422 F.2d 1233 (8th Cir. 1970), 19682, Vanderboom v. Sexton

Docket Nº:19682-19684.
Citation:422 F.2d 1233
Party Name:Ilo VANDERBOOM et al., Appellants, v. Sam SEXTON, Jr., James S. Hall, Charles H. Smith, Austin Gatlin, Erma S.Gatlin, Diamond G Ranch, Inc., an Arkansas Corporation, Texas CapitalCorporation, a Texas Small Business Investment Company, Appellees.
Case Date:February 24, 1970
Court:United States Courts of Appeals, Court of Appeals for the Eighth Circuit

Page 1233

422 F.2d 1233 (8th Cir. 1970)

Ilo VANDERBOOM et al., Appellants,

v.

Sam SEXTON, Jr., James S. Hall, Charles H. Smith, Austin Gatlin, Erma S.Gatlin, Diamond G Ranch, Inc., an Arkansas Corporation, Texas CapitalCorporation, a Texas Small Business Investment Company, Appellees.

Nos. 19682-19684.

United States Court of Appeals, Eighth Circuit.

February 24, 1970

Rehearing Denied March 20, 1970.

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[Copyrighted Material Omitted]

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William M. Stocks of Bethell, Stocks, Callaway & King, Fort Smith, Ark., on brief for appellants.

Philip S. Anderson, Jr., Little Rock, Ark., for appellee James S. Hall.

Don A. Smith, Fort Smith, Ark., for appellees Gatlin, Diamond G Ranch, Inc. and Texas Capital Corp.

Edward L. Wright, Little Rock, Ark., Thomas Harper, and Sam Sexton, Jr., Fort Smith, Ark., were on the brief with Anderson and Smith.

Before MEHAFFY, GIBSON and HEANEY, Circuit Judges.

GIBSON, Circuit Judge.

These are appeals from a summary judgment verdict rendered in the United States District Court for the Western District of Arkansas against plaintiffs-appellants Vanderboom, et al. The complaint in the District Court stated two causes of action, one for common law fraud and deceit under Arkansas law, jurisdiction assertedly resting on diversity of citizenship, and the other a federal cause of action for violations of the securities laws, essentially 15 U.S.C. § 78j, which is § 10 of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.

The District Court ruled on December 5, 1968 that the common law fraud complaint was not cognizable because of lack of complete diversity between the parties and that this was not a proper case for the utilization of the federal courts'

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power of pendent jurisdiction. The federal cause of action was dismissed on summary judgment on January 24, 1969 on the ground that it was barred by the applicable state statute of limitations. 1 It is from these two rulings that these appeals are taken.

An extended discussion of the factual context of this case can be found in City National Bank of Fort Smith v. Vanderboom, 422 F.2d 221, decided the 20th day of February, 1970, and thus we will set forth only those facts essential to an adequate explication of this case.

The South Dakota investors (being all of the investors except Investors Thrift Corporation), and Investors Thrift Corporation (ITC), an Arkansas corporation, filed this action against Sam Sexton, Jr., an attorney, Jim Hall, former vice-president of the City National Bank of Fort Smith, Arkansas, and Huey Smith as sellers of the stock in American Home Builders, Inc. (AHB). Also included in their complaint as defendants were Austin Gatlin, a former owner of Peoples Loan and Investment Company (PL&I), Gatlin's wife, the Diamond G Ranch, Inc., a Gatlin owned corporation, and Texas Capital Corporation, formerly the principal creditor of AHB. The complaint alleged that all of the above defendants aided, abetted and conspired to defraud the South Dakota investors and ITC in connection with their purchase of the AHB stock for a total consideration of $947,300.00. 2

Maurice Markham, president of ITC, signed an option agreement under date of September 9, 1965, providing for the purchase by appellant ITC of the capital stock of AHB which owned the controlling stock interest (68%) of PL&I. One hundred fifty thousand dollars was paid at the signing of this option, $157,500.00 at the date the option was exercised on November 2, 1965, and additional payments of $400,000.00 and $300,000.00 were made later to Texas Capital Corporation, a creditor of AHB.

All of the South Dakota appellants owned significant amounts of non-voting stock in ITC, but they did not own all of the capital stock of ITC. They dispute whether Markham should be considered as their agent at the time of the option agreement, but we think this contention is clearly without merit. 3 The option was to extend until January 10, 1966, but was exercised on November 2, 1965, and all payments were made and all stock delivered by January 10, 1966. The complaint in this case was filed July 18, 1968.

STATUTE OF LIMITATIONS

Section 10 of the Securities and Exchange Act of 1934 contains no statute of limitations. As a result there is some question as to the applicable statute of limitations for the federally created cause of action.

The cases of International Union, United Automobile Workers v. Hoosier Cardinal Corp., 383 U.S. 696, 86 S.Ct. 1107, 16 L.Ed.2d 192 (1966)

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, Cope v. Anderson, Receiver, 331 U.S. 461, 67 S.Ct. 1340, 91 L.Ed. 1602 (1947), and Holmberg v. Armbrecht, 327 U.S. 392, 66 S.Ct. 582, 90 L.Ed. 743 (1946), as well as a legion of lower court cases, make it clear that when the federal legislative act is silent as to the statute of limitations applicable to it, the limitations period of the forum state is applied. But it is not entirely clear which of several Arkansas statutes of limitations is the appropriate one to apply. The basic standard for determining which of the various local periods of limitation to utilize is that it should be 'one which best effectuates the federal policy at issue.' Charney v. Thomas, 372 F.2d 97, 100 (6th Cir. 1967).

Appellants contend that the proper statute of limitations to follow is found in Ark.Stat.Ann. § 37-206 (Replacement 1962), a general statute of limitations applying to any action of account, assumpsit or on the case, founded on any contract or liability, and which, according to the District Court, has been made applicable to common law fraud and deceit by Arkansas judicial decision. See Air Leases v. Baker, 167 F.Supp. 145 (W.D. Ark., 1958). Under this statute an action must be brought within three years of the date it accrues. If this statute were applicable, appellants would not be barred by the statute of limitations. Appellants admit that the Arkansas five year general catch-all statute of limitations does not apply to the action set forth in the complaint.

The appellees contend, and the District Court determined, that the appropriate statute of limitations for the federally based 10b-5 action 4 is found in § 22 of the Arkansas Securities Act of 1959, Ark.Stat.Ann. § 67-1256(e) (Replacement 1966), which is also § 410(e) of the Uniform Securities Act. There it is stated that no person suing under that statute may do so more than two years after the relevant contract of sale. We agree with the District Court that this is the proper statute of limitations to apply since it deals expressly with the sale of securities.

While appellants contend that no federal case has applied a short blue-sky statute of limitations, it appears that this ordinarily would be the most reasonable and logical type of statute to apply to essentially what might be termed an 'implied federal blue-sky' type of statutory action. See A. Bromberg, Securities Law, Fraud, SEC Rule 10b-5. The reported federal courts of appeals cases on this issue favorable to appellants' position include Charney v. Thomas, 372 F.2d 97 (6th Cir. 1967), which refused to apply the Michigan blue-sky statute of limitations because the Michigan blue-sky law did not contain any provision similar to rule 10b-5, and instead applied the longer Michigan statute of limitations on general common law fraud; Janigan v. Taylor, 344 F.2d 781 (1st Cir. 1965), cert. denied, 382 U.S. 879, 86 S.Ct. 163, 15 L.Ed.2d 120 (1965), which applied a Massachusetts two year statute, with no discussion of other possible statute; Errion v. Connell, 236 F.2d 447 (9th Cir. 1956), which applied the Washington three year fraud statute from the date of the discovery of the fraud without discussing any other possible blue-sky type of statute; and Fratt v. Robinson, 203 F.2d 627, 37 A.L.R.2d 636 (9th Cir. 1953), which applied the Washington fraud statute of three years instead of a two year statute covering liability created by statute.

Since the standard for determining the applicable statute of limitations is to select the statute that best effectuates the federal policy involved, it is appropriate to look to the local statute which bears the closest resemblance to the federal

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statute involved. Rule 10b-5 states:

'It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud.

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.'

It is suggested by the appellants that there is no section of Ark.Stat.Ann.§ 67-1235-1262 (Replacement 1966) (the Arkansas blue-sky provision) which is entirely comparable to Rule 10b-5. It is true that though Rule 10b-5 is codified as § 101 of the Uniform Securities Act and as § 67-1235 of the Arkansas blue-sky law, it was specifically stated in the Commissioner's notes to this section that it was to create no private remedy. The only section of the Act which provides a private remedy is § 410, Ark.Stat.Ann. § 67-1256 (Replacement 1966). This section is modeled after and parallels Section 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2). Section 67-1256 states in relevant part:

'Any person who--

(2) offers or sells a 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...

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