May 23, 2003

S.D.N.Y. On Statute Of Limitations

In Bond Opportunity Fund v. Unilab Corp., 2003 WL 21058251 (S.D.N.Y. May 9, 2003), the court addressed the issue of inquiry notice and the statute of limitations. The statute of limitations for Section 14(a) claims (misleading statements in proxies) is one year from discovery or three years from the occurrence that gives rise to the action, whichever is less (Sarbanes-Oxley arguably has not changed this standard because Section 14(a) does not “sound in fraud”). The Second Circuit has stated that discovery of the claim occurs when the plaintiff “obtains actual knowledge of the facts giving rise to the action or notice of the facts, which in the exercise of reasonable diligence, would have led to actual knowledge.” In other words, inquiry notice is sufficient to trigger the statue of limitations.

If the court determines that inquiry notice existed and the plaintiffs concede they engaged in no investigation, dismissing the claim based on the statute of limitations is straightforward. More difficult is the case where the plaintiffs claim that they did engage in an investigation after being put on inquiry notice, but were unable to obtain sufficient facts to bring the claim until more than a year later.

In Unilab, plaintiffs claimed that BT Alex.Brown aided and abetted in the alleged Section 14(a) violation committed by the company. Plaintiffs argued “that because they began to make inquiry immediately upon issuance of the proxy, in late October/early November 1999, knowledge of BT Alex.Brown’s role should not be imputed until they actually learned all the facts in November 2000 [less than a year before BT Alex Brown was added to the case in September 2001].” The court disagreed. Noting that BT Alex.Brown’s role as a key player in the transaction was disclosed in the proxy statement, the court found it “incomprehensible how Plaintiffs can claim that they were not sufficiently aware of BT Alex.Brown’s involvement in this transaction to name it as a defendant in this action prior to its deposition in November 2000.”

Holding: Securities claims against BT Alex.Brown dismissed as time-barred. The opinion also addressed other claims not discussed in this summary.

Quote of note: “A minimal or lackadaisical investigation will not serve to extend the statute of limitations until the plaintiff actually learns facts that could have been discovered much earlier had a diligent investigation taken place.”

Posted by Lyle Roberts at May 23, 2003 11:19 PM | TrackBack
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