Short v. Belleville Shoe Mfg. Co.

• Decision Date: 30 July 1990
• Docket Number: No. 89-3271,89-3271
• Citation: 908 F.2d 1385
• Parties: Fed. Sec. L. Rep. P 95,379 Marian W. SHORT, Plaintiff-Appellant, v. BELLEVILLE SHOE MANUFACTURING COMPANY, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1385

908 F.2d 1385

Fed. Sec. L. Rep. P 95,379

Marian W. SHORT, Plaintiff-Appellant, v. BELLEVILLE SHOE MANUFACTURING COMPANY, et al., Defendants-Appellees.

No. 89-3271.

United States Court of Appeals, Seventh Circuit.

Argued June 12, 1990.

Decided July 30, 1990.

Donald E. Casey, Gary E. Dienstag, Springer, Casey, Dienstag & Devitt, Chicago, Ill., Alan C. Kohn, Robert A. Useted, Kohn, Shands, Elbert, Gianoulakis & Giljum, St. Louis, Mo., for plaintiff-appellant.

Robert S. Allen, Lewis, Rice & Fingersh, St. Louis, Mo., Amiel Cueto, Cueto, Daley, Williams, Moore & Cueto, Belleville, Ill., for defendants-appellees.

Before POSNER, EASTERBROOK, and MANION, Circuit Judges.

EASTERBROOK, Circuit Judge.

Belleville Shoe Manufacturing Company redeemed 550 shares of its stock from Marian Short in 1977, paying $273 per share. Twelve years later Short filed this suit under Sec. 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and the SEC's Rule 10b-5, 17 C.F.R. Sec. 240.10b-5, contending that Belleville (a closely-held, family corporation) and its controlling shareholders had defrauded her about the value of the shares. They painted a gloomy picture of the firm's prospects in 1977; it has prospered since. Short depicts her brother Homer Weidmann, an officer of Belleville, as her principal business adviser and contends that she delayed filing suit because Weidmann repeatedly assured her that she had received a fair price in 1977.

The district court dismissed the case under Fed.R.Civ.P. 12(b)(6), concluding that Short could not escape the statute of limitations. Short relies on state and federal tolling rules. Defendants respond that we should not inquire into tolling because Sec. 13 of the '33 Act, 15 U.S.C. Sec. 77m, which they ask us to apply, sets three years as an unyielding limit. Defendants ask, in other words, that we cease looking to state law as a source of periods of limitations in securities cases, on the authority of Agency Holding Corp. v. Malley-Duff & Associates, Inc., 483 U.S. 143, 107 S.Ct. 2759, 97 L.Ed.2d 121 (1987), which applied a federal statute of limitations (from the antitrust laws) to cases under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Secs. 1961-68.

I

A

For many years we have applied to cases under Rule 10b-5 statutes of limitations borrowed from state blue sky statutes, adding an overlay of tolling principles from state and federal law. Davenport v. A.C. Davenport & Son Co., 903 F.2d 1139 (7th Cir.1990), is the most recent in a line going back at least to Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123, 125-27 (7th Cir.1972). See also, e.g., Norris v. Wirtz, 818 F.2d 1329 (7th Cir.1987); Teamsters Local 282 Pension Trust Fund v. Angelos, 815 F.2d 452 (7th Cir.1987); Suslick v. Rothschild Securities Corp., 741 F.2d 1000 (7th Cir.1984); Goldstandt v. Bear, Stearns & Co., 522 F.2d 1265 (7th Cir.1975); Tomera v. Galt, 511 F.2d 504 (7th Cir.1975). Like the other courts of appeals, we looked to state law because Congress has not enacted a statute of limitations for Rule 10b-5, and could hardly have been expected to--for the right of action under Rule 10b-5 was created by the courts rather than Congress. Section 10(b) itself grants rulemaking authority to the SEC; because it does not create a right of action, it is not accompanied by a statute of limitations.

Because Congress was silent, we applied the principle, derived from the Rules of Decision Act, 28 U.S.C. Sec. 1652, that when federal law is deficient, state law fills the gap. One of the venerable applications is to obtain periods of limitations from state law. E.g., Auto Workers v. Hoosier Cardinal Corp., 383 U.S. 696, 704, 86 S.Ct. 1107, 1112, 16 L.Ed.2d 192 (1966) (collecting cases). This is so predictable that Congress may anticipate it, so that when it does not enact a federal statute of limitations it means to leave in place the background rule that state law applies. See Reed v. United Transportation Union, 488 U.S. 319, 109 S.Ct. 621, 625, 102 L.Ed.2d 665 (1989); Agency Holding, 483 U.S. at 147, 107 S.Ct. at 2762; DelCostello v. Teamsters, 462 U.S. 151, 158, 103 S.Ct. 2281, 2287, 76 L.Ed.2d 476 (1983). Federal courts are so accustomed to turning to state periods of limitations that we (and our colleagues in other circuits) did this on auto-pilot, without discussing whether something differentiated securities laws from other statutes. See also Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210 n. 29, 96 S.Ct. 1375, 1389 n. 29, 47 L.Ed.2d 668 (1976); Herman & MacLean v. Huddleston, 459 U.S. 375, 384 n. 18, 103 S.Ct. 683, 688 n. 18, 74 L.Ed.2d 548 (1983), both recognizing the prevailing practice.

Yet there are differences. One is that Congress could hardly have anticipated that courts would turn to state law for a period of limitations, when Congress did not create the right of action in the first place. We are not dealing here with a problem of deciding whether Congress meant to depart from a norm; we have a problem of the courts' creation. See United Parcel Service, Inc. v. Mitchell, 451 U.S. 56, 68 n. 4, 101 S.Ct. 1559, 1567, 67 L.Ed.2d 732 (1981) (Stewart, J., concurring); DelCostello, 462 U.S. at 158-59 n. 12, 103 S.Ct. at 2287 n. 12. Federal courts have an obligation to create stable periods of limitations for their handiwork. Smith v. Chicago, 769 F.2d 408 (7th Cir.1985).

A second difference is that Congress has not been silent. The securities acts are jammed with statutes of limitations. For every statutory right of action there is a corresponding statute of limitations. The Securities Act of 1933 gave the purchaser two years from the date of discovering the fraud, but in no event more than ten years from the date of sale. 48 Stat. 84 (1933). When Congress enacted the '34 Act, it amended this statute (now Sec. 13 of the '33 Act) and added four more, one for each of the new express rights of action. See Secs. 9(e), 16(b), 18(c), and 29(b), 15 U.S.C. Secs. 78i(e), 78p(b), 78r(c), and 78cc(b). In 1988 it added another for inside trading cases, 102 Stat. 4680-81, to be codified as Sec. 20A, 15 U.S.C. Sec. 78t-1. There can be no presumption that Congress meant courts to look to state law, when every time Congress has authorized a federal remedy it has also created a federal period of limitations.

Third, turning to state law for periods of limitations creates special problems under the securities acts because the acts do not apply in the first place unless the transactions occurred in interstate commerce. At least two state statutes therefore could be applied to any case. Courts must use conflict-of-laws principles to pare the number down to one. Congress enacted a national rule against fraud because it believed that national law ought to govern multi-state transactions. Returning to state law to fetch a period of limitations is inconsistent in spirit with this decision.

All of this would be by the by if the Rules of Decision Act requires federal courts to use state law. But two cases decided after the courts of appeals began to apply state law under Rule 10b-5 hold that it does not. DelCostello concluded that a six-month period drawn from the National Labor Relations Act governs "hybrid" suits alleging an employer's breach of contract coupled with a union's breach of the duty of fair representation. Agency Holding decided to apply the four-year period of limitations in the antitrust laws to suits under RICO. These cases call for fresh examination of the question whether to turn to state law in securities cases. The third circuit conducted such an examination and concluded that Sec. 13 of the '33 Act is the appropriate statute. In re Data Access Systems Securities Litigation, 843 F.2d 1537 (3d Cir.1988) (in banc). The Securities and Exchange Commission likewise believes that federal law supplies the period of limitations, although it thinks that the new Sec. 20A rather than Sec. 13 is the closer match. Brief for the United States as Amicus Curiae in Lebman v. Aktiebolaget Electrolux, No. 88-1144 (October Term, 1988), cert. denied, --- U.S. ----, 109 S.Ct. 3214, 106 L.Ed.2d 564 (1989). The time is ripe for reconsideration in this circuit too.

"[W]hen a rule from elsewhere in federal law clearly provides a closer analogy than available state statutes and when the federal policies at stake and the practicalities of litigation make that rule a significantly more appropriate vehicle for interstitial lawmaking", DelCostello, 462 U.S. at 171-72, 103 S.Ct. at 2294, quoted in Agency Holding, 483 U.S. at 148, 107 S.Ct. at 2763, it is appropriate to select a federal statute of limitations. Securities law satisfies both branches. The statutes of limitations in the securities acts are addressed to the conduct at stake in this case--securities fraud. Section 13, in particular, covers the express right of action in Sec. 12, which concerns incorrect statements and material omissions in the course of selling securities. Congress has spoken directly to the appropriate statute of limitations for litigation of the sort Short presses. When the statute contains not only a statute of limitations for every express right of action, but also an express right of action quite similar to the implied right of action, then the federal statute "clearly provides a closer analogy than available state statutes".

Difficulties in selecting an appropriate state statute also influence the "practicalities of litigation". Even when turning to state law, courts should endeavor to find a single period of limitations "that can be applied with ease and predictability in all 50 States." Owens v. Okure, 488 U.S. 235, 109 S.Ct. 573, 578, 102 L.Ed.2d 594 (1989). That task has proved daunting in securities cases. Different courts have looked to different bodies of state law for inspiration. Some borrow from the statute generally applicable to fraud; some borrow from state blue sky laws; some courts use a little of...