Kennedy v. Tallant

• Decision Date: 28 July 1983
• Citation: 710 F.2d 711
• Parties: Fed. Sec. L. Rep. P 99,428 Allen V. KENNEDY, on behalf of himself and all other persons similarly situated, other than defendants who purchased Class A common stock of Preferred Land Corporation on or after
• Court: U.S. Court of Appeals — Eleventh Circuit

710 F.2d 711

Fed. Sec. L. Rep. P 99,428

Allen V. KENNEDY, on behalf of himself and all other persons

similarly situated, other than defendants who purchased

Class A common stock of Preferred Land Corporation on or

after June 23, 1967, and before January 1, 1971, Plaintiff-Appellee, v. Fred C. TALLANT, Sr., William M. Womack, Jr., and C. Jon

Erwin, Defendants-Appellants.

No. 78-2167.

United States Court of Appeals,

Eleventh Circuit.

July 28, 1983.

E. Lewis Hansen, Atlanta, Ga., C. Patrick Flynn, Nashville, Tenn., Carl T. Shipley, Washington, D.C., for defendants-appellants.

Thomas E. Skinner, Birmingham, Ala., Thomas H. Seymour, Miami, Fla., for plaintiff-appellee.

Appeals from the United States District Court for the Southern District of Georgia.

Before KRAVITCH and HENDERSON, Circuit Judges, and MORGAN, Senior Circuit Judge.

LEWIS R. MORGAN, Senior Circuit Judge:

The District Court for the Southern District of Georgia concluded that appellants Fred C. Tallant, Sr., and William M. Womack, Jr., violated Rule 10b-5, as adopted and promulgated by the Securities Exchange Commission pursuant to Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), in connection with the sale of class A common stock of the Preferred Land Corporation (PLC). This appeal challenges the district court's conclusion on several grounds. We affirm.

Tallant, Womack, and C. Jon Erwin promoted and organized PLC under Georgia Law in early 1967 for the stated purpose of buying, selling, and developing real estate. The corporation's charter authorized the issuance of ten million shares of common stock with a par value of five cents ($.05) per share. These shares were divided into eight million shares of class A common stock and two million shares of class B common stock. Salesmen employed by PLC offered class A stock exclusively to citizens of Georgia over a period of some five years. During this period, there were seven separate offerings of the class A stock. The first offering was sold at ten cents ($.10) per share, and the price increased with each additional offering until the final offering was sold at five dollars ($5.00) per share. Each offering was accompanied by a prospectus. Eventually over seven million shares of the class A stock were sold for a price in excess of twelve million dollars. The class A stockholders elected two of the five members of the PLC board of directors. The remaining three board members were elected by the class B common stockholders. Tallant, Womack, and Erwin originally owned the only issued class B common stock for which they paid a total consideration of approximately five thousand dollars. Stock dividends were never paid by PLC.

Allen V. Kennedy, the named plaintiff below, purchased one thousand shares of class A common stock at two dollars ($2.00) per share in January of 1969. He purchased an additional two hundred shares at five dollars ($5.00) per share in May of 1970. He was approached by a salesman employed with PLC and given a prospectus each time, although he never read the prospectuses before purchasing the stock. In December of 1972, Kennedy read an article in the Atlanta Journal newspaper which questioned the legitimacy of PLC and appellants' activities.

Kennedy initiated this action on September 11, 1973, seeking recision of all PLC class A stock purchases for himself and all others similarly situated. His amended complaint alleged that the defendants, Tallant, Womack, Erwin, and PLC, entered into an unlawful conspiracy, plan and scheme "to defraud the public ... and to enrich themselves by the sale of securities" in violation of Section 10b and Rule 10b-5. In support of his claim, Kennedy further alleged that the defendants committed the following acts: (1) the charter and by-laws of PLC were shrewdly drafted to permit the defendants to retain indefinite control over the corporation; (2) the defendants gained sixty percent of the voting power of the stockholders at a cost of less than 4/100ths of one percent of the contributed capital; (3) the prices at which the class A stock were sold in the seven separate offerings were artificially and fraudulently inflated; (4) the artificial and fraudulent pyramiding of stock prices was designed to induce the public to believe the stock had actually increased in value when in fact the value remained the same; (5) the defendants concealed from the public their plan to retain indefinite control over PLC; (6) the defendants concealed from the public that they had gained control of PLC through a nominal investment; (7) the seven prospectuses issued by PLC were designed to mislead and confuse the public; (8) the defendants used PLC's manpower, sales organization, and facilities to organize and promote fourteen additional Georgia corporations which sold stock in the same manner as PLC; (9) Tallant received stock sales commissions from each of the fourteen additional corporations; (10) Tallant and his family owned corporation received substantial management and consultant fees from PLC and the other corporations; and (11) the defendants concealed their activities with regard to the other corporations from PLC's class A stockholders.

The trial court certified this suit as a class action in August of 1974 on behalf of "all purchasers of class A common stock of defendant Preferred Land Corporation who bought on or after June 23, 1967, and before January 1, 1971, and who before or at the time of their purchase received one or more of the prospectuses or other promotional material alleged to be fraudulent as specified in plaintiff's complaint." In June of 1976 the district judge denied a motion by appellants to dismiss for failure to state a claim. After three years of discovery and pretrial hearings, the liability issues were finally tried before the district judge with the assistance of an advisory jury empaneled pursuant to Fed.R.Civ.P. 39(c). The advisory jury answered each of fifty-two special interrogatories in favor of Kennedy and against the defendants. On October 22, 1976, the trial court entered its findings of fact and conclusions of law with respect to the liability of all defendants. Having found that they were liable as charged, the trial court proceeded to a determination of damages. In May of 1979, it entered a final judgment against PLC and the individual defendants and awarded damages to the plaintiff class of over eight million dollars plus interest. ¹

In this appeal, Tallant and Womack raise four issues: (I) whether Kennedy's claim was barred by the applicable statute of limitations; (II) whether the district judge erred in certifying this suit as a class action; (III) whether the district judge erred in denying appellants' motion to dismiss for failure to state a claim; and (IV) whether crucial findings of fact made by the district judge are clearly erroneous. ² After reviewing the relevant portions of over six thousand pages of record in this case, numerous exhibits, and the applicable law, we find no merit to any of these claims.

I

We begin our discussion of the issues in this appeal by addressing appellants' concerns over the statute of limitations. The statute of limitations in a Section 10(b) action is taken from the state law remedy which bears the closest resemblance since the federal securities laws do not establish a specific time period in which an action must be filed. Sargent v. Genesco Inc., 492 F.2d 750 (5th Cir.1974). In the present case, the parties agree that the district court properly recognized the applicability of a two-year statute of limitations provided by Georgia law for the recision of a fraudulent sale of securities. See Diamond v. Lamotte, 709 F.2d 1419 (11th Cir.1983); Official Code of Ga.Ann. Secs. 10-5-12, 14 (Michie 1982), Ga.Code Ann. Secs. 97-112, 114 (Harrison 1981). Although the time period itself is taken from state law, the time at which the action accrues and the statute begins to run is a question of federal law. Hudak v. Economic Analysts, Inc., 499 F.2d 996 (5th Cir.1974). Therefore, the two-year statute of limitations applicable here began to run against Kennedy at the point in time when he had actual knowledge of the fraud or notice of facts which would lead to actual knowledge in the exercise of due diligence. Azalea Meats, Inc. v. Muscat, 386 F.2d 5 (5th Cir.1967).

Appellants claim that the prospectus Kennedy received when he made his final purchase of PLC stock contained sufficient information to place him on notice of the acts over which he now complains. This occurred in May of 1970 and Kennedy's original complaint was not filed until October 3, 1973, over three years later. Therefore, according to appellants, Kennedy's claim was not timely filed. Kennedy responds that he was not on notice of any fraud until December of 1972 when an article regarding appellants' management of PLC appeared in the Atlanta Journal, and thus the two-year statute of limitations did not begin to run until that time. The district court reviewed these arguments and submitted the matter to the advisory jury since questions of notice and due diligence are particularly suited for a jury's consideration. Azalea Meats, Inc. v. Muscat, 386 F.2d at 9. The advisory jury answered affirmatively to the following interrogatory:

Do you find from a preponderance of the evidence, under the circumstances of this case, that the defendants artfully concealed from the plaintiff and the other purchasers of PLC's Class "A" common stock fraudulent conduct, if any, and that the plaintiff filed this suit within two years from the date such fraudulent conduct was discovered or could have been discovered by the exercise of due diligence?

Record, vol. 16, at 3982, question no. 47. The district judge adopted this finding of fact and concluded as a matter of law that Kennedy's complaint was timely filed. ³ We find an abundance of evidence in the record to support this conclusion. The PLC stock offerings and...