Lawrence v. CohnLawrence v. Cohn
MEMORANDUM OPINION AND ORDER
This case is before the Court on plaintiffs’ motion under
Plaintiffs are beneficiaries under the will of the late Sylvan Lawrence, who died in December, 1981. The defendant, Seymour Cohn, Lawrence’s brother, is the sole executor of the Lawrence estate (the “Estate”) and a trustee of a residuary trust created by the will.
Plaintiffs allege that Cohn committed various acts of fraud and breached his fiduciary duty in connection with his duties as trustee of the Estate. These parties have been litigating the matter in the Surrogate’s Court (Hon. Renee R. Roth) since 1983.
In 1990, plaintiffs filed this federal action. The amended сomplaint charges Cohn with violations of § 10(b) of the Securities and Exchange Act of 1934,
They seek imposition of a constructive trust on certain partnership interests acquired by defendant; a conveyance of those interests to the plaintiffs and/or the Estate; an aсcounting; compensatory damages (trebled under RICO); punitive damages; attorneys fees; and costs.
Defendant moved to dismiss the amended complaint on a number of grounds. By order dated November 12, 1991, the Court dismissed the 10b-5 claim as untimely under the .statute of limitations, and declined to assert jurisdiction over the remaining claims, including the RICO claim, as they were being fully litigated in the state court. The Clerk of the Court entered an order of Judgment dismissing the case on November 25, 1991.
Plaintiffs noticed their appeal to the Second Circuit on December 12, 1991. A subsequent Order- to Show Cause for Vacatur of Judgment and Order pursuant to
Upon the advice of staff counsel to the Sécond Circuit, plaintiffs wrote this Court on January 14, 1991, asking whether this Court would consider plaintiffs’
By order dated February 4, 1992, the Second Circuit remanded the case to this Court for disposition of the
BACKGROUND
The facts of the case are set forth more fully in the Court’s November 12, 1991 opinion,
*193 Prior to his death, Lawrence and defendant Cohn were the sole general partners of a limited partnership known as Ninеty-Five Wall Street Company (the “Limited Partnership”). The Limited Partnership’s principal asset was an office building located at 95 Wall Street. Lawrence and Cohn owned a 60% interest as general partners; the other 40% was held by a number of individuals as limited partners.
The Limited Partnership agreement provided that upon the death, retirement, or incоmpetency of one of the general partners (Lawrence or Cohn), the partnership would continue, with the remaining partner as the sole general partner with a 30% interest. The retired, deceased or incompetent partner (or his legal representatives) would become a limited partner with a 30% interest. Limited Partnershiр Agreement, ¶ 9. Accordingly, upon Lawrence’s death, his interest as a general partner was automatically converted into a 30% limited partnership in favor of his Estate; Cohn became the sole general partner.
The Limited Partnership agreement further provided that in the event one of the limited partners wished to sell his interest, the other limited partners had the right of first refusal. (If more than one limited partner wished to partake in the purchase, they would do so in proportion to their respective interests.) If the limited partners did not wish to purchase the interest, the General Partners had the next right of refusal. Limited Partnership Agreement ¶ 8(b).
On May 23,1983, defendant Cohn executed an аgreement with the limited partners (exclusive of Lawrence’s Estate) for the purchase of their partnership interests, which accounted for a 40% interest. On August 18, 1983, Cohn commenced a proceeding in the Surrogate’s Court seeking that court's advice and direction (the “Advice and Direction Proceeding”) regarding who, as between him and the Estаte, should own the 40% limited partnership interests acquired in his buy-out of the limited partners. In connection with that proceeding, on January 6, 1984, Cohn submitted an affidavit outlining his opinion of the value of the limited partnership interests, and the wisdom of the Estate purchasing all or part of the interests up for sale.
On or about May 17, 1984, Cohn and the plaintiffs completed the signing of a settlement agreement providing for the disposition of the 40% limited partnership interest; one-half would be acquired by the Estate and one-half would be acquired by Cohn individu7 ally. This agreement was approved by the Surrogate on or about May 18, 1984.
Plaintiffs essentially allege that prior to the May 1984 agreement, Cohn fraudulently concealed from them the true facts regarding the status of negotiations with lessees of space at 95 Wall Street. The effect of those fraudulent omissions was to make the building appear less valuable than it was. Plaintiffs alleged that had Cohn timely informed them of the true facts,
plaintiffs would not have signed the Purchase and Sale Agreement — in which the Estаte relinquished and conveyed to [Cohn] individually a portion of its right to purchase the entire 40 percent limited partnership interests acquired pursuant to the Limited Partners Buy-Out Agreement — and would instead have caused the Estate to purchase the entire amount of such interest. Complaint at ¶ 92.
Additionally, plaintiffs allege other wrongdoing on the рart of Cohn beginning soon after Lawrence’s death. They allege that Cohn seeks to retain control of the Estate so that he may continue to pillage it.
Needless to say, these issues have been the subject of litigation in the Surrogate’s Court for almost a decade.
The November 12, 1991 opinion of this Court granted defendant’s motion to dismiss, finding thаt plaintiffs’ federal securities claims were time-barred in light of the recent Supreme Court decision in
Lampf Pleva, Lipkind, Prupis & Petigrow v. Gilbertson,
— U.S. -,
The issue now pending before this Court is whether subsequent developments in the law make it appropriate to vacate the Court’s November 12th order. That decision depends on what statute of limitations governs plaintiffs’ § 10(b) claims.
DISCUSSION
Section 10(b) of the 1934 Act does not provide an explicit statute of limitаtions. At the time plaintiffs commenced this lawsuit on Api*il 9, 1990, most courts in this Circuit adhered to the principle that the statute of limitations should be “borrowed” from the most analogous state statute; here, that mandated application of New York’s “two year/six year” statute of limitations for fraud actions. 1
On December 8, 1990, the Second Circuit handed down its dеcision in
Ceres Partners v. GEL Associates,
That question was not answered until 1991 when the Circuit issued its decision in
Welch v. Cadre Capital,
Welch I
was the law in the Second Circuit until June 20,1991, when the Supreme Court announced decisions in
Lampf
and
James B. Beam Distilling Co. v. Georgia,
— U.S. -,
Thereafter, the Supreme Court vacated and remanded
Welch I
for reconsideration of the retroactivity issue in light of the holdings of
Lampf
and
Jim Beam. See Northwest Savings Bank, PaSA v. Welch,
— U.S. -,
Welch II
was the state of the law in the Second Circuit until December 19, 1991, when Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991 (codified at Securities and Exchange Act of 1934, § 27A,
(a) EFFECT ON PENDING CAUSES OF ACTION — The limitation period for any private civil action implied under Section 10(b) of this Act that was commenced on or before June 19, 1991, shall be the limitation period provided by the laws application in the jurisdiction, in- *195 eluding principles of retroactivity, as such laws existed on June 19, 1991. 2
(b) EFFECT OF DISMISSED CAUSES OF ACTION — Any private civil action implied under Section 10(b) of this Act that was commenced on or before June 19, 1991—
(1) which was dismissed as time-barred subsequent to June 19, 1991, and
(2) which would have been timely filed under the limitation period provided by the laws applicable in the jurisdiction, including principles of retroactivity, as such laws existed on June 19, 1991,
shall be reinstated on motion by the plaintiff not later than 60 days after the date of the enactment of this section.
Plaintiffs claim that the order dismissing their complaint should be vacated under Section 27A. They assert, and it appears undisputed, that they have fulfilled the procedural requirements (filing a motion within 60 days of the date of enactment), and are thus entitled to an order vacating the dismissal.
Defendant оpposes plaintiffs’ motion on three grounds. He argues that (1) application of § 27A does not reinstate plaintiffs’ claim; (2) § 27A is unconstitutional; and (3) even if the court reinstates plaintiffs’ § 10(b) claim, it should not reinstate the RICO and pendent state claims that were also dismissed. The Court will address each argument in turn.
1. Application of Section 27A
The language of Section 27A requires reinstatement of claims that were dismissed after June 19, 1991 as time-barred if they would have been timely filed under the law of the jurisdiction as it existed on June 19,1991. There is no dispute that plaintiffs’ § 10(b) claim was dismissed as time-barred after June 19: the issue in dispute concerns the state of the law in this circuit prior to June 19, 1991.
Defendant claims that the one year/three year rule set forth in Lampf and Ceres was the law of the Circuit in June 1991. See Defendant’s Memorandum in Opposition, at 21. Defendant reaches this position by reasoning that Jim Beam did not create new law, but merely characterized what the law actually was. As defendant asserts, the Supreme Court does not change laws, but articulates “laws” that already exist. Hence, when the Second Circuit came down with its decision in Ceres, the retroactivity issue was clear: the Court should have applied the decision retroactively, as the Supreme Court explained in Jim Beam. Since Welch I was wrongly decided, the way the law should have been in the Second Circuit in the period leading up to June 19,1991 was a retroactive application of Ceres.
Defendant’s position, however, has been rejеcted by the Second Circuit. In
Henley v. Slone,
“Chevron recognized for civil actions a narrow exception to the general presumption favoring application of the law prevailing at the time of appeal. To qualify for purely prospective application, a decision must establish a nеw 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. A court should then ‘weigh’ in each case whether retroactive application would conflict with the purposes of the rule and whether it wоuld produce inequitable results.” Welch I,923 F.2d at 993 , citing and quoting Chevron,404 U.S. at 106-07 ,92 S.Ct. at 355 (citations omitted).
Welch I
read
Chevron
to require satisfaction of the first factor (establishment of a new
*196
principle of law), which would allow the court to proceed to a balancing test employing the second and third factors.
Welch I,
Chevron’s first factor is whether the decision “establishes 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.” Id,., at 993. In Welch I, the Second Circuit held that Ceres met that first requirement, reasoning that the one year/three year rule was a distinctive changе in practice in the Circuit. I am bound by that holding.
As to
Chevron’s
second factor, whether the application of the new statute of limitations would further the purposes behind the rule,
Welch I
concluded that the “application of a shorter limitations period not yet in existence at the time the suit was commenced clearly does not further either of thе competing interests [of deterrence and repose].”
Welch I,
Balancing into the equation the third Chevron factor, whether the equities favor the application of the old rule, I think that plaintiffs’ make a strong case for application of the old rule, since the new rule would bar their claim. Plaintiffs did not delay in any attempt to maneuver a procedural advantage. Nor has defendant alleged that the timing of plaintiffs’ federal filing has рrejudiced him in any way.
Accordingly, I conclude that taking into account the factors set forth in Chevron, the retroactive application of the Ceres rule is not required in these circumstances. Plaintiffs should have the benefit of the application of the pre-Ceres rule.
II. Constitutionality of Section 27A
Defendant’s second argument is that Section 27A is unconstitutional, as it violates the Separation of Powers Clause of Article III, the Supremacy Clause of Article VI, and the Equal Protection and Due Process Clauses of the Fifth Amendment.
The Second Circuit has not yet addressed this question. It has declined to do so until it is squarely presented with a case raising that issue.
Henley,
The district courts in this circuit that have been confronted with the issue have unanimously found the statute constitutional.
See Adler v. Berg Harmon Associates,
Although other district courts have reached a different conclusion as to constitutionality,
see In re Brichard Sec. Litigation,
III. Reinstatement of Plaintiffs’ Claims
Defendant argues that even if the Court finds that Section 27A constitutionally requires reinstatement of plaintiffs’ § 10(b) сlaims, the Court should not reinstate plaintiffs’ RICO and common law causes of action, which the court dismissed on November 12, 1991, on the grounds of abstention. He also contends that the § 10(b) claim is time- *197 barred even under the application of New York’s “two year/six year” rule.
Defendant asks this Court to go beyond the purposes of the limited remand from the Sеcond Circuit. The Second Circuit remanded this ease solely so this Court could decide whether or not to vacate its November 12, 1991 order. I have concluded that plaintiffs’ motion to vacate should be granted for the reasons set forth above. I will not consider any of defendant’s other contentions until they are properly before this Court.
ORDER
The Clerk of the Court is directed to vacate the Court’s order of November 12,1991. The parties are invited to attend a status conference on Friday, March 19,1993 at 3:00 p.m. in Room 307 of the United States Courthouse. If any party wishes to make a further substantive motion, it will have the opportunity to do so after that conference.
It is SO ORDERED.
Notes
. New York C.P.L.R. §§ 213(9) and 203(f) require that an action for fraud be brought within six years of the commission of the fraud, or within two years of the discovery of the fraud, whichever period is longer.
See Triangle Underwriters, Inc. v. Honeywell, Inc.,
. June 19, 1991 is the day before the Lampf and Jim Beam decisions were handed down by the Supreme Court.