Cahill v. Ernst & Ernst

• Decision Date: 30 June 1980
• Docket Number: No. 79-2402,79-2402
• Citation: 625 F.2d 151
• Parties: Blue Sky L. Rep. P 71,553, Fed. Sec. L. Rep. P 97,559 John D. CAHILL, Plaintiff-Appellant, v. ERNST & ERNST, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 151

625 F.2d 151

Blue Sky L. Rep. P 71,553, Fed. Sec. L. Rep. P 97,559

John D. CAHILL, Plaintiff-Appellant, v. ERNST & ERNST, Defendant-Appellee.

No. 79-2402.

United States Court of Appeals Seventh Circuit.

Argued April 28, 1980.

Decided June 30, 1980.

John H. Bowers, Lawton & Cates, Madison, Wis., for plaintiff-appellant.

William H. Alverson, Milwaukee, Wis., for defendant-appellee.

Before PELL and SPRECHER, Circuit Judges, and MARKEY, Chief Judge. ^*

SPRECHER, Circuit Judge.

In this appeal we reaffirm for Wisconsin forum cases, as we have previously held for Illinois and Indiana forum cases, that a civil action brought under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5, is governed by the forum state's securities law statute of limitations and not by its common law fraud limitation period nor by its catch-all limitation period.

I

In Count I of the complaint, ¹ plaintiff sought damages from defendant accounting firm, alleging that defendant made false representations to him about the financial condition of the American City Bank & Trust Company of Milwaukee, Wisconsin, and its holding company, American Bankshares Corporation. Defendant's misrepresentations and non-disclosures assertedly caused plaintiff to buy Bankshares stock on May 17, 1974. The complaint alleged that the defendant acted "with intent to deceive, manipulate and defraud Plaintiff" and "knowingly or recklessly" concealed the distressed financial condition of the two companies from plaintiff. This was alleged to violate section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 thereunder.

The district court granted the defendant's motion for summary judgment, finding that the action was time-barred, 448 F.Supp. 84 (E.D.Wis.1978). The complaint was filed on May 17, 1977; defendant claimed the action was barred by the period of limitations contained in section 551.59(5) of the Wisconsin Statutes, which requires actions to be commenced within one year after discovery of the misrepresentation or within three years after the act itself, whichever expires first. ² The district court held that the action was time-barred because "discovery of the fraud occurred when the plaintiff appeared in (a prior case ³) by answering the complaint therein on January 22, 1976." 448 F.Supp. at 86.

The district court held that Count I of the complaint resembled a cause made actionable by section 551.59 ⁴ of the Wisconsin Statutes, so that the one-to-three year statute of limitations set out in that section applied. We vacated the summary judgment and remanded the cause for further proceedings because the plaintiff had failed to argue before the district court that Count I more closely resembled a cause actionable under section 551.41 ⁵ of the Wisconsin Statutes, which might require application of a different statute of limitations. Unpublished order in Appeal No. 78-1576, September 26, 1978.

Upon remand, the district court held that further proceedings and consideration led to the same result, namely that the Wisconsin one-to-three year security act limitation applied to Count I and hence that the count was time-barred. 478 F.Supp. 1186 (E.D.Wis.1979). The plaintiff has again appealed.

II

Since no statute of limitations is provided for civil actions under section 10(b) of the Securities Exchange Act of 1934, the federal courts apply the limitation period applicable to the forum state's most closely analogous state law cause of action. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210 n. 29, 96 S.Ct. 1375, 1389, 47 L.Ed.2d 668 (1976).

Consequently, the Seventh Circuit has held that a section 10(b) action brought in Illinois is governed by the three-year statute of limitations of the Illinois Securities Law. Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123, 126 (7th Cir. 1972); Hupp v. Gray, 500 F.2d 993, 996 (7th Cir. 1974); Schaefer v. First National Bank of Lincolnwood, 509 F.2d 1287, 1291 (7th Cir. 1975), cert. denied, 425 U.S. 943, 96 S.Ct. 1682, 48 L.Ed.2d 186 (1976); Tomera v. Galt, 511 F.2d 504, 508-09 (7th Cir. 1975); Goldstandt v. Bear, Stearns & Co., 522 F.2d 1265, 1267 (7th Cir. 1975); Wright v. Heizer Corp., 560 F.2d 236, 257 (7th Cir. 1977), cert. denied, 434 U.S. 1066, 98 S.Ct. 1243, 55 L.Ed.2d 767 (1978); Nemkov v. O'Hare Chicago Corp., 592 F.2d 351, 353, 355 (7th Cir. 1979).

This court has similarly held that a section 10(b) action brought in Indiana is governed by the two-year statute of limitations of the Indiana Securities Regulation Act. LaRosa Bldg. Corp. v. Equitable Life Assurance Society, 542 F.2d 990, 993 (7th Cir. 1976).

Although we have not as yet determined the applicable Wisconsin statute of limitations in a section 10(b) action, district judges sitting in Wisconsin have held that such an action is governed by the one-to-three year statute of limitations of the Wisconsin blue sky law. Wis.Stat. § 551.59(5). See Kramer v. Loewi & Co., 357 F.Supp. 83 87 (E.D.Wis.1973) (Reynolds, C. J.); Colonial Bank & Trust Co. v. American Bankshares Corp., 439 F.Supp. 797, 801-02 (E.D.Wis.1977) (Warren, J.); Colonial Bank & Trust Co. v. American Bankshares Corp., 442 F.Supp. 234, 238 (E.D.Wis.1977) (Warren, J.); Turner v. First Wisconsin Mortgage Trust, 454 F.Supp. 899, 904 (E.D.Wis.1978) (Reynolds, C. J.).

In Sperry v. Barggren, 523 F.2d 708, 710 (7th Cir. 1975), we noted that the Kramer case held that Wisconsin's one-to-three year limitation period, rather than its six-year statute of limitations for fraud, applied in section 10(b) actions. We added that "(s)ince neither party contests the correctness of the Kramer holding, we assume its validity." Id. at 710 n. 1.

Thus, ever since the Parrent decision in 1972, this circuit has uniformly adopted the limitation provision in the forum state's securities law, in section 10(b) cases, which is in accord with the majority of circuits. ⁶ Other circuits have applied the limitation provision which the forum state applied to common law fraud, in section 10(b) cases. ⁷

In the prior appeal of this case, plaintiff urged the adoption of the Wisconsin fraud limitation statute which provides a six-year period. ⁸ The district court had rejected that argument. 448 F.Supp. 84 (E.D.Wis.1978). We now reject that argument for the same reasons comparable limitations were rejected by us in Parrent (Illinois' 5-year limitation for fraud) and LaRosa (Indiana's 6-year limitation for fraud) and by the Wisconsin district court in Kramer (Wisconsin's 6-year limitation for fraud).

Upon remand, we suggested that the district court consider a somewhat different argument: that plaintiff's Count I might more closely resemble section 551.41, that section 551.41 might permit an implied cause of action, and that since section 551.41 contained no express limitation, the Wisconsin six-year catch-all statute of limitations might apply. ⁹

Our concern was based on the fact that in enacting in substance the Uniform Securities Act, the Wisconsin legislature included in section 551.59(9) the phrase "The rights and remedies under this chapter are in addition to any other rights or remedies that may exist at law or in equity," but excised the phrase "but this act does not create any cause of action not specified in this section . . . " from section 551.59(9), thus seemingly authorizing a private cause of action under section 551.41. The draftsmen of the Uniform Securities Act had indicated that the excised phrase was intended to abrogate a private cause of action. Commissioners' Note, Uniform Securities Act § 410(h), 7A Uniform Laws Annotated at 672-73.

The reconsideration which we suggested upon remand conceivably depended upon the resolution of several questions: (1) can a private right of action be implied from section 551.41?; (2) if so, can the catch-all statute of limitations be implied to govern such a private right of action?; and (3) even if so, should we adopt such a catch-all statute as a matter of policy? In order for the plaintiff to prevail, it would be necessary to answer each question in the affirmative.

Upon remand the district court gave careful consideration to the first question by a detailed study of the legislative history of chapter 551 of the Wisconsin Statutes. The court noted that section 551.41 contains wording virtually identical to that found in Rule 10b-5, and that like Rule 10b-5, the state provision contains no limitation period. However, the court found that the legislature, as indicated by the minutes of its advisory committee, "clearly recognized that there would be no civil actions for subsections 1 and 3 of 551.41." 478 F.Supp. at 1190. The court then concluded:

After its examination and analysis of the legislative history of chapter 551, the Court concludes that section 551.41 does not provide for a private right of action. The Court further concludes that 551.59(1) contains the civil remedy for a violation of section 551.41(2) and that the limitations period in 551.59(5) applies to these action.

Since both 551.41(2) and 551.59(1) cover basically the same conduct, it would be inconsistent to have a six-year statute of limitations apply to one section and a three-year limitation period applied to the other.

478 F.Supp. at 1190.

Having concluded that a private right of action was not intended to be implied from section 551.41, it was not necessary for the district court to answer the second or third question. However, since the first question is a matter of state law and since a Wisconsin court could in the future differ with the district court's answer, we shall endeavor to confront the remaining questions, which are purely federal questions.

Our research reveals that while the majority of circuits and cases have adopted the limitation period set forth in the forum state's securities law and while several circuits and cases have adopted the limitation period which the forum state applied...