The opinion of the court was delivered by: RICHEY
This case is before the Court on the motion of defendants Estrin, Abod, Steinberg, Sloan, Frankel and Human Service Group, Inc. ("HSG") to dismiss the complaint. The plaintiff charges the named defendants with violation of Section 10(b) of the Securities and Exchange Act of 1934 (15 U.S.C. § 78j(b)) and Rule 10b-5 (17 C.F.R. § 240.10b-5), as well as fraud, breach of fiduciary duty and breach of contract.
These defendants seek to dismiss this action on four grounds: one, that any claim under the federal securities laws is time-barred by the two-year statute of limitations; two, that plaintiff has failed to properly allege fraud under the federal securities laws; three, that no federal claim is asserted against defendant Sloan, and he must therefore be dismissed individually; and four, the complaint fails to allege a claim against the corporation, HSG. Upon careful consideration of defendants' motion and plaintiff's opposition thereto, the Court hereby denies said motion in toto. The Court will discuss the rationale with respect to each of the four grounds seriatim below.
Prior to December 16, 1977, the plaintiff, Dr. Fishman, was president and a member of the Board of Directors of American Health Services, Inc. (AHS) and HSG.
On December 16, 1977, the plaintiff and defendants Estrin, Abod, Frankel and Steinberg entered into a stock purchase agreement wherein the defendants agreed to buy and the plaintiff agreed to sell all of his shares of common stock of HSG for a mutually acceptable price.
Additionally, on the same date, defendants Estrin, Abod, Frankel and Steinberg, as well as defendant Sloan, entered into the Dominion-Barcroft Agreement, whereby the defendants agreed to use their "best-efforts" in trying to persuade the remaining "independent" directors of AHS to sell AHS of Virginia, Inc.,
a wholly-owned subsidiary of AHS, to the plaintiff. On September 7, 1978, the "independent" directors of AHS rejected the plaintiff's offer; from which plaintiff has brought suit.
COUNT I IS NOT BARRED BY THE STATUTE OF LIMITATIONS
The Court notes that the parties are in agreement as to the applicable limitation period for the federal cause of action. Pursuant to Forrestal Village, Inc. v. Graham, 179 U.S. App. D.C. 225, 551 F.2d 411, 413 (D.C.Cir.1977), actions brought under Rule 10b-5 in the United States District Court for the District of Columbia are to be governed by the District of Columbia's blue sky law. Accordingly, the two-year limitation period established by § 2-2413 of the District of Columbia Code governs. Accord, Wachovia Bank and Trust Co. v. National Student Marketing Corp., 461 F. Supp. 999, 1007-08 (D.D.C.1978); Houlihan v. Anderson-Stokes, Inc., 434 F. Supp. 1324, 1326 (D.D.C.1977).
The Court takes note of defendants' reliance on Pittsburgh Coke and Chemical Co. v. Bollo, 421 F. Supp. 908, 923 (E.D.N.Y.1976), aff'd, 560 F.2d 1089 (2d Cir. 1977), that "(f)or purposes of a Rule 10b-5 claim, events occurring after the commitment to purchase stock has been made are irrelevant." However, the federal tolling doctrine is applicable to cases involving antifraud provisions like Rule 10b-5. Vanderboom v. Sexton, 422 F.2d 1233, 1240 (8th Cir. 1969), cert. denied, 400 U.S. 852, 91 S. Ct. 47, 27 L. Ed. 2d 90 (1970). As this Court noted in its decision in Houlihan v. Anderson-Stokes, Inc., 434 F. Supp. 1319, 1322 (D.D.C.1977), the statute of limitations cannot begin to run until the alleged fraud is or should have been discovered.
The defendants claim that there were many instances in which the plaintiff should have known of the alleged fraud. (Def. Reply Memo at 3-5.) While the Court agrees that the plaintiff should have become suspicious, the Court finds that, in this situation, mere suspicion alone would not have been grounds for suit.
If suit had been brought at that time, the defendants could merely have claimed that the "independent" board of AHS had not yet acted; thus the case would not have been ripe. The Court finds that such director action is the distinguishing element between this case and those cited by the defendants.
As pointed out in Maine v. Leonard, 365 F. Supp. 1277 (W.D.Va.1973), the duty of reasonable diligence is determined by the circumstances of each case. The Court finds that in this case the plaintiff did not sit back and leisurely undertake discovery of the full details of the alleged fraud. Klein v. Bower, 421 F.2d 338, 343 (2d Cir. 1970). Instead, the plaintiff merely waited a short period of time for board action.
To permit otherwise, would allow parties to abuse the various statutes of limitations; a defendant need only enter into a contract with part performance due past the applicable limitation period. While such a contract would often times be completed, a plaintiff would be required to bring suit within the applicable limitation period to ensure that he had access to the courts. Accordingly, the Court finds that despite rumors to the contrary, a reasonable person has every right to believe that persons of "high integrity" will carry out their contracts.
THE COMPLAINT STATES A CLAIM OF FRAUD AND MISREPRESENTATION "IN CONNECTION WITH" THE SALE OF SECURITIES IN VIOLATION OF SECTION 10(b) AND RULE 10b-5
With respect to defendants' first contention, the Court finds that the alleged fraud was in connection with the contract for the sale of stock. The plaintiff has alleged that prior to the signing of the agreements, the parties had been involved in protracted negotiations with each side being represented by counsel. Plaintiff had wanted one agreement by which he would agree to sell his stock in HGS to defendants at an agreed upon price, and the defendants would use their best efforts to persuade the "independent" directors of AHS to sell Dominion-Barcroft to him. However, defendants contended that the execution of legally separate contracts was the only appropriate way to proceed. (Def. Memo at 12.) Plaintiff recanted from this demand upon the belief that the defendants would still carry out their original agreement.
The Court finds that the defendants attempted to obfuscate what seems to be a reasonable agreement between the parties by stating that there was no connection between the two agreements. Yet the defendants admit in a footnote that the stock purchase agreement acknowledges that other contracts are being signed on the same ...