Nothing lasts forever. This adage applies to claims made under statutory or common law. In the recent case of Klein v. George G. Kerasotes Corp., the Seventh Circuit Court of Appeals described how claims limitations affect sellers and buyers of securities.
The case involved an action by Michael P. Kerasotes, a former shareholder in George P. Kerasotes Corporation (“Corporation”), a closely-held family business. Kerasotes alleged he was forced to sell his shares, the value of his shares was misrepresented, and the price the Corporation paid for his shares was improperly discounted. He argued that, as a seller, his claim was not recognized under the Illinois Securities Law of 1953 (the “Act”) and, consequently, was not subject to the Act’s claims limitations.
Legal claims generally are subject to limitation periods which bar recovery if claims are not asserted within a given time. This encourages prompt assertion and resolution of claims while evidence and parties are still available, and enables parties to conduct business and other activities without the need to forever look over their shoulders. Limitations periods vary depending upon the type of claim and are often subject to extension for “repose” periods intended to cover situations where discovery of a potential claim may be difficult due to concealment of facts or other circumstances.
In April, 1995, Kerasotes received a letter from the Corporation stating that he owned 1,900 shares which the Corporation wanted to buy at $140 per share for a total of $266,000. The Corporation as a whole valued itself at $7,850,000 or approximately $310 per share for each of the 25,350 outstanding shares. It applied certain discounts to Kerasotes's shares because they were nonvoting and otherwise non-marketable.
On May 23, 1995, Kerasotes signed a Stock Redemption Agreement, believing he had no choice but to accept the Corporation’s offer.
On February 9, 1999, Kerasotes sought to renegotiate the share’s purchase price, believing that he had not received fair value. The Corporation refused, again pointing to an enterprise value of $7,850,000. However, the actual value of the Corporation in 1998 was $49 million, more than six times higher than the valuation for the purchase of Kerasotes’ shares.
On August 24, 2003, Kerasotes became aware of the Corporation’s greater fair value.
On August 3, 2005, Kerasotes filed his lawsuit against the Corporation and certain officers and directors.
The defendants argued that because a sale of a security was involved, the Act applied, including its three year limitations period and its repose period, which extended the applicable claims bar to a date five years following the date Kerasotes knew or should have known that he had not received fair value. Kerasotes claimed that the Act did not provide a remedy for sellers and that its limitations and repose periods did not apply, apparently believing that his common law fraud claims were subject to a longer limitations and repose period.
The trial and appellate courts rejected Kersaotes’ arguments, concluding that the express language of the Act addressed claims by sellers, as well as buyers, of securities. Consequently, the limitations and repose periods under the Act served to bar Kersaotes’ claims. He believed something was amiss by February 9, 1999. Arguably, he should have investigated further at that time and filed a claim within five years thereafter. By waiting until August 3, 2005 to file, he forfeited any possible claim for recovery.
The Kerasotes case serves as a reminder that potential claims should be promptly evaluated and asserted, including review of applicable claims limitations and repose periods. A dead-bang winner will become a loser if asserted after the limitation period has expired. Please be sure to consult counsel immediately upon receipt of information that you may have a claim. To quote another adage: there is no profit in delay.