The opinion of the court was delivered by: GERRY
As the trial date of this five-year old class action securities case nears, the court is presented with a flurry of last minute motions for summary judgment. To say that this matter has generated substantial motion practice during its long life would be an understatement: we note that the docket sheet compiled by the clerk of the court on this case runs over 30 pages and currently contains 937 entries. There is little need, therefore, for a lengthy recitation of the factual allegations and procedural history of this litigation. Suffice it for us to quote from an earlier letter opinion:
The plaintiff contends, inter alia, that the Preliminary Official Statement ("POS") and Official Statement ("OS") issued to prospective bondholders contained misrepresentations and omissions on which they ("the plaintiffs") relied to their injury when the company which received the bond proceeds, National Smelting of New Jersey ("NSNJ"), became insolvent and its assets virtually worthless.
Boiled down, the plaintiffs' central theory of liability is this: the OS and POS implied that much of the bond proceeds -- some $ 3.9 million of a total $ 6.6 million -- were to be used by NSNJ to purchase a lead smelting and refining plant in Pedricktown, New Jersey. (Prior to the purchase, the plant was owned by defendant N. L. Industries, Inc. ("NL").) Thus, prospective investors were led to believe that the plant, which was to secure the bonds, was worth at least $ 3.9 million. In fact, the plaintiffs charge, the plant was worth substantially less than $ 3.9 million, and the purchase price covered not only the acquisition of the plant but the relinquishing, by NL, of obligations owed NL by NSNJ's parent company National Smelting & Refining ("NSR") and by the Standard Metals Corporation ("SMC"), which owned 50% of NSR. The plaintiffs further claim that the OS failed to disclose information which tended to show that the plant was worth less than $ 3.9 million and additionally failed to describe the "other transactions" which were funded by the $ 3.9 million.
Letter op. 12/14/87, at 3-4.
After being pared down by motion practice and other developments,
the list of defendants currently include Boris Gresov, CEO and Chairman of the Board of Standard Metals Corporation and Director of NSR; Robert L. Puckett, CEO and Director of NSR and NSNJ; Edward L. Puckett, Vice President and Director of NSR and NSNJ; and Aaron Holman, Treasurer of SMC and Director of NSR.
Gresov has filed a third-party complaint against Arthur Young & Company who served as certified public accountants to NSNJ and independent outside auditors to NSR; and Michael Thomas, general partner of Standard Ventures Limited Partnership ("SVLP"), which (according to the OS) acted as an "acquisition advisor" on the Pedricktown deal.
Presently before us are motions for summary judgment on behalf of defendants Holman and the Pucketts. Also, third-party defendants Arthur Young & Company, Michael Thomas and Windels and Conroy seek summary judgment on the third-party complaints of Gresov and Holman, respectively. Finally, defendant Gresov and third-party defendants Conroy and Windels urge dismissal of Alston and Birds' claim for contribution against them which, by the terms of settlement between Alston & Bird and the plaintiff class, has been assigned to the plaintiffs.
Summary judgment may be granted only when the record shows that there is no genuine issue of material fact, and that the moving party is entitled to judgment as a matter of law. Hersh v. Allen Products Co., 789 F.2d 230, 232 (3d Cir. 1986).
A genuine issue of material fact is created where the non-moving party adduces sufficient evidence in opposition to a motion against him to support a reasonable jury verdict in his favor. Id. at 248, 211-212. In evaluating whether he has met his burden, the evidence is viewed in the light most favorable to the non-moving party. White v. Westinghouse Electric, 862 F.2d 56, 59 (3d Cir. 1988), (rehearing den. Jan. 5, 1989). The allegations of the non-moving party are accepted as true, and any conflicts are resolved in his favor. Id., citing Gans v. Mundy, 762 F.2d 338, 340 (3d Cir.), cert. denied, 474 U.S. 1010, 88 L. Ed. 2d 467, 106 S. Ct. 537 (1985). Inferences to be drawn from the evidence must be viewed in the light most favorable to the non-moving party. Id. However, when faced with a properly presented motion for summary judgment, the non-moving party is required "to go beyond the pleadings and by her own affidavits, or by the 'depositions, answers to interrogatories, and admissions on file,' designate 'specific facts showing that there is a genuine issue for trial.'" Celotex Corp. v. Catrett, 477 U.S. 317, 324, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986).
Similarly, with regard to the motions to dismiss, "the accepted rule [is] that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957).
With these principles in mind, we discuss the motions before us seriatim.
I. Defendant Holman's Motion for Summary Judgment
A. Statute of Limitations
Defendant Holman's first argument in support of his motion for summary judgment is based on the Third Circuit Court of Appeal's en banc decision in In re Data Access Systems Securities Litigation, 843 F.2d 1537 (3d Cir.) (en banc), cert. denied sub. nom, Vitriella v. I. Kahlowsky, 488 U.S. 849, 109 S. Ct. 131, 102 L. Ed. 2d 103 (1988). Abandoning the frustrating and tedious procedure of adopting the most analogous state statute of limitations period and applying it to claims under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), the Third Circuit held that "the proper period of limitations for a complaint charging violation of section 10(b) and Rule 10b-5 is one year after the plaintiff discovers the facts constituting the violation and in no event more than three years after such violation." Id. at 1550 (the "one-three rule").
Holman contends that the plaintiffs were aware of the facts upon which they based their claim against him at least as early as April 30, 1984, approximately 15 months before plaintiff's July 19, 1985 complaint naming Holman as a defendant. Therefore, if we apply Data Access retroactively, as Holman insists we must, the plaintiff class's claims are time-barred.
Our answer to the first question depends on the application of three factors articulated by the Supreme Court in Chevron Oil Co. v. Huson, 404 U.S. 97, 30 L. Ed. 2d 296, 92 S. Ct. 349 (1971). These factors are premised on a general assumption that judicial decisions should apply retroactively. To apply Data Access non-retroactively under the Chevron test:
(1) its holding must establish 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;
(2) we must weigh the merits and demerits of this case by looking to the history of the rule in dispute, its purpose and effect, and whether retrospective operation will further or retard the rule's operation; and
(3) retrospective application of Data Access must create the risk of producing substantially inequitable results.
Defendant Holman insists that our task is a simple one in light of the decision of a panel of the Third Circuit in Hill. Holman argues that Hill stands firmly for the proposition that Data Access did not overrule clear precedent upon which § 10(b) plaintiffs could have reasonably relied, and therefore we must find that the first Chevron factor counsels against non-retroactive application of Data Access here. Unfortunately for Holman, we do not read Hill as standing for such a broad proposition.
Hill involved an appeal by a group of Maryland resident plaintiffs whose § 10(b) claims were dismissed as time-barred. Referring to Delaware's borrowing statute, Senior District Judge Latchum had determined that Maryland law provided the applicable statute of limitations to be applied to the Maryland plaintiffs' claims, and that the Maryland Blue Sky Law was the Maryland state law most analogous to the plaintiff's § 10(b) claim.
Since the Maryland Blue Sky Law contained a 1-3 rule (like that later adopted in Data Access) and the transactions underlying the plaintiffs' claims occurred more than three years before the plaintiffs filed their action, their lawsuit was barred.
On appeal, the Maryland plaintiffs attacked the district court's application of the Maryland Blue Sky Law's statute of limitations, arguing that Delaware's general fraud law's limitations period should have been applied. The Third Circuit dealt with the appeal as primarily raising the question of whether in the context of that case, Data Access, which had been decided after the district court's decision, should be given retrospective application. Applying the three Chevron factors, the court answered affirmatively.
The court's decision turned on its analysis of the first and third Chevron factors, which are closely related. With respect to the first factor, the court noted that the state of the law on two dates was pertinent -- the date on which the plaintiffs were aware of the possibility that they had a claim, June 1979, and the date on which they filed their complaint in April of 1982, some two years and ten months later. Hill, 851 F.2d at 697. At each time, the court determined that the law of the circuit was uncertain as to the statute of limitations to be applied to § 10(b) claims. Id. at 697-698. In so ruling, however, the court stressed the differences between various judges on the circuit with regard to whether state general fraud laws or blue sky laws should provide the statute of limitations for particular § 10(b) claims. Id. at 697, discussing Roberts v. Magnetic Metals Co., 611 F.2d 450 (3d Cir. 1979) and Biggans v. Bache Halsey Stuart Shields, Inc., 638 F.2d 605 (3d Cir. 1980). As Data Access makes clear, the prior approach of looking for the most analogous state law statute of limitations was unwieldy and unpredictable, with various circuit and district judges placing different emphases on furthering states' policies of repose as opposed to the federal interests underlying § 10(b), and giving varying weight to whether a state's blue sky law provided a remedy for the behavior complained of by the plaintiff and whether the blue sky law was enacted to supplement rather than supplant existing common law remedies. It was this uncertainty as to which state statute would apply which was relevant to the Hill court's holding that the Maryland plaintiffs had no clear precedent upon which to rely in waiting to file their lawsuit, since the plaintiffs were complaining that the district court selected the wrong state statute of limitations. The law in this circuit was crystal clear prior to Data Access insofar as it indicated that district courts were bound to apply the state limitations law most analogous to a particular plaintiff's § 10(b) claim. But this could be of no solace to the Maryland plaintiffs in Hill because a potentially applicable state statute, in fact the one applied by the district court, was identical to the 1-3 rule articulated in Data Access.
In fact, the Hill court relied on this identity in finding that there was no inequity in applying Data Access retroactively, the third Chevron inquiry. Hill, 851 F.2d at 698. Indeed, given the existing case law, the court indicated that the district court's application of Maryland's Blue Sky Law "should not have been unexpected." Id. at 698.
Coupled with its assumption that resolution of the second Chevron factor -- whether retrospective operation would further or retard Data Access's ruling -- was neutral, the court's analysis of the first and third Chevron factors impelled it to give retroactive effect to Data Access. An application of the Chevron factors here, however, counsels a different outcome.
We start with the first factor. Though there perhaps was some uncertainty on April 30, 1984, the date on which the plaintiffs allegedly had the basic facts underlying their complaint against Holman, and July 19, 1985, the date of the amended complaint adding Holman as a defendant, as to whether the New Jersey Blue Sky Law's statute of limitations, N.J.S.A. 49:3-71(e) (1985), or the six-year limitation applicable to common law fraud actions in New Jersey, N.J.S.A. 2A:14-1, would apply to plaintiff's § 10(b) claims, there was absolutely no doubt that some state limitations period would be applied. Whatever differences might have existed among the judges of our circuit court, all agreed that their task, prior to Data Access, was to find and apply the most analogous state law statute of limitations. Hill, 851 F.2d at 695 (prior to Data Access, Third Circuit "decisional law required application of the most analogous state limitations statute comporting with the policy behind section 10(b) and Rule 10(b)(5)"). Data Access, 843 F.2d at 1541, 1553 (majority and dissenting opinions, respectively); Sharp v. Coopers & Lybrand, 649 F.2d 175, 191 (3d Cir. 1981), cert. denied, 455 U.S. 938, 71 L. Ed. 2d 648, 102 S. Ct. 1427 (1982); Biggans, 638 F.2d at 607, 611 (majority and dissenting opinions, respectively); Roberts v. Magnetic Metals Co., 611 F.2d at 452, 456, 461 (concurring opinions of Gibbons, J., Sloviter, J., and dissenting opinion of Seitz, J., respectively).
In the case sub judice, it appears that plaintiffs filed their complaint well within either of the two state limitations periods which would have been potentially applicable prior to Data Access. When this is the situation, we believe that Data Access is appropriately seen as overruling clear past precedent upon which plaintiffs could have reasonably relied. By timely filing a complaint which satisfied any potentially applicable state statute, plaintiffs relied on the only universally agreed upon principle prior to Data Access -- that the courts would apply the most analogous limitation period referenced by the law of the forum state.
Defendant Holman himself seems to have recognized this bottom-line certainty, since this is the first time he has raised a statute of limitations argument by way of motion practice. Moreover, he does not contend that New Jersey would apply the limitations law of another state to this dispute. As this is the record before us, we will not speculate on what other state's limitations law might be applicable to this class action, especially since none suggests itself. Sharp, 649 F.2d at 192, n.24.
In sum, we believe that the plaintiffs were entitled to rely upon the clear precedent of the circuit that an analogous state limitations period would be applied. As such, the first Chevron factor favors non-retrospective application of Data Access here. In so deciding, we acknowledge the existence of numerous decisions by other district courts in this circuit holding that there was no certain precedent upon which plaintiffs could reasonably rely in waiting to file a § 10(b) claim. To the extent that these cases involve plaintiffs who did not timely file under both of the potentially applicable state statutes of limitations, they are distinguishable on the same ground as Hill. See Prospect Purchasing Co. v. Weber, Lipshie & Co., 694 F. Supp. 1149, 1156 n.13 ("the issue of uncertainty [does] not concern the question of whether to apply the federal or state statute of limitations, but rather which state statute to apply"); McCarter v. Mitcham, 693 F. Supp. 349, 352 (W.D. Pa. 1988). To the extent that the decisions rested on an application of Hill without discussion of whether the uncertainty relevant in Hill was relevant in the case at bar, we respectfully decline to follow their approach. See, e.g., Schwartz v. Philadelphia National Bank, 701 F. Supp. 92 (E. D.Pa. 1988); Bradford-White Corp. v. Ernst & Whinney, rev'd Bradford-White Corp. v. Ernst & Whinney, 872 F.2d 1153 (3d Cir. April 21, 1989); Adelaar v. Lauxmont Farms, Inc., 695 F. Supp. 821 (M.D. Pa. 1988).
And, of course, not all district courts have given retroactive effect to Data Access. Gruber v. Price Waterhouse, 697 F. Supp. 859 (E.D. Pa. 1988); ITG, Inc. v. Price Waterhouse, 697 F. Supp. 867 (E.D. Pa. 1988); Newfield v. Shearson Lehman Bros., 699 F. Supp. 1124, 1126 (E.D. Pa. 1988) (refusing to apply Data Access retroactively, not because of an analysis of the Chevron factors, but because to do so would be "unfair").
Turning to the second Chevron factor -- whether retroactive application here will further or retard the rule articulated in Data Access -- there is no reason to believe that retroactive application would either further or hinder the new rule's function. Indeed, there is nothing before us to distinguish Hill's assumption of neutrality as to the second Chevron criteria. Hill, 851 F.2d at 698.
The final Chevron factor focuses on whether retrospective application would create the risk of producing substantially inequitable results. "In practice, this consideration overlaps with that of the first factor, in that it would be inequitable to give retrospective application to a shortening of the limitations period that altered established law upon which plaintiff could have reasonably relied." Fitzgerald v. Larson, 769 F.2d 160, 164 (3d Cir. 1985). Given our finding on the first Chevron factor, we can, without saying much more, indicate our belief that it would be inequitable to apply Data Access to bar the plaintiffs' claims against defendant Holman. This is especially so where defendant Holman moved for summary judgment on this ground over a year after the Third Circuit's decision in Data Access,6 and the plaintiffs have litigated this issue for five years at great expense and effort.
Therefore, finding that application of Chevron counsels non-retrospectivity, we answer our first question in the negative and deny defendants' summary judgment motion insofar as it rests on the application of Data Access to the case before us.
As to the second question, i.e., what point in time was the statute of limitations triggered with respect to plaintiffs' claims against Holman, the record before us is such that we cannot hazard an answer. Hence, even were we to give Data Access retrospective effect we would deny Holman's motion on this ground. Though Holman argues that April 30, 1984 is the date plaintiffs discovered the basis for their claim against Holman, the record evidence cited by Holman does not persuade us that this is so.
Nowhere in the exhibits pointed to by Holman is there a discussion of the all important "other transactions." While there was information available to plaintiffs on April 30, 1984 which suggested that the Pedricktown plant was worth less than $ 3.9 million, and that the costs of cleaning up the plant site, from an environmental standpoint, were large, we are unable to conclude that, as a matter of law, on April 30, 1984 a reasonably diligent plaintiff would have known there was a basis for a claim against Holman on this inchoate information,
though the evidence before us is such that we can perhaps say that the plaintiffs were on "inquiry notice" as of April 30, 1984, Gruber, 697 F. Supp. at 864. We will deny Holman's motion with respect to plaintiffs' § 20(a) Exchange Act claim and plaintiffs' § 15 Securities Act claim, since Holman's attempt is premised on our finding, as a matter of law, that April 30, 1984 has the significance he assigns to it. Defendant Holman, of course, remains free to and should submit proposed jury interrogatories so that the essentially factual determination of when the statute of limitations began to run on plaintiffs' claims may be made. And plaintiffs are warned that they must be prepared to do more than say that they did not possess the facts upon which their claim was based on a particular date; rather, they will be expected to produce evidence of their efforts at uncovering the alleged fraud and of the date on which they discovered the evidence underlying the complaint. Defendant Gresov's tag-along statute of limitations argument, asserted by way of letter, a charming but improper way to submit a motion, is denied.
B. § 10(b) Primary Liability
Defendant Holman also moves for summary judgment on the ground that the plaintiffs have failed to produce evidence sufficient to create a material dispute of fact with respect to whether Holman had the requisite state of mind to trigger § 10(b) liability. Under § 10(b), plaintiffs bear the burden, at trial, of demonstrating that the defendants acted with scienter, "a mental state embracing intent to deceive, manipulate or defraud." Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976). Within the Third Circuit, the scienter requirement may be satisfied by a showing of recklessness. See e.g., Eisenberg v. Gagnon, 766 F.2d 770, 776 (3d Cir.), cert. denied, Weinstein v. Eisenberg, 474 U.S. 946, 88 L. Ed. 2d 290, 106 S. Ct. 343, 106 S. Ct. 342 (1985); Healey v. Catalyst Recovery of Pennsylvania, Inc., 616 F.2d 641, 649 (3d Cir. 1980); MacLean v. Alexander, 599 F.2d 1190, 1197-98 (3d Cir. 1979); Coleco Industries, Inc. v. Berman, 567 F.2d 569, 574 (3d Cir. 1977), cert. denied, 439 U.S. 998, 58 L. Ed. 2d 671, 99 S. Ct. 601 (1978). A jury may find that a defendant in the § 10(b) context has acted recklessly if his conduct constitutes "an extreme departure from the standards of ordinary care, . . . which presents a danger of misleading . . . that is either known to the defendant or is so obvious that the actor must have been aware of it." Healey, 616 F.2d at 649, quoting Sundstrand Corp. v. Sun Chemical Corp., 553 F.2d 1033, 1045 (7th Cir.) cert. denied, 434 U.S. 875, 54 L. Ed. 2d 155, 98 S. Ct. 224 (1977). This standard's application is troublesome because in the § 10(b) context negligence, gross negligence and recklessness do not bleed into one another. Rather, recklessness in this context requires conduct "relatively close to intentional conduct." Healey, 616 F.2d at 649; MacLean, 599 F.2d at 1198 ("negligence -- whether gross, grave or inexcusable -- cannot serve as a substitute for scienter."); Sundstrand, 553 F.2d at 1045 ("recklessness should be viewed as the functional equivalent of intent").
As we have previously noted, "summary judgment is generally inappropriate for issues of state of mind, knowledge and intent," Letter Op., 12/14/87 at 10; however, Holman insists that the record before us is such that summary judgment in his favor is mandated. And as we have recently noted, "recent precedent suggests that summary judgment can be granted if plaintiff fails to present credible evidence of scienter." Laven v. Flanagan, 695 F. Supp. 800, 812 (D. N.J. 1988) (citing cases). "Plaintiffs must do more than simply attack defendants' affidavits as self-serving and argue that a jury could choose to disbelieve them without offering any evidence that would provide a basis for such belief." Id. (quotes omitted).
Holman primarily relies on his own certification as the factual basis for his motion, and the following is asserted therein. When the bonds were issued on February 22, 1983, Holman was a Director of Standard Metals, NSR and NSNJ. Holman Cert., para. 2. Holman also was in-house counsel to and Secretary-Treasurer of Standard Metals. Id.
Holman insists that his role in the purchase of the Pedricktown plant (and the bond issue in particular) was limited. In late 1982 and 1983, Holman knew that NSR was planning to buy the Pedricktown plant, and that it would do so by forming NSNJ, which would be wholly owned by NSR. Id. para. 7. Holman did not, however, participate in the negotiations among NSR, NL and Standard Metals leading to the sale. Id. Later, Holman learned that the acquisition of the plant would be financed by a $ 6,000,000 bond issue but insists that he "did not initiate the concept of the bond financing or participate in any of the negotiations or structuring which led up to the financing." Id. para. 8. Holman alleges that he had no knowledge of any misrepresentations and/or omissions in the Official Statement, did not ...