Berning v. A.G. Edwards & Sons, Inc.

• Decision Date: 25 March 1993
• Docket Number: No. 91-3318,91-3318
• Citation: 990 F.2d 272
• Parties: , Fed. Sec. L. Rep. P 97,389 Robert F. BERNING and Evelyn C. Berning, Plaintiffs-Appellants, and United States of America, Intervenor, v. A.G. EDWARDS & SONS, INC., and John R. Stuhrenberg, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 272

990 F.2d 272

61 USLW 2628, Fed. Sec. L. Rep. P 97,389

Robert F. BERNING and Evelyn C. Berning, Plaintiffs-Appellants and United States of America, Intervenor, v. A.G. EDWARDS & SONS, INC., and John R. Stuhrenberg Defendants-Appellees.

No. 91-3318.

United States Court of Appeals Seventh Circuit.

Argued Oct. 21, 1992.

Decided March 25, 1993.

Rosemarie J. Guadnolo, Horvath, Lieber & Quilici, Chicago, IL (argued), for plaintiffs-appellants.

Kent Lawrence, Charles J. Risch (argued), Randall B. Gold, Lawrence, Kamin, Saunders & Uhlenhop, Chicago, IL, for defendants-appellees.

Barbara C. Biddle, Scott R. McIntosh (argued), Dept. of Justice, Civ. Div., Appellate Section, Washington, DC, for intervenor.

Paul Gonson, Jacob H. Stillman, James R. Doty, Leslie E. Smith, Kelly Rowe, S.E.C., Office of Gen. Counsel, Washington, DC, for amicus curiae, S.E.C.

Before CUMMINGS, Circuit Judge, PELL, Senior Circuit Judge, and KAUFMAN, Senior District Judge. ^*

FRANK A. KAUFMAN, Senior District Judge.

This is a private federal securities suit brought by Robert and Evelyn Berning ("the Bernings") against A.G. Edwards & Sons, Inc., and John R. Stuhrenberg (collectively "the brokers") in the United States District Court for the Northern District of Illinois. The Bernings' action, presenting claims arising under Section 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b), and Rule 10(b)-5, 17 C.F.R. § 240.10b-5, was filed in August 1989. The brokers asserted that the suit was time-barred under this Court's subsequent decision in Short v. Belleville Shoe Mfg. Co., 908 F.2d 1385 (7th Cir.1990), cert. denied, --- U.S. ----, 111 S.Ct. 2887, 115 L.Ed.2d 1052 (1991). On March 7, 1991, in Berning I, the District Court denied the brokers' motion for summary judgment on limitations grounds, holding that Short need not be applied retroactively. Instead, the District Court relied upon and applied this Court's pre-Short practice of borrowing the applicable limitations period for private Section 10(b) actions from state law, i.e. Illinois law, which in this instance provided for a limitations period of three years.

On June 20, 1991, however, the Supreme Court, in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, --- U.S. ----, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991), required the use of a uniform federal one year statute of limitations coupled with a three year statute of repose, thus requiring plaintiffs to bring suit within one year of the time at which they became or should have become aware of their cause of action and in any event, not later than three years from the time of the events giving rise to said cause of action. ¹ On the same day, the Supreme Court handed down its decision in James B. Beam Distilling Co. v. Georgia, --- U.S. ----, 111 S.Ct. 2439, 115 L.Ed.2d 481 (1991), in which the majority of the Court discarded the use of "selective prospectivity" in civil litigation, that is, the practice of applying a new rule of law in the case in which it is announced but not applying the new rule to parties in other pending civil suits. Relying upon Lampf and Beam, the District Court granted the brokers' motion for reconsideration of its earlier denial of their motion for summary judgment and held the Bernings' claims to be time-barred (Berning II ). 774 F.Supp 480. The Bernings filed a timely appeal on October 7, 1991 to this Court.

While the Bernings' appeal was before this Court, Congress "decided that retroactive application of Lampf was not desirable," McCool v. Strata Oil Co., 972 F.2d 1452, 1458 (7th Cir.1992), and accordingly, in one of the miscellaneous provisions of the Federal Deposit Insurance Corporation Improvement Act of 1992, amended Section 27A of the '34 Act so as effectively to overturn the combination of Lampf and Beam upon which the trial court in the instant case had relied in granting the brokers' summary judgment on the limitations issue. In pertinent part, the new section 27A reads:

The limitation period for any private civil action implied under section 10(b) of this Act that was commenced on or before June 19, 1991, shall be the limitation period provided by the laws applicable in the jurisdiction, including principles of retroactivity, as such laws existed on June 19, 1991.

15 U.S.C. § 78aa-1(a).

The instant action was commenced prior to June 19, 1991; thus, new section 27A applies herein. The brokers, however, contend: 1) section 27A is unconstitutional and thus the trial court's grant of summary judgment under Lampf and Beam should be affirmed; 2) alternatively, assuming that section 27A is constitutional, Short should be applied retroactively so as to bar the Bernings' claims; and 3) the district court erred in denying the brokers' motion for summary judgment on grounds other than limitations, i.e. the district court erred in denying summary judgment to the brokers because a) the Bernings had validly released the brokers from liability for the claim at issue, and/or b) there was insufficient evidence to establish the element of scienter under Rule 10(b)-5.

I

Robert Berning was born in 1926 and Evelyn Berning was born in 1931. Evelyn Berning has a bachelor's degree in education and Robert has a bachelor's degree in chemical engineering and a masters degree in education. Robert has worked as a teacher in a parochial school since 1953. The Bernings first invested in stocks in 1953, with such investments increasing to approximately $86,000 by 1973. In 1975, the Bernings began investing with appellee Stuhrenberg, who was then a broker at Merrill, Lynch. Shortly thereafter, the Bernings began investing in options upon Stuhrenberg's recommendation. The Bernings purchased covered calls ² and naked puts. ³ When the Chicago Board of Options Exchange began trading indexed options in 1983, the Bernings began to purchase OEX options which are based on the Standard and Poors 100. ⁴ In 1982, plaintiffs opened an account with a discount broker, and Evelyn took primary responsibility for deciding which stocks to purchase for that account. Corresponding with Stuhrenberg's change of brokerage firms, the Bernings transferred their account to Kidder, Peabody in 1979 and to appellee A.G. Edwards & Sons, Inc. in 1985.

On October 13, 1987, Robert, acting on Stuhrenberg's recommendation, authorized the purchase of 30 OEX November 325 calls, 30 OEX November 330 calls, and 30 OEX November 300 puts. On Wednesday, October 14, the Dow Jones Industrial Average (DJIA) dropped 95 points. On October 15 and 16, the DJIA fell a further 57 and 108 points, respectively. On Saturday the 17th, Stuhrenberg recommended to the Bernings that they close out all their open option positions at a loss. ⁵ The Bernings authorized Stuhrenberg to do so at the opening of the market on the morning of Monday, October 19. The brokers failed to close out the Bernings' positions at the opening of the market; instead, an order to close out the call options was entered at 9:28 a.m. on October 19 and an order to close out the puts was entered after 2:00 p.m. on that same day. On Monday, October 19, the market opened with the DJIA down approximately 200 points from the level at which it had closed on the previous Friday and it continued to sink rapidly, eventually closing down a total of 508.32 points.

Plaintiffs' put positions were eventually closed out at a price of $105, producing a loss of $315,000. The Bernings contend that had their order to close out their put positions been executed at the market's opening rather than approximately five hours later, their position would have been closed out at the opening price of $60, reducing their loss by $135,000. With the $315,000 loss, there was a negative balance of $50,000 in the Bernings' account resulting in a margin call of $17,000.

II

In the days following the market crash of October 19, 1987, the parties embarked upon a course of sometimes heated discussions culminating in the signing, on October 29, 1987, by the Bernings and Robert Bagby, Vice President of A.G. Edwards & Sons, Inc., of the following agreement.

RELEASE AND SETTLEMENT AGREEMENT

WHEREAS, A.G. Edwards & Sons, Inc., a Delaware corporation (hereinafter referred to as "Edwards"), has made certain claims against Robert Berning and Evelyn Berning for damages incurred by them in connection with certain transactions in Account No. 296-006-076 (the "Account") with Edwards; and

WHEREAS, the parties to said claim desire to compromise and settle all matters in controversy between them;

NOW, THEREFORE, for and in consideration of their mutual and respective promise and agreements herein, the parties do hereby agree as follows:

1. Edwards hereby agrees to credit the Account of Robert Berning and Evelyn Berning the sum of One Hundred Thirty Five Thousand Dollars ($135,000.00) to correct an order error.

2. In consideration of said credit, Robert and Evelyn Berning hereby forever waives, releases and renounces any and all claims that it may now have against Edwards arising out of or based upon any transactions with Edwards, its officers, agents, employees and related corporations which arose prior to the date of this release.

3. Robert Berning and Evelyn Berning hereby agree to remain liable for the remaining debit balance in the Account.

The brokers, relying on that agreement, claim entitlement to summary judgment. The Bernings, opposing, contend that the release sought to be asserted against them by the brokers is unenforceable for, among other reasons, lack of consideration. The brokers, in response, assert that a credit of $135,000 is sufficient consideration to support the release. The District Court "[v]iewing the facts in the light most favorable to plaintiffs," concluded that "it can be inferred that defendants had no good faith belief that plaintiffs were not entitled to the $135,000 credit." Citing Illinois law, the District Court ruled that "paying part of an amount claimed due where...