Champion Home Builders Co. v. Jeffress, 73-1341.

• Decision Date: 11 January 1974
• Docket Number: No. 73-1341.,73-1341.
• Citation: 490 F.2d 611
• Parties: CHAMPION HOME BUILDERS CO., a Michigan Corporation, Plaintiff, Joseph L. Kramer et al., Intervenor-Plaintiffs-Appellants, v. Etson B. JEFFRESS, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

490 F.2d 611 (1974)

CHAMPION HOME BUILDERS CO., a Michigan Corporation, Plaintiff Joseph L. Kramer et al., Intervenor-Plaintiffs-Appellants, v. Etson B. JEFFRESS, Defendant-Appellee.

No. 73-1341.

United States Court of Appeals, Sixth Circuit.

Argued October 17, 1973.

Decided January 11, 1974.

COPYRIGHT MATERIAL OMITTED

Robert B. Block, New York City, for intervenor-plaintiffs-appellants; Pomerantz, Levy, Haudek & Block, New York City, Louisell, Chilingirian & Kovaleski, Detroit, Mich., on brief.

James C. Sargent, New York City, for defendant-appellee; Whitman & Ransom, New York City, Scholl, Jenkins, Robinson & Stieg, Detroit, Mich., on brief.

Before PHILLIPS, Chief Judge, and EDWARDS and McCREE, Circuit Judges.

PHILLIPS, Chief Judge.

This action was brought on behalf of a corporation to recover short-swing profits from the sale of stock by an insider. The issue on appeal is whether the purchase of the stock, within the meaning of § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), occurred within a period of less than six months prior to its sale.

In an opinion published at 352 F. Supp. 1081 (E.D.Mich.1973), the District Court held that more than six months had elapsed between the purchase and sale and dismissed the action. We reverse.

Joseph and Beatrice F. Kramer were intervenor-plaintiffs in the District Court. They are stockholders of the Champion Home Builders Co. (Champion). On behalf of the corporation they seek to recover certain profits realized by the defendant-appellee Jeffress from a sale of Champion stock allegedly within six months after its purchase.

The District Court denied the Kramers' motion for summary judgment on the issue of liability and granted Jeffress' motion for summary judgment of dismissal. The Kramers appeal. Champion has not appealed.

The case arose from the acquisition of Concord Mobile Homes, Inc. (Concord) by Champion. This acquisition was effected by a purchase of 100 per cent of the Concord stock, owned by Jeffress, in exchange for 105,000 shares of Champion stock (13 per cent of the total). After the exchange Jeffress became an officer and director of Champion. Pursuant to a public offering, and along with three other major officer-director-shareholders, Jeffress sold a portion of his Champion stock. The Kramers as shareholders of Champion seek to recover on behalf of Champion the profits from this sale as provided for under § 16(b) of the Securities Exchange Act of 1934. Section 16(b) provides as follows:

"For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) within any period of less than six months, unless such security was acquired in good faith in connection with a debt previously contracted, shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months. Suit to recover such profit may be instituted at law or in equity in any court of competent jurisdiction by the issuer, or by the owner of any security of the issuer in the name and in behalf of the issuer if the issuer shall fail or refuse to bring such suit within sixty days after request or shall fail diligently to prosecute the same thereafter; but no such suit shall be brought more than two years after the date such profit was realized. This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale, or the sale and purchase, of the security involved, or any transaction or transactions which the Commission by rules and regulations may exempt as not comprehended within the purpose of this subsection."

The sole question before this court is to determine when Jeffress purchased the Champion stock.¹ The date of the sale is not in dispute.

On February 17, 1968, Jeffress entered into a handshake agreement with the President and the Treasurer of Champion. This agreement was subject to the approval of Champion's Board of Directors. On February 21, 1968, the Champion Board approved the acquisition of Concord and authorized negotiations to that end. The minutes of that meeting were signed by Champion's President.

The parties entered into a 25 page written agreement and plan of reorganization on April 17, 1968. This agreement was approved by the Champion Board on April 24, 1968. Pursuant to a public offering, and after the stock had split two-for-one, Jeffress and three other officer-director-shareholders sold part of their stock on September 12, 1968.

If the Champion stock was "purchased" on February 21, 1968, the date of the resolution, as Jeffress contends and as held by the District Court, liability under the section will not attach. On the other hand, if the stock was "purchased" on April 17, 1968, the date the agreement and plan of reorganization was executed, liability will attach for any insider swing profits realized by Jeffress.

The District Court held that the purchase date of the Champion stock was February 21, 1968. The court reasoned that the resolution of the Board of Directors was an acceptance of Jeffress' offer to sell and created a mutually binding contract. This "contract" was held to be a purchase within the meaning of § 16(b). We disagree.

Section 3(a) (13) of the Act, 15 U.S.C. § 78c(a), defines "purchase" so as to include "any contract to buy, purchase or otherwise acquire." As said by then Circuit Judge Potter Stewart, "Every transaction which can reasonably be defined as a purchase will be so defined, if the transaction is of a kind which can possibly lend itself to the speculation encompassed by § 16(b)." Ferraiolo v. Newman, 259 F.2d 342, 345 (6th Cir. 1958), cert. denied, 359 U.S. 927, 79 S. Ct. 606, 3 L.Ed.2d 629 (1959).

The Supreme Court, speaking through Mr. Justice Stewart, has stated that "where alternative constructions of the terms of § 16(b) are possible, those terms are to be given the construction that best serves the congressional purpose of curbing short-swing speculation by corporate insiders." Reliance Electric Co. v. Emerson Electric Co., 404 U. S. 418, 424, 92 S.Ct. 596, 600, 30 L.Ed.2d 575 (1972). This holding was reaffirmed in Kern County Land Co. v. Occidental Petroleum Corp., 411 U.S. 582, 595, 93 S.Ct. 1736, 36 L.Ed.2d 503 (1973).

The definition of these terms is a matter of federal law. See, e. g., Tcherepnin v. Knight, 389 U.S. 332, 337-338, 88 S.Ct. 548, 19 L.Ed.2d 564 (1967); Blau v. Lehman, 368 U.S. 403, 413-414, 82 S.Ct. 451, 7 L.Ed.2d 403 (1962); Bershad v. McDonough, 428 F. 2d 693, 696 (7th Cir. 1970), cert. denied, 400 U.S. 992, 91 S.Ct. 458, 27 L.Ed.2d 440 (1971). "The phrase `any purchase and sale' in § 16(b) is therefore not to be limited or defined solely in terms of commercial law of sales and notions of contractual rights and duties." 428 F. 2d at 697. The transaction must be examined primarily in terms of federal securities law, and the analysis must focus on and be consistent with the congressional mandate of curbing insider short-swing speculation. "The question thus becomes one of balancing the respective advantages and disadvantages of each contended for `purchase' date and determining which one, if held to be the date of purchase, would be more likely to lend itself to the abuses the statute was designed to protect against." Booth v. Varian Associates, 334 F.2d 1, 4 (1st Cir. 1964), cert. denied, 379 U.S. 961, 85 S.Ct. 651, 13 L.Ed.2d 556 (1965).

With these considerations in mind, we now turn our attention to the transaction of February 21, 1968. The holding of the District Court was as follows:

"The court finds that on February 21 the parties had reached a meeting of the minds on the essentials of their exchange agreement and that if matters had thereafter bogged down in the drafting of a formal contract, either party could have sued to enforce the contract or for its breach. Since this was merely a purchase of stock by Champion, all that was needed to bind the corporation to the deal was the approval of the Board of Directors. This approval was formally given at the February 21 meeting. Jeffress, as the seller of his own stock, was similarly bound by the acceptance of his offer of sale. Under the cases the parties were thus bound and defendant Jeffress then became the `beneficial owner\' and an insider." 352 F.Supp. 1081, 1083, (E.D.Mich. 1973).

The resolution of the Board of Directors is as follows:

"RESOLVED, that the proposed acquisition by Champion Home Builders Co. of all the issued and outstanding shares of the common stock, no par value (`Concord Stock\'), of Concord Mobile Homes, Inc. and sic Indiana corporation, from Etson B. Jeffress in exchange for 105,000 shares of the Common Stock, par value $1, of Champion Home Builders Co., is approved, and the President and/or the Treasurer of this corporation are hereby authorized and empowered to negotiate with Etson B. Jeffress and to enter into, on behalf of this corporation, an agreement and plan of reorganization providing for the acquisition of Jeffress\' Concord Stock in exchange for 105,000 shares of this corporation\'s Common Stock, par value $1, and providing for such additional terms and conditions (not to effect the foregoing) as they consider proper and in the best interests of the corporation;

"FURTHER RESOLVED, that the President and/or the Treasurer of this corporation are authorized and empowered to execute such agreement and plan of reorganization, to make any necessary modifications thereto, to sign any and all papers, documents and instruments necessary in connection

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