Campbell v. Upjohn Co.

Decision Date30 September 1980
Docket NumberNo. K78-23 CA4.,K78-23 CA4.
Citation498 F. Supp. 722
PartiesJ. Scott CAMPBELL, Plaintiff, v. The UPJOHN COMPANY, Defendant.
CourtU.S. District Court — Western District of Michigan


Richard C. Walsh, Kalamazoo, Mich., Robert J. Sokolowski, New Haven, Conn., for plaintiff.

William J. Doyle, New Haven, Conn., Thomas G. Parachini, Kalamazoo, Mich., for defendant.


BENJAMIN F. GIBSON, District Judge.

On November 6, 1969, plaintiff J. Scott Campbell ("Campbell") entered into an agreement with the defendant ("Upjohn") which, among other things, provided for the exchange of his shares of Homemakers, Inc. ("Homemakers") for those of Upjohn. Campbell initiated this lawsuit in Connecticut Superior Court on October 31, 1975, alleging that the agreement violated section 17 of the Securities Act of 1933, 15 U.S.C. § 77q, section 10 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, and the Security and Exchange Commission's Rule 10b-5, 17 C.F.R. § 240.10b-5 (1979). The case was removed to the United States District Court for the District of Connecticut, and subsequently transferred to this District upon stipulation of the parties. Arguing that the expiration of the limitations period bars this action, the defendant has moved to dismiss the complaint and for summary judgment. The Court is of the opinion that the plaintiff did not timely bring suit after he should have learned of his cause of action, and so grants the defense motion for summary judgment.


Homemakers in 1969 was a small but aspiring provider of home health care services. Believing that its growth potential was restricted by insufficient liquid capital, Homemakers' management (plaintiff Campbell as Sales Director, and Edward Wilsmann as President) sought to ally the company with a larger and richer firm. Negotiations commenced with Upjohn in June of 1969 culminated in the complained of merger agreement, dated October 31, 1969 but in reality signed on November 6, 1969, Campbell alleges that the merger agreement omitted numerous provisions that had been "material inducements" to his assent, and so was the product of misrepresentation. Moreover, he asserts that he was not informed of the changes in the operative documents, neither read nor received a copy before affixing his signature, and signed only under duress "coldly calculated to destroy my will ... at a time that sic I was without counsel."1 More Definite Statement, ¶ 29.

Merger discussions between Homemakers and Upjohn perforce involved three major matters: the terms of integration; Homemakers' operation with the Upjohn organization; and the future role to be played by Homemakers' officers and executives. Campbell alleges that the terms of the final agreement vary from Upjohn's representations in all three areas. The Plan and Agreement of Merger (hereinafter the "Agreement") contains a standard integration clause. Agreement § 9.6.

The transfer of corporate control was effected by the "front end" exchange of 225 shares of Upjohn common stock then trading at about $45, for each share of Homemakers stock. Agreement § 3.1(b). (Campbell held 11 shares of Homemakers stock; Wilsmann 45; and one Ernest Wunderlich, who founded the company, 35.) This ratio apparently remained constant during negotiation, and Campbell admits that he duly received 2,475 shares of Upjohn stock. Campbell claims, however, that the transaction was to be structured as a tax-free Type "B" merger, and that loans from Upjohn to Homemakers destroyed eligibility under the Tax Code. I.R.C. § 368(a)(1)(B). More Definite Statement ¶¶ 13 & 37.

Campbell also alleges that additional compensation was promised him by means of "back end" payments. It appears that two basic formulas for computing such delayed compensation were discussed. The first appears in a written proposal from Upjohn to Homemakers dated June 19, 1969 and attached to the More Definite Statement as Exhibit "B." It called for Campbell and Wilsmann to purchase 5.4% interests in the successor corporation in return for six shares each of Homemaker stock, and granted Upjohn the option to buy out the 5.4% interests at twenty times the average annual earnings per share after five years. According to Campbell, Upjohn represented that it would commit itself to buy out the 5.4% interests, extending the time for doing so, if necessary to ensure that the "back end" payment at least equalled the "front end"—17,775 shares of Upjohn stock at 1969 value. The second formula is set forth in a letter from Upjohn to Homemakers dated August 11, 1969. This second communication, attached to the More Definite Statement as Exhibit "A," states that discussions conducted since June 19, 1969—the date of the first written proposal—"have indicated that the structure of our proposal be altered." It then calls for Wilsmann and Campbell to enter into "incentive five year employment agreements" which would carry an annual bonus equal to 21.6% of net Homemaker earnings in excess of $14,310. Wilsmann's Employment Agreement incorporates this second formula, although the net earnings floor was lowered to $12,150. ¶ 3(b), at 2. The final merger documents made no mention of the first formula, and did not provide for an "incentive employment agreement" with Campbell.

Campbell further alleges that Upjohn conducted the Homemakers operation in a manner which reduced net earnings, and so the amount available for "back end" payments under either formula. He claims that, contrary to its representations, Upjohn used substantial debt financing of Homemakers, and deducted the interest in calculating net earnings, ¶ 34; did not establish an "in-house" financing company to assist Homemakers and boost its earnings, ¶ 36; failed to devote its large pharmaceutical sales force to promoting Homemakers' services, ¶ 33; and in many other particulars failed to calculate net earnings "in a reasonable and good faith manner." More Definite Statement ¶ 39.

Perhaps most upsetting of all to the plaintiff was his exclusion from post-merger employment with the Homemakers successor corporation. He was constantly assured during negotiations, of his continuing role as an executive, he claims, but Upjohn representatives abruptly demanded and secured his resignation at the closing. "Stunned because Upjohn had turned a moment of personal triumph into one of shame and humiliation before their audience, I signed everything Defendant Upjohn asked me to without hesitating again." Campbell Aff. ¶ 6. The Agreement as Campbell signed it provided for an incentive employment agreement only with Wilsmann. Without such an arrangement, Campbell would receive no bonus payments as described in the August 11, 1969 letter and in Wilsmann's employment agreement.

Upjohn responds that the complaint on its face shows that Campbell's cause of action for securities fraud2 accrued on November 6, 1969, and that he failed to initiate suit within the applicable two year limitations period. Campbell rejoins that the running of the statutory period was suspended by Upjohn's concealment of the original fraud until it was actually discovered by reading the merger documents in June of 1975, only four months before suit was filed. Campbell claims that he failed to read the merger agreement when he signed it because 1) he presumed that the merger terms had not changed over the four and half months of negotiation, Campbell Dep. at 58-59, 75; Campbell Aff. at ¶ 7; 2) he had been assured up to the last moment that his employment contract and "back end" payments were included, Campbell Dep. at 60; and 3) he was shocked by his sudden, unexpected, forced resignation into passive accession to all documents laid before him for signature. Campbell Aff. at ¶ 6. He explains his failure to read the merger documents during the subsequent 69 months as the result of 1) continual assurances by Upjohn officers and agents that his "back end" payment would be forthcoming in July, 1975, Campbell Aff. ¶ 11; Campbell Dep. at 71, 73; and 2) the psychic trauma of his forced resignation which caused physical and mental illness that prevented his discovery of the alleged fraud. Campbell Aff. ¶ 8.


The provisions of the securities laws here involved contain no limitations period. The Court thus looks to the state statute of limitations that best effectuates the policy they promote. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210 n.29, 96 S.Ct. 1375, 1389 n.29, 47 L.Ed.2d 668 (1976); Gaudin & KDI Corp., 576 F.2d 708, 711 (6th Cir. 1978); I.D.S. Progressive Fund, Inc. v. First of Michigan Corp., 533 F.2d 340 (6th Cir. 1976). This case was transferred from the District of Connecticut, and the limitations period must be found in that State's laws. Van Dusen v. Barrack, 376 U.S. 612, 639, 84 S.Ct. 805, 820, 11 L.Ed.2d 945 (1964); H. L. Green Co. v. MacMahon, 312 F.2d 650 (2nd Cir. 1962) cert. denied, 372 U.S. 928, 83 S.Ct. 876, 9 L.Ed.2d 736 (1963). The parties are correctly agreed that the applicable statute in this case is Conn.Gen.Stat. § 36-346(e),3 which requires that all actions involving securities sales contracts be brought within two years of the exchange.4 Gannett Co. v. Register Publishing Co., 428 F.Supp. 818 (D.Conn.1977); Long v. Abbott Mortgage Corp., 424 F.Supp. 1095 (D.Conn.1976); Hitchcock v. deBruyne, 377 F.Supp. 1403 (D.Conn.1974).

State law provides no more than the limitations period; when the cause of action accrues, the date the statute begins to run, and the circumstances that toll it, are determined under the federal common law. Gaudin v. KDI Corp., 576 F.2d 708, 711 (6th Cir. 1978). The general rule is that a limitation period begins to run when the claimant discovers, or in the exercise of reasonable diligence should have discovered, the acts constituting the alleged fraud. N. L. R. B. v. Don Burgess Construction Corp., 596 F.2d 378, 382, (9th Cir.) cert. denied, 444 U.S. 940, 100 S.Ct. 293, 62 L.Ed.2d 306...

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