McCullough v. Leede Oil & Gas, Inc.

• Decision Date: 19 July 1985
• Docket Number: No. CIV 84-597-R.,CIV 84-597-R.
• Parties: Gaylon McCULLOUGH, Plaintiff, v. LEEDE OIL & GAS, INC., and Robert Johnson, Defendants.
• Court: U.S. District Court — Western District of Oklahoma

617 F. Supp. 384

Gaylon McCULLOUGH, Plaintiff, v. LEEDE OIL & GAS, INC., and Robert Johnson, Defendants.

No. CIV 84-597-R.

United States District Court, W.D. Oklahoma.

July 19, 1985.

Emmanuel E. Edem, John W. Norman Inc., Oklahoma City, Okl., for plaintiff.

R. Paul Wickes, Lisa B. Plumly, Watson & McKenzie, Max C. Tuepker, Mock, Schwabe, Waldo, Elder, Reeves & Bryant, Oklahoma City, Okl., for defendants.

ORDER

DAVID L. RUSSELL, District Judge.

The Plaintiff brought this action against the Defendants pursuant to the Securities Act of 1933, 15 U.S.C. §§ 77a-77aa (1982), the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78kk (1982) and the statutes and common law of Alabama, Oklahoma and Texas. The Defendant Leede Oil & Gas counterclaimed, alleging that the Plaintiff has breached a joint operating agreement between the parties. Currently pending are two motions made pursuant to Fed.R.Civ.P. 56: (1) The Defendant's Motions for Partial Summary Judgment on the Plaintiff's claims; and, (2) the Plaintiff's Motion for Summary Judgment on Leede's counterclaim. The Defendant Robert Johnson has joined in Leede's motion seeking judgment on the Plaintiff's claims. The two motions have been fully briefed and the Court is prepared to dispose of them in this Order.

I.

In Count I of his Second Amended Complaint, the Plaintiff alleges that the Defendants violated § 12(1) of the Securities Act of 1933, 15 U.S.C. § 77l(1) (1982), by selling an unregistered security. The Defendants argue that this claim is barred by the applicable statute of limitations, § 13 of the Act, 15 U.S.C. § 77m. Noting that § 13 provides a one year statute of limitations for nonregistration claims under § 12(1), and that this action was filed over two years after the date of sale, the Defendants contend that § 13 bars maintenance of this claim. The Plaintiff, on the other hand, argues that the § 13 statute of limitations was tolled by the Defendants' fraudulent concealment of their violation of the Act. E.g., Holmberg v. Armbrecht, 327 U.S. 392, 397, 66 S.Ct. 582, 585, 90 L.Ed. 743 (1946); Exploration Co. v. United States, 247 U.S. 435, 449, 38 S.Ct. 571, 573, 62 L.Ed. 1200 (1918); Bailey v. Glover, 88 U.S. (21 Wall.) 342, 349, 22 L.Ed. 636 (1875).

In seeking an equitable tolling of the statute of limitations for fraudulent concealment, the Plaintiff is in essence asking the Court to create a "discovery rule" exception to the one year period contained in § 13. See Cook v. Avien, 573 F.2d 685, 695 (1st Cir.1978). Section 13 provides as follows:

No action shall be maintained to enforce any liability created under section 77k § 11 of the Act or 771(2) § 12(2) of the act of this title unless brought within one year after the discovery of the untrue statement or omission, or after such discovery should have been made by the exercise of reasonable diligence, or, if the action is to enforce a liability created under section 771(1) § 12(1) of the Act of this title, unless brought within one year after the violation upon which it is based. In no event shall any such action be brought to enforce a liability created under section 77k or 771(1) of this title more than three years after the security was bona fide offered to the public, or under section 771(2) of this title more than three years after the sale.

15 U.S.C. § 77m (1982). As is obvious from text of § 77m, the Act employs a discovery rule statute of limitations for false registration claims under § 11 of the act and for the so-called "antifraud" claims under § 12(2) of the Act. However § 77m does not provide for a discovery rule statute of limitations for the type of claim brought herein by the Plaintiff, a nonregistration claim under § 12(1) of the Act. For those claims a flat one year period is prescribed. Thus, at least on its face, the statute does not lend itself to the construction urged by the Plaintiff. Nevertheless, some courts have applied the discovery rule tolling to the § 13 period applicable to nonregistration claims, e.g., Katz v. Amos Treat & Co., 411 F.2d 1046, 1055 (2nd Cir.1969); Houlihan v. Anderson-Stokes, Inc., 434 F.Supp. 1319, 1322 (D.D.C.1977); Dyer v. Eastern Trust & Banking Co., 336 F.Supp. 890, 901 (D.Me.1971); cf. Ingenito v. Bermec Corp., 376 F.Supp. 1154, 1173 (S.D.N.Y.1974), presumably because "tolling by fraudulent concealment ... `is read into every federal statute of limitation.'" Public Service Co. of New Mexico v. General Electric Co., 315 F.2d 306, 310 (10th Cir.1963), cert. denied 374 U.S. 809, 83 S.Ct. 1695, 10 L.Ed.2d 1033 (1963), quoting Armbrecht, 327 U.S. at 397, 66 S.Ct. at 585. See also In re Home-Stake Production Co., 76 F.R.D. 337, 344 (N.D.Okla. 1975).

The application of the discovery rule to the one year limitation period for nonregistration claims has not been universal; some courts have concluded that "under the explicit language of § 13, the limitations period runs from the date of the violation irrespective of whether the plaintiff knew of the violation." Cook v. Avien, 573 F.2d 685, 691 (1st Cir.1978). See also Gridley v. Cunningham, 550 F.2d 551, 552-53 (8th Cir. 1977); Kilmartin v. H.C. Wainwright & Co., 580 F.Supp. 604, 610 (D.Mass.1984); Felts v. National Account Systems Association, Inc., 469 F.Supp. 54, 64 (N.D.Miss. 1978); Lingenfelter v. Title Insurance Co. of Minnesota, 442 F.Supp. 981, 990 (D.Neb. 1977); Mason v. Marshall, 412 F.Supp. 294, 299 (N.D.Tex.1974), aff'd 531 F.2d 1274 (5th Cir.1976); Ferland v. Orange Groves of Florida, Inc., 377 F.Supp. 690, 703 (M.D.Fla.1974); Shuman v. Sherman, 356 F.Supp. 911, 912-13 (D.Md.1973); Moerman v. Zipco, Inc., 302 F.Supp. 439, 445 (E.D.N.Y.1969), aff'd 422 F.2d 871 (2nd Cir. 1970). Thus, the Court in considering this question of first impression in this district is faced with a split of authority concerning the applicability of the discovery rule to the one year limitation period governing § 12(1) nonregistration claims.

The Court concludes that neither the discovery rule nor its analog, the doctrine of equitable tolling, should be applied to the one year limitation period governing nonregistration claims for three reasons. First, the language of § 13 militates against such an application. With respect to § 12(1) claims, it is clear and unequivocal that an action must be "brought within one year after the violation upon which it is based." 15 U.S.C. § 77m. Had Congress intended that this limitation be subject to equitable tolling, it could have included the discovery rule utilized in the limitation provision applicable to § 11 and § 12(2) claims. The legislative message is clear; by including a discovery rule limitation for certain classes of claims but omitting it for nonregistration claims, in the very same statutory provision, Congress clearly reflected its intent to prohibit application of the discovery rule to § 12(1) nonregistration claims. This Court refuses to do what Congress declined to do in enacting § 13.

Second, there is little justification for application of the discovery rule outside the fraud-based causes of action. The discovery rule, or any equitable tolling on the basis of fraudulent concealment, is premised on a fraudfeasor's ability to conceal his violations. However, a seller of securities cannot conceal the fact that the securities he sells are not registered. While he may misrepresent that the securities are properly registered, or that registration is not required, he cannot prevent a purchaser from discovering the true facts as to a lack of registration. Thus, the discovery rule has little justification in the nonregistration setting.

Finally, the type of relief available for § 12(1) violations militates against application of the discovery rule to the one year statute of limitations. Actions under § 12 afford only rescissionary relief to a purchaser who still holds the unregistered security. 15 U.S.C. § 77l. One who seeks rescission is under an obligation to do so with reasonable diligence. See Ingenito, 376 F.Supp. at 1177 (Section 12(1) is a "strictly limited cause of action for rescission, whose timely prosecution is essential to its survival."). This policy is furthered generally by a shorter statute of limitations, and in particular by a statute of limitations not extended by a purchaser's lack of knowledge of the facts giving rise to his claim. While this reasoning is arguably applicable to all § 12 claims, it is especially forceful where Congress has declined to permit extension of the limitation period by equitable tolling and the seller is unable to conceal the facts giving rise to the claim, as are both the case with § 12(1) claims. Thus, the fact that claims for nonregistration bring rescissionary relief suggests that the applicable limitation period be kept to the shortest permissible length.

In summary, the Court concludes that the § 13 one year period of limitations governing § 12(1) nonregistration claims is subject to neither the discovery rule nor equitable tolling for fraudulent concealment. But see LeCroy v. Dean Witter Reynolds, Inc., 585 F.Supp. 753, 758-59 (E.D.Ark.1984) (Although no discovery rule applies to § 12(1) claim, equitable tolling may apply); Upton v. Trinidad Petroleum Corp., 468 F.Supp. 330, 334-35 (N.D.Ala. 1979), aff'd 652 F.2d 424 (5th Cir.1981). The one year period "runs from the date of the violation." Cook, 573 F.2d at 691. It is undisputed in this case that this action was brought more than one year from the Defendants' alleged sale of an unregistered security, and is therefore barred by the statute of limitations.¹ Accordingly, the Defendants' Motions for Partial Summary Judgment are granted to the extent that they challenge the Plaintiff's first claim for relief.

II.

The Defendants next contend that Count II of the Plaintiff's second Amended Complaint, an antifraud claim under § 12(2) of the Act, 15 U.S.C. § 77l(2), is barred by the statute of limitations. Again, the applicable period is found in § 13 of ...