Diamond v. Lamotte

• Decision Date: 18 July 1983
• Docket Number: No. 82-8473,82-8473
• Parties: Blue Sky L. Rep. P 71,836, Fed. Sec. L. Rep. P 99,417 Arthur E. DIAMOND, etc., et al., Plaintiffs-Appellants, v. Peter LAMOTTE, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1419

709 F.2d 1419

Blue Sky L. Rep. P 71,836, Fed. Sec. L. Rep. P 99,417

Arthur E. DIAMOND, etc., et al., Plaintiffs-Appellants, v. Peter LAMOTTE, et al., Defendants-Appellees.

No. 82-8473.

United States Court of Appeals, Eleventh Circuit.

July 18, 1983.

Cofer, Beauchamp, Hawes, Brown, Julie Childs, Atlanta, Ga., for plaintiffs-appellants.

Philip S. Coe, Atlanta, Ga., for Lamotte.

James R. Gilreath, Greenville, S.C., Marion Smith, II, Atlanta, Ga., for Guinn.

Thomas C. Harney, Kevin B. Buice, Atlanta, Ga., for all other defendants-appellees.

Appeal from the United States District Court for the Northern District of Georgia.

Before TJOFLAT and VANCE, Circuit Judges, and MORGAN, Senior Circuit Judge.

LEWIS R. MORGAN, Senior Circuit Judge:

The appellants instituted this action in the United States District Court for the Northern District of Georgia to recover damages which they alleged they incurred as the result of the appellees' violations of federal securities laws and state laws. The district court granted summary judgment in favor of the appellees on the federal securities claims holding the action was time barred by the two year limitations. Appellants bring this appeal contending the district court should have applied a four year limitations period.

For the purpose of the motion for summary judgment, the parties stipulated to the following facts: From May 1973 to October 1977, the appellants, with the exception of Michael Edkins, purchased promissory notes issued by Thermal Belt Air Services, Inc. (TBA). During this same time period, a TBA note issued to Michael Edkins was purchased by appellant J.L. Diamond. In their complaint the appellants alleged that Jack C. Pettee, an employee of appellee Mastrom, Inc., fraudulently represented that promissory notes issued by Thermal Belt Air Services, Inc., and purchased by or for the appellants were a "prudent, safe and secure investment" and that TBA's business was "booming."

In October and November of 1977, certain creditors of TBA, including the appellants, received written communications from TBA and Pettee to the effect that TBA's financial condition was extremely precarious. During the same time period, TBA failed to make interest payments due to the appellants on the various TBA notes. In December 1977, TBA petitioned for relief from its debts under the federal bankruptcy laws. Accordingly, by December 1977, the appellants knew or had reason to know of any fraudulent conduct by Pettee or TBA concerning TBA's financial condition.

The appellants filed their complaint on September 16, 1981, over two years but less than four years after the action accrued. ¹ In the complaint, the appellees are alleged either to be "sellers" of the notes or as parties who had an obligation to protect the appellants. Specifically, in Count I of their complaint, the appellants alleged the appellees violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. Sec. 240.10b-5. In Count II, the appellants allege appellee Mastrom, Inc., violated Secs. 15(a)(1) and 29(a) of the Securities Exchange Act of 1934, 15 U.S.C. Secs. 78o (a)(1), 78cc(a). In Count III, the appellants sought to assert liability against the various appellees as controlling persons pursuant to Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78t(a). The remaining counts of the complaint set forth violations of state law, including common law fraud.

The appellees filed motions for summary judgment as to Counts I, II, and III asserting that these claims were barred by the applicable statute of limitations. The appellants did not oppose the motions as to Counts II and III. The district court concluded that the claims brought pursuant to the federal securities laws were barred by the applicable statute of limitations and therefore granted summary judgment in favor of the appellees. The court also dismissed the state law claims for lack of complete diversity of citizenship between the parties. It is from the grant of summary judgment as to Count I that the appellants appeal. ² Accordingly, the sole issue before this court is which state statute of limitations is applicable to this action brought pursuant to Section 10(b) and Rule 10b-5 of the 1934 Securities Act in a federal court sitting in Georgia.

Neither Section 10(b) nor Rule 10b-5 expressly creates a private right of action for damages and therefore, there is no specific statute of limitations governing timeliness of actions brought for their violation. Where such a void occurs within the interstices of federal statutory law the courts have "borrowed" the "most appropriate" law of limitations of the forum state. Board of Regents v. Tomanio, 446 U.S. 478, 483-84, 100 S.Ct. 1790, 1794-95, 64 L.Ed.2d 440 (1980); Johnson v. Railway Express Agency, Inc., 421 U.S. 454, 462, 95 S.Ct. 1716, 1721, 44 L.Ed.2d 295 (1975); Holmberg v. Armbrecht, 327 U.S. 392, 395, 66 S.Ct. 582, 584, 90 L.Ed. 743 (1946). See also McNeal v. Paine, Webber, Jackson and Curtis, Inc., 598 F.2d 888, 891 n. 4 (5th Cir.1979). The Supreme Court, in determining the most appropriate state limitations, has consistently applied the limitations period governing the most closely analagous state cause of action after an examination of the federal cause of action and the federal policies involved. United Parcel Service v. Mitchell, 451 U.S. 56, 60-61, 101 S.Ct. 1559, 1562-1563, 67 L.Ed.2d 732, 739 (1981); Occidental Life Insurance Company v. EEOC, 432 U.S. 355, 97 S.Ct. 2447, 53 L.Ed.2d 402 (1977). This analysis begins with an inquiry into the nature and characterization of the federal claims. United Parcel Service v. Mitchell, supra; International Union of Auto Workers v. Hoosier Cardinal Corp., 383 U.S. 696, 705-707, 86 S.Ct. 1107, 1113-1114, 16 L.Ed.2d 192, 200 (1966). The second stage of the analysis then focuses upon whether the state limitations period is inconsistent with the policies expressed in the federal statutes. Id. See also Board of Regents v. Tomanio, supra; Johnson v. Railway Express, supra. Federal policy, therefore, plays two functions in this analysis: defining and refining the characterization of the federal cause of action and limiting the application of state timeliness rules that would frustrate the federal cause of action.

In implementing this analysis, this circuit first inquires into how the state court would categorize the action looking to the "essential nature" of the claim and then determines the state limitations period applying to the action so categorized. Ingram v. Steven Robert Corp., 547 F.2d 1260 (5th Cir.1977); Shaw v. McCorkle, 537 F.2d 1289 (5th Cir.1976). Consistent with the Supreme Court's dictate, this court has refused to apply a limitations period that impinged on federal policies underlying the action. See, e.g., Franklin v. City of Marks, 439 F.2d 665 (5th Cir.1971). However, this court has quickly eschewed borrowing state limitations statutes solely on the basis that it either best effectuated federal policies or represents a trend among the various federal courts in choosing one state limitations period over another. Ingram, supra, at 1261; Wood v. Combustion Engineering, Inc., 643 F.2d 339, 344 n. 11 (5th Cir.1981). In accordance with the Supreme Court's directive that the law of limitations of the forum state is to be followed in the context of implied actions under Section 10(b) as in other cases of judicially implied remedies, Ernst and Ernst v. Hochfelder, 425 U.S. 185, 210, 96 S.Ct. 1375, 1389, 47 L.Ed.2d 668, 686 n. 29 (1976), this court has applied the limitations period governing the state cause of action bearing the closest substantive resemblance to the federal claim. White v. Sanders, 650 F.2d 627 (5th Cir.1981); Wood v. Combustion Engineering, supra; McNeal v. Paine, Webber, supra. While not expressly analyzed under the formulation of Ingram and McCorkle, these cases nonetheless have engaged in the "essentially esoteric" inquiry, McNeal, supra, at 892, of comparing the essential elements of the cause of action asserted by the plaintiff with the proffered state causes of action asserted to be closely analagous. For example, in McNeal the plaintiff sought damages against the defendant for unlawful "churning" of his account. The court analyzed the various elements of the Section 10(b) action with those available under the Georgia Securities Act of 1957 and Georgia common law fraud and concluded that because the remedy the plaintiff sought, damages against the broker, was not available under the blue sky statute the general fraud limitations period controlled. McNeal, supra, at 894. Similarly, in Wood the court compared a Section 10(b) claim based on fraudulent misrepresentations and omissions with those claims cognizable under the forum's blue sky and fraud statutes. Wood, supra, at 345-46. Finally, in White the court in making a similar comparison looked at the essential elements of a Section 10(b) claim with the requirements of the state's blue sky action and determined that the causes of actions were substantively similar. In addition the court looked at the purposes of the two statutes, not as an independent means of selecting the appropriate limitations period, but as one additional factor for comparison.

Thus, these cases dictate the method to ferret out the Georgia statute of limitations which should be applied in this case. First we categorize this action as a Georgia court would had this action or a similar action been brought in state court. In so categorizing the action, we compare the essential elements of the federal cause of action with those available choices under state law, looking not only to the elements of the analagous actions but also to the similarity of purposes behind the actions. Second, the state categorization of the action and concomitant limitations periods are applied unless the categorization or...