Carr-Consolidated Biscuit Company v. Moore, Civ. No. 3792.

CourtUnited States District Courts. 3th Circuit. United States District Court of Middle District of Pennsylvania
Writing for the CourtMURPHY
Citation125 F. Supp. 423
PartiesCARR-CONSOLIDATED BISCUIT COMPANY, Plaintiff, v. H. S. MOORE (also known as Harry S. Moore), Defendant.
Docket NumberCiv. No. 3792.
Decision Date25 October 1954

125 F. Supp. 423

H. S. MOORE (also known as Harry S. Moore), Defendant.

Civ. No. 3792.

United States District Court M. D. Pennsylvania.

October 22, 1954.

As Amended October 25, 1954.

125 F. Supp. 424
125 F. Supp. 425
125 F. Supp. 426
White, Rowlands, Aston & Hourigan, Leo W. White, Wilkes-Barre, Pa., for plaintiff

Arthur Silverblatt, Roscoe B. Smith, Wilkes-Barre, Pa., for defendant.

MURPHY, District Judge.

Plaintiff moves for summary judgment in an action under § 16(b), Securities Exchange Act of 1934, 15 U.S.C.A. § 78p(b), and see § 27, Id. § 78aa, to recover profit realized by a former treasurer from the sale and purchase of its common stock on the open market within less than six months. In opposition defendant denies engaging in short swing trading for speculative purposes;1 and moves for dismissal of the action because of the statute of limitations.2

Assuming, as we must, for present purposes, defendant's version as to the motive for the sale and purchase, Zell v. American Seating Co., 2 Cir., 1943, 138 F.2d 641, at page 642; United States v. Haynes School Dist., D. C., 102 F.Supp. 843, at page 848, under the terms of § 16(b), considering the legislative history of the Act, plaintiff should ordinarily recover.

125 F. Supp. 427

To prevent unfair use of information by insiders the section provides for the timely recovery of any profit from any sale and purchase within six months3 regardless of the intention with which the transactions were made. The section forfeits the profits in order to discourage insiders from dealing in the shares within the time prescribed. Cf. Gratz v. Claughton, 2 Cir., 1951, 187 F.2d 46, at page 49, certiorari denied 341 U.S. 920, 71 S.Ct. 741, 95 L.Ed. 1353.

Although § 16(b) was apparently specifically designed to protect "outside" shareholders against short swing speculation by insiders with advance information (see 59 Yale L.Jnl. 511, footnote 11), the only remedy deemed effective was the imposition of liability based upon an objective measure of proof. Smolowe v. Delendo Corp., 2 Cir., 1943, 136 F.2d 231, at pages 234-236, 148 A.L.R. 300, certiorari denied 320 U.S. 751, 64 S.Ct. 56, 88 L.Ed. 446; Falco v. Donner Foundation, Inc., 2 Cir., 1953, 208 F.2d 600, at page 604; Walet v. Jefferson Lake Sulphur Co., 5 Cir., 1953, 202 F.2d 433, at page 434, certiorari denied 346 U.S. 820, 74 S.Ct. 35, 98 L.Ed. ___; Pellegrino v. Nesbit, 9 Cir., 1953, 203 F.2d 463, at page 468; Magida on Behalf of Vulcan Detinning Co. v. Continental Can Co., D.C.S.D.N.Y.1951, 12 F.R.D. 74, at page 78; Truncale v. Blumberg, D.C. S.D.N.Y.1948, 80 F.Supp. 387, at page 392. "Abuse of corporate position, influence, and access to information may raise questions so subtle that the law can deal with them effectively only by prohibitions not concerned with the fairness of a particular transaction." Securities and Exchange Commission v. Chenery Corp., 1943, 318 U.S. 80, at page 92, 63 S.Ct. 454, at page 461, 87 L.Ed. 626.

If Congress intended that only profits from an actual misuse of inside information and from short swing speculation by insiders should be recoverable it would have been simple enough to say so. See Smolowe v. Delendo Corp., supra, 136 F.2d at page 236; Pellegrino v. Nesbit, supra, 203 F.2d at page 468.

Defendant had a duty under § 16(a)4 to report to the Exchange and the Commission within 10 days after the month in which the change in ownership occurred. He was three months late in doing so. His position is that the delay occurred through sheer inadvertence and without any intent or desire to conceal the matter from anyone.5 He asserts that the president and secretary (director and counsel) of plaintiff company knew about the sale and purchase when they occurred; that contemporary proxy statements were already printed preventing his reporting the change in ownership therein. Finally that the present action is a reprisal measure because he unsuccessfully attempted to oust the management and resigned from the company.6

125 F. Supp. 428

Applying the same tests and objective standard, plaintiff's motive in bringing the action would not affect the result. See Pellegrino v. Nesbit, supra, 203 F.2d at page 466; Magida on Behalf of Vulcan Detinning Co. v. Continental Can Co., supra, 12 F.R.D. at page 78; Benisch v. Cameron, D.C.S.D.N.Y.1948, 81 F.Supp. 882, at page 885; Grossman v. Young, D.C.S.D.N.Y.1947, 72 F.Supp 375, at page 380.

Once defendant purchased the stock and realized a profit, a cause of action arose;7 a right of action by the corporation8 existed and the limitation period began to run.9 Since plaintiff's action was commenced more than two years thereafter,10 ordinarily defendant's motion to dismiss should be granted.

Plaintiff and the Commission11 contend that here too an objective standard should determine the timeliness of the action. Since defendant violated a statutory policy against insider trading and a statutory duty of filing, the limitation period should not begin to run until the § 16(a) report was filed, regardless of whether the delay was caused by inadvertence or wilful misconduct. See Fistel v. Christman, D.C.W.D.Pa., 13 F.R.D. 245, at page 248; contra, where the report was filed within the ten day period.

Pointing to the purpose of the Act, § 2 (see 59 Yale L.Jnl. 511); the high standard of fiduciary conduct required;12 the

125 F. Supp. 429
legislative history;13 the complementary nature of (a) and (b);14 the specific purpose of § 16; the short limitation period, understandable only in context with a duty to make prompt disclosure,15 they argue that the limitation is not an integral part of the right of action; that such construction provides an effective sanction against tardy § 16(a) reports, and that a contrary holding would frustrate the will of Congress and defeat a worthy statutory purpose

Second, that defendant's conduct amounted to fraud and concealment which tolled the statute; even though an insider tells the officers and directors about his stock transactions, delay in reporting, whether wilful or inadvertent, should prevent such knowledge from being imputed to the corporation.

Third, estoppel against pleading such a defense; since defendant could have started the period running, plaintiff and the shareholders should not be prejudiced by his failure to do so. A defendant should not profit from his own wrong. Bigelow v. R. K. O. Radio Pictures, Inc., 1946, 327 U.S. 251, at pages 264, 265, 66 S.Ct. 574, 90 L.Ed. 652.

If plaintiff's theory as to statutory construction were adopted and an objective standard applied, regardless of the cause of defendant's delay or plaintiff's knowledge, plaintiff's motion should be granted. But § 16(b) created a new cause of action16 and contains within itself a statute of limitations.

"* * * the limitation imposed becomes an integral part of the right of action created by the statute and so limits it that an aggrieved person cannot maintain his suit after the time fixed by the statute has expired." Pennsylvania Company for Insurance, etc., v. Deckert, 3 Cir., 1941, 123 F.2d 979, at page 985.17 "* * * such statutes

125 F. Supp. 430
cannot be tolled, after the manner of statutes of limitation, even for fraud or concealment by the defendant which prevent the plaintiff from bringing the action within time." Damiano v. Pennsylvania R. Co., 3 Cir., 1947, 161 F.2d 534, at page 535, certiorari denied 332 U.S. 762, 68 S.Ct. 65, 92 L.Ed. 348; Carpenter v. Erie R. Co., 3 Cir., 1942, 132 F.2d 362; and see United States v. Borin, 5 Cir., 1954, 209 F.2d 145, at pages 147, 148.18 Although there is respectable authority to the contrary19 we shall follow the teachings of the Court of Appeals for this Circuit.20

As to statutes of limitations generally, see Mr. Justice Stone in Guaranty Trust Co. of New York v. United States, 1938, 304 U.S. 126, at page 136, 58 S.Ct. 785, at page 790, 82 L.Ed. 1224, "The statute of limitations is a statute of repose * * * regarded by this Court * * * as a meritorious defense, in itself serving a public interest." Mr. Justice Sutherland in United States v. Oregon Lumber Co., 1922, 260 U.S. 290, at page 299, 43 S.Ct. 100, at page 103, 67 L.Ed. 261, "* * * not a technical defense but substantial and meritorious. The great weight of modern authority is to this effect." Mr. Justice McLean in McCluny v. Silliman, 1830, 3 Pet. 270, 28 U.S. 270, 277, 7 L.Ed. 676, "The courts do not now, unless compelled by the force of former decisions, give a strained construction, to evade the effect of those statutes * * *." And see Mr. Justice Story in Bell v. Morrison, 1828, 1 Pet. 351, 26 U.S. 351, at page 360, 7 L.Ed. 174 "* * * it has often been a matter of regret, * * * that, in the construction of the statute of limitations, the decisions had not proceeded upon principles better adapted to carry into effect the real objects of the statute;

125 F. Supp. 431
that instead of being viewed in an unfavorable light, * * * it had received such support as would have made it what it was intended to be, emphatically, a statute of repose." And see Mr. Justice Bradley in Amy v. City of Watertown, supra, 130 U.S. 320, at page 324, 9 S.Ct. 537, at page 538, 32 L.Ed. 953, speaking of the power to make exceptions, "but the cases in which it applies are very limited in character, and are to be admitted with great caution; otherwise the court would make the law instead of administering it. The general rule is that * * * the act must prevail, and no reasons based on apparent inconvenience or hardship can justify a departure from it."

Finally Mr. Justice Jackson in Chase Securities Co. v. Donaldson, 1945, 325 U.S. 304, at pages 313-314, 65 S.Ct. 1137, at page 1142, 89 L.Ed. 1628, statutes of limitations "always have vexed the philosophical mind for it is difficult to fit them into a completely logical and symetrical system of...

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