Court Opinion

ID: 2994292
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:13:52.649234+00
Date Added: 2024-06-11T15:03:03.190241
License: Public Domain

In the
United States Court of Appeals
For the Seventh Circuit

No. 99-3193

TIMOTHY L. JACKS,

Plaintiff-Appellant,

v.

SCHNEIDER SECURITIES, INCORPORATED,
BARRY D. TULL, and THOMAS GRAFTON,

Defendants-Appellees.

Appeal from the United States District Court
for the Central District of Illinois.
No. 98-4114--Joe B. McDade, Chief Judge.

ARGUED April 19, 2000--DECIDED JUNE 27, 2000

  Before HARLINGTON WOOD, JR., KANNE, and
DIANE P. WOOD, Circuit Judges.

  HARLINGTON WOOD, JR., Circuit Judge. This
is an appeal from a district court order
granting a motion for summary judgment in
favor of Schneider Securities, Inc.
("SSI"), Barry Tull ("Tull"), and Thomas
Grafton ("Grafton"). Appellant, Timothy
Jacks ("Jacks") filed suit, alleging
violations of sec. 13 of the Illinois
Securities Law of 1953, 815 Ill. Comp.
Stat. 5/13 (West 1993) ("Illinois
Securities Law" or "Act"). The district
court had jurisdiction pursuant to 28
U.S.C. sec. 1332.

I.   BACKGROUND

  SSI is a corporation with its primary
place of business in Colorado. Tull, a
citizen of Colorado, and Grafton, a
citizen of California, were both formerly
employed by SSI. Jacks, an Illinois
resident, purchased Maesa Gaming stock
from SSI, through its employees Tull and
Grafton, on five separate occasions
between January and March of 1994.
  Jacks concedes that he learned of
possible violations of the Illinois
Securities Law in August 1996. On August
16, 1996, Jacks sent SSI the following
handwritten letter:

I am making a complaint against Schneider
Securities Inc., and Tom Graffton [sic]
(stockbroker). He misrepresented Masa
[sic] Gaming stock. He sold me
appromately [sic] 98,000 shares, average
stock cost 75 cents per share. When I
started selling my stock he quit working
for Schneider Securities Inc. and went to
work for Masa [sic] Gaming. I believe
that there was a [sic] act of fraud. I
lost over $50,000. I demand my money
back.

The letter was sent by certified mail,
return receipt requested. On October 10,
1996, Jacks sent a second letter to SSI
containing a list of five questions
requesting information relating to the
receipt of his first letter and
information regarding Tull and Grafton.
This letter was also sent by certified
mail with return receipt requested.

  Jacks filed suit against SSI, Tull, and
Grafton on August 19, 1998, alleging
several violations of the Illinois
Securities Law. Jacks’ allegations
included stock manipulation,
misrepresentation of risk and suitability
of stock, and failure to disclose Maesa
Gaming’s involvement in litigation. The
defendants removed the case from Rock
Island County Court to the United States
District Court for the Central District
of Illinois, and then filed a motion for
summary judgment pursuant to Fed. R. Civ.
P. 56(b). For the purposes of the motion
for summary judgment, the defendants
stipulated to all facts alleged by Jacks,
and Jacks conceded all facts alleged by
the defendants. Therefore, there are no
disputed facts.

  In their motion for summary judgment,
the defendants asserted that Jacks did
not provide the notice that is required
under sec. 13 of the Act. Section 13(B)
requires the purchaser to give notice if
he or she chooses to void his or her
purchase. 815 Ill. Comp. Stat. 5/13 (B).
The defendants claimed that the letters
Jacks sent to SSI did not afford proper
notice. The district court granted
summary judgment for the defendants,
holding that "a 13(B) notice must at
least refer generally to Illinois law."

II.   DISCUSSION

   We review the district court’s grant of
summary judgment de novo. Allensworth v.
General Motors Corp., 945 F.2d 174, 178
(7th Cir. 1991). No Illinois court has
addressed the required content for proper
notice under sec. 13(B); therefore, we
view this issue as a matter of first
impression. Under sec. 13(A) of the Act,
any sale of securities made in violation
of the provisions of the Act is voidable
at the election of the purchaser,
provided the purchaser satisfies certain
statutory requirements. 815 Ill. Comp.
Stat. 5/13 (A). The issue we are presented
with is whether Jacks’ letters to SSI
were sufficient to satisfy the statutory
notice requirements set out in sec. 13(B)
of the Act.

  Section 13(B) provides:

Notice of any election provided for in
subsection A of this Section shall be
given by the purchaser within 6 months
after the purchaser shall have knowledge
that the sale of securities to him or her
is voidable, to each person from whom
recovery is sought, by registered mail or
certified mail, return receipt requested,
addressed to the person to be notified at
his or her last known address with proper
postage affixed or by personal service.

815 Ill. Comp. Stat. 5/13 (B). Subsection
A provides two options for recovery by
the purchaser. Following the rescission
of a voidable sale, the purchaser can
either recover (1) the full amount paid,
plus interest earned from the date of
purchase; or (2) if the purchaser no
longer owns the stock, the amount set
forth previously in clause 1, minus any
amounts received through a subsequent
sale of the stocks. 815 Ill. Comp. Stat.
5/13 (A).

  While no Illinois state court has
expressly considered the required content
for a sec. 13(B) notice, Illinois cases
have stated that the provisions of the
Act should be "liberally construed to
protect the investing public from fraud
and deceit in the sales of securities."
Norville v. Alton Bigtop Restaurant,
Inc., 317 N.E.2d 384, 391 (Ill. App. Ct.
1974) (citations omitted). The statutory
six-month notice is not a statute of
limitations, but is an "equitable
feature" to protect against stale claims.
Bultman v. Bishop, 457 N.E.2d 994, 997
(Ill. App. Ct. 1983); Gowdy v. Richter,
314 N.E.2d 549, 556 (Ill. App. Ct. 1974).
The six-month period does not begin until
the purchaser is aware that his or her
purchase is voidable. Hidell v.
International Diversified Invs., 520 F.2d
529, 539 (7th Cir. 1975).

  Defendants do not dispute that the two
letters Jacks sent to SSI fell within the
statutory six-month period. There is also
no dispute that the letters were
certified and return receipt was
requested. Jacks argues that this is
enough to satisfy the statutory
requirement for notice, particularly if
the statute is to be "liberally
construed" and the time limit is an
"equitable feature" to protect against
stale claims.

  However, the Norville, Gowdy, and
Bultman cases upon which Jacks relies
refer only to the form of the notice and
not the content. Norville held that
filing a complaint could substitute for
the notice if the complaint was filed
within the six-month period. 317 N.E.2d
at 391. Gowdy ruled that the six-month
time period should only start when the
purchaser has knowledge that the sale is
voidable. 314 N.E.2d at 556. In Bultman,
the purchasers informed the defendants
that they wished to avoid the sale and
receive "the purchase price and other
sums allowed by the statute." 457 N.E.2d
at 996. The court in Bultman held that if
the notice is mailed by certified mail
instead of registered mail, then the
notice may still meet the statutory
requirements./1 Id. at 997. None of
these issues apply in the present case.
Unlike the plaintiff in Norville, Jacks
did not file a complaint until two years
after he discovered that the sale was
voidable; therefore, he cannot argue that
his complaint fulfilled the statutory
notice requirement. In the present case,
there is no dispute as to when the six-
month time period began as was the case
in Gowdy. There is also no dispute that
Jacks sent the letters in the proper
form, which distinguishes this case from
Bultman.

  In the present case, we must determine
whether the content of Jacks’ letters was
sufficient to satisfy sec. 13(B). One
district court case, Denten v. Merrill
Lynch, Pierce, Fenner & Smith, Inc., 887
F. Supp. 176 (N.D. Ill. 1995), touches on
this issue. In Denten, the court found
that an oral notice was insufficient, in
part because "plaintiff does not allege
that she told Merrill Lynch she would be
pursuing recovery under the Illinois
Securities Law. Providing notice requires
plaintiff to notify Merrill Lynch that it
will be making this claim; rather than,
merely asserting that Merrill Lynch has
knowledge of [the alleged violations]."
Id. at 180-81. While Denten turns on the
insufficiency of an oral notice, it also
clearly states that the notice is
insufficient if it does not inform the
potential defendant that the purchaser is
making her claim under the Act.

  Clearly, the second letter Jacks sent to
SSI, which only poses a list of
questions, does not provide the proper
notice. The first letter sent to SSI
makes no mention that Jacks is making his
complaint under the Act or Illinois law.
He does allege misrepresentation and
fraud, and demands his money back;
however, absent any reference to Illinois
law, this letter could be construed as a
disgruntled customer who is demanding a
refund of the money he lost, but is not
making a legal claim for rescission of
the sale under sec. 13. Even if Jacks
were making a legal claim, it is unclear
from the letter whether he is making that
claim under Illinois, Colorado, or
federal securities law.

  The Act requires that "[n]otice of any
election provided for in subsection A of
this Section shall be given . . . ." 815
Ill. Comp. Stat. 5/13 (B). The elections
under subsection A are to recover (1) the
full amount paid, plus interest earned
from the date of purchase; or (2) if the
purchaser no longer owns the stock, the
amount in clause 1, minus any amounts
received through a subsequent sale of
stocks. 815 Ill. Comp. Stat. 5/13 (A). From
the letter, it is not clear if Jacks is
demanding the entire amount he spent on
the stock, which would be approximately
$73,500, or if he is demanding only the
$50,000 that he lost. Jacks states in his
letter, "When I started selling my stock,
[Grafton] quit working for Schneider
Securities Inc. and went to work for Masa
[sic] Gaming." It is not clear how much
of his stock, if any, Jacks sold.
Therefore, it is unclear which of the two
options under subsection A Jacks is
electing. Since he did not expressly
demand to rescind the sale, it is unclear
if the demand for his money back is in
fact a demand to rescind the sale, or
only a demand for the return of the lost
money while Jacks still keeps the stocks.
As the Illinois Appellate Court held in
Bultman, "[s]ellers of securities have no
liability under [the Act] until they have
received notice of the buyers’ intention
to avoid the sale." 457 N.E.2d at 997
(emphasis added).

  In sum, Jacks’ letter did not state he
was making his claim under Illinois law.
Furthermore, he only stated that he was
demanding his "money back", and not that
he wanted to rescind the sale. It is
unclear if he was demanding only the
$50,000 he lost, or the entire amount he
invested. It is also unclear whether he
wished to keep the stock that he
purchased, in which case subsection A
would not have applied. Because of these
factors, we find that neither of the
letters Jacks sent to SSI constitute
proper notice under sec. 13(B), even when
we interpret the Act liberally as
Illinois case law requires.

  Jacks argues in the alternative that
even if he failed to give proper notice
under the Act, the notice requirement is
an equitable feature designed to prevent
stale claims, and lack of proper notice
should not serve as an absolute bar to
his suit. However, under the facts of the
present case, there is nothing
inequitable in requiring proper notice.
As Jacks concedes, he had knowledge of
the Act at the time he sent the letters
to SSI. Section 13(B) clearly requires
that "[n]otice of any election" sought be
given. As previously discussed, Jacks
failed to give this notice. This
deviation from the statutory requirements
is not a slight variance, but rather one
which undermines the entire purpose of
the notice requirement.

  Tull claims that because he did not
receive the letters Jacks sent, Jacks
cannot allege notice was sent to Tull
since the Act requires notice to be sent
"to each person from whom recovery will
be sought." 815 Ill. Comp. Stat. 5/13 (B).
Because we find, as did the district
court, that the notice sent to SSI was
insufficient, we need not address whether
Tull received constructive notice due to
his employment with SSI.

AFFIRMED.

/1 At the time the Act only referred to registered
mail and not certified mail.