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POLANSKY v. PAINEWEBBER INC.

March 14, 1991

I. PETER POLANSKY, custodian for Meg and Jane Polansky, Plaintiffs,
v.
PAINEWEBBER INCORPORATED, a corporation, and RONALD LEVI, Defendants


Brian Barnett Duff, United States District Judge.


The opinion of the court was delivered by: DUFF

BRIAN BARNETT DUFF, UNITED STATES DISTRICT JUDGE

 Plaintiff Peter Polansky filed this three count complaint against PaineWebber Inc. ("PaineWebber") and one of its employees, Ronald Levi, alleging violations of the Securities and Exchange Commission Rule 10b-5 ("Rule 10b-5"), 17 C.F.R. § 240.10b-5, common law fraud and breach of fiduciary duty. *fn1" The complaint was filed on November 13, 1990 and alleged that the defendants, who were responsible for the plaintiff's brokerage accounts, misrepresented the risk involved in his purchase of Lomas Financial Inc. Liquid Yield Notes ("Lomas"). In addition, the defendants allegedly failed to inform the plaintiff that the safety of the notes had materially decreased due to changes in market conditions. As a result, the notes became virtually worthless.

 Ronald Levi was the account executive responsible for the plaintiff's brokerage accounts. Levi did not have the discretion to make trades without the approval of the plaintiff. The plaintiff alleges that he is an unsophisticated investor and totally relied on Levi's investment advice. He also alleges that Levi was aware of the fact that preservation of capital was the plaintiff's highest priority.

 Lomas was in the business of making real estate loans primarily in the Southwestern portion of the United States. Because of the recession in the real estate industry, Lomas was forced to declare bankruptcy. At the time the plaintiff purchased the notes, they were of BBB quality, although Levi represented that the bonds were A quality. In the world of corporate bonds, a BBB rating is considered investment grade quality. Thus, they are safe enough for pension funds and other lower risk investors. Any rating below BBB is no longer investment grade quality. There is a considerable difference in the risk associated with federally insured certificates of deposit, which the plaintiff sold to purchase these notes, and BBB notes. The former is almost a risk free investment, while the latter does carry a much higher degree of risk.

 The defendants have moved pursuant to Federal Rule 12(b)(6) and 12(b)(2) to dismiss this complaint. Their attack focuses on the first count, the Rule 10b-5 violation, because it is the sole basis of this court's jurisdiction. The defendants contend that the Rule 10b-5 claim is barred by the statute of limitations and that it fails to state a cause of action.

 STATUTE OF LIMITATIONS

 In this circuit, the statute of limitations for Rule 10b-5 claims have been borrowed from the Illinois Blue Sky Laws. Teamsters Local 282 Pension Trust Fund v. Angelos, 815 F.2d 452 (7th Cir. 1987). The seventh circuit has determined that the limitation period is three years. Ill.Rev. Stat. ch. 121.5, para. 137.13 D (Smith-Hurd 1960). The court reversed course in Short v. Belleville Shoe Manufacturing Co., 908 F.2d 1385 (7th Cir. 1990), holding that the limitation period for Rule 10b-5 claims should be derived from the limitations applicable to express private civil remedies contained in the Securities Exchange Act of 1934 and the Securities Act of 1933. The court determined that the appropriate limitation period was one year with a three year period of repose. § 13 of the Securities Act of 1933. *fn2" The court found § 13 as the most suitable limitations period because it was designed by Congress to apply to the same type of conduct that comprises most Rule 10b-5 claims: "fraudulent misstatements or omissions in connection with the purchase or sale of securities." Id. at 1390. This conclusion had previously been reached by the third circuit in In re Data Access Systems Secur. Litigation, 843 F.2d 1537 (3rd Cir. 1988). The second circuit followed suit on November 8 in Ceres Partners v. GEL Associates, 918 F.2d 349 (2nd Cir. 1990).

 The question before the court, with a slight twist, is whether Short applies retroactively. Short was decided on July 30, 1990, almost four months before the plaintiff filed his complaint. On October 24, 1989, the plaintiff sent a letter to the Vice President of PaineWebber, Grant Ellington, complaining about the very same actions that are alleged in the first count of his complaint. Therefore, for purposes of the statute of limitations the plaintiff had discovered this malfeasance no later than October 24, 1989. Because his claim accrued on that date, the plaintiff had three months to discover the Short opinion and still comply with the new one year statute of limitations.

 The defendant argues that there is no question of retroactivity in this case because the complaint was filed subsequent to the Short decision. Retroactive treatment is when a decision is "applied to conduct that occurred before the decision was rendered." E.E.O.C. v. Vucitech, 842 F.2d 936 (7th Cir. 1988). Therefore, this is a case where the retroactive application of a decision is at issue. In deciding this issue, the court will consider the fact that the complaint was filed after the Short decision.

 In Chevron Oil Co. v. Huson, 404 U.S. 97, 30 L. Ed. 2d 296, 92 S. Ct. 349 (1971), the Supreme Court held that a newly announced rule of law should not be applied retroactively when 1) the new rule overrules clear past precedent on which litigants may have relied, 2) its purpose and effect would not be substantially furthered by retroactive application, and 3) imposing the rule retroactively would impose hardship or injustice. Id. at 106-07. There is a presumption favoring retroactive treatment. E.E.O.C. v. Vucitech, 842 F.2d 936 (7th Cir. 1988).

 Short overruled existing seventh circuit precedent which had previously looked to state law in determining the appropriate limitation period. See e.g. Teamsters Local 282 Pension Trust Fund v. Angelos, 815 F.2d 452 (7th Cir. 1987). The defendant, however, argues that Short was clearly foreshadowed by recent Supreme Court and seventh circuit cases and therefore reliance on past precedent was unjustified. See Del Costello v. International Brotherhood of Teamsters, 462 U.S. 151, 161, 76 L. Ed. 2d 476, 103 S. Ct. 2281 (1983) ("In some circumstances, however, state statute of limitations can be unsatisfactory vehicles for the enforcement of federal law.") Agency Holding Corp. v. Malley-Duff & Associates, Inc., 483 U.S. 143, 97 L. Ed. 2d 121, 107 S. Ct. 2759 (1987) (Using antitrust statute of limitations for RICO claims). In Norris v. Wirtz, 818 F.2d 1329 (7th Cir. 1987; Easterbrook, J.) the court specifically expressed its disfavor with using the state statute of limitations for § 10(b) claims. Perceiving that the federal courts had made a mistake, Judge Easterbrook, in an insightful opinion, stated:


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