Janigan v. Taylor, 6410.

Decision Date04 May 1965
Docket NumberNo. 6410.,6410.
Citation344 F.2d 781
PartiesJohn B. JANIGAN, Defendant, Appellant, v. Frederick B. TAYLOR et al., Plaintiffs, Appellees.
CourtU.S. Court of Appeals — First Circuit


Harold Lavien, Boston, Mass., with whom Joshua A. Guberman and Brown, Rudnick, Freed & Gesmer, Boston, Mass., were on brief, for appellant.

Harold M. Willcox, Boston, Mass., with whom Charles C. Cabot, Jr., Boston, Mass., was on brief, for appellees.

Before ALDRICH, Chief Judge, SWEENEY, Chief District Judge, and WYZANSKI, District Judge.

ALDRICH, Chief Judge.

This is a personal action brought by plaintiffs as a class in the district court for the district of Massachusetts in which they allege violations by the defendant of Rule 10b-5 (17 C.F.R. § 240, 10b-5) of the Securities and Exchange Commission promulgated pursuant to section 10 of the Securities Exchange Act of 1934 (15 U.S.C. § 78j), hereinafter the Act. The cause of action arises by implication of the Act. Fratt v. Robinson, 9 Cir., 1953, 203 F.2d 627, 631-633, 37 A.L.R.2d 636. The basic facts are simple. The plaintiffs are former stockholders, some of whom were also the controlling directors, of Boston Electro Steel Casting, Inc. (BESCO). For convenience they will be called stockholders, directors, or, collectively, plaintiffs. The defendant was the president, general manager and a director of BESCO. In early 1956, following a directors' meeting on December 27, 1955, defendant purchased plaintiffs' stock (virtually all of the outstanding stock of the company) for approximately $40,000. In December 1957 he sold it for $700,000. Suit was brought in October 1958. Plaintiffs' action rests upon a statement by the defendant admittedly made at the December 27 meeting in response to a question by one of the directors.1 Asked whether he "knew of any material change in the affairs of the company or in the past months which could cause us to have any different opinion about the company," his answer was, "There was none, it was about the same." For convenience we will call this the representation. Trial was had without jury. The district court found the representation consciously and materially false and, to the degree hereinafter set forth, that plaintiffs relied on it, and awarded as damages defendant's net profits. Defendant appeals. All events took place in Massachusetts and it is agreed that its law governs to the extent that federal law does not.

At the threshold is the question whether plaintiffs' action was brought too late. Although other sections of the Act have attached provisions for limitation of action, there is none here applicable. Hence the state statute applies. Campbell v. City of Haverhill, 1895, 155 U.S. 610, 15 S.Ct. 217, 39 L.Ed. 280. This is two years. Mass.G.L. c. 260 § 2A. More than two years had elapsed since the representation and sale before the present suit was brought. In light of this, plaintiffs claim the benefit of Mass.G.L. c. 260 § 12 under which the statute of limitations is tolled if the cause of action has been fraudulently concealed. The tolling statute, however, requires some affirmative act of concealment except, apparently, where there is a duty to disclose imposed by a fiduciary relationship. Stetson v. French, 1947, 321 Mass. 195, 198-200, 72 N.E.2d 410, 173 A.L.R. 569; Old Dominion Copper Mining & Smelting Co. v. Bigelow, 1909, 203 Mass. 159, 201, 89 N.E. 193, 40 L.R.A.,N.S., 314. The sole case which plaintiffs cite for the contrary position, Brackett v. Perry, 1909, 201 Mass. 502, 87 N.E. 903, in no way supports it.

Absent special circumstances, an officer or director has no fiduciary duties in purchasing or selling stock under Massachusetts law. Goodwin v. Agassiz, 1933, 283 Mass. 358, 361-363, 186 N.E. 659; Gladstone v. Murray Co., 1943, 314 Mass. 584, 587, 50 N.E.2d 958. Nor has he at federal law. See Strong v. Repide, 1909, 213 U.S. 419, 431-433, 29 S.Ct. 521, 53 L.Ed. 853. Hence, unless we should decide that the effect of the Act is to establish new fiduciary relationships, fn. 1, supra, plaintiffs show nothing entitling them to the benefit of the Massachusetts tolling section under either the general rule or the exception.

It is unnecessary to interpret the Act in order to toll the statute of limitations. Federal law has long been established, with more liberality than that of Massachusetts, that where fraud is involved the cause of action is, so-to-speak, automatically concealed, and does not arise until discovery. Bailey v. Glover, 1875, 21 Wall. 342, 22 L.Ed. 636; Traer v. Clews, 1885, 115 U.S. 528, 6 S.Ct. 155, 29 L.Ed. 467. Bailey v. Glover was said to apply equally to actions "at law" and "in equity" in tolling federal statutes of limitations. 21 Wall. at 349. Holmberg v. Armbrecht, 1946, 327 U.S. 392, 66 S.Ct. 582, 90 L.Ed. 743, extended the doctrine to toll a state statute of limitations where the cause of action was federal in origin and equitable. We are in considerable sympathy with Judge Friendly's opinion in Moviecolor Ltd. v. Eastman Kodak Co., 2 Cir., 1961, 288 F.2d 80, 90 A.L.R.2d 252, cert. den. 368 U.S. 821, 82 S.Ct. 39, 7 L.Ed.2d 26, to the effect that the Holmberg decision should be applied to state statutes of limitation where the cause of action is federal in origin and cognizable solely in federal courts, whether the cause of action be regarded as "legal" or "equitable," concepts which have lost much of their meaning in federal practice. Without deciding how far we would carry this principle we hold that federal law must determine the date of accrual here even though the period of limitation thereafter is determined by state law.

Turning to the merits, the defendant makes a massive attack upon the court's findings that his representation was false, and that it was consciously so. We will deal first with the latter findings because defendant's criticism of one aspect of them has at least superficial merit. The court stated,

"I find that Janigan was not a truthful witness either during the taking of his deposition or while testifying in Court. Specifically, I disbelieve his denials of knowledge of the firming of prices and increase of backlog in late 1955 and, not believing his denials of such knowledge, I find that he did know about them at the time he told Bergen that things were just about the same." 212 F.Supp. 794, at 800.

Defendant argues that this was a violation of the principle that disbelief of testimony does not of itself constitute a basis for finding the opposite. Although the temptation to do so may be strong, see Dyer v. MacDougall, 2 Cir., 1952, 201 F.2d 265, 269, however satisfied a court may be from the witness's demeanor or his demonstrated untruthfulness in other respects that certain testimony is false, it cannot use such disbelief alone to support a finding that the opposite was the fact. See Moore v. Chesapeake & Ohio Railway Co., 1951, 340 U.S. 573, 576-577, 71 S.Ct. 428, 95 L.Ed. 547; Nishikawa v. Dulles, 1958, 356 U.S. 129, 137, 78 S.Ct. 612, 2 L.Ed.2d 659. The reason must be obvious. Were the rule otherwise a case could be made for any proposition in the world by the simple process of calling one's adversary and arguing to the jury that he was not to be believed.

Whatever the arguable meaning of the court's language we do not think that it intended to adopt such a fallacy. Rather, we take its statement as a roundabout way of saying that the evidence of the material facts, and of defendant's access thereto and connection therewith, was such that it would infer full knowledge on defendant's part unless it believed his profession of ignorance, and that not so believing, this inference controlled. On this basis the sole question is the correctness of the underlying findings.

The district court's considerable number of subsidiary findings, if well founded, warrant its conclusion that defendant's representation was materially false. In the main we find them supported by the evidence. The plaintiff became president and general manager of BESCO in April 1952. BESCO was a steel foundry doing, exclusively, a special order business. It was, accordingly, peculiarly dependent upon its customers and upon a steady influx of orders. In addition, its plant was old and relatively inefficient and its financial position poor. New capital was needed, and none was obtainable. Rather, the company was in trouble with an R.F.C. loan. The directors left the company's affairs almost exclusively to the defendant, and accepted the validity of his reports of current conditions, which were generally pessimistic. However, we think the finding that they were "all" pessimistic is open to question. The indications in the court's opinion that the company sustained a loss every month were incorrect.2 On the contrary, it is quite clear that the business measurably fluctuated.

In the fall of 1955 the directors called a stockholders meeting for the purpose of considering sale or liquidation. The defendant opposed the call of the meeting. It also seems clear that no misstatement by him, and no failure to disclose, brought about the meeting, or the decision reached that a sale should be attempted. This, however, is not determinative. The question is what happened thereafter. One month after the stockholders meeting the defendant made an offer himself and the representation in question. Essentially the representation was false because there had been a firming of prices and an increasing backlog of orders such that the first quarter of 1956 could be expected by defendant, due to his detailed knowledge, to show a profit. Furthermore, the court found various changes in practice with respect to pricing of inventory, and actual alterations to conceal an improvement in profits.3

Viewed against a background of past fluctuations, we might not find the misrepresentation to be of the importance intimated by the court's opinion. Certainly it could not be...

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