Burns v. Ersek

• Decision Date: 08 May 1984
• Docket Number: No. 3-83 CIV 971.,3-83 CIV 971.
• Citation: 591 F. Supp. 837
• Parties: Edward BURNS, Plaintiff, v. Robert A. ERSEK, Jerald H. Maxwell, Larry A. Rasmusson, Arvid B. Evensvold, and Lurie, Eiger, Besikof & Co., Defendants.
• Court: U.S. District Court — District of Minnesota

591 F. Supp. 837

Edward BURNS, Plaintiff, v. Robert A. ERSEK, Jerald H. Maxwell, Larry A. Rasmusson, Arvid B. Evensvold, and Lurie, Eiger, Besikof & Co., Defendants.

No. 3-83 CIV 971.

United States District Court, D. Minnesota, Third Division.

May 8, 1984.

Stull, Stull & Brody by Robert Stull, New York City, and Jerome S. Rice, Law Offices by Diane Kotula, Minneapolis, Minn., for plaintiff.

Moss & Barnett by Thomas J. Shroyer, Minneapolis, Minn., for defendant Lurie, Eiger Besikof & Co.

MEMORANDUM ORDER

ALSOP, District Judge.

This matter comes before the court upon defendant Lurie, Eiger, Besikof & Co.'s (Lurie Eiger) motion to dismiss the plaintiff's entire claim for failure to state a claim pursuant to Fed.R.Civ.P. 12(b)(6). Defendant Lurie Eiger also moved to dismiss the state law claims for lack of jurisdiction pursuant to Fed.R.Civ.P. 12(b)(1) and (2), to dismiss the securities fraud, common law fraud and the Racketeer Influenced & Corrupt Organizations (RICO) Act claim for failure to plead fraud with particularity as required by Fed.R.Civ.P. 9(b) and to dismiss the class action allegations pursuant to Fed.R.Civ.P. 23(c)(1). The latter aspect of the motion was not directly briefed or argued. Since matters outside the pleadings were presented to and considered by the court, the motion will be treated as required by Fed.R.Civ.P. 12(b) as one for summary judgment pursuant to Fed.R.Civ.P. 56.

I. The Complaint

Plaintiff claims to have purchased common stock of Med General, Inc. (Med General) and claims to represent a class of purchasers of Med General stock during the period April 24, 1978 and November 19, 1979. Med General was involved in the development, manufacture, and sale of surgical and medical products sold through dealers to health care providers. Plaintiff claims Med General also controlled a separate corporation, Pain Control Centers, Inc. (PCCI). The individual defendants are various officers and directors of Med General. Defendant Lurie Eiger, an accounting firm, allegedly audited Med General's financial statements for the years 1977 and 1978 and for the six months ended June 30, 1979 as well as quarterly periods commencing with the quarter ending March 31, 1978 and continuing through June 30, 1979. All of these statements, except the statement for the six month period, were allegedly disseminated by Med General to the public.

Plaintiff in Count I of his complaint alleges that the defendants violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated under that act. Specifically, plaintiff claims that Med General misrepresented its profits and sales at inflated levels by, among other things, falsely reporting shipments of unordered goods as sales, by reporting consignments as sales, by making sales to poor credit risks, by keeping quarters open to report later sales, and by granting excessively generous payment terms. See complaint ¶ 13, a-m. Defendant Lurie Eiger is alleged to have acted either with knowledge or recklessly in not examining Med General's financial statements for 1978 in accordance with generally accepted auditing standards (¶ 26, 27), in making misstatements in the financial statements contained in the 1978 Annual Report and not presenting such financials in accord with generally accepted accounting principles (¶ 31), in its knowledge that the financial statements in the Annual Reports and 10K's did not comply with doctrines of fair reporting (¶ 32), and in failing to declare in 1979 the "economic reality of Med General's financial condition". (¶ 30, 33).

Plaintiff in Count II alleges state common law fraud, deceit, and negligence claims based on the same activities under the doctrine of pendent jurisdiction. Count III alleges violations of the Minnesota Securities Act, Minn.Stat. §§ 80A.01 and 80A.03. Specifically, plaintiff claims Lurie Eiger knowingly misstated or omitted material facts in its opinions during the period and knowingly, recklessly, negligently or unreasonably failed to conduct a reasonable and proper audit in 1977, 1978 and June 1979. Finally, Count IV alleges that all defendants by the activities described above and by use of the United States mails engaged in a pattern of racketeering in violation of 18 U.S.C. §§ 1961-1968 and specifically § 1962(c).

II. Tolling

Defendant contends that the class allegations asserted under § 10b in Count I are barred by the statute of limitations. Plaintiff claims that he was unable to discover the alleged securities fraud until Med General filed Chapter 11 bankruptcy in May, 1980. This suit was filed on August 11, 1983, more than three years after that date. It is well settled that the statute of limitations in 10b-5 actions is found by looking to the most closely analogous state statute. See Johnson v. Railway Express Agency Inc., 421 U.S. 454, 95 S.Ct. 1716, 44 L.Ed.2d 295 (1975); Morris v. Stifel, Nicolaus & Co., Inc., 600 F.2d 139, 140 (8th Cir.1979) (citing cases at 140); Vanderboom v. Sexton, 422 F.2d 1233, 1239 (8th Cir.), cert. denied, 400 U.S. 852, 91 S.Ct. 47, 27 L.Ed.2d 90 (1970); and Bailey v. Piper Jaffray & Hopwood, Inc., 414 F.Supp. 475 (D.Minn.1976). There seems to be no dispute in this case and the court agrees that the appropriate statute of limitations is the three year provision found in the Minnesota Securities Act, Minn.Stat. § 80A.23 subd. 7. Section 80A.01 of that act is almost identical to Rule 10b-5. The period meets the "commonality of purpose and similarity of defenses" test used in this circuit. See, e.g. Morris, 600 F.2d 139.

Defendant concedes that the named plaintiff is not barred from bringing his individual § 10(b) suit, even though this suit was begun after the statute would have run, because the running of the period was tolled by the filing of a class action in the case of Markewich v. Ersek, Civ. 3-83-810. Briefly, that case was filed June 9, 1980 in the Southern District of New York. Mr. Markewich purported to represent in a § 10b action the same class of purchasers that Mr. Burns seeks to represent in this case. After Mr. Markewich's motion for class certification was denied, Curtis Delegard was granted leave to intervene. His motion for class certification was subsequently denied and Lloyd Anderson intervened. Mr. Anderson's motion for certification was also denied. (All were denied on the grounds that plaintiffs were not proper class representatives.) Markewich was then transferred to this court pursuant to 28 U.S.C. § 1404(a). Defendant concedes that the tolling doctrine of American Pipe & Construction v. Utah, 414 U.S. 538, 94 S.Ct. 756, 38 L.Ed.2d 713 (1974) applies to Mr. Burns' individual claim, provided that same claim was raised in the previous class action. American Pipe held that "the commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class who would have been parties had the suit been permitted to continue as a class action." Id. at 554, 94 S.Ct. at 766.

Defendants contend that this tolling doctrine grants to the individual members of a purported class action the right to either intervene in the pending class action or to file their own lawsuits. Crown, Cork & Seal Company, Inc. v. Parker, 462 U.S. 345, 103 S.Ct. 2392, 76 L.Ed.2d 628 (1983). That doctrine does not, defendants say, permit an unnamed member of a class to commence his or her own class action upon the denial of class certification in the original class proceeding. Such an interpretation would permit perpetual tolling, prejudicing defendants and allowing use of extremely stale evidence.

Plaintiff contends that the tolling doctrine of American Pipe does apply to toll the claims of the putative class members in Burns, as well as the claims of the named plaintiff. Plaintiff claims that defendant's interpretation would frustrate the purposes of Fed.R.Civ.P. 23 and is not required by American Pipe or Crown Cork.

While there appears to be little law on the question, the court agrees with defendant that the tolling doctrine does not apply to the class allegations of the putative class members in Burns. American Pipe was a federal antitrust suit filed with only 11 days left to run on the applicable statute of limitations. After the district court had ruled that the suit could not proceed as a class action and after the statute would have run, a number of putative class members moved to intervene. The Supreme Court held that the motions to intervene were not time-barred. The court recognized that unless the statute of limitations was tolled by the filing of the class action, class members would not be able to rely on the existence of the class suit to protect their rights. Instead, they would be required to file motions to intervene or to join to protect themselves against possible denial of class certification and running of the statute. 414 U.S. at 553, 94 S.Ct. at 766. The purposes of the class action procedure — promotion of efficiency and economy of litigation — would be frustrated. Id. Thus the court ruled that commencement of the class action suspended the applicable statute of limitations for the intervenors.

Following American Pipe, a split developed in the circuits as to whether the tolling doctrine applied only to putative class members who sought to intervene after denial of class certification or whether it extended to those class members who later filed individual actions. See, e.g. Pavlak v. Church, 681 F.2d 617 (9th Cir.1982) vacated ___ U.S. ___, 103 S.Ct. 3529, 77 L.Ed.2d 1382 (1983) (vacated and remanded for consideration in light of Crown Cork); Stull v. Bayard, 561 F.2d 429 (2d Cir.1977), cert. denied, 434 U.S. 1035, 98 S.Ct. 769, 54 L.Ed.2d 783 (1978) (limiting doctrine to intervenors). But see Parker v. Crown Cork & Seal Co., Inc., 677 F.2d 391 (4th Cir.1982) (extending doctrine to all members).

In Crown Cork & Seal Co., Inc. v. Parker, 462 U.S. 345, 103 S.Ct. 2392, 76...