Fortenberry v. Foxworth Corp.

• Decision Date: 09 June 1993
• Docket Number: Civ. A. No. H90-0116(W).
• Citation: Fortenberry v. Foxworth Corp., 825 F.Supp. 1265 (S.D. Miss. 1993)
• Parties: Floyce L. FORTENBERRY, As Conservator of the Estate of Frank Adams Fortenberry, Plaintiff, v. FOXWORTH CORPORATION and Thomas "Arny" Rhoden, Individually and As a Director and Officer of the Foxworth Corporation, Defendants.
• Court: U.S. District Court — Southern District of Mississippi

825 F. Supp. 1265

Floyce L. FORTENBERRY, As Conservator of the Estate of Frank Adams Fortenberry, Plaintiff, v. FOXWORTH CORPORATION and Thomas "Arny" Rhoden, Individually and As a Director and Officer of the Foxworth Corporation, Defendants.

Civ. A. No. H90-0116(W).

United States District Court, S.D. Mississippi, Hattiesburg Division.

June 9, 1993.

COPYRIGHT MATERIAL OMITTED

John W. Barrett, Lexington, MS, Alexander A. Alston, Jr., Jackson, MS, for plaintiff.

Robert B. Bieck, Jr., T. Michael Twomey, M. Megan Shemwell, New Orleans, LA, Mark A. Nelson, Hattiesburg, MS, for defendants.

MEMORANDUM OPINION AND ORDER

WINGATE, District Judge.

Before this court is defendants' motion to dismiss this lawsuit under Fed.R.Civ.P. 12(b)(1)¹ on the basis that this court lacks subject matter jurisdiction over the dispute in issue. The principal dispute here between the parties is whether the defendants are liable to plaintiff under plaintiff's federal cause of action brought under the Securities Exchange Act of 1934, Section 10(b) (hereinafter "§ 10(b)"), codified at 15 U.S.C. § 78j(b)² and under Securities Exchange Commission Rule 10b-5, codified at 17 C.F.R. § 240.10b-5³ (hereinafter "Rule 10b-5"). Defendants' motion to dismiss attacks plaintiff's timeliness in bringing this lawsuit. More specifically, defendants contend that plaintiff filed this lawsuit beyond the applicable statute of limitations, which according to defendants is two years. Plaintiff, on the other hand, argues that the appropriate period of limitation is six years, which, if correct, would save this lawsuit filed almost six years after the occurrences in dispute. So, the key issue here is readily identified: in a federal district court sitting in Mississippi, what is the requisite period of limitations for a lawsuit filed pursuant to § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities Exchange Commission Rules? While the question is easily framed, the construction of the answer requires a much greater expenditure of thought, primarily because § 10(b) and Rule 10b-5 carry no congressionally-fixed statute of limitations and because in the last two years both the United States Congress and the United States Supreme Court have spoken on the issue, but not in blended, harmonious voices.

PARTIES AND JURISDICTION

The plaintiff here, Floyce L. Fortenberry (hereinafter "plaintiff"), is the conservator and wife of Frank Adams Fortenberry (hereinafter "Mr. Fortenberry") and is an adult citizen of Mississippi. The corporate defendant, the Foxworth Corporation (hereinafter "Foxworth Corporation"), is a corporation organized and existing under the laws of Mississippi. Defendant Thomas "Arny" Rhoden (hereinafter "Rhoden") is an adult citizen of Mississippi, as well as an officer, major shareholder, and the director of the Foxworth Corporation.

Plaintiff's complaint alleges that Mr. Fortenberry was defrauded by the defendants in violation of § 10(b) and Rule 10b-5. Her complaint also charges state law claims, that the defendants: violated the Mississippi Securities Act, specifically Miss.Code Ann. § 75-71-501⁴ (hereinafter § 501); committed common law fraud; breached their fiduciary duties; and intentionally inflicted emotional distress. Defendants deny all of the plaintiff's claims and assert, moreover, that all of plaintiff's claims are time-barred.

Plaintiff's federal claims under § 10(b) and Rule 10b-5 are before this court pursuant to federal question jurisdiction, 28 U.S.C. § 1331.⁵ Plaintiff's state claims are here pursuant to this court's pendent jurisdiction. See United States Mine Workers v. Gibbs, 383 U.S. 715, 725, 86 S.Ct. 1130, 1138, 16 L.Ed.2d 218 (1966).

FACTS

On September 7, 1984, Mr. Fortenberry, a long-time principal with the Bank of Foxworth and a shareholder in the Foxworth Corporation, sold his four shares of Foxworth Corporation common stock back to the Foxworth Corporation via the defendant Thomas Rhoden. The written and recorded "conveyance and agreement" reflects that as consideration for the transfer of Mr. Fortenberry's stock back to the Foxworth Corporation, the defendants promised to make monthly payments of $2,000.00 to Mr. Fortenberry, then 74 years of age, for the remainder of his life. Claiming that the aggregate value of the stock at issue was at least $300,000.00,⁶ plaintiff alleges that the "sell back" was for grossly insufficient consideration.

Plaintiff further contends that, at the time of the transaction, Mr. Fortenberry was suffering from Alzheimer's disease and has been so afflicted since 1983. Plaintiff accuses the defendant Rhoden of exploiting his friendship with a mentally debilitated Mr. Fortenberry, by making fraudulent, material misrepresentations to Mr. Fortenberry and by fraudulently concealing material facts which Rhoden had a duty to disclose to Mr. Fortenberry in order to defraud Mr. Fortenberry of his shares of Foxworth Corporation stock.

The plaintiff avers that she was unaware of this transaction until it was accidentally discovered by her accountant, over five years later, on an unspecified date in 1990. On June 4, 1990, the plaintiff was appointed as the conservator of Mr. Fortenberry's estate. That same order adjudged Mr. Fortenberry to be by reason of his advanced age and mental weakness incapable of handling his own affairs. On June 6, 1990, the plaintiff filed her original complaint. On July 30, 1990, the plaintiff filed her amended complaint which added a count alleging the intentional infliction of emotional distress.

PROCEDURAL HISTORY

When Congress enacted § 10(b) of the Securities Exchange Act of 1934, for whatever reason, Congress failed to include an applicable period of limitations. This omission behooved the courts to move into this vacuum and breathe a judicially determined period of limitations into the Act. The circuits have been uniform in their appreciation of the problem, but diverse in their approach.

Some circuits have adopted a uniform federal limitation period from expressed limitation periods in the Securities Act of 1933 and in provisions of the Securities Exchange Act of 1934 other than § 10(b). These circuits apply a limitation period of one year from plaintiff's discovery of the alleged violation, and three years from the occurrence of the alleged violation. See Ceres Partners v. GEL Assoc., 918 F.2d 349, 360 (2nd Cir.1990); In re Data Systems Securities Litigation, 843 F.2d 1537 (3rd Cir.), cert. denied sub nom. Vitiello v. I. Kahlowsky & Co., 488 U.S. 849, 109 S.Ct. 131, 102 L.Ed.2d 103 (1988); Short v. Belleville Shoe Mfg. Co., 908 F.2d 1385 (7th Cir.1990); General Builders Supply Co. v. River Hill Coal Venture, 796 F.2d 8, 10 (1st Cir.1986); O'Hara v. Kovens, 625 F.2d 15 (4th Cir.1980); Silverberg v. Thomson McKinnon Securities, Inc., 787 F.2d 1079, 1081 (6th Cir.1986); Herm, et al. v. Stafford, et al., 663 F.2d 669, 677 (6th Cir.1980); Morris v. Stifel, Nicolaus & Co., Inc., 600 F.2d 139 (8th Cir.1979); Nesbit v. McNeil, 896 F.2d 380 (9th Cir.1990); Robuck v. Dean Witter & Co., 649 F.2d 641 (9th Cir.1980); Bath v. Bushkin, Gaims, Gaines & Jonas, 913 F.2d 817 (10th Cir.1990); Wachovia Bank and Trust Co., et al. v. National Student Marketing Corporation, et al., 650 F.2d 342, 344 (D.C.Cir.1980); Forrestal Village, Inc. v. Graham, 551 F.2d 411 (D.C.Cir.1977).

Most circuits, including the Fifth Circuit, instead have adopted state limitation periods through the so-called "absorption" doctrine, whereby federal trial courts hearing federal actions without their own limitation periods adopt the limitation period of the state cause of action most analogous to the language and purpose of the federal statute or rule. See Reed v. United Transportation Union, 488 U.S. 319, 327, 109 S.Ct. 621, 627, 102 L.Ed.2d 665 (1989).

Since this Circuit, the Fifth Circuit Court of Appeals, champions the absorption doctrine, this court saw its obligation to determine first which Mississippi statute or common law cause of action is most analogous to § 10(b) and Rule 10b-5 claims and then to apply its period of limitation to this action. The parties argued accordingly.

The plaintiff argued that the Mississippi cause of action which bore the closest substantive resemblance to § 10(b) and Rule 10b-5 was Mississippi's common law fraud action, relying primarily on the fact that both § 10(b) and Rule 10b-5 and common law fraud required scienter. As supportive authority, the plaintiff relied upon the Fifth Circuit cases of In re Sioux, Ltd., Securities Litigation v. Coopers & Lybrand, 914 F.2d 61, 64 (5th Cir.1990), and Wood v. Combustion Engineering, Inc., 643 F.2d 339, 341-346 (5th Cir.1981), which held that Texas' general fraud statute bore a closer substantive resemblance to § 10(b) and Rule 10b-5 actions than Texas' Blue Sky Laws.

Alternatively, the plaintiff argued that if this court eschewed the six-years limitation period of common law fraud and applied the two-year limitations period proposed by defendants, the action, nevertheless, has been tolled by Mr. Fortenberry's alleged mental disability pursuant to Miss.Code Ann. § 15-1-59⁷ (hereinafter § 59) and/or Mr. Fortenberry's alleged fiduciary relationship with the defendant Rhoden.

The defendants presented contrary arguments. Firstly, the defendants urged this court to adopt the uniform federal limitations period (a one-year statute of limitations and a three-year statute of repose) followed by other circuits. Secondly, in the event this court chose not to follow that course, the defendants argued that Miss.Code Ann. §§ 75-71-501⁸ (hereinafter § 501) and 75-71-717⁹ (hereinafter § 717) (both sections are components of Mississippi's Securities Act, located at Title 75, Chapter 71 of the Mississippi Code Annotated) bore the closest substantive resemblance to § 10(b) and Rule 10b-5. Relying on the Fifth Circuit's "commonality of purposes" test for borrowing limitation periods from analogous state statu...