650 F.2d 627 (5th Cir. 1981), 79-2149, White v. Sanders

Docket Nº:79-2149.
Citation:650 F.2d 627
Party Name:Blue Sky , Ernest H. WHITE and Mary Ellen White, et al., Plaintiffs-Appellants, Cross Appellees, v. Prentice SANDERS (Edna E. Sanders, as Executrix of the Estate of Prentice Sanders, substituted in place and stead of Prentice Sanders, Deceased), Defendant-Appellee, Cross Appellant.
Case Date:July 13, 1981
Court:United States Courts of Appeals, Court of Appeals for the Fifth Circuit
 
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Page 627

650 F.2d 627 (5th Cir. 1981)

Blue Sky ,

Ernest H. WHITE and Mary Ellen White, et al.,

Plaintiffs-Appellants, Cross Appellees,

v.

Prentice SANDERS (Edna E. Sanders, as Executrix of the

Estate of Prentice Sanders, substituted in place

and stead of Prentice Sanders,

Deceased), Defendant-Appellee,

Cross Appellant.

No. 79-2149.

Unit B

United States Court of Appeals, Fifth Circuit

July 13, 1981

Page 628

John A. Owens, Barrie Balzli Stokes, Tuscaloosa, Ala., for plaintiffs-appellants, cross-appellees.

Fite, Davis & Fite, James K. Davis, Hamilton, Ala., for defendant-appellee, cross appellant.

Appeals from the United States District Court For the Northern District of Alabama.

Before JONES, FAY and HENDERSON, Circuit Judges.

HENDERSON, Circuit Judge:

On May 24, 1977, Ernest H. White and Mary Ellen White filed a complaint in the United States District Court for the Northern District of Alabama against the appellee, Prentice Sanders, alleging fraud under Alabama law and violations of § 10(b) of the Securities & Exchange Act of 1934, 15 U.S.C.A. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. In the following weeks, virtually identical actions were instituted against Sanders by James N. McGee and his wife Betty Jean, and Ora Mae Reeves who sued on her own behalf and in her capacity as Administratrix of the Estate of L.C. Reeves. All of these suits arose in connection with the plaintiffs' investments in National Account Service Administration, Inc., an Alabama corporation. The three cases were consolidated for trial, and resulted in a jury verdict in favor of Sanders. Having previously moved for a directed verdict, the plaintiffs, appellants on appeal, filed a motion for judgment notwithstanding the verdict or in the alternative for a new trial. The district judge granted a new trial, explaining that the verdict was against the great weight of the evidence and that he had erroneously admitted into evidence certain prejudicial material.

A verdict for Sanders in the second trial again precipitated a motion for judgment notwithstanding the verdict or in the alternative for a new trial. On March 19, 1979, the district court issued a memorandum opinion acknowledging that Sanders had sold securities, that he received compensation for selling the securities and that he failed in his duty to disclose this fact to the appellants. The judge also noted that the appellants would not have participated in the sale of the securities but for Sanders' activities, and that this was a fact about which reasonable minds could not differ. Nevertheless, he denied the motion for judgment n.o.v. because he found that the statute of limitations applicable to the federal securities claims had run prior to the filing of the three actions. It is only this latter determination with which we are concerned on this appeal.

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Our analysis begins with repetition of the well-settled principle that, because the federal securities laws contain no statute of limitations which is expressly applicable to private actions under § 10(b) and Rule 10b-5, a federal court must adopt the limitations period which the forum state applies to the state cause of action bearing the closest substantive resemblance to the implied cause of action arising under the federal provisions. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); McNeal v. Paine, Webber, Jackson & Curtis, Inc., 598 F.2d 888 (5th Cir. 1979); Hudak v. Economic Research Analysts, Inc., 499 F.2d 996 (5th Cir. 1974). Here, the apparent choice is between the one-year "catch-all" limitations period which Alabama follows in common law fraud actions, Ala. Code § 6-2-39, and the two-year period applicable to actions under the Alabama "blue sky" law, Ala. Code § 8-6-19(e). 1 The district court opted for the one-year statute of limitations. Since the appellants were apparently aware of Sanders' purported misrepresentations in March of 1976, more than one year prior to the filing of the complaints in May and June of 1977, the court held that the actions were barred. We reverse because we conclude that the state blue sky law bears the closer substantive resemblance to § 10(b) and Rule 10b-5, and that, accordingly, the application of its specifically-prescribed limitations period, rather than the "catch-all" provision relating to general fraud actions, better effectuates the federal policy involved.

The district judge chose to use the common law fraud limitations period because he found essentially three features which distinguished the Alabama blue sky statute from the federal securities laws. 2 As one such distinction, he noted that § 10(b) and Rule 10b-5 provide redress for defrauded purchasers and sellers of securities, whereas the Alabama blue sky law allows recovery by purchasers only. 3 However, this difference alone has never been of controlling significance, especially where, as here, the suit is brought by the purchaser. See Dupuy v. Dupuy, 551 F.2d 1005, 1023-24 n. 31

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(5th Cir. 1977); Forrestal Village, Inc. v. Graham, 551 F.2d 411, 414 (D.C. Cir. 1977); Berry Petroleum Co. v. Adams & Peck, 518 F.2d 402, 408 (2d Cir. 1975).

Another factor which influenced the district judge's decision was his observation that the statute of limitations prescribed by...

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