White v. Sanders

• Decision Date: 13 July 1981
• Docket Number: No. 79-2149,79-2149
• Citation: 650 F.2d 627
• Parties: Blue Sky L. Rep. P 71,708, Fed. Sec. L. Rep. P 98,407 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. . Unit B
• Court: U.S. Court of Appeals — Fifth Circuit

Page 627

650 F.2d 627

Blue Sky L. Rep. P 71,708, Fed. Sec. L. Rep. P 98,407

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.

United States Court of Appeals, Fifth Circuit.

Unit B

July 13, 1981.

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.

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 (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 the state blue sky law runs from the date of sale. In contrast, he reasoned, both federal law and the Alabama law governing actions for fraud provide that the commencement of the limitation period awaits discovery of the purported misrepresentation. See Ala. Code § 6-2-3. This distinction, though technically valid, is not persuasive. For regardless of which state statute of limitations is adopted, a federal court is bound to follow the federal rule as to "when the clock starts running." Azalea Meats, Inc. v. Muscat, 386 F.2d 5, 8 (5th Cir. 1967).

The final and most compelling consideration underlying the district judge's decision is the element of scienter which is now undeniably required in Rule 10b-5 actions after the Supreme Court's opinion in Ernst & Ernst v. Hochfelder, supra. Common law fraud actions similarly demand proof of scienter, whereas § 8-6-19(a)(2) of the Alabama blue sky statute allows recovery for mere negligence in connection with the sale of a security. The district court reasoned that the solidification of the scienter requirement was sufficient to discredit the authority of pre-Hochfelder decisions such as Hudak v. Economic Research Analysts, supra, where this court elected to apply the limitation period prescribed by the Florida blue sky statute to a 10b-5 action. The Hudak opinion was based largely on the circumstance that, at that time, both the Florida courts and this circuit had "relaxed such traditional notions of scienter and evil purpose in actions brought under their respective securities regulation provisions." 499 F.2d at 1000 (citation omitted). Since the federal position regarding scienter has now come full circle, the district judge held that a common law fraud cause of action is more akin to a private action brought pursuant to Rule 10b-5 than is the cause of action available under the Alabama securities laws. ⁴

The scienter distinction is indeed significant and deserves consideration. Nevertheless, when confronted with analagous situations and given the equivalent choice, this court has applied state blue sky law limitations periods in its post-Hochfelder decisions. See Dupuy v. Dupuy, supra; Nortek v. Alexander Grant & Co., 532 F.2d 1013 (5th Cir. 1976). Of particular relevance is Judge Wisdom's reasoning in Dupuy :

The Louisiana law prohibits only misrepresentations by sellers, and it measures the conduct of defendants against a negligence standard of care. Even with these distinguishing features, however, the Blue Sky statute still bears a closer resemblance to Rule 10b-5 than a catch-all provision dealing with the variety of offenses and quasi offenses in the Louisiana Code.

551 F.2d at 1024 n. 31. ⁵

Although our last two ventures into this area have resulted in rejection of the blue sky limitations period, the scienter factor was not dispositive in either case. Indeed, for reasons which we will explain, we believe that each of these recent decisions rests on circumstances and considerations which do not control our present choice.

In McNeal v. Paine, Webber, Jackson & Curtis, Inc., 598 F.2d 888 (5th Cir. 1979), the four-year limitations period applicable to actions brought under Georgia's general fraud statute was accepted over the two-year period prescribed by the Georgia blue sky law. However, McNeal involved a suit for damages against a broker for alleged "churning" of the plaintiff's account. The now-obsolete Georgia securities law before the panel was simply not conducive to such a cause of action. The following excerpt reveals the rationale behind the McNeal holding and simultaneously explains its inapplicability to the present case:

In concluding that the cause of action available under Georgia's general fraud statute, rather than that available under the Georgia Securities Act of 1957, most closely resembles the 10b-5f cause of action relied upon here, we find determinative the fact that McNeal seeks damages against a broker, on account of alleged churning of his account, and does not seek rescission from an actual purchaser or seller of securities. Although the language of section 11 of the Georgia Securities Act of 1957 mimics that of Rule 10b-5 in prohibiting employment of "any device, scheme or artifice to defraud," the remedy made available by section 13 is expressly limited to an action for rescission by a purchaser against a seller. As such, the remedy is ineffective to a 10(b) plaintiff such as McNeal, who was allegedly injured by Paine, Webber's actions as an agent rather than as a principal. For that reason, McNeal could not frame his action as one for rescission. Although McNeal sought damages in an amount equal to the total...