CBI Industries, Inc. v. Horton

• Decision Date: 25 June 1982
• Docket Number: No. 82-1262,82-1262
• Citation: 682 F.2d 643
• Parties: Fed. Sec. L. Rep. P 98,729 CBI INDUSTRIES, INC., Plaintiff-Appellee, v. John T. HORTON, Defendant-Appellant.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 643

682 F.2d 643

Fed. Sec. L. Rep. P 98,729

CBI INDUSTRIES, INC., Plaintiff-Appellee, v. John T. HORTON, Defendant-Appellant.

No. 82-1262.

United States Court of Appeals Seventh Circuit.

Argued May 25, 1982.

Decided June 25, 1982.

Calvin Sawyier, Winston & Strawn, Chicago, Ill., for defendant-appellant.

Michael M. Conway, Hopkins & Sutter, Chicago, Ill., for plaintiff-appellee.

Before WOOD and POSNER, Circuit Judges, and FOREMAN, Chief Judge. ^*

POSNER, Circuit Judge.

Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), provides, so far as is immediately relevant here, that if a corporate director sells shares in his company and then, within six months, buys shares in the company, "any profit realized by him" shall be recoverable in a suit by the company. Thus, if a director sold 1000 shares in his company for $60 a share and within six months bought 1000 shares for $40, the company could sue him for $20,000, his "profit" on the transaction (more realistically, the loss he averted by selling when he did). We have to decide in this case whether the "him" includes his grown children, when they are beneficiaries of a trust of which the director is a co-trustee.

Horton, the defendant in this case, is a director of CBI Industries, Inc., the plaintiff. Along with the Continental Illinois National Bank and Trust Company of Chicago he is co-trustee of a trust (actually two trusts, but to make this opinion simpler we shall treat them as one) created many years ago by his mother for the benefit of his two sons. In the period relevant to this case they were full-time students, 19 and 22 years old, living apart from Horton most of the time. The original assets of the trust consisted entirely of CBI stock. The trustees were authorized but not required to retain the stock, and the record does not reveal the present composition of the trust's assets. In 1980 Horton sold on the open market 3000 shares of CBI stock that he owned himself; and within six months he bought (again on the open market), this time for the trust, 2000 shares of the stock at a lower price than he had sold his own stock. The difference in price, multiplied by 2000, is $25,000-the amount CBI sued Horton for, and recovered below. 530 F.Supp. 784 (N.D.Ill.1982).

If Horton had bought the shares for his own account he would indisputably have violated section 16(b) and the company would have been entitled to his $25,000 "profit." But that is because the $25,000 would have been his to do with as he liked; it would have been "profit realized by him," in the language of the statute. The $25,000 that the trust may be said to have gained from the purchase of the shares at a price lower than the price at which Horton had earlier sold his own shares (gained, that is, by waiting to buy until the price fell) did not become his to use as he wished, but was for the exclusive use of his sons. It is true that as the family-member co-trustee, Horton had, within very broad limits, the power to manage the trust; for when a bank is a co-trustee with a member of the family of the grantor and the beneficiaries, it ordinarily defers to the family member's wishes, and did so here. But Horton did not have the power to divert the income of the trust to himself. That would clearly have violated the terms of the trust, and even a somnolent bank trustee would have been jarred awake by an attempt at such a diversion. Moreover, since the trust beneficiaries were, in contemplation of law at least, adults, see, e.g., Waldron v. Waldron, 13 Ill.App.3d 964, 301 N.E.2d 167 (1973), Horton could not have looked to the income of the trust to fulfill his legal obligation of support, thereby replacing personal income that he would otherwise have had to devote to the boys-he no longer had any such obligation. (In any event, if he had used trust income to fulfill a legal obligation, the income so used would have been taxed to him rather than to the trust, a result that he would almost certainly want to avoid and that therefore was unlikely to occur, and so far as appears did not occur.) Finally, it is of little significance that Horton is the first in a series of contingent remaindermen of the trust. If both boys die without issue before they reach the age of 25, all of the assets of the trust will go to him. The probability of this happening could be calculated, and the result of this calculation could be multiplied by $25,000 to yield the expected value to Horton of the trust's profit from the challenged transaction, but no one has made this calculation and we suspect it would yield a number too minute to motivate CBI to sue.

If Horton did have a pecuniary interest in the trust's $25,000 "profit," the fact that the stock was not purchased in his name would not be decisive. In Whiting v. Dow Chem. Co., 523 F.2d 680, 682 (2d Cir. 1975), the wife of a corporate director sold stock in his company less than six months before he bought shares in it at a lower price, and the difference in price was held to be a profit realized by him. But her income was considerably larger than his and was used to pay many of their joint living expenses, so that in effect the defendant was treating her money, including proceeds from transactions in the stock of the company of which he was a director, as if it were his. But so far as appears Horton does not-and under the terms of the trust he may not-treat the trust income this way. In Whittaker v. Whittaker Corp., 639 F.2d 516, 523 (9th Cir. 1981), the defendant's mother had given him a general power of attorney which he used, among other things, " 'to freely borrow large sums of money from her while never having to consider paying the money back, posting adequate security or even paying any interest that might accrue.' " In fact, he "felt free to utilize his mother's assets exactly as if they were his own." He thus had a direct pecuniary stake in the profits from the insider trading that he did in her name. (To similar effect see Jefferson Lake Sulphur Co. v. Walet, 104 F.Supp. 20, 25 (E.D.La.1952), aff'd, 202 F.2d 433 (5th Cir. 1953).) If Horton had like access to the trust assets, or if, as in Whiting, those assets were used to pay his living expenses, then a profit realized by the trust would be realized "by him" within the meaning of the statute; otherwise the statute would be so easily avoidable as to be virtually a dead letter.

But we cannot stop here. Having regard for the purpose and not merely the language of section 16(b), we must consider whether the words "profit realized by him" should be read more broadly-as broadly as the temptations that led Congress to enact the statute in the first place can be conceived. The preamble to section 16(b) describes the statutory purpose as "preventing the unfair use of information which may have been obtained" by the classes of corporate insiders specified in section 16(a). This suggests, what is anyway obvious, that the framers were concerned that corporate insiders would be tempted to use inside information to make short-term speculative profits; and the temptation is there whether the beneficiary is the insider himself or his children, grown or otherwise. A person's "wealth," in a realistic though not pecuniary sense, is increased by increasing the pecuniary wealth of his children-even if no part of their increased wealth is used to reduce any legal obligation of support that he may owe them, even if they never spend a nickel on him, even if he has no financial relations with them at all-provided only that he has the normal human feelings toward his children. To limit "profit realized by him" to purely pecuniary receipts thus seems, in the case of Mr. Horton, to ignore human nature.

But taking a "realistic" approach to the interpretation of these words would result in placing greater restrictions on corporate insiders than Congress can plausibly be thought to have intended in 1934, when notions of conflict of interest were less exacting than they are today. We asked CBI's counsel at oral argument whether in his view it would have made any difference to Horton's liability if the trust beneficiaries had been Horton's godsons rather than his sons. Counsel said it would not, but...