Stamm v. Corporation of Lloyd's
1997 WL 438773, Fed. Sec. L. Rep. ¦ 99,540
For Plaintiffs: Richard A. De Palma, Esq. Coudert Brothers 1114 Avenue of the Americas New York, N.Y. 10036 Tel: (212) 626-4400
For Defendants: William A. Meehan, Esq. Jeff Imeri, Esq. Mendes & Mount, L.L.P. 750 Seventh Avenue New York, N.Y. 10019 Tel: (212) 261-8000
Lawrence W. Pollack, Esq. Lorna McKenzie, Esq. LeBoeuf, Lamb, Greene & MacRae, L.L.P. 125 West 55th Street New York, N.Y. 10019-5389 Tel: (212) 424- 8000
SCHEINDLIN, District Judge.
*1 Plaintiffs filed a First Amended Complaint on April 9, 1997, alleging claims for violation of sections 12(1) and 12(2) of the Securities Act of 1933 (the "Securities Act"), 15 U.S.C. ¤ 771(1) and (2), Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. ¤ 78j (b), Securities Exchange Commission Rule 10b-5 ("Rule 10b-5"), 17 C.F.R. 240.10b- 5, Article 22-A of the New York General Business Law [FN1] and common law fraud. Defendants moved to dismiss pursuant to Rules 12(b)(3) and 12(b)(6) of the Federal Rules of Civil Procedure. For the reasons that follow, defendants' motion is granted.
FN1. N.Y. General Business Law ¤¤ 349 et seq. (McKinney 1988).
I. Procedural and Factual Background
Familiarity with the facts of this case is presumed. For a full account, see Stamm v. Barclay's Bank of New York et al., 960 F.Supp. 724, 725-26 (S.D.N.Y.1997). I will, however, briefly sketch the procedural history of this case to explain its current posture.
On June 26, 1996, plaintiffs filed an action for common law fraud and violations of Article 22-A of the New York General Business Law in the Supreme Court of the State of New York. Defendant Lloyd's [FN2] removed the action to this Court on July 9, 1996 pursuant to 12 U.S.C. ¤ 632, 9 U.S.C. ¤¤ 203 and 205, 28 U.S.C. ¤ 1331, 28 U.S.C. ¤¤ 1441(a) and (d), and 28 U.S.C. ¤ 1426. Plaintiff moved to remand to state court, and I denied this motion in an Opinion and Order dated October 23, 1996. See Stamm v. Barclay's Bank of New York et al., No. 96 Civ. 5158, 1996 WL 614087 (S.D.N.Y.1996) (federal jurisdiction exists under 12 U.S.C. ¤ 632). Plaintiffs then moved to certify the October 23, 1996 Order for appeal pursuant to 28 U.S.C. ¤ 1292(b), and defendants moved to dismiss pursuant to, inter alia, Rule 12(b)(3) of the Federal Rules of Civil Procedure and the doctrine of forum non conveniens. In an Opinion and Order dated March 26, 1997, I denied plaintiffs' motion to certify and granted defendants' motion to dismiss. See Stamm, 960 F.Supp. at 728, 733.
FN2. "Lloyd's" refers here to defendant Corporation of Lloyd's, a/k/a Society and Council of Lloyd's, d/b/a Committee of Lloyd's, and Lloyd's of London. Lloyd's contends that it should properly be referred to as "The Corporation, Society and Council of Lloyd's". See Lloyd's Memorandum of Law in Support of Motion to Dismiss ("Lloyd's Memo") at 1; Lloyd's Reply Memorandum in Support of Motion to Dismiss ("Lloyd's Reply") at 1.
However, the March 26 Order granted plaintiffs leave to amend their Complaint:
Plaintiffs did not bring their claims under United States securities laws, and did not contend that the FS [forum selection] and COL [choice-of-law] clauses violate United States public policy because plaintiffs lack an adequate remedy in England to vindicate their substantive rights. No doubt plaintiffs chose not to do so, but rather to bring their claims under New York law, because they believed that [Roby v. Corporation of Lloyd's, 996 F.2d 1353 (2d Cir.1993) ] effectively foreclosed such claims.... Given the SEC's newly- adopted position regarding Lloyd's practices in recruiting American Names, it is unclear whether Roby continues to squarely preclude the instant plaintiffs from arguing that the FS and COL clauses in the New Undertaking are unreasonable because they violate United States public policy by depriving American investors of adequate remedies. In light of the aforementioned developments, I dismiss plaintiffs' action with leave to amend their Complaint in accordance with this Opinion.
*2 Stamm, 960 F.Supp. at 733-34. Thus encouraged, plaintiffs filed a First Amended Complaint that alleged state claims and claims brought under federal securities laws and regulations.
A. Plaintiffs' Federal Claims
Both Lloyd's and plaintiffs have dedicated the lion's share of their briefs to debating the question of whether the FS and COL clauses require the dismissal of plaintiffs' federal claims. Plaintiffs' arguments present an interesting question of law, described briefly below. However, this question cannot be resolved in this forum because plaintiffs' federal claims are time-barred.
1. Plaintiffs' Arguments
Purchasers of securities offered to the public within the United States cannot waive the substantive rights provided to them by federal securities laws and regulations. Section 14 of the Securities Act provides:
Any condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this title or of the rules and regulations of the Commission [the SEC] shall be void.
15 U.S.C. ¤ 77n. Section 29a of the Exchange Act provides a substantially similar antiwaiver provision. See 15 U.S.C. ¤ 78cc(a).
Roby held that Lloyd's FS and COL clauses, operating in tandem, did not violate these antiwaiver provisions. See Roby, 996 F.2d at 1363, 1366. Plaintiffs nevertheless proffer two related Lines of argument in an effort to escape the preclusive effect of the Roby decision.
First, noting that Roby recently has been the focus of judicial and scholarly criticism, plaintiffs contend that case was incorrectly decided. See Richards v. Lloyd's of London, 107 F.3d 1422, 1428 (9th Cir.1997) ( "Although we do not lightly deviate from the conclusions of our fellow circuits, we are convinced that those cases improperly disregard the statutory antiwaiver provisions of the Securities Acts.") (citing Darrell Hall, No Way Out: An Argument Against Permitting Parties to Opt Out of U.S. Securities Laws in International Transactions, 97 Colum. L.Rev. 57 (1997)). The reasoning of the Richards opinion, combined with Hall's extensive research, analysis and critique of the circuit cases with which it conflicts are highly persuasive. However, it is fundamental that district judges may not disregard controlling circuit precedent even if they consider it to be unwise or outdated. I am therefore bound to follow Roby, although it may well be wrongly decided.
Plaintiffs also maintain that dicta in Roby, read in light of the SEC's current position regarding Lloyd's FS and COL clauses, provides the leeway necessary to distinguish this case from the circumstances of Roby. Specifically, the Roby court stated:
We are concerned in the present case that the Roby Names' contract clauses may operate "in tandem" as a prospective waiver of the statutory remedies for securities violations, thereby circumventing the strong and expansive public policy in deterring such violations.... We believe this policy concern is somewhat diluted in this case because the SEC consistently has exempted Lloyd's from the registration requirement of the securities laws. Apparently, the SEC has decided that the Lloyd's means test meets the requirements of Regulation D. We are extremely reluctant to dispute the SEC's apparent judgment that the Roby Names are sophisticated enough that they do not need the disclosure protections of the securities laws. *3 Roby, 996 F.2d at 1364, 1365-66. From this language it is apparent that, at least in part, the Second Circuit relied on the SEC's inaction in reaching its holding that Lloyd's FS and COL clauses did not violate the antiwaiver provisions of the Securities and Exchange Acts.
The SEC has recently taken the position that the FS and COL clauses do violate the antiwaiver provisions of the Securities and Exchange Acts because, taken together, they operate to deprive purchasers of securities of the substantive rights provided by those statutes, and because English law does not provide comparable rights and remedies. See Declaration of Richard A. De Palma, Counsel for Plaintiffs ("De Palma Decl."), dated June 20, 1997, Ex. D (Amicus Curiae Brief filed with the Ninth Circuit by SEC in Richards ). [FN3] The SEC's view is in part based on the following observation:
FN3. Plaintiffs also claim that the SEC has filed an amicus brief advocating the same position with the Fifth Circuit in Leslie v. Lloyd's of London, 1995 WL 661090 (S.D.Tex. Aug.25, 1995). See Plaintiffs' Memorandum in Opposition to Defendants' Motion to Dismiss ("Plaintiffs' Memo") at 18 n. 6.
The district court's decision, if upheld, would allow foreign promoters of securities undertaking large scale selling efforts in the United States to avoid private liability under the securities laws simply by requiring the American investors to agree to resolve disputes in a foreign jurisdiction under foreign law, even if the remedies available under the foreign law were far less effective than those available under United States law.... Concluding that the English courts will provide "sufficient", albeit more restrictive, remedies to investors, the courts have held that United States public policy is not contravened by the choice of forum and choice of law clauses. The antiwaiver provisions, however, are not simply an expression of public policy that favors United States securities laws unless other comparable laws are available. Rather, they are an express and unequivocal directive that the rights and obligations under the securities laws cannot be waived. This determination has been made by Congress, and the courts are not free to substitute their own public policy determinations.
De Palma Decl., Ex. D at 5, 15 (emphasis added).
Plaintiffs now argue that the SEC's position represents a legal and regulatory sea-change that requires a reevaluation of Lloyd's FS and COL clauses. Given the Roby court's reliance on the SEC's previous silence, plaintiffs contend that the Second Circuit may in the future hold that it is not absolutely bound to follow that decision. A fortiori, plaintiffs argue, district courts should no longer consider Roby iron-clad precedent with regard to Lloyd's FS and COL clauses.
The cogent reasoning of the Richards decision, combined with the SEC's forcefully-advocated position and Hall's exhaustive scholarship combine to form a convincing attack on the citadel of Roby by undermining the policy bases and analysis of Supreme Court precedent on which that decision rests. Arguably, a district court might find that Roby no longer requires the enforcement of Lloyd's FS and COL clauses in actions brought under the federal securities claims. This question, however, must await another day. Because I find below that plaintiffs' federal securities claims are time-barred, it would be inappropriate to resolve this issue.
2. The Securities and Exchange Acts' Statute of Limits and Repose
*4 The time requirements of actions brought under Section 12(1) or Section 12(2) of the Securities Act are clear and unambiguous:
Section 13 [of the Securities Act] sets forth a statute of limitations framed by a statute of repose. Under this provision, plaintiffs have one year from the date of discovery of a violation to file an action. Defendants who may be liable for such a violation, however, are safe from any liability arising from the violation if the action is not brought within three years of the violation itself. Three undisputed principles exist within the statute. First, Section 13 is clear on its face: discovery starts the one-year limitation running. Second, the phrasing of the discovery rule incorporates the doctrine of fraudulent concealment, pegging accrual of the cause of action for a concealed fraud to the date "after such discovery should have been made by the exercise of reasonable diligence." Third, while the Section 13 discovery rule incorporates the doctrine of fraudulent concealment, the one-year-after- discovery provision will be extended "in no event ... more than three years after the security was bona fide offered to the public, or ... after the sale". 15 U.S.C. ¤ 77m.
Anixter v. Home-Stake Production Co., 939 F.2d 1420, 1434 (10th Cir.1991), judgment vacated on other grounds sub. nom. Dennler v. Trippet, 503 U.S. 978, 112 S.Ct. 1658, 118 L.Ed.2d 382 (1992). See also Jackson Nat. Life Ins. v. Merrill Lynch & Co., 32 F.3d 697, 704 (2d Cir.1994) ("The three-year period is an absolute limitation which applies whether or not the investor could have discovered the violation."). See generally, X Louis Loss and Joel Seligman, Securities Regulation 4492-4498 (1993) ("Loss & Seligman") (discussing statute of limitations for actions under section 12 of the Securities Act).
In 1991, the Supreme Court ruled that the same time requirements applied to private rights of action brought under ¤ 10(b) of the Exchange Act or under Rule 10b-5. See Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 361, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991). In Lampf, the Supreme Court also ruled that "[b]ecause the purpose of the 3-year limitation is clearly to serve as a cutoff, we hold that [equitable] tolling principles do not apply to that period." Id. at 363. From this it follows that no claims under sections 12(1) and (2) of the Securities Act, Section 10(b) of the Exchange Act, or Rule 10b-5 may be brought more than three years after the sale or public offering from which those claims arise. See Phillips v. Kidder, Peabody & Co., 933 F.Supp. 303, 312 (S.D.N.Y.1996), aff'd, 108 F.3d 1370 (2d Cir.1997). See generally, Loss & Seligman at 4515-4521 (discussing statute of limitations for actions under Section 10(b) of the Exchange Act and Rule 10b-5).
Plaintiffs were originally solicited by Lloyd's in 1977, and each became Names more than 17 years ago. See Stamm, 960 F.Supp. at 726 n. 3; First Amended Complaint at ¦ 40. Plaintiffs allege that they wrote insurance through Syndicate 0317 in 1982, Syndicate 0418 in 1983, and Syndicate 0421 in 1985. See First Amended Complaint at ¦ 48. Thus, it appears that the latest "sale" or "offering" of a security by defendants to plaintiffs occurred in 1985. [FN4] As plaintiffs filed this action in 1996, defendants argue that any federal securities claims based on those sales or offerings are now time- barred.
FN4. Section 12(2)(3) of the Securities Act states in pertinent part: "The term 'sale' or 'sell' shall include every contract of sale or disposition of a security or interest in a security, for value. The term 'offer to sell', 'offer for sale', or 'offer' shall include every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value." 15 U.S.C. ¤ 77b. Section 3(14) of the Exchange Act contains a similar definition of the terms "sale" and "sell". See 15 U.S.C. ¤ 78c.
*5 Plaintiffs respond to this fatal attack on their federal securities claims by contending their claims were timely filed because defendants' fraudulent conduct has continued to date. See Plaintiffs' Memo at 24. The flaw in this argument is that it conflates plaintiffs' claims arising from the offer and sale of securities in 1985 and before with claims arising from defendants' allegedly fraudulent conduct committed after that offer and sale. Plaintiffs federal claims, however, are based entirely on defendants' alleged sale of unregistered securities and fraudulent sale of securities, and not on defendants' alleged post-sale fraudulent activities. See First Amended Complaint at ¦¦ 100-107. The express language of 15 U.S.C. ¤ 77m and Lampf dictate that federal securities claims such as plaintiffs' may not be brought more than three years after the sale or offering of a security under any circumstance. Hence, whether or not Lloyd's fraudulent conduct has been on-going, plaintiffs do not have a viable claim under the federal securities laws and regulations arising from a sale or offering of securities that took place more than three years ago. Defendants' motion to dismiss plaintiffs' federal claims must be granted.
B. Plaintiffs' State Claims
The antiwaiver provisions of the federal securities laws do not exempt plaintiffs' state claims from the FS and COL clauses. See Richards, 107 F.3d at 1430 (dismissing state common law claims for improper venue because of Lloyd's FS and COL clauses). Accordingly, for reasons already discussed in Stamm, 960 F.Supp. at 728-733, plaintiffs' claims for common law fraud and violation of Article 22-A of the New York General Business Law must be dismissed for improper venue.
C. Leave to Amend
Rule 15(a) of the Federal Rules of Civil Procedure provides that the court should grant leave to amend "freely ... when justice so requires." The Second Circuit has noted that "[w]hen a motion to dismiss is granted, 'the usual practice is to grant leave to amend the complaint.' ... Although the decision whether to grant leave to amend is within the discretion of the district court, refusal to grant leave to amend must be based on a valid ground." Oliver Schools, Inc. v. Foley, 930 F.2d 248, 253 (2d Cir.1991) (quoting Ronzani v. Sanofi S.A., 899 F.2d 195, 198 (2d Cir.1990) (quotations omitted)). Where the possibility exists that the defect can be cured and there is no prejudice to defendant, leave to amend at least once should normally be granted as a matter of course. See Oliver Schools, Inc., 930 F.2d at 253.
Plaintiffs have twice attempted to plead claims under state and federal law. [FN5] It now appears that any claims plaintiffs may have against defendants are either subject to the FS and COL clauses or are time-barred. I therefore see no reason why leave to amend should be granted for a second time. At this stage the parties would be best served by litigating in the courts of England, which will no doubt swiftly resolve this dispute.
FN5. Plaintiffs' original Complaint, first filed in the Supreme Court of the State of New York, also contained federal claims. After Lloyd's removed the action to this Court, plaintiffs voluntarily dismissed their federal claims pursuant to Fed.R.Civ.P. 41(a)(1).
*6 For the foregoing reasons, plaintiffs' state claims must be dismissed for improper venue and plaintiffs' federal claims are time-barred. It does not appear that plaintiffs will be able to amend their pleadings to present viable claims against defendants in this forum. Defendants' motion to dismiss pursuant to Rules 12(b)(3) and 12(b)(6) of the Federal Rules of Civil Procedure is accordingly granted with prejudice. The Clerk of the Court is ordered to close this case.