit has since refused to
apply Ceres retroactively on two different occasions. Levine v.
NL Indus., Inc., 926 F.2d 199 (2d Cir. 1991); Welch v.
Cadre Capital, supra, 923 F.2d 989; see also Finkel v. Stratton
Corp., 754 F. Supp. 318, 331-32 (S.D.N.Y. 1990). However, these
cases make clear that the question of whether to apply the rule
retroactively is one which must be decided on a case by case
basis. The standard to be used in making this determination was
set forth in Welch:
We look to the three-part test set forth in
Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349
[30 L.Ed.2d 296] (1971), to determine whether this
rule should be applied retroactively to bar the
plaintiffs' '34 Act claims. . . . To qualify for
purely prospective application, a decision "must
establish a new principle of law, either by
overruling clear past precedent
on which litigants may have relied, . . . or by
deciding an issue of first impression whose
resolution was not clearly foreshadowed." A court
should then "weigh" in each case whether
retroactive application would conflict with the
purposes of the rule and whether it would produce
923 F.2d at 993 (quoting Chevron, 404 U.S. at 106, 92 S.Ct. at
355, footnotes omitted). The court emphasized that "the first
prong of the Chevron test requires only a prior rule on which
plaintiffs `may' have relied, and does not create a test of
actual reliance." 923 F.2d at 993 n. 5. See also Levine, 926
F.2d at 201-02; Finkel, 754 F. Supp. at 331-32.
The rationale for denying retroactive application of
Ceres in Welch, Levine and Finkel was that prior to Ceres it
was well-settled in this Circuit that the statute of
limitations applied in securities actions was the most nearly
analogous state statute. See Welch, 923 F.2d at 994 ("the
impending revision of a limitations period for 10b-5 claims was
not so clearly foreshadowed that plaintiffs were chargeable
with its prediction"); Levine, 926 F.2d at 202;
Finkel, 754 F. Supp. at 332 ("Under the New York statute and the
Second Circuit rule in existence at the time of filing,
[plaintiffs'] § 10(b) claim was timely").
In the present case, however, as the preceding discussion
makes clear, the Investors' claims were in fact untimely even
under the pre-Ceres rule. Bearing in mind the Welch comment
that the Chevron test requires a rule on which the plaintiff
"may" have relied, the Investors cannot satisfy the first
Chevron prong, as at most they could have relied on First
Blood's failure to notice the limitations problem, and that
therefore the federal limitations period announced in Ceres
ought to apply to their claims. See United States v. Johnson,
457 U.S. 537, 550 n. 12, 102 S.Ct. 2579, 2587 n. 12, 73 L.Ed.2d
202 (1982) (describing the first Chevron prong as "the
threshold test for determining whether or not a decision should
be applied nonretroactively").*fn4
The limitations period adopted in Ceres is the "one
year/three year" rule, i.e., one year from the plaintiff's
discovery of the claim, but in no event more than three years
from the date of accrual of the claim. Under this rule, the
Investors' claims would have been time-barred as of October,
1985, more than one year prior to the filing of the class
Under the limitations rule in effect prior to the Second
Circuit's decision in Ceres the Investors' claims were untimely
at the time the original class action complaint was filed.
Therefore, First Blood's motion for summary judgment based on
the pre-Ceres statute of limitations is granted. Alternatively,
as the Investors could not have relied on the pre-Ceres state
of the law, Ceres applies retroactively to bar their claims.
It is so ordered.