Margolies v. Deason

• Decision Date: 11 September 2006
• Docket Number: No. 05-10928.,05-10928.
• Parties: Michael MARGOLIES; Elaine Margolies, as Trustee on Behalf of the Margolies Family Trust, Plaintiffs-Counter Defendants-Appellants, v. Darwin DEASON; Douglas R. Deason; David L. Neely, Defendants-Counter Claimants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

464 F.3d 547

Michael MARGOLIES; Elaine Margolies, as Trustee on Behalf of the Margolies Family Trust, Plaintiffs-Counter Defendants-Appellants, v. Darwin DEASON; Douglas R. Deason; David L. Neely, Defendants-Counter Claimants-Appellees.

No. 05-10928.

United States Court of Appeals, Fifth Circuit.

September 11, 2006.

COPYRIGHT MATERIAL OMITTED

Susan C. Stanley, Shustak, Jalil & Heller, James P. Jalil, Thompson Hine, New York City, Theodore J. Riney, Geary, Porter & Donovan, Addison, TX, David Alexander Browde, Law Offices of David A. Browde, Chappaqua, NY, for Michael and Elaine Margolies.

David Henry Pace, Hal S. Sumner, Sumner, Schick & Hamilton, Dallas, TX, for Darwin and Douglas Deason.

Stephen G. Wilcox, Law, Snakard & Gambill, Fort Worth, TX, for Neely.

Appeal from the United States District Court for the Northern District of Texas.

Before HIGGINBOTHAM, DENNIS and CLEMENT, Circuit Judges.

EDITH BROWN CLEMENT, Circuit Judge:

Michael Margolies and the Margolies Family Trust (collectively "Margolies") appeal the district court's dismissal of all claims as time-barred, arguing that an extension to the statute of repose in the Sarbanes-Oxley Act of 2002 ("SOA") applies to the federal claims and that the district court erred in finding that Margolies was on inquiry notice of the alleged fraud in 1998. We affirm in part and reverse in part, and remand the case to the district court.

I. FACTS AND PROCEEDINGS

Michael Margolies and the Margolies Family Trust were the largest shareholders of a company known as U.S. Transportation Systems ("USTS"). On March 19, 1998, Precept Business Services, Inc. ("Precept") acquired USTS. In exchange for Margolies's ownership interest in USTS, he received Precept common stock. Subsequently, Precept filed for bankruptcy, and the Precept stock owned by Margolies became worthless. In November 2002, the trustee appointed for Precept filed a complaint in the adversary bankruptcy proceeding. In this complaint, the trustee claimed that the defendants, Darwin Deason, Douglas R. Deason, and David L. Neely (collectively "Deason"), engaged in behavior amounting to self-dealing and fraud which resulted in the collapse of the company. On March 17, 2003, Margolies filed a complaint against Deason alleging eight causes of action relating to this self-dealing and fraud. Margolies subsequently amended the complaint. The first amended complaint contained five causes of action: (1) violation of the Securities Act of 1933, (2) violation of the Securities Exchange Act of 1934, (3) violation of Texas Blue Sky Article 581-33(A)(2), (4) violation of Texas Blue Sky Article 581-33(F), and (5) common law fraud.

Deason filed a motion for summary judgment seeking dismissal of all of Margolies's claims as time-barred. Deason claimed that in 1998 Margolies became either actually or constructively aware of the facts giving rise to the causes of action in the complaint. Conversely, Margolies claimed that he did not and could not reasonably have learned the relevant information until the trustee filed a complaint in the bankruptcy proceeding in November 2002. The district court granted Deason's motion for summary judgment and entered a final judgment dismissing all of Margolies's claims as time-barred.¹

II. STANDARD OF REVIEW

The district court's grant of summary judgment is reviewed de novo. Shell Offshore Inc. v. Babbitt, 238 F.3d 622, 627 (5th Cir.2001). The district court's grant of "[s]ummary judgment is appropriate if the record shows `that there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law.'" Id. (quoting FED.R.CIV.P. 56(c)). In the summary judgment context, the court "views the evidence in the light most favorable to the non-movant." Abarca v. Metro. Transit Auth., 404 F.3d 938, 940 (5th Cir.2005). If a reasonable jury could return a verdict for the non-movant, a genuine issue of material fact exists and summary judgment is not proper. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

III. DISCUSSION

A. Federal Securities Law Claims

The parties dispute which particular statutes set the applicable periods of time in which to bring the first and second causes of action in the first amended complaint. In the first cause of action, Margolies alleges that Deason violated §§ 11 & 12 of the Securities Act of 1933, codified at 15 U.S.C. §§ 77k & 771. Deason argues that the appropriate time limits for this action are found at 15 U.S.C. § 77m, which imposes a term of three years after the sale of the security or its being offered to the public.

In the second cause of action, Margolies alleges that Deason violated both § 10(b) of the Securities Exchange Act of 1934, codified at 15 U.S.C. § 78j(b), and Rule 10(b)-5, codified at 17 C.F.R. § 240.10b-5. In Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 364, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991), the Supreme Court held that these claims were barred after the same time period, namely three years after the sale or offering. Under this period, which Deason urges, the first and second causes of action are clearly time-barred because suit was not filed within three years of the sale or offering.

Margolies argues that instead the time limit for the first and second causes of action is controlled by Section 804 of the SOA. Enacted on July 30, 2002, the SOA changed the time period to bring any "private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws, as defined in section 3(a)(47) of the Securities Exchange Act of 1934." 28 U.S.C. § 1658(b). The district court correctly found that the claims in the first and second causes of action involved fraud such that they were the type of claims that fall within the confines of this statute.

Under the new statute, such violations "may be brought not later than the earlier of — (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation." Id. The SOA contains two other important provisions. First, one provision states that the new time period "shall apply to all proceedings addressed by this section that are commenced on or after the date of enactment of this Act." Pub.L. No. 107-204, 116 Stat. 745, 801 (2002). Second, another provision states that "[n]othing in this section shall create a new, private right of action." Id.

At this point it is worth noting the difference between statutes of limitations and statutes of repose. Statutes of limitations speak to matters of remedy, whereas statutes of repose eliminate the underlying rights when they lapse. Chase Securities Corp. v. Donaldson, 325 U.S. 304, 314, 65 S.Ct. 1137, 89 L.Ed. 1628 (1945) (statutes of limitations); Lieberman v. Cambridge Partners, L.L.C., 432 F.3d 482, 490 (3d Cir.2006) (statutes of repose); Burlington Northern & Santa Fe Ry. Co. v. Poole Chemical Co., 419 F.3d 355, 362-63 (5th Cir.2005) ("[T]he differences between statutes of limitations and statutes of repose are substantive, not merely semantic.").

The statute at issue here is a statute of repose. See Lampf, 501 U.S. at 360, 111 S.Ct. 2773 (noting that the pre-SOA three-year time period under the Securities Exchange Act of 1934 is a statute of repose); Bear Lake & River Waterworks & Irrigation Co. v. Garland, 164 U.S. 1, 14, 17 S.Ct. 7, 41 L.Ed. 327 (1896) (stating that when a statute creates a right unknown at common law, the general rule is that a corresponding statutory time bar is one of repose rather than limitation). As such, the right to relief itself is extinguished when the relevant time period expires.

The SOA was enacted well after the first and second causes of action accrued and subsequently expired under the old time limits. Under the pre-SOA period of three years, these causes of action were extinguished in early 2001, more than a year prior to the enactment of the SOA. Margolies would have us hold that these causes of action that were indisputably time-barred for a period of more than a year prior to the enactment of the SOA are no longer time-barred post-SOA.

The Second, Third, Fourth, Seventh, and Eighth Circuits, in cases addressing this issue, have held that the SOA did not revive previously extinguished causes of action. See In re Enter. Mortgage Acceptance Co. Sec. Litig. ("Enterprise"), 391 F.3d 401, 411 (2d Cir.2005); Lieberman, 432 F.3d at 492; Glaser v. Enzo Biochem, Inc., 126 Fed.Appx. 593, 598 (4th Cir.2005); Foss v. Bear, Stearns & Co., 394 F.3d 540, 542 (7th Cir.2005); In re ADC Telecomms., Inc. Sec. Litig., 409 F.3d 974, 978 (8th Cir.2005). The Second Circuit's opinion in Enterprise contains a well-written retroactivity analysis that the other circuit courts have largely followed. 391 F.3d at 405-10; see, e.g., Foss, 394 F.3d at 542 ("We find [Enterprise] persuasive and have nothing to add to the second circuit's explanation."). In an interlocutory appeal, the Eleventh Circuit disagreed with the other circuits and remanded for further fact-finding. Tello v. Dean Witter Reynolds, Inc., 410 F.3d 1275, 1281-82 (11th Cir.2005) (noting that statutes that are textually clear as to retroactivity should be retroactively applied). We conclude that the district court correctly followed the majority of the circuits in holding that the SOA did not apply retroactively to revive the first and second causes of action.

The Supreme Court has stated repeatedly "that there is a presumption against retroactive legislation that is deeply rooted in our jurisprudence." Hughes Aircraft Co. v. United States ex rel. Schumer, 520 U.S. 939, 946, 117 S.Ct. 1871, 138 L.Ed.2d 135 (1997) (internal alteration and quotation omitted). In Landgraf v. USI Film Products, the Supreme Court established a two-part test for retroactivity inquiries. 511 U.S. 244, 280, 114 S.Ct. 1483, 128 L.Ed.2d 229 (1994); see ...