notice of fraud well in advance of the commencement of this action.
Plaintiffs counter that none of the events cited by defendants was sufficient to put them on notice of fraud or breach of fiduciary duty because each event was susceptible to a conflicting but reasonable interpretation. In addition, plaintiffs argue that they could not have discovered the alleged fraud and breach until the action against Orion was settled and certain revelations concerning the initial negotiations between Orion and Glass became known because of defendants' concealment.
I. Standards for Summary Judgment
The standards applicable to motions for summary judgment are well-settled. A court may grant summary judgment only where there is no genuine issue of material fact and the moving party is therefore entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(c). Accordingly, the court's task is not to "weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S. Ct. 2505, 2511, 91 L. Ed. 2d 202 (1986). Summary judgment is inappropriate if, resolving all ambiguities and drawing all inferences against the moving party, id. at 255, 106 S. Ct. at 2513 (citing Adickes v. S.H Kress & Co., 398 U.S. 144, 158-59, 90 S. Ct. 1598, 1608-09, 26 L. Ed. 2d 142 (1970)), there exists a dispute about a material fact "such that a reasonable jury could return a verdict for the nonmoving party." Anderson, 477 U.S. at 248, 106 S. Ct. at 2510.
To defeat a motion for summary judgment, however, the nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S. Ct. 1348, 1356, 89 L. Ed. 2d 538 (1986). There is no issue for trial unless there exists sufficient evidence in the record favoring the party opposing summary judgment to support a jury verdict in that party's favor. Anderson, 477 U.S. at 249, 106 S. Ct. at 2511. As the Court stated in Anderson, "if the evidence is merely colorable, or is not significantly probative, summary judgment may be granted." Id. at 249-50, 106 S. Ct. at 2511 (citations omitted). With these standards in mind, I turn to defendants' motion for summary judgment.
II. Statute of Limitations
The parties agree that the statute of limitations for plaintiffs' fraud claim is either six years from the date of the alleged fraud or two years from the date the fraud was, or through the exercise of reasonable diligence could have been, discovered, whichever is later. New York CPLR 203(g), 213(8) (McKinney 1990 & Supp. 1995); see Marathon Enter., Inc. v. Feinberg, 595 F. Supp. 368, 371 (S.D.N.Y. 1984).
The appropriate standard of limitations for plaintiffs' breach of fiduciary duty claim is somewhat less clear. While the parties agree that the CPLR provides a six year statute of limitations for the fiduciary duty claim (see CPLR § 213(1); see also CPLR § 213(2)), the parties disagree as to whether a "discovery rule" should apply: defendants argue that it does not; plaintiffs contend that it does and that the six year period does not begin running until they had actual or constructive knowledge of the breach. I agree with plaintiffs' position and consequently hold that the limitations period for the fiduciary duty claim is tolled until, through the exercise of reasonable diligence, plaintiffs had actual or constructive knowledge of the breach. See Fisher v. Reich, 1994 U.S. Dist. LEXIS 17121, 1995 WL 23966, *9 (S.D.N.Y. Jan. 10, 1995) (New York statute of limitations for breach of fiduciary duty claim is six years from "actual or constructive discovery of the injury"); Zola v. Gordon, 685 F. Supp. 354, 374 (S.D.N.Y. 1988) (New York statute of limitations for breach of fiduciary duty claim "does not commence running until the plaintiff has actual or constructive knowledge of the breach") Elghanayan v. Victory, 192 A.D.2d 355, 355, 596 N.Y.S.2d 35, 36 (1st Dep't 1993) (statute of limitations for breach of fiduciary duty claim begins to run on "date of discovery").
Accordingly, as to both applicable statutes of limitations, the critical question is whether the circumstances of this case put plaintiffs on notice of defendants' alleged fraud and breach of fiduciary duty and if, through the exercise of reasonable diligence, they would have discovered the wrongdoing. See Armstrong v. McAlpin, 699 F.2d 79, 88 (2d Cir. 1983); Robertson v. Seidman & Seidman, 609 F.2d 583, 587, 589-92 (2d Cir. 1979); Lenz v. Associated Inns & Restaurants Co. of America, 833 F. Supp. 362, 370 (S.D.N.Y. 1993). Although the determination of whether a plaintiff has exercised sufficient diligence is normally a question of fact for the jury to decide, see McMahan & Co. v. Wherehouse Entertainment, Inc., 859 F. Supp. 743, 756 (S.D.N.Y. 1994), aff'd in part, rev'd in part on other grounds, 65 F.3d 1044, 1995 U.S. App. LEXIS 25979, 1995 WL 542493 (2d Cir. Sept. 13, 1995), it is an objective standard and summary judgment may be appropriate if the circumstances of the case were such that a reasonable investor would have thought to inquire and respond. Dodds v. Cigna Secs., Inc., 12 F.3d 346, 350 (2d Cir. 1993), cert. denied, 128 L. Ed. 2d 74, 114 S. Ct. 1401 (1994); Armstrong, 699 F.2d at 88.
Defendants have the onerous burden of proving that there is no issue of fact as to whether plaintiffs would have discovered the fraud and breach of fiduciary duty through the exercise of reasonable diligence. See McMahan, 859 F. Supp. at 756 (defendants have "extraordinary burden" of convincing the court that summary judgment is appropriate on issue of inquiry notice). In addition, defendants must show that the information available to plaintiffs suggested the probability, not just the possibility, of fraud. See In re Integrated Resources Real Estate Ltd. Partnerships Sec. Litig., 815 F. Supp. 620, 638 (S.D.N.Y. 1993) (citing Armstrong, 699 F.2d at 88)). Thus, summary judgment based on inquiry notice is rare. See Fisher, 1994 U.S. Dist. LEXIS 17121, 1995 WL 23966 at *4.
Because the issues of due diligence and constructive knowledge depend upon inferences drawn from the facts of each case, when different inferences can be drawn, summary judgment is inappropriate. See Seidman & Seidman, 609 F.2d at 591; McMahan, 859 F. Supp. at 756; Phillips v. Kidder, Peabody & Co., 782 F. Supp. 854, 859 (S.D.N.Y. 1991). Many such conflicting inferences are present in this case. Accordingly, the motion for summary judgment must be denied.
Defendants argue that plaintiffs were put on inquiry notice or had constructive knowledge of the alleged fraud and breach of fiduciary duty on several occasions between 1981 and 1991: 1) in August 1981 upon receiving the POM; 2) in October 1982, when they were informed that the movie was a financial disaster and that the general partners were considering a lawsuit against Orion; 3) between 1986 and 1990 during the litigation in the Tax Court and on appeal to the Eighth Circuit; 4) in 1988 upon receiving the general partners' proposal to either dissolve the partnership or sell the movie back to Orion and the pro forma tax return that omitted any mention of the AEDP; 5) in January 1990 upon Orion's failure to repay the Excess Advertising Funds; and 6) on April 15, 1991 when the partnership filed a K-1 tax report that omitted the film as an asset. Each of these arguments is rejected.
Defendants are correct that the existence of factual discrepancies in available documents is one factor that would put a reasonable investor on inquiry notice. See Nivram Corp. v. Harcourt Brace Jovanovich, Inc., 840 F. Supp. 243, 250-51 (S.D.N.Y. 1993). While I am not persuaded by plaintiffs' argument that they did not read the underlying transaction documents because they were relying on Glass's knowledge and experience or on other professionals' guidance, see Fisher v. Reich, 1994 U.S. Dist. LEXIS 17121, 1995 WL 23966 at *4 (rejecting plaintiff's position that reviewing a summary of an offering was sufficient diligence because "a reasonable investor would have read the [private placement memorandum] and familiarized himself with the potential for loss, rather than relying on the assurances of an advisor"), I nevertheless conclude that a reasonable fact-finder could find that even if plaintiffs had reviewed the Distribution Agreement, it would not have put them on notice of the fraudulent activity alleged in the complaint. The IRS, the Tax Court and the Eighth Circuit Court of Appeals all missed the inconsistent provision in paragraph 3-1 of Appendix A to the Distribution Agreement; rather, all three read the Distribution Agreement as requiring Orion to repay the Excess Advertising Funds.
If none of these entities discovered the contradictory provision or interpreted paragraph 3-1 as conflicting with the POM, I cannot conclude as a matter of law that plaintiffs' failure to do so was unreasonable. See Seidman, 609 F.2d at 592 (where SEC, with its expertise and investigative abilities, did not discover defendants' fraud, it would be unreasonable to insist that plaintiff also discover fraud).
In addition, plaintiffs allege that Glass, in his negotiations with Orion, deliberately made the language of paragraph 3-1 ambiguous so as to lull investors into believing that they had a "safety net" for their investment through the AEDP, a contention which Glass refutes. Thus, there is a question of material fact as to whether plaintiffs, through reasonable due diligence, could have discovered the discrepancy.
Defendants next argue that plaintiffs were on inquiry notice as of October 1982 when they received letters from the general partners proposing to sue Orion following the dismal performance of the movie. In essence, they contend that because plaintiffs were to receive the Excess Advertising Funds in 1990, it would have been a useless exercise to force Orion to spend more money to promote the movie and thus plaintiffs should have realized something was amiss. Defendants also cite the Scobey letters as a circumstance that should have put plaintiffs on inquiry notice.
Plaintiffs respond that none of these events was sufficiently unusual to put them on inquiry notice of fraud because they were interested in recouping as much of their investment immediately, as opposed to waiting eight years, during which period events could occur that might interfere with their investment.
(See, e.g., Robert Scissors Aff. P 7; Robert Schoor Aff. P 13-14). Suing Orion to spend additional money to promote the movie could accomplish that goal because the promotion would have helped make the movie a success (See Letter from Daniel Glass to potential investor dated June 23, 1981, attached as Exh. 15 to plaintiffs' response). Because conflicting inferences can be drawn from the fact that the general partners considered commencing a lawsuit against Orion in 1982, plaintiffs cannot be deemed at this juncture to have known of the fraud at that time. See McMahan, 859 F. Supp. at 756 (conflicting inferences as to inquiry notice required denial of motion for summary judgment based on statute of limitations) Phillips, 782 F. Supp. at 859, 862 (same).
Defendants contend that the partnership's position in the Tax Court and on appeal to the Eighth Circuit from 1986-1990 gave plaintiffs sufficient warning to trigger inquiry notice. Had plaintiffs read the post-trial briefs or the briefs to the Eighth Circuit, defendants argue, they would have known that paragraph 3-1 contradicted the AEDP and that there was a strong probability that Orion would not be obligated to repay the Excess Advertising Funds. Plaintiffs counter that it was reasonable for them, as limited partners, to rely on the general partners to keep them informed as to the progress of the cases. I agree to the extent that I find the existence of a genuine issue of material fact. It was not unreasonable as a matter of law for plaintiffs to have delegated the day to day management of the partnership to the general partners and to rely on the general partners to defend the partnership's best interests in the tax litigation. Indeed, limited partners are constrained by law from participating in the management of the partnership. See Goldman, Sachs & Co. v. Michael, 113 A.D.2d 326, 329, 496 N.Y.S.2d 427, 429 (1st Dep't 1985); N.Y. Partnership Law §§ 96, 98, 99 (McKinney 1988). In addition, the decisions of the Tax Court and the Eighth Circuit supported the plaintiffs' position that they were entitled to a refund under the AEDP and thus would not have caused a reasonable investor any alarm.
Defendants next argue that the general partners' suggestion to dissolve the partnership and sell the picture back to Orion, and the omission of the AEDP funds on the pro forma tax return, were all inconsistent with the expectation of a future receipt of funds and thus should have caused plaintiffs to be on notice of the alleged fraud or wrongdoing. This argument is rejected because plaintiffs have presented a genuine issue of material fact as to both the dissolution proposal and the omission of the film as an asset on the tax form. First, with respect to dissolution, the general partners sent a letter in November 1988 stating that the dissolution proposal was an attempt to "resolve issues raised by the Internal Revenue Service" by accelerating the repayment of the purchase Notes. (Blumberg Aff. Exh. C). Since litigation with the IRS was pending, this was not an unreasonable explanation. Second, at least three of the plaintiffs conveyed their opposition to the dissolution to the general partners.
Finally, several of the partners stated that they did not receive any correspondence because of address changes. Because a reasonable investor could have concluded that the sale of the movie back to Orion to resolve the tax litigation with the IRS was proper and because some plaintiffs may not have received the correspondence, there is an issue of fact as to whether the 1988 correspondence established the probability of fraud. The same is true of the omission of the AEDP from the pro forma tax return.
Next, defendants assert that plaintiffs were on inquiry notice of the alleged fraud in 1990 when Orion failed to make the AEDP payment as required on January 10, 1990.
This is not a suspicious circumstance that would necessarily alarm a reasonable investor for two reasons: first, because Orion had gone bankrupt and had been taken over by Warner Bros., it was not inconceivable that Warner would balk at paying millions of dollars on its predecessor's deal, and second, the partnership commenced a lawsuit against Orion/Warner in August 1990 to collect the AEDP funds.
Finally, defendants assert that the omission of the movie as an asset on the K-1 tax report for 1990 should have alerted plaintiffs to the probability that they were not going to receive any funds under the AEDP. Because litigation was ongoing to recover that amount from Orion/Warner, however, a reasonable jury could conclude that it was reasonable for plaintiffs to have believed that the funds should not be listed as an asset until the litigation was resolved. A reasonable jury could also accept plaintiffs' evidence that they were not put on notice of the probability of fraud until certain events in the lawsuit against Orion/Warner (e.g., the Minkoff letter dated November 18, 1992; learning of the Orion attorney's deposition testimony).
Thus, for all of the foregoing reasons, defendants have not met their "extraordinary burden" of proving the absence of any genuine issue of material fact as to whether plaintiffs were on inquiry notice more than two years before the filing of this action.
Accordingly, defendants' motion for summary judgment is denied. The parties are to appear for a status conference in Courtroom 11A of the United States Court House at 500 Pearl Street on October 6, 1995 at 2:15 p.m.
Dated: New York, New York
September 20, 1995
United States District Judge