Opinion
No. 57743-3-I.
April 9, 2007.
Appeal from a judgment of the Superior Court for King County, No. 05-2-08394-8, Palmer Robinson, J., entered January 17, 2006.
Affirmed by unpublished opinion per Ellington, J., concurred in by Appelwick, C.J., and Grosse, J.
Steve Bastrom roped 30 people into a Ponzi scheme. Nine of his victims sued Bastrom's former securities brokerage, Cadaret, Grant Company, in an attempt to recoup their losses. The trial court dismissed the action as barred by the three-year statute of limitations in the Washington State Security Act, chapter 21.20 RCW. We agree. Appellants, exercising reasonable care, should have discovered the fraud by January 2002. Because they failed to file suit until March 2005, their action is barred, and we affirm.
BACKGROUND
The nine appellants were victims of fraud by a trusted financial advisor, Steve Bastrom. The Alexanders, Rutledges, and Dunbars had invested with Bastrom since the mid-1980s; Lillian Day had known him since the early 1990s; and the Balls had known him since 1997. They met Bastrom through the schools where they worked, community events, and mutual friends. At first, he advised them to invest in legitimate, standard investments, such as tax sheltered annuities and securities offered by American Funds.
In early to mid-1999, however, Bastrom convinced appellants to invest in a restricted international private placement program offered by Resource Development International (RDI). He described the program as investing "in a banking system outside the United States." Clerk's Papers at 58. He promised them their capital would be secure because it would never leave RDI's account and would be used only as collateral for foreign bank loans. In return, appellants would receive monthly payments of between two and four percent of their principal.
When Bastrom first sold RDI to appellants, he worked for AIG Life, the investment arm of the well-known insurance company, American International Group (AIG). All AIG agents carry their broker's licenses with Cadaret. Bastrom sold the investment on behalf of RDI, but repeatedly corresponded with appellants about RDI on AIG letterhead.
From the time of their initial RDI investment through February 2001, every appellant received monthly payments as promised. Because the payments came on time and without fail, some appellants invested additional money during 1999 and 2000.
In March 2001, the payments stopped. Appellants, concerned, contacted Bastrom. He reassured them their investments were safe. Thereafter, appellants began receiving regular letters from RDI's president, David Edwards. The letters came about once per month, providing explanations for the delay and assuring appellants they would receive their money soon.
The gist of Edwards' letters was that a "banking compliance entity" had put a hold on the international account, preventing transfer of funds to appellants. Clerk's Papers at 161. The compliance entity was never identified. Edwards wrote that he could not divulge the name of the banks holding the investment funds "because of contractual obligations." Clerk's Papers at 165. Some appellants requested return of their principal, but RDI informed them their funds could not be released until the compliance entity cancelled the hold on the account.
In August 2001, RDI renewed appellants' contracts, but announced it would refuse any additional investments because it feared the government would accuse it of running a Ponzi scheme: "If we are not taking new clients or new money from existing clients, there is no way to falsely accuse us, making us prove ourselves innocent." Clerk's Papers at 171. RDI blamed further delay on the events of September 11, claiming it had lost staff in the tragedy and had to relocate offices.
In January 2002, RDI sent its eleventh letter, which was to be its last "[b]ecause we need to conserve our office expense account." Clerk's Papers at 178. The letter instructed investors to call RDI's answering service, which it promised to update with a new message roughly twice a week. RDI did record a message and regular updates, continuing to assure investors that the hold on their money was temporary, and that everyone could expect payment soon.
On March 25, 2002, Securities and Exchange Commission (SEC) agents raided David Edwards' office in Tacoma. Two days later, the Tacoma News Tribune published a story reporting the raid and the SEC's decision to charge Edwards, his brother, and RDI with securities fraud. The Edwards brothers were subsequently convicted and imprisoned. Bastrom declared bankruptcy.
On March 10, 2005, more than three years after receiving the eleventh letter but less than three years after the Tacoma News Tribune article appeared, appellants filed a complaint against Bastrom's former securities broke, Cadaret.
The trial court dismissed on summary judgment, ruling that the statute of limitations barred the action.
ANALYSIS
We apply the usual standard of review for summary judgment.
We review a grant of summary judgment de novo, engaging in the same inquiry as the trial court and viewing the facts and the reasonable inferences from those facts in the light most favorable to the nonmoving party. Overton v. Consol. Ins. Co., 145 Wn.2d 417, 429, 38 P.3d 322, 327 (2002). Summary judgment is appropriate where "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law." CR 56(c).
The Washington State Securities Act (WSSA) includes a civil "discovery rule" in its statute of limitations. Investors must file a claim of securities fraud within three years of discovering a violation, or within three years of when a violation "would have been discovered by him or her in the exercise of reasonable care." RCW 21.20.430(4)(b) (emphasis added). The parties disagree as to the proper interpretation of the phrase "exercise of reasonable care."
The civil discovery rule delays accrual of a cause of action until the plaintiff, in the exercise of reasonable care, knows or should know the relevant facts, "whether or not the plaintiff also knows that these facts are enough to establish a legal cause of action." Allen v. State, 118 Wn.2d 753, 758, 826 P.2d 200 (1992). Whether a plaintiff has exercised reasonable care in ascertaining the material facts is answered with reference to an objective, reasonable person standard. Mayer v. City of Seattle, 102 Wn. App. 66, 76, 10 P.3d 408 (2000).
Appellants contend, however, that the WSSA's purpose of protecting investors requires application of a subjective standard, such that a cause of action does not accrue until the relevant facts are public knowledge, and the plaintiff understands the legal significance of those facts.
In their reply brief, appellants deny they seek to apply a subjective standard. App. Reply Br. at 7. In their opening brief, however, appellants argue that inquiry notice does not begin until the facts are public, that the statute does not run until a plaintiff knows the facts and their legal significance ("[t]he legal significance must be known to the Plaintiff (subjective test)"), and that a plaintiff's failure to discover facts is excused unless the facts are public knowledge. App. Br. at 16.
Appellants first interpret the history of the civil discovery rule. They begin with Ohler v. Tacoma General Hospital, 92 Wn.2d 507, 598 P.2d 1358 (1979), which they characterize as holding that a claim does not accrue until the plaintiff understands the legal significance of the facts. Appellants then contend that the legislature has overruled Ohler by adopting an objective standard for the discovery rule for some causes of action, but not for securities cases.
Appellants offer no authority for their view of the legislative reaction to Ohler. In any case, we disagree with their reading of the case. In Ohler, a premature infant was blinded when hospital workers administered oxygen to her. Ohler knew the oxygen had caused her blindness, but believed it had been medically necessary. Twenty-one years later, she learned that hospital workers might have administered too much of oxygen. Id. at 509. At that moment, her tort claim accrued, because she had "discovered or reasonably should have discovered all of the essential elements of her possible cause of action, i.e., duty, breach, causation, damages." Id. at 511. Ohler does not adopt a subjective rule. Ohler's claim accrued when she discovered a fact essential to her claim, to wit, that the oxygen administered may have exceeded the amount medically necessary. Once she discovered the missing fact, she filed a complaint within seven months.
Appellants cite no cases applying a subjective standard to determine whether a plaintiff exercised reasonable care in discovering a cause of action. In fact, they ignore two cases implicitly applying an objective standard to discovery of securities fraud violations. In Douglass v. Stanger, 101 Wn. App. 243, 255, 257, 2 P.3d 998 (2000), the plaintiff's action for securities and common law fraud was time-barred because the fraud was discoverable from public records more than three years before the suit, and the plaintiff, in failing to examine the records, had failed to exercise due diligence. In First Maryland Leasecorp v. Rothstein, 72 Wn. App. 278, 864 P.2d 17 (1993), the court suggested that the only material difference between the discovery rule in common law fraud claims (in which the objective standard applies) and the discovery rule in WSSA claims is that the former requires knowledge of damages, while the latter merely requires knowledge of a violation.
"[T]he statute of limitation for a damage action based on common law fraud does not commence to run until the aggrieved party discovers, or should have discovered, the fact of fraud by due diligence and sustains some actual damage as a result therefrom. . . . Under [the WSSA], an action must be commenced within 3 years of the violation, although the 3-year period is tolled until the securities violation is discovered or should have been discovered." First Maryland, 72 Wn. App. at 283, 287.
Moreover, nothing in the plain language of the WSSA discovery statute suggests a subjective standard. The statute requires investors to exercise reasonable care.
Our previous interpretation of the discovery rule has been applied to products liability, medical malpractice, accountant malpractice, and other areas. See Green v. A.P.C., 136 Wn.2d 87, 96-97, 960 P.2d 912 (1998); Duke v. Boyd, 133 Wn.2d 80, 89, 942 P.2d 351 (1997) (Durham, J., concurring); Burns v. McClinton, 135 Wn. App. 285, 300, 143 P.3d 630 (2006). It is a settled formulation of the rule in Washington, and we see no reason to carve out a separate interpretation for securities fraud, especially where nothing in the language of the statute suggests legislative intent to do so. A cause of action for a securities act violation accrues when the plaintiff knows or should know the relevant facts of the fraud, whether or not the plaintiff also knows that these facts are enough to establish a legal cause of action. The plaintiff must exercise due diligence in discovering the basis for a cause of action, and the plaintiffs' actions are judged against those of a reasonable investor.
RCW 4.16.340(c), which applies only in cases alleging injuries from childhood sexual abuse, appears to apply a subjective test. Subsection (c) lacks the "exercise of reasonable care" language present in RCW 21.20.430(4)(b).
The next question is whether appellants acted as reasonable investors in failing to discover the fraud until March 27, 2002, the day of the Tacoma News Tribune article. When a plaintiff should have discovered the factual basis for a cause of action is ordinarily an issue of fact for the jury. Allen, 118 Wn.2d at 760; Green, 136 Wn.2d at 100. But if the facts lead to only one conclusion, summary judgment is appropriate. Allen, 118 Wn.2d at 760. The defendant, as the moving party, has the burden of showing there is no issue of material fact with regard to what the plaintiff should have known. Green, 136 Wn.2d at 99. The plaintiff has the burden of putting forth facts explaining why the fraud could not be discovered. Stanger, 101 Wn. App. at 256.
Bastrom was a trusted advisor who had provided reliable financial advice to some of the appellants for more than 15 years. And true to Bastrom's word, once appellants invested in RDI, they received monthly payments. When the payments stopped, most, if not all, of the appellants contacted Bastrom, their sole RDI contact, to inquire. He assured them that everything was fine.
Then came the letters from RDI.
Appellants admit they had knowledge of a potential breach of contract claim when moneys were not returned as requested, but contend they did not know that RDI was a fraud. But the question is when appellants were on inquiry notice and reasonably could have discovered the material facts using due diligence. Appellants received no payments for a year. The letters intended to assuage their fears were replete with vague promises and explanations, and mysterious references to government compliance agencies and unnamed foreign banks. The contract renewal letter even explained that RDI would no longer take additional investments so the government could not accuse the company of running a Ponzi scheme. Even if the events of September 11 lent plausibility to some of RDI's excuses, payments were already delinquent by six months. Appellants contend that only a sophisticated agency with subpoena power, such as the SEC, had the power to penetrate the fraud. But the WSSA requires only that purchasers prove they relied on material misrepresentations or omissions about the security made by the seller and/or others. Stewart v. Estate of Steiner, 122 Wn. App. 258, 264, 93 P.3d 919 (2004). Despite appellants' contention to the contrary, the newspaper report of the SEC raid did not disclose additional key facts of appellants' claim. It demonstrated that the known facts created a legal claim of fraud. A cause of action accrues when the victims should know the relevant facts, not when they realize that the facts create a legal cause of action.
Finally, appellants urge us to hold that where a defendant "lulls" a victim into inaction, the statute of limitations does not run. The lulling doctrine applies in criminal cases, including criminal securities fraud cases, so that the statute of limitations is not triggered by the date of the offense if the defendant manages to conceal or camouflage the crime. State v. Argo, 81 Wn. App. 552, 568, 915 P.2d 1103 (1996). Instead, the statute of limitations begins running when the defendant's lulling activities are completed. Id. Appellants urge us to extend this doctrine to civil fraud cases, and argue that they failed to act sooner because they were lulled by RDI's letters.
The defendant here was not RDI but Cadaret, which had no knowledge of Bastrom's fraud until this lawsuit was filed. Appellants seek to impute Bastrom's fraud to Cadaret
But there is no need to extend the lulling doctrine to civil securities fraud cases, because the doctrine is already inherent in the language of the WSSA limitations provision: accrual does not occur until a plaintiff reasonably should have known of the fraud. Further, in Argo, receipt of regular monthly payments lulled investors into inactivity, whereas here, payments stopped. Receiving promised payments on schedule is considerably different from receiving letter after letter explaining that payments are not forthcoming because of governmental investigations. Rather than lulling appellants to inaction, the letters should have spurred them to investigate.
We are mindful that hindsight has a way of making things painfully obvious in retrospect, even when they were not readily apparent at the time. But here, the facts known to appellants were strong indicators of a violation of the WSSA, and no reasonable juror could conclude that appellants could reasonably have known of their cause of action only after the SEC raid became public knowledge. We agree with the trial judge that appellants' action is time-barred.
Affirmed.
WE CONCUR: