Western Auto Supply Company v. Gamble-Skogmo, Inc.

• Decision Date: 13 August 1965
• Docket Number: No. 17748.,17748.
• Citation: 348 F.2d 736
• Parties: WESTERN AUTO SUPPLY COMPANY and Beneficial Finance Co., Appellants, v. GAMBLE-SKOGMO, INC., Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

348 F.2d 736 (1965)

WESTERN AUTO SUPPLY COMPANY and Beneficial Finance Co., Appellants, v. GAMBLE-SKOGMO, INC., Appellee.

No. 17748.

United States Court of Appeals Eighth Circuit.

July 19, 1965.

Rehearing Denied August 13, 1965.

Armin M. Johnson, of Faegre & Benson, Minneapolis, Minn., for appellants.

Edward J. Callahan, Jr., of Callahan & Callahan, Minneapolis, Minn., Allen T. Rorem, Minneapolis, Minn., for appellee.

Philip A. Loomis, Jr., General Counsel, Securities and Exchange Commission, Washington, D. C., Walter P. North, Associate General Counsel, George P. Michaely, Jr., Sp. Counsel and Roy Nerenberg, Attorney for Securities and Exchange Commission, Washington, D. C., for Securities and Exchange Commission, Washington, D. C., amici curiae.

Before VAN OOSTERHOUT, BLACKMUN and MEHAFFY, Circuit Judges.

MEHAFFY, Circuit Judge.

This appeal is from a judgment of the United States District Court of Minnesota denying claims for recovery of alleged "short swing" profits from transactions in the common stock of Western Auto Supply Company of Missouri under § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78p(b) and § 78aa.

Plaintiffs-appellants, Western Auto Supply Company and Beneficial Finance Co., both Delaware corporations, are hereafter referred to respectively as Western Delaware and Beneficial. Defendant-appellee, Gamble-Skogmo, Inc., a Delaware corporation, is hereafter referred to as Gamble-Skogmo. Western Auto Supply Company, formerly a Missouri corporation, is hereafter referred to as Western Missouri and the Gamble-Skogmo Profit-Sharing — Stock Bonus Trust Fund is hereafter referred to as Trust Fund.

The case was submitted to the District Court upon a stipulation of facts which we summarize. On January 1, 1960, Gamble-Skogmo had been for over six months the owner of 1,256,044 shares of the only outstanding common stock of Western Missouri which constituted more than a 10% beneficial ownership in this stock under § 16(a) of the Act, 15 U.S. C.A. § 78p(a). On January 15, 1960, the Executive Committee of Gamble-Skogmo unanimously adopted a resolution approving the Company's purchase of 32,000 additional shares of common stock of Western Missouri for the purpose of contributing so much as necessary to its Trust Fund in satisfaction of the Company's annual contribution to the fund for the year 1959. Pursuant to this resolution, on January 21, 1960, the 32,000 shares were purchased at $32.35 per share or a total cost of $1,035,200.00. The shares were paid for on January 27, 1960, were delivered by the brokerage firm to Gamble-Skogmo in certificates bearing street names, and were duly endorsed in blank.

On or about January 28, 1960, Gamble-Skogmo transferred 25,942 of these recently purchased shares to its Trust Fund along with a check for $28.08, which combined represented the amount determined to constitute Gamble-Skogmo's contribution to its Trust Fund. Gamble-Skogmo was under no obligation to make this contribution in stock of Western Missouri or any other company.

On April 1, 1960, the Government brought a civil antitrust action against Gamble-Skogmo seeking divestiture of its holdings in Western Missouri. On July 18, 1960, a consent decree was entered in the antitrust case enjoining and restraining Gamble-Skogmo from owning shares in Western Missouri. Gamble-Skogmo at no time admitted the antitrust violations upon which the Government based its complaint. However, on July 11, 1960, less than six months after purchase of the 32,000 shares, Gamble-Skogmo sold its entire holding of 1,262,102 shares of Western Missouri common stock to Beneficial for $36.00 per share or a total sale price of $45,435,672.00.¹

On October 27, 1961, Western Missouri merged with Beneficial, the latter emerging as the surviving corporation. After the merger was consummated, Beneficial transferred to Western Delaware all the assets formerly held by Western Missouri with exceptions not material here.

On December 13, 1961, the President of Western Delaware wrote Gamble-Skogmo demanding an accounting for profits, including dividends, which the latter received as an "insider" from the "short swing sale" of 32,000 shares of Western Missouri on July 11, 1960. Gamble-Skogmo responded by forwarding a check to Western Delaware for $22,111.70, being the difference in the sale price over cost on 6,058 shares, but refused payment on the 25,942 shares which it had transferred to its Trust Fund.

In its decision reported in 231 F.Supp. 456, the District Court held that plaintiffs were entitled to recover the sum of $4,240.60 which is the profit received by way of dividends on the 6,058 shares together with the interest at the legal rate from June 1, 1960, to the date of judgment, April 19, 1964. The Court held against Gamble-Skogmo on its counterclaim for return of the $22,111.70 which it had paid voluntarily to Western Delaware on December 18, 1961. Gamble-Skogmo had alleged that this payment was made under a mistake of law and fact "and as a practical solution of an alleged claim" of Western Delaware.²

This appeal presents issues as to Western Delaware and Beneficial's capacity to bring this action; the existence of a purchase and a sale of the 25,942 shares of Western Missouri within the meaning of the statute; the existence of a profit on the purchase and sale of these shares; and the inclusion of dividends and interest in a recoverable judgment.

Capacity to Sue. At the outset the question is posed as to whether merger of the issuing corporation, Western Missouri, with a surviving corporation which subsequently assigns all the interests acquired in the issuer to a third corporation, properly vests the successor, Beneficial, and its assignee, Western Delaware, with the statutory right of the issuer to bring an action under § 16(b)?

In answering this proposition affirmatively, the District Court relied principally upon the merger statute of Missouri, the State where the issuing corporation was incorporated. This statute simply operates to transfer to the successor corporation without further act or deed all rights, privileges, interests, property and liabilities, including choses in action which formerly belonged or were chargeable to the merged corporation. See Mo.Rev.Stat. § 351.450, V.A.M.S. (1959).³ The District Court also reasoned that since the legislative purpose of § 16(b) was intended to protect property rights of the investing public as well as those of the issuing corporation, § 16(b) must be broadly construed in reaching the decision that the chose in action here survived and was properly assigned.

We note that Gamble-Skogmo is in the anomalous position of having failed to cross-appeal from the District Court's finding that Beneficial and Western Delaware were entitled under § 16(b) to the profits on the 6,058 shares not conveyed to the trust, but retained in Gamble-Skogmo's corporate portfolio. Despite this apparent concession that not only the issuer, Western Missouri, but also its successor and assignee, Beneficial and Western Delaware, were proper parties to maintain a § 16(b) action for recovery of the non-trust fund profits, Gamble-Skogmo inconsistently argues that these appellants were incapable under the statute of suing for the profits on the 25,942 shares transferred to the Trust Fund. Even though we have grave reservations with respect to whether Gamble-Skogmo has not thereby already waived its right to challenge Beneficial and Western Delaware's capacity to bring this action, the issue is one of significant first impression and worthy of discussion.

By its express language, § 16(b) gives a right of action at law or in equity in any court of competent jurisdiction to recover profits gained by an insider in a short swing purchase and sale of stock to the issuer or the owner of any security of the issuer in its behalf.⁴ Section 3 (a)(8) defines "issuer" as "any person who issues or proposes to issue any security * * *." 15 U.S.C.A. § 78c(a) (8). Gamble-Skogmo contends that the statutes' failure to create a right of action for heirs, successors or assigns of the named parties in interest indicates legislative intent to exclude their capacity to sue. And that the applicable federal common law does not recognize survival or assignment of this statutory right which is personal and expires when the party on whom it was conferred ceases to exist.

Gamble-Skogmo cites United States v. Klein, 153 F.2d 55 (8th Cir. 1946) as authority for its argument against looking to the general common law to determine whether a cause of action under § 16(b) can survive. This is a misinterpretation of our rationale in Klein. That case involved federal statutes governing the medical and compensation benefits covering employees injured while serving in the old Civilian Conservation Corps. We held there that these statutory provisions furnished the Government its exclusive remedy for obtaining an assignment of a cause of action in order to recoup from the third party tort-feasor the benefits paid an injured CCC employee and for that reason no resort could be had to the common law of agency of the jurisdiction where the injury occurred to establish the Government's capacity to sue.

The view which has been embraced by the weight of federal authority is that resort must be made to the federal and general common law when the federal statute is silent with respect to the question of survivability to determine if the cause of action is of a nature or substance which has traditionally survived. Pierce v. Allen B. Du Mont Laboratories, Inc., 297 F.2d 323, 324 (3rd Cir. 1961), cert. denied 371 U.S. 814, 83 S.Ct. 24, 9 L.Ed.2d 55 (1962), reh. denied 371 U.S. 917, 83 S.Ct. 251, 9 L.Ed.2d 175 (1962), and cases there cited; Sullivan v. Associated Billposters and Distributors, 6 F.2d 1000, 42 A.L.R. 503 (2nd Cir. 1925); Mills v. Sarjem Corp., 133 F. Supp. 753 (N.J.1955).

An award for profits made by an insider in a short...