Zerman v. Ball, 22

• Citation: 735 F.2d 15
• Decision Date: 15 May 1984
• Docket Number: D,No. 22,22
• Parties: Blue Sky L. Rep. P 72,011, Fed. Sec. L. Rep. P 91,485 Evelyn ZERMAN, Plaintiff-Appellant, v. George BALL, Robert Fomon, and E.F. Hutton & Company, Inc., Defendants-Appellees. ocket 83-7213.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 15

735 F.2d 15

Blue Sky L. Rep. P 72,011, Fed. Sec. L. Rep. P 91,485

Evelyn ZERMAN, Plaintiff-Appellant, v. George BALL, Robert Fomon, and E.F. Hutton & Company, Inc.,

Defendants-Appellees.

No. 22, Docket 83-7213.

United States Court of Appeals, Second Circuit.

Argued Sept. 28, 1983.

Decided May 15, 1984.

Ernest Zerman, Hallandale, Fla. (Evelyn Zerman, pro se, Hallandale, Fla., on the brief), for plaintiff-appellant.

Jay L. Himes, New York City (Snow, Becker, Kroll, Klaris & Krauss, P.C., New York City, on the brief), for defendants-appellees.

Before MANSFIELD, KEARSE and WINTER, Circuit Judges.

KEARSE, Circuit Judge:

Plaintiff Evelyn Zerman appeals from a judgment of the United States District Court for the Southern District of New York, Charles L. Brieant, Jr., Judge, granting defendants' motion for partial summary judgment dismissing two counts of the complaint and for dismissal of the entire complaint pursuant to Fed.R.Civ.P. 12(b)(6). Zerman alleged that statements and omissions of defendants George Ball, Robert Fomon, and E.F. Hutton & Co. ("Hutton") violated Secs. 7, 10, 15, 20, and 29 of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. Secs. 78g, 78j, 78o, 78t, 78cc (1982), and Rules 10b-5 ("Rule 10b-5") and 10b-16 promulgated thereunder, 17 C.F.R. Secs. 240.10b-5, 240.10b-16 (1983); Secs. 12(2) and 17 of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. Secs. 77l (2), 77q (1982); New York Stock Exchange ("NYSE") Rules 401 and 405; National Association of Securities Dealers ("NASD") Rules of Fair Practice, Article III, Sec. 2 (the "Suitability Rule"); ¹

                and various provisions of Florida law. 2   For the reasons below, we affirm the judgment in large part;  but since we conclude that as to one of the alleged misrepresentations the complaint stated a claim upon which relief might be granted against Hutton under Sec. 10(b) of the 1934 Act and Rule 10b-5, we vacate the judgment of dismissal as to that claim and remand for further proceedings
                

I. BACKGROUND

A. The Complaint

Zerman's complaint alleged that on July 1, 1980, she purchased two securities from Hutton at its Pompano Beach, Florida office. One was a $100,000 Government National Mortgage Association ("GNMA") certificate purchased at a price of $104,000 on margin; the other was $10,000 worth of Miami Convention Center bonds (the "Bonds"), for which Zerman paid the full price of $10,000 in cash. Zerman sold the Bonds on February 25, 1981, for $8300; she sold the GNMA certificate on June 22, 1981, for $79,208.05.

On July 12, 1982, Zerman commenced the present action against Ball, as Hutton's former Chief Executive Officer; Fomon, as Hutton's Acting President and Chairman; and Hutton. She alleged that her purchases had been preceded by various false representations and omissions by the defendants, made knowingly and for the purpose of inducing her purchases, and that she had relied on them. Her complaint indicated that the person she dealt with was one Norman Dinerman, a Hutton vice president in the Pompano Beach office, who has not been made a defendant to this action. She alleged that the liability of Ball and Fomon to her arose by virtue of the actions of persons associated with them whom Ball and Fomon failed to supervise.

Zerman's nine-count complaint set forth eight alleged misrepresentations or omissions, as follows:

(a) Dinerman failed to discuss or "consider [Zerman's] financial needs";

(b) Defendants falsely represented " 'that the "Municipal" Securities market was up all day and up at 3:30 P.M. and had been up all the previous week' ";

(c) Hutton advertised that "When E.F. Hutton Talks, People Listen," thereby assuring that any statement made to her by Dinerman was reliable;

(d) Defendants failed to apprise Zerman of the nature of a margin account and of the prospect that she might be called upon to provide more funds if the market fell;

(e) Defendants assured Zerman that GNMAs could be sold before maturity, but did not tell her that any such sale would be at market price;

(f) Defendants failed to advise Zerman that so long as her securities were held on margin, title would be held in Hutton's name;

(g) Defendants urged Zerman to purchase the Bonds by telling her that there were only a few left and that they were a "marvelous" investment;

(h) Defendants told her that there was no question as to the legality of the Bonds "when the city of Miami was QUESTIONING THE DEAL ON THE BONDS."

Zerman alleged that these statements and omissions violated Secs. 7, 10, 15, 20, and 29 of the 1934 Act and Rules 10b-5 and 10b-16 promulgated thereunder (Count I); Secs. 12(2) and 17 of the 1933 Act (Count II); Sec. 7 of the 1934 Act and Rule 10b-16 (Count III); NYSE Rule 405 (Count IV); NYSE Rule 401 (Count V); the NASD Suitability Rule (Count VI); the Florida counterpart to Rule 10b-5, Fla.Stat.Ann. Sec. 517.301 (Count VII); Florida's usury law, id. Sec. 687.01 (Count VIII); and defendants' common law fiduciary duties (Count IX). She requested actual damages in an unspecified total amount, plus consequential and punitive damages, interest, and costs.

B. Proceedings in the District Court

Defendants moved pursuant to Fed.R.Civ.P. 12(b)(6) to dismiss the complaint for failure to state a claim upon which relief might be granted, and pursuant to Rule 56 for summary judgment dismissing Count II (the 1933 Act claim) and Count VIII (the Florida usury claim). With respect to Count II's claim of a violation of Sec. 12(2) of the 1933 Act, defendants argued that GNMAs and the Bonds were exempt securities within the meaning of the 1933 Act and that, in any event, the Sec. 12(2) claim had not been asserted within the applicable one-year statute of limitations. With respect to Count VIII, defendants submitted a copy of the margin agreement signed by Zerman in which she agreed, inter alia, that the permissible rate of interest would be that allowed by New York law. Defendants moved to dismiss Zerman's remaining claims principally on the grounds (1) that she had failed to plead the elements of fraud with the degree of specificity required by Fed.R.Civ.P. 9(b); (2) that she had failed to allege sufficient facts to state a claim against Ball and Fomon; and (3) that there is no implied right of action for violation of stock exchange rules or NASD rules, or for violation of Rule 10b-16, promulgated under the 1934 Act.

By memorandum endorsement on November 9, 1982, the district court granted the motion, noting that it had received no papers in opposition. On November 10, 1982, Zerman filed her papers in opposition to defendants' motion. With respect to the usury count, Zerman asserted that she had not really agreed to the margin contract but had simply signed the document, without knowing its terms, because Dinerman told her to sign. By memorandum dated November 15, 1982, the district court stated that it had read Zerman's opposition papers and that it adhered to its original ruling.

This appeal followed.

II. DISCUSSION

On appeal Zerman contends essentially that her pleading was sufficient under Fed.R.Civ.P. 9(b), that questions of fact existed that should have prevented the entry of summary judgment against her, and that an implied private right of action exists under each of the statutes, rules, or regulations she has invoked. ³ We conclude (a) that summary judgment was properly granted with respect to Count VIII and so much of Count II as invoked Sec. 12(2) of the 1933 Act, (b) that Zerman has stated a claim against Hutton under Sec. 10(b) of the 1934 Act and Rule 10b-5 with respect to one of the alleged misrepresentations, and (c) that the remaining claims were properly dismissed for failure to state a claim upon which relief may be granted under any of the authorities invoked.

A. Summary Judgment on Sec. 12(2) (Count II) and Count VIII

The granting of summary judgment dismissing Count VIII and the Sec. 12(2) claim in Count II was plainly proper. Count VIII alleged that the rate of interest charged by Hutton in connection with the margin account violated Florida's usury laws. Defendants submitted to the court the Hutton margin agreement signed by Zerman, which specified that the laws of New York governed the agreement and that Zerman expressly waived her right to challenge an interest rate, lawful under New York law, as usurious under the laws of any other state. Zerman's belated assertions that she was duped into signing the agreement and that she signed it only because she was told to do so by Dinerman were conclusory and insufficient either to raise an issue of fact as to her assent or to suggest that she should be relieved of the agreement.

Further, we see no basis in law for not honoring the parties' choice of New York law. In deciding a question of state law, the federal court must apply the forum state's choice-of-law rules to determine The court also properly granted summary judgment as to so much of Count II as contended that defendants had violated Sec. 12(2) of the 1933 Act. Section 13 of that Act, 15 U.S.C. Sec. 77m, provides that "[n]o action shall be maintained to enforce any liability created under ... [Sec. 12(2) ] unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence." The record below reveals indisputably that Zerman must have been aware, while she held her GNMA certificate, of the fluctuation of interest rates and the nature of a margin account. Attachments to the complaint reveal that during that period Zerman received notices of various rates of interest charged on the balance outstanding on her margin account, and she has conceded that she responded to several margin calls. Zerman sold the Bonds in February 1981 and the GNMA certificate in June 1981. She did not commence this action until July 12, 1982, more than one year after she must have discovered the facts of which she complains...