Landry v. All American Assur. Co.

• Decision Date: 07 October 1982
• Docket Number: No. 81-3302,81-3302
• Citation: 688 F.2d 381
• Parties: Blue Sky L. Rep. P 71,767, Fed. Sec. L. Rep. P 98,823 Dr. W. B. LANDRY, Bryan Zeringue and Curtis Chauvin, Plaintiffs-Appellants Cross-Appellees, v. ALL AMERICAN ASSURANCE COMPANY, Defendant, REPUBLIC SECURITIES CORP., et al., Defendants-Third-Party Plaintiffs-Appellees, v. BANK OF ST. CHARLES & TRUST COMPANY, et al., Third-Party Defendants-Appellees Cross-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 381

688 F.2d 381

Blue Sky L. Rep. P 71,767, Fed. Sec. L. Rep. P 98,823

Dr. W. B. LANDRY, Bryan Zeringue and Curtis Chauvin, Plaintiffs-Appellants Cross-Appellees, v. ALL AMERICAN ASSURANCE COMPANY, Defendant, REPUBLIC SECURITIES CORP., et al., Defendants-Third-Party Plaintiffs-Appellees, v. BANK OF ST. CHARLES & TRUST COMPANY, et al., Third-Party

Defendants-Appellees Cross-Appellants.

No. 81-3302.

United States Court of Appeals,

Fifth Circuit.

Oct. 7, 1982.

As Amended on Denial of Rehearings Nov. 19, 1982.

Robert E. Winn, New Orleans, La., for plaintiffs-appellants cross-appellees.

Bruce S. Kingsdorf, New Orleans, La., for Republic Securities and Charest Thibaut.

Gregory Frost, Baton Rouge, La., for Royal American.

Anita Warner, New Orleans, La., for Bank of St. Charles & Trust Co., et al.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before GARZA, POLITZ and WILLIAMS, Circuit Judges.

GARZA, Circuit Judge:

Below, the unsuccessful plaintiffs sought to try their case under several theories of securities law, but were permitted to proceed under only one. On this appeal it is their contention that the district court erred both in its dismissal of the other claims and the jury instructions given. With the exception of one state law issue, we find that no reversible error was committed and affirm the result below. ¹

I. A Change of Seasons

In the spring of 1974, appellants Bryan Zeringue, Curtis Chauvin and Dr. W. B. Landry learned-later to their detriment-that certain common stock of the St. Charles Bank and Trust Company was to be made available for sale. The circumstances surrounding the sale of that stock gave rise to the present suit. Disagreement between the parties as to the facts is minuscule.

Appellants are two businessmen and a practicing physician who live and work in St. Charles Parish, Louisiana. For years they had banked with the St. Charles Bank and Trust Company (hereinafter referred to as the Bank). When the Bank formed an "advisory board" in the fall of 1973, appellants Zeringue and Chauvin were asked to serve on it; they accepted. In the spring of 1974, both Zeringue and Chauvin were informed at one of the board's meetings that the Bank's chairman of the board, Charest Thibaut, was thinking of retiring and was willing to sell some of his common stock. Not long thereafter, Dr. Landry was also informed, by one of his patients, ² that stock in the Bank was to be made available for purchase. That summer, each appellant purchased 1,500 shares of the Bank's common stock at $60 per share for a total of $90,000 apiece, or $270,000 for the total purchase price.

At first, it appeared that the money invested by the appellants was well spent-in January of 1975 a 25% stock dividend was declared, increasing the common stock ownership of each appellant from 1,500 to 1,875 shares. This feeling of euphoria, however, was unfounded. In the fall and winter of 1974, and the spring of 1975, various audits and bank examinations conducted by the Federal Deposit Insurance Corporation and the Louisiana Commissioner of Financial Institutions revealed gross inadequacies and deficiencies in the financial structure of the Bank. As a result of these examinations and actions taken by regulatory authorities, very substantial changes in the Bank's organization were brought about, including the resignation of the Bank's president, C. Therral Ransome, and the Bank's chairman of the board, Charest Thibaut. Other members of the board also resigned or were asked to resign in the spring and summer of 1975. Finally, in December of 1975, the Bank issued a proxy statement in which its precarious financial condition was set out, and in January, 1976, the Bank issued a stock offering to raise needed additional capital. At that time the Bank's common stock was valued at $4 per share-down from the $60 per share paid by appellants in the summer of 1974.

Outraged by the drastic devaluation of their investments, appellants consulted with counsel, and on January 26, 1977, filed suit in federal court alleging that All American Assurance Company, Republic Securities Corporation, Charest Thibaut, Remy F. Gross and C. Therral Ransome had violated § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. ³ Specifically, appellants contended that the financial statements prepared and issued by the Bank in 1973 and 1974 were inaccurate and grossly misrepresented its financial condition. Furthermore, it was asserted that representations made by the various defendants at advisory board meetings and elsewhere were affirmatively misleading, inaccurate and omitted material information. ⁴

On January 29, 1979, appellants amended their complaint so as to expand both the number of defendants and the causes of action asserted. Added to the list of defendants were the Bank, Royal American Corporation, Henry Friloux and Alcide J. Laurent. ⁵ The causes of action asserted were broadened to encompass claims under § 17(a) of the Securities Act of 1933, La.Rev.Stat.Ann. § 12:91, and the Louisiana Blue Sky Law (La.Rev.Stat.Ann. § 51:701, et seq.).

Prior to trial, however, the defendants filed motions to dismiss and/or for summary judgment claiming that no private cause of action was created under either § 17(a) of the Securities Act of 1933 or La.Rev.Stat.Ann. § 12:91. The trial court agreed and dismissed the counts. The trial court also granted defendants' motion to dismiss the Louisiana Blue Sky claim and held that the two-year statute of limitations included in the Blue Sky Law ⁶ was peremptive rather than prescriptive.

Thereafter, the case went to trial. Although the jury found that the Bank, Henry Friloux and Alcide J. Laurent had knowingly or recklessly misrepresented or failed to disclose material facts to the appellants in connection with their purchases of stock, it also found that the appellants had not exercised "due diligence" in purchasing the stock and were, therefore, precluded from recovery. This appeal ensued.

II. The Dismissed Theories For Relief

(a) Implied Private Cause of Action Under § 17(a) of the Securities Act of 1933

Unquestionably, the most far reaching of the issues we resolve today is whether § 17(a) of the federal Securities Act of 1933 ⁷ creates an implied private cause of action. ⁸ While res nova in this Circuit, ⁹ the controversy over this issue is by no means new. ¹⁰ Of the circuits which have expressly addressed the issue, four have ruled that a private cause of action may be implied, ¹¹ while one has ruled that it may not. ¹² But while a clear majority view exists, few circuit court decisions have analyzed the issue in depth. In fact, as one learned commentator has observed, the existence of the § 17(a) private remedy "seems to be taken for granted." 6 L. Loss, Securities Regulation 3913 (2nd ed. Supp. 1969). ¹³

Most of these cases trace their creation of a private cause of action back to Chief Judge Friendly's concurring opinion in SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2nd Cir. 1968), cert. denied, 394 U.S. 976, 89 S.Ct. 1454, 22 L.Ed.2d 756, 404 U.S. 1005, 92 S.Ct. 561, 30 L.Ed.2d 558 (1969). Judge Friendly's opinion was primarily concerned with establishing that negligence in the drafting of a press release should not be the basis of civil liability under Rule 10b-5(2). ¹⁴ In his discussion of the origins of Rule 10b-5, however, Judge Friendly stated in dicta that while he had considerable doubt as to whether a private remedy under § 17(a) was ever intended, ¹⁵ "there seemed little practical point in denying the existence of such an action under § 17" "(o)nce it had been established ... that an aggrieved buyer has a private action under § 10(b) of the 1934 Act." ¹⁶ As subsequent decisions have revealed, this seed fell on very fertile ground. The lack of a clearly articulated standard, however, has resulted in the fragmentation of the district courts with respect to this issue. ¹⁷ Nor can it be said that a general consensus exists among the commentators. ¹⁸

Perhaps the main reason for the somewhat awkward development of the law under § 17(a) of the 1933 Act is the fact that it has traditionally lived in the shadow of another area of securities law: Rule 10b-5. ¹⁹ Rule 10b-5, adopted under § 10(b) of the Securities and Exchange Act of 1934, ²⁰ is substantially identical to § 17(a). ²¹ When the judiciary recognized a private cause of action under Rule 10b-5 shortly after its promulgation, ²² cases that might have fit a § 17(a) cause of action were instead decided under Rule 10b-5. This was true even when a plaintiff pleaded a cause of action under both.

In 1976, however, the Supreme Court severely limited the Rule 10b-5 cause of action in Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). There the Court established that allegations of the defendant's scienter are an essential element of the plaintiff's cause of action under Rule 10b-5. The Court based its holding on the language of § 10(b) of the 1934 Act, asserting that the narrower language of that section constrained the reach of the broader Rule 10b-5 language. ²³

The law under § 17(a), however, is not so distinct. In Aaron v. SEC, 446 U.S. 680, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980), the Supreme Court was faced with the question of whether the SEC was required to establish scienter as an element of a civil enforcement action ²⁴ to enjoin violations of § 10(b) and Rule 10b-5 of the 1934 Act, and § 17(a) of the 1933 Act. While the Court decided that scienter was a necessary prerequisite under the 1934 Act, its response split with respect to § 17(a):

The language of § 17(a) strongly suggests that Congress contemplated a scienter requirement under § 17(a)(1), but not under § 17(a)(2) or § 17(a)(3). The language of § 17(a)(1), which makes it unlawful "to employ any device, scheme, or artifice to defraud," plainly evinces an intent on the part of C...