Caproni v. Prudential Securities, Inc.

• Citation: 15 F.3d 614
• Decision Date: 27 July 1994
• Docket Number: No. 92-2282,92-2282
• Parties: Fed. Sec. L. Rep. P 98,057, RICO Bus.Disp.Guide 8486 Carolyn CAPRONI, Plaintiff-Appellant, v. PRUDENTIAL SECURITIES, INCORPORATED; Terrance W. Sullivan; and Ronald J. Chewning, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 614

15 F.3d 614

Fed. Sec. L. Rep. P 98,057, RICO Bus.Disp.Guide 8486

Carolyn CAPRONI, Plaintiff-Appellant, v. PRUDENTIAL SECURITIES, INCORPORATED; Terrance W. Sullivan; and Ronald J. Chewning, Defendants-Appellees.

No. 92-2282.

United States Court of Appeals, Sixth Circuit.

Submitted Aug. 2, 1993.

Decided Feb. 7, 1994.

Rehearing Denied July 27, 1994. ^*

Jerome P. Pesick and Jonathan B. Frank (briefed), Mason, Steinhardt & Jacobs, Southfield, MI, for plaintiff-appellant.

Edward M. Kronk, Ronald E. Reynolds, and Sheldon H. Klein (briefed), Butzel, Long, Gust, Klein & Van Zile, Detroit, MI, for defendants-appellees.

Before: MILBURN, RYAN, and BATCHELDER, Circuit Judges.

BATCHELDER, Circuit Judge.

I.

Plaintiff Carolyn Caproni came into some money in 1984 as a result of the sale of a family owned newspaper; she received $800,000 in cash plus $400,000 paid to her over ten years. Mrs. Caproni says she spent most of her life as a housewife and thus had little or no knowledge regarding investments, so she went to her tax attorney, Gary Matthews, for advice on what to do with the money. Matthews put her in touch with defendant Terrance Sullivan, who was an investment broker with defendant Prudential Securities (Prudential) in Michigan. After meeting Sullivan once, Caproni had Matthews write a letter to Sullivan outlining her "investment objectives," which were to invest the money safely and conservatively so as to protect the principal while producing approximately $75,000-$90,000 in income yearly. On May 9, 1984, Sullivan wrote Caproni a letter outlining several proposed investments. On May 12, 1984, Caproni met with Sullivan again to talk about what to do; as a result of the meeting, Caproni bought a $50,000 share of Almahurst Bloodstock IV, a limited partnership dealing in "standardbred" horses. By December 31, 1985, Caproni had made a total of six different investments on Sullivan's recommendation; her principal totalled over $330,000.

Unfortunately, the horses (as well as the other investments) turned out to be dogs; Sullivan had actually recommended highly risky investments in oil and gas, aviation equipment leasing, and real estate. Caproni says Sullivan never advised her of the risk (although she admits he said they would net between 12% and 17% annually) and she claims she did no more than scan the prospectuses and other papers Sullivan sent her to read and sign. By mid-1985, some of the initial investments had begun to do poorly; Caproni noticed a sharp decrease in the amount of some of her dividend checks. By 1986, Prudential had fired Sullivan as a result of a New York Stock Exchange investigation of his activities, and Caproni's accounts were referred to another Prudential broker, Verna Katz, who recommended between March and August 1986, that Caproni sell the investments and cut her losses. By August 1987, Caproni had sold off many of these investments and claims that the rest had become worthless.

Mrs. Caproni filed this action in Michigan on June 17, 1991, naming as defendants Prudential Securities, Incorporated, Terrance Sullivan, and his supervisor Ronald Chewning and claiming losses of $269,042.90 on her investments and other damages. The complaint contained six counts alleging violations of Secs. 10(b) and 15 of the Securities Exchange Act of 1934, violations of RICO, breach of fiduciary duty, breach of the Michigan Consumer Protection Act, common law fraud, and breach of contract.

The district court granted defendants' motion to dismiss the count based on the Michigan Consumer Protection Act on the ground that it failed to state a claim on which relief could be granted. ¹ Subsequently, the district court granted defendants' motions for summary judgment on the securities fraud and RICO claims, finding that because "prior to June 18, 1987," Caproni knew or should have known that her investments had gone sour and that Sullivan had intentionally flouted her desire for a conservative investment plan these claims were time-barred. The court then dismissed the pendent state claims described in the remaining three counts. The district court thus disposed of this entire case, and this timely appeal followed.

II.

A.

The district court granted summary judgment on plaintiff's claims of securities fraud and RICO violations, holding that, as a matter of law, those claims were time-barred. Summary judgment is appropriate where "there is no genuine issue as to any material fact and ... the moving party is entitled to judgment as a matter of law." Federal Rule of Civil Procedure 56. A district court's grant of summary judgment is reviewed de novo. Pinney Dock & Transp. Corp. v. Penn Cent. Corp., 838 F.2d 1445, 1472 (6th Cir.), cert. denied, 488 U.S. 880, 109 S.Ct. 196, 102 L.Ed.2d 166 (1988). A district court's determination of state law is also reviewed de novo. Salve Regina College v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 1221, 113 L.Ed.2d 190 (1991). We deal first with the securities fraud claims.

Where a federal statute lacks a statute of limitations, courts have looked to "borrow" the state statute of limitations from the state law most "analogous" to the federal law. Wilson v. Garcia, 471 U.S. 261, 266-67, 105 S.Ct. 1938, 1942, 85 L.Ed.2d 254 (1985). Prior to the Supreme Court's decision in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, --- U.S. ----, ----, 111 S.Ct. 2773, 2778, 115 L.Ed.2d 321 (1991), this was the rule followed by most federal district courts hearing cases alleging violations of Secs. 10(b) and 15 of the Securities Exchange Act of 1934. Lampf, however, held that shareholder fraud actions under the Securities Exchange Act of 1934 (usually known as "10b-5" actions, after the Securities and Exchange Commission regulation enabling this type of civil action) were governed by a three year statute of repose, or a one year limit from the plaintiff's date of discovery of the wrong, rather than by applicable state limitations periods. Under Lampf, the district court dismissed Caproni's claims on January 6, 1992. By that time, however, Congress had acted to abolish the retroactive effect of Lampf by enacting 15 U.S.C. Sec. 78aa-1, commonly known as "Section 27A," which applied only to cases that had been filed by the time Lampf was decided in June 1991; the statute of limitations for those cases was declared to be whatever limitations law was applicable prior to the decision in Lampf. The parties to the case at bar stipulated to the applicability of Sec. 78aa-1 to their case, and pursuant to this stipulation, the district court reinstated the case on February 19, 1992. While defendants reserved the right to challenge the constitutionality of Sec. 78aa-1, they have waived this issue for the purposes of the present appeal. ²

The district court held that even in the absence of Lampf, plaintiff's claims would be time-barred under the applicable state statute of limitations. The court declined to apply the six-year statute of limitations for fraud actions of the forum state of Michigan ³ because it found that the cause of action had accrued in Kentucky and that the Michigan borrowing statute ⁴ was therefore applicable. Pursuant to that statute, the court applied the three-year Kentucky statute of limitations. Because the court found that the claim had accrued "prior to June 18, 1987," it held that the claim was untimely.

We hold first that the findings of fact upon which the district court based its conclusions that the federal securities fraud claim accrued in Kentucky "prior to June 18, 1987" are not clearly erroneous. The district court found that based on Sullivan's recommendations, the plaintiff bought most of the securities in 1984 and early 1985; her last purchase occurred in November 1985. The district court found that by the end of 1985 and early 1986, Caproni had become "grave[ly] concern[ed]" with several of the investments; her losses by this time had begun to manifest themselves. By August 1986, Caproni knew that her accounts had been transferred by Prudential to another broker, and that the new broker was urging her to sell the investments made for her by Sullivan and to cut her losses. And at approximately this same time, Caproni learned that Sullivan had been fired by Prudential because of the investigation of his activities by the New York Stock Exchange. During nearly all of this time, Caproni lived in Kentucky; she did not move to Alabama until sometime in 1986.

Federal law governs the determination of when the statute of limitations begins to run on a claim of federal securities fraud. See Herm v. Stafford, 663 F.2d 669 (6th Cir.1981). The statute of limitations in such a case begins to run when the fraud is or should have been discovered. Id. at 682. We hold that the district court did not err in finding that Caproni's 10b-5 cause of action had accrued "prior to June 18, 1987."

Plaintiff claims, however, that although the district court was required to look to the law of the forum state to determine what statute of limitations to apply to this claim, the court erred in holding that the claim accrued in Kentucky and in applying the Michigan borrowing statute. Citing this circuit's decision in Champion Int'l Corp. v. United Paperworkers Int'l, 779 F.2d 328 (6th Cir.1985), plaintiff argues that using the borrowing statute to invoke the shorter Kentucky limitations period is inconsistent with federal policy, and that this circuit has rejected the use of such borrowing statutes. Plaintiff further maintains that we have held squarely that federal securities fraud policy favors longer, rather than shorter, limitations periods, citing Herm and IDS Progressive Fund, Inc. v. First of Michigan Corp., 533 F.2d 340 (6th Cir.1976).

However, we do not read Champion as standing for the proposition that adoption of the forum state's borrowing statute is prohibited in cases such as this one. Rather, we think Champion is properly read to hold that such adoption is...