Opinion ID: 366985
Heading Depth: 2
Heading Rank: 2

Heading: Similarity of Defenses

Text: 25 Ernst & Ernst's impact on the Vanderboom analysis is more readily discernible with regard to the similarity of defenses factor. The appellants contend that since scienter is required to establish common law fraud and a violation of Rule 10b-5, but not under section 409.411, it is conclusive that there is a congruence of defenses between common law fraud and Rule 10b-5. Appellants argue further that this finding precludes the application of section 409.411 to appellants' claims based on Rule 10b-5 violations. Again, lack of intentional misrepresentation is not necessarily a defense to common law fraud in Missouri. But we do recognize that Ernst & Ernst had the effect in this circuit of adding a defense to a Rule 10b-5 violation not available in an action under section 409.411 on the question of the defendant's mental state. It does not follow, however, that the addition of an element to a Rule 10b-5 action making available an additional defense causes Rule 10b-5 and common law fraud to bear a closer resemblance than the rule and section 409.411. Vanderboom did not establish conjunctive prerequisites for the application of a state's blue sky statute. This Court merely articulated two factors to guide a federal court in its selection of state statutes of limitations for actions brought under Rule 10b-5. Greater similarity of defenses between Rule 10b-5 and common law fraud therefore does not, standing alone, require the Court to apply the period of limitations governing common law fraud. Rather, the Vanderboom analysis hinges upon a weighing of commonality of purpose together with similarity of defenses in determining the appropriate state statute of limitations for a Rule 10b-5 action. 26 What Ernst & Ernst does with respect to the approach taken in this circuit is potentiate situations such as here in which the commonality of purpose and similarity of defenses factors cut in different directions. When the ultimate question is which limitations period best effectuates federal policy underlying section 10(b) and Rule 10b-5, we believe commonality of purpose weighs more heavily in the final balance if the federal and state securities statutes share a substantial congruence in this regard, and the variance in defenses under the respective statutes does not result in two fundamentally different causes of action. We have already noted the congruence in purpose. Likewise, 10b-5 actions and section 409.411 actions both remedy misrepresentations or omissions to state material facts in connection with the sale of securities. As Judge Alsop has observed somewhat differently: resemblance must be determined not by reference to general state anti-fraud provisions, but by reference to Securities fraud. (Emphasis original.) Bailey v. Piper, Jaffray & Hopwood, 414 F.Supp. at 482-83. 27 This perspective is consistent with if not implicit in the holdings of the majority of courts faced with similar issues in the wake of Ernst & Ernst. In many such cases, the state blue sky statute in issue was, like the Missouri statute here and the Arkansas statute in Vanderboom, patterned after section 410 of the Uniform Securities Act. See Forrestal Village v. Graham, 179 U.S.App.D.C. 225, 228, 551 F.2d 411, 414 (applying District of Columbia blue sky law); Osterneck v. E. T. Barwick Industries, Inc., 79 F.R.D. 47 (1978 Transfer Binder) Fed.Sec.L.Rep. (CCH) P 96,498 (N.D.Ga. May 10, 1978); McNeal v. Paine, Webber, Jackson & Curtis, Inc., 429 F.Supp. 359, 363 (N.D.Ga.1977) (applying Georgia blue sky law); Bailey v. Piper, Jaffray & Hopwood, Inc., 414 F.Supp. 475, 582 (D.Minn.1976) (applying Minnesota blue sky law). See also Dupuy v. Dupuy, 551 F.2d 1005, 1023-24 n. 31 (5th Cir.), Cert. denied, 434 U.S. 911, 98 S.Ct. 312, 54 L.Ed.2d 197 (1977); LaRosa Building Corp. v. The Equitable Life Assurance Society, 542 F.2d 990 (7th Cir. 1976) (applying Indiana blue sky law); Colonial Bank & Trust v. American Bankshares Corp., 442 F.Supp. 234 (E.D.Wis.1977) (applying Wisconsin blue sky law); Reid v. Madison, 438 F.Supp. 332 (E.D.Va.1977) (applying Virginia blue sky law); Dirksen v. Hynes & Howes Insurance Counselors, Inc., 423 F.Supp. 1290 (S.D.Iowa 1976) (applying Iowa blue sky law). 28 Two Sixth Circuit cases, Nickels v. Koehler Management Corp., 541 F.2d 611 (6th Cir.), Cert. denied, 429 U.S. 1074, 97 S.Ct. 813, 50 L.Ed.2d 792 (1976) (applying Ohio common law fraud statute) and IDS Progressive Fund, Inc. v. First of Michigan, 533 F.2d 340 (6th Cir. 1976) (applying Michigan common law fraud statute) provide limited support for the appellants' contentions. However, the Sixth Circuit based its determination to apply the period of limitations for common law fraud in part on (1) the need for continuity in its decisions, and (2) the belief that federal securities acts are best served by a longer, not a shorter statute of limitations. IDS Progressive Fund, Inc. v. First of Michigan Corp., 533 F.2d at 344; See Nickels v. Koehler Management Corp., 541 F.2d at 614. Dating back to its decision in Connelly v. Balkwell, 279 F.2d 685 (6th Cir. 1960), that Circuit has consistently favored applying the period of limitations for common law fraud as opposed to the period governing state blue sky actions. In the Nickels and IDS Progressive Fund cases, the court emphasized its continued preference for applying the period of limitations for common law fraud to Rule 10b-5 actions. (F)ederal policy will be best served by the Continued application of the four year limitation period that we approved in Connelly v. Balkwell . . . . (Emphasis original.) Nickels v. Koehler Management Corp., 541 F.2d at 618; See IDS Progressive Fund v. First of Michigan Corp., 533 F.2d at 343. We agree with the Sixth Circuit on the importance of Stare decisis to the extent that what statute of limitations applies should be relatively fixed and ascertainable. Parties rely on the limitations period and it would be counterproductive to apply the Vanderboom factors with over-refined emphasis on detail resulting in an elastic limitations period swaying to nonfundamental alterations in individual elements of the state or federal statutes in issue. See United California Bank v. Salik, 481 F.2d 1012, 1015 (9th Cir.), Cert. denied, 414 U.S. 1004, 94 S.Ct. 361, 38 L.Ed.2d 240 (1973). Thus we are reluctant to suggest that the addition of the scienter element to 10b-5 actions necessitates a different result than that reached in Alodex and Vanderboom. We are also unpersuaded that longer limitations periods best serve federal securities policy as a general premise. The equitable tolling doctrine, note 7 Ante, protects prospective plaintiffs from concealment of the misrepresentation. Further, those provisions of the securities acts which do contain specific limitation periods for private actions generally limit the bringing of actions to one year after discovery of the pertinent facts up to a maximum of three years after the actionable facts occurred, 11 a circumstance which does not betray a congressional preference for longer statutes of limitation and, indeed, quite apart from resemblance, would indicate that the Missouri blue sky two-year period better effectuates federal securities policy. 29 Although section 409.411 is not identical with section 10(b) and Rule 10b-5, we conclude that the two statutes bear a marked resemblance in both purpose and substance. This similarity predominates over the differences between section 10(b) and the Missouri blue sky statute. Therefore, we conclude that the two-year period of limitation in section 409.411 was properly applied by the district court as best effectuating the policies underlying the federal securities laws.