Unpublished Disposition, 895 F.2d 1418 (9th Cir. 1986)

MEMORANDUM^* 

SUMMARY

Appellants, investors in limited partnerships, appeal summary judgment for appellees, creators and marketers of the partnerships, on the ground that statutes of limitation bar appellants' federal and state securities fraud claims.

We hold that questions of material fact remain as to whether appellants had inquiry notice and what knowledge the general partners possessed. We also hold that the statute of limitations period governing the federal securities fraud claims governs the federal RICO claims. Finally, we vacate dismissal of the pendent claims. Accordingly, we reverse and remand.

PROCEEDINGS BELOW

Most appellants filed complaints on November 3, 1986, alleging violations of: Sec. 17(a) (1) of the Securities Act of 1933, 15 U.S.C. §§ 771 and 77g; Sec. 10b of the Securities Exchange Act of 1934 and Rule 10b-5, 15 U.S.C. § 78j(b) and 17 C.F.R. Sec. 240.10b-5, respectively; and federal RICO, 18 U.S.C. § 1961, et seq. Appellants also brought pendent state claims.

The district court found, as a matter of law, that time barred the federal claims because: (1) reports to appellants of the drastic decline in value of their investments had put them on inquiry notice by fall 1982; (2) the general partners' knowledge in summer 1982 of allegations of fraud and the results of an investigation into them constituted inquiry notice that was imputed to appellants; and (3) distribution of the reports and installation of a general partner previously associated with appellees did not constitute fraudulent concealment tolling the statutes of limitations. The district court declined to exercise pendent jurisdiction over the remaining state claims.

STANDARD OF REVIEW

The circuit court reviews de novo the district court's grant of summary judgment. Conmar Corp. v. Mitsui & Co. (U.S.A.), Inc., 858 F.2d 499, 501 (9th Cir. 1988), cert. denied, 109 S. Ct. 795 (1989). Summary judgment is appropriate only where no genuine issues of material fact exist, and the moving party is entitled to prevail as a matter of law. Vucinich v. Paine, Webber, Jackson & Curtis, Inc., 739 F.2d 1434, 1436 (9th Cir. 1984). The court must view the evidence in the light most favorable to the party opposing the motion. Id. "Because our precedent dictates that the question of notice of fraud is for the trier of fact, the party seeking summary disposition has an extremely difficult burden to show that there exists no issue of material fact regarding notice." Admiralty Fund v. Hugh Johnson & Co., 677 F.2d 1301, 1309-10 (9th Cir. 1982), cert. denied, 464 U.S. 822 (1983); Volk v. D.A. Davidson & Co., 816 F.2d 1406, 1417 (9th Cir. 1987). Summary disposition on the ground of the statute of limitations is discouraged. Admiralty Fund, 677 F.2d at 1310. A court may grant summary judgment only "if the uncontroverted evidence irrefutably demonstrates that a plaintiff discovered or should have discovered the fraud but failed to file a timely complaint." Volk, 816 F.2d at 1417.

ANALYSIS

* Inquiry Notice

The analogous forum state statute of limitations period continues to govern Sec. 10(b) claims. Davis v. Birr, Wilson & Co., Inc., 839 F.2d 1369 (9th Cir. 1988) (applying analogous state limitations period despite concurrence urging application of analogous federal period). Therefore, Oregon's two-year fraud statute of limitations period governs all of the federal securities claims at bar. Volk, 816 F.2d at 1411-12. A four-year period governs the federal RICO claims. Agency Holding Corp. v. Malley-Duff & Assocs., 483 U.S. 143 (1987). If appellants lacked inquiry notice of their federal securities claims by November 1984 (two years before most filed their complaints), then they also lacked inquiry notice of their federal RICO claims by November 1982. Accordingly, we focus upon the issue of whether appellants had inquiry notice of their federal securities claims by November 1984.¹ 

Although state law governs the length of the limitations period for the federal securities claims, federal law controls when the period starts. Volk, 816 F.2d at 1412. The statute of limitations (for Sec. 10(b) of the 1934 Act (15 U.S.C. § 78j(b)) and Sec. 17(a) (2)-(3) of the 1933 Act (15 U.S.C. § 77q)) starts upon "actual or inquiry notice that a fraudulent misrepresentation has been made." Id. Inquiry notice arises when plaintiff could discover the fraud through the exercise of reasonable diligence. Id. " [R]easonable diligence is tested by an objective standard." Kramas v. Security Gas & Oil, Inc., 672 F.2d 766, 770 (9th Cir.), cert. denied, 459 U.S. 1035 (1982). Investors have inquiry notice of fraud when they "should discover that they paid an inflated price for securities as a result of misleading statements or omissions." Id. at 1414.

We have reversed summary judgment and held that knowledge of an investment's failure does not necessarily constitute inquiry notice of fraud where nonfraudulent business events might explain the failure. See, e.g., Admiralty Fund, 677 F.2d at 1310 (9th Cir. 1982) (declining, dramatically fluctuating stock price did not yield inquiry notice, as a matter of law, that stock offering prospectus had misrepresented issuer's financial strength, because " [g]eneral market conditions, subsequent events, or the inherent risk of the business could have been responsible" for the stock changes); Briskin v. Ernst & Ernst, 589 F.2d 1363, 1368 (9th Cir. 1978) (knowledge of survivor company's post-merger financial problems--including private placement of stock at lower price than represented at time of merger, missed dividend, and 85% decline in common stock price--did not constitute inquiry notice, where " [m]arket evidence might point equally to a general decline in the economy or post-merger mismanagement as the cause of ... [the survivor's] financial condition"); see also Mosesian v. Peat, Marwick, Mitchell & Co., 727 F.2d 873, 878 (9th Cir.), cert. denied, 469 U.S. 932 (1984) (reversing judgment notwithstanding the verdict in holding that knowledge of company's financial problems, including large, rapid decline in stock price, sudden losses, suspension of trading in stock, and difficulty with creditors, did not necessarily suggest accounting fraud, where problems could instead result from "financial mismanagement, cost overruns, general market conditions, or other events unrelated to accounting fraud").

Volk, holding that knowledge that coal mines lacked represented reserves constituted inquiry notice of fraud, is distinguishable. This knowledge necessarily suggested fraudulent misrepresentation of the reserves because the amount of coal was scientifically verifiable and unchangeable in a human timespan. The Volk investors knew not only that their investments had performed drastically below projections, but also that the projections had been based upon facts objectively ascertainable at offering time and not subject to risk of subsequent change. In contrast, in the instant case, appellants' knowledge that the software investment had performed dramatically below projections did not necessarily suggest intentional misrepresentation of income projections, upon which the software appraisals were based, at offering time. Rather, the software failures could have resulted from realization of the risks of technological obsolescence, market change, and lessee marketing difficulties--of which the offering memoranda had warned and to which the Lawrence Reports (except possibly those sent to the Euston Associates investors) had ascribed the failures.

Jablon v. Dean Witter & Co., 614 F.2d 677 (9th Cir. 1980), and Davis v. Birr, Wilson & Co., 839 F.2d 1369 (9th Cir. 1988), are distinguishable. They involved sophisticated investors in public stocks with easy access to published market information obviously inconsistent with the representations. In contrast, in the case at bar, the software's poor performance was consistent with risks disclosed in the offering memoranda. As limited partners, appellants lacked easy access to further information as to their investments.

We cannot hold as a matter of law that appellants had inquiry notice of fraud as a result of the Lawrence Reports, offering memoranda, and Mt. Hood Associates "investment package." As discussed above, failure of the software did not necessarily suggest misrepresentations at offering time because the failure plausibly could have resulted instead from nonfraudulent realization of business risks disclosed by the offering memoranda and cited by the Lawrence Reports.

II

Imputed Knowledge

Under both Or.Rev.Stat. Sec. 68.240 and Conn.Gen.Stat. Sec. 34-50, notice to any partner "will operate as notice to, or knowledge of the partnership, except in the case of a fraud on the partnership committed by or with the consent of that partner."²  We do not impute the knowledge of an agent to the principal where evidence shows that the former participated in the fraud. See Admiralty Fund, 677 F.2d 1310 (knowledge of president of plaintiff mutual fund could not be imputed to plaintiff because plaintiff alleged that president had participated in the fraud).

Questions of fact remain as to the extent of the general partners' knowledge which require resolution before the issues of whether such knowledge yielded inquiry notice and can be imputed to the limited partners arise. Inter alia, questions of fact exist as to the content of: (1) Burt's 1982 discussions with the Mt. Hood general partners regarding potential liability of defendants and possible misrepresentation of the software; and (2) Burt's disclosures to the Mt. Hood general partners regarding the results of Taylor's investigation into Poggel's charges.

III

Fraudulent Concealment

A plaintiff bears the burden of proving fraudulent concealment. Conmar v. Mitsui & Co. (U.S.A.), Inc., 858 F.2d 499, 502 (9th Cir. 1988). As appellees contend, to toll the statutes of limitations under this theory, appellants must prove that: (1) appellees affirmatively concealed the existence of the causes of action; and (2) if appellants otherwise had inquiry notice, they diligently investigated the facts yielding notice but did not discover the existence of their claims because of the fraudulent concealment.

Because we hold that a question of fact exists as to whether appellants had inquiry notice, we need not consider whether appellants showed due diligence. Id. at 504-05. Also, a question of fact exists as to whether appellees affirmatively concealed appellants' claims by causing the general partners to hire Ward and installing Quenemoen as general partner or administrative assistant of all limited partnerships except LaMar (and by McKenna's denying to Taylor and Burt that any misrepresentation had occurred). Accordingly, factual issues remain as to whether fraudulent concealment occurred that are not susceptible to summary judgment.

IV

RICO Claims

The Arnheim appellees argue for the first time on appeal that the district court correctly dismissed appellants' federal RICO claims because appellants failed to allege facts showing a pattern of racketeering activity as to these appellees. We do not decide this issue because it is appropriate for remand. See Dandridge v. Williams, 397 U.S. 471, 475-76 n. 6 (1970) (quoting United States v. American Railway Express Co., 265 U.S. 425, 435 (1924)), which states:

" [T]he appellee may ... urge in support of a decree any matter appearing in the record...." When attention [in the trial court] has been focused on other issues, or when the [lower] court ... has expressed no views on a controlling question, it may be appropriate to remand the case rather than deal with the merits of that question [in the reviewing court]....

V

Pendent Claims

Because the district court predicated dismissal of these claims on an incorrect view of the case, dismissal is vacated. The district court may revive these claims.

CONCLUSION

We emphasize that nothing we have said is intended to indicate any opinion regarding the resolution of the factual issues on any of the questions involved in this case. We simply hold that genuine issues of material fact remain in each of these areas.

We REVERSE and REMAND for proceedings consistent with our holdings herein.