Hagert v. Glickman, Lurie, Eiger & Co.

• Decision Date: 26 August 1981
• Docket Number: Civ. No. 3-81-259.
• Parties: David A. and Betty L. HAGERT, et al., Plaintiffs, v. GLICKMAN, LURIE, EIGER & CO.; Lurie, Eiger, Besikoff & Co.; Offerman & Co., Inc., Robert H. Ersek, M.D., Jerald H. Maxwell, Larry A. Rasmusson, A. Nicol Smith, Arvid B. Evensold; Fryberger, Buchanan, Smith, Sanford & Frederick, P.A., and John Doe, representing unknown defendants, Defendants.
• Court: U.S. District Court — District of Minnesota

520 F. Supp. 1028

David A. and Betty L. HAGERT, et al., Plaintiffs, v. GLICKMAN, LURIE, EIGER & CO.; Lurie, Eiger, Besikoff & Co.; Offerman & Co., Inc., Robert H. Ersek, M.D., Jerald H. Maxwell, Larry A. Rasmusson, A. Nicol Smith, Arvid B. Evensold; Fryberger, Buchanan, Smith, Sanford & Frederick, P.A., and John Doe, representing unknown defendants, Defendants.

Civ. No. 3-81-259.

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

August 26, 1981.

COPYRIGHT MATERIAL OMITTED

Joseph T. Dixon, Jr., and Bruce C. Recher, Henson & Efron, P.A., Minneapolis, Minn., for plaintiffs.

W. Scott Herzog and Thomas J. Shroyer, Barnett, Ratelle, Hennessy, Vander Vort, Stasel & Herzog, Minneapolis, Minn., for defendants Glickman, Lurie, Eiger & Co. and Lurie, Eiger, Besikoff & Co.

Laurance R. Waldoch and Thomas E. Glennon, Lindquist & Vennum, Minneapolis, Minn., for defendant Offerman & Co., Inc.

Stephen H. Cohen and John B. Massopust, Robins, Zelle, Larson & Kaplan, Minneapolis, Minn., for defendants A. Nicol Smith and Fryberger, Buchanan, Smith, Sanford and Frederick, P.A.

Mark C. Peterson, Oppenheimer, Wolff, Foster, Shepard & Donnelly, St. Paul, Minn., for defendant Robert A. Ersek.

MEMORANDUM AND ORDER

DEVITT, Senior District Judge.

This case is brought by approximately 235 plaintiffs against various defendants alleging violations of both federal and state securities laws and common law fraud and negligence. Before the court are plaintiffs' motion for partial summary judgment on the issue of compliance with the applicable statute of limitations with regard to Sections 11 and 12 of the 1933 Securities Act, 15 U.S.C. §§ 77k, 77l, and defendants Glickman, Lurie, Eiger & Co., Lurie, Eiger, Besikoff & Co., A. Nicol Smith, and Fryberger, Buchanan, Smith, Sanford & Frederick, P.A.'s motions to dismiss on various grounds.

This action arises out of the purchase by plaintiffs of publicly offered ten percent subordinated capital notes due 1988 with warrants to purchase common stock of $.01 par value (hereinafter "Med General Notes") issued by Med General, Inc. (hereinafter "Med General") in 1978. The public offering was made pursuant to a registration statement filed April 27, 1978 and a prospectus dated June 14, 1978. Plaintiffs claim that these documents, together with the 1978 annual report of Med General, contained materially false information and omitted to state material facts with regard to Med General's sales and income during 1977 and 1978. Med General has defaulted on the notes, and is presently involved in reorganization proceedings.

Defendants Glickman, Lurie, Eiger & Co.; Lurie, Eiger, Besikoff & Co.¹ (hereinafter "accountants") acted as accountants for Med General and certified its financial condition for 1977 and the first quarter of 1978 in the registration statement and prospectus, and certified the company's financial condition in the 1978 annual report.

Defendant Offerman, Inc. acted as underwriter for the sale of the notes. Defendants Ersek, Maxwell, Rasmusson, and Smith were all officers and directors of Med General at the time the registration statement was filed. Defendant Evensold was a director at the time the registration statement was filed. All directors named as defendants, with the exception of Ersek, are alleged to have signed the registration statement. Defendants Fryberger, Buchanan, Smith, Sanford & Frederick, P.A. (hereinafter "law firm" or "attorneys") acted as legal counsel to Med General during the time period when the alleged wrongdoing occurred. Defendant Smith is a shareholder in the law firm.

Plaintiffs' complaint² alleges that all defendants, either as principals, aiders and abettors, or controlling persons violated Section 11 of the 1933 Securities Act, 15 U.S.C. § 77k; that defendant Offerman, Inc., as a seller or aider and abettor, and the remaining defendants as aiders and abettors or controlling persons, violated Section 12(2) of the 1933 Securities Act, 15 U.S.C. § 77l(2); that all the defendants engaged in common law fraud; that all defendants as either principals, aiders and abettors or control persons violated Minn. Stat. §§ 80A.01, 80A.03, and 80A.17; that all defendants were negligent and acted with willful indifference to plaintiffs' rights; that all defendants, either as principals, aiders and abettors or control persons, violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j and Rule 10b-5, and that all defendants, either as principals, aiders and abettors, or controlling persons violated Section 18 of the Securities Exchange Act of 1934, 15 U.S.C. § 78r.

I. Motion for Partial Summary Judgment and Motions to Dismiss for Failure to Comply with the Statute of Limitations.

Plaintiffs move for partial summary judgment on Counts 1 and 2 of the complaint on the issue of compliance with the statute of limitations applicable to Sections 11 and 12(2) of the 1933 Securities Act. Defendants accountants and lawyers move to dismiss on the grounds that the complaint fails to state a claim upon which relief may be granted in Counts 1, 2, and 8 for failure to affirmatively plead compliance with the statute of limitations applicable to Sections 11 and 12(2) of the 1933 Act and Section 18 of the 1934 Act. In view of our disposition of defendants' motion to dismiss the Section 18 claim on other grounds, we will consider only the timeliness of the Sections 11 and 12(2) claims at this juncture. Defendant Smith and his law firm also assert that it is clear from the record that these counts are time-barred. To that extent the motion will be considered one for summary judgment.

The timeliness of the Section 11 and 12(2) claims are governed by Section 13 of the 1933 Act, 15 U.S.C. § 77m, which provides in relevant part,

No action shall be maintained to enforce any liability created under section 77k or 77l(2) of this title unless 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 ....

Prior to October, 1979, Med General represented itself as, and was recognized to be, an extremely fast growing company in excellent financial condition. Med General was in the business of manufacturing and distributing medical and surgical products. The company reported to the public that its net sales had doubled for each year from 1974 through 1977, and had substantially increased in 1978 to a high of 8.3 million dollars. In May, 1979, Med General announced record first quarter sales and earnings for 1979.

On October 3, 1979, the Minneapolis Star, a local daily newspaper, published an article detailing alleged questionable sales practices engaged in by Med General, that resulted in inflated reported sales. The article enumerated alleged financial problems experienced by Med General, including sustaining earnings levels only through tax breaks, a large amount of debt, and problems with accounts receivable.

On October 4, 1979 the company announced an expected net loss for the third quarter of 1979 of approximately $670,000. This was explained by the company to have resulted from a one time liberalization of its credit policies, and the holding of one million dollars worth of orders it had been unable to ship during the third quarter of 1979.

In late October, 1979, defendants Maxwell and Rasmusson resigned as president and vice president of Med General. They remained directors of the company.

On December 14, 1979, the Wall Street Journal reported that Med General was anticipating a substantial fourth quarter loss. This article also reported that Med General had changed accounting firms, that it was having continuing cash flow problems, that a committee of its creditors had been formed to arrange a moratorium on payment of certain of the company's financial obligations, and that it was trying to sell administrative and factory facilities under construction. The article also stated that the company explained the anticipated loss was due to dealer returns and the activities of a former salesperson.

On September 17, 1979, the bid price for the Med General notes was 85. On October 1, 1979, the bid price was 88; on October 29, 1979, it dropped to 78. The bid price was then 85 on November 15, 1980 and January 15, 1980. On February 4, 1980 the bid price had dropped to 68. By April 1, 1980, it dropped further to 64. Plaintiffs argue that this drop was due to high interest rates, and merely reflects a general trend in bond prices during that period.

Med General was timely in its interest payments on the notes until February 1980. Default on these payments occurred in May, 1980.

Plaintiffs argue that they were not on notice of any fraud in the sale of the notes until May, 1980, when the default on the notes occurred, and the company's 10-K report for fiscal 1979 indicated that the company's losses exceeded its sales for 1979. That 10-K report also restated the company's financial statements for 1978, showing a loss of $246,000 instead of the previously reported net profit of $885,000. Defendants argue that the plaintiffs were on notice of the alleged fraud as a matter of law in October, 1979, when the article in the Minneapolis Star appeared, and that plaintiffs did not act with due diligence to discover that fraud.

Summary judgment is an appropriate vehicle for determining compliance with a statute of limitations, but summary judgment should be denied where there are issues of fact as to when the limitations period begins. See Buder v. Merrill Lynch, Pierce, Fenner & Smith, 644 F.2d 690, 692 (8th Cir. 1981). The commencement of the limitations period is to be tested not only by the subjective judgment of the defrauded party, but also by an objective standard of reasonable diligence by the plaintiffs. Id.

Here conflicting inferences can be drawn from the information available to the plaintiffs regarding the alleged fraud. The forceful arguments...