Herm v. Stafford

• Decision Date: 15 August 1978
• Docket Number: No. 6651.,6651.
• Citation: 455 F. Supp. 650
• Parties: Louis L. HERM et al., Plaintiffs, v. Daniel W. STAFFORD et al., Defendants.
• Court: U.S. District Court — Western District of Kentucky

455 F. Supp. 650

Louis L. HERM et al., Plaintiffs, v. Daniel W. STAFFORD et al., Defendants.

No. 6651.

United States District Court, W. D. Kentucky, Louisville Division.

January 10, 1978.

On Motion to Reconsider August 15, 1978.

COPYRIGHT MATERIAL OMITTED

Spencer E. Harper, Jr., William W. Davis, Louisville, Ky., J. Vernon Patrick, Jr., Birmingham, Ala., for plaintiffs.

Ivan M. Diamond, William C. Boone, Jr., Richard A. Getty, Donald H. Balleisen, Louisville, Ky., for defendant, Carling Dinkler.

MEMORANDUM OPINION

BALLANTINE, District Judge.

This matter is before the Court on motion of defendant, Carling Dinkler, for summary judgment based on the Statute of Limitations under Kentucky Revised Statutes 292.480(3). July 10, 1970, was the latest date which gave plaintiffs notice of the alleged fraud for purposes of the commencing of the applicable limitation period. The original complaint in this action was filed on June 23, 1970, with an amended complaint filed on October 15, 1970. Not until October 20, 1972, was Dinkler named as a defendant in the second amended complaint.

The complaint alleges that Dinkler is liable under Section 10 (b) of the Securities Exchange Act of 1934 (1934 Act), 48 Stat. 891, 15 U.S.C. Section 78j (b), and Securities and Exchange Commission Rule 10b-5, 17 CFR Section 240.10b-5, for participating in the issuance of false and deceptive statements in connection with the sale of securities of Daniel Boone Fried Chicken, Inc. ("DBFC"). In the alternative, plaintiffs allege that Dinkler is liable under Section 15 of the Securities Act of 1933 (1933 Act), 48 Stat. 74, 15 U.S.C. Section 77a et seq., and Sections 20 (a) and (b) of the 1934 Act, 15 U.S.C. Section 78t, as a de facto director and controlling person of DBFC. Jurisdiction is predicated on Section 22 of the 1933 Act, 15 U.S.C. § 77v, Section 27 of the 1934 Act, 15 U.S.C. § 78aa, Section 44 of the Investment Co. Act of 1940, 15 U.S.C. Section 80a-43, and 28 U.S.C. Section 1337. The plaintiffs assert that this Court has pendent jurisdiction of all claims arising under the laws of the Commonwealth of Kentucky.

Dinkler contends that he was never a director of DBFC and that he never participated in its management or in any manner took part in the issuance of its securities, thus absolving him from liability. He contends that the applicable statute of limitations, KRS 292.480(3), bars all claims against him in any event.

The plaintiffs argue that a genuine dispute exists regarding the following facts: The time at which plaintiffs discovered or should have discovered defendant's wrongful conduct; the extent of defendants' promotional scheme to defraud investors; and the damage sustained by plaintiffs as a consequence of defendant's activities.

On May 14, 1969, Dinkler attended a gathering of several principals of DBFC at the Palm Bay Club in Miami, Florida. A press release naming Dinkler to the Board of Directors was issued, and he did not overtly dispute its contents. As President of Dinkler Hotels and a member of Transcontinental Investing Corporation, Dinkler was one of fourteen "celebrities" who were by motion added to the Board in March, 1969. However, it does not appear that Dinkler was ever elected to the Board pursuant to this motion.

The Court must first address defendant's argument that the applicable statute of limitations bars all claims made against him. Where no federal statute of limitations is provided, federal courts will apply the most analogous state statute best effectuating federal securities laws. IDS Progressive Fund, Inc. v. First of Michigan, 533 F.2d 340, 342 (6th Cir. 1976), citing United Automobile Workers v. Hoosier Cardinal Corp., 383 U.S. 696, 86 S.Ct. 1107, 16 L.Ed.2d 192 (1966). The proper limitation period for actions under Section 10 (b) of the 1934 Act is the one provided by state law. IDS Progressive Fund, supra; Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); Nickels v. Koehler Management Corp., 541 F.2d 611 (6th Cir. 1976).

The applicable Statute of Limitations is either Kentucky's "Blue Sky Law", KRS 292.480 (3), or the general fraud statute, KRS 413.120. The Sixth Circuit Court of Appeals has not yet ruled whether application of the former statutory period (three years as amended June 16, 1972) or the fraud period (five years) better effectuates federal securities policies.

The Court must also decide when the applicable statute begins to run. If KRS 292.480 (3) is to be applied, it must then be determined whether to impose the amended three year period or the two year period under prior law.

In City of Owensboro v. First U.S. Corp., 534 S.W.2d 789 (1975), the Court of Appeals of Kentucky held that the Blue Sky limitation period was applicable to actions brought for violations of federal securities law. The Court was unanimous in the Owensboro decision, upholding two earlier cases construing the two year period under KRS 292.480 (3) as "the most appropriate state statute applicable" under the federal securities claim. See First State Bank of Pineville v. Slusher, 267 Ky. 190, 101 S.W.2d 661 (1937); Thomas v. Fidelity & Casualty Co. of N.Y., 258 Ky. 360, 80 S.W.2d 8 (1935).

In Payne v. Fidelity Homes of America, Inc., 437 F.Supp. 656 (W.D.Ky. 1977), the Court noted that the Sixth Circuit has occasionally applied the fraud period where differences in the statutory schemes warranted such application. However, the language of § 10 (b) is nearly identical to that of KRS 292.320 (1). Cf. 17 CFR 240.480 (3). The limitation period of KRS 292.480 (3) will therefore be applied to bar the § 10 (b) claims.

The Statute of Limitations in federal fraud cases begins to run upon discovery of the fraud or when the plaintiff could, with reasonable diligence, have discovered the fraud. Holmberg v. Armbrecht, 327 U.S. 392, 66 S.Ct. 582, 90 L.Ed. 743 (1946). The defendant has cited three events which together should have put the plaintiffs on notice of Daniel Boone's misrepresentations and omissions: (1) The suspension of trading in Daniel Boone stock July 24, 1969; (2) The initiation of insolvency proceedings in Fayette Circuit Court, Lexington, Kentucky, on June 5, 1970; and (3) Action by the Securities Exchange Commission against Daniel Boone July 10, 1970.

The Kentucky press widely reported the events surrounding Daniel Boone's financial collapse and the securities fraud. Defendant contends that by no later than July 10, 1970, such publicity put shareholders on notice of the situation. In Morgan v. Koch, 419 F.2d 993 (7th Cir. 1969), the plaintiff failed to exercise due diligence to discover facts giving rise to federal claims. Just as in Morgan, the circumstances and publicity generated by Daniel Boone's demise should have aroused the suspicion of the plaintiffs. Certainly the suspension of stock trading, initiation of insolvency proceedings and SEC action against Daniel Boone should have given shareholders adequate notice that something was amiss.

The plaintiffs argue that these events did not give notice as to the activities of Dinkler himself. Dinkler's involvement in the scheme was at the earliest discoverable on April 3, 1971. On that date Roger Reece, the public relations consultant who arranged the May 14, 1969, press conference, informed plaintiffs' attorneys that Dinkler had in fact approved the press release and had posed for promotional pictures in Miami. If the Court finds the Blue Sky limitation applicable, then the second amended complaint was timely filed after the April, 1971, disclosure by Reece.

The defendant counters this argument by stating that complete details of the transaction need not be known to put the plaintiffs on notice. Sufficient information which would put a reasonable person on notice will start the running of the Statute of Limitations. New Amsterdam Casualty Co. v. Waller, 323 F.2d 20, 26 (4th Cir. 1963), cert. denied, 376 U.S. 963, 84 S.Ct. 1124, 11 L.Ed.2d 981 (1964). The commencement of the statutory period does not depend upon plaintiff's discovery of the full details of the alleged scheme. Klein v. Bower, 421 F.2d 338 (2nd Cir. 1970); Talmadge v. United States Shipping Board, 54 F.2d 240, 243 (2nd Cir. 1931) (L. Hand, J.); Berry Petroleum Company v. Adams & Peck, 518 F.2d 402, 410 (2nd Cir. 1975). The cumulative effect of the stop trade order, insolvency proceedings and SEC injunctive action clearly yielded sufficient information to put shareholders on notice of the fraud.

The Blue Sky limitation period was amended effective June 16, 1972, extending the time period to three years. Prior to that date, and no later than July 10, 1970, the plaintiffs were put on notice of the alleged fraudulent activities. The former two year period under KRS 292.480 (3) therefore applies to bar the action against Dinkler, who was not named as a defendant until October 20, 1972.

The plaintiffs further contend that the addition of Dinkler in the second amended complaint relates back to the filing date of the original complaint or the first amended complaint under F.R.Civ.P. 15 (c).

The Rule, as amended effective July 1, 1966, reads as follows:

Whenever the claim or defense asserted in the amended pleading arose out of the conduct, transaction or occurrence set forth or attempted to be set forth in the original pleading, the amendment relates back to the date of the original pleading. An amendment changing the party against whom a claim is asserted relates back if the foregoing provision is satisfied and, within the period provided by law for commencing the action against him, the party to be brought in by amendment (1) has received such notice of the institution of the action that he will not be prejudiced in maintaining his defense on the merits, and (2) knew or should have known that, but for a mistake concerning the identity of the proper party, the action would have been brought against him.

The general rule is that Rule 15 (c) will...