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PUCCI v. SANTI

April 17, 1989

RALPH PUCCI and BRUCE JOHNSON, Plaintiffs,
v.
LOUIS SANTI, GERALD LITWIN, CLAPP & EISENBERG, Defendants



The opinion of the court was delivered by: DUFF

 BRIAN BARNETT DUFF, UNITED STATES DISTRICT JUDGE

 Plaintiffs Ralph Pucci and Bruce Johnson have sued Emil Stavriotis, Louis Santi, Gerald Litwin and the law firm Clapp and Eisenberg for violating § 10(b) of the Securities Exchange Act of 1983 ("§ 10(b)"), 15 U.S.C. § 78j(b), the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961 et seq., and Illinois statutory and common law. On December 7, 1988, this court dismissed the plaintiffs' twelve-count first amended complaint, ruling that the two federal counts failed to state claims upon which relief could be granted and that the state law claims should be brought in state court. Pucci v. Stavriotis, 86 C 6860, slip op. (N.D.Ill. Dec. 7, 1988) (" Pucci I "). The plaintiffs have now moved to reconsider this ruling. For the reasons set forth below, the motion to reconsider will be granted, the December 7 ruling vacated, and the motion to dismiss granted in part and denied in part.

 BACKGROUND

 The allegations of the complaint are as follows. In early 1981, Stavriotis and Santi, aided and abetted by Litwin, entered into a conspiracy to sell worthless interests in a coal mining venture. At the time, Santi was the major shareholder of Minerals Development Company, Inc. ("MDC") and Stavriotis was the major shareholder of Exploring Resources, Inc. ("ERI"). Litwin was a shareholder, officer and director of ERI, as well as a member of the law firm Clapp and Eisenberg.

 From the outset, Stavriotis, Santi and Litwin knew that neither JPR nor MDC owned properties with substantial coal reserves, that the negotiations between MDC and JPR were a sham, that MDC had been insolvent since 1980, and that the plaintiffs' interests in JPR were worthless. Nevertheless, from April 1981 through at least September 1986, Stavriotis and Santi continued to advise the plaintiffs that exploration, engineering and development work was being conducted, and that MDC was making production payments to JPR from the purported coal production on JPR properties. For his part, Litwin represented that he was serving as the attorney for JPR, but failed to disclose the fraud to the plaintiffs.

 The complaint further alleges that the plaintiffs first discovered the wrongdoing on September 3, 1986 when one of them, Mr. Pucci, was deposed in connection with two lawsuits filed against the defendants in a federal court in Wisconsin. The plaintiffs brought this lawsuit in August, 1987.

 The original complaint named as defendants Stavriotis, Santi, Litwin, and Clapp and Eisenberg, and contained 17 counts: two federal claims and 15 state law claims. Because the plaintiffs as well as Stavriotis were Illinois citizens, the state law claims were predicated solely on pendent jurisdiction.

 Stavriotis, however, soon filed for bankruptcy. The plaintiffs, rather than waiting for the automatic bankruptcy stay to be lifted, chose to dismiss Stavriotis from the case, filing a first amended complaint which listed Stavriotis as a defendant in the heading, and repeatedly referred to him in the allegations, but did not name him as a defendant. The plaintiffs also sought, and this court entered, a default judgment against defendant Santi. Thus, only Gerald Litwin and Clapp and Eisenberg remain in the case. Of the twelve counts in the amended complaint, eleven name them.

 Shortly after the amended complaint was filed, the defendants moved to dismiss these claims on a variety of grounds, the most important being that the statute of limitations had run on all claims and that the plaintiffs had failed to allege facts justifying an extension of the limitations period. In Pucci I, this court agreed with the defendants that the § 10(b) claim was time-barred. As for the RICO claim, the court did not reach the limitations issue, instead dismissing the claim because the plaintiffs had failed to plead a pattern of racketeering. The court then dismissed the remaining claims on the grounds that they were state law claims and, with the federal claims gone, should be pursued in state court.

 The plaintiffs have moved for reconsideration of that ruling on two grounds. First, they assert that because the only non-diverse defendant in this case has been dismissed, the court now has diversity jurisdiction over the state law claims. They then contend that this court erred in finding that the § 10(b) claim is time-barred.

 DISCUSSION

 The State Law Claims

 Because the original complaint named Stavriotis as a defendant, and the amended complaint listed him in the heading and repeatedly referred to him as an integral part of the alleged conspiracy, this court took him still to be a defendant in this case. The record, on the contrary, reflects that the plaintiffs dismissed him from the case on September 10, 1987. Complete diversity thus exists between the plaintiffs and the remaining defendants. Since the defendants concede that Stavriotis is not an indispensable party here, this case may proceed in federal court.

 This ruling does not mean, of course, that all of the state law claims should be reinstated. The defendants have moved to dismiss them on their merits, and some of their arguments prove more meritorious than some of the claims.

 a. Counts III and IV

 Counts III and IV are predicated on Illinois securities law, Ill.Rev.Stat. ch. 121 1/2, paras. 137.5, 137.8. They have as their limitations period Ill.Rev.Stat. ch. 121 1/2, para. 137.13D. Pursuant to amendments effective January 1, 1986, the statute contains both a three-year limitations period and a five-year statute of repose. *fn1" The comments to the amended statute make clear that the five-year repose period overrides the general Illinois fraudulent concealment statute, Ill.Rev.Stat. ch. 110, paras. 13-215. *fn2" See Zahorik v. Smith Barney, Harris Upham & Co., Inc., 664 F. Supp. 309, 312 (N.D.Ill. 1987). Since the plaintiffs invested in JPR in April 1981, but did not file suit until August 1987, the defendants argued in their original motion that the claims were time-barred.

 In their response, the plaintiffs did not dispute that the amended version of the statute, with its five-year repose period, applies to these claims. See Pucci I, slip op. at 3. n. 1. As discussed at length below, they did argue that the federal securities claims could be tolled under federal tolling principles despite the state repose period, but that argument obviously has no bearing on the state securities claims. See Hemmings v. Barian, 822 F.2d 688, 690 (7th Cir. 1987). The plaintiffs thus avoided having these state law claims dismissed as time-barred only because the court dismissed them on jurisdictional grounds.

 Now that the state claims are back before the court, the arguments (or lack thereof) in the original briefs would seem to mandate their dismissal. However, in their motion to reconsider, the plaintiffs have raised one argument which, although they addressed it only to the § 10(b) claim, could save their state securities claims as well.

 To understand how, a brief digression is necessary. In dismissing the § 10(b) claim, this court held that the Seventh Circuit's ruling in Norris v. Wirtz, 818 F.2d 1329, 1331 (7th Cir.), cert. denied, 484 U.S. 943, 108 S. Ct. 329, 98 L. Ed. 2d 356 (1987), foreshadowed a break in § 10(b) limitations analysis. Prior to Norris, the Seventh Circuit had consistently held that, although federal courts must adopt analogous state limitations periods in § 10(b) cases, federal tolling principles were available to stay the running of the period. See, e.g., Suslick v. Rothschild Securities Corp., 741 F.2d 1000 (7th Cir. 1984). However, in Norris, and then again in Barian, the Seventh Circuit suggested that the federal courts had gone astray in adopting state law limitations periods but then employing federal tolling rules. Although Barian said so only in dicta, and Norris proceeded to analyze (but then reject) the federal tolling argument, this court was convinced that these cases signalled a change in the law. Accordingly the court ruled that the plaintiffs could not rely on federal tolling principles to delay the expiration of their § 10(b) claim.

 Having determined that state law exclusively would apply, the court then noted that para. 137.13 D was the controlling state statute, and that it now contains a five-year repose period. Since the plaintiffs had not contested that, if state law controlled, the amended version of the statute was applicable, the court ruled that the § 10(b) claim was time-barred.

 In their motion to reconsider, however, the plaintiffs now have argued that, even assuming that federal tolling no longer applies, the court should not have dismissed the claims. They contend that because the amended version of para. 137.13 D shortened the limitations period applicable to their claim -- under the old version they (may have) had until September 1989 to file suit -- this court should not have automatically applied the new limitations period here.

 Although the plaintiffs made this argument only on the § 10(b) claims, it obviously applies as well to those state claims governed by para. 137.13 D. The defendants could have responded with some force that the plaintiffs waived this argument by not raising it in the first round of briefs, but because they did not, this court will examine it.

 The first issue that arises is whether the amendment to para. 137.13 D -- containing a limitations period of three years and a repose period of five -- actually shortened the period applicable to the plaintiffs' claims. Prior to January 1, 1986, the statute of limitation for state law securities claims was three years. If this was an ordinary limitations period, then it could be extended by principles of equitable tolling, and (assuming for now that the plaintiffs adequately have pleaded fraudulent concealment) the plaintiffs' claims still existed when the amended statute adopted its repose period. On the ...


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