claim as a bona fide purchaser. Notice includes both actual knowledge and reason to know under all the facts and circumstances. § 1-201(25). Cannon did not have actual knowledge of any adverse claim to these bonds by Pershing. Nor did the securities contain any restrictive endorsement or statement to indicate they were the property of another; § 8-304(1)(a) and (b). But Cannon had reason to know of Pershing's claim from all the facts and circumstances and had constructive notice under § 1-201(25)(c).
"Suspicious circumstances of the transaction may give a purchaser (particularly a commercially sophisticated purchaser such as a broker) 'reason to know'" of an adverse claim. § 8-304, Comment 1; Gruss, supra at 431 n. 6. Cannon while not a large brokerage house was in the securities business and must be held to the standards of a commercially sophisticated purchaser. The circumstances of the Carroll transactions heretofore described were sufficiently suspicious to Cannon, a commercially sophisticated purchaser, so that it had reason to know of the adverse claims. Cf. Colin, supra. Therefore, Cannon did not act in good faith and without notice of Pershing's claims; it was not a bona fide purchaser of the bonds and INA may not claim such status through it.
Although Cannon was not a bona fide purchaser in its own right, INA argues in the alternative that it was a bona fide purchaser under the "shelter doctrine" which provides that "the purchaser acquires the rights in the security which his transferor has." § 8-301. Thus, if INA established that Carroll was a bona fide purchaser, Cannon/INA would also acquire the rights of a bona fide purchaser. However, based on the testimony that was introduced concerning Carroll's acquisition of these bonds at racetracks for 20 to 25% of their face value the court cannot find that Carroll took the bonds in good faith without notice of adverse claims.
Because INA is not a bona fide purchaser as to the bonds reported stolen by Pershing, Pershing is not liable for conversion of those bonds. This leaves in issue only the $27,000 face amount of "good bonds" which were bonds never reported stolen by Pershing. Pershing has failed to establish ownership of these bonds.
Therefore, it was not necessary for INA to prove that Cannon was a bona fide purchaser as to those bonds. Cannon had a right to sell those bonds and to obtain their proceeds as against Pershing.
Because Pershing has wrongfully asserted a claim of ownership to the "good bonds," Cannon was deprived of the value of these bonds from August 12, 1971, the date that they originally were sold. A conversion is treated as a forced sale of property. Horne v. Francis I. DuPont & Co., 428 F. Supp. 1271 (D.D.C. 1977). Therefore, INA is entitled to receive as compensation the fair market value of the bonds on the date of the conversion, which was $13,853.75. So that INA may be fully compensated for its lost use of the money, INA is entitled to receive additional damages for the delay at the rate of 6%, which the court determines to be a fair rate on this record. Peterson v. Crown Financial Corp., 661 F.2d 287, 293-94 (3d Cir. 1981); Citizens' Natural Gas Co. v. Richards, 130 Pa. 37, 18 A. 600 (1889).
B. INA v. U.S.
INA asserts jurisdiction over defendant US under the Tucker Act, 28 U.S.C. § 1346(a)(2) and the Federal Tort Claims Act, 28 U.S.C. § 2674. Plaintiff claims that upon delivery of the stolen bonds to the FBI, the government agency became bailee of the bonds for the benefit of INA and that an express and an implied promise
to redeliver the bonds were made. Alliance Assurance Co. v. U.S., 252 F.2d 529 (2d Cir. 1958). The FBI executed receipts for the $172,000 face value bearer bonds which they took from Cannon.
Contract claims against the US exceeding $10,000 can only be asserted in the Court of Claims, Putnam Mills Corp. v. U.S., 432 F.2d 553 (2d Cir. 1970) (per curiam); 28 U.S.C. §§ 1346(a)(2), 1491. The district court does not have the power to sever one claim against the US into multiple civil claims so that no claim is greater than $10,000. Eccles v. U.S., 396 F. Supp. 792 (D.C.N.D. 1975). Therefore, there is no jurisdiction over the US under the Tucker Act.
The Federal Tort Claims Act provides that no actions can be instituted against the US unless an administrative claim is first presented to the appropriate federal agency (within two years after the claim accrues). The administrative claim must contain written notification of the incident together with a claim for money damages in a sum certain. 28 C.F.R. § 14.2. This claim must be finally denied by the agency in writing. 28 U.S.C. § 2675(a). Failure of an agency to make a final disposition of a claim within six months is deemed a final denial of the claim and suit can be instituted. 28 U.S.C. § 2675(a).
The FBI took the bonds from Cannon between August, 1971 and March, 1972. INA instituted this suit on July 29, 1977. The complaint was filed within six years after the earliest date any right of action against the US might have accrued. 28 U.S.C. § 2401(a). The US asserts that no proper administrative claim was made under the Act. However, on July 26, 1977 INA wrote a letter demanding return of the bonds. This letter was sufficient to constitute a claim; it contained notification of the incident and stated the bonds were worth "approximately $170,000 in face amount." Bialowas v. U.S., 443 F.2d 1047 (3d Cir. 1971); Walley v. U.S., 366 F. Supp. 268 (E.D.Pa. 1973), aff'd, 546 F.2d 421 (E.D.Pa. 1976).
The US also asserts that this claim was not presented in writing to the agency within two years of the alleged conversion on November 8, 1974 and therefore is barred by the limitations provision of 28 U.S.C. § 2401(b). But under the Federal Tort Claims Act, a cause of action accrues and the limitation period begins to run when the claimant discovers, or in exercise of reasonable diligence should have discovered, the existence and cause of his injury. U.S. v. Kubrick, 444 U.S. 111, 62 L. Ed. 2d 259, 100 S. Ct. 352 (1979). The FBI gave the bonds to Pershing on November 8, 1974. The FBI was aware of INA's interest in the bonds but did not tell INA that the bonds had been delivered to Pershing until April 12, 1977 (P-28). Since INA made claim on July 26, 1977 and filed suit on July 29, 1977, the action is not time barred for that reason.
But § 2675(a) of the Federal Tort Claims Act requires that an administrative claim is both presented within two years after the claim accrues and is finally denied before suit is commenced (within six months of final denial). Failure of an agency to make a final disposition within six months may be deemed a final denial. The provisions of § 2675(a) are jurisdictional and are to be interpreted strictly although this occasionally leads to harsh results. Bialowas, supra; Rosario v. American Export -- Isbrantsen Lines, Inc., 531 F.2d 1227 (3d Cir.), cert. denied, 429 U.S. 857, 50 L. Ed. 2d 135, 97 S. Ct. 156 (1976). At the time the complaint was filed, only three days had elapsed from the filing of the administrative complaint. The suit against the US was commenced prematurely and the court lacked subject matter jurisdiction over the claims against the US at the time it was filed. Morano v. U.S. Naval Hospital, 437 F.2d 1009 (3d Cir. 1971); Caton v. U.S., 495 F.2d 635 (9th Cir. 1974); Walley, supra.
At the time of trial, more than six months had elapsed from the date of filing the administrative complaint without any final decision. Although in some cases the jurisdictional defect has been considered cured where the six-month period has elapsed prior to any substantial progress in the litigation, Kubrick v. U.S., 435 F. Supp. 166, 168 (E.D.Pa. 1977), aff'd, 581 F.2d 1092, 1098 (3d Cir. 1978), rev'd on other grounds, 444 U.S. 111, 62 L. Ed. 2d 259, 100 S. Ct. 352 (1979), the court does not believe this should be the case here where the filing of the lawsuit within three days of submitting the administrative claim can only be considered a deliberate flouting of the requirement that an agency have six months free of litigation to attempt to resolve the matter. Plaintiff's claim against the U.S. must be dismissed.
C. INA v. Carroll
Plaintiff alleges jurisdiction under § 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa and asserts claims pursuant to § 10(b) and Rule 10b-5 thereunder and a pendent claim for fraud under the common law of Pennsylvania. INA asserts liability of the Estate of Morris Carroll for sums Carroll received from Cannon for sale of the bonds on the ground that Carroll himself or through his agent Cartier made misrepresentations and omissions of material facts on which Cannon relied to its detriment. A § 10(b) action can be brought by a purchaser or seller of a security against a person who has used any manipulative or deceptive device or contrivance in connection with the purchase or sale of a security; 15 U.S.C. § 78j. However, a § 10(b) plaintiff must prove that the defendant acted with scienter, i.e., with intent to deceive, manipulate or "defraud." Herman & MacLean v. Huddleston, 459 U.S. 375, 74 L. Ed. 2d 548, 103 S. Ct. 683, 51 U.S.L.W. 4099 (1983).
The court assumes that the transaction between Cannon and Carroll was in connection with the purchase or sale of a security, cf., "churning" cases cited in Biggans v. Bache Halsey Stuart Shields, 638 F.2d 605, 609 (3d Cir. 1980), and that the conduct of Cartier is imputed to Carroll. But cf., Rochez Brothers, Inc. v. Rhoades, 527 F.2d 880 (3d Cir. 1975) (Rochez II) and Gould v. American-Hawaiian Steamship Co., 535 F.2d 761, 779 (3d Cir. 1976) with Sharp v. Coopers & Lybrand, 649 F.2d 175 (3d Cir. 1981), cert. denied, 455 U.S. 938, 71 L. Ed. 2d 648, 102 S. Ct. 1427 (1982). It is clear that both Carroll and his agent Cartier misrepresented numerous facts that were material to Cannon's decision to transact bearer bonds sales for Carroll.
Carroll and Cartier misrepresented that Carroll maintained an account at the First Pennsylvania Bank; however, Joseph Koscinski, a bank representative, testified that there was no account in 1971 maintained by the bank for Carroll under either his own name or his alias, Moe Nudelman, nor was any account maintained there by Cartier. Cartier misrepresented that Carroll was retired when he was operating a television repair store in the northeastern section of Philadelphia.
There was a misrepresentation that Carroll resided on Indiana Avenue, when the uncontradicted evidence was that Carroll lived elsewhere; Carroll gave a different address when one of the Cannon checks was endorsed. The most serious misrepresentations involved Cartier's agency. Although Cartier was and had been for 23 years, a route salesman for Fagan Brothers Furniture Store, Cartier misrepresented himself as a full-time financial consultant. Neither Carroll nor Cartier told Cannon that Carroll used at least one alias, Moe Nudelman. Finally, Carroll and Cartier failed to advise Cannon that Carroll had purchased the bonds for cash from gamblers frequenting horse racing tracks in the Philadelphia area. The purchases were at 20 to 25% of market value with no questions asked or documentation required.
Reliance is an element of a plaintiff's action for damages under rule 10b-5 . . . . The obvious reason for this requirement is that a plaintiff in a rule 10b-5 action should not be allowed to recover damages when the defendant's wrongful action had no relationship to the plaintiff's loss. See 3 A. Bromberg, Securities Law § 8.7, at 213 (1979). Reliance is therefore one aspect of the ubiquitous requirement that losses be causally related to the defendant's wrongful acts . . . . Normally, a plaintiff suing under rule 10b-5 bears the burden of proving all the elements of his case. (Citations omitted).
Sharp, supra at 186, 187.
It is clear that the plaintiffs in a § 10(b) suit must prove their case only by a preponderance of the evidence. Herman & MacLean, supra. Nevertheless, the necessity of an element to a valid claim does not determine the allocation of the burden of going forward and persuasion with respect to that element. In our Circuit, the flexible approach to the problem of reliance has been to analyze the plaintiff's allegations and determine the most reasonable burden of proof of reliance under the circumstances of the case. 649 F.2d at 188-189. Assuming that the preponderance of the evidence supports a finding that Cannon had relied on Cartier's fraudulent representations and omissions about Carroll, the reasonableness of this reliance would remain for consideration because as to Pershing, Cannon had not observed reasonable commercial standards in conducting the transaction. But the court need not resolve this issue because it concludes that plaintiff's action against Carroll is barred by the applicable statute of limitations.
In the absence of a federal statute expressly providing a period of limitations for private actions based on § 10(b) of the Securities Exchange Act, selection of an appropriate limitations period from the law of Pennsylvania, the forum state, requires application of the statute of limitations governing common law fraud. Biggans, supra. "Prior to June 27, 1978 the statute of limitations for a common law fraud action was six years. 12 P.S. § 531 (Purdon 1953) . . . . On June 27, 1978, the Judiciary Act of 1976, which created the Judicial Code, became effective. The Code repealed various statutes of limitation, including Pa. Stat. Ann. Tit. 12, § 31, and established a new limitations scheme. See, Act of July 9, 1976, Act No. 142, 1976 Pa. Laws 586; codified at 42 Pa.C.S.A. §§ 5521-5536 (1978) . . . ." Biggans, supra, at 607 n. 2 (citations omitted). INA commenced this action on July 29, 1977, prior to the effective date of the Code; therefore, the issue is whether it was filed within six years of the fraud, the period of limitation prior to Code's effective date.
Although state law provides the limitations period, federal law determines when the period commences to run. Under the federal equitable tolling doctrine the statute does not run until the plaintiff knew or exercising reasonable diligence should have known of the fraudulent conduct. Biggans, supra, at 607, 608 n. 3.
The bonds at issue were transmitted for sale no earlier than April and no later than August 10, 1971. Checks were paid to the customer on April 21, April 28, May 19, May 21, May 24 and June 4. No payment was made for the bonds delivered in August because notice of a claim that the bonds were reported stolen was received prior to payment. N.T. 117. Even though some of the bonds were discovered missing and presumed stolen from Pershing as early as April 16, 1971, there is no evidence that Cannon knew the bonds were stolen prior to August 12, 1971. Some of them were delivered to FBI Agent James Carroll on August 13 and Williams, Cannon's president and major shareholder believed the telephone call from Harry McKay, of Laird, Bissel & Meeds, Inc., one of the purchasers, came the previous day. Mr. Williams then reviewed the lists of lost or stolen securities fliers in the possession of Cannon. N.T. 81. None of the bonds at issue appeared. N.T. 85. Therefore, the first actual knowledge of the facts giving rise to a cause of action against Carroll was less than six years prior to July 29, 1977, the day this action was filed.
However, the determinative issue is when plaintiff in the exercise of reasonable diligence should have known of the misrepresentations. Since liability is asserted not for stealing the bonds but for misrepresenting and omitting to state material facts relating to the sale, the test is reason to know, not that the bonds were stolen but that the representations of Cartier and Carroll were either untrue or unreasonable to believe in whole or in part. That time was when the misrepresentations were made and Cannon's agents, experienced securities dealers, had reason to know from the totality of the circumstances that something was amiss. If Cannon could not be a bona fide purchaser for the reasons already stated, it was because it did not exercise due diligence; therefore, it had reason to know at least of the misrepresentations if not the omissions even without actual notice. The exercise of due diligence at the time the bearer bonds were first transmitted for sale would have disclosed some if not all the omissions as well. Because in the exercise of due diligence, Cannon had reason to know of any Rule 10b-5 violations in late April, May or June, 1971, more than six years prior to the filing of this action on July 29, 1977, Cannon would be barred by the applicable statute of limitations. INA's rights as assignee of Cannon can be no greater than those of its assignor. Therefore, INA cannot recover against the Estate of Carroll for any violation of federal securities law (Count II). For the same reason, INA cannot recover for common law fraud (Count III). However, because plaintiff's federal claim against Carroll must be dismissed, the pendent state claims should be dismissed as well. Weaver v. Marine Bank, 683 F.2d 744 (3d Cir. 1982).
In Count IV, plaintiff seeks a declaratory judgment that Cannon and INA are not liable to the Estate of Carroll in an action pending in the Court of Common Pleas of Philadelphia County, May Term, 1975, No. 5098 in which Cannon and INA are defendant and third-party defendant respectively. There is no diversity of citizenship among the parties in that state action and in any event it could not be removed to federal court by the defendants who are citizens of the forum state, 28 U.S.C. § 1441(b). It would be improper to enter a declaratory judgment as to whether Carroll can recover as plaintiff in that action. Of course, this would not preclude any res judicata effect the findings herein are given by state law in the state action.
III. CONCLUSIONS OF LAW
1. The court has jurisdiction over the person and over the subject matter as to defendant Pershing under 28 U.S.C. § 1332 and as to defendants Norman and William Carroll, Administrators of the Estate of Morris Carroll, deceased, under the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq. and 28 U.S.C. § 1331.
2. The court does not have subject matter jurisdiction over the United States of America under the Tucker Act, 28 U.S.C. §§ 1346(a), 1491 or the Federal Tort Claims Act, 28 U.S.C. §§ 1346(b), 2674.
3. INA was not a bona fide purchaser of the $93,000 of Gulf & Western or $20,000 of Yonkers Electric Power & Light Co. bonds which had been stolen from Pershing.
a. INA's assignor, Cannon, failed to observe reasonable commercial standards and therefore did not take the bonds in good faith.
b. Because of the suspicious circumstances surrounding the transactions, Cannon had reason to know of Pershing's claims and therefore did not take the bonds without notice of adverse claim.