Colonial Bank & Trust Co. v. American Bankshares, 77-C-289

• Decision Date: 29 October 1979
• Docket Number: 77-C-294.,No. 77-C-289,77-C-289
• Citation: 478 F. Supp. 1186
• Parties: COLONIAL BANK & TRUST COMPANY, an Illinois Banking Corporation, as assignee of William F. Fox, Plaintiff, v. AMERICAN BANKSHARES CORPORATION, a Wisconsin Corporation, et al., Defendants. John D. CAHILL, Plaintiff, v. ERNST & ERNST, Defendant.
• Court: U.S. District Court — Eastern District of Wisconsin

478 F. Supp. 1186

COLONIAL BANK & TRUST COMPANY, an Illinois Banking Corporation, as assignee of William F. Fox, Plaintiff, v. AMERICAN BANKSHARES CORPORATION, a Wisconsin Corporation, et al., Defendants.

John D. CAHILL, Plaintiff, v. ERNST & ERNST, Defendant.

Nos. 77-C-289, 77-C-294.

United States District Court, E. D. Wisconsin.

October 29, 1979.

Reuben W. Peterson, Jr., Borgelt, Powell, Peterson & Frauen, Milwaukee, Wis., James S. Gordon, Chicago, Ill., for plaintiff.

Matthew J. Flynn and Thomas J. Donnelly, Jr., Quarles & Brady, Milwaukee, Wis., for outside directors.

William H. Alverson, Godfrey & Kahn, Milwaukee, Wis., for Ernst & Ernst.

William J. French, Gibbs, Roper, Loots & Williams, Milwaukee, Wis., for FDIC.

Clifford B. Buelow and Walter S. Davis, Davis, Kuelthau, Vergeront, Stover & Leichtfuss, Milwaukee, Wis., for Benson.

MEMORANDUM AND ORDER

WARREN, District Judge.

Plaintiffs in these two actions have brought suit alleging violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission. Jurisdiction is grounded on 15 U.S.C. § 78aa.

In the complaint in Civil Action 77-C-289, plaintiff alleges that William Fox purchased 5,000 shares of common stock of defendant American Bankshares Corporation (Bankshares) in reliance on representations about the financial status of American City Bank & Trust Co. (American City) and Bankshares made by officers, directors and agents of City Bank, Bankshares and defendant Ernst & Ernst. To finance this purchase, Fox borrowed $101,500 from plaintiff and pledged and assigned to plaintiff these 5,000 shares of Bankshares stock.

Plaintiff alleges that the defendants fraudulently concealed from Fox certain material information about the financial condition of Bankshares and American City. Plaintiff filed this action as assignee of William F. Fox on May 16, 1977.

The complaint in Civil Action 77-C-294 was filed on May 17, 1977. The complaint basically alleges that the plaintiff, John D. Cahill, purchased Bankshares stock on May 17, 1974 and borrowed money from the Colonial Bank & Trust Co. (Colonial Bank) to finance such purchase, in reliance on Bankshares' financial statements for the year 1973. Plaintiff alleges that the defendant failed to disclose to plaintiff certain material financial information about American City and Bankshares.

On March 14, 1978 the Court granted defendant's motion for summary judgment in Civil Action 77-C-294. The Court found that the action was time-barred by the period of limitations set forth in section 551.59 of the Wisconsin Statutes. Plaintiff appealed the decision.

The Seventh Circuit Court of Appeals noted that plaintiff failed to argue before the district court that count I of the complaint more closely resembles one actionable under section 551.41 of the Wisconsin Statutes and that such statute permits a private right of action so that the six-year statute of limitations contained in 893.19(4) of the Wisconsin Statutes applies. In spite of this omission, the court of appeals concluded that the district court should consider plaintiff's argument. Therefore, the court of appeals vacated the summary judgment granted to defendant and remanded the case for further proceedings.

On October 26, 1978, for the purpose of briefing this issue only, this Court consolidated Cahill v. Ernst & Ernst, 448 F.Supp. 84, D.C., with Colonial Bank & Trust Co. v. American Bankshares Corp., Civil Action No. 77-C-289.

The parties agree that state law provides the appropriate limitations period for a rule 10b-5 action. Auto Workers v. Hoosier Corp., 383 U.S. 696, 86 S.Ct. 1107, 16 L.Ed.2d 192 (1966). However, they disagree over which state statute contains the applicable limitations period.

Plaintiffs argue that count 1 of the complaint resembles a claim made actionable under § 551.41 and that this statute permits private rights of action.

Section 551.41 provides:

It is unlawful for any person, in connection with the offer, sale or purchase of any security in this state, directly or indirectly:

(1) To employ any device, scheme or artifice to defraud;

(2) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or

(3) To engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person.

Defendant contends that the action resembles one made actionable by section 551.59 of the Wisconsin Statutes so that the one-to-three year statute of limitations set forth in 551.59(5) applies.

Section 551.59 provides in relevant part:

(1) Any person who: (a) offers or sells a security in violation of s. 551.21, 551.31 or 551.55 or any rule relating thereto, or any condition imposed under s. 551.26 or 551.27 or any order under this chapter of which he has notice; or (b) offers or sells a security by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, the purchaser not knowing of the untruth or omission, and who does not sustain the burden of proof that he did not know and in the exercise of reasonable care could not have known of the untruth or omission shall be liable to the person purchasing the security from him, who may sue either at law or in equity to recover the consideration paid for the security, together with interest at the legal rate from the date of payment, less the amount of any income received on the security, upon the tender of the security, or for damages if he no longer owns the security. Damages are the amount that would be recoverable upon a tender less the value of the security when the purchaser disposed of it and interest at the legal rate from the date of disposition. Tender shall require only notice of willingness to exchange the security for the amount specified. Any notice may be given by service as in civil actions or by certified mail addressed to the last known address of the person liable.

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(5) No action shall be maintained under this section unless commenced before the expiration of 3 years after the act or transaction constituting the violation or the expiration of one year after the discovery of the facts constituting the violation, whichever first expires, but the time specified for commencing such action shall be extended by reason of any fact and for the time specified in ss. 893.30 to 893.38.

Section 551.41 of the Wisconsin Statutes contains wording virtually identical to that found in rule 10b-5. However, it is not clear from a reading of the statute whether or not section 551.41 permits a private right of action. It is clear that section 551.41, unlike 551.59, contains no limitations period. Furthermore, section 551.41(2) is basically incorporated into section 551.59(1).

In order to determine if section 551.41 permits a private right of action, the Court must examine the legislative history of chapter 551 of the Wisconsin Statutes.

Prior to the enactment of chapter 551 of the Wisconsin Statutes of 1969, an Advisory Committee on Securities Laws was appointed as an advisory body to the Insurance and Banking Committee of the Wisconsin legislature. These advisory committee minutes provide an insight into the legislative purpose and intent in enacting chapter 551.

Plaintiffs contend that a private right of action exists under section 551.41 because the Wisconsin Legislature excised the phrase "but this act does not create any cause of action not specified in this section . . . " from section 551.59(9) in enacting this provision of the Uniform Securities Law. The draftsmen of the Uniform Securities Act had indicated that this phrase was intended to abrogate a private cause of action. Commissioners' Note, Uniform Securities Act § 410(h), 7 Uniform Laws Annotated at 773.

The advisory committee minutes of April 19, 1968 show, however, that the committee decided that there should be no civil action for subsection 1 and 3 of Rule 10b-5 but that there would be a civil action provided for subsection 2.

Mr. Nelson referred to the civil liability section and noted that the committee should decide whether it should include in the proposed draft the private right of action for claims for sections 1 and 3 of Rule 10b-5. It was suggested that possibly there could be a private right of action under all 3 sections of 10b-5 and a requirement of privity in all 3 cases.

The committee agreed that there should be no civil action for subdivisions 1 and 3 of Rule 10b-5; a civil action for part 2 with "wilful" intent included;

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The committee agreed that there be an offer to repurchase available in all cases provided the defrauded person is furnished a complete statement of facts constituting the violation. Any civil lawsuit must be initiated within one year after the individual has knowledge of the violation with a maximum limitation of 3 years after the violation. Minutes of Wis. Legislative Council, Insurance & Banking Committee Advisory Committee on Securities Laws, April 19, 1968, at 15. See also minutes at 18.

The issue of implied civil liability for violations of chapter 551 were also addressed at the April 19, 1968 meeting:

Mr. Nelson reviewed the memorandum prepared by Carl A. Neumann, professional assistant, office of the commissioner of securities.

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Rule 10b-5 has become the basis of implied civil liabilities. No comparable implied right of action exists in the California or Wisconsin Acts, and the Uniform Act in § 410(h) specifically limits civil remedies for "unlawful" conduct defined in § 101 to the remedies found in § 410.

In his memorandum, Mr. Neumann referred to remarks which were delivered by David S. Ruder, professor of

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