Powers v. Stuart-James Co. , 148 F.3d 1223 ( 1998 )

PUBLISH
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
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No. 97-2283 FILED
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U.S. COURT OF APPEALS
D. C. Docket No. 88-32-CIV-T-24A ELEVENTH CIRCUIT
2/18/03
THOMAS K. KAHN
WALTER L. POWERS, JR. and JOICELYN H. POWERS, individually and on
CLERK
behalf of a class,
Plaintiffs-Appellants,
versus
STUART GRAFF; JAMES PADGETT, et al.,
Defendants-Appellees.
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Appeal from the United States District Court
for the Middle District of Florida
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(August 3, 1998)
Before EDMONDSON and BIRCH, Circuit Judges, and LAWSON*, District
Judge.
______________
*Honorable Hugh Lawson, U.S. District Judge for the Middle District of
Georgia, sitting by designation.
EDMONDSON, Circuit Judge:
Plaintiffs -- a class of individuals alleging federal
securities law violations -- appeal the district court’s grant of
summary judgment for Defendants, officers of the Stuart-
James Company (a penny-stock brokerage company). The
company was involved in securities transactions with or for
Plaintiffs. The district court concluded that Plaintiffs’ Fourth
Amended Complaint adding Defendants did not relate back to
the original filing of the class action. The court then granted
Defendants’ motion for summary judgment because the
claim was barred by the statute of limitations. Because the
district court did not err in refusing to allow the Fourth
Amended Complaint to relate back to the date of the original
filing, we affirm.1
Plaintiffs, in their many amended complaints, named a
1
number of defendants, including Stuart-James Company,
“John Does 1-1,000” (unknown brokers), known brokers, and
the individual defendants involved in this appeal: Stuart
Graff, C. James Padgett, and Marc Geman, control persons of
2
Background
A certified class of Florida plaintiffs, represented by Walter
and Joicelyn Powers, filed a complaint in Florida state court
against the Stuart-James Company, Inc., Rex Alan Field (the
Powers’ broker), and John Does 1-1,000 (representing all
Florida-based Stuart-James brokers and brokers who sold
securities to Florida residents). The plaintiff class included
Florida residents who purchased specific securities from
Stuart-James between May 1984 and January 1988. The claims
were based on alleged wrongdoing by the company and its
brokers: Stuart-James’s manipulation of the market for certain
securities.2
Stuart-James. All of Plaintiffs’ claims, except those against
the individual control persons of Stuart-James, have been
disposed of in the district court and are not before us.
Plaintiffs now argue that their original complaint was
2
based on acts Plaintiffs believed to be the acts of “rogue”
brokers. But as discussed in this opinion, Plaintiffs alleged
3
The case was removed to federal court; and Plaintiffs
sought to and did amend their complaint several times. The
Original Complaint, filed 8 December 1987, named as
defendants the company and all brokers dealing with Florida
residents during the relevant period. The First Amended
Complaint added a claim for violation of section 10(b) of the
Securities and Exchange Act. The Second Amended Complaint
deleted the “John Doe” brokers and enlarged the class to
include all purchasers of securities from Stuart-James
nationwide.3 The Third Amended Complaint refined or
corrected certain jurisdictional allegations. The Fourth
Amended Complaint, with which we are concerned in this
appeal, was filed on 13 December 1990;4 this amendment added
wrongdoing on the part of the company, not just its agents,
from the start of the litigation.
3
This new class was seemingly certified by the district court.
This date was beyond the statute of limitations for filing
4
the pertinent claims against Defendants.
4
Graff, Padgett, Geman, and 50 other Stuart-James control
persons as defendants.5
Discussion
Plaintiffs’ claims were disposed of pursuant to a motion for
summary judgment filed by Defendants in accord with Federal
Rule of Civil Procedure 56. But the essence of this appeal is
not Rule 56. “When a plaintiff amends a complaint to add a
defendant, but the plaintiff does so after the running of the
relevant statute of limitations, then Rule 15(c)(3) controls
Control, or controlling, persons are defined in the
5
Securities and Exchange Act:
Every person who, directly or indirectly, controls
any person liable under any provision of this
chapter or of any rule or regulation thereunder shall
also be liable jointly and severally with and to the
same extent as such controlled person to any
person to whom such controlled person is liable . . .
.
15 U.S.C. § 78t(a) (1994).
5
whether the amended complaint may ‘relate back’ to the filing
of the original complaint and thereby escape a timeliness
objection.” Wilson v. United States, 23 F.3d 559, 562 (1st Cir.
1994). Rule 15, in relevant part, sets forth these standards:
(c) Relation Back of Amendments. An amendment of
a pleading relates back to the date of the original
pleading when
....
(2) the claim or defense asserted in the amended
pleading arose out of the conduct, transaction,
or occurrence set forth or attempted to be set
forth in the original pleading, or
(3) the amendment changes the party or the
naming of the party against whom a claim is
asserted if the foregoing provision (2) is satisfied
and, within the period provided by Rule 4(m) for
service of the summons and complaint, the party
to be brought in by amendment (A) has received
such notice of the institution of the action that
the party will not be prejudiced in maintaining a
defense on the merits, and (B) knew or should
have known that, but for a mistake concerning
the identity of the proper party, the action would
have been brought against the party.
Fed. R. Civ. P. 15(c).
6
Application of Rule 15(c) is reviewed for abuse of
discretion. See Andrews v. Lakeshore Rehabilitation Hosp., 140
F.3d 1405, 1409 n.6 (11th Cir. 1998). But the findings of fact
necessary for application of the rule are reviewed for clear
error. See Gerritsen v. Consulado General De Mexico, 989 F.2d
340, 344 (9th Cir. 1993); cf. McCurry v. Allen, 688 F.2d 581, 585
(8th Cir. 1982).6
Plaintiffs mainly contend that the district court’s decision
about relation back was contrary to our decision in Itel Capital
6
Although we generally review grants of summary
judgment de novo, this appeal is not really a review of the
grant of summary judgment. Instead the appeal is a review
of the district court’s prerequisite decision not to allow the
Plaintiffs’ Fourth Amended Complaint to relate back to the
date of the original pleading. Once we review that
preliminary decision of the district court, the legal issue of
whether the claims are barred by the statute of limitations
can be determined de novo. But in this case, no party seems
to dispute that, if the amended complaint does not relate
back, the claims against Defendants are time barred; we
agree.
7
Corp. v. Cups Coal Co., 707 F.2d 1253 (11th Cir. 1983). We
disagree.
In Itel, we made a fact-based decision that the amended
complaint should relate back because the facts established that
all of the requirements of Rule 15 were met. We concluded,
based on the facts of that case, that the added defendant, a 97%
owner of the corporation named in the original complaint, was
on notice of the action from the time of the original complaint.
We wrote that the owner “knew or should have known, but for
a mistake by Itel, . . . he would have been named as a defendant
when the complaint was filed.” Id. at 1258. Itel established no
general rules about suits originally filed against a corporation
where the plaintiff later attempts to add corporate control
persons or owners as individual defendants.
Although the relation back provisions of Rule 15 are to be
somewhat liberally applied, the purpose of the provision does
not support relation back in cases like this one: cases where
8
the newly added defendants were known to the plaintiff before
the running of the statute of limitations and where the potential
defendants should not necessarily have known that, absent a
mistake by the plaintiff, they would have been sued. When
relation back is too liberally allowed the important policy
reasons for limitations periods are circumvented. Cf. Wells v.
HBO & Co., 813 F. Supp. 1561, 1567 (N.D. Ga. 1992) (“Rule 15(c)
plainly provides that potential defendants are entitled to repose
after a certain period unless they know they have escaped suit
only by mistake.”).
The purpose of Rule 15(c) is to permit amended complaints
to relate back to original filings for statute of limitations
purposes when the amended complaint is correcting a mistake
about the identity of the defendant. See Worthington v. Wilson,
8 F.3d 1253, 1256 (7th Cir. 1993) (Relation back applies where
the amendment is made “to correct a misnomer of a defendant
where the proper defendant is already before the court and the
9
effect is merely to correct the name under which he is sued.”).
See generally Hill v. United States Postal Serv., 961 F.2d 153
(11th Cir. 1992) (permitting pro se plaintiff’s amended complaint
to relate back when he mistakenly named postal service instead
of postmaster as defendant, contrary to statutory
requirements); see also Schiavone v. Fortune, 106 S. Ct. 2379
(1986). “[The Rule] permits an amendment to relate back only
where there has been an error made concerning the identity of
the proper party and where that party is chargeable with
knowledge of the mistake, but it does not permit relation back
where . . . there is a lack of knowledge of the proper party.”
Worthington, 8 F.3d at 1256 (emphasis added).
“A potential defendant who has not been named in a
lawsuit by the time the statute of limitations has run is entitled
to repose -- unless it is or should be apparent to that
person that he is the beneficiary of a mere slip of the pen, as it
were.” Rendall-Speranza v. Nassim, 107 F.3d 913, 918 (D.C. Cir.
10
1997). Contrary to this idea, Plaintiffs argue that they are
entitled to relation back because, although they knew early in
the litigation that Defendants controlled Stuart-James (a named
defendant), Plaintiffs did not learn until later that the control
persons might be proper defendants.
We disagree that these alleged facts entitle Plaintiffs to
relation back. “The Advisory Committee Notes (1991) state that
Rule 15(c) deals with ‘the problem of a misnamed defendant.’
. . . Nothing in the Rule or in the Notes indicates that the
provision applies to a plaintiff who was fully aware of the
potential defendant’s identity but not of its responsibility for the
harm alleged.” Id.
Before the statute of limitations period ran, Plaintiffs knew
Defendants’ identities.7 As the district court seemingly found,
No later than April 1988, the date of Defendant Geman’s
7
deposition, the details of Stuart-James’s ownership and
management structure were known to Plaintiffs. At that
point, if not sooner, the identity of Stuart-James’s control
persons was known.
11
only when Stuart-James faced possible insolvency did Plaintiffs
amend their complaint to add these known Defendants. “[E]ven
the most liberal interpretation of ‘mistake’ cannot include a
deliberate decision not to sue a party whose identity plaintiff
knew from the outset.” Wells, 813 F. Supp. at 1567.
Not only did Plaintiffs know the identity of Defendants
before expiration of the limitations period -- justifying the
district court’s refusal to allow relation back under Rule 15(c) --
Plaintiffs also should have known that Defendants would be
proper parties to the suit, that is, persons arguably liable for the
alleged wrongdoing.8 To know that Defendants may have been
liable for the wrongdoing, Plaintiffs need only have known that
8
In the light of the law and circumstances, Plaintiffs did
know or should have known very early that Defendants could
be proper parties. The same law and circumstances would
give Defendants no reason to believe that they were omitted
from the original complaint on account of mistake, as
opposed to some kind of strategic choice by Plaintiffs.
See Fed.R.Civ.P. 15(c)(3)(B). Thus for this reason too, the
attempted amendment should not relate back to the date of
that original complaint.
12
Defendants were, in fact, control persons of Stuart-James. See
generally Brown v. Enstar Group, Inc., 84 F.3d 393 (11th Cir.
1996). No showing of intentional wrongdoing is necessary.
Plaintiffs, in their original complaint, alleged the fraudulent
manipulation of certain stocks on an institutional scale.9 So,
the control persons involved with the stock brokerage company
were known to be potential defendants as early as 1987. Thus,
it was not clearly erroneous for the district court to find that
Plaintiffs not only knew Defendants’ identity, but also knew of
a claim against Defendants, and that Plaintiffs elected not to
sue these individuals.
For example, in Plaintiffs’ original complaint in 1987,
9
Plaintiffs alleged that the fraudulent securities transactions
were conducted by Stuart-James employees “acting within
the scope of their employment” and “with the knowledge,
consent, direction and full cooperation and approval of
STUART JAMES.” Such cooperation and approval could only
be given by those in charge of Stuart-James, the control
person Defendants.
13
Consistent with these facts, the district court found that,
throughout the litigation, Plaintiffs knew of the potential role
Defendants played in the alleged wrongdoing and did include
facts in their original complaint that would support a claim
against Defendants;10 yet Plaintiffs did not seek to name
Defendants until Plaintiffs learned that Stuart-James was going
out of business and might be facing insolvency. The district
court had every reason to find that the decision not to name the
control persons of this company was a conscious choice by
Plaintiffs; the pertinent proposed amendment was not due to
the kind of mistaken identity addressed by Rule 15(c).
The district court found that no mistake of identity had
been made that would entitle Plaintiffs to relation back under
Rule 15: Plaintiffs made “a deliberate decision” not to sue
individual Defendants. These findings are not clearly
Plaintiffs’ deposed Defendant Geman as early as April 1988.
10
During this deposition, Geman was asked about the
management structure at Stuart-James.
14
erroneous. Cf. Andrews, 140 F.3d at 1409 (recognizing that if
supported by evidence in the record a district court’s
preliminary factual findings made to apply Rule 15(c) will
probably stand). And based on these factual findings, the
district court properly denied relation back and did not abuse
its discretion. Plaintiffs’ claims against Defendants are time
barred.
AFFIRMED.
15