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KLEIN v. GOETZMANN

January 25, 1993

ALBERT M. KLEIN and DANIEL SLANE, Plaintiffs,
v.
HARRY E. GOETZMANN, JR., JOHN L. BARTOLO, LYNN H. SMITH, ALVIN O. BEILING, THOMAS J. PRINZING, JAMES J. MOSHER and DELOITTE & TOUCHE, Defendants.


McCurn


The opinion of the court was delivered by: NEAL P. MCCURN

MEMORANDUM-DECISION AND ORDER

 INTRODUCTION

 Thus far, this court has issued two decisions in this case. See Klein v. Goetzmann, 745 F. Supp. 107 (N.D.N.Y. 1990) ("Klein I"); Klein v. Goetzmann, 770 F. Supp. 78 (N.D.N.Y. 1991) ("Klein II"). In Klein I, the court granted the individual defendants' motion to dismiss plaintiffs' common law negligent misrepresentation claim but denied their motion with respect to plaintiffs' claims based upon section 10(b) of the Securities and Exchange Act of 1934 ("1934 Act") and Rule 10b-5 promulgated thereunder as well as plaintiffs' common law fraud claim. *fn1" In Klein II, Touche moved to dismiss the claims against it on the ground that they were barred by the statute of limitations. Even though the court concluded that the one-year/three-year statute of limitations announced in Ceres Partners v. GEL Assoc., 918 F.2d 349 (2d Cir. 1990), applied to plaintiffs' section 10(b) and Rule 10b-5 claims against Touche, it held that "it [could not determine] from the pleadings when the plaintiffs discovered or should have discovered fraud by Touche." Klein II, 770 F. Supp. at 84. Nonetheless, the court held that it could "apply the three-year prong of the Ceres test on the motion to dismiss." Id. at 85. Accordingly, the court granted Touche's motion "as to claims arising out of violations occurring more than three years before the filing of the second consolidated amended complaint [on January 14, 1991], . . ." Id.

 Touche now moves for summary judgment on the remaining federal claims ("1988 claims") pursuant to Fed. R. Civ. P. 56 and for dismissal of the pendent state claims. In addition to opposing Touche's motion, plaintiffs cross-move to reinstate the claims ("1987 claims") which this court dismissed in Klein II as time-barred in light of Congress' enactment of Section 27A of the 1934 Act. The court heard oral argument on these motions on April 28, 1992. The following constitutes the court's findings of fact and conclusions of law.

 BACKGROUND 2

 Plaintiffs filed their original complaint in this action on July 19, 1988. Named as defendants in this original complaint were Continental Information Systems, Inc. ("CIS") and nine individuals who were officers and/or directors of CIS ("individual defendants"). Plaintiffs brought this original complaint on behalf of all purchasers of CIS common stock between May 13, 1988, and July 14, 1988. On November 13, 1989, plaintiffs filed a first amended complaint against the individual defendants. This amended complaint dropped CIS as a defendant in light of CIS' pending bankruptcy proceedings. In addition, plaintiffs' first amended complaint extended the class period to cover more than a year and a half, April 29, 1987 to November 18, 1988, and added allegations of fraud with respect to CIS' 1987 Annual Report and the Aerolease Transaction. As a result of discovery concerning these allegations, plaintiffs filed a second amended complaint on January 14, 1991, adding Touche as a defendant. It is the allegations in this second amended complaint which are the subject of these motions.

 Touche now moves to have the court grant it summary judgment with respect to plaintiffs' 1988 claims on the ground that these claims are time-barred because plaintiffs knew, or with reasonable diligence should have discovered, the facts constituting Touche's alleged violations more than one year prior to filing their second amended complaint. See Touche's Memorandum of Law at 18-19. Plaintiffs, on the other hand, contend, first of all, that it is actual notice of the facts constituting fraud which starts the statute of limitations running, not inquiry notice. See Plaintiffs' Memorandum of Law at 25. Secondly, plaintiffs argue that even if the court were to apply the inquiry notice standard suggested by Touche, they did not, and could not, have discovered Touche's role in the CIS fraud until after Touche completed production of documents in July 1990. See id. at 35.

 In addition, plaintiffs have cross-moved to have this court reconsider its decision in Klein II which dismissed their 1987 claims against Touche in light of Congress' enactment of Section 27A. In opposition to this cross-motion, Touche contends, first of all, that Section 27A does not apply to the present case. See Touche's Opposition Memorandum of Law at 6-7. In the alternative, Touche argues that even if the court were to find that Section 27A is applicable, the court still should not apply the statute because it is unconstitutional. *fn3" See id. at 21. The court will discuss each of these motions in turn, beginning with plaintiffs' cross-motion.

 DISCUSSION

 I. Plaintiffs' 1987 Claims

 In Klein II, this court held that "the 'one year/three year' statute of limitations announced in Ceres [ Partners v. GEL Assoc., 918 F.2d 349 (2d Cir. 1990)] applies to the section 10(b) and Rule 10b-5 claims against Touche." Klein II, 770 F. Supp. at 83. Based upon this conclusion, the court granted Touche's motion to dismiss the 1987 claims as time-barred under Ceres. Plaintiffs now ask this court to reconsider its decision in light of Congress' enactment of Section 27A which sought to alter the retroactive effect of the Supreme Court's decisions in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, U.S. , 111 S. Ct. 2773, 115 L. Ed. 2d 321 (1991), and James B. Beam Distilling Co. v. Georgia, U.S. , 111 S. Ct. 2439, 115 L. Ed. 2d 481 (1991).

 In Lampf the Supreme Court adopted the same one year/three year statute of limitations for section 10(b) claims as the Second Circuit had adopted in Ceres. It also applied this new statute of limitations retroactively to the parties in Lampf. On the same day, the Supreme Court decided Beam in which it stated that "when the Court has applied a rule of claw to the litigants in one case it must do so with respect to all others not barred by procedural requirements or res judicata." Beam, U.S. at , 111 S. Ct. at 2448, 115 L. Ed. 2d at . The effect of this ruling was to mandate that the new statute of limitations established in Lampf be applied retroactively to all cases not finally adjudicated on the date Lampf was decided (June 20, 1991).

 In response to the Supreme Court's decisions in Lampf and Beam, Congress enacted Section 27A which provides, in pertinent part:

 (b) EFFECT ON DISMISSED CAUSES OF ACTION

 -- Any private civil action implied under section 10(b) of this Act that was commenced on or before June 19, 1991 --

 (2) which would have been timely filed under the limitation period provided by the laws applicable in the jurisdiction, including principles of retroactivity, as such laws existed on June 19, 1991, shall be reinstated on motion by the plaintiff not later than 60 days after the date of enactment of this section.

 Section 27A, Federal Deposit Insurance Corporation Improvement Act of 1991, Pub. L. 102-242, § 476 (1991) (emphasis added).

 In order for Section 27A to be applicable to the present case, plaintiffs' 1987 claims must meet the requirements of both subparagraph (b)(1) and subparagraph (b)(2). There is no argument that the 1987 claims meet the requirements of subparagraph (b)(1). Plaintiffs' second amended complaint was filed on January 14, 1991, prior to June 19, 1991; and the 1987 claims were dismissed as time barred on July 19, 1991, subsequent to June 19, 1991. These claims, however, do not meet the requirement of subparagraph (b)(2). They were not, as this court decided in Klein II, timely filed under the limitations period that existed in this circuit on June 19, 1991. On that date, Ceres' one year/three year statute of limitations was the law of this circuit. In fact, Ceres had been the law of this circuit since November 8, 1990, more than 60 days before plaintiffs filed their second amended complaint naming Touche as a defendant. Thus, Section 27A, by its very terms, does not apply to plaintiffs' 1987 claims.

 Plaintiffs, however, offer an alternative argument in support of their cross-motion to reinstate their 1987 claims. This argument is based upon plaintiffs' contention that because their second amended complaint was filed only 67 days after Ceres announced a new statute of limitations they should be given the benefit of a "grace period." According to this theory, plaintiffs' claims should be treated as though filed prior to Ceres and therefore subject to the six year/two year statute of limitations which existed at that time. If the court were to adopt this reasoning and treat plaintiffs' claims as having been filed prior to Ceres, then, under certain circumstances, Section 27A might serve as a basis to reinstate plaintiffs' 1987 claims.

 In order to determine whether Section 27A would affect actions filed prior to Ceres, the court would have to look at the principles of retroactivity which existed in this circuit on June 19, 1991. On that date, the law of this circuit was that "Ceres Partners was not to be applied retroactively as a routine matter." Henley v. Slone, 961 F.2d 23, 25 (2d Cir. 1992) (citing Welch v. Cadre Capital, 923 F.2d 989 (2d Cir. 1991) ("Welch I")).4 Thus, Section 27A would require that the court apply the principles of retroactivity set forth in Welch I to the facts of this case. Pursuant to these rules, after applying the Chevron5 analysis to the facts of this case, the court might conclude that Ceres should not apply retroactively to plaintiffs' 1987 claims. If the court were to reach this conclusion, plaintiffs' claims would be governed by the six year/two year statute of limitations which existed prior to Ceres.

 Unfortunately for plaintiffs, the Second Circuit very recently refused to adopt a similar grace period theory espoused by the plaintiffs in Walsche v. First Investors Corp., 981 F.2d 649 (2d Cir. 1992). In Walsche, the plaintiffs filed their complaint three months after the Second Circuit decided Ceres. Thus, the district court dismissed their complaint as untimely under Ceres. On appeal, the plaintiffs contended that the statute of limitations announced in Ceres should not be applied to their cause of action. The Second Circuit, however, disagreed, stating that

 although we have had occasion to rule on the effect of Ceres, we have not established such a grace period for § 10(b) litigants. Providing one at this late juncture would go beyond our Congressional mandate that we apply the law of this jurisdiction, "as such laws existed on June 19, 1991." Even absent consideration of Section 27A, such a rule would unsettle the established rule in this Circuit that Ceres applies prospectively to cases filed after its announcement.

 Walsche, slip op. at 379 (emphasis added).

 Without the aid of a grace period, plaintiffs' arguments for reinstatement of their 1987 claims based upon Section 27A have no merit. Section 27A simply is inapplicable to the facts of this case. Accordingly, the court denies plaintiffs' ...


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