Source: https://law.justia.com/cases/federal/appellate-courts/F2/970/1030/269617/
Timestamp: 2019-07-23 03:41:07
Document Index: 794506617

Matched Legal Cases: ['§ 80', '§ 1983', '§ 1983', '§ 1983', '§ 10', '§ 20', '§ 20', '§ 20', '§ 215', '§ 36', '§ 80', '§ 77', '§ 78', '§ 78', '§ 78', '§ 215', '§ 36', '§ 215', '§ 36', '§ 215', '§ 36', '§ 36', '§ 80', '§ 29', '§ 78', '§ 29', '§ 15', '§ 29', '§ 203', '§ 77', '§ 206', '§ 215', '§ 29']

Phyllis Kahn and Steven G. Thorne, Plaintiffs-appellants, v. Kohlberg, Kravis, Roberts & Co., a New York Limitedpartnership, Kkr Associates, a New York Limitedpartnership, and Whitehall Associates,l.p., a Delaware Limitedpartnership,defendants-appellees, 970 F.2d 1030 (2d Cir. 1992) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Second Circuit › 1992 › Phyllis Kahn and Steven G. Thorne, Plaintiffs-appellants, v. Kohlberg, Kravis, Roberts & Co., a New...
Phyllis Kahn and Steven G. Thorne, Plaintiffs-appellants, v. Kohlberg, Kravis, Roberts & Co., a New York Limitedpartnership, Kkr Associates, a New York Limitedpartnership, and Whitehall Associates,l.p., a Delaware Limitedpartnership,defendants-appellees, 970 F.2d 1030 (2d Cir. 1992)
US Court of Appeals for the Second Circuit - 970 F.2d 1030 (2d Cir. 1992)
Argued May 22, 1992. Decided June 30, 1992
Sidney B. Silverman, New York City (Silverman, Harnes, Obstfeld & Harnes, of counsel), for plaintiffs-appellants.
F.J. Zepp, New York City (Latham & Watkins, of counsel), for defendants-appellees.
Plaintiffs Phyllis Kahn and Steven G. Thorne appeal from the dismissal by the United States District Court for the Southern District of New York, John S. Martin, Jr., Judge, of their complaint pursuant to Federal Rules of Civil Procedure (Fed. R. Civ. P.) 12(b) (6) on the ground that the action was barred by the statute of limitations. We affirm.
Plaintiffs commenced this direct and derivative action on August 21, 1991, seeking rescission of an investment advisory agreement entered into on September 25, 1987, by the Minnesota State Board of Investment (the "State Board"), as trustee for certain state employee pension funds (the "Retirement Funds"), and the defendant Kohlberg, Kravis, Roberts & Co. ("KKR"), on the grounds that the agreement violates the Investment Advisers Act of 1940, 15 U.S.C. § 80b-1 et seq. (the "IAA"), in several ways.
KKR, KKR Associates, and Whitehall moved to dismiss the Complaint pursuant to Fed. R. Civ. P. 12(b) (6) and 12(b) (7) on the grounds that (a) plaintiffs lacked standing to assert their claims, (b) plaintiffs had failed to join an indispensable party, (c) plaintiffs' claims were barred by the statute of limitations, and (d) plaintiffs were guilty of laches. The district court granted defendants' motion on the ground that the claims were barred by the statute of limitations and found it unnecessary to reach the other issues.
II. WHAT IS THE PROPER STATUTE OF LIMITATIONS APPLICABLE TO
ACTIONS FOR RESCISSION UNDER THE IAA?
The Investment Advisers Act regulates the conduct of investment advisers and provides that it may be enforced by the Securities and Exchange Commission through an action for injunctive relief. Section 215 of the IAA provides that contracts whose formation or performance would violate the act are void. In Transamerica Mortgage Advisors, Inc. (TAMA) v. Lewis, 444 U.S. 11, 100 S. Ct. 242, 62 L. Ed. 2d 146 (1979), the Supreme Court held that this created an implied private cause of action for rescission of the void contract and restitution and that this was the sole private remedy available under the Advisers Act. Id. at 24, 100 S. Ct. at 247, 249.
When Congress has failed to provide a statute of limitations for a federal cause of action, courts generally borrow the state statute of limitations most analogous to the case at hand. Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, --- U.S. ----, 111 S. Ct. 2773, 2778, 115 L. Ed. 2d 321 (1991). Because this rule has been followed for so long, if Congress is silent it is ordinarily assumed that it intends for the court to engage in state borrowing. Id.
Del Costello v. International Bhd. of Teamsters, 462 U.S. 151, 103 S. Ct. 2281, 2289, 76 L. Ed. 2d 476 (1983) (citation omitted).
1. Step One--Should the Limitations Period be Uniform?
a. The first step is to determine whether the statute of
limitations should be uniform:
Where a federal cause of action tends in practice to "encompass numerous and diverse topics and subtopics," ... such that a single state limitations period may not be consistently applied within a jurisdiction, we have concluded that the federal interests in predictability and judicial economy counsel the adoption of one source, or class of sources, for borrowing purposes.
Lampf, 111 S. Ct. at 2779 (citations omitted).
Thus the Court has determined that a uniform statute of limitations should apply for all RICO cases since RICO claims could be analogized to an endless number of state actions on the basis of the great variety of possible predicate acts for RICO claims. Agency Holding Corp. v. Malley-Duff Associates, Inc., 483 U.S. 143, 107 S. Ct. 2759, 2763-64, 97 L. Ed. 2d 121 (1987). The Court also noted that many of the concepts and elements of RICO claims, such as a "RICO enterprise" and a "pattern of racketeering activity" had no analogue at common law. Id. at 150, 107 S. Ct. at 2764.
Likewise the Court determined that claims under 42 U.S.C. § 1983 should have a uniform statute of limitations since "every § 1983 claim can be favorably analogized to more than one of the ancient common-law forms of action ... [or to] one arising under a statute," each of which could have a different statute of limitations. Wilson v. Garcia, 471 U.S. 261, 273-75, 105 S. Ct. 1938, 1945-47, 85 L. Ed. 2d 254 (1985). Not only would this create uncertainty for all parties, but scarce resources would be dissipated on "unproductive and ever-increasing litigation." Id. at 275, 105 S. Ct. at 1946.1
2. Step Two--Should the Limitations Period be Derived from a Federal or State Source?
The second step, assuming that the court decides to apply a uniform period, is to determine whether this period should be derived from a state or federal source. Lampf, 111 S. Ct. at 2779. In making this determination, "the court should accord particular weight to the geographic character of the claim." Id. If the federal action has links to more than one state it poses the "danger of forum shopping and at the very least ... guarante [es] ... complex and expensive litigation over what should be a straightforward matter." Id. (citations omitted). Additionally, borrowing from state sources poses the risk of "the application of [an] unduly short state statute of limitations that would thwart the legislative purpose of creating an effective remedy." Agency Holding, 483 U.S. at 154, 107 S. Ct. at 2766 (citations omitted).
3. Step Three--Does a Federal Source Provide a Closer Fit?
a. If the court finds that the interstate character of the action supports federal borrowing, the "presumption of state borrowing requires that [it] determine that an analogous federal source truly affords a 'closer fit' with the cause of action at issue than does any available state-law source." Lampf, 111 S. Ct. at 2779. The relevant considerations will include, but not be limited to, "commonality of purpose and similarity of elements," id., which period will further the policies behind the federal law, practicalities of application, the interest in uniformity, and the interest in having clearly defined, easily applied rules.
Thus, in Occidental Life Ins. Co. v. EEOC, 432 U.S. 355, 97 S. Ct. 2447, 53 L. Ed. 2d 402 (1977), the Court decided that enforcement suits brought by the EEOC under Title VII of the 1964 Civil Rights Act should not be subject to a state limitations period since those limitations might unduly hinder the policy behind the Act by placing too great an administrative burden on the agency. 432 U.S. at 367-72, 97 S. Ct. at 2455-57; see also Del Costello, 462 U.S. at 172, 103 S. Ct. at 2294.
Similarly in Del Costello, 462 U.S. at 165-66, 103 S. Ct. at 2291, the Court determined that the state limitations period for vacation of an arbitration award in a commercial setting was too short to apply to an employee's hybrid breach of a collective bargaining agreement/duty of fair representation claim since the aggrieved employee needed more time to determine that he had a claim, retain counsel, investigate the issues not raised by the union, and frame his suit. Id.
In contrast, the Court noted that the brief limitations period for vacating an arbitration award was appropriate in the usual commercial arbitration since the parties will usually be represented by counsel or have some experience and sophistication. In addition, the action to vacate will usually involve issues that were already presented and contested in the arbitration proceedings. Id. at 166, 103 S. Ct. at 2291. The Court also pointed out the substantive difference between the two claims. Id. at 167, 103 S. Ct. at 2292.
The Del Costello Court also rejected the lengthy state limitations period for a breach of contract action since it would frustrate the federal policy of resolving labor disputes quickly. Id. at 168-9, 103 S. Ct. at 2293.
Finally, the Del Costello Court decided that the appropriate source for borrowing was a federal statute that was fashioned to accommodate the same competing national interests and to suit the same unique context of labor relations. See id. at 171-2, 103 S. Ct. at 2294.
In Agency Holding, the Supreme Court found that federal antitrust statutes provided a closer analogy to a RICO claim than any state law alternative. 483 U.S. at 155, 107 S. Ct. at 2766. It first determined that RICO claims have a multistate nature since they often involve an interstate transaction, and indeed must have some nexus to interstate or foreign commerce, and the predicate acts could take place in several states. Id. The Court contrasted this to § 1983 claims that require no interstate nexus and tend to take place in one state. Id. at 155, 107 S. Ct. at 2766.
The Court next considered the similarities in purpose and structure between the two federal statutes2 , the Congressional intent to pattern the RICO statute after the antitrust statute, the uniqueness of the concepts involved in a RICO claim, the federal policies at stake and the multistate nature of the claims. Id. at 150-55, 107 S. Ct. at 2764-67.
4. Special Procedure if Statute Also has an Express Cause of Action with an Express Statute of Limitations
Thus, the Lampf Court determined that the one and three year limitations periods applicable to many of the express causes of action under the 1933 and 1934 Securities Acts were the appropriate source for a limitations period for the implied cause of action under § 10(b) of the 1934 Act. The Court refused to apply the five year statute of limitations applicable to the § 20A insider trading cause of action which was created over 50 years later on the grounds that the provision focused upon a "specific problem" and was longer on account of the "unique difficulties in identifying evidence of such activities" and that the purpose of § 20A was "to provide greater deterrence, detection and punishment of violations of insider trading." Id. 111 S. Ct. at 2781 (citations omitted). The Court found that not only was there no indication that the drafters of § 20A intended to extend that enhanced protection to other provisions of the 1934 Act, but that the text expressed their intent to leave other laws unaffected. Id.3
a. Step One--Should the Limitations Period be Uniform?
Following the analysis set out above, the first step is to determine whether the limitations period should be uniform. This turns upon whether the "federal cause of action tends in practice to 'encompass numerous and diverse topics and subtopics,' such that a single state limitations period may not be consistently applied within a jurisdiction." Lampf.
Plaintiffs' analysis focuses upon the single remedy available and ignores the fact that there are numerous and varied grounds for invoking it. Clearly the inquiry into the different bases for a claim should focus on the factual and legal theories supporting the claim. Given the numerous possible arguments that could be made for analogizing § 215 claims to different causes of action, and the resulting potential for uncertainty and an excess of useless litigation, this appears to be an ideal case for a uniform period.4 Having determined that the limitations period should be uniform, the next step is to determine whether the court should turn to a federal or state source.
b. Step Two--Should the Limitations Period be Derived from a
Federal or State Source?
c. Step Three--Does a Federal Source Provide a Closer Fit?
The district court held that the most analogous federal limitations period was either the one year period found in § 36(b) of the Investment Company Act, 15 U.S.C. § 80a-1, et seq. (the "Company Act"), or the one year from discovery/three years from the violation period applied under both the 1933 and 1934 Securities Acts for sale of unregistered securities, §§ 77l and 77m, fraud in connection with a registration statement § 78r, fraud in connection with the offering or selling of securities, § 78i(e), § 78cc(b), and Rule 10b-5.
Plaintiffs contend that Congress could not have intended to apply the one year period of the 1970 amendment when it enacted § 215 in 1940. Yet, as pointed out in Del Costello, the court need not determine that Congress had the specific intent to apply the borrowed period.5
Plaintiffs also contend that § 36(b) is not analogous to § 215 since § 36(b) "create [d] an entirely new right" and that unlike the § 215 right, it may not be enforced by the investment company "client." Daily Income Fund, Inc. v. Fox, 464 U.S. 523, 535-541, 104 S. Ct. 831, 78 L. Ed. 2d 645 (1984).
They contend that the limitations period was made so short as part of a tradeoff with the securities industry for the new stricter standards it imposed. The statute imposes stricter standards upon the acceptable amount of compensation an investment adviser may collect. The limitation period is directly tied to this aspect of the legislation since rather than barring the assertion of a claim, it limits the period during which damages can accrue to one year prior to the filing of the action. See § 36(b) (3). Furthermore, the one year period is fully adequate for the Company Act § 36(b) claim since other provisions of the statute require that the shareholders review and approve the subject contracts annually. See 15 U.S.C. § 80a-15(c).
Finally they argue that § 29 of the 1934 Act demonstrates Congress's intention that the one/three year period apply only to causes of action for fraud. 15 U.S.C. § 78cc(b). When originally enacted § 29 contained no limitations period. It was subsequently amended to provide that a one/three year period would apply but only to claims based upon § 15, which is an antifraud provision. Since § 29 can also encompass non-fraud claims, the inference is that the one/three year period should not apply to those claims. Defendants contend that the IAA claims are also similar to the 1933 and 1934 Act claims. The purposes behind the statutes are almost identical. In fact, the Supreme Court has said that "Congress intended the [IAA] to be construed like other securities legislation 'enacted for the purpose of avoiding frauds.' " SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195, 84 S. Ct. 275, 284-85, 11 L. Ed. 2d 237 (1963) (citations omitted). Both sets of regulations operate in the same securities market context, proscribe similar conduct, and impose registration and disclosure requirements.
Specifically, the plaintiffs contend that the § 203 claim is identical to the 15 U.S.C. § 77l and 77m, failure to register claims, that § 206 claim duplicates the Rule 10b-5 fraud claim, and that the § 215 rescission remedy is parallel to the § 29(b) rescission remedy.
The district court refused to apply the continuing wrong theory holding that it "has been consistently rejected." The plaintiffs argue that the continuing wrong theory has been consistently applied in federal actions excluding one exception which does not apply here.6
For example, in the antitrust context, the courts hold that " 'each time that a plaintiff is injured by an act of the defendants a cause of action accrues to him to recover the damages caused by that act.' " Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 295 (2d Cir. 1979), cert. denied, 444 U.S. 1093, 100 S. Ct. 1061, 62 L. Ed. 2d 783 (1980) (quoting Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 338, 91 S. Ct. 795, 806, 28 L. Ed. 2d 77 (1971)). The Berkey court explained that the statute begins to run at the time that the plaintiff sustains injury and not when the defendant acts, since anti-competitive conduct by the defendant may give rise to damages in the future which are not predictable at the time of the initial act or within the limitations period. Id. at 295-96 (citing Zenith Radio, 401 U.S. at 339-40, 91 S. Ct. at 806-07).
Similarly, in a civil rights class action based upon installment contracts offered on different terms on the basis of race, one court said that, as in the antitrust context, "the relationship [between the sellers and purchasers] constituted a prolonged and continuing invasion of the rights of the purchasers." Baker v. F & F Invest., 420 F.2d 1191, 1200 (7th Cir. 1970), cert. denied, 400 U.S. 821, 91 S. Ct. 42, 27 L. Ed. 2d 49 (1970). The court said that the limitations period did not begin to run at the execution of each contract since the defendants repeated the overt acts of entering into discriminatory contracts and reaping the unlawful benefits. Id. The court focused on the fact that plaintiffs had alleged a conspiracy to establish an ongoing discriminatory relationship with the entire class of plaintiffs and analogized the situation to the antitrust cases.
In the copyright infringement context, another court found that the infringement was a continuing wrong as long as the defendant and his co-tortfeasors continued to sell the infringing copies. Taylor, 712 F.2d at 1119. Thus, plaintiff had to bring the suit within the statutory period from the last infringing sale, but he could reach back to sales before the statutory period in order to collect his damages. Id.7
Defendants contend that the completed sales transaction theory or commitment theory applies here. That theory provides that the wrong occurs when the plaintiff makes a completed sales transaction. See, e.g., Department of Economic Dev. v. Arthur Andersen & Co., 683 F. Supp. 1463, 1475 (S.D.N.Y. 1988); Ingenito v. Bermec Corporation, 376 F. Supp. 1154, 1184 (S.D.N.Y. 1974). In other words, once plaintiff has committed itself to the transaction, the claim accrues and thus the statute begins to run. When the plaintiff actually fulfills his obligations under the contract, a new wrong is not created since he was already bound to do so. Id. Thus, subsequent payments on a completed sales transactions affect the amount of damages but do not constitute separate wrongs.
The test for whether the commitment theory applies to a contract calling for subsequent payments is whether the plaintiff was committed to pay that amount under the contract or whether he retained the right to terminate the contract and not pay that amount. Arthur Andersen, 683 F. Supp. at 1475; Ingenito, 376 F. Supp. at 1184.
For example, in Ingenito, 376 F. Supp. at 1184, the court found that payments on a promissory note given as consideration for a completed sale did not give rise to new claims while payments pursuant to a maintenance contract did, since by its terms plaintiff was not obligated to continue the maintenance contract and retained the right to cancel it at any time. Id.
Plaintiffs argue that the 1987 Agreement was not binding since it could be cancelled by rescission. It is settled though that the commitment theory tests whether a contract is binding or terminable by its terms. Freschi v. Grand Coal Venture, 551 F. Supp. 1220, 1229-30 (S.D.N.Y. 1982). The possibility of rescinding the contract on the grounds that it violated the IAA does not make the subsequent payments new wrongs.
Plaintiffs argue that the continuing wrong theory applies since the agreement calls for defendants to render on-going investment advice. They contend that this continuing "special relationship" constitutes a continuing wrong relying upon Baker, discussed above, and Eli Lilly and Co. v. EPA, 615 F. Supp. 811 (S.D. Ind. 1985).
The Baker principle does not apply in this case since the defendants entered into one discrete contract with plaintiffs after which plaintiffs were committed to invest a set amount of money. The Eli Lilly reasoning is also not applicable since that case focused on the ongoing statutory authority of the EPA over pesticide registrants under the Federal Insecticide, Fungicide, and Rodenticide Act. Eli Lilly, 615 F. Supp. at 822-23. The relationship between two private parties pursuant to a contract cannot be equated with that kind of relationship, even if it is regulated by statute.
Plaintiffs contend that the continuing duty of KKR to register extends the limitations period. Yet, the cases they rely upon do not support this argument. One case actually applies the commitment theory to a fiduciary's duty to withdraw from an imprudent investment that it is not obligated to continue. Buccino v. Continental Assur. Co., 578 F. Supp. 1518, 1521 (S.D.N.Y. 1983). Another case holds that the offense of a draftee's failure to advise the draft board of his current address was not committed and completed on the first day of such failure but rather was a continuing offense as long as the draftee failed to update the board. United States v. Guertler, 147 F.2d 796, 797 (2d Cir. 1945).
The investment adviser also owes a duty to the government to register. Yet, he harms the purchaser of his investment advice at the time that he enters into a contract that commits the purchaser to pay for the advice. Moreover, the different context of Guertler and the fact that the commitment theory has been consistently applied in the securities law context (see Arthur Andersen, Ingenito, Freschi) suggest that it is far more appropriate to apply the commitment theory here.
The only contract clearly identified in the Complaint as an investment advisory contract entered into on a specified date and alleged in violation of the IAA was the 1987 Agreement. While the Complaint references the partnership agreements, it does not allege the dates on which they were entered or how they violated the IAA. Thus, on this 12(b) (6) motion it was entirely proper for the district court to consider the 1987 Agreement as the sole basis for the accrual of the claim.
Discovery takes place when the plaintiff obtains actual knowledge of the facts giving rise to the action or notice of the facts, which in the exercise of reasonable diligence, would have led to actual knowledge. Ingenito v. State Mutual Life Assurance Company of America, 441 F. Supp. 525, 554 (D.C.N.Y.1977).
In Wilson the Court chose to apply a uniform state statute. 471 U.S. at 275-76, 105 S. Ct. at 1947
"Both RICO and the Clayton Act are designed to remedy economic injury by providing for the recovery of treble damages, costs, and attorney's fees. Both statutes bring to bear the pressure of 'private attorneys general' on a serious national problem for which public prosecutorial resources are deemed inadequate; the mechanism chosen to reach the objective in both the Clayton Act and RICO is the carrot of treble damages. Moreover, both statutes aim to compensate the same type of injury; each requires that a plaintiff show injury 'in his business or property by reason of' a violation." Agency Holding, 483 U.S. at 151, 107 S. Ct. at 2764 (citations omitted)
While the court may be influenced by evidence of Congressional intent, there is no need to show that at the time that Congress provided the express federal limitations period it intended that it would apply to this cause of action. Del Costello, 462 U.S. at 169 n. 21, 103 S. Ct. at 2293 n. 21. Rather, a source should be chosen "because it is the most suitable source for borrowing."
In fact, notwithstanding plaintiffs' contention that a uniform period is improper, they are actually requesting that a uniform period be applied. They just want that period to be the state period for rescission of an unlawful contract
The plaintiffs cite Lampf for the proposition that the court must demonstrate some basis that Congress, when it passed the later legislation, intended for its limitation period to apply to the pre-existing legislation. As explained supra that is not the law. Furthermore, it seems that the Lampf Court addressed the issue primarily because there was express language in the later legislation disclaiming any intent to effect other laws. See 111 S. Ct. at 2780
The plaintiffs cite to cases wherein the continuing wrong theory was applied to federal actions for antitrust, patent infringement, and violation of civil rights. They claim that the cases relied upon the district court involve the exception for completed sales transactions. They claim that since this action is based upon an on-going service contract, which is executory, the completed sales doctrine does not apply
There appears to be some conflict about whether the continuing wrong theory allows a plaintiff to reach back past the limitations period to point to wrongful conduct, but not to calculate damages, or whether it permits the plaintiff to reach back in order to calculate his damages as well. Compare Taylor, 712 F.2d at 1119 ("letting him reach back and get damages for the entire duration of the alleged violation") with Berkey Photo, 603 F.2d at 295 ("The plaintiff, therefore, clearly can recover only for overcharges suffered since the beginning of the limitations period. It remains to be decided, however, whether the conduct element of the offense may be satisfied by wrongful action occurring before the limitations period.")