Arneil v. Ramsey

• Decision Date: 12 May 1976
• Docket Number: No. 75 Civ. 1766.,75 Civ. 1766.
• Citation: 414 F. Supp. 334
• Parties: James A. ARNEIL and Vernon A. Stockwell, Plaintiffs, v. James B. RAMSEY, Jr., et al., Defendants.
• Court: U.S. District Court — Southern District of New York

414 F. Supp. 334

James A. ARNEIL and Vernon A. Stockwell, Plaintiffs, v. James B. RAMSEY, Jr., et al., Defendants.

No. 75 Civ. 1766.

United States District Court, S. D. New York.

May 12, 1976.

COPYRIGHT MATERIAL OMITTED

Spengler, Carlson, Gubar & Churchill, New York City, Lovitt & Hannan, Inc., San Francisco, Cal., for plaintiffs.

Milbank, Tweed, Hadley & McCloy by Edward J. Reilly and Norman R. Nelson, New York City, for defendant New York Stock Exchange.

Milgrim, Thomajan & Jacobs by Roger Milgrim, New York City, for defendants Ramsey, Vanderbilt & Lendman.

MEMORANDUM AND ORDER

BRIEANT, District Judge.

On April 11, 1975, plaintiffs filed a complaint alleging, in fourteen separate counts, numerous violations of Sections 6, 10(b) and 20 of the Securities Exchange Act of 1934 ("the 1934 Act"), 15 U.S.C. §§ 78f, 78j and 78t, and Rule 10b-5, 17 C.F.R. § 240.10b-5. In addition plaintiffs have asserted various claims of common law fraud and breach of a fiduciary duty.

Jurisdiction is premised on § 27 of the 1934 Act, 15 U.S.C. § 78aa and principles of pendent jurisdiction.

The Parties.

Plaintiffs James Arneil and Vernon Stockwell are long-time residents of Wenatchee, Washington. Mr. Arneil is an attorney and Mr. Stockwell is the manager and part owner of two apple orchards.

Defendant New York Stock Exchange, Inc. ("the Exchange") is a not-for-profit corporation organized under the laws of the State of New York and registered as a national securities exchange under § 6 of the 1934 Act.

Defendant Blair and Co., Inc. ("Blair") was a member organization of the Exchange and a stockbroker. On September 25, 1970, Blair ceased operations, and the Exchange appointed Mr. Patrick E. Scorese as liquidator for Blair.

Defendant James B. Ramsey, Jr. is a former President of Blair. Defendant Oliver DeG. Vanderbilt is a former Chairman of the Board of Blair. Defendant William M. Lendman is also a former President of Blair. Ramsey, Vanderbilt and Lendman will sometimes be referred to collectively as the individual defendants.

The Complaint.

In Count I, plaintiffs claim that all defendants violated Rule 10b-5 in April of 1969 by inducing and encouraging the plaintiffs to purchase non-voting common and preferred stock of Blair and to become subordinated lenders to Blair. Count II charges all defendants except Blair with aiding and abetting Blair in the sale of its securities in violation of Rule 10b-5. Count III alleges a conspiracy to violate Rule 10b-5 in that the Exchange and the individual defendants agreed to obtain additional capital for Blair through the sale of securities to plaintiffs without adequate disclosure of material facts. Count IV asserts that the Exchange and the individual defendants were persons in control of Blair (as defined by § 20(a) of the 1934 Act) and as such owed a duty to the plaintiffs in connection with the purchase of these securities and issuance of secured demand notes.

Counts V through XII allege numerous violations of § 6 of the 1934 Act. The Exchange is the only defendant on these § 6 counts, discussed in more detail below.

Count XIII alleges that all the defendants are guilty of common law fraud in connection with the purchase of the securities and the giving of the notes.

Finally, Count XIV asserts that the Exchange breached a fiduciary duty which it owed to the plaintiffs by favoring its own interests and the interests of its members over the interests of the plaintiffs and the general public.

All defendants except Blair¹ have moved for summary judgment pursuant to Rule 56, F.R.Civ.P. The individual defendants move solely on the ground that the 10b-5 and common law fraud claims (the only counts in which they are named) are time barred by the applicable statute of limitations. The Exchange bases its motion both upon the statute of limitations point and on the ground that there is no genuine issue as to any material fact.

The 10b-5 Claims (Counts I-IV).

The Securities Exchange Act of 1934 prescribes no period within which actions must be brought. Nor is there any general federal statute of limitations applicable to all civil actions alleging violations of federal law. However, it is well settled that where Congress creates federal rights but does not prescribe a time period for enforcement, a federal court will apply the statute of limitations law of the forum state. International Union, United Auto Workers v. Hoosier Cardinal Corp., 383 U.S. 696, 703-05, 86 S.Ct. 1107, 1111-1113, 16 L.Ed.2d 192, 198-199 (1966); Klein v. Bower, 421 F.2d 338, 343 (2d Cir. 1970).

Our reference to New York law to determine whether or not the action is timely includes its "borrowing statute," New York CPLR § 202. Cope v. Anderson, 331 U.S. 461, 67 S.Ct. 1340, 91 L.Ed. 1602 (1947); Sack v. Low, 478 F.2d 360, 365 (2d Cir. 1973); Hornblower, Weeks, Hemphill & Noyes v. Burchfield, 366 F.Supp. 1364, 1367 (S.D.N.Y.1973). That statute provides:

"An action based upon a cause of action accruing without the state cannot be commenced after the expiration of the time limited by the laws of either the state or the place without the state where the cause of action accrued, except that where the cause of action accrued in favor of a resident of the state the time limited by the laws of the state shall apply."

As noted in Korn v. Merrill, 403 F.Supp. 377, CCH Fed.Sec.L.Rep. ¶ 95,355 at 98,767 (S.D.N.Y.1975), a New York court will borrow the limitations law of a foreign state only where (1) the cause of action being sued upon accrued outside of New York, and (2) the plaintiff is not a resident of New York.

Here the second condition is clearly satisfied. Plaintiffs are, and at all relevant times have been, residents of the State of Washington. While plaintiffs contend that they were "doing business" in New York by reason of the brokerage accounts which they maintained with Blair in New York City, such business activities do not establish New York residence for purposes of the borrowing statute. See American Lumbermens Mut. Cas. Co. of Ill. v. Cochrane, 129 N.Y.S.2d 489 (Sup.Ct.), aff'd without opinion, 284 App.Div. 884, 134 N.Y.S.2d 473 (1st Dept. 1954), aff'd without opinion, 309 N.Y. 1017, 133 N.E.2d 461 (1956) foreign corporation licensed to do business in state is not a resident within meaning of predecessor borrowing statute.

The first condition creates a more complicated issue. Sack v. Low, supra at 365, holds that New York would follow the rule of the First Restatement of Conflicts, § 377, note 4, that ". . . when a person sustains loss by fraud, the place of wrong is where the loss is sustained, not where fraudulent representations are made." The Court went on to state that ". . . loss from fraud is deemed to be suffered where its economic impact is felt, normally the plaintiff's residence." Id. at 366. Applying this test to the facts of this case, it is clear that the cause of action accrued in the State of Washington because it is there that plaintiffs' pocketbooks are situated.

Plaintiffs' point to dictum in Sack v. Low, id. at 368, that it might make some difference ". . . if the plaintiffs maintained an open account at defendant's New York offices, and the loss was reflected in that account." They claim that both their stock in Blair and their secured demand notes were held by Blair in New York City and that when the stock declined in value and the collateral securing the note was converted into cash and sold in July 1970 in order to apply the proceeds to pay off the note, any value which they had in their accounts at Blair was wiped out.

However, reading the dictum quoted above in context, it is clear that the Court did not single out the place where the account was maintained as the sole or controlling criterion for determining where the cause of action accrued. The method of payment, and other details were also considered important factors. This issue was mentioned but not actually decided by the Court of Appeals because of the insufficiency of the record on appeal. The Court concluded that while it was unlikely plaintiffs could demonstrate that the cause of action arose in New York under the traditional test, they should not be foreclosed from trying to do so.

This dictum read in context, does not change the result which flows from the application of the strict test of the First Restatement of Conflicts.

It is sufficient to point out that plaintiffs here executed the promissory notes, and mailed their checks to pay for the stock from Washington, and that they sent at least some of the securities which were to serve as the collateral for the secured demand notes from Washington to New York. And even though the account was liquidated in New York, it cannot be denied that the impact of losing their investment was experienced first and foremost by plaintiffs at their homes in Wenatchee, Washington.²

Thus both prerequisites to applicability of the borrowing statute have been satisfied. A New York court would therefore apply the statute of limitations of the State of Washington, which would be applicable to the claims.

Washington Rev.Code § 4.16.080(4) states:

"Actions limited to three years. Within three years:

* * * * * *

4. An action for relief upon the ground of fraud, the cause of action in such case not to be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud."

The Ninth Circuit Court of Appeals has held that this Washington statute should be applied to claims for relief under Rule 10b-5. Douglass v. Glenn E. Hinton Investments, Inc., 440 F.2d 912 (9th Cir. 1971); Errion v. Connell, 236 F.2d 447 (9th Cir. 1956).

If plaintiffs discovered "the facts constituting the fraud" prior to April 11, 1972, Counts I-IV would be time-barred.

Plaintiffs allege that certain risk factors were not disclosed to them when they bought securities of Blair in April of 1969. But by the summer of 1970, plaintiffs had apparently discovered that the true...