Nickels v. Koehler Management Corp., s. 75-1684

• Decision Date: 02 September 1976
• Docket Number: Nos. 75-1684,75-2200,s. 75-1684
• Citation: 541 F.2d 611
• Parties: Blue Sky L. Rep. P 71,307, Fed. Sec. L. Rep. P 95,719 Charles NICKELS, Margaret Nickels, on behalf of themselves and all other shareholders of Koehler Management Corporation, Plaintiffs-Appellants, v. KOEHLER MANAGEMENT CORP., et al., Defendants-Appellees. Rhoda V. McINTYRE, Individually and as a representative of a class,Plaintiff-Appellee, v. The FIRST NATIONAL BANK OF CINCINNATI, Individually and as agent,Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 611

541 F.2d 611

Blue Sky L. Rep. P 71,307, Fed. Sec. L. Rep. P 95,719

Charles NICKELS, Margaret Nickels, on behalf of themselves

and all other shareholders of Koehler Management

Corporation, Plaintiffs-Appellants, v. KOEHLER MANAGEMENT CORP., et al., Defendants-Appellees.

Rhoda V. McINTYRE, Individually and as a representative of a class,Plaintiff-Appellee, v. The FIRST NATIONAL BANK OF CINCINNATI, Individually and as

agent,Defendant-Appellant.

Nos. 75-1684, 75-2200.

United States Court of Appeals Sixth Circuit.

Argued Dec. 18, 1975.

Decided Sept. 2, 1976.

Dennis E. Murray, James Kimbler, Murray & Murray Co., Sandusky, Ohio, for plaintiffs-appellants.

Stanley Goodman, (Eisenhauer, Gillmor, Goodman, Janis, Johnston, Siegel, Fischer) Goodman & Goodman, Cincinnati, Ohio, for Koehler Management Corp.

Eugene N. Balk, Toledo, Ohio, for Ray Molder and Alfred Rhoden, M.D.

Robert B. Gosline, Shumaker, Loop & Kendrick, Toledo, Ohio, for Schuster.

Louis Hattner, Spengler, Nathanson, Heyman, McCarthy & Durfee, Toledo, Ohio, for Gerald Koehler.

Robert W. Rowley, Toledo, Ohio, for Roger Benham.

L. Clifford Craig, Taft, Stettinius & Hollister, Cincinnati, Ohio, Chapman & Cutler, Chicago, Ill., for First Nat. Bank of Chicago.

Thomas L. Conlan, Kyte, Conlan, Wulsin & Vogeler, Frederick J. McGavran, Cincinnati, Ohio, for Rhoda McIntyre.

Before PECK, McCREE and MILLER, ^* Circuit Judges.

McCREE, Circuit Judge.

We consolidated these two appeals because they present the same question: what statute of limitations should be applied in an action in a United States District Court in Ohio based upon Rule 10b-5, § 10(b) of the Securities Exchange Act of 1934, and § 17(a) of the Securities Act of 1933. In case No. 75-2200, McIntyre v. First National Bank of Cincinnati, the District Court for the Southern District of Ohio, Western Division, applied Ohio's four year statute of limitations for general fraud, Ohio Rev. Code 2305.09. In case No. 75-1684, Nickels v. Koehler Management Corp., the District Court for the Northern District of Ohio, Western Division, applied the Ohio two year blue sky period of limitations, Ohio Rev. Code 1707.43.

We hold that the four year period of limitation in Ohio Rev. Code 2305.09 should be adopted because it best effectuates the policies of the federal securities laws.

The plaintiff in McIntyre is a former shareholder in the Verkamp Corporation, which was acquired by KDI Corporation and KDI Verkamp pursuant to a merger agreement approved by the Verkamp shareholders. McIntyre alleged that the approval of the merger was fraudulently induced by the KDI defendants, and that the merger agreement provided for the exchange of 27 shares of KDI stock, which had a value of less than $2 per share, for each share of Verkamp stock, which had a value of $900 per share. Another portion of the original complaint charged the First National Bank with a transfer in defraud of creditors and a fraudulent conveyance both arising from KDI's pledge to the bank of the shares and assets of the former Verkamp corporation after the merger. In a second amended complaint, McIntyre also alleged that First National controlled, aided and abetted, and participated in the fraudulent acquisition of Verkamp as security for KDI's debts to First National and a group of banks represented by First National. The bank contended that the new claims in the second amended complaint did not arise out of the transaction set forth in the original complaint, and that they were barred by the two year statute of limitations in the state blue sky law. ¹ The district court granted McIntyre's motion for leave to file the second amended complaint, holding that the four year general fraud limitation, Ohio Rev.Code 2305.09, applied. The district court certified the question of the proper limitation period under 28 U.S.C. § 1292(b), and we granted leave for an interlocutory appeal.

The plaintiffs in the second case, Nickels, are stockholders in the Koehler Management Corporation. The allegations of the complaint are as follows. In 1970, pursuant to the recommendation of their board of directors, the stockholders of Koehler approved a merger with Ohio Indiana Mutual Corporation. Several Koehler directors were also directors of Ohio Indiana. At the time they urged approval of the merger, the Koehler directors knew or should have known that in 1969, Ohio Indiana had loaned $590,000, with no collateral, to Gerald Koehler (who was at that time president of both Koehler and Ohio Indiana), that the loan was still outstanding, and that it was uncollectible. The complaint alleges that when the public learned of the loan, the value of the Koehler stock dropped from $12.00 per share to $.60 per share. The district court sustained the defendants' motion to dismiss on the ground that the two year statute of limitations in the Ohio blue sky law barred the cause of action. ² Plaintiffs appeal from that order.

Neither § 10(b) of the 1934 Act, nor § 17(a) of the 1933 Act contains a period of limitations, and there is no general federal statute of limitations. Accordingly, we held in a § 10(b) case that " '(T)he Federal Courts must choose among the several state statutes of limitations and apply that one which best effectuates the federal policy at issue.' " IDS Progressive Fund, Inc. v. First of Michigan Corp., 533 F.2d 340, 342 (6th Cir. 1976), quoting Charney v. Thomas, 372 F.2d 97, 100 (6th Cir. 1967). This view was approved recently by the Supreme Court in Ernst & Ernst v. Hochfelder, --- U.S. ----, ----, n.29, 96 S.Ct. 1375, 1389, 47 L.Ed.2d 668 (1976):

Since no statute of limitations is provided for civil actions under § 10(b), the law of limitations of the forum state is followed as in other cases of judicially implied remedies. See Holmberg v. Armbrecht, 327 U.S. 392, 395 (66 S.Ct. 582, 584, 90 L.Ed. 743) (1946), and cases cited therein.

The question whether the Ohio blue sky period of limitations or fraud period would better implement the federal policies underlying Rule 10b-5 and §§ 10(b) and 17(a) has not previously been considered by our court. However, in Connelly v. Balkwill, 279 F.2d 685 (6th Cir. 1960), we affirmed, without discussion, a determination by the District Court for the Northern District of Ohio that the four year fraud period should be applied in preference to the six year limitation period for actions based upon a liability created by statute, Ohio Rev. Code 2305.07. The two year blue sky limitation period was not considered. The district court opinion, reported at 174 F.Supp. 49 (N.D. Ohio 1959), focused on the fact that § 10(b) and Rule 10b-5 did not create a new kind of liability, but rather incorporated into statute and rule the common law fraud action. Accordingly, the court applied the six year fraud limitation. It did not discuss the applicability of Ohio Rev. Code 1707.43, the two year blue sky limitation. The district court also discussed the resemblance between the Ohio law of fraud and 10b-5 in connection with the defendants' claim that res judicata barred the 10b-5 action because plaintiffs had already been denied recovery in a state fraud action. The court held that "this (10b-5) case is based on a cause of action no different from the cause of action upon which plaintiffs sought recovery in the previous (fraud) action." It found that

Ohio must be assigned a place among those "more enlightened jurisdictions" where the duty to disclose material facts is as broad and exacting as the duty of disclosure defined by Rule X 10b-5. 174 F.Supp. 60. (Emphasis added.)

Then, in Charney v. Thomas, 372 F.2d 97 (6th Cir. 1967) we were presented with a choice between applying the six year Michigan limitation for general fraud and the two year limitation in the state blue sky law. The plaintiff alleged fraudulent misrepresentation in violation of § 10 of the 1934 Act. We held that the six year limitation for fraud would best promote federal policy because the Michigan statute did not contain a provision similar to 10(b).

Most recently in IDS Progressive Fund, Inc. v. First of Michigan Corp., 533 F.2d 340 (6th Cir. 1976), we rejected the contention that we ought to apply the new Michigan blue sky limitation contained in the Uniform Securities Act, which was adopted in place of the earlier blue sky law considered in Charney. We held that "(f)or us to change the applicable limitation period without good cause would add an unnecessary uncertainty to the prosecution of federal claims under Section 10(b)." 533 F.2d 343. Additionally, we observed that " 'the broad remedial purposes of the federal securities laws are best served by a longer, not a shorter statute of limitations.' " 533 F.2d 344, quoting United California Bank v. Salik, 481 F.2d 1012 (9th Cir.), cert. denied, 414 U.S. 1004, 94 S.Ct. 361, 38 L.Ed.2d 240 (1973).

Although we have not applied a state blue sky limitation in any of the cases before us, we are aware that other circuits have applied similar blue sky limitations periods in fraud cases based upon 10b-5, and sections 10(b) and 17(a). Newman v. Prior, 518 F.2d 97 (4th Cir. 1975), Hudak v. Economic Research Analysts, Inc., 499 F.2d 996 (5th Cir. 1974), cert. denied, 419 U.S. 1122, 95 S.Ct. 805, 42 L.Ed.2d 821 (1975), Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123 (7th Cir. 1972), Vanderboom v. Sexton, 422 F.2d 1233 (8th Cir. 1970), cert. denied, 400 U.S. 852, 91 S.Ct. 47, 27 L.Ed.2d 90 (1970). In each of these cases, the court determined that the state blue sky law closely resembled the federal securities provisions. For example, in Parrent, the Seventh Circuit observed that the state blue sky law had a purpose similar to the 10b-5's purpose "of protecting the 'uninformed, the ignorant, the gullible.' " 455 F.2d 126. The court determined, "Except for the interstate elements in 10b-5, Section 12 of the Illinois Securities Law . . . covers the same violations as 10b-5." 455 F.2d 127. (Emphasis added.) The court...