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Phillips v. Levie


decided: February 15, 1979.


Appeal from order and judgment of the Honorable Vincent L. Broderick, United States District Judge for the Southern District of New York, granting appellees' motion for summary judgment and dismissing the complaint brought for an alleged violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78, (b) as barred by the statute of limitations. Reversed and remanded.

Before Feinberg, Mulligan and Gurfein, Circuit Judges.

Author: Mulligan

Randolph Phillips appeals from a memorandum order and a judgment entered June 27, 1978 in the Southern District of New York, Honorable Vincent L. Broderick, Judge, granting appellees' motion for summary judgment and dismissing appellant's complaint in this action brought for an alleged violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (The Act), as barred by the statute of limitations.*fn1 We reverse the judgment and remand to the district court for further proceedings not inconsistent with this opinion.


On May 20, 1968, appellant opened an account with appellee Phillips Appel & Walden, Inc. (Appel), a member of the New York Stock Exchange and the National Association of Securities Dealers and a licensed broker-dealer. At that time appellee Levie,*fn2 an account representative of Appel, assisted Phillips in completing a "new account form" which reflected Phillips' standing instructions that all shares purchased for his account were to be mailed to him. Upon Levie's recommendation Phillips purchased through Appel 3,000 shares of Kloof Gold Mining Co., Ltd. (Kloof) from Singer & Mackie, Inc. (Singer). Pursuant to the terms of the written confirmation of the purchase order Phillips remitted payment of the $24,298.50 purchase price*fn3 to Weis, Voisin, Cannon, Inc. (Weis), clearing broker for Appel. Delivery of the shares to appellant was to be made on the settlement date, May 27, 1968.

Weis, however, did not mail the Kloof shares to Phillips. Instead Phillips received a monthly statement dated May 31, 1968 which indicated that the Kloof shares were being held by Weis for Phillips' account. This statement was not accurate. In fact, the Kloof shares had not yet been delivered to Weis by the selling broker, Singer. Weis did not receive the Kloof stock from Singer until June 13, 1968.

In any event, after receipt of the monthly statement Phillips requested in a letter of June 7, 1968 that Weis forward the shares to the firm of Halle & Steiglitz. When the shares were not forthcoming Phillips directed subsequent requests for delivery of the Kloof stock to Weis' vice-president on July 2, 1968 and at an unspecified date soon thereafter. These requests were also unavailing. Finally, on July 16, 1968 Phillips instructed Weis to sell the stock. After effecting the transaction Weis sent Phillips a check in the amount of $23,475 covering the proceeds of the sale minus tax and commissions.

Phillips filed a complaint in the district court on June 10, 1974, alleging jurisdiction under the Act, 15 U.S.C. § 78aa.*fn4 As the district court observed:

The gravamen of (Phillips') complaint is that Appel, through its agent Weis, fraudulently retained possession of plaintiff's shares; that when the price of those shares began to fall plaintiff was precluded from selling them; and that on July 16, 1968 plaintiff was compelled to sell the shares through Weis in order to free his funds, thereby paying a "coerced commission," having been unable to sell through the broker of his choice.

Phillips asserted that the above facts stated a claim under section 10(b)*fn5 and Rule 10b-5, 17 C.F.R. § 240, 10b-5.*fn6 Additionally, he maintained that his complaint set forth a state law breach of contract action over which the district court had pendent jurisdiction.

Appel denied the material allegations of the complaint and asserted numerous affirmative defenses, including that of statute of limitations. Appel subsequently moved for summary judgment on five of its affirmative defenses.*fn7 Phillips cross-moved for summary judgment. The district court granted Appel's motion solely on the basis that the federal securities law claim was time-barred and dismissed the complaint. Phillips' motion for reargument was denied and this appeal followed.*fn8


Since the Act provides no statute of limitations for actions brought under section 10(b) the federal courts apply the limitations period applicable to the forum's most closely analogous state law action. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210 n.18, 96 S. Ct. 1375, 47 L. Ed. 2d 668 (1976); see Stull v. Bayard, 561 F.2d 429, 431 (2d Cir. 1977), cert. denied, 434 U.S. 1035, 98 S. Ct. 769, 54 L. Ed. 2d 783 (1978). This circuit has repeatedly held that New York's statute of limitations governing common law fraud actions is applicable to section 10(b) claims. E. g., Klein v. Shields & Co., 470 F.2d 1344 (2d Cir. 1972); Klein v. Auchincloss, Parker & Redpath, 436 F.2d 339, 341 (2d Cir. 1971). At the same time federal law determines when the period begins to run as to a federal securities law claim. Arneil v. Ramsey, 550 F.2d 774, 780 (2d Cir. 1977). Under federal law the statute begins 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." Stull v. Bayard, supra, at 432.

Applying these principles the district court looked to N.Y.C.P.L.R. § 213(8),*fn9 which sets forth a six year statute of limitations period for fraud actions, and held that pursuant to federal law the statute began to run from the time Phillips reasonably should have discovered the fraudulent scheme. The district judge then found that Phillips "was in possession of all the information necessary to alert him to the alleged fraud" by June 7, 1968, the date on which he wrote to Weis insisting that the Kloof shares be sent to him according to his earlier instructions. The district court held, therefore, that the six year limitation period had run by June 10, 1974 when Phillips filed his complaint.

We fully agree that commencement of the statutory period does not await a plaintiff's "leisurely discovery of the full details of the alleged scheme," Klein v. Bower, 421 F.2d 338, 343 (2d Cir. 1970); accord, Arneil v. Ramsey, supra, 550 F.2d at 780. However, here Phillips did not act in a dilatory fashion. He was advised on May 31, 1968 that the Kloof shares were being held by Weis for his account. Phillips then made several prompt requests for delivery between June 7 and July 16. Had appellant made an immediate investigation he would have found that Weis had not even received the Kloof stock until June 13, 1968. Thus the circumstances prior to that date might have indicated either a negligent or intentional breach of the agreement with Phillips, but they did not demonstrate a fraudulent Retention Of the shares, which is the gist of the complaint.*fn10 The alleged fraudulent retention could only have commenced on June 13, not at an earlier date as found below.*fn11 Accordingly, the action commenced on June 10, 1974 was timely under the six year statute of limitations applicable in New York.*fn12 Reversed and remanded.

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