Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 09 C 5984--John A. Nordberg, Judge.
The opinion of the court was delivered by: Posner, Circuit Judge.
ARGUED SEPTEMBER 22, 2011
Before POSNER, FLAUM, and SYKES, Circuit Judges.
This appeal concerns statutory deadlines for filing federal securities suits, in the some- what unusual context of a divorce. The district judge dismissed the suit with prejudice on the ground that it was time-barred. The principal question raised by the appeal is whether the period in which a private suit for a federal securities violation may be brought begins with the fraud or other misconduct on which the suit is based or not until a harm befalls the plaintiff from the misconduct. The Supreme Court has thus far declined to answer the question. See Merck & Co. v. Reynolds, 130 S. Ct. 1784, 1796 (2010). (It noted the government's position that the time begins to run on the earlier date. Id.)
The plaintiff, Denise McCann, and her husband, Anthony McCann, divorced in August 2002. He was an executive of a closely held corporation called Hy-Vee, a super- market chain that is the defendant in this case. He was paid a salary of $300,000 a year and also owned common stock in the corporation. The divorce decree transferred to his wife almost a third of his shares of stock "until such time as [he] is first able to sell" them. The decree also required him to pay both alimony and child support through May 2007--when the couple's youngest child would finish high school--and to continue paying alimony until August 2012 unless he managed to sell the shares before then and forwarded the proceeds to Denise. At that point the alimony obligation would end, as she would then have the cash proceeds of the sale of the stock to live on.
The suit charges Hy-Vee with defrauding Denise as a favor to her husband--that during the negotiations leading up to the divorce Hy-Vee's chief financial officer told her falsely that her husband's shares could be sold only if he died, ceased to be employed by Hy-Vee, or ceased being employed in a position that entitled him to buy stock in the company (for example by being de- moted). He told her that until one of those things hap- pened she could not be dispossessed of the shares--and unless she was dispossessed of them before August 2012 her alimony would continue until then. In fact, the com- plaint alleges, Anthony could at any time obtain the company's permission to sell the stock forthwith. But the CFO's false assurance persuaded Denise (she argues) both to accept the stock in lieu of a cash settlement and to agree that her alimony payments would terminate as soon after May 2007 as Anthony was first allowed to sell the stock.
Although none of the triggering events listed by the CFO occurred, Hy-Vee on June 12, 2007--less than two weeks after the earliest day on which Anthony could stop paying alimony to Denise--agreed to buy back the shares that had been transferred to her. The price (rounded to the nearest $1,000) was $908,000. Anthony mailed her a check for $709,000, explaining that the differ- ence between that amount and the larger amount he had received from the company represented taxes and over- payment. He demanded the shares in return. She refused and her refusal precipitated state court litigation, which she lost, finally surrendering the shares in January 2008 and receiving in exchange $712,000. (The increase over the original figure of $709,000 probably was seven months' interest on the $709,000.) Anthony also stopped making alimony payments when Hy-Vee agreed to buy the shares in June 2007, depriving Denise of $220,500 that she would have received through August 2012 had the shares not been sold by then.
Denise filed the present suit on September 25, 2009, charged Hy-Vee with having violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and the SEC's Rule 10b-5, 17 C.F.R. § 240.10b-5, by making misrepresentations in connection with her receipt and sale of Hy-Vee stock. Section 10 (b) forbids deceptive conduct "in connection with the purchase or sale of" a security, and Rule 10b-5 prohibits the making of any "untrue statement of a material fact" or omission of any material fact "necessary . to make the statements made . . . not misleading." Anthony was not joined as a defendant. The district court, as we said, dismissed the suit as untimely.
As an alternative ground of dismissal, Hy-Vee argued in the district court (and no doubt would renew the argument if we reversed the dismissal of the suit, as the district court left the issue open) that there was no pur- chase or sale of stock because Denise never bought or sold Anthony's shares but merely "held" them until Anthony decided to sell. We disagree. When Anthony made the sale of the stock to the corporation in 2007, he was acting on behalf of Denise in the sense that the amount he received in the sale, after adjustments, went to Denise rather than being retained by him. In effect she sold the stock to the corporation for that amount, albeit involuntarily.
True, the sale that was made in reliance on the misrep- presentation was the 2002 "sale" of the shares to Denise pursuant to the divorce decree (the 2007 sale by Anthony on her behalf was not in reliance on the misrepresentation but rather was a consequence of the terms of the earlier sale), and the 2002 transaction was not labeled a sale. But realistically that's what it was. Denise received securities and paid for them by giving up a demand for other con- cessions in the divorce decree, such as a longer period of alimony--a surrender that constituted valuable con- sideration for the shares. Cf. Farid-Es-Sultaneh v. Commis- sioner, 160 F.2d 812, 815 (2d Cir. 1947). No more was necessary to satisfy the statutory requirement of a purchase or sale of a security. See SEC v. Zandford, 535 U.S. 813, 819-20 (2002); Norris v. Wirtz, 719 F.2d 256, 259- 60 (7th Cir. 1983); Smith v. Pennington, 352 F.3d 884, 889 (4th Cir. 2003); James v. Gerber Products Co., 483 F.2d 944, 948 (6th Cir. 1973).
So we come to the issue of timeliness. It is governed by 28 U.S.C. § 1658(b), Merck & Co. v. Reynolds, supra, 130 S. Ct. at 1789-90; Foss v. Bear, Stearns & Co., 394 F.3d 540, 541-52 (7th Cir. 2005), the two subsections of which provide that a private suit for federal securities fraud "may be brought not later than the earlier of--(1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation." The district court relied on subsection (2) in deciding to dismiss the suit, but the defendant argues that it is barred by subsec- tion (1) as well, and this is probably true. Although Denise had no reason in 2002 to doubt what Hy-Vee's chief financial officer told her were the limited condi- tions under which Anthony could sell the stock out from under her--Hy-Vee doesn't argue that prudence re- quired her to demand documentary proof of the truth- fulness of the CFO's statement to her--she probably discovered that she had been had when she learned that her husband had been authorized to sell the stock even though none of the triggering events that the chief financial officer had mentioned to her had occurred. She learned that in June 2007 and didn't sue until 27 months later--three months too late. She got the check from Anthony, not from Hy-Vee, and claims not to have known that he'd sold the stock. But this is unlikely, and it is especially unlikely that had she been diligent she still would have failed to realize that Hy-Vee was pur- chasing the stock from Anthony--and the two-year time limit in section 1658(b)(1) begins to run when the plaintiff would have discovered the violation had she been diligent. Merck & Co. v. Reynolds, supra, 130 S. Ct. at 1797-98. (As a detail, we note that Merck, 130 S. Ct. at 1797- 98, disapproved decisions of ours, such as Tregenza v. Great American Communications Co., 12 F.3d 717, 722 (7th Cir. 1993), which had held that the two-year period begins to run even earlier--upon "inquiry notice," which means as soon as the plaintiff discovers facts that while not constituting a violation create enough suspicion of one to induce a diligent person to investigate further and by doing so discover it.)
But the district judge made no findings with regard to subsection (1), instead ruling that the suit was barred by subsection (2), which gives the plaintiff five years rather than two in which to sue but makes the period run from the violation rather than from its discovery. The question, which is a question under subsection (1) as well, is what "violation" means. Does it mean when the fraud was committed or when the fraud caused a loss? In other words, is section 1658(b) (and specifically its second subsection) a statute of limitations or a statute of repose? "A period of limitation bars an action if the plaintiff does not file suit within a set period of time from the date on which the cause of action accrued. In contrast, a period of repose bars a suit a fixed number of years after an action by the defendant (such as manu- facturing a product), even if this period ends before the plaintiff suffers any injury." Beard v. J.I. Case Co., 823 F.2d 1095, 1097 n. 1 (7th Cir. 1987); see also Roskam Baking Co. v. Lanham Machinery Co., 288 F.3d 895, 903-04 (6th Cir. 2002). So imagine a case in which a defective product is sold at time t, the defect causes an accident at t 10, but the deadline for suit is t 5. E.g., Chang v. Baxter Healthcare Corp., 599 F.3d 728, 733 (7th Cir. 2010). Such a deadline creates a period of repose, barring suit even though the victim of an accident caused by the defective product could not, however diligent or well informed, have sued within the deadline because the accident didn't occur until after the deadline had passed.
A statute of repose is strong medicine, precluding as it does even meritorious suits because of delay for which the plaintiff is not responsible. "[A]s opposed to a statute of limitations, which begins running upon the accrual of some claim and permits equitable exceptions, . . . a statute of repose . . . 'serves as an un- yielding and absolute barrier' to a cause of action, re- gardless of whether that cause has accrued." Klein v. DePuy, Inc., 506 F.3d 553, 557 (7th Cir. 2007). "The rule in the federal courts is that both tolling doc- trines--equitable estoppel and equitable tolling-- are . . . grafted on to federal statutes of limitations," but "neither tolling doctrine applies to statutes of repose; their very purpose is to set an outer limit unaffected by what the plaintiff knows." Cada v. Baxter Healthcare Corp., 920 F.2d 446, 451 (7th Cir. 1990).
The argument for so unbending a rule is that the risk of error is great when the interval between an alleged wrongful act and its harmful consequence is a pro- tracted one. The argument is particularly strong in the case of product defects, but it applies to securities fraud as well. Suits for securities fraud can, as in this case, be based on oral statements, which are difficult to verify after several years have passed. The causal relation be- tween a misleading statement and a change in the price of a security is also ...