Shepard v. City Co. of New York

• Decision Date: 30 September 1938
• Citation: 24 F. Supp. 682
• Parties: SHEPARD v. CITY CO. OF NEW YORK, Inc.
• Court: U.S. District Court — District of Minnesota

24 F. Supp. 682

SHEPARD v. CITY CO. OF NEW YORK, Inc.

District Court, D. Minnesota, Third Division.

September 30, 1938.

O'Brien, Horn & Stringer, of St. Paul, Minn., for plaintiff.

Doherty, Rumble, Butler, Sullivan & Mitchell, of St. Paul, Minn., for defendant.

BELL, District Judge.

This is an action to recover the purchase price of corporate stock sold to the plaintiff by the defendant. The defendant, on seven different occasions from December 6, 1928, to November 13, 1930, sold to the plaintiff shares of the capital stock of The National City Bank of New York together with a proportionate beneficial interest in the capital stock of the defendant. The sales aggregated 640 shares and a total consideration of $194,328 was paid. These sales were all made more than six years prior to August 9, 1937, the date when this action was commenced.

Each sale of the shares of the capital stock of the National City Bank, with a proportionate beneficial interest in the capital stock of the defendant, was a unit transaction and the respective stock certificates evidenced the number of shares issued to the purchaser in both the National City Bank and the National City Company. Thus the sales of the stock of the defendant were linked with the sales of the stock of the bank.

These sales were made in the state of Minnesota and the stock was not registered under the Blue Sky Law (Sections 3996-4 to 3996-22, Mason's Minnesota Statutes 1927). The plaintiff at the times he made the purchases did not know the stock had not been registered according to law, and did not discover it until March 1, 1937. The plaintiff assumed that the stock was registered and made no inquiry about it. The defendant did not divulge that fact.

The defendant was licensed to transact business in the State of Minnesota in 1917, at which time it filed its articles of incorporation and appointed an agent for service of process. In August, 1934, it withdrew, revoked the agency for service purposes, and appointed the Secretary of State as the "agent of said withdrawing corporation for service of legal process and other notices upon it in any action or proceeding of any nature or kind arising out of or involving anything done or omitted by said foreign corporation in this state while licensed to do business here," as required by Section 7494, Mason's Minnesota Statutes 1927.

The defendant applied for and received a broker's license from the Blue Sky Commission in 1926 and filed a power of attorney appointing "the chairman of the commission attorney for the service of process in any action or proceeding against such person or in which such person may be a party, in relation to or involving any transaction covered by" the Securities Act. The appointment was irrevocable and was for one year. It was renewed from year to year and kept in effect until June 12, 1934, when on application of the defendant it was terminated by order of the Commission. The defendant in June, 1934, closed its offices and ceased to transact business in Minnesota. It made application for dissolution under the laws of New York and was dissolved in June, 1934.

The defendant has interposed the bar of the statute of limitations and affirmatively has alleged ratification, laches and estoppel. The plaintiff contends the limitation period did not begin until March 1, 1937, the date when the plaintiff first discovered that the stock was not registered; and that, even if it began when the sales were made, the statute was tolled by the withdrawal of the defendant from the state on August 23, 1934. Therefore, the first question is on the bar of the statute and that question involves the nature of the cause of action.

The Blue Sky Law of Minnesota provides that "no securities shall be sold within the State of Minnesota unless or until such securities have been registered as herein provided." (3996-4) A sale of corporate stock that is not registered in accordance with the statutes is illegal and the consideration paid therefor can be recovered by the purchaser. Vercellini v. U. S. I. Realty Company, 158 Minn. 72, 196 N.W. 672; Webster v. U. S. I. Realty Company, 170 Minn. 360, 212 N.W. 806; Drees v. Minnesota Petroleum Company, 189 Minn. 608, 250 N.W. 563; David E. Baker v. National City Company, decided by Judge Joyce of this court April 22, 1937, not reported. The court in these cases characterized such sales as void. The purpose of the law is stated in the Webster Case, as follows page 807: "* * * The purchaser was not a party to the violation of the statute. He is not in pari delicto with the seller. The statute was intended to protect one class of people against the imposition of another class. The basis of this rule is that no one shall be allowed to enrich himself at the expense of another through his own wrongful act." (Citing authorities)

The language of the court in the Minnesota cases has not always been consistent. In Edson v. O'Connell, 190 Minn. 444, 252 N.W. 217, the court said page 218: "the sale is not as to him the purchaser void, but voidable," although the court followed with the statement that the purchaser could recover "without first offering to rescind or return the stock, as held in the Drees Case." Regardless of whether the sale of unregistered stock be termed void or voidable, it is settled in Minnesota that the purchaser can recover the consideration.

However, it is necessary to determine the character of the action in order to ascertain the applicable section of the statute of limitations. Section 9191 provides:

"The following actions shall be commenced within six years:

"1. Upon a contract or other obligation, express or implied, as to which no other limitation is expressly prescribed.

"2. Upon a liability created by statute, other than those arising upon a penalty or forfeiture. * * *

"6. For relief on the ground of fraud, in which case the cause of action shall not be deemed to have accrued until the discovery by the aggrieved party of the facts constituting the fraud."

The Minnesota decisions above cited clearly indicate that the action is not on a contract, express or implied, or on a liability created by statute. The court in the Vercellini Case said: "No transaction in violation of law can be made the foundation of a valid contract." The court in the Webster Case said: "The basis of this rule is that no one shall be allowed to enrich himself at the expense of another through his own wrongful act." The court in the Drees Case said page 565: "The action is not one in quasi contract for recovery of money had and received by the corporation on an implied promise to repay, but for recovery on the ground of tort." See, also, Tipton v. Atchison, Topeka & Santa Fe Railway Company, 298 U.S. 141, 56 S.Ct. 715, 80 L.Ed. 1091, 104 A.L.R. 831; Metropolitan Railroad Company v. District of Columbia, 132 U.S. 1, 10 S.Ct. 19, 33 L.Ed. 231; Hertz Drivurself Stations, Inc., v. Ritter, 9 Cir., 91 F.2d 539; Durham v. Firestone Tire & Rubber Company, 47 Ariz. 280, 55 P.2d 648.

The action is in tort according to the Supreme Court of Minnesota. The basis of the tort is fraud. The fraud consisted of sales of corporate stock to the plaintiff without divulging to him that it was not registered as required by the Minnesota law. The defendant violated the law, and that was sufficient to entitle the plaintiff to recover even though no express representations were made by the defendant with intent to defraud. The courts repeatedly have said that the seller and buyer of securities are not in pari delicto. The seller is presumed to know the character of his goods; and if he chooses to sell them in violation of the law, let him beware. Securities are issued to sell; too often they are designed unduly to attract. Myriads of buyers may be found among the innocent and unsuspecting. The statute undertakes to protect those without from those with knowledge, to protect the weak from the strong, one of the chief functions of government. The effort of the state to exercise some degree of supervision over the activities of modern agencies of "high finance" certainly should not be discouraged by judicial interpretation. When an express provision of the law is violated, in a sale of securities subject to registration under the Blue Sky Law, the term "fraud" is an appropriate characterization of the disobedience.

The plaintiff contends that the fraud should be implied from the circumstances of the transaction and was actual fraud. The defendant contends that, if the term "fraud" may be used, it was purely constructive; and that the statute of limitations commenced to run at the time of the transaction and not at the time of discovery. In Blue Sky cases the period of limitation should be the same whether the fraud is actual or constructive. The character of the fraud will not justify one rule in one class and a different rule in another class. In cases where there has been actual fraud, the statute allows six years from the discovery of the fraud to begin action; in cases where the fraud is implied from the circumstances of the situation, the period of limitation likewise should be six years from the discovery of the fraud. Substantially the same reasons exist in both classes of cases. Distinctions may be made but they do not justify a difference. The courts have held that the fundamental purpose of a Blue Sky Law is to prevent fraud. Zochrison v. Redemption Gold Corporation, 200 Minn. 383, 274 N.W. 536; Hall v. Geiger-Jones Company, 242 U.S. 539, 37 S.Ct. 217, 61 L.Ed. 480, L.R.A.1917F, 514, Ann.Cas.1917C, 643; Northwest Bancorporation v. Benson, D. C., 6 F.Supp. 704.

In actions based on fraud, whether in equity to rescind or at law for damages, the six year statute of limitations beginning with the discovery of the fraud has been applied. Humphrey v. Carpenter, 39 Minn. 115, 39 N.W. 67; Shave v. United States Fidelity & Guaranty Company, 199 Minn. 538, 272 N.W. 597. This rule has been...