Morgan v. Koch

Decision Date29 December 1969
Docket NumberNo. 17447.,17447.
Citation419 F.2d 993
PartiesMargaret MORGAN, Plaintiff-Appellant, v. Walter G. KOCH, Ivan H. Morgan, Morgan Packing Co., Inc., Herman C. Krannert and Inland Container Corp., Defendants-Appellees.
CourtU.S. Court of Appeals — Seventh Circuit

John P. Price, Robert A. Rose, Indianapolis, Ind., George N. Craig, Brazil, Ind., Klineman, Rose & Wolf, Hamill & Price, Indianapolis, Ind., of counsel, for appellant.

Telford B. Orbison, James E. Bourne, New Albany, Ind., Fred P. Bamberger, Evansville, Ind., Theodore R. Dann, Douglass R. Shortridge, Indianapolis, Ind., Bamberger, Foreman, Oswald & Hahn, Evansville, Ind., Orbison, Rudy & O'Connor, New Albany, Ind., McHale, Cook & Welch, Dann, Backer, Pecar & Newman, Indianapolis, Ind., of counsel, for appellees.

Before KILEY, FAIRCHILD and CUMMINGS, Circuit Judges.

CUMMINGS, Circuit Judge.

This action was for violation of Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)) and SEC Rule 10b-5 and for fraud under the common law of Indiana. The only question we find necessary to decide is whether the action is barred by the Indiana 6-year statute of limitations governing suits for fraud.

In the original complaint, the plaintiff sought rescission of the sale of her stock in defendant Morgan Packing Co., Inc. to Walter G. Koch. She also sought damages of $1,337,500 (including exemplary damages), claiming that she sold her stock at $90 per share whereas it was worth $300 per share. After a pretrial hearing, plaintiff abandoned all equitable issues.

This cause of action concerns stock in Morgan Packing Co., Inc., an Austin, Indiana, cannery formerly operated as a family partnership. Plaintiff was admitted as a partner in 1934. In 1949, the partnership was changed to a corporation, with the control remaining in various members of the Morgan family. At this time, the company required substantial financing, necessitating a voting trust agreement among the stockholders. Plaintiff's brother, Ivan H. Morgan, was appointed as voting trustee for the trust, which was to remain in effect until February 15, 1966. Voting trust certificates were issued to the stockholders whose stock was placed in the voting trust.

Plaintiff's brother, Ivan H. Morgan, became president of the company upon its incorporation in 1949. After suffering substantial losses from 1953 through 1955, the company has enjoyed substantial profits. In 1956, the plaintiff and other stockholders who were dissatisfied with her brother's operation of the company sued him and the company. In turn, he and the company filed suit against the plaintiffs. A third state court suit by plaintiff and others asked for her brother's removal as voting trustee. Thereafter, counsel for the state court litigants negotiated for the sale of the shares belonging to plaintiff and the other dissident stockholders to the company or to her brother. These negotiations failed because the parties could not agree upon a price for the stock.

In September 1957, an Indianapolis broker contacted plaintiff and the other dissident shareholders with regard to a sale of their interests. The next month, he produced defendant Walter G. Koch of Evansville, Indiana, as a prospective purchaser. The sale was discussed by Koch during a visit to plaintiff's home. This meeting was attended by Koch, the broker, the plaintiff, and her sister and brother-in-law, Mr. and Mrs. Thomas N. Lyons. This was plaintiff's only meeting with Koch. Plaintiff claims that at the beginning of this conference, she and her sister indicated to Koch that they would be unwilling to sell their stock if he was associated with her brother or defendant Herman G. Krannert, another director of the company. Plaintiff asserts that Koch replied that he did not know her brother and was buying the stock for himself. He said that he expected to run the company, and her brother would not be connected with its management. This story is substantially corroborated by plaintiff's sister, Mrs. Lyons. Koch, on the other hand, contends that he told plaintiff and her sister that he knew Mr. Krannert and that he would not fire Mr. Morgan because he was needed in the operation of the business.

On October 23, 1957, plaintiff and the other dissident stockholders agreed to sell their approximately 20,000 shares of stock to Koch for $90 per share. At the same time, they assigned their pending state court claims to Koch, who then dismissed those actions. Defendants Krannert and Inland Container Corporation, which he controlled, assisted Koch in obtaining the financing for the stock purchase. On November 8, 1957, the sale transaction was closed and plaintiff received $487,500 for her stock.

After purchasing the stock, Koch became chairman of the board of the Morgan Packing Company. He did not, however, remove plaintiff's brother from his position as the corporation's president. In October 1958, Koch sold his stock to a third party, who then transferred it to the company. Shortly thereafter, Koch left his position with the company and was employed by defendant Inland Container Corporation in 1959.

On October 31, 1958, after the packing company reacquired plaintiff's shares, it filed a statement with the Indiana Secretary of State, cancelling the 20,000 shares it had purchased from its stockholders and reducing its authorized capital stock to 10,000 shares. As a result of these transactions, Ivan H. Morgan and members of his family owned all of the 9,166 2/3 shares of stock outstanding.

Plaintiff, a qualified psychiatrist, was born and raised in Austin, Indiana, which is a small, rural community located in the southern part of the state. After the 1957 sale of her stock, she frequently visited her mother and sister at their Austin residences. She asserts that she only discovered Koch's misrepresentations when the true facts were brought to her attention by her nephew in 1964 and by an Internal Revenue agent in 1965. In December 1966, she filed the original complaint in this action.

At the conclusion of plaintiff's opening statement, the district court held that the common law cause of action was barred by the 6-year Indiana statute of limitations governing frauds, for counsel did not accept the court's invitation to disclose any concealment that would toll the statute. At the close of plaintiff's case, the court directed a verdict as to the cause of action based on the Securities Exchange Act of 1934 and Rule 10b-5, holding this claim barred by laches and the statute of limitations. The court also concluded that plaintiff's evidence was insufficient as a matter of law with respect to the essential elements of the federal cause of action. Detailed findings of fact and conclusions of law were entered. The only findings of fact disputed by the plaintiff are that plaintiff knew or should have known in November 1957 through her counsel that Koch was affiliated with the other defendants in purchasing her stock. In affirming, we place no weight on those findings, nor do we decide whether plaintiff failed to prove a violation of the securities laws. We conclude that as a matter of law, plaintiff failed to present evidence of due diligence sufficient to justify submission of the question of the statute of limitations to the jury.

The Defense of Laches

In the amended complaint, as modified after the pretrial hearing, the plaintiff abandoned her equitable claims for rescission and sought only damages. The two causes of action espoused by the modified complaint were (1) a violation of Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)) and of SEC Rule 10b-5 and (2) a pendent Indiana common law action for fraud. In lengthy findings of fact and conclusions of law, the district court sustained the defense of laches to both these actions and granted defendants' motions to dismiss. This was erroneous in view of plaintiff's abandonment of all equitable claims.

By virtue of plaintiff's modification of the amended complaint, the action became one strictly at law, so that the doctrine of laches was inapplicable. Where, as here, a litigant is seeking to enforce federal and state rights in law only, the applicable statute of limitations controls rather than laches. Cope v. Anderson, 331 U.S. 461, 463, 464, 67 S.Ct. 1340, 91 L.Ed. 1602; Holmberg v. Armbrecht, 327 U.S. 392, 395-396, 66 S.Ct. 582, 90 L.Ed. 743; Russell v. Todd, 309 U.S. 280, 289, 60 S.Ct. 527, 84 L.Ed. 754; Swan v. Board of Higher Education, 319 F.2d 56, 59 (2d Cir. 1963). Under those authorities, the doctrine of laches would not apply even if this plaintiff were still alternatively seeking equitable relief. As stated in Myzel v. Fields, 386 F.2d 718, 742 (8th Cir. 1967), certiorari denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143, where the plaintiffs also sought damages for violation of Section 10(b) of the Act and Rule 10b-5:

"The fact that plaintiffs\' original prayer was for recision or for damages in the alternative would not change the applicability of the state limitations statute as opposed to laches."

Accordingly, the trial court should not have sustained the defense of laches in this case.

The Federal Cause of Action

Defendants also raised the statute of limitations as a defense in bar of this action. In adjudicating claims for relief "at law" based upon federally created rights, federal courts have long referred to state statutes of limitations in the absence of any applicable federal statute. Campbell v. City of Haverhill, 155 U.S. 610, 15 S.Ct. 217, 39 L.Ed. 280; Cope v. Anderson, 331 U.S. 461, 67 S.Ct. 1340, 91 L.Ed. 1602; International Union, United Auto, etc., Workers v. Hoosier Cardinal Corp., 383 U.S. 696, 86 S.Ct. 1107, 16 L.Ed.2d 192; see also Holmberg v. Armbrecht, 327 U.S. 392, 395, 66 S.Ct. 582, 90 L.Ed. 743. This is also true of actions brought under the Federal Securities Exchange Act and SEC Rule 10b-5. See Fratt v. Robinson...

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