Davis v. AG Edwards & Sons, Inc.

• Decision Date: 27 May 1986
• Docket Number: Civ. A. No. 85-2675,85-2733.
• Parties: John P. DAVIS v. A.G. EDWARDS AND SONS, INC. et al. Paul M. DAVIS v. A.G. EDWARDS AND SONS, INC. et al.
• Court: U.S. District Court — Western District of Louisiana

635 F. Supp. 707

John P. DAVIS v. A.G. EDWARDS AND SONS, INC. et al.

Paul M. DAVIS v. A.G. EDWARDS AND SONS, INC. et al.

Civ. A. Nos. 85-2675, 85-2733.

United States District Court, W.D. Louisiana, Shreveport Division.

May 27, 1986.

J. Ransdell Keene, Evans, Feist, Auer & Keene, Shreveport, La., for plaintiffs.

John T. Cox, Jr., Blanchard, Walker, O'Quin & Roberts, Shreveport, La., for defendants.

MEMORANDUM RULING

STAGG, Chief Judge.

John P. and Paul M. Davis seek treble damages, costs, and attorney's fees arising from alleged violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961, et seq., the Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq., and state contract laws, La.Civ.Code articles 1906, et seq. This Court exercises jurisdiction pursuant to 28 U.S.C. § 1331. The defendants, A.G. Edwards and Sons, Inc. ("Edwards"), Lloyd D. Tiller Jr., and other yet unnamed Edwards employees, move to dismiss all claims on grounds of prescription, move for an award of attorney's fees pursuant to Fed.R.Civ.P. 11, and move to strike affidavits submitted in opposition to defendants' motions. For reasons hereinafter stated, the motions to dismiss federal claims on grounds of prescription are GRANTED, remaining claims submitted by plaintiffs are dismissed for lack of subject matter jurisdiction, and the motion for attorney's fees is DENIED.

THE COMPLAINTS

In September, 1985, John P. Davis and Paul M. Davis individually filed suit against A.G. Edwards and Sons, Inc. and its employee, Lloyd D. Tiller, Jr., alleging that the defendants "engaged in the manipulative and fraudulent practice of excessive and objectionable trading activity, i.e., churning, with the plaintiffs' funds and accounts" at A.G. Edwards and Sons, Inc. The excessive trading in these accounts was allegedly motivated by additional profit to Edwards and its agents in the form of increased commissions on purchases and sales of securities. According to the complaint, Edwards engaged in these manipulative practices with the intent to defraud and with reckless disregard for the plaintiffs' interests throughout 1980, 1981, 1982 and during most of 1983. As a result of these practices, the Davises closed their accounts with Edwards in 1983. In their September 1985 complaints, plaintiffs allege that Edwards and its employees violated the provisions of the Securities Exchange Act of 1934, specifically, § 10(b) and 17 C.F.R. § 240.14(a)-9. Plaintiffs seek damages consisting of sums equal to the loss in value of their securities portfolios, the excessive commissions charged and received by defendants, and reasonable attorney's fees and costs.

Subsequently, in October 1985, John and Paul Davis filed amending and superseding complaints, adding substantive claims and joining unknown employees at Edwards. In addition to the purported violation of federal securities laws, plaintiffs seek relief under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961, et seq., asserting that the excessive and objectionable trading practices employed by the defendants were part of a scheme or conspiracy to obtain increased profits through excessive securities transactions in plaintiffs' "daily accumulation funds." Contending that the practices employed by Edwards and its associates caused losses in excess of $300,000 to Paul and John Davis, plaintiffs demand treble damages in the amount of $900,000, costs and attorneys' fees. Additionally, plaintiffs seek a mandatory injunction requiring Tiller and other unspecified employees to divest themselves of their interests in Edwards and to resign their positions as directors, officers, employees and agents thereof. Also sought is an order revoking the professional licenses of all defendants for a reasonable period of time.

In their amended complaints, plaintiffs append state law claims for breach of contract and for unjust enrichment pursuant to La.Civ.Code art. 1906, et seq., and 1757. These claims arise from the same facts underlying plaintiffs' claims for violations of federal securities and racketeering laws.

MOTIONS TO DISMISS AND FOR ATTORNEY'S FEES

Defendants move to dismiss substantive claims on the grounds of prescription and support their motions with affidavits, confirmation slips and monthly statements relating to plaintiffs' daily accumulation funds. First, the defendants assert that the federal claims prescribe no later than two years after plaintiffs knew or had reason to know of the alleged misconduct. Pointing to express allegations in plaintiffs' complaints, Edwards maintains that judicial admissions in the pleadings foreclose as untimely this action by John and Paul Davis. Furthermore, Edwards contends that an exception to the ten-year prescriptive period otherwise controlling the pendent contract claims is found in La.R.S. 51:714, providing that an action for securities fraud is barred by the passage of two years. If this exception is not applied, assert the defendants, the specific limitation governing securities fraud is rendered meaningless. Alternatively, application of this exception is said to conform with the express provisions of Louisiana law and, if applied, would dictate dismissal of the remaining claims for failure to prosecute timely.

In conjunction with the motion to dismiss supported by matters outside the record and properly characterized by defendants as a motion for summary judgment, the defendants seek an award of attorney's fees pursuant to Fed.R.Civ.P. 11. In support of this claim, it is maintained that:

The instant law suit, alleging securities fraud in the form of unauthorized purchases and sales of securities by the defendants through the plaintiffs' accounts (churning) is totally without merit, and when viewed in context strongly suggests that it was directed only at obtaining a "nuisance settlement" from defendants.

Plaintiffs' Brief in Support of Motion for Rule 11 Sanctions, p. 1. Believing that the allegations in the complaints were formed without "reasonable inquiry" into the facts or law underlying the Davis claims, Edwards seeks sanctions in the form of reasonable attorney's fees and expenses incurred in opposing plaintiffs' allegations.

PRESCRIPTION

Count 1 of the amended complaint alleges that the defendants used wire and mail interstate communications while engaging in a pattern of racketeering activity in violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961, et seq. ("RICO"). Edwards first notes that Congress did not enact a period of limitations in the RICO statute and suggests that federal courts must apply the state statute of limitations which governs the state cause of action bearing the closest substantive resemblance to the federal cause of action.

A conflict exists between the parties concerning the cause of action bearing the closest substantive resemblance to the federal cause of action. First, defendants assert that the analogous state prescriptive period is found in La.Civ.Code art. 3492, which provides that delictual acts are subject to a liberative prescription of one year. In support of this contention, the defendants cite the official comment to art. 3492, which would extend "delictual" liability to intentional misconduct such as fraud. Defendants also rely on Ingram Corporation v. J. Ray McDermott & Company, Inc., 495 F.Supp. 1321, 1324 n. 4 (E.D.La.), reversed on other grounds, 698 F.2d 1295 (5th Cir.1983), where the United States District Court for the Eastern District of Louisiana adopted this position. Alternatively, defendants suggest that plaintiffs' claims are basically those for securities fraud, and should follow the analogous state limitation for securities violations found in La.R.S. 51:714. Pursuant to that statute, the claim would be barred by a two-year prescriptive period.

On the other hand, the Davises assert that the "predicate acts" underlying the civil RICO claim are mail and wire fraud, carrying five-year limitation periods under federal law, and that these limitations should govern civil RICO claims. They find support for consideration of the most analogous federal limitation, as opposed to the analogous state limitation, in the Supreme Court's recent decision in DelCostello v. Teamsters, 462 U.S. 151, 103 S.Ct. 2281, 76 L.Ed.2d 476 (1983). In that case, the court refused to apply a state limitation where a federal statute of limitations was found to better reflect the preferred balance between the substantive policies underlying the federal claim and the policies of repose underlying all limitations issues. "When a rule from elsewhere in federal law clearly provides a closer analogy than available state statutes, and when the federal policies at stake and the practicalities of litigation make that rule a significantly more appropriate vehicle for interstitial law making, we have not hesitated to turn away from state law." 462 U.S. at 171-72, 103 S.Ct. at 2294-95. According to defendants, the federal statutes from which the RICO provisions were patterned, the Clayton and Sherman Anti-Trust Acts, are the most analogous federal statutes, and, in conformity with the federal interest in the uniform application of federal law, should define the appropriate statute of limitations. With the antitrust laws containing a four-year period of limitations, plaintiffs maintain that their civil RICO claims were filed timely and that the motion to dismiss should be denied.

In resolving this conflict, guidance is found in the recent Supreme Court opinion in Wilson v. Garcia, 471 U.S. 261, 105 S.Ct. 1938, 85 L.Ed.2d 254 (1985). Addressing the issue of prescription in a § 1983 action, the Court initially declared that, where "Congress has not established a time limitation for a federal cause of action, the settled practice has been to adopt a local limitation as federal law if it is not inconsistent with federal law or policy to do so." Id. at ____, 105 S.Ct....