Sagehorn v. Engle

• Decision Date: 18 July 2006
• Docket Number: No. B188323.,B188323.
• Citation: 46 Cal.Rptr.3d 131,141 Cal.App.4th 452
• Court: California Court of Appeals Court of Appeals
• Parties: Robert SAGEHORN, et al., Plaintiffs and Respondents, v. Michael R. ENGLE, Defendant and Appellant.

46 Cal.Rptr.3d 131

141 Cal.App.4th 452

Robert SAGEHORN, et al., Plaintiffs and Respondents, v. Michael R. ENGLE, Defendant and Appellant.

No. B188323.

Court of Appeal, Second District, Division 4.

July 18, 2006.

Certified for Partial Publication.^*

Proskauer & Rose and Robert H. Horn, Los Angeles, for Defendant and Appellant.

Scott E. Schutzman, Santa Ana, and Lee W. Chen, for Plaintiffs and Respondents.

WILLHITE, J.

INTRODUCTION

This case involves a lawsuit based upon the Securities Act of 1933 (15 U.S.C. §§ 77a et seq.), hereafter referred to as the "1933 Act."¹ Section 12(a)(1) of the 1933 Act creates civil liability for the sale of an unregistered security (§ 77l (a)(1).) The purchaser can sue the seller in either state or federal court for rescission and recovery of the purchase price.² Section 13 of the 1933 Act provides that the action is subject to a one-year statute of limitations that begins to run when the sale is made.

Here, three purchasers sued a seller of an unregistered security. The buyers, conceding that they had filed their action past the applicable one-year statute of limitations, relied upon the doctrine of equitable tolling to halt the running of the limitations period. They based their equitable tolling theory on evidence that the seller had affirmatively misrepresented to them that the security was registered. In a bench trial, the trial court found that the principle of equitable tolling applied to a section 12(a)(1) action and that the buyers had established its evidentiary foundations. The trial court awarded the buyers a total judgment of $301,000.

On this appeal, we decide a question of first impression: does the principle of equitable tolling apply to a section 12(a)(1) action? No California or federal appellate court has addressed this question. The federal district courts are in conflict, with the vast majority of those courts finding the doctrine inapplicable. We adopt the majority view for two reasons. First, the lynchpin of equitable tolling — the defendant's ability to conceal from a plaintiff the right to bring a lawsuit — is not present in a section 12(a)(1) action, because whether a security is registered is a matter of public record. Hence, there is no reason to equitably toll the time in which a lawsuit must be filed. Second, the language of section 13 — the provision setting forth a statute of limitations for, inter alia, a section 12(a)(1) action — militates against applying the equitable tolling doctrine. In section 13, Congress included a discovery rule for certain classes of claims but omitted that rule for a section 12(a)(1) claim. This omission reflects congressional intent to prohibit the use of the equitable tolling doctrine in a section 12(a)(1) action.

Plaintiffs concede that they filed the lawsuit beyond the statutory one-year period. Consequently, our resolution of this issue in favor of the seller is dispositive of the appeal and renders it unnecessary to address any of his other claims of error. We reverse with directions to enter judgment in favor of the seller.

FACTUAL AND PROCEDURAL BACKGROUND³

The plaintiffs are three brothers: Robert, John and Thomas Sagehorn.⁴ The defendant is Michael Engle. The transaction at issue involved shares in Genesis Fund.

In March 2000, defendant invited Robert to invest in Genesis Fund. Thereafter, defendant gave Robert copies of the fund's brochure and subscription agreement. After signing the subscription agreement, Robert made his initial purchase of Genesis Fund shares on March 20, 2000. Several months later, Robert told his two brothers about the investment. On or about July 1, 2000, Thomas made his only purchase of shares in Genesis Fund for $26,000. John made two purchases of Genesis Fund shares for a total of $75,000. The first was in September 2000 and the second was in August 2001. Robert made several purchases in the Fund, for a total of $200,000. Robert's last purchase was made in January 2002.

In late 2002, plaintiffs learned that Genesis Fund had suffered substantial investment losses. In July 2003, they filed suit. In the trial court, plaintiffs conceded that their action had been filed more than one year after each plaintiff had made his last purchase of shares in Genesis Fund. To avoid a defense of the one-year statute of limitations, plaintiffs relied upon the doctrine of equitable tolling. As will be explained in more detail below, equitable tolling suspends the running of the statute of limitations during the period a plaintiff exercises due care, but remains ignorant of the facts entitling him to sue because of the defendant's concealment of those facts.

At trial, the parties presented conflicting evidence on the issue of equitable tolling. Plaintiffs' theory was that defendant had affirmatively misrepresented to them that Genesis Fund shares were registered securities. Plaintiffs argued that they did not learn the true fact of non-registration until within a year of filing suit. The parties presented documentary evidence such as the Genesis Fund brochure, Genesis Fund subscription agreements, and letters written by defendant to plaintiffs. In addition, the three plaintiffs testified to what defendant had told them about the status of Genesis Fund. Defendant presented contrary testimony.

The trial court first resolved the legal issue in favor of plaintiffs; it adopted the minority view that the one-year statute of limitations is subject to equitable tolling when there is fraudulent concealment. The trial court then resolved the factual issue in favor of plaintiffs. The court noted that one provision in the subscription agreement that defendant had provided to plaintiffs stated that Genesis Fund was not registered. However, the court went on to find that this language was contradicted by other language in the agreement and was ambiguous in light of still another provision. In addition, the court found that defendant's subsequent letters to plaintiffs contradicted the subscription agreement's statement of non-registration. The court concluded: "These facts, along with testimony from Plaintiffs that they relied on the belief that Genesis Fund was registered in large part based on Defendant's affirmative oral and written representations, are sufficient to find that [plaintiffs] were not on notice of the non-registration status of Genesis Funds at the time they signed the subscription agreement. Therefore, the Court finds that equitable tolling applies from November 13, 2000, when [defendant] affirmatively represented Genesis Fund to be `like a mutual fund,' to October 26, 2002 when [plaintiff Robert Sagehorn] returned from the Genesis Fund meeting in Mexico City and discovered Plaintiffs' investments were in serious trouble. Since the complaint was filed on July 21, 2003, it is not barred by the one-year statute of limitations."

The trial court rejected defendant's other arguments and defenses and entered judgment in favor of plaintiffs. This defense appeal follows.

DISCUSSION

1. The 1933 Act

The primary purpose of the 1933 Act "is to protect investors by requiring publication of material information thought necessary to allow them to make informed investment decisions concerning public offerings of securities in interstate commerce. [Citations.] The registration requirements are the heart of the Act, and § 12(1)[⁵] imposes strict liability for violating those requirements. Liability under § 12(1) is a particularly important enforcement tool, because in many instances a private suit is the only effective means of detecting and deterring a seller's wrongful failure to register securities before offering them for sale. [Citations.]" (Pinter v. Dahl (1988) 486 U.S. 622, 638, 108 S.Ct. 2063, 100 L.Ed.2d 658, italics added.)

Section 12(a)(1) therefore creates strict liability if a sale violates the registration provisions of Section 5 of the 1933 Act (§ 77e). Section 13 of the 1933 Act (§ 77m) contains the statute of limitations for bringing a civil action for sale of an unregistered security (§ 77l (a)(1)), for fraud in the sale of a security (§ 77l (a)(2)), and for making a false registration statement (§ 77k). The first portion of section 13 reads:

"No action shall be maintained to enforce any liability created under section 77k or 77l (a)(2) of this title unless brought within one year after the discovery of the untrue statement or the 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 77l(a)(1) of this title, unless brought within one year after the violation upon which it is based." (§ 77m, italics added.)

The one-year statute begins to run when the unregistered security is sold. (Snyder v. Newhard, Cook & Co., Inc. (D.Colo.1991) 764 F.Supp. 612, 618.)

The second portion of section 13 contains the following language. As explained below, this provision constitutes a statute of repose.

"In no event shall any such action be brought to enforce a liability created under section 77k or 77l (a)(1) of this title more than three years after the security was bona fide offered to the public, or under section 77l (a)(2) of this title more than three years after the sale." (§ 77m.)

A statute of repose is "a subspecies" of the statute of limitations. "A statute of repose runs from a fixed date readily determinable by the defendant, such as, for example, the date of `sale,' `transaction,' `accident,' or `occurrence,' rather than a date determined by the personal circumstances of the plaintiff, such as, for example, the date of `discovery' or `damage.' Using a fixed date easily determined by the defendant allows for `repose' from the cause of action and serves the need for finality in certain financial and professional dealings." (Caviness v. Derand Resources Corp. (4th. Cir.1993) 983 F.2d 1295, 1300, fn. 7.)

Section 13 therefore incorporates both a statute of limitation (claim...