Denise McCann v. Hy-Vee, Inc.

In the
United States Court of Appeals
For the Seventh Circuit
No. 11-1459
DENISE MCCANN,
Plaintiff-Appellant,
v.
HY-VEE, INC.,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 09 C 5984—John A. Nordberg, Judge.
ARGUED SEPTEMBER 22, 2011—DECIDED NOVEMBER 22, 2011
Before POSNER, FLAUM, and SYKES, Circuit Judges.
POSNER, Circuit Judge. This appeal concerns statutory
deadlines for filing federal securities suits, in the some-
what unusual context of a divorce. The district judge
dismissed the suit with prejudice on the ground that it
was time-barred. The principal question raised by the
appeal is whether the period in which a private suit
for a federal securities violation may be brought begins
with the fraud or other misconduct on which the suit is

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2 No. 11-1459
based or not until a harm befalls the plaintiff from the
misconduct. The Supreme Court has thus far declined to
answer the question. See Merck & Co. v. Reynolds, 130 S. Ct.
1784, 1796 (2010). (It noted the government’s position
that the time begins to run on the earlier date. Id.)
The plaintiff, Denise McCann, and her husband, Anthony
McCann, divorced in August 2002. He was an executive
of a closely held corporation called Hy-Vee, a super-
market chain that is the defendant in this case. He was
paid a salary of $300,000 a year and also owned common
stock in the corporation. The divorce decree transferred
to his wife almost a third of his shares of stock “until
such time as [he] is first able to sell” them. The decree
also required him to pay both alimony and child support
through May 2007—when the couple’s youngest child
would finish high school—and to continue paying
alimony until August 2012 unless he managed to sell
the shares before then and forwarded the proceeds to
Denise. At that point the alimony obligation would end,
as she would then have the cash proceeds of the sale of
the stock to live on.
The suit charges Hy-Vee with defrauding Denise as a
favor to her husband—that during the negotiations
leading up to the divorce Hy-Vee’s chief financial officer
told her falsely that her husband’s shares could be sold
only if he died, ceased to be employed by Hy-Vee, or
ceased being employed in a position that entitled him
to buy stock in the company (for example by being de-
moted). He told her that until one of those things hap-
pened she could not be dispossessed of the shares—and

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No. 11-1459 3
unless she was dispossessed of them before August 2012
her alimony would continue until then. In fact, the com-
plaint alleges, Anthony could at any time obtain the
company’s permission to sell the stock forthwith. But
the CFO’s false assurance persuaded Denise (she argues)
both to accept the stock in lieu of a cash settlement and
to agree that her alimony payments would terminate
as soon after May 2007 as Anthony was first allowed to
sell the stock.
Although none of the triggering events listed by the
CFO occurred, Hy-Vee on June 12, 2007—less than two
weeks after the earliest day on which Anthony could
stop paying alimony to Denise—agreed to buy back the
shares that had been transferred to her. The price
(rounded to the nearest $1,000) was $908,000. Anthony
mailed her a check for $709,000, explaining that the differ-
ence between that amount and the larger amount he had
received from the company represented taxes and over-
payment. He demanded the shares in return. She refused
and her refusal precipitated state court litigation, which
she lost, finally surrendering the shares in January 2008
and receiving in exchange $712,000. (The increase over
the original figure of $709,000 probably was seven
months’ interest on the $709,000.) Anthony also stopped
making alimony payments when Hy-Vee agreed to buy
the shares in June 2007, depriving Denise of $220,500
that she would have received through August 2012
had the shares not been sold by then.
Denise filed the present suit on September 25, 2009,
charged Hy-Vee with having violated section 10(b) of the

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4 No. 11-1459
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and the
SEC’s Rule 10b-5, 17 C.F.R. § 240.10b-5, by making
misrepresentations in connection with her receipt and
sale of Hy-Vee stock. Section 10(b) forbids deceptive
conduct “in connection with the purchase or sale of” a
security, and Rule 10b-5 prohibits the making of any
“untrue statement of a material fact” or omission of any
material fact “necessary . . . to make the statements
made . . . not misleading.” Anthony was not joined as a
defendant. The district court, as we said, dismissed the
suit as untimely.
As an alternative ground of dismissal, Hy-Vee argued
in the district court (and no doubt would renew the
argument if we reversed the dismissal of the suit, as the
district court left the issue open) that there was no pur-
chase or sale of stock because Denise never bought or
sold Anthony’s shares but merely “held” them until
Anthony decided to sell. We disagree. When Anthony
made the sale of the stock to the corporation in 2007, he
was acting on behalf of Denise in the sense that the
amount he received in the sale, after adjustments, went
to Denise rather than being retained by him. In effect
she sold the stock to the corporation for that amount,
albeit involuntarily.
True, the sale that was made in reliance on the misrep-
resentation was the 2002 “sale” of the shares to Denise
pursuant to the divorce decree (the 2007 sale by Anthony
on her behalf was not in reliance on the misrepresentation
but rather was a consequence of the terms of the earlier
sale), and the 2002 transaction was not labeled a sale. But

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No. 11-1459 5
realistically that’s what it was. Denise received securities
and paid for them by giving up a demand for other con-
cessions in the divorce decree, such as a longer period
of alimony—a surrender that constituted valuable con-
sideration for the shares. Cf. Farid-Es-Sultaneh v. Commis-
sioner, 160 F.2d 812, 815 (2d Cir. 1947). No more was
necessary to satisfy the statutory requirement of a
purchase or sale of a security. See SEC v. Zandford, 535
U.S. 813, 819-20 (2002); Norris v. Wirtz, 719 F.2d 256, 259-
60 (7th Cir. 1983); Smith v. Pennington, 352 F.3d 884, 889
(4th Cir. 2003); James v. Gerber Products Co., 483 F.2d 944,
948 (6th Cir. 1973).
So we come to the issue of timeliness. It is governed by
28 U.S.C. § 1658(b), Merck & Co. v. Reynolds, supra, 130 S. Ct.
at 1789-90; Foss v. Bear, Stearns & Co., 394 F.3d 540, 541-52
(7th Cir. 2005), the two subsections of which provide
that a private suit for federal securities fraud “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.” The district court
relied on subsection (2) in deciding to dismiss the suit,
but the defendant argues that it is barred by subsec-
tion (1) as well, and this is probably true. Although
Denise had no reason in 2002 to doubt what Hy-Vee’s
chief financial officer told her were the limited condi-
tions under which Anthony could sell the stock out from
under her—Hy-Vee doesn’t argue that prudence re-
quired her to demand documentary proof of the truth-
fulness of the CFO’s statement to her—she probably
discovered that she had been had when she learned
that her husband had been authorized to sell the stock

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6 No. 11-1459
even though none of the triggering events that the chief
financial officer had mentioned to her had occurred. She
learned that in June 2007 and didn’t sue until 27 months
later—three months too late. She got the check from
Anthony, not from Hy-Vee, and claims not to have
known that he’d sold the stock. But this is unlikely, and
it is especially unlikely that had she been diligent she
still would have failed to realize that Hy-Vee was pur-
chasing the stock from Anthony—and the two-year
time limit in section 1658(b)(1) begins to run when the
plaintiff would have discovered the violation had she
been diligent. Merck & Co. v. Reynolds, supra, 130 S. Ct. at
1797-98. (As a detail, we note that Merck, 130 S. Ct. at 1797-
98, disapproved decisions of ours, such as Tregenza v.
Great American Communications Co., 12 F.3d 717, 722
(7th Cir. 1993), which had held that the two-year period
begins to run even earlier—upon “inquiry notice,” which
means as soon as the plaintiff discovers facts that while
not constituting a violation create enough suspicion of
one to induce a diligent person to investigate further
and by doing so discover it.)
But the district judge made no findings with regard to
subsection (1), instead ruling that the suit was barred by
subsection (2), which gives the plaintiff five years
rather than two in which to sue but makes the period
run from the violation rather than from its discovery.
The question, which is a question under subsection (1) as
well, is what “violation” means. Does it mean when the
fraud was committed or when the fraud caused a loss?
In other words, is section 1658(b) (and specifically its
second subsection) a statute of limitations or a statute

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No. 11-1459 7
of repose? “A period of limitation bars an action if the
plaintiff does not file suit within a set period of time
from the date on which the cause of action accrued. In
contrast, a period of repose bars a suit a fixed number
of years after an action by the defendant (such as manu-
facturing a product), even if this period ends before the
plaintiff suffers any injury.” Beard v. J.I. Case Co., 823
F.2d 1095, 1097 n. 1 (7th Cir. 1987); see also Roskam Baking
Co. v. Lanham Machinery Co., 288 F.3d 895, 903-04 (6th Cir.
2002). So imagine a case in which a defective product
is sold at time t, the defect causes an accident at t + 10,
but the deadline for suit is t + 5. E.g., Chang v. Baxter
Healthcare Corp., 599 F.3d 728, 733 (7th Cir. 2010). Such a
deadline creates a period of repose, barring suit even
though the victim of an accident caused by the defective
product could not, however diligent or well informed,
have sued within the deadline because the accident
didn’t occur until after the deadline had passed.
A statute of repose is strong medicine, precluding as
it does even meritorious suits because of delay for
which the plaintiff is not responsible. “[A]s opposed
to a statute of limitations, which begins running
upon the accrual of some claim and permits equitable
exceptions, . . . a statute of repose . . . ’serves as an un-
yielding and absolute barrier’ to a cause of action, re-
gardless of whether that cause has accrued.” Klein v.
DePuy, Inc., 506 F.3d 553, 557 (7th Cir. 2007). “The rule
in the federal courts is that both tolling doc-
trines—equitable estoppel and equitable tolling—
are . . . grafted on to federal statutes of limitations,” but

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8 No. 11-1459
“neither tolling doctrine applies to statutes of repose;
their very purpose is to set an outer limit unaffected by
what the plaintiff knows.” Cada v. Baxter Healthcare Corp.,
920 F.2d 446, 451 (7th Cir. 1990).
The argument for so unbending a rule is that the risk
of error is great when the interval between an alleged
wrongful act and its harmful consequence is a pro-
tracted one. The argument is particularly strong in the
case of product defects, but it applies to securities fraud
as well. Suits for securities fraud can, as in this case, be
based on oral statements, which are difficult to verify
after several years have passed. The causal relation be-
tween a misleading statement and a change in the price
of a security is also more difficult to determine the
longer the interval. And business planning is impeded
by contingent liabilities that linger indefinitely.
The plaintiff argues that there was no “violation” to
trigger the statute of repose until 2007, when the
defendant agreed to buy the stock, thus extinguishing
Anthony’s alimony obligations and so causing Denise’s
injury. Indeed the injury from the alleged fraud did not
occur until then—until, that is, Anthony sold the stock
before any triggering event listed by the CFO occurred,
thus cutting off the payment of alimony to Denise. But
to argue that the injury is an element of the violation
would (if the argument prevailed) make section 1658(b)
a statute of limitations rather than a statute of repose,
since there is no tort without an injury, whether a com-
mon law tort, Rozenfeld v. Medical Protective Co., 73 F.3d
154, 155-56 (7th Cir. 1996); Bastian v. Petren Resources

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No. 11-1459 9
Corp., 892 F.2d 680, 684 (7th Cir. 1990), or a federal statu-
tory tort. E.g., Blue Cross & Blue Shield United v. Marshfield
Clinic, 152 F.3d 588, 592 (7th Cir. 1998); Kanar v. United
States, 118 F.3d 527, 531 (7th Cir. 1997). There can be
questions about what constitutes an injury; in Delaware
State College v. Ricks, 449 U.S. 250 (1980), the Supreme
Court held that termination of a teacher’s tenure con-
tract was an injury that started the statute of limitations
for employment discrimination running even though
the teacher was given a year to find another job. But
the principle is secure: there is no tort without an injury
and if the period in which a tort suit can be brought
runs from the date of the tort, it is a period prescribed
by a statute of limitations rather than by a statute
of repose.
If section 1658(b) were a statute of limitations (and
assuming that “violation” means the same thing in both
subsections), a person who had bought a security could,
having later discovered that he’d been defrauded, wait
indefinitely to determine whether his purchase had been
a mistake (because of the fraud) or a windfall (because
despite the fraud the price of the security had risen
beyond expectations), since his two-year period under
subsection (1) would not begin to run until the fraud
caused him harm. This would be a heads I win, tails you
lose, proposition, which the law would be unlikely to
countenance. Short v. Belleville Shoe Mfg. Co., 908 F.2d
1385, 1392 (7th Cir. 1990).
That is an example from subsection (1). Interpreting
“violation” in subsection (2) to mean the completed tort

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10 No. 11-1459
would produce its own anomalies. Imagine a person who
bought General Motors stock in 1935 allegedly on the
basis of a deliberately false oral assurance, com-
municated privately by a GM official, that GM would
never bargain with a union. In 2009, when GM goes
bankrupt, at least in part because of contracts it had
negotiated with the auto workers union governing
health benefits, the buyer’s granddaughter (his heir)
sues for securities fraud. The alleged misrepresentation,
having been private, did not affect the stock price
until (let us say) 2008, and so any harm from it did not
occur until then. If the five-year deadline of subsection (2)
began its count down in 2008, the outer limit for suing
would be 2013—78 years after the alleged misrepresenta-
tion was made—if “violation” in section 1658(b)(2) is the
completed statutory tort.
A bit of further evidence that “violation” in section
1658(b) does not require injury is that the SEC can bring
an enforcement action for a “violation” of federal
securities law without anyone having suffered harm,
which is to say without anyone having relied on a misrep-
resentation or misleading omission to his detriment.
Schellenbach v. SEC, 989 F.2d 907, 913 (7th Cir. 1993); SEC
v. Rana Research, Inc., 8 F.3d 1358, 1363-64 and n. 4 (9th
Cir. 1993). This evidence of the meaning of the word
in section 1658(b) is not conclusive, however, because
although the SEC doesn’t have to prove reliance on a
misrepresentation, a private party would have to, as
otherwise he would have suffered no injury, Basic, Inc.
v. Levinson, 485 U.S. 224, 243 (1988); Astor Chauffeured

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No. 11-1459 11
Limousine Co. v. Runnfeldt Investment Corp., 910 F.2d 1540,
1546 (7th Cir. 1990), yet there is no mention of reliance
or injury in either section 10(b) of the 1934 Act or Rule 10b-
5. But the addition of these elements to the private suit
is perhaps better viewed as a judicial graft necessary
to make the statute and the rule function as the source
of an implied private right of action than as an inter-
pretation of the word “violation.”
Another argument for treating the statute as a statute
of repose is that the starting gate in statutes of limita-
tions is usually expressed as the date on which “such
claim accrues,” United States v. Kubrick, 444 U.S. 111, 113
(1979), or “the date on which the cause of action arose,”
Bay Area Laundry & Dry Cleaning Pension Trust Fund
v. Ferbar Corp., 522 U.S. 192, 198 (1997), or similar
language, rather than the date of “violation.”
But legislation is not noted for consistent terminology,
and it is the practical considerations that we’ve dis-
cussed that persuade us that section 1658(b)(2) (subsec-
tion (1) as well, but we’re not ruling on the application
of (1) to this case) is best regarded as a statute
of repose rather than as a statute of limitations, as held
in the only other appellate case on point, In re Exxon
Mobil Corp. Securities Litigation, 500 F.3d 189, 200-01
(3d Cir. 2007). The court in Exxon called the two-year
deadline in the first subsection a “statute of limita-
tions”—which it would be if “violation” meant “claim” in
that subsection, but we said earlier that we don’t think it
means that. Yet the court was troubled by the idea “that
the statute of limitations begins at a different time than

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12 No. 11-1459
the statute of repose,” because this “would require the
same word to have two meanings within the same statu-
tory provision—a significant textual mountain to climb.”
Id. at 201 n. 15. It left open the possibility that it
would climb the mountain if necessary, as it was not in
the Exxon case. But the alternative, which we prefer, is
that the two-year deadline, like the five-year deadline,
runs from the date of the fraud rather than the date of the
injury. (Merck also describes subsection (1) as a “statute
of limitations,” 130 S. Ct. at 1793, 1799, but in context
was using the term as a generic label for statutes that
impose deadlines for filing suit; for remember that the
Court did not hold that loss or harm must occur before
the period within which to file begins.)
Were it not for the practical considerations that argue
compellingly against requiring proof of injury in the
first subsection (the “heads I win, tails you lose” argu-
ment), it would be natural to think that subsection a
statute of limitations and the second a statute of repose.
For that is a common pairing, and two statutes of re-
pose—one with a discovery provision, the other not—is
uncommon, though it makes practical sense in the
context of securities fraud. The dilemma identified by
the Third Circuit in Exxon is a natural one, though we
think avoidable.
But we needn’t penetrate farther into this thicket, as
we are not relying on subsection (1), and regarding sub-
section (2) the Third Circuit and we are at one. The vio-
lation in this case, defined as it should be—as the mis-
representation—occurred in August 2002, more than

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No. 11-1459 13
five years before the suit was filed. The suit is therefore
untimely.
AFFIRMED.
11-22-11

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