The opinion of the court was delivered by: MAROVICH
GEORGE M. MAROVICH, UNITED STATES DISTRICT JUDGE
Plaintiffs filed this eight-count complaint against defendants alleging that defendant Boulevard Bancorp Inc. ("Boulevard") committed various violations of: (1) §§ 11 and 12(2) of the Securities Act of 1933 ("SA"), 15 U.S.C. § 77k (which prohibits, inter alia, the making of material misstatements and omissions in registration statements) and 15 U.S.C. § 77l(2) (which prohibits, inter alia, the seller of a security from making material misstatements or omissions in a prospectus or oral communication); (2) §§ 10(b) and 29 of the Securities Exchange Act of 1934 ("SEA"), 15 U.S.C. § 78j(b) (which prohibits the use of any "manipulative or deceptive device or contrivance" in contravention of the SEC's Rule 10b-5 in connection with the purchase or sale of any security) and 15 U.S.C. § 78cc (which addresses the validity of contracts "made in violation of any provision of [the SEA] or of any rule or regulation thereunder"); and (3) pendent Illinois statutory and common law. Plaintiffs further allege that defendant Miami Corporation is liable to plaintiffs for Boulevard's alleged SA and SEA violations pursuant to the "controlling person" provisions of § 15 of the SA, 15 U.S.C. § 77o and § 20(a) of the SEA, 15 U.S.C. § 78t(a). The SA and SEA claims are in counts one through four and the pendent state claims are in counts five through eight. Before the court is defendants' motion for summary judgment as to plaintiffs' federal securities claims. For the following reasons, defendants' motion is granted. Furthermore, plaintiffs' pendent state law claims are dismissed for lack of subject matter jurisdiction.
Summary judgment is appropriate if "the pleadings, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the movant is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). Where a party bears the burden of proof on an issue he must "affirmatively demonstrate, by specific factual allegations, that there is a genuine issue of material fact which requires trial." Beard v. Whitley County REMC, 840 F.2d 405, 410 (7th Cir. 1988) (emphasis in original). A party opposing a motion for summary judgment must do more than raise "'some metaphysical doubt as to the material facts' in order to survive summary judgment." Holland v. Jefferson National Life Ins. Co., 883 F.2d 1307, 1312 (7th Cir. 1989) (quoting Beard at 410). "Where the factual allegations presented by the party opposing the motion would not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial." Id.
Defendant Boulevard is a bank holding company which owns the outstanding stock of four member banks: Boulevard Bank National Association ("BBNA"), First National Bank of Des Plaines, Citizens' National Bank of Downers Grove, and National Security Bank of Chicago ("National Security"). Defendant Miami Corporation is a private investment company which "at all material times" owned or controlled 49% of the outstanding common stock of Boulevard. Plaintiffs are the former shareholders of Northwest Financial Corp. ("Northwest"). Northwest -- 100% of whose stock is now owned by Boulevard -- owns more than 99% of the outstanding common stock of National Security.
On September 29, 1989, pursuant to an Agreement and Plan of Merger dated March 23, 1989 ("Merger Agreement"), plaintiffs and Boulevard closed a transaction pursuant to which plaintiffs "exchanged" all of their shares of Northwest stock for 840,000 shares of Boulevard common stock "purportedly worth . . . more than $ 20,000,000". The Merger Agreement contemplated, inter alia, that National Security would become a member bank of Boulevard, that plaintiffs would remain as the directors of National Security, and that plaintiffs would become shareholders of Boulevard.
The motion for summary judgment which is before the court is narrow in scope. The single issue presented is whether plaintiffs' federal securities claims are time-barred. This issue was originally presented to Magistrate Judge Lefkow on April 9, 1991 during a hearing on plaintiffs' motion for a preliminary injunction. On April 12, 1991 the magistrate judge read into the record her report and recommendation to this court that plaintiffs' motion for preliminary injunction be denied because plaintiffs had failed to show a likelihood of success on the merits. (The report of the April 12, 1991 proceedings is incorporated herein by reference). Plaintiffs filed with this court written objections to the magistrate judge's recommendation.
The statute of limitations for private causes of action brought under §§ 11 and 12(2) of the SA is expressly provided for in § 13 of the SA, 15 U.S.C. § 77m. That statute provides for a limitation period of one year "after the discovery of the untrue statement or the omission, or after such discovery could have been made by the exercise of reasonable diligence . . . ." In Short v. Belleville Shoe Mfg. Co., 908 F.2d 1385 (7th Cir. 1990), the Seventh Circuit held that the statute of limitations set forth in § 13 of the SA also applies to actions brought pursuant to § 10(b) of the SEA. Id. at 1392.
The parties agree that the statute of limitations was tolled by express agreement between the parties from December 29, 1990 until the date this lawsuit was filed. Thus, if plaintiffs discovered defendants' alleged SA and SEA violations or could have discovered such violations by the exercise of reasonable diligence before December 29, 1989, plaintiffs' SA and SEA claims are time-barred.
The gravamen of plaintiffs' complaint against defendants is that the "true value of the Boulevard shares [which they received in exchange for their Northwest shares under the Merger Agreement] . . . was materially overstated as a result of the concealment of and material misrepresentations [by defendants] concerning" various aspects of Boulevard's well-being including, inter alia, the well-being of various aspects of its loan portfolio.
Plaintiffs' primary contention is that defendants withheld information about the magnitude of potential third and fourth quarter 1989 losses due to nonperforming loans until after the September 29, 1989 closing of their Merger Agreement. Related to the increase in nonperforming loans is defendants' alleged failure to have an adequate allowance for possible loan losses and an adequate provision for possible loan losses. Specifically, plaintiffs claim that the ratios of allowances for possible loan losses to the nonperforming loans and the provisions for possible loan losses to the nonperforming loans were inadequate and misleading as to the actual potential loss. Thus, argue plaintiffs, defendants made the Boulevard stock look more valuable than it would have been if more accurate provisions and allowances for loan losses were made.
The briefs submitted by both parties, while well-written and thorough, cover more ground than the court intends to address. Suffice it to say, there may very well be many disputed issues of fact on substantive issues, particularly those relevant to the pendent state claims. The court will not be distracted from the only question before it in this motion: whether the federal securities claims, which are the sole basis for this court's jurisdiction, are time-barred. The court focuses on those claims and more specifically focuses on whether plaintiffs discovered or could have discovered the alleged misrepresentations and omissions through the exercise of reasonable diligence before December 29, 1989. Plaintiffs bear the burden of proof on that issue.
One of the plaintiffs is A. L. Bogan, Jr. He was the primary focus of the preliminary injunction motion. He was at all relevant times, and still is, the Chairman and Chief Executive Officer of National Security. On September 22, 1989, one week before the closing of the Merger Agreement, Bogan was elected to the Board of Directors of both BBNA and defendant Boulevard, its holding company. Bogan's directorship was effective October 1, 1989. As a director of Boulevard and Boulevard Bank, Bogan received detailed monthly financial information about both institutions. Bogan was elected as a new member of Boulevard's Asset and Liability Management Committee on October 20, 1989, the date of the ...