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Hupp v. Gray

decided: August 12, 1974.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. 71 C 2279 FRANK J. McGARR, Judge.

Swygert, Chief Judge, Pell and Stevens, Circuit Judges.

Author: Pell

PELL, Circuit Judge.

Plaintiff-appellant George T. Hupp appeals from the district court's order dismissing plaintiff's complaint and denying plaintiff leave to file a proposed first amended complaint.

Hupp filed his original complaint in September 1971 seeking damages from Laurence Gray, an individual, and A. G. Becker & Company, Incorporated, a corporate broker-dealer. The complaint had four counts, each of which set forth an alternative theory of recovery. Count I was based on section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)) and Rule 10b-5 of the Securities Exchange Commission (17 C.F.R. § 240.10b-5). Count II was based on the Illinois common law of fraud. Count III was based on section 7 of the Securities Exchange Act of 1934 (15 U.S.C. § 78g) and the Rules of the Board of Governors of the Federal Reserve System promulgated thereunder. Count IV was based on the Illinois common law of negligence.

Both defendants moved, pursuant to Rule 12(b),*fn1 Fed. R. Civ. P., to dismiss the complaint on the theory that the action was barred by the statute of limitations. Hupp's deposition was submitted by the defendants in support of their motion to dismiss. On the basis of the pleadings and Hupp's deposition, the district court dismissed Counts I and III as time barred. Counts II and IV, being based upon pendent jurisdiction, were dismissed for lack of federal jurisdiction.

Hupp then sought leave to file a first amended complaint which contained three counts, corresponding to Counts I, II, and IV in his original complaint. The district court denied plaintiff leave to file this proposed first amended complaint on the ground that the federal counts of the proposed complaint would also be barred by the statute of limitations and would, therefore, be subject to a motion to dismiss.

The facts, as disclosed in Hupp's complaint and deposition, are as follows. From May 1, 1965, to January 10, 1966, Hupp made a number of purchases of shares of stock in the Variable Annuity Life Insurance Company of America (Valic) through the defendant Gray, a stockbroker in the employ of Becker. Gray allegedly induced Hupp to make these purchases by means of misrepresentations and omissions of material facts concerning Valic. These misrepresentations allegedly included statements indicating that Valic had a commanding lead over the major insurance companies in the field of variable annuity life insurance and that the Chicago School Board was about to execute a contract with Valic for the purchase of a group policy covering thousands of teachers. The price paid by Hupp for the Valic stock ranged from $24.75 per share to $47 per share. At the time of Hupp's last purchase of Valic stock in January 1966, when the price was $47 per share, Gray allegedly stated that, in his opinion, Valic stock might go to $75 per share "at an early date." In the weeks after this purchase, however, the market price of Valic stock began to drop. In March 1967, Hupp sold his shares of Valic through a different broker-dealer for approximately $17.50 per share. Gray made no further representations to Hupp concerning Valic after March 1967. Hupp discovered Gray's alleged misrepresentations and omissions by accident in August 1970, during a conversation with a fellow employee in which Gray was told that the co-worker's wife, "a Chicago school teacher, had been solicited to purchase a variable annuity life insurance policy by several large insurance firms, contrary to Gray's representation that Valic was the only firm marketing a variable policy."

The sole question on appeal is whether the plaintiff can avoid the bar of the statute of limitations.

The Section 10(b) Claim

In Parrent v. Midwest Rug Mills, Inc., 455 F.2d 123 (7th Cir. 1972), this court held that where an action is brought under § 10(b) of the Securities Exchange Act of 1934 and Illinois is the forum state, the district court should apply the three-year statute of limitations of the Illinois Securities Law (Ill. Rev. Stat. ch. 121 1/2, § 137.13D). In the present case, all of the plaintiff's dealings in Valic stock ended in 1967 and yet the complaint was not filed until September 1971, over four years later. The plaintiff contends, however, that the doctrine of fraudulent concealment, which he particularly emphasized in the proposed amended complaint, tolled the statute of limitations in this case until Hupp discovered the misrepresentations in August 1970.

This court recognized in Parrent that the statute of limitations in a § 10(b) action may be tolled by the "equitable doctrine" of fraudulent concealment. In order to invoke this doctrine, however, the plaintiff must have remained ignorant of the fraud "without any fault or want of diligence or care on his part." Bailey v. Glover, 88 U.S. (21 Wall.) 342, 348, 22 L. Ed. 636 (1874). It is well established that a plaintiff may not merely rely on his own unawareness of the facts or law to toll the statute. Morgan v. Koch, 419 F.2d 993, 997 (7th Cir. 1969); Laundry Equip. Sales Corp. v. Borg-Warner Corp., 334 F.2d 788, 792 (7th Cir. 1964). The plaintiff, rather, has the burden of showing that he "exercised reasonable care and diligence in seeking to learn the facts which would disclose fraud." Morgan v. Koch, supra 419 F.2d at 997. The statutory period "[does] not await appellant's leisurely discovery of the full details of the alleged scheme." Klein v. Bower, 421 F.2d 338, 343 (2d Cir. 1970).

In the present case, Hupp alleged, in his original complaint, that in the exercise of due diligence, he learned of the facts giving rise to this cause of action in August 1970. Yet in neither the complaint, the proposed amended complaint, nor the deposition did the plaintiff indicate by way of fleshing out the allegations of diligence any actual steps which he had taken prior to August 1970 to discover the true facts about Valic. Indeed, the only conclusion is that he remained narcous until August 1970.

The undisputed facts in the plaintiff's complaint and deposition reveal that Hupp was on notice by March 1967, at the very latest, of the facts from which he should have known of the claimed fraud. When Hupp made his final purchase of Valic stock in January 1966 (at $47 per share), Gray told the plaintiff that the market price might soon rise to $75 per share. Shortly thereafter the price of Valic stock fell and, by March 1967, when Hupp ultimately ...

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