year) CIS gave the impression that it was digesting CMI without a hitch.
See "Harry Goetzmann's Grand Illusion," Corporate Finance, November 1989 at 40 (emphasis added).
Furthermore, the article states that
nearly a year after filing its bankruptcy petition, CIS cannot but reliable figures on either its assets or liabilities.. . . The files for roughly 2,700 lease transactions have mysteriously disappeared. The company's books are such a mess that an incredible 50 percent of its receivables are overdue 60 days or longer. Amazingly, according to court filings, "management was so incompetent . . . that it asked Touche Ross [its auditor] to hire local college students to try to collect the past due receivables."
Id. at 39 (emphasis added).
Another factor which troubles the court is plaintiffs' apparent total failure to make any attempt to discover Touche's role in the CIS fraud for more than eighteen months after they filed their original complaint. In their original complaint, plaintiffs relied upon CIS' 1988 Annual Report, among other things, as a basis for their claims of fraud against CIS and the individual defendants. As noted above, it is obvious from reading this Annual Report that Touche was involved in its preparation in its role as CIS' independent auditor. Certainly, given this fact, it would have been logical for plaintiffs to subpoena Touche's workpapers to substantiate their allegations, even if they did not suspect Touche of any wrongdoing at the time. This plaintiffs failed to do. It was not until more than a month after plaintiffs filed their first amended complaint that they finally subpoenaed documents from Touche. Plaintiffs offer no explanation for their delay in seeking to discover Touche's workpapers which they now maintain are critical to their case.
Based upon a thorough review of all the documents upon which plaintiffs base their allegations against Touche, the court is convinced that there is only one reasonable inference that can be drawn, and that inference is that plaintiffs knew of, or with reasonable diligence could have discovered, Touche's role in the CIS fraud more than one year prior to filing their second amended complaint on January 14, 1991. Accordingly, the court grants Touche's motion for summary judgment as to plaintiffs' 1988 federal securities claims.
III. Plaintiffs' Pendent State Claims
Touche asserts that if the court dismisses plaintiffs' 1988 federal security claims, it should likewise dismiss plaintiffs' pendent state claims because the court lacks an independent jurisdictional basis over these claims.
See Touche's Memorandum of Law at 40. The court disagrees. Although the court has dismissed all of the federal claims against Touche, it still must adjudicate the federal claims against the individual defendants. Thus, with respect to the remainder of this litigation, Touche is, in effect, a pendent party.
As the Second Circuit recently stated, "effective December 1, 1990, [the effective date of 28 U.S.C. § 1367] the district court generally has supplemental jurisdiction over state-law claims against a non-diverse party if it has original jurisdiction over related claims against another party." Hogan v. Consolidated Rail Corp., 961 F.2d 1021 (2d Cir. 1992). In the present case, the court has original jurisdiction over the federal securities claims alleged against the individual defendants. The common law claims, alleged against both Touche and the individual defendants, are related to these federal claims. Thus, pursuant to section 1367, the court has supplemental jurisdiction over Touche as to these common law claims despite the fact that the court has dismissed all of the federal claims alleged against Touche. Accordingly, the court denies Touche's motion to dismiss plaintiffs' common law claims.
For the reasons stated above, upon reconsideration of its July 19, 1991, decision, the court concludes that the oneyear/three-year statute of limitations enunciated in Ceres applies to plaintiffs' allegations against Touche in their second amended complaint. Thus, the court denies plaintiffs' cross-motion to reinstate their 1987 claims. With respect to plaintiffs' 1988 claims, the court concludes that plaintiffs knew or with reasonable diligence should have known of the facts underlying their claims against Touche more than one year prior to filing their second amended complaint. Thus, the court grants Touche's motion for summary judgment on plaintiffs' 1988 federal securities claims. Finally, the court finds that Touche is a pendent party with respect to the remainder of this litigation. Accordingly, pursuant to 28 U.S.C. § 1367, the court denies Touche's motion to dismiss plaintiffs' common law claims.
IT IS SO ORDERED.
DATED: January 25, 1993
Syracuse, New York
Neal P. McCurn
Chief, U.S. District Judge