Azalea Meats, Inc. v. Muscat

Citation386 F.2d 5
Decision Date22 November 1967
Docket NumberNo. 23339.,23339.
PartiesAZALEA MEATS, INC., Appellant, v. Victor MUSCAT and Edward Krock, Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (5th Circuit)

Hugh L. Black, Jr., Miami, Fla., for appellant.

Earl D. Waldin, Jr., Stanley Jay Bartel, John W. Prunty, Miami, Fla., for appellee.

Before GEWIN and AINSWORTH, Circuit Judges, and LYNNE, District Judge.

LYNNE, District Judge:

Presented on appeal is the narrow question as to whether the district court properly determined, on motion for summary judgment filed in behalf of appellees,1 that appellant's2 action, posited upon the provisions of section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C.A. § 78j(b)), specifically charging violations of regulation 10b-5 promulgated thereunder,3 was barred by the Florida statute of limitations. Of the opinion that it did not, we reverse.

Distilled from an abridged, printed record of almost two thousand pages a narrative of the evidentiary contentions contained therein is an aid to a proper perspective. The ensuing synopsis is introduced by a caveat of the gravest importance. We do not essay the role of factfinders nor do we express any opinion as to what issues, if any, should ultimately be submitted to a jury.

Griffith was appellant's president and controlling stockholder. Prior to September 8, 1961, he had participated with Muscat, Huffines and Krock in several business ventures in varying capacities. Griffith and Muscat organized Griffith National Corporation. Huffines joined with Griffith in acquiring Estate Life Insurance Company. Krock, Griffith, Muscat and one A. Alex Shuford, Jr. acquired control of National Bankers Life Insurance Company. Griffith National Corporation became Insurance & Industrial Enterprises, Inc. (I.& I.E.) and thereafter acquired, by an exchange of stock, approximately 77.7 per cent of the common stock of National Bankers Life Insurance Company. The 10,507 shares of I.& I.E acquired by appellant in this exchange had a cost basis to appellant of approximately $62,000 or six dollars per share.

On May 15, 1961, appellant, having committed itself to the purchase of the Biltmore Terrace Hotel on Miami Beach, borrowed $94,000 from Krock, executing its note in the sum of $100,000, due six months thereafter. Griffith unsuccessfully attempted, both before and after this date, to persuade Krock to acquire an interest in the hotel. In the early part of June, 1961, Griffith had opened discussions with Krock relative to the sale of his I.& I.E. stock. From June 4 until the first week in August, 1961, Griffith was on a trip outside the continental limits of the United States. In his absence he committed to his manager, Pruitt, the responsibility of forming an opinion as to the fair and reasonable value of his I.& I.E. stock.

Between June 4, 1961 and August 11, 1961, Pruitt and Krock had conversations and correspondence about I.& I.E. stock and the price which Krock might pay for it. Hayden, Stone & Company, a New York investment banking firm, had been retained to make an independent appraisal of I.& I.E. and Serrick4 and to recommend a fair exchange ratio for a merger of the two companies.

On June 30, 1961, Hayden, Stone & Company submitted a report, reciting that it had been retained by the management of the two corporations concerned, which in substance appraised the fair value of I.& I.E. within the range of $67.52 to $73.50 per I.& I.E. common share, thus placing a value on I.& I.E. at from 2.11 to 2.29 times the value of Serrick. Such report expressed the opinion that "a merger between the two companies effected within this range of ratios would be considered equitable."

Prior to September 8, 1961, this report was made available to appellant and was studied and understood by both Griffith and Pruitt. For example, on August 11, 1961, Pruitt wrote Krock a letter containing his analysis of such report and offering to sell appellants I.& I.E. stock at $30 per share or, in the alternative, to sell enough stock at that price to pay off appellant's note for $100,000 which Krock was holding.

After further negotiations and on September 8, 1961, appellant sold to Krock its 10,507 shares of I.& I.E. stock at $20.94 a share. Within a few days thereafter Krock either sold or transferred one-third of these shares to Muscat and one-third thereof to Huffines.

As of September 8, 1961, Muscat, Huffines and Krock controlled the stock of both Serrick and I.& I.E. and were the managing officers of both corporations. While Griffith was a nominal director of I.& I.E. he was so inactive in its affairs that Huffines stated that he had no connection with such corporation except as a stockholder.

Neither appellant nor Griffith was ever connected in any way with Serrick prior to September 8, 1961. Serrick's stock was listed on the American Stock Exchange while I.& I.E. stock was obscure, unregistered and with no ready market.

There was a spirit of mutual distrust existing between Griffith and Muscat and before appellant sold its I.& I.E. stock to Krock he had assured Griffith that none of it would be transferred to Muscat. In the course of negotiations which resulted in the sale of its stock by appellant, both Huffines and Krock had repeatedly represented to appellant that the Hayden-Stone report was worthless. Before the sale Krock had advised appellant in writing that the Hayden-Stone appraisal had been revised downward after "a million conferences" because "they wouldn't realize that the dividends from National Bankers Life Insurance Company are paid in one hand and repaid back to National Bankers in the other"; that the value Hayden-Stone placed on National Bankers (from which 90 per cent of the income of I.& I.E. derived) "wouldn't hold water"; that I. & I.E. had "a lot of hardships" that appellant "wouldn't know about", and that I.& I.E. "didn't even have a value of $30, much less the value in the Hayden-Stone report."

On September 8, 1961, Krock acquired all of appellant's I.& I.E. stock for $20.94 per share. On September 12, 1961, Huffines and Muscat met with the other directors of Serrick and persuaded its board to recommend to its stockholders, on the basis of the Hayden-Stone report, that Serrick pay to each I.& I.E. stockholder Serrick stock of the value of $70 for each share of I.& I.E. stock and an amendment to its charter permitting Serrick to acquire stock from its officers and directors. On June 20, 1962, the charter was so amended.

Although not entirely clear upon the record, it appears that Griffith's purported signature was affixed to a contract executed in behalf of appellant's employees' trust, which owned some 300 shares of I.& I.E. stock, to exchange such stock for Defiance stock and which apparently expressed the rate of such exchange. This was done, if done at all, less than three years before this suit was filed.5

Focusing its attention upon the critical dates of September 8, 1961 (the sale by appellant of its stock to Krock), and September 29, 1964 (when the complaint was filed herein), the district court correctly decided that since 15 U.S.C.A. § 78j(b) embodies no statute of limitations, the applicable state statute of limitations governs under the Rules of Decisions Act, 28 U.S.C.A. § 1652, and proceeded to a consideration of section 95.11 of the Florida Statutes Annotated which pertinently provides as follows:

"Actions other than those for the recovery of real property can only be commenced as follows:
* * * * * *
"(5) Within three years —
"(a) An action upon a liability created by statute, other than a penalty or forfeiture;
* * * * * *
"(d) An action for relief on 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."

In a thorough opinion6 the district court recognized that either of the two limitation periods could apply but expressed a preference for the former. Whether the present action is characterized as one upon a liability created by statute, on the one hand, or one for relief on the ground of fraud, on the other, is really immaterial for the end result would be the same. It is important, however, to note, though gratuitously, that conceptually the gravamen of an action brought under section 10(b) of the Securities Exchange Act of 1934 is fraud and that a state statute of limitations should not be permitted to narrow the filing time available under a broadly remedial federal act to a period less than the one available for commencing a similar common-law action. This we believe to be the import of the holding of the Supreme Court that: "A fundamental purpose, common to these statutes7, was to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus to achieve a high standard of business ethics in the securities industry." G. S. E. C. v. Capital Gains Bureau, 375 U.S. 180, 186, 84 S.Ct. 275, 280, 11 L.Ed.2d 237 (1963).

In determining when the clock starts runnng for the purpose of applying a borrowed state statute of limitations to a federally created remedy, federal, not state, law is controlling. It is observed in Movie-color Limited v. Eastman Kodak Co., 288 F.2d 80, 83 (2d Cir. 1961): "Similarly, a federal court will follow state decisions as to how far a cause of action must be `complete' to have `accrued' under state limitation statutes but will look to federal law to determine what needs be done to advance a federally created right to the level so required * * *." We agree with the holding of Janigan v. Taylor, 344 F.2d 781, 784 (1st Cir. 1965): "* * * that federal law must determine the date of accrual here even though the period of limitation thereafter is determined by state law."

Insisting upon a subjective test of actual knowledge, appellant contends that the pertinent Florida statute of limitations did not commence to run until it discovered, on September 17, 1964, the material...

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