O'HARA v. Kovens

• Decision Date: 12 July 1979
• Docket Number: Civ. No. Y-78-2329.
• Parties: James Francis O'HARA, III, et al. v. Irvin KOVENS et al.
• Court: U.S. District Court — District of Maryland

473 F. Supp. 1161

James Francis O'HARA, III, et al. v. Irvin KOVENS et al.

Civ. No. Y-78-2329.

United States District Court, D. Maryland.

July 12, 1979.

William A. Snyder, Jr., John T. Ward, and James B. Wieland, Baltimore, Md., for plaintiffs.

William F. Gately, Baltimore, Md., for Irvin Kovens.

Arnold M. Weiner, M. Albert Figinski, and Ira C. Cooke, Baltimore, Md., for Marvin Mandel.

William G. Hundley, Washington, D. C., for W. Dale Hess.

Thomas C. Green, Washington, D. C., for Harry W. Rodgers, III.

H. Russell Smouse, Baltimore, Md., for Irving T. Schwartz.

Gary M. Anderson, Laurel, Md., for Ernest N. Cory, Jr.

Michael E. Marr, Baltimore, Md., for William A. Rodgers.

Charles W. Bills, Gaithersburg, Md., for Eugene B. Casey.

JOSEPH H. YOUNG, District Judge.

The plaintiffs, James, Michael, and Josephine M. O'Hara, seek compensatory and punitive damages against the defendants as the result of the sale of their stock in the Marlboro Race Track to the defendants on December 31, 1971. The complaint alleges three counts of fraud based upon state and federal law. Count I states a federal cause of action alleging that defendants' conduct violated Rule 10b-5,¹ 17 C.F.R. § 240.10b-5 (1978), promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, 15 U.S.C. § 78j (1976). Count II asserts a violation of the Maryland Securities Act, Md.Corp. & Ass'ns.Code Ann. § 11-101 et seq. Count III alleges that defendants' acts constituted common law fraud. Since Counts II and III are state causes of action, federal jurisdiction is asserted under the doctrine of pendent jurisdiction.

This lawsuit is based on facts developed when a federal grand jury handed down indictments on November 24, 1975 against former Maryland Governor Marvin Mandel and certain associates who were alleged to have engaged in certain illegal activities in connection with the stock of the Marlboro Race Track, now known as the Bowie Race Track. Plaintiffs claim that the defendants conspired to acquire the controlling interest in the Marlboro Race Track without disclosing their intentions to plaintiff shareholders, the Maryland legislature, the Maryland Racing Commission, and the general public.

The conspirators allegedly acted between January 7, 1969 and May 28, 1971 to depress the value of plaintiff's stock. This purported manipulation was supposedly accomplished by Governor Mandel's veto of House Bill 1128 which would have effectuated a permanent transfer of eighteen racing days from Hagerstown Race Track to Marlboro Race Track. After the veto, with the stock commanding a lower price, it is alleged the defendants began acquiring a controlling interest through several different routes.

Stock purchases continued throughout 1971, and one of the defendants, Eugene B. Casey, wrote to each member of the Maryland General Assembly on or about January 7, 1972 purportedly to induce the legislators to override the Mandel veto of House Bill 1128. Such an override would increase the value of Marlboro Race Track stock by virtue of alloting it the additional eighteen racing days. The legislature did in fact override the Governor's veto on January 12, 1972, and the plaintiffs maintain that Governor Mandel himself acted directly and through his agents with the intent to have his own veto overridden. The stock value was further boosted by passage of the 1972 race track consolidation bill which was supported by Governor Mandel and the other defendants.

Having become aware of the allegedly fraudulent practices engaged in by defendants, plaintiffs filed this suit on November 22, 1978, almost exactly three years after the first indictments were brought. They seek compensatory and punitive damages totaling $15,000 plus interest, costs, and fees as well as the appointment of a receiver for the Bowie Race Track stock and such additional relief as may be necessary.

At this juncture, defendants Kovens and William Rodgers have moved for judgment on the pleadings pursuant to Fed.R.Civ. Proc. Rule 12(c). Defendants Mandel, Hess, Harry Rodgers, Cory, and Schwartz have moved to dismiss for failure to state a cause of action upon which relief can be granted. Fed.R.Civ.Proc. Rule 12(b)(6). Defendant Casey has filed an Answer in which he prays for dismissal of the complaint. After reviewing the case and the legal memoranda filed therein, the Court will grant defendants' motions pursuant to Rule 12.

Defendants' motion to dismiss raises one straightforward legal issue, namely, whether the appropriate statute of limitations period for this 10b-5 action is the one-year period established by the Maryland Securities Act, Md.Corp. & Ass'ns.Code Ann. § 11-703(f)(2), or the three-year period applicable under the Maryland statute of limitations for fraud actions, Md.Cts. & Jud. Proc.Code Ann. § 5-101.² Since there is no period of limitations prescribed in the statute for actions brought under section 10(b), courts have adopted the most "analogous" State statute of limitations. Once courts began implying civil remedies under rule 10b-5, Kardon v. National Gypsum Co., 69 F.Supp. 512 (E.D.Pa.1946), it might have been expected that they would have borrowed the limitations periods which accompany those sections of the Securities Act of 1933 or the Securities Exchange Act of 1934 which set forth their own express liability clauses and limitations periods.³

Instead, courts followed the well-settled principle of Holmberg v. Armbrecht, 327 U.S. 392, 66 S.Ct. 582, 90 L.Ed. 743 (1946), that "the timeliness of an action under the federal securities laws is to be determined by reference to the appropriate State statute of limitations." Fox v. Kane-Miller Corp., 542 F.2d 915, 917 (4th Cir. 1976). In Holmberg, Justice Frankfurter had explained that "the implied absorption of State statutes of limitations within the interstices of the federal enactments is a phase of fashioning remedial details where Congress has not spoken but left matters for judicial determination within the general framework of familiar legal principles." 327 U.S. at 395, 66 S.Ct. at 584.

The first cases to apply the Holmberg reasoning held that the controlling limitations provision was the State statute of limitations for fraud actions;⁴ however, more recent cases have shown a trend toward adopting the statute of limitations in a State's Blue Sky Laws.⁵ Two commentators have explained the effects of choosing one theory over the other:

If the "fraud" statute of limitations is adopted, then it typically will not begin to run until "discovery" of the fraud. However, if the Blue Sky statute of limitations is applied and contains no such tolling provision the cases have uniformly held that the general Federal equitable doctrine relating to concealment of a "fraud" will apply (even though they have just stated that a Rule 10b-5 violation is not necessarily "fraud" as the reason for applying the Blue Sky statute.)

R. Jennings & H. Marsh, Securities Regulation 859 (4th ed. 1977).

Vanderboom v. Sexton, 422 F.2d 1233 (8th Cir.), cert. denied, 400 U.S. 852, 91 S.Ct. 47, 27 L.Ed.2d 90 (1970), was the first court to apply the Blue Sky limitations period rather than the common law fraud period. Its reasoning was based on the fact that rule 10b-5 and the Arkansas Blue Sky law were both specifically aimed at securities fraud and shared a "commonality of purpose" making the application of a "resemblance test" a more reasonable ground for choosing the securities-related statute of limitations.⁶

The Vanderboom court distinguished the Sixth Circuit's ruling in Charney v. Thomas, 372 F.2d 97 (6th Cir. 1967), which had held that neither the Michigan Blue Sky law nor the common law fraud statute were closely analogous to Rule 10b-5. Nevertheless the Charney court continued to apply the common law fraud limitation.

Vanderboom distinguished Charney in light of the fact that the Sixth Circuit required scienter for a 10b-5 action whereas the Eighth Circuit permitted 10b-5 recoveries where there had been negligent as well as intentional misrepresentation. Since scienter was absent from the Michigan Blue Sky law, application of the common law fraud limitations was the best means of effectuating federal policy. See Note, A Cry for Help: The Ninth Circuit and the Statute of Limitations in Rule 10b-5 Actions, 22 UCLA L.Rev. 947, 954-55 (1975).

Although the Supreme Court has recently held that scienter is required for implied causes of action pursuant to Rule 10b-5, Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668, reh. denied, 425 U.S. 986, 96 S.Ct. 2194, 48 L.Ed.2d 811 (1976), this new requirement would not undermine the validity of Vanderboom's resemblance test. Although scienter is now required as an element of a 10b-5 offense, it is only partially relevant to picking the appropriate limitations period. The presence or absence of negligence as a permissible element in an offense seems unrelated to the limitations question in a situation where there is a State statute clearly resembling the federal policy and containing a limitation's period which, on the basis of this resemblance, is thereby more compelling.

Plaintiffs read Ernst as mandating application of the state common law fraud limitation:

The plaintiffs believe that the Ernst case is crucial because it converted § 10(b) from a negligence-and-fraud statute into a fraud statute only. As plaintiffs will seek to demonstrate, § 11-703 of the state securities act is a negligence-and-fraud statute—not a fraud statute only. Thus, the state analog to Rule 10b-5, after Ernst, is common law fraud, not § 11-703.

Plaintiffs' Memorandum in Opposition to Defendants' Motions to Dismiss and Motions for Judgment on the Pleadings at 9.

In light of what has been said thus far, plaintiffs' argument is unconvincing. Plaintiffs extrapolate too much from Ernst which mentioned the statute of limitations issue only in passing. 425 U.S. at...