Brown v. Producers Livestock Loan Co.

• Decision Date: 01 November 1978
• Docket Number: No. C 77-0179.,C 77-0179.
• Citation: 469 F. Supp. 27
• Parties: Boyd J. BROWN, Plaintiff, v. PRODUCERS LIVESTOCK LOAN COMPANY, a Utah Corporation, Producers Livestock Marketing Association, a Utah Corporation, GLS Livestock Management Inc., a Utah Corporation, George M. Smith, George L. Smith and Federal Intermediate Credit Bank of Berkeley, a Federally Chartered Banking Corporation, Defendants.
• Court: U.S. District Court — District of Utah

469 F. Supp. 27

Boyd J. BROWN, Plaintiff, v. PRODUCERS LIVESTOCK LOAN COMPANY, a Utah Corporation, Producers Livestock Marketing Association, a Utah Corporation, GLS Livestock Management Inc., a Utah Corporation, George M. Smith, George L. Smith and Federal Intermediate Credit Bank of Berkeley, a Federally Chartered Banking Corporation, Defendants.

No. C 77-0179.

United States District Court, D. Utah, C. D.

November 1, 1978.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Parker M. Nielson, Alan E. Walcher, Mary Lou Godbe, Salt Lake City, Utah, for plaintiff.

David E. West, Salt Lake City, Utah, for Producers Livestock Loan Co. and George M. Smith.

Arthur H. Nielsen and Stephen L. Henriod, Salt Lake City, Utah, for Producers Livestock Market Assn.

Walter R. Ellett, Murray, Utah, for GLS Livestock Mgt., Inc. and George L. Smith.

ALDON J. ANDERSON, Chief Judge.

This matter comes before the court on motions for summary judgment by all the defendants and a motion for partial summary judgment by the plaintiff. Defendants George L. Smith and GLS Livestock Management, Inc. have, subsequent to the submission of these motions, filed bankruptcy petitions and are not, therefore, subject to the court's jurisdiction at this time. Thus, the only motions acted upon in this order are the motions of plaintiff Brown and defendants Producers Livestock Loan Company, Producers Livestock Marketing Association, and George M. Smith. Defendant Federal Intermediate Credit Bank of Berkeley was previously dismissed from the action (Order of Dismissal, November 11, 1977).

I. Statute of Limitations

The first issue raised by the defendants' motions is whether or not plaintiff's claims are barred by the applicable statute of limitations. In his complaint, plaintiff alleges violations of section 10 of the Exchange Act (15 U.S.C. § 78j) and Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5); sections 17(a), 12(1) and (2) of the Securities Act (15 U.S.C. §§ 77qa, 77l1 and 2); section 206 of the Investment Advisers Act (15 U.S.C. § 80b-6); and sections 61-1-1 and 61-1-2 of the Utah Code. Each alleged violation will be dealt with separately.

A. Section 10(b) and Rule 10b-5

There is no federal statute of limitations applicable to 10b-5 actions. Federal courts must, therefore, apply state law in determining the timeliness of actions brought under this section. This court has held that the applicable statute of limitations for claims brought under § 10(b) and Rule 10b-5 is § 78-12-26(3), Utah Code Annotated (1953) which requires that actions be brought within three years after the plaintiff discovered, or should have discovered, the alleged fraud. Boone v. GLS Livestock Management, et al., No. C 75-178 (D.Utah 1976). This statute almost always presents a question of fact as to when plaintiff did discover or should have discovered the defendants' wrongdoing and therefore seldom lends itself to summary disposition. Defendants cite the case of Gaudin v. KDF Corporation, 576 F.2d 708 (6th Cir. 1978) in which the Sixth Circuit upheld a district court ruling on summary judgment that the statute of limitations had run on a § 10(b) claim. Both the district and circuit courts based their holdings on a careful factual analysis of all the circumstances known to plaintiff and concluded that if the plaintiff had been exercising due diligence he would have discovered the fraud more than three years prior to the institution of the suit. Id. at 712. While it is true here, as in Gaudin, that plaintiff had, within three years of the last transaction with defendants, evidence of a continuous decline in the value of his investment, the circumstances in this case are such that the decline alone might not have put plaintiff on notice of fraud. Plaintiff's investment was declining at a time when the entire livestock market was falling. It is at least plausible that plaintiff could have initially attributed his loss to the general market decline and not become aware of any possible wrongdoing until after his account was audited in 1975. At least these circumstances create an issue of fact as to the reasonableness of plaintiff's behavior. Therefore, defendants' motions for summary judgment, based on the untimeliness of plaintiff's 10b-5 claim are denied.

B. Section 17(a)

The applicable statute of limitations for actions under § 17(a) is again § 78-12-26(3), Utah Code Annotated (1953). As stated above, on the current state of the record it is not clear that this suit is not within the three-year limitations period prescribed by that statute and, therefore, summary judgment on this claim is denied.

C. Section 12(1)

Section 12(1) (15 U.S.C. § 77l) prohibits the sale or delivery of a security in or by means of an instrumentality of interstate commerce unless a registration statement is in effect for that security. The limitations period for violations of § 12(1), set forth in § 13 of the Act (15 U.S.C. § 77m), is one year from the date of violation upon which the action is based and in no event more than three years from the date on which the security was issued.

Plaintiff argues that this action is not barred by section 13 because it is not brought under section 12(1). The cause of action created by section 12(1) enables a party to "sue either at law or in equity . . ., to recover the consideration paid . . . upon tender of the security, or for damages if he no longer owns the security." The plaintiff asserts that "this action, by contrast, is one for rescission under an entirely different section — a remedy not created by §§ 77l(1) and (2)." (Plaintiff's, Memorandum in Opposition to Defendants Motion for Summary Judgment, at 10, emphasis added). Rather, plaintiff argues that this action is based on the "voidability" provisions of the securities laws, 15 U.S.C. §§ 77n and 78cc.

Three observations may be made about this argument. First plaintiff cites, in paragraph 10 of his complaint, § 12(1) as a partial basis for the court's jurisdiction. Therefore, one can assume that the plaintiff is, at least partially, suing under that section of the Securities Act. In paragraph 36 of his complaint, plaintiff does allege that the promissory note and related agreements are void under § 77n, but this is not the sole section invoked to support his cause of action.

Second, if plaintiff is contending that § 12(1) does not allow for the remedy of rescission, he is clearly in error. Section 12(1) provides for precisely that remedy when it creates a cause of action for return of the consideration paid upon tender of the security. Rescission voids a contract from its inception and restores the parties to the conditions existing before the contract was made. By providing a cause of action for return of the consideration upon tender of the security, § 12(1) allows a court to void the contract and return the parties to the status quo; it allows a court to grant rescission. See Adler v. Microwave Communications, Inc., 353 F.Supp. 624 (D.Mass.1973), aff'd 502 F.2d 1158 (1st Cir. 1973); John Hopkins University v. Hutton, 297 F.Supp. 1165, 1224 (D.Md.1968), aff'd 422 F.2d 1124 (4th Cir. 1970); Kominsky, An Analysis of Securities Litigation Under Section 12(2) and How It Compares With Rule 10b-5, 13 Houston Law Review 231, 280. Voiding a contract is a part of the rescissional remedy, not a separate form of relief under § 77n.

Third, § 77n provides as follows:

any condition . . . binding any person acquiring any security to waive compliance with any provision of this subchapter or of the rules and regulations of the Commission shall be void.

On its face, this section does no more than void contractual provisions that release contracting parties from liability under the securities laws. Moreover, the case law interpreting the section ascribes to it no other meaning. E. g., Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953); Starkman v. Seroussi, 377 F.Supp. 518 (S.D. N.Y.1974). There is no indication that the promissory note and related agreements at issue here contained a provision waiving liability under the securities laws. More important, there is no indication in the statute nor the case law that § 77n provides a rescissional remedy separate from § 12(1).

It is true that § 78cc, also cited by plaintiff, is a much broader provision than § 77n. Section 78cc provides that all contracts made in violation of the 1934 Act are void. However, § 78cc does not directly apply to actions brought under § 12(1) of the 1933 Act. Given that § 12(1) of the 1933 Act provides a rescissional remedy, it is not necessary to look to the 1934 Act in order to fashion this form of relief.

Plaintiff makes a final argument based on the posture of this litigation. Initially, defendant Producers Livestock Loan sued plaintiff in state court seeking to recover on the promissory note signed by plaintiff. Plaintiff counterclaimed alleging securities law violations and removed the action to federal court. Concurrently, plaintiff filed this action in federal court. The two cases were consolidated and the original state court suit was then dismissed, on stipulation, in favor of this action.

Plaintiff argues that this procedural history and "the reason and logic of the statutory scheme" compel the court to find that "plaintiff's suit to invalidate his alleged contracts in the form of the note . . must be governed by the same statutory limitations period . . . as the defendant's suit to enforce the note." (Plaintiff's Memorandum at 10). The court finds no merit in this argument. This suit, which is the only one before the court, is a suit based, in part, on an alleged violation of § 12(1) of the 1933 Securities Act. There is not pending before this court, nor any other court that it is aware of, a suit by Producers Livestock Loan to recover on the promissory note. Plaintiff is not a counterclaimant in this action. His claim must be taken on its own terms according to the statutory...