Quentin Walter v. Frank J. Avellino , 564 F. App'x 464 ( 2014 )

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[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
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No. 13-13081
Non-Argument Calendar
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D.C. Docket No. 2:12-cv-14411-DLG
QUENTIN WALTER,
WELDON STOUT (Deceased),
Plaintiffs - Appellants,
versus
FRANK J. AVELLINO,
and,
NANCY CARROLL AVELLINO,
together,
Defendants - Appellees.
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Appeal from the United States District Court
for the Southern District of Florida
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(April 28, 2014)
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Before TJOFLAT, FAY and COX, Circuit Judges.
PER CURIAM:
In this securities fraud case, the Plaintiffs, Quentin Walter and Weldon
Stout, allege that the Defendants, Frank Avellino and Nancy Avellino, fraudulently
invested the Plaintiffs’ money in Bernard Madoff’s ponzi scheme. On the
Defendants’ motion, the district court dismissed the Plaintiffs’ complaint and
closed the case, holding that the claim was untimely and failed to meet the
heightened pleading requirements for security fraud. The Plaintiffs appeal.
I. Facts and Procedural History
The dates and nature of the contentions advanced by the parties are
important to this appeal, so we relate them in detail.
On November 12, 2012, the Plaintiffs filed a pro se complaint asserting a
variety of state law claims related to the Defendants’ alleged fraud. (R. 1.) Upon
the Defendants’ motion, the district court dismissed the complaint for lack of
subject matter jurisdiction. (R. 21.) On March 18, 2013, the Plaintiffs filed an
amended complaint alleging securities fraud in violation of Rule 10b-5. (R. 26.)
According to the amended complaint, Stout invested $175,000 with Frank Avellino
on December 29, 2006, in accounts for himself and Walter. The investment was
made with Frank Avellino’s advice. Walter also invested an additional $10,000
with Frank Avellino on June 1, 2008. On December 9, 2008, Nancy Avellino
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contacted Stout and told him that the funds had been invested in Madoff’s Ponzi
Scheme and were entirely lost. The state law claims were not re-alleged in the
amended complaint.
The Defendants moved to dismiss the amended complaint on the grounds
that it was untimely and failed to plead fraud with specificity as required by the
Private Securities Litigation Reform Act, 109 Stat. 737 (codified as amended in
scattered sections of 15 U.S.C.) (“PSLRA”). (R. 30.) The Defendants contended
that a federal securities action had to be brought within one year of discovering the
fraud and within three years of the violation according to Lampf, Pleva, Lipkind,
Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363–64, 111 S. Ct. 2773, 2782
(1991). The Plaintiffs responded that they did not discover the Defendants’ fraud
until the summer of 2012. (R. 31.) In a separate document, the Plaintiffs also
contended that under 28 U.S.C. § 1658(b) their claim had to be brought within two
years of discovering the fraud and within five years of the violation. (R. 36.)
The district court dismissed the complaint and closed the case. (R. 45.) The
district court applied 28 U.S.C. § 1658(b) 1 to determine whether the claim was
timely. The court held that the statute of limitations commences when a potential
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“Notwithstanding subsection (a), a private right of action that involves a claim of fraud,
deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the
securities laws, as defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(47)), may be brought not later than the earlier of--
(1) 2 years after the discovery of the facts constituting the violation; or
(2) 5 years after such violation.” 28 U.S.C. § 1658(b).
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plaintiff has inquiry notice of a violation. According to the district court, the
Plaintiffs had inquiry notice when they received Nancy Avellino’s phone call
admitting that their investment had been lost. Thus, the statute of limitations began
to run on December 9, 2008 and concluded two years later on December 9, 2010.
The district court also held in the alternative that the Plaintiffs failed to meet the
heightened pleading standard for fraud. The Plaintiffs appeal.
II. Standard of Review
We review de novo a motion to dismiss for failure to state a claim. Timpson
v. Sampson, 518 F.3d 870, 872 (11th Cir. 2008).
III. Discussion
A. The Statutes of Limitation and Repose
On appeal, the parties’ contentions on this issue have dramatically changed.
In the Appellants’ Brief, the Plaintiffs contend that the district court erred by
holding that inquiry notice triggered the statute of limitations because the Supreme
Court has rejected the inquiry notice standard. (Appellants’ Br. at 16.) In
response, the Defendants do not dispute that the district court erred by applying the
inquiry notice standard. Nor do the Defendants dispute that the Plaintiffs’
complaint met the statute of limitations under the Merck & Co., Inc. v. Reynolds,
559 U.S. 633, 130 S. Ct. 1784 (2010), standard. Instead, the Defendants contend
that we should affirm anyway because the Plaintiffs’ complaint was untimely
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under the five year statute of repose. (Appellees’ Br. at 8.) The Plaintiffs reply
that at least one investment (Walter’s $10,000 investment in 2008) is within the
statute of repose and that Walter’s other investments should be brought in under
the continuing fraud doctrine. (Appellants’ Reply Br. 2, 4.)
We agree with both parties that the district court erred by applying the
inquiry notice standard. In Merck, the Supreme Court specifically rejected the
inquiry notice standard and in doing so overruled Theoharous v. Fong, 256 F.3d
1219, 1228 (11th Cir. 2001), and implicitly overruled Tello v. Dean Witter
Reynolds, Inc., 410 F.3d 1275, 1283 (11th Cir. 2005), which the district court
relied on. Merck, 559 U.S. at 652, 130 S. Ct. at 1798.
In the ordinary case, we would accept the Defendants’ invitation and
consider whether the district court’s order should be affirmed on an alternative
basis, the five year statute of repose. However, at least one claim, Walter’s
$10,000 investment, appears to be timely under the statute of repose. And, the
Plaintiffs contend that other violations may be timely under the continuing fraud
doctrine. The district court has not had the opportunity to consider this issue. So,
under these circumstances, we vacate the district court’s order and remand for the
district court to consider first these contentions about the statute of repose.
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B. The Heightened Pleading Standard for Securities Fraud
The district court dismissed the Plaintiffs’ pro se complaint in the alternative
for failing to meet the heightened pleading standards under the PSLRA. The
Plaintiffs acknowledge that the amended complaint does not meet the heightened
pleading standard, but contend that they should be allowed to amend their
complaint to comply. (Appellants’ Reply Br. at 3, 6.) The Plaintiffs never brought
a motion to amend the complaint before the district court. Of course, the Plaintiffs
could not have brought a motion for leave to amend the complaint because the
district court had already ruled that the claims were untimely and closed the case—
amendment was futile and this appeal was their only option.
In this procedural posture, the district court has never denied a motion to
amend the pleadings. Thus, we have no district court order to review on this issue.
Furthermore, whether the Plaintiffs should have leave to amend will depend on the
district court’s resolution of whether their claims are timely. If the claims are not
timely, then amendment will still be futile. The Plaintiffs should bring their
motion for leave to amend before the district court on remand.
IV. Conclusion
Accordingly, we vacate the district court’s order dismissing the complaint
and remand for further proceedings consistent with this opinion and the Supreme
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Court’s opinion in Merck & Co., Inc. v. Reynolds. The Plaintiffs should bring their
motion to amend the complaint before the district court on remand.
VACATED AND REMANDED.
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