Klapmeier v. Peat, Marwick, Mitchell & Co.

• Decision Date: 06 September 1973
• Docket Number: No. 5-72 Civ. 26.,5-72 Civ. 26.
• Citation: 363 F. Supp. 1212
• Parties: James E. KLAPMEIER et al., Plaintiffs, v. PEAT, MARWICK, MITCHELL & CO., Defendant.
• Court: U.S. District Court — District of Minnesota

363 F. Supp. 1212

James E. KLAPMEIER et al., Plaintiffs, v. PEAT, MARWICK, MITCHELL & CO., Defendant.

No. 5-72 Civ. 26.

United States District Court, D. Minnesota, Fifth Division.

September 6, 1973.

Rider, Bennett, Egan, Johnson & Arundel, by Stuart W. Rider, Jr., Minneapolis, Minn., for plaintiffs.

Gray, Plant, Mooty & Anderson, by Robert E. Bowen, and Lloyd V. Anderson, Jr., Minneapolis, Minn., for defendant.

NEVILLE, District Judge.

FACTS

Plaintiff Klapmeier and others have brought this action against defendant Peat, Marwick, Mitchell & Co. (Peat, Marwick), a firm of independent certified public accountants, alleging that certain financial reports of Telecheck International, Inc. (TCI) prepared by defendant contained false and misleading information and omissions. Plaintiffs claim they were induced by reports certified by Peat, Marwick including TCI's 1968 annual report into selling their corporation through a stock transfer. In an earlier action plaintiffs received a favorable jury verdict resulting in a judgment in this court in the amount of $857,632 against TCI based on these stock transactions. TCI having since taken refuge under Chapter XI of the Bankruptcy Act, plaintiffs now seek to recover that judgment, among other damages, against Peat, Marwick. It appears that TCI had used Peat, Marwick as its accountant during the relevant period.

The claims in this action originally were brought under various sections of both the Securities Act of 1933 and the Securities Exchange Act of 1934 and under common law fraud principles. However, plaintiffs' memorandum in opposition to defendant's motion to dismiss indicates the 1933 Act claims and some 1934 Act claims will not be pursued. (Received March 5, 1973, at pp. 8-9.)

Both parties, in brief, have addressed themselves solely to the 1934 Act claim based on Section 10(b), 15 U.S.C. § 78j (b), and Rule 10b-5. 17 CFR 240.10 (b)-5. Peat, Marwick now moves for dismissal of the common law fraud and 10b-5 claims arguing that the applicable statute of limitations has run. If these claims were to be dismissed it would terminate the entire action.

The difficulty is that Section 10(b) of the 1934 Act contains no statute of limitations. This omission probably was not an oversight since at the time the Act was passed there was little indication that the courts would imply a private cause of action based upon it. But this has occurred and has received Supreme Court endorsement. Superintendent of Ins. v. Bankers Life & Casualty Co., 404 U.S. 6, 13 n. 9, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971); cf. Affiliated Ute Citizens v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972).

When dealing with federal legislation which does not contain a statute of limitations the course is clear; this court must apply the limitation period of the forum state. Both Supreme Court and Eighth Circuit precedent is unequivocal. International Union, United Automobile Workers v. Hoosier Cardinal Corp., 383 U.S. 696, 86 S.Ct. 1107, 16 L.Ed.2d 192 (1966); Cope v. Anderson, Receiver, 331 U.S. 461, 67 S.Ct. 1340, 91 L.Ed. 1602 (1947); Holmberg v. Armbrecht, 327 U.S. 392, 66 S.Ct. 582, 90 L.Ed. 743 (1946); Vanderboom v. Sexton, 422 F.2d 1233 (8th Cir. 1970). Defendants have put forth a forceful argument backed by an array of distinguished commentators that a better approach would be to apply the statute of limitations found in the federal securities laws for sections other than 10(b).¹

These authorities argue that Congress, in dealing with the Securities laws, uniformly has provided for a one-three year statute of limitations when it has specifically created a private cause of action. Thus, where the courts have implied a private cause of action the reasonable statute of limitations should be that which Congress has ordained for other securities violations. Schulman, Statutes of Limitation in 10b-5 Actions: Complication Added to Confusion, 13 Wayne L.Rev. 635, 656-58 (1967). Adoption of the federal statute of limitations would provide uniformity for these actions throughout the country. And there is an argument that when the original Supreme Court precedents on the question were decided there were no closely analogous federal statutes of limitation which could be applied and thus the state statute was chosen by default to avoid the unfairness of allowing a claim which had no limit upon it. L. Loss, Securities Regulation, VI at 3898-3900 (1969 Supp); Israels, Book Review of A. Bromberg, Securities Laws, 77 Yale L.J. 1585, 1591-92 (1968). Finally, several Supreme Court justices have opined that simply looking for an applicable state statute of limitations may not be the best way to implement federal policy and have cautioned against placing undue weight upon Congressional silence on the issue. McAllister v. Magnolia Petroleum Co., 357 U.S. 221, 228-229, 78 S.Ct. 1201, 2 L.Ed.2d 1272 (1958) (Brennan, J. concurring); United Automobile Workers v. Hoosier Cardinal Corp., 383 U.S. 696, 709, 86 S.Ct. 1107, 16 L.Ed.2d 192 (1966.) (White, J. in dissent).

Although these arguments have merit, it is not for this court to ignore controlling precedent. Either Congress or the Supreme Court may respond favorably to the proposal. But presently the law is clear.² It is noteworthy that the United Auto Workers v. Hoosier Cardinal case was decided in 1966. The Vanderboom case was decided in 1970. Certainly the United States Supreme Court was, and is, aware that choosing state statutes of limitations will create varying lengths of life for federal claims depending upon which forum is looked to and which of its statutes of limitations is chosen. Although these cases may lead to the application of a longer statute of limitations where the cause of action is judicially created than where it is created by Congress the lack of uniformity, both within the securities acts, and geographically across the country³ is not a strong enough rationale for ignoring such clear precedent.

Since the statute of limitations of the forum, here Minnesota, must be used the really difficult question is squarely put: which of Minnesota's several statutes of limitations should apply? The parties have presented several suggestions, both parties basing their arguments on the Vanderboom case.

"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 v. Sexton, supra, 422 F.2d at 1237 quoting Charney v. Thomas, 372 F.2d 97, 100 (6th Cir. 1967). In the Vanderboom decision the court adopted a statute of limitations found in the Arkansas Securities Act, and stated that it was "the proper statute of limitations to apply since it deals expressly with the sale of securities." Vanderboom v. Sexton, supra, 422 F.2d at 1237. In Minnesota the statute of limitations in the Securities Act is Minn.Stat. § 80.26 (1969). However, the Minnesota Securities Act does not contain a substantive provision which is close to the Eighth Circuit definition of Rule 10b-5 as the Arkansas Act did.⁴ Moreover, the major reason why the Vanderboom court rejected the Arkansas fraud limitations statute was that Arkansas required scienter in fraud cases and the Eighth Circuit has eliminated this element from 10b-5 cases. Similarly Minnesota does not require scienter in fraud cases. Swanson v. Domning, 251 Minn. 110, 86 N.W.2d 716 (1957); Hollerman v. F. H. Peavey & Co., 269 Minn. 221, 130 N.W.2d 534 (1964); Swedeen v. Swedeen, 270 Minn. 491, 134 N.W.2d 871 (1965). Thus the major reason for failing to choose the fraud limitations statute in Vanderboom does not apply in Minnesota.

The only parts of Minn.Stat. § 80 which even remotely deal with fraud in the sale of securities simply do not reflect the elements of Rule 10b-5. Minn. Stat. § 80.19 (1968) is entitled "False statements or misleading acts" but does not refer to the purchase or sale of securities but rather refers to false information filed in connection with a registration of securities. In fact the entire thrust of the Minnesota securities regulation is through registration and not by overseeing individual securities sales. Perlman, A Critical Analysis of the Registration Provisions of the Minnesota Securities Act, 56 Minn.L.Rev. 523, 528 (1972).

The only other section which might conceivably apply is Minn.Stat. § 80.37 (1968) entitled "Violations: penalties". This section makes it a felony to sell securities in a fraudulent manner. It does not provide for a private right of action, yet does give specific criminal sanctions. The Minnesota Supreme Court has interpreted this statute to be the basis of a civil action where stock is sold without the required registration, but apparently that is not the situation here. It does not appear from the pleadings that the TCI stock here transferred required registration with the Securities Exchange Commission. In Drees v. Minnesota Petroleum Co., 189 Minn. 608, 250 N.W. 563 (1933), the court found an implied civil action for violation of the registration requirement and allowed a plaintiff to recover the amount paid. Still, the court did not elaborate on the confines of this implied action so it is difficult to compare it with Rule 10b-5 as Vanderboom requires.

Vanderboom clearly indicates that the statute of limitations which the state uses for securities violations should be given careful consideration in cases such as this one. 422 F.2d at 1237, 1240. Thus, although the securities limitation statute should not apply here because Minnesota does not have a substantive statute paralleling Rule 10b-5, it is instructive to look at the limitation length the state has chosen for securities violations. Under Minn.Stat. § 80.26 (1969) the applicable period of limitations, since the transfer in question took place on May 10, 1969, is "six years after the date on which the securities were delivered to the purchaser pursuant to such sale." It...