F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
MAR 3 1999
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT
CIRO REALMONTE;
FRANK REALMONTE;
SALVATORE REALMONTE,
Plaintiffs-Appellants,
v. No. 98-6079
ALVIN REEVES, JR.; COOPERS &
LYBRAND, L.L.P.,
Defendants-Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF OKLAHOMA
(D.C. No. CIV-97-542-C)
Submitted on the briefs:
Mark C. Dangerfield, Grant, Williams, Lake & Dangerfield, P.C., Phoenix,
Arizona, for Plaintiffs-Appellants.
Margaret M. Enloe, Associate General Counsel, Coopers & Lybrand, L.L.P.,
New York, New York, B.J. Rothbaum, Linn & Neville, P.C., Oklahoma City,
Oklahoma, for Defendants-Appellees.
Before BALDOCK , EBEL , and MURPHY , Circuit Judges.
MURPHY , Circuit Judge.
Plaintiffs Ciro, Frank, and Salvatore Realmonte (the Realmontes) appeal
the district court’s dismissal of their federal securities fraud action brought
against defendants Alvin Reeves, Jr. and Coopers & Lybrand, L.L.P., pursuant to
sections 10(b) and 20(a) of the Securities and Exchange Act, 15 U.S.C. §§ 78j(b)
and 78t(a), 17 C.F.R. § 240.10b-5, state, and common law. The district court
dismissed the action on statute of limitations grounds and subsequently denied
the Realmontes’ Fed. R. Civ. P. 59(e) motion to alter or amend judgment.. 1
I. Background
Prior to December 8, 1993, the Realmontes owned seventy-five percent of
the stock in R&B Quality Foods, Inc. in Scottsdale, Arizona. 2
At this same time,
defendant Alvin Reeves was president, chief financial officer, and treasurer of
Skolniks, Inc. (Skolniks), a publicly-owned bagel company whose stock traded on
the NASDAQ. Defendant Coopers & Lybrand served as outside auditor for
Skolniks.
1
After examining the briefs and appellate record, this panel has
determined unanimously that oral argument would not materially assist the
determination of this appeal. See Fed. R. App. P. 34(a)(2); 10th Cir. R. 34.1(G).
Therefore, the parties’ requests for oral argument are denied, and the case is
ordered submitted without oral argument.
2
The remaining twenty-five percent of the stock in R&B was owned
by Antonino M. Balbo, who is not a party to this action.
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Early in 1993, Reeves approached the Realmontes inquiring about the
possibility of Skolniks purchasing R&B in exchange for Skolniks stock.
Although Skolniks had suffered financial losses in 1992, it had shown gains so far
in 1993, and Reeves provided the Realmontes with a positive outlook for the
remainder of 1993 and 1994. In reliance on Reeves’ representations, on October
29, 1993, the Realmontes signed a letter agreement with Skolniks which
contemplated the future merger of R&B into Skolniks in exchange for
approximately 126,667 shares of Skolniks stock. The letter agreement referred to
a future merger agreement which the parties agreed to negotiate in good faith.
At the time the Realmontes signed the letter agreement, Coopers & Lybrand
was in the process of completing its audit of Skolniks, which they issued on
November 12, 1993. In its audit report, Coopers & Lybrand gave its unqualified
opinion certifying Skolniks’ 1993 financial statements and confirming Skolniks’
improved financial position and future outlook. On December 8, 1993, the sale of
R&B to Skolniks was consummated, and the Skolniks stock certificates were
transferred to the Realmontes and Balbo. 3
The Realmontes assert that Reeves and
Coopers & Lybrand did not disclose Skolniks’ true financial picture, and had they
done so, the Realmontes would not have agreed to the merger.
3
The Realmontes received 95,000 shares of Skolniks stock with the
remainder going to Balbo.
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In November 1994, a class action alleging securities fraud was filed against
Reeves in federal district court. An amended complaint was filed on February 10,
1995, adding Coopers & Lybrand as a defendant, and stating that the action was
brought “on behalf of all person[s] and entities (the ‘Class’) who purchased
Skolniks common stock during the period from November 3, 1993 through
October 25, 1994, inclusive (the ‘Class Period’).” 4
Appellants’ App. Vol. 1 at 14.
The amended complaint exempted from the class the defendants and their
families, any person or entity in which the defendants may have a controlling
interest or to which the defendant may be affiliated, and any legal representative
of any exempted party. See id. at 14-15.
On September 19, 1996, the district court certified the class for the purpose
of approving a settlement agreement. The certification order provided that any
putative class member could opt out by notice to lead counsel. Upon receipt of
the notice of settlement, the Realmontes, who objected to the terms of the
settlement agreement, elected to opt out, and on November 11, 1996, submitted
written notice of their decision to be excluded. Due to a large number of persons
electing to be excluded, the settlement agreement, as originally submitted, was
4
According to the class action complaint, during the class action
period, Skolniks stock was trading at approximately $14.00 a share. After it was
revealed that Skolniks was not as financially sound as represented, the stock
dropped to $1.00 a share, was eventually delisted by NASDAQ, and is now
considered worthless. See Appellants’ App. Vol. 1 at 2.
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not approved. A new settlement agreement was negotiated and eventually
approved.
The Realmontes filed this action on April 10, 1997. The district court
dismissed the Realmontes’ complaint on statute of limitations grounds,
concluding that the Realmontes did not acquire their stock within the class period,
November 3, 1993, through and including October 25, 1994, and therefore were
not entitled to the equitable tolling of the statute of limitations during the
pendency of a class action. In so holding, the court had before it the October 29,
1993 letter agreement between Skolniks and the Realmontes and the December 8,
1993 merger agreement. The court held that, because the letter agreement and the
merger agreement referred to an “effective” date of October 30, 1993, that was
the date of purchase for purposes of the running of the statute of limitations.
This finding placed the Realmontes’ acquisition outside the class period. The
court also determined that because the Realmontes acquired their stock in
“a stock-for-stock transaction” and not “on the open market,” the Realmontes
could not be considered class members. Appellants’ App. Vol. II at 427, 430.
On appeal, the Realmontes assert that the district court erred in its findings
that the method and timing of their acquisition of Skolniks stock precluded them
from class membership. We agree, and for the following reasons, we reverse the
district court’s dismissal.
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II. Discussion
A. Standard of Review
Where, as here, a party moves to dismiss pursuant to Fed. R. Civ. P. 12(c),
we review the judgment on the pleadings de novo. See McHenry v. Utah Valley
Hosp. , 927 F.2d 1125, 1126 (10th Cir. 1991). In reviewing a motion to dismiss,
we accept the well-pleaded allegations of the complaint as true and construe them
in the light most favorable to the non-moving party. See Yoder v. Honeywell
Inc. , 104 F.3d 1215, 1224 (10th Cir. 1997) .
B. Statute of Limitations
In American Pipe & Construction Co. v. Utah , 414 U.S. 538, 552-53
(1974), the Supreme Court held that commencement of a class action tolls the
running of the applicable statute of limitations for all class members who upon
denial of certification make timely motions to intervene. 5
In Crown, Cork & Seal
5
In Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson , 501 U.S.
350, 364 (1991) (superceded by statute on different holding), the Supreme Court
concluded that § 10(b) actions “must be commenced within one year after the
discovery of the facts constituting the violation and within three years after such
violation.” Accord Sterlin v. Biomune Sys. , 154 F.3d 1191, 1195 (10th Cir.
1998). The district court determined that the applicable period for the
Realmontes’ state securities fraud claim was “two years from the date they
discovered the fraud but no more than three years after purchase of the security,
71 Okla. Stat. § [408(f)],” and for the fraud and negligence claims, “two years
from the discovery of a fraud or negligence claim, 12 Okla. Stat. § 95(3).”
(continued...)
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Co. v. Parker , 462 U.S. 345, 350-52 (1983), the Court extended the tolling of the
statute of limitations to those seeking to bring individual actions in the event class
certification is denied, and to those electing to opt out of the class action in order
to file individual claims. In American Pipe and Crown, Cork & Seal the class
certification was denied. In the instant case the class was certified for the
purpose of approving a settlement agreement.
Relying on American Pipe and Crown, Cork & Seal , defendants argue that
“[t]he filing of a complaint containing class action allegations, . . . interrupts the
running of statutes of limitation only as to persons who would have been members
of a properly defined class and only if a motion to maintain a class suit has been
denied. ” Appellees’ Br. at 8-9. Defendants assert that the tolling rule of
American Pipe has “ never been applied in a case in which class certification has
been granted.” Id. at 9. Contrary to defendants’ confident statement, there are a
number of cases in which the tolling rule of American Pipe has been applied when
a class action has been certified. See, e.g. , Adams Pub. Sch. Dist. v. Asbestos
Corp. , 7 F.3d 717, 718 n.1 (8th Cir. 1993) (decision to opt out rather than denial
of class certification “irrelevant” to tolling); Tosti v. City of Los Angeles ,
754 F.2d 1485, 1488 (9th Cir. 1985) (when class certification has been granted,
(...continued)
5
Appellants’ App. Vol. 2 at 425-26.
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statute of limitations begins running anew from date class member opts out);
Edwards v. Boeing Vertol Co. , 717 F.2d 761, 766 (3d Cir. 1983) (distinction
based on whether class was denied or certified for application of tolling rule
“would make no sense”). 6
Rule 23(c)(2) requires notice to all class members that they can, upon
request, be excluded from the class. See also Eisen v. Carlisle & Jacquelin ,
417 U.S. 156, 173 (1974). We agree with the Court in Crown, Cork & Seal ,
that without tolling, this rule would be irrelevant because the statute of
limitations period for absent class members would, more often than not, have
expired, making the right to pursue individual claims meaningless. See 462 U.S.
at 351-52.
Considering the Supreme Court’s rationale that tolling the applicable
statute of limitations during the course of a class member’s participation would
serve to prevent the “needless duplication of motions” and protective filings by
parties seeking to preserve their rights, we believe that, in this case, the tolling
6
Defendants cite to Basch v. Ground Round, Inc. , 139 F.3d 6 (1st
Cir.), cert. denied , 119 S. Ct. 165 (1998) to support this argument. In Basch , the
court held that, even assuming the tolling rules of American Pipe and Crown,
Cork & Seal applied to Age Discrimination in Employment Act cases, it would
not have saved the plaintiffs’ case because their tolling claim depended on the
“stacking” of two sequential class actions in order to keep their claims timely.
See 139 F.3d at 11. We determine that the facts and holding in Basch are
inapposite here.
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rule would even be more strongly applicable. American Pipe , 414 U.S. 553-54.
Therefore, we hold that the fact that the Realmontes’ participation in the class
action terminated with a decision to opt out of a certified class rather than with
the denial of class certification is irrelevant to the applicability of the American
Pipe tolling rule.
C. Method of Stock Acquisition
The district court found that the Realmontes’ stock was acquired in a
stock-for-stock transfer, was not traded on the open market, and was subject to
certain restrictions. The court decided that these facts precluded the Realmontes
from being considered putative class members thus depriving them of the tolling
of the statute of limitations afforded class members desiring to file individual
claims.
Among the purposes of Fed. R. Civ. P. 23 is to assure that courts will
properly identify the common interests of class members and evaluate the ability
of the named plaintiff and counsel to fairly and adequately protect the interests of
the class. The requirements for class certification pursuant to Rule 23(a) are:
(1) the proposed class must be so numerous that joinder of all members is
impracticable; (2) the party seeking class certification must demonstrate that there
is at least one question of law or fact common to the class; (3) the claims of the
representative plaintiffs must be typical of the claims of the class; and (4) the
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representative parties must demonstrate an ability to fairly and adequately
represent the interests of the class members.
Here, we are concerned with whether the Realmontes’ claims were common
to those of the class. Commonality is not necessary on every issue raised in
a class action. See DeBoer v. Mellon Mortgage Co. , 64 F.3d 1171, 1174 (8th Cir.
1995). In fact, “Rule 23 is satisfied when the legal question linking the class
members is substantially related to the resolution of the litigation.” Id. (further
quotation omitted).
On appeal the Realmontes argue that the Supreme Court’s case of SEC v.
National Securities, Inc. , 393 U.S. 453 (1969) is dispositive. In National
Securities , the Court reviewed the Rule 12(b)(6) dismissal of the SEC’s complaint
alleging that the merger of two insurance companies, National Life & Casualty
Insurance Co. and Producers Life Insurance Co., was in violation of Securities
and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5. See id. at 455-56.
Because of certain alleged misrepresentations, Producers’ shareholders were
misled into approving the merger, thus losing their stock in Producers and
becoming stockholders in a new company. See id. at 455.
After determining that, in order to protect stockholders as well as policy
holders, federal securities law applied, the Court considered the respondents’
argument that the lower court’s judgment could be sustained on the alternative
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grounds that the SEC complaint failed to allege a “purchase or sale” of securities
within the meaning of § 10b-5. The Court agreed that “[f]or the statute and the
rule to apply, the allegedly proscribed conduct must have been ‘in connection
with the purchase or sale of any security.’” Id. at 466 (quoting 15 U.S.C.
§ 78j(b)). Concluding that Producers’ stock exchange constituted a purchase
of shares in the new company, the Court opined that “[w]hatever the terms
‘purchase’ and ‘sale’ may mean in other contexts, here an alleged deception has
affected individual shareholders’ decisions in a way not at all unlike that involved
in a typical cash sale or share exchange.” Id. at 467. We agree with the
Realmonte’s assertion that National Securities is applicable here.
The Securities Exchange Act of 1934 defines “sale” to include “every
contract of sale or disposition of a security or interest in a security, for value.” 15
U.S.C. § 77b(3). This section has been interpreted to include exchanges of one
security for another. See, e.g. , 7547 Corp. v. Parker & Parsley Dev. Partners,
L.P. , 38 F.3d 211, 223 (5th Cir. 1994); United States v. Wernes , 157 F.2d 797,
799 (7th Cir. 1946). When an exchange of shares facilitates the merger of two
separate and distinct corporate entities, that exchange constitutes a “purchase
or sale” for purposes of bringing a Rule 10b-5 action. See National Securities ,
393 U.S. at 467; Gelles v. TDA Indus., Inc. , 44 F.3d 102, 104 (2d Cir. 1994).
Therefore, as a matter of law, we conclude that the Realmontes were purchasers
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of Skolniks stock for purposes of bringing federal securities fraud claims which
were the basis of the class action.
Here, the district court did not cite any authority or offer any rationale to
support its conclusion that the Realmontes’ claims were not in common with those
of the rest of the class. It states only that “the difference in the method in which
these plaintiffs acquired Skolniks stocks provides an additional reason for finding
plaintiffs are not properly considered among the class of plaintiffs in the [class
action].” Appellants’ App. Vol. II at 430. This finding is erroneous. The
Realmontes assert in their complaint, which the court must construe as true,
see Yoder , 104 F.3d at 1224, that they relied on the representations of Reeves and
Coopers & Lybrand as to the financial condition and future of Skolniks in making
their decision to go through with the merger. Therefore, it can be assumed that
defendants’ alleged deceptions influenced the Realmontes’ decision in the same
way the alleged deceptions influenced those who bought Skolniks stock on the
open market. 7
7
Pursuant to the factual averments in the class action complaint and in
the Realmontes’ complaint, in making their respective decisions regarding the
acquisition of Skolniks stock, the class members and the Realmontes relied on the
alleged overstated financial statements and projections of Skolniks officers, the
report of the outside auditors, and press releases. See Appellants’ App. Vol. 1 at
3-6, 144-47.
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The claims of the Realmontes and the other class members allege that they
relied, to their detriment, on defendants’ actions, conduct, and representations as
to the financial condition and future of Skolniks. Therefore, under these facts,
the Realmontes’ acquisition of their Skolniks stock through the merger does not
render their claims atypical of a class member who acquired Skolniks stock on the
open market. Cf. Alpern v. UtiliCorp United, Inc. , 84 F.3d 1525, 1540 (8th Cir.
1996) (plaintiff’s acquisition of stock through a dividend reinvestment plan did
not render his claim atypical of those of members of the class who purchased
stock on the open market).
D. Date of Stock Purchase
Next, the district court determined that “[b]ecause plaintiffs here acquired
their Skolniks stock outside the window of time established for the [class action]
(November 3, 1993, through October 25, 1994), . . . the doctrine of equitable
tolling does not save plaintiffs’ claim.” Appellants’ App. Vol. II at 430. In so
finding, the district court relied on notations in both the October 29, 1993 letter
agreement and the December 8, 1993 merger agreement between the Realmontes
and Skolniks stating that the closing would be “effective as of October 30, 1993.”
Appellants’ App. Vol. II at 426.
The Realmontes argue that the “sale” did not occur until December 8, 1993,
when the parties were committed to the transaction and the acquisition was
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consummated. They contend that the October 30, 1993 effective date was
“wholly arbitrary and likely had more to do with corporate bookkeeping than
anything else.” Appellants’ Br. at 18.
Coopers & Lybrand argues that, because the Realmontes acquired their
Skolniks stock on October 30, 1993, they cannot claim that they relied on any
alleged misrepresentations in the November 12, 1993 audit report. We determine
this argument to be unpersuasive. Moreover, it is inconsistent with a note to
Skolniks’ financial statements in Coopers & Lybrand’s audit report discussing the
proposed merger at some length, including a summary of R&B’s unaudited
financial statements. See Appellants’ App. Vol. II at 565. In this note, Coopers
& Lybrand stated that the closing was “subject to certain conditions to be fulfilled
and the signing of a definitive agreement.” Id. The report asserted that although
“there is no assurance that the acquisition will be consummated,” Skolniks
believed that there was a “substantial likelihood that the acquisition will occur
as planned.” Id. Therefore, contrary to Coopers & Lybrand’s assertion, at the
time of its report, no stock had changed hands and the merger was far from
consummated.
Defendants further argue that the Realmontes “became obligated” to
transfer R&B stock on October 30, 1993. Appellees’ Br. at 4. Our reading of the
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October 29, 1993 letter agreement does not lead us to that conclusion. The letter
agreement states:
5. Closing . The closing of the transactions described in this letter
shall occur at Oklahoma City, Oklahoma, at a time to be designated
by Skolniks, with time being of the essence, but in any event
immediately following the satisfaction of all conditions to closing.
The closing shall be made effective as of October 30, 1993.
However, all references to closing made herein shall refer to the date
upon which the closing actually occurs.
Appellants’ App. Vol. 1 at 200. The only obligation we glean from this
provision, and the other provisions of this letter, is the obligation of the parties to
negotiate the terms of a future merger agreement in good faith according to the
guidelines set forth in the letter.
Pursuant to Oklahoma law, a letter agreement which memorializes the
material terms of the parties’ agreement may serve as a binding contract if the
parties so intend. See Raydon Exploration, Inc. v. Ladd , 902 F.2d 1496, 1500
(10th Cir. 1990). Our reading of the parties’ October 29, 1993 letter agreement
here does not reveal such intent. Performance of the terms of the contract was not
required until the date of closing, and there were a number of contingencies upon
which performance was dependent. In this light, it is clear that the Realmontes
did not receive any interest in the Skolniks stock until December 8, 1993.
It follows that their claimed injuries did not arise until after they acquired
such interest.
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Regardless of the “effective date” of the closing, it is our conclusion that
the Realmontes did not acquire or become finally obligated to acquire Skolniks
stock until the date of closing, December 8, 1993. See Appellants’ App. Vol. 1
at 236 (Skolniks was required to deliver stock certificates to the Realmontes
at closing). We conclude, therefore, that, under the facts presented here, the
“effective as of” legal fiction inserted in the letter agreement and the merger
agreement without further explanation, cannot be invoked to prejudice the rights
of the Realmontes. 8
8
We note that our decision on this issue prevents the incongruous
result of rendering irrelevant a fraudulent document provided after the “as of”
date in order to entice plaintiffs such as the Realmontes to remove the
contingencies in the agreement letter and complete the deal.
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E. Conclusion
In sum, it is our conclusion that neither the method nor the timing of
the Realmontes’ acquisition of Skolniks stock precluded them from class
membership. Therefore, because the Realmontes were purported class members
who opted out in favor of filing an individual action, they were entitled to the
tolling of the statute of limitations from the commencement of the original class
suit. See Crown, Cork & Seal , 462 U.S. at 351-52. In accord, the judgment
of the United States District Court for the Western District of Oklahoma is
REVERSED, and the matter is REMANDED to the district court for further
proceedings consistent with this opinion.
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