Eaton v. Coal Par of West Virginia, Inc.

• Decision Date: 13 February 1984
• Docket Number: No. 82-8491-CIV-JAG.,82-8491-CIV-JAG.
• Citation: 580 F. Supp. 572
• Parties: Richard EATON, Plaintiff, v. COAL PAR OF WEST VIRGINIA, INC., et al., Defendants.
• Court: U.S. District Court — Southern District of Florida

580 F. Supp. 572

Richard EATON, Plaintiff, v. COAL PAR OF WEST VIRGINIA, INC., et al., Defendants.

No. 82-8491-CIV-JAG.

United States District Court, S.D. Florida, N.D.

February 13, 1984.

John Stetson, West Palm Beach, Fla., for plaintiff.

Gary Dumas, Stroock & Stroock & Lavan, Miami, Fla., Charles Franken, Fort Lauderdale, Fla., Robert Hackney, West Palm Beach, Fla., Jay Reynolds, Steven Warm, Boca Raton, Fla., for defendants.

ORDER

GONZALEZ, District Judge.

I. Background

In February 1981, plaintiff Richard Eaton viewed defendant Dale Jackson discussing financial investments on a television program. Eager to establish an immediate cash flow to satisfy his alimony payments, Mr. Eaton paid Mr. Jackson a visit in the brokerage office of the latter's employer, First Florida Securities, Inc. ("FFS"). Attracted by alleged promises that his investment would return $40,000 per month, on March 13, 1981 Mr. Eaton purchased eight promissory notes totaling $200,000 issued by defendant Coal Par of West Virginia, Inc. ("Coal Par"). Coal Par was to use the proceeds from the sale of the notes for the mining and marketing of coal. Instead of paying Mr. Eaton the interest, Coal Par was to pay him a royalty of $0.10 per ton of coal mined until the termination of the program. Amended Complaint ¶¶ 14-18, 22 (filed Sept. 19, 1983).

Much to Mr. Eaton's dismay, as time progressed there proved to be a substantial disparity between the promised and the actual return. Rather than realize a return of $40,000 per month, plaintiff claims to have received barely $12,000 in over two years, a return of only $600 per month. Id. ¶ 22(a), (g).¹ Plaintiff has turned to this Court in an attempt to recoup his losses.

In addition to naming Mr. Jackson, FFS, and Coal Par as defendants, Mr. Eaton also has sued the three top officers in Coal Par: President Sergio Oliver, Vice-President David Reed, and Secretary-Treasurer Patrick Shepherd. Plaintiff has filed a nine count Amended Complaint, which breaks down into four general areas. Counts 1, 4, 5, and 6 allege statutory or common-law fraud; counts 2, 3, and 9 charge defendants with securities law violations flowing from their failure to register the Coal Par offering; and counts 7 and 8 charge only defendant FFS with failing to comply with an administrative rule promulgated by the Florida Department of Banking and Finance, and negligence, respectively. This Court has subject matter jurisdiction by virtue of the federal questions presented. Jurisdiction over the state claims is made possible by the doctrine of pendent jurisdiction. United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966).

In response to plaintiff's Amended Complaint, defendants have filed motions to dismiss. Additionally, defendant Reed has filed a cross-claim for indemnification or contribution, which defendants FFS, Oliver, and Jackson oppose.

In reviewing the defendants' motions to dismiss, the Court is cognizant that plaintiff's various actions "should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts that would entitle him to relief." McKinnis v. Mosley, 693 F.2d 1054, 1058 (11th Cir.1982) (citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 103, 2 L.Ed.2d 80 (1957)).

II. Sufficiency of Allegations Sounding in Fraud

Plaintiff's statutory and common-law fraud claims require different allegations. Section 12(2) of the Securities Act of 1933, 15 U.S.C.A. § 77l(2) (1981),² is a broad anti-fraud provision that permits a purchaser of a security to recover against his immediate seller for false or misleading statements. Supplementing³ the prohibitions of section 12(2) is Rule 10b-5,⁴ which implements section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j (1981).⁵ As applied here, section 10(b) and Rule 10b-5 provide a purchaser with a private cause of action⁶ against a seller whose sale of a security was fraudulently induced by intentional misstatements of material fact, or omissions of material facts necessary to make the statements made not misleading. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976).

Plaintiff also charges defendants with fraud under Florida law. In count 5, plaintiff seeks rescission under section 517.211(2), Florida Statutes, for defendants alleged violations of the anti-fraud provisions of section 517.301, Florida Statutes.⁷ Finally, plaintiff charges all defendants with common-law fraud in count 6.

The allegations in counts 1, 4, 5, and 6 charge defendants with either direct participation in, or aiding and abetting, the allegedly fraudulent Coal Par scheme.

Rather than argue that plaintiff fails to plead the elements of a prima facie case of statutory or common-law fraud, defendant FFS challenges the basic sufficiency of all of plaintiff's allegations. Citing Benoay v. Decker, 517 F.Supp. 490 (E.D.Mich.1981), FFS contends that in a multi-defendant securities case, each defendant "must be apprised separately of the specific acts of which he is accused." Id. at 492. Rule 9(b) of the Federal Rules of Civil Procedure also supports FFS's position: "In all averments of fraud ..., the circumstances constituting fraud ... shall be stated with particularity." "Thus, `mere conclusory allegations of fraud, couched in the bare statutory language of the Securities Act will not satisfy Rule 9(b). Rather, the allegations must be accompanied by some delineation of the underlying acts and transactions which are asserted to constitute the fraud.'" Merrill Lynch, Pierce, Fenner & Smith v. Del Valle, 528 F.Supp. 147, 149 (S.D.Fla.1981) (quoting duPont v. Wyly, 61 F.R.D. 615, 630 (D.Del.1973)).

After reviewing plaintiff's Amended Complaint, however, the Court finds the allegations of fraud or aiding and abetting to be sufficiently particularized, and as direct as is reasonable at this early juncture in the case. In support of his claims sounding in fraud, Mr. Eaton has alleged that FFS is a registered broker-dealer and the employer of defendant Jackson, Amended Complaint ¶ 8; in selling the Coal Par notes, Mr. Jackson was acting within the actual or apparent scope of his employment, id. ¶¶ 11, 59; at various times between February and November 1981, Mr. Eaton visited Mr. Jackson at FFS' office to discuss the Coal Par project, id. ¶¶ 15, 19, 22, 27; Mr. Jackson kept the Coal Par offering circular at FFS' office, id. ¶ 61; and Mr. Eaton signed the Coal Par subscription agreement at FFS' office, id. For additional alleged material misstatements and omissions, see n. 1.

These facts, if taken as true, suggest that FFS arguably participated in, or at least aided and abetted, the alleged fraud.⁸ Because "the aim of the Federal Rules of Civil Procedure is to deemphasize the pleadings and to try the case on the proofs," C. Wright, Law of Federal Courts ¶ 68, at 326 (1976), the dismissal of all the fraud or aiding and abetting claims would be improvident at this time. To avoid subsequent dismissal of his claims against FFS, however, plaintiff must demonstrate that the broker/dealer was a "substantial factor," see generally Junker v. Crory, 650 F.2d 1349, 1360 (5th Cir.1981); Pharo v. Smith, 621 F.2d 656, 667 (5th Cir.1980), or rendered "substantial assistance," see Woodward v. Metro Bank of Dallas, 522 F.2d 84, 94-97 (5th Cir.1975), in selling the Coal Par notes.

III. Statute of Limitations

Section 12(1) of the Securities Act of 1933, 15 U.S.C.A. § 77l(1) (1981),⁹ imposes civil liability for the sale of a security in violation of section 5. As modified by section 5, section 12(1) prohibits the use of interstate commerce or of the mails to aid in the offer of sale of an unregistered security, or the sale of a registered security without delivery of a prospectus satisfying the requirements of section 10, 15 U.S. C.A. § 77j (1981).

Section 13 of the Securities Act of 1933, 15 U.S.C.A. § 77m (1981), establishes a federal statute of limitations for all civil actions under section 12(1). At one extreme, section 13 provides that a section 12(1) action must be brought within one year after a sale in violation of section 5. At the other extreme, however, a section 12(1) action may be brought as late as "three years after the security was bona fide offered to the public...."

Defendants FFS, Oliver, and Jackson contend that plaintiff's section 12(1) claim is barred by the one year period of limitations contained in section 13. Plaintiff responds that the statute of limitations is tolled by the defendants' fraudulent concealment. As explained in Hochfelder v. Ernst & Ernst, 503 F.2d 1100, 1119 (7th Cir.1974), rev'd on other grounds, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976), "the equitable tolling doctrine provides that where a fraud which is the foundation of the suit has actually been concealed, ... the statute of limitations is tolled until Plaintiff has obtained knowledge of the fraud or in the exercise of due care should have obtained knowledge of the fraud." Cf. Kennedy v. Tallant, 710 F.2d 711, 716-17 (11th Cir.1983) (statute of limitations for § 10(b) action tolled because defendants concealed their fraudulent activities).

When a motion to dismiss is based on the running of the statute of limitations, it can be granted only if the assertions of the complaint, read with the required liberality, would not permit the plaintiff to prove that the statute was tolled. Jablon v. Dean Witter & Co., 614 F.2d 677, 682 (9th Cir.1980). After reviewing paragraphs 26 and 27 of the Amended Complaint, the Court finds that plaintiff has alleged facts which, if true, would require application of the equitable tolling doctrine. The pleadings show that plaintiff allegedly met with defendant Jackson at FFS' office, or spoke telephonically with him, approximately once every other week between March and November, 1981. During these meetings and conversations, plaintiff alleges that he...