Knight v. EF Hutton and Co., Inc., 89-325-CIV-T-17B.

• Citation: 750 F. Supp. 1109
• Decision Date: 11 October 1990
• Docket Number: No. 89-325-CIV-T-17B.,89-325-CIV-T-17B.
• Parties: Mildred KNIGHT, Plaintiff, v. E.F. HUTTON AND CO., INC., now known as Shearson Lehman Hutton, Inc., Defendant.
• Court: U.S. District Court — Middle District of Florida

750 F. Supp. 1109

Mildred KNIGHT, Plaintiff, v. E.F. HUTTON AND CO., INC., now known as Shearson Lehman Hutton, Inc., Defendant.

No. 89-325-CIV-T-17B.

United States District Court, M.D. Florida, Tampa Division.

October 11, 1990.

COPYRIGHT MATERIAL OMITTED

John P. Graves, Jr., Chartered, William T. Kirtley, P.A., Sarasota, Fla., for plaintiff.

Peter W. Homer, Greer, Homer & Bonner, P.A., Miami, Fla., for defendant.

ORDER

KOVACHEVICH, District Judge.

This cause is before the Court on the following:

1. Motion to Dismiss Plaintiff's Complaint and Motion to Strike Plaintiff's Request for Attorneys' Fees and Punitive Damages, filed April 4, 1990, by Defendant Shearson Lehman Hutton, Inc. (Hutton)

2. Response of Plaintiff Mildred Knight (Knight) To Defendant's Motion To Dismiss, filed May 10, 1990

Defendant's motion to dismiss is granted in part and denied in part for the reasons set forth herein.

Plaintiffs bring this action alleging they were fraudulently induced into making a risky investment when relatively risk-free investments were what they sought and were promised. The action, principally founded in federal securities law and alleged violations of federal and state RICO statutes, contains four counts:

Count I for Securities Fraud: Violations of Section 10(b) and Rule 10(b)-5 of the Securities Exchange Act of 1934 (the Exchange Act) and Florida Statutes, § 517.301 of the Florida Securities and Investor Protection Act (FIPA);

Count II for Suitability: Violations of the Exchange Act, FIPA, the National Association of Securities Dealers, Inc. Rules of Fair Practice (the NASD rules) and the Rules of the New York Stock Exchange and the American Stock Exchange (the NYSE rules and the AMEX rules, respectively);

Count III for common law fraud;

Count IV under RICO: Violations of the provisions of 18 U.S.C. § 1961(4) (Federal RICO) and Florida Statutes, § 895.02(3), (Florida RICO).

Defendants move to dismiss on the grounds that the Complaint 1) is barred by the statute of limitations; 2) asserts a private cause of action for violations of various exchange rules; 3) fails to plead essential elements of a Rule 10(b)-5 claim and fails to plead fraud with particularity; and 4) fails to state a claim for relief for alleged violations of Federal and Florida RICO statutes.

STANDARD OF REVIEW

A complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that Plaintiff can prove no set of facts that would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-102, 2 L.Ed.2d 80 (1957). A trial court, in ruling on a motion to dismiss, is required to view the complaint in the light most favorable to Plaintiff. Scheuer v. Rhodes, 416 U.S. 232, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974).

FACTS

Plaintiff Knight is a 77 year old retired widow. Beginning in 1981, when Knight was 72, and continuing until approximately October, 1987, Plaintiff purchased a series of investments totalling $730,500 from Defendant. Plaintiff contends that prior to her investments with Defendant Hutton, she had conducted investment activities involving only prudent investment media. She further alleges that during the course of her investment activities with Defendant Hutton, she was induced to make unsuitable investments through the fraudulent efforts of Defendant Hutton and its registered representative Ray J. Shouse (Shouse). She also contends that Defendant Hutton, through Shouse, concealed from Plaintiff the true nature and character of the investments.

Statutes of Limitations

1. Section 10(b), Rule 10(b)-5 and FIPA Claims

Defendant Hutton first argues that Plaintiffs' Section 10(b), Rule 10(b)-5, and Florida claims under FIPA are barred by the applicable statutes of limitations. A motion to dismiss based on the tolling of a statute of limitations can be granted only if it appears beyond a doubt that Plaintiffs can prove no set of facts that toll the statute. See Summer v. Land & Leisure, Inc., 664 F.2d 965 (5th Cir. Unit B 1981); Eaton v. Coal Par of West Virginia, Inc., 580 F.Supp. 572 (S.D.Fla.1984). This is in keeping with the standard for deciding a Rule 12(b)-6 motion. See Conley v. Gibson, supra.

Federal securities laws provide no limitation period expressly applicable to Section 10(b) and Rule 10(b)-5 claims. Instead, the Court must apply the limitations period applicable to the law most analogous to Section 10(b) and Rule 10(b)-5 in the forum state. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210 n. 29, 96 S.Ct. 1375, 1389 n. 29, 47 L.Ed.2d 668 (1976); Friedlander v. Troutman, Sanders & Lockerman, 788 F.2d 1500, 1502 (11th Cir.1986).

In Florida, the most analogous law is found in the Florida Investment Protection Act at Florida Statutes, § 517.301(1)(a). Nortek, Inc. v. Alexander Grant & Co., 532 F.2d 1013, 1015 (5th Cir.1976); Hudak v. Economic Research Analysis, Inc., 499 F.2d 996 (5th Cir.1974). Accordingly, the Court finds that the two-year statute of limitations applicable to § 517.301(1)(a)(2) applies to Plaintiffs' Section 10(b) and Rule 10(b)-5 claims.

Although state law provides the applicable statute of limitations, federal law determines when a Section 10(b) and Rule 10(b)-5 claim accrue and thus when the statutory period begins to run. Kennedy v. Tallant, 710 F.2d 711 (11th Cir.1983). Under federal law, such claims accrue when Plaintiff "has either knowledge of the violation or notice of facts which, in the exercise of due diligence, would have led to actual knowledge thereof." Vigman v. Community National Bank & Trust Co., 635 F.2d 455 (5th Cir.1981). The concept of due diligence is not a rigid standard, but depends on the facts of each individual case. Azalea Meats, Inc. v. Muscat, 386 F.2d 5, 9 (5th Cir.1967).

In its response to Hutton's Motion to Dismiss, Plaintiff makes a good-faith, albeit ambiguous, assertion that she did not discover the alleged fraud more than two years prior to bringing suit. Whether due diligence would have led her to that discovery more than two years before suit was filed is a question for the jury. See Durham v. Business Management Associates, 847 F.2d 1505, 1509 (11th Cir.1988). Such an issue cannot be resolved on a motion to dismiss. See Aldrich v. McCulloch Properties, Inc., 627 F.2d 1036 (10th Cir.1980); Summer v. Land & Leisure, Inc., 571 F.Supp. 380 (S.D.Fla.1983). Therefore, Defendant's allegation that Plaintiff's Section 10(b), Rule 10(b)-5 and FIPA claims are time-barred is not persuasive.

2. Common Law Fraud and RICO Claims

Defendant also argues that Plaintiff's common law fraud and RICO claims are time-barred. Under Florida law, actions for fraud are subject to a four-year statute of limitations. Florida Statutes, § 95.11(3)(j). The statute of limitations for Florida RICO claims is five years. Florida Statutes, § 895.05(10). The statute of limitations for Federal RICO claims is five years from the date of the last predicate act. See 18 U.S.C. § 3282.

Defendant Hutton points out that the statute of limitations for an action based on fraud is strictly construed against the party bringing the action and that the statute of limitations begins to run when the alleged basis for the action was either discovered or should have been discovered by the exercise of due diligence. Matthews v. Matthews, 222 So.2d 282, 284 (Fla.2d DCA 1969). Defendants further argue that some of the twenty-one limited partnerships that Plaintiff purchased between May, 1982 and September, 1986 may be time-barred because they occurred prior to four years from the date of filing this action.

Plaintiffs claim that the statute of limitations was tolled because Hutton's representative, Shouse, fraudulently concealed investment facts from Plaintiff (Paragraph 6 of Complaint). The doctrine of equitable tolling has been considered by this Court in Armbrister v. Roland International Corp., 667 F.Supp. 802 (M.D.Fla.1987). Armbrister involved a series of summary judgments sought by aggrieved investors who had purchased Florida real estate. The court was faced with the task of sorting out and applying various limitation periods to the basis of the investor claims that included claims based in the securities laws, and determining whether the operation of such limitation periods had been barred by equitable estoppel or equitable tolling. The court, in considering the matter said:

Two doctrines are available, in appropriate circumstances not present herein, to avoid a statute of limitations bar; equitable estoppel and equitable tolling ... as the Eleventh Circuit put it the ... doctrine of equitable tolling ... is grounded in fraudulent concealment of harm which gives rise to the right to sue.

Armbrister, 667 F.Supp. at 809, 810.

In the present case, the issue of whether Plaintiff has exercised sufficient due diligence in timely discovering the fraud that is the basis of relief sought in the Complaint cannot be resolved on a motion to dismiss. It is a question for the jury. Therefore, Defendant's allegation that Plaintiff's fraud and RICO claims are time-barred is not persuasive.

Claims Under the Exchange Rules

Among other things, Count II alleges Defendant violated the provisions of the Rules of Fair Practice of the NASD, the NYSE and the AMEX. Defendant moves to dismiss those claims on the ground that none of the exchange rules give rise to a private right of action for damages. Indeed, the Eleventh Circuit has held that there is no private cause of action under the federal securities laws for violation of both the NYSE "know your customer rule" and the NASD "suitability rule." Thompson v. Smith Barney Harris Upham & Co., 709 F.2d 1413, 1419 (11th Cir.1983); see also Rolf v. Blyth, Eastman Dillon & Co., Inc., 570 F.2d 38, 43 & n. 6 (2d Cir.), cert. denied, 439 U.S. 1039, 99 S.Ct. 642, 58 L.Ed.2d 698 (1978). Plaintiff does not contend otherwise. Instead Plaintiff claims that she has an implied cause of action because Defendant's violation of Section...