In re Alodex Corporation Securities Litigation

• Decision Date: 03 April 1975
• Docket Number: M.D.L. No. 165.
• Citation: 392 F. Supp. 672
• Parties: In re ALODEX CORPORATION SECURITIES LITIGATION.
• Court: U.S. District Court — Southern District of Iowa

392 F. Supp. 672

In re ALODEX CORPORATION SECURITIES LITIGATION.

M.D.L. No. 165.

United States District Court, S. D. Iowa, C. D.

April 3, 1975.

L. R. Voigts, W. Don Brittin, Jr., Nyemaster, Goode, McLaughlin, Emery & O'Brien, Des Moines, Iowa, for Marlin Cole.

Lawrence C. Brown, Faegre & Benson, Minneapolis, Minn., for Northwest Growth Fund, Inc.

Marvin J. Klass, Theodore M. Whicher, Robert D. Mishne, Stewart, Hatfield, Klass & Whicher, Sioux City, Iowa, for Constance N. Belin and others.

Herrick, Langdon, Belin, Harris, Langdon & Helmick, Des Moines, Iowa, for David W. Belin.

Timothy J. Walker, John C. Eddy, Merrick Scott Rayle, Kermit Sutton, Whitfield, Musgrave, Selvy, Kelly & Eddy, Des Moines, Iowa, Edward J. Schwartzbauer, William J. Keppel, Dorsey, Marquart, Windhorst, West & Halladay, Minneapolis, Minn., John D. Martin, Jr., David C. Porteous, Martin, Tate, Morrow & Marston, P.C., Memphis, Tenn., for Alodex Corporation; Kemmons Wilson and Wallace E. Johnson.

Charles F. Wasker, Michael P. Joynt, Wasker, Sullivan, Wheatcraft & Ward, Des Moines, Iowa (R. Steven Johnson, Des Moines Iowa), Roger A. Johnson, Johnson, Thompson, Klaverkamp & James, P.A., Minneapolis, Minn., James E. Tolan, Peter Aron, Olwine, Connelly, Chase, O'Donnell & Weyher, New York, City, for Harris, Kerr, Forster & Company.

ORDER RE: MOTIONS TO DISMISS OF HARRIS, KERR, FORSTER AND COMPANY AND THE ALODEX DEFENDANTS IN THE COLE AND BELIN CASES

HANSON, Chief Judge.

The Court addresses this Order to statute of limitations issues raised by way of motions to dismiss filed by defendants Harr, Kerr, Forster and Company (Harris, Kerr) and defendants Kemmons Wilson, Wallace Johnson and the Alodex Corporation (the Alodex defendants). These defendants raise three related grounds: (1) That the period applicable to the Cole and Belin lawsuits is the two-year provision of the Iowa Blue Sky Statute, § 502.23, Code of Iowa (1973); (2) That the two-year period bars these claims, notwithstanding the federal tolling doctrine; (3) That the doctrine of estoppel is similarly unavailing to these plaintiffs.

THE APPLICABLE STATUTE OF LIMITATIONS

Federal jurisdiction in both the Belin and Cole cases is founded upon claims under Section 10 of the Securities Exchange Act of 1934. Because the 1934 Act contains no statute of limitations governing 10b-5 claims, the appropriate limitations period of the forum state is applied. United Auto Workers v. Hossier Cardinal Corp., 383 U.S. 696, 704-05, 86 S.Ct. 1107, 16 L.Ed.2d 192 (1966); Vanderboom v. Sexton, 422 F. 2d 1233, 1236-37 (8th Cir. 1970). As the Eighth Circuit Court of Appeals has noted, "The basic standard for determining which of the various local periods of limitation to utilize is that it should be `one which best effectuates the federal policy at issue.'" Vanderboom, supra, at 1237.

Vanderboom dictates the method by which this Court must determine which Iowa statute of limitations to apply, and a review of that decision will be helpful here. In Vanderboom the Eighth Circuit determined that "it is appropriate to look to the local statute which bears the closest resemblance to the federal statute involved." Id. 1237 (emphasis added). The Court compared a federal 10b-5 action with an action for fraud in Arkansas, and with an action under the Arkansas Securities Act. In doing so, the role of scienter in each of those three causes of action played a major role. The Court noted that the Eighth Circuit had previously adopted a rule applying Rule 10b-5 to "negligent as well as intentional misrepresentations." See Myzel v. Fields, 386 F.2d 718, 734-35 (8th Cir. 1967), cert. denied, 390 U.S. 951, 88 S.Ct. 1043, 19 L.Ed.2d 1143 (1968). Thus, proof of scienter was not an element of recovery in a 10b-5 action. The Court then determined that an action under the Arkansas Securities Act similarly lacked a scienter requirement; recovery for Arkansas fraud, however, required proof of scienter. To the Court, this comparison revealed a similar lack of defenses which rendered a 10b-5 action more like an Arkansas blue sky action than an Arkansas fraud suit. The Court also noted that the state and federal securities actions shared a "commonality of purpose;" both dealt "expressly with the sale of securities." Under these dual criteria, the Court applied the two-year limitations statute of the Arkansas Securities Act to the pending 10b-5 action, rather than the three-year period for Arkansas fraud actions.

At the time of its decision, the Vanderboom court noted that, to the best of its knowledge, no prior federal court had "applied a short blue-sky statute of limitations" to a 10b-5 case. 422 F.2d at 1237. Since that case, however, a number of courts have used Vanderboom's resemblance analysis, and reached a similar result. See, e.g., Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123 (7th Cir. 1972); Hudak v. Economic Research Analysts, Inc., 499 F.2d 996 (5th Cir. 1974); Maine v. Leonard, 353 F. Supp. 968 (W.D.Va.1973). Thus, it is quite clear to this Court that the Vanderboom approach has gained a notable following, and certainly must be adhered to in this case.

The parties to this litigation do not directly challenge the propriety of this Court's applying the Vanderboom test. Rather, they quarrel over the result which an application of that test will yield. In a nutshell, plaintiffs contend that actions for fraud in Iowa more closely resemble 10b-5 actions than do actions under the Iowa Securities Act. Thus, they assert that the five-year limitations period § 614.1(4) of the Code of Iowa (1973), should apply here. Defendants assert that the two-year limitations period of the Iowa Securities Act (§ 502.23 of the Code) applies, since in their view causes of action under that law are more like 10b-5 suits than are common law fraud cases. To resolve this question it will be necessary to compare the pertinent Iowa causes of action in light of Vanderboom's two-pronged resemblance test: commonality of purpose and lack of defenses.

The plaintiffs do not seriously challenge defendants' assertions that the purposes of the Iowa and federal securities acts are coterminous. In commenting upon the purposes to be served by the Iowa Securities Law, the Iowa Supreme Court has stated:

It is well known that this state in times past has been flooded with worthless securities, and that there are people who have thus been defrauded. It was the intention of the Legislature in passing this act to avoid this situation. A study of the act shows that securities could not be issued by corporations in this state without first obtaining permission from the secretary of state, and, in order to obtain such permission, written statements provided for in the act were required to be made by the corporation or its officers, sworn to prior to having been filed with the secretary, and it was for the secretary of state to determine, under the showing made, the good faith and financial stability of the corporation thus wishing to issue such securities. As one of the provisions of said act, the above-quoted section of the Code was made to aid the purpose of the act. State v. Dobry, 217 Iowa 858, 860, 250 N.W. 702, 703 (1933).

In Lolkus v. VanderWilt, 258 Iowa 1074, 141 N.W.2d 600 (1966), the Supreme Court noted:

As stated in appellant's brief, "The suppression of fraudulent practices and the protection of the public from their own gullibility are commonly accepted as the primary purposes of Blue Sky Laws". 141 N.W.2d at 603.

It is apparent to this Court that the state and federal securities laws share a specific commonality of purpose which is lacking when common law fraud actions are compared with federal securities claims. The comparison of the three relevant causes of action in terms of their available defenses is not so straightforward, however, and will involve a more detailed evaluation of the various causes of action.

Division I of both the Cole and Belin complaints alleges a cause of action under Section 10 of the Securities Exchange Act of 1934. That section has been implemented by Rule 10b-5, which states:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud.

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

As previously noted, in the Eighth Circuit Rule 10b-5 applies to negligent as well as intentional misrepresentations. Myzel v. Fields, supra. See also, Klapmeier v. Peat, Marwick, Mitchell & Co., 363 F.Supp. 1212, 1215 (D.Minn.1973). Thus, "Proof of `scienter,' i. e., knowledge of the falseness of the impression produced by the statements or omissions made, is not required under Section 10(b) of the Act." Myzel, supra, 386 F.2d, at 734-35. Accordingly, this Court's premise for comparing Rule 10b-5 with the relevant Iowa actions in terms of lack of defenses is that the federal cause of action has dispensed with scienter. The key inquiry must focus on the role of scienter in Ch. 502 claims and in common law fraud suits.

Numerous Iowa Supreme Court cases have delineated the following as necessary elements of fraud: (1) representation, (2) falsity, (3) materiality, (4) scienter, (5) intent to deceive, (6) reliance, (7) injury and damages. See Detrick v. Aetna Casualty & Surety Co., 261 Iowa 1246, 158 N.W.2d 99, 105-06 (1968); Hall v. Wright, 261 Iowa 758, 156 N.W.2d 661, 666 (1968); Ford v. Barcus, 261 Iowa 616, 155 N.W.2d 507, 511 (1968), and cases cited therein. Other cases have held,...