Breen v. Centex Corp.
| Decision Date | 20 January 1983 |
| Docket Number | No. 81-1527,81-1527 |
| Citation | 695 F.2d 907 |
| Parties | , Fed. Sec. L. Rep. P 99,065 John E. BREEN, J.D. Malkemus, R.B. Lewis, J.D. Griffin and Jeannie F. Graham, Plaintiffs-Appellants, v. CENTEX CORPORATION, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Joel H. Pullen, Daniel Sciano, San Antonio, Tex., for plaintiffs-appellants.
Jenkins & Gilchrist, T. Ray Guy, William D. Sims, Dallas, Tex., for defendant-appellee.
Appeal from the United States District Court for the Western District of Texas.
Before THORNBERRY, JOHNSON and HIGGINBOTHAM, Circuit Judges.
In 1970, appellee Centex Corporation (Centex) acquired Constructional Chemicals, Inc. (CCI) as a wholly owned subsidiary. The acquisition agreement entered into by Centex and CCI provided that CCI stockholders would exchange their stock for Centex stock. Appellants, five CCI stockholders who exchanged their CCI stock for Centex stock, initiated this action alleging that certain misrepresentations made by Centex violated federal and state laws. Specifically, appellants maintained that Centex's conduct gave rise to the following five causes of action: (1) a federal securities action under Rule 10b-5; (2) a state statutory fraud action under section 27.01 of the Texas Business & Commerce Code (hereinafter section 27.01); (3) a Texas common-law fraud action; (4) a Texas Blue Sky Law action; and (5) a breach of contract action. Centex answered asserting that the stockholders' claims were barred by limitations and moved the court to render summary judgment. Concluding that all five stockholders' actions were barred by limitations, the district court rendered summary judgment for Centex on the Rule 10b-5, section 27.01, and common-law fraud actions and dismissed the appellants' pendent Texas Blue Sky law and breach of contract actions without prejudice. This Court, holding that summary judgment was granted improperly as to one of the five stockholders, affirms in part, reverses in part, and remands this case to the district court for further proceedings consistent with this opinion.
Centex is a publicly held corporation whose subsidiary corporations engage in various aspects of real estate acquisition, sale, and development. CCI, a Texas corporation, manufactures and sells cement additives. On or about July 10, 1970, CCI, Centex, and Ewing Clark Corporation, a wholly owned subsidiary of Centex, entered into an agreement providing that Centex would acquire CCI as a wholly owned subsidiary. According to the acquisition agreement, CCI stockholders were to receive two shares of Centex stock for each share of CCI stock they owned. The CCI stockholders received one-half of the Centex stock outright, but the other one-half was placed in escrow subject to an "earn out" agreement. According to the earn out agreement, CCI stockholders were to receive all of the escrowed stock if, at the end of any fiscal year between March 31, 1971 and March 31, 1975 (the four-year earn out period), CCI had earned a total of $400,000. If, however, CCI had earned at least $200,000 (but less than $400,000) by the end of the earn out period (March 31, 1975), CCI stockholders would receive a proportional amount of the escrowed stock. Finally, the earn out agreement provided that if CCI's earnings were less than $200,000 during the earn out period, all of the escrowed stock would revert to Centex. During the earn out period, Centex was to "take no action a primary purpose of which is to reduce the net income of Sub [CCI]...." The earn out was never achieved, however, and the stock reverted to Centex upon the termination of the four-year earn out period (March 31, 1975).
The founder and former majority stockholder of CCI, Sanford Bauman, filed suit against Centex on June 16, 1975 alleging essentially the same contentions asserted in this case. See Bauman v. Centex Corp., 611 F.2d 1115 (5th Cir.1980) (hereafter Bauman). Bauman's suit went to trial during the summer of 1977 and resulted in a jury verdict in favor of Bauman on June 15, 1977. Thereafter, appellants initiated the instant proceeding on September 9, 1977.
Appellants contend that the district court erred in granting summary judgment on their Rule 10b-5, section 27.01, and common-law fraud claims, since material issues of fact exist concerning when the appellants knew or, in the exercise of reasonable diligence, should have known of the appellee's fraudulent conduct. Rule 56 of the Federal Rules of Civil Procedure authorizes the district court to render summary judgment if "there is no genuine issue as to any material fact" and "the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). It is well settled that this Court must view the evidence in the light most favorable to the party resisting the motion when determining the propriety of the district court's granting of a summary judgment. United States v. Diebold, Inc., 369 U.S. 654, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962); Marshall v. Victoria Transportation Co., 603 F.2d 1122 (5th Cir.1979); and Vetter v. Frosch, 599 F.2d 630, 632 (5th Cir.1979). It is also important to note that this Court is not permitted to assess the probative value of any of the evidence. To the contrary, this Court must only decide whether a genuine issue of material fact exists "so as to insure that factual issues will not be determined without the benefit of the truth seeking procedures of a trial." Southern Distributing Co. v. Southtown, Inc., 574 F.2d 824, 826 (5th Cir.1978).
In order to determine the summary judgment issue in this case, this Court must answer two preliminary questions. Initially, this Court must determine which period of limitations is appropriate, and, thereafter, this Court must determine when the period of limitations began to run.
The 1934 Securities & Exchange Act, which gives rise to appellants' Rule 10b-5 action, sets no period of limitations. As a result, courts have been forced to analyze the law of the forum state and apply the period of limitations that the forum state applies to the state cause of action bearing the closest substantive resemblance to the implied cause of action arising under the federal securities laws. See McNeal v. Paine, Webber, Jackson & Curtis, Inc., 598 F.2d 888 (5th Cir.1979). In Wood v. Combustion Engineering, Inc., 643 F.2d 339 (5th Cir.1981), after careful analysis of the substantive laws of Texas resembling federal securities laws, this Court held that the two-year statute of limitations applicable to actions brought under section 27.01 of the Texas Business & Commerce Code should be applied to a 10b-5 claim arising in Texas. Accordingly, this Court concludes that a two-year period of limitations must be applied to the appellants' Rule 10b-5 claims. Additionally, Texas law indicates that the two-year period of limitations should also be applied to the state statutory and common-law fraud actions. See L.C.L. Theaters, Inc. v. Columbia Pictures Industries, Inc., 566 F.2d 494, 496 (5th Cir.1978); National Founders Corp. v. Central National Bank, 521 S.W.2d 92, 96 (Tex.Civ.App.--Houston [14th] 1975, writ ref'd n.r.e.); Ryan v. Collins, 496 S.W.2d 205, 210-11 (Tex.Civ.App.--Tyler 1973, writ ref'd n.r.e.).
Having concluded that a two-year period of limitations is applicable, this Court must determine "when the clock starts running for the purpose of applying the borrowed statute of limitations...." Azalea Meats, Inc. v. Muscat, 386 F.2d 5, 8 (5th Cir.1967); see also Janigan v. Taylor, 344 F.2d 781, 784 (1st Cir.1965). Although the period of limitations is determined according to state law, see Wood v. Combustion Engineering, Inc., 643 F.2d 339 (5th Cir.1980), federal law determines when the period of limitations begins to run. In McNeal v. Paine, Webber, Jackson & Curtis, Inc., 598 F.2d 888 (5th Cir.1979), this Court held that "the period of limitations applicable to implied causes of action under section 10(b) and section 7 begins running only when the plaintiff discovers, or in the exercise of reasonable diligence should discover, the alleged violations." Id. at 893 n. 11. Accordingly, the limitations period on the appellants' 10b-5 action began to run when the appellants knew or, in the exercise of reasonable diligence, should have known of the appellee's alleged fraudulent conduct. This also appears to be the appropriate test for determining when the limitations period began to run on the appellants' section 27.01 and common-law fraud claims. See L.C.L. Theaters, supra; Bush v. Stone, 500 S.W.2d 885, 889 (Tex.Civ.App.--Corpus Christi 1973, writ ref'd n.r.e.). 1 Therefore, this Court must ultimately determine, pursuant to the appropriate summary judgment analysis, whether the district court erred in concluding that all five plaintiffs either knew or, in the exercise of reasonable diligence, should have known of the appellee's fraudulent conduct more than two years prior to the initiation of the case sua sponte.
Appellants contend that the district court erred in granting a summary judgment since material fact issues exist concerning when they knew or, in the exercise of reasonable diligence, should have known of Centex's allegedly improper conduct. Certain facts relied upon by Centex in its motion for summary judgment apparently were accepted by the district court and applied across-the-board to all five appellants. Specifically, the district court relied upon the following three facts to support its granting of summary judgment against all five appellants: (1) the fact that the escrow agreement terminated on March 31, 1975 and the stock reverted to Centex; (2) the...
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