Berry Petroleum Co. v. Adams and Peck

• Decision Date: 23 June 1975
• Docket Number: D,No. 805,805
• Parties: Blue Sky L. Rep. P 71,223, Fed. Sec. L. Rep. P 95,220 BERRY PETROLEUM COMPANY, an Arkansas Corp. (Dissolved), et al., Plaintiffs-Appellants, v. ADAMS & PECK et al., Defendants-Appellees. ocket 74-2588.
• Court: U.S. Court of Appeals — Second Circuit

Page 402

518 F.2d 402

Blue Sky L. Rep. P 71,223, Fed. Sec. L. Rep. P 95,220

BERRY PETROLEUM COMPANY, an Arkansas Corp. (Dissolved), et al., Plaintiffs-Appellants, v. ADAMS & PECK et al., Defendants-Appellees.

No. 805, Docket 74-2588.

United States Court of Appeals Second Circuit.

Argued April 25, 1975.

Decided June 23, 1975.

Edward Lester, Little Rock, Ark. (Lester & Shults, Little Rock, Ark., Oliver M. Clegg, Keith, Clegg & Eckert, Magnolia, Ark., Stephen Philbin, Locke, Purnell, Boren, Laney & Neely, Dallas, Tex., on the brief), for plaintiffs-appellants Berry Petroleum Co., an Arkansas Corp. (Dissolved), J. E. O'Daniel, Yvonne Law, McAlester Fuel Company, and Gerland P. Patten & Co., Inc.

P. B. Konrad Knake, New York City (White & Case, New York City, on the brief), for defendant-appellee Arthur Young & Co. R. B. Block, New York City (Pomerantz, Levy, Haudek & Block, New York City, on the brief), for defendants-appellees Kleiner Bell Group.

John J. Loflin, New York City (Lord, Day & Lord and R. Scott Greathead, New York City, on the brief), for defendant-appellee American Stock Exchange, Inc.

Holtzmann, Wise & Shepard, New York City, on the brief, for defendant-appellee Allen & Co., Inc.

Davis, Polk & Wardwell, New York City, Dearborn & Ewing, Nashville, Tenn., Burgoyne, Michels, Rose & Williamson, New York City, on the brief, for defendants-appellees Peter Huang, H. Igor Ansoff, and Gottfried von Meyern Hohenberg.

Before LUMBARD, HAYS and MULLIGAN, Circuit Judges.

LUMBARD, Circuit Judge:

Plaintiffs appeal from a summary judgment entered August 19, 1974, in the Southern District which dismissed their class-action complaint. They argue that the district court erred in concluding, inter alia, that their action was barred by the statute of limitations and that all but four of the named plaintiffs were also barred by the res judicata effect of a prior judgment with respect to 20 of the 28 defendants. We affirm the dismissal of the complaint.

This is a class-action suit which was brought December 15, 1972, in the Northern District of Texas. Berry Petroleum Co. (a dissolved Arkansas corporation) and four named plaintiffs (O'Daniel, Law, McAlester Fuel Co., and Gerland P. Patten & Co., Inc.) are suing on behalf of all those persons who owned Berry common stock as of October 16, 1968, and who exchanged such Berry stock for shares of Commonwealth United Corporation (CUC) on October 31, 1968, pursuant to a merger and reorganization agreement between Berry and CUC. The twenty-eight defendants are various officers, directors, and agents of CUC, underwriters, consultants, the American Stock Exchange, and Variety Magazine. The suit alleges violations of the federal securities law and pendant common law concepts in that the proxy statement furnished Berry shareholders prior to their approval of the merger contained misstatements of material facts and omissions of material facts and that the defendants engaged in other fraudulent conduct and disseminated other misleading information between January 1, 1968, and December 31, 1969.

This lawsuit (hereinafter Berry II ) is intimately related to two other lawsuits which arose out of the CUC's financial problems. Berry and three of the other four named plaintiffs in this action (O'Daniel, Law, and Gerland P. Patten & Co.) had previously sued CUC and a wholly owned subsidiary in the Western District of Arkansas. ¹ They brought that suit (hereinafter Berry I ) as a class action on behalf of the same class involved here. The suit alleged that CUC misrepresented its financial condition to the Berry stockholders in violation of the federal securities laws. In his opinion below Judge McFadden concluded correctly "that Berry I and Berry II are in essence the same lawsuits with different defendants as targets." A settlement was reached in Berry I on October 2, 1972, under which the class defined therein received 54,365 shares of CUC stock and $325,000 in cash. Berry II was commenced about two and one-half months after this settlement was reached.

The other suit related to this case was a class action on behalf of all persons who acquired CUC securities for value between October 16, 1968, and August 1, 1969. This case (hereinafter the Land case) was brought in the Southern District of New York on August 27, 1969. ² The defendants in that case included twenty of the defendants in the present action. ³ A stipulation of settlement in the Land case was signed in May 1972; the district court approved the settlement on November 29, 1972. ⁴ The Land settlement was approved two weeks prior to the filing of Berry II.

Berry II was originally brought in the Northern District of Texas, but it was transferred, pursuant to 28 U.S.C. § 1407, to the Southern District of New York on August 3, 1973, by the Judicial Panel on Multidistrict Litigation. In re Seeburg-Commonwealth United Merger Litigation, 362 F.Supp. 568 (1973). The Panel felt that Berry II should be consolidated with the remaining part of the Land action for coordinated pretrial proceedings. It also noted that some of the issues raised in Berry II (e. g., the question of whether the action was barred by the Land action settlement) could best be considered and decided by Judge McFadden who had a "first-hand familiarity with all aspects of this litigation." 362 F.Supp. at 571.

The two issues on this appeal are whether this action is barred by the statute of limitations and whether the action is barred by the res judicata effect of the Land settlement. ⁵

I. Statute of Limitations

This suit was brought under SEC rule 10b-5 and section 10(b) of the Securities Exchange Act of 1934. 15 U.S.C. § 78j(b). As there is no federal statute of limitations that applies to that section of the Act, a district court must look to state law to determine if a suit has been timely brought. Saylor v. Lindsley, 391 F.2d 965, 970 (2d Cir. 1968).

In this case the appropriate state law is the law of Texas (the forum state where this suit was initiated). Unfortunately, Texas has two statutes under which one might bring a suit alleging fraud in the sale of securities one which has a two-year statute of limitations and one which has a three-year statute. The choice of the proper statute is of some importance in this case. Berry II was not commenced until December 15, 1972, and even plaintiffs admit that they knew or should have known of the alleged fraud by December 15, 1970. Thus, it is only if we decide, contrary to the decision of the district court, that the three-year statute applies here that we need reach the district court's alternative holding that the Berry II plaintiffs were barred from suing because they knew or should have known of the alleged fraud by December 15, 1969 (three years prior to their commencement of the suit).

A.

The district court concluded that the three-year statute did not apply because the court felt that that statute was not a true statute of limitations. The three-year statute is contained in the Texas Securities Act which both establishes a cause of action for securities fraud and sets a three-year limit on the time within which suit has to be brought. Courts often consider such a limitation to be a time limitation on the right created, rather than a traditional statute of limitations which is a limitation on the time within which a suit must be brought on a right that never ceases to exist. While this distinction may have some utility in certain areas of the law, ⁶ we do not think that it should be considered in the determination of which statute of limitations applicable to state securities fraud claims should be used in rule 10b-5 actions.

The most important consideration in picking a state statute of limitations to apply to rule 10b-5 actions is to compare the state causes of action to a rule 10b-5 action and to choose the statute of limitations applicable to that state cause of action which is most similar to the federal cause of action under rule 10b-5 and which best effectuates the rule's purpose. Hudak v. Economic Research Analysts, 499 F.2d 996, 999 (5th Cir. 1974), cert. denied, 419 U.S. 1122, 95 S.Ct. 805, 42 L.Ed.2d 821 (1975); Sargent v. Genesco, Inc., 492 F.2d 750, 758 (5th Cir. 1974); Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123, 126 (7th Cir. 1972); Vanderboom v. Sexton, 422 F.2d 1233, 1237-40 (8th Cir.), cert. denied, 400 U.S. 852, 91 S.Ct. 47, 27 L.Ed.2d 90 (1970). In this way investors have at least as much time to sue under the federal statute as they do under the most analogous state statute. Since the purposes of the securities law are remedial, this best effectuates the congressional policy to provide redress in federal courts for victims of securities fraud. Thus, it is necessary to compare and contrast the substantive provisions of the two Texas statutes with the substantive provisions of rule 10b-5.

Article 581-33 of the Texas Securities Act, which contains a three-year statute of limitations, provides:

A. Any person who . . . (2) Offers or sells a security . . . by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made not misleading (when the person buying the security does not know of the untruth or omission, and who in the exercise of reasonable care could not have known of the untruth or omission) is liable to the person buying the security from him . . . .

Section 27.01(a) of the Texas Business and Commerce Code, V.T.C.A., provides:

Fraud in a transaction involving real estate or stock in a corporation or joint stock company consists of a (1) false representation of a past or existing material fact, when the false representation is (A) made to a person for the purpose of inducing that person to enter into a contract; and (B) relied on by that person in entering into that contract . . . .

While no specific limitation applies to section 27.01, Texas courts have held that Texas's two-year...