Dahl v. Gardner, Civ. No. C-83-1347W.

• Decision Date: 27 March 1984
• Docket Number: Civ. No. C-83-1347W.
• Citation: 583 F. Supp. 1262
• Parties: William H. DAHL, T.O. Nance, Peter Malukas, Leighton Jaeger, and Edgardo Contini, Plaintiffs, v. Paul N. GARDNER, Norman Larsen, and Probe, Inc., a Utah corporation, Defendants.
• Court: U.S. District Court — District of Utah

583 F. Supp. 1262

William H. DAHL, T.O. Nance, Peter Malukas, Leighton Jaeger, and Edgardo Contini, Plaintiffs, v. Paul N. GARDNER, Norman Larsen, and Probe, Inc., a Utah corporation, Defendants.

Civ. No. C-83-1347W.

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

March 27, 1984.

David J. Jordan, Jeffrey E. Nelson, Salt Lake City, Utah, for plaintiffs.

Charles C. Brown, Jeffrey B. Brown, Salt Lake City, Utah, for defendants.

WINDER, District Judge.

This matter is before the court on defendants' motion to dismiss or alternatively for a more definite statement. Neither party has requested oral argument. After reviewing the memoranda, the complaint and pertinent authorities, the court renders the following decision and order.

This action arises from the sale of limited partnership interests in two Utah limited partnerships. The complaint alleges that plaintiffs purchased interests in connection with a first offering in September, 1980, and in connection with a second offering in June and September, 1981. The complaint alleges causes of action arising from each offering based on sections 5, 12(1) and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77e, 77l(1), 77o, Section 10 of the Securities Exchange Act of 1934, id. § 78j, and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, the Utah Uniform Securities Act, Utah Code Ann. § 61-1-7, -22 (Supp.1983), the California Securities Law, Cal.Corp.Code §§ 25110, 25120, 25130, 25401, 25501, common law fraud, breach of contract and breach of fiduciary duty. Plaintiffs also seek an accounting of partnership assets. Defendants' motion requests dismissal of claims 1-6 and 12-17 on the grounds that they are barred by the applicable statutes of limitations. Further, defendants contend that claims 4-7, 8 and 15-19 fail to state a claim for fraud and should be dismissed, or alternatively the court should order a more definite statement of the fraud claims. Finally, defendants move for the dismissal of claim 22 on the grounds that it fails to state a sufficient factual basis for the claim against defendant Probe, Inc. and that the claim improperly alleges the alter ego doctrine.

I. Statute of Limitations

The first issue raised by defendants' motion is whether claims 1-6 and 12-17 are barred by the applicable limitations statutes. Because several limitations provisions are involved, the court will address each one separately.

A. Section 12(1) of the 1933 Act

Plaintiffs have alleged in their first and twelfth causes of action that defendants sold them unregistered securities in violation of sections 5, 12(1) and 15 of the Securities Act of 1933, 15 U.S.C. §§ 77e, 77l (1), 77o. Section 12(1) of the 1933 Act prohibits the offer or sale of a security unless a registration statement is in effect pursuant to section 5. Section 15 provides that certain controlling persons are liable to the same extent as any person liable under section 12.

Section 13 of the 1933 Act dictates that an action under section 12(1) must be brought within one year after the violation upon which the action is based but in no event more than three years from the date the security was offered to the public. See id. § 77m. Defendants argue that the section 12(1) claims are barred because they were not brought within one year of the violations. Plaintiffs contend that the claims are timely because defendants fraudulently concealed the alleged violations by stating to the plaintiffs that the limited partnership interests were exempt from registration.

The doctrine of equitable tolling relied on by plaintiffs is "read into every federal statute of limitations." Holmberg v. Armbrecht, 327 U.S. 392, 66 S.Ct. 582, 90 L.Ed. 743 (1946); see Esplin v. Hirschi, 402 F.2d 94, 103 (10th Cir.), cert. den., 394 U.S. 928, 89 S.Ct. 1194, 22 L.Ed.2d 459 (1969). The doctrine "is grounded in the fraudulent concealment of the harm which gives rise to the right to sue," Aldrich v. McCulloch Properties, Inc., 627 F.2d 1036, 1043 n. 7 (10th Cir.1980), and provides that the limitations period does not begin to run "until the fraud is or should have been discovered," Vanderboom v. Sexton, 422 F.2d 1233, 1240 (8th Cir.), cert. den., 400 U.S. 852, 91 S.Ct. 47, 27 L.Ed.2d 90 (1970). The equitable tolling doctrine has been applied in section 12(1) cases with facts like those alleged here. See, e.g., Houlihan v. Anderson-Stokes, Inc., 434 F.Supp. 1319 (D.D.C.1977).

Plaintiffs' equitable tolling argument, however, fails to distinguish the separate issues raised by each of the causes of action based on section 12(1). The twelfth cause of action is based on alleged violations that occurred in June and September, 1981, within three years prior to the commencement of this action.¹ On the other hand, the first cause of action is based on alleged violations that occurred in September, 1980, more than three years prior to the commencement of this action. Although some courts have applied the equitable tolling doctrine to the three-year limitation in section 13, see, e.g., In re Home-Stake Production Co. Securities Litigation, 76 F.R.D. 337, 344-45 (N.D.Okl.1975), most courts have concluded that Congress meant the three-year bar to be absolute. See, e.g., Securities and Exchange Commission v. Seaboard Corp., 677 F.2d 1301, 1308 (9th Cir.1982); Summer v. Land & Leisure, Inc., 664 F.2d 965, 968 (5th Cir. 1981), cert. den., 458 U.S. 1106, 102 S.Ct. 3484, 73 L.Ed.2d 1367 (1982); Benoay v. Decker, 517 F.Supp. 490, 496 (E.D.Mich. 1981).

In Aldrich v. McCulloch Properties, Inc., 627 F.2d 1036 (10th Cir.1980), the Tenth Circuit held that a three-year limitations period in the Interstate Land Sales Full Disclosure Act, 15 U.S.C. § 171(1), which was patterned after and contains language nearly identical to section 13, was absolute and could not be tolled with evidence of fraudulent concealment. See id. at 1042-43. The Aldrich court further concluded that evidence that the defendants had induced the plaintiffs to forego suit once the basis for the action was known might create an equitable estoppel preventing the defendants from asserting the statutory limitation. See id. at 1043 n. 7; accord Darms v. McCulloch Oil Corp., 720 F.2d 490, 494 (8th Cir.1983). This court agrees with the reasoning in Aldrich and concludes that the three-year limitation in section 13 is absolute, although a defendant may be equitably estopped from asserting the limitation.

Paragraph eighteen of plaintiffs' complaint states:

Defendants and each of them fraudulently concealed the violation of the Securities Act complained in this cause of action by falsely stating to offerees and purchasers of said securities that said securities were exempt from registration.

That allegation is expressly couched in terms of fraudulent concealment. Plaintiffs have not alleged that the defendants induced them to forego suit after the basis for the action was known and therefore the allegation in no way can be construed as alleging equitable estoppel. Thus, the first cause of action, which is based on an alleged violation that occurred more than three years prior to this action, must be dismissed. The dismissal will be without prejudice and plaintiffs will be granted leave to amend the complaint to allege the elements of equitable estoppel if the facts so warrant.

Finally, the court notes that compliance with section 13 is an essential element of the rights created under section 12, and is therefore a substantive rather than a procedural matter. Accordingly, a plaintiff must affirmatively allege facts indicating that the action has been brought timely. See, e.g., Hagert v. Glickman, Lurie, Eiger & Co., 520 F.Supp. 1028, 1033 (D.Minn.1981); Rochambeau v. Brent Exploration, Inc., 79 F.R.D. 381, 384 (D.Colo. 1978). The twelfth cause of action merely contains a conclusory assertion of fraudulent concealment identical to that in the first cause of action. The twelfth claim must, therefore, also be dismissed without prejudice. Plaintiff will be granted leave to amend the complaint to plead sufficient facts to demonstrate conformity with the statute of limitations.²

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

Defendants next contend that the fourth and fifteenth causes of action based on section 10(b) of the Securities Exchange Act and Rule 10b-5 are time barred. Because there is no federal statute of limitations applicable to 10(b) actions, federal courts must apply state law in determining the timeliness of claims brought under that section.

It is well-settled that the applicable fraud limitations period under both Utah and California law is three years after the plaintiff discovered, or should have discovered, the alleged fraud. See United California Bank v. Salik, 481 F.2d 1012, 1014-15 (9th Cir.), cert. den., 414 U.S. 1004, 94 S.Ct. 361, 38 L.Ed.2d 240 (1973); Brown v. Producers Livestock Loan Co., 469 F.Supp. 27, 30 (D.Utah 1978). Defendants argue, however, that the three-year period is inappropriate in this action because plaintiffs' fourth and fifteenth causes of action do not sound in fraud but merely allege technical violations of the 1934 Act. Instead, defendants contend that the two-year statute found in Utah Code Ann. § 61-1-22(b)(5) (Supp.1983) applies barring the 10(b) claims.

After reviewing the allegations in the fourth and fifteenth causes of action, the court concludes that the claims clearly sound in fraud and that the three-year limitations period is applicable.³ Accordingly, the fifteenth cause of action based on the 1981 sales is plainly within the three-year period. The fourth cause of action, which is based on the 1980 sales, was not brought within the three-year period; however, it would be premature on this 12(b)(6) motion to conclude that plaintiffs discovered or should have discovered the fraud more than three years before this action was commenced. As the court observed in Brown v. Producers Livestock Loan Co., 469 F.Supp. 27 (D.Utah 1978), the fraud statute of...