Smith v. Duff and Phelps, Inc.

• Decision Date: 16 January 1990
• Docket Number: No. 89-7324,89-7324
• Citation: 891 F.2d 1567
• Court: U.S. Court of Appeals — Eleventh Circuit
• Parties: Blue Sky L. Rep. P 73,205, 58 USLW 2448, Fed. Sec. L. Rep. P 94,889 Vera SMITH, as Executrix of the Estate of Robert J. Smith, Deceased, Plaintiff-Appellee, v. DUFF AND PHELPS, INC., a corporation, and Claire V. Hansen, Defendants-Appellants.

Page 1567

891 F.2d 1567

Blue Sky L. Rep. P 73,205, 58 USLW 2448,

Fed. Sec. L. Rep. P 94,889

Vera SMITH, as Executrix of the Estate of Robert J. Smith, Deceased, Plaintiff-Appellee, v. DUFF AND PHELPS, INC., a corporation, and Claire V. Hansen,

Defendants-Appellants.

No. 89-7324.

United States Court of Appeals,

Eleventh Circuit.

Jan. 16, 1990.

Lord, Bissell & Brook, Edward C. Fitzpatrick, Chicago, Ill., Copeland, Franco, Screws & Gill, Richard H. Gill, Montgomery, Ala., for defendants-appellants.

Griffin Sikes, Jr., Montgomery, Ala., for plaintiff-appellee.

Appeal from the United States District Court for the Middle District of Alabama.

Before JOHNSON and EDMONDSON, Circuit Judges, and PECKHAM ^*, Senior District Judge.

JOHNSON, Circuit Judge:

This is an interlocutory appeal certified by the district court under 28 U.S.C.A. § 1292(b) to resolve two questions arising under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b) (hereinafter "section 10(b)") and Rule 10b-5 accompanying section 10(b), 17 C.F.R. § 240.10b-5 (hereinafter "Rule 10b-5"). The district court action for securities fraud under these statutes and under Alabama law has been stayed pending disposition by this Court.

I. STATEMENT OF THE CASE

Duff and Phelps, Inc. ("Duff & Phelps") is a closely-held Chicago-based financial consulting and management firm; Claire Hansen is its president and largest shareholder. Plaintiff's decedent, Robert J. Smith, worked for Duff & Phelps as a public utilities manager in southeast Alabama from 1956 until his retirement in January 1983. ¹ In 1972 and 1976, Smith accrued some 400 shares of Duff & Phelps stock. In purchasing the stock, Smith signed certain stock repurchase agreements, which provided that:

upon the termination of the employment with the corporation for any reason, including resignation, discharge, disability or retirement, the individual whose employment is terminated ... shall sell to the Corporation and the Corporation shall buy all shares of the Corporation then owned by such individual.... The price to be paid for such shares shall be equal to the adjusted book value (as hereinabove defined) of the shares on the December 31 which coincides with or immediately precedes the date of such individual's employment.

Sometime in 1982, Duff & Phelps, through Claire Hansen, began negotiations with Security Pacific Bank, a prospective purchaser. On February 9, 1982, Smith had his 65th birthday. On November 16, 1982, Hansen travelled to Alabama to meet with Smith. Smith alleges that at this time Hansen told Smith that retirement at 65 was mandatory. ² Thus, in December 1982, Smith retired from Duff & Phelps and, pursuant to the stock repurchase agreements, sold his 400 shares back to the company at the then-adjusted book value of $100 per share in January 1983. ³ In January 1984, Duff & Phelps reached an agreement with Security Pacific whereby the latter would purchase all of Duff & Phelps' stock for between $1,700 and $2,000 per share. On February 1 and 2, 1984, Duff & Phelps wrote two letters to Smith to apprise him that an agreement had been reached between Duff & Phelps and Security Pacific; neither letter disclosed the per-share amount negotiated for the stock exchange. Although this agreement never came to fruition, Duff & Phelps ultimately established an "Employee Stock Ownership Trust" (ESOT) in December 1985. Employees sold their outstanding Duff & Phelps stock to the trust for $2,065.69 per share.

On August 12, 1987, Smith filed suit in district court against Duff & Phelps and Hansen. The complaint alleged that Hansen had fraudulently coerced Smith into retiring early by failing to disclose to him the negotiations with Security Pacific and by misrepresenting to him that the mandatory retirement age was 65. Smith stated causes of action pursuant to section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, the Racketeer Influenced and Corrupt Organizations Act ("RICO") ⁴, and Alabama state law.

On November 3, 1987, and February 1, 1988, Duff & Phelps made separate motions for summary judgment. The November 3 motion contended that summary judgment should be granted because the two-year statute of limitations under Alabama law barred the suit. The February 1 motion maintained that summary judgment should be granted because Duff & Phelps had no duty to disclose the negotiations with Security Pacific. The district court denied both motions on April 13, 1988. Duff & Phelps moved for reconsideration on June 17, 1988; that motion was denied by order of November 10, 1988.

On October 31, 1988, Duff & Phelps moved to certify the April 13 order denying summary judgment and the November 10 order denying reconsideration for interlocutory appeal pursuant to 28 U.S.C.A. § 1292(b). The district court found that the issues of statute of limitations and duty to disclose were "controlling questions of law as to which there is substantial ground for difference of opinion" and certified the questions for immediate appeal on November 10, 1988. On May 1, 1989, this Court granted certification.

We consider two issues on this appeal. First, we consider whether the statute of limitations period for violations of section 10(b) and Rule 10b-5 is determined by analogy to state or federal law, and when the period begins to run. Second, we consider whether a corporation has a duty under the federal securities laws to disclose to a stockholder-employee facts which might indicate that the stock is worth more than the contractually determined book value when a stockholder-employee has a contractual duty to sell his stock back to the corporation at the termination of his employment for that book value.

II. ANALYSIS

A. Statute of Limitations

1. Source of Limitations Period

Section 10(b) does not provide for a statute of limitations on securities fraud actions. The parties suggest two different limitations periods which they claim are applicable to Smith's Rule 10b-5 action. Smith asserts that the law in this Circuit requires the Court to borrow the most analogous state law statute of limitations. Duff & Phelps urges the Court to adopt a uniform statute of limitations for all section 10(b) and Rule 10b-5 claims, as did the Third Circuit in In re Data Access Systems Securities Litigation, 843 F.2d 1537 (3rd Cir.) (en banc ), cert. denied sub nom. Vitiello v. I. Kahlowsky & Co., --- U.S. ----, 109 S.Ct. 131, 102 L.Ed.2d 103 (1988). ⁵

The Eleventh Circuit has held that the statute of limitations for section 10(b) claims is the period that the forum state applies to the most closely analogous state claim. Durham v. Business Management Associates, 847 F.2d 1505 (11th Cir.1988); Friedlander v. Troutman, Sanders, Lockerman & Ashmore, 788 F.2d 1500 (11th Cir.1986); Kennedy v. Tallant, 710 F.2d 711 (11th Cir.1983); Diamond v. Lamotte, 709 F.2d 1419 (11th Cir.1983). It is clearly settled in this Circuit that "one panel of the Court is not permitted to overrule a decision by a previous panel unless the Court overrules the earlier decision by an en banc proceeding." Minor v. Dugger, 864 F.2d 124, 126 (11th Cir.1989); see also Greensboro Lumber Co. v. Georgia Power Co., 844 F.2d 1538, 1541 (11th Cir.1988); cf. Bonner v. City of Prichard, 661 F.2d 1206, 1212 (11th Cir.1981) (en banc Court can overrule its own precedent). The en banc Court has not overruled Durham, Friedlander, Kennedy, and Diamond, which hold that state securities laws are the most analogous statutes to section 10(b). Therefore this Court may not now overrule those cases and adopt the Third Circuit approach. ⁶ Accordingly, the statute of limitations to be applied by the district court to Smith's section 10(b) and Rule 10b-5 claim is the period of limitations prescribed by the closest analogous state statute.

2. Applicable Alabama Statute ⁷

The April 13, 1988 order certified by the district court states that "[t]he parties agree that the two-year statute of limitations period found in section 6-2-38 of the Code of Alabama applies both to the state and federal claims." Smith v. Duff and Phelps, et al., No. 87V-789-N (order denying motion for summary judgment) (N.D.Ala. April 13, 1988). Section 6-2-38, however, is the statute of limitations applying to various torts, including wrongful death, malicious prosecution, seduction, libel or slander, recovery of wages, and master-servant. The statute apparently applies to fraud, although it does not explicitly mention fraud. See Ala.Code § 6-2-38 (1989) (annotations following text). This Circuit has consistently held that state securities laws are most analogous to section 10(b), see Durham, Friedlander, Kennedy, and Diamond, supra, and we held in Durham that Ala.Code § 8-6-19(a)(1)-(2) is the proper statute to analogize to section 10(b). 847 F.2d at 1508. ⁸ The limitations period for Ala.Code § 8-6-19(a)(1)-(2) is also two years. See Ala.Code § 8-6-19(e). Under either statute, the applicable limitations period is two years.

While Alabama law governs the length of the limitations period, federal law determines at what point the limitations period begins to run. Durham, 847 F.2d at 1508 (citing Osterneck v. E.T. Barwick Indus., Inc., 825 F.2d 1521, 1535 (11th Cir.1987), aff'd sub nom. Osterneck v. Ernst & Whinney, --- U.S. ----, 109 S.Ct. 987, 103 L.Ed.2d 146 (1989)). Under federal law, the statute of limitations begins to run "when the plaintiff discovers, or in the exercise of reasonable diligence should have discovered the alleged violations." Id. (citing Kennedy v. Tallant, 710 F.2d at 716; Diamond v. Lamotte, 709 F.2d at 1420 n. 1)). ⁹

3. Propriety of Summary Judgment

The district court order denied Duff & Phelps' motion for summary judgment. The court found that the questions of whether the plaintiff exercised due diligence and whether the February 1 and 2 letters should have signalled to the plaintiff that there might be fraud were questions of material fact to be determined...