Athas v. Day, Civ. No. 5394.

• Decision Date: 09 May 1958
• Docket Number: Civ. No. 5394.
• Citation: 161 F. Supp. 916
• Parties: L. P. ATHAS, Richard L. Bird, Jr., Robert H. Bird, John H. Kelly, P. G. Paulos, Grant H. Chidester, Kenneth R. Pomeroy and Leslie E. Hart, and all other persons similarly situated, Plaintiffs, v. Sam DAY, Defendant.
• Court: U.S. District Court — District of Colorado

161 F. Supp. 916

L. P. ATHAS, Richard L. Bird, Jr., Robert H. Bird, John H. Kelly, P. G. Paulos, Grant H. Chidester, Kenneth R. Pomeroy and Leslie E. Hart, and all other persons similarly situated, Plaintiffs, v. Sam DAY, Defendant.

Civ. No. 5394.

United States District Court D. Colorado.

May 9, 1958.

COPYRIGHT MATERIAL OMITTED

Stone & Blood, Denver, Colo., and William D. Blood, Denver, Colo., for plaintiff.

Gene E. Fischer, Fort Collins, Colo., for defendant.

ARRAJ, District Judge.

Plaintiff's Third Amended Complaint alleges six causes of action. The first four are stated as class actions under Rule 23(a) (3), F.R.C.P., 28 U.S.C.A., and allege violations of 15 U.S.C.A. Secs. 77e and 77l, which provide for private causes of action where securities are sold without proper registration or by use of untrue statements. The last two are individual actions by the named plaintiffs alleging fraud. Defendant filed a Motion to Dismiss and, on argument, claimed that (1) there was no cause of action under the SEC Act for untrue statements that were not in interstate commerce, (2) that the action was barred by the statute of limitations as to all except the first five plaintiffs because they did not enter the case until more than one year after the fraud was discovered, (3) Rule 15 does not permit adding parties, and (4) this is a cause of action for fraud, which cannot be the subject of a class action.

The first question to be determined is —Have plaintiffs alleged sufficient facts to state a claim against defendants under the SEC Act?

15 U.S.C.A. Sec. 77l, creates a private cause of action to recover the consideration paid for a security on tender of such security when the seller sells the security "by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements * * not misleading." Defendant maintains that facts must be alleged to show that the untrue statements were in interstate commerce to state a cause of action under this section. Plaintiffs contend that they have sufficiently alleged that statements were so made, and that it is only necessary that the securities themselves be sent interstate or through the mail. On this issue, plaintiff's contention is valid. Schillner v. H. Vaughan Clarke & Co., 2 Cir., 1943, 134 F.2d 875 and Blackwell v. Bentsen, 5 Cir., 1953, 203 F.2d 690. In Schillner the sale and the statements made in connection therewith were intrastate, but the certificate was delivered by mail. The Court held that a cause of action was stated under Sec. 77l because the delivery was within the definition of a sale as set out in Sec. 77b(3). In Blackwell the sale and the statements made in connection with it were also intrastate, and the delivery of the security was by mail. Following Schillner, the Court held that the acts were within Sec. 77l; and the Court said that delivery was part of the sale and that the transaction was consummated by use of the mail.

It is here noted that paragraph 6 of the 1st cause of action and paragraph 4 of the 3rd cause of action allege that "The said sale or assignment to plaintiff * * * was effected by means of oral communication and use of the mails in interstate commerce and by interstate transportation, in the course of which untrue statements of material facts were made by defendant, and by others in his behalf, including the following: * * *." Following this, plaintiff sets out the alleged untrue statements. This allegation is sufficient to withstand a motion to dismiss on the grounds of failure to state a claim upon which relief can be granted.

It is a requirement of Sec. 77l that the purchaser did not know of the untruth or omission, and defendant here claims that plaintiffs have not alleged reliance on the false or untrue statements. However, plaintiffs have specified the dates of the sales and the dates on which they discovered that the statements were untrue. It would appear to be a sufficient allegation that plaintiffs did not know of the alleged untruths, and that no further reliance need be alleged.

The next question for determination is—Are plaintiffs that were added in the Third Amended Complaint barred by the Statute of Limitations?

It is alleged that the sales involved in this action occurred on March 5, 1955, and February 17, 1956, and that plaintiffs learned of the falsity of the statements in June, July, and October of 1955. The original complaint was filed on June 11, 1956, naming as plaintiffs "L. P. Athas, Richard L. Bird, Jr., Robert H. Bird, John H. Kelly and P. G. Paulos and all other persons similarly situated." The first amended complaint, filed on November 21, 1956, and the second amended complaint, filed on December 28, 1956, named the same parties plaintiff. The third and last amended complaint was filed on June 12, 1957, and added three persons, namely; Grant H. Chidester, Kenneth R. Pomeroy and Leslie E. Hart, as parties plaintiff.

15 U.S.C.A. Sec. 77m provides that,

"No action shall be maintained to enforce any liability created under * * * section 77l(2) of this title unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence, or, if the action is to enforce a liability created under section 77l (1) of this title, unless brought within one year after the violation upon which it is based."

Plaintiff seeks to maintain this suit as a spurious class action under Rule 23(a) (3). In contrast to the true or hybrid class actions, this (spurious class action) is merely a permissive joinder device where there is a common question of law or fact and common relief is sought. See 2 Barron and Holtzoff Sec. 562. If this were a true or hybrid class action, the only question would be whether plaintiff adequately represented the class. If he did, the statute of limitations would not bar their recovery. The spurious class action,...