Opinion ID: 502715
Heading Depth: 1
Heading Rank: 4

Heading: Running of The Prescriptive Period

Text: 15 The Jensens argue that the summary judgment dismissal of their federal securities law claims, on prescription grounds, was error because the record does not establish that prescription began to run more than two years before suit was brought. To prevail in their affirmative defense of prescription, the defendants had to show that, more than two years prior to bringing suit under Sec. 10(b) and Rule 10b-5, the plaintiffs had knowledge sufficient to begin the running of the limitations period. The Jensens contend that the evidence, when viewed in the light most favorable to them, is sufficient for a trier of fact to find for them on the issue, rendering summary judgment inappropriate. 16 Although we borrow the applicable limitations period from state law, the determination of when that limitations period begins to run is governed by federal law. Davis, 823 F.2d at 107. Under federal law, the limitations period commences when the aggrieved party has either knowledge of the violation or notice of facts which, in the exercise of due diligence, would have led to actual knowledge thereof. Id. (quoting Vigman, 635 F.2d at 459). Thus, the limitations period applicable to a cause of action for fraud, including one brought under Sec. 10(b) or Rule 10b-5, which proscribe the use of fraudulent or deceptive representations or practices in the sale of securities, does not begin to run until the plaintiff discovers, or in the exercise of reasonable diligence should discover, the alleged fraudulent conduct. Breen v. Centex Corp., 695 F.2d 907, 911 (5th Cir.1983). The requisite knowledge that a plaintiff must have to begin the running of the limitations period is merely that of 'the facts forming the basis of his cause of action,' ... not that of the existence of the cause of action itself. Vigman, 635 F.2d at 459 (emphasis in original) (quoting Azalea Meats, Inc. v. Muscat, 386 F.2d 5, 9 (5th Cir.1967)). 17 The Jensens urge that where a defendant has acted affirmatively to conceal the fraud, we should apply a different rule. They would have us toll the limitations period until actual discovery, regardless of due diligence, by applying the principles expounded by the Seventh Circuit in Tomera v. Galt, 511 F.2d 504, 509-10 (7th Cir.1975). We decline to do so. We think the better reasoned rule is that an act of concealment should not relieve the plaintiff of his duty to exercise reasonable diligence to discover the fraud. See State of Ohio v. Peterson, Lowry, Rall, Barber & Ross, 651 F.2d 687, 694 (10th Cir.), cert. denied, 454 U.S. 895, 102 S.Ct. 392, 70 L.Ed.2d 209 (1981). Concealment by the defendant is only a factor to be considered in determining when the plaintiff should have discovered the fraud. 18 The requirement of diligent inquiry imposes an affirmative duty upon the potential plaintiff. Plaintiff is not permitted a leisurely discovery of the full details of the alleged scheme. Klein v. Bower, 421 F.2d 338, 343 (2d Cir.1970). A plaintiff who has learned of facts which would cause a reasonable person to inquire further must proceed with a reasonable and diligent investigation, and is charged with the knowledge of all facts such an investigation would have disclosed. See In re Beef Indus. Antitrust Litig., 600 F.2d 1148, 1171 (5th Cir.1979); Armstrong v. McAlpin, 699 F.2d 79, 88 (2d Cir.1983). Investors are not free to ignore storm warnings which would alert a reasonable investor to the possibility of fraudulent statements or omissions in his securities transaction. Cook v. Avien, Inc., 573 F.2d 685, 697-98 (1st Cir.1978). Our emphasis on the duty of due diligence comports with the policy underlying statutes of limitation. They are intended to ensure fairness to defendants against claims that have been allowed to slumber. ... the right to be free of stale claims in time comes to prevail over the right to prosecute them. Maxwell v. Swain, 833 F.2d 1177, 1178 (5th Cir.1987) (quoting Order of Telegraphers v. Railway Express Agency, Inc., 321 U.S. 342, 348, 64 S.Ct. 582, 586, 88 L.Ed. 788 (1944)). 19 Thus, the court must determine whether, by September 15, 1979, two years before suit was filed, the Jensens had either inquiry notice or actual notice of the alleged fraudulent conduct on the part of each of the defendants. Our review of the record leads us to determine the issue against the Jensens and to affirm the limitations bar against the securities claims as to each of the defendants.
20 In their complaint, the Jensens base their securities claim against Snellings on numerous material misrepresentations and omissions made by him with the intent to defraud and to induce them to invest in certain programs, the fraud including, but not limited to: (1) the failure to reveal that he had no experience or knowledge in cattle investments; (2) the statement that the risks of the cattle investment program could be fairly easily circumscribed; (3) the statement that he was providing the primary daily management of the cattle investment program; (4) the failure to reveal that commissions to Hutton were increased by hedging through Hutton's Dallas office rather than through Granada; and (5) the failure to reveal the extent of the Jensens' losses. 21 The record shows that the Jensens' substantial losses in the cattle investment program, directly contrary to Snellings' on-going assurances of profits or, at most, minimal losses, were unquestionably apparent by the spring of 1979. Upon learning from Sam Gilmore, the banker for the cattle investment program, that they had not made their hedges, the Jensens repeatedly communicated with David Eller, Granada's president, in March and April 1979 concerning their investment. Eller told the Jensens that their losses were about $290,000. Sterling Jensen contacted feedyards and discovered that Snellings had not supervised the cattle feeding as claimed. He told Eller that Snellings had woven a fairy tale and gouged them, calling him a scalawag and wanting him disbarred. Viewed in their totality, these signs indicate that, as to defendant Snellings, and, indirectly, the Firm, the Jensens had at least the storm warnings that trigger the duty to inquire further and the running of the statute of limitations in the spring of 1979. 22 Even if this were not the case, information revealed to the Jensens in July 1979, more than two years before suit was filed, was surely sufficient to commence the limitations period. In April 1979, the Jensens sought an attorney to assist them in understanding their investment program, and, upon the recommendation of Eller, retained Walter Weathers of the Houston, Texas law firm of Sewell, Junell & Riggs. Weathers conducted an extensive investigation of the Jensens' investment program, focusing on Snellings' involvement. He wrote a thirty-five page memorandum concerning the Jensens' investment program, which was received by the Jensens in July 1979. In his memorandum, Weathers confirmed losses of over $300,000. He spoke of possible secret profits received by Snellings from Bradshaw and Granada, misrepresentations by Snellings as to losses, unjustifiable management fees charged by Snellings, and statements by Snellings that he was a complete novice in the area of cattle investments. Weathers wrote that the Jensens might have a cause of action against Snellings, and referred to claims and recovery. 23 The Jensens undoubtedly understood that the facts revealed in the memorandum might support a suit against Snellings, because their July 1979 letter to Ellers declared that facts known to them could build a case, and referred to Weathers' first memorandum as containing material for consumption by a jury. On the Jensens' copy of the Weathers' memorandum, Esther Jensen wrote, next to the account of Snellings' own description of his activities, the words con job, hoax, absurd, and sheer fabrication. Indeed, Weathers' memorandum provided not merely storm warnings, but nearly all the facts on which the Jensens' federal securities claims against Snellings and the Firm were subsequently brought. 24 When these facts came to the Jensens' attention, they had a duty to exercise reasonable diligence to ferret out the truth and timely bring their claim. We find ample evidence that they did not do so. In a cover letter to a mid-October 1979 memorandum discussing Snellings' misconduct, Weathers advised the Jensens to obtain independent legal counsel concerning the case, including Hutton's and Granada's involvement in their investments. That same month, the Jensens contacted a Louisiana attorney, Martin Feldman, who told them they had a possible malpractice claim against Snellings. Due to a conflict of interest, he declined the case and referred them to attorney Harry Zimmerman, whom they contacted in late November 1979. Zimmerman, upon reviewing the Jensens' materials to date, told them they had a possible federal securities action against Snellings and the Firm, as well as Bradshaw, Hutton and Granada. Subsequently, after more than a year of no activity by Zimmerman, the Jensens reclaimed their materials. They sought the advice of the Washington, D.C. law firm of Steptoe & Johnson in August or September 1981. Suit was finally brought in mid-September. 25 We cannot accept the Jensens' argument that they were unsophisticated, unknowlegeable, and befuddled, and that they therefore did not understand that there was wrongdoing from the information they had by July 1979. The standard for whether facts sufficient to commence the limitations period would have been discovered upon reasonable inquiry is an objective one. Koke v. Stifel, Nicolaus & Co., Inc., 620 F.2d 1340, 1343 (8th Cir.1980) (the proper inquiry is [w]hat facts would alert a reasonable person to the possibility of wrongdoing? (emphasis added)). A reasonable person would have been alerted to a possible fraudulent scheme on the part of Snellings at least upon receipt of Weathers' memo in July 1979, and more likely by the spring of that year. 26 Similarly, we reject Jensens' contention that the limitations period did not begin to run until Zimmerman, in November of 1979, told them they had a possible securities claim. The requisite knowledge, actual or constructive, needed to begin the running of the prescriptive period is merely that of the underlying facts, not that of the legal cause of action itself. Vigman, 635 F.2d at 459. Zimmerman merely reviewed the Jensens' materials and based his assessment on the very facts already available to them. 27 The district court was correct in holding that the Jensens' federal securities claims against Snellings and the Firm were time-barred.
28 The Jensens' federal securities claims against broker Bradshaw and his employer, Hutton, are also time-barred. In their complaint, the Jensens fault Bradshaw and Hutton for fraudulently inducing them into investing in the cattle feeding investment programs through the use of many material misrepresentations and omissions, among them being: (1) the statement that Bradshaw would closely supervise the cattle feeding investments; (2) the failure to reveal that Hutton had underwritten the Granada cattle feeding program offering to ensure that Granada would be capable of paying for a feedlot purchased from Hutton; (3) the statement that the Jensens would make a million dollars and be drinking champagne in three years; (4) the failure to reveal that Granada would perform the marketing and management functions of the program; (5) the failure to deliver to the Jensens the private placement memorandum of Granada's offering; and (6) the failure to reveal that Hutton would receive one dollar out of every five-dollar management fee paid by the Jensens to Granada. 29 Despite his assurance that he would closely supervise their investment program, by March 1979 Bradshaw had not contacted the Jensens for two years. At that time, upon learning from Eller of substantial losses in Granada's cattle feeding program, Esther Jensen called Bradshaw, who insisted that the Jensens had made a profit. She felt that Bradshaw was very menacing during their discussion. In an April 4, 1979 letter to Eller, Sterling Jensen criticized Bradshaw for praising Snellings' efforts, saying that Bradshaw was continuing the myth that George [Snellings] was working his ass off on our behalf. He also noted that Bradshaw should have told them of their losses, but did not. Thus, it appears that by spring 1979 the Jensens had knowledge of sufficient inconsistencies concerning Bradshaw and Hutton to trigger a duty to inquire further. 30 Even if these signs of notice were insufficient to trigger a duty to investigate Bradshaw and Hutton, information contained in Weathers' first memorandum, in July 1979, clearly constituted sufficient notice. Weathers wrote that there were possible secret profits paid by Hutton to Snellings; that the Jensens were suspicious that Bradshaw had received payments from Snellings for referring the Jensens to him; that Bradshaw had misrepresented who was to perform the management of the cattle feeding programs; that Hutton had underwritten Granada's offering in an effort to ensure payment on a feedlot sold by Hutton to Granada; that Hutton received one dollar out of every five-dollar management fee collected by Granada; and that Bradshaw collected nonessential brokerage commissions by having the hedging done through his office in Dallas rather than through Granada, at double the cost to the Jensens. In his memorandum, Weathers advised that these extra brokerage commissions should be explored. This memorandum clearly provided them with sufficient storm warnings to alert a reasonable person to the possibility that there were material misrepresentations or omissions on the part of Bradshaw and Hutton in their investment transactions. 31 Contrary to their contention on appeal, the evidence shows that the Jensens were aware from the outset that attorney Weathers was not investigating Bradshaw, Hutton or Granada. Indeed, after Weathers' first memorandum, the Jensens did themselves initiate an inquiry regarding Bradshaw and Hutton, and questioned Eller regarding the extra brokerage commissions. The inquiry, however, did not proceed with reasonable diligence. 32 We find no merit in the Jensens' contention that the information they had by July 1979 was insufficient to trigger the limitations period because they did not know whether it was true. They did have knowledge of facts sufficient to excite further inquiry in a reasonable person, which, if pursued, would have disclosed the fraud. 6 We concur in the district court's ruling that the statute of limitations had run on the Jensens' federal securities claims against Bradshaw and Hutton.
33 In their complaint, the Jensens assert that Granada failed to properly supervise Snellings or Bradshaw or to notify the Jensens upon learning of Snellings' misconduct, rendering Granada secondarily liable through their status as controlling persons under Sec. 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78t. 7 Additionally, they claim Granada is primarily liable for failure to deliver a private placement memorandum to the Jensens. 34 A review of the record reveals that the Jensens had sufficient facts by July 1979 to cause a reasonable person to inquire further as to any wrongdoing or responsibility of Granada. The Jensens were concerned that Eller, Granada's President, never gave them the same figure twice as to the amount of their losses. In March 1979, Mildred Ewing told her daughter, Esther Jensen, that she thought that Granada had stolen $70,00 each from her, the Jensens, and Robert Ewing. In his first memorandum, received by the Jensens in July 1979, Weathers disclosed the secret relationship between Granada and Hutton. 35 Moreover, the limitations period ran notwithstanding the secondary nature of Granada's liability for the misconduct of Bradshaw and Snellings. If they had diligently investigated their claim against Bradshaw and Snellings, they would have also learned of Granada's secondary liability within the requisite limitations period. Indeed, as with the other defendants, it appears that the facts and knowledge concerning Granada gathered by the Jensens by July 1979 formed not only the basis of Zimmerman's conclusion that they had a possible securities fraud case against all the defendants herein, but also the basis of the complaint filed on their behalf nearly two years later. Additionally, the Jensens charge Granada with failure to furnish a private placement memorandum. They certainly knew all along that one had never been delivered to them. 36 Accordingly, we conclude that the record contains ample evidence to prove that the Jensens' federal securities law claims were barred by the statute of limitations as to all defendants.