Clodfelter v. Thuston, 85-1713C(6).

• Decision Date: 24 June 1986
• Docket Number: No. 85-1713C(6).,85-1713C(6).
• Parties: Marvin J. CLODFELTER, Gloria M. Clodfelter, Plaintiffs, v. John L. THUSTON, Ann Thuston, Richard M. Faust, Jan D. Clift, Bar Van Co., Inc., Defendants.
• Court: U.S. District Court — Eastern District of Missouri

637 F. Supp. 1034

Marvin J. CLODFELTER, Gloria M. Clodfelter, Plaintiffs, v. John L. THUSTON, Ann Thuston, Richard M. Faust, Jan D. Clift, Bar Van Co., Inc., Defendants.

No. 85-1713C(6).

United States District Court, E.D. Missouri, E.D.

June 24, 1986.

COPYRIGHT MATERIAL OMITTED

Jeffrey B. Hunt, John M. Hessel, Lewis & Rice, St. Louis, Mo., for plaintiffs.

Jan D. Clift, Bruce Nangle, Nangle & Nangle, David Campbell, Campbell & Campbell, St. Louis, Mo., for defendants.

MEMORANDUM

GUNN, District Judge.

Plaintiffs brought this eleven-count securities fraud action against five defendants. The defendants are three general partners of a partnership in which plaintiffs purchased limited partnership interests, an accounting firm which employed one of these general partners, and a businessperson who together with the other individual defendants owned an equity interest in two corporations which were allegedly involved in the partnership's affairs. The complaint alleges that plaintiffs were induced by misrepresentations to invest a total of $25,000 ($15,000 in March 1983, $6,000 in June 1983 and $4,000 on July 30, 1983) in a limited partnership formed to raise equity for a real estate development venture in the Lake of the Ozarks area in Missouri. Defendants John and Ann Thuston (referred to in the complaint jointly as "Thuston") and defendant Faust were general partners of the partnership. Defendant Faust, an agent of defendant Bar Van Co., an accounting firm, was also plaintiffs' accounting and tax consultant. The alleged misrepresentations on the part of these defendants include failure to disclose the risks of the investment, failure to disclose that plaintiffs were the only partners making cash contributions to the partnership, and failure to disclose the participation and involvement in partnership affairs of two corporations in which defendants Thuston, Faust and Clift had equity interests. The assets of the partnership, i.e., plaintiffs' cash contributions, were allegedly transferred to the assets of these two corporations.

The complaint further alleges that plaintiffs began to suspect the soundness of their investment in August 1984 when their request to inspect partnership books was denied, but that they were repeatedly reassured by defendants Thuston and Faust that "all was well."

The present action was commenced on July 29, 1985; the first amended complaint was filed on December 13, 1985. Counts I through VII are against the Thustons and Faust. Count I claims that the above recited facts constitute a scheme or artifice to defraud in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the Securities Exchange Commission. Count II is brought under the Racketeer Influenced and Corrupt Organization Act (RICO), 18 U.S.C. §§ 1961-68, claiming that the sales of partnership interests to plaintiffs and other investors constitute a pattern of racketeering activity by an enterprise in violation of § 1961(4) of the Act. Count III is a claim of common law fraud. Count IV seeks recission of the three 1983 transactions claiming that the allegedly untrue statements made by defendants Thuston and Faust were in violation of § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2) (civil liabilities arising in connection with prospectuses and communications). Count V claims breach of the fiduciary duty owed by general partners to limited partners under state law. Count VI seeks recovery under Missouri's blue sky law, Mo.Rev.Stat. § 409.411(a)(1), on the ground that the Thustons and Faust were not registered as investment advisors and the limited partnership was not a registered security. Count VII seeks recovery under Mo.Rev.Stat. 409.411(a)(2), the state securities anti-fraud provision.

Count VIII is against Faust and Bar Van Co., as Faust's employer, for breach of the fiduciary duty owed to plaintiffs as their financial advisor. Count IX against the Thustons and Faust appears to be a claim under Missouri law for monies had and owing. Count X claims conversion of plaintiffs' capital contribution in the partnership to two corporations in which the Thustons and Faust had equity interests. Finally, Count XI, the only count against defendant Clift, claims interference by Clift, individually and on behalf of the two above-mentioned corporations, with plaintiffs' business relationship with the partnership.

Now under consideration are John and Ann Thuston's joint motion to dismiss all the counts against them, these defendants' separate motions for summary judgment, and plaintiffs' cross-motion for summary judgment against these two defendants.

The Court begins by noting that in ruling on a motion to dismiss, a court is required to view the facts alleged in the complaint in the light most favorable to the plaintiff. Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). A complaint should not be dismissed unless it "appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Id. 355 U.S. at 45-46, 78 S.Ct. at 101-102. In ruling on a motion for summary judgment, a court is required to view the facts and inferences that may be derived therefrom in the light most favorable to the non-moving party. A movant is entitled to summary judgment only if he can "show that there is no genuine issue as to any material fact and that he is entitled to a judgment as a matter of law." Rule 56(c), Fed.R.Civ.P. See also Buller v. Buechler, 706 F.2d 844, 846 (8th Cir.1983).

DEFENDANT THUSTON'S MOTION TO DISMISS

§ 10b and Missouri's Blue Sky Law

Defendants first argue that any claims in Counts I (10b-5), VI and VII (Missouri's blue sky statute) based on the March and June 1983 transactions are barred by the applicable two year statute of limitations. As noted above, the complaint was filed on July 29, 1985, more than two years after these two transactions.

In Morris v. Stifel, Nicolaus & Co., 600 F.2d 139 (8th Cir.1979), the Eighth Circuit Court of Appeals held that federal suits under § 10(b) and Rule 10b-5 brought in Missouri must be filed within the period of limitations contained in Mo.Rev.Stat. § 409.411(e), which provides "no person may sue under this section more than two years after the contract of sale." For such federal claims the limitations period begins to run "only from the date of discovery of the fraud or from the date the fraud upon reasonable inquiry should have been discovered." Vanderboom v. Sexton, 422 F.2d 1233, 1240 (8th Cir.), cert. denied, 400 U.S. 852, 91 S.Ct. 47, 27 L.Ed.2d 90 (1970). "It is not only the subjective judgment of the defrauded party that is relevant. Commencement of the period is also tested by an objective standard of reasonable diligence on the part of the plaintiff in discovering the fraud." Buder v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 644 F.2d 690, 692 (8th Cir.1981). "Investors are not free to ignore warning signals which would cause a reasonable person to ask questions, but must exercise reasonable care and diligence in seeking to learn the facts which would disclose fraud." Koke v. Stifel, Nicolaus & Co., 620 F.2d 1340, 1343 (8th Cir.1980). See also Sohn v. Show Petroleum, Inc., 581 F.Supp. 23, 25 (E.D.Mo.1984).

Plaintiffs in the present case argue that the limitations period on its 10b-5 claim did not begin to run until August 1984 at the earliest, the date the first amended complaint alleges plaintiffs' request to inspect the partnership's books and records was denied, and that the suit was thus timely.

Under the standard for ruling on a motion to dismiss set forth above, the Court cannot conclude that there exists no set of facts under which plaintiffs' 10b-5 claim would be timely. Furthermore, the Court concludes that the allegations of fraud in Count I are specific enough to satisfy the requirements of Rule 9(b), Fed. R.Civ.P. Accordingly, defendants' motion to dismiss Count I of plaintiffs' complaint is denied.

Counts VI and VII of the complaint arise under Missouri securities laws. The federal doctrine of tolling is not applicable to these claims. See Vanderboom v. Sexton, 422 F.2d at 1240. Plaintiff has cited no Missouri decisions in which the two year statute of limitations of Mo.Rev.Stat. § 409.411(e) was tolled. Indeed, the Missouri Supreme Court has held that where, as here, a statute of limitations is a special one and not included in the general chapter on limitations, "the running thereof cannot be tolled because of fraud, concealment, or any other reason not provided in the statute itself." State ex rel. Bier v. Bigger, 352 Mo. 502, 178 S.W.2d 347, 359 (en banc 1944). In Frazee v. Partney, 314 S.W.2d 915, 919 (Mo.1958), the Missouri Supreme Court ruled that "a special statute of limitations must carry its own exceptions, and we may not engraft others upon it." Thus, the Court concludes that the two year statute of limitations provided for by § 409.411(e) must be applied strictly to plaintiffs' state claims in Count II. See Berger v. Bishop Investment Corp., 528 F.Supp. 346 (E.D.Mo.1981) (order granting defendants' motion to dismiss Count II of plaintiffs' complaint).

Accordingly, defendants' motion to dismiss the claims in Counts VI and VII of plaintiffs' complaint based upon the March and June 1983 transactions is granted.

§ 12(2) of the Securities Act of 1933

Defendants argue that Count IV of plaintiffs' complaint seeking recission under § 12(2) of the Securities Act of 1933, 15 U.S.C. § 77l(2), is time barred by the statute of limitations contained in § 13 of the Act, 15 U.S.C. § 77m, which provides that

no action shall be maintained to enforce any liability created under section ... 77l(2) of this title unless brought within one year after the discovery of the untrue statement or omission, or after such discovery should have been made by the exercise of reasonable diligence.... In no event shall any such

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