Durham v. Business Management Associates
| Decision Date | 23 June 1988 |
| Docket Number | Nos. 87-7453,s. 87-7453 |
| Court | U.S. Court of Appeals — Eleventh Circuit |
| Parties | Blue Sky L. Rep. P 72,758, Fed. Sec. L. Rep. P 93,808, 11 Fed.R.Serv.3d 713, RICO Bus.Disp.Guide 6976 Richard DURHAM, et al., Plaintiffs-Appellees, v. BUSINESS MANAGEMENT ASSOCIATES, et al., Defendants, Somers & Altenbach, Defendant-Appellant. Richard DURHAM; Merrill R. Barron; Peter S. Verrill; Khalid L. Khan; Donald J. Gale; Phillip Gilchrist; Wray A. Hammer; Jesse D. Hester; Mamoun R. Pacha; Richard G. O'Leary; Samuel Staggers, Jr.; Maurice F. Mc Carthy, Jr.; Robert E. Hallett; James B. Threlkel; Wade Faulkner; Shailesph P. Upadhyay; Mohammed A. Mohiuddin and Timothy L. Eakes, Plaintiffs-Appellees, v. BUSINESS MANAGEMENT ASSOCIATES; Executive Counsel, Inc.; Robert M. Fulmer; Robert J. Underwood; Underwood Financial Planning, Inc., and William B. Aylor, Defendants-Appellants, McGraw-Hill Information Systems Company, et al., Defendants. Richard DURHAM; Merrill R. Barron; Peter S. Verrill; Khalid L. Khan; Donald J. Gale; Phillip Gilchrist; Wray A. Hammer; Jesse D. Hester; Mamoun R. Pacha; Richard G. O'Leary; Samuel Staggers, Jr.; Maurice F. Mc Carthy, Jr.; Robert E. Hallett; James B. Threlkel; Wade Faulkner; Shailesph P. Upadhyay; Mohammed A. Mohiuddin and Timothy L. Eakes, Plaintiffs-Appellees, v. BUSINESS MANAGEMENT ASSOCIATES; Executive Counsel, Inc.; Robert M. Fulmer; Robert J. Underwood; Underwood Financial Planning, Inc., and William B. Aylor, Defendants, McGraw-Hill Information Systems Company, Defendant-Appellant. to 87-7455. |
Maynard, Cooper, Frierson & Gale, P.C., N. Lee Cooper, A. Inge Selden, III, Luther M. Dorr, Jr., Birmingham, Ala., for McGraw-Hill.
Michael D. McKibben, H. Douglas Hinson, Bradley, Arant, Rose & White, Birmingham, Ala., for Underwood and Underwood Financial Planning.
Steven F. Casey, Balch & Bingham, John F. Mandt, Stanley M. Brock, Birmingham, Ala., for Durham, et al.
Crawford S. McGivaren, Jr., Cabaniss, Johnston, Gardner, Dumas & O'Neal, Sara Eugenia Akin, Inger M. Sjostrom, Birmingham, Ala., for Somers & Altenbach.
G. Thomas Yearout, Brett N. Blackwood, Birmingham, Ala., for R.M. Fulmer and Executive Council.
Corley, Moncus, Bynum & DeBuys, P.C., John F. DeBuys, Jr., E. Clayton Lowe, Jr., Birmingham, Ala., for Business Management and William Aylor.
Appeals from the United States District Court for the Northern District of Alabama.
Before VANCE, Circuit Judge, TUTTLE *, Senior Circuit Judge, and LYNNE **, Senior District Judge.
In this complex securities fraud action appellants appeal from the district court's order denying their motion for summary judgment. We affirm.
Appellees initiated this action on September 10, 1986 by filing a complaint in the United States District Court for the Northern District of Alabama. Appellees sought to recover damages for alleged violations of federal securities law and state law. The district court dismissed the original complaint, but granted appellees leave to amend so that they could defeat a statute of limitations bar. Appellees timely filed an amended complaint on February 6, 1987.
The amended complaint contains claims identical to the claims in the original complaint and alleges additional facts in an attempt to avoid a statute of limitations bar. Appellees' claims are based on alleged violations of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), sections 12(2) and 17(a) of the Securities Act of 1933, 15 U.S.C. Secs. 77l (2), 77q(a), sections 8-6-17, 8-6-19, and 6-5-100 through 6-5-104 of the Alabama Code, as well as common law claims of fraud, negligence and breach of fiduciary duty. The district court summarily dismissed with prejudice the claims under section 12(2), section 17(a) and Alabama Code sections 8-6-17 and 8-6-19. 1 The district court stated that it could not determine whether the statute of limitations barred the section 10(b), fraud and negligence claims as a matter of law or whether "the RICO claim(s) should be dismissed as a matter of law." Accordingly, the district court denied the motions for summary judgment. 2 Noting that its opinion "involves a controlling question of law as to which there is a substantial ground for difference of opinion," the district court certified the case for an interlocutory appeal pursuant to 28 U.S.C. Sec. 1292(b). This court subsequently granted appellants' petitions for interlocutory appeal.
The undisputed facts in this case are as follows: Business Management Associates ("BMA"), a limited partnership, was formed in 1981. The purpose of the partnership was to acquire and market a series of business management video cassettes. Appellants Executive Counsel, Inc. ("ECI") and Robert M. Fulmer, an officer of ECI, agreed to produce twenty master tapes for BMA's distribution. The master tapes, from which copies would be produced for sale to the business community, were to be the partnership's only assets.
In late 1981 appellees subscribed for units of limited partnership interest in BMA. As a part of the offering each investor received a Private Placement Memorandum which outlined the structure of the limited partnership. The Private Placement Memorandum contained an appraisal, prepared by appellant McGraw-Hill, of the value of the master tapes and a tax opinion, prepared by appellant Somers & Altenbach, which described the expected income tax consequences of the partnership's activities. The memorandum also explained that the limited partners would receive periodic financial information as required by the partnership agreement. Appellants Robert J. Underwood and Underwood Financial Planning, Inc. ("UFPI") acted as underwriters for the offering and thereafter represented the investors as information agents in connection with the investment.
The parties dispute the extent of communications received by appellees over the next two years. Appellants maintain that appellees were advised of the low sales volume during this period and point to a July 1983 memorandum which alerted investors to the disappointing number of sales. Appellees on the other hand, argue that they did not receive the tax information as asserted by appellants McGraw-Hill and Somers & Altenbach and that the July 1983 memorandum, while acknowledging that sales had been disappointing, did not indicate the complete failure of the partnership or its operation as a sham. In 1984 the IRS began to examine the 1981 and 1982 tax returns of the partnership. Appellees allege that in late October 1984 they initially became aware of possible adverse IRS action. Asserting that the partnership was a sham and that they were not alerted to the possibility of fraud until advised of the 1984 IRS action, appellees seek to recover damages for alleged violations of federal securities law and state common law.
Appellants argue that appellees' claims are time-barred and that the district court erroneously denied the motions for summary judgment. The statute of limitations for a section 10(b) action is the limitations period the forum state applies to the cause of action "which bears the closest resemblance" to the federal claim. Kennedy v. Tallant, 710 F.2d 711, 716 (11th Cir.1983); Diamond v. Lamotte, 709 F.2d 1419, 1421 (11th Cir.1983); White v. Sanders, 650 F.2d 627, 629 (5th Cir. Unit B 1981). But see In re Data Access Sys. Sec. Litig., 843 F.2d 1537 (3d Cir.1988) (in banc) (). In this case, the district court properly applied Alabama's two-year statute of limitations applicable to actions for the fraudulent sale of securities. 3 See Ala.Code Sec. 8-6-19(e); Hunt v. American Bank & Trust Co., 783 F.2d 1011, 1013 (11th Cir.1986).
While state law governs the limitations period applicable to a section 10(b) action, federal law governs when the limitations period begins to run. Osterneck v. E.T. Barwick Indus., Inc., 825 F.2d 1521, 1535 (11th Cir.1987), petition for cert. filed sub nom., Osterneck v. Ernst & Whinney, 56 U.S.L.W. 3530 (U.S. Jan. 15, 1988) (No. 87-1201); Kennedy, 710 F.2d at 716; White, 650 F.2d at 630. Federal law provides that the statute of limitations for an action under section 10(b) begins to run when the plaintiff discovers, or in exercise of reasonable diligence should have discovered the alleged violations. Kennedy, 710 F.2d at 716; Diamond, 709 F.2d at 1420 n. 1; see also Azalea Meats, Inc. v. Muscat, 386 F.2d 5, 10 (5th Cir.1967). In other words "what matters is not when the information was actually known, but rather when in the exercise of due diligence it should have been known." Hunt, 783 F.2d 1011, 1014.
A similar standard applies to the commencement of the limitations period for fraud and negligence actions under Alabama law. In fraud actions Alabama Code section 6-2-3 tolls the limitations period 4 until the "fraud is readily discoverable or the potential plaintiff is on notice that a fraud may have been perpetrated." Lampliter Dinner Theater v. Liberty Mut. Ins. Co., 792 F.2d 1036, 1043 (11th Cir.1986). Alabama courts have applied this tolling provision in other tort actions not arising in fraud. See Tonsmeire v. Tonsmeire, 285 Ala. 454, 233 So.2d 465, 467 (1970). Like the federal due diligence standard, Alabama law provides that the "fraud is 'deemed to have been discovered ... at the time of the discovery of facts which would provoke inquiry by a person of ordinary prudence and which, if followed up, would have led to the discovery of the fraud.' " Ramp Operations, Inc. v. Reliance Ins. Co., 805 F.2d 1552, 1554-55 (11th Cir.1986) (quoting Papastefan v. B & L Constr. Co., 385 So.2d 966, 967 (Ala.1980)).
Appellants argue that the amended complaint is "virtually devoid" of any showing of due diligence. They point out that the partnership...
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