statements). Where even a brief examination of the Agreement would have revealed certain procedural irregularities as to the negotiations of the stock sale, plaintiffs' claims that they were duped by Ludwig's assurances because Gail Bilick did not have a copy of the Agreement in front of her at the time of the sale loses its force. Certainly there is no allegation that Gail Bilick was not aware of the existence of the Agreement, or that she was prevented from obtaining a copy of it for herself.
Similarly, plaintiffs' allegations that for fifteen years defendants had failed to provide plaintiffs with financial and other information about Eagle as required by the corporate by-laws, or that at the time of the stock sale plaintiffs had no financial documentation regarding the book value of the Eagle shares, further suggest circumstances invoking some reasonable duty of inquiry on the plaintiffs' part to investigate the financial condition of Eagle before finalizing the securities transaction here. Yet notwithstanding the issuance of these "storm warnings," plaintiffs do not allege that they attempted to obtain financial or other information regarding the value of the shares. Indeed, there is no statement in the amended complaint that the plaintiffs took any steps to ascertain either their rights under the Agreement or the accuracy of the stock valuation. See, Miller, supra, at 1091-93 (where plaintiff discovered misstatements and omissions in financial statements received from partnership, but chose to make no inquiries or take further action, and in fact invested further in partnership, plaintiff could be deemed to be on "inquiry notice" due to failure to exercise reasonable diligence under circumstances). Plaintiffs appear indirectly to allege that they undertook no further investigation due to Ludwig's position as a control person at Eagle, asserting, "as a consequence of defendant Ludwig's position as the president, chairman of Eagle Electric's board, and its dominant and controlling shareholder, and as a member of plaintiffs' family, plaintiffs justifiably and reasonably relied on the misrepresentation made to him by them." Amended Complaint, at P 36. Yet clearly this fact by itself does not obviate the need for plaintiffs to plead diligent efforts to uncover an alleged fraud once they were on notice of the various problems outlined above. Although the amended complaint alleges that defendant Ludwig has remained the dominant and controlling shareholder at least until the institution of this action -- and thus during the time of whatever discovery plaintiffs made that led them to bring this action -- his position alone does not relieve the plaintiffs of their duty to undertake reasonably diligent efforts to uncover the alleged underlying fraud, and to particularize those efforts in their pleading. See supra note 9 (discussing need for diligence requirement even in cases where fraud is actively concealed); see also Long, supra, at 114-18 (investor in mortgages who had knowledge of risk of investments and early default of mortgages but undertook no independent investigation of them had not satisfied his duty to undertake diligent efforts to uncover alleged fraud once he was put on notice of potential problems; moreover, in light of representations that investor relied exclusively on the valuation of the mortgaged properties to protect investment, investor was on notice of need to investigate land values but failed to undertake an independent valuation assessment). Fraudulent concealment, like any other sort of fraud, must be pleaded with particularity, and the plaintiffs must offer "distinct averments as to the time when the mistake, concealment, or misrepresentation was discovered, and what the discovery is, so that the court may clearly see, whether by the exercise of ordinary diligence, the discovery might not have been before made." Moviecolor Ltd. v. Eastman Kodak Co., 288 F.2d 80, 88 (2d Cir.) (Friendly, J.), cert. denied, 368 U.S. 821, 7 L. Ed. 2d 26, 82 S. Ct. 39 (1961). If mere conclusory allegations that a plaintiff was unable to discover the fraud before the limitations period has run are insufficient to toll the applicable statute of limitations, see Landy v. Mitchell Petroleum Technology Corp., 734 F. Supp. 608, 618 (S.D.N.Y. 1990), surely the plaintiffs' wholesale failure to plead fraudulent concealment and to detail the circumstances and timing of any discovery is fatal to their federal securities claim. For example, even if the plaintiffs have made a passing attempt to argue that the limitations period should be tolled as a result of fraudulent concealment, their nonspecific assertion that Gail Bilick received a copy of the Agreement "months" after the stock sale hardly permits this Court to determine if this action is timely brought. Likewise, the amended complaint alleges that prior to the stock purchase plaintiffs were unaware of offers to purchase Eagle from other companies in or about 1985, see Amended Complaint, at P 19, yet the amended complaint in no way explains either the circumstances through which the plaintiffs learned of these alleged offers, or when that discovery took place. Compare Pomeroy v. Schlegel Corp., 780 F. Supp. 980 (W.D.N.Y. 1991) (former employee plaintiff who sold stock back to company prior to corporate disclosure of merger intentions time-barred from filing federal securities action when plaintiff discovered the merger possibility, and investigated the potential strength of his legal claims, but did not act to file suit thereafter until applicable limitations period had run). As a further example, the amended complaint alleges that attempts by a prior employee and minority shareholder to inspect the financial statements and books and records of the company in 1985 and early 1986 were rebuffed, and that this employee then sued Eagle in 1986. Amended Complaint, at PP 20-21.
Again, however, the amended complaint does not describe either the exact timetable of these events or plaintiffs' discovery of them. See Pomeroy, supra, at 983-84 (plaintiff clearly put on notice of potential material omissions with regard to his sale of stock back to company where, among other things, he had read at least one newspaper
account of suit filed in federal court arising out of same operative facts).
While the Court must construe plaintiffs' allegations liberally, at present plaintiffs have failed to plead fraudulent concealment, and the Court cannot simply turn a blind eye to an utterly deficient pleading. On the facts as alleged in this amended complaint plaintiffs may not rely upon equitable tolling principles to hurdle any statute of limitations bar. Plaintiffs' claims are time-barred, and the amended complaint must be dismissed as to plaintiffs' federal cause of action.
IV. Leave to Replead
Under Federal Rule of Civil Procedure 15(a), leave to replead "shall be freely granted when justice so requires," and there is no reason to deny plaintiffs that opportunity here. Upon granting a motion to dismiss it is the usual practice also to grant plaintiffs leave to replead; a court's refusal to do so without a justifying reason is an abuse of discretion. See Cortec Indus. v. Sum Holding L.P., 949 F.2d 42, 48 (2d Cir. 1991). Nor should this Court deny plaintiffs leave to amend by reason of delay alone:
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 Bd. v. Fluor Corp., 654 F.2d 843, 856 (2d Cir. 1981) (citation omitted). The doctrine of equitable tolling did not come into play until the defendants raised the statute of limitations defense, see Long, supra, at 113, and the plaintiffs must be allowed to respond appropriately.
Accordingly, defendants' other arguments in support of their motion to dismiss -- that plaintiffs have failed to state a claim upon which relief may be granted, and that plaintiffs have failed to plead fraud with particularity -- need not be addressed at this juncture. If plaintiffs' second amended complaint adequately overcomes the statute of limitations bar, motions to dismiss on these alternative grounds may be resubmitted.
V. Pendent State Claims
Since no federal claim remains, plaintiffs' pendent state law claims also must be dismissed. See Grondahl, supra, at 1294 (citing United Mine Workers v. Gibbs, 383 U.S. 715, 726, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966)); see also Nolan v. Meyer, 520 F.2d 1276, 1280 (2d Cir.), cert. denied, 423 U.S. 1034, 46 L. Ed. 2d 408, 96 S. Ct. 567 (1975). However, plaintiffs argue that even if this Court declines to exercise its jurisdiction over the pendent state claims, federal jurisdiction nonetheless arises on the basis of the diversity of citizenship, and urge this Court to "deem" diversity jurisdiction to be alleged in the amended complaint, based upon the plaintiffs' residency in Connecticut and the defendants' operations and residency in New York. This request is appropriately construed as a motion to amend the complaint, and as such the motion is granted. Plaintiffs shall be allowed to replead to establish federal diversity jurisdiction.
In sum, plaintiffs' amended complaint does not adequately allege facts sufficient to sustain a claim of fraudulent concealment, and defendant's motion to dismiss is therefore granted. The amended complaint is dismissed without prejudice, and the plaintiffs are granted leave to replead in accordance with this opinion. Plaintiffs shall have sixty days from the date of this decision to file a second amended complaint.
Dated: Brooklyn, New York
November 2, 1992
RAYMOND J. DEARIE
United States District Judge