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CORTES v. GRATKOWSKI

May 14, 1992

MARY B. CORTES, DENNIS CORTES, MARCUS J. PERKERSON, WILLIAM B. BARTON, ROSEMARY L. BARTON, JAMES W. REINDL, MARGARET S. REINDL, GEORGE E. MARTINO, HOWARD S. ROSEN, EVELYN F. ROSEN, G. THOMAS SEELEY, JUDY A. SEELEY, JON DAVID STEINMETZ, WILLIAM M. GUILD and PATRICK J. MARTINO, Plaintiffs,
v.
RONALD GRATKOWSKI and PATRICK A. PARISI, Defendants. PATRICK A. PARISI, Third-Party Plaintiff, v. CONTINENTAL CASUALTY COMPANY, an Illinois corporation, Third-Party Defendant.


HOLDERMAN


The opinion of the court was delivered by: JAMES F. HOLDERMAN

JAMES F. HOLDERMAN, District Judge:

 Plaintiffs, investors in a real estate partnership, brought this action for violations of § 10(b) of the Securities Exchange Act of 1934 (the "1934 Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder (Count I), violations of the Illinois Securities Law of 1953, Ill. Ann. Stat. ch. 121 1/2, P137.1 et seq. (Count II), legal malpractice (Count III), and breach of contract (Count IV). Plaintiffs allege that defendants Ronald Gratkowski and Patrick A. Parisi ("defendants") made and concealed misrepresentations and omissions of material facts in the course of the sale of partnership interests. Defendant Parisi ("defendant") moves for summary judgment on all counts as to certain plaintiffs. For the following reason, that motion is denied.

 FACTS

 The facts according to plaintiffs' complaint are as follows. Defendants, while jointly doing business as "Urban Innovations," formed partnerships for the purposes of acquiring, developing, rehabilitating, selling and/or renting various real estate projects. (Complaint, P5.) Defendants jointly formed an entity called "Urban Innovations: Sheridan II General Partnership." The purpose of this entity was "to acquire, manage, rehabilitate, mortgage, lease and/or convert and/or further develop/improve the premises located at 4128-36 North Sheridan Road in the City of Chicago" (the "Sheridan II Project"). (Id., P6.) In forming the Sheridan II Project, defendants created a document, entitled "Urban Innovations: General Partnership Joint Venture Agreement," which purports to set forth the interests of the participants in this entity. (Id., P7.)

 Plaintiffs allege that beginning in or about November, 1986 and continuing through May, 1989, defendants commenced a course of conduct designed to sell interests in the Sheridan II Project to plaintiffs. (Id., P8.) In connection with such sale, defendants made various oral and written misrepresentations of material facts, omitted to state material facts necessary in order to make the representations not misleading, and engaged in a continuing scheme to conceal such misrepresentations and omissions. (Id., PP9-10).

 DISCUSSION

 Defendant's summary judgment motion is based upon the statute of limitations for claims under § 10(b) of the 1934 Act. Defendant relies on the Supreme Court's decision in Lampf, Pleva, Lipkind, Prupis& Petigrow v. Gilbertson, 115 L. Ed. 2d 321, 111 S. Ct. 2773 (1991) and the Seventh Circuit's decision in Short v. Belleville Shoe Mfg. Co., 908 F.2d 1385 (7th Cir. 1990), cert. denied, 115 L. Ed. 2d 1052, 111 S. Ct. 2887 (1991). These cases rejected the practice of borrowing from state law the limitations period for § 10(b) claims and established a federal limitations period. Lampf, 111 S. Ct. at 2780; Short, 908 F.2d at 1389. The federal statute of limitations announced in these cases bars § 10(b) actions not brought within one year after the discovery of the facts constituting the violation and within three years after such violation. Lampf, 111 S. Ct. at 2782; Short, 908 F.2d at 1390. The three year limit is a period of repose which is inconsistent with tolling. Lampf, 111 S. Ct. at 2782; Short, 908 F.2d at 1391-92.

 In reliance on Lampf and Short, defendant argues that any purchase of securities by plaintiffs which occurred more than three years prior to the filing of this suit on May 22, 1990, are barred by the statute of limitations. Furthermore, defendant contends that payments made by these plaintiffs subsequent to May 22, 1987, were required responses to partnership capital calls and were not subsequent sales of securities involving investment decisions. Finally, defendant moves to dismiss Counts II, III, and IV for lack of pendent jurisdiction should Count I, upon which federal jurisdiction is premised, be dismissed.

 On December 19, 1991, seven months after the decision in Lampf, Congress passed the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC Act"), Public Law 102-242, 105 Stat. 2236. Section 476 of the FDIC Act amends the 1934 Act and requires only the prospective application of Lampf.1 Under § 476(a),

 
the limitations period for any private civil action implied under § 10(b) of this [1934] Act that was commenced on or before June 19, 1991, shall be the limitation period provided by the laws applicable in the jurisdiction, including principles of retroactivity, as such laws existed on June 19, 1991.

 Section 476 implicitly approves the statute of limitations adopted by the Supreme Court in Lampf on June 20, 1991, but overrules the Court's retroactive application of the limitation period. *fn2" Thus, Congress, by passing § 476 in light of Lampf, effectively established a federal statute of limitations for § 10(b) cases and decided that the limitations period would be effective only for cases commenced after June 19, 1991.

 I. CONSTITUTIONALITY OF § 476 OF THE FDIC ACT

 Defendant argues that § 476 violates the Equal Protection Clause of the U.S. Constitution because "the statute creates separate classes of citizens with different protections regarding the same federal securities claim depending on where the citizens reside and when the claim was filed." (Def. Supp. Reply, p. 10.) Defendant contends that such classifications are not rationally related to a legitimate governmental purpose. (Id. at 11.)

 All the cases cited by defendant in support of his equal protection claim involve the invalidation of state laws. This is particularly significant because greater deference is afforded to Congress when a court tests a federal law than to a state legislature when a court tests a state statute. Hampton v. Mow Sun Wong, 426 U.S. 88, 96 S. Ct. 1895, 1905, 48 L. Ed. 2d 495 (1976). The Supreme Court has stated that when a discriminatory rule is expressly mandated by Congress, "we ...


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