McLernon v. Source Intern., Inc.

• Decision Date: 30 June 1988
• Docket Number: No. 85-C-1427.,85-C-1427.
• Parties: Judith McLERNON, et al., Plaintiffs, v. SOURCE INTERNATIONAL, INC., et al., Defendants.
• Court: U.S. District Court — Eastern District of Wisconsin

701 F. Supp. 1422

Judith McLERNON, et al., Plaintiffs, v. SOURCE INTERNATIONAL, INC., et al., Defendants.

No. 85-C-1427.

United States District Court, E.D. Wisconsin.

June 30, 1988.

COPYRIGHT MATERIAL OMITTED

Thomas Tobin, Paul B. Episcope, and Anthony S. DiVincenzo, Campbell & DiVincenzo, Chicago, Ill., for plaintiffs.

James D. Larsen, Green Bay, Wis., pro se.

Roger J. Nuernberg, Appleton, Wis., pro se.

Wayne E. Babler, Jr., Mark A. Kircher, Quarles & Brady, Milwaukee, Wis., for Source Securities, Source Intern., Great Western Securities, Kay Bair, Rodney Williams, Vernon Gwynne, Sue Paden, Richard Guy and Robert Treadaway.

Thomas J. Arenz, Ross A. Anderson, Frisch, Dudek & Slattery, Milwaukee, Wis., for Paul Mongin.

William Aune, Sturgeon Bay, Wis., pro se.

James T. Murray, Jr., Peterson, Johnson & Murray, S.C., Milwaukee, Wis., for Robert Dvorak, Richard Wirth, Norbert Urban, John Haase, Chester Lawicki, John Leonard, Betty Gould, Hibbard Engler and Robert Hurlbutt.

Tim R. Anderson, Middleton, Wis., pro se.

Jerome H. Block, Appleton, Wis., for Valerie Myse.

Challoner McBride, McBride & Cote, Sturgeon Bay, Wis., for Colleen Cote.

James Howard, Paul Erickson, Zirbel, Howard & Malone, S.C., Milwaukee, Wis., for Sharon Nejedlo, Jack Kosloske (Jack Koloske), Charles Wood (Dal Wood) and David Edwards.

Stephen L. Morgan, Christine Schneider, Murphy & Desmond, S.C., Madison, Wis., for First Affiliated Securities (FAS), Kenneth Elsberry, Richard Woltman, Jack Alexander, J. Donald Hill and J. David Markley.

Burton A. Strnad, Milwaukee, Wis., for Patricia Klitzke.

Dwight D. Darrow, Gruhle, Fessler, Van De Water & Darrow, Sheboygan, Wis., for Joseph Miller.

DECISION AND ORDER

STADTMUELLER, District Judge.

More than 300 individual plaintiffs commenced this securities fraud lawsuit in the fall of 1985 and then filed an amended complaint, ostensibly as a class, on March 14, 1986. The case was transferred to this court by Judge Terence T. Evans on November 4, 1987 following my appointment to the federal bench. Most of the more than 40 defendants have filed motions to dismiss the majority of the 15-count, 365 paragraph amended complaint.

In a nutshell, the amended complaint alleges that between approximately April 1, 1982 and October 4, 1984, defendants fraudulently induced plaintiffs to purchase unregistered securities—specifically, corporate and mortgage notes issued by the Newman Companies. It is also alleged that some plaintiffs bought mortgage notes as early as 1980. Plaintiffs who purchased securities prior to August 30, 1983 apparently did so through First Affiliated Securities, Inc. (FAS), Newman's broker-dealer at that time. FAS was replaced as Newman's broker-dealer by Source Securities, Inc. (Source) beginning on or about August 30, 1983. It appears that a number of plaintiffs purchased securities after that date through Source. Plaintiffs allege that defendants induced them to purchase the securities by various misrepresentations, both written and oral. The allegations are brought against Newman, FAS, Source, their officers and directors and numerous salespersons.

JOINDER

Plaintiffs purport in their amended complaint to proceed as a class (¶¶ 13-19). However, they did not file a motion to certify the class, though Judge Evans' May 12, 1987 order established a period within which they could do so. Their brief in opposition to defendants' motions to dismiss affirmatively states that they do not seek class certification.

Plaintiffs instead have joined as individuals in the prosecution of this lawsuit. Most of the defendants oppose joinder under Fed.R.Civ.P. 20(a). Rule 20(a) states in relevant part as follows:

(a) Permissive Joinder. All persons may join in one action as plaintiffs if they assert any right to relief jointly, severally, or in the alternative, in respect of or arising out of the same transaction, occurrence, or series of transactions or occurrences and if any question or fact common to all these persons will arise in the action.

Courts have adopted a flexible, case-by-case approach to determine whether a particular factual situation constitutes a single transaction or series of transactions for purposes of Rule 20(a). The ultimate question is whether the claims of the various plaintiffs are "logically related." See 7 C.A. Wright, A.R. Miller & M.K. Kane Federal Practice and Procedure, § 1653 p. 382 (2d ed. 1986).

Rule 20(a) also requires that there be a question of law or fact common to all plaintiffs. Cases construing the parallel requirement under Fed.R.Civ.P. 23(a) provide a helpful framework for construing the commonality required by Rule 20. Mosley v. General Motors Corporation, 497 F.2d 1330, 1334 (8th Cir.1974). In the securities context, courts have found the requisite commonality where alleged misrepresentations are uniform as to all class members, even if reliance and damages are unique to each plaintiff. In the absence of uniform misrepresentations, courts have generally denied class action status. For example, there is insufficient commonality where individual plaintiffs were subjected to different oral misrepresentations during separate conversations with defendants. See 3B J. Moore, ¶ 23.46.

Plaintiff's amended complaint is inadequate to establish that plaintiffs' claims are logically related and share a common issue of fact. It is vaguely suggested that all plaintiffs relied upon certain misrepresentations and omissions in newspaper advertisements, brochures, television appearances and personal correspondence. But it is not clear that these misrepresentations are part of all plaintiffs' claims. Indeed, other portions of the amended complaint indicate that some plaintiffs' claims arise out of oral misrepresentations not made to other plaintiffs (¶¶ 73-80). Moreover, ¶¶ 69 and 71 allege that advertisements were simply used to induce plaintiffs to phone a Newman Company representative, at which point each plaintiff may have been persuaded by representations made only to them.

Despite these ambiguities, I am not inclined at this stage to order severance of plaintiffs. Such a ruling would expose defendants and the already over-burdened judiciary to perhaps hundreds of individual lawsuits, which may ultimately prove to be sufficiently related to justify joinder. Therefore, plaintiffs will be required to file a more definite statement of their claims (a procedure to which they apparently have no objection, see Pl. br. p. 8, n. 3) if they wish to pursue their misrepresentation claims in unison.

In order to satisfy Rule 20(a), they must allege that their claims arise from one or more uniform misrepresentations. To do so, they must specifically identify which representations and/or omissions, if any, were made to all plaintiffs. If the representation was written, the writing in which the representation appeared and the date of publication must be set forth. That plaintiffs' claims may be premised on oral misrepresentations does not preclude joinder, provided plaintiffs allege that the substance of the oral representations was standardized (e.g., if sales persons were directed to make a standardized "pitch" for Newman's securities). Those plaintiffs whose claims arise out of representations not made to other plaintiffs must be specifically identified and will be subject to severance.

The FAS defendants also contend that their joinder with the Source defendants is inappropriate given that each company operated as Newman's broker-dealer during distinct time periods. The argument is not without merit. Nonetheless, severance of defendants is not warranted at this juncture. It may be that a number of plaintiffs have claims against both FAS and Source. Severance would require those plaintiffs to prosecute two separate lawsuits. In addition, if plaintiffs can establish that all were duped by a common misrepresentation, the claims against the two broker-dealers would appear to be sufficiently related to justify joinder.

STATUTE OF LIMITATIONS

Most of the defendants have filed motions to dismiss various counts of the amended complaint on the ground that the claims are time-barred. Two points must be made at the outset.

First, defendants argue that the timeliness of plaintiffs' action should not be based on the date the original complaint was filed (October 4, 1985). Rather, defendants contend the relevant benchmark is March 14, 1986, the date the amended complaint was filed. They further urge that the amended complaint does not relate back to the initial filing.

Fed.R.Civ.P. 15(c) provides that an amended complaint relates back if it "arose out of the conduct, transaction or occurrence set forth or attempted to be set forth in the original pleading...." (emphasis added). There is no question that the amended complaint arose out of the conduct and transactions set forth in the original complaint. Plaintiffs allege in both pleadings that they were fraudulently induced to purchase unregistered Newman Company securities between 1980 and 1984. It is true that the original complaint is not as particularized as the amended version. But, as the highlighted language in Rule 15 suggests, mere amplification of the details of the transactions does not alter the essential nature of the conduct at issue. Neither is the addition of new legal theories of consequence where, as here, the original complaint gave defendants adequate notice of the conduct and transactions that gave rise to the new claims. Since all of the moving defendants were named as defendants in the original complaint, they cannot feign ignorance of its allegations. See generally 6 C. Wright, A. Miller Federal Practice and Procedure, § 1497 (1971) and the 1987 supplement thereto, at pp. 252-253 (distinguishing cases cited by FAS).

Second, plaintiffs bear the burden of pleading and proving facts showing that their claims were filed within the limitations period established by the Securities Act of 1933. See Cook v....