LeCroy v. Dean Witter Reynolds, Inc. (585 F. Supp. 753, 1984)

MEMORANDUM AND ORDER

EISELE, Chief Judge.

Pending before the Court is defendant’s motion for partial summary judgment. For the reasons stated below, the motion will be granted in part and denied in part.

This case involves the salé of certain securities by Dean Witter Reynolds, Inc., the defendant, to Ms. Ruth LeCroy, the plaintiff. Ms. LeCroy’s complaint includes nine causes of action premised on the Securities Act of 1933, the Securities Exchange Act of 1934, the Arkansas Securities Act of 1959, and the Arkansas common law theories of fraud and intentional infliction of emotional distress. Though the bases for liability are numerous, the gist of Ms. Le-Croy’s complaint is quite simple.

Ms. LeCroy claims that in September of 1978 she was approached by an agent of the defendant about investing some of her savings. She states that, being of advanced age, she was interested in investing her savings in a way that would secure for her a monthly income. Specifically, she states she informed defendant’s agent that: (1) she was advanced in years and did not want any long-term investments; (2) she needed a return on her investment that would be greater than a return she could obtain from a savings account; and (3) she wanted her principal available for use in case it was needed. She ultimately tendered $25,128.02 to defendant who purchased for her 25 units of a security known as The Corporate Income Fund (“Fund”).

Ms. LeCroy apparently became dissatisfied with the securities purchased and brought this suit on July 1, 1981, on the grounds that: (1) the Fund is a long-term investment not suited to the needs she made expressly known to defendant; (2) the monthly income from the Fund was approximately $190, a sum less than that she desired and could have obtained from a savings account; and (3) the Fund did not mature for 26 years during which time the value of her principal diminishes and access to her principal is impaired.

In short, Ms. LeCroy claims defendant purchased securities of a type she expressly stated she did not desire and therefore seeks a recission of the sale, actual damages in the amount of $25,128.02, interest on that sum at 6% per annum, punitive damages of $1,000,000, compensatory damages for personal injury and mental and emotional distress in the amount of $150,-000 and costs and attorney’s fees.

It is important to keep in mind what the plaintiff is not alleging. She is not claiming that the Fund shares themselves were valueless or had some value less than what she paid. Nor does she claim that the Fund itself is valueless or exists to defraud its shareholders. She asserts only that these securities, that is, shares of the Fund, were not the securities she bargained for, and that she was defrauded into purchasing them.

The defendant has moved for partial summary judgment on three points. First, it contends that the plaintiff’s first two causes of action, which stem from alleged violations of section 5 of the Securities Act of 1933, 15 U.S.C. § 77e, are barred by the applicable statute of limitations. Second, it urges the Court to dismiss plaintiff’s claim for intentional infliction of emotional distress. Third, it requests the Court to make a ruling setting forth the maximum amount of damages that the plaintiff may recover if the defendant is found liable for plaintiff’s third, fourth, fifth, sixth and eighth causes of action.

As a preliminary matter, the Court recognizes the drastic nature of the summary judgment remedy. The Court may grant summary judgment only if “the moving party has established his right to a judgment with such clarity as to leave no room for controversy and the non-moving party is not entitled to recover under any discernible circumstances.” Butler v. MFA Life Insurance Co., 591 F.2d 448, 451 (8th Cir.1979). Furthermore, the Court must view all the evidence in the light most favorable to the non-moving party, Camfield Tires, Inc. v. Michelin Tire Corp., 719 F.2d 1361, 1364 (8th Cir.1983), in determining whether a genuine issue of material fact exists that would preclude the entry of summary judgment. In the context of defendant’s statute of limitations defenses, the Court notes that summary judgment is appropriate if the action is clearly barred, but that if the running or tolling of the statute requires the adjudication of facts, summary judgment is inappropriate. See Admiralty Fund v. Jones, 677 F.2d 1289, 1293 (9th Cir.1982) (citing C. Wright & A. Miller, Federal Practice and Procedure § 2734 at 647-48 (1973)). Although cognizant of these strictures on the availability of the summary judgment remedy, the Court nevertheless finds that defendant’s motion must be granted in part and denied in part.

I. Statute of Limitations

The defendant contends that the applicable statute of limitations bars plaintiff’s first and second causes of action. The plaintiff’s first two causes of action are both premised on § 5(b)(2) of the 1933 Securities Act. Section 5(b)(2) prohibits any person from selling or delivering a security unless the security is preceded or accompanied by a properly-drawn prospectus. The plaintiff contends that in September of 1978 the defendant delivered two securities to her without providing her with the required prospectuses.

Technically, the plaintiff is required to plead and prove compliance with the statute of limitations. See McMerty v. Burtness, 72 F.R.D. 450, 453 (D.Minn. 1976); L. Loss III Securities Regulation, Ch. ll(C)(l)(f)(ii) at 1744 (2d ed. 1961) (hereinafter cited as “Loss”). See also Cook v. Avien, Inc., 573 F.2d 685, 695 (1st Cir. 1978). Plaintiff’s complaint omits any such pleading. Nevertheless, the defendant has raised the issue in its motion for partial summary judgment and in her response, the plaintiff has asserted proper compliance with the applicable limitations periods. The Court will therefore consider whether the plaintiff has in fact timely filed her first two causes of action.

A. Applicable Statutory Provisions

Section 5 provides in pertinent part:

It shall be unlawful for any person, directly or indirectly

(2) to carry or cause to be carried through the mails or in interstate commerce any such security for the purpose of sale or for delivery after sale, unless accompanied or preceded by a prospectus that meets the requirements of subsection (a) of section 77j of this title.

The provision, standing alone, creates no private cause of action. However, Congress infused life into section 5 by providing under section 12(1), 15 U.S.C. § 111 (1), that a private party may sue for violations of section 5. The applicable statute of limitations for section 12(1), appears in section 13, 15 U.S.C. § 77m, which states:

No action shall be maintained to enforce any liability created under section 77k or 111(2) of this title unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence, or, if the action is to enforce a liability created under section 771(1) of this title, unless brought within one year after the violation upon which it is based. In no event shall any such action be brought to enforce a liability created under section 77k or 771(1) of this title more than three years after the security was bona fide offered to the public, or under section 111 (2) of this title more than three years after the sale,

(emphasis added).

B. One-Year Limitations Period

The defendant contends that the one-year limitations period has run and that consequently the plaintiff’s first two causes of action are time-barred. The plaintiff essentially concedes that the complaint was not filed within one year of the date that the securities were offered, sold or delivered. See Mason v. Marshall, 412 F.Supp. 294, 299 (N.D.Tex.1974) (period commences as of the last of these three events), aff'd, 531 F.2d 1274 (5th Cir.1976); Buchholtz v. Renard, 188 F.Supp. 888 (S.D.N.Y.1960). Nevertheless, the plaintiff urges the Court to apply the Federal Equitable Tolling Doctrine and find that her first two causes of action are not barred.

1. Federal Equitable Tolling Doctrine

At the outset, the Court notes that the doctrine has limited application. Equitable tolling is invoked primarily in two situations: where fraud forms the basis of the federal cause of action; and where other non-fraud-based federal causes of action have been concealed by the tortfeasor. See Dyer v. Eastern Trust & Banking Co., 336 F.Supp. 890, 901 (D.Me. 1971). In practical effect, the doctrine tolls the running of the applicable limitations period until the fraud or the fraudulent concealment is (or should have been) discovered by the plaintiff.

Unquestionably, the equitable tolling doctrine applies in the context of statutes of limitations under the federal securities laws. The doctrine, however, must be applied in the light of the particular facts and circumstances and consistently with the policies underlying the cause of action being asserted. The mere fact that the Securities Act was designed largely to proscribe and redress the consequences of fraud in the securities markets does not mean that the equitable tolling doctrine automatically applies in each and every securities case.

The doctrine should obviously apply where a broker/dealer fraudulently conceals any violation of the securities acts (whether or not the underlying violation constitutes fraud). See Peoria Union Stock Yards Co. v. Penn Mutual Life Insurance Co., 698 F.2d 320, 326 (7th Cir. 1983). Where, however, an investor seeks equitable tolling based solely upon the allegation that the defendant has violated the Securities Act, the Court must scrutinize the established facts and circumstances before applying the doctrine. The doctrine has natural appeal in the classic case of Securities Act fraud, such as one brought under sections 11 or 12(2). In such instances, the wrongdoer’s fraudulent act may mislead the investor and thereby convince the investor to make a purchase he might otherwise shun. If completely successful, the wrongdoer will not only defraud the investor, but also disguise the fraudulent acts so that the investor never knows he has been defrauded. In recognition of this fact, courts have uniformly applied the doctrine to toll the running of the one-year limitations period contained in section 13.

On the other hand, the nature of actions brought pursuant to section 12(1) for violations of section 5(b)(2) varies considerably from the forms of fraud proscribed under section 11 and 12(2), as outlined above. Section 12(1) creates liability inter alia where a broker breaches section 5(b)(2) by failing to provide a prospectus before or simultaneously with the sale or offer of a security. Obviously, the acts giving rise to the violation do not fall into the conventional definition of fraud. See Ingenito v. Bermec Corp., 441 F.Supp. 525, 553 n. 26 (S.D.N.Y.1977) (“actions under § 12(1) are not themselves in the nature of fraud”). Indeed, the mandate set forth in section 5(b)(2) does not seek to prohibit fraud per se; instead, it simply seeks to ensure that, by requiring the provision of information before the investor commits himself to purchase, the investor will at least have had the opportunity to make a well-informed investment decision. Seen in this light, it is apparent that when a broker violates section 5(b)(2), thereby setting himself up for liability under section 12(1), he has merely committed a procedural infirmity, not fraud.

Since a violation of section 5(b)(2) does not alone actually constitute fraud, a plaintiff seeking to invoke equitable tolling must look beyond the underlying cause of action for some other basis on which to toll the running of the statute of limitations. See id.

2. Inapplicability of the Equitable Tolling Doctrine

In the case at bar, the plaintiff has failed to identify any conduct—independent of the alleged violations of section 5(b)(2)— that would justify invocation of the equitable tolling doctrine. Although plaintiff cites Houlihan as supporting her position, her reliance on that case is misplaced. Nothing in the complaint or other submissions suggests that the defendant or its agents made any post-sale fraudulent misrepresentations and, specifically, the plaintiff contends neither that she was told a prospectus was unnecessary nor that the defendant told her that she could delay in filing her complaint without adverse consequences. Moreover, as noted above, the mere violation of section 5(b)(2), without more, provides insufficient grounds for tolling the one-year statute of limitations. The Court must therefore conclude that the one-year statute of limitations was not tolled for purposes of plaintiffs section 12(1) claim. Cf. Upton v. Trinidad Petroleum Corp., 468 F.Supp. 330 (N.D.Ala. 1979), aff'd on other grounds, 652 F.2d 424 (5th Cir.1981) (no tolling of limitations period in action brought where defendants failed to register certain securities).

The period of limitation for an action premised upon a violation of section 5(b)(2), begins to run from the date the violation occurred. See Gridley v. Cunningham, 550 F.2d 551, 552 (8th Cir.1977). Courts have generally interpreted this as meaning that the period runs from latest of three events; the date the security was offered; the date it was sold; or the date it was delivered. See Mason v. Marshall, 412 F.Supp. 294, 299 (N.D.Tex.1974), aff'd, 531 F.2d 1274 (5th Cir.1976). Assuming that the one-year limitation period commenced on September 29, 1978,—the date the securities were delivered to the plaintiff — it is clear that the period had long since run by the time plaintiff filed her complaint on July 1, 1981.

B. Three-Year Limitations Period

■ Nevertheless, plaintiff raises one final argument in an attempt to breathe life into her otherwise expired section 12(1) claim. She states: “Plaintiff’s action was brought within three years of her purchase of the certificates from Defendant and her action is not barred by the applicable statute of limitations.” (Plaintiffs brief, July 8, 1982, at p. 3.) It appears plaintiffs contention seems to be that, even if untimely under the one-year limitation period, since plaintiff filed her claim within the three-year limitations period included under section 13, her section 12(1) claim is not barred.

The Court must disagree. From a literal reading of the statute and a reference to the legal authorities, the Court concludes as a matter of law that the one- and three-year limitations periods contained in section 13 are cumulative, not alternative. See Osborne v. Mallory, 86 F.Supp. 869, 873-74 (S.D.N.Y.1949); Loss, ch. 11(C)(1)(f)(i) at p. 1742, n. 188. Therefore, the plaintiff must be able to demonstrate not only that she filed her action within one year of the section 5(b)(2) violation, but also that the filing occurred within three years after the securities were first bona fide offered to the public. If she fails to meet either limitation period, her cause of action is time-barred.

The Court’s conclusion about the cumulative nature of the two limitations periods is not reached without some degree of disquietude. For from this reading, any person who invests in a security more than three years after it was first offered to the public is automatically time-barred from suing for a violation of section 5(b)(2) no matter how quickly after the sale that person files his complaint. The three-year limitation period therefore stands as a trap for the unwary investor who fails to receive a prospectus in connection with a slow offering. Obviously, this defeats the very core principle upon which the section 5(b)(2) requirement is based: At any time after three years from the initial offering, a broker may sell or offer to sell a security without providing a prospectus and be completely insulated from liability under section 12(1). To the extent that this “cumulative” interpretation permits unscrupulous brokers to act with impunity after the third year following the initial public offering, it undermines the Act’s fundamental policy of ensuring that investors possess (or have the opportunity to possess) a modicum of information about the securities they ultimately purchase.

In spite of these theoretical misgivings about the cumulative nature of the two limitations periods in section 13, the Court remains firmly convinced that since plaintiffs action is untimely under the one-year limitations period, the plaintiffs alleged compliance with the three-year limitations period is irrelevant. Thus, plaintiffs first and second causes of actions premised upon section 12(1) must be dismissed.

II. Emotional Distress

The defendant argues that the Court should decline to hear the plaintiffs claim for intentional infliction of emotional distress. The plaintiffs emotional distress claim is based neither on the securities laws nor on common law fraud. Instead, she states that her claim rests on an independent cause of action for “intentional infliction of emotional distress” (“emotional distress”) or “outrage,” which was recognized by the Arkansas Supreme Court in M.B.M. Co. v. Counce, 268 Ark. 269, 596 S.W.2d 681 (1980).

In reply, the defendant asserts that the emotional distress claim should be dismissed for two reasons: first, because under the circumstances of this case the Court should not exercise pendent jurisdiction to hear this state claim; and second, because the plaintiff has failed to adequately plead and establish her claim.

A. Exercise of Pendent Jurisdiction

As a threshold matter, the Court finds that the emotional distress claim is properly before the Court as a pendent claim. As noted in United Mine Workers of America v. Gibbs, 383 U.S. 715, 725, 86 S.Ct. 1130, 1138, 16 L.Ed.2d 218 (1966), a federal court possesses pendent jurisdiction of a related state claim if the federal claim is “substantial,” if the state claim arises out of the same “nucleus of operative fact” as does the federal claims, and if the nature of the claims is so related that a plaintiff ordinarily would be expected to try all in the same proceeding.

In this case, the plaintiffs emotional distress claim meets the three prongs of the Gibbs test. The federal claims, which are premised upon the Securities Act of 1933 and the Securities and Exchange Act of 1934, comprise the core of her cause of action. The Court finds them to be substantial. See Levering & Garrigues Co. v. Morrin, 289 U.S. 103, 105-06, 53 S.Ct. 549, 550, 77 L.Ed. 1062 (1933). Koke v. Stifel, Nicolaus & Co., Inc., 620 F.2d 1340, 1346 (8th Cir.1980). The state claim also arises out of the same “nucleus of operative facts” upon which the federal claims are based. Indeed, if the federal claims were dropped, the Court believes that little, if anything could remain of plaintiffs emotional distress claim. Cf. Cunningham v. Dean Witter Reynolds, Inc., 550 F.Supp. 578, 581-82 (E.D.Calif.1982) (pendent state claim for intentional infliction of emotional distress would not be ordered arbitrated pursuant to contract provision due to close connection with federal securities laws claims). Finally, logic would dictate that for the sake of judicial economy the emotional distress claim be litigated in the same proceeding as plaintiffs securities laws claims.

The defendant suggests that irrespective of these findings, the Court should decline to hear the emotional distress claim because Arkansas has only recently recognized the tort and the law is not well-settled. In all fairness to the defendant, the tort of emotional distress is, under Arkansas law, in its incipient stages of development. See Givens v. Hixson, 275 Ark. 370, 372, 631 S.W.2d 263 (1982) (the tort is “new and still developing”). The Court cannot disagree with the theory underlying defendant’s argument that unsettled areas of state law are best left to state courts for resolution and refinement. See Gibbs, 383 U.S. at 726, 86 S.Ct. at 1139. Nevertheless, the Court believes that, although not comprehensively litigated, the tort’s basic contours seem sufficiently established to permit this Court’s exercise of pendent jurisdiction. See, e.g., Orlando v. Alamo, 646 F.2d 1288, 1290 (8th Cir.1981); McArthur v. Robinson, 568 F.Supp. 393, 396 (E.D. Ark.1983); Givens, 275 Ark. 370, 631 S.W.2d 263 (1982); M.B.M. Co. v. Counce, 268 Ark. 269, 596 S.W.2d 681 (1980). See also Dalrymple v. Fields, 276 Ark. 185, 190, 633 S.W.2d 362 (1982); Fuller v. Marx, 724 F.2d 717, 719 (8th Cir.1984); Case Note, Intentional Infliction of Emotional Distress — Escaping the Impact Rule in Arkansas, 35 Ark.L.Rev. 533 (1981). Furthermore, the Arkansas Supreme Court’s general embracement of the approach outlined in the Restatement (Second) of Torts § 46, see, e.g., Givens, 275 Ark. at 372, 631 S.W.2d 263; Counce, 268 Ark. at 280, 596 S.W.2d 681; see also Orlando, 646 F.2d at 1291, n. 5, suggests that this Court may consult the Restatement for additional insights as it carries out its inquiry. Thus, the Court concludes that with the aid of these legal authorities, as well as that obtained from other federal decisions addressing the tort in the context of securities fraud cases, it is appropriate to exercise pendent jurisdiction over the plaintiff’s emotional distress claim.

B. Nature of the Plaintiffs Emotional Distress Claim

The plaintiff raises her emotional distress claim in her ninth cause of action, where she contends:

As a direct and proximate result of Defendant’s wilful and wanton actions and omissions, through its agents and employees, Plaintiff has suffered severe mental and emotional distress, suffering and worry, and physical injuries in the form of loss of vision, revival of a dormant diabetic condition and an overall impairment of her health.

As a result thereof, Plaintiff is entitled to punitive damages, damages for mental and emotional distress and damages for consequential physical injuries.

(Plaintiff’s Complaint, ¶1¶ 41, 42.) This claim incorporates by reference the allegations raised in numerous paragraphs throughout the Complaint and implements the factual assertions contained in said paragraphs to support her claims for damages for mental and emotional distress (as well as for damages for “consequential physical injuries” and punitive damages).

The dearth of substantive facts in the Complaint tends to make it difficult to understand the nature of plaintiff’s claim. It appears that the only factual assertions that could possibly lend credence to her emotional distress claim arise in paragraphs 17, 19, 23, 25, 26, 33, 34, 37, 38, 41 and 42 of the Complaint. In those paragraphs, the plaintiff essentially alleges:

1) That the defendant falsely represented to plaintiff that her security would have a greater rate of return than that obtained in a bank account;

2) That defendant knowingly made false representations that plaintiff’s security was not a long-term investment and failed to inform plaintiff that her principal could not be withdrawn before maturity without resulting in a substantial loss, and that said representations and material omissions were willfully made by plaintiff in order to induce her reliance and to cause her to invest without having all necessary information.

3) That defendant willfully failed to inform the plaintiff about the nature of her investment, the percentage of return thereon and the risk involved.

4) That defendant failed to purchase certain securities requested by plaintiff and instead purchased shares in a mutual fund without plaintiff’s permission.

5) That defendant knew or should have known that, in light of plaintiffs advanced age and short life expectancy, the investment in securities having a long-term maturity was not suitable for the plaintiff.

6) That plaintiff has suffered severe mental and emotional distress, suffering and worry.

The plaintiffs deposition reveals the following information that relates, albeit tangentially, to her emotional distress claim:

* That plaintiff notified the defendant’s agent that she did not want to invest in long-term securities having long-term maturity because of her age. See Deposition, pp. 21, 23, 30, 37, 76, 85, 90.

* That she told the agent she could not afford to lose money, and that she needed a return on her investment of at least $200 per month. See deposition, pp. 12, 22, 45, 56, 85, 86, 90.

* That defendant never provided any literature or other written information, such as a prospectus, in conjunction with the sale of the securities. See deposition, pp. 31, 89.

* That she had no knowledge of investments and that she relied heavily on the expertise of the defendant. See deposition, pp. 36, 86.

* That she is elderly. See deposition, p. 5.

* That she suffered physical and emotional damages as a result of her dealings with the defendant. See deposition, pp. 39, 40, 49, 50.

The plaintiff summarizes the theory underlying her emotional distress claim by stating:

Plaintiff is a woman of advanced years who purchased the securities not to obtain a commercial advantage, but to simply protect herself against a loss of income in the later years of her life. The defendant knew of the Plaintiffs goals in purchasing the securities. Clearly, if the Defendant misled, deceived, or defrauded the Plaintiff, the natural consequence of that action would be that Plaintiff would suffer mental and emotional distress, a fact of which Defendant was well aware.

(