The opinion of the court was delivered by: Walls, District Judge
Plaintiff Rick Del Sontro ("Plaintiff") alleges that Defendant Cendant Corporation, Inc. ("Cendant" or "Defendant") violated Sections 11 and 12(a)(2) of the Securities Act of 1933, 15 U.S.C. §§77k and 77l(a)(2), (the "Securities Act") and Sections 10(b) and 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b) and 78n(a), (the "Exchange Act") by including materially false and misleading financial statements for CUC International, Inc. ("CUC") in the joint registration statement and proxy/ prospectus issued in connection with the 1997 merger of CUC and HFS Inc. ("HFS") that formed Cendant. *fn1 Plaintiff asserts a claim for promissory estoppel out of Cendant's alleged promise to settle the claims of its employees who were excluded from the class action on the same terms as it settled with the Class.
This matter is before the Court on Defendant's Motion to Dismiss: (1) each of the federal securities law claims because they are time barred and (2) the promissory estoppel claim because there was no clear and definite promise on which Plaintiff reasonably relied. Plaintiff opposes the motion on the grounds that: (1) the federal securities law claims were filed within the applicable periods and alternatively, equitable principles prohibit defendant from raising a statute of limitations defense and (2) the promissory estoppel claim is based on Cendant's clear and definite promise to settle claims with its employees who were excluded from the class.
After Defendant filed this Motion to Dismiss, Plaintiff filed an Amended Complaint adding a claim under New Jersey's state securities laws and a Second Amended Complaint adding a breach of contract claim. Plaintiff concedes that it was improper for him to file the Second Amended Complaint without leave of court. As such, Plaintiff now moves for leave to file the Second Amended Complaint pursuant to Fed. R. Civ. P. 15(a). Defendant opposes this motion and moves to: (1) strike the amended complaints because they were filed in violation of the automatic stay provisions or (2) to strike the additional state claim because it is time barred and the breach of contract claim because the "offer" of settlement was nothing more than a gratuitous and conditional proposal. Plaintiff asserts: (1) that the automatic stay provision only applies to discovery and does not prohibit the filing of an amended complaint and (2) that the additional claims should be permitted because the state securities claims were timely filed and alternatively, equitable principles bar Defendant from raising a statute of limitations defense and the breach of contract claim is based on a legally enforceable "offer." Defendant also moves for sanctions pursuant to Rule 11 arguing that Plaintiff's claims are not warranted under existing law.
After reviewing the parties submissions and hearing oral argument, this Court: (1) grants Defendant's Motion to Dismiss Plaintiff's federal securities law claims because such claims were not filed with the applicable statute of limitations or statute of repose periods, (2) grants Defendant's Motion to Dismiss Plaintiff's promissory estoppel claim because the promise on which Plaintiff relied was not "clear and definite," (3) denies Plaintiff's Motion for Leave to File A Second Amended Complaint because the breach of contract claim which Defendant seeks to add is insufficient as a matter of law, (4) grants Defendant's request to strike Plaintiff's First Amended Complaint because the state securities claims are time barred, and (6) denies Defendant's Motion for Sanctions because Plaintiff's claims were not frivolous, legally unreasonable, or without factual foundation.
FACTS AND PROCEDURAL HISTORY
Cendant was formed by the December 17, 1997 merger of HFS with and into CUC. On April 15, 1998, Cendant publicly announced its discovery of potential accounting irregularities at certain business units of the former CUC. In the wake of this announcement, Cendant's stock prices declined precipitously. On August 28, 1998 Cendant publicly announced that what it had previously described as "accounting irregularities" was really fraud. Finally on September 29, 1998, Cendant restated earnings for 1995, 1996, 1997 and the first two quarters of 1998 demonstrating that its previously reported earnings were grossly inflated. Each of these reports caused the stock to further plummet.
On April 15, 1998, Plaintiff was a Senior Vice-President of Cendant and owned about 50,000 shares of stock purchased through his exercise of options. Plaintiff sold half of his stock in mid August 1998, and sold the remaining shares in late 1998/ early 1999. Plaintiff's out of pocket loss was approximately $1,000,000.
Beginning on April 16, 1998, alleged purchasers and acquirers of CUC and Cendant securities filed securities fraud lawsuits against Cendant for violations of various federal securities laws, including Sections 11 and 12(a)(2) of the Securities Act and Sections 10(b) and 14(a) of the Exchange Act. Excluded from the class definition were "officers and directors of Cendant and its subsidiaries and affiliates." (Kadet Cert. Ex.B ¶25.)
Plaintiff asserts that when he found out about the class action lawsuit, he asked Paul McNicol, Counsel for Cendant if Cendant wanted its employees to opt out of the class. McNicol informed Plaintiff that he had discussed the issue with James Buckman, General Counsel for Cendant, who told him that the company encouraged its employees to remain in the class. Mr. McNicol did not mention Plaintiff's exclusion from the class. For the next year and a half, Plaintiff believed that he was a member of the class. He periodically received updates about the class action from his broker, Prudential Securities. He was also provided with information from Cendant about the status of the class action via public announcements and meetings. On April 14, 2000, Plaintiff received notification from his broker stating that its "records indicate that [he] meet[s] the requirement of eligibility [for the class] outlined below." (Del Sontro Aff. at ¶20.) For these reasons, from 1998 to mid-April 2000, Plaintiff believed he was a member of the class.
On April 20, 2000, Cendant's General Counsel, issued an interoffice memorandum (the "April 20 Memo") to all Cendant employees in which he addressed frequently asked questions concerning the settlement of securities class actions. The memo stated: "[s]pecifically excluded from the Class are the Individual Defendants and officers and directors of Cendant and its subsidiaries and affiliates." (the "Excluded Employees") (Kadet Cert. Ex.H). The memo explained:
The Board has determined that Cendant will settle claims of such persons excluded from the Class separately, at the same time and at the same amount of money as such persons would have received had they not been excluded from the Class . . . Please note, however, that this separate settlement with the persons excluded from the Class is totally voluntary on the part of Cendant and Cendant reserves the right to alter the terms of such separate settlement or to rescind its determination to provide such settlement in its sole and absolute discretion. [(the "Voluntary Settlement")]. (Kadet Cert. Ex. H).
According to Plaintiff, this memo was the first information that Plaintiff received from any source indicating that he was excluded from the Class.
In March 2000, Plaintiff told the President of the Real Estate Division of his intention to leave the company if he does not receive a promotion. From mid-April to May 1, 2000, Plaintiff had several communications with Defendant's HR Department about his separation package, however, Defendant said nothing to Plaintiff about relinquishing his rights under the Settlement Plan if he left.
On April 27, 2000, Mr. Buckman sent another interoffice memorandum (the "April 27 Memo") to inform the Excluded Employees that if they wished to participate in the Voluntary Settlement they would be required to submit to Cendant a proof of claim and release, identical in form to that provided to class members, no later than July 1, 2000. (Kadet Cert. Ex. I.)
On or about May 1, 2000, Plaintiff gave Defendant formal notice that he was leaving in two weeks. According to Plaintiff, during a meeting where Plaintiff was discussing his separation package, either the Executive Vice President or the HR Manager again confirmed to Plaintiff that his separation from Defendant has no bearing on his eligibility for the Settlement Program. Further, in the days following Plaintiff's last day at Cendant, the Vice-President in Cendant's Legal Department asked Plaintiff if Cendant could deduct the balance of his $100,000 loan from his settlement payment.
On May 25, 2000 Mr. Buckman sent a third memorandum to inform the Excluded Employees of further developments with respect to the proposed Voluntary Settlement. The memo explained that the proposed Voluntary Settlement would be open only to Excluded Employees who "continue to be employees of Cendant or any of its subsidiaries and affiliates on the date that the settlement funds are distributed." (Kadet Cert. Ex. J.) This memorandum also reiterated the warning that "this proposed settlement is in the discretion of the Board and its subject to change at any time." Id.
Plaintiff alleges that on June 29, 2000, he submitted his Proof of Claim and Release to Defendant. Plaintiff explains that he was entitled to $500,000 under the Settlement Program and that he expected to receive his settlement payment within a year. A few weeks after Plaintiff left Cendant, Plaintiff became aware of the May 25, 2000 memo and that Cendant denied his claim under the Settlement Program because he no longer worked for the Company.
On August 28, 2001 - more than three years and four months after Cendant disclosed accounting irregularities - Defendant filed his complaint.
I. Motion to Dismiss Federal Securities Law Claims Standard For Motion to Dismiss
On a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), the court is required to accept as true all allegations in the complaint and all reasonable inferences that can be drawn therefrom, and to view them in the light most favorable to the non-moving party. See Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380, 1384 (3d Cir. 1994). The question is whether the claimant can prove any set of facts consistent with his or her allegations that will entitle him or her to relief, not whether that person will ultimately prevail. Hishon v. King & Spalding, 467 U.S. 69, 104 S.Ct. 2229, 81 L.Ed.2d 59 (1984). While a court will accept well-plead allegations as true for the purposes of the motion, it will not accept unsupported conclusions, unwarranted inferences, or sweeping legal conclusions cast in the form of factual allegation. See Miree v. DeKalb County, Ga., 433 U.S. 25, 97 S.Ct. 2490, 53 L.Ed.2d 557 (1977). Moreover, the claimant must set forth sufficient information to outline the elements of his claims or to permit inferences to be drawn that these elements exist. See Fed. R. Civ. P. 8(a)(2); Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).
Statute of Limitations for Federal Securities Law Claims
Section 13 of the Securities Act, 15 U.S.C. §77m, sets forth the limitations period applicable to claims brought under Sections 11 and 12 of that Act. See Ballay v. Legg Mason Wood Walker, Inc., 925 F.2d 682, 691 (3d Cir. 1991). Section 13 states, in relevant part, that:
No action shall be maintained to enforce any liability created under [Section 11] or [Section 12(a)(2)] of this title unless brought within one year after the discovery of the untrue statement or the omission, 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 under [Section 11] . . . of this title more than three years after the security was bona fide offered to the public, or under [Section 12(a)(2)] of this title more than three years after the sale. 15 U.S.C. §77m.
This statute creates a one-year statute of limitations framed by a three-year statute of repose. See Green v. Fund Asset Mgmt., L.P., 19 F.Supp. 2d 227, 232 (D.N.J. 1998)(applying the one-year/three-year limitations period to claims under the Investment Company Act; see also Whitlock Corp. v. Deloitte & Touche, L.L.P., 233 F.3d 1063, 1064-65 (7th Cir. 2000).
The three-year period is not tied to discovery of a fraud, but instead begins to run immediately upon the accrual of the cause of action. See Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363-64, 111 S.Ct. 2773, 115 L.Ed.2d 321. As such, it serves as an absolute bar to any claims brought more than three years after accrual, regardless of when a plaintiff discovered or could have discovered that he had a claim. See id. at 363. As indicated by the legislative history "Congress included statutes of repose because of fear that lingering liabilities would disrupt normal business and facilitate false claims. It was understood that the three year rule was to be absolute." Norris v. Wirtz, 818 F.2d 1329, 1332 (7th Cir. 1987) (overruled on other grounds); see also H.R.Conf.Rep. No. 1838, 73d Cong., 2d Sess. 32, 36, 42 (1934); 78 Cong.Rec. 8198-8203 (May 7, 1934).
A claim under Section 10(b) of the Exchange Act is subject to similar limitations and repose periods. See Lampf, Pleva, Lipkand, Prupis & Petigrow, 501 U.S. at 364; In re Data Access Sys. Sec. Litig., 843 F.2d 1537, 1550 (3d Cir. 1988). In Lampf, the United States Supreme Court held that, although Congress never specifically created a limitations period for an implied right of action under Section 10(b), private actions under 10(b) must be filed within one year after the fraud was or should have been discovered, and in no event more than three years after the occurrence of the fraud. 501 U.S. at 364. The same rule applies to actions under Section 14(a) of the Exchange Act. See Westinghouse Elec. Corp. By Levit v. Franklin, 993 F.2d 349, 353 (3d Cir. 1993) (holding that for purposes of determining the appropriate limitations period, actions under Section 14(a) are treated identically to actions under 10(b)).
Courts within the Third Circuit have uniformly adopted an "inquiry notice" standard to resolve the question of when a plaintiff should have learned the existence of a cause of action under the federal securities laws. See e.g. Rosen v. Communications Servs. Group, Inc., 155 F.Supp.2d 310, 323 (E.D. Pa 2001). Under this standard, the one-year period begins to run when a plaintiff "discovered or in the exercise of reasonable diligence should have discovered the basis for [his] claim" against the defendant. Gruber v. Price Waterhouse, 697 F.Supp. 859, 863 (E.D. Pa 1988). To make this determination, courts must determine when plaintiffs had sufficient information of possible wrongdoing to place them on "inquiry notice" or to excite "storm warnings" of culpable activity. Rosen, 155 F.Supp.2d at 323; see also Tobacco & Allied Stocks, Inc. v. Transamerica Corp., 143 F.Supp. 323, 329 (D.Del. 1956), aff'd 244 F.2d 902 (3d Cir. 1957). Once plaintiffs are on inquiry notice, they must exercise reasonable diligence to uncover the basis for their claims and are held to have constructive notice of all facts that could have been discovered during the limitations period. Gruber, 697 F.Supp. at 864.
Equitable Tolling and Equitable Estoppel
Under the doctrine of equitable tolling, "`a statute of limitations does not run against a plaintiff who is unaware of his cause of action' due to the fraudulent acts of the defendant." Friedman v. Wheat First Union Sec. Inc., 64 F.Supp.2d 338, 346 (S.D.N.Y. 1990) (quoting Cerbone v. Int'l Ladies' Garment Workers' Union, 768 F.2d 45, 49-50 (2d Cir. 1985)). Similarly, "[e]quitable estoppel is established where there is conduct that amounts to a misrepresentation of material facts, unknown to the party misled, done with the expectation that the misled party will change his position based on the conduct, and that party in fact changes his position." Rodichok v. Limitorque Corp., No. Civ. A. 95-3528, 1997 WL 392535 (D.N.J. July 8, 1997 )(citing Carlsen v. Masters, Mates & Pilots Pension Plan Trust, 80 N.J. 334, 339 (1979)).
The Seventh Circuit has explained that the difference between these two theories is that unlike equitable tolling, equitable estoppel "is not concerned with the running and suspension of the limitations period, but rather comes into play only after the limitations period has run and addresses itself to the circumstances in which a party will be estopped from asserting the statute of limitations as a defense to an admittedly untimely action because his conduct has induced another into forbearing suit within the applicable limitations period." Bomba v. W.L. Belvidere, Inc., 579 F.2d 1067, 1070 (7th Cir. 1978).
Defendant asserts that Plaintiff's federal securities law claims should be dismissed as time-barred because they were not filed within one year of the date on which Plaintiff discovered or should have discovered the fraud. By April 15, 1998, the date Cendant disclosed publicly its discovery of the accounting irregularities, Plaintiff knew or should have known of the existence of his claims. However, Plaintiff did not assert his securities claims until nearly three and one-half years later, on August 28, 2001. Further, Defendant argues that even if Plaintiff could save his claims from the one-year limitations period, these claims are still untimely under the three-year period of repose which began to run on April 1, 1998, the date of Plaintiff's last transaction in Defendant's securities. Finally, ...