802 F.2d 229 (7th Cir. 1986), 85-2824, Sentry Corp. v. Harris
|Citation:||802 F.2d 229|
|Party Name:||SENTRY CORPORATION and SNE Corporation, Plaintiffs-Appellants, v. Ethel R. HARRIS, as Trustee Under Trust Agreement dated March 1, 1973, et al., Defendants-Appellees.|
|Case Date:||September 16, 1986|
|Court:||United States Courts of Appeals, Court of Appeals for the Seventh Circuit|
Argued May 28, 1986.
Rehearing and Rehearing En Banc Denied Nov. 12, 1986.
John A. Rothstein, Quarles & Brady, Milwaukee, Wis., for plaintiffs-appellants.
Laura A. Kastar, Jenner & Block, Chicago, Ill., for defendants-appellees.
Before CUDAHY and RIPPLE, Circuit Judges, and SWYGERT, Senior Circuit Judge.
SWYGERT, Senior Circuit Judge.
This is yet another in a long line of cases in which the courts have sought with enormous difficulty to unravel the complexities created by Congress' failure to provide statutes of limitations to govern all federal causes of action. In this case the plaintiffs appeal from an order of the district court dismissing their federal securities claim as barred by the applicable state statute of limitations. The district judge held that when a federal court borrows a state statute of limitations to apply to a federal cause of action it must also borrow those provisions relating to when the action is commenced and when service of process must be effectuated to toll the statute of limitations. We affirm in part, reverse in part, and remand for further proceedings.
The facts of this case, relevant to the issue presented on appeal, are not in dispute. The plaintiffs, Sentry Corporation and SNE Corporation, brought a federal 10b-5 securities claim, alleging that the defendants, Ethel R. Harris, as Trustee under Trust Agreement dated March 1, 1973, et al., had defrauded them in the sale of the stock of the Harris-Crestline Corporation. To that federal claim, the plaintiffs appended various state law claims. The plaintiffs' cause of action accrued on October 30, 1981, the date on which the stock purchase agreement containing the alleged misrepresentations was executed. The plaintiffs filed their complaint on October 26, 1984 and served the defendants with the complaint on January 30, 1985, ninety days later.
The defendants moved to dismiss the action on the ground, inter alia, that it was barred by the statute of limitations. Below both parties agreed that 10b-5 actions,
which do not have their own federal limitations period, are governed by the most analogous state statute of limitations. See Sperry v. Barggren, 523 F.2d 708, 710 n. 1 (7th Cir.1975). 1 Both parties also agreed that Wis.Stat. Sec. 551.59(5) (1983), which was in effect at the time of the allegedly fraudulent transaction and which provided for a limitations period of three years, governed. The parties disagreed, however, whether state or federal law governed the questions of when the action was "commenced" for purposes of the statute of limitations and if and when service of process had to be completed in order to toll the statute of limitations.
Relying on recent Supreme Court civil rights cases, see Wilson v. Garcia, 471 U.S. 261, 105 S.Ct. 1938, 85 L.Ed.2d 254 (1985); Chardon v. Fumero Soto, 462 U.S. 650, 103 S.Ct. 2611, 77 L.Ed.2d 74 (1983); Board of Regents of University of New York v. Tomanio, 446 U.S. 478, 100 S.Ct. 1790, 64 L.Ed.2d 440 (1980); Johnson v. Railway Express Agency, Inc., 421 U.S. 454, 95 S.Ct. 1716, 44 L.Ed.2d 295 (1975), and a diversity case, Walker v. Armco Steel Corp., 446 U.S. 740, 100 S.Ct. 1978, 64 L.Ed.2d 659 (1980), the district judge held that the issue of when the action was "commenced" should be governed by state law. She observed that under Wisconsin law, an action is "commenced" when the complaint is filed and the defendant is served with a copy of the complaint. See Wis.Stat. Sec. 893.02 (1983). The district judge also observed that the plaintiff is given some leeway if he fails to serve the complaint within the applicable limitations period, here three years. If the defendant is served with a copy of the complaint within sixty days of filing, even though service occurs outside the limitations period, the action is deemed "commenced" as of the date of filing. Wis.Stat. Sec. 801.02 (1983). The district judge concluded that this service limitation was an "integral part" of the Wisconsin statute of limitations period. She noted that in this case the complaint was filed four days before the expiration of the three-year limitations period, but service was not made until January 30, 1985, thirty days after the sixty-day grace period had expired. She held that the action was therefore not "commenced" under Wisconsin law until January 30, 1985, more than three years after the cause of action had accrued, and it was therefore barred. The district judge also dismissed the pendent claims under United Mine Workers of America v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966), which holds that dismissal of the federal question claim prior to any lengthy pretrial proceedings requires, absent extraordinary circumstances, dismissal of all pendent claims.
Our analysis of the present case begins with two preliminary observations. First, in cases involving federal rights for which Congress has expressly provided a federal limitations period, Fed.R.Civ.P. 3 directly governs the issue of when an action is commenced for statute of limitations purposes, unless Congress has expressly provided otherwise. See generally 4 C. Wright & A. Miller, Federal Practice and Procedure Sec. 1056, at 177 (1969) and cases
cited therein. The Supreme Court has held that when a federal rule (promulgated by the Court pursuant to the Rules Enabling Act) directly applies, its validity is to be tested under the Rules Enabling Act, 28 U.S.C. Sec. 2072 (1982). 2 Hanna v. Plumer, 380 U.S. 460, 463-64, 470-71, 85 S.Ct. 1136, 1139-40, 1143-44, 14 L.Ed.2d 8 (1965). The test to be applied is whether the rule "abridge[s], enlarge[s] or modif[ies] any substantive right." This test applies in both diversity and non-diversity actions. 3 See, e.g., Chesny v. Marek, 720 F.2d 474, 479-80 (7th Cir.1983), rev'd on other grounds, --- U.S. ----, 105 S.Ct. 3012, 87 L.Ed.2d 1 (1985); see also Ely, The Irrepressible Myth of Erie, 87 Harv.L.Rev. 693, 737 n. 226 (1974). To date, no court has ruled that, in the context of non-diversity cases governed by express federal limitations periods, Fed.R.Civ.P. 3 violates the Rules Enabling Act, 28 U.S.C. Sec. 2072, and hence cannot be applied. 4
Second, in cases involving a federal right for which there is no express limitations period, federal courts ordinarily borrow state limitations periods. They are not compelled to do so, however. Although the Supreme Court early on appeared to adhere to the view that the Rules of Decisions Act, 28 U.S.C. Sec. 1652 (1982), 5 compelled the application of a state law (and therefore state limitations periods) where federal law was silent, see McCluny v. Silliman, 28 U.S. 270, 277, 3 Pet 270, 277, 7 L.Ed. 676 (1830), the Court subsequently modified its view. See, e.g., Holmberg v. Armbrecht, 327 U.S. 392, 394, 66 S.Ct. 582, 583, 90 L.Ed. 743 (1946); Board of County Commissioners v. United States, 308 U.S. 343, 347-50, 60 S.Ct. 285, 287-88, 84 L.Ed. 313 (1939); Campbell v. Haverhill, 155 U.S. 610, 614-15, 15 S.Ct. 217, 219-20, 39 L.Ed. 280 (1895). In each of those cases, the Court made clear that the Rules of Decision Act did not compel the application of state law in federal causes of action, even where federal law was silent. The Court recently reaffirmed that conclusion in Wilson, 471 U.S. at 269, 270, 105 S.Ct. at 1944 & n. 22; DelCostello v. International Brotherhood of Teamsters, 462 U.S. 151, 159-60 n. 13, 103 S.Ct. 2281, 2287-88 n. 13, 76 L.Ed.2d 476 (1983); Occidental Life Ins. Co. v. EEOC, 432 U.S. 355, 367, 97 S.Ct. 2447, 2454, 53 L.Ed.2d 402 (1977); Johnson, 421 U.S. at 465, 95 S.Ct. at 1722, noting that there is only a presumption in favor of the application of state law and that the federal courts still retain discretion to fill gaps
in federal statutory law by formulating federal common law or by looking to other analogous law. 6 See also American Pipe & Construction Co. v. Utah, 414 U.S. 538, 556 n. 27, 94 S.Ct. 756, 767 n. 27, 38 L.Ed.2d 713 (1974). It is beyond cavil, however, that state law is only applied when there is no valid federal law directly governing the issue. See, e.g., Hanna, 380 U.S. at 465, 85 S.Ct. at 1140. And even when state law is applied, it becomes a part of the federal law and retains no independent significance. See Wilson, 471 U.S. at 269, 105 S.Ct. at 1943.
The question presented for review in the instant case then is whether Fed.R.Civ.P. 3, which directly controls when an action is commenced in cases involving federal rights expressly governed by federal limitations periods, directly controls when an action such as the one at bar is commenced. If it does control this issue, it must be applied notwithstanding contrary state law, unless, of course, it violates the Rules Enabling Act's prohibition against rules that would modify, abridge, or enlarge any substantive rights of the parties.
We now hold that Fed.R.Civ.P. 3 governs when cases such as the one at bar are commenced for statute of limitations purposes and that this rule is a valid exercise of the Supreme Court's rulemaking authority. 7 We therefore find that it should be applied regardless of whether Wisconsin's service requirement is an integral provision of Wisconsin's statute of limitations.
There does not appear to be much dispute that Fed.R.Civ.P. 3 "passes muster" under the Rules Enabling Act. As the Court in Hanna observed:
[T]he test must be whether a rule really regulates procedure, ... the judicial
process for enforcing rights and duties...
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