Ohio v. Peterson, Lowry, Rall, Barber & Ross

• Decision Date: 18 June 1979
• Docket Number: Civ. A. No. 76-F-992.
• Parties: STATE OF OHIO, Plaintiff, v. PETERSON, LOWRY, RALL, BARBER & ROSS, a partnership, Peterson, Ross, Rall, Barber & Seidel, a partnership, Timothy G. Lowry, Herbert C. Loth, Jr., Abe R. Peterson, Owen Rall, Henry P. C. W. Barber, Richard V. Henry, Jr., Gerhard E. Seidel, J. Hayden MacDonald, Elroy C. Sandquist, Jr., Irving G. Swenson, Robert G. Schloerb, Theodore J. Tsoumas, J. Robert Geiman, Thomas K. Peterson, John G. Campbell, Peter M. Sfikas, Robert S. Milnikel, Richard S. Borland, and Russell M. Pleton, Jr., Defendants.
• Court: U.S. District Court — District of Colorado

472 F. Supp. 402

STATE OF OHIO, Plaintiff, v. PETERSON, LOWRY, RALL, BARBER & ROSS, a partnership, Peterson, Ross, Rall, Barber & Seidel, a partnership, Timothy G. Lowry, Herbert C. Loth, Jr., Abe R. Peterson, Owen Rall, Henry P. C. W. Barber, Richard V. Henry, Jr., Gerhard E. Seidel, J. Hayden MacDonald, Elroy C. Sandquist, Jr., Irving G. Swenson, Robert G. Schloerb, Theodore J. Tsoumas, J. Robert Geiman, Thomas K. Peterson, John G. Campbell, Peter M. Sfikas, Robert S. Milnikel, Richard S. Borland, and Russell M. Pleton, Jr., Defendants.

Civ. A. No. 76-F-992.

United States District Court, D. Colorado.

June 18, 1979.

J. Vernon Patrick, Jr., Berkowitz, Lefkovits & Patrick, Birmingham, Ala., Harry J. Hobson, Miles M. Gersh, Luke J. Danielson, Holland & Hart, Denver, Colo., for plaintiff.

Donald M. Haskell, Mitchell A. Orpett, James J. Widland, Haskell & Perrin, Chicago, Ill., Raymond J. Connell, Yegge. Hall & Evans, Denver, Colo., Donald J. McLachlan, Robert H. Wheeler, John W. Treece, Isham, Lincoln & Beale, Chicago, Ill., Jeffrey A. Hyman, Denver, Colo., for defendants.

OPINION AND ORDER GRANTING SUMMARY JUDGMENT

SHERMAN G. FINESILVER, District Judge.

THIS MATTER, a securities case, is before the court on defendants' Motions to Dismiss, motions which we treat as Motions for Summary Judgment.¹ Defendants contend that the instant suit is untimely filed and hence barred by the applicable statute of limitations. Plaintiff, invoking the equitable tolling doctrine, asserts that its suit remains viable.

For reasons which follow, we grant defendants' motions and enter judgment for defendants.

I

Plaintiff is the state of Ohio. Through its Treasurer, plaintiff purchased a $3,000,000 promissory note on April 17, 1970 and a $5,000,000 promissory note on or about May 1, 1970. Both notes were issued by the King Resources Company ("KRC" hereinafter). Plaintiff alleges that there were securities violations in connection with the sale and purchase of those notes in 1970.

The defendants are a Chicago law firm, its successor in interest, and individual partners of the firm. The defendants were outside counsel for King Resources Company during the time in question. Plaintiff alleges that the statements, legal opinions, and representations of the defendant lawyers assisted King Resources Company and its accountants in materially overstating KRC's financial condition for the years ending December 31, 1968 and December 31, 1969. Plaintiff alleges that these defendants thereby violated provisions of federal and state law.²

The state of Ohio filed suit on April 17, 1972 against the King Resources Company, its accounting firm (Arthur Andersen & Company), a credit reporting firm (Dun & Bradstreet, Inc.), and several other named defendants, all with respect to the same transactions which underlie the instant lawsuit. See, e.g., Ohio v. Crofters, Inc., 75 F.R.D. 12, 14-15 (D.Colo.1977); see also, Defendants' Exh. A(XII).

The state of Ohio did not file the instant suit, naming the law firms and the individual lawyers as defendants, until October 7, 1976. Plaintiff alleges in its complaint that it did not become aware of the violative conduct of the defendant lawyers until 1976. Complaint, ¶ 34 (October 7, 1976); Amended Complaint, ¶ 34 (dated January 22, 1979 and accepted by this court's Order of February 8, 1979). In its amended complaint, the state of Ohio claims that the defendant lawyers fraudulently concealed their activities so that plaintiff, despite the exercise of due diligence, remained unaware of its claim against them until 1976, "the year next preceding the filing of this complaint."

On December 29, 1978, the defendants renewed their Motions to Dismiss, based upon the statute of limitations. The matter is now properly at issue (see note 1, supra), it has been fully briefed, and, on June 15, 1979, the matter was argued in open court. We are now prepared to issue our order granting defendants' motions.

II

There are three related issues of law which are relevant to the application of the statute of limitations in the instant case. These issues involve: (a) the determination of the governing statute of limitations, (b) the working of the equitable tolling doctrine, and (c) the effect of fraudulent concealment on the running of the statute. We discuss each of the three issues, in turn.

A

The governing statute of limitations is three years for each of the claims advanced by plaintiff.

The claims arise under § 17 of the 1933 Act, §§ 10(b) and 20 of the 1934 Act, and under the common law of the state of Colorado (see, note 2, supra).³

With respect to the federal claims alleged here under the 1933 and 1934 Acts, the Congress has provided no statute of limitations.⁴ Neither is there any federal statute of limitations for civil actions, generally. In this situation, the limitations period of the state in which the action is brought will be applied. We, thus, look to Colorado law.

Our starting point is Colo.Rev.Stat. § 13-80-106 (1973). That statute provides that "all actions upon a liability created by a federal statute . . . for which actions no period of limitations is provided in such statute, shall be commenced within two years or the period specified for comparable actions arising under Colorado law, whichever is longer, after the cause of action accrues." (emphasis added). We therefore begin with a presumptive two year limitations period and next inquire whether there is any other period specified for comparable actions arising under state law which may be longer than two years.

It would appear that there is, indeed, a comparable action arising under state law. Such an action is provided for in the Colorado Securities Act, Colo.Rev.Stat. §§ 11-51-101 through -129 (1973) and, specifically, in § 11-51-123. Section 11-51-123 is an enactment in Colorado of § 101 of the Uniform Securities Act. See, People v. Terranova, 563 P.2d 363, 365 (Colo.App.1976). This provision of the Uniform Act, and the Colorado enactment thereof, is substantially identical to the Securities and Exchange Commission's Rule 10b-5 and to § 17 of the Securities Act of 1933. See, 7A Uniform Laws Annotated (1978), p. 568 (Commissioners' Note).⁵

Since Rule 10b-5 and § 17 of the 1933 Act are at the heart of plaintiff's federal action, it is inescapable that Colo.Rev.Stat. § 11-51-123 is the corresponding and comparable action at state law. Section 11-51-123 is, in essence, identical to the federal provisions upon which plaintiff relies.

There is no specific limitations period attached to Colo.Rev.Stat. § 11-51-123.⁶ We are, thus, compelled to look elsewhere in state law to find the applicable period. There are three other provisions of Colorado law which are of relevance. These relate to actions based upon fraud (Colo.Rev. Stat. § 13-80-109), upon implied or constructive fraud (Colo.Rev.Stat. § 13-80-108(1)(a)), and upon all other actions of any kind for which no other period of limitation is provided (Colo.Rev.Stat. § 13-80-108(1)(b)). All three of these provisions set an identical three year limitations period. Without the necessity of further elaboration, it is thus apparent that, under one or another of these three statutes, a three year statute of limitations is provided by Colorado law for civil actions arising out of § 11-51-123 (the substantive state law provision which is most nearly comparable to the federal action brought by plaintiff herein).

It follows that, under the working of Colo.Rev.Stat. § 13-80-106 (the provision applicable to federal actions for which the Congress has set no statute of limitations), we apply, not the presumptive two year limitations period,⁷ but rather the longer, three year period specified for the comparable Colorado Securities Act civil action.⁸

With respect to the state claims here alleged, sounding in common law fraud and negligent misrepresentation, the appropriate statute of limitations is the three year period provided in Colo.Rev.Stat. § 13-80-109 for actions based upon fraud.

In summary, we conclude that the governing statute of limitations is three years for each of the claims advanced by plaintiff.

B

Though the limitations period is supplied by the law of Colorado, the circumstances which will toll the running of the statute are matters of federal law. deHaas v. Empire Petroleum Co., 435 F.2d 1223, 1225 (10th Cir. 1970); Esplin v. Hirschi, 402 F.2d 94, 103 (10th Cir. 1967).

The federal rule is that the statute of limitations does not begin to run until the plaintiff knew or, in the exercise of due diligence, should have known of the alleged fraud. Dzenits v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 494 F.2d 168, 171 (10th Cir. 1974). The focus of the inquiry under the equitable tolling doctrine is the plaintiff and the question is whether plaintiff exercised due diligence in becoming aware of the wrong.

C

A final issue of law relevant to the instant case is the effect of fraudulent concealment on the running of the statute of limitations.

At the outset, we note that the cases have recognized at least two types of fraudulent behavior which may toll the statutory period. See, Goldstandt v. Bear, Stearns & Co., 522 F.2d 1265, 1268 (7th Cir. 1975); Tomera v. Galt, 511 F.2d 504, 510 (7th Cir. 1975).

The first, and most common type, occurs where a fraud goes undetected even though the defendant has done nothing, after the commission of the wrong, to conceal it. Here, plaintiff's due diligence (or lack thereof) in becoming aware of the wrong is the essential issue. This court does not consider a situation such as this to constitute a fraudulent concealment. Indeed, this is nothing more than a variant of the equitable tolling doctrine since the focus of inquiry remains on the plaintiff. We consider this situation to be subsumed under the equitable tolling doctrine and do not consider it to call for separate attention or analysis.

The second, and more important type, occurs where the...