Smith v. Duff and Phelps, Inc.

• Decision Date: 22 October 1993
• Docket Number: No. 91-7521,91-7521
• Citation: 5 F.3d 488
• Parties: RICO Bus.Disp.Guide 8439 Vera SMITH, Executrix of the Estate of Robert J. Smith, deceased, Plaintiff-Appellant, v. DUFF AND PHELPS, INC., a corporation and Claire V. Hansen, Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 488

5 F.3d 488

RICO Bus.Disp.Guide 8439

Vera SMITH, Executrix of the Estate of Robert J. Smith, deceased, Plaintiff-Appellant, v. DUFF AND PHELPS, INC., a corporation and Claire V. Hansen,

Defendants-Appellees.

No. 91-7521.

United States Court of Appeals, Eleventh Circuit.

Oct. 22, 1993.

Griffin Sikes, Jr., Frank M. Wilson, Montgomery, AL, for plaintiff-appellant.

Richard H. Gill, Copeland, Franco, Screws & Gill, Montgomery, AL, Edward C. Fitzpatrick, Patrick E. Deady, Lord, Bissell & Brook, Chicago, IL, for defendants-appellees.

Appeal from the United States District Court for the Middle District of Alabama.

Before TJOFLAT, Chief Judge, HATCHETT and BIRCH, Circuit Judges.

TJOFLAT, Chief Judge:

Vera Smith appeals from summary judgment in favor of Duff and Phelps, Inc., on the issue of whether the statute of limitations had run on her securities fraud claims. Because a prior panel ruled (in an interlocutory appeal) that this issue was inappropriate for summary judgment, we remand for trial. Smith also appeals the district court's denial of leave to amend her complaint to reflect a federal RICO claim. Because the district court did not abuse its discretion by denying leave to amend, we affirm the denial.

I.

We set out the facts of this case in our previous opinion. Smith v. Duff and Phelps, 891 F.2d 1567 (11th Cir.1990) (Smith I ). The events that we described there have been the subject of other lawsuits as well. See, e.g., Jordan v. Duff and Phelps, 815 F.2d 429 (7th Cir.1987), cert. dismissed, 485 U.S. 901, 108 S.Ct. 1067, 99 L.Ed.2d 229 (1988); McLaury v. Duff and Phelps, 691 F.Supp. 1090 (N.D.Ill.1988); Guy v. Duff and Phelps, 672 F.Supp. 1086 (N.D.Ill.1987). Accordingly, we only briefly review the factual background. ¹

Robert Smith worked for the financial consulting and management firm Duff and Phelps, Inc., a closely held corporation, from 1956 until his retirement in 1983. Thereafter, he continued to serve as a consultant to the firm until April 1984. Smith had acquired 400 shares of Duff and Phelps stock during the 1970's, approximately 2 percent of the outstanding shares. These shares were subject to stock repurchase agreements that required Smith to sell the shares to the company at their adjusted book value upon his retirement. Pursuant to this agreement, Duff and Phelps purchased Smith's stock at a price of $100 per share in early 1983. At this time, Duff and Phelps was secretly negotiating the sale of the company. Although a deal was struck with Security Pacific Corporation in January 1984, it was an Employee Stock Ownership Trust (ESOT) that ultimately purchased the company's stock in December 1985. ² Employees sold their stock to the trust at a price of $2,065.69 per share. Duff and Phelps notified Smith of the pending sale to Security Pacific (but not the agreed price) by two letters in February 1984.

Smith filed the present suit against Duff and Phelps on August 12, 1987, more than four years after Duff and Phelps repurchased the stock. He claimed that the company had coerced him into retirement by misrepresenting the company's mandatory retirement age. The purpose of this tactic, Smith maintained, was to reduce the number of shares outstanding and, thus, to increase the per share profits of the remaining shareholders. The case proceeded under several theories, including federal securities fraud, common law fraud, breach of fiduciary duties, state securities fraud, and violation of the Racketeering Influenced and Corrupt Practices Act (RICO Act).

In his complaint, Smith alleged that the statutes of limitations on his claims ³ did not begin to run until he read an article about lawsuits stemming from the sale of Duff and Phelps in the March 20, 1987 Wall Street Journal. ⁴ He was prepared to testify that, although diligent in his inquiry, he had not discovered the alleged fraud until he read the Journal article. Smith's death in September 1987 made proof of this contention problematic. Vera Smith, Robert's wife and the executrix of his estate, was subsequently substituted as plaintiff.

On October 23, 1987, the district court dismissed plaintiff's RICO claim on the ground that it failed to "state the requisite elements for a civil RICO cause of action." The court's order was silent on whether Smith had leave to amend. In any case, Smith did not seek permission to restore the RICO claim to the complaint until October 1, 1990.

Duff and Phelps filed a motion for summary judgment on November 3, 1987, contending that the statute of limitations barred the remaining claims. The district court denied the motion for summary judgment and certified the limitations issue for immediate appeal on November 10, 1988. ⁵ This court granted certification and affirmed the ruling that denied summary judgment in Smith I.

After Smith I was decided, the parties appeared to be headed to trial. On March 7, 1991, however, Duff and Phelps filed a motion in limine in which it sought to have excluded both the statements Smith made to others on the day that he read the Journal article and their testimony about his actions and demeanor. It argued that this evidence was inadmissible hearsay and thus unavailable to prove when Smith learned of the alleged fraud. The district court agreed, and advised the parties that the evidence would be excluded. Based on its belief that the plaintiff bore "the burden of proving that Plaintiff's deceased did not discover, and would not in the exercise of reasonable diligence have discovered, the alleged fraud before August 12, 1985," the court informed the parties that unless the plaintiff could adduce competent evidence on this issue, he would direct a verdict on defendant's behalf at a trial of the limitations issue.

Throwing caution to the wind, the parties and the court decided to dispense with the formality of selecting a jury and having a trial. They reasoned that it would be more efficient to let the plaintiff make a proffer of his evidence before the court, and have the court grant defendant's motion for a "directed verdict." On April 22, 1991, a hearing was held at which the plaintiff presented evidence about the events of March 20, 1987. The plaintiff's counsel explained the procedure the parties and court had devised:

[B]y doing this we have eliminated the necessity of selection of a jury this morning and making opening statements on the bifurcated issue of the statute of limitations when, in effect, we would have had no opening ... statement to make because of Your Honor's ruling on the motion in limine.

But I do think the record should be clear, and it probably already is, that this procedure is by agreement of the parties. And I guess we could have gone through the sham of selecting a jury and putting them in the box. But we are certainly not waiving anything by [not] doing that.

And now we would just propose to proffer the evidence that we would have submitted but for your ruling on the motion in limine, in order to make what we think will be a record that will allow for an appeal.

After the proffer, the defendant, as planned, moved to exclude the evidence as hearsay and requested a "directed verdict." Not surprisingly, the court granted the Motion in Limine on May 22, 1991, and granted the Motion for a Directed Verdict on June 6, 1991. ⁶

The plaintiff appealed from the "directed verdict" on the statute of limitations defense and from a February 7, 1991, order denying her the right to amend her complaint and restate her RICO claim. We discuss the limitations issue in part II, then turn in part III to the amendment question.

II.

In reviewing this case we are reminded that "[p]utting a saddle on a duck does not make it a horse." Smith v. Morgan, 235 S.W.2d 938, 942 (Tex.Civ.App.--San Antonio 1950, error dism'd) (Pope, J., concurring). Here, the "directed verdict" saddle seems singularly inappropriate on the back feathers of the proceedings below. Whatever the parties and the court chose to call what they were doing, the posture of the case was summary judgment. We must unsaddle the duck and review the summary judgment that the court granted in favor of the defendants on the limitations issue.

Duff and Phelps' November 3, 1987 motion for summary judgment contended that the statute of limitations barred Smith's suit. The defendants argued that (1) the limitations period should be derived from federal law, and (2) Smith should have discovered any alleged fraud in February 1984, and thus that the statute of limitations should have begun to run at that time. ⁷ Similarly, Duff and Phelps' nominal motion for directed verdict ⁸ alleged that

Since Plaintiff cannot prove by a preponderance of evidence that Mr. Smith did not discover and would not, in the exercise of reasonable diligence, have discovered the alleged fraud [more than two years before the suit was filed], Defendants are entitled to a directed verdict against Plaintiff and in favor of Defendants on their defense of statute of limitations as to all of the Plaintiff's claims.

The defendants claimed that the exclusion of the evidence about the events of March 20, 1987, made it impossible for Smith to meet her burden concerning discovery of the alleged fraud. ⁹ She claimed that the evidence about the events of March 20, 1987 was not inadmissible hearsay, and that that evidence served to demonstrate that her husband had not been aware of the fraud until he read the Wall Street Journal article.

The district court denied the first motion for summary judgment on April 13, 1988, concluding that

The question for this Court becomes, then, whether the receipt of those letters in February, 1984, announcing the planned acquisition would have led a reasonable person as a matter of law to the discovery of the alleged fraud. The Court is of the opinion that summary judgment is precluded in this case since questions of notice and due diligence regarding the statute of limitations are generally questions for...