Petition for Writ of Certiorari — Balcor Film Investors v. Eckstein

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Ur TRE BLERK

IN THE

Supreme Court of the United States

OCTOBER TERM, 1993

BALCOR FILM INVESTORS, et al.,

Petitioners,

ROBERT ECKSTEIN and SYLVIA ECKSTEIN, et al.,

Respondents.

355 South Grand Avenue

39th Floor

Los Angeles, California 90071

(213) 617-7070

Petition for Writ of Certiorari to the United

States Court of Appeals for the Seventh Circuit

PETITION FOR WRIT OF CERTIORARI

H. NICHOLAS BERBERIAN STEVEN L. BASHWINER

RoBERT J. MANDEL Counsel of Record

NEAL GERBER & EISENBERG Mary ELLEN HENNESSY

Two North LaSalle Street Amy E. SMITH

Suite 2200 KATTEN MUCHIN & ZAVIS

Chicago, Illinois 60602 525 West Monroe Street

(312) 269-8000 Suite 1600

Dennis M. PeRLuss Chicago, Illinois 60661

HUFSTEDLER, KAUS . (312) 902-5200

& ETTINGER

Attorneys for Petitioners

Midwest Law Printing Co., Chicago 60611, (312) 321-0220

QUESTIONS PRESENTED

1. Whether the Seventh Circuit correctly interpreted Sec-

tion 27A of the Securities Exchange Act of 1934 as codify-

ing a “non-uniform federal law”’ requiring a federal court

to apply the statute of limitations law of the transferor

forum, and not its own statute of limitations, to a federal

question case transferred pursuant to 28 U.S.C. § 1404(a),

in light of a conflicting interpretation of Section 27A by

the United States Court of Appeals for the Second Cir-

cuit in Menowitz v. Brown, 991 F.2d 36 (2d Cir. 1993),

and this Court’s decision in DelCostello v. International

Brotherhood of Teamsters, 462 U.S. 151 (1983), which held

that the statute of limitations question in a federal ques-

tion case is itself a federal question?

2. Whether the holdings of Ferens v. John Deere Co.,

494 U.S. 576 (1990), and Van Dusen v. Barrack, 376 U.S.

612 (1964)—that a transferee court must follow the rules

of the transferor forum pursuant to 28 U.S.C. § 1404(a)—

apply whenever the law of the United States is “geo-

graphically non-uniform,” regardless of whether the ac-

tion at issue arises out of a federal question or diversity

claim?

3. Whether a litigant’s decision to file in one federal

forum as opposed to another constitutes sufficient “reli-

ance” under Chevron Oil v. Huson, 404 U.S. 97 (1971),

and McCool v. Strata Oil Co., 972 F.2d 1452 (7th Cir.

1992), to avoid retroactive application of subsequent deci-

sions affecting the limitations period in the chosen forum?

LIST OF PARTIES

Petitioners/defendants include Balcor Film Investors,

Balcor Entertainment Company, Ltd., The Balcor Com-

pany, f/k/a Balcor/American Express, Inc., Balcor Securi-

ties Company, New World Pictures, Ltd., New World

Entertainment, Ltd., The American Express Company,

Lehman Brothers Inc., f/k/a Shearson Lehman Hutton,

Inc., f/k/a Shearson Lehman Brothers, Ine., and f/k/a

Shearson Lehman/American Express, Inc., Jerry M. Reins-

dorf, Robert A. Judelson, James E. Finley, Gregory S.

Junkin, Barry R. Jackson, Lawrence L. Kuppin, Robert

Rehme and Harry E. Sloan. Respondents/plaintiffs include

Robert Eckstein, Sylvia Eckstein, Ralph Majeski, Joseph

Yach, Janice Waisman, Larry R. Peterson, Thomas Weil,

Lee Aldridge, Randy Karpinsky, Kenneth Kulas, Robb S.

Elliott and Raymond Harding.

The following is furnished in compliance with Supreme

Court Rule 29.1:

Balcor Entertainment Company, Ltd.

Parent Company - The Balcor Company

Subsidiaries (except wholly owned) - None

The Balcor Company

Parent Company - National Express Company

Subsidiaries (except wholly owned) - None

Baleor Securities Company

Parent Company - The Balcor Company

Subsidiaries (except wholly owned) - None

New World Entertainment, Ltd.

Parent Company - Andrews Group Incorporated

Subsidiaries (except wholly owned) - None

New World Pictures, Ltd.

See New World Entertainment, Ltd.

The American Express Company

Parent Company - None

Subsidiaries (except wholly owned) - First

Data Corp.

Lehman Brothers Inc.

Parent Company - The American Express

Company

Subsidiaries (except wholly owned) - None

TABLE OF CONTENTS

PAGE

QUESTIONS PRESENTED .................. i

ee ee aca c seca un scents cece wees ii

TABLE OF AUTHORITIES ................. vi

SE SE ou eu idawananddweewawins l

PT e560 bk cae ssev enn ens ]

p¥ valyy - Big oi A y 4: Sen 2

STATEMENT OF THE CASE ............... 3

REASONS FOR GRANTING THE WRIT .... 7

Ns danas nGiekos srnGsuke tL oeaasee cs 7

THE DECISION BELOW CONFLICTS WITH

THE DECISION OF THE SECOND CIRCUIT

gs POPPE Peer eT ee eT Pee ereT 8

IT.

THE SEVENTH CIRCUIT’S INTERPRETA-

TION OF SECTION 27A IS INCONSISTENT

WITH DELCOSTELLO AND RAISES QUES-

TIONS REGARDING THE PROPER SCOPE OF

VAN DUSEN AND FERENS .............. 9

[APL MINE o do ceasidavesenadecssakcaewnes 15

APPENDIX

Opinion of the United States Court of Appeals for

the Seventh Circuit (dated August 20, 1993) ..

Judgment of the United States Court of Appeals

for the Seventh Circuit (dated August 20, 1993) .

Decision and Order of the United States District

Court for the Eastern District of Wisconsin

(dated March 11, 1992)....................

Judgments of the United States District Court for

the Eastern District of Wisconsin (dated March

11, 1992)

OP ORO ARKAARAA EL AASABDA OH 4S 28-2 OO Oo Oe

APP.

PAGE

TABLE OF AUTHORITIES

Cases: Page

Chevron Oil v. Huson, 404 U.S. 97 (1971) ... 6,8, 10, 14

DelCostello v. International Brotherhood of Team-

sters, 462 U.S. 151 (1983) ........... 7,9, 11, 12, 13

Eckstein v. Balcor Film Investors, {Current BindeF]

Fed. Sec. L. Rep. (CCH) ¢ 97,712 (7th Cir. Aug.

My DOSED cv ovuncccstndoncvasstacksesuleeen passim

Erie R. Co. v. Thompkins, 304 U.S. 64 (1938) ... 13

Ferens v. John Deere Co., 494 U.S. 576 (1990) ...

In re Balcor Film Investors Sec. Litig., No. 805

aaa Le, De Bee vécwessesscuneeeees 4

In re Korean Air Lines Disaster, 829 F.2d 1171

(D.C. Cir. 1987), affd sub nom. Chan v. Korean

Air Lines, Ltd., 490 U.S. 122 (1989) ... 5, 7, 12, 13, 14

In re Pittsburgh & L.E.R. Co. Sec. & Antitrust

Litig., 543 F.2d 1058 (3d Cir. 1976) ........ 12

I.N.S. v. Cardoza Fonseca, 480 U.S. 421 (1987) ... 1]

Mayeski v. Balcor Entertainment Co., Ltd., 740 F.

Supp. 563 (E.D. Wis. 1990) ................ 3

Mayeski v. Balcor Entertainment Co., Ltd., 134

fei Fi aie ee Ree 4

Mayeski v. Balcor Entertainment Co., Ltd., 786 F

Supp. 1458 (E.D. Wis. 1992) ............... l

McCool v. Strata Oil Co., 972 F.2d 1452 (7th Cir.

HOOD 6.06 Bd evscaciveneseueeseen Caanscesues? 6, 10

Menowitz v. Brown, 991 F.2d 36 (2d Cir. 1993) ..

neta ew eeenaneeeeheceua edie 7, 8, 9, 13, 14

vil

Short v. Belleville Shoe Mfg. Co., 908 F.2d 1385

(7th Cir. 1990), cert. denied, 111 S. Ct. 2887

SP beck ssbnnendnteabsacieeesscnecs 5, 6, 10

Tyler v. U.S., 929 F.2d 451 (9th Cir. 1991) .... 11

Van Dusen v. Barrack, 376 U.S. 612 (1964)...

Sidbbeesnstardsagadeveres tee 5d, 6, 7, 9, 12, 13, 14

Statutes:

Se SRE Se OD <6 ccccccectsbnaesauden passim

Sp ay. OE ion unc cddevanedcckwettcen passim

Se Gras WED kno acocesecececkhewesceuxeun l

28 U.S.C. § 1404a) ................... 2,4,6,9, 10, 14

BP SEAS PE oc bo cund dacdcenncccencors ind 4, 10

Treatises:

Friendly, “The ‘Law of the Circuit’ And All That,”

46 St. John’s L. Rev. 406 (1972) ........... 12

IA J. Moore, Moore’s Federal Practice ¢ 0.345 [4.6]

ree rere rn 12

Miscellaneous:

137 Cong. Rec. § 17469-03 (1991) .............. 1]

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF

APPEALS FOR THE SEVENTH CIRCUIT

Baleor Film Investors, Baleor Entertainment Company,

Ltd., The Balcor Company, f/k/a Balcor/American Express

Inc., Baleor Securities Company, New World Pictures, Ltd.,

New World Entertainment, Ltd., The American Express

Company, Lehman Brothers Inc., f/k/a Shearson Lehman

Hutton, Inec., and f/k/a Shearson Lehman/American Ex-

press, Inc., Jerry M. Reinsdorf, Robert A. Judelson,

James E. Finley, Gregory S. Junkin, Barry R. Jackson,

Lawrence L: Kuppin, Robert Rehme and Harry E. Sloan

respectfully petition for a writ of certiorari to review the

judgment and opinion of the United States Court of Ap-

peals for the Seventh Circuit entered in this proceeding

on August 20, 1993.

OPINIONS BELOW

The opinion of the Court of Appeals is reported at [Cur-

rent Binder] Fed. Sec. L. Rep. (CCH) 497,712 (7th Cir.

Aug. 20, 1993). App. 1-20. The decision of the District

Court is reported at 786 F. Supp. 1458 (E.D. Wis. 1992).

App. 23-44. j

JURISDICTION

The judgment of the Court of Appeals was entered on

August 20, 1993. App. 21. The jurisdiction of this Court

to review that judgment by writ of certiorari is invoked

under 28 U.S.C. § 1254(1).

— we

STATUTES INVOLVED

Section 10(b) of the Securities Exchange Act of 1934,

15 U.S.C. § 78j(b), provides in relevant part that

It shall be unlawful for any person, directly or in-

directly, by the use of any means or instrumentality

of interstate commence or of the mails or of any facil-

ity of any national securities exchange

* * *

(b) to use or employ, in connection with the purchase

or sale of any security registered on a national se-

curities exchange or any security not so registered,

any manipulative or deceptive device or contrivance

in contradiction of such rules and regulations as the

commission may prescribe as necessary or appropri-

ate in the public interest or for the protection of in-

vestors.

Section 27A of the Securities Exchange Act of 1934, 15

U.S.C. § 78aa-1(a), provides in relevant part that

The limitation period for any private civil action im-

plied under section 78j(b) of this title that was com-

menced on or before June 19, 1991, shall be the

limitation period provided by the laws applicable

in the jurisdiction, including principles of retroactiv-

ity, as such laws existed on June 19, 1991.

Section 1404(a) of the Judiciary and Judicial Procedure

Act, 28 U.S.C. § 1404(a), provides that

For the convenience of the parties and witnesses, in

the interest of justice, a district court may transfer

any civil action to any other district or division where

it might have been brought.

a oe

STATEMENT OF THE CASE

Majeski v. Balcor Entertainment Company, No. 88 C

1079 (““Mayjeskv’’), was filed by ten Wisconsin investors on

October 11, 1988, in the United States District Court for

the Eastern District of Wisconsin (“Eastern District of

Wisconsin” or the “District Court”) as a putative class

action on behalf of all persons who purchased limited part-

nership interests in Balcor Film Investors (“BFI’’). BFI

was a limited partnership formed in 1984 to produce and

distribute low-budget movies pursuant to an agreement

with New World Entertainment, Ltd. (“New World’’).

Majeski’s Amended Complaint asserted claims under Sec-

tion 10(b) of the Securities Exchange Act of 1934, Sec-

tions 12(2) and 17 of the Securities Act of 1933 and various

common law claims.! In essence, the Majeski plaintiffs

alleged that BFI was misrepresented as being a safe and

conservative investment, when in fact it was highly specu-

lative.

Eckstein v. Balcor Film Investors, No. 89 C 1315 (“Eck-

stein”), another putative class action also seeking to repre-

sent all BFI limited partners, was filed on February 10,

1989 in the United States District Court for the Central

District of California (‘Central District of California’’).

Eckstein also asserted Section 10(b) and common law

claims, although the latter were dismissed swa sponte by

the lower California court. The Eckstein Section 10(b)

claim alleged a “fraud created the market” theory, assert-

1 The District Court ultimately dismissed the Majeski plaintiffs’

Section 17 and Section 12(2) claims. The District Court dismissed

the Section 12(2) claim for failure to adequately plead the one

year/three year limitations period set forth in 15 U.S.C. § 77m.

Majeski v. Balcor Entertainment Co., Ltd., 740 F. Supp. 563,

566-67 (E.D. Wis. 1990). The Majeski plaintiffs did not seek appel-

late review of that decision.

a ee

ing that, but for the alleged misrepresentations and omis-

sions, the BFI offering would not have been successful.

Both actions arose from the offering of BFI limited part-

nership interests which were sold pursuant to a Prospectus

dated January 8, 1985. The offering was limited to investors

who met certain financial and suitability requirements and

who had no need for liquidity in their investment given

the lack of a secondary market for the partnership in-

terests. Investors were warned that there could be no

assurance that the partnership’s objectives of a return on

investment, appreciation in BFI’s investments and tax

benefits, would be achieved. In addition, the Prospectus

cautioned that an investment in BFI was not only subject

to all of the significant risks inherent in an investment

in the motion picture industry, but that BFI’s success was

also dependent upon the results achieved through New

World’s performance in developing, acquiring, producing

and distributing the BFI movies.

On August 23, 1989, on defendants’ motion, the Judicial

Panel for Multidistrict Litigation transferred the Eckstein

action to the Eastern District of Wisconsin pursuant to

28 U.S.C. § i pretrial proceedings with

Mayeski. In re Balcor Film Investors Sec. Litig., No. 805

(J.P.M.L. Aug. 23, 1989). On February 27, 1991, the Dis-

trict Court permanently transferred Eckstein to the Eastern

District of Wisconsin pursuant to 28 U.S.C. § 1404(a) and

Fed. R. Civ. P. 42(a).2 App. 23 n.1.

2 In the interim, on January 18, 1991, the District Court certified

one class of all persons who purchased interests in BFI, and created

two separate subclasses—an Eckstein subclass comprised of “‘all

persons who purchased [BF1 Interests] without relying on any of

the public offering materials” and a Majeski subclass of purchasers

who relied on the offering materials in making their investments.

Majeski v. Balcor Entertainment Co., Ltd., 134 F.R.D. 240 (E.D.

Wis. 1991) (emphasis in original).

—

—y)—

On March 11, 1992, the District Court granted peti-

tioners’ motions for summary judgment in both actions.

App. 42, 45-46. The District Court found that Short »v.

Belleville Shoe Mfg. Co., 908 F.2d 1385 (7th Cir. 1990),

cert. denied, 111 S. Ct. 2887 (1991), which adopted the

one year/three year statute of limitations for claims brought

pursuant to Section 10(b) set forth in 15 U.S.C. § 77m,

applied retroactively to both actions and that, as a conse-

quence, both actions were time barred. App. 28-29, 40, 42.

With reference to Eckstein, the District Court held that

under Section 27A and In re Korean Air Lines Disaster,

829 F.2d 1171 (D.C. Cir. 1987) (Ruth B. Ginsberg, J.), aff'd

on other grounds sub nom. Chan v. Korean Air Lines,

Ltd., 490 U.S. 122 (1989), its own law, and not that of

the transferor California forum, applied. App. 26-27. The

District Court thus dismissed Eckstein pursuant to Short

because it was filed after the three year period of 15

U.S.C. § 77m had expired. App. 42. The District~Court

found that the Majeski action was also time barred pur-

suant to 15 U.S.C. §77m because it was not filed within

one year after plaintiffs were placed on inquiry notice of

the alleged fraud. App. 40-41.

On August 20, 1993, the Seventh Circuit vacated the

District Court’s judgments and remanded the cases for

further proceedings. App. 20-21. Specifically, in connec-

tion with Eckstein, the Court of Appeals held that the

language of Section 27A, requiring the application of the

statute of limitations of “the jurisdiction” to Section 10(b)

cases filed before June 20, 1991, implied that Section 27A

codified ‘geographically non-uniform”’ federal law, i.e., a

federal law wherein different federal courts applied differ-

ent rules. App. 8-9. Based on that interpretation of Section

27A, and its interpretation of Van Dusen v. Barrack, 376

U.S. 612 (1964), and Ferens v. John Deere Co., 494 U.S.

516 (1990), the Court of Appeals held that the rule of the

transferor forum, rather than its own rule, applied to

Eckstein. Thus, the Court declined to impose Short’s one

year/three year statute of limitations to Eckstein (since

the law of the Central District of California, Eckstein’s

forum of filing, applied) and remanded the action. App. 8-9.

With regard to Majeski, the Court of Appeals held that

Section 27A required the District Court to analyze whether

Short’s statute of limitations should be retroactively ap-

plied by using the test articulated in Chevron Oil v.

Huson, 404 U.S. 97 (1971) (as interpreted by McCool v.

Strata Oil Co., 972 F.2d 1452 (7th Cir. 1992)), to deter- |

mine if plaintiffs had relied on pre-Short law. Since the

District Court did not perform such an analysis, the Court

of Appeals vacated the District Court’s judgment and re-

manded the case for further proceedings consistent with

its opinion. App. 12-13. However, in addressing the issue

of what could satisfy Chevron Oil and McCool, the Court

of Appeals advised that a plaintiff's decision not to file

in one forum and to proceed instead in another could con-

stitute sufficient reliance under Chevron Oil to prevent

the retroactive application of a new rule of law. App. 13.

Petitioners seek review of the Court of Appeals’ hold-

ings that: (i) Section 27A, which instructs courts to apply

the statute of limitations of “the jurisdiction” to cases filed

before June 20, 1991, has codified ‘‘non-uniform federal

law” mandating that the law of the transferor forum, and

not that of the transferee forum, be applied to cases trans-

ferred pursuant to 28 U.S.C. § 1404(a); (ii) the principles

of Van Dusen and Ferens apply to both diversity and

federal question claims; and (ili) a party’s decision to file

in one forum as opposed to another is a sufficient form

of reliance under Chevron Oil to avoid retroactive applica-

tion of a new rule of law.

REASONS FOR GRANTING THE WRIT

Summary

The writ should be granted because the Court of Ap-

peals’ interpretation of Section 27A has resulted in the

application of two different rules of law, that of the

Seventh Circuit and that of the Ninth Circuit, to two

federal cases which are pending in the same court; have

been brought on behalf of the same parties, i.e., all limited

partners of Balcor Film Investors; are asserting the same

federal claims; and have been consolidated for all pur-

poses. The decision of the Seventh Circuit conflicts with

Menowitz v. Brown, 991 F.2d 36 (2d Cir. 1993), which

recognized the unitary nature of federal law and held that

a transferee court should apply its own rule of law rather

than that of the transferor forum in determining the ap-

propriate statute of limitations under Section 27A.

In addition, the Court of Appeals’ interpretation of Section

27A is at odds with this Court’s holding in DelCostello

v. International Brotherhood of Teamsters, 462 U.S. 151

(1983), in which the Court affirmed the unitary nature of

federal statute of limitations questions in finding that the

issue of the proper statute of limitations to be applied

in a federal question case is itself a federal question.

Moreover, the Court of Appeals’ holding extends the

diversity principles articulated in Van Dusen and Ferens

to federal question cases, a holding also inconsistent with

Menowitz and with the decision of United States Court

of Appeals for the District of Columbia Circuit in Korean

Air Lines. Finally, in interpreting Section 27A as imply-

ing a Congressional intent to insure that pre-June 20, 1991

Section 10(b) statute of limitations questions are decided

on the basis of where the litigation was filed and could

have been filed rather than where it was pending on June

exe.

19, 1991, the Court of Appeais has blurred both the line

between state and federal law and the meaning of reliance

under Chevron Oil. For all these reasons, it is appropriate

that this Court grant the petition for writ of certiorari

seeking review of the Court of Appeals’ decision.

THE DECISION BELOW CONFLICTS WITH THE DECI-

SION OF THE SECOND CIRCUIT IN MENOWITZ.

Section 27A directs that the limitations period applicable

to a Section 10{b) case filed prior to June 20, 1991 is the

limitations period ‘“‘provided by the laws applicable in the

jurisdiction” as they existed on June 19, 1991. 15 U.S.C.

§78aa-l(a). When given its natural meaning, the statute

refers to “the jurisdiction” in which a Section 10(b) case

was pending as of June 19, 1991.

In Menowitz, the Second Circuit held that, in determin-

ing the statute of limitations law of “the jurisdiction’”’

under Section 27A, a transferee court should apply the

law of its own circuit, 7.e., where the transferred case was

pending as of June 19, 1991, rather than that of the trans-

feror forum in which the case was filed. 991 F.2d at 40.

The Seventh Circuit, however, held the reverse, finding

that Section 27A requires a transferee court to apply the

law of the transferor forum, the jurisdiction in which the

case was filed, rather than its own law. App. 8-9. Thus,

the decision below conflicts with the decision of the Second

Circuit in Menowitz, a conflict which the Seventh Circuit

expressly noted in its decision. App. 9 n.7.

Il.

THE SEVENTH CIRCUIT’S INTERPRETATION OF SEC-

TION 27A IS INCONSISTENT WITH DELCOSTELLO AND

RAISES QUESTIONS REGARDING THE PROPER SCOPE

OF VAN DUSEN AND FERENS.

Not only does the decision below directly conflict with

the Second Circuit’s decision in Menowitz, it is inconsis-

tent with this Court’s decision in DelCostello and is at

odds with the plain language of the statute and its legis-

lative history. It also raises serious issues regarding the

proper construction and scope of this Court’s decisions in

Van Dusen and Ferens, which should be settled by this

Court.

The court below, without addressing the legislative his-

tory of Section 27A or this Court’s decision in DelCostello,

came to the conclusion that Congress’ reference to “the

jurisdiction” in Section 27A constituted a recognition that,

prior to June 20, 1991, different circuits applied different

statutes of limitations to Section 10(b) cases and thus codi-

fied the “non-uniform” nature of statutes of limitations

for Section 10(b) cases filed before June 20, 1991. App. 8

9. It further held that, whenever a federal court is faced

with a case transferred under Section 1404(a) wherein such

a “non-uniform federal law’”’ is at issue, the diversity prin-

ciples articulated in Ferens and Van Dusen pertain. App. 9.

Accordingly, even though Eckstein was based on a federal

claim, and was pending in “the jurisdiction” of the East-

ern District of Wisconsin on June 19, 1991, the Court of

Appeals found that Section 27A coupled with Ferens and

Van Dusen required the statute of limitations of the

transferor forum, the Central District of California, and

not that of the transferee forum, to be applied to Eck-

stein. Id.

With regard to Majeski, the Court of Appeals found

that Section 27A required it to apply the Chevron Oil test

to the question of whether Short’s one year/three year

limitations period applied retroactively to the Majeski

plaintiffs’ clairis. It also found the dispositive question on

‘hat issue to pe: if those plaintiffs had known that Snort

would apply to their claims, could and would they have

filed within the period of limitations? The Court stated that

those plaintiffs might have satisfied Chevron Oil and McCool

by filing their action in Wisconsin when they could have

chosen to file their action in California. App. 13.

The result of the Seventh Circuit’s reasoning is one

which is an anathema to the national policy of uniform-

ity in the application of federal laws. Eckstein, a Section

10(b) case with no pendent state law claims, was trans-

ferred to the Eastern District of Wisconsin pursuant to

28 U.S.C. § 1407(a) for coordinated or consolidated pro-

ceedings with Majeski, another Section 10(b) case already

on file in Wisconsin. The case was thereafter permanent- |

ly transferred pursuant to Section 1404(a) and consolidated |

with Majeski for all purposes. The District Court certified

only one class, consisting of all BFI investors. However,

under the Seventh Circuit’s reasoning, Section 27A’s use

of the generic term “‘the jurisdiction’”’ mandated that the

timeliness of these similar actions brought pursuant to the

same federal statute on behalf of the same class be analyzed

under two different statutes of limitations. Thus, under

the decision below, the Eckstein plaintiffs received the

benefit of the California state statute of limitations al-

though their action was pending in the Wisconsin District

Court, not California, on June 19, 1991. The Majeski plain-

tiffs, on the other hand, received the benefit of the Wiscon-

sin state statute of limitations by virtue of their argu-

ment that they could have filed in California, even though

|) =

their action also was pending in the Wisconsin District

Court, not California, on June 19, 1991. If Section 27A

were given its common sense meaning, however, only one

statute of limitations would be applied to both the Ma-

jeski and Eckstein actions.

Section 27A directs that the limitations period applicable

to both Eckstein and Majeski is the limitations period of

“the jurisdiction” in which Eckstein and Majeski were

pending on June 19, 1991—not the jurisdiction in which

Eckstein was filed two and one half years earlier, or

where Mayjeski ‘“‘could have”’ or “would have” been filed.

This construction of Section 27A is reinforced by the fact

that a proposed draft of Section 27A actually included the

language “‘in the jurisdiction in which such civil action

was commenced.” 137 Cong. Rec. § 17469-03 (1991) (em-

phasis added). That language, however, was deleted in

favor of the present version which does not refer to where

the ‘faction was commenced.” See I.N.S. v. Cardoza Fon-

seca, 480 U.S. 421, 442-43 (1987) (‘Few principles of stat-

utory construction are more compelling than the proposi-

tion that Congress does not intend sub silentio to enact

statutory language that it has earlier discarded in favor

of other language.’’); Tyler v. U.S., 929 F.2d 451, 456 n.8

(9th Cir. 1991) (“the very fact of deletion implies a legis-

lative intent different from that in the original proposal’’

(citing 2A Sutherland Construction § 48.18)).

In DelCostello, this Court laid to rest any possible ques-

tion remaining as to the nature of a borrowed state stat-

ute of limitations period in a federal claim, holding that

‘the choice of a limitations period for a federal cause of

action is itself a question of federal law,” and cautioning

federal courts against allowing the use of state law in a

federal question case to interfere with the national policy

of federal uniformity. 462 U.S. at 159 n.13. Congress’ deci-

sion not to adopt statutory language referring to “the

jurisdiction in which the action was commenced” but to

refer only to “the jurisdiction,” comports with this Court’s

ruling in DelCostello and confirms that a federal action’s

original or hypothetical original geographical origin is ir-

relevant to the proper application of Section 27A. Thus,

the Court of Appeals’ interpretation of Section 27A con-

flicts not only with the plain language of the statute but

with this Court’s pronouncement in DelCostello as to

federal statute of limitations questions as well.

The Court of Appeals’ construction of Section 27A, and

its finding that Van Dusen and Ferens apply “whenever

different federal courts properly use different rules” (App.

9), are also at odds with the weight of authority address-

ing transferred federal question claims. Courts and com-

mentators alike have supported the premise that trans-

feree courts should apply their own law to transferred

federal question claims. See, e.g., Korean Air Lines, 829

F.2d at 1174-76; In re Pittsburgh & L.E.R. Co. Sec. &

Antitrust Litig., 543 F.2d 1058, 1065 n.19 (3d Cir. 1976).

See also IA J. Moore, Moore’s Federal Practice 4 0.345

[4.-6] (2d ed. 1993); Friendly, “The ‘Law of the Circuit’

And Ali That,” 46 St. John’s L. Rev. 406, 412 (1972). The

logical view is that Congress, well aware of that premise

and of the potentially conflicting results which could occur

if different jurisdictions’ statutes of limitations were to

apply to two or more consolidated Section 10(b) cases, de-

leted the “in which the action was commenced” language

from Section 27A to avoid that very conflict.

This interpretation of Congressional action is consistent

with an analysis performed by then-Circuit Judge Gins-

berg in Korean Air Lines, the seminal case addressing

a oe fF

—13—

the question of which choice of law rule to apply in con-

nection with transferred federal question, as opposed to

diversity, claims. Circuit Judge Ginsberg reasoned that

the policies of Erie R. Co. v. Thompkins, 304 U.S. 64 (1938),

which acknowledged a party’s right to the application of

the state substantive law where the case was properly

filed, “did not figure in the calculus when the law to be

applied is federal, not state.” Jd. at 1174. Judge Ginsberg

also specifically addressed Van Dusen and determined

that its rule was also not applicable in federal question

cases. /d. at 1174-76. Accordingly, the court held that the

law of the transferee forum would apply to the parties

before it since

it is logically inconsistent to require one judge to ap-

ply simultaneously different and conflicting interpreta-

tions of what is supposed to be a unitary federal law.

Id. at 1175-76.

In Menowitz, the Second Circuit followed DelCostello

and Korean Air Lines in deciding to apply the transferee

forum’s statute of limitations to a transferred Section 10(b)

case in the aftermath of Section 27A, holding that:

[although federal courts sometimes arrive at different

constructions of federal law, federal law (unlike state

law) is supposed to be unitary. Thus, the rule of Van

Dusen does not apply by analogy where a case is trans-

ferred under § 1407 to a federal court that has a dif.

ferent construction of relevant federal law than the

federal court in which the action was filed. “ ‘(FJed-

eral courts compromise a single system applying a

single body of law, and no litigant has a right to have

the interpretation of one federal court rather than

that of another determine his case.’ ”’

Menowitz, 991 F.2d at 40 (citations omitted). Thus. the

Seventh Circuit’s view that Van Dusen’s diversity prin-

anitin.

ciples apply both to Section 27A transfer cases and when-

ever different federal courts apply different norms con-

flicts with Menowitz and Korean Air Lines.

Additionally, with regard to Majeski, choice of forum

is not reliance in the sense meant by Chevron Oil for the

obvious reason that it does not represent any detrimental

change of position as to the timing of the lawsuit. If the

timing of the action has not been affected in reliance on

the existing statute of limitations, there has been no “reli-

ance” in the ordinary sense of the term. Yet the deci-

sion below suggests that retroactivity may be avoided by

the argument that, if litigants could have predicted that

the law would change, they would have filed somewhere

else. If that were a sufficient reason to avoid retroactiv-

ity, there would never have been any retroactive applica-

tions of a decision under a Chevron Oil analysis because

plaintiffs virtually always have a choice of forum and

every plaintiff could say “If I had known what the future

would bring in this jurisdiction, I would have sued some-

where else.” If that were enough to prevent retroactivity,

new decisions would have applied retroactively to no one,

a conclusion clearly contrary to what this Court recognized

in Chevron Oil.

In sum, clarification by this Court is needed not only

to reach a direct conflict between the Second and Seventh

Circuits and to resolve divergent interpretations of the

scope of the diversity principles set forth in Van Dusen

and Ferens, but to determine the appropriate interplay

between Section 27A, Section 1404(a) and the meaning of

reliance under Chevron Oil where a plaintiff has a choice

of forum in which to file his or her claims.

CONCLUSION

For the reasons stated, a writ of certiorari should is-

sue to review the judgment and opinion of the Seventh

Circuit.

Respectfully submitted,

H. NicHOLAS BERBERIAN STEVEN L. BASHWINER

RoBERT J. MANDEL Counsel of Record

NEAL GERBER & EISENBERG Mary ELLEN HENNESSY

Two North LaSalle Street Amy E. SMITH

Suite 2200 KATTEN MUCHIN & ZAVIS

Chicago, Illinois 60602 525 West Monroe Street

(312) 269-8000 Suite 1600

Chicago, Illinois 60661

DENNIS M. PERLUsS “~ &

(312) 902-5200

HUFSTEDLER, KAUS

& ETTINGER

355 South Grand Avenue

39th Floor

Los Angeles, California 90071

(213) 617-7070

Attorneys for Petitioners

APPENDIX

App. 1

IN THE

UNITED STATES COURT OF APPEALS

FOR THE SEVENTH CIRCUIT

Nos. 92-1851 & 92-2510

ROBERT ECKSTEIN, et al.,

Plaintiffs-Appellants,

Vv.

BALCOR FILM INVESTORS, et al.,

Defendants-Appellees.

Appeals from the United States District Court

for the Eastern District of Wisconsin.

Nos. 88-C-1079 & 89-C-1315—John W. Reynolds, Judge.

ARGUED FEBRUARY 25, 19983—DecIDED AUGUST 20, 1993

Before CUMMINGS, COFFEY, and EASTERBROOK, Circuit

Judges.

EASTERBROOK, Circuit Judge. By late 1984 New World

Entertainment, Ltd. (New World) had experienced some

success making and distributing low-budget movies. New

World approached Balcor Entertainment Company, Ltd.

(BEC), a subsidiary of Shearson Lehman/American Ex-

press, Inc., to solicit working capital. New World wanted

to expand; BEC wanted some of the profits to be made

in movies. There were the makings of a deal: BEC would

obtain financing for New World’s films in exchange for

part of the films’ profits. Because BEC didn’t want to

accept the risk of being the sole source of capital, it re-

cruited outside investors. Balcor Film Investors (BFI) is

App. 2

a limited partnership formed to raise money for eight to

twelve low budget movies that New World would produce

and distribute.

Early in 1985 BFI registered partnership interests un-

der the Securities Act of 1933 and commenced public solic-

itation. Subscriptions received were to be held in escrow

until $50 million had been secured. Failing to raise this

amount by the deadline, BFI reduced the minimum to $35

million, offered to refund the investors’ money, and began

soliciting anew. By the end of 1985 $48 million was on

deposit, and BFI closed the offering. During the first two

years BFI supplied the tax benefits for which the investors

had hoped. But New World’s films flopped. In 1988 BFI

told its limited partners that they were likely to lose some

of their capital. Investors then filed class action suits

against Shearson (now known as Shearson Lehman Hut-

ton, Inc.), BFI, BEC, the other Balcor entities that had

put together the offering, and their officers and directors

(collectively Balcor). There are two groups of plaintiffs:

a class of investors who read the prospectus (the Majeski

plaintiffs) and a class of those who did not (the Eckstein

plaintiffs). The Majeski plaintiffs assert a standard fraud

theory: they purchased the limited partnership interests

in reliance on the misrepresentations in the prospectus

and its omissions of material facts. The Eckstein plain-

tiffs, whose defining characteristic is failure to read the

prospectus, contend that but for the misrepresentations

and omissions the offering would not have been successful.

This group, in other words, asserts causation in lieu of

reliance.

Although errors and omissions in the offering documents

usually lead to liability under §§ 11 and 12(2) of the 33

Act, 15 U.S.C. §§ 77k, U(2), the plaintiffs feared that their

suits would be untimely under §13 of that Act, the statute

of limitations applicable to actions under §§ 11 and 12. So

they invoked §10(b) of the Securities Exchange Act of

1934, 15 U.S.C. §78j(b), and the SEC’s Rule 10b-5, 17

C.F.R. §240.10b-5. This avenue is available even though

the investors complain about an initial public offering rather

App. 3

than a transaction in the aftermarket. See Herman &

MacLean v. Huddleston, 459 U.S. 375 (1983). Section 10(b)

and Rule 10b-5 require the investors to show fraud, not

just material errors and omissions. In exchange they get

a longer statute of limitations—or so they thought.

The Majeski plaintiffs filed in October 1988 and the

Eckstein plaintiffs in February 1989. When they began

the litigation, courts throughout the nation derived from

state law the periods of limitations in §10(b) cases. On

July 30, 1990, this court overruled opinions that had looked

to state law and announced that §13 of the ’33 Act sup-

plies the statute of limitations. Short v. Belleville Shoe

Manufacturing Co., 908 F.2d 1385 (7th Cir. 1990). On June

20, 1991, the Supreme Court agreed with Short that the

federal securities laws are the source of the period of lim-

itations, but the Court selected §9(e) of the ’34 Act, 15

U.S.C. §78i(e), as the most appropriate rule. Lampf, Pleva,

Lipkind, Prupis & Petigrow v. Gilbertson, 111 S. Ct. 2773,

2782 n.9 (1991). Both §13 of the ’33 Act and §9(e) of the

’34 Act give an investor one year from discovering the

facts constituting the violation, but no more than three

years from the violation, to begin suit. The advantage of

using §10(b) disappeared.

Congress responded to Lampf by enacting stopgap legis-

lation. A new §27A of the ’34 Act, 15 U.S.C. §78aa-1(a),

provides that “(t]he limitation period for any private civil

action implied under section [10(b) of the ’34 Act] that was

commenced on or before June 19, 1991, shall be the limita-

tion period provided by the laws applicable in the jurisdic-

tion, including principles of retroactivity, as such laws ex-

isted on June 19, 1991.” Plaintiffs believe that this law

saves their suits. The district court disagreed, dismissing

both as untimely. 786 F. Supp. 1458 (E.D. Wis. 1992). Al-

though §27A avoided Lampf, the district court held, it

did not disturb Short, which was the law in the seventh

circuit on June 19, 1991. And Short, the district court held,

is fully retroactive. It concluded that Short governs the

Eckstein plaintiffs, who filed in California, as well as the

Majeski plaintiffs, who filed in Wisconsin. The Panel on

App. 4

Multidistrict Litigation had transferred the Eckstein case

to Wisconsin under 28 U.S.C. §1407 for consolidated pre-

trial proceedings, and the district court then completed

the transfer by invoking 28 U.S.C. §1404(a) to make the

transfer permanent. After the transfer the whole case was

in Wisconsin, which the district court believed is “the ju-

risdiction” to which §27A refers. Both groups of plain-

tiffs have appealed.

Whether the Eckstein plaintiffs have appealed correct-

ly is another matter. The Majeski plaintiffs may have de-

stroyed the Eckstein plaintiffs’ notice of appeal, leaving

us without appellate jurisdiction to review the appeal of

the Eckstein class. At the heart of the matter is the ques-

tion: was the Eckstein case fully consolidated with the

Majeski case? If the cases were fully consolidated the

Eckstein appellants have problems.

Here is what happened. On March 11, 1992, the district

court entered judgments dismissing both actions. The Ma-

jeski plaintiffs filed a timely motion under Fed. R. Civ.

P. 59. Shortly thereafter, the Eckstein plaintiffs filed a

notice of appeal. The district court denied the Rule 59

motion, and the Majeski plaintiffs filed a timely notice of

appeal. Then the Eckstein plaintiffs filed what they called

a “Supplemental Notice of Appeal”’. The clerk of this court

treated that document as another notice of appeal and as-

signed it a new number. It did not last long: the Eckstein

plaintiffs failed to pay the docketing fee, and as a notice

of appeal this paper was at all events untimely, coming

34 days after the district court denied the Rule 59 mo-

tion—four more than Fed. R. App. P. 4(aX1) permits. Thus

our jurisdiction over the Eckstein plaintiffs’ case depends

on their notice of appeal filed before the district court

acted on the Majeski plaintiffs’ Rule 59 motion.

If the district court fully consolidated the cases, the

Ecksteins have no valid notice of appeal and we have no

appellate jurisdiction. Rule 4(aX4) specifies the “time for

App. 5

appeal for all parties” when “any party’’ files a timely

Rule 59 motion. See Polara v. Trans World Airlines, Inc.,

284 F.2d 34 (2d Cir. 1960); Continental Casualty Co. v.

United States, 167 F.2d 107 (9th Cir. 1948). If consolida-

tion produced a single “‘case,’’ then the Eckstein plain-

tiffs’ first notice of appeal had “‘no effect’? because it was

filed before disposition of the Majeski plaintiffs’ Rule 59

motion. Fed. R. App. P. 4(aX4).

Did the district court consolidate the cases? Yes and

no. As often happens, the district court did not clearly

explain the extent to which the actions were consolidated.

See Ivanov-McPhee v. Washington National Insurance

Co., 719 F.2d 927 (7th Cir. 1983). The district court or-

dered “the Eckstein and Majeski actions . . . consolidated

for the remainder of the pretrial proceedings and trial’”’

and certified each set of plaintiffs as a subclass of a sin-

gle class of all investors in BFI. A month later the court

added: “the actions are not consolidated for ‘all purposes’

nor are they merged into a single cause of action” (em-

phasis in original). What can this mean when the court

had certified a single class spanning both sets of plain-

tiffs? Because neither case contained the entire class, if

the cases were not fully consolidated, there could not have

been subclasses. In Jvanov-McPhee, 719 F.2d at 930, we

held that cases were fully consolidated because they could

have been brought as a single unit and there was no pur-

pose in the cases retaining separate identities. Sandwiches,

Inc. v. Wendy’s International, Inc., 822 F.2d 707, 710 (7th

Cir. 1987), adds that courts should keep in mind the rela-

tion between consolidation and appeal. Preserving formal-

ly separation may multiply the number of appeals, which

should not occur when there is only one nucleus of facts.

In order for plaintiffs to make up a single class their claims

must have a great deal in common. Fed. R. Civ. P. 23(bX3).

We should not have to review twice claims common enough

to be classed together. By all lights, the Majeski and Eck-

stein cases should have been consolidated for all purposes.

Nonetheless, the district court entered two judgments,

just as if the suits were separate. Different plaintiffs ap-

App. 6

pealed from each judgment. Appellate jurisdiction follows

the judgment, providing the certainty that is essential

when a misstep may forfeit a valuable right. Separate

judgments are independently appealabie, and no one need

appeal until the formal judgment under Fed. R. Civ. P.

58 has been entered. United States v. Indrelunas, 411

U.S. 216, 220-22 (1973). Sometimes a party may appeal

from a final decision not embodied in a judgment, see

Bankers Trust Co. v. Mallis, 435 U.S. 381 (1978), but it

is always entitled to wait for (and rely on) the separate

Rule 58 judgment. Shalala v. Schaefer, 61 U.S.L.W. 4722,

4725 (U.S. June 24, 1993); Mallis, 435 U.S. at 386; In re

Kilgus, 811 F.2d 1112, 1117 (7th Cir. 1987). Anything else

baits a trap for unwary litigants—for wary ones, too, the

kind who pay particular attention to judgments. The Eck-

stein plaintiffs therefore were entitled to rely on the fact

that the district judge issued two judgments. They ap-

pealed in a timely manner from theirs, and the Majeski

plaintiffs’ motion did not affect that appeal.

BFI used a single prospectus for the two offerings of

its partnership interests. When BFI re-offered these in-

terests in the fall of 1985 it furnished investors with a

supplement describing recent events. The plaintiffs’ claims

center on this supplement, which they say left out infor-

mation about business reverses New World suffered in

1985. New World was making low-budget films that had

limited attendance at the box office and reaped most of

their profits from television and from the sale and rental

of video cassettes for home viewing. A firm called World-

vision had agreed to distribute New World’s films outside

the theaters. According to plaintiffs, the supplement to the

prospectus fraudulently omitted the fact that Worldvision

and New World had had a falling out—that Worldvision,

dissatisfied with the quality of the films, was attempting

to withdraw as distributor and had filed a suit against

New World. Plaintiffs also contend that the offering ma-

terials concealed the fact that New World was to keep

the lion’s share of the profits from VCR distribution.

in eeneeneninaieneeiniinael

App. 7

These adverse events occurred before the investors sent

in their money between October 11, 1985, and December

31, 1985. But, plaintiffs insist, they were unaware that

New World had encountered troubles until BFI told them

in mid-1988 that they probably would not get all of their

money back. The Majeski plaintiffs filed suit in the Eastern

District of Wisconsin in October 1988, while the Eckstein

plaintiffs filed suit in the Central District of California

in February 1989. Because different issues determine the

applicable limitations period for each group of plaintiffs,

we discuss them separately.

The Eckstein plaintiffs’ case moved from California to

Wisconsin under 28 U.S.C. §1404(a). Section 27A instructs

us to use the “laws applicable in the jurisdiction” on June

19, 1991. The district in which the court that, decides the

case sits must be “the jurisdiction” for purposes of §27A.

But what is the law of that jurisdiction? Short identifies

the statute of limitations in force within the seventh cir-

cuit on June 19, 1991. Choice-of-law rules are part of any

jurisdiction’s whole law, however, a principle important in

diversity cases. See Klaxon Co. v. Stentor Electric Man-

ufacturing Co., 313 U.S. 487 (1941). Usually we do not

think of federal courts as having choice-of-law rules for

cases decided under federal law, which is supposed to be

uniform. Yet there is one distinctively federal choice-of-

law problem. What happens when a federal court transfers

the case to another under §1404(a)? Van Dusen v. Bar-

rack, 376 U.S. 612 (1964), and Ferens v. John Deere Co.,

494 U.S. 516 (1990), hold that such a transfer leaves the

law unaffected; the original forum’s rules (including the

choice-of-law rules of the state in which that court sits)

are unaffected by the movement.

Are different circuits like different states for the pur-

poses of Van Dusen and Ferens? Usually not. In re Korean

Air Lines Disaster, 829 F.2d 1171 (D.C. Cir. 1987) (Ruth

B. Ginsburg, J.), affirmed on other grounds under the name

Chan v. Korean Air Lines, Ltd., 490 U.S. 122 (1989). A

App. &

single federal law implies a national interpretation. Al-

though courts of appeals cannot achieve this on their own,

the norm is that each court of appeals considers the ques-

tion independently and reaches its own decision, without

regard to the geographic location of the events giving rise

to the litigation. This meant to the judges in Korean Air

Lines that a transfer under §1404(a) leaves each court to

work out the problem for itself rather than to guess how

the circuit comprising the original district court would

reason. Congress might require one federal court to ap-

ply another’s interpretation of federal law, but §1404(a)

does not itself do so. Jd. at 1178 (D.H. Ginsburg, J., con-

curring). See also Richard L. Marcus, Conflicts Among

Circuits and Transfers Within the Federal Judicial Sys-

tem, 93 Yale L.J. 677, 702 (1984).

We agree with Korean Air Lines that a transferee court

normally should use its own best judgment about the mean-

ing of federal law when evaluating a federal claim, but

§27A instructs us to act differently. Section 27A recog-

nizes that different circuits had taken different approaches

to the appropriate statute of limitations in suits under

§10(b), and it codifies this fractured nature of federal law

for cases filed before June 20, 1991. Congress requires

us to apply federal law as courts understood it at a point

in the past rather than to make an independent judgment

about what that law actually is. And the law in use on

June 19, 1991, was not nationally uniform. By then three

circuits had adopted §13 of the ’33 Act for suits under

§10(b). One applied this rule retroactively, another pro-

spectively (in the main), and this circuit had not ruled on

retroactivity. In all other circuits the courts derived the

period of limitations from state law—with different circuits

looking to different kinds of state laws. See Pommer v.

Medtest Corp., 961 F.2d 620, 627-28 (7th Cir. 1992); Norris

vy. Wirtz, 818 F.2d 1329, 1331-33 (7th Cir. 1987).

Recently the second circuit concluded that because “fed-

eral law (unlike state law) is supposed to be unitary”, a

transferee court should apply the law of its circuit and

ignore the law of the transferor court when determining

App. 9

“the jurisdiction” under §27A. Menowitz v. Brown, 991

F.2d 36, 40 (2d Cir. 1993). Menowitz held that Van Dusen

and Ferens apply only in diversity cases. We believe that

this conclusion disregards both the language of §27A (whose

reference to “the jurisdiction” implies a non-uniform fed-

eral law) and the holdings of Van Dusen and Ferens, which

construed §1404(a) rather than any principle of state law.

Although both of those cases arose under the diversity

jurisdiction, their references to Erie R.R. v. Tompkins,

304 U.S. 64 (1938), do not imply a ruling limited to state

law. Erie is itself part of national law, interpreting the

Rules of Decision Act, 28 U.S.C. §1652. Van Dusen and

Ferens accordingly apply whenever different federal courts

properly use different rules. Erie is not unique in requir-

ing federal courts to apply disparate norms. Consider 42

U.S.C. §1988, which leads federal courts to use state law

as the basis of a federal period of limitations. Wilson v.

Garcia, 471 U.S. 261 (1985); Owens v. Okure, 488 U.S. 235

(1989). Or consider the law of federal! contracts, which is

largely borrowed from state law. United States v. Kimbell

Foods, Inc., 440 U.S. 715 (1979); United States v. Einum,

992 F.2d 761 (7th Cir. 1993). When the law of the United

States is geographically non-uniform, a transferee court

should use the rule of the transferor forum in order to im-

plement the central conclusion of Van Dusen and Ferens:

that a transfer under §1404(a) accomplishes “but a change

of courtrooms’. Van Dusen, 376 U.S. at 639. Section 27A

presents such a situation. Accordingly we respectfully dis-

agree with Menowitz.t

So we must examine how a judge in the Central District

of California would have viewed the limitations question

on June 19, 1991. At the time, courts within the ninth

circuit used the most analogous statute of limitations un-

der the law of the state in which the district court sat.

+ Because this opinion creates a conflict among the circuits, it

was circulated before release to all judges in active service. Cir-

cuit Rule 40(f). None favored a hearing in banc.

App. 10

Stitt v. Williams, 919 F.2d 516, 522 (9th Cir. 1990). Cali-

fornia’s three year statute of limitations for fraud, Cal.

Civ. Proc. Code §338, was the appropriate one to use in

securities fraud cases. [bid. The period under that statute

“eommences when the plaintiff discovered or could have

discovered the fraud with the exercise of reasonable dili-

gence”. SEC v. Seaboard Corp., 677 F.2d 1301, 1309 (9th

Cir. 1982). See also Miller v. Bechtel Corp., 33 Cal. 3d

868, 875, 663 P.2d 177, 181 (1983); Mosesian v. Peat, Mar-

wick, Mitchell & Co., 727 F.2d 873, 877 (9th Cir. 1984).

The district court concluded that the Eckstein plaintiffs’

claim would be barred by that rule as well as the federal

rule adopted in Short. It concluded that the time for bring-

ing suit started to run when the investors purchased their

limited partnership interests because the dire warnings of

risk in the prospectus should have put the investor: on

notice of fraud. 786 F. Supp. at 1466. This logic is flawed.

A warning about risk does not give notice of fraud. Every

prospectus is filled with advice about the perils of the

business, because every business faces its own set of risks.

Giving general advice about the industry does not relieve

an issuer of the need to be truthful about itself. Warn-

ings of the kind that appeared in BFI’s prospectus put

investors on notice that there is a chance things may not

go as hoped in the future; they do not put investors on

notice that statements made in the prospectus are untrue

at the time, or that important facts have been left out

of the prospectus. Plaintiffs allege, for example, that New

World and Worldvision had come to blows, and that this

gravely affected the opportunity for profitable investment.

A prospectus stating a risk that such a thing could happen

is a far cry from one stating that this had happened. The

former does not put an investor on notice of the latter.

Plaintiffs’ argument that they “could [not] have discov-

ered the fraud with the exercise of reasonable diligence”

until Balcor told them in 1988 they probably would lose

money is equally flawed. Discovering that one has lost

money is not the same as discovering that one has been

defrauded. Most losses occur without fraud of any kind.

App. 11

DiLeo v. Ernst & Young, 901 F.2d 624, 627-28 (7th Cir.

1990). And victims of fraud usually discover the problem

long before the wrongdoer stands up and confesses. Plain-

tiffs’ position amounts to an assertion that the time to

sue does not start until the extent of the injury becomes

clear. But the question under California law is when the

investors discovered (or should have discovered) the de-

ceit, not when the full consequences of that deceit are

felt. An investor can be defrauded before any loss is real-

ized. Discovery of the fraud means the discovery of the

misrepresentation. Howard v. Haddad, 962 F.2d 328, 330

(4th Cir. 1992); Volk v. D.A. Davidson & Co., 816 F.2d

1406, 1412-13 (9th Cir. 1987). Investors must bring their

claims as soon as they become aware of misrepresenta-

tions or omissions, instead of waiting ‘‘while avoidable

damages accrue.” Volk, 816 F.2d at 1412.

It is conceivable, we suppose, that until receiving the

advice in mid-1988 reasonable investors would not have

bestirred themselves to find out about New World. (The

Eckstein plaintiffs, after all, invested in BFI without read-

ing the prospectus; apparently they do not think infor-

mation very useful.) Many reasonable investors—the kind

who read the prospectus?—would have pricked up their

ears sooner. The fact that Worldvision filed suit against

New World in the fall of 1985 tu rescind its contract may

have been sufficient to trigger an investigation. The suit

itself was a piece of information missing from the pro-

spectus; from one angle its omission was the fraud, yet

the fact of the suit was public knowledge in 1985. If that

should have triggered an investigation, then California’s

statute of limitations expired before the Eckstein plain-

tiffs filed their suit in February 1989. That plaintiffs may

have been ignorant of Worldvision’s suit should not mat-

ter, because they, not the defendants, bear the burden

of their own ignorance. See United States v. Kubrick, 444

U.S. 111, 124 (1979); Norris, 818 F.2d at 1335-36. It may

be possible to decide what reasonable investors knew, or

should have known, without submitting the question to

a jury, but the subject is one for the district court to ad-

dress in the first instance.

App. 12

Unlike the Eckstein plaintiffs, the Majeski plaintiffs have

clearly satisfied the relevant state statute of limitations.

Wisconsin gives investors three years from the sale, Wis.

Stat. §551.59, and the Majeski plaintiffs filed before the

end of 1988, at a time when we would have used that

law as the period of limitations. Cahill v. Ernst & Ernst,

625 F.2d 151 (7th Cir. 1980). But §13 of the ’33 Act gives

investors only one year from the time the fraud was or

should have been discovered, and the considerations we

discussed immediately above imply that the Majeski plain-

tiffs would have a hard time satisfying that requirement.

The district court held that §13 applies to the Majeski

plaintiffs because they filed suit within the seventh cir-

cuit after Short had been decided, and that the suit is

untimely under §13.

The district court concluded that Short is fully retroac-

tive. Under current law, it would be. James B. Beam Dis-

tilling Co. v. Georgia, 111 S. Ct. 2439 (1991), holds that

decisions are retroactive if the court applies the new rule

to the parties. See also Harper v. Virginia Department

of Taxation, 61 U.S.L.W. 4664 (U.S. June 18, 1993). Short

applied its new rule to the litigants in that case. But §27A

tells us to use the law, including principles of retroactivity,

in force on June 19, 1991, and Beam, like Lampf, was de-

cided on June 20, 1991. We concluded in McCool v. Strata

Oil Co., 972 F.2d 1452, 1458-59 (7th Cir. 1992), that Beam

changed the law of retroactivity, which means that on

June 19, 1991, Chevron Oil Co. v. Huson, 404 U.S. 97

(1971), still controlled the approach to that subject. McCool

holds that §27A requires us to employ Cnevron’s approach.

To apply Chevron courts must balance several factors.

After a consideration of these factors McCool concluded

that Short does not apply retroactively when the plain-

tiff relied on the pre-Short limitations period. 972 F.2d

at 1459.

The dispositive question under McCool thus is: if the

plaintiffs had known that Short would apply to their claim,

App. 13

could and would they have filed within the period of lim-

itations? The Majeski plaintiffs say that they filed suit

within two months of discovering the fraud, so it is hard

to see how any delay can be chalked up to reliance on

the availability of Wisconsin’s law. But the belief that

state law would provide three years may have influenced

the investors in other ways. Perhaps it offered assurance

that they need not investigate expeditiously. Perhaps the

Majeski plaintiffs relied by filing in Wisconsin when they

could have chosen California. Although Balcor insists that

filing in one forum as opposed to another is not a legiti-

mate form of reliance, we disagree. McCool held that the

plaintiffs had relied on the former status of the law by

dismissing a suit they had filed in state court. 972 F.2d

at 1459. We do not believe that relying by foregoing the

opportunity to pursue a claim in a state forum should dif-

fer from foregoing the opportunity to pursue a claim in

another federai forum.

Ultimately, the determination whether the plaintiffs did

rely is for the district court. Chevron creates a balanc-

ing approach, and the court of first instance does the bal-

ancing with deferential appellate review. Indeed if mate-

rial factual questions about reliance are controverted the

matter cannot be decided on summary judgment at all.

Berning v. A.G. Edwards & Sons, Inc., 990 F.2d 272,

276-77 (7th Cir. 1993).

Ill

Despite our disagreement with the district court’s rea-

son for dismissing the suits, a remand does not necessarily

follow. We may affirm its judgment on any properly pre-

served ground that the record supports. Massachusetts

Mutual Life Insurance Co. v. Ludwig, 426 U.S. 479 (1976).

A timely but non-meritorious suit should be cut off at the

first opportunity. We therefore inquire whether the plain-

tiffs have a good claim under the securities laws.

App. 14

Because they never read the prospectus, the Eckstein

plaintiffs encounter difficulty in establishing that they re-

lied to their detriment on the seller’s statements, a com-

ponent of a claim under §10(b) and Rule 10b-5 according

to the canonical formulation. See Lisi v. Fashion Park,

Inc., 340 F.2d 457 (2d Cir. 1965). Although courts often

refer to “‘reliance”’ as an element of the claim under §10(b),

we have held that reliance is a means by which the plain-

tiff may establish that material misstatements or omissions

caused him injury, rather than an indispensable element.

Flamm v. Eberstadt, 814 F.2d 1169, 1173 (7th Cir. 1987).

See also Rowe v. Maremont Corp., 850 F.2d 1226, 1233 (7th

Cir. 1988). The Supreme Court’s adoption of the fraud-

on-the-market doctrine in Basic, Inc. v. Levinson, 485 U.S.

224 (1988), shows that reliance is not essential; although

Basic continued to use that word, it allowed an alternative

method of establishing causation—an effect on the market

price—to support recovery by investors who never read

the supposedly deceitful statement. Jd. at 243-47. See also

Affiliated Ute Citizens v. United States, 406 U.S. 128,

152-54 (1972).

When “‘the market’’—that is, the outcome of trading by

persons who are well-informed about what the issuer is

doing and saying—translates a lie or omission from voice

to price, it is easy to see how injury can befall a person

who is unaware of the deceit. The price in an open and

developed market usually reflects all available information,

because the price is an outcome of competition among knowl-

edgeable investors. See generally Sanford J. Grossman,

The Informational Role of Prices (1989); James H. Lorie,

Peter Dodd & Mary Hamilton Kimpton, The Stock Market:

Theories and Evidence (2d ed. 1985). Competition among

savvy investors leads to a price that impounds all avail-

able information, even knowledge that is difficult to ar-

ticulate. We call a market “efficient’”” because the price

reflects a consensus about the value of the security be-

ing traded—not necessarily because the price captures the

true value of the firm’s assets but because the price is

App. 15

the best available device to assess the significance of ad-

ditional bits of information. Investors who trade at the

market price are affected, for good or ill, by the infor-

mation underlying that price.

Not all stocks are eagerly followed by astute investors

with the capital to turn their views into movements in

price. The more thinly traded the stock, the less well the

price reflects the latest pieces of information. “Efficiency”

is not an all-or-nothing phenomenon. See Comment, Suf-

ficient Efficiency: Fraud on the Market in the Initial Pub-

lic Offering Context, 58 U. Chi. L. Rev. 1393 (1991). Prices

of even poorly followed stocks change in response to news,

including statements by the issuers, and these changes

may be better indicators of causation than litigants’ self-

serving statements about what they read and relied on

and about what they would have paid (or whether they

would have bought at all) had the issuer said something

different. Even an “inefficient”? market price is objective

and contemporaneous with events, not plagued by lapses

of memory or the cognitive dissonance that influences what

witnesses may remember years later. Still, at some point

the market process peters out and the litigation process

offers superior information about causation. The Eckstein

plaintiffs may have reached that point.

BFI issued its interests as part of an initial public of-

fering at a fixed price, $1,000 per unit (with a minimum

of three units per investor). No trading market valued

these interests; only the investors could do so. No trading

market developed afterward, so we cannot combine the

Capital Asset Pricing Model with the tables in the Wall

Street Journal to see what effect Worldvision’s suit, or

the other information that slowly came to light about New

World, had on price. It would be revealing if news about

Worldvision’s withdrawal as New World’s distributor caused

the price to fall by 20% (using the CAPM to hold the market

constant). It would be equally revealing if the news had

no effect on price, which would imply either that other

distributors were readily available (so that information

about Worldvision was not material) or that investors had

App. 16

fully taken this fact into account back in 1985 (so the stat-

ute of limitations would bar these suits). Alas, no such

luck, because there are no such prices. This does not mean

that the Eckstein plaintiffs cannot show causation, but

they must carry the greater burden of proving the causal

links that an efficient secondary market establishes auto-

matically.

The Eckstein plaintiffs try to do so via a theory we

could call “fraud-created-the-market.” BFI’s offering was

conditioned on its ability to raise at least $35 million. A

minimum sales requirement may serve two functions: it

ensures that the venture has sufficient capital to function,

and it provides a form of vicarious protection to ignorant

investors who assume that the condition will be met only

if a significant number of informed buyers think the proj-

ect a good investment. Plaintiffs allege that, if BFI had

made complete and truthful statements, it would not have

been able to selFinterests to investors who did read the

prospectus. Without those investors, BFI would not have

been able to sell the minimum amount, and thus would

have returned the plaintiffs’ tendered funds. Thus, say

the Eckstein plaintiffs, the misstatements and omissions

in the prospectus caused their losses.

The fifth circuit adopted a variant of this approach by

a vote of 12 to 10 in Shores v. Sklar, 647 F.2d 462 (1981)

(in bane). Shores held that an investor may maintain an

action under §10(b) by establishing that the fraud permitted

the securities to exist in the market—that but for the fraud

the securities would have been “unmarketable”—and that

the investor relied on their existence. The tenth and elev-

enth circuits follow modified versions of the Shores ap-

proach, while the sixth circuit has repudiated that case

outright. Compare T.J. Raney & Sons, Inc. v. Ft. Cobb

Oklahoma Irrigation Fuel Authority, 717 F.2d 1330 (10th

Cir. 1983), and Ross v. Bank South, N.A., 885 F.2d 723

(11th Cir. 1989) (in bane), with Freeman v. Laventhol &

Horwath, 915 F.2d 193 (6th Cir. 1990). We agree with the

sixth circuit. The existence of a security does not depend

App. 17

on, or warrant, the adequacy of disclosure. Many a secu-

rity is on the market even though the issuer or some third

party made incomplete disclosures. Federal securities law

does not include “merit regulation.” See The Business

Roundtable v. SEC, 905 F.2d 406 (D.C. Cir. 1990); §23

of the ’33 Act, 15 U.S.C. §77w. Full disclosure of adverse

information may lower the price, but it does not exclude

the security from the market. Securities of bankrupt cor-

porations trade freely; some markets specialize in penny

stocks. Thus the linchpin of Shores—that disclosing bad

information keeps securities off the market, entitling in-

vestors to rely on the presence of the securities just as

they would rely on statements in a prospectus—is simply

false.

Without the aid of Shores, the Eckstein plaintiffs have

rough sledding ahead. They cannot use the incomplete or

rosy nature of Balcor’s pamphlets, which they may have

read, as the actionable “fraud”; sales literature need not

repeat the full disclosures and risk analysis in the pro-

spectus. (We discuss this more fully below.) To prevail

the Eckstein plaintiffs must prove that, had the prospec-

tus been free from fraud, BFI would not have satisfied

the minimum-sale requirement of $35 million. Because this

is a suit under §10(b) of the ’34 Act rather than §§ 11

or 12(2) of the ’33 Act, the Eckstein plaintiffs must es-

tablish this counterfactual proposition about the decision-

making of thousands of investors using only statements

or omissions amounting to fraud; other errors and omis-

sions that might have supported liability under §§ 11 or

12(2) do not support an inference of causation that can

replace direct reliance in a case under §10(b). The differ-

ence between errors and fraud, and the fact that BFI at-

tracted $48 million, substantially exceeding the $35 million

cutoff, present the Eckstein plaintiffs with a daunting

task. Still, the record in its current state does not doom

their case, so we must remand their case to the district

court for further proceedings.

App. 18

The Majeski plaintiffs, who read the prospectus, may

establish causation in the traditional way, by proof of their

reliance on any misstatements and omissions. These plain-

tiffs advance a second theory—that because Balcor circu-

lated upbeat brochures and other supplemental literature

that was much easier to understand than the dense pro-

spectus, the defendants should have put the stern warn-

ings about risk in these documents as well. Why, one of

these brochures even offered tables of possible rates of

return under different assumptions, and the worst case

still showed BFI able to repay the original investments

(although without interest or other profits). Because these

easy-to-digest brochures dominated the investors’ percep-

tion of the risks, plaintiffs insist, Balcor was obligated to

make additional disclosures of risk in the supplemental

literature. To simplify the conduct of this litigation on re-

mand, we now hold that such a theory cannot support

a claim under §10(b)—which, recall, depends on proof of

fraud, and not just errors or omissions. Ernst & Ernst

v. Hochfelder, 425 U.S. 185 (1976); Aaron v. SEC, 446

U.S. 680 (1980).

The ’33 Act permits issuers, underwriters, and dealers

to engage in “free writing’”’ once the registration state-

ment becomes effective, and to furnish promotional litera-

ture to investors provided that literature is accompanied

or preceded by a prospectus. Section 2(10Xa) of the ’33

Act, 15 U.S.C. §77b(10Xa); Louis Loss, Fundamentals of

Securities Regulation 119 (1983). Only the registration

statement need be self-contained. A prospectus is a subset

of the information contained in the registration statement,

and the sales brochures are a subset of the information

in the prospectus (plus the customary effort to sell the

securities). If the sales literature had to contain all the

warnings that appear in the prospectus, the privilege of

distributing supplemental sales literature would be all but

meaningless. Federal law establishes a regime in which

the prospectus contains the comprehensive description of

App. 19

the securities. Other literature can be brief precisely be-

cause an inquiring investor has the prospectus to turn to.

Federal law also establishes a rule for resolving conflicts:

in the event statements in sales brochures and the pro-

spectus do not agree, the prospectus wins. See Brown v.

E.F. Hutton Group, Inc., 991 F.2d 1020, 1033 (2d Cir.

1993). “If the investor already possesses information suf-

ficient to call [a] representation into question, he cannot

claim later that he relied on or was deceived by the lie.”

Teamsters Local 282 Pension Trust Fund v. Angelos, 762

F.2d 522, 530 (7th Cir. 1985). See also, e.g., Atari Corp.

v. Ernst & Whinney, 981 F.2d 1025, 1030-31 (9th Cir.

1992); Zobrist v. Coal-X, Inc., 708 F.2d 1511, 1518-19 (10th

Cir. 1983). The Majeski plaintiffs do not contend that the

risk disclosures in the prospectus were buried or indigesti-

ble; to the contrary, they were prominent and blunt. Cf.

Virginia Bankshares, Inc. v. Sandberg, 111 S. Ct. 2749,

2760-61 (1991); Associated Randall Bank v. Griffin, Kubik,

Stephens & Thompson, Inc., No. 92-2684 (7th Cir. Aug.

19, 1993); Acme Propane, Inc. v. Tenexco, Inc., 844 F.2d

1317, 1322, 1325 (7th Cir. 1988). Failure to disclose impor-

tant things in supplemental literature is not fraud when

those things appear in the prospectus.

One final observation. Many of the claims in this case

arise out of predictions that did not come to pass. For

example, the Majeski plaintiffs allege that Balcor stated

that presales of movies would generate revenues equal

to half of the movies’ production costs, and that this state-

ment is false. Yet the statement is nothing but a predic-

tion about how much revenue New World expected to

generate from preselling movies. Only statements or omis-

sions of fact can be fraudulent. Although intentions and

beliefs are ‘facts’ for this purpose when they are open

to objective verification, Sandberg, 111 S. Ct. at 2760,

2765, an inability to foresee the future does not constitute

fraud, because “(t]he securities laws approach matters

from an ex ante perspective”. Pommer, 961 F.2d at 623.

See DiLeo, 901 F.2d at 627-28. If those statements had a

reasonable basis when made, the defendants did not com-

aia ia tai i

App. 20

mit fraud. Wielgos v. Commonwealth Edison Co., 892

F.2d 509, 513 (7th Cir. 1989).

The judgments are vacated, and the cases are remanded

for further proceedings consistent with this opinion. As

the district court dismissed the plaintiffs’ claims under

state law only because it had dismissed all of their claims

under federal law, the state-law claims must be reinstated.

A true Copy:

Teste:

Clerk of the United States Court of

Appeals for the Seventh Circuit

App. 21

UNITED STATES COURT OF APPEALS

For the Seventh Circuit

Chicago, Illinois 60604

D NT - WITH : NT

Date: August 20, 1993

BEFORE: Honorable Walter J. Cummings, Circuit Judge

Honorable John L. Coffey, Circuit Judge

Honorable Frank H. Easterbrook, Circuit Judge

Nos. 92-1851 and 92-2510

ROBERT ECKSTEIN, et al.,

Plaintiffs - Appellants

BALCOR FILM INVESTORS, BALCOR ENTERTAINMENT

COMPANY, BALCOR COMPANY, et. al.,

Defendants - Appellees

Appeal from the United States District Court for the

Eastern District of Wisconsin

No. 88 C 1079, John W. Reynolds, Senior Judge

This cause was heard on the record from the above

mentioned District Court, and was argued by counsel.

On consideration whereof, IT IS ORDERED AND

ADJUDGED by this court that the judgment of the Dis-

trict Court is VACATED and the case is REMANDED, in

accordance with the decision of this court entered this

date. Appellants shall recover their costs.

App. 22

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF WISCONSIN

RALPH MAJESKI, JOSEPH YACH, JANICE WAISMAN,

LARRY R. PETERSON, THOMAS WEIL, LEE

ALDRIDGE, RANDY KARPINSKY , KENNETH KULAS

ROBB S. ELLIOTT and RAYMOND HARDING,

Plaintiffs,

Vv. Civil Action No. 88-C-1079

BALCOR ENTERTAINMENT COMPANY LTD, an

Illinois corporation; SHEARSON LEHMAN

HUTTON, INC., f/k/a SHEARSON LEHMAN BROTHERS,

INC., and f/k/a SHEARSON LEHMAN/AMERICAN

EXPRESS, INC., a Delaware corporation; THE

BALCOR COMPANY, an Illinois corporation;

BALCOR/AMERICAN EXPRESS INC., an Illinois

corporation; BALCOR SECURITIES COMPANY, an

Illinois corporation, THE AMERICAN EXPRESS

COMPANY, a New York corporation; NEW WORLD

PICTURES, LTD.., a California corporation, and

BALCOR FILM INVESTORS, an Illinois Limited

Partnership,

Defendants.

ROBERT ECKSTEIN and SYLVIA ECKSTEIN, on

behalf of themselves and all others

similarly situated,

Plaintiffs,

Vv. Civil Action No. 89-C-1315

App. 23

BALCOR FILM INVESTORS, BALCOR ENTERTAINMENT

COMPANY, THE BALCOR COMPANY, THE BALCOR

SECURITIES COMPANY, JERRY M. REINSDORF,

ROBERT A. JUDELSON, JAMES E. FINLEY,

GREGORY S. JUNKIN, BARRY R. JACKSON, JOSEPH

A. KRUSZYNSKI, NEW WORLD ENTERTAINMENT,

LTD., LAWRENCE L. KUPPIN, ROBERT REHME, and

HARRY E. SLOAN,

Defendants.

DECISION AND ORDER

INTRODUCTION

This action concerns a public offering of limited

partnership interests in Balcor Film Investors (“BFI”).

BFI was formed to produce and distribute movies

pursuant to an agreement with a motion picture com-

pany, New World Entertainment, Ltd. (“New World”).

The initial offering was unsuccessful, and the Securi-

ties Exchange Commission required that the purchases

of BFI interests be cancelled. On October 11, 1985, the

prospectus was amended to make a second offering

and to seek resubscription by previous investors. The

interests were sold between October 11, 1985, and

December 31, 1985. Both the Majeski and Eckstein

classes’ allege that the defendants violated § 10(b) of

' On August 23, 1989, the Judicial Panel on Multidistrict Litiga-

tion ordered, pursuant to Title 28 U.S.C. § 1407, that the case

Robert Eckstein, et al. v. Balcor Film Investors, et al. ( Senate ) )

(continued...

App. 24

the Securities Exchange Act of 1934 and Rule 10b-5 by

portraying the BFI investment as “safe and conserva-

tive.” This court concludes, as discussed below, that

the defendants adequately conveyed the risky nature

of the BFI investment.

Presently before the court is the defendants’ No-

vember 5, 1991 motion for partial summary judgment

on all remaining federal claims in both Majeski and

Eckstein. This court previously dismissed the Majeski

class claims that the defendants violated §§ 17(a) and

12(2) of the Securities Act of 1933. The only additional

federal claim alleged by the Majeski class is that the

defendants violated § 10(b) and Rule 10b-5. The Eck-

stein class only alleges violations of § 10(b) and Rule

10b-5 in its complaint. The defendants argue that the

federal securities law claims under § 10(b) and Rule

10b-5 alleged in both Majeski and Eckstein are barred

by the statute of limitations in light of a recent

Supreme Court decision, Lampf, Pleva, Lipkind, Prupis

igrow v. Gi » 111 S. Ct. 2773 (1991)

(“Lampf”).

In “Lampf’, the Supreme Court established a

uniform statute of limitations for Section 10(b) claims

that “[llitigation instituted pursuant to § 10(b) and

Rule 10b-5 . . . must be commenced within one year

after the discovery of the facts constituting the viola-

' (...continued)

be transferred from the Central District of California to this court

for consolidated pretrial proceedings with Ralph Maijeski., et al. v.

Balcor Film Investors, et al. (“Majeski”). On February 27, 1991,

this court permanently transferred, pursuant to Title 28 U.S.C.

§ 1404(a), Eckstein to this court. This court also consolidated

Majeski and Eckstein for pretrial and trial purposes.

App. 25

tion and within three years after such violation.”

Lampf at 2782 (footnote omitted). The Supreme Court

applied this rule retroactively.

On December 20, 1991, the President signed

Senate Bill 543 into law, which essentially overruled

Lampf. The new law states that:

The limitation period for any private civil ac-

tion 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 ap-

plicable in the jurisdiction, including principles of

retroactivity, as such laws existed on June 19,

1991.

Federal Deposit Insurance Corporation Improvement

Act of 1991, Public L. No. 102-242, § 476, 105 Statutes

2236, 2387 (1991).

The defendants argue that the Majeski and

Eckstein classes knew or should have known of their

claim in 1985 when they received the BFI prospectus,

which contained high risk disclosures; these high risk

disclosures would have been in conflict with the “safe

and conservative” investment portrayal which the

plaintiffs allege the defendants made. Because the last

possible day of sale for BFI investments and of receipt

of the prospectus was December 31, 1985, any claim

accruing at this time had to be filed by December 31,

1988, to meet the three-year prong of the statute of

limitations, as this court discusses below. Alternative-

ly, the defendants argue that the plaintiffs knew or

should have known of their claim no later than May

14, 1987, when the plaintiffs received a report that

BFI had produced all its films, and had a net loss of

App. 26

$14 million. Any claim accruing at this time had to be

filed by May 14, 1988, to meet the one-year prong of

the statute of limitations, as this court discusses

below.

ANALYSIS

Rule 56(c) of the Federal Rules of Civil Procedure

provides that a federal district court shall grant a

motion for summary judgment if the pleadings, deposi-

tions, answers to interrogatories, admissions, and

affidavits indicate that no material facts are in dispute

and that the moving party is entitled to judgment as

a matter of law. Howland v. Kilquist, 833 F.2d 639,

642 (7th Cir. 1987). The party moving the court for

summary judgment has the burden of proving that no

material facts are in dispute, and the court must re-

view the record with all reasonable inferences being

drawn in favor of the non-moving party. Becker v.

Tenenbaum-Hill Associates, Inc., 914 F.2d 107, 110

(7th Cir. 1990); Reardon v. Wroan, 811 F.2d 1025,

1027 (7th Cir. 1987).

Applicable Law

The Eckstein class argues that since its complaint

was originally filed on February 10, 1989, in the Ninth

Circuit, the Ninth Circuit’s statute of limitations

should be applied. California Code of Civil Procedure

§ 388(4), which the Ninth Circuit has borrowed for

10(b) purposes, allows actions filed within three years

of discovery of the facts constituting fraud.

The defendants argue that the new law mandates

that “the jurisdiction” is the Seventh Circuit. This

App. 27

court agrees with the defendants; the Seventh Circuit

was “the jurisdiction” for this action as of June 19,

1991. Additionally, this court’s earlier analysis and

conclusion that Seventh Circuit law applies to the

Eckstein class is still applicable. See Eckstein _v.

Balcor Film Investors, 740 F. Supp. 572 (E.D. Wis.

1990). Thus, the Seventh Circuit law as it existed on

June 19, 1991 applies.

The relevant Seventh Circuit case is Short v.

Belleville Shoe Mfg. Co., 908 F.2d 1385 (7th Cir. 1990),

cert. den., 111 S. Ct. 2887 (1991) (“Short”). In Short,

the Seventh Circuit decided to change its practice of

consulting state blue sky statutes to determine the

statute of limitations for actions brought under § 10(b)

and Rule 10b-5. The court held that § 13 of the Securi-

ties Act of 1933 is the controlling statute of limitations

for actions under § 10(b) and Rule 10b-5. Id. at 1389.

That statute provides:

No action shall be maintained to enforce any

liability .. . unless brought within one year after

the discovery of the untrue statement or the omis-

sion, 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 . . . more than three

years after the sale.

Short at 1390. In Short, the Seventh Circuit applied

this statute of limitations to the plaintiff in that case.

The Seventh Circuit specifically declined to determine

whether its decision should be applied retroactively to

other actions.

App. 28

All the parties in this action discuss Chevron Oil

v. Huson, 404 U.S. 97 (1971), in which the Supreme

Court established three factors to consider when

determining whether newly-created court law should

be applied retroactively: (1) whether the decision “es-

tablish[es] a new principle of law, either by overruling

clear past precedent on which litigants may have

relied ... or by deciding an issue of first impression

whose resolution was not clearly foreshadowed” (cita-

tions omitted); (2) “whether [the] retrospective opera-

tion will further or retard its [the new rule’s] opera-

tion” (citation omitted); and (3) whether the retroac-

tive application “could produce substantial inequitable

results” (citation omitted). Id. at 106-107.

While the Seventh Circuit has not yet addressed

the issue of whether the Short decision should be

applied retroactively, this court has applied Short ret-

roactively when no reliance on the formerly applicable

statute of limitations has been shown. See Wentzka v.

Gellman, 759 F. Supp. 484, 487 (E.D. Wis. 1991).

In a recent decision, the Supreme Court greatly

reduced, if not abolished, the impact of Chevron Oil

when it held that “it is error to refuse to apply a rule

of federal law retroactively after the case announcing

the rule has already done so.” See James B. Beam

Distilling Co. v. Georgia, 111 S. Ct. 2439, 2446 (June

20, 1991) (“Beam”). This decision was made one day

after the June 19, 1991 date established by the new

law. Beam clarifies, but does not create new law. Thus,

the then existing law in the Seventh Circuit must be

applied, which means that Beam directs this court to

apply the rule adopted by the Seventh Circuit in Short

to this action.

App. 29

This court notes that the policy reasons for a uni-

form statute of limitations are great. See, e.g., Short

at 1388-1389. Those policy considerations are even

stronger in a case such as this, where a class action

involves a number of people from different states.

Maieski

It is clear that the Majeski complaint, filed on

October 11, 1988, was timely filed with respect to the

three-year prong of the applicable statute of limita-

tions. The defendants argue that the Majeski class

filed its complaint more that one year after it knew or

should have known of the facts supporting its alleged

claim, which brings us to the question of whether the

prospectus and its accompanying reports did or should

have put the plaintiffs of notice of their claims.

In support of their proposition, the defendants

argue that the investors were repeatedly warned of the

risky nature of the BFI investment, beginning with the

prospectus and then repeated in the annual reports.”

The prospectus itself contained badges of riskiness.

The following quotes list some of these badges, with

this court’s emphasis.

THIS OFFERINC INVOLVES CERTAIN RISK

FACTORS. In this regard, investors should consid-

er that:

2 The court has attached a chart to this opinion to aid the reader

in following the progression of events relevant to this action.

App. 30

(1) Interests are being offered only to per-

sons who meet the suitability standards set forth

in this Prospectus. See “Who Should Invest.” ...

(4) The success of a motion picture is large-

ly dependent upon public taste, which cannot be

accurately anticipated, and other factors beyond

the control of the General Partner. Accordingly, it

is impossible for anyone to predict with a high

degree of certainty whether any particular picture

or group of pictures will be financially successful.

See “Risk Factors--The Motion Picture Industry

Generally.”

For further discussion of risks of the offering,

see “Risk Factors.”

Jan. 8, 1985 BFI Prospectus at 1 (emphasis added).*

An investment in the Partnership involves a

high ree of risk... . Accordingly, Interests will

be sold only to a person who represents in writin

nt n ] j nci n

Id. at 2 (Who Should Invest) (emphasis added).

The production, distribution and exploitation of

motion pictures is a complex and risky undertak-

ing and there can be no assurance that the Part-

nership’s investment objectives will be realized in

whole or in part.

° A copy of the prospectus can be found attached as Ex. H to the

defendants’ motion.

aie

App. 31

Id. at 4 (Partnership Investment Objectives) (emphasis

added).

The following briefly summarizes certain signi-

ficant risks relating to an investment in the Part-

nership. These risks are more completely dis-

cussed in the “Risk Factors” section of this Pro-

spectus and in the other sections of this Prospec-

tus referred to therein. The following summary is

qualified in its entirety by reference to such “Risk

Factors” section and to the other sections of this

Prospectus cited therein.

--An investment in the Partnership is sub-

ject to all of the risks associated with the mo-

tion picture industry. The success of any mo-

tion picture is largely dependent upon public

taste, which cannot be accurately anticipated.

In addition, the success of a motion picture is

dependent upon several factors, including local

promotion, the cooperation and acceptance of

exhibitors and the popularity of other motion

pictures being distributed at the time a picture

is released. The motion picture industry is

highly competitive and Partnership Pictures

will be competing with pictures from many

sources, including pictures produced and dis-

tributed by companies which are better capital-

ized and better established in the motion pic-

ture industry than are the Partnership and

New World.

--The Partnership’s arrangements with New

World reserve for New World a substantial

amount of discretion with respect to several

significant factors relating to the development,

aiiaiaseiieiianiaaaaitaiadieiiaeaele

App. 32

acquisition, production and distribution of

Partnership pictures. The Partnership will be

largely dependent upon the performance by

New World of its obligations under the Produc-

tion Agreement, including New World’s ability

to identify motion picture projects with poten-

tial for commercial appeal, to product commer-

cially viable pictures on budget and on sched-

ule and to exploit such pictures successfully.

--The Partnership will also be dependent

upon the overall financial performance of all

aspects of New World’s operations for the value

of the Preferred Stock and to generate suffi-

cient earnings (in excess of present earnings)

to make interest and principal payments when

due under the Note. Between accountings to

the Partnership (monthly, for an initial period,

and quarterly thereafter), amounts otherwise

le to the Partnershi ing]

with other funds belonging to New World or

other parties. In the event of the insolvency of

New World, the Partnership may be unable to

receive payments from New World as and

when they are due. In addition, the Partner-

ship has agreed with New World and its prin-

cipal lender to forego certain legal remedies

which would otherwise be available to it under

certain conditions.

--The Partnership intends to incur indebt-

edness in connection with the financing of

Distribution Expenses. The cost of this borrow-

ing may reduce profits or increase losses re-

sulting from the operations of the Partnership.

App. 33

--The General Partner will have sole re-

sponsibility for, and control of, all aspects of

the Partnership’s operations, and the Limited

Partners will be entirely dependent upon the

General Partner for the management of the

Partnership’s business. The Partnership is

newl rm h rating histor

. ; ONG

ee ene ava ha 2 hi

--The General Partners and New World will

be subject to various conflicts of interest in

connection with the transactions provided for

in the Production Agreement.

Id. at 6 (Risk Factors) (emphasis added).

An investment in the Partnership involves

a high degree of risk and should only be con-

sidered by persons who can afford to lose their

entire investment in the Partnership. In addi-

tion to the factors set forth elsewhere in the

Prospectus (see “Description of Motion Picture

Industry and New World Pictures” and “Busi-

ness of the Partnership”), investors should

carefully consider the following:

1. The Motion Picture Industry in General.

The Partnership’s activities are subject to all of

the risks associated with the motion picture

industry. Only a relatively small percentage of

: ' . mt

a .

their investment in pictures.

In view of the foregoing, it is impossible for

anyone to predict whether any particular pic-

App. 34

ture or group of pictures will be financially

successful and there can be no assurance that

the Partnership will recover its costs in con-

nection with the production, acquisition and

distribution of the Partnership Pictures.

2. Developments in the Motion Picture In-

dustry. It is not possible to predict accurately

the other effects that recent technological de-

velopments, and the developments that may

occur in the future, may have on the value of

rights in certain markets or media, the motion

picture industry in general or on the ability of

Partnership Pictures to generate revenues.

10. No Operating History. The Partnership

is —_ formed and has no-operating history

ment in me Partnership. The Partnership will

be competing with companies which are better

capitalized and better established in the mo-

tion picture industry.

Id. at 27-30 (Risk Factors) (emphasis added).

The defendants further argue that the annual

reports did or should have put the Majeski class on

notice that the BFI investment was not a conservative

investment as the plaintiffs allege they were told:

Based on New World’s estimates of ultimate

revenues from the 11 partnership pictures re-

leased through June 30, 1986, and the addi-

tional production and distribution costs the

partnership has committed to pay relating to

App. 35

these pictures, the general partner does not

its investment in these pictures.

Aug. 13, 1986 BFI Second Quarter 1986 Report to

Investors and Interim Financial Statements at 1

(Operations) (emphasis added).‘

Based on estimates provided by New World

regarding the ultimate revenues expected to be

generated from all markets for the eleven films

released through June 30, 1986, and the addi-

tional production and distribution costs to be

paid, the Partnership does not believe it will

recover its total investment in these films.

Id. at 8 (Management’s Discussion and Analysis,

Operations) (emphasis added).

Based on estimates provided by New World re-

garding the ultimate revenues expected to be

generated from all markets for the films re-

leased through September 30, 1986 [eighteen

total], and the additional production and dis-

tribution costs to be paid, the Partnership does

not believe it will recover its total investment

in these films.

* A copy of this report can be found attached as Ex. A to the

defendants’ motion. This court refers to the reports by the

typewritten dates on the reports. Apparently, there was often a

several month delay between the date and the mailing of the

reports to the investors.

App. 36

Nov. 13, 1986 BFI Third Quarter 1986 Interim Finan-

cial Statements at 8 (Management’s Discussion and

Analysis, Operations) (emphasis added).°

Based on estimates regarding the ultimate rev-

enues expected to be generated from all mar-

kets for the films released through December

31, 1986 [nineteen total], and the additional

production and distribution costs to be paid,

the Partnership does not believe it will recover

its total investment in these films.

Apr. 6, 1987 BFI 1986 Annual Report at 2 (Manage-

ment’s Discussion and Analysis of Financial Condition

and Results of Operations, Operations) (emphasis

added).®

All of the Partnership’s twenty-three motion

pictures were released as of March 31, 1987

and are generating cash receipts from domestic

and foreign theatrical exploitation, domestic

and foreign home video, pay television and

domestic television . . . . Based on estimates

regarding the ultimate revenues expected to be

generated from all markets for the films re-

leased through March 31, 1987 and the addi-

tional distribution costs to be paid, the Part-

investment in these films. . . . The estimated

ultimate revenues for the films as of March

* A copy of this report can be found attached as Ex. B to the

defendants’ motion.

° A copy of this report can be found attached as Ex. C to the

defendants’ motion.

iain earaeananiea neal

App. 37

31, 1987 total approximately $90,885,000 and

the ultimate production and distribution costs

total approximately $105,236,000, thus result-

ing in an overall net loss of approximately

$14,351,000, all of which has been recognized

through March 31, 1987.

May 14, 1987 BFI First Quarter 1987 Interim Finan-

cial Statement at 6 (Management’s Discussion and

Analysis, Operations) (emphasis added).’

All of the Partnership’s twenty-three motion

pictures were released as of June 30, 1987 and

are generating cash receipts from domestic and

foreign theatrical exploitation, domestic and

foreign home video, pay television and domes-

tic television. . . . Based on estimates regard-

ing the ultimate revenues expected to be gen-

erated from all markets for the films released

through June 30, 1987 and the additiona!

distribution costs to be paid, the Partnership

ment in these films. . . . The estimated ulti-

mate revenues for the films as of June 30,

1987 total approximately $87,000,000 and

the ultimate production and distribution costs

total approximately $104,482,000, thus result-

$16,982,000.

7 A copy of this report can be found attached as Ex. D to the

defendants’ motion. This report was mailed to the investors in

August 1987 (Jan. 6, 1992 Cody Aff. 7] 3-4).

App. 38

Aug. 18, 1987 BFI Second Quarter 1987 Interim

Financial Statement at 7 (Management’s Discussion

and Analysis, Operations) (emphasis added).®

The Majeski class argues that supplemental

literature portrayed the BFI investment as “safe” and

“conservative,” and that “[t]he ‘worst case scenario’ for

this investment was a return of capital. A probable

scenario would involve a doubling of money and a best

case scenario was described as ‘who knows.’ ” Dec. 20,

1991 Br. at 28; see also Feb. 24, 1989 Am. Compl.

{ 12. The class further argues that “[t]he investors

were entitled to assume that the Prospectus contained

truthful information . . . the investors believed they

were relying on information [contained in the supple-

mental literature] consistent with the Prospectus.” Id.

at 29-30.° Additionally, the reports were “not incon-

sistent with the offering literature, which had told

investors some movies may be losers but that modest

success by a few, or even by one movie, would make

the overall venture profitable, potentially very profit-

able, and that the income from a variety of sources for

* A copy of this report can be found attached as Ex. E to the

defendant’s motion.

* The Majeski class emphasizes the following language from the

prospectus: “Although the information contained in such [supple-

mental) literature does not conflict with any of the information

contained in this Prospectus .. . .” Jan. 8, 1985 BFI Prospectus

at 69 (Supplemental Literature). That sentence continues: “such

material does not purport to be complete, and should not be

considered as a part of this Prospectus . . . or as incorporated in

this Prospectus . . . or as forming the basis of the offering of the

Interests described herein.” Id.

App. 39

BFI would nevertheless produce a successful invest-

ment.” Id. at 5.

The Majeski class asserts that the first time the

class members were made aware of any fraudulent -

actions was in May-July 1988, when the investors

were told: “Based upon the performance of the Part-

nership’s films to date, as well as New World’s esti-

mates of ultimate revenues from exploitation of the

pictures and related expenses, we do not anticipate re-

ceiving sufficient net revenues to return all of inves-

tors’ original capital.” May 13, 1988 BFI 1987 Annual

Report (July 1988 Silverstein [Balcor Chairman and

CEO] letter) at 1.'° This discovery date would there-

fore defeat the defendants’ argument that Majeski was

not timely filed with respect to the one-year prong of

the statute of limitations. The Majeski class argues

that their position on discovery creates questions of

fact as to whether the complaint was filed within one

year after the violation was or should have been dis-

covered. -

The standard for determining when fraud should

have been discovered, however, is an objective one:

were there sufficient facts to put a reasonable person

on inquiry notice of possible fraud. DeBruyne v. Equi-

table Life Assurance Soc’y. of the U.S., 920 F.2d 457,

466 (7th Cir. 1990); Hupp v. Gray, 500 F.2d 993, 997

(7th Cir. 1974). This question may be resolved on

summary judgment. DeBruyne at 466.

10 A copy of this letter can be found attached as Ex. L. to the

Dec. 13, 1991 Kersten Aff.

App. 40

This court finds that there were sufficient facts

present in the prospectus itself, and supplemented by

the numerous reports which discussed the losses asso-

ciated with the released movies, to put the Majeski

class on notice that the BFI investment was risky and

not in conformance with the representations regarding

the investments’ returns which the class alleges were

made. There were numerous warnings, conspicuously

placed throughout the prospectus, that clearly and

specifically discussed the risky nature of the BFI

investment. The reports additionally told the investors

that the movies were not bringing in money. These

warnings, when viewed in light of the optimistic state-

ments regarding the BFI investment that the class

alleges were made, should have put a reasonable in-

vestor on notice that the BFI investment was not “safe

and conservative.” Thus, to meet the one-year prong of

the statute of limitations, the Majeski complaint had

to be filed by May 14, 1988.'' Because the Majeski

class knew or should have known of their alleged claim

more than one year before the Majeski complaint was

filed on October 11, 1988, the Majeski § 10(b) claim

must be dismissed as untimely. Thus, the Majeski

complaint has no remaining federal claims. The

Majeski complaint also included a number of state law

claims. On January 18, 1991, this court certified for

class treatment the Majeski state law claim for breach

of fiduciary duties. This court declined to certify for

class treatment the Majeski state law claims of fraud,

negligent misrepresentation, misrepresentation - strict

1! Or by August 1988, the last date by which all the plaintiffs

received the BFI First Quarter 1987 Interim Financial Statement.

See n.7, supra.

| ;

App. 41

liability, breach of contract and derivative action. The

dismissal of all the federal claims requires this court

to relinquish its pendent claim jurisdiction and there-

fore dismiss this entire action. United Mine Workers

v. Gibbs, 383 U.S. 715, 726 (1966).

The Majeski class also argues that they are not

barred by the statute of limitations because the de-

fendants actively concealed the fraud by lying about

the relationship between BFI and New World, citing

Davenport v. A.C. Davenport & Son Co., 903 F.2d 1139

(7th Cir. 1990) (overruled by Short regarding the

statute of limitations). The class argues that the de-

fendants failed to inform the investors that the Balcor

defendants and New World were involved in serious

disputes, which eventually led to a settlement agree-

ment in the summer of 1987.”

The defendants, however, point out that BFI’s Sec-

ond Quarter 1987 Interim Financial Statement dis-

closed the existence of the settlement agreement. In

addition, the settlement agreement is distinct from the

alleged “safe and conservative” portrayal of the BFI

investment, to which the plaintiffs should have discov-

ered the alleged fraud based on the reasons discussed

above.

The Majeski class also argues that the defendants

waived the statute of limitations argument by waiting

more than a year after the Short decision to bring

their motion. The defendants argue that their answers

to the amended complaint, given a few months after

12 A copy of the settlement agreement can be found attached as

Ex. N to the Dec. 13, 1991 Kersten Aff.

App. 42

the Short decision, stated the statute of limitations as

an affirmative defense. This court finds no reason to

conclude that the defendants waived this argument.

Eckstein

The absolute language of § 13 of the Securities Act

of 1933 applies to the Eckstein class, i.e. “[iJn no event

shali any such action be brought to enforce a liability

created ... more than-three years after the sale”

(emphasis added). In Short, the court noted that this

language “sets three years after the sale as the outer

limit for litigation.” Short at 1392. Because the last

possible day of receipt of the BFI prospectus and sale

of BFI investments was December 31, 1985, the last

day to file the Eckstein complaint within the three-

year prong of the statute of limitations was December

31, 1988. The Eckstein complaint was filed on Febru-

ary 10, 1989, and must therefore be dismissed as un-

timely.

The Eckstein class also argues that the defen-

dants’ fraudulent concealment, as distinct from equita-

ble tolling, applies to the statute of limitations. This

court finds, however, that the Seventh Circuit law as

expressed in Short imposes an absolute three-year

limitation on actions brought pursuant to § 10(b) and

Rule 10b-5.

IT IS THEREFORE ORDERED that the defen-

dants’ November 5, 1991 motion fer summary judg-

ment is GRANTED and the above-captioned actions

are DISMISSED.

aN te

App. 43

Dated at Milwaukee, Wisconsin, this 11th day of

March, 1992.

BY THE COURT:

/s/ John W. Reynolds

John W. Reynolds

Senior Judge

App. 44

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App. 45

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF WISCONSIN

JUDGMENT IN A CIVIL CASE

RALPH MAJESKI, et al.,

v. Case Number: 88-C-1079

John W. Reynolds, Judge

BALCOR ENTERTAINMENT

COMPANY, LTD., et al.

OQ} Jury Verdict. This action came before the Court and

a jury with the judicial officer named above presid-

ing. The issues have been tried and the jury has

rendered its verdict.

& Decision by Court. This action came to trial or hear-

ing before the Court with the judge named above

presiding. The issues have been tried or heard and a

decision has been rendered.

IT IS ORDERED AND ADJUDGED that the defend-

ant’s November 5, 1991 motion for summary judgment is

GRANTED and this action is hereby DISMISSED.

Date March 11, 1992

SOFRON B. NEDILSKY

Clerk

/s/ Rita Zvers

(By) Deputy Clerk

App. 46

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF WISCONSIN

JUDGMENT IN A CIVIL CASE

ROBERT ECKSTEIN, et al.,

V. Case Number: 89-C-1315

John W. Reynolds, Judge

BALCOR FILM INVESTORS, et al.

QO Jury Verdict. This action came before the Court and

a jury with the judicial officer named above presid-

ing. The issues have been tried and the jury has

rendered its verdict.

& Decision by Court. This action came to trial or hear-

ing before the Court with the judge named above

presiding. The issues have been tried or heard and a

decision has been rendered.

IT IS ORDERED AND ADJUDGED that the defend-

ant’s November 5, 1991 motion for summary judgment is

GRANTED and this action is hereby DISMISSED.

Date March 11, 1992

SOFRON B. NEDILSKY

Clerk

/s/ Rita Zvers

(By) Deputy Clerk

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.