BERNARD v. RUSH, (M.D.La. 1986)

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Docket Number

Civ. A. No. 85-458-B.

Advocates

Fredrick R. Tulley, Taylor, Porter, Brooks Phillips, Baton Rouge, La., for Bernard. Leonard L. Kilgore, III, Kean, Miller, Hawthorne, D'Armond, McCowan Jarman, Baton Rouge, La., for Delage and Madison. Wood Brown, III, New Orleans, for Logic, Inc. Michael E. Robinson, Dallas, Tex., Peter G. Burke, New Orleans, La., for Rauscher-Pierce Refsner, Inc. Shelly C. Zwick, Roy, Kiesel, Aaron West, William F. Ridlon, II, McCollister, McCleary, Fazio Holliday, John L. Avant, Avant Falcon, O'Neal Walsh, Franklin, Moore Walsh, Baton Rouge, La., for other defendants. Roy C Cheatwood, Jones, Walker, Waechter, Poitevent, Carrere Denegre, New Orleans, La., for Morris Newman. Robert L. Klienpeter, Kleinpeter Kleinpeter, Baton Rouge, La., for Richard O. Rush, Richard O. Rush, Jr., North Zachary Farms, Inc., Jefferson Standard Mortg. Corp., and Southern Educators Development Corp. F. Barry Marionneaux, Plaquemine, La., for G.G. and Jeanette Watson. Camille F. Gravel, Jr., Gravel Brady, Baton Rouge, La., Mark David, Gaynell C. Methvin, Moore Peterson, Dallas, Tex., for Charles C. Rush, Southern Nat. Life Ins., Hobby and Southern Nat. Consulting Corp.

Judges

Frank Joseph Polozola

Acts

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Smart Summary

Factual and Procedural Background

Sherman A. Bernard, Insurance Commissioner for the State of Louisiana, acting as Rehabilitator of the First American Life Insurance Company, filed suit against approximately thirty-nine defendants alleging violations of the 1934 Securities Exchange Act (15 U.S.C. § 78j(b)), the Racketeer Influenced and Corrupt Organizations Act (RICO) (18 U.S.C. §§ 1961-1968), and various state law claims. Defendant Ramon Jarrell filed a motion to dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), arguing lack of subject matter jurisdiction and that the plaintiff's claims were prescribed (time-barred).

Legal Issues Presented

Whether the Court has subject matter jurisdiction over the claims asserted by the plaintiff.
Whether the plaintiff’s RICO claim is barred by the applicable prescriptive (statute of limitations) period.
Whether the plaintiff’s Rule 10b-5 securities fraud claim is barred by the applicable prescriptive period.
Determination of the appropriate prescriptive period for civil RICO claims under Louisiana law.
Determination of when the prescriptive periods for the RICO and Rule 10b-5 claims begin to run.

Arguments of the Parties

Defendant Ramon Jarrell's Arguments

The Court lacks subject matter jurisdiction over the claims, warranting dismissal under Rule 12(b)(1).
The plaintiff’s claims are prescribed, and thus should be dismissed under Rule 12(b)(6).
The Louisiana one-year prescriptive period should apply to the RICO claim, or alternatively, the two-year prescriptive period under the Louisiana Blue Sky Law (LSA-R.S. 51:714 C) should apply.
The two-year prescriptive period under the Louisiana Blue Sky Law applies to the Rule 10b-5 claim.

Plaintiff's Arguments

The opinion does not contain a detailed account of the plaintiff’s legal arguments beyond contesting the applicability of the shorter prescriptive period to the RICO claim.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Hall v. Sutton, Civ. A. 84-765 (M.D. La.)	Application of Louisiana one-year prescriptive period to civil RICO claims	Adopted as persuasive authority supporting the one-year prescriptive period for RICO claims
Moore v. A.G. Edwards Sons, Inc., 631 F. Supp. 138 (E.D. La. 1986)	One-year limitation period for RICO claims analogous to Louisiana general fraud statute	Court adopted Judge Feldman’s reasoning that the one-year period applies to civil RICO claims
Davis v. A.G. Edwards and Sons, Inc., 635 F. Supp. 707 (W.D. La. 1986)	Support for one-year prescriptive period in RICO claims	Referenced as consistent with the Court’s view on prescription period
Kirschner v. Cable Tel Corp., 576 F. Supp. 234 (E.D. Pa. 1983)	Limitation period for RICO claims and accrual rules under federal law	Used to establish that the prescriptive period begins when fraud is or should have been discovered
Eisenberg v. Gagnon, 564 F. Supp. 1347 (E.D. Pa. 1983)	Analogy of RICO claims to fraud for limitation purposes	Supports the application of fraud-based prescription period to RICO claims
D'Iorio v. Adonizio, 554 F. Supp. 222 (M.D. Pa. 1982)	Limitation period for RICO claims	Supports the fraud analogy for RICO prescription
Ingram v. J. Ray McDermott Co., Inc., 495 F. Supp. 1321 (E.D. La. 1980)	Limitation period for fraud claims analogous to RICO	Referenced for analogy to fraud prescription period
Johnson v. Railway Express Agency, 421 U.S. 454 (1975)	General federal policy on limitation periods and fraud	Supports that application of state limitation period does not frustrate federal RICO policy
Wilson v. H.J. Wilson Co., 563 F. Supp. 10 (M.D. La. 1982)	Federal law governs accrual of RICO claims	Confirms federal law governs when prescriptive period begins
Longoria v. Bay City, Texas, 779 F.2d 1136 (5th Cir. 1986)	Accrual of cause of action under federal law	Applied to determine when prescriptive period begins to run for RICO and Rule 10b-5 claims
Hunt v. American Bank, 783 F.2d 1011 (11th Cir. 1986)	Prescriptive period for RICO claims begins when fraud is or should have been discovered	Supports accrual rule applied by the Court
Landry v. All American Assurance Co., 688 F.2d 381 (5th Cir. 1982)	Two-year prescriptive period under Louisiana Blue Sky Law applies to Rule 10b-5 claims	Applied to determine prescription for securities fraud claims
White v. Sanders, 650 F.2d 627 (5th Cir. 1981)	Two-year prescriptive period under Louisiana Blue Sky Law applies to Rule 10b-5 claims	Supports the Court’s application of the two-year period for Rule 10b-5 claims

Court's Reasoning and Analysis

The Court first addressed the issue of subject matter jurisdiction and found that it had jurisdiction over the claims, denying Jarrell’s motion under Rule 12(b)(1). The Court then examined the prescriptive periods applicable to the plaintiff’s claims under Rule 12(b)(6). For the RICO claim, the Court analyzed whether the Louisiana one-year or two-year prescriptive period applied. The Court adopted the reasoning in Moore v. A.G. Edwards Sons, Inc., holding that the one-year prescriptive period under Louisiana’s general fraud statute (Article 3492) applies to civil RICO claims because RICO primarily targets fraudulent conduct. The Court rejected the plaintiff’s argument favoring the longer two-year period under the Louisiana Blue Sky Law for RICO claims.

The Court further held that the accrual of the prescriptive period for RICO claims is governed by federal law, which starts the clock when the plaintiff knew or should have known of the injury through due diligence. The Court noted it could not determine from the record when the plaintiff discovered or should have discovered the facts underlying the RICO claim, leaving this issue for potential future resolution after discovery.

Regarding the Rule 10b-5 securities fraud claims, the Court held that the two-year prescriptive period under the Louisiana Blue Sky Law applies, consistent with Fifth Circuit precedent. Similar to the RICO claim, the Court could not determine from the record when the prescriptive period began to run for the Rule 10b-5 claims.

Because the Court found that the complaint stated viable claims and could not resolve the prescription issues on the record before it, the motion to dismiss was denied.

Holding and Implications

The Court DENIED the motion to dismiss filed by Ramon Jarrell. It held that:

The Court has subject matter jurisdiction over the claims.
The Louisiana one-year prescriptive period applies to civil RICO claims.
The Louisiana two-year prescriptive period under the Blue Sky Law applies to Rule 10b-5 claims.
The prescriptive periods begin to run when the plaintiff knew or should have known of the injury, but the record was insufficient to determine that date.

The direct effect is that the plaintiff’s claims against Jarrell survive dismissal at this stage, allowing discovery and further proceedings to determine whether the claims are timely. The Court did not establish new precedent beyond adopting existing authority on the applicable prescriptive periods and accrual rules.

Show full summary ...

Sherman A. BERNARD, Insurance Commissioner, State of Louisiana, as Rehabilitator of the First American Life Insurance Company, a Louisiana Corporation v. Richard O. RUSH, et al.

POLOZOLA, District Judge.

Sherman A. Bernard, the Commissioner of Insurance for the State of Louisiana, has filed this action as the Rehabilitator of the First American Life Insurance Company against some thirty-nine defendants. This suit alleges violations of the 1934 Securities Exchange Act, 15 U.S.C. § 78j(b), the Racketeer Influenced and Corrupt Organization Act ("RICO"), 18 U.S.C. § 1961-1968, and various state law based claims.

Ramon Jarrell was named as one of the defendants in this case. He has now filed a motion to dismiss under Rule 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure. Jarrell contends the Court lacks subject matter jurisdiction and the plaintiff's suit has prescribed.

The Court finds that the Court has subject matter jurisdiction in this case. Therefore, Jarrell's motion to dismiss under Rule 12(b)(1) is denied.

Jarrell also seeks a dismissal of the Rule 10b-5 and RICO actions under Rule 12(b)(6) on the ground that plaintiff's suit has prescribed. Jarrell seeks to have the Court apply the Louisiana one year prescriptive period to the RICO claim or in the alternative, the two year prescriptive period set forth in the Louisiana Blue Sky Law, LSA-R.S. 51:714 C. Jarrell contends the two year prescriptive period is applicable to the Rule 10b-5 claim.

Formerly R.S. 51:715, this section was redesignated as R.S. 51:714 by Acts 1985, No. 722 § 1.

The Court finds that the complaint does state a claim or cause of action against Jarrell. Thus, Jarrell's motion to dismiss can only be granted if the Court finds either or both of the claims asserted under Rule 10b-5 or RICO prescribed.

A. The RICO Claim

The allegations set forth in the RICO claim allege certain fraudulent acts on the part of the defendants, including Jarrell. In Louisiana, liability for participating in a scheme or artifice to defraud is governed by Article 2324 of the Louisiana Civil Code. Since Article 2324 of the Louisiana Civil Code is a delictual action, it is governed by the one year prescriptive period set forth in Article 3492.

Thus, the first issue the Court must determine on this motion is the prescriptive period to be applied in actions brought pursuant to the Civil RICO Statute, 18 U.S.C. § 1961-1968. The second issue to be decided is when does this prescriptive period begin to run.

In Hall v. Sutton, (Civil Action 84-765, M.D.La.) [Available on WESTLAW, DCTU database], this Court found the Louisiana one year prescriptive period to be applicable in civil RICO cases. More recently, judges in the Eastern and Western Districts of Louisiana have issued similar rulings. Moore v. A.G. Edwards Sons, Inc., 631 F. Supp. 138 (E.D.La. 1986); Davis v. A.G. Edwards and Sons, Inc., 635 F. Supp. 707 (W.D.La. 1986). Because the Court believes the decision by Judge Feldman in Moore correctly sets forth the law on this issue, the Court hereby adopts the following portion of Judge Feldman's opinion as the Court's opinion in this case:

RICO and Prescription

The RICO statute, 18 U.S.C. § 1961-1968, does not specify a limitation period. One must therefore be chosen by analogy. Defendants contend that the one year general fraud period of Louisiana Civil Code Article 3492 should be used. Plaintiffs contend that the longer two year period of the Louisiana Blue Sky Law should be used because it best effectuates the purpose of RICO.

The Court finds that the one year limitation period of the Louisiana general fraud statute is most closely analogous to RICO. The end result of the conduct at issue points to a classic scheme to defraud. The fact that the claim partially stems from securities fraud does not change the pivotal nature of the claim as that of plain common law fraud. At the core of this dispute is the charge that Howard cheated plaintiffs. The central evil RICO targets is fraud; RICO challenges fraudulent conduct in a variety of forms; and, therefore, the limitation period for fraud should apply. See, 18 U.S.C. § 1961; Kirschner v. Cable Tel Corp., 576 F. Supp. 234, 241 (E.D.Pa. 1983); Eisenberg v. Gagnon, 564 F. Supp. 1347, 1354 (E.D.Pa. 1983); D'Iorio v. Adonizio, 554 F. Supp. 222 (M.D.Pa. 1982); Ingram v. J. Ray McDermott Co., Inc., 495 F. Supp. 1321, 1324 n. 4 (E.D.La. 1980).

Application of the one year period in no way frustrates, or is inconsistent with, the federal policy underlying RICO. Johnson v. Railway Express Agency, 421 U.S. 454, 95 S.Ct. 1716, 44 L.Ed.2d 295 (1975). Although the Court looks to state law to determine the applicable limitation period, the question of when a cause of action accrues and the limitation period begins to run is still governed by federal law. Wilson [v. H.J. Wilson Co.], 563 F. Supp. [10] at 13 (M.D.La. 1982). Under RICO, the limitation period begins to run when the fraud was or should have been revealed to the plaintiffs by the exercise of due diligence. Kirschner, 576 F. Supp. at 241.

Measured by that standard, the Court finds that Brown's claim under RICO has prescribed. Count II is therefore dismissed as to Brown. The Court denies the defendants' Motion as to Moore for reasons already expressed.

631 F. Supp. at 143-144.

Having determined that the Louisiana one year prescriptive period applies in civil RICO cases, the Court must now determine when this period begins to run. The question of when the prescriptive period begins to run is governed by federal law. Longoria v. Bay City, Texas, 779 F.2d 1136, 1138 (5th Cir. 1986). Under federal law, a cause of action accrues when the plaintiff knows or has reason to know of the injury which is the basis for his action. Longoria, 779 F.2d at 1138. Several recent cases have held that the prescriptive period under RICO begins to run when the fraud was or should have been known or discovered by the plaintiff through the exercise of due diligence. Hunt v. American Bank, 783 F.2d 1011 (11th Cir. 1986); Moore v. A.G. Edwards, 681 F. Supp. 138, 144 (E.D.La. 1986); Kirschner v. Cable/Tel Corp., 576 F. Supp. 234, 241 (E.D.Pa. 1983).

The Court is unable to determine from the facts set forth in the record when the plaintiff knew or should have known or discovered the facts which form the basis of the RICO complaint. Perhaps this issue may be resolved at a later date after additional discovery has been completed with a motion for summary judgment.

B. The Rule 10b-5 Claims

It is settled that the applicable prescriptive period relative to the Rule 10b-5 claim is the two year prescriptive period set forth under the Louisiana Blue Sky Law, LA R.S. 51:714 C. Landry v. All American Assurance Co., 688 F.2d 381 (5th Cir. 1982); White v. Sanders, 650 F.2d 627 (5th Cir. 1981). As with the RICO claim, the Court is unable to determine from the record when the plaintiff knew or should have known the facts which form the basis of the Rule 10b-5 claim.

Therefore:

IT IS ORDERED that the motion of Ramon Jarrell to dismiss be and it is hereby DENIED.