                     United States Court of Appeals
                              FOR THE EIGHTH CIRCUIT
                                 ________________

                                    No. 00-1609
                                 ________________

Bruce K. Ritchey; Marty V.                 *
Crawford,                                  *
                                           *
             Appellants,                   *
                                           *       Appeal from the United States
      v.                                   *       District Court for the
                                           *       Eastern District of Arkansas.
William L. Horner, Jr.; Eloise S.          *
Horner,                                    *
                                           *
             Appellees.                    *

                                 ________________

                                 Submitted: December 11, 2000
                                     Filed: March 26, 2001
                                 ________________

Before WOLLMAN, Chief Judge, RICHARD S. ARNOLD, and HANSEN, Circuit
Judges.
                         ________________

HANSEN, Circuit Judge.

       Plaintiffs Bruce Ritchey and Marty Crawford filed suit, alleging that William
Horner and his mother, Eloise Horner, committed violations of federal and state
securities laws when they sold their building supply business to plaintiffs. The district
court granted summary judgment on the federal claim in favor of the Horners,
concluding that it was time-barred, and declined jurisdiction over the supplemental state
law claims. Plaintiffs appeal, and we reverse.
                                          I.

        On September 22, 1997, Ritchey and Crawford met with the Horners to finalize
their purchase of the Horners' family-owned corporation, the Mississippi County
Lumber Company. Ritchey had worked as a truck driver and salesperson for the
company from 1980 to 1985. He then left the company but rejoined it again in 1991
and was employed as its manager until the time of the purchase. Crawford was not
employed by the company but had done business with Jack Horner since 1994 in
relation to his home improvement business. At the meeting, the parties executed a
written agreement in which Ritchey and Crawford agreed to purchase the Horners'
interest in the corporation. In the agreement, the Horners warranted that the
corporation had filed all tax returns required by law, that the returns had been timely
filed, and that the corporation had no outstanding tax liabilities.

       Ritchey and Crawford were apparently concerned about the company's tax
returns and tax liabilities because Ritchey knew that the company had received a
proposed tax assessment from the State of Arkansas for the 1994 and 1995 tax years.
The notice indicated that the assessed tax was due on July 26, 1997. Jack Horner,
however, assured Ritchey sometime prior to the meeting that the company did not
actually owe taxes for the two years and that the company received the notice only
because its accounting firm, Deitz & Associates (Deitz), had not yet filed the tax
returns for those years.1 Jack Horner also directed Deitz to fax a May 31, 1997,
company financial statement to plaintiffs, which they received on September 10. The
statement did not reflect any outstanding tax liabilities. At the meeting itself, Jack

      1
       The record contains a September 21, 1997, letter from Deitz to the Arkansas
Department of Finance and Administration, explaining in response to the proposed
assessment that the company had no taxable income for 1994 and 1995 once operating
expenses and loss carryforwards were taken into consideration. Oddly, the letter
claims that the firm would complete and file the required returns by September 15,
1997. In an affidavit, Ritchey asserts that he never saw the letter.
                                          2
Horner specifically stated that the corporation's 1995 and 1996 federal and state income
tax returns had been filed but that he would have to send them to Ritchey and Crawford
later because the returns were in Deitz's possession. Although the record is not clear
as to why, plaintiffs were apparently no longer concerned about the 1994 tax returns
at the time of the September meeting.

       After the September 22 meeting, Ritchey and Crawford were told by their own
accountant that there were advantageous tax reasons to restructure the purchase of the
company. As a consequence, the Horners and the corporation entered into a stock
repurchase agreement on October 20, 1997, in which the corporation agreed to pay the
Horners $250,000 for their shares; $50,000 as a down payment and the remaining
balance, plus interest, in installments over 59 months. Ritchey and Crawford, in turn,
each contributed approximately $1500 to the corporation and furnished the down
payment to the Horners on behalf of the corporation. They also personally guaranteed
the corporation's debt to the Horners, and, in exchange, the corporation issued one
share to each. As part of the deal, the Horners requested that $5000 of the down
payment be paid directly to Deitz for its accounting work. The stock repurchase
agreement provided that the Horners would remain on the company's board for life and
that Jack Horner would have the right to review and approve any distributions or
salaries paid by the corporation to its officers or employees until such time as the
corporation repaid its debt to the Horners.

       Ritchey and Crawford asked Jack Horner on numerous occasions after the
September meeting why they had not yet received the 1995 and 1996 tax returns from
Deitz. On at least one occasion, Horner explained that the delay was caused by some
confusion or dispute over some accounting charges that he and his mother owed to
Deitz for personal work performed for him and his mother. On the other occasions, he
told them that the returns would be coming soon and that he needed to "get with" his
accountant about getting the returns. Plaintiffs never verified whether the returns had
in fact been filed, believing it better to let Jack Horner resolve the matter because he

                                           3
had dealt with the firm in the past. Following the purchase, plaintiffs no longer
employed Deitz to perform its accounting work.

       Despite Horner's repeated promises to resolve the tax return problem, Ritchey
received a letter from Deitz on June 12, 1998, which explained that the company's 1995
and 1996 tax returns had not been completed or filed because the company had failed
to pay the firm for its past services.2 Approximately one month later, Ritchey and
Crawford received a notice from the State of Arkansas assessing the company's 1995
tax liability, including penalty and interest, at $26,968.95, and seeking immediate
payment. After attempts to resolve the tax liability with the Horners failed, plaintiffs
brought suit on April 19, 1999, asserting that the Horners engaged in securities fraud
in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and
Rule 10b-5, 17 C.F.R. § 240.10b-5, based on their representations that the company's
tax returns had been filed and that the company owed no outstanding taxes. The
Horners then filed a motion to dismiss, which the district court treated as one for
summary judgment because the parties relied on matters outside the pleadings, arguing
that the securities fraud claim was not brought within the applicable one-year statute
of limitations. In ruling on the motion, the district court found as a matter of law that
plaintiffs had inquiry notice of the alleged problems with the company's tax returns by,
at latest, February 1998, more than one year before the suit was filed.

                                           II.

       The time period in which an aggrieved party must bring an implied private cause
of action under § 10(b) and Rule 10b-5 is governed by § 13 of the Securities Act of

      2
        According to the letter, the company had failed to pay accounting charges dating
back to 1991. As of the end of 1993, the company owed the accounting firm
$23,860.37, although Jack Horner made a payment of $7,500 on the company's account
in August 1997. Strangely enough, the financial statement prepared by Deitz did not
reflect a liability for previous accounting services.
                                           4
1933, 15 U.S.C. § 77m (Supp. IV 1998). Great Rivers Coop. of S.E. Iowa v. Farmland
Indus., 120 F.3d 893, 896 (8th Cir. 1997) (citing Lampf, Pleva, Lipkind, Prupis &
Petigrow v. Gilbertson, 501 U.S. 350, 361 (1991)). Section 13 provides, as relevant
here, that the action must be brought within one year after the discovery of the alleged
misrepresentation or "after such discovery should have been made by the exercise of
reasonable diligence." 15 U.S.C. § 77m. The reasonable diligence standard is an
objective one, commonly referred to as the doctrine of "inquiry notice," because the
one-year limitations period may be triggered even though the victim is unaware of the
misleading statements if, in exercising reasonable diligence, he should have discovered
their misleading nature. See Great Rivers, 120 F.3d at 896. We have said before that
"inquiry notice exists when there are 'storm warnings' that would alert a reasonable
person of the possibility of misleading information, relayed either by an act or by
omission." Id. (quoting Davidson v. Wilson, 973 F.2d 1391, 1402 (8th Cir. 1992)).
Because plaintiffs' alleged failure to file suit within the period prescribed by § 13 is an
affirmative defense, the Horners bear the burden of establishing it. See Law v. Medco
Research, Inc., 113 F.3d 781, 786 (7th Cir. 1997); cf. Schmidt v. United States, 933
F.2d 639, 640 (8th Cir. 1991) (recognizing that statute of limitations is an affirmative
defense that defendant bears the burden to prove). Thus, the issue is whether
defendants have shown that there is no genuine dispute of fact that plaintiffs were on
inquiry notice that the returns had not been filed sometime before April 19, 1998.

      In deciding this issue, the district court reasoned that Jack Horner's
"unconvincing excuses" as to why Ritchey and Crawford had not received the
company's tax returns constituted red flags that should have led Ritchey and Crawford,
by February 1998 at the very latest, to verify whether the returns had in fact been filed.
We review the district court's decision de novo, and we uphold summary judgment only
if we find that no genuine issues of material fact remain and that the Horners are
entitled to judgment as a matter of law. Concerned Irrigators v. Belle Fourche
Irrigation Dist., 235 F.3d 1139, 1143 (8th Cir. 2001). In determining the existence of


                                            5
any genuine issues of material fact, we view the record most favorably to plaintiffs, the
nonmoving parties. Id.

       Plaintiffs argue that the record does not support the district court's finding as a
matter of law that they were on inquiry notice of the company's tax problems for more
than a year before they filed suit. In particular, they contend the district court failed to
take into account their long-standing relationship with Jack Horner in characterizing his
excuses as unconvincing. Their position, in contrast, is that they had no reason to
disbelieve what Jack Horner had been telling them all along until they received the June
12, 1998, letter from Deitz. In resolving plaintiffs' arguments, we are guided by Great
Rivers' statement that there are three determinations a court must make in ascertaining
whether the inquiry notice standard has been satisfied: "(1) the facts of which the victim
was aware; (2) whether a reasonable person with knowledge of those facts would have
investigated the situation further; and (3) upon investigation, whether the reasonable
person would have acquired actual notice of the defendant's misrepresentations." 120
F.3d at 896.

       We begin with the relevant facts known to plaintiffs in deciding whether, or
when, they were on inquiry notice of the problems. Ritchey and Crawford concede that
they were aware in July 1997 that tax returns had not been filed and that a proposed
assessment was pending, and due, before the first contract was executed in September
1997. They emphasize, however, that Jack Horner told Ritchey that the prepurchase
tax assessment was received only because the corporation's returns had not been filed
by Deitz and, further, that no tax was actually owed.

        At the September meeting, plaintiffs again received assurances from Jack Horner
that all the corporation's returns were filed and that the company had no outstanding tax




                                             6
liability.3 When they did not receive the returns after the September meeting, Horner
explained that the returns had been filed but that Deitz refused to provide them because
of some confusion over unpaid accounting charges. The details as to what he told
plaintiffs and when he told them are not clear from the record. Viewing the record in
plaintiffs' favor, though, it appears that Horner informed them early on that he and his
mother owed the firm for some personal accounting work, work unrelated to company
business, and that once he resolved the confusion, Deitz would provide the returns.
Through June of 1998, Jack Horner continued to tell plaintiffs that he would resolve the
matter with Deitz and that he would get the returns.

        Plaintiffs contend, for several reasons, that they did not become suspicious of
Horner when he told them the returns had been filed or when he failed after numerous
requests to resolve the billing problem. First, the financial statement, prepared and
faxed to plaintiffs by Deitz, did not identify any company liability for outstanding taxes
nor did it indicate that the company owed Deitz. Second, as part of their purchase of
the company, plaintiffs paid $5000 directly to the accounting firm, which, because of
the billing confusion, permitted them to believe that Deitz had completed the 1995 and
1996 returns and that the firm's charges for those services had been paid in full.
Finally, both Ritchey and Crawford describe Jack Horner as being either absent-minded
or a procrastinator and explain that, based on their past experiences with him, he often
failed to do what he said he was going to do. Despite his tendency to procrastinate,
though, they assert that they had total faith in his statement that the returns had been
completed because he had never been dishonest or deceptive with them in the past.




      3
        Defendants insinuate that Ritchey had to be aware that the tax returns had not
been filed because he was the "manager" of Mississippi County Lumber. In his
affidavit, however, Ritchey states that Jack Horner and the company's bookkeeper
handled the company's financial matters prior to the purchase, including preparation of
the tax returns.
                                            7
       The question next becomes whether the fact that plaintiffs did not receive the
returns after the purchase was completed, and Jack Horner's explanation and repeated
assurances that he would resolve the problem, would have alerted a reasonable person
to the possibility that the returns had not been filed. We conclude that this inquiry is
far too factual to be resolved at the summary judgment stage. Courts, including our
own, that have found facts sufficient as a matter of law to alert a reasonable investor
of the possibility of a misrepresentation have generally done so when the record
contains evidence that plaintiffs received information directly contrary to the
complained-of misrepresentation. See, e.g., Cooperativa de Ahorro y Credito Aguada
v. Kidder, Peabody & Co., 129 F.3d 222, 224-25 (1st Cir. 1997) (concluding duty to
investigate triggered where high interest rates, coupled with drastic short-term decline
in value, provided inquiry notice that investment was not low-risk, safe and non-
speculative, as described); Great Rivers, 120 F.3d at 897-98 (finding inquiry notice as
a matter of law where article stated that capital credits would be redeemed at about 5%
annually, and that redemption was wholly discretionary, which was contrary to alleged
misrepresentation that credits could be redeemed within one to two years); Davidson
v. Wilson, 973 F.2d 1391, 1402-03 (8th Cir. 1992) (finding inquiry notice on summary
judgment where plaintiffs received a Schedule K-1 showing a substantial discrepancy
in the allocation of partnership tax losses and cash distributions from those promised).
Here, the record contains no evidence (that is until June 1998) that plaintiffs received
or had access to any information contrary to Jack Horner's assertions that the returns
had been filed. Instead, the crux of defendants' argument in support of summary
judgment is that plaintiffs should have become suspicious enough to verify that the
returns had been filed because Jack Horner continued to assure them that they had been
filed but failed to produce the returns.

      But the facts relied upon to support inquiry notice must rise to a level of more
than mere suspicion; they must instead be "sufficiently confirmed or substantiated" to
a point at which the victims are incited to investigate. Fujisawa Pharm. Co. v. Kapoor,
115 F.3d 1332, 1335 (7th Cir. 1997). From an outsider's view it seems that plaintiffs

                                           8
should have been leery of Jack Horner's repeated assurances, but we must look at the
information available to the victims before that judgment is made, which includes what
the two knew about Jack Horner based on their past experiences with him. According
to their affidavits, plaintiffs both knew and trusted Jack Horner. Both had done
business with him or worked for him previously, and neither had ever known him to be
deceitful. In addition, the structure of plaintiffs' purchase of the company appears to
reflect great trust, even mentorship, in the relationship; Jack Horner remained a member
of the corporation's board (for life), he approved plaintiffs' salaries, and both he and his
mother continued to have a financial stake in the company, i.e., the remaining debt
owed to them by the corporation. Based on their past experiences with him, plaintiffs
also assert that Horner often procrastinated. What effect the relationship may have had
on how plaintiffs viewed what Jack Horner told them cannot be adequately adjudged
on summary judgment. Consequently, we cannot say as a matter of law that Jack
Horner's statements were "unconvincing" and that plaintiffs should have been led to
investigate.

       We also find it odd that the record contains no evidence of any correspondence
between Deitz and plaintiffs until the June 12 letter. Deitz was presumably aware that
plaintiffs purchased the company, and the firm was obviously aware that tax returns
needed to be filed, but it took nearly eight months to notify plaintiffs that there was a
problem. The accounting firm also prepared the financial statement which failed to
show any liability for accounting charges or unpaid taxes. Moreover, plaintiffs
received no further assessment from the state. Given these facts, and that plaintiffs
were aware that a proposed assessment was due prior to their purchase of the company,
a fact finder could certainly conclude that Jack Horner's claims that the returns had
been filed were bolstered by the fact that plaintiffs heard nothing further about the tax
returns from the accountants or the State. Having thoroughly reviewed the record, we
conclude that the evidence is not such that no rational trier of fact could find in favor
of plaintiffs on whether they were on inquiry notice before April 19, 1998. See
Lambert v. City of Dumas, 187 F.3d 931, 935 (8th Cir. 1999) ("Summary judgment is

                                             9
to be granted only where evidence is such that no reasonable jury could return a verdict
for the nonmoving party.").

                                          III.

       Accordingly, we reverse the district court's grant of summary judgment and
remand plaintiffs' federal claim for further proceedings not inconsistent with this
opinion. Because the dismissal of plaintiffs' state law claims was premised upon the
adverse grant of summary judgment leaving no federal claim to try, we reverse that
decision as well and direct the district court upon remand to resume jurisdiction over
the state law claims.

      A true copy.

             Attest:

                     CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.




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