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GILMORE v. BERG

December 14, 1992

ROBERT J. GILMORE and NOAH LIFF, Plaintiffs
v.
JOHN GORDON BERG, HAROLD M. WINSTON, STEPHEN T. MARCOE, JR., ROSALIND SCHNEIDER, MARTIN R. BARKER, HOWARD GREEN, GILBERT TUCKER, COOPER RIVER OFFICE BUILDING ASSOCIATES, AMERICAN REAL ESTATE ASSOCIATES, INC., MANAGEMENT OF COOPER RIVER, INC., OFFICE BUILDINGS OF COOPER RIVER, INC., PAT CHARLES, CHARLES STURM & MASTERS and NORMAN S. COHEN, Defendants



The opinion of the court was delivered by: STANLEY S. BROTMAN

BROTMAN, District Judge:

 Presently before the Court is the motion for summary judgment of Defendants John Gordon Berg; Cooper River Office Building Associates ("CROBA"); American Real Estate Associates, Inc. ("AREA"); Management of Cooper River, Inc. ("MCR"); Office Buildings of Cooper River, Inc. ("OBCR"); Norman S. Cohen; and Martin R. Barker. For the reasons set forth below, Defendants' motion will be granted in part and denied in part.

 BACKGROUND

 In December of 1980 Plaintiffs purchased unregistered securities in CROBA, a New Jersey limited partnership. According to Plaintiffs' Amended Complaint, on December 13, 1980 OBCR, a Nevada corporation owned by Defendants Berg, Howard Green, and Gilbert Tucker, paid $ 2,500,000 for two New Jersey office buildings and the land on which they stand. On the same day, OBCR sold the two buildings for $ 4,770,000 and leased the underlying land for a seventeen-year term to Defendant MCR. Also on that same day, MCR sold the two buildings and assigned the lease to Defendant AREA for $ 5,300,000. MCR is a wholly-owned subsidiary of AREA, a company controlled by Berg. Plaintiffs claim that the December 13, 1980 transactions constituted an illegal scheme concocted by the Defendants to impair the value of their investment. Specifically, Plaintiffs complain that the Defendants failed to disclose in their offering memorandum the "step-up" in the purchase of the two buildings--that is, the difference between the $ 2,500,000 paid for the buildings by OBCR and the $ 5,300,000 ultimately paid by AREA. Plaintiffs allege that the Defendants' actions diminished the likelihood they would realize desired profits and appreciation, caused an inflated basis on the property for federal income tax purposes, and misled them into believing they would be afforded substantial depreciation and interest deductions.

 Plaintiffs commenced this action in November of 1986, claiming that as a result of the Defendants' alleged fraudulent misrepresentations and omissions, they lost profits, lost tax deductions and credits, and incurred substantial interest and penalties. Plaintiffs claim that Defendants violated section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, promulgated thereunder; sections 1962(a)-(d) of the Racketeer Influenced and Corrupt Organizations Act (RICO); and numerous state common law and statutory provisions.

 In their present motion for summary judgment, Defendants argue, among other things, that Plaintiffs' claims under section 10(b) and Rule 10b-5 are untimely. This issue, which the Court has already addressed several times in this case, has proven to be unusually problematic. The issue first arose in June of 1987 when the Court denied a motion by Defendants to dismiss Plaintiffs' 10b-5 claims. See Gilmore v. Berg, No. 86-4694, slip op. at 8 (D.N.J. June 24 1987). Based on the law at that time, the Court followed the usual rule that when congress has failed to provide a statute of limitations for a federal claim, a court must adopt the limitation period from the most analogous law of the forum state. Wilson v. Garcia, 471 U.S. 261, 266-67, 85 L. Ed. 2d 254, 105 S. Ct. 1938 (1985). Accordingly, based on an analogy to the limitation period prescribed by the New Jersey Uniform Securities Act, N.J. Stat. Ann. ยง 49:3-71, the Court ruled that the applicable limitation period was two years from the time Plaintiffs knew or should have known of the allegedly unlawful conduct of the Defendants.

 The issue what limitation period applies to Plaintiffs' 10b-5 claims was next addressed in April of 1991. See Gilmore v. Berg, 761 F. Supp. 358 (D.N.J. 1991). Several Defendants had moved for summary judgment, arguing that Plaintiffs' claims were barred under the rule established by the Court of Appeals for the Third Circuit in In re Data Access Systems Securities Litigation, 843 F.2d 1537 (3d Cir.), cert. denied sub nom. Vitiello v. I. Kahlowsky & Co., 488 U.S. 849, 102 L. Ed. 2d 103, 109 S. Ct. 131 (1988). In Data Access the Court of Appeals held that the limitation period applicable to claims under Rule 10b-5 should be measured by a uniform federal standard rather than by the most analogous state statute of limitations. The standard established by the Data Access court was based on the one-year/three-year limitation period applicable to several express causes of action contained in the Securities Exchange Act. Specifically, the Court of Appeals held that an action under Rule 10b-5 must be commenced one year after the plaintiff discovers the facts constituting the violation, and in no event more than three years after such violation. Because in this case the conduct of which Plaintiffs complain occurred in 1980, and Plaintiffs did not commence this action until 1986, a straightforward application of the Data Access rule would have required the dismissal of Plaintiffs' claims. But Plaintiffs argued against a straightforward application, contending that the Data Access rule should operate only prospectively--a question the Data Access court expressly declined to decide.

 Consequently, the Court considered whether the limitation period established in Data Access should be applied retroactively in this case to bar Plaintiffs' 10b-5 claims. See Gilmore v. Berg, 761 F. Supp. 358, 364-67 (D.N.J. 1991). Under the law in this Circuit as it existed at that time, *fn1" the question whether Data Access should be given retroactive effect required a case-by-case analysts under the three-part test set forth by the Supreme court in Chevron Oil Co. v. Huson, 404 U.S. 97, 30 L. Ed. 2d 296, 92 S. Ct. 349 (1971). In its decisions applying the Chevron Oil test to determine whether Data Access should be applied retroactively, *fn2" the Third Circuit considered three factors: (1) whether Data Access overruled established precedent upon which the plaintiff may have relied, see, e.g., Gruber v. Price Waterhouse, 911 F.2d 960, 965 (3d Cir. 1990); (2) whether retroactive application of the new rule would further or retard the rule; and (3) whether retroactive application would be inequitable.

  Plaintiffs failed to satisfy the first factor: No clear precedent on the applicable limitation period for 10b-5 actions existed in this Circuit at the time Data Access was decided or at the time Plaintiffs' cause of action arose in 1980. See McCarter v. Mitcham, 883 F.2d 196, 203 (3d Cir. 1989). Moreover, because Plaintiffs conceded they were unaware of the operative facts underlying their cause of action until 1986--at least twenty-eight months after the three-year absolute bar of Data Access had passed--they could not possibly have relied on a longer limitation period. The second factor was neutral. See id. at 204. However, Plaintiffs satisfied the third factor. Because Plaintiffs had moved forward through over four years of litigation on the joint understanding of the parties that New Jersey's two-year discovery rule applied, the Court reasoned that it would have been unfair to apply Data Access retroactively to dismiss their claims. As a result, Defendants' motion for summary judgment on Plaintiffs' 10b-5 claims was denied.

 The issue whether Plaintiffs' 10b-5 claims are untimely arose once again in July of 1991, when Defendants filed a motion for reconsideration of the Court's April 5, 1991 decision refusing to apply Data Access retroactively. Defendants argued that the Supreme Court's decision in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 115 L. Ed. 2d 321, 111 S. Ct. 2773 (1991), rendered on June 20, 1991, required that a one-year/three-year limitation period be applied in this case to bar Plaintiffs' 10b-5 claims.

 Like the Court of Appeals for the Third Circuit in Data Access, the Supreme Court in Lampf held that the limitation period applicable to claims under Rule 10b-5 should be measured by a uniform federal standard of one year from the discovery of the violation, and no more than three years after the violation. Defendants pointed out that the Supreme Court applied the one-year/three-year rule to dismiss the 10b-5 claims of the plaintiffs in Lampf, despite a vigorous dissent by Justice O'Connor, who argued that under Chevron Oil the one-year/three-year rule should be applied only prospectively. Defendants argued that this Court should follow the majority's example. But because the Lampf majority failed to address the issue of retroactivity or Justice O'Connor's dissent, this Court declined to alter its decision refusing to apply Data Access retroactively in this case. Gilmore v. Berg, No. 86-4694 (D.N.J. July 29, 1991) (order denying motion for reconsideration).

 DISCUSSION

 The 10b-5 Claims

 In their present motion for summary judgment, Defendants once again argue that Plaintiffs' 10b-5 claims are untimely. Defendants point out that when their motion for reconsideration was argued, neither party brought to this Court's attention the Supreme Court's decision in James B. Beam Distilling Co. v. Georgia, 115 L. Ed. 2d 481, 111 S. Ct. 2439 (1991), and this Court did not consider that decision in making its ruling. Beam, which was decided on the same day as Lampf, resulted in six opinions, none of which was signed by more than three Justices. However, it is clear that "the one common thread among the positions of these six Justices is that all agree if a rule is applied in the case currently before the Court, it must be applied to all other pending cases." In re Graham, 973 F.2d 1089, 1102 (3d Cir. 1992). Because the Supreme Court applied its new one-year/three-year rule to dismiss the 10b-5 claims of the ...


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