Parrent v. Midwest Rug Mills, Inc.

• Decision Date: 26 January 1972
• Docket Number: No. 18728.,18728.
• Parties: James W. PARRENT and William K. Hargett, Jr., Plaintiffs-Appellees, v. MIDWEST RUG MILLS, INC., an Illinois corporation, Beacon Hills of North Carolina, Inc., a North Carolina corporation, d/b/a Mountain Rug Mills, and John H. Boss, Defendants, and Robert Boss, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

455 F.2d 123 (1972)

James W. PARRENT and William K. Hargett, Jr., Plaintiffs-Appellees, v. MIDWEST RUG MILLS, INC., an Illinois corporation, Beacon Hills of North Carolina, Inc., a North Carolina corporation, d/b/a Mountain Rug Mills, and John H. Boss, Defendants, and Robert Boss, Defendant-Appellant.

No. 18728.

United States Court of Appeals, Seventh Circuit.

January 26, 1972.

Max Chill, Charles B. Bernstein, Byron M. Getzoff, Chicago, Ill., for defendant-appellant Robert Boss; Max & Herman Chill, Chicago, Ill., of counsel.

Thomas A. Mass, Edwin Josephson, Chicago, Ill., for plaintiffs-appellees James W. Parrent and William K. Hargett, Jr.; Mass, Miller & Josephson, Chicago, Ill., of counsel.

Before KILEY, PELL and STEVENS, Circuit Judges.

KILEY, Circuit Judge.

Defendant Robert Boss is sole appellant from a judgment against defendants in a bench trial of plaintiffs' suit to set aside their purchases of stock, of the defendant companies, as fraudulent under federal and Illinois securities laws and under common law. We reverse the judgment as to Robert Boss alone.

Parrent and Hargett (plaintiffs) were employed by defendant Midwest Rug Mills, Inc. (Midwest), respectively as bookkeeper in September, 1959, and as salesman in February, 1959. Both Midwest and defendant Beacon Hills of North Carolina, Inc. (Beacon Hills) were, during the time relevant to this suit, closely held Boss family corporations. John Boss was chairman of the board, president, director and controlling stockholder of both Midwest and Beacon Hills. His son Robert Boss was a vice-president of Midwest, and stockholder and director in both companies.

Plaintiffs at various times during their employment purchased stock in Midwest and Beacon Hills until July, 1965. The companies did not prosper. Midwest failed and was liquidated, and thereafter Beacon Hills went into receivership. Employment of both plaintiffs by Midwest ended in 1967. On October 8, 1968 they filed the joint complaint in this suit alleging that their purchases of stock in both companies were induced by fraud of the defendants. Plaintiffs¹ seek in Counts I and II to recover damages for violation of Section 17(a) of the Securities Act of 1933 (15 U.S.C. § 77q(a)), Section 10(b) of the Securities and Exchange Act of 1934 (15 U.S.C. § 78j(b)), and SEC Rule 10b-5 (17 C.F.R. § 240.10b-5); in Counts III and IV to rescind the sales and recover the purchase price under Section 13 of the Illinois Securities Law of 1953 (Ill.Rev.Stat. ch. 121½, § 137.13); and in Counts V and VI to recover damages for common law fraud.

Defendants moved to strike the complaint on the ground that all counts were barred by Illinois statutes of limitations. The court expressly denied the motion so far as it was directed to Counts I, II, V and VI, the federal securities and Illinois common law counts. No ruling is recorded as to Counts III and IV. We shall presume therefore that the motion was also denied as to those counts. The denial of the motion is challenged and presents the first question before us.²

I. The Statute of Limitations

There is no general federal statute of limitations and no provision in either Section 17 of the Securities Act of 1933 or Section 10 of the Securities and Exchange Act of 1934 governing the suit before us.³ The appropriate limitations act in the forum state of Illinois therefore controls. International Union, United Automobile, etc., Workers v. Hoosier Cardinal Corp., 383 U.S. 696, 86 S.Ct. 1107, 16 L.Ed.2d 192 (1966); Sackett v. Beaman, 399 F.2d 884, 890 (9th Cir.1968); Janigan v. Taylor, 344 F.2d 781, 783 (1st Cir.1965); Northern Trust Co. v. Essaness Theatres Corp., 103 F.Supp. 954, 965 (N.D.Ill.E.D.1952). The Illinois general five year statute of limitations (Ill.Rev.Stat. ch. 83, § 16) covers actions for fraud, Rozny v. Marnul, 43 Ill.2d 54, 69, 250 N.E.2d 656, 664 (1969). The three year limitation applies to actions brought under Section 13 of the Illinois Securities Law. We must therefore choose which of the two statutes "best effectuates" the federal policy at issue. Charney v. Thomas, 372 F.2d 97 (6th Cir.1967); Vanderboom v. Sexton, 422 F.2d 1233 (8th Cir.1970). The question posed here is one of first impression.⁴

Defendants rely upon Vanderboom to support their contention that the Illinois Securities Law three year limitation period should be applied. Plaintiffs rely upon Charney to support their contention that the general five year limitation period for fraud actions governs.

In Charney and Vanderboom — involving questions of law similar to those before us — the courts, in deciding which forum statute should be chosen, applied the resemblance test, i. e., each court applied the forum state statute of limitations which more closely resembled Rule 10b-5. The divergent results in the two cases lay in the courts' differing interpretations of the scope of 10b-5.

The Sixth Circuit in Charney thought that a plaintiff under 10b-5 was required to prove scienter as he would have had to do at common law. Since the Michigan Blue Sky Law had no provision like 10b-5, the court held that the Michigan general six year limitation applicable to common law fraud cases ought to apply,⁵ although 10b-5 was "not exactly" like the common law. In Vanderboom the Eighth Circuit read Rule 10b-5 in a broader sense that the Sixth Circuit had. The court decided that a plaintiff need not prove scienter under 10b-5 but could recover for negligent as well as intentional misrepresentation. The court applied the three year limitation of Section 22 of the Arkansas Securities Act to the 10b-5 action although Section 22 was modeled after Section 12(2) of the Securities Act of 1933. The reasons given were the "commonalty of purpose" and the lack of defenses available under both Rule 10b-5 and Section 22 of the Arkansas Securities Act as compared with the Arkansas common law fraud. The court thought a suit under 10b-5 was "a blue sky type" of claim specifically aimed at securities fraud.

We agree with the Eighth Circuit's interpretation of 10b-5 in Vanderboom. We hold therefore that the three year limitation provision in the Illinois Securities Law applies to the federal actions in Counts I and II of the complaint, since it is our view that that provision "best effectuates the policy" of protecting the "uninformed, the ignorant, the gullible."⁶ The Illinois Securities Law has a similar purpose.⁷

Section 10(b) (15 U.S.C. § 78j(b)) provides that:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange —

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(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.

It will be noted that Section 10(b) does not create a civil remedy by its terms. But it is now established that it implies a civil remedy.⁸

Section 10(b) does however grant the Securities and Exchange Commission power to prescribe rules and regulations "necessary or appropriate" in the public interest or for the protection of investors. Rule 10b-5, implementing Section 10(b), represents an exercise of that power:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

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(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, ...

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Except for the interstate elements in 10b-5, Section 12 of the Illinois Securities Law (Ill.Rev.Stat. ch. 121½, § 137.12) covers the same violations as 10b-5.

It is clear that under the resemblance test⁹ the three year limitation in Section 13, subd. D of the Illinois Securities Law (Ill.Rev.Stat. ch. 121½, § 137.13, subd. D) applies to the 10b-5 actions stated in Counts I and II.¹⁰

The three year limitation is also closer to the express limitation periods in the various sections of the federal act, noted above in n. 3. Furthermore, logic dictates selection of the three year Illinois limitation as tending more toward an orderly development of law, than reaching into a different Illinois Act (Ill.Rev. Stat. ch. 83, § 16) for the appropriate limitation.

Finally, and importantly, we think that since Section 137.12 of the Illinois act so closely parallels 10b-5, the inference follows that the Section 137.13 three year limitation better effectuates the federal policy expressed in 10b-5. Neither Section 137.12 nor 10b-5 contains the defense that one "did not know and in the exercise of reasonable care could not have known" of the misrepresentation which is contained in Section 12(2) of the federal statute (15 U.S.C. § 77l(2)) and at common law. The liability under 10b-5 and Section 137.12 is stricter; their remedies should have a greater deterence against fraud.

Plaintiffs' reliance upon Fratt v. Robinson, 203 F.2d 627 (9th Cir.1953), is of no aid to their position that the Illinois five year statute applies. There the court in a suit similar to plaintiffs' held a three year Washington state limitation governing actions "upon the ground of fraud" applied, rather than the two year limitation governing actions "to recover on a liability created by statute." Fratt at 634-635. There was no reference there to any Washington securities law which resembled Rule 10b-5. Neither is Northern Trust Co., supra, of aid to plaintiffs. That decision was rendered in January, 1952, before the Illinois Securities Law was enacted in July, 1953. The...