Suslick v. Rothschild Securities Corp.

• Decision Date: 21 August 1984
• Docket Number: No. 83-2570,83-2570
• Citation: 741 F.2d 1000
• Parties: , Fed. Sec. L. Rep. P 91,629 Edith R. SUSLICK, Executor of the Estate of Alvin Suslick, Deceased, Plaintiff-Appellant, v. ROTHSCHILD SECURITIES CORP., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1000

741 F.2d 1000

39 Fed.R.Serv.2d 1225, Fed. Sec. L. Rep. P 91,629

Edith R. SUSLICK, Executor of the Estate of Alvin Suslick, Deceased, Plaintiff-Appellant, v. ROTHSCHILD SECURITIES CORP., et al., Defendants-Appellees.

No. 83-2570.

United States Court of Appeals,

Seventh Circuit.

Argued May 21, 1984.

Decided Aug. 16, 1984.

As Amended Aug. 21, 1984.

Henry Thrush Synek, Chicago, Ill., for plaintiff-appellant.

Bruce L. Wald, Tishler & Wald, Chicago, Ill., for defendants-appellees.

Before WOOD and ESCHBACH, Circuit Judges, and CAMPBELL, Senior District Judge. ^*

HARLINGTON WOOD, Jr., Circuit Judge.

The principal issue in this case concerns the interplay between the federal doctrine of equitable tolling and the state statute of limitations adopted for actions brought pursuant to Sec. 17(a) of the Securities Act of 1933, Sec. 10(b) the Securities Exchange Act of 1934, and Rule 10b-5 of the Securities and Exchange Commission (SEC) in the absence of an applicable federal statute of limitations. The district court held that the appropriate limitations period was the three-year period contained in Ill.Rev.Stat. ch. 121 1/2 Sec. 137.13 D (1977), that the limitations period had run, that the appellant had failed to allege any facts which would toll the running of the statute, and that therefore the appellant's claim was barred. The district court also assessed attorneys' fees against the appellant and her attorney pursuant to 28 U.S.C. Sec. 1927 and Rule 11, Federal Rules of Civil Procedure. While we hold that the appellant did allege sufficient facts to toll the running of the statute during part of the limitations period, the limitations period nevertheless ran and we therefore affirm the order of the district court dismissing the appellant's complaint. Because we conclude that neither the appellant nor her counsel acted with subjective bad faith, we hold that an award of fees was unjustified and we therefore reverse that aspect of the district court's order.

I.

The appellant, acting in her capacity as executor of her late husband's estate, filed her initial complaint in this action on May 19, 1981. The complaint alleged that the appellees, defendants below, had violated Sec. 17(a) of the Securities Act of 1933, 15 U.S.C. Sec. 77q(a), Sec. 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and SEC Rule 10b-5 in their handling of an options trading account on behalf of the decedent. The appellees subsequently moved to dismiss on the grounds that the action was barred by res judicata and the applicable statute of limitations. ¹

The district court granted the appellees' motion to dismiss on the ground that this action was barred by the three-year statute of limitations contained in Ill.Rev.Stat. ch. 121 1/2 Sec. 137.13 D (1977), and applicable to actions under Sec. 10(b) and Rule 10b-5. The district court noted that the appellant had failed to allege either active concealment of the cause of action by the appellees or due diligence in investigating a possible cause of action by the appellant, either of which might have tolled the running of the statute.

The appellant filed an amended complaint on March 12, 1982. The appellees moved to dismiss and moved for an award of attorneys' fees. The appellant then filed a second amended complaint on June 21, 1982; it is this complaint which is the subject of this appeal.

In her second amended complaint the appellant alleged that her decedent maintained an account with the appellees from 1975 until his death on May 22, 1978. The appellant further alleged that the appellees owed both her and the decedent a fiduciary duty with respect to the trading account and with respect to disclosure of the risks involved in trading options. The second amended complaint also contains a listing of the trades which underlie the alleged securities law violations in this case. The last trade took place in July 1976. Finally, the appellant alleged that, after the decedent's death, the appellees actively concealed from the appellant and her attorney information from which the appellant or her attorney could determine whether or not a cause of action existed against the appellees. The appellant alleged that the specific acts of concealment committed by the appellees included claims: that no option account existed in the decedent's name; that the files in which such an account might be listed were in New York City; that the files were in a Chicago warehouse; that the files were misplaced; that the entire file was not available; that there was nothing wrong with the account; that because of an office move the file was misplaced; and that the person in charge was on vacation or had left the appellees' employ. The appellant also generally alleges that despite her frequent requests the appellees withheld information about the account until August 1979. Significantly, the appellant does not allege that the appellees ever actively concealed any information from the decedent prior to his death.

The district court dismissed this second amended complaint on December 30, 1982. The court again found that the applicable statute of limitations had run and that the appellant's complaint was therefore barred because the appellant had alleged no basis for an equitable tolling of the limitations period. The district court also awarded attorneys' fees to the appellee pursuant to 28 U.S.C. Sec. 1927 ² and Rule 11, Federal Rules of Civil Procedure. ³ The court based its award of fees on a finding that the second amended complaint was filed for vexatious and oppressive reasons, although the district court does not specifically find how the pleadings were vexatious and oppressive; in a later denial of the appellant's motion for reconsideration, the district court observed that the appellant's pleadings "speak for themselves." The fees were to be assessed against both the appellant and her attorney. The appellant filed a timely notice of appeal to this Court.

To avoid confusion, we briefly restate the pleadings and parties involved in this appeal. Three complaints are involved. The first was filed by the appellant in her capacity as the decedent's heir; this complaint was dismissed and the appellant neither amended the complaint nor appealed its dismissal. The appellant then filed the initial complaint in this action, which was dismissed. The appellant then amended her complaint, which was again dismissed and the appellant appealed. The first two complaints do not allege any concealment of the cause of action by the appellees; the last complaint does allege active concealment. However, this final complaint only alleges that the appellees concealed the cause of action from the appellant. No acts of concealment were alleged to have occurred between the date of the final transaction on the options account and the death of the appellant's predecessor in interest, her husband. As will be discussed below, the applicable statute of limitations on any claim arising out of the options account would run first against the decedent and then against the appellant, unless tolled.

II.

The appellant raises two principal issues on appeal. The appellant first argues that the district court erred in applying a three-year statute of limitations to bar the appellant's action. Rather, appellant asserts that the proper statute of limitations is the five years after discovery limitation imposed on actions for fraudulent concealment by Ill.Rev.Stat. ch. 110 Sec. 13-215 (1982). The appellant also argues that her second amended complaint was a good faith effort to comply with the earlier orders of the district court, was not vexatious and oppressive, and therefore did not justify an award of attorneys' fees to the appellee under either Sec. 1927 or Rule 11. We will consider each argument in turn, as well as an additional tolling issue not raised by the parties. In this appeal of the dismissal of the appellant's complaint we of course view the allegations in the complaint and any inferences drawn from them in the light most favorable to the appellant. Goldstandt v. Bear, Stearns & Co., 522 F.2d 1265, 1268 (7th Cir.1975).

A.

Both parties agree that because there is no general federal statute of limitations and because there is no provision concerning limitations in either Sec. 17 of the Securities Act of 1933 or Sec. 10 of the Securities Exchange Act of 1934, the appropriate limitations act in the forum state of Illinois controls. Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123, 125 (7th Cir.1972). And this Court and the district courts have repeatedly held that the appropriate statute of limitations is the three-year limitation imposed by Ill.Rev.Stat. ch. 121 1/2 Sec. 137.13 D (1977). Id. at 126; see Cahill v. Ernst & Ernst, 625 F.2d 151, 153 (7th Cir.1980) (citing cases).

The appellant nevertheless asserts that, because the appellees fraudulently concealed the cause of action from her, the five years after discovery limitation of the predecessor of Ill.Rev.Stat. ch. 110 Sec. 13-215 (1982) should apply. The appellant misunderstands the effect of an allegation of fraudulent concealment on the running of the statute of limitations in federal securities violation cases. The usual three-year limitation still applies. The federal doctrine of equitable tolling is available, however, to determine when the limitations period begins to run. Tomera v. Galt, 511 F.2d 504, 509 (7th Cir.1975) (federal doctrine of equitable tolling applies in 10b-5 actions); Sperry v. Barggren, 523 F.2d 708, 710 (7th Cir.1975) (equitable tolling doctrine is read into every federal statute of limitations including state statutes adopted by federal law).

Equitable tolling applies in two situations. First, the doctrine will toll the running of the statute of limitations where the fraud goes undiscovered even though the defendant does nothing to conceal it. The plaintiff, however, must exercise due diligence in attempting to uncover the...