United States District Court, D. New Jersey
June 4, 2003
PEDRO YANG, CAROL JACKSON, and PETER S. KELSCH, on behalf of themselves and all persons similarly situated, Plaintiffs,
STEVEN A. ODOM, MARK GERGEL, HENSLEY E. WEST, MARTIN D. KIDDER and STEPHEN J. CLEARMAN, Defendants. JAMES BARBERIAN, and JOSEPH and KAREN KINOSIAN, on behalf of themselves and all persons similarly situated, Plaintiffs, v. STEVEN A. ODOM, MARK GERGEL, HENSLEY E. WEST, MARTIN D. KIDDER and STEPHEN J. CLEARMAN, Defendants.
The opinion of the court was delivered by: JOEL A. PISANO, District Judge
The instant consolidated actions arise out of allegations that Steven
[265 F. Supp.2d 470]
Mark Gergel, Hensley A. West, Martin D. Kidder, and Stephen J.
Clearman ("Defendants"), in their capacities as officers and/or directors
of World Access, Inc., a publicly held telecommunications company
headquartered in Atlanta, Georgia,*fn1 were "control persons" of that
corporation and caused it to commit multiple incidences of securities
fraud. Plaintiffs Pedro Yang, Carol Jackson, Peter S. Kelsch, James
Barberian, Joseph Kinosian and Karen Kinosian, on their own behalf and as
a class action pursuant to Fed.R.Civ.P. 23 assert four causes of action
against Defendants, alleging violations of Section 10(b) and Section
20(a) of the Exchange Act, 15 U.S.C. § 78j(b) and 78t(a),
Rule 10b-5, and Sections 11 and 15 of the Securities Act, 15 U.S.C. § 77(k)
Presently before this Court is Defendants' Motion to Dismiss on the
following grounds: (1) the applicable statute of limitations has
expired; (2) the filing of this action is in violation of the
"first-filed" rule; and (3) venue is improper. In the alternative,
Defendants move for a transfer of venue to the Northern District of
Georgia. The Court has federal question jurisdiction pursuant to
28 U.S.C. § 1331. The motion was opposed, and the Court decides the
motion without oral argument as permitted by Fed.R.Civ.P. 78. After
considering the parties' written submissions, and for all the reasons
discussed below, the Court grants Defendants' motion to dismiss on the
basis of the statute of limitations. Finding Plaintiffs' claims
time-barred, the Court declines to address Defendants' other grounds for
dismissal or their request for change of venue.
For the limited purpose of this motion to dismiss under Rule 12(b)(6)
of the Federal Rules of Civil Procedure, the Court accepts as true the
facts alleged in the amended complaint and all reasonable inferences
drawn from those facts. See Hayes v. Gross, 982 F.2d 104, 106 (3d Cir.
1992); see also infra II. Rule 12(b)(6) Standard. Accordingly, the facts
recited below are taken from Plaintiff's Class Action Complaint, and do
not represent this Court's factual findings.
Plaintiffs Pedro Yang, a New Jersey resident, Carol Jackson, a
Washington resident, and Peter S. Kelsch, a California resident, are the
proposed class representatives in the Yang action. They seek to represent
a class of themselves and all other persons or entities who:
(i) acquired securities of World Access, Inc.
("WAXS") in the merger of NACT Telecommunications,
Inc. ("NACT") into WAXS, which closed on October 29,
1998 . . . (ii) acquired securities of WAXS in the
merger of Telco Systems, Inc. ("Telco") into WAXS,
which closed on November 30, 1998 . . . or (iii)
purchased securities of WAXS in the open market during
the period April 29, 1997 through February 11, 1999
who were damaged by defendants' violations of the
federal securities laws.
(Compl. ¶ 1).*fn2
Plaintiffs claim that during the class period, Defendants "issued
materially false and misleading statements and omitted to disclose
material information concerning WAXS's products, revenues, earnings,
[265 F. Supp.2d 471]
inventory, and sales practices. . . ." (Compl. ¶ 2). Plaintiffs
further allege that throughout the class period, Defendants "engaged in a
common course of conduct that operated as a fraud on the integrity of the
market for WAXS securities." (Compl. ¶ 3). This conduct allegedly
included issuing press releases, financial statements, and other
corporate documents that failed to disclose that one of WAXS's products,
a telephone switching product known as the "CDX Switch" was a
"non-functional development-stage prototype." (Compl. ¶ 3).
Plaintiffs make a series of allegations relating to WAXS's CDX Switch.
They claim that the company sold defective switches, continued to record
revenue in connection with the non-functioning switches, and otherwise
conducted business improperly in light of the non-functioning nature of
this key product. (Compl. ¶ 3). They also allege that Defendants
misrepresented that WAXS was not losing business due to financial
conditions in Asia during 1997-1998, materially overstated WAXS's sales,
revenues, assets, inventory and earnings, materially understated
corporate expenses, and failed to disclose the reasons the company's
inventory had ballooned. (Compl. ¶ 4).
Plaintiffs charge that as a result of these actions, the market price
of WAXS securities traded at artificially inflated levels throughout the
class period. (Compl. ¶ 7). Finally, Plaintiffs allege that
Defendants' fraud resulted in announced earnings substantially less than
the previous quarter, and far less than analysts' expectations. (Compl.
Similar allegations have also been made in ongoing securities
litigation taking place before the Honorable Orinda D. Evans, Chief Judge
for the United States District Court for the Northern District of
Georgia, entitled In re World Access, Inc. Securities Litigation, 1:99 CV
43 (ODE) (the "Georgia litigation"). That litigation was first filed in
January 1999 as a putative class action, but the court has denied motions
for class certification on two separate occasions: first by rejecting the
parties' stipulated class certification by Order dated July 30, 2001, and
then rejecting Plaintiffs' renewed motion for class certification by
Order dated July 1, 2002. In its July 1 Order, the court denied
certification with prejudice based on the inadequacy of the class
representatives. Pls' Ex. H. Plaintiffs then moved for reconsideration of
the July 1 Order, which was denied on August 9, 2002. Plaintiffs filed a
petition with the United States Court of Appeals for the Eleventh Circuit
for interlocutory review of the denial of class certification pursuant to
Fed.R.Civ.P. 23(f). That petition was denied on September 17, 2002. Pls'
Ex. J. Following the denial of class certification, certain individual
plaintiffs continued the litigation. The record reveals that the Georgia
litigation has been thus far a massive undertaking by that court, with a
docket comprised of several hundred entries.
The instant case is comprised of two actions. The first, filed by
Plaintiffs Pedro Yang, Carol Jackson and Peter S. Kelsch was filed on
December 17, 2002, bearing the docket number 02-CIV-5968 (JAP). The
second, filed on February 14, 2003 by Plaintiffs James Barberian and
Karen Kinosian, with allegations virtually identical to the Complaint
filed in Yang, bears docket number 03-CIV-725 (JAP). The Court
consolidated both cases by Order dated March 18, 2003.
Defendants claim that the instant actions are impermissibly repetitive
of the Georgia litigation, and are furthermore barred by the one-year
statute of limitations for federal securities fraud claims imposed by
15 U.S.C. § 77m.
[265 F. Supp.2d 472]
Federal Rule of Civil Procedure 12(b)(6) permits a court to dismiss a
complaint "for failure to state a claim upon which relief can be
granted." On a Rule 12(b)(6) motion, the court will, as it must, accept
as true all of the factual allegations within the complaint and any
reasonable inferences that may be drawn from those allegations. Nami v.
Fauver, 82 F.3d 63, 65 (3d Cir. 1996). Claims will be dismissed under
Rule 12(b)(6) only if "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 (1957). Courts may consider
a statute of limitations defense in a motion to dismiss "where the
complaint facially shows non-compliance with the limitations period and
the affirmative defense clearly appears on the face of the pleading."
Jaramillo v. Experian Information Solutions, Inc., 155 F. Supp.2d 356,
358-59 (E.D.Pa. 2001)
Generally, the court's task requires it to disregard any material
beyond the pleadings. In re Burlington Coat Factory Sec. Litig.,
114 F.3d 1410, 1426 (3d Cir. 1997); Pension Benefit Guar. Corp. v. White
Consol. Indus., 998 F.2d 1192, 1196 (3d Cir. 1993). A district court
may, however, consider the factual allegations within other documents,
including those described or identified in the complaint and matters of
public record, if the plaintiff's claims are based upon those documents.
Burlington Coat, 114 F.3d at 1426; In re Westinghouse Sec. Litig.
("Westinghouse"), 90 F.3d 696, 707 (3d Cir. 1996); In re Donald Trump
Sec. Litig., 7 F.3d 357, 368 n. 9 (3d Cir. 1993); Pension Benefit Guar.
Corp., 998 F.2d at 1196. Yet just because the court elects to examine
these types of documents outside of the complaint does not mean that it
need treat the motion as one for summary judgment. Burlington Coat, 114
F.3d at 1426; Pension Benefit Guar. Corp., 998 F.2d at 1196-97.
Defendants seek dismissal of Plaintiffs' Class Action Complaint on
multiple grounds: (1) the applicable statute of limitations has expired;
(2) the filing of this action is in violation of the "first-filed" rule;
and (3) venue is improper. In the alternative, Defendants move for a
transfer of venue to the Northern District of Georgia. Because the Court
finds the statute of limitations bars filing of this action in the
District of New Jersey, it shall not address Defendants' other
Plaintiffs bring claims pursuant to Sections 11 and 15 of the
Securities Act, 15 U.S.C. § 77(k) and 77(o), and Sections 10(b) and
20(a) of the Exchange Act, 15 U.S.C. § 78j(b) and 78t(a).
15 U.S.C. § 77m of the Securities Act sets forth a one-year period to
file federal securities fraud claims; this period commences to run on the
date of inquiry notice to prospective plaintiffs. See 15 U.S.C. § 77m
(allowing "one year after the discovery of the untrue statement or
omission, or after such discovery should have been made by the exercise
of reasonable diligence," to file suit). See also In re NAHC, Inc. Secs.
Litig., 306 F.3d 1314 (3d Cir. 2002). Defendants argue that this period
commenced to run no later than January 5, 1999, the date that WAXS
disclosed its earnings were going to be less than projected. See Compl.
¶¶ 5, 166. After reviewing the Complaint, the Court agrees with this
assessment, and finds that the statutory period began to run on January
5, 1999.*fn3 By extension, therefore, Plaintiffs'
[265 F. Supp.2d 473]
Complaint, which was filed on December 17, 2002, is almost two years out
of time, absent any tolling.
Plaintiffs argue that the statute of limitations has been effectively
tolled by the rule articulated by the United States Supreme Court in
American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), and as
enunciated by the Third Circuit's opinion in McKowan Lowe v. Jasmine
Ltd., 295 F.2d 380 (3d Cir. 2002). The American Pipe rule provides that
when a class action complaint is filed, the statute of limitations is
tolled for all members of that putative class who then choose to
intervene or file an independent action following a denial of class
certification. See American Pipe, 414 U.S. at 555 ("Not until the
existence and limits of the class have been established and notice of
membership has been sent does a class member have any duty to take note
of the suit. . . ."). See also Crown, Cork & Seal Co. v. Parker,
462 U.S. 345, 350 (1983) (extending American Pipe tolling to subsequent
individual actions filed after the denial of class certification).
American Pipe has been interpreted by most courts considering the issue
as holding that "stacking" one class action atop another following a
denial of class certification is prohibited. See, e.g., Korwek v. Hunt,
827 F.2d 874, 879 (2d Cir. 1987) ("filing new but repetitive complaints"
not intended by Supreme Court in American Pipe). See also Basch v. Ground
Round, Inc., 139 F.3d 6, 11 (1st Cir. 1998); Griffin v. Singletary,
17 F.3d 356, 359 (11th Cir. 1994); Andrews v. Orr, 851 F.2d 146, 149 (6th
Cir. 1988); Robbin v. Fluor Corp., 835 F.2d 213, 214 (9th Cir. 1987).
This has been called the "anti-stacking" rule.
As a matter of first impression, in McKowan Lowe the Third Circuit
considered the breadth of the American Pipe rule as applied to a
plaintiff seeking to intervene in a securities fraud class action after
the statute of limitations had expired. In that case, the plaintiff, a
shareholder of Jasmine Ltd., a shoe company, filed suit against the
corporation, its management, underwriter and principals, as well as other
entities, all in relation to an initial public offering of Jasmine
stock. See McKowan Lowe, 295 F.3d at 383. The complaint, filed by Harry
Berger on his own behalf and on the behalf of all others similarly
situated, alleged that defendants misstated Jasmine's financial
statements to conceal debt owed to another corporation. Id. The court
denied Berger's request for class certification based on its analysis
that he did not meet the adequacy requirements of Fed.R.Civ.P. 23. Id.
Shortly after the denial of class certification, but more than three
years after the complaint was first filed, Bernard Cutler intervened as a
plaintiff. But for the tolling rule enunciated in American Pipe, Cutler's
claims would have been barred by the one year statute of limitations for
such securities fraud actions.
The Third Circuit determined that Cutler could benefit from American
Pipe tolling because the class certification motion of his predecessor,
Mr. Berger, was denied not due to any defects in the class itself, but
due to Berger's inadequacy as a class representative. Id. at 386. In so
deciding, the court closely examined case law from the Second Circuit,
see Korwek v. Hunt, 827 F.2d 874 (2d Cir. 1987), and the Eleventh
Circuit, see Griffin v. Singletary, 17 F.3d 356 (11th Cir. 1994). The
circuit court distinguished Korwek as applying to instances where a court
has found the class itself inappropriate, not due to any perceived
deficiencies in the class representative herself. The Third Circuit found
that while the class in Griffin was denied
[265 F. Supp.2d 474]
due to the inadequacy of the
class representative, the distinction illuminated in Korwek was ignored
by that court. The court found that the reasons for the denial of class
certification were significant to its decision, and keeping with Third
Circuit precedent in Haas v. Pittsburgh Nat'l Bank, 526 F.2d 1083 (3d
Cir. 1975) (allowing American Pipe tolling for a subsequent class
representative on a claim that the initial representative lacked standing
to pursue), allowed Cutler to intervene.
However, the circuit court's holding was not without limits: the court
clearly stated "we hold that the class claims of intervening class
members are tolled if a district court declines to certify a class for
reasons unrelated to the appropriateness of the substantive claims for
certification." Id. at 389 (emphasis added).
However, neither the Supreme Court nor the Third Circuit has yet
addressed whether the tolling rule permits the filing of a new class
action in a different district court after the statutory period has
expired. Plaintiffs argue that McKowan Lowe should be read as creating a
broad exception to the "anti-stacking" rule, one that allows the filing
of subsequent class actions by new plaintiffs in different districts, not
only claims filed by intervenors. Defendants argue that the plain
language of the Third Circuit's holding limits the breadth of the
American Pipe tolling exception to subsequent claims filed by
intervenors, and does not toll the statute of limitations for a new
action filed in a different district court, as is the case here. The
Court agrees with Defendants. The American Pipe tolling rule is an
exception to the statute of limitations already in operation.*fn4
McKowan Lowe provides an enunciation of that exception in the Third
Circuit: claims of intervening class members are entitled to a tolling of
the statute of limitations while class proceedings are ongoing.*fn5
In support of their motion, Defendants cite the Ninth Circuit's
conclusion in Robbin v. Flour Corp., 835 F.2d 213 (9th Cir. 1987), where
the court refused to allow a separate class action to proceed in the
Central District of California after a virtually identical class had been
denied certification in New York. In that case, the Ninth Circuit
rejected plaintiffs' arguments that American Pipe tolling applied to
subsequent class actions filed in other courts. Id. at 214.
Plaintiffs argue that Robbin is inapposite because the Ninth Circuit
does not have the benefit of the McKowan Lowe decision. However, the same
result is required here, and McKowan Lowe does not change the analysis
markedly. In fact, as discussed supra, the holding of the Third Circuit
in McKowan Lowe is clear: in this Circuit, American Pipe tolls the class
claims of intervening class members. As Plaintiffs are not intervenors,
and have filed a separate class action here in the District of New Jersey
despite the ongoing proceedings in the Northern District of Georgia, the
McKowan Lowe decision does
[265 F. Supp.2d 475]
not mandate tolling. It is not the function of
this Court to unnecessarily depart from the clear holding of the Third
Circuit in McKowan Lowe and extend American Pipe tolling to the instant
time-barred action. Therefore, as Plaintiffs are not within the scope of
the American Pipe/McKowan Lowe tolling exception, the statute of
limitations bars their claims.
As this determination is dispositive of Plaintiffs' entire Class Action
Complaint, the Court declines to address the other arguments for
dismissal and/or transfer set forth in Defendants' motion.
An appropriate order follows.
Before the Court is the motion of Defendants Steven A. Odom, Mark
Gergel, Hensley E. West, Martin D. Kidder and Stephen J. Clearman to
dismiss the Class Action Complaints in the above-captioned actions under
Rule 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons
set forth in the accompanying written opinion,
IT IS on this 3rd day of June 2003,
ORDERED that Defendants' motion to dismiss under Rule 12(b)(6) of the
Federal Rules of Civil Procedure is GRANTED; and it is further,
ORDERED that the Class Action Complaints are dismissed with prejudice.
This cases bearing the Civil Action Numbers above are CLOSED.