Dottenheim v. Emerson Electric Mfg. Co., Civil Action No. 7072.

• Decision Date: 16 April 1948
• Docket Number: Civil Action No. 7072.
• Parties: DOTTENHEIM et al. v. EMERSON ELECTRIC MFG. CO.
• Court: U.S. District Court — Eastern District of New York

77 F. Supp. 306

DOTTENHEIM et al. v. EMERSON ELECTRIC MFG. CO.

Civil Action No. 7072.

District Court, E. D. New York.

April 16, 1948.

Milton Pollack, of New York City, for plaintiff Dottenheim.

Crawford & Parsons, of New York City (J. Lester Parsons, Jr. and H. Victor Crawford, both of New York City, of counsel), for defendant.

GALSTON, District Judge.

The plaintiff, Dottenheim, sues alleging that he was and is a stockholder of the defendant. His claim is that W. Stuart Symington was the president and a director of the defendant, and that within a period of six months, ending on December 18, 1944, Symington purchased 20,000 shares of the common stock of the defendant at a price of $4 a share, and sold 4,000 of such shares, realizing a profit of $57,872. It is alleged that under the Securities Exchange Act of 1934, § 16 (b), 15 U.S.C.A. § 78p (b), such profit inured to and was recoverable by the defendant. Dottenheim alleges that under the provisions of that statute he was empowered to investigate any and all transactions of officers and directors of the defendant in securities of the defendant for the purpose of determining whether such transactions were within the framework of the statute; that he requested the defendant to commence suit for the recovery of the profits. Prior to the demand he employed Morton Frederick, an attorney, to make an investigation, and Dottenheim alleges that he agreed to pay Frederick a reasonable fee for his services "contingent upon a benefit therefrom to the corporation, and upon the reimbursement to the plaintiff * * * by the corporation of the said fees so incurred."

It is the allegation of the plaintiff that after he had made demand that the defendant commence suit against Symington, and solely by reason thereof, the defendant notified Symington of the demand, and that in consequence on or about February 15, 1946, Symington paid the profits to the defendant.

So by this action plaintiff seeks to recover the expenses of counsel "contingently undertaken and incurred."

A second cause of action alleged in the complaint was dismissed by Judge Inch on motion. D.C., 7 F.R.D. 195.

The plaintiff's claim is resisted on several counts, as will hereafter appear.

The proof discloses that W. Stuart Symington entered the employ of the defendant in 1938 under a contract which called for a salary plus additional compensation in the form of options to purchase common stock of the defendant. Pursuant to the terms of the option that he held, Mr. Symington notified the defendant that he desired to purchase 20,000 shares of the common stock at $4 a share. The purchase was consummated on December 14, 1944. To raise part of the purchase price Symington obtained a bank loan, and to reduce this loan he sold 4,000 shares of the stock at $19 a share on December 18, 1944. In so doing he acted in good faith and no imputation otherwise is shown. W. S. Snead, vice president and treasurer of the company, was informed of the purchase either before or immediately after it occurred, and early in January, 1945, Robert H. McRoberts, a director and secretary of the company, and a member of the law firm representing the defendant, was also informed thereof. Other directors were informed of the matter. Indeed McRoberts was not only counsel for the company, but also was Symington's counsel. Members of the company's law firm then discussed the situation in the light of the decision in Smolowe v. Delendo Corporation, 2 Cir., 136 F.2d 231. They were of opinion that the language of that decision was so broad that it would probably be held to cover the Symington purchase and sale. Judge Cave, a member of the law firm, was concerned lest the directors be held liable in the event that the company failed to take steps to recover the profits before the two year limitation period defined in the statute should expire. The directors reached the conclusion that the company would not immediately press the claim against Symington, but would see if some decision might be handed down modifying the broad language of Smolowe v. Delendo, supra. In July, 1945, Mr. Symington resigned as president to enter the services of the federal government, and in January, 1946, was appointed Assistant Secretary of War for Air.

In respect to the company's stand, the question was thus left with the board of directors to determine what action should be taken. Before any action was taken, however, on December 17, 1945, the company's...