# In Re Integrated Resources Real Estate Ltd. Partnerships Securities Litigation

> District Court, S.D. New York · February 11, 1993 · 815 F. Supp. 620

URL: https://www.frixlaw.com/law-library/cases/1584833

## Case

- **Full name:** In Re INTEGRATED RESOURCES REAL ESTATE LIMITED PARTNERSHIPS SECURITIES LITIGATION
- **Court:** District Court, S.D. New York
- **Decided:** February 11, 1993
- **Citations:** 815 F. Supp. 620; 1993 WL 19100
- **Precedential status:** Published
- **Opinion:** Opinion by Sweet
- **Judges:** Sweet
- **Cited by:** 107 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/1584833

## How later opinions describe it (automated extraction)

- holding that summary judgment on question of inquiry notice is warranted only in the “extreme circumstances” that the undisputed facts in the record allow the court to “readily impute knowledge of a probable fraud ... without having to assume the role of the jury and undertake…
- finding that investors were placed on inquiry notice by virtue of press reports surrounding entity’s financial difficulties and subsequent demise, and by communications from the entity
- explaining the rationale behind the consolidation of mjiltidistrict litigation

## Opinion text

OPINION
SWEET, District Judge.
The Judicial Panel on Multidistrict Litigation (“MDL”) consolidated and transferred to this Court on October 10, 1991, a number of actions arising out of the demise of partnerships affiliated with Integrated Resources, Inc. (“Integrated”), which filed for relief under chapter 11 of the bankruptcy code, 11 U.S.C. §§ 101 ,
et seq.,
in 1990.
See In re Integrated Resources, Inc.,
135 B.R. 746, 748 (Bankr.S.D.N.Y.1992), Since the transfer of the original actions, several others have been filed in the Southern District of New York or transferred by the Multidistrict Panel to this Court and consolidated with these proceedings (“Later Filed Actions”).
In general, the Plaintiffs in each of these actions bought limited partnership interests in ventures sponsored by Integrated or an entity associated with Integrated. The ventures were invéstment vehicles which bought, owned, operated, and leased residential and commercial real estate and equipment. The offer and sale of these interests was conducted in compliance with the requirements of Regulation D .(“Reg. D”), Rules 501-08, 17 C.R.F. 230.501-230.508, of the Securities Act of 1933 (“1933. Act”), 15 U.S.C. §§ 77a,
et seq.,
thereby exempting the transactions from the registration requirements of the 1933 Act. Since these transactions are not registered with the Securities and Exchange Commission, the 1933 Act limits purchasers to those who qualify as “accredited investors.”
To qualify as a Reg. D accredited investor, a “natural person” must have “an individual net worth, or joint net worth with that person’s spouse, at the time of his purchase [in .excess of] $1,000,000”; or he must have:
had an individual income in excess of $200,-000 in each -of the two most recent years or joint income with the person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.
Rule 501(a)(5) & (6). A trust qualifies for accredited-investor status if it has “total assets in excess of $5,000,000, not formed for
*628
.the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person ...Rule 501(a)(7), to wit, one who “has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment ... Rule 506(b)(2)(ii).
The purpose of these requirements is to facilitate and expedite specially designed offerings, while at the same time offsetting the danger posed by the lack of SEC scrutiny of the offer and sale by precluding those from participating in the offering who are inexperienced purchasers of securities and unable to afford professional advice regarding the merits and risks of purchasing the offered securities. Each of the investors in the Integrated partnerships was required to represent in writing that he qualified for Reg. D accredited-investor status and that he met the additional financial criteria set forth in the “Who May Invest” section of the confidential private placement memorandum (“PPM”) issued for each partnership.
The investors were also warned in the respective partnership PPMs of various financial risks involved with each partnership investment. The following statement from the first paragraph of the Clovine Associates Limited Partnership PPM is typical:
The tax consequences of an investment in the Partnership, the absence of Cash Flow from such investment for at least the first four years of the operation of the Partnership and the illiquidity of such investment make the purchase of Interests suitable only for investors who have substantial net worth and substantial taxable income, and an Interest should be purchased only as a long-term investment.
Clovine PPM at 1.
Additionally, each PPM contained a section entitled “Risk Factors,” in which the various risk factors of the investment were explicated at length, including, for example, restrictions on transferability and the possible lack of a market for the investment interests; the possible unavailability of tax benefits and changes in the tax law; risks arising from the terms and conditions of purchase money notes, mortgages, and leases; the possible inability to refinance the project; the possible lack of available sources of funds for the operating partnership; risks arising from leveraged financing and the ownership of the specific property; the possible inability to sell the project; and the possible adverse effects of technological developments in competing equipment.
The limited partnerships were highly leveraged, and the Plaintiffs allege they were promised considerable tax savings through debt financing and, after the initial debt was paid off, considerable profits from rental income from the buildings and equipment. The Plaintiffs further allege that the investments had no prospects for success from their inception and served no other economic purpose than to provide the Defendants with millions of dollars of profit in sales proceeds, fees, and other commissions.
On February 3, 1992, this Court signed “Pre-Trial Order No. 1” (“Pre-Trial Order”) which, among other things, established an initial motion and discovery schedule for all actions subject to the MDL Order. The Pre-Trial Order created four separate global motion categories: (I) statutes of limitations governing the federal securities claims (“Global Motion I”), (II) the legal sufficiency of the federal securities claims (“Global Motion II”), (III) the legal sufficiency of the federal RICO claims (“Global Motion III”), and (IV) all Global Motion I, II, III motions applicable to the Later Filed Actions (“Global Motion IV”). The Pre-Trial Order also consolidated the briefing and hearing schedules for Global Motions I and II and Global Motions III and IV.
The actions subject to the present motion are:
Byrne v. Research Triangle Associates Limited Partnership,
91 Civ. 6966
(“Research Triangle
”) (filed January 3,1991 in the Arizona District, Phoenix Division);
Reagan v. 600 Grant Street Associates Limited Partnership,
91 Civ. 5498
(“600 Grant Street/Reagan”)
(filed April 12, 1991 in the Central District of California);
Schoonmaker Homes v. 600 Grant Street Associates Limited Partnership,
91 Civ. 8528
(“600 Grant Street/Schoonmaker”)
*629
(filed December 18, 1991 in the Southern District of New York);
Standefer v. Clovine Associates Limited, Partnership,
91 Civ. 6968
(“Clovine/Standefer
”) (filed April 9,1991, in the Southern District of Ohio, Western Division);
Ellingson v. Kanzar Associates,
91 Civ. 6967
(“Clovine/Ellingson
”) (filed March 14, 1991, in the Southern District of Ohio, Western Division);
Baird v. EVP Fourth Corp.,
91 Civ. 1063
(“West Palm/Baird”)
(filed February 12, 1991, in the Southern District of New York);
Coleman v. EVP Fourth Corp.,
91 Civ. 0678
(“West Palm/Coleman")
(filed January 23, 1991, in the Southern District of New York);
Coolspring Dental Clinic v. EVP Seventh Avenue Corp.,
91 Civ. 6905
(“Rittenhouse")
(filed October 15, 1991, in the Southern District of New York);
Martin v. EVP Second Corp.,
90 Civ. 7074
(/‘Lenox Towers
”) (filed November 2,1990, in the Southern District of New York; dismissed with leave to replead to add additional plaintiffs by this Court on August 26, 1992);
Gorman v. Sevzar Associates,
90 Civ. 6979
(“Southern Inns
”) (filed October 19, 1990 in the Southern District of New York);
Greene’s Ready Mixed Concrete Co. v. Fillmore Pacific Associates Limited Partnership,
91 Civ. 0978
(“Fillmore/Greene’s ”)
(filed February 8,1991, in the Southern District of New York);
Enviro Corp. v. Fillmore Pacific Associates Limited Partnership,
91 Civ. 1625
(“Fillmore/Enviro
”) (filed March 7, 1991, in the Southern District of New York);
White v. Hunter Publishing Limited Partnership,
91 Civ. 2232
(“Hunter Publishing
”) (filed April 1, 1991, in the Southern District of New York);
Christian v. Integrated MR Limited Partnership,
91 Civ. 6003
(“Intermobile
”) (filed September 5, 1991, in the Southern District of New York).
The present motions do not apply to any of the Later Filed Actions or to
Barron v. Miami Executive Towers Assocs. Ltd. Partnership,
89 Civ. 8569 (RWS) (filed December 18, 1989, in the Southern District of New York), or to
Rabin v. Fivzar Assocs.,
90 Civ. 4869 (RWS) (filed July 23,1990, in the Southern District of New York). Nevertheless, the parties should assume that general principles set forth below will be applied to those actions in accordance with Global Motion IV.
Additionally, the Pre-Trial Order stayed the production of documents to the Plaintiffs by various parties pending the disposition of the Global Motions.
1
The Pre-Trial Order also stayed the depositions of parties, except as to the Plaintiffs’ deposition of Landauer Associates, Inc., in
Clovine/Ellingson,
pending the disposition of the Global Motions and the completion of document discovery.
Pursuant to the schedule established in the Pre-Trial Order, as amended, the “Anderson Kill” and “Integrated” Defendants (“Moving Defendants”)
2
moved for summary judgment
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dismissing the federal securities claims in the subject actions pursuant to Fed.R.Civ.P., Rules 12(b), 12(c), and 56, (Global Motion I), and for an order dismissing those claims under pursuant to Fed.R.Civ.P., Rules 12(b), 12(c), and 9(b) (Global Motion II), on February 21,1992. Most of the Individual Defendants joined in these motions and either adopted the reasoning of the Anderson Kill and Integrated Defendants or submitted their own papers.
3
Additionally, pursuant to Rule 12(b)(6), Fed.R.Civ.P., the Plaintiffs in
Lenox Towers
moved to dismiss counterclaims made against them by the Anderson Kill and Camhy Karlinsky & Stein Defendants.
See supra
note 2.
Oral argument on these motions was heard on June 10, 1992. The cross-motion of the
Lenox Towers
Plaintiffs is considered submitted as of that date. Various supplemental letter briefs were received by the Court through October 30, 1992 and October 2, 1992 on Global Motions I and II, respectively, and the Global Motions are considered submitted as of those dates.
Global Motion I
On Global Motion I, the Moving Defendants seek summary judgment dismissing most of the Plaintiffs’ federal securities claims on the ground that the claims are untimely under the applicable statutes of limitations. The individual complaints allege claims under either § 10(b) of the Securities Exchange Act of 1934 (“1934 Act”), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240 .10b-5, or § 12(2) of the 1933 Act, 15 U.S.C. § 77Z (2), or both. For the reasons set forth below, Global Motion I is granted in part and denied in part.
For simplicity’s sake, the general legal principles governing the statute of limitations
*631
issues will be set forth first. These principles will then be applied to the individual complaints on a case-by-case basis.
I. The Statute of Limitations for the § 12(2) Claims
Section 13 of the 1933 Act provides that: No action shall be maintained to enforce any liability created under section 77k or
771
(2) [12(2) ] 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
111
(2) of this title more than three years after the sale.
15 U.S.C. § 77m.
“The three-year time limit in section 13 is an absolute outer limit.”
Bresson v. Thomson McKinnon Sec., Inc.,
641 F.Supp. 338, 343 (S.D.N.Y.1986). Moreover, because compliance with § 13 is an essential ingredient of a § 12(2) claim,
see Morin v. Trupin,
747 F.Supp. 1051, 1063 (S.D.N.Y.1990)
(“Morin
7”) (quoting
Bresson,
641 F.Supp. at 343 ), a complaint asserting such a claim must set forth:
(1) the time and circumstances of the discovery of the fraudulent statement;
(2) the reasons why it was not discovered earlier (if more than one year has lapsed since the making of the fraudulent statement); and
(3) the diligent efforts which plaintiff undertook in making or seeking such discovery.
Id.; see Friedman v. Arizona World Nurseries, Ltd. Partnership,
730 F.Supp. 521, 543-44 (S.D.N.Y.1990).
Failure to comply with these requirements will subject an individual § 12(2) claim to dismissal. The issues concerning the individual discovery dates are set forth below in the § 10(b) discussion.
II. The Statutes of Limitations for the § 10(b) Claims
Before the Supreme Court’s decision in
Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson,
— U.S. -, 111 S.Ct. 2773 , 115 L.Ed.2d 321 (1991), on June 20, 1991, Congress had never seen it fit to legislate a uniform statute of limitations for the implied right of action arising out of § 10(b). Once the Court announced such a limitations period in
Lampf, see
— U.S. at-& n. 9, 111 S.Ct. at 2782 & n. 9, and directed that it be applied retroactively,
see Welch v. Cadre Capital,
946 F.2d 185, 187 (2d Cir.1991)
(“Welch II
”);
Ahmed v. Trupin,
781 F.Supp. 1017, 1021 (S.D.N.Y.1992), Congress responded by amending the 1934 Act and inserting a new § 27A:
(a) EFFECT ON PENDING CAUSES OF ACTION. — The limitation period for any private civil action implied under section 10(b) of this Act that was commenced on or before June 19, 1991, shall be the limitation period provided by the laws applicable in the jurisdiction, including principles of retroactivity, as such laws existed on June 19, 1991.
(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—
(1) which was dismissed as time barred subsequent to June 19, 1991, and
(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.
Federal Deposit Insurance Corporation Improvement Act of 1991, Pub.L. No. 102-242, § 476 , 105 Stat. 2236 (codified at Securities Exchange Act of 1934, § 27A, 15 U.S.C. § 78aa-l).
This action includes cases filed after the Supreme Court’s decision in
Lampf,
cases filed in the Second Circuit before
Lampf,
but after the November 8, 1990 decision in
Ceres Partners v. GEL Assocs.,
918 F.2d 349 , 364 (2d Cir.1990) (adopting uniform limitations period § 10(b) actions); cases filed in the Second Circuit before
Ceres Partners;
and
*632
cases filed in federal district courts outside the Second Circuit.
Such a state of affairs rarely lends itself to simply stated rules, and the present motions are no exception. Rather, myriad issues must be addressed, including the constitutional validity of § 27A; the applicable statute of limitations for each case and, in certain instances, for each Plaintiff; whether the limitations period from some other circuit can be applied here; and at what point various Plaintiffs should have discovered the conduct upon which their claims are based.
A.The § 10(b) Statute of Limitations to be Applied to Claims Filed on or after June 20, 1991
In
Lampf,
the Supreme Court held that private actions under § 10(b) must be commenced within one year after the discovery of the facts constituting the violation and within three years after such violation.
See
— U.S. at-, 111 S.Ct. at 2781-82 . In adopting this uniform federal statute of limitations, the Court borrowed from § 9(e) of the 1934 Act, 15 U.S.C. § 78i(e), which provides:
No action shall be maintained to enforce any liability created under this section, unless brought within one year after the discovery of the facts constituting the violation and within three years after such violation.
See
— U.S. at-n. 9, 111 S.Ct. at 2781-82 .
The Court also noted that the language used in § 9(e) of the 1934 Act varies from that used in the 1933 Act.
See id.
While § 13 of the 1933 Act imposes a strict three-year limit from the date of “sale,” § 9(e) of the 1934 Act imposes such a limit “after the cause of action accrued”.
Compare
15 U.S.C. § 77m
with id.
§ 78i(e). To the extent this difference has any substantive effect in an individual case will be determined in applying the statute of limitations below.
The Supreme Court decided
Lampf
on June 20, 1991. Section 27A is directed at only those cases commenced on or before June 19, 1991. Therefore, § 9(e) limitations period will be applied to the § 10(b) claims in the cases commenced on or after June 20, 1991.
B.
Section 27A is Not Unconstitutional
This Court fully considered the question of § 27A’s constitutionality based on briefs filed by counsel to most of the parties to this litigation in
Rabin v. Fivzar Assocs.,
801 F.Supp. 1045, 1051-56 (S.D.N.Y.1992). Additional materials submitted in this matter shed no further light on the decision there that the statute does not violate principles of separation of powers and due process.
See id.
at 1056 ;
cf. Litton Industries, Inc. v. Lehman Brothers Kuhn Loeb Inc.,
967 F.2d 742 , 751 n. 6 (2d Cir.1992).
C.
The § 10(b) Limitations Period to be Applied to Claims Filed before June 20, 1991, and on or after November 8, 1990
The statute of limitations for § 10(b) in the Second Circuit required that the case be brought within one year of discovery of the fraud and within three years of the fraud some seven months before
Lampf-was
decided. In
Ceres,
the Second Circuit concluded that the limitations period found in §§ 9 and 18 of the 1934 Act should apply to implied claims brought under § 10(b), the same period selected by the Supreme Court in
Lampf. See Ceres,
918 F.2d at 364. Therefore, all those § 10(b) claims filed on or after November 8, 1990, the date
Ceres
was decided, will be subject to the uniform one-year/three-year period adopted in
Ceres
and
Lampf. See
15 U.S.C. § 78aa-l;
Henley v. Slone,
961 F.2d 23, 24 (2d Cir.1992).
The Integrated lawsuits originally filed in this Court after November 8,1990 and therefore bound by the statute of limitations laid down in
Ceres
are
West PalmJBaird
(filed February 12, 1991),
West Palm/Coleman
(filed January 23, 1991),
Fillmore/Greene’s
(filed February 8, 1991),
Fillmore/Enviro
(filed March 7, 1991),
Hunter Publishing
(filed April 1, 1991),
4
and
600 Grant Street/Reagan
(filed April 12, 1991).
*633
Two other lawsuits were originally filed in the Southern District of New York just before the Second Circuit handed down the new statute of limitations in
Ceres: Lenox Towers
(filed November 2, 1990) and
Southern Inns
(filed October 19,1990). Claims in these two cases will be governed by the Second Circuit’s prior practice of borrowing the most analogous state statute of limitations for the § 10(b) claims.
See Ades v. DeLoitte & Touche,
Fed.Sec.L.Rep. (CCH) ¶ 96,469 (S.D.N.Y.1992). The § 12(2) claims in these cases, of course, continue to be governed by the one-year/three-year statute of limitations prescribed by § 13 of the 1933 Act, 15 U.S.C. § 77m.
D.
Determining the Applicable § 10(b) Limitations Periods for Claims Filed in Other Jurisdictions
The other three lawsuits were originally filed elsewhere and then transferred to this Court by the Judicial Panel on Multidistrict Litigation. The complaints were filed in Arizona, Phoenix Division
(Research Triangle,
filed Jan. 3, 1991), the Central District of California
(600 Grant Street/Reagan,
filed April 12, 1991), and the Southern District of Ohio, Western Division
(Clovine/Standefer,
filed April 9, 1991, and
Clovine/Ellingson,
filed March 14, 1991).
In all three, both the Plaintiffs and the Moving Defendants agree that the fraud occurred more than three years before the Plaintiffs brought suit. Since the alleged fraud occurred when the Plaintiffs were induced to purchase their partnership interests, and since in
Research Triangle
and
Clovine/Standefer
the latest Plaintiffs purchased in 1986, claims in all three actions are time-barred under Second Circuit law.
The
Clovine/Ellingson
Plaintiffs contend that the Court must use the § 10(b) statute of limitations of the district in which the action was filed, on the grounds that the transferor state’s jurisdiction is the “jurisdiction” meant by § 27A. The Plaintiffs in the other two partnership actions maintain it would be “inequitable” to apply Second Circuit law to these claims.
The definition of “jurisdiction,” however, is not quite as clear cut as the
Clovine/Ellingson
Plaintiffs make it out to be. Prior to the statute’s enactment, the crazy-quilt of statutes of limitations employed in § 10(b) actions was well known.
See Ceres,
918 F.2d at 353-60. At the most, § 27A has done nothing more than codify this procedural morass in place.
1. Second Circuit Law Before “Ceres”
Prior to
Ceres,
courts within the Second Circuit traditionally applied the forum state’s most analogous statute of limitations to claims under § 10(b).
See Welch v. Cadre Capital,
923 F.2d 989, 993 (2d Cir.)
(“Welch I
”),
vacated and remanded sub worn. Northwest Sav. Bank, PaSa v. Welch,
— U.S. -, 111 S.Ct. 2882 , 115 L.Ed.2d 1048 ,
aff'd,
946 F.2d 185 (2d Cir.1991);
Armstrong v. McAlpin,
699 F.2d 79, 86-87 (2d Cir.1983). In the Southern District of New York, that statute of limitations is contained in both the State’s statute of limitations for common-law fraud actions and its “borrowing statute”.
See Armstrong,
699 F.2d at 87 ;
Arneil v. Ramsey,
550 F.2d 774, 779 (2d Cir.1977);
Morin v. Trupin,
799 F.Supp. 342, 345 (S.D.N.Y.1992)
(“Morin III”).
In the case of plaintiffs who were residents of New York State at the time of the injury, the former period set forth in N.Y.Civ. Prac.L. & R. § 213(8) (McKinney 1990 Supp.) applies: The action must be commenced within six years of the commission of the alleged fraud or two years from the time the alleged wrongdoing was, or with reasonable diligence should have been, discovered.
See Armstrong,
699 F.2d at 87 ;
Morin III,
799 F.Supp. at 345 . In those cases where the plaintiffs were nonresidents at the time the cause of action accrued, N.Y.Civ.Prac.L. & R. § 202 (McKinney 1990) applies.
Under this “borrowing statute,” a court is to apply the limitations period “of either
*634
[New York] or the place without [New York] where the cause of action accrued,” whichever is shorter.
See Bresson,
641 F.Supp. at 349 ;
Klock v. Lehman Brothers Kuhn Loeb, Inc.,
584 F.Supp. 210, 214 (S.D.N.Y.1984). “Thus, if a suit brought in the ‘place’ of the plaintiffs residence would be time-barred, the suit in a New York federal court is time-barred.”
Ceres,
918 F.2d at 353 (citations omitted).
As this Court recently noted:
Although federal courts look to state law for the applicable limitations period, they look to federal law for guidance as to the appropriate accrual and equitable tolling principles.
See ITT v. Cornfeld,
619 F.2d 909 , 929 (2d Cir.1980) (period commences to run “when the plaintiff has actual knowledge of the alleged fraud or knowledge of facts which the exercise of reasonable diligence should have led to actual knowledge”);
Baskin v. Hawley,
807 F.2d 1120, 1130-31 (2d Cir.1986).
A plaintiff must bring a § 10(b) action in federal court. Thus, in applying the rule of “the place without the state where the cause of action accrued” a federal court sitting in New York does not automatically turn to state law but rather must look to the statute of limitations that would be applied by the federal district court where the nonresident plaintiff resided at the time of the injury.
See Ceres,
918 F.2d at 353;
Ahmed v. Trupin,
781 F.Supp. 1017, 1022-23 (S.D.N.Y.1992).
Morin III,
799 F.Supp. at 347 . Therefore, the Court must look to the relevant states for statutes of limitations governing the § 10(b) actions filed before
Ceres.
In the matter at hand, this applies to the actions filed in
Lenox Towers
and
Southern Inns.
2.
Retroactivity as Determined by Chevron
Although the
Ceres
court explicitly refused to address the retroactive effect of its ruling,
see Ceres,
918 F.2d at 364, the Second Circuit resolved that question in
Welch I,
923 F.2d at 993-95 .
Welch I
established that the retroactive application of
Ceres
must be determined on a case-by-case basis according to a three-part test laid out in
Chevron Oil Co. v. Huson,
404 U.S. 97 , 92 S.Ct. 349 , 30 L.Ed.2d 296 (1971). Only then should the court return to the Second Circuit’s prior practice of applying the most analogous state statute of limitations. The three parts of the test hinge on 1) whether the new rule was “clearly foreshadowed” at the time the relevant complaint were filed, 2) whether retroactive application of the statute of limitations would serve the purpose of the new rule, and 3) whether the equities weighed in favor of nonretroactivity.
See Chevron,
404 U.S. at 106-7 , 92 S.Ct. at 355-56 ;
Welch I,
923 F.2d at 993-95 ;
Rabin,
801 F.Supp. at 1049 .
The argument offered by the Plaintiffs in
Research Triangle
and
Clovine/Standefer
— that this Court’s failure to apply the law of the transferor state would work harsh inequities — is only one part of the test, not a determination of the whole. Whether retroactive application of the law was foreseeable and whether it serves the purpose of the law is more significant here: “As for the third Chevron factor, the courts have held that the retroactive application of
Ceres
does not produce substantial inequitable results when the statute of limitations is unchanged by retroactive application,” as it is for cases filed after November 8, 1990.
In re Chaus Sec. Litig.,
801 F.Supp. 1257, 1269 (S.D.N.Y.1992) (applying
Ceres
statute of limitations to case transferred pursuant to 28 U.S.C. § 1407 ). The law of the jurisdiction is Second Circuit law.
The second prong of the
Chevron
test— that retroactive application will further the new rule — does warrant retrospective application under
Ceres.
In the context of a transferred class action, the traditional method of looking to the state of each nonresident class plaintiff to determine whether each claim would be time-barred could result in the claims of some plaintiffs being time-barred while the claims of others would not be. This result would be at least as inequitable as the result envisioned by the Plaintiffs if
Ceres
were applied to their claims in
Clovine/Standefer
and
Research Triangle. See Chaus,
801 F.Supp. at 1269.
The uniform application of
Ceres
in this context does further the rule because here
*635
the rule is not, strictly speaking, retroactive. All four Complaints were filed in their respective jurisdictions after November 8, 1990:
Research Triangle
on January 3, 1991;
Clovine/Ellingson
on March 14, 1991;
Clovine/Standefer
on April 9, 1991;
600 Grant Street/Reagan
on April 12, 1991. If the Plaintiffs could avoid the application of Second Circuit law merely by filing their claim in an inconvenient forum which had a longer statute of limitations, and then take that statute of limitations with them when their case was transferred, they could make an end run around the rule laid down by
Ceres.
Although this is now impossible for all claims filed after June 19,1991, due to the Supreme Court’s decision in
Lamp,f,
the eight-month lag between
Ceres
and
Lampf
creates an apparent window of opportunity which the Plaintiffs should not be allowed to exploit.
Finally, the first prong of the
Chevron
test — that the rule changes the practice in this Circuit — is met for cases filed here, and for cases transferred here but not transferred as part of MDL litigation. The precedents for MDL cases are not as clear-cut as for cases filed under other statutes, because the special concerns inherent in MDL litigation have been reflected in the case law.
3. Multidistrict Litigation
The multidistrict transfer statute, 28 U.S.C. § 1407 , attempts to provide for the “just and efficient conduct” of related cases scattered throughout the federal courts by consolidating such cases before one court.
See
28 U.S.C. § 1407 (a). One of the key means by which this goal is achieved is through the establishment of a single body of law for the unified proceedings.
See generally In re Korean Air Lines Disaster,
829 F.2d 1171, 1176-84 (D.C.Cir.1987) (Ginsburg, J., concurring),
affd on other grounds sub nom. Chan v. Korean Air Lines, Ltd.,
490 U.S. 122 , 109 S.Ct. 1676 , 104 L.Ed.2d 113 (1989);
see also In re Pan American Corp.,
950 F.2d 839 , 847 (2d Cir.1991) (adopting
Korean Air Lines).
Without such a mechanism, “[t]he conduct of multidistrict litigation, which is invariably time consuming as it is, will grind to a standstill while transferee judges read separate briefs, each based on the case law of a transferor circuit, on a single issue of federal law.”
Pan Am,
950 F.2d at 847. In most cases such an effort should be futile, since it must be presumed that the Supreme Court will eventually resolve any pertinent split among the circuits and set down a uniform federal law.
See, e.g., Chan,
490 U.S. at 124-25, 135 , 109 S.Ct. at 1678-79, 1684 (resolving the split at issue in
Korean Air
Lines).
The
Clovine/Ellingson
Plaintiffs argue that under
Van Dusen v. Barrack,
376 U.S. 612 , 84 S.Ct. 805 , 11 L.Ed.2d 945 (1964),
5
Klaxon Co. v. Stentor Elec. Mfg. Co.,
313 U.S. 487 , 61 S.Ct. 1020 , 85 L.Ed. 1477 (1941), and
Erie R. Co. v. Tompkins,
304 U.S. 64 , 58 S.Ct. 817 , 82 L.Ed. 1188 (1938), this Court must apply the statute of limitations that each transferor court would have applied to these actions.
See Berry Petroleum Co. v. Adams & Peck,
518 F.2d 402, 406 (2d Cir. 1975);
H.L. Green Co. v. MacMahon,
312 F.2d 650, 653 (2d Cir.1962),
cert. denied,
372 U.S. 928 , 83 S.Ct. 876 , 9 L.Ed.2d 736 (1963);
In re Plumbing Fixtures Litig.,
342 F.Supp. 756, 758 (J.P.M.L.1972) (per curiam).
Although this argument finds support within Erie’s progeny,
see Walker v. Armco Steel Corp.,
446 U.S. 740, 752-53 , 100 S.Ct. 1978, 1986 , 64 L.Ed.2d 659 (1980);
Guaranty Trust Co. v. York,
326 U.S. 99, 110-12 , 65 S.Ct. 1464, 1470-71 , 89 L.Ed. 2079 (1945), it ignores the fundamental difference between those cases and the present litigation, just as the
Clovine/Ellingson
Plaintiffs’ reliance on New York law ignores the fact that this cause of action can only be tried in a federal court. Jurisdiction here is based on a federal question. As such,
Erie’s
familiar concerns over state law are inapplicable here.
See West v. Conrail,
481 U.S. 35 , 39 n. 4, 107 S.Ct. 1538 , 1541 n. 4, 95 L.Ed.2d 32 (1987);
Isaac v. Life Inv. Ins. Co.,
749 F.Supp. 855, 863 (E.D.Tenn.1990);
see also
Richard L. Marcus,
Conflicts Among the Circuits and Transfers Within the Federal Judicial System,
93 Yale L.J. 677 , 679 (1984)
(“Erie
is
*636
simply irrelevant where federal claims are involved”).
The reasoning in the cases relied on by the
Clovine/Ellingson
Plaintiffs in making this argument has been subsequently rejected. The line of authority holding that a transferee court should apply the law of the transfer- or court in federal claims transferred pursuant to § 1407 finds its genesis in
Plumbing Fixtures,
342 F.Supp. at 758 (“It is clear that the substantive law of the transferor forum will apply after transfer,” citing
Van Dusen v. Barrack,
376 U.S. 612 , 84 S.Ct. 805 , 11 L.Ed.2d 945 (1964)). This language has, however, been expressly withdrawn by the Multidistrict Panel:
Any suggestion to the contrary in dictum found in
Plumbing Fixtures
is withdrawn. Indeed, the dictum in
Plumbing Fixtures
is itself questionable given that
Plumbing Fixtures
was a litigation arising under the federal courts’ federal question jurisdiction and
Van Dusen ,
on which the Panel relied in support of its dictum, was an action arising under the federal courts’ diversity jurisdiction.
In re General Motors Class E Stock Buyout Sec. Litig.,
696 F.Supp. 1546 , 1547 n. 1 (J.P.M.L.1988). The other cases these Plaintiffs have cited in support of this argument principally rely on
Plumbing Fixtures. See, e.g., Berry Petroleum,
518 F.2d at 408 n. 7;
In re Haven Industries, Inc.,
462 F.Supp. 172, 179 (S.D.N.Y.1978). To this extent, then, the reasoning of these cases is now called into question.
In its place, the federal courts have adopted two considerations for cases transferred under 28 U.S.C. § 1407 : first, that statutes of limitations are either federal or procedural in nature, and second, that the circuits do not need to defer to other circuits’ interpretation of federal law if it conflicts with their own.
In the MDL context, the statute of limitations may not be a matter of state law at all, and as such, the limitation period should be decided by a federal transferee court in accordance with its own interpretation of federal law “without deference to any contrary interpretation of a transferor circuit.”
In re General Dev. Corp. Bond Litig.,
800 F.Supp. 1143, 1146 (S.D.N.Y.1992). Since “the choice of a limitations period for a federal cause of action is itself a question of federal law,”
Del Costello v. International Brotherhood of Teamsters,
462 U.S. 151 , 159 n. 13, 103 S.Ct. 2281 , 2288 n. 13, 76 L.Ed.2d 476 (1983), the limitations periods for federal causes of action, from wherever derived, are
not
matters of state law in any meaningful sense and should not, in the transfer context, implicate
Van Dusen
principles. As the court in
General Development
noted:
“[I]t seems ... clear that the best reading of the F.D.I.C.’s Improvement Act’s phrase “laws applicable in the jurisdiction,” as it applies to a complaint ... filed before the date of the decision in
Lampf
and transferred here, is that the jurisdiction referred to must be the one in which the federal transferee court sits ...
ie.,
the one- and three-year period set forth in
Ceres Partners.”
800 F.Supp. at 1148 .
Even if the choice of the limitations period is not itself a question of federal law, there is another reason why a federal limitations period should govern. Federal courts have viewed questions pertaining to the statutes of limitations for federal securities claims as procedural, not substantive, matters, and they are, therefore, subject to the federal law of the transferee court.
See, e.g., Singer v. Olympia Brewing Co.,
878 F.2d 596, 599 (2d Cir.1989);
Duke v. Touche Ross & Co.,
765 F.Supp. 69, 73 (S.D.N.Y.1991).
In short, the Plaintiffs have presented no compelling reason to require the rejection of the holdings of
Pan Am
and
Korean Air Lines.
The Second Circuit’s rules for determining which statute of limitations to apply to the individual § 10(b) claims therefore govern.
See Pan Am,
950 F.2d at 847;
Korean Air Lines,
1175-76.
Despite the expectation of some supporters of section 27A that it would routinely apply a more generous state or federal common law limitations period to all suits pending on June 19, 1991, we see no escape from the clear statutory language requiring the application of “the laws applicable in the jurisdiction.”
*637
Henley v. Slone,
961 F.2d 23, 25 (2d Cir.1992) (refusing to apply common-law fraud statute of limitations to securities fraud claim brought in Connecticut).
E.
New York Law
Finally, the
Clovine/Ellingson
Plaintiffs contend that a general choice of law clause in their limited partnership materials mandates that New York’s six-year statute of limitations for common-law fraud should apply. The clause in question reads:
This Agreement, the Notes, any amendments or replacements hereof and thereof, and the legality, validity and performance of the terms hereof and thereof, shall be governed by and construed in all respects in accordance with the internal laws of the State of New York ... applicable to contracts, transactions and obligations entered into and to be performed in New York.
Pis.’ Mem. in Opp. Ex. A at 3.
This contention fails for two reasons. First, the clause is a generic choice of law clause governing the interpretation of contracts. Such clauses generally do not apply to statutes of limitations; indeed, this clause is silent as to the issue. Absent an express term, the clause does not alter the federal law applicable to this federal claim.
See Des Brisay v. Goldfield Corp.,
637 F.2d 680 , 682 (9th Cir.1981);
Gatto v. Meridian Medical Assocs., Inc.,
No. Civ. A 87-5076 (JCL), 1989 WL 23125 (D.N.J. Feb. 9, 1989).
Second, if the New York choice of law clause does apply, it would have to be read as requiring the application of the law of a federal court sitting in New York. Section 27 of the 1934 Act grants federal courts with exclusive jurisdiction of federal securities claims.
See Ceres,
918 F.2d at 353. A plaintiff must begin a § 10(b) action in federal court. A federal court sitting in New York cannot automatically turn to state law but must first look to the statute of limitations that would be applied by the federal district court in the state where the plaintiff brought his § 10(b) action. Therefore, Second Circuit, not New York, law would apply.
See id; Ahmed
781 F.Supp. at 1022 ;
Marlow v. Gold,
[1991 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 96,112, 1991 WL 107268 (S.D.N.Y.1991).
F. Determiningr
When Plaintiffs Were Placed on Inquiry Notice
In the Second Circuit, the statute of limitations for securities fraud claims begins to run when the plaintiff has actual knowledge of the alleged fraud or when the plaintiff is placed on
inquiry notice,
to wit, when the plaintiff has “knowledge of facts which in the exercise of reasonable diligence should have led to actual knowledge.”
Phillips v. Levie,
593 F.2d 459, 462 (2d Cir.1979) (quoting
Stull v. Bayard
561 F.2d 429, 432 (2d Cir.1977), emphasis added).
Thus, the statute is not tolled for a plaintiffs “leisurely discovery of the full details of the alleged scheme.”
Klein v. Bower,
421 F.2d 338, 343 (2d Cir.1970). Instead, the period runs from the time at which a plaintiff “should have discovered the general fraudulent scheme.”
Robertson v. Seidman & Seidman,
609 F.2d 583, 587 (2d Cir.1979) (quoting
Berry Petroleum Co. v. Adams & Peck,
518 F.2d 402, 410 (2d Cir.1975)).
Kronfeld v. Advest, Inc.,
675 F.Supp. 1449, 1458 (S.D.N.Y.1987);
accord Arneil,
550 F.2d at 780 .
1. The Objective Test
The Second Circuit has held that the test determining whether a plaintiff was placed on inquiry notice is “objective” in nature.
The means of knowledge are the same thing in effect as knowledge itself. Where the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded, a duty of inquiry arises, and if he omits that inquiry when it would have developed the truth, and shuts his eyes to the facts which call for investigation, knowledge of that fraud will be imputed to him. This rule is fully applicable in cases ... which involve claims of securities fraud.
Armstrong,
699 F.2d at 88 (citations and internal quotations omitted). This objective test mandates a dismissal of or summary judgment on a plaintiffs securities fraud
*638
claim when the “pleadings disclose facts sufficient to have placed the plaintiff on inquiry-notice of the alleged fraud prior to the one-year cutoff.”
Bresson,
641 F.Supp. at 345 .
To satisfy this test, the knowledge of the alleged fraud imputed to a plaintiff must rise to the level of the probable and not merely of the possible. When inquiry notice is asserted by a defendant as the basis for a summary judgment motion, as is the case here, the defendant has the burden of showing that no genuine issue of material fact exists as to whether the plaintiff, exercising reasonable diligence, would have discovered the fraudulent scheme by the dates identified by the defendant.
See Kronfeld,
675 F.Supp. at 1458 . The defendant also must establish that the circumstances in question suggested to the plaintiff the probability that he allegedly had been defrauded and not the mere possibility of the alleged fraud to trigger inquiry notice and start the running of the statute of limitations period.
See Armstrong,
699 F.2d at 88 ;
see also Zola v. Gordon,
685 F.Supp. 354 , 367 n. 14 (S.D.N.Y.1988)
(“Zola I”)
(rejecting as “incorrect” the proposition in
Klein v. Shields & Co.,
470 F.2d 1344, 1347 (2d Cir.1972), that inquiry notice is triggered when the imputed knowledge is of the possibility of fraud).
6
2. Deciding Motions for Summary Judgment Based on Inquiry Notice
This Court has noted the care with which a motion for summary judgment based on an assertion of inquiry notice must be decided, because the question of whether a plaintiff exercised reasonable diligence is usually a question of fact for the jury to decide.
See Intre Sport, Ltd. v. Kidder, Peabody & Co.,
625 F.Supp. 1303, 1310 (S.D.N.Y.1985),
aff'd without opinion,
795 F.2d 1004 (2d Cir.1986),
vacated on other grounds,
482 U.S. 922 , 107 5. Ct. 3203, 96 L.Ed.2d 690 (1987). As the Second Circuit stated in
Robertson ,
[i]ssues of due diligence and constructive knowledge depend on inferences drawn from the facts of each particular case— similar to the type of inferences that must be drawn in determining intent and good faith, [and w]hen conflicting inferences can be drawn from the facts, ... summary judgment is inappropriate.
609 F.2d at 591 . In light of these considerations, this Court has concluded it is only in “extreme circumstances” that summary judgment is appropriate when the defendants assert that the action was untimely commenced because inquiry notice was triggered more than a year before the action was brought by the plaintiff.
Freschi v. Grand Coal Venture,
583 F.Supp. 780, 785 (S.D.N.Y.1984).
These circumstances do obtain when a court readily can impute knowledge of a probable fraud to the plaintiff from the face of the documents and facts in evidence supporting the motion for summary judgment without having to assume the role of the jury and undertake a detailed deductive analysis of the factual record to justify that imputation of such knowledge to the plaintiff. Thus, in
Borden, Inc. v. Spoor Behrins Campbell & Young, Inc.,
778 F.Supp. 695, 700 (S.D.N.Y.1991), Judge Conner stated that,
[w]hile defendants spend an inordinate amount of time in their papers trying to prove the essentially factual issue of what plaintiff knew and when plaintiff knew it, this Court is reluctant to engage in the type of fact-finding defendants request on a motion for summary judgment.
Cf. Friedman v. Meyers,
482 F.2d 435, 439 (2d Cir.1973) (summary judgment is “particularly inappropriate” when inferences which the parties sought to have drawn regarding the discovery of the alleged fraud were questions of motive, intent, and subjective feelings and reactions).
Nonetheless, when these circumstances do obtain, the issues of inquiry notice and the discovery of the alleged fraud may be decided by the court as a matter of law and the court “should not be reluctant to grant summary judgment.”
Hartford Fire Ins. Co. v. Federated Dep’t Stores, Inc.,
723 F.Supp. 976, 981 (S.D.N.Y.1989);
see In re General Dev. Corp. Bond Litig.,
800 F.Supp. 1128, 1136 (S.D.N.Y.1992) (because the test of in
*639
quiry notice is objective, “a court’s determination that the information available to a plaintiff in a given instance should (or should not) have given him reason to consider and investigate the probability of fraud is surely warranted in appropriate cases” in the context of a motion to dismiss);
Quantum Overseas, N.V. v. Touche Ross & Co.,
663 F.Supp. 658, 663-64 (S.D.N.Y.1987) (quoting
Rickel v. Levy,
370 F.Supp. 751, 756 (E.D.N.Y.1974) and
Cook v. Avien, Inc.,
573 F.2d 685, 697-98 (1st Cir.1978), that general suspicions and “storm warnings” in financial data trigger inquiry notice upon which summary judgment may be granted);
Kronfeld,
675 F.Supp. at 1458 (“the cases are legion in which summary judgment has been granted on the ground that the plaintiff should have discovered his cause of action under the securities law before the statute of limitations had run”);
Harner v. Prudential Sec. Inc.,
785 F.Supp. 626 (E.D.Mich.1992) (“where ... the underlying facts are undisputed, even factually-based issues may be decided as a matter of law”).
7
3. Information Triggering Inquiry Notice
The information that triggers inquiry notice of the probability of an alleged securities fraud is any financial, legal, or other data available to the plaintiffs providing them “with sufficient storm warnings to alert a reasonable person to the [probability] that there were either misleading statements or significant omissions involved in the sale of the [securities].”
8
Quantum Overseas,
663 F.Supp. at 664 (quoting
Cook,
573 F.2d at 697-98 ). Such data may come in the form of the letters and other documents provided to limited partners by the partnership,
see Bresson,
641 F.Supp. at 341 ;
Farr,
755 F.Supp. at 1225;
Miller v. Grigoli,
712 F.Supp. 1087, 1088 (S.D.N.Y.1989);
Hirschler v. GMD Inv. Ltd. Partnership,
[1990—1991 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 95,919, 1991 WL 115773 (E.D.Va. Mar. 28, 1991); the offering materials themselves,
see Marlow v. Gold,
[1991 Transfer Binder] Fed. Sec.L.Rep. (CCH) ¶ 96,112, at 90,633-90,635, 1991 WL 107268 (S.D.N.Y. June 6, 1991);
Landy v. Mitchell Petro. Tech. Corp.,
734 F.Supp. 608, 617 (S.D.N.Y.1990);
Kennedy v. Josephthal & Co.,
814 F.2d at 798, 802 (1st Cir.1987);
Hirschler ,
¶ 95,919, at 99,564;
Bender v. Rocky Mountain Drilling Assocs.,
648 F.Supp. 330, 334-35 (D.D.C.1986); and public disclosures in the media about the financial condition of the defendant and other lawsuits alleging fraud committed by the defendant,
see Arneil,
550 F.2d at 781 ;
Zola II,
701 F.Supp. at 70;
Korwek v. Hunt,
646 F.Supp. 953, 959 (S.D.N.Y.1986),
aff'd,
827 F.2d 874 (2d Cir.1987);
Bresson,
641 F.Supp. at 345 ;
Gluck v. Amicor, Inc.,
487 F.Supp. 608 , 613-14 & n. 6 (S.D.N.Y.1980).
*640
Furthermore, neither reassurances accompanying the relevant notice nor the continued failure to disclose the facts allegedly misrepresented in the first place, relieves the plaintiff of his duty to undertake reasonable inquiry or tolls the statute of limitations. For example, in
Zola I,
the plaintiffs contended that the IRS notice did not start the statute of limitations because the defendant allegedly sent the plaintiffs a letter representing that he intended to fight the IRS, and because the defendant had stated earlier that the partnership had obtained its own expert appraisals supporting its valuation of the firm.
See
685 F.Supp. at 366-67 .
The court rejected this position, stating that “as a matter of law plaintiffs would not be entitled to rely on ‘reassuring comments’ given them after they received constructive knowledge of the fraud.”
Id.
at 366 . The court also rejected the plaintiffs’ contention that the defendant’s continuing failure to disclose material facts which originally had been misrepresented constituted fraudulent concealment sufficient to further toll the statute of limitations:
The suppression of this information simply is irrelevant to plaintiffs’ duty to inquire, which was triggered by receipt of the IRS report.
See Hupp [v. Gray,
500 F.2d 993 ,] 997 [ (7th Cir.1974) ] (“the fact which would have put a reasonable person on notice of the possibility of fraud ... was concealed”)____ Plaintiffs present no facts indicating that they undertook any inquiry whatsoever. The court can only reach one conclusion, that plaintiffs remained narcose.
Zola I,
685 F.Supp. at 368 (footnote omitted).
See also Farr,
755 F.Supp. at 1228 (“statements of cautious optimism, reiterations of the goal of providing income to investors, and explanations for past poor performance do not rise to the level of affirmative concealment necessary to excuse a reasonable investor from the duty of inquiry presented by the cold numbers contained in the [reports]”). Thus, once placed on inquiry notice, a limited partner cannot avoid the duty to inquire by relying on reassurances and optimistic statements made by the partnership.
4. Inquiry Notice of Integrated’s Demise
This Court has previously noted that sophisticated investors legally may be presumed to know of information in the public domain, such as newspapers and magazine articles.
See Hartford Fire Ins.,
723 F.Supp. at 976 . In
Hartford,
the plaintiff bondholders claimed that Federated had committed a material omission by failing to disclose the risk that Federated would be the subject of a leveraged buyout and the adverse impact that such a buyout would have on the subject debt instruments.
See id.
at 981-83, 987 .
On the defendants’ motion for summary judgment, this Court held that the alleged omissions were not material, and dismissed the plaintiffs’ §§ 10(b) and 12(2) claims.
See id.
at 990. This disposition followed from the fact that the disclosure of the omitted information would not have affected the “total mix” of available information because plaintiffs already should have known of such matters from general publicity accorded Federated in the media.
See id.
at 988. There, over sixty newspaper articles and financial reports in the general press and financial community had identified Federated as an “attractive” takeover candidate and had outlined the negative effect of takeovers on investment grade securities, such as the notes in which plaintiffs subsequently invested.
See id.
at 987-88 (citing
Business Week
and
The New York Times
articles);
see also Seibert v. Sperry Rand Corp.,
586 F.2d 949, 952 (2d Cir.1978) (plaintiff shareholders presumed to know information in public domain); Gol
dberger v. Baker,
442 F.Supp. 659 (S.D.N.Y.1977) (allegations of material omissions insufficient where omitted information was a “matter of public knowledge that anyone could acquire by reading a newspaper with an Amex listing”).
The Moving Defendants assert that the central allegation raised by the Plaintiffs in their various Complaints, which serves as the unifying thread throughout all of the actions, is the allegation that the Plaintiffs relied on the Defendants’ misrepresentations and material omissions regarding the financial stability of Integrated. The Moving Defendants assert further that, in light of the extensive publicity surrounding the collapse of Inte
*641
grated, the Plaintiffs were placed on inquiry notice of this central aspect of their fraud claim from June 1988.
9
At oral argument, however, the Plaintiffs denied that reliance on Integrated’s financial condition to secure the financial viability of the various limited partnerships is a key unifying feature and one of the common elements of the alleged fraud perpetrated by the Defendants. Rather it was asserted that the only commonality among these cases is that “most of the defendants are Integrated or Integrated-related entities or elements.” Tr. at 34. Thus, there are several unique elements of the fraud that relates to Integrated:
It is different for each partnership____ Integrated is there because we allege control in some cases, we allege guarantees in some cases, but in each case there is a specific fraud which is unique to that partnership. Or there might be a group of partnerships that have a specific fraud that we are focusing on now.
Id.
The Plaintiffs allege “until [they] were advised that the units were not sold out, there was no damage,” and contend from this claim that, because only then was each Partnership faced with the need to borrow money to cover the shortfall, “Integrated is not necessarily an integral part of that fraud or the damage.” Tr. at 35. The Plaintiffs derive, as a final conclusion from this analysis, the proposition that “until the plaintiffs, the investors, were on notice of the shortfall, they were not on notice of any fraud.”
Id.
Despite the Plaintiffs’ blanket denial of their reliance on Integrated’s financial condition in deciding to invest in these Partnerships, the final determination of this issue turns on what the Plaintiffs actually pleaded in their various Complaints regarding the Defendants’ allegedly fraudulent scheme. Thus, to the extent that the Plaintiffs allege in their Complaints that the fraud committed by the various limited partnerships was, in whole or in part, tied to misrepresentations or omissions about the financial condition of Integrated, the media reports regarding the financial demise of Integrated placed the Plaintiffs on inquiry notice about the probability of the alleged fraud caused by investing in these Partnerships out of reliance on the financial condition of Integrated and the assumption that Integrated would be in a position to finance any shortfall caused by under-subscription of the offerings.
G.
Pleading Compliance with the Statute of Limitations
This Court has directed that plaintiffs asserting securities fraud claims must,
inter alia,
plead with specificity the date of purchase of the securities at issue.
See Morin I,
747 F.Supp. at 1062 ;
Intre Sport,
625 F.Supp. at 1310 . “Failure to plead compliance with the statute of limitations requires dismissal without prejudice to replead.”
Chaus,
801 F.Supp. at 1269 ;
accord Ingenito v. Bermec Corp.,
441 F.Supp. 525, 552 (S.D.N.Y.1977).
In the numerous complaints at issue here, the Plaintiffs have consistently failed to specify their dates of purchase, in some cases simply alleging that Plaintiffs’ investments
*642
occurred “after” a certain date. Thus, each is defective insofar as it fails to plead compliance with the relevant statutes of limitations.
The Defendants have provided comprehensive schedules setting forth the purchase dates for the various Partnerships. In light of the fact that the Defendants do not dispute these dates,
10
these dates are accepted as the relevant dates in determining the issue of compliance with the statute of limitations, thereby obviating the need to dismiss the Complaints with leave to replead and suffer the delay that such a disposition would necessitate.
III. Applying the Statutes of Limitations
Five of the complaints have been amended to add more plaintiffs:
Fillmore/Greene’s,
11
Clovine/Standefer,
12
West
Palm/Coleman,
13
Hunter Publishing,
14
and
Southern Inns
15
.
The Anderson Kill Defendants allege that all new Plaintiffs and Defendants are barred because they fail to relate back to the original complaints according to the requirements of Rule 15(c), Fed.R.Civ.P., which governs the “relation back” of amendments to the original pleadings.
A Certain Plaintiffs’ Claims Relate Back
Although the language of Rule 15(c) does not explicitly govern the relation back of amendments changing or adding plaintiffs, the Advisory Committee Notes to the 1966 amendment to the Rule state that “the attitude taken in revised Rule 15(c) toward change of defendants extends by analogy to amendments changing plaintiffs.” Additional plaintiffs may be added provided there was both notice to the defendants of the existence of the additional claim and a mistake in the original pleading as to the proper party.
See Morin v. Trupin,
778 F.Supp. 711, 734 (S.D.N.Y.1991)
(“Morin
II”);
Adler v. Berg Harmon Assocs.,
790 F.Supp. 1235, 1239 (S.D.N.Y.1992); 6 Wright, Miller & Kane, 6A
Federal Practice and Procedure
§ 1501 at 154 (1990).
Rule 15(c), in effect at the time of the filing of the Amended Complaint in
Hunter Publishing
(filed September 9, 1991, adding forty-four plaintiffs) and of the filing of the first two Amended Complaints in
Southern Inns
*643
(filed November 16, 1990, adding eleven new plaintiffs, and January 7, 1991, adding seven plaintiffs), provided that:
An amendment changing the party against whom a claim is asserted relates back if ... within the period provided by law for commencing the action against the party to be brought in by amendment that party (1) has received such notice of the institution of the action that he will not be prejudiced in maintaining his defense on the merits, and (2) knew or should have known that, but for a mistake concerning the identity ■ of the proper party the action would have been brought against him.
Fed.R.Civ.P., Rule 15(c) (1988).
On December 19, 1991, the Plaintiffs filed amended pleadings in five of the pending actions to add additional plaintiffs (Fill
more/Greene’s,
adding nine plaintiffs,
Clovine/Standefer,
adding twenty-nine plaintiffs,
West Palm/Coleman,
adding three plaintiffs,
Hunter Publishing,
adding one plaintiff, and
Southern Inns,
adding two plaintiffs). These are governed by Rule 15(c) as amended.
16
However, the Plaintiffs may not add new plaintiffs to any action after June 19, 1991, the date laid down in § 27A. Relation back must be permitted by the statute of limitations. “Plaintiffs who joined this action by Amendments [dated after June 19, 1991] are not entitled to ... reinstatement under Section 27A. The pláin language of the statute permits ... only ... claims commenced prior to June 20, 1991 and dismissed pursuant to
Lampf
and
Beam.
[T]he Court disagrees with plaintiffs’ argument that the claims of the
post-Lampf
plaintiffs relate back to the date of the filing of the original Complaint in 1989.”
Adler,
790 F.Supp. at 1238 . Therefore, only the plaintiffs added prior to June 20, 1991, namely, the First and Second Amended Complaints in
Southern Inns,
may be permitted, and then only if these plaintiffs satisfy the two prongs of Rule 15(c): Notice to the defendants sufficient to prevent prejudice to their defense, and some form of mistake concerning the identity of the proper party.
In
Morin II,
778 F.Supp. at 733-35, additional plaintiffs (added through a consolidation of actions) were barred for two reasons. The first was that cited above, namely, that to consolidate untimely actions with timely ones “totally defies the reasoning and import of
Lampf.” Id.
at 734. The second was that the amended complaint did not satisfy the notice prong since the original complaint “contained no like intimation of a greater universe of possible plaintiffs.”
Id.
This Court distinguished
Nielsen v. Professional Financial Management, Ltd.,
682 F.Supp. 429 (D.Minn.1987) (following
Stoppelman v. Owens,
580 F.Supp. 944 (D.C.Cir.1983)),
*644
which had permitted additional limited partners otherwise time-barred to be added as plaintiffs in a similar action, based on identity of interest and the fact that the original timely complaint in
Nielsen
had stated that “plaintiffs are one [sic] of several hundred Energy Brain investors nationwide and one [sic] of several investors in this district.”
Nielsen,
682 F.Supp. at 435 ,
quoted in Morin II,
778 F.Supp. at 735. In
Stoppelman ,
the court held that the untimely claims of other limited partners could be permitted because the original action put the defendants on notice.
See
580 F.Supp. at 946 .
The notice contemplated by Rule 15(c) is related to the idea of mistake. It must be clear to the Court that the late action is not a deliberate device to circumvent the statute of limitations. As this Court stated in
Morin II,
“[s]ubsection (2) makes clear that Rule 15(c) does not exist merely to keep the door open for any tardy plaintiff of whom a defendant may be aware. Rather, Rule 15(c) stands as a device of adding a party who ‘but for a mistake concerning the identity of the proper party1 would have been named originally.” 778 F.Supp. at 735;
accord, Adler,
790 F.Supp. at 1239 (eliminating additional plaintiffs whose claims were added after deadline of June 19, 1991 in § 27A). But
Morin
concerned consolidated actions which were not only not governed by Rule 15(c) but also clearly failed the notice prong. Because defendants could easily believe that they were not named in the original
Morin
action as a deliberate tactical matter, they would not be on notice that they would be named in the future. The distinction is between the plaintiffs’ strategy or lack of due diligence and their honest error.
“In view of the history of the application of Rule 15(c), the phrase ‘a mistake concerning the identity of the proper party* should clearly not be read to limit its usefulness to cases of misnomer.” 3
Moore’s Federal Practice
¶ 15-15[4.-2] at 15-167, n. 19 (1992). “The ‘mistake’ condition does not isolate a specific type or form of error in identifying parties, but rather is concerned fundamentally with the new party’s awareness that failure to join it was error rather than a deliberate strategy.”
Advanced Power Sys., Inc. v. Hi-Tech Sys., Inc.,
801 F.Supp. 1450 (E.D.Pa.1992). Here the Defendants were on notice of the lawsuit from the time of the original complaint. “The addition of the other Plaintiffs did not bring any new claims into the action. The purpose behind the statute of limitations, namely notice, is not defeated in this action by permitting the amended complaint to relate back.”
Stoppelman,
580 F.Supp. at 947 . As long as the original complaint gives the defendant adequate notice, an amendment relating back is proper even if it exposes defendants to greater damages. Wright, Miller & Kane, supra § 1501 at 162. In the matter at hand, unlike the plaintiffs in
Morin,
the additional Plaintiffs in the first two amended complaints come directly within the holding of
Stoppelman,
580 F.Supp. at 947 .
Therefore, the §§ 10(b) and 12(2) claims of the Plaintiffs added in the Amended Complaint in
Fillmore/Greene’s,
the Amended Complaint in
Clovine/Standefer,
the Amended Complaint in
West Palm/Coleman,
the First and Second Amended Complaints in
Hunter Publishing,
and the Third Amended Complaint in
Southern Inns
are dismissed and the Moving Defendants’ motion for summary judgment against these Plaintiffs’ claims is granted. However, the §§ 10(b) and 12(2) claims of the Plaintiffs added in the First and Second Amended Complaints in
Southern Inns
do relate back to the original Complaint and survive this aspect of the Global Motion I.
B. Plaintiffs’ Claims Do Not Relate Back To Include New Defendants
The logic in
Adler
extends to defendants as well, since if the date of § 27A is an absolute bar, it should bar both plaintiffs and defendants. Although
Adler
concerned only plaintiffs, there seems no reason not to follow it where the amendment adding defendants was filed December 19, 1991, an even she months after the effective cutoff date. However, the additional defendants are barred by more than an extension of the recent decision in
Adler .
Since Rule 15(c) applies by its terms to defendants, the relation back analysis is
*645
the same. The new Defendants in
Southern Inns
have been added by the Third Amended Complaint filed December 19, 1991, over a year after the original Complaint was filed (in October 1990).
17
These Defendants have been added more than three years after the alleged fraudulent purchases by some of the Plaintiffs, and more than one year after all of the Plaintiffs were put on “inquiry notice” of the alleged fraud. “Where a plaintiff seeks to add a new defendant in an existing action, the date of the filing of the motion to amend constitutes the date the action was commenced for statute of limitations purposes.”
Northwestern Nat. Ins. Inc. v. Alberts,
769 F.Supp. 498, 510 (S.D.N.Y.1991) (citing
Schiavone,
477 U.S. at 25-32, 106 S.Ct. at 2382-85). But
Schiavone
allowed a claim otherwise barred by the statute of limitations to name a defendant only if that defendant had notice: “Timely filing of a complaint, and notice within limitations period to the party named in the complaint, permit imputations of notice to a subsequently named and sufficiently related party---- The linchpin is notice, and notice within the applicable limitations period.”
Id.
at 29, 31, 106 S.Ct. at 2384, 2385.
The Plaintiffs allege that the new Defendants are “the individuals who own and direct and control the activities of the defendant entities, including the general partners,” and that “the identity of interests between the original and the newly added defendants is complete.” Pis.’ Mem. in Opp. at 116. The sole specific example of the new Defendants’ identity of interests with the prior Defendants is the fact that the newly added Defendants are represented by the same counsel.
Id.
The Plaintiffs do not state whether the new defendants were always represented by the same counsel, or whether they acquired the services of the same counsel after the original Complaint was served.
The Complaint itself is more specific. It alleges that Selig Zises was the Chairman of the Board of Directors and CEO of Integrated Resources; that his brother Jay Zises was Vice Chairman of the Board of Directors; that they and their immediate family owned 12% of the outstanding stock of Integrated Resources; and that “through such ownership exercised effective control over Integrated Resources and all of its subsidiaries.” Compl. 17. The other eight personal Defendants are all alleged to have been officers and directors of Integrated Resources, EVP, and Sevzar at the time of the allegedly fraudulent events, and to have overseen the purchases and operations of the partnership. The two remaining Defendants are Zar Corporation and EVP Sixth Corporation, both corporate general partners. The Complaint gives the full corporate title and positions of each of the named Defendants.
The Supreme Court noted in
Schiavone,
477 U.S. at 29, 106 S.Ct. at 2384, that for newly added defendants:
Relation back is dependent upon four factors, all of which must be satisfied: (1) the basic claim must have arisen out of the conduct set forth in the original pleading; (2) the party to be brought in must have received such notice that it will not be prejudiced in maintaining its defense; (3) that party must or should have known that, but for a mistake concerning identity, the action would have been brought against it; and (4) the second and third requirements must have been fulfilled within the prescribed, limitations period.
Id.
at 31, 106 S.Ct. at 2385. The last requirement has been modified by the amendment to Rule 15(c).
See supra
note 16. The Court in
Schiavone
declined to decide whether or not to accept the “identity of interest” exception to this rule:
Some Courts of Appeals have recognized an “identity-of-interest” exception under which an amendment that substitutes a party in a complaint after the limitations period has expired will related back to the date of the filing or the original complaint____ Even if we were to adopt the identity-of-interest exception, and even if Fortune properly could be named as a defendant, we would be compelled to reject
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petitioners’ contention that the facts of this case fall within the exception.
Schiavone,
477 U.S. at 28, 29, 106 S.Ct. at 2383, 2384. Since the specific ground for the Plaintiffs’ claim that the allegations against the new Defendants relate back to the original Complaint is the new Defendants’ alleged identity of interest with the existing Defendants, this ground will be considered below.
The classic definition of the identity of interest exception is in
Hernandez Jimenez v. Calero Toledo,
604 F.2d 99, 102-03 (1st Cir.1979):
The identity of interests concept, a judicial gloss on Rule 15(c)(1), provides that the institution of the action serves as constructive notice of the action to the parties added after the limitations period expired, when the original and added parties are so closely related in business of other activities that it is fair to presume the added parties learned of the institution of the actions shortly after it was commenced____ The identity of interest principle is often applied where the original and added parties are a parent corporation and its wholly owned subsidiary, two related corporations whose officers, directors, or shareholders are substantially identical and who have similar names or share office space, past and present forms of the same enterprise, or co-executors of an estate.
Id.
at 102-03 . In the Second Circuit, “[cjourts have generally held that Rule 15(c) is satisfied where the original party and added party have a close identity of interests____ [Ijdentity of interests has also served as touchstone for determining whether the new party knew or should have known that ‘but for’ a mistake in identity, he would have been sued in the first instance.”
Sounds Express Int’l Ltd. v. American Themes and Tapes, Inc.,
101 F.R.D. 694, 697 (S.D.N.Y.1984). The Second Circuit, following
Schiavone,
has analyzed the exception as if it did apply.
See In re Allbrand Appliance & Television Co.,
875 F.2d 1021 , 1025 (“We assume for purposes of this discussion that an identity of interest exception exists.”).
Analyzed under in
Allbrand,
the Plaintiffs’ Second Amended Complaint here relates back neither to the corporate general partners nor to the individual defendants. “Courts accepting that rationale [identity of interest] have required substantial structural and corporate identity, such as shared organizers, officers, directors, and offices.”
Id.
at 1025. The Plaintiffs have alleged that Zar Corporation is a wholly-owned subsidiary of Integrated.
See Southern Inns
2d Am. Compl. ¶ 5. Complete ownership by itself does not suffice to relate the claims back to Zar Corporation. In
Allbrand,
in which a wholly-owned subsidiary was served in place of its corporate parent in a case almost factually identical to Schiavone,
18
“the parent-subsidiary relationship standing alone is simply not enough — as Professors Wright and Miller perhaps too optimistically state ...— to establish the identity of interest exception to the relation back rule. Greater identity of interest must be shown than this record reveals.”
Allbrand,
875 F.2d at 1025. The Seventh Circuit has distinguished
Allbrand
from a mere “misnomer” case, when it allowed a complaint that incorrectly named only the trademark but was correctly served on the corporation’s legal agent for service of process to relate back:
[O]ur case does not differ from a misnomer____
Allbrand Appliance
is based on the principle that the corporate form must be respected. Corporations are not agents of their stockholders (their “parents”). Nothing in our opinion calls this principle into question. The notice in this case came to C.T. Corporation, which unlike a subsidiary was unquestionably Seal Air’s agent for the purpose of receiving process. The decisions do not conflict.
Peterson v. Sealed Air Corp.,
902 F.2d 1232, 1237-38 (7th Cir.1990). Ownership alone is not enough. Service upon a subsidiary, without more, is not service upon the parent corporation.
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For the other new corporate Defendant, the Plaintiffs have only alleged that EVP Sixth Corporation is wholly owned and controlled by five of the individual defendants. Since the Plaintiffs have failed to show that the complaint relates back to the individual Defendants, this claim too must be denied.
The notice requirement for the individual Defendants is crucial. “The conclusion of a growing number of courts and commentators is that sufficient notice may be deemed to have occurred where a party who has some reason to expect his potential involvement as a defendant hears of the commencement of litigation through some informal means.”
Kinnally v. Bell of Pennsylvania,
748 F.Supp. 1136, 1141 (E.D.Pa.1990). The notice has to be such that the new defendant must be able to anticipate and therefore prepare for his role as a defendant. Plaintiffs rely on a case from the Federal Circuit,
Fromson v. Citiplate, Inc.,
886 F.2d 1300 (Fed.Cir.1989), for the proposition that they may hold individual officers liable, since the court in
Fromson
found “corporate officers and directors personally liable for ‘participating in, inducing, and approving acts of patent infringement’ by a corporation.”
Id.
at 1304 . There, however, the Court permitted the complaint to relate back to two defendants who were both founders, sole owners, and sole directors of the defendant corporation in a situation where the plaintiff had alleged both adequate notice and mistake. On the facts in that case, the two defendants “could not have been surprised when From-son moved before trial to add them as defendants,” and, since they themselves had resisted that motion “on the basis of false assurances that Citiplate was solvent,” they “themselves created the ‘mistake’ respecting the identity of the proper party rightfully to be sued and capable of responding in damages.”
Id.
at 1304 .
The case relied on by
Fromson ,
in turn, was also based on “general principles relating to piercing the corporate veil.” In
Orthokinetics, Inc. v. Safety Travel Chairs, Inc.,
806 F.2d 1565 (Fed.Cir.1986), the court imposed liability on a defendant who “was at all material times the President and sole stockholder” of one defendant corporation and, together with two other principals, held all of the directorships and owned all of the stock in the other defendant corporation.
Id.
at 1579 , cited in
Fromson,
886 F.2d at 1304 . Other situations in which the plaintiffs were allowed to relate their claims back contain similar allegations that the named defendants were the only real parties in interest. An untimely amended complaint related back where it named as defendant the president who owned 97% of the defendant corporation,
see Itel Capital Corp. v. Cups Coal Co.,
707 F.2d 1253, 1258 (11th Cir.1983), or where it named two former employees, founders and principals of a new company, in an action which alleged the new company had stolen trade secrets from its principals’ former employer,
see Advanced Power Sys,
801 F.Supp. at 1450 . The 12% ownership alleged by Plaintiffs here usually is not considered a controlling share, and none of the cases cited by the Plaintiffs make corporate officers or directors personally responsible based solely on holding their office.
For new defendants as well as new plaintiffs, the notice prong of Rule 15(c) is intertwined with the element of mistake. Unless the plaintiffs can allege a specific reason why they failed to identify these corporate officers in the original complaint, an officer will not expect to be sued personally for the sins of the corporation and so will have no true notice of the lawsuit within the meaning of Rule 15(c). 3
Moore’s Federal Practice
¶ 15.-15[4.-2], at 15-120 & n. 22 (1992). Therefore, even in situations where the courts have found an “identity of interest” between the corporate officer and the corporation, or between two corporations, the new defendant suffers prejudice unless the plaintiff alleges a reason for the mistake.
In cases where the plaintiff has attempted to relate an amended pleading back to name corporate officers solely by virtue of their position, the relation back has been denied. In
Hashim v. First National Bank of Chicago,
No. 86 C 2696, 1992 U.S.Dist. LEXIS 5686 (N.D.Ill. Apr. 17, 1992), the district court denied the plaintiffs’ motion for leave to amend the complaint to include a bank officer and an advisor of a bank-sponsored
*648
commercial real estate investment, finding that:
[t]he record reveals that Hashim dealt with both Anderson [President and Managing Director of defendant corporation] and Herbert [member of defendant bank’s Trust Committee having a “supervisory capacity” with respect to certain trust assets] while at First Chicago. He knew who they were and therefore could have sued them at the time [of] the original complaint.
1992 U.S.Dist. LEXIS 5686, at *29. Mistake must be alleged even when one corporation is substituted for the other, if they are separate legal entities and plaintiff at the time of the original complaint knew of the existence and role of the second.
Plaintiff was notified in March 1975, prior both to the filing of her first two complaints and the expiration of the limitations statute, that TRW manufactured the steering gear mechanism; yet, she named only International Harvester and its insurer as defendants in her complaints. Moreover, plaintiff has never alleged that she made a mistake or has offered an explanation for her three-year delay in naming TRW as a defendant.
Norton v. International Harvester Co.,
627 F.2d 18, 22 (7th Cir.1980). A firm or an individual may receive notice that the lawsuit exists (Rule 15(c)(1)) without recognizing itself as the proper defendant and so without knowledge that it would be sued (Rule (15)(c)(2)), just as a firm or individual may be the proper party without receiving any notice at all. The former is as thoroughly barred by Rule 15(c) as the latter. Here the Plaintiffs have alleged no reason or mistake which could explain why they failed to name the new defendants in the first place.
To support their claim of “identity of interest” between the new and the prior Defendants, the Plaintiffs allege that the new Defendants share counsel with prior Defendants. Shared counsel, without more, is not determinative, and plaintiffs have not alleged that the new Defendants were represented by the same counsel at the time the original complaint was filed.
See Wood v. Worachek,
618 F.2d 1225, 1230 (7th Cir.1980);
Miles v. Department of Army,
881 F.2d 777 (9th Cir. 1989). Even if they had, this by itself would not be enough in the Second Circuit. In
Allbrand,
where both defendants shared counsel throughout the relevant time period, “appellant makes much of the shared legal counsel and parses Heveran’s role as Caloric’s counsel into something more than it really was. Consequently, we conclude the identity of interest exception may not be used to impute to Raytheon the timely service of pleadings made on its subsidiary Caloric.”
Allbrand
875 F.2d at 1026.
Alleging that the new Defendants were all on notice merely because they were somehow involved in the limited partnerships does not rise to the level of notice. The Plaintiffs did nothing to indicate to the separate and distinct new groups of defendants that they intended to include them.
Gleason v. McBride,
869 F.2d 688, 694 (2nd Cir.1989). Adding control persons and other partners to the existing Defendants is not a mistake of the kind Rule 15(c) contemplates.
Curry v. Johns-Manville Corp.,
93 F.R.D. 623, 626-27 (E.D.Pa.1982).
C.
The Complaints Barred by “Ceres”
Four of the complaints are clearly barred by
Ceres: Research Triangle, 600 Grant Street/Reagan, Clovine/Standefer,
and
Clovine/Ellingson.
All four allege an act of fraud based on omissions and representations and transaction loss from sales which could at the very latest have taken place in 1986. All four lawsuits were filed in 1991, more than four years thereafter. Applying
Ceres’
limitation against § 10(b) actions brought more than three years from the date of the fraud, and § 13 statutory ban against § 12(2) actions brought more than three years from the date of the fraud, all plaintiffs’ actions in these suits are time-barred.
A fifth claim is apparently barred by
Ceres,
although it is difficult to tell from the facts pleaded by the Plaintiff whether the claim is effectively barred or not. In
Fillmore/Enviro
(offered by a private placement memorandum dated January 11, 1988) the Plaintiffs allege they purchased their interests from February 11, 1988 through “mid-March 1988.” The Moving Defendants, on
*649
the other hand, maintain that all interests were purchased on February 16,1988. However, there is only one Plaintiff in
Fillmore/Enviro
(the Enviro Corporation) and that Plaintiff has not offered any evidence to refute the February 16, 1988 date of purchase.
19
The Complaint in
Fillmore/Enviro
was filed in the Southern District of New York on March 7, 1991, and so the statute of limitations is that laid down by
Ceres.
All claims arising out of interests purchased by March 7, 1988 in this case are time-barred. The date of purchase is the date the subscription agreements evidencing an interest in the partnerships were executed for both § 10(b) and § 12(2) claims. It is not the date that the Plaintiffs received notification that they were accepted into the Partnership.
Marlow v. Gold,
1991 Fed.Sec.L.Rep. (CCH) ¶ 96,112, at p. 90, 633, 1991 WL 107268 (S.D.N.Y. June 13, 1991);
Maxwell v. LaBrunerie,
731 F.Supp. 358, 362-63 (W.D.Mo.1989);
Amoroso v. Southwest Drilling Multi-Rig Partnership No. 1,
646 F.Supp. 141 (N.D.Cal.1986). The three-year limitation is an absolute.
Farley v. Baird, Patrick & Co.,
750 F.Supp. 1209, 1214 (S.D.N.Y.1990).
D.
Pre-Ceres Actions: Lenox Towers and Southern Inns
Two of the cases filed in New York are not governed by
Ceres: Lenox Towers
and
Southern Inns.
Those actions were commenced just prior to the Second Circuit’s decision in
Ceres.
Because this Court has held above that § 27A of the 1934 Act is constitutionally valid, the statute of limitations set forth in
Ceres
does not apply retroactively to the pending § 10(b) claims in these two cases. Under
pre-Ceres
law, the applicable statute of limitations would be either the forum state’s most analogous state law claim statute of limitations or the most analogous state law claim under New York’s “borrowing statute,” whichever is shorter.
See Armstrong,
699 F.2d at 87 ;
Arneil,
550 F.2d at 779-80 ;
Morin III,
799 F.Supp. at 345 . In the case of plaintiffs who were residents of New York State at the time of the injury, N.Y.Civ.Prac.L.R. § 213(8) (McKinney 1990 Supp.) applies: The action must be commenced within six years of the commission of the alleged fraud or two years from the time the alleged wrongdoing was, or with reasonable diligence should have been, discovered. For plaintiffs who were nonresidents at the time, New York’s “borrowing statute,” N.Y.Civ.Prac.L. & R. § 202 (McKinney 1990 Supp.), applies.
The law of New York applies to the Plaintiffs in
Lenox Towers.
However, since the relevant Plaintiffs in
Southern Inns
live in Alabama, Connecticut, the District of Columbia, Florida, Illinois, Iowa, Maryland, Missouri, Mississippi, North Carolina, New Jersey, Pennsylvania, and Tennessee, it is necessary to identify the statute of limitations which would be applied by district courts sitting in these states in order to determine the timeliness of the various § 10(b) claims. In both cases, the timeliness of all of the § 12(2) claims is governed by the one year/ three year limitations set forth in the 1933 Act.
1. Lenox Towers
The Lenox Towers Associates Limited Partnership, which was syndicated on February 15, 1989, was set up to acquire and manage two office buildings in Atlanta, Georgia. The Plaintiffs purchased their units in the Partnership between June 1988 and January 1988, and they filed their original Complaint on November 2, 1990.
a. Section 10(b) Claims Survive
Under New York’s six-year statute of limitations, the Plaintiffs’ § 10(b) claims in
Lenox Towers
are timely and survive this motion to dismiss.
b. Section 12(2) Claims Survive
Although the Plaintiffs’ § 12(2) claims fall within the three-year outer limit of the 1933 Act’s statute of limitations, it remains to be determined whether these claims are time-barred under the “within one year of discov
*650
ery” limitation. 15 U.S.C. § 77m (1991). The question, then, is this: When did the Plaintiffs have actual knowledge or when were they placed on inquiry notice regarding the probability of the fraud they now allege in their Complaint?
The thrust of the securities fraud claims in the
Lenox Towers
action is that the subject private placement offering memorandum misrepresented and failed to disclose the possibility that the limited partnership units being offered would not completely sell out, and that the Partnership might borrow the resulting shortfall from outside lenders. Specifically, the Complaint alleges that:
The Memorandum and investment summary ... were drafted to lead plaintiffs and the class to believe that $15,345,000 of capital contributions
[i.e.
the full amount of the offering] would be obtained from the syndication. Thus, for example, the investment summary contained an illustration of economic benefits of investing in one unit of the Partnership as though all of the units would be sold. The Memorandum, in the very first page, stated the offering was for $15,345,000.
Lenox Towers
Compl. ¶ 19.
The Complaint continues with a recitation of other sections in the PPM, all of which the Complaint alleges led the Plaintiffs mistakenly to believe that the offering would completely sell out. These sections include the “pro forma allocation of capital contribution,” the “illustration of the hypothetical economic benefits” to an investor, and the “illustration of the economic consequences of a hypothetical sale of the properties.”
Id.
However, the Lenox Towers PPM unambiguously did disclose, in capitalized type on page ii, that the offering might be undersubscribed and specifically indicated that the Partnership retained the option of borrowing the shortfall:
THE PARTNERSHIP MAY IN THE FUTURE BE REQUIRED TO BORROW ADDITIONAL AMOUNTS SUFFICIENT TO ENABLE THE PARTNERSHIP TO PAY CERTAIN OF ITS OBLIGATIONS THAT HAVE OR WILL BECOME DUE BEFORE THE PARTNERSHIP RECEIVES THE PROCEEDS OF THIS OFFERING. TO THE EXTENT THAT THE UNITS OFFERED HEREBY REMAIN UNSOLD, A PORTION OF SUCH BORROWINGS WILL REMAIN OUTSTANDING.
Lenox Towers PPM at ii.
In addressing this same issue of disclosure in the Lenox Towers PPM, Judge Stanton found, in
Martin v. EVP Second Corp.,
No. 90 Civ. 7074 (LLS), 1991 WL 131176 , *1, 1991 U.S.Dist. LEXIS 9234, *3 (S.D.N.Y. July 9, 1991), that the Memorandum “warned three times that if investor interests remain unsold, the partnership might have to rely on borrowed capital.” However, despite these warnings, the Court went on to conclude that the Defendants failed to disclose “the allegedly material fact that in the recent past, similar investments syndicated by the same entities had failed to sell out.”
Id.
Therefore, if the Plaintiffs’ claim that the Defendants had failed to inform the Plaintiffs that previous limited partnership offerings had failed to sell out proved to be true, the Plaintiffs had pleaded a material omission sufficient to withstand a motion to dismiss.
In
Martin ,
Judge Stanton considered the adequacy of the offering materials in question within the
context of
a
motion
brought by the Integrated Defendants to dismiss the Plaintiffs’ Complaint pursuant to Rules 9(b) and 12(b)(6), Fed.R.Civ.P. The Integrated Defendants did not raise the question of the timeliness of the §§ 10(b) and 12(2) claims, nor did Judge Stanton explicitly address that issue. However, his holding regarding the omission of an allegedly material fact from the offering materials is directly relevant to the present issue of whether the Plaintiffs were placed on inquiry notice by those materials of the fraud they now allege in their First Amended Complaint.
The holding in
Martin
is the law of this particular case, and as such, it controls the disposition of the Global Motion I as it relates to the timeliness of the Complaint filed in
Lenox Towers.
Therefore, to the extent
Martin
holds that the offering materials omitted a material fact regarding the unsold units of prior partnerships — a fact which now serves as the basis of the § 12(2) claims of
*651
the
Lenox Towers
Plaintiffs, those Plaintiffs were not placed on inquiry notice by the PPM, and their § 12(2) claims are not time-barred under § 13 of the 1933 Act.
2. Southern Inns
The Southern Inns Associates Limited Partnership, which was syndicated on June 10, 1988, had acquired and was set up to operate seven Comfort Inns motels located in Charlotte, Raleigh, and Winston-Salem, North Carolina, Greenville, South Carolina, and Richmond, Virginia. The Plaintiffs purchased their units in the Partnership between June 1988 and January 1988, and they filed their action against the Defendants in this case on October 19, 1990.
Like the allegations made in
Lenox Towers,
the
Southern Inns
Complaint asserts securities fraud claims that are grounded on a purportedly defective private placement offering .memorandum. The defects are alleged to be certain misrepresentations made by the Defendants and the Defendants’ failure to disclose the possibility that the limited partnership units being offered would not completely sell out and that, in the event any units remained unsold, the Partnership might borrow from outside lenders to cover the resulting shortfall.
See Southern Inns
3d Am.Compl. ¶¶ 13, 14, 16-18. The Plaintiffs also allege that the
pro forma
balance sheet and other sections in the PPM were fraudulent because they were based upon the presumed sale of all of the limited partnership units.
Id.
at ¶ 12.
However, like the Lenox Towers PPM, the Southern Inns PPM disclosed that the respective offerings might not sell out and that. the Partnership might borrow the shortfall. The PPM expressly stated that:
In the event that not all of the Interests are sold to investors in the Offering, it is anticipated that the General Partner or one of its Affiliates will purchase such Interests for its own account at the same purchase price (less selling commissions) as charged to Investors and that it will hold such Interests as a Limited Partner____ The General Partner or its designee may, in the alternative, lend to the Partnership from time to time an amount equal to the aggregate purchase price (net of selling commissions) of all unsold Interests, including the interest payment on the deferred portion of such purchase price, in exchange for the Partnership’s promissory note(s).
Southern Inns PPM at 140.
In light of the warnings in the PPM regarding the possibility that the offering may not sell out and the well-known status of the Defendants as organizers of similar limited-partnership ventures, the reasonable investor
20
would inquire about the success of recent offerings that the Defendants had conducted that were similar to the one the investor was presently considering. This is not a case where the investor would have had to check the brokerage registration of a company, the validity of its corporate articles, or the chain of title to the properties in order to discover the misstatements. It was no secret that Integrated was in the business of syndicating investment vehicles. Large sections of at least several of the partnership PPMs revealed the financial status, including bankruptcies, of Integrated-sponsored partnerships.
The rule set forth here is consistent with the Second Circuit law on inquiry notice, which requires the imputation of constructive knowledge of the probability of the alleged fraud before the statute of limitations is triggered but does not require actual knowledge of the fraud and is hostile to the notion that the plaintiff be allowed “leisurely discovery of the full details of the alleged scheme.”
Klein,
421 F.2d at 343 . However, it is just this sort of “leisurely discovery” that is implicitly tolerated by the finding in
Martin
that the failure to disclose unsold units in other partnerships constituted an omission of a material fact. On this view, the reasonable investor would be relieved from any duty to make even the most obvious of inquiries regarding the track record of the parties with whom he is dealing. It is such inquires that the reasonable investor would make and is in a position to make when discussing his in
*652
vestment in the partnership with the syndicators and general partners at the time of the offering.
The contradiction between the disclosure of the possibility of an undersubscribed offering and the alleged misrepresentations in the offering materials that all of the units would be sold, could have been discerned readily by a reasonable investor reading the PPM prior to investing. This apparent contradiction on the face of the PPM placed the Plaintiffs on inquiry notice of the probability of the fraud alleged in their Complaint from the date they purchased investment units in the Partnership.
The publicity concerning Integrated’s financial collapse commencing in June 1989 also put the Plaintiffs on inquiry notice of the alleged misrepresentations respecting Integrated’s financial wherewithal.
See Southern Inns
Compl. ¶¶ 15, 17, 18. Indeed, the June 1989 publicity put the Plaintiffs on notice of not only their fraud claims relating to Integrated’s financial condition but also of their claim based on the failure to sell all of the units. The alleged misrepresentations and omissions regarding Integrated’s financial stability are central to the fraud claims concerning the incomplete sale as they are set forth in the Plaintiffs’ Complaint.
Therefore, if, as the Plaintiffs allege, the
proforma
and other provisions regarding the Southern Inns investment were misleading insofar as they assumed the sale of all of the limited partnership units, the alleged fraud was evident from the face of the PPM. In light of the explicit disclosures and warnings in the offering materials and the publicity surrounding Integrated’s financial demise, the
Southern Inns
Plaintiffs were placed on inquiry notice of the fraud they now allege over twelve months prior to the time their Complaint was filed. It follows that the
Southern Inns
Plaintiffs were placed on inquiry notice at the time they purchased investment units in the Partnership. Furthermore, the information available to them at the time of purchase was such .that it placed them on notice of the probability and not merely the possibility of virtually every aspect of the §§ 10(b) and 12(2) securities fraud claims they now allege in their Complaint.
With this background of the Partnership and the determination of when inquiry notice was triggered, the status of each Plaintiff to the action must be evaluated to determine whether his or her claim was timely when this action was filed. This exercise reveals that the § 10(b) claims of most of the
Southern Inns
Plaintiffs are time-barred under pr
e-Ceres
law involving the application of New York’s statutes of limitations, including the New York “borrowing statute,” N.Y.Civ. Prac.L. & R. § 202 (McKinney
1990). See generally, Ahmed,
781 F.Supp. 1017 ;
Ceres,
918 F.2d at 352-53.
The § 10(b) claims of most of these non-New York resident Plaintiffs are barred under pr
e-Ceres
law because the § 10(b) limitation periods applied by the district courts embracing their respective residences had already expired at the time the aetion in
Southern Inns
was commenced; hence, pursuant to the New York “borrowing statute”, they may not avail themselves of a longer time period established by New York law. The exception is the Plaintiffs who were residents of Florida and Illinois at the time they purchased an investment interest in Southern Inns. For the reasons set forth below, their claims survive Global Motion I.
a. Section 10(b) Claims that are Time-Barred Under Statutes of Limitations Triggered by the Purchase of a Security
The § 10(b) claims of two
Southern Inns
Plaintiffs are time-barred by the relevant statutes of limitations which are triggered by the purchase of a security, and which a district court sitting in respective circuits would be required to apply in this case.
1. Fifth Circuit: Alabama
A district court sitting in the Fifth Circuit and deciding the timeliness of a § 10(b) claim governed by
pre-Ceres
law would apply that state’s blue sky law and hold that a plaintiff had two years from the contract date of the purchase of the security to bring an action for § 10(b) violations.
See White v. Sanders,
650 F.2d 627, 629 (5th Cir.1981) (applying Alabama blue sky law,
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Ala.Code § 8-6-19(e)). Ronald Stein, a resident of Alabama, purchased his investment unit in the Partnership on August 8,1988 but did not join in bringing this action until October 19, 1990. Thus, Stein’s § 10(b) claim is time-barred under the applicable Alabama law.
2. District of Columbia Circuit
Applying the applicable
pre-Ceres
law governing § 10(b) actions brought in the District of Columbia, a district court sitting there would apply D.C.’s blue sky law and hold that a plaintiff had two years from the contract date of the purchase of the security to bring this action.
See Forrestal Village, Inc. v. Graham,
551 F.2d 411, 413 (D.C.Cir.1977) (applying D.C. blue sky law, D.C.Code § 2-2613(e)). DeWest Hooker, a resident of Washington, D.C., purchased his investment unit in Southern Inns on July 29, 1988, more than two years before the Complaint in this action was filed. Thus, Hooker’s § 10(b) claim is time-barred under the applicable Washington, D.C. law.
b. Claims that are Time-Barred, Under Statutes of Limitations Triggered by Inquiry Notice
The timeliness of the remaining § 10(b) claims brought by
Southern Inns
Plaintiffs are governed by the applicable state statute of limitations which are triggered by a plaintiffs being placed on inquiry notice of the fraud he subsequently alleges in his complaint against a defendant.
1. Second Circuit: Connecticut
Barring retroactive application of
Ceres,
a district court sitting in the Second Circuit on or before June 19, 1991 would have applied the forum state’s most analogous statute of limitations. The statute of limitations for § 10(b) claims accruing in Connecticut prior to
Ceres
was the state’s blue sky limitations period of two years.
See Welch I,
923 F.2d at 995 (applying Connecticut blue sky law, Conn.Pub.Act 77-482 §§ 21, 30(c));
Luca v. Hanson Indus.,
Fed.Sec. L.Rep. (CCH) ¶ 95,672, 1990 WL 163969 (D.Conn.1990); Conn.Gen.Stat. § 36-498(f) (1990). This period commences to run when the plaintiff has actual knowledge of the alleged fraud or knowledge of facts which in the exercise of reasonable diligence would have led to actual knowledge.
Peter Leibold, a resident of Connecticut, purchased his investment unit in the Partnership on August 16, 1988 and was placed on inquiry notice as of that date of the § 10(b) allegations on which he is basing this present action. The original Complaint in this action was filed on October 19, 1990. Thus, Leibold’s § 10(b) claim is time-barred under Connecticut law.
2. Third Circuit
On June 19, 1991, a district court sitting in the Third Circuit would have applied the statute of limitations established set forth in
In re Data Access Sys. Sec. Litig.,
843 F.2d 1537 (3d Cir.) (en banc),
cert. denied sub nom. Vitiello v. I. Kahlowsky & Co.,
488 U.S. 849 , 109 S.Ct. 131 , 102 L.Ed.2d 103 (1988).
See Ceres,
918 F.2d at 353 (applying
Data Access
rule to § 10(b) claim of New Jersey resident). In that case, the Third Circuit adopted a uniform statute of limitations for § 10(b) claims of “one year after the plaintiff discovers the facts constituting the violations, and in no event more than three years after such a violation.”
Id.
at 1550. Although not relevant here, the Third Circuit has held that its holding is to be applied retroactively.
See Hill v. Equitable Trust Co.,
851 F.2d 691, 698 (3d Cir.1988),
cert. denied sub nom. Data Controls N., Inc. v. Equitable Bank, Nat’l Assn.,
488 U.S. 1008 , 109 S.Ct. 791 , 102 L.Ed.2d 782 (1989). This period is shorter than New York’s two-year/ six-year period, and is therefore applicable to the claims of New Jersey and Pennsylvania plaintiffs.
(a) New Jersey
The following Plaintiffs are residents of New Jersey who purchased their units in the Partnership (and were placed on inquiry notice) more than one year prior to the filing of the Complaint and whose § 10(b) claims are, therefore, time-barred: Phillip and Laraine Katzev (January 26, 1989); Vo-Toys, Inc. (August 22, 1988); and John Lucania (July 13, 1988).
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(b) Pennsylvania
Barry Kraymark, a resident of Pennsylvania, purchased his investment unit in Southern Inns on October 13,1988, and his § 10(b) claims are time-barred under Pennsylvania law.
3.Fourth Circuit
A district court sitting in the Fourth Circuit faced with the prospect of borrowing a state statute of limitations for federal purposes in a pr
e-Ceres
case would apply the statute that “most clearly addresses the same or similar policy considerations as are addressed by the federal right being asserted.”
Howard v. Haddad,
962 F.2d 328 , 330 & n. 3 (4th Cir.1992);
accord Gurley v. Domination, Inc.,
674 F.2d 253, 258 (4th Cir.1982);
O’Hara v. Kovens,
625 F.2d 15 , 18 (4th Cir.1980),
cert. denied,
449 U.S. 1124 , 101 S.Ct. 939 , 67 L.Ed.2d 109 (1981).
(a) Maryland
Under the law of Maryland, a plaintiff has one year from discovery of the alleged fraud to bring an action to recover on a § 10(b) claim.
See O’Hara,
625 F.2d at 18 (applying Maryland blue sky law, Md.Corp. & Ass’ns Code Ann. § ll-703(f)). Plaintiffs J. Lee Bailey and Phyllis Bailey, residents of Maryland, purchased their investment interest in Southern Inns on July 28,1988. Thus, their § 10(b) claims are time-barred under Maryland law.
(b) North Carolina
Under North Carolina law, the statute of limitations on actions for securities fraud is two years from the date of discovery.
See Umstead v. Durham Hosiery Mills, Inc.,
578 F.Supp. 342, 347 (M.D.N.C.1984) (applying N.C.Gen.Stat. § 78A-56(f)). The following Plaintiffs are residents of North Carolina and purchased their interests in the Southern Inns partnership more than two years prior to the commencement of this action, and their § 10(b) claims are, therefore, time-barred: Aotis Family Trust (July 21, 1988); Katherine Palmer (September 26, 1988); Jesse Fox (July 12, 1988); James Thompson (July 11, 1988); and Wesley Huggins (June 29, 1988).
4. Sixth Circuit: Tennessee
Federal district courts sitting in Tennessee are split as to which statute of limitations is to be borrowed for pr
e-Ceres
§ 10(b) actions. Several courts have applied the state’s three-year common-law fraud limitations period,
see, e.g., Nichols v. Merrill Lynch, Pierce, Fenner & Smith,
706 F.Supp. 1309, 1320-21 (M.D.Tenn.1989);
Media General, Inc. v. Tanner,
625 F.Supp. 237 (W.D.Tenn.1985), while the majority of district courts have borrowed the state’s analogous one-year/two-year blue sky limitations period set forth in Tenn.Code Ann. § 48-2-122(h),
see, e.g., Ockerman v. May Zima & Co.,
785 F.Supp. 695, 706 (M.D.Tenn.1992)
(“Ockerman II”); Ockerman v. May Zima & Co.,
694 F.Supp. 414, 416 (M.D.Tenn.1988);
Haney v. Dean Witter Renyolds, Inc.,
No. CIV-1-85-531, 1986 WL 21340 (E.D.Tenn. Aug. 20, 1986).
This Court follows
Ockerman II
in holding that the appropriate statute of limitations to be applied in this case is Tennessee’s blue sky limitations period “because it is the most analogous state statute of limitations.” 785 F.Supp. at 706;
see Holmberg v. Armbrecht,
327 U.S. 392, 395 , 66 S.Ct. 582, 584 , 90 L.Ed. 743 (1946);
Herm v. Stafford,
663 F.2d 669, 682 (6th Cir.1981). Therefore, an action to recover on a § 10(b) claim is time-barred if it is brought one year after the violation was or should have been discovered.
Plaintiffs Robert Evans and Harriet Smith, residents of Tennessee, purchased their respective investment units in the Southern Inns partnership on July 25, 1988 and September 14,1988. Thus, their § 10(b) claims are time-barred by the application of Tenn.Code Ann. § 48-2-122(h) to those claims.
5. Seventh Circuit: Illinois
Confronted with the matter at hand, a district court sitting in Illinois, the relevant Seventh Circuit state, would apply the statute of limitations applicable to actions for securities violations under that state’s blue sky law.
See
Ill.Rev.Stat. ch. 121%, ¶ 137.-13(D) (1991);
McCool v. Strata Oil Co.,
972 F.2d 1452, 1460 (7th Cir.1992). Paragraph
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137.13(D) prescribes a limitations period which runs for three years from the time when the plaintiff knows or should know that the securities laws have been violated and ends no more than five years after the sale of the securities.
Although the district court would borrow the Illinois state statute of limitations, the accrual of a federal cause is a question of federal law.
See McCool,
972 F.2d at 1460 ;
Wilson v. Giesen,
956 F.2d 738, 740 (7th Cir.1992);
Cada v. Baxter Healthcare Corp.,
920 F.2d 446, 450 (7th Cir.1990),
cert. denied,
— U.S. -, 111 S.Ct. 2916 , 115 L.Ed.2d 1079 (1991). Thus, an Illinois plaintiffs’ cause of action accrues “on the date the sale of the instrument is completed,”
McCool,
972 F.2d at 1460 (quoting
Suslick v. Rothchild Sec. Corp.,
741 F.2d 1000, 1005 (7th Cir.1984)), unless federal tolling principles apply,
see McCool,
972 F.2d at 1461 ;
Suslick,
741 F.2d at 1004 .
Plaintiff Bhurji Singh, a resident of Illinois (“Illinois Plaintiff”), purchased on an invests ment interest in the Southern Inns partnership on September 1, 1988. He brought his § 10(b) claim against the
Southern Inns
Defendants in the Second Amended Complaint in that action, which was filed on January 7, 1991. Therefore, his § 10(b) is timely and Global Motion I as to it is denied.
6.Eighth Circuit ,
A district court sitting in the Eighth Circuit faced with the prospect of borrowing a state statute of limitations for federal purposes in a pr
e-Ceres
case would apply the statute that “best effectuates the federal policy at issue.”
Vanderboom v. Sexton,
422 F.2d 1233, 1237 (8th Cir.),
cert. denied,
400 U.S. 852 , 91 S.Ct. 47 , 27 L.Ed.2d 90 (1970).
(a) Iowa
A district court sitting in Iowa deciding a pr
e-Ceres
action for a § 10(b) claim would apply the two-year statute of limitations period set forth in Iowa’s blue sky statute, Iowa Code § 502.26 , rather than the five-year limitations period applicable to common-law fraud actions brought in that state.
See In re Alodex Corp. Sec. Litig.,
533 F.2d 372, 374 (8th Cir.1976).
Plaintiff Ali Kholeif, a resident of Iowa, purchased an interest in Southern Inns on August 9, 1988. Under the applicable blue sky provision, Kholeif had two years from discovery of the alleged fraud to bring this action. Thus, Kholeif s § 10(b) claim is time-barred under the applicable Iowa law.
(b) Missouri
Pre-Ceres actions for § 10(b) violations heard by district courts sitting in Missouri are governed by the two-year statute of limitations set forth in Missouri’s blue sky statute, Mo.Rev.Stat. § 409.411(e).
See Harris v. Union Electric Co.,
787 F.2d 355, 360 (8th Cir.1986),
cert. denied,
479 U.S. 823 , 107 S.Ct. 94 , 93 L.Ed.2d 45 (1986);
Morris v. Stifel, Nicolaus & Co.,
600 F.2d 139, 146 (8th Cir.1979). The limitations period is tolled until the alleged fraud is discovered or, upon reasonable inquiry, when it should have been discovered.
See Harris,
787 F.2d at 360 .
Data Comm, Inc. Salary Reduction Plan and Joseph Aldon, both residents of Missouri, purchased their investment interests in Southern Inns on September 12, 1988 and July 30, 1988, respectively, more than two years before the Complaint was filed. Thus, their § 10(b) claims are time-barred under the application of Missouri’s two-year statute of limitations running from the date they were placed on inquiry notice.
7.Eleventh Circuit: Florida
A district court sitting in Florida, the relevant Eleventh Circuit state, would apply Florida’s two-year statute of limitations applicable to actions under Florida Statutes § 517.301(l)(a)(2) (1991).
See Knight v. E.F. Hutton & Co.,
750 F.Supp. 1109, 1112 (M.D.Fla.1990);
Byrne v. Gulfstream First Bank & Trust Co.,
528 F.Supp. 692, 694 (S.D.Fla.1981) (applying Florida’s blue sky law, Fla.Stat. § 95.11(4)(e)),
affd without op.,
720 F.2d 686 (11th Cir.1983). The running of this statute of limitations is tolled until the alleged fraud is discovered or reasonably should have been discovered in the exercise of reasonable diligence.
See Osterneck v. E.T. Barwick Indus., Inc.,
825 F.2d 1521 , 1532, 1535 (11th Cir.1987),
aff'd,
489 U.S. 169 , 109 S.Ct. 987 , 103 L.Ed.2d 146
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(1989);
Knight,
750 F.Supp. at 1112 . Whether due diligence would have led to discovery more than two years before suit was filed is a jury question.
Id.
at 1112 .
The § 10(b) claims of the
Southern Inns
Plaintiffs who were Florida residents at the time they purchased their interests in the Partnership survive the Moving Defendants’ Global Motion I, because the question of whether due diligence would have led to the discovery of the fraud they now allege more than two years before they filed this action is a question for the jury to decide. Therefore, Global Motion I is denied as to the § 10(b) claims of Plaintiffs Joan Agurcia, Leonard Ganderton, Ruth Ganderton, Richard House, Henrietta House, Rhona Miller, Mary Walker, Elizabeth Walker Trust, and James Weldon (“Florida Plaintiffs”).
c.
All § 12(2) Claims are Time-Barred
The
Southern Inns
Plaintiffs were on inquiry notice when they purchased their units of the Partnership between June 30, 1988 and January 31, 1989. Therefore, their § 12(2) claims are time-barred pursuant to the one-year statute of limitations of the 1933 Act.
E.
The One-Year Statute of Limitation Bars Various Plaintiffs’ §§ 10(b) and 12(2) Claims
1. Intermobile
The Intermobile MR Investors Limited Partnership was set up to acquire and maintain magnetic resonance imaging (“MRI”) equipment, which was then to be contracted out to hospitals and physicians’ groups. The Partnership was syndicated on November 7, 1988, and the general partners accepted investor subscriptions between November 30, 1988 and July 15, 1989. On September 5, 1991, the
Intermobile
Plaintiffs filed their Complaint against the Defendants.
In the Complaint, the
Intermobile
Plaintiffs allege several material misrepresentations and omissions in the private placement offering materials upon which they relied in investing in this limited partnership. These misrepresentations and omissions constitute the basis upon which the
Intermobile
Plaintiffs ground their §§ 12(2) and 10(b) securities fraud claims against the Defendants.
At the outset of the
Intermobile
Plaintiffs’ allegations regarding the nature of the Defendants’ conduct, the Plaintiffs explicate their reliance on Integrated’s financial condition in investing in the Intermobile partnership:
[A]s a result of the statements contained in the Offering Materials regarding Integrated Resources’ exceptionally high quality reputation and Integrated’s marketing programs, plaintiffs reasonably believed that Integrated Resources, its subsidiaries and affiliates, were deserving of a great amount of trust and confidence, which plaintiffs vested in them.
Intermobile
Compl. ¶20.
The misrepresentations which the Plaintiffs assert contributed to the fraud perpetrated upon them by the Defendants include the following: (a) the investment was a unique opportunity that provided a “very attractive semi-annual cash distributions, safety, short holding period, and very substantial capital appreciation”; (b) the offering materials stressed that the MRI equipment was “the best diagnostic examine available” with “no competing technology on the horizon,” and without advising the partners that the equipment was “already obsolete”; (c) the “extreme downside scenario” of the investment was that the “limited partners could expect to receive 8% to 12% in semi-annual cash distributions”; (d) Integrated or an affiliate would contribute funds to offset any unsold units; (e) there were no foreseeable technological advances that would render the equipment obsolete; (f) sufficient revenue would be generated to continue as a going concern and sustain the partnership; and (g) Integrated was financially stable.
Intermobile
Compl. ¶21.
Intermobile
Plaintiffs allege further that the Defendants failed to disclose the following material facts:
(a) that in the event all of the units were not sold, Integrated Resources and its affiliates ... were without the financial wherewithal to contribute to any shortfall inequity capital and that the Partnership
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should be unable to repay the equity loan and would have to borrow such balance;
(b) that in the event all the units were not sold, the description of the offering, use of the proceeds, allocation of the capital contributions and illustrations of the anticipated economic returns to the limited [partners] would not reflect the actual condition or reasonable expected returns from the offering or operation of the Partnership, but that the equity loans would remain outstanding, thereby increasing the debt/equity ratio and diverting funds otherwise available for capital investment and income distributions to service the undisclosed debt;
(c) that at the time of the offering, commencing in June 1988 and continuing through February 1990, Integrated Resources had significantly overvalued its assets and shareholder equity by, among other things, listing as assets over $200 million in .receivables from prior syndications of limited partnerships that were troubled or in default and could not be expected to pay such receivables;
(d) that Integrated had been unable to successfully market all the units of its limited partnership offerings as had already occurred in several partnerships ...;
(e) that the investment was not a unique health care investment opportunity and ... the equipment which was already obsolete at the time of the offering -....;
(f) that a lag in providing upgrades to the equipment created a market perception problem [and] ... caused the partnership to be without enough clients for the use of its machines and to lose significant goodwill; and
(g) that omitted from the financial projections were operating and administrative cost increases of between 10% to 27%, all of which were known to the [Defendants] ... at the time the interests in the Partnership were sold....
Intermobile
Compl. ¶ 22.
The §§ 12(2) and 10(b) claims in the Complaint are time-barred because the
Intermobile
Plaintiffs were on inquiry notice of the alleged frauds from the November 1988 PPM, from the publicity surrounding the financial difficulties of Integrated, and from letters of October 26, 1989 and April 9, 1990 sent by the Partnership to the limited partners.
To the extent that the Plaintiffs allege that they relied on Integrated’s financial stability and commitment to offset any shortfalls in financing the Partnership, the Plaintiffs were placed on inquiry notice from the time they invested in the Partnership, and they were placed on further inquiry notice during the summer of 1989 when Integrated announced its debt moratorium and its subsequent unsuccessful struggle to refinance its debt burden and remain viable.
The PPM specifically stated, in bold, all-capitalized print, under the heading
“INTEGRATED RESOURCES, INC.”:
NOTWITHSTANDING THE FOREGOING [description of Integrated’s financial condition], SINCE INTEGRATED HAS NO RESPONSIBILITIES OR OBLIGATIONS TO THE PARTNERSHIP, THE FINANCIAL CAPABILITY OF INTEGRATED SHOULD NOT BE VIEWED AS DIRECTLY OR INDIRECTLY BENEFITING THE PARTNERSHIP.
Intermobile PPM at 125. Therefore, to the extent that any representations were made to the
Intermobile
Plaintiffs giving rise to the belief that Integrated’s financial assets stood behind the Partnership, this explicit ■provision placed them on inquiry notice that something was amiss.
The
Intermobile
Plaintiffs allege that the Defendants concealed their fraud through incomplete, misleading, and materially untrue statements. The Plaintiffs point to various letters sent by the Partnership to the limited partners, including a letter dated October 26, 1989, in which the alleged concealment took place. The Plaintiffs assert that this letter misleadingly brought tidings of “good news” regarding the status of the Partnership.
Intermobile
Compl. ¶35.
The October 26, 1989 letter, however, expressly placed the Plaintiffs on inquiry notice regarding many of the issues that are referred to in their Complaint. For example, the letter informed the limited partners that
*658
the financial condition of the Partnership was worse than it was a year earlier, while revenues were lagging behind the forecast; that lower utilization and rapid expansion of the fleet contributed to lower than projected profits; that the semi-annual distribution was to be delayed; and that interest, depreciation, and administrative overhead resulted in lower than anticipated net income. Rocano Aff. Ex. B at 8-9.
The April 9, 1990 letter went even further in explicitly advising the limited partners of numerous business problems the Partnership was experiencing, many of which are referred to in the Complaint. The limited partners were advised that “earnings for 1989 were disappointing” and that this “require[d] the Partnership to omit the cash flow distribution for 1989.”
Id.
at B, 1. The letter further notified the limited partners that the operating fleet of mobile MRI equipment had generated “lower average utility rates,” that the expansion of the fleet to 15 units had caused “higher operating depreciation and interest expenses” which “resulted in an operating loss,” and that “two machines were out of services for significant periods of the third quarter.”
Id.
The Plaintiffs do not dispute that they received the April 9, 1990 letter.
In light of the PPM, the publicity sur-' rounding Integrated’s financial demise, and the letters of October 26, 1989 and April 9, 1990, the
Intermobile
Plaintiffs were placed on inquiry notice of the fraud they now allege at least seventeen months before their complaint was filed. Furthermore, the information available to them at that time was such as to place them on notice of the probability and not merely the possibility of virtually every aspect of the §§ 10(b) and 12(2) securities fraud claims they now allege in their Complaint.
It follows that the one-year statute of limitations began to run no later than April 9, 1990 and expired well before the
Intermobile
Complaint was filed on September 5, 1991. Therefore, the
Intermobile
Plaintiffs’ §§ 10(b) and 12(2) claims are time-barred by the applicable one-year statute of limitations periods and are dismissed as untimely commenced.
2.
Rittenhouse
The Rittenhouse Square Associates Limited Partnership was organized to own, maintain, and operate a residential apartment building consisting of 104 apartment units and approximately 9,400 square feet of commercial space, in Philadelphia, Pennsylvania. The Partnership was syndicated on September 6, 1988, and on October 15, 1991, the
Rittenhouse
Plaintiffs filed their Complaint against the Defendants.
In the Complaint, the Plaintiffs allege several material misrepresentations and omissions in the PPM upon which they relied in investing in this Partnership. These alleged misrepresentations and omissions constitute the basis upon which the
Rittenhouse
Plaintiffs ground their §§ 10(b) and 12(2) securities fraud claims against the Defendants.
The
Rittenhouse
Plaintiffs’ preface their allegations against the Defendants by discussing the financial strength of Integrated and their reliance on representations regarding Integrated in deciding to invest in this Partnership:
Statements contained in the Offering Materials and Integrated’s marketing programs regarding Integrated’s exceptionally high quality reputation, in addition to similar oral representations made, caused plaintiffs to believe that Integrated, as well as its subsidiaries and affiliates, were deserving of a great amount of trust and confidence, which plaintiffs reasonably vested in them.
Rittenhouse
Compl. ¶ 9.
Turning to the series of alleged material misrepresentations and omissions in the offering materials, the
Rittenhouse
Plaintiffs contend that the Partnership’s property, a residential apartment building in Philadelphia, Pennsylvania, which was to be convert ed into condominiums over a five year period from the date of the offering, was falsely represented as being in a “dynamic” market, in “a premier neighborhood,” and backed by Integrated — “one of the nation’s leading diversified financial service companies.”
Rittenhouse
Compl. ¶¶ 14, 15. The result was that the Partnership was “virtually ensured of success.”
Id.
¶ 14.
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The related material omissions alleged by the Plaintiffs include the failure to disclose that “there was no ‘dynamic growth’ for the Partnership to take advantage of in Philadelphia” because of a glutted real estate market; that the appraisal provided by Cushman & Wakefield was misleading because “it did not address the survivability of the project during the

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/1584833. Public record. Not legal advice.