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July 8, 1992



The opinion of the court was delivered by: LAWRENCE M. MCKENNA

Currently pending before this Court are motions arising out of the Class Action Complaint ("Harold Menowitz, on behalf of himself and all others similarly situated, v. David F. Brown et al.") filed in the Southern District of New York on January 25, 1991. *fn1" The Complaint alleges violations of Sections 11 and 15 of the Securities Act of 1933 (the "Securities Act" or the "1933 Act"), 15 U.S.C. §§ 77k and 77o, Sections 10(b) and 20 of the Securities Exchange Act of 1934 (the "Exchange Act" or "the 1934 Act"), 15 U.S.C. §§ 78j(b) and 78t(a), Rule 10b-5 promulgated thereunder, and the common law. Plaintiff's motion for an order certifying the class pursuant to Rule 23 of the Federal Rules of Civil Procedure having been deferred, the Court in this Memorandum and Order addresses motions submitted on behalf of the individual defendants and Defendant KPMG Peat Marwick seeking dismissal of the Complaint. For the reasons that follow, the Defendants' motions are granted and the Complaint is dismissed in its entirety.


 The following description of the parties and recital of the factual background of this matter is drawn from the allegations of the Complaint. General Development Corporation ("GDC" or "the Company") is a residential, commercial and industrial real estate developer incorporated in the State of Delaware and headquartered in Miami, Florida. The Complaint alleges that GDC, which filed for Chapter 11 bankruptcy protection on April 6, 1990, is or was engaged in the development, offering, and sale of homesites and other properties located primarily in the state of Florida, and also in the construction and sale of single and multi-family housing, for which GDC provided mortgage financing to purchasers through a subsidiary called GDV Financial Corporation ("GDV" or "GDVFC"). GDC is or was a reporting company registered with the Securities and Exchange Commission (the "SEC") pursuant to the Securities Exchange Act, and the Complaint alleges that, at all relevant times, the bonds issued by the Company pursuant to the public offering that is the subject of the action were traded on the New York Stock Exchange. GDC, having filed for bankruptcy protection, is not a party to this lawsuit.

 Plaintiff Harold Menowitz is a purchaser of approximately $ 450,000 (face value) in bonds issued by The Company in a $ 110 million public offering (the "Offering") of 12-7/8% Senior Subordinated bonds (the "Bonds"). The Bonds were issued pursuant to a registration statement (the "Registration Statement"), which included a prospectus dated April 8, 1988 (the "1988 Prospectus").

 The individually named defendants (hereinafter collectively the "Individual Defendants") served as senior officers and/or directors of GDC at all relevant times, and were the signatories of assorted documents publicly disseminated by the Company. *fn2" The Complaint alleges that, as of December 31, 1988, Defendants Brown, Ehrling, Askew, Clark, Simons, Brinckerhoff, Hatch, Manley, Pyne and Scharffenberger owned shares of GDC common stock ranging in number from 200 to 357,258. Directors of the Company, and members and chairmen of the various Committees of the Board, received annual fees for their services, and each director received stock appreciation rights and was entitled to the equivalent of $ 2,500 per annum in tax advice and tax preparation assistance. According to the allegations of the Complaint, "by reason of their stock ownership, management positions and/or membership on GDC's Board of Directors, the Individual Defendants were "controlling persons" of GDC within the meaning of Section 15 of the Securities Act, [ 15 U.S.C. § 77o], and Section 20 of the [Securities] Exchange Act, [ 15 U.S.C. 78t(a)]."

 Defendants PaineWebber, Inc. ("PaineWebber") and Merrill Lynch, Pierce, Fenner & Smith, Inc. ("Merrill Lynch") (hereinafter collectively the "Underwriter Defendants") were the underwriters in connection with the Offering. The Complaint alleges that "the Underwriter Defendants purportedly conducted or participated in 'due diligence' investigations into the business, operations and prospects of GDC as part of their responsibilities as underwriters of the offering, and participated in the preparation of the Registration Statement and 1988 Prospectus."

 Plaintiffs' recital of GDC's activities during the purported class period, comprising forty-five pages and ninety-six paragraphs of the Complaint, is summarized here only briefly. In essence, Plaintiffs allege that certain documents issued and disseminated by the Company during the purported class period (April 8, 1988 through March 17, 1990), including the 1988 Prospectus as well as Quarterly and Annual Reports to shareholders and other publicly disseminated filings following the issuance of the 1988 Prospectus, misrepresented the Company's financial position and prospects, and contributed to the artificial inflation of GDC bonds.

 As factual background, Plaintiffs allege that for over seven years between 1982 and 1989, GDC was engaged in a "comprehensive and far reaching scheme" to solicit and consummate sales of Florida properties to unsophisticated purchasers, usually out-of-state residents with limited education and little or no experience in real estate. Potential customers would frequently be flown to Florida at GDC's expense, met at the airport by GDC sales representatives, and shepherded through the Company's "one-stop" shopping process, whose object was to minimize exposure to outside sources of information and assure the eventual sale of GDC properties at highly inflated rates. In furtherance of its "fraudulent selling practices," GDC allegedly provided customers with appraisals that substantially overestimated the value of GDC properties, encouraged the financing of purchases through GDC subsidiary GDV, and--until 1987, when the practice was halted following discovery by the Federal National Mortgage Association (the "FNMA")--contrived to maintain as current mortgages issued by GDV that would otherwise have gone into default, triggering GDC's buy-back obligations under the terms of its agreements with certain institutional purchasers of GDV-originated mortgages. The Complaint alleges further that GDC systematically breached sales contracts providing for the reimbursement to defaulting purchasers of certain percentages of monies previously paid the Company, and that this practice--along with the Company's failure to honor certain contractual obligations concerning the completion of homesites and homesite improvements--resulted in extensive potential liability in connection with lawsuits filed on behalf of large numbers of disgruntled purchasers of GDC properties.

 Plaintiffs' essential argument in support of their federal securities and common law fraud claims is that purchasers of GDC Bonds during the purported class period were injured by the inadequacy of the Company's disclosures with respect to the existence, scope, and potential repercussions of the activities outlined above. The substantive allegations of the Complaint fall into three broad categories:

 (1) Misrepresentations about GDC's "competitive advantage and business acumen": Plaintiffs allege that GDC's public filings in connection with the Offering were materially false and misleading insofar as increases in the Company's reported revenues and income, as well as other successes, were described as the result of GDC's "competitive advantage" and the superior "business acumen" of its sales force. As Plaintiffs would have it, the Company's public filings should have revealed that revenues and income were artificially inflated as a result of GDC's illegal selling practices and would not be maintainable following the eventual discovery and cessation of those practices.

 (3) Failure to disclose the extent of the Company's contractual obligations to refund monies: Plaintiffs allege that the publicly filed documents issued by GDC in connection with the Offering omitted disclosures--which had been included in documents previously filed by the Company--concerning the extent of GDC's obligation to refund certain monies, including, inter alia, refunds to defaulting purchasers of homesites and monies potentially owing for GDC's failure to complete developments.

 Motions to Dismiss

 The Individual Defendants seek dismissal of the action as against them pursuant to Rules 12 and 9(b) of the Federal Rules of Civil Procedure, urging, in the alternative, that Plaintiffs' federal securities law claims are time-barred, and that in any event Plaintiffs have failed adequately to allege certain substantive elements of their federal and common law claims. *fn3" The Individual Defendants argue that the Complaint, predicated on Plaintiffs' backward reasoning from GDC's eventual bankruptcy and the indictment of several of its officers and directors, constitutes a pleading of "fraud by hindsight"; they urge dismissal on grounds that the failure to predict the events leading to GDC's demise is not actionable as a matter of law, that complete and appropriate disclosures were included in the Company's public filings during the relevant period, and that Plaintiffs have alleged neither reliance nor causation with the particularity required of pleadings that sound in fraud.

 Defendant Peat Marwick argues similarly that Plaintiffs' federal securities claims are time-barred by the applicable statute of limitations and that pendent (now "supplemental") jurisdiction over the common law fraud claims should not be found on this record. Even assuming, arguendo, the timeliness of Plaintiffs' federal claims, Peat Marwick urges dismissal of Counts III, IV, V, and VII of the Complaint, alleging primary and secondary violations of federal securities laws under the 1933 and 1934 Acts, as well as common law fraud and deceit, as follows:

 1) With respect to Count III, which asserts claims under Section 11 of the 1933 Act, Peat Marwick seeks dismissal on the grounds that Plaintiffs fail to plead compliance with the applicable limitations period, fail to attribute specifically to Peat Marwick any allegedly misleading information publicly filed or disseminated in connection with the Registration Statement, and improperly include allegations of wrongdoing subsequent to publication of the 1988 Prospectus.

 2) With respect to Counts IV and V, which assert claims under Section 10 of the 1934 Act and Rule 10b-5 promulgated thereunder, Peat Marwick seeks dismissal on the grounds that Plaintiffs fail to allege fraud with particularity against Peat Marwick, and fail adequately to allege reliance, causation, and scienter. Insofar as Count IV includes an allegation of aiding and abetting under Section 10, Peat Marwick argues both that Plaintiffs omit to allege the required element of substantial assistance and that they erroneously predicate liability upon an alternative allegation of recklessness or actual knowledge. Insofar as Count V includes an allegation that Peat Marwick violated a duty to correct false information contained in the 1988 Prospectus (and elsewhere) pursuant to Section 10, Peat Marwick argues that no such duty could have arisen under the facts alleged in the Complaint and that, in any event, Plaintiffs particularize neither the misrepresentations allegedly attributable to Peat Marwick nor the moment at which a duty to correct or to disclose false information purportedly arose.

 3) With respect to Count VII, which alleges common law fraud and deceit, Peat Marwick argues that the Complaint fails to plead fraud with particularity, and fails to allege reliance by Plaintiffs on any particular misrepresentation or omission attributable to Peat Marwick. *fn4"

 The Time Bar Issue

 Applicable Limitations Periods

 The limitations period applicable to actions brought pursuant to Section 11 of the 1933 Act is set forth in Section 13, 15 U.S.C. § 77m, which provides that

 no action shall be maintained to enforce any liability created under section 77k . . . of this title unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence . . . . In no event shall any such action be brought to enforce a liability created under section 77k . . . of this title more than three years after the security was bona fide offered to the public . . . .

 The timeliness of Plaintiffs' claims as measured by the three-year prong of Section 13 is undisputed. With respect to the one-year prong, Defendants take the position that Plaintiffs' Section 11 claims are time-barred insofar as Plaintiffs were on inquiry notice of the alleged fraud over one year before the filing of the Complaint that commenced this action. Defendants urge also that Plaintiffs' cause of action for alleged violations of Section 10(b) of the 1934 Act is similarly barred by the analogous standard applicable to those claims.

 In opposition to the contention that their federal securities law claims are time-barred by the applicable limitations periods, Plaintiffs argue vigorously that, with respect to the claims under Section 10(b) of the 1934 Act, the one- and three-year limitations period for which Defendants argue is not analogous to the one set forth in Section 13 of the 1933 Act quoted above; rather, Plaintiffs say, an action brought under Section 10(b) of the 1934 Act must be considered timely unless brought more than three years after the transaction complained of or more than one year after actual notice or discovery of the facts that give rise to a plaintiff's claim: because inquiry notice does not start the running of the clock on claims under Section 10(b), in Plaintiffs' view, those counts of the Complaint asserting violations of 15 U.S.C. 78(j)(b) are timely and should be sustained. Even if inquiry notice will suffice to trigger the one-year limitations period for claims arising under Section 10(b), Plaintiffs further contend, the determination whether inquiry notice has occurred is one of mixed law and fact inappropriate for consideration on a motion to dismiss; alternatively, Plaintiffs argue that such a determination--if deemed appropriate here--must be made without reference to anything external to the pleadings in the case. Finally, Plaintiffs urge that they were not, in fact, on inquiry notice of the facts giving ...

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