State of Ohio v. Peterson, Lowry, Rall, Barber & Ross

• Decision Date: 24 April 1981
• Docket Number: No. 79-1762,79-1762
• Citation: 651 F.2d 687
• Parties: , Fed. Sec. L. Rep. P 97,880 STATE OF OHIO, Plaintiff-Appellant, v. PETERSON, LOWRY, RALL, BARBER & ROSS et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 687

651 F.2d 687

71 A.L.R.Fed. 244, Fed. Sec. L. Rep. P 97,880

STATE OF OHIO, Plaintiff-Appellant, v. PETERSON, LOWRY, RALL, BARBER & ROSS et al., Defendants-Appellees.

No. 79-1762.

United States Court of Appeals Tenth Circuit.

April 24, 1981.

Rehearing and Rehearing En Banc Denied May 26, 1981.

J. Vernon Patrick, Jr., Birmingham, Ala. (Thomas J. Gallo and William R. Sylvester, Birmingham, Ala., with him on the brief) of Berkowitz, Lefkovits & Patrick, Birmingham Ala. (and Harry L. Hobson and William J. Baum, Jr. of Holland & Hart, Denver, Colo., with him on the brief), for plaintiff-appellant.

Robert H. Wheeler, Chicago, Ill. (Donald J. McLachlan and John W. Treece, Chicago, Ill., with him on the brief) of Isham, Lincoln & Beale, Chicago, Ill. (and Jeffrey A. Hyman, Denver, Colo., with him on the brief), for defendants-appellees Peterson, Ross, Rall, Barber & Seidel and individually-named defendants-appellees except Timothy G. Lowry.

Mitchell A. Orpett, Chicago, Ill. (Donald M. Haskell and James J. Widland, Chicago, Ill., with him on the brief) of Haskell & Perrin, Chicago, Ill. (and Raymond J. Connell of Yegge, Hall & Evans, Denver, Colo., with him on the brief), for defendant-appellee Timothy G. Lowry.

Before SETH, Chief Judge, McKAY, Circuit Judge, and PALMIERI, District Judge ^*.

PALMIERI, District Judge.

The State of Ohio appeals from a summary judgment dismissing its action in securities fraud as barred by the statute of limitations. Ohio brought this action under § 20 and § 10(b) of the Securities Exchange Act of 1934 ¹ against Peterson, Lowry, Rall, Barber & Ross, a Chicago law firm, and Timothy G. Lowry, a former member of that firm, on October 7, 1976 in the District of Colorado. The district court found, in a thorough opinion, after permitting Ohio to amend its complaint and after a full opportunity for discovery had been afforded the parties, ² that the applicable three-year statute of limitations had run. This decision followed an earlier appellate disposition in the case by this court which resolved certain procedural problems but left the limitations question open for decision on a fresh record. Ohio v. Peterson, Lowry, Rall, Barber & Ross, 585 F.2d 454 (10th Cir. 1978).

The Factual Background

On April 17 and May 1, 1970, Ohio bought two promissory notes of King Resources Company (KRC) for a total of $8 million as part of its investments in commercial paper. Each had a two-year maturity. KRC was involved in oil, gas, and other natural resource ventures. Its bankruptcy in 1971 entailed creditor and investor losses of many millions of dollars. On November 16, 1970, the Securities and Exchange Commission filed a complaint in the Southern District of Ohio against the broker who handled the sale of the notes to Ohio and also against KRC, John M. King (KRC's founder, former chairman and major stockholder), and numerous others, alleging fraud in the sale of KRC securities. SEC v. Crofters, 351 F.Supp. 236 (S.D.Ohio 1972). On the basis of the S.E.C.'s complaint, later in 1972 Ohio brought an action in securities fraud against fifteen defendants, including KRC, John M. King, and KRC's accounting firm. See Ohio v. Crofters, 75 F.R.D. 12 (D.Colo.1977). Both SEC v. Crofters and Ohio v. Crofters dealt with the same transactions which form the basis of the case at bar.

At the time of the fraud alleged in Ohio v. Crofters, the appellee law firm represented KRC, and appellee Lowry was KRC's general counsel and a member of its board of directors. ³ There appears to be no doubt that King dominated and controlled KRC and that Lowry was closely involved with him in numerous transactions. Although Ohio failed to join appellees as defendants, their possible role in frauds involving KRC did not escape other plaintiffs. Lowry and the firm were named as defendants in at least eleven other suits concerning KRC. Many of these suits were consolidated with Ohio v. Crofters after it was transferred by the Judicial Panel on Multi-district Litigation to the District of Colorado on November 17, 1972. See In re KRC Securities Litigation, 352 F.Supp. 975 (Jud.Pan.Mult.Lit.1972).

Exhibits in the record indicate that the KRC lawsuits received extensive publicity almost from the time of the initial collapse of KRC. Lowry was prominently mentioned in a number of such articles. The publications included the nationally circulated Wall Street Journal and local newspapers in Ohio, Texas and Colorado.

Internal memoranda from the Ohio Attorney General's office produced on discovery reveal that Lowry's possible involvement had come to the attention of Ohio's lawyers in 1972 or early in 1973. A note from the Ohio files made by Richard N. Patterson, then an Assistant Attorney General, refers to Lowry as "active in the inflation" presumably a reference to the fraudulent inflation of KRC's stated assets. A June 1973 memorandum reflects a call received by the Attorney General's office about Ohio's willingness to settle a claim against Lowry's director's liability policy. ⁴

An involuntary petition in bankruptcy had been filed against KRC on August 18, 1971, in the Northern District of Texas. After venue was changed to the District of Colorado, the trustee in bankruptcy, acting on behalf of KRC's creditors, applied for permission to sue Lowry and the Peterson firm. Ohio was a major creditor and active participant in the bankruptcy proceeding. The trustee's proposed complaint, filed in the bankruptcy proceeding on August 21, 1973, ⁵ alleged that Lowry and the firm had conspired to defraud KRC of $1.1 million from December of 1968 through October of 1970 the period during which Ohio had purchased its KRC notes.

Ohio argues that the statute of limitations in its fraud action against appellees should be tolled until January 5, 1976, the date when Ohio claims it first discovered the fraud by Lowry and the firm. Ohio says that on this date Lowry revealed in a deposition that a sale which he had certified in 1970 as genuine was in fact subject to a secret buy-back agreement, a copy of which Lowry had hidden in his firm's safe in Chicago and later destroyed. Ohio, noting that it could not have deposed Lowry earlier because of a court-imposed stay of discovery, claims that despite its diligence it could not have known of Lowry's involvement ⁶ until Lowry's deposition. Appellees offer a different explanation for Ohio's delay. They note that Patterson, referring to the KRC bankruptcy proceeding in an internal memorandum of the Attorney General's office dated April 11, 1973, said that "our negligence in this case is stunning," and added: "I cannot emphasize more strongly ... the fiasco further apathy might engender."

I.

Since there is no federal statute of limitations applicable to private actions under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and S.E.C. Rule 10b-5 promulgated thereunder, the limitations period is supplied by the law of the forum state. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210 n.29, 96 S.Ct. 1375, 1389, 47 L.Ed.2d 668 (1976). The district court held that the applicable state statute was Colo.Rev.Stat. § 13-80-109 (1973), and that ruling has not been appealed. Section 13-80-109 provides: "Bills of relief on the ground of fraud shall be filed within three years after the discovery by the aggrieved party of the facts constituting such fraud, and not afterwards."

The rule in this circuit has been that in fraud cases only the limitations period is borrowed from state law, whereas the tolling rule is supplied by federal jurisprudence. Esplin v. Hirschi, 402 F.2d 94, 103 (10th Cir. 1968), cert. denied, 394 U.S. 928, 89 S.Ct. 1194, 22 L.Ed.2d 459 (1969). As we noted not long ago, Aldrich v. McCulloch Properties, Inc., 627 F.2d 1036, 1041 (10th Cir. 1980), the Esplin rule appears to conflict with certain language in Board of Regents v. Tomanio, 446 U.S. 478, 100 S.Ct. 1790, 64 L.Ed.2d 440 (1980). There, the Supreme Court held that under the borrowing statute for federal civil rights cases, 42 U.S.C. § 1988, a federal judge was barred from exercising equitable power to toll the limitations period where the borrowed state statute contained no provision for tolling under the circumstances presented and further provided: "No court shall extend the time limited by law for the commencement of an action." Id., 446 U.S. at 486, 100 S.Ct. at 1796. Section 1988 applies only to the civil rights provisions of Title 18 and Title 42, United States Code. There is no analogous borrowing statute applicable to implied private actions under the Securities Exchange Act of 1934. To apply the Tomanio rule by analogy to cases where federal courts borrow a state limitations period as a matter of judicial convenience would in effect overrule ⁷ Holmberg v. Armbrecht, 327 U.S. 392, 66 S.Ct. 582, 90 L.Ed. 743 (1946), a decision whose continuing vitality is attested by the many cases relying upon it in § 10(b) private actions. ⁸ We do not believe the Supreme Court intended that such a significant consequence should be attached sub silentio to its decision, especially since the precedents cited by the Court in Tomanio all deal with civil rights cases under § 1988. Board of Regents v. Tomanio, supra, 446 U.S. at 483, 100 S.Ct. at 1794.

Another reason for standing by our decision in Esplin v. Hirschi is the question (left unanswered by Tomanio ) of how deeply into state case law a federal court deciding a federal cause of action must go in order to borrow a state limitations period. Tomanio stays within the four corners of the state statute. Here, however, Colo.Rev.Stat. § 13-80-109 computes the limitations period from plaintiff's discovery of the fraud without any requirement that plaintiff exercise reasonable diligence. For the diligence requirement, one must look to Colorado decisions. Greco v. Pullara, 166 Colo. 465, 444 P.2d 383 (1968). Similarly, one question we must resolve in this case concerns the respective...