Rehearing Denied in Nos. 9718, 9800 Denied November 6, 1968.
Certiorari Denied March 24, 1969. See 89 S.Ct. 1194.
HILL, Circuit Judge.
This action was commenced by Leland and Laverne Hirschi, appellees and cross-appellants here, individually and as a class action, against B & E Securities, Inc., William A. Barlocker, Lee J. Esplin, K. C. Weaver, Leo Reeve, Arthur Barlocker and Doyle Sampson.
Early in the litigation the trial judge determined the case was not a class action under Rule 23, F.R.Civ.P., as Amended, and dismissed that part of the complaint pertaining thereto.
In addition to the appeal by the individual defendants from the part of the judgment awarding damages, the Hirschis have cross-appealed from the dismissal of the class action and the denial of their cause of action under the Investment Company Act.
The defendant, B & E Securities, Inc., is a Utah corporation formed early in 1961 for the original purpose of receiving and holding certain assets owned by the Bank of St. George, the disposal of which had been directed by the bank examiners. The incorporators and original directors of B & E were defendants, William A. Barlocker, Lee Esplin, K. C. Weaver, Leo Reeve and Arthur Barlocker. William Barlocker originally and at all times owned over fifty per cent of the voting stock of B & E. The defendant, Doyle Sampson, was an employee and agent of B & E.
Early in the life of the corporation it was determined that the purposes of the corporation should be expanded to include investment in certain real estate, insurance companies, and a motel corporation. To achieve these expanded purposes the Board of Directors undertook to sell stock in B & E to the public. Accordingly, steps were taken to provide for five hundred thousand shares of common stock, one hundred thousand shares of Class A preferred stock, three hundred thousand shares of Class B preferred stock and one million shares of Class C preferred stock. All the stock was to have a par value of $1.00 per share.
Sometime during September and again in November of 1961, the plaintiffs, Hirschis, were approached by defendant Sampson who told them among other things, that the investment potential of B & E was good and solicited their investment in the capital stock of the company. Pursuant to this solicitation the Hirschis purchased shares of stock in B & E to the extent of $20,800.00.
In this action filed on December 2, 1965, it was asserted that defendants had violated section 10(b) of the Securities Exchange Act by employing devices, schemes and artifices in selling shares of stock to plaintiffs. It was undisputed that defendants did not deliver a prospectus to any of the investors and that the only written communications received by plaintiffs from the defendants were a letter dated October 24, 1962, giving notice of a special stockholders meeting for the purpose of a stock exchange, an official notice of the special stockholders meeting, a notice of the January 25, 1963, annual stockholders meeting dated December 21, 1962, a letter of October 1, 1963, concerning the reporting of dividends to the Internal Revenue Service and a statement of financial operations and retained earning of B & E Securities, Inc., for the fiscal year ending June 30, 1963.
It was admitted that it was not disclosed to plaintiffs the rights, privileges and preferences of the various classes of securities nor the manner in which the funds or assets of the corporation would be applied if the funds obtained from the issuance of stock were insufficient or
It was specifically found by the jury in answer to special interrogatories submitted to them that the defendant B & E Securities, Inc., in connection with the sale of securities to plaintiffs made untrue statements of fact and omitted to state facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading and that such misrepresentations or omissions were material.
The jury further found with respect to plaintiffs' allegations that defendants' actions had concealed the fraudulent omissions and that plaintiffs had been lulled into not presenting an action based on these omissions earlier. The jury held that during the shareholders meeting of January 25, 1963, the plaintiffs first knew, or in the exercise of reasonable diligence and inquiry should have known, about the facts constituting such misrepresentations or omissions and that the plaintiffs should have known on or about May 7, 1962, that B & E Securities, Inc., engaged or proposed to engage primarily in the business of investing, reinvesting and trading in securities. Based upon these findings the trial court determined as a matter of law that plaintiffs were entitled to a judgment against the defendants on their first count but were barred by the statute of limitations from recovering under the second count. The various claims of the parties on appeal raise three basic issues: (1) whether the lower court was correct in dismissing the class action; (2) whether the cause of action based upon the Investment Company Act should have been held to be barred, and (3) whether the trial court applied the correct rule as to the measure of damages to be applied in 10b-5 actions.
This case presents the first occasion for this court to consider the scope of revised Rule 23 of the Federal Rules of Civil Procedure. Rule 23, as Amended, became effective July 1, 1966, and this action was filed in December, 1965. However, the decision on the question of allowing the class action was not made until August, 1966. As a result, the lower court considered it within its discretion to apply either the old or new rule. Inasmuch as the amendment of Rule 23 was intended primarily as a simplification and clarification of the prior rule and because the trial court did consider
Rule 23(a) and (b) delineate the factors to be considered in determining the propriety of a class action. The trial court considered, and the parties agree, that the four prerequisites found in Rule 23(a) were present in the instant case. Subdivision (b) establishes three further criteria and requires that one of these be fulfilled before a class action is maintainable. The controversy to be resolved here is whether the provisions of 23(b) (3) were met.
Before a class action can be established under (b) (3) it is necessary to find, first, "that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members," and second, "that a class action is superior to other available methods for the fair and efficient adjudication of the controversy."
The lower court found, that as to the 10b-5 count, the individual questions involving the dissimilarity of oral representations, the issue of reliance and the matter of knowledge sufficient to invoke the statute of limitations, were the primary issues presented.
We are thus faced with the question of whether the trial court was too restrictive in its interpretation of Rule 23 in not allowing this class action to proceed. Undoubtedly the possibility exists that there will be questions of individual oral misrepresentation
As to the Investment Company Act the lower court acknowledged that the claims of each and every member of the class were identical. Inasmuch as plaintiffs were merely required to show that B & E was an investment company, that it had not registered and that the individual defendants were controlling persons, the activities of the plaintiffs could have little or no effect upon the operative facts determining liability. Hence, while the propriety of allowing a class action on the 10b-5 count is an extremely close question, there is really little doubt, as to the Investment Company Act, that the common issues predominate. Consequently, there does exist as to the totality of issues a common nucleus of operative facts such as would justify allowing the class action to proceed under newly amended Rule 23. It cannot be denied that the resolution of the class action issue in suits of this type places an onerous burden on the trial court. But if there is to be an error made, let it be in favor and not against the maintenance of the class action, for it is always subject to modification should later developments during the course of the trial so require. Eisen v. Carlisle & Jacquelin, 391 F.2d 555, 566 (2d Cir. 1968).
It is no doubt true that in determining the predominance of common over individual questions, the critical test is "whether there is `material variation' in elements like the representations made by the defendants to different members of a plaintiff class or the degrees of reliance by members of the class."
There have been a number of cases considering the effect of newly amended Rule 23.
In Harris it was asserted that because the investors made payments on the securities at different times and stood in different positions with respect to the representations made to them and the reasonableness of their reliance, the common issues did not predominate. The court answered: "But even assuming these premises to be true, since the complaint alleges a common course of conduct over the entire period, directed against all investors, generally relied upon, and violating common statutory provisions, it sufficiently appears that the questions common to all investors will be relatively substantial." Id. at 914.
In Dolgow v. Anderson, 43 F.R.D. 472 (E.D.N.Y.1968), Weinstein, J., in an extensive opinion dealing with the effect of the amendments of Rule 23, declared that: "Unpersuasive is defendants' reliance upon the fact that there are involved a plethora of statements, not all of which were necessarily brought to the attention of all investors." Id. at 489. In addition, it was stated that "[D]efendants argue that each member of the class would have to prove reliance, compliance with the statute of limitations, and damages, and thus the common questions cannot be said to predominate over those affecting individual members. * * * The common issues need not be dispositive of the entire litigation. The fact that questions peculiar to each individual may remain after the common questions have been resolved does not dictate the conclusion that a class action is not permissible." Id. at 490.
We hold, therefore, that the common questions presented, both by the 10b-5 and Investment Company Act issues, were sufficiently predominate to satisfy the first prerequisite for a 23(b) (3) type of class action.
The remaining consideration in determining the propriety of the class action is whether it is superior to other
In sum, it is entirely understandable why the lower court, considering merely the abstract question of whether common issues predominate, decided as it did. But taking the issue in the context of the securities laws and realizing that "the ultimate effectiveness of the federal remedies * * * may depend in large measure on the applicability of the class action device," 3 Loss, Securities Regulation 1819 (2d ed.1961), the interests of justice require that in a doubtful case, such as was presented here when considered by the trial court, any error, if there is to be one, should be committed in favor of allowing the class action. In the usual case when the class action is being considered prior to trial, it is within the power of the court to limit either the issues or the parties. The same remains true here. If it develops as to some of the investors that they had superior knowledge or received unique representations or that they were in some way atypical, then the subclass authorization of Rule 23, or some other procedural device can be fashioned to meet the exigencies of the situation.
We turn now to the issues presented by the lower court's barring the cause of action under the Investment Company Act of 1940. The jury in answering a special interrogatory found that, considering all the pertinent circumstances, including the payment of dividends, and any other lulling or concealing activity on the part of the defendants, the plaintiffs knew or should have known on May 7, 1962, that B & E Securities, Inc., was engaged or proposed to engage primarily as an investment company as defined by the Act. Because the Investment Company Act does not contain an applicable statute of limitations certain state statutes were applied to determine whether the cause of action was barred. In so doing, the trial court correctly determined that it must look to the statutes of the forum state.
Plaintiffs contend that the trial court should have applied section 78-12-23 which declares that an action based upon a written contract may be instituted any time within six years. However, in seeking to establish that the security purchase agreement was founded upon a written obligation the plaintiffs are forced to rely upon a personal check, a promissory note and stock certificates as the only written indicia of the agreement. It thus becomes apparent that the action is not founded upon a written instrument.
It is further contended that it is established Utah law that when there is some doubt as to the statute of limitations to be applied the court should apply the statute which permits the action to proceed. Nonetheless, in characterizing the action under the Investment Company Act for purposes of determining the most appropriate state statute, it cannot be gainsaid that the gist of the action is not the breach of a written contract. Inasmuch as this is the relevant inquiry in determining which statute to apply, it follows that the decision by the lower court to apply the three-year statute relating to statutorily imposed liability is exceedingly more appropriate. The action is grounded in the failure to meet the requirements of the Investment Company Act. It is difficult to conceive of a statute of limitations that could be more compatible in this context.
The trial court held that as to the defendant corporation the action was likewise barred. The court applied section 78-12-25(2), Utah Code Annot., which provides that an action may be instituted within four years for any action not otherwise governed by any of the other more specific limitation sections. Applying this catchall section and the appropriate date of May 7, 1962, it is difficult to understand why the action was held to be barred. The four year period of limitation would not have elapsed until May 7, 1966; yet the action was admittedly instituted in December, 1965. Plaintiffs urge on appeal that this error can be explained only as a result of the fact that the lower court failed to apply the federal tolling policy. If that were the situation, then the applicable dates would be September and November, 1961, the dates of the purchase of the securities. If this had been the court's approach then it undoubtedly would have precluded the issue in the pretrial order or in some fashion have indicated the reason for the divergent treatment of the defendant corporation and the individual defendants.
In any event, the federal law clearly requires that in every limitation question the old chancery doctrine of equitable tolling is to be applied. In Holmberg v. Armbrecht, 327 U.S. 392, 397, 66 S.Ct. 582, 585, 90 L.Ed. 743 (1946), the Supreme Court announced the proposition that "where a plaintiff has been injured by fraud and `remains in ignorance of it without any fault or want of diligence or care on his part, the bar of the statute does not begin to run until the fraud is discovered * * *.'" This federal policy of tolling has consistently been applied to actions brought under section 10(b) of the Exchange Act;
The defendants have indicated that the jurisdiction of the court was challenged in regard to the private action based upon the Investment Company Act. They did not find it necessary to discuss the problem in any detail. As a result, it becomes necessary for this court to consider the issue on its own motion.
In view of the recent developments of the law in implying private civil remedies for violations of the various federal securities laws, the strong indication is that when given the opportunity, the Supreme Court following the policy announced in J. I. Case Co. v. Borak, 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964), will find an implied civil liability arising from the Investment Company Act thereby superseding the only authority to the contrary, Brouk v. Managed Funds, 286 F.2d 901 (8th Cir. 1961). Brouk was implicitly overruled by Greater Iowa Corp. v. McLendon, 378 F.2d 783 (8th Cir. 1967), in which the court indicated that the other Circuits passing on the question had upheld a private cause of action. This court, therefore, finds that although the Investment Company Act makes no specific provision for private civil liability arising from the violations of the Act such liability may be implied.
The court below in its conclusions of law found that B & E was at all times after July 1, 1961, an unlicensed investment company within the definition, meaning and intent of the Act. Hence, the cause of action against B & E should have been sustained and the requested rescission of the security purchase arrangement allowed.
Lastly, defendants contend that as to the 10b-5 action the lower court committed error in awarding damages to the plaintiffs in the amount of $15,600.00. The issue of damages was submitted below upon a special interrogatory requesting the jury to ascertain the value of the purchased securities at three pertinent dates, i. e., the date of purchase, the date the suit was instituted and the date of the trial. The jury found that the securities were worthless on the latter two dates but determined that as of the date of purchase the preferred shares had a value equal to the purchase price. The common stock was valued at $.60 per share. On the basis of these findings plaintiffs' damages would be limited to $320.00.
The lower court, however, disregarded the jury finding choosing rather to fix the relevant date for determining the loss as of the date of the plaintiffs' discovery of the fraud. Inasmuch as the jury had not been requested to fix the value on this latter date, the court exercised its reserved power under Fed. R.Civ.P. 49 and found that "on January 25, 1963, when plaintiffs were charged with notice of said defendants fraud this stock had a reasonable and actual value of less than 25 cents per share." The plaintiffs were thus allowed a recovery of $15,600.00.
The defendants contend that the proper measure of damages is the difference between the amount plaintiffs paid for their stock in 1961 and its actual value at that time. As support for this position defendants cite Estate Counseling Service, Inc. v. Merrill, Lynch, Pierce, Fenner and Smith, Inc., 303 F.2d 527 (10th Cir. 1962). In that case this court was concerned with the distinction between "benefit of the bargain" and "out of pocket" damages. In adopting the latter view, the specific question of the appropriate date for ascertaining such damages was not before the court. Our statement that "the question is not what the plaintiff might have gained, but what he has lost by being deceived into the purchase," does, however, point to the crux of the issue here presented.
The plaintiffs have incurred a loss as a result of the fraudulent practices of the defendants in the sale of securities in violation of the securities laws. The extent of this loss will not necessarily be fully known until some time after the original transaction. This follows because the same fraudulent practices that have induced the plaintiffs' purchase of the securities also operate on other buyers thereby affecting the prevailing market price. It is not until the existence of the fraudulent conduct is known that the true value of the securities as an investment can be ascertained.
We hold, therefore, under the facts and circumstances of this case that the appropriate date to be applied in determining damages is the date on
The money judgment in favor of appellees and against appellants is affirmed and the case is remanded for further proceedings in accordance herewith.
Date No. of Shares Class Consideration9-27-61 10,000 A Preferred $10,000 11-30-61 10,000 B Preferred $10,000 11-30-61 800 Common $ 800