Narum v. Faxx Foods, Inc.
1999 ND 45, 590 N.W.2d 454 (1999)
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Rule of Law:
A statutory provision creating a private right of action for securities violations that contains a one-year statute of limitations from the date of discovery is not tolled or rendered inapplicable by the seller making a rescission offer. The statute of limitations and the rescission offer provision are conjunctive requirements, both of which may bar a purchaser's claim.
Facts:
- In 1992, Faxx Foods, Inc. (Faxx) began offering and selling common stock to North Dakota investors, including Terry Narum and the other plaintiffs, to finance the acquisition of a food distribution company.
- Faxx violated the terms of its limited offering exemption from the North Dakota Securities Commissioner by selling more shares than authorized, selling shares before receiving approval, and misusing the proceeds.
- In July 1993, an attorney for a third party informed several of the plaintiff-investors that Faxx had committed these securities law violations.
- On August 20, 1993, Faxx's president, Richard Olsen, sent the investors a formal rescission offer to buy back their shares and refund their investment, which most of the plaintiffs accepted.
- On October 6, 1993, Olsen notified shareholders that Faxx was placing the rescission offer "on hold" but would initiate a new offer in the future.
- On January 14, 1994, Olsen sent a second, less favorable rescission offer, proposing to repay only 40% of the investment in another company's stock.
- On February 16, 1994, Faxx's attorney sent a letter to the investors formally withdrawing the second rescission offer and explicitly advising them to "consult with your own attorneys to assist you in making decisions in regard to this matter, including the protection of your legal rights."
Procedural Posture:
- Terry Narum and other investors (plaintiffs) filed a lawsuit in a North Dakota trial court against Robert D. King and other directors of Faxx Foods, Inc. (defendants) for violations of the state Securities Act.
- A default judgment was entered against separate defendants Faxx Foods, Inc., Richard A. Olsen, and Roger W. Sweet, who did not answer the complaint.
- The remaining defendants answered the complaint, asserting as a defense that the action was barred by the one-year statute of limitations under N.D.C.C. § 10-04-17(1).
- The plaintiffs moved to amend their complaint to add a claim of constructive fraud.
- The trial court granted the defendants' motion for summary judgment, dismissing the action as time-barred, and denied the plaintiffs' motion to amend their complaint.
- The plaintiffs (appellants) appealed the summary judgment and the denial of their motion to amend to the Supreme Court of North Dakota.
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Issue:
Does a seller's rescission offer under N.D.C.C. § 10-04-17(2) render the statute's one-year limitation period from the date of discovery inapplicable, and if not, are the sellers equitably estopped from asserting the statute of limitations defense after making and withdrawing such offers?
Opinions:
Majority - Chief Justice Vande Walle
No. A seller's rescission offer does not negate the one-year statute of limitations, and the sellers are not equitably estopped from asserting it. The court reasoned that the statute's one-year limitation period and the provision regarding rescission offers are connected by the word "and," making them conjunctive rather than mutually exclusive. A potential plaintiff must avoid the limitations in both subsections to bring a successful claim; making a rescission offer does not create an indefinite period to sue. To hold otherwise would lead to the absurd result of a cause of action with no time limit. Furthermore, equitable estoppel does not apply because there was no affirmative deception by the defendants. The plaintiffs were put on notice of their need to act when Faxx's attorney explicitly advised them in February 1994 to consult their own counsel to protect their legal rights, which occurred more than one year before they filed suit. Relying on Faxx's separate lawsuit against a third party was not reasonable, as a successful outcome is never certain and Faxx never asked them to delay filing their own claim.
Analysis:
This decision clarifies that a statutory rescission offer in securities law is not a substitute for a statute of limitations but rather an additional, separate provision. It establishes that making such an offer does not toll the limitations period, placing a firm duty on aggrieved investors to file a claim promptly after discovering a violation. The ruling also narrowly construes the doctrine of equitable estoppel, signaling that it will not apply where a party has been explicitly advised to seek independent legal counsel, even amidst ongoing communications or related litigation. This reinforces the principle that plaintiffs must exercise due diligence in protecting their rights and cannot rely on a defendant's conduct to extend statutory deadlines unless there is clear, affirmative deception.
