Cooperativa v. Kidder ( 1993 )

United States Court of Appeals
For the First Circuit
No. 92-2148
COOPERATIVA DE AHORRO Y CREDITO AGUADA,
Plaintiff, Appellant,
v.
KIDDER, PEABODY & CO., ET AL.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Jose Antonio Fuste, U.S. District Judge]
Before
Selya, Cyr, and Stahl,
Circuit Judges.
Enrique Peral, with whom Edgardo L. Rivera, Roberto Boneta, and
Munoz Boneta Gonzalez Arbona Benitez & Peral, were on brief for
appellant.
Nestor M. Mendez-Gomez, with whom Patricia Rivera-MacMurray and
Pietrantoni Mendez & Alvarez, were on brief for appellee Kidder,
Peabody & Co., Gladys Isabel Flores for appellee Ramon Almonte, and
Guillermo J. Bobonia and Carlos A. Bobonis on brief for appellee Paine
Webber Incorporated.
May 19, 1993
STAHL, Circuit Judge. In this appeal, we must
decide whether the district court properly applied Fed. R.
Civ. P. 12(b) in dismissing plaintiff's complaint as time
barred. Because the district court improperly relied on
materials not within the pleadings in reaching its decision,
we reverse the dismissal.
I.
FACTUAL BACKGROUND AND PRIOR PROCEEDINGS
For purposes of this appeal, we provide only a
summary of the procedural history of this case.1 Plaintiff-
appellant Cooperativa de Ahorro y Credito Aguada ("the Coop")
is a single-branch savings and loan cooperative located in
Aguada, Puerto Rico. On December 28, 1989, more than three
years after purchasing shares in Drexel Burnham Lambert Unit
Trust Bond Funds (hereinafter "Unit Trusts"), the Coop
brought Section 10(b)2 and Rule 10b-53 claims against its
1. For more detailed accounts of the case, see Cooperativa
de Ahorro y Credito Aguada v. Kidder, Peabody & Co., 758 F.
Supp. 64 (D.P.R. 1990) (hereinafter "Cooperativa I");
Cooperativa de Ahorro y Credito Aguada v. Kidder, Peabody &
Co., 777 F. Supp. 153 (D.P.R. 1990) (hereinafter "Cooperativa
II"); Cooperativa de Ahorro y Credito Aguada v. Kidder,
Peabody & Co., 799 F. Supp. 261 (D.P.R. 1990) (hereinafter
"Cooperativa III").
2. Section 10(b) of the Securities Exchange Act of 1934, 15
U.S.C. 78j(b), states in relevant part:
It shall be unlawful for any person, directly or
indirectly, by the use of any means or
instrumentality of interstate commerce or of the
mails, or of any facility of any national
securities exchange . . . [t]o use or employ, in
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financial services brokers, defendants-appellees Kidder,
Peabody & Co. ("Kidder") and Ramon Almonte.4 The complaint
connection with the purchase or sale of any
security registered on a national securities
exchange or any security not so registered, any
manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the
Commission may prescribe as necessary or
appropriate in the public interest or for the
protection of investors.
3. Rule 10b-5, 17 C.F.R. 240.10b-5 states:
It shall be unlawful for any person, directly or
indirectly, by the use of any means or
instrumentality of interstate commerce, or of the
mails or of any facility of any national securities
exchange,
(a) To employ any device, scheme, or
artifice to defraud,
(b) To make any untrue statement of a
material fact or to omit to state a
material fact necessary in order to make
the statements made, in the light of the
circumstances under which they are made,
not misleading, or
(c) To engage in any act, practice, or
course of business which operates or
would operate as a fraud or deceit upon
any person,
in connection with the purchase or sale of any
security.
4. The complaint also named Almonte's subsequent employer,
Paine Webber, Inc., ("Paine Webber"), as a defendant, and
alleged other securities, RICO, and mail fraud claims against
Almonte, Kidder and Paine Webber. These additional federal
claims were dismissed by the district court and are not
before us on this appeal. See Cooperativa I, 758 F. Supp. at
64; Cooperativa II, 777 F. Supp. at 157-61.
In addition, the complaint included state law fraud
claims against all three defendants. These claims were
dismissed for want of pendent jurisdiction coincident with
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alleged that Almonte, while employed at Kidder, had
fraudulently induced the Coop to purchase shares in the Unit
Trusts by misrepresenting to the Coop the nature and risk of
these investments. As to timeliness, the complaint alleged
that, because Almonte had continued to misrepresent the
nature and value of the Unit Trusts from the date of purchase
through July of 1989, the applicable Puerto Rico two-year
statute of limitations had tolled.5
While the Coop's claims were pending before the
district court, the United States Supreme Court announced a
uniform federal statute of limitations for all Section 10(b)
and Rule 10b-5 claims in Lampf, Pleva, Lipkind, Prupis &
Petigrow v. Gilbertson, 111 S. Ct. 2773 (1991). Lampf held
that such claims must be brought within one year of discovery
of the facts which give rise to the violation, and no more
the dismissal of the federal securities claims. See
Cooperativa II, 777 F. Supp. at 161. While our decision in
the instant appeal will result in the reinstatement of those
claims as well, we reinstate them without prejudice to the
district court's further consideration of whether or not it
should hear and determine them under pendent and/or
supplemental jurisdiction.
5. The parties do not dispute that at the time the Coop
filed suit, the applicable statute of limitations was the
two-year provision "borrowed" from the Puerto Rico Securities
Act, 10 L.P.R.A. 890(e). This two-year limitation was
subject to equitable tolling under the doctrine of fraudulent
concealment, which provides that "the statute of limitations
applicable to claims under Section 10(b) and Rule 10b-5
begins to run when an investor, in the exercise of reasonable
diligence, discovered or should have discovered the alleged
fraud." General Builders Supply Co. v. River Hill Coal
Venture, 796 F.2d 8, 11 (1st Cir. 1986).
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than three years after the violation itself. Id. at 2781-82.
The one-and-three year limitation announced in Lampf is not
subject to tolling. Id. at 2782. Because the Coop's claims
had been filed more than three years after the purchase of
the Unit Trusts, the district court, relying on Lampf,
dismissed the claims (hereinafter "the first dismissal").
Cooperativa II, 777 F. Supp. at 155-56.
Less than two months after the first dismissal, the
Coop's claims were reinstated by Section 476 of the Federal
Deposit Insurance Corporation Improvement Act of 1991, Pub.
L. No. 102-242, 105 Stat. 2387 (codified as 27A of the
Securities Exchange Act of 1934, 15 U.S.C. 78aa-1)
(hereinafter "Section 27A").6 Section 27A reinstates claims
6. Section 27A provides:
(a) Effect on pending causes of action
The limitation period for any private civil
action implied under [section 10(b)] 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.
(b) Effect on dismissed causes of action
Any private civil cause of action implied
under [section 10(b)] that was commenced on or
before June 19, 1991--
(1) which was dismissed as time barred
subsequent to June 19, 1991, and
(2) which would have been timely filed under
the limitation period provided by the laws
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which, like the Coop's, were (1) pending at the time Lampf
was decided, and (2) dismissed as time barred under Lampf.
Pursuant to Section 27A, the Coop filed a timely motion for
reinstatement.
With the Coop's claims before it a second time, the
district court set out to apply the pre-Lampf statute of
limitations, which, as noted above, was subject to tolling.
Having no discovery before it on the issues of timeliness and
tolling, the district court applied Fed. R. Civ. P. 12(b)7
to the Coop's motion for reinstatement.
The district court began its application of Rule
12(b) with a brief analysis of the junk bond market. Relying
extensively on articles in the national press, submitted by
applicable in the jurisdiction, including
principles of retroactivity, as such laws existed
on June 19, 1991, shall be reinstated on motion by
the plaintiff not later than 60 days after Dec. 19,
1991.
7. Defendants argue that the district court applied Rule
60(b) to the motion for reinstatement. Though the district
court did refer to the motion as a "Fed. R. Civ. P. 60(b)
motion for reconsideration," Cooperativa III, 799 F. Supp. at
262, it went on to apply a Rule 12(b) standard, "[l]ooking at
the facts in a light most favorable to [the Coop] and taking
them as true, Fed. R. Civ. P. 12(b)(6)." Id. at 264.
Nothing in the language of Section 27A or in its
legislative history suggests that district courts should
apply Rule 60(b) to motions for reinstatement thereunder.
Rather, Section 27A states that claims meeting its
requirements "shall be reinstated on motion by the plaintiff"
(emphasis supplied). The district court properly chose to
apply a Rule 12(b) standard to the Coop's motion for
reinstatement, and we reject defendant's argument that the
court applied or should have applied Rule 60(b).
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neither party, the district court found that "it was public
common knowledge within institutional investment circles that
. . . the high yield bonds sold by Drexel were accompanied by
an equally high risk," Cooperativa III, 799 F. Supp. at 264,
and that "any reasonabl[y] sophisticated institutional
investor should have recognized that it was investing in junk
bonds."8 Id. at 266. The district court concluded that the
Coop "was under an obligation to conduct a reasonably
diligent inquiry from the date of purchase of [the Unit
Trusts] and so the statute of limitations began to run on
that date." Id.
As an alternative date for commencing the running
of the statute of limitations, the district court found that
the stock market crash of October 19, 1987, was sufficient to
put the Coop on notice of its possible securities claims
against defendants. Id. at 265-66. Again, the court relied
on national press reports submitted by neither party to
support its view that such notice was within the realm of
common knowledge.9
8. The district court relied upon articles from, inter alia,
The Christian Science Monitor, Barrons, Forbes, Business
Week, Fortune, and The Los Angeles Times. Cooperativa III,
799 F. Supp. at 264 nn. 5, 6.
9. Here, the district court relied on articles from The
Financial Times, Reuters, The New York Times, and The
Washington Post. Cooperativa III, 799 F. Supp. at 265-66 nn.
10, 12.
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Applying either date, the district court found that
the Coop's December 28, 1989, complaint failed to state a
timely claim under Puerto Rico's two-year statute of
limitations. Accordingly, it dismissed the Coop's claims a
second time (hereinafter "the second dismissal"). Id.
The Coop now appeals the second dismissal, arguing
that the district court's reliance on materials outside of
the pleadings was improper and thus not a valid basis for
dismissing its claim. For the reasons that follow, we agree.
II.
DISCUSSION
Under Rule 12(b), "any consideration of documents
not attached to the complaint, or not expressly incorporated
therein, is forbidden, unless the proceeding is properly
converted into one for summary judgment under [Fed. R. Civ.
P.] 56." Watterson v. Page, 987 F.2d 1, 3 (1st Cir. 1993).
See also Fed. R. Civ. P. 12(b) (if "matters outside the
pleading are presented to and not excluded by the court, the
motion shall be treated as one for summary judgment and
disposed of as provided in Rule 56"). Moreover, upon
conversion to summary judgment, "all parties shall be given a
reasonable opportunity to present all material made
pertinent" by the conversion. Fed. R. Civ. P. 12(b). See
also Whiting v. Maiolini, 921 F.2d 5, 6 (1st Cir. 1990).
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Here, the district court relied extensively on
materials outside the pleadings in reaching its conclusion as
to when the statute of limitations began to run on the Coop's
claims. In relying on these extraneous materials, the
district court gave the parties neither notice nor
opportunity to be heard, nor did it convert the proceeding to
one for summary judgment. Such use of outside materials is
beyond the scope of Rule 12(b).
Nor do we find that the district court's reliance
on such material was within the scope of "judicial notice"
under Fed. R. Evid. 201(b).10 Ordinarily, when a district
court takes judicial notice of a fact other than at the
request of a party, it should notify the parties that it is
doing so and afford them an opportunity to be heard. United
States v. Garcia, 672 F.2d 1349, 1356 n.9 (11th Cir. 1982).
See also Barr Rubber Prods. Co. v. Sun Rubber Co., 425 F.2d
1114, 1125-26 (2d Cir.) (stating that failure to notify
parties "exceeded the bounds of judicial notice, and thereby
denied [party] an effective opportunity to object [to],
examine and rebut the matters noticed") (footnote omitted),
10. Fed. R. Evid. 201(b) provides:
A judicially noted fact must be one not subject to
reasonable dispute in that it is either (1)
generally known within the territorial jurisdiction
of the trial court or (2) capable of accurate and
ready determination by resort to sources whose
accuracy cannot reasonably be questioned.
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cert. denied, 400 U.S. 878 (1970); 21 Charles A. Wright &
Kenneth W. Graham, Federal Practice and Procedure 5107
(1977) ("[T]he judge must notify the parties that [s/]he is
taking judicial notice of an adjudicative fact.") (footnote
omitted). As noted above, the district court gave the
parties no such opportunity to be heard. Accordingly, we
find that the district court's use of scattered press reports
to take judicial notice of an adjudicative fact was beyond
the proper scope of judicial notice.
Finally, defendants offer an alternative ground for
affirming the district court's dismissal of the Coop's
claims, claiming that Section 27A is constitutionally infirm.
For the reasons persuasively stated in Anixter v. Home-Stake
Prod. Co., 977 F.2d 1533, 1543-47 (10th Cir. 1992), cert.
denied, No. 92-1099, 1992 WL 391280 (Apr. 19, 1993), we
reject defendants' constitutional challenges to Section
27A.11 See also Henderson v. Scientific-Atlanta, Inc., 971
11. "Given the existence of a cogent, well-reasoned,
eminently correct opinion closely on point, we embrace it."
United States v. 29 Cartons, 987 F.2d 33, 37 (1st Cir. 1993).
Beyond Anixter, we add only the following comment in order to
address defendants' argument that Section 27A
unconstitutionally deprived them of a vested property right.
It is well established that a party's property right in a
cause of action does not vest "until a final, unreviewable
judgment has been obtained." Hammond v. United States, 786
F.2d 8, 12 (1st Cir. 1986). See also Hoffman v. City of
Warwick, 909 F.2d 608, 621 (1st Cir. 1990). At the time that
Section 27A was signed into law, no final judgment had been
entered in the instant case. Accordingly, defendants'
argument that Section 27A deprived them of a vested property
right is without merit.
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F.2d 1567, 1571-75 (11th Cir. 1992); Berning v. United
States, No. 91-3318, 1993 WL 84590, **5-7 (7th Cir. March 25,
1993).
III.
CONCLUSION
For the foregoing reasons, the order of the
district court denying the Coop's motion for reinstatement
under Section 27A is reversed. Reversed and remanded.
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