United States District Court, Southern District of New York
November 15, 1991
BORDEN, INC., ALFRED S. CUMMIN, A.S. D'AMATO, ANN FORRESTAL AND W. DONALD NYLAND AS EXECUTORS OF THE ESTATE OF FRANK
FORRESTAL, DECEASED, ROBERT GUTHEIL, JON HETTINGER, DAVID KELLY, WALTER KOCHER, AUGUSTINE MARUSI, RUTH MARUSI, ALLAN MILLER, BERNARD NEMTZOW, HERMAN PEED, EDWARD I. PIERNICK, JOSEPH SAGGESE, EUGENE SULLIVAN AND GLORIA SULLIVAN, PLAINTIFFS, V. SPOOR BEHRINS CAMPBELL & YOUNG, INC.; FIRST INTERSTATE BANK, LTD.; FIRST INTERSTATE SERVICES, INC.; KENNETH R. BEHRINS, T. RICHARD SPOOR, ROBERT L. CAMPBELL AND MICHAEL D. YOUNG, DEFENDANTS.
The opinion of the court was delivered by: Conner, District Judge.
OPINION AND ORDER
Plaintiff investors charge defendants with fraud in
connection with the sale of securities. This action is
currently before the Court on the motion of defendants First
Interstate Bank, Ltd. and First Interstate Services, Inc.
("First Interstate") for summary judgment pursuant to Rule
56(b) Fed.R.Civ.P. as to the claims brought against them by
plaintiff Augustine R. Marusi, the retired Chief Executive
Officer of plaintiff Borden, Inc., a consumer products and
chemical company. Plaintiff has cross-moved for leave to file
a second amended complaint under Rule 15.
The amended complaint in this action alleges, inter alia,
various fraudulent and corrupt practices in connection with the
sale of securities in violation of Section 10(b) of the
Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b),
and Rule 10b-5 promulgated thereunder. The amended
complaint identifies as the primary wrongdoer in this action,
Spoor Behrins Campbell & Young, Inc. ("SBCY"), a firm of
investment advisors. The amended complaint identifies the
moving defendants as successive parent corporations and sole
stockholders of SBCY from May, 1983, to December 31, 1987, and
asserts their liability under Section 10(b) and Rule 10b-5; the
Racketeer Influenced and Corrupt Organizations Act ("RICO"),
18 U.S.C. § 1961 et seq.; and Section 20(a) of the Exchange Act,
15 U.S.C. § 78t(a). The amended complaint further alleges
claims against the moving defendants for the imposition of a
constructive trust and for aiding and abetting SBCY's alleged
commission of common law fraud and breach of fiduciary duty.
The genesis of this action can be traced back to 1978, when
members of SBCY approached executives of plaintiff Borden
offering to establish a program pursuant to which it would
provide key Borden executives, including Marusi and the other
individuals named above, with investment advice to be paid for
by Borden on an annual per capita fee basis. Am. Cmplt. ¶ 26.
According to the amended complaint, SBCY represented to Borden
and Borden officials, that it was independent and was acting
only in the best interests of the Borden executives who were
the beneficiaries of its service. Am. Cmplt. ¶ 27. The gravamen
of this action is the alleged failure of SBCY to disclose to
Marusi and the other plaintiffs payments allegedly made to SBCY
by organizers and promoters of investment ventures as
consideration for SBCY's recommendations and sales of security
interests to Marusi and the other named plaintiffs. Am. Cmplt.
From 1979 through 1984, Marusi made a series of twelve
investments through SBCY, ten of which he challenges in this
action. Plaintiff asserts that no pre-investment materials he
received disclosed any commission or payments to SBCY for
selling to Marusi.*fn1 Op.Mem. at 18. Plaintiff further
asserts that SBCY affirmatively denied receiving payments in
offeree representative questionnaires issued in four of the ten
subject transactions. Op.Mem. at 26. Moreover, plaintiff avers
that subsequent to the challenged investments, in numerous
filings with the SEC and Federal Reserve Board and in
conversations with Borden officials, defendants actively
concealed the commission payments received. Am. Cmplt. ¶¶
Plaintiff made the last investment he challenges here on
August 13, 1984, and he filed the complaint commencing this
lawsuit more than five years later on December 28, 1989.
1. Applicable Legal Requirements
A party seeking summary judgment must demonstrate that "there
is no genuine issue as to any material fact." Fed.R.Civ.P.
56(c); Knight v. U.S. Fire Ins. Co., 804 F.2d 9, 11 (2d Cir.
1986), cert. denied, 480 U.S. 932, 107 S.Ct. 1570, 94 L.Ed.2d
762 (1987); see Celotex Corp. v. Catrett, 477 U.S. 317, 106
S.Ct. 2548, 91 L.Ed.2d 265 (1986). "When the moving party has
carried its burden under Rule 56(c), its opponent must do more
than simply show that there is some metaphysical doubt as to
the material facts." Matsushita Elec. Industrial Co. v. Zenith
Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356, 89
L.Ed.2d 538 (1986). It must establish that there is a "genuine
issue for trial." Id. at 587, 106 S.Ct. at 1356. "In
considering the motion, the court's responsibility is not to
resolve disputed issues of fact but to assess whether there are
any factual issues to be tried, while resolving ambiguities and
drawing reasonable inferences against the moving party."
Knight, 804 F.2d at 11. The inquiry under a motion for summary
judgment is thus the same as that under a motion for a directed
verdict: "whether the evidence presents a sufficient
disagreement to require submission to a jury or whether it is
so one-sided that one party must prevail as a matter of law."
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106
S.Ct. 2505, 2512, 91 L.Ed.2d 202 (1986).
2. Plaintiffs' Section 10(b) Claim
Defendants move for summary judgment on plaintiff's § 10(b)
claim on the grounds that this claim is time-barred. The
Supreme Court has recently decided that the limitations period
applicable to implied private claims under § 10(b) of the
Exchange Act and Rule 10b-5 is the one-and-three-year structure
applicable to express causes of action under the Exchange Act.
Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, ___
U.S. ___, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991). Thus, the
Court held that "litigations instituted pursuant to § 10(b) and
Rule 10b-5 therefore must be commenced within one year after
the discovery of the facts constituting the violation and
within three years after such violation." See id., 111 S.Ct. at
2782. Significantly, the Supreme Court applied its holding
retroactively in Lampf, thereby making the
plaintiff-respondents' lawsuit untimely. See id. at 2782.
In James B. Beam Distilling Co. v. Georgia, ___ U.S. ___, 111
S.Ct. 2439, 115 L.Ed.2d 481 (1991), decided the same day as
Lampf, the Court addressed the issue of retroactivity with
respect to newly announced rules of law, declaring that it is
error to refuse to apply a rule of federal law retroactively
after the case announcing the rule has already done so and that
"[o]nce retroactive application is chosen for any assertedly
new rule, it is chosen for all others who might seek its
prospective application." See id., 111 S.Ct. at 2447-2448. In
light of Beam, the Second Circuit has
recently confirmed that Lampf will be applied retroactively in
this Circuit. See Welch v. Cadre Capital, 946 F.2d 185 (2d Cir.
In the instant case plaintiff does not contest
Lampf's retroactive effect. Instead, plaintiff insists that the
doctrine of equitable estoppel survived Lampf and bars First
Interstate from invoking Lampf's three-year statute of repose.
Plaintiff's argument derives in large part from the Court's
failure in Lampf to comment explicitly on the availability of
equitable estoppel to avoid the three-year period of repose
established by the Court. The Court noted only that the
three-year period is "a period of repose inconsistent with
tolling" and later reiterated the point that "tolling
principles do not apply to [the three-year] period." Lampf, 111
S.Ct. at 2782.
In further support of its contention, plaintiff notes that
the one commentator cited by the Supreme Court in support of
its rejection of equitable tolling in Lampf actually suggests
that the doctrine of equitable estoppel may extend that
statutory period. See Op.Mem. at 65 (quoting Bloomenthal, The
Statute of Limitations and Rule 10b-5 Claims: A Study of
Judicial Lassitude, 60 U.Colo.L.Rev. 291-92 (1989)).
Plaintiff fails to note, however, that the one
post-Lampf decision to address this issue found equitable
estoppel inconsistent with Lampf's holding. In Anixter v.
Home-Stake Prod. Co., 939 F.2d 1420 (10th Cir. 1991), the Tenth
Circuit applied the statutory one-and-three-year rule of
section 13 of the Securities Act of 1933 to plaintiffs 1933 Act
claims and then the Lampf rule to plaintiffs' Rule 10b-5
claims. In so doing, the appellate court overturned the lower
court's holding, which was based on the jury's findings, that
defendants were equitably estopped from raising the statute of
limitations defense. After detailed analysis of the relevant
congressional history, the appellate court concluded:
[W]e believe the more accurate analysis [of
Section 13] excludes the application of [equitable
estoppel] when the consequence operates to trump a
clear outer limit intended by Congress. "Unless
the `in no event more than three' language cuts
off claims of tolling and estoppel at three years,
however, it serves no purpose at all — what other
function could be served by such language in a
statute that starts the time on discovery?" We
therefore conclude that the doctrine of equitable
estoppel is not available to avoid the statute of
repose established by Section 13.
Anixter, 939 F.2d at 1436 (quoting Short v. Belleville Shoe
Mfg. Co., 908 F.2d 1385, 1391). Once it had decided the pivotal
issue as to Section 13, the Tenth Circuit had little
difficulty, following Lampf, deciding that the same reasoning
applied to the court-imposed limitation for Rule 10b-5 actions:
"based on our prior discussion of Section 13 to plaintiffs'
express causes of action, we hold that plaintiffs' Section
10(b) and Rule 10b-5 claims are untimely and must be
dismissed." Id. at 1441.
In addition to the Tenth Circuit's holding in
Anixter, a Seventh Circuit decision cited with approval in
Lampf also supports this Court's refusal to apply equitable
estoppel to the instant claims. In Lampf, the Supreme Court
stated that it "agreed with every Court of Appeals that ha[d]
called upon to apply a federal statute of limitations to a
§ 10(b) claim. . . ." Lampf, 111 S.Ct. at 2781. In support, the
Court cited, inter alia, Short v. Belleville Shoe Mfg. Co.,
908 F.2d 1385 (7th Cir. 1990).*fn3 In Belleville Shoe, the Seventh
Circuit addressed the question at issue here, holding that
equitable estoppel is not available to extend the three-year
repose period; the court reasoned that "[u]nless the `in no
event more than three' language cuts off claims of tolling and
estoppel at three years . . . it serves no purpose at all." 908
F.2d at 1391.
Here, as in Belleville Shoe and Anixter, the Court finds that
the three-year period of repose acts as an absolute bar to
plaintiff's Section 10(b) claims.*fn4 The most recent
violation of Section 10(b) of which plaintiff complains
occurred in August of 1984. Accordingly, plaintiff was required
to commence an action on or before August of 1987, three years
after the occurrence of the conduct alleged to have violated
the statute. Since plaintiff's original complaint was filed in
December of 1989, his Section 10(b) claims must now be
3. Plaintiff's RICO claim
Defendants also seek to dismiss plaintiff's RICO claims as
time-barred. In Agency Holding Corp. v. Malley-Duff & Assocs.,
Inc., 483 U.S. 143, 107 S.Ct. 2759, 97 L.Ed.2d 121 (1987), the
Supreme Court held that a four-year statute of limitations
should apply to all civil RICO actions regardless of the
predicate acts involved. Subsequently, in Bankers Trust Co. v.
Rhoades, 859 F.2d 1096 (2d Cir. 1988), cert. denied,
490 U.S. 1007, 109 S.Ct. 1642, 104 L.Ed.2d 158 (1989), the Second
Circuit held "each time a plaintiff suffers an injury caused by
a violation of 18 U.S.C. § 1962, a cause of action to recover
damages based on that injury accrues to plaintiff at the time
he discovers or should have discovered the injury." Id. at
This limitations standard, in contrast to the 10b-5 statute
of repose discussed above, is subject to equitable
tolling.*fn5 Nonetheless, defendants argue vigorously that
this Court should grant summary judgment on plaintiff's RICO
claims. Specifically, defendants contend that the four-year
RICO statute of limitations begins to run when the plaintiff
should have discovered his RICO injury in the exercise of
"reasonable diligence." Griffin v. McNiff, 744 F. Supp. 1237,
1255 (S.D.N.Y. 1990) (citing Armstrong v. McAlpin, 699 F.2d 79,
8 (2d Cir. 1983)). Defendants further contend that the critical
point is not "the time at which plaintiff becomes aware of all
of the various aspects of the alleged fraud, but rather . . .
the time at which plaintiff should have discovered the general
fraudulent scheme." See Def.Rep. Mem. at 20-21 (citing Arneil
v. Ramsey, 550 F.2d 774, 780 (2d Cir. 1977)).
Defendants next contend that from the beginning of his
relationship with SBCY in 1979, by virtue of offering documents
that he received, signed, and held in his possession, Marusi
was on notice that SBCY received various forms of monetary
from general partners and their affiliates. Thus, defendants
conclude that plaintiff was on notice, or by virtue of due
diligence should have been on notice, of the alleged fraud at
the time he made each of the investments at issue and therefore
the statute of limitations cannot be tolled in the instant
While defendants spend an inordinate amount of time in their
papers trying to prove the essentially factual issue of what
plaintiff knew and when plaintiff knew it, this Court is
reluctant to engage in the type of fact-finding defendants
request on a motion for summary judgment.*fn6 "Issues of due
diligence and constructive knowledge depend on inferences drawn
from the facts of each particular case — similar to the type
of inferences that must be drawn in determining intent and good
faith." Robertson v. Seidman & Seidman, 609 F.2d 583, 591 (2d
Cir. 1979). As the Second Circuit further noted in Friedman v.
Meyers, 482 F.2d 435, 439 (2d Cir. 1973): "We have repeatedly
stated that summary judgment is particularly inappropriate
where, as here, it is sought on the basis of `inferences which
the parties seek to have drawn [as to] questions of motive,
intent and subjective feelings and reactions.'"
Far more damaging to their motion, however, is defendants'
complete failure to address the principal argument in
plaintiff's opposition brief. The very inquiry into Marusi's
due diligence that defendants request of the Court is wholly
immaterial, as plaintiff strenuously argues, because Marusi has
alleged active concealment of the fraud by defendants.*fn7 The
Second Circuit, as well as several other courts, has adopted
the rule that where there is active concealment, a plaintiff's
due diligence is irrelevant. See Robertson v. Seidman &
Seidman, 609 F.2d at 593 (2d Cir. 1979); Sperry v. Barggren,
523 F.2d 708, 711 (7th Cir. 1975); Tomera v. Galt,
511 F.2d 504, 510 (7th Cir. 1975).
In adopting the active/passive distinction, the Second
Under the federal equitable tolling doctrine, the
active concealment of fraudulent conduct tolls the
statute of limitations in favor of the defendant
party until such time as he actually knew of the
fraudulent conduct of the opposing party.
Robertson v. Seidman & Seidman, 609 F.2d at 593 (citing
Atlantic City Electric Co. v. General Electric, 312 F.2d 236,
239 (2d Cir. 1962) (en banc), cert. denied, 373 U.S. 909, 83
S.Ct. 1298, 10 L.Ed.2d 411 (1963).
In the instant case, plaintiff's allegations of active
concealment are sufficient to create a genuine issue of
material fact as to the tolling of the applicable statute of
limitations. See Huang v. Sentinel Gov't Sec., 709 F. Supp. 1290,
1299 (S.D.N.Y. 1989); Clute v. Davenport Co., 584 F. Supp. 1562,
1579 (D.Conn. 1984). Marusi has alleged not only an
initial deception on the part of defendants, but also
subsequent affirmative steps to prevent discovery of the
scheme. Specifically, plaintiff alleges, inter alia, that
defendants affirmatively denied, in numerous SEC filings and
filings with the Federal Reserve Board, that it received
payments from organizers and promoters of investment ventures
as consideration for recommendations and sales of security
to Marusi and the other named plaintiffs. Am. Cmplt. ¶¶ 46-63.
In addition, plaintiff alleges several knowingly false
statements made by SBCY officials in an attempt to conceal the
payments they are alleged to have received. Am. Cmplt. ¶ 79.
Accordingly, defendants' summary judgment motion on plaintiff's
RICO claim is denied.
4. Jurisdiction over Pendent State-Law Claims
On the assumption that all of the other federal claims would
be dismissed, the moving defendants urge that the Court dismiss
the remaining pendent state-law claims. Because this Court
declines to grant defendants' summary judgment motion with
respect to the RICO claims, federal claims remain in the case.
Thus, this Court will continue to exercise pendent jurisdiction
over plaintiff's state-law claims.
5. Plaintiffs' Motion to Amend Complaint
All the named plaintiffs in this action have moved to amend
the Amended Complaint, pursuant to Fed.R.Civ.P. 15(a) by adding
four new counts and by modifying one existing count.
Specifically, plaintiffs move to add new causes of action
against First Interstate for conspiracy to violate § 10(b) of
the Exchange Act and Rule 10b-5; against all defendants for
conspiracy to commit common law fraud; against all defendants
for conspiracy to breach fiduciary duty; and against First
Interstate for conspiracy to cause SBCY to receive commercial
Rule 15 must be construed to allow courts liberally to grant
leave to amend. See Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct.
227, 230, 9 L.Ed.2d 222 (1962). In deference to this liberal
standard, defendants offer no objections as to plaintiffs'
proposed amendments except for plaintiffs' new count asserting
a conspiracy to violate the federal securities laws. Defendants
aver that because plaintiffs' securities claims are time barred
under Lampf, any conspiracy claims with respect to those
alleged violations must necessarily fail as well. The Court
agrees. In order to prove conspiracy in securities fraud
violations, plaintiff must establish an underlying securities
violation. See Hill v. Equitable Bank, 655 F. Supp. 631, 645-46.
(D.Del. 1987), aff'd, 851 F.2d 691 (3d Cir. 1988), cert.
denied, 488 U.S. 1008, 109 S.Ct. 791, 102 L.Ed.2d 782 (1989).
Because this Court has dismissed plaintiffs' 10(b) claims as
time-barred, permitting new allegations of a conspiracy to
violate Section 10(b) would be futile. Accordingly, Count III
of the proposed Second Amended Complaint and that part of
paragraph 320 relating to Count III will not be permitted. See
Posadas de Mexico, S.A. de C.V. v. Dukes, 757 F. Supp. 297, 300
(S.D.N.Y. 1991); Friedman v. Chesapeake & O.R. Co., 261 F. Supp. 728
(S.D.N.Y. 1966), aff'd, 395 F.2d 663 (2d Cir. 1968), cert.
denied, 393 U.S. 1016, 89 S.Ct. 619, 21 L.Ed.2d 561.
For the reasons stated above, defendants' motion for summary
judgment is granted in part and denied in part. Plaintiff's
cross-motion to amend the complaint is granted with those
exceptions enumerated above.