Gilson v. Chock Full O'Nuts Corporation

• Decision Date: 03 January 1964
• Docket Number: No. 90,Docket 28316.,90
• Citation: 331 F.2d 107
• Parties: Jerome L. GILSON and Morris J. Levy, Plaintiffs-Appellants, v. CHOCK FULL O'NUTS CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

331 F.2d 107 (1964)

Jerome L. GILSON and Morris J. Levy, Plaintiffs-Appellants, v. CHOCK FULL O'NUTS CORPORATION, Defendant-Appellee.

No. 90, Docket 28316.

United States Court of Appeals Second Circuit.

Argued November 1, 1963.

Decided January 3, 1964.

Rehearing Granted March 12, 1964.

Decided April 24, 1964.

Morris J. Levy, New York City, for plaintiffs-appellants.

Debevoise, Plimpton, Lyons & Gates, New York City (Samuel E. Gates, J. Asa Rountree and Cecil Wray, Jr., New York City, of counsel), for defendant-appellee.

Before LUMBARD, Chief Judge, and SWAN, WATERMAN, MOORE, FRIENDLY, SMITH, KAUFMAN, HAYS and MARSHALL, Circuit Judges.

Rehearing in Banc Granted March 12, 1964.

FRIENDLY, Circuit Judge.

After this appeal had been decided by the panel, 326 F.2d 246 (2d Cir. 1964), a majority of the Court voted to grant defendant's petition that it be reheard in banc. We did this in the belief that the appeal raised the issue whether in a case where an attorney for a stockholder does nothing more than find a claim for the recovery of "short-swing" profits under § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p (b), which the corporation then successfully brings at the stockholder's request, the stockholder or the attorney has a right to be compensated by the corporation for the attorney's services, as was held with respect to the stockholder in Dottenheim v. Emerson Elec. Mfg. Co., 7 F.R.D. 195 (E.D.N.Y.1947) — an issue which we deemed important because of the historic concentration of § 16(b) litigation in this circuit. Finding that the services appropriately rendered by the attorney in this case went well beyond what we have just stated, we follow the panel in reversing the district court's order dismissing the complaint, but on a basis somewhat narrower than that indicated in its opinion.

The corporation is wholly in error in urging that, under the rule of Erie R. R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), decision here is controlled by New York law. The right created by § 16(b) for a corporation and, derivatively, for its stockholders being a federal right, its remedial incidents also are a matter of federal law. Board of County Commissioners of the County of Jackson v. United States, 308 U.S. 343, 60 S.Ct. 285, 84 L.Ed. 313 (1939); Royal Indem. Co. v. United States, 313 U.S. 289, 61 S.Ct. 995, 85 L. Ed. 1361 (1941); Brooklyn Sav. Bank v. O'Neil, 324 U.S. 697, 715, 65 S.Ct. 895, 89 L.Ed. 1296 (1945); Fielding v. Allen, 181 F.2d 163 (2 Cir.), cert. denied sub nom. Ogden Corp. v. Fielding, 340 U.S. 817, 71 S.Ct. 46, 95 L. Ed. 600 (1950). What can be rightly said is that in deciding how far Congress intended the federal courts to go in allowing a complaining stockholder or his attorney to obtain compensation from a corporation that has succeeded in recovering "short-swing" profits, the rule generally followed by courts of equity in analogous situations is a relevant datum.

In contrast to the general recognition that "a stockholder who is successful in maintaining * * * an action" for the corporation's benefit which it has been unwilling to institute "is entitled to reimbursement for reasonable attorney's fees on the theory that the corporation which has received the benefit of the attorney's services should pay the reasonable value thereof," on which this court relied for the award of such reimbursement under § 16(b) in Smolowe v. Delendo Corp., 136 F.2d 231, 241 (2 Cir. 1943), a stockholder who, even at considerable effort, only brings to the corporation's attention a claim that it successfully prosecutes, has been held not to be so entitled. Evans v. Diamond Alkali Co., 315 Pa. 335, 172 A. 678 (1934); see also Ripley v. International Railways of Central America, 16 A.D.2d 260, 227 N.Y.S.2d 64 (1st Dep't), aff'd, 12 N.Y.2d 814, 236 N.Y.S.2d 64, 187 N.E.2d 131 (1962). Acts of this sort seem rather analogous to those of the informer, which, like those of other volunteers, are not usually compensable in the absence of statute. See United States ex rel. Marcus v. Hess, 317 U.S. 537, 63 S.Ct. 379, 87 L.Ed. 443 (1943). There are policy considerations against requiring a corporation to pay a stockholder for volunteering to do what the corporation ought to do and might well have done without any impulse from him, considerations that would be especially strong in a case where the stockholder's request was made shortly after the information became available from reports under § 16 (a) and at a...