Finne v. Dain Bosworth Inc.

• Decision Date: 13 November 1986
• Docket Number: Civ. No. 4-86-399.
• Citation: 648 F. Supp. 337
• Parties: Wayne FINNE, Plaintiff, v. DAIN BOSWORTH INCORPORATED, Thomas Ranfrance and Michael Maher, Defendants.
• Court: U.S. District Court — District of Minnesota

648 F. Supp. 337

Wayne FINNE, Plaintiff, v. DAIN BOSWORTH INCORPORATED, Thomas Ranfrance and Michael Maher, Defendants.

Civ. No. 4-86-399.

United States District Court, D. Minnesota, Fourth Division.

November 13, 1986.

COPYRIGHT MATERIAL OMITTED

Mark Arth and Gary L. Huusko, Arth & Huusko, St. Paul, Minn., for plaintiff.

James B. Lynch and Michael A. Lindsay, Dorsey & Whitney, Minneapolis, Minn., for defendants Dain Bosworth Inc. and Maher.

Steven E. Rolsch, George Restovich, Patterson-Restovich, Rochester, Minn., for defendant Ranfranz.

MEMORANDUM AND ORDER

MacLAUGHLIN, District Judge.

This matter is before the Court on defendants' motions to dismiss, for partial summary judgment, for a more definite statement and for a stay of proceedings pending arbitration. Defendants' motions will be granted in part and denied in part.

FACTS

Plaintiff Wayne Finne (Finne) is a resident of Olmsted County, Minnesota. Defendant Dain Bosworth Inc. (Dain) is a broker-dealer corporation engaged in the sale of securities. Defendants Thomas Ranfranz (Ranfranz) and Michael Maher (Maher) are or were employees of Dain in its Rochester, Minnesota branch.

This is an action for violations of Sections 12(1), 12(2) and 17(a) of the Securities Act of 1933, 15 U.S.C. § 77a et seq.; violations of the Securities Exchange Act of 1934 and Rules 106-5 and 106-16 thereunder; and violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. Plaintiff also brings claims of state securities law violations and common law breach of fiduciary duty and fraud pursuant to the Court's pendent jurisdiction. Jurisdiction for plaintiff's federal claims lies under Section 22(a) of the Securities Act of 1933, Section 27 of the Securities Exchange Act of 1934, and 18 U.S.C. § 1965.

In or about 1979 Finne opened an account with Dain at its Rochester, Minnesota branch office. On March 3, 1981 he executed a "Customer's Margin Agreement" governing the broker-customer relationship. This agreement included a standard arbitration clause. Paragraph 10 of each Customer Margin Agreement provides:

Any controversy between you Dain Bosworth and me the customer arising out of or relating to this agreement or the breach thereof shall be settled by arbitration in accordance with the rules then obtaining of the New York Stock Exchange, or if the New York Stock Exchange declines to accept jurisdiction, then of the American Arbitration Association. Unless otherwise provided by the applicable rules, any arbitration hereunder shall be before three (3) arbitrators. The award of the arbitrators or a majority of them shall be final and judgment upon the award rendered may be entered in any court, state or federal, having jurisdiction.

(Emphasis added.)

Finne proceeded to engage in securities trading through his account at Dain Bosworth Inc. Among the securities traded by Finne was stock of Denelcor, a company involved in research and development of a super-fast computer. After several years of trading in this particular stock, the company, Denelcor, apparently experienced difficulties and eventually went into bankruptcy. Finne contends that Ranfranz and Maher encouraged him to engage in trading Denelcor stock by making false and fraudulent misrepresentations to him, and as a result Finne lost substantial sums of money. Plaintiff subsequently brought this suit.

Defendants now move to dismiss plaintiff's complaint for failure to state a claim on which relief can be granted and failure to plead fraud with particularity. Defendants further move for a more definite statement of plaintiff's state securities law claim, for partial summary judgment on the common law breach of fiduciary duty and breach of contract claims, and for a stay of proceedings pending arbitration for any non-dismissed claims.

DISCUSSION

A. Section 12(1) Claims

Count I of plaintiff's complaint alleges a violation of section 12(1) of the Securities Act of 1933. Section 12(1) of the Securities Act of 1933 imposes civil liability for selling or offering to sell an unregistered security or using a prospectus that does not satisfy statutory requirements. 15 U.S.C. §§ 77e, 77l(1). All section 12 actions are subject to the statute of limitations provisions of section 13 of the 1933 Act. Section 13 provides that all actions under section 12(1) must be brought within one year after the violation upon which it is based. "In no event shall any such action be brought ... more than three years after the security was bona fide offered to the public." 15 U.S.C. § 77m. Compliance with section 3 is an essential element of a section 12 action, and thus compliance is a substantive, rather than a procedural, matter. Hagert, v. Glickman, Lurie, Eiger & Co., 520 F.Supp. 1028, 1033 (D.Minn.1981); McMerty v. Burtness, 72 F.R.D. 450, 453 (D.Minn.1976). Therefore, a plaintiff must affirmatively plead facts indicating the action has been timely brought. Hagert, 520 F.Supp. at 1033. Accord, Shotto v. Laub, 635 F.Supp. 835, 837 (D.Md.1986); Woods v. Homes and Structures of Pittsburg, Kansas, Inc., 489 F.Supp. 1270, 1289 (D.Kan.1980); Kroungold v. Triester, 407 F.Supp. 414, 419 (E.D.Pa.1975).

Plaintiff in this case has failed to plead and prove that his action is timely brought, and has also failed to plead and prove that the security at issue, Denelcor stock, was in fact an unregistered security when it was offered for sale or sold to the public. The facts pled by plaintiff show that his section 12(1) claim is time-barred by section 13. Plaintiff's complaint states that he began to engage in transactions involving Denelcor stock in 1981. Complaint ¶ 6, 7. The complaint was filed on May 13, 1986. Thus even if the Denelcor stock was an unregistered security when it was sold or offered for sale to plaintiff in 1981, plaintiff has obviously failed to bring this action within the three-year limit of section 13. Accordingly, Count I of plaintiff's complaint will be dismissed with prejudice as time-barred.

B. Section 12(2) Claims

Count II of plaintiff's complaint alleges violations of section 12(2) of the 1933 Act. Section 12(2) provides a private right of recovery against any person who offers or sells a security by the use of any means of interstate commerce, by means of a prospectus or oral communication which includes an untrue statement of material fact or omits to state material facts. 15 U.S.C. § 77l(2). The section 13 statute of limitations on section 12 actions provides that actions for violation of section 12(2) must be brought "within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence .... In no event shall any action be brought ... more than three years after the sale of the security." 15 U.S.C. § 77m. The section 13 limitations period begins to run at the point at which a plaintiff has enough facts to be on inquiry notice of a potential claim; it does not wait until he has full knowledge of the eventual particulars of his case. Ingenito v. Bermec Corp., 441 F.Supp. 525, 554-55 (1977).

Where defendants' fraudulent concealment of material facts prevents a plaintiff from discovering the alleged violations, the one-year limitations period of section 13 does not commence until plaintiff has, or in the exercise of due diligence should have, discovered the violation. Weiss v. Gibson, 610 F.Supp. 609, 611 (D.D. C.1985); Currie v. Layman Resources Corp., 595 F.Supp. 1364, 1379 (N.D.Ga. 1984). In no event, however, can an action be brought more than three years after the sale of the security alleged to be in violation of section 12(2). 15 U.S.C. § 77m. Additionally, the doctrine of equitable tolling does not apply to this three-year maximum period. See, e.g., Clute v. Davenport Co., 584 F.Supp. 1562, 1577 (D.Conn.1984), citing Admiralty Fund v. Hugh Johnson Co., 677 F.2d 1301, 1308 (9th Cir.1982); Summer v. Land & Leisure, Inc., 664 F.2d 965, 968 (5th Cir.1981); Turner v. First Wisconsin Mortgage Trust, 454 F.Supp. 899 (E.D.Wisc.1978); Brick v. Dominion Mortgage & Realty Trust, 442 F.Supp. 283, 289-91 (W.D.N.Y.1977); Cowsar v. Regional Recreations, Inc., 65 F.R.D. 394, 397 (M.D.La.1974). Moreover, since section 13 is an essential element of a section 12 action, plaintiff must affirmatively plead facts indicating compliance with section 13. Hagert, 520 F.Supp. at 1033. Accord, Shotto v. Laub, 635 F.Supp. 835, 837 (D.Md.1986); Woods v. Homes and Structures of Pittsburgh, Kansas Inc., 489 F.Supp. 1270, 1289 (D.Kan.1980); Kroungold v. Triester, 407 F.Supp. 414, 419 (E.D. Pa.1975).

Plaintiff's complaint alleges eight instances of fraudulent misrepresentations by oral communication in violation of section 12(2). Complaint ¶ 7(a)-(h). Action on two of these instances is time-barred since one occurred in May, 1981 and the other in early 1982 and the complaint was not filed until May 13, 1986, long after the maximum three-year statutory period had run. Complaint ¶ 7(a), (d). Three of the instances in the complaint fail to state any dates of occurrence, and therefore are not in compliance with section 13's requirement of affirmative pleading. Complaint ¶ 7(b), (c), (g). The remaining three instances in the complaint are within the three-year period, having occurred in June, 1983, March, 1984, and February, 1985. Complaint ¶ 7(e), (f), (h). However, plaintiff has not affirmatively pled the facts necessary to trigger the three-year limitations period, namely, that the defendants fraudulently concealed material facts and thus prevented plaintiff from discovering the alleged violations. If no such concealment occurred, and the plaintiff should have, in the exercise of due diligence, discovered the violation, then the one-year limitations period applies and all of plaintiff's section 12(2) action is barred since the latest date of alleged misrepresentation, February, 1985, occurred more than one year...