Aetna Casualty & Surety Company, Appellant, v. Frank Fernandez, Appellee, 830 F.2d 952 (8th Cir. 1987)

Daniel E. Wilke, Clayton, Mo., for appellant.

John F. Triggs, for appellee.

Before ARNOLD and MAGILL, Circuit Judges, and DUMBAULD,^*  Senior District Judge.

DUMBAULD, Senior District Judge.

The question for decision in this case is whether the District Court¹  was correct in holding that appellant's claim was barred by the Missouri²  statute of limitations and that this defense was so clearly meritorious that appellant is subject to sanctions under Rule 11 FRCP³  for filing suit after being notified by defendant-appellee's counsel of the existence of the defense. We affirm.

More specifically, the issue is whether the statutory five year period may be tolled by virtue of appellant's contention that it did not discover defendant's wrongdoing until a later date.⁴ 

The Missouri law on this point is clear. A good statement of the requirements for tolling the statute is found in the following extract from the case of Burr v. National Life & Accident Ins. Co., 667 S.W.2d 5, 7 (Mo.App.1984):A cause of action for fraud accrues at the time the defrauded party discovered or in the exercise of due diligence, should have discovered the fraud, Siler v. Kessinger, 149 S.W.2d 890, 893 (Mo.App.1941), although by statute discovery must fall within ten years of the alleged fraud, Section 516.120(5).⁵  The plaintiff maintains the duty to make inquiry to discover the facts surrounding fraud. Where the means of discovery exist, the plaintiff will be deemed to have known of the fraud so as to begin the running of the statute. Briece v. Bosso, 158 S.W.2d 463, 467 (Mo.App.1942). The party seeking to avoid the bar of the statute in an action for fraud must set forth in her pleadings "... facts which would toll the statute, showing due diligence on their part in attempting to discover the fraud; or that it was not within their power; or that the other parties had by artifice or trick concealed the facts; or that a fiduciary relation existed between them and the other parties." Brink v. Kansas City, 359 Mo. 311, 221 S.W.2d 490, 493 (1949). See also Womack v. Callaway County, 358 Mo. 850, 159 S.W.2d 630 (1942).

An earlier formulation of the well-settled rules regarding this topic is contained in Briece v. Bosso, 158 S.W.2d 463, 467 (St. Louis Ct. of Appeals, Missouri, 1942):

As a general rule a party seeking to avoid the bar of the statute of limitations on account of fraud must aver and show that he used due diligence to detect it, and if he had the means of discovery in his power, he will be held to have known it. A party cannot avail himself of this exception to the statute when the means of discovering the truth were within his power and were not used. Concealment by mere silence is not enough. There must be some trick or contrivance intended to exclude suspicion and prevent inquiry. There must be reasonable diligence; and the means of knowledge are the same thing in effect as knowledge itself. This rule, however, is subject to qualification where a relation of trust and confidence exists between the parties. When a plaintiff is lulled into a sense of security by reason of such relationship rendering it the duty of the defendant to disclose the truth he is under no duty to make inquiry, and the statute does not begin to run until actual discovery of the fraud. If there was nothing in the transaction at the time, and nothing occurred later, to cause a reasonably prudent person to suspect fraud, he is not guilty of negligence in failing to ferret it out.

Several propositions are thus clearly established under Missouri law:

(1) The statute begins to run, even in the absence of actual discovery, at the time when, in the exercise of due diligence, the defrauded party should have discovered the fraud.

(2) Plaintiff must diligently make reasonable inquiry.

(3) Means of discovery are deemed the equivalent of actual knowledge.

(4) The party seeking to avoid the bar of the statute must plead "facts ... showing due diligence."⁶ (5) Likewise, facts showing affirmative concealment by artifice or trick⁷  must be pleaded in order to toll the statute. Concealment by mere silence is not enough.

(6) Where a fiduciary relation of trust and confidence exists, the statute does not run until actual discovery of the fraud.⁸ 

The law being clear, the real dispute between the parties in the case at bar is one relating to the proper evaluation of the facts in the light of the foregoing legal precepts. We shall now review the pertinent facts.

Appellant's insured (and assignor⁹ ) Emerson Electric Company, of St. Louis, suspected collusion between its employees and suppliers resulting in payment of inflated, non-competitive and artificially excessive prices for goods purchased by Emerson.¹⁰  Hence on September 7, 1978, Emerson retained a law firm to conduct an independent investigation. A preliminary report of October 3, 1978, identified Terence Gibbs, Emerson's Manager of Purchasing, as a primary suspect, and appellee Frank Fernandez, and his company Components Plus, Inc., as secondary suspects.¹¹ 

Aetna's excuse for not having proceeded at an earlier date to seek relief against Fernandez seems to attach undue importance to erecting a "middle wall of partition"¹²  between the "arrangement" to extort excessive prices from Emerson during 1976, for participation in which Fernandez was under suspicion, and the "major conspiracy to defraud" from 1976 to 1978.¹³ 

There might be some point in distinguishing carefully between separate conspiracies in a criminal prosecution where a particular defendant might not be involved in the particular scheme for which he was being prosecuted [Berger v. U.S., 295 U.S. 78, 80-81, 82-83, 55 S. Ct. 629, 630, 630-31, 79 L. Ed. 1314 (1935) ] although implicated in other wrongdoing.¹⁴  So too the distinction might become important in a prosecution for engaging in a "continuing criminal enterprise" under 21 U.S.C. § 848, if the defendant took part only in a fresh conspiracy rather than a long-standing enterprise of organized institutionalized crime.

But in the case at bar the distinction is of little if any significance. Appellant insurance company as assignee of its insured (Emerson Electric Company) would be entitled to sue Fernandez for loss suffered as a result of any tortious wrongdoing or unlawful scheme, whether y-clept a "major conspiracy" or merely a less massive minor "arrangement".

It must be remembered emphatically that the assignment from Emerson to Aetna covered all loss caused by collusion of the Emerson employees named in the fidelity insurance policy,¹⁵  whether denominated a "major" conspiracy or merely a simple "arrangement".

Under the Missouri law as previously outlined it seems clear that Aetna and Emerson did not use reasonable diligence in developing the facts after it knew Fernandez to be a suspect in the collusive pricing by which Emerson had been victimized.

Aetna's second excuse is that it had no means of investigating Fernandez until Gibbs had been sentenced, for Gibbs would have "taken the Fifth" if his testimony had been timely sought. Would Fernandez also have remained silent if his deposition had been sought? Surely some sort of investigative effort, even review of available documentary evidence in Emerson's records, would be required in order to demonstrate due diligence after the identity of a suspect had been learned. Aetna demonstrated no diligence whatever.

We hold that the action against Fernandez is time-barred.

Was the defense afforded by the statute of limitations so clear-cut and obvious that it was abuse of process for Aetna to go ahead and file suit after being advised of the availability of that defense by counsel for Fernandez?

We are mindful of what Justice Brandeis said in Myers v. Bethlehem Shipbuilding Corp., 303 U.S. 41, 51-52, 58 S. Ct. 459, 464, 82 L. Ed. 638 (1938): "Lawsuits ... often prove to have been groundless; but no way has been discovered of relieving a defendant from the necessity of a trial to establish the fact."¹⁶ 

We are also mindful that excessive "sanctionitis" under Rule 11 (as Judge Becker of the Third Circuit calls it) might discourage or "chill" vigorous and ingenious advocacy, especially in matters of controversial character where there is a reasonable likelihood of achieving potential change in the law.

Likewise we recognize that a good defense tolling the statute of limitations is possible if a solid case is made showing affirmative concealment. But no facts supporting such a defense were pleaded in the case at bar. Mere silence, it will be remembered, does not constitute active concealment or deceptive conduct under the Missouri authorities.

So on the whole we are satisfied that defendant's warning should have discouraged the insurance company from instituting unmeritorious litigation, and Rule 11 sanction was appropriate.

However, it seems that if the law is so clear that plaintiff's case was so weak, it should not have required much research and effort on the part of defense counsel to defend successfully. Perhaps the preparation of a simple "boiler plate" motion, supported by a short brief (and short oral argument if necessary) was all that was required for victory, and all that plaintiff should reasonably be compelled to pay for.¹⁷  The District Court's findings are somewhat unilluminating as to the basis for the quantum of the fee awarded.¹⁸ 

We therefore affirm the District Court on both issues which it decided, except that we remand for further elucidation with respect to the amount of fees to be awarded.

AFFIRMED and REMANDED for further findings as to amount of fees.