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PROSPECT PURCHASING CO. v. WEBER

September 7, 1988

PROSPECT PURCHASING CO., INC., Plaintiff,
v.
WEBER, LIPSHIE & CO., Defendant; WEBER, LIPSHIE & CO., Third-Party Plaintiff, v. PROSPECT INDUSTRIES CORP., Third-Party Defendant



The opinion of the court was delivered by: WOLIN

 ALFRED M. WOLIN, UNITED STATES DISTRICT JUDGE.

 This opinion supplements and modifies this Court's opinion delivered on the record following oral argument for defendant's motion to dismiss on July 25, 1988. The issue facing the Court is whether plaintiff's federal securities claims brought pursuant to section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission, 17 C.F.R. § 240.10b-5, are barred by the federal one-year statute of limitations borrowed pursuant to the Third Circuit's opinion in In re Data Access Systems Securities Litigation, 843 F.2d 1537, Fed.Sec.L.Rptr. (CCH) para. 93, 704 (3d Cir. 1988) (in banc). For the following reasons, this Court finds that retroactive application of the Data Access opinion appropriately bars plaintiff's federal securities action. However, this Court will not dismiss plaintiff's pendent state law negligence claims.

 I. BACKGROUND

 The facts of this case, although complicated, may be greatly simplified for purposes of this motion. Prospect Industries Corp. (the "Company"), the third-party defendant herein, was involved in the manufacture and sale of steel drums and pails. The principal shareholders of the Company (approximately 17% of which has been publicly owned since 1969) prior to the transaction which is the subject of this lawsuit, were Milton Gold and his brother Sol Gold (the "Golds"), and Karel Sokoloff and his brother Abraham Sokoloff (the "Sokoloffs").

 On September 3, 1982, the brothers Daniel and Nathan Milikowsky consummated a deal whereby the recently created Prospect Purchasing Co., Inc. ("Purchasing Co."), the plaintiff herein, would acquire the 83% of the Company's stock which was owned by the Golds and the Sokoloffs. *fn1" Upon acquisition of the Company, it appears that the Milikowskys and William Kane, whom the Milikowskys had just installed as President of the Company, quickly discovered that certain aspects of the Company appeared to have been overvalued. *fn2" Upon transmittal of the suspected fraud to the Golds and Sokoloffs during a meeting between the buyers and sellers on or about December 9, 1982, the terms of the deal were amended effective December 28, 1982. *fn3"

 In spite of mounting losses, the Milikowskys continued to operate the Company throughout 1983. In 1984, however, Prospect Industries Co. was liquidated piecemeal. Finally, in 1985, the Milikowskys attempted to sell the Company's manufacturing plant. Whereupon in the Spring of 1985, the Milikowskys discovered that the plant's grounds were contaminated with waste products and that the New Jersey Department of Environmental Protection would prohibit the sale of the plant until the site was cleaned up.

 In August of 1985, the Milikowskys, on behalf of Jordan International Co., Inc. and Purchasing Co., caused this action to be filed in federal district court. The complaint contained allegations of negligence, securities fraud and aiding and abetting of securities fraud by Weber, Lipshie in conducting an audit of the 1981 financial statements of the Company. Jurisdiction was alleged to exist by virtue of diversity of citizenship, section 10(b) of the 1934 Securities and Exchange Act and principles of pendent jurisdiction.

 In October 1987, plaintiffs Purchasing Co. and Jordan sought leave to amend the complaint to include the same federal and common law allegations with respect to the 1979 and 1980 audits of the Company's financial statements performed by Weber, Lipshie. *fn4" Weber, Lipshie opposed the motion on several grounds, including the ground that Jordan was not a proper party to this action. In a decision dated November 4, 1987, Magistrate Hedges granted Purchasing Co.'s motion to amend the complaint, extended the time within which to complete pre-trial discovery and dismissed Jordan from the action. This order was appealed to Judge Lechner who, on December 14, 1987, affirmed the order with respect to these issues.

 Defendant has now moved to dismiss the federal securities fraud count of the amended complaint on the grounds that it is time-barred by the applicable statute of limitations as a result of the Third Circuit's in banc opinion in In re Data Access Systems Securities Litigation.5 In response, plaintiff does not contest that if the Data Access one-year rule is applied to its federal claim THEN it would be time barred. Instead, plaintiff contends that the Data Access rule should not be applied retroactively to this action.

 A. Retroactivity - The Chevron Oil Test

 In its simplest form, the question which remains before this Court is whether the Third Circuit's Data Access opinion should be applied retroactively in light of the three-part test articulated by the Supreme Court in Chevron Oil Co. v. Huson, 404 U.S. 97, 92 S. Ct. 349, 30 L. Ed. 2d 296 (1971):

 
In our cases dealing with the nonretroactivity question, we have generally considered three separate factors. First, the decision to be applied nonretroactively must establish a new principle of law, either by overruling clear past precedent on which litigants may have relied [citation omitted], or by deciding an issue of first impression whose resolution was not clearly foreshadowed [citation omitted]. Second, it has stressed that "we must . . . weigh the merits and demerits in each case by looking to the prior history of the rule in question, its purpose and effect, and whether retrospective operation will further or retard its operation. " [Citation omitted]. Finally, we have weighed the inequity imposed by retroactive application, for "where a decision of this Court could produce substantial inequitable results if applied retroactively, there is ample basis in our cases for avoiding the 'injustice or hardship ' by a holding of nonretroactivity. " [Citation omitted].

 404 U.S. at 107-108, 92 S. Ct. at 355.

 The application of the Chevron Oil retroactivity test with respect to Data Access is further facilitated by the Third Circuit's recent opinion in Hill v. The Equitable Trust Company, 851 F.2d 691 (3d Cir. 1988). As a threshold matter, the Equitable Trust court expressly stated that the majority of the Third Circuit in Data Access deferred the question of retroactivity:

 
Although the judges of this court were unanimous that this federal statute of limitations should apply in section 10(b) and Rule 10b-5 cases, the majority [in Data Access ] specifically declined to decide whether its holding would be retroactive.

 Equitable Trust, at 695. But see Data Access 843 F.2d at 1552 (Seitz, J. dissenting) (under Chevron Oil, borrowed federal statute of limitation should be applied prospectively only). Although the Equitable Trust court concluded that "in the present litigation, at least two of the three Chevron factors counsel in favor of the general presumption of retroactivity and against the uncommon exception of prospectivity[,]" ...


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