Robuck v. Dean Witter & Co., Inc.

• Decision Date: 07 March 1980
• Docket Number: Nos. 77-1841,77-1842,s. 77-1841
• Citation: 649 F.2d 641
• Parties: Fed. Sec. L. Rep. P 98,379 John D. ROBUCK, Appellant, v. DEAN WITTER & CO., INC., a corporation, Appellee. John D. ROBUCK, Appellant, v. DEAN WITTER & CO., INC., a corporation, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 641

649 F.2d 641

Fed. Sec. L. Rep. P 98,379

John D. ROBUCK, Appellant, v. DEAN WITTER & CO., INC., a corporation, Appellee.

John D. ROBUCK, Appellant, v. DEAN WITTER & CO., INC., a corporation, Appellee.

Nos. 77-1841, 77-1842.

United States Court of Appeals, Ninth Circuit.

March 7, 1980.

C. Edward Simpson, Jones, Bell & Simpson, Los Angeles, Cal., for appellee.

Appeal from the United States District Court for the Southern District of California.

Before GOODWIN and KENNEDY, Circuit Judges, and HILL, ^* District Judge.

GOODWIN, Circuit Judge:

An investor disappointed by events that wiped out his margin account sued his investment advisor, Dean Witter, for damages. The district court held the action barred by California's statute of limitations and not proved on the merits. This appeal challenges both rulings.

In October of 1968, Robuck, the investor, told Thompson, an account executive with Dean Witter, that he wanted to make a low-risk investment that would produce above-average returns. After conferring with the firm's research department, Thompson recommended Ling-Temco-Vought (LTV) bonds, which were selling at a depressed price due to high interest rates. Robuck purchased, on a margin account, approximately 200 LTV $1,000 bonds (at about $680 per bond). In early November 1968, he purchased another 100 LTV bonds, again on margin (at about $650 per bond). Robuck's purchases brought the account to a quoted value of approximately $287,000, with an equity position of about $145,000.

Thereafter, Robuck received monthly statements from Dean Witter showing the status of his various accounts, all transactions in them, and the amount of his margin debt. Robuck also had access to the daily newspapers, of course, in which were recounted the daily trading values of each security he held and particularly of the bonds in his margin account.

The market price of the bonds declined steadily after Robuck's first purchase. On several occasions, Robuck called Thompson to express his concern over the drop in price. On each occasion Thompson either assured Robuck that the price would increase, or that the bond investment was generally sound. Nonetheless, in September 1969, after one of his discussions with Thompson, Robuck sold 120 of his LTV bonds, and invested in other bonds, at a loss of approximately $22,000. At trial, on cross-examination, Robuck admitted that as early as September 1969 he considered that Dean Witter's advice and projections about the economy, and about the LTV bonds, was wrong. Robuck also admitted that as early as 1969, he was dissatisfied with the way Dean Witter was handling his account.

Between September 1969 and May 1970, in the midst of a severe market slump, Dean Witter made four margin calls on Robuck's account. Each margin call prompted Robuck to demand an explanation from Thompson. Thompson attributed two margin calls in late 1969 to bookkeeping errors, but Robuck was asked to satisfy the calls with additional funds until the mistakes were corrected. He complied. Concerning April and May 1970 margin calls, Thompson again stated that a bookkeeping error was responsible; at these times, however, Robuck paid no additional funds into the account.

On May 27, 1970, Dean Witter liquidated Robuck's account because he failed to meet the margin calls of April and May, and because the equity in his accounts had fallen below his indebtedness to Dean Witter. Liquidation left a negative balance in favor of Dean Witter of $8,027.40.

Robuck's complaint against Dean Witter, filed May 22, 1973, alleged three counts: (1) violations of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5; (2) fraud and, as discussed below, perhaps breach of fiduciary duty under state law; and (3) violations of section 17(a) of the Securities Act of 1933, and of the rules of the New York Stock Exchange (NYSE) and National Association of Securities Dealers (NASD).

After a nonjury trial, the court found that by May 21, 1970, Robuck knew, or in the exercise of reasonable diligence should have known, all the facts he relied upon to support his fraud claims. The court therefore held the entire action barred by the three-year California statute of limitations for fraud, Cal.Civ.Proc.Code § 338(4) (West). The conclusions of law filed by the court also declared that Robuck's claims were invalid on the merits. (The court held for Dean Witter on its counterclaim for the balance due on Robuck's account, a ruling that Robuck does not appeal.)

Under the California statute of limitations for fraud, the three-year period does not begin to run until the plaintiff has actual or constructive notice of the facts constituting the fraud. Constructive notice is knowledge of facts sufficient to make a reasonably prudent person suspicious of fraud, thus putting him on inquiry. National Automobile and Casualty Insurance Co. v. Payne, 261 Cal.App.2d 403, 408-09, 67 Cal.Rptr. 784 (1968). In this circuit the limitations period for claims arising under the antifraud provisions of the federal securities laws in California begins to run at the same time as does the California period for fraud. See Rochelle v. Marine Midland Grace Trust Co., 535 F.2d 523, 531 (9th Cir. 1976); Turner v. Lundquist, 377 F.2d 44, 46-47 (9th Cir. 1967).

The trial judge's finding of fact that Robuck had constructive notice of any fraud by May 21, 1970, can be set aside only if it was clearly erroneous. Fed.R.Civ.P. 52(a); United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 541, 92 L.Ed. 746 (1948); deLaurier v. San Diego Unified School District, 588 F.2d 674, 679 (9th Cir. 1978). The record as a whole creates conflicting inferences about this issue, but it does not show that the trial judge's finding was clearly erroneous. Therefore, we must affirm the judgment in its entirety unless application of the three-year statute of limitations for fraud to all three of Robuck's claims was improper as a matter of law. We conclude that the three-year statute was properly applied to any claims arising under federal law and the exchange rules.

Our rule for federal causes of action with no federal limitations period is to look to the state statute of limitations applicable to the most similar state-law cause of action. E. g., Briley v. California, 564 F.2d 849, 854 (9th Cir. 1977). An action for damages charging a violation of the antifraud provisions of the federal securities laws most resembles an action for fraud, for in order to trigger liability, both must include a showing of intentional or reckless conduct. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). Hence, plaintiff's causes of action for violations of federal law, and for violations of any NYSE and NASD rules proscribing fraud must be governed by the three-year fraud statute, section 338(4). See, United California Bank v. Salik, 481 F.2d 1012, 1015 (9th Cir.), cert. denied, 414 U.S. 1004, 94 S.Ct. 361, 38 L.Ed.2d 240 (1973); Sackett v. Beaman, 399 F.2d 884, 890-91 (9th Cir. 1968); Turner v. Lundquist, supra. To the extent that some of the exchange rules require "due diligence" on the part of a broker, rather than merely refraining from fraudulent acts, any cause of action arising under them would be barred by the two-year state statute of limitations for negligence, Cal.Civ.Proc.Code § 339 (West). See Rochelle v. Marine Midland Grace Trust Co., supra. ¹

We must, however, remand the state-law claims for further proceedings. If all of plaintiff's state-law claims are governed by the three-year statute of limitations for fraud, then these as well as the federal claims are barred. Cal.Civ.Proc.Code § 343 (West), however, establishes a four-year limitations period for all types of actions not specifically addressed by another limitations section. Cal.Civ.Code § 2219 deems all who voluntarily assume relations of personal confidence to be "trustees," and there is a separate cause of action for breach of trust. See, Kornbau v. Evans, 66 Cal.App.2d 677, 685-86, 152 P.2d 651 (1944). Therefore, if one of plaintiff's state law theories was grounded in a claim that Dean Witter breached a fiduciary duty to Robuck, then the four-year period would apply, not the three-year period governing actions based solely on fraud. If, as discussed below, the issues of fiduciary duty and the four-year limitations period were properly before the district court, then it is possible that Robuck need not have alleged a state-law count for breach of fiduciary duty independently of his fraud action. ² We think it inappropriate, however, to address this issue on this record, since it is not clear that the fiduciary duty aspect of this case was preserved at the trial level.

We hold that the trial court's finding that Dean Witter "did not practice or participate in any common law deceit" is not clearly erroneous. The findings of fact recount, for example, the various margin calls by Dean Witter, as well as Thompson's continuing reassurances to Robuck "that the account was safe and the equity sufficient." The findings then point out that Robuck got a monthly statement of his account and could have gathered all the material facts he needed by making an examination of the statement and reading the daily newspapers. However, that holding does not permit a final disposition of the case before us because of uncertainty as to the scope of the state law issues which were before the trial court for decision.

The findings regarding deceit do not establish as a substantive matter that Dean Witter did not breach a fiduciary duty which it might have owed to Robuck. Thompson misrepresented the soundness of Robuck's investment and the causes of the margin calls. The findings of fact do not establish Thompson's state of mind as to the truth or falsity of all his statements when he made representations to Robuck, whether Robuck relied on them to his detriment, or whether Dean Witter should...