Dirksen v. Hynes & Howes Ins. Counselors, Inc.

• Decision Date: 10 December 1976
• Docket Number: Civ. No. 73-257-2.
• Citation: 423 F. Supp. 1290
• Parties: Joseph DIRKSEN et al., Plaintiffs, v. HYNES AND HOWES INSURANCE COUNSELORS, INC., an Iowa Corporation, et al., Defendants.
• Court: U.S. District Court — Southern District of Iowa

423 F. Supp. 1290

Joseph DIRKSEN et al., Plaintiffs, v. HYNES AND HOWES INSURANCE COUNSELORS, INC., an Iowa Corporation, et al., Defendants.

Civ. No. 73-257-2.

United States District Court, S. D. Iowa, C. D.

December 10, 1976.

C. Carleton Frederici, A. Arthur Davis, Donald J. Brown, Jack H. Heen, Frank J. Carroll, Thoma, Schoenthal, Davis, Hockenberg & Wine, Des Moines, Iowa, for plaintiffs.

James A. Francis, Tam B. Ormiston, Patrick M. Courtney, Francis, Courtney & Ormiston, Davenport, Iowa, James T. Otis; George E. Weaver, Price, Cushman, Keck, Mahin & Cate, Chicago, Ill., for defendants H & H Ins. Counselors, Inc.; The Frank B. Howes Tr.; Ralph A. Perry; Willis A. Schrampfer; Norman J. Kelinson; Hubert Nelson; John R. Howes; Marion Moorhead; Dale R. Dietz & Richard G. Sage.

David J. Sohr, John E. Nagle, Edward B. Harris, Nagle, Blair & Sohr, Davenport, Iowa, for defendants John J. Hiebing; Ronald C. Mathias; & Hiebing & Mathias, a partnership.

Thomas F. Daley, Jr., Betty, Neuman, McMahon, Hellstrom & Bittner, Davenport, Iowa, for defendants Durwood W. Dircks, A. Fred Berger, Ronald L. Saylor and Dircks, Berger & Saylor.

Sam F. Scheidler, Brent B. Green, Gamble, Riepe, Burt, Webster & Fletcher, Des Moines, Iowa, for defendants Edmund L. Shapley; Robert E. Shapley; Shapley, Jennings & Co., a partnership.

ORDER

HANSON, Chief Judge.

In In re Alodex Corporation Securities Litigation, 392 F.Supp. 672 (D.C.1975), aff'd 533 F.2d 372 (8th Cir. 1976), this Court ruled that the two-year statute of limitations of Iowa's blue sky law applies to federal Rule 10b-5 actions brought in this state. Pending in this securities fraud lawsuit are motions to dismiss which raise questions as to the present validity of Alodex in light of recent changes in both state and federal securities law.

The original complaint in this case was filed on November 13, 1973. Plaintiffs are fourteen present and former shareholders of Hynes and Howes Insurance Counselors (the Company) who purchased certain common stock pursuant to a public offering held in late 1972 and early 1973. Defendants to the original complaint were the Company and certain directors, officers, and/or alleged controlling persons thereof. Five counts are asserted against these defendants. Count I alleges that the common stock in question was sold in violation of § 12(1) of the 1933 Securities Act, 15 U.S.C. § 77l(1), in that no proper registration statement had been filed at the time of the public offering. Count II is based upon § 12(2) of the 1933 Act, 15 U.S.C. § 77l(2); Counts III and IV are based, respectively, on the anti-fraud provisions of § 17(a) of the 1933 Act and § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 77q(a) and 78j(b); Count V is a pendent claim based upon § 502.28 of the Iowa Securities Act. In an Order filed on January 14, 1976, it was ruled that the case could proceed as a class action under Rule 23 of the Federal Rules of Civil Procedure.

The pending motions to dismiss are in response to plaintiffs' third amendment to their complaint, filed on December 31, 1975. That amendment, in six new counts, added certain lawyer and accountant defendants to the case. Specifically, Count VI asserts anti-fraud violations of the 1933 and 1934 Acts against defendants John Hiebing, Ronald Mathias, and the accounting firm of Hiebing & Mathias (the accountants); Counts VII and VIII assert anti-fraud violations of the Iowa Securities Act against the accountants; Count IX asserts anti-fraud violations of the 1933 and 1934 Acts against defendants Durwood Dircks, A. Fred Berger, Jr., Ronald Saylor, and the partnership of Dircks, Berger and Saylor (the lawyers); and Counts X and XI assert Iowa Securities Act anti-fraud violations against the lawyers.¹ These new counts are based upon allegations of the lawyers and accountants' involvement with the Hynes and Howes Insurance Counselors public stock offering in 1972.

The accountant and lawyer defendants have moved to dismiss the six counts against them for the reason that they are barred by the statute of limitations. Counts VI and IX of the amended complaint assert that the defendants directly violated § 10(b) of the 1934 Act (and Rule 10b-5 thereof) and aided and abetted in other defendants' violations of Rule 10b-5, as well as Sections 17 and 12(2) of the 1933 Act. Of these three federal provisions, only § 12(2) has its own statute of limitations, that being the one-year provision of § 13 of the 1933 Act. State law must therefore be utilized to provide the statute of limitations applicable to the Section 17 and Rule 10b-5 causes of action.²Vanderboom v. Sexton, 422 F.2d 1233, 1237 (8th Cir.), cert. denied, 400 U.S. 852, 91 S.Ct. 47, 27 L.Ed.2d 90 (1970).

In Alodex, supra, this Court prescribed a two-year statute of limitations for Rule 10b-5 suits by determining which of the following Iowa causes of action most "resembled" a Rule 10b-5 claim: common law fraud, § 502.26 of the Iowa Securities Law, or § 502.28 of the Iowa Securities Law. The § 502.26 cause of action was chosen, primarily because neither it nor Rule 10b-5 required scienter on the part of a defendant, while § 502.28 and fraud did. 392 F.Supp. at 674-79. This conclusion was affirmed on appeal, 533 F.2d 372. Less than one week after the Eighth Circuit's Alodex opinion was handed down, the United States Supreme Court decided the case of Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). In that case, the Court held that a private cause of action for damages under § 10b and Rule 10b-5 will not lie "in the absence of any allegation of `scienter' — intent to deceive, manipulate, or defraud." 425 U.S. at 193, 96 S.Ct. at 1381. In so ruling, the Court repudiated the Eighth Circuit's view that negligence is sufficient to establish a defendant's Rule 10b-5 liability. Myzel v. Fields, 386 F.2d 718 (8th Cir. 1967), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143 (1968). Given the emphasis placed on the lack of scienter for Rule 10b-5 recovery in Alodex, that decision's conclusions must now be reexamined.

The Court has no doubt that the Vanderboom v. Sexton resemblance test survives Hochfelder. See Bailey v. Piper, Jaffray & Hopwood, Inc., 414 F.Supp. 475, 479 (D.Minn.1976). The question boils down to whether the resemblance test analysis undertaken in Alodex produces a different result after Hochfelder. The Iowa causes of action which must be compared to Rule 10b-5 for purposes of the pending motions remain common law fraud and the two provisions of the Iowa Securities Law, §§ 502.26 and 502.28.³ The Court's inquiry must focus upon which state cause of action (1) shares a "common purpose" with Rule 10b-5, and (2) permits the assertion of substantially the same defenses that are available in a Rule 10b-5 action. Alodex, supra, 533 F.2d at 373.

The first prong of the test is settled by Alodex — the state and federal statutory actions share a commonality of purpose which common law fraud and Rule 10b-5 do not. Id. As to the second prong of the test, it is clear that § 502.26 is no longer the most analogous cause of action to Rule 10b-5, given the latter's Hochfelder-dictated scienter element. This does not necessarily mean that the two-year limitations period of § 502.23 is inapplicable, however, for § 502.28 must also be considered. As previously stated by this Court, "Section 28 applies to a defendant who knowingly makes false representations in the course of a securities sale. Its plain language clearly reveals a scienter element." 392 F.Supp. at 679. While common law fraud in Iowa also requires scienter, id. at 677, the commonality of purpose shared by § 502.28 and Rule 10b-5 makes those causes of action more analogous than are Rule 10b-5 and fraud. Accordingly, it is the Court's conclusion that the statute of limitations for § 502.28 applies to Rule 10b-5 actions in Iowa. This statute is § 502.23, the same limitations period that governs § 502.26 actions. Thus, the net effect of Hochfelder on Alodex is that Iowa's securities act statute of limitations still applies, but because of the resemblance of § 502.28, as opposed to § 502.26, to Rule 10b-5.

Having determined that the statute of limitations of § 502.23 applies to Rule 10b-5 cases, the effects of certain amendments to § 502.23 must now be considered. Prior to May 2, 1974, § 502.23 contained a two-year limitations period. In an amendment effective on that date, however, the statute was lengthened to five years.⁴ The parties are in disagreement as to which of these two periods, two or five years, governs Counts VI through XI.

There can be no dispute from the record in this case that the occurrences upon which plaintiffs sue pre-date the May 1974 amendment. The public offering at issue commenced in October of 1972, and ended by early 1973. It is significant, however, that the acts complained of occurred less that two years prior to the five-year extension in May of 1974. Further, plaintiffs assert that they did not discover their cause of action against the lawyers and accountants until July of 1974, at the earliest. Because this discovery was made after the five-year statute was in effect, and because their claim was still in existence in May of 1974, plaintiffs assert that Counts VI through XI should be governed by the extended period.

The Alodex plaintiffs similarly sought to avail themselves of the May 2, 1974 amendment lengthening § 502.23, but were unsuccessful. Alodex is distinguishable from the instant case, however, for in Alodex the plaintiffs' two-year period to sue under § 502.23 had expired prior to the May amendment. Giving the Alodex plaintiffs the benefit of the five-year statute thus would have had the impermissible effect of reviving an expired claim. See Wisbey v. American Community Stores Corp., 288 F.Supp. 728, 734 (D.Neb.1968); 51 Am.Jur. Limitations of Actions, § 44 (1970). In this case, the earliest that § 502.23 could...