United States District Court, Southern District of New York
May 8, 1991
ERNEST GUTMAN, JOSEPH KARLIN, EDWARD J. KINEKE, THOMAS R. CASEY, ROBERT DOWNING, EFREM HIAN, MICHAEL R. TONGEL, NORMAN WALL, RALPH A. JESSAR, SALVATORE J. VERNACE, ELLIOT A. HELLER, AHMAD HASHEMIYOON, ALF ABRAHAMSEN, MICHAEL A. GOLD, BARRY JAY KAYE, ALAN H. KOTZ, JOSEPH
COOPER, HARRIS TRUST AND SAVINGS BANK, AS EXECUTOR OF THE ESTATE OF LLOYD V. CONANT, AND NOVICK BROS. A PENNSYLVANIA PARTNERSHIP, AS INVESTORS WHO PURCHASED THE SECURITIES OF EQUIDYNE EXTRACTIVE INDUSTRIES 1980 PETRO/COAL PROGRAM I AND ALSO DERIVATIVELY ON BEHALF OF EQUIDYNE 1980 GAS AND OIL ASSOCIATES I, A LIMITED PARTNERSHIP, PLAINTIFFS, V. EQUIDYNE EXTRACTIVE INDUSTRIES 1980 PETRO/COAL PROGRAM I, EQUIDYNE 1980 GAS AND OIL ASSOCIATES I, EQUIDYNE 1980 COAL VENTURE, EQUIDYNE EXTRACTIVE INDUSTRIES, INC., EQUIDYNE CORPORATION, EASTLAND DRILLING CORPORATION, EASTERN MINING SYSTEMS, EASTLAND INDUSTRIES, INC., STUART R. ROSS, JOEL I. BEELER, ROBERT H. LIEBMANN, ROBSON, MILLER & OSSERMAN, AND MARKS SHRON AND COMPANY, DEFENDANTS. ROBSON, MILLER & OSSERMAN, THIRD-PARTY PLAINTIFF, V. JOEL I. BEELER, THIRD-PARTY DEFENDANT.
The opinion of the court was delivered by: Kevin Thomas Duffy, District Judge:
MEMORANDUM AND ORDER
In early 1987, plaintiffs Ernest Gutman, Joseph Karlin,
Edward J. Kineke, Thomas R. Casey, Robert Downing, Efrem Hian,
Michael R. Tongel, Norman Wall, Ralph A. Jessar, Salvatore J.
Vernace, Elliot A. Heller, Ahmad Hashemiyoon, Alf Abrahamsen,
Michael A. Gold, Barry Jay Kaye, Alan H. Kotz, Joseph V.
Cooper, Harris Trust and Savings Bank as Executor of Lloyd V.
Conant's Estate, and Novick Brothers commenced
this action against, inter alia, defendant law firm of Robson,
Miller & Osserman ("Robson"), alleging violations of: § 10(b)
of the Securities and Exchange Act of 1934 ("1934 Act") and
Rule 10b-5 promulgated thereunder; §§ 17(a) and (a)(2) of the
Securities Act of 1933 ("1933 Act"); the Racketeer Influenced
and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq.
(1982); common law fraud and deceit; and legal malpractice in
connection with a fraudulent investment letter. On November 17,
1987, Robson moved to dismiss federal and pendent state claims.
By order dated July 25, 1990, I dismissed claims founded upon
§§ 17(a) and (a)(2) and legal malpractice against Robson. The
only claims which remain as against Robson are claims pursuant
to § 10(b) and Rule 10b-5, and state claims pendent thereto. In
addition, I dismissed the complaint against defendant
accounting firm, Marks Shron & Co. Robson now moves pursuant to
Fed.R.Civ.P. 15(a) to amend its answer to add an affirmative
statute of limitations defense as to the federal claims. In the
event that I grant that motion, Robson further moves pursuant
to Fed.R.Civ.P. 56(c) to dismiss all remaining federal claims
as time barred and dismiss the state claims for incomplete
diversity and lack of pendent jurisdiction.
This action arises out of the investments by Gutman, et al.
in a limited partnership known as Equidyne Extractive
Industries 1980, Petro/Coal Program I ("Equidyne") which was a
New York limited partnership created for the purpose of
subleasing, developing, and mining coal from various tracts of
land located in the State of Kentucky. Claiming to have been
induced to make their respective investments by a series of
written misrepresentations, Gutman et al. filed a complaint
against Robson on November 28, 1986.
In lieu of an answer, Robson moved to dismiss the complaint,
raising a statute of limitations defense as to the legal
malpractice claim only. No statute of limitations defense was
then asserted as to the alleged securities laws violations. An
amended complaint, dated September 11, 1987, was then filed,
containing the same essential claims but setting forth
additional supportive factual allegations. On November 17,
1987, Robson served another motion to dismiss the amended
complaint. Although that motion raised the issue of statute of
limitations on the legal malpractice claim, it raised no such
defense with regard to the claims based on securities law
violations and common law fraud. Subsequently, Robson served
its answer to the amended complaint. No affirmative defense was
contained within that answer dated September 24, 1990.
By this application, Robson now seeks to amend its answer in
order to add a statute of limitations defense to the federal
claims at bar. Gutman et al. take exception, claiming that
Robson does not deny that it was served with the original
complaint in early 1987 and should have been on notice of
potential affirmative defenses. Yet, almost four years after
service of the complaint, Robson seeks leave to amend its
answer to assert an affirmative defense with respect to claims
under § 10(b) of the 1934 Act, and Rule 10b-5 promulgated
thereunder. On the other hand, Robson asserts that no prejudice
will be suffered by the amendment. According to Robson, no
discovery has taken place in this action and it served its
answer a mere three months before bringing this motion, thus no
prejudice can be claimed. Not only is the delay reasonable, but
the request is made in light of a decision rendered by the
Second Circuit after the time that Robson answered.
Pursuant to Fed.R.Civ.P. 15(a), a party is given the
opportunity to amend its answer as follows:
(A) Amendments. A party may amend the party's
pleading once as a matter of course at any time
before a responsive pleading is served or, if the
pleading is one to which no responsive pleading is
permitted and the action has not been placed upon
the trial calendar the party
may so amend it at any time within 20 days after
it is served. Otherwise a party may amend the
party's pleading only by leave of court or by
written consent of the adverse party; and leave
shall be freely given when justice so requires. A
party shall plead and respond to an amended
pleading within the time remaining for response to
the original pleading or within 10 days after
service of the amended pleading, whichever period
may be longer, unless the court otherwise orders.
It is undisputed that under this rule, leave of court may be
sought when a party has determined that it must amend its
answer when more than 20 days have elapsed since the original
answer was served. In the within action, such leave is
necessary since Robson served and filed its original answer on
September 24, 1990. Furthermore, while motions to amend the
answer are committed to the discretion of the court, leave is
to be freely given when justice so requires. Poloron Products,
Inc. v. Lybrand Ross Bros. & Montgomery, 72 F.R.D. 556
(S.D.N.Y. 1976). A defendant would not be prohibited from
adding an affirmative defense about which it had knowledge as
long as the addition does not prejudice the opposing party.
Ragin v. Harry Macklowe Real Estate Co., 126 F.R.D. 475, 478
(S.D.N.Y. 1989). Moreover, "amendments seeking to insert or
correct matters about which parties should have known but did
not know are plainly within the scope of Rule 15(a)." Hanlin v.
Mitchelson, 794 F.2d 834 (2d Cir. 1986).
In this case, Robson contends that it is entitled to amend
its answer to include an affirmative defense of statute of
limitations, almost four years after service of the original
complaint and after resolving two previous motions to dismiss,
because of a recent decision in the Second Circuit that might
affect the viability of the federal claims at bar. I agree. New
law which creates the potential to affect jurisdiction over a
matter at hand provides adequate justification to allow an
answer to be amended.
A uniform statute of limitations period for federal claims
arising under § 10(b) of the 1934 Act has recently been set at
one-to-three years. Ceres Partners v. Gel Assoc., 918 F.2d 349
(2d Cir. 1990). "This `one year/three year' formulation bars
any suit filed more than one year after discovery of the fraud
or more than three years after the violation." Welch v. Cadre
Capital, 923 F.2d 989 (2d Cir. 1991). Prior to Ceres, there was
no uniform statute of limitations for federal securities fraud
litigation and district courts were constrained to borrow an
appropriate statute of limitations period. "Hence, the federal
court could be required to borrow whatever period one state
court would conclude a sister state's court might apply in a
case over which neither has any jurisdiction." Ceres Partners
v. Gel Assoc., 918 F.2d at 354. Thus, the longstanding practice
of borrowing the most analogous state statute of limitations
for claims founded on the 1934 Act § 10(b), and Rule 10b-5
promulgated thereunder, was essentially replaced. Welch v.
Cadre Capital, 923 F.2d 989, 992 (2d Cir. 1991).
In light of this, Robson maintains that it timely moved to
add an affirmative defense and requests that Ceres be applied
retroactively in order to dismiss the federal claims for having
been brought after the requisite statutory period of
one-to-three years. However, the ruling in Ceres had no adverse
consequence for the plaintiffs since their claims would have
been barred under the applicable limitations period under state
law. See Welch v. Cadre Capital, 923 F.2d at 993. Because
plaintiffs' 10b-5 claims were properly dismissed under either
approach in the Ceres case, left unresolved was the retroactive
application of the `one year/three year' limitations period.
Id. at 993 (citing Ceres Partners v. Gel Assoc., 918 F.2d at
The Supreme Court has articulated a three-part test germane
to determining whether to apply a new limitations rule
retroactively. Welch v. Cadre Capital, 923 F.2d at 993 (citing
Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S.Ct. 349, 30 L.Ed.2d
296 (1971)). A court must consider whether: (1) the new rule
past precedent on which litigants may have relied; (2)
retroactive application of the new rule will further or retard
its operation; (3) retroactive application would impose
injustice or hardship. Chevron Oil Co. v. Huson, 404 U.S. 97,
92 S.Ct. 349, 30 L.Ed.2d 296 (1971).
As to the first element, the one year/three year statute of
limitations sets new precedent. "Adoption of a uniform federal
limitations period changes the practice in this Circuit, which
was clear at the time the challenged fraud was discovered, of
looking to the law of the forum state for an appropriate
statute of limitations for 10b-5 claims." Welch v. Cadre
Capital, 923 F.2d at 994. Not only must there be a clear past
precedent set, but the plaintiffs must also be shown to have
relied thereupon. Generally, absent such reliance, a plaintiff
would not be able to make the requisite showing of undue
hardship or injustice, except that "the impending revision of a
limitations period for 10b-5 claims was not so clearly
foreshadowed that plaintiffs were chargeable with its
prediction." Id. (citing DelCostello v. International
Brotherhood of Teamsters, 462 U.S. 151, 103 S.Ct. 2281, 76
L.Ed.2d 476 (1983)). Thus, although reliance is oft an
essential factor, its absence will not affect this inquiry.
As to the second factor, retroactive application of the new
limitations period will always further the new rule,
i.e., "[a] new, shorter period will end a law suit filed beyond
the new limits, and a new, longer period will allow a lawsuit
otherwise barred." Welch v. Cadre Capital, 923 F.2d at 994.
This analysis is somewhat simplistic. The purposes of statutes
of limitations are to insure plaintiff's commencement of suit
in a timely manner while giving "notice to potential plaintiffs
of the time within which suit must commence and to potential
defendants of the time beyond which exposure to liability
ceases." Id. at 995. Application of a limitations period not
yet in existence at the time suit was commenced clearly appears
at odds to and not in furtherance of either aforementioned
As to the third Chevron factor, the equities appear to favor
Gutman et al. Indeed, for me to now apply a new and shorter
limitations period would be unfair because retroactive
application would not prompt a past plaintiff into timely
filing after the fact, and could constitute an unjust penalty
for rightful reliance on existing law. Retroactive application
of the Ceres rule would unjustly deny Gutman et al. their day
Robson argues that even in the event that I do not
retroactively apply the uniform statute of limitations, the
claims of Gutman, Karlin, Casey, Downing, Hian, Tongel, Wall,
Jessar, Hashemiyoon, Abrahamsen, Gold, Kaye, Kotz, Conant, and
Novick Bros. are time barred under the relevant state statutes
of limitations of the states in which they are domiciled.
Specifically, Robson asserts that although New York's six-year
statute of limitations, based on common law fraud, customarily
governs, its "borrowing statute," contained in N.Y.Civ.Prac.
Law & Rules § 202 (1988), is applicable to securities claims
instituted by non-New York residents. Robson further asserts
that the borrowing statute bars a claim based upon a cause of
action accruing outside of New York if the time limitation set
by the laws of either New York or the place outside of New York
where the action accrues has expired prior to the filing of the
complaint. Thus, if the claim is barred under the law of either
jurisdiction, the non-resident plaintiff can no longer pursue
the claim. At this juncture, Robson's argument on the law must
be rejected because questions of fact still remain regarding:
(1) when the fraud was realized; and (2) whether circumstances
tolled the statutes' accrual of time. This is enough to defeat
this motion for summary judgment.
For the foregoing reasons, Robson's motion is granted in part
and it is allowed to amend its answer to include a statute of
limitations defense. The remainder of its motion for summary
judgment is denied.
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