Tregenza v. Great American Communications Co.

• Citation: 12 F.3d 717
• Decision Date: 23 December 1993
• Docket Number: No. 93-2341,93-2341
• Parties: , Fed. Sec. L. Rep. P 98,010 W. Kenneth TREGENZA, James E. Haas, and Erwin B. Seegers, Plaintiffs-Appellants, v. GREAT AMERICAN COMMUNICATIONS COMPANY and Shearson Lehman Brothers, Incorporated, Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 717

12 F.3d 717

62 USLW 2415, Fed. Sec. L. Rep. P 98,010

W. Kenneth TREGENZA, James E. Haas, and Erwin B. Seegers Plaintiffs-Appellants, v. GREAT AMERICAN COMMUNICATIONS COMPANY and Shearson Lehman Brothers, Incorporated, Defendants-Appellees.

No. 93-2341.

United States Court of Appeals Seventh Circuit.

Argued Nov. 8, 1993.

Decided Dec. 23, 1993.

Arthur T. Susman, Terry Rose Saunders, Robert E. Williams, Terrence Buehler (argued), Susman, Saunders & Buehler, Chicago, IL, for plaintiffs-appellants.

Steven J. Rotunno, Timothy J. Murphy, J. Patrick Sexton, Sedgwick, Detert, Moran & Arnold, Chicago, IL, James E. Burke (argued), James R. Matthews, Keating, Muething & Klekamp, Cincinnati, OH, for Great American Communications Co.

H. Nicholas Berberian (argued), Jerry M. Santangelo, Robert J. Mandel, Neal, Gerber & Eisenberg, Chicago, IL, for Shearson Lehman Bros., Inc.

Before POSNER, Chief Judge, and BAUER and EASTERBROOK, Circuit Judges.

POSNER, Chief Judge.

Section 9(e) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78i(e), requires that suits to enforce the substantive provisions of section 9 be brought "within one year after the discovery of the facts constituting the violation and within three years after such violation." The Supreme Court has held that section 9(e) supplies, as well, the statute of limitations (more properly called, in the case of the three-year cutoff, a statute of repose) for suits brought under the SEC's Rule 10b-5, which was promulgated under section 10(b) of the Act, 15 U.S.C. Sec. 78j(b), a section that contains no statute of limitations. Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, --- U.S. ----, ----, 111 S.Ct. 2773, 2780, 115 L.Ed.2d 321 (1991). Of course section 9(e) is confined by its terms to suits under section 9, but the Supreme Court has long "borrowed" limitations periods for federal statutes lacking them from other statutes, federal or state, and that is what it did in Lampf.

We must decide whether the one-year statute of limitations in section 9(e) begins to run when the victim of the alleged fraud became aware of facts that would have led a reasonable person to investigate whether he might have a claim ("inquiry notice"), or not until he became aware that he was, in fact, a victim of fraud ("actual knowledge"). The issue was not addressed in Lampf, and as the opinion contains dicta pointing both ways, compare --- U.S. at ---- n. 2, 111 S.Ct. at 2777 n. 2 with id. --- U.S. at ---- n. 9, 111 S.Ct. at 2782 n. 9, not much help can be got from it. The district judge, in accordance with all the appellate holdings on the question, e.g., Menowitz v. Brown, 991 F.2d 36, 41-42 (2d Cir.1993) (per curiam); Anixter v. Home-Stake Production Co., 939 F.2d 1420, 1434 (10th Cir.1991), as amended on denial of rehearing, 947 F.2d 897, 899 (10th Cir.1991), vacated on different grounds under the name Dennler v. Trippet, --- U.S. ----, 112 S.Ct. 1658, 118 L.Ed.2d 382 (1992), held that inquiry notice sets the statute running and that the plaintiffs had such notice no later than October 1990--making their suit, filed in September 1992, untimely. 823 F.Supp. 1409 (N.D.Ill.1993).

The judge held in the alternative that the suit must be dismissed because the plaintiffs had failed to plead in their complaint facts demonstrating the timeliness of the suit. There are cases, in fact securities cases, that say this. E.g., Davidson v. Wilson, 973 F.2d 1391, 1402 n. 8 (8th Cir.1992); Anixter v. Home-Stake Production Co., supra, 939 F.2d at 1434; Cook v. Avien, Inc., 573 F.2d 685, 695 (1st Cir.1978). And it has the support of the redoubtable Louis Loss. 10 Louis Loss & Joel Seligman, Securities Regulation 4501-02 (3d ed. 1993). The cases give no reason for the rule; nor does the Loss treatise; and the rule makes no sense that we can see. The statute of limitations is an affirmative defense, and a plaintiff is not required to negate an affirmative defense in his complaint. Gomez v. Toledo, 446 U.S. 635, 640, 100 S.Ct. 1920, 1923-24, 64 L.Ed.2d 572 (1980). Of course if he pleads facts that show that his suit is time-barred or otherwise without merit, he has pleaded himself out of court. Early v. Bankers Life & Casualty Co., 959 F.2d 75, 79 (7th Cir.1992); Bartholet v. Reishauer A.G., 953 F.2d 1073, 1078 (7th Cir.1992). But it does not follow from the fact that a plaintiff can get into trouble by pleading more than he is required to plead that he is required to plead that more.

The authorities we have cited invoke the archaic rule that in the case of common law claims the statute of limitations merely limits the remedy, while in the case of statutory claims it limits or defines the substantive right; it is an element of the claim itself. Thomas E. Atkinson, "Pleading the Statute of Limitations," 36 Yale L.J. 914, 926 (1927). This is a conclusion rather than an explanation, and an especially dubious one where as in this case the statute of limitations isn't even found in the statute that creates the substantive right. Atkinson, the last person as far as we know to analyze the issue, gives only two reasons for the old rule that are not merely restatements of the rule itself: that statutory claims are disfavored, which was probably true in 1927 but is certainly false today; and that because tolling principles do not apply to statutes of limitations governing statutory claims, it is efficient to permit judges to dispose of untimely statutory claims on demurrer (the 1927 version of the motion to dismiss for failure to state a claim). Once again, whatever the situation may have been more than half a century ago, today tolling principles apply to statutory claims to the same extent as to common law claims. They do not apply to statutes of repose, but a statute of repose is as likely to cut off a common law claim, for example a products liability claim, as a statutory one. A complaint that on its face reveals that the plaintiff's claim is barred by a statute of limitations or repose can be dismissed on a motion to dismiss, in accordance with the principle noted above that a plaintiff can plead himself out of court; and if the suit is not vulnerable to such disposition only because the complaint omits the date at which the statutory period began to run, the defendant can supply that fact by an affidavit attached to his motion to dismiss. The motion will then be treated as a motion for summary judgment, Fed.R.Civ.P. 12(b), 56, and if the date is uncontestable and no tolling rule is possibly applicable, the suit will be dismissed in the blink of an eye. Of course we are describing the procedure under the Federal Rules of Civil Procedure, which were not in effect in 1927.

Old rules sometimes accrete new rationales as the original rationales fall to changed circumstances. But that is not the case with respect to the old rule that compliance with the statute of limitations is an element of a statutory claim. To the extent that the rule has persisted, it has done so by blind inertia. It is time that it was discarded, and though a case in which the application of the rule would not affect the outcome is not the occasion for the formal obsequies, we shall not rely on it as a possible ground for the dismissal of this suit. Instead we turn to the district judge's first ground, that the statute of limitations applicable to a suit under Rule 10b-5 starts to run when the plaintiff is put on inquiry notice and that by this criterion the present suit is untimely.

As the suit was dismissed on summary judgment, we construe the facts--without of course vouching for the construal--as favorably to the plaintiffs as the record will permit. In October 1987, defendant Great American Communications Company purchased Taft Broadcasting Company for $1.5 billion, taking on heavy debt to finance the purchase. Two years later, to reduce its debt, it arranged with Shearson Lehman Brothers, Inc. for the latter to sell to the public several million new shares of GACC common stock and use the proceeds to retire debt. Lehman's brokers received a generous commission--$1 per share of stock, the sale price being only $12.50. The fact that the proceeds were being used to retire debt was not disclosed publicly until sometime after October 12, 1989, when the sale was complete. Not until February 1992 did the public learn (through a magazine article) that Lehman had been lending large blocks of GACC stock to short sellers, who were of course banking on the stock's falling in value. The short seller borrows stock from a broker, who sells it, and later the seller buys the stock--he hopes at a lower price--and returns it to the broker to clear the loan.

In collaboration with GACC, Lehman devised a "script" for its brokers to use in selling the stock to an unsuspecting public that included the three plaintiffs in this case. The script called for the brokers to tell prospects that the stock was greatly undervalued and within two years its price should be well above $20; that the stock's downside risk at its current price level of $12 to $12.50 was less than 10 percent, which we suppose meant that there was no appreciable risk that the stock would decline more than 10 percent from its current level before beginning or resuming its ascent into the stratosphere; and that prominent investors held large blocks of GACC stock, implying that it was a promising investment. In fact, the complaint alleges, the price of the stock was grossly inflated, the downside risk was huge because the company was so burdened with debt, and prominent investors held large blocks of GACC stock only because they had received them in exchange for their stock in Taft Broadcasting Company when GACC had bought Taft two years earlier.

Immediately after the sale of the stock on October 12, 1989, its market price began what the plaintiffs describe as "a slow, steady decline." It was steady, all right--indeed inexorable. By October of the following year...