Tobacco and Allied Stocks v. Transamerica Corp., Civ. A. No. 1468.

• Citation: 143 F. Supp. 323
• Decision Date: 18 June 1956
• Docket Number: Civ. A. No. 1468.
• Court: U.S. District Court — District of Delaware
• Parties: TOBACCO AND ALLIED STOCKS, Inc., et al., Plaintiffs, v. TRANSAMERICA CORPORATION, Defendant.

143 F. Supp. 323

TOBACCO AND ALLIED STOCKS, Inc., et al., Plaintiffs, v. TRANSAMERICA CORPORATION, Defendant.

Civ. A. No. 1468.

United States District Court D. Delaware.

June 18, 1956.

COPYRIGHT MATERIAL OMITTED

Daniel O. Hastings, Stewart Lynch and Clarence Taylor (of Hastings, Lynch & Taylor), Wilmington, Del., and Simon H. Rifkind, Samuel J. Silverman and Edward N. Costikyan (of Paul, Weiss, Rifkind, Wharton & Garrison), New York City, for plaintiffs.

Edwin D. Steel, Jr., George T. Coulson and William S. Megonigal, Jr. (of Morris, Steel, Nichols & Arsht), Wilmington, Del., and Gerhard A. Gesell and David E. McGiffert (of Covington & Burling), of Washington, D. C., for defendant.

LEAHY, Chief Judge.

On August 8, 1951, in related class actions brought by minority stockholders, I held defendant, Transamerica Corporation, violated Rule X-10B-5, promulgated by the Securities and Exchange Commission under ž 10(b) of the Securities Exchange Act of 1934, 15 U.S. C.A. ž 78j(b), in that preceding an offer to purchase Class A and Class B stock at a fixed price (plus a call on the A stock), defendant, a parent corporation and majority stockholder of its subsidiary, Axton-Fisher Tobacco Company, did not disclose to minority stockholders the true value of its inventory and pre-existing intent to capture the appreciation of such inventory upon merger or liquidation. I found the evidence made out a case for fraud. The amount of damages to be awarded and the persons to whom the judgment would run was left to the determination of a special master. See Speed v. Transamerica Corporation, D.C.Del., 99 F.Supp. 808, for fixing liability; issue of damages resolved in D.C. Del., 135 F.Supp. 176.

On July 10, 1952, present plaintiffs, owners of Class A common stock, started an independent suit again alleging violation of Rule X-10B-5. The request for relief included: an accounting of profits as well as monies and properties received; the impressing of a trust thereon; or, in the alternative, the awarding of damages; or, in the alternative, the rescission and setting aside of the sale. In addition to defenses on the merits to be tried before a jury, defendant asserts if jurisdiction is at law or, at most, concurrent, the Delaware statute of limitation bars the action, but if exclusively in equity, then the doctrine of laches. Plaintiffs contend jurisdiction is solely in equity, thus laches governs, but, they argue, neither laches nor limitation is a bar. It is these special defenses tried separately to the court under F.R. 42(b), 28 U.S.C., to which this particular opinion is directed.

Three questions are presented:

1. Whether the legal statute of limitation or the equitable doctrine of laches is applicable to this action, or both.

2. What principles of law appertain to the commencement of the period in question.

3. Whether under the facts this action is barred.

I.

1. When Congress attaches a statute of limitation to a right it creates, it is conclusive. Absent express provision, however, the federal court makes, as it should, its own determination. Thus, where the action is termed one at law for which only legal remedies are available, the court will look to the local law of limitation. Campbell v. City of Haverhill, 155 U.S. 610, 15 S.Ct. 217, 39 L.Ed. 280; McClaine v. Rankin, 197 U.S. 154, 25 S.Ct. 410, 49 L.Ed. 702; Pufahl v. Estate of Parks, 299 U.S. 217, 57 S.Ct. 151, 81 L.Ed. 133; Williamson v. Columbia Gas & Electric Corp., D.C. Del., 27 F.Supp. 198, affirmed 3 Cir., 110 F.2d 15, certiorari denied 310 U.S. 639, 60 S.Ct. 1087, 84 L.Ed. 1407; Klein v. Lionel Corp., D.C.Del., 130 F.Supp. 725. Where the sole remedy is in equity, the doctrine of laches will be followed. Holmberg v. Armbrecht, 327 U.S. 392, 66 S.Ct. 582, 90 L.Ed. 743, following Russell v. Todd, 309 U.S. 280, 60 S.Ct. 527, 84 L.Ed. 754. And in Russell v. Todd, supra, and Cope v. Anderson, 331 U.S. 461, 67 S.Ct. 1340, 91 L.Ed. 1602, the Supreme Court stated the rule where equity jurisdiction is exercised in aid or support of a legal right, or predicated upon a legal cause of action, or where it is concurrent with that at law, the federal court will withhold equitable relief if the forum's limitation would bar the concurrent legal right. In passing, it should be noted the standards differ somewhat in diversity cases where state created rights are in issue and in which the nature of the action is determined by referring to state law.¹

2. Plaintiffs cite Kardon v. National Gypsum Company, D.C.Pa., 73 F.Supp. 798, 803, that the issues in this case are to be treated solely on equitable principles. In Kardon plaintiff stockholders were awarded an accounting for recovery of profits for a violation of Rule X-10B-5 by two directors. Proof of loss was not required on the ground plaintiffs' cause of action was not one for damages based on common law deceit. Judge Kirkpatrick said: "* * * the broad terms of the Act are to be made effective in a case like the present one through application of well known and well established equitable principles governing fiduciary relationships." But the ratio of that case was not founded on any issue of limitation, and accordingly it does not restrict the issue posed by the case at bar. This was recognized at pages 802-803: "Perhaps all that would be necessary for this decision would be the determination that the conduct of the defendants came within the terms of the Act and the remedy sought is one provided by the law for redress."

3. Much emphasis has been placed on the nature of the relief requested by plaintiffs here. Defendant interprets plaintiffs' alternative prayer for damages as indicative of the concurrency of jurisdiction under X-10B-5. Plaintiffs answer the award of damages is merely the incidental relief which equity traditionally gives to accord full justice to the parties. Both sides obviously misconceive its importance.

At common law, formalism was zealously guarded. Actions were either legal, that is, in the law courts, or equitable, in the courts of chancery. Consequently, the relief demanded by the moving party had to be consistent with the theory of its action. Today, in the face of rules ostensibly eliminating these distinctions, it would be incompatible to permit a period of limitation to hinge on the turn of a word fixed by a plaintiff at the pleading stage. And for this court to speculate on such a maneuver would compound the error and ignore the true standard in determining the nature of jurisdiction. In the final analysis, recourse should be had not to the language of the pleader's Complaint but to the terms of the federal act granting the right of action and to the remedy which the court can supply. The decisive feature, then, which gives jurisdiction the flavor of concurrency, is not the narrow question of whether formal relief requested in a particular action is equitable or legal, primary or incidental, but the broader determination of whether the federal right in issue may be judicially enforced in any action by means both legal and equitable.

4. Defendant, arguing limitation is the prevailing doctrine, cites prior decisions under Rule X-10B-5 applying the forum's statute.² Plaintiffs minimize these holdings on the ground legal damages were sought, and hence the remedy was pursued on the law side. But plaintiffs' thesis, admitting the legal remedy, is in itself a concession that actions under X-10B-5 contemplate a concurrency of jurisdiction. The fact the concurrent remedy at law may be inadequate, as plaintiffs contend, is not material for "it is the inadequacy of the legal remedies to do complete justice that furnishes the foundation of the concurrent jurisdiction."³ I therefore believe rights accruing under Rule X-10B-5 are enforceable at law and in equity and provide a proper case for concurrent jurisdiction in the federal courts.

I also find both limitation and laches in point notwithstanding the language in Russell v. Todd and Cope v. Anderson, supra. As I read those cases a defendant is not to be precluded from setting up the defense of laches if circumstances warrant its application. It is inconceivable a right capable of being enforced by legal and equitable means should not be required to meet the letter of both. True, the aforementioned X-10B-5 decisions applied limitation. But those decisions, in discussing which state statute governed, were only considering limitation. None considered fully the impact of concurrency. To my knowledge, no federal court has disposed of this precise issue, and in weighing the arguments incident to Rule X-10B-5, I would apply the same principles to any federal, concurrent right of action lacking the articulate congressional stamp of limitation.

5. As to the applicable Delaware statute of limitation, Title 10, ž 8106 of the Revised Code of 1953 provides: "* * * no action based on a statute, and no action to recover damages caused by an injury unaccompanied with force or resulting indirectly from the act of the defendant shall be brought after the expiration of 3 years from the accruing of the cause of such action * * *". The phrase action based on a statute has been understood not to include actions existing at common law when the statute was adopted.⁴ Rule X-10B-5, founded on common law fraud, is therefore excluded.⁵ But an action under X-10B-5 is historically an action on the case⁶ and, as such, within the purview of the succeeding provision of the three year statute as quoted above.

The doctrine of laches, however, requires more than the mere lapse of time or a rigid and mechanical reference to the statute of limitation.⁷ Its existence rests upon the equities of the parties as viewed by the court. This has been translated in terms of inexcusable delay in instituting suit plus prejudice resulting therefrom. See Gardner v. Panama R. Co., 342 U.S. 29, 30-31, 72 S.Ct. 12, 96 L.Ed. 31.

II.

1. I determine both the three year Delaware statute of...