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Stull v. Bayard

decided: August 26, 1977.


Appeal from an order of the United States District Court for the Southern District of New York, Wyatt, J., dismissing plaintiff's claim under Section 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(e) as barred by the statute of limitations. Affirmed.

Van Graafeiland, Circuit Judge, Mehrtens*fn* and Pierce,*fn** District Judges.

Author: Van Graafeiland


This action arises out of the unsuccessful attempt of Chris-Craft Industries (Chris-Craft) to acquire control of Piper Aircraft Corporation (Piper).*fn1 Plaintiff, a Piper shareholder, brought suit under § 14(e) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n(e), alleging that he and other members of a putative class were induced not to exchange their Piper shares for Chris-Craft stock and cash because of fraudulent misstatements and omissions by defendants. The District Court granted defendants' motion for summary judgment on the ground that plaintiff's claim was barred by the statute of limitations. We affirm.

During 1969, Chris-Craft and Bangor Punta Corporation (Bangor Punta) were engaged in a battle for control of Piper. To induce Piper shareholders to surrender their stock, Chris-Craft made a number of cash tender and stock exchange offers, the last of which expired on August 4, 1969. On July 18, 1969, Bangor Punta filed a prospectus and extended a competing exchange offer. On August 1, 1975, plaintiff commenced this suit against Bangor Punta and The First Boston Corporation, an investment adviser and underwriter, and named as additional defendants certain officers of these corporations and of Piper. His theory of action was that a series of misstatements and omissions by defendants between January and mid-July 1969 induced a number of Piper shareholders not to accept Chris-Craft's final exchange offer. The last wrongful act alleged in the complaint was the overevaluation of an asset in the July 18 Bangor Punta prospectus.

The trial court held that plaintiff's action was governed by a six-year statute of limitation which ran from the last fraudulent act committed by defendants.*fn2 Because this had occurred on July 18, 1969 and plaintiff did not sue until August 1, 1975, the court found his action to be time-barred. This appeal followed.

Section 14 of the Securities Exchange Act of 1934 prescribes no period of limitation for actions brought thereunder. In such a situation, federal courts apply those statutes of limitation of the forum state which best effectuate the policies underlying the federal statute. Arneil v. Ramsey, 550 F.2d 774, 779 (2d Cir. 1977). In actions alleging fraudulent violations of the federal securities law, this court has consistently adopted state statutes of limitation for actions based upon common law fraud. See, e.g., Klein v. Shields & Co., 470 F.2d 1344, 1346 (2d Cir. 1972); Klein v. Auchincloss, Parker & Redpath, 436 F.2d 339, 341 (2d Cir. 1971); Hoff Research & Development Laboratories, Inc. v. Philippine National Bank, 426 F.2d 1023 (2d Cir. 1970).*fn3 We look to federal law, however, to determine when the limitation period starts to run. Arneil v. Ramsey, supra, 550 F.2d at 780. Under federal law, the statute commences to run when the plaintiff has actual knowledge of the alleged fraud or knowledge of facts which in the exercise of reasonable diligence should have led to actual knowledge. Berry Petroleum Co. v. Adams & Peck, 518 F.2d 402, 410 (2d Cir. 1975); Klein v. Shields & Co., supra, 470 F.2d at 1346-47; Azalea Meats, Inc. v. Muscat, 386 F.2d 5, 8-9 (5th Cir. 1967).

The New York statute of limitation most closely analogous to this federal rule, C.P.L.R. § 203(f), provides in part:

Because it is undisputed that plaintiff had actual knowledge of defendants' alleged violations of § 14 no later than May 10, 1971, this provision, standing alone, would be a clear bar to the present action. Rickel v. Levy, 370 F. Supp. 751, 756-57 (E.D.N.Y. 1974).

However, C.P.L.R. § 203(f), read in conjunction with C.P.L.R. § 213, also permits an action based upon fraud to be brought within six years "from the time the cause of action accrued" if this is longer than the two-year period above provided for. "The result, in an actual fraud suit, is two separately-timed and alternative limitations periods in the case of a delayed discovery: six years from accrual or two years from discovery, whichever is longer." Hoff Research & Development Laboratories, Inc. v. Philippine National Bank, supra, 426 F.2d at 1026 (footnote omitted).

The alternative six-year period is not measured from the date of the defendant's last fraudulent act, but from when the plaintiff suffers a loss as a result thereof, Sack v. Low, 478 F.2d 360, 365-66 (2d Cir. 1973); i.e., when a plaintiff assumed knowledge of the fraudulent wrong may assert a claim for relief. Barninger v. National Maritime Union, 372 F. Supp. 908, 913 (S.D.N.Y. 1974); Practice Commentary C203:12 7B McKinney's Consolidated Laws 125-127 (1976). In the instant case, the District Court correctly held that this right accrued promptly following defendants' fraudulent conduct.

The federally created right upon which plaintiff bases his claim is the right to full disclosure of accurate information which would have helped him to decide whether to retain his stock or surrender it to the take-over bidder. Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 58, 45 L. Ed. 2d 12, 95 S. Ct. 2069 (1975). Appellant was deprived of this right on July 18, 1969, when the pool of information accessible to Piper shareholders was muddied by Bangor Punta's allegedly misleading prospectus. Although § 14(e) does not specifically provide plaintiff a cause of action for this deprivation, such a right to sue has generally been inferred. See, e.g., H. K. Porter Co. v. Nicholson File Co., 482 F.2d 421, 424 (1st Cir. 1973). Moreover, it has been extended to both tendering and nontendering shareholders. Smallwood v. Pearl Brewing Co., 489 F.2d 579, 596 (5th Cir.), cert. denied, 419 U.S. 873, 42 L. Ed. 2d 113, 95 S. Ct. 134 (1974); Electronic Specialty Co. v. International Controls Corp., 409 F.2d 937, 947 (2d Cir. 1969). Whatever uncertainty may attach to these holdings as a result of the Supreme Court's caveat in Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 97 S. Ct. 926, 51 L. Ed. 2d 124, 45 U.S.L.W. 4182, 4193 n.28 (1977) need not concern us here. Assuming that plaintiff had a right to sue and, in addition, had immediate knowledge of defendants' misrepresentations as contemplated by New York's six year statute of limitation, his right to seek legal relief accrued when the misrepresentations were made. He was not precluded from suit, as he now contends, until Chris-Craft's tender offer expired unaccepted on August 4, 1969.*fn4 Regardless of plaintiff's decision concerning tender of his stock, he might well have sustained damage because of the depressing effect which disclosure of the Bangor Punta overevaluation might have had on the market value of Piper stock. See Electronic Specialty Co. v. International Controls Corp., supra, 409 F.2d at 946; cf. Dann v. Studebaker-Packard Corp., 288 F.2d 201, 209 (6th Cir. 1961). Because plaintiff, with the knowledge presumed by New York's six year statute, did have a claim which he could promptly pursue, the District Court correctly rejected his contention that his cause of action did not accrue until Chris-Craft's tender offer expired on August 4, 1969.

Relying upon American Pipe & Construction Co. v. Utah, 414 U.S. 538, 38 L. Ed. 2d 713, 94 S. Ct. 756 (1974), appellant argues that the six year statute of limitation was tolled for a two year period during which a related class action was pending. In 1972, appellant's wife, with appellant acting as her attorney, commenced a class action on a complaint almost identical to the one herein. On April 30, 1974, the District Court refused to certify a class in that action, see Stull v. Pool, 63 F.R.D. 702 (S.D.N.Y. 1974), and thereafter the ...

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