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July 16, 1992

C. RUSH McINNIS, et al.

The opinion of the court was delivered by: THOMAS A. HIGGINS

 The Court has before it the motions to dismiss of the defendants, Merrill Lynch, Pierce, Fenner & Smith; Sandestin Beach Hotel, Inc.; and Frank L. Flautt, Jr., made orally on October 30, 1991, after the close of the plaintiffs' proof. Merrill Lynch filed a contemporaneous written motion to dismiss (Docket Entry No. 446). *fn1" Also before the Court are the plaintiffs' response to motion to dismiss of defendant Merrill Lynch, Pierce, Fenner & Smith, Inc. (filed October 29, 1991; Docket Entry No. 448), and Merrill Lynch's reply brief in support of motion to dismiss (filed November 12, 1991; Docket Entry No. 450).

 For the reasons discussed below, the Court grants the defendants' motions to dismiss plaintiffs' federal and state securities claims, state fraud claims, and breach of fiduciary duty claims on statute of limitations grounds. The Court grants the defendants' motions to dismiss plaintiffs' breach of contract claim on its merits. *fn2"


 This action was filed originally on October 31, 1986, in the District Court for the Northern District of Alabama. It was transferred to this Court on January 21, 1987, by order of the Honorable Seybourn H. Lynne, Senior Judge for the Northern District of Alabama. It is a class action *fn4" in which the plaintiffs allege violations of section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j) and Rule 10b-5 promulgated thereunder, the Florida Securities Act (Fla. Stat. § 517.301), fraudulent misrepresentation and deceit under Alabama state law (Ala. Code § 6-5-104), and breach of contract and breach of fiduciary duty. *fn5" The Court has jurisdiction over the federal securities claims pursuant to 28 U.S.C. § 1331, 15 U.S.C. §§ 77v and 78aa, and 18 U.S.C. § 1964. The Court has pendant jurisdiction over the state law claims.

 At issue are hotel interests *fn6" which the plaintiffs purchased in the Sandestin Beach Hilton, a resort hotel on Florida's Gulf Coast. The hotel is fifteen stories high and has 400 guest rooms. It was developed by the defendant Sandestin Beach Hotel, Inc. (SBH). Frank Flautt was, at all times material to this case, a shareholder, director, and president of SBH. The hotel interests were sold exclusively by Merrill Lynch for SBH.

 Most of the investors were "accredited investors," as determined by Regulation D of the Securities Act of 1933, with a net worth in excess of one million dollars or a gross income of at least $ 200,000 for the years 1981 and 1982, and with anticipated income at least equal to that in 1983. Confidential private placement memorandum at 1, plaintiffs' trial exhibit no. 2A. A few investors did not meet this high qualifying criteria, but were screened by Merrill Lynch using financial information provided by the potential investor. *fn7" Merrill Lynch, Pierce, Fenner & Smith, Inc.'s proposed findings of fact and conclusions of law at 3 (received August 30, 1991). The hotel interests were sold based on the representations in a Private Placement Memorandum, a copy of which each investor received at or before the time he signed the Unit Sales Agreement (through which he contracted to buy the hotel interest). The PPM was issued, and the hotel interests were offered for sale, on February 9, 1983. All of the plaintiffs signed their respective Unit Sales Agreements on or before April 25, 1983. No investor exercised his right to cancel the contract within fifteen days of executing the Unit Sales Agreement. See Unit Sales Agreement at para. 10, plaintiffs' trial exhibit no. 3; PPM at 37; Merrill Lynch's proposed findings of fact at 27.

 The plaintiffs allege essentially that the defendants omitted to disclose, or misrepresented, material facts with regard to: (a) the townhouses which were subsequently built on land adjacent to the hotel site, the ownership of that adjacent land, and the effect of the townhouses on views from the hotel rooms; (b) the developer's profits; (c) the structure of the offering; and (d) the inflation projections in the PPM. Plaintiffs' trial brief and proposed findings of fact and conclusions of law at 3-5 (filed August 30, 1991; Docket Entry No. 421). Before trial, the defendants filed various motions for summary judgment and to dismiss, which the Court denied. See McInnis v. Merrill Lynch, Pierce, Fenner & Smith, 706 F. Supp. 1355, 1359-60 (M.D. Tenn. 1989). Primarily, for purposes of this memorandum, the Court denied Merrill Lynch's motion to dismiss on statute of limitation grounds because there were "disputed factual questions." Id. at 1357. Trial before the Court began on September 23, 1991, and continued through the close of plaintiffs' proof on October 28, 1991. On October 30, 1991, the defendants moved to dismiss pursuant to Rule 41(b) of the Federal Rules of Civil Procedure.


 When considering a defendant's motion to dismiss under Rule 41(b) *fn8" "for insufficiency of the plaintiff's evidence it becomes the duty of a court to weigh and evaluate the evidence." Weissinger v. United States, 423 F.2d 795, 798 (5th Cir. 1970). "Moreover, in evaluating the evidence, the judge makes no special inferences in favor of the plaintiff." Hersch v. United States, 719 F.2d 873, 876 (6th Cir. 1983). The defendants have moved to dismiss this case on the grounds that the plaintiffs failed to file within the applicable statutes of limitations and failed to prove the essential elements of their claims. See e.g., Merrill Lynch's motion to dismiss. The Court will discuss the defendants' statute of limitations arguments first, since if they prevail on those arguments, there will be no need for the Court to address the sufficiency of the plaintiffs' proof.

 A. Applicable Statutes of Limitation

 (1) Securities Exchange Act of 1934

 "It has long been settled that an action under SEC Rule 10b-5 is available to private plaintiffs." Nichols v. Merrill Lynch, Pierce, Fenner & Smith, 706 F. Supp. 1309, 1318 (M.D. Tenn. 1989) (citations omitted). Until recently, however, there was no federal statute of limitations in securities cases. A federal court generally borrowed the most closely analogous state statute of limitations from the state in which it sat. See e.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210 n.29, 96 S. Ct. 1375, 1389 n.29, 47 L. Ed. 2d 668, 686 n.29 (1976); Carothers v. Rice, 633 F.2d 7, 12 (6th Cir. 1980), cert. denied, 450 U.S. 998, 101 S. Ct. 1702, 68 L. Ed. 2d 199 (1981). All of this was to change when the Supreme Court decided Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. , 111 S. Ct. 2773, 115 L. Ed. 2d 321 (1991).

 In Lampf, the Supreme Court announced a statute of limitations for actions under section 10(b) and Rule 10b-5 consisting of a "1-year period after discovery combined with a 3-year period of repose." Id. at , 111 S. Ct. at 2780, 115 L. Ed. 2d at 334. The Court reasoned that, although "it is the usual rule that when Congress has failed to provide a statute of limitations for a federal cause of action, a court 'borrows' or 'absorbs' the local time limitation most analogous to the case at hand. . . . the rule . . . is not without exception." Id. at , 111 S. Ct. at 2778, 115 L. Ed. 2d at 331 (citations omitted). Therefore, finding that federal law provided a closer analogy than state law, and that a uniform national standard was preferable, id. at , 111 S. Ct. at 2778-79, 115 L. Ed. 2d at 332-33, the Court borrowed the "1-and-3-year structure [found] in the [1934] Act's original remedial provisions." Id. at , 111 S. Ct. at 2781, 115 L. Ed. 2d at 335. The Court applied the newly-announced rule retroactively to the parties in the case before it. Id. at , 111 S. Ct. at 2782, 115 L. Ed. 2d at 336-37.

 On the same day the Supreme Court decided Lampf, it also decided James B. Beam Distilling Co. v. Georgia, 501 U.S. , 111 S. Ct. 2439, 115 L. Ed. 2d 481 (1991), in which it retroactively applied the rule in another case to the litigants in the case before it. *fn9" In the wake of the decisions in Lampf and James Beam, many pending cases alleging violations of section 10(b) and Rule 10b-5 were dismissed on statute of limitations grounds. Although many of these cases may have been filed timely under the then existing statutes of limitations, they were no longer timely under Lampf's one-and-three year configuration.

 After a considerable outcry, Congress effectively overruled the Supreme Court's retroactive application of Lampf by enacting section 1126(a) of the Comprehensive Deposit Insurance Reform and Taxpayer Protection Act of 1991, Pub. L. No. 102-242, § 27A, 105 Stat. 2236, 2387 (1991). The Act provides in relevant part that "the limitation period for any private civil action implied under section 10(b) of this 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." *fn10"

 The Court is not persuaded by the defendants Flautt's and SBH's assertions purporting to challenge the constitutionality of the Act. Response of defendants Sandestin Beach Hotel, Inc. and Frank L. Flautt, Jr. in opposition to plaintiffs' motion for status conference at 2 (filed January 7, 1992; Docket Entry No. 456). Rather, the Court is convinced of the Act's constitutionality as applied to this case. See Robertson v. Seattle Audubon Soc'y, 118 L. Ed. 2d 73, 112 S. Ct. 1407, 60 U.S.L.W. 4273, 4276 (U.S. Mar. 25, 1992) (upholding the application of § 318 of the Department of the Interior and Related Agencies Appropriations Act to the case before the Supreme Court, which was enacted after the case had been filed, because the Act "compelled changes in law, not findings or results under old law"); Threiber v. Katz, 1992 WL 124431, at *7 (E.D. Mich. June 5, 1992) (finding the Act constitutional as applied to pending cases, but not "to the extent it seeks to reinstate § 10(b) claims that have already been subject to final adjudication. . . ."); Brown v. Hutton Group, 795 F. Supp. 1307, 60 U.S.L.W. 2695 (S.D.N.Y. Apr. 27, 1992) (finding that the Act "does not direct courts to make a specific factual finding or to apply a specific rule of decision to cases before it"). Therefore, as directed by Congress, the Court will apply the statute of limitations applicable to section 10(b) cases before the Supreme Court's decision in Lampf.

 Although this Court usually would apply Tennessee law, this case was filed originally in the Northern District of Alabama. A transferee court must apply the law of the state in which the transferor court sits. See McInnis, 706 F. Supp. at 1357; Campbell v. Upjohn Co., 498 F. Supp. 722, 726 (W.D. Mich. 1980), aff'd, 676 F.2d 1122 (6th Cir. 1982). Therefore, the most closely analogous state-law statute of limitations is the Alabama two-year blue sky limitations period. Ala. Code § 8-6-19(f) (1991); Hunt v. American Bank & Trust, 606 F. Supp. 1348, 1353 (N.D. Ala. 1985), aff'd, 783 F.2d 1011 (11th Cir. 1986).

 Although the Court must apply the state statute of limitations, federal law determines when the statute begins to run. Campbell 498 F. Supp. at 726. "The general rule is that a limitation period begins to run when the claimant discovers, or in the exercise of reasonable diligence should have discovered, the acts constituting the alleged fraud." Id. In other words, "what matters is not when the information was actually known, but rather when in the exercise of due diligence it should have been known." Hunt v. American Bank & Trust, 783 F.2d 1011, 1014 (11th Cir. 1986). Applying these principles, the Court finds that the plaintiffs did not file this lawsuit in a timely manner. Therefore, their federal securities claims are time-barred and should be dismissed.

 Plaintiffs essentially complain that the defendants made material misstatements and omissions of fact in the PPM regarding (a) the townhouses on an adjacent parcel of land, who would own that land, and their effect on views from hotel rooms; (b) the developer's profits; (c) the structure of the offering; and (d) inflation projections. Plaintiffs' trial brief at 3-5. For the plaintiffs' claims to be time-barred, the Court must find that the plaintiffs knew or should have known of the facts which constitute the alleged material misstatements or omissions of fact before October 31, 1984, two years before they filed suit. Each plaintiff received a copy of the PPM at or before the time he signed his Unit Sales Agreement. The last Unit Sales Agreement was signed on April 25, 1983. This lawsuit is being tried solely on the representations, or lack thereof, in the PPM.

 (a) The Townhouses

 The PPM contained numerous disclosures and disclaimers regarding each of the specific misstatements or omissions of which the plaintiffs complain. First, with regard to the ownership of the land on which the townhouses sit, the PPM specifically stated that:

. . . .
While the purchase price for the Hotel Interests will be used by SBH to acquire the townhouse site and the parcel to the west of the Hotel site, Investors will not acquire any ownership interest in such parcels.

 PPM at 16-17 (emphasis added). In addition, a map of the area on page 15 of the PPM showed the "SANDESTIN BEACH HILTON SITE," the site "RESERVED FOR ADDITIONAL DEVELOPMENT BY S.B.H.," and the "townhouse site" with their respective acreages of 9.5 acres, 3.77 acres, and 1.0 acre. (Capitalization and emphasis in original). The use of proceeds section of the PPM disclosed that the "developed land cost" would include "land cost of $ 5,700,000 for the purchase of the site, the townhouse and the site reserved for future development by SBH, site improvement costs of $ 1,039,500 and a capital contribution to Sandestin Corporation of $ 1,800,000." PPM at 8 (emphasis added). The investors were also told that "the common elements [of the hotel in which they will have ownership rights] will include the land of 9.5 acres at the Hotel." PPM at 26. Nowhere were they told that they would own the townhouse site or the site reserved for future development.

 The plaintiffs also argue that the townhouses affect the view of the Gulf of Mexico from the hotel rooms, and therefore, decrease the hotel's rental income. The brochure which accompanied the PPM promised the investors a "picturesque view of the Gulf of Mexico" from each of the 400 hotel rooms. Brochure, plaintiffs' trial exhibit 2B. It also described the resort as "overlooking the seemingly endless stretch of sand dunes, wide beaches and the Gulf of ...

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