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LEWIS v. HERMANN

September 13, 1991

EDMUND J. LEWIS, M.D., individually and as Trustee for EDMUND J. LEWIS, M.D. & ASSOCIATES, S.C. DEFINED BENEFIT PENSION TRUST, EDMUND J. LEWIS, M.D. & ASSOCIATES, S.C., an Illinois corporation, and AMERICAN MEDICAL SUPPLY CORPORATION, an Illinois corporation, Plaintiffs,
v.
RICHARD C. HERMANN, R.C. HERMANN & ASSOCIATES, C.P.A., TRAVERSE REALTY AND DEVELOPMENT CORPORATION, an Illinois corporation, CHARLES J. RICHARDS, RIVER NORTH SECURITIES CORPORATION, an Illinois corporation, MUCH SHELIST, FREED, DENENBERG, AMENT & EIGER, P.C., SCHWARTZ & FREEMAN, and LONG GROVE TRADING CO., Defendants



The opinion of the court was delivered by: ASPEN

 MARVIN E. ASPEN, UNITED STATES DISTRICT JUDGE

 In June 1989, Dr. Edmund J. Lewis, individually and as a Trustee for Edmund J. Lewis, M.D. & Associates, S.C. defined Benefit Pension Trust ("Lewis Trust"), Edmund J. Lewis, M.D. & Associates, S.C., and the American Medical Supply Corporation (hereafter collectively referred to as "Lewis") brought this multi-count action against Richard C. Hermann, R.C. Hermann & Associates, Traverse Realty & Development Corporation ("Traverse Realty"), Charles J. Richards, and River North Securities Corporation ("River North"). In June 1990, the plaintiffs amended their complaint to add counts against three new defendants, Long Grove Trading Company ("Long Grove"), Much Shelist, Freed, Denenberg, Ament & Eiger, P.C. ("Much Shelist"), and Schwartz & Freeman ("S & F").

 Currently pending are several motions. Richards and River North (hereafter collectively referred to as "Richards") have moved to dismiss Counts I through VII. Hermann, R.C. Hermann & Associates, and Traverse (hereafter collectively referred to as "Hermann") have moved to dismiss Counts I and III through VII. Long Grove, Much Shelist, and S & F have moved to dismiss Counts XI, XII, and XII, respectively. In addition, Lewis has moved to strike portions of Hermann's answer to Count X and has moved for judgment on the pleadings on Count X. For the following reasons, we grant the motions in part and we deny them in part.

 I. Background *fn1"

 Lewis' complaint seeks recovery based on a variety of alleged transgressions by each of the defendants in connection with Lewis' purchase of interests in several real estate investments. The complaint claims statutory violations under federal securities laws, ERISA, Illinois securities laws, and the Illinois Consumer Fraud and Deceptive Business Practices Act. The complaint also presents claims for common law fraud, breach of fiduciary duty, negligent misrepresentation, accountant's negligence, trover and conversion, and an action on a guaranty. The allegations pertinent to the motions to dismiss are as follows.

 A. Allegations Concerning Richards and Hermann

 From 1982 to 1986, Hermann served in varying capacities as bookkeeper, collection agent, accountant and financial consultant for Lewis, both in his individual capacity and in his capacity as Trustee for the Lewis Trust. During this time, Hermann arranged, either directly or through Richards, to have Lewis invest his funds and the funds of the Lewis Trust in five real estate limited partnerships. In 1981, Hermann recommended that Lewis invest in La Villita Investors, Beta ("La Villita"). In early 1984, Richards recommended that Lewis invest funds in Metro Partners. In mid-1985, Richards recommended that Lewis invest in serial notes issued by Houston Land Investors, Ltd. ("Houston Land"). Also in 1985, Hermann recommended that Lewis invest in Pueblo Villas Investors ("Pueblo Villas"). Finally, in August 1986 Richards recommended that Lewis purchase serial notes for and a limited partnership interest in Metro Uptown Investors, Ltd. ("Metro Uptown"). The precise dates as to when Lewis actually purchased his interests in these entities has not been alleged. With the exception of Houston Land, Hermann was a general partner of each of the limited partnerships.

 In seeking to hold Richards and Hermann liable for any loss of these investments, Lewis' allegations of wrongdoing are substantially similar as to each partnership. Generally, Lewis claims a variety of omissions and misrepresentations made by Hermann and Richards in connection with their recommending and executing the purchase of interests in each of the partnerships on behalf of Lewis. Lewis claims that these defendants never told him about the substantial sales or management commissions that they would receive from the transaction. Regarding La Villita and Houston Land, Lewis claims he never received a private placement memorandum. Regarding Metro Partners and Metro Uptown, Lewis claims that he was not told about or directed to read the information contained in each private placement memorandum. Lewis further alleges wrongdoing regarding the handling of certain of the investor suitability questionnaires. Lewis also claims that he was given false information about the price and viability of the real estate investments in Metro Partners and Metro Uptown.

 B. Allegations against Long Grove, Much Shelist, and S & F

 Lewis claims that Long Grove should be held liable as a responsible party in this action because Long Grove was listed as the broker-dealer for the purchase of the serial note issued by Houston Land. *fn2" Lewis alleges in Count XI that, as a registered broker on the sale of Houston Land, Long Grove failed to adequately or properly train or supervise Richards' activities, and that Long Grove aided and abetted the fraud perpetrated upon Lewis in violation of federal securities laws.

 Lewis seeks to hold the law firms S & F and Much Shelist liable for their respective roles in counseling Hermann in the drafting and finalizing of office circulars which were used in the solicitation and sale of interests in Metro Partners and Metro Uptown. Lewis claims that S & F and Much Shelist had a duty to disclose Hermann's and Richards' material misrepresentations or omissions, and that, by failing to do so, they aided and abetted the commission of securities fraud against Lewis.

 II. Discussion

 A. Statute of Limitations

 Each of the defendants has moved to dismiss certain counts or portions of counts on the ground that they are barred by the applicable statute of limitations. Richards challenges the timeliness of the claims in Counts I-VII that relate to Metro Partners and Houston Land. Hermann challenges the timeliness of the claims in Counts I, IV, V and VII that relate to Metro Partners, La Villita and Pueblo Villas and the claims in Counts III and VI that relate only to Metro Partners and La Villita. *fn3" Long Grove, Much Shelist and S & F have challenged the timeliness of Counts XI, XII and XIII respectively.

 1. Timeliness of Limitations Argument

 With respect to the statute of limitations arguments raised by Richards and Hermann, Lewis first argues that these defendants have waived the right to raise the limitations defense. Hermann filed his answer to Lewis' original complaint on August 11; Richard filed his on August 14, 1989. The answers did not assert the statute of limitations as an affirmative defense. On June 1, 1990, Lewis filed his amended complaint, which added new counts and parties but did not significantly change any of the claims against Richards and Hermann. It was in their answers to the amended complaint that Richards and Hermann first raised the defense of the statute of limitations. The same limitations defense was also raised by the each of the newly added defendants. All of the motions to dismiss were directed at the amended complaint, with Richards and Hermann being the first to promptly file their motions.

 Generally, an assertion that the statute of limitations bars a claim is an affirmative defense which must be pleaded in the first responsive pleading or it may be considered waived. See Johnson v. Heckler, 769 F.2d 1202, 1208-09 (7th Cir. 1985); Metropolitan Housing Development Corp. v. Village of Arlington Heights, 558 F.2d 1283 (7th Cir. 1977), cert. denied, 434 U.S. 1025, 98 S. Ct. 752 , 54 L. Ed. 2d 772 (1978). This rule, however, is not applied automatically and as a practical matter there are numerous exceptions to it. See generally, 5 Wright & Miller, Federal Practice and Procedure, 1278, 491-505 (1990). Resolution of the issue appears mainly to be a matter within our discretion, balancing the available procedures for correcting any omission from the pleadings with prudential considerations of notice and prejudice to the plaintiff. In other words, since the federal rules allow liberal amendment of pleadings, including answers, our primary consideration basically is whether we would have allowed Richards and Hermann leave to amend their original answer in June of 1990 had they not been compelled to file new answers in response to Lewis' amended complaint. Without unduly complicating the analysis, we believe that the circumstances of this case do not warrant a finding of waiver.

 Subsequent to the close of the original pleadings, the parties spent the first several months attempting to reach a settlement. It was not until those efforts failed in mid-January 1990 that the case entered the initial phases of discovery, during which time the parties on both sides sought and obtained repeated extensions of time for discovery and to add parties. It was not until the middle of May that the first two depositions were noticed and the parties reached certain accords regarding the discovery of documents. In sum, nothing of major substance transpired in the case between the time it was originally filed and the time that Lewis filed his amended complaint. *fn4" Thus, what Lewis derides as a delay of over a year on the part of Richards and Hermann in raising the limitations defense was a delay of no great consequence to the pursuit of the merits of the case. Cf. Expertise, Inc. v. Aetna Fin. Co., 810 F.2d 968 (10th Cir. 1987) (a statute of limitations defense was not waived by its absence from defendant's answer, when the defense was included in a pre-trial order). The only prejudice to Lewis is that he may ultimately be denied a decision on the merits of his case. That alone is not the kind of prejudice that compels a finding of waiver of the limitations defense--if it were, then there would never be grounds for allowing an affirmative defense that was not raised in the original answer.

 2. Counts I and XI-XIII (Federal Securities Laws)

 Counts I and XI-XIII are based on alleged violations of Sections 10(b) and 15(c)(1) of the Securities Exchange Act of 1934, 15 U.S.C. 78j(b) and 78o(c)(1). The Seventh Circuit has recently overruled prior precedent and held that Section 13 of the Securities Act of 1933, as amended by the Securities Act of 1934 ("§ 13"), 15 U.S.C. § 77, provides the most appropriate limitations period for § 10(b) and Rule 10b-5 actions. Short v. Belleville Shoe Manufacturing Co., 908 F.2d 1385 (7th Cir. 1990). And just this past week, in reversing a case out of the Ninth Circuit, the United States Supreme Court affirmed that Section 13 provides the applicable limitations period. Lampf v. Gilbertson, 111 S. Ct. 2773, 115 L. Ed. 2d 321 (1991). Section 13 provides that an action is barred unless brought within one year of the discovery of the untrue statement or omission but in no event shall any action be brought more than three years after the sale. 15 U.S.C. § 77m. Equitable tolling principles will not extend the filing period beyond three years after the transaction. Lampf, slip op. at 12-13; Short, 908 F.2d at 1391-92; see also Norris v. Wirtz, 818 F.2d 1329 (7th Cir.) cert. denied, 484 U.S. 943, 108 S. Ct. 329 , 98 L. Ed. 2d 356 (1987) (Legislative history of § 13 indicates that Congress did not intend equitable tolling principles to apply in actions under the federal securities laws).

 In response to the motions to dismiss Lewis has raised the issue, expressly left open in Short, as to whether Short should be applied retroactively. *fn5" 908 F.2d at 1389; see also, Radiology Center, S.C. v. Stifel, Nicolaus & Co., 919 F.2d 1216, 1223 (7th Cir. 1990); Robin v. Arthur Young & Co., 915 F.2d 1120, 1122 (7th Cir. 1990), cert. denied, 113 L. Ed. 2d 250, 111 S. Ct. 1317 (1991); Astor Chauffeured Limousine Co. v. Runnfeldt Invest. Corp., 910 F.2d 1540, 1544 (7th Cir. 1990). Lewis claims that, because the decision was handed down after he filed his amended complaint and represented a clear break from past precedent, a retroactive application of Short would be unjust. See Chevron Oil Company v. Huson, 404 U.S. 97, 92 S. Ct. 349, 355 , 30 L. Ed. 2d 296 (1971). In seeking to avoid retroactive application of Short, Lewis wishes to defeat the statute of limitations defense by taking advantage of earlier rulings in this circuit that applied the arguably broader statute of limitations of the forum state to Section 10(b) and Rule 10b-5 cases. See, e.g., Davenport v. A.C. Davenport & Son, Inc., 903 F.2d 1139 (7th Cir. 1990) (employing the three year limitations period found in Section 13(D) of the Illinois Securities Act, Ill. Rev. Stat., ch. 121 1/2, para. 137.13(D)); Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123, 127 (7th Cir. 1972) (same).

 Lewis relies in part on our prior decision in Charette v. Emmanuel, No. slip op. (N.D. Ill. , 1990). In that opinion, decided prior to Short, we declined to depart from then-existing precedent as to the statute of limitation and further concluded in any event that

 
even if we chose to depart from existing precedent, it would be inappropriate to enforce a new limitations period in this case. A court should not apply a new rule of law retroactively when to do so would overrule clear precedent and result in injustice. Chevron Oil Company v. Huson, 404 U.S. 97, 92 S. Ct. 349, 355 , 30 L. Ed. 2d 296 (1971). The application of a new statute of limitations in this case would result in injustice to Charette, who was entitled to rely on Seventh Circuit precedent establishing a three year limitations period. This reliance was justified even though it appears that this precedent may topple in the near future. See Kayne v. Paine Webber, 703 F. Supp. 1334, 1343 (N.D.Ill. 1989).

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