Baker v. Wheat First Securities, Civ. A. No. 3:85-1281.

• Decision Date: 08 September 1986
• Docket Number: Civ. A. No. 3:85-1281.
• Citation: 643 F. Supp. 1420
• Parties: Roy D. BAKER and Jane F. Baker, Plaintiffs, v. WHEAT FIRST SECURITIES and John K. Merical, Defendants.
• Court: U.S. District Court — Southern District of West Virginia

643 F. Supp. 1420

Roy D. BAKER and Jane F. Baker, Plaintiffs, v. WHEAT FIRST SECURITIES and John K. Merical, Defendants.

Civ. A. No. 3:85-1281.

United States District Court, S.D. West Virginia, Huntington Division.

September 8, 1986.

COPYRIGHT MATERIAL OMITTED

William L. Mundy, Baker & Mundy, Huntington, W.Va., for plaintiffs.

John K. Merical, Poca, W.Va., pro se.

Larry A. Winter and Cynthia A. Nelson Spilman, Thomas, Battle & Klostermeyer, Charleston, W.Va., for Wheat First.

MEMORANDUM OPINION AND ORDER

HADEN, Chief Judge.

Pending before the Court are the cross motions for summary judgment made by the Defendant, Wheat First Securities (Wheat), and the Plaintiffs. Both motions have been well briefed and the Court now deems the same mature for decision.

I. Brief Background

This action arises out of the alleged defalcations of John K. Merical. Merical was employed as a stock broker by Defendant Wheat. During his employment, Don and Jane Baker, husband and wife, decided to open an account with Wheat. Having been solicited by Merical, their account was assigned to him. He was their account executive.

The Plaintiffs allege that Merical engaged in a variety of wrongdoing while serving as their account executive and that they were damaged as a result. They contend, inter alia, that he made unauthorized trades in their account, bought stock that was unsuited for their investment objectives, misappropriated money from their account and from them personally, made fraudulent representations to them and breached his fiduciary duty to them.

The summary judgment motions address a variety of issues. The Court writes as much to clarify its perspective on the law as to dispose of certain claims. Each issue will be addressed in turn.

II. Discussion of Wheat's Motion for Summary Judgment

A. Statute of Limitations.

1. Federal Securities Law Claims.

Wheat argues that the Bakers' federal securities claims and common law claims are barred by the applicable statute of limitations. That limitations period, according to Wheat, is two years. It borrows that period from W.Va.Code, § 55-2-12. The Court finds Wheat's argument to be well taken as to the common law fraud claim; a two-year limitations period does apply. As to the federal securities claims, however, the Court believes the West Virginia Blue Sky Act, W.Va.Code, § 32-1-101, et seq., to provide the better analogy. Therefore, the Court adopts its three-year limitations period.

The Plaintiffs and Wheat both agree that with the lack of a limitations period for implied actions under Section 10 and Rule 10b-5, a federal court must "borrow" the limitations period from the forum state's most analogous cause of action. Ernst and Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); O'Hara v. Kovens, 625 F.2d 15 (4th Cir. 1980), cert. denied, 449 U.S. 1124, 101 S.Ct. 939, 67 L.Ed.2d 109 (1981). Wheat contends that because the Plaintiffs' action is based upon fraud, the limitations period for a common law fraud action should be borrowed. The Court disagrees. Although there may be a split of authority, several other courts have utilized the limitations period of a particular state's Blue Sky law and the Court deems such to be the preferrable course to follow. See e.g., O'Hara v. Kovens, supra, and Fox v. Kane-Miller Corp., 542 F.2d 915 (4th Cir.1976) (adopting limitations period of Maryland securities act for Rule 10b-5 action); Newman v. Prior, 518 F.2d 97 (4th Cir.1975) (Virginia Blue Sky law was analagous statute for borrowing limitations period). Moreover, Wheat admits in its memorandum in opposition to the Plaintiffs' pending motion for summary judgment that the lead section of the West Virginia Blue Sky Act, W.Va. Code, § 32-1-101, "parallels" Section 10(b) of the federal act. Wheat's memorandum at 19. See also State v. Fairchild, 298 S.E.2d 110, 129 (W.Va.1982) ("Section 101 of the Uniform Securities Act is substantially Rule 10b-5 promulgated by the federal Securities and Exchange Commission").¹ Accordingly, the Court holds that a three-year limitations period governs the Plaintiffs' federal securities law claims.

In making its statute of limitations argument, Wheat divided the Plaintiffs' claims into three categories: (1) federal securities law fraud, (2) state securities law fraud, and (3) common law claims. As to the state securities fraud category, Wheat recognizes that a three-year statute of limitation applies; therefore, it does not assert the bar of the statute of limitations as to that category of the Plaintiffs' claims. A fortiori, since a three-year limitations period has also been found appropriate for the federal securities law fraud claim, the Court assumes that Wheat would accept the federal claims as being timely.²

2. Common Law Theories

Both Wheat and the Plaintiffs agree that a two-year limitations period applies to the Plaintiffs' common law theories. W.Va. Code, § 55-2-12; Stanley v. Sewell Coal Co., 285 S.E.2d 679 (W.Va.1981). They also agree that the proper inquiry is when the statute began to run. They disagree, however, as to when that occurred. In any event, since the Plaintiffs' action was initiated on April 23, 1985, the operative date is April 23, 1983. If the statute began to run prior to that date, the action, insofar as it relates to acts completed prior to that date, is time barred.

Wheat argues that the Plaintiffs either had actual knowledge or should have been put on notice to make an inquiry prior to April 23, 1983. It makes this assertion in regard to three different aspects of the Plaintiffs' case. As to the unauthorized trading in the Plaintiffs' accounts, Wheat points out that the Plaintiffs received a confirmation slip each time a purchase or sale occurred within their account. The slip would specify what securities the Plaintiffs had purchased. Moreover, Wheat also sent the Plaintiffs a security account statement on a monthly or periodic basis. Such statement described every transaction which occurred in the Plaintiffs' account for the period covered. In addition, the Plaintiffs also received annual summaries which described each transaction which took place during the preceding year. Wheat argues that these documents either provided the Plaintiffs with actual knowledge of unauthorized trading or should have spurred them to make an inquiry. Indeed, Wheat submits that the Plaintiffs did inquire of Merical and then unreasonably accepted his stock answer that everything was fine.

The Plaintiffs complain that $1,000 given to Merical on November 25, 1982, for purchase of shares in American Pace Fund was appropriated by Merical for his personal use. Wheat contends that the Plaintiffs should have been put on notice of this "fraud" prior to April 23, 1983. Plaintiffs, according to Wheat, never received anything in the mail pertaining to the purchase. Specifically, the Plaintiffs received periodic account statements dated December 31, 1982, January 31, 1983, February 28, 1983, and March 31, 1983. None of those statements made any reference to the purchase of American Pace Fund stock. It also appears that Mr. Baker called Merical and questioned him about American Pace Fund not showing up on the account statements.

On March 13, 1983, Merical allegedly used a letter of authorization to transfer $15,250 from the Baker's joint account to the account of another Wheat customer. Wheat argues that the Plaintiffs also had actual notice of this fraud prior to April 23, 1983. It contends that the transfer of funds was reflected as a debit on the Plaintiffs' March 31, 1983, securities account statement. This statement, according to Wheat, should have reached the Plaintiffs in the early part of April, 1983. The debit appeared on page 1 of the statement. Moreover, Wheat submits that the Plaintiffs, by comparing the February 28, 1983, statement with the March 31, 1983, statement, should have discovered that the value of their account had decreased from $45,162.24 to $36,979.41.

In response to the above "facts" gathered by Wheat, the Plaintiffs counter that Mr. Baker did not understand what he was reading—that he was an unsophisticated investor who relied completely on his friend, John Merical. Mr. Baker would contact Merical to get clarifications and would receive explanations which appeared to him to be plausible. For instance, Merical allegedly would sometimes represent that all holdings of the Plaintiffs were not reflected on the statement, or that there were mistakes on the statements. In addition, the Plaintiffs cite the testimony of Ed Knowles, Branch Manager of Wheat's branch office in Charleston, West Virginia, to the effect that the difficulties encountered by Mr. Baker in understanding the statements were not uncommon to Wheat's customers.

As mentioned, both of the parties appeared to be in agreement that the West Virginia court would apply a discovery rule for fraud actions. See Brock & Davis Co. v. Charleston National Bank, 443 F.Supp. 1175 (S.D.W.Va.1977) (in dicta the court predicted that West Virginia would apply a discovery rule to actions in fraud). The rule would presumably be similar to the federal equity doctrine: "The discovery of fraud is either the date of actual discovery or the date on which the plaintiff in the exercise of reasonable diligence should have made such discovery." John Hopkins University v. Hutton, 488 F.2d 912, 917 (4th Cir.1973), cert. denied, 416 U.S. 916, 94 S.Ct. 1622, 40 L.Ed.2d 118 (1974). In this vein, the Eighth Circuit has held that the standard is an objective one. Koke v. Stiffel, Nicolaus & Co., Inc., 620 F.2d 1340, 1343 (8th Cir.1980). The Plaintiffs must act as reasonably prudent persons.

Wheat relies on the Koke case to illustrate that the Plaintiffs here did not act reasonably in discovering (or not discovering) the fraud being perpetrated upon them. In Koke, the plaintiff testified that the confirmation slips and account statements she received were written in ...