Harris v. Union Elec. Co.

• Decision Date: 02 May 1986
• Docket Number: No. 85-1252,85-1252
• Citation: 787 F.2d 355
• Parties: Fed. Sec. L. Rep. P 92,535 Harold HARRIS, et al., Appellees, v. UNION ELECTRIC COMPANY, Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 355

787 F.2d 355

Fed. Sec. L. Rep. P 92,535

Harold HARRIS, et al., Appellees, v. UNION ELECTRIC COMPANY, Appellant.

No. 85-1252.

United States Court of Appeals Eighth Circuit.

Submitted Oct. 16, 1985.

Decided March 24, 1986.

Rehearing and Rehearing En Banc Denied May 2, 1986.

Francis X. Duda, St. Louis, Mo., for appellant.

David L. Campbell, St. Louis, Mo., for appellees.

Before ARNOLD, Circuit Judge, FLOYD R. GIBSON, Senior Circuit Judge, and FAGG, Circuit Judge.

FLOYD R. GIBSON, Senior Circuit Judge.

Harold Harris, Continental Casualty Company, and National Fire Insurance Company of Hartford, individually and on behalf of a class of bondholders, brought this action against Union Electric Company alleging violations of section 10(b) of the Securities Exchange Act and of Rule 10b-5 of the Securities Exchange Commission with respect to the issuance and proposed call of the First Mortgage Bonds of Union Electric Company. The district court ¹ entered judgment on a jury verdict awarding the class $2,716, 240. Union Electric Company appeals, and for reversal it argues that 1) the plaintiffs' claims are barred by the statute of limitations; 2) insufficient evidence exists to sustain the jury's verdict on the plaintiffs' section 10(b) and Rule 10b-5 claims; 3) the court erroneously instructed the jury with respect to liability and damages; and 4) the court erroneously excluded evidence regarding market value and interest payments made after the plan to call the bonds was cancelled. For the reasons discussed below, we affirm the district court's judgment.

I. BACKGROUND

In March of 1975, Union Electric Company (UE) issued $70,000,000 of its First Mortgage Bonds, 10 1/2 Series due March 1, 2005 pursuant to a Supplemental Indenture. The bonds had a par value of $1,000, and were sold to a group, or syndicate, of eighty-eight underwriters, who offered the bonds to the public. By April 9, 1975, all of the bonds had been sold to the public, and the syndicate was dissolved. Harris purchased twelve bonds at 100% of par, or a total price of $12,000. Continental purchased 1,000 bonds in two transactions--500 bonds at 98.25% of par, or $491,000, and 500 bonds at 102% of par, or $510,000. National purchased 3000 bonds in three transactions--1,000 bonds at 100.55% of par, or $1,005,000, 1,500 bonds at 100.5625%, or $1,508,437.50, and 500 bonds at 100.25%, or $501,250.

On April 11, 1978, UE publicly announced its plan to call $50,000,000 of the Series 2005 Bonds. As a result of the announcement, the market value of the bonds plunged from approximately 113 to 101, or $120 per bond. To implement the plan, UE incurred short-term debt of $49,887,000 in cash at an interest rate of less than 10.60%, which it deposited with its mortgage trustee; $49,187,000 was placed in UE's Maintenance Fund and $700,000 was placed in its Improvement Fund. The short-term debt was to be replaced by a private placement of a long-term mortgage bond issue at 9.35%. Although UE instructed the trustee to call the Series 2005 Bonds, the trustee refused to do so without judicial approval because it questioned the legality of the plan to call the bonds through the Maintenance Fund. On May 9, 1978, the plaintiffs in this suit instituted a state court action in the Missouri State Circuit Court against UE and its trustee, seeking injunctive and declaratory relief. The purchasers of the 9.35% bonds (the bonds that were to be sold to replace the short-term debt) refused to buy when they learned of the state court action. Consequently, on June 19, 1978, UE abandoned its plan, and withdrew the cash from the Maintenance Fund. In December of 1979, the Missouri Circuit Court granted the plaintiffs' motion for summary judgment. The Missouri Court of Appeals reversed, construing the indentures and the bond contract to allow UE to call the Series 2005 Bonds as it had planned. Harris v. Union Electric Co., 622 S.W.2d 239, 246-50 (Mo.Ct.App.1981). The court of appeals did not rule on the issue of whether the prospectus for the Series 2005 Bonds adequately disclosed the bonds' call protection because it held that issue was not properly before the court. Id. at 244. The prospectus, however, as well as the plan, is the subject of the present action, which the plaintiffs instituted in the federal district court on February 11, 1980.

The plaintiffs' amended complaint alleged violations of section 10(b) of the Securities Exchange Act, 15 U.S.C. Sec. 78j (b) (1982), and Rule 10b-5 of the Securities Exchange Commission, 17 C.F.R. Sec. 240.10b-5 (1985). Specifically, the plaintiffs claimed that the prospectus for the Series 2005 Bonds misrepresented and omitted material facts regarding the call-protection provisions of the bond contract, and that the attempted plan to call the bonds constituted a scheme to defraud the bondholders because UE knew the plan was "contrary to and prohibited by the terms of the prospectus." The district court certified the class pursuant to Fed.R.Civ.P. 23(b)(3). The court's amended definition of the class included "[a]ll persons, companies, and corporations who held First Mortgage Bonds of Union Electric Company, 10 1/2% Series, due March 1, 2005, as of the public redemption announcement by Union Electric Company on April 11, 1978." The class consisted of 1,500 bondholders, holding a total of 67,906 bonds. After a bifurcated trial on the issues of liability and damages, the jury returned verdicts in favor of the plaintiffs, awarding them $2,716,240. The court entered its judgment in accordance with the verdicts, and UE appealed.

II. DISCUSSION

A. Statute of Limitations

UE contends that the plaintiffs' claims are barred by the two-year statute of limitations set forth in section 409.411(e) of the Missouri Revised Statutes. UE argues that the claims are untimely because this action was commenced five years after the bonds were sold, and three years after several plaintiffs learned of a "similar plan" implemented by Florida Power & Light Company (FP & L). Although UE correctly identifies the appropriate statute of limitations, its argument must fail. In Morris v. Stifel, Nicolaus & Co., 600 F.2d 139, 146 (8th Cir.1979), the court held that section 409.411(e) is the appropriate statute of limitations for section 10(b) and Rule 10b-5 actions commenced in Missouri federal courts. It is well established, however, that the limitations period is tolled until the fraud is discovered or, upon reasonable inquiry, when it should have been discovered. Id. at 140 n. 7 (citing Vanderboom v. Sexton, 422 F.2d 1233, 1240 (8th Cir.), cert. denied, 400 U.S. 852, 91 S.Ct. 47, 27 L.Ed.2d 90 (1970)). See also Koke v. Stifel, Nicolaus & Co., 620 F.2d 1340, 1343 (8th Cir.1980). Although the bonds were sold in 1975, the plaintiffs did not discover the fraud until UE announced its plan to call the bonds on April 11, 1978. Furthermore, in these circumstances, a reasonable person holding UE's Series 2005 Bonds would not have discovered the fraud simply by learning in 1977 that FP & L announced a plan to redeem similarly issued bonds. Indeed, several experts, including several UE officials, were not aware of the possibility of UE employing such a plan with respect to the Series 2005 Bonds until long after FP & L implemented its plan. Therefore, we hold that the plaintiffs' action is not barred by the statute of limitations. ²

B. Rule 10b-5

The plaintiffs' amended complaint alleged that UE's conduct violated section 10(b) and Rule 10b-5 in two respects, which they describe as disclosure fraud and transaction fraud. First, UE committed disclosure fraud when it misrepresented and omitted material facts in its prospectus concerning redemption and refunding rights. Second, UE engaged in a course of business and employed a device, scheme, or artifice to defraud, constituting the transaction fraud, when it borrowed funds at an interest rate lower than 10.60%, deposited the funds in the Maintenance Fund, instructed the trustee to call the Series 2005 Bonds, and publicly announced its plan to call the bonds, causing the market price of the bonds to plummet.

UE contends that the evidence was insufficient to support a jury verdict for damages pursuant to Rule 10b-5 because no probative evidence was submitted to establish materiality, reliance, damages, or scienter with respect to the class in general, and specifically, with respect to those members who held bonds on April 11, 1978 (the date the plan was announced), but who did not purchase their bonds in 1975. ³ UE argues that the plaintiffs' proof that UE officials were unaware of the possibility of calling the bonds until 1977, after FP & L implemented its plan, negates any allegation of scienter at the time the bonds were issued in 1975. UE claims that it could not have made a conscious effort to mislead investors in 1975 about the possibility of a plan that it was unaware existed until 1977. UE also argues that the plaintiffs failed to establish materiality. Although evidence was submitted showing that call-protection provisions in general are material, UE contends that the plaintiffs failed to show that an otherwise worded provision in the prospectus would have caused an average buyer to make a different investment decision. In fact, it is UE's position that the prospectus clearly disclosed UE's right to call the bonds in the manner in which the plan provided. It is also UE's position that those members of the class who held bonds on the date the plan was announced, but who did not purchase their bonds in 1975, could not have relied on the misrepresentations and omissions of material fact allegedly made by UE in 1975. Therefore, UE argues, those members could not prove fraudulent conduct, materiality, or reliance. UE also contends that the class members as well as the named plaintiffs were not damaged. UE argues that because the plan was cancelled before any bonds were selected for call, bondholders did not sustain a...