Astor Chauffeured Limousine Co. v. Runnfeldt Inv. Corp.
| Decision Date | 24 August 1990 |
| Docket Number | 89-1654,Nos. 89-1631,s. 89-1631 |
| Citation | 910 F.2d 1540 |
| Parties | Fed. Sec. L. Rep. P 95,459 ASTOR CHAUFFEURED LIMOUSINE COMPANY, Plaintiff-Appellant-Cross-Appellee, v. RUNNFELDT INVESTMENT CORPORATION, et al., Defendants-Appellees-Cross-Appellants. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Michael H. Moirano, Nisen & Elliott, Shelly B. Kulwin, Chicago, Ill., for plaintiff-appellant-cross-appellee.
Gary M. Elden, George R. Dougherty, Philip C. Stahl, Grippo & Elden, Chicago, Ill., for defendants-appellees-cross-appellants.
Before POSNER and EASTERBROOK, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.
Limousine companies, like many law firms, flourish to the extent they have stable lists of corporate clients. Walk-in business is not enough to keep a firm solvent. Centennial Custom Limousine Service, which offered limousine service in Chicago, experienced the problem first hand. Two years of negative profits convinced its parent Runnfeldt Investment Corporation, that new clients had to be obtained immediately.
Runnfeldt's principal investors, Elmer A. Goodman and David Schoenberg, hired James Malchin, the dispatcher at Chicago Limousine Company. Centennial promised Malchin an equity interest in exchange for producing clients. Malchin moved, and clients came with him. Despite this boost, Centennial remained unprofitable, and its owners were reluctant to give Malchin the promised shares. While continuing to work as Centennial's dispatcher, Malchin set up his own business leasing drivers to corporations that supplied their own limousines (the "drivers' program"), in competition with Centennial. He remained disgruntled. After another year of losses Schoenberg and Goodman decided that the limo business was not for them. Representations they made in the course of selling Centennial produced this securities suit.
Astor Chauffeured Limousine Company, a substantially larger firm, was expanding aggressively. Astor sought to buy smaller firms, keep the clients, and improve efficiency by consolidating administration and dispatch. In April 1985 Runnfeldt's principals met Michael Zaransky, Astor's president, at a party given by Altheimer & Gray, the law firm of which Schoenberg was a partner. Altheimer & Gray had supplied legal advice to Zaransky's businesses. Goodman, Schoenberg, and Zaransky discussed a possible sale of Centennial to Astor.
Astor wanted to buy the client list by itself, but Runnfeldt demurred. After two months of discussions the parties met at the offices of Altheimer & Gray on June 19, 1985, to hammer out a deal. Astor inquired about the reliability of the clients and "who controlled them". Goodman and Schoenberg responded that "they controlled the clients and that they would stay". That was the assurance Astor needed. (Defendants deny making such statements, but we recite the facts as the jury apparently found them.) To back up the promises, Goodman and Schoenberg made covenants not to compete in the limousine business. The parties also discussed Malchin's fate. Schoenberg sought a promise that Malchin wouldn't be "pruned". Astor thought Malchin was deadwood (the point of Astor's acquisition program was to obtain a larger clientele to be handled by its existing administrative apparatus) and asked whether keeping Malchin was a condition of the deal. Goodman and Schoenberg decided to leave Malchin to his own devices: Goodman said to Zaransky, "If you don't need him, fuck him." On July 24 Astor purchased Centennial's stock for $192,057.70. Astor also bought Centennial's limousines for $85,590.45 from a partnership that had leased them to Centennial.
Malchin did not appreciate this turn of events. Within two months he was gone, and his clients went with him. Centennial's business dropped off precipitously. Astor did not obtain the business that was the motivation for the deal. Centennial (at Astor's behest) sued Malchin in state court, charging that he had breached his fiduciary duties to the firm. Malchin responded that the clients were his, that Centennial had broken its promise of an ownership interest, and that Centennial had authorized him to run the drivers' program as a stopgap until it came through with the promised equity stake. Centennial ultimately obtained a judgment of nearly $500,000 against Malchin; the record does not reveal whether this judgment has been satisfied.
In January 1987 Astor filed this suit against Runnfeldt, Goodman, Schoenberg, their partnership, and Ronald S. Simon (collectively "Runnfeldt"), seeking relief under Sec. 12 of the Securities Act of 1933, 15 U.S.C. Sec. 77l, Sec. 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), the SEC's Rule 10b-5, 17 C.F.R. Sec. 240.10b-5, and the common law of Illinois. Astor claimed that Runnfeldt misled it in three ways: (1) lying about who controlled the clients; (2) failing to disclose the drivers' program; and (3) failing to reveal that Centennial had promised Malchin an ownership interest. Astor sought $525,270 in compensatory damages.
The jury found Runnfeldt liable. It awarded Astor $300,000 under Sec. 10(b) $193,466 under Sec. 12(2), $6,534 on the common law count, and threw in $25,000 in punitive damages, for what it must have thought was a total of $525,000. Both sides challenged the verdict. Astor asked the district judge to vindicate the jury's "true intent" by entering a judgment of $525,000, rather than the $300,000 that was the highest award on any one count. Runnfeldt sought a new trial or a judgment notwithstanding the verdict. The district judge refused to overturn the verdict but reduced the judgment to $225,000. Both sides appeal.
First comes a question about appellate jurisdiction. Astor purchased Centennial through its subsidiary, Limousines, Inc. Both Astor and Limousines were plaintiffs. Before trial, the district judge dismissed Astor, reasoning that it lacked standing because its injury is derivative from Limousines. See Kagan v. Edison Brothers Stores, Inc., 907 F.2d 690 (7th Cir.1990). Yet the notice of appeal names Astor as the appellant, not mentioning Limousines. Runnfeldt maintains that we therefore lack jurisdiction. See Torres v. Oakland Scavenger Co., 487 U.S. 312, 108 S.Ct. 2405, 101 L.Ed.2d 285 (1988).
Shortly after the district judge dismissed Astor, however, he apparently reversed field, stating in open court that Astor rather than Limousines is the proper plaintiff. Although the judge did not memorialize the decision in a written order, both the parties and the judge conducted the trial as though Astor were the sole plaintiff. The final judgment bears its (and not Limousines') name. Because Astor is the party named in the judgment, it is entitled to file an appeal.
Although the claims under the federal securities laws have many things in common with the claims under state law, we separate them for purposes of exposition. We briefly discuss Sec. 12(2) and then take up all questions under Rule 10b-5. Part III covers state law to the extent it presents distinct issues. Part IV deals with damages.
Runnfeldt contends that no award under Sec. 12(2) is possible, because the statute of limitations in Sec. 13 of the '33 Act, 15 U.S.C. Sec. 77m, gave Astor only one year from the date it discovered the fraud. The sale closed in July 1985. Malchin left in September. Centennial (under Astor's control) sued Malchin in state court almost immediately. In November Malchin filed his answer, contending that he owned the customers, that he had been promised an ownership interest in Centennial, and that Centennial had authorized the drivers' program. Astor did not file the federal suit until January 1987, more than a year later.
Malchin's answer, if true, revealed what Runnfeldt hid. Astor was on notice. Although Astor insists that it was not required to believe Malchin, this statute of limitations starts to run when the party knows enough to call for inquiry. Norris v. Wirtz, 818 F.2d 1329, 1334 (7th Cir.1987). Malchin's departure and the immediate decline of business in September 1985 should have induced Astor to look into whether it had been told the truth about who controlled the customers. By November 1985 Astor had been told point blank that Malchin viewed the customers as his property. Suit more than a year later is untimely under Sec. 13. The claim under Sec. 12(2) should have been dismissed.
After this case was argued, we held that Sec. 13 also supplies the statute of limitations in suits under Sec. 10(b) and Rule 10b-5. Short v. Belleville Shoe Manufacturing Co., 908 F.2d 1385 (7th Cir.1990). Before Short, this court had borrowed the statutes of limitations from state blue-sky laws, a period that in Illinois is three years. See Davenport v. A.C. Davenport & Son Co., 903 F.2d 1139 (7th Cir.1990). We reserved in Short the question whether Sec. 13 would be applied retroactively, 908 F.2d at 1390, and we do not answer that question today. Runnfeldt has never challenged the timeliness of the claims under Sec. 10(b) and Rule 10b-5, so Astor has not been required to show that it relied on the three-year period. It would be inappropriate to apply Sec. 13 retroactively when the defendant has been silent.
Silent about the statute, that is. Runnfeldt insists that the securities claims are untimely because p 8 of the contract provides that the purchaser may not file suit unless it serves notice within 180 days of the date of signing. This clause is inapplicable, for it applies only to "an action for breach of a representation and warranty set forth in paragraph 6 ()". Astor's principal argument is that Runnfeldt's pre-contract representations--statements not included in p 6--were false; yet the 180-day rule applies only to p 6. Moreover p 6(a)(xiv), excluded from the 180-day limit, represents that there had been no adverse change in Centennial's condition,...
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