Grossman v. Young

• Decision Date: 03 July 1947
• Citation: 72 F. Supp. 375
• Parties: GROSSMAN et al. v. YOUNG et al.
• Court: U.S. District Court — Southern District of New York

72 F. Supp. 375

GROSSMAN et al. v. YOUNG et al.

District Court, S. D. New York.

July 3, 1947.

Silver & Saperstein, of New York City (Isaac M. Barnett, of New York City, of counsel), for plaintiffs.

Sullivan & Cromwell, of NewYork City, and Cook, Smith, Jacobs & Beake, of Detroit, Mich. (Inzer B. Wyatt, of New York City, Bethel B. Kelley, of Detroit, Mich., and Bruce A. Hecker, of New York City, of counsel), for defendant.

Roger S. Foster, of Philadelphia, Pa., amicus curiae, for Securities and Exchange Commission.

RIFKIND, District Judge.

By his motion under Federal Rules of Civil Procedure, Rule 12(b) (6), 28 U.S. C.A. following section 723c, defendant Leonard A. Young seeks an order dismissing the complaint for its failure to state a claim upon which relief can be granted. Thereby he raises two questions of statutory construction heretofore unanswered. The action is brought under Sec. 16(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78p(b). The complaint states two causes of action whereby plaintiffs, stockholders of the corporate defendant, seek to recover, for the benefit of the corporate defendant, profits alleged to have been made by defendant Young from short term trading in the stock of the corporate defendant. The text of Section 16 is quoted in full in the margin.¹

The complaint, filed on April 10, 1946, alleges that Young, an officer, director and owner of more than 10% of the outstanding stock of the corporation, which had equity securities outstanding registered on a national securities exchange, by means of a wholly owned and controlled Canadian corporation known as J. M. Quinn Securities, Ltd., traded, and realized profits from trading, in the securities of the corporation, between March, 1937, and March, 1940, and that the profits arose out of purchases and sales and sales and purchases within a period of six months; that Young fraudulently concealed these profits and failed to file the statements required by Sec. 16(a); that on April 18, 1944, the Securities and Exchange Commission instituted an action to compel Young to file such statements; that Young did file statements on February 26, 1945; that by reason of the fraudulent concealment by Young, plaintiffs were prevented from discovering the facts until "sometime subsequent to April 18, 1944"; that on March 21, 1946 less than sixty days before the commencement of this action, plaintiffs requested the corporation to institute suit under Sec. 16(b) to recover the profits realized by Young and that the corporation failed to do so; that Young exercises effective working control over the corporation and its management making further demands futile.

The second cause of action declared in the complaint is of the same character and is based upon the alleged purchase and sale by Young of 11,854 shares of stock of the corporation, in January, 1945.

The grounds upon which dismissal of the complaint is sought by this motion is, as to the first cause of action, that it fails to state a claim because it is not brought within the two year period prescribed by Sec. 16(b), and as to both causes of action, that the complaint discloses that the plaintiffs commenced the action before the expiration of the sixty day period after notice and demand upon the corporation.

The first question is whether the allegations of fraud, concealment and delayed discovery are sufficient to justify bringing the action more than two years after the profits were realized. Arguments may be marshalled on both sides of this question. In support of its motion defendant Young contends:

1. Since the action is based upon a newly created statutory right, unknown to the common law and since the statute creating the right provides its own time limitation such limitation constitutes a condition precedent to the maintenance of the action upon the statutory right and is, therefore, not capable of being tolled by fraud or by any other circumstance. The Harrisburg, 1886, 119 U.S. 199, 7 S.Ct. 140, 30 L.Ed. 358; Pollen v. Ford Instrument Co., 2 Cir., 1940, 108 F.2d 762; Partee v. St. Louis & S. F. R. Co., 8 Cir., 1913, 204 F. 970, 51 L.R.A.,N.S., 721; United States v. Dawes, 7 Cir., 1945, 151 F.2d 639, 642, certiorari denied, 327 U.S. 788, 66 S.Ct. 808, 90 L. Ed. 1015; Bowles v. Distilling Co., D.C. S.D.N.Y., 1945, 62 F.Supp. 20, 22.

2. The plain language of the statute requires the holding that the action is barred after the expiration of two years from the time when "such profit was realized". This plain meaning of the language is corroborated by comparison with other provisions of the same statute wherein Congress, when such was its intention, explicitly established the date of discovery of the facts as one of the controlling dates in determining the timeliness of the action. Thus in Sec. 9(e) of the same statute it is provided: "No action shall be maintained to enforce any liability created under this section, unless brought within one year after the discovery of the facts constituting the violation and within three years after such violation." Section 18(c) of the same statute provides: "No action shall be maintained to enforce any liability created under this section unless brought within one year after the discovery of the facts constituting the cause of action and within three years after such cause of action accrued".

Among the arguments against the construction advocated by the defendant are the following:

1. The Harrisburg case does not establish an inflexible rule that whenever a period of limitation is provided in the very statute creating the right the time limitation conditions the right. In Midstate Horticultural Co., Inc. v. Pennsylvania R. Co., 1943, 320 U.S. 356, 360, 64 S.Ct. 128, 130, 88 L.Ed. 96, the court said, "Origin of the right is not per se conclusive whether the limitation of time `extinguishes' it or `merely bars the remedy' with the accepted alternative consequences respecting waiver. Source is merely evidentiary, with other factors, of legislative intent whether the right shall be enforceable in any event after the prescribed time, which is the ultimate question. * * * whether the policy of interstate commerce legislation contemplates the one result or the other. This is the controlling question." See, also, Davis v. Mills, 1904, 194 U.S. 451, 454, 24 S.Ct. 692, 48 L.Ed. 1067.

2. In Exploration Co. v. United States, 1918, 247 U.S. 435, 38 S.Ct. 571, 572, 62 L. Ed. 1200, the court construed the language of the Act of March 3, 1891, 26 Stat. 1093, 43 U.S.C.A. § 1166 note, relating to land patents, which reads: "That suits by the United States to vacate and annul any patent heretofore issued shall only be brought within five years from the passage of this act, and suits to vacate and annul patents hereafter issued shall only be brought within six years after the date of the issuance of such patents." The court held that the defendant's fraud tolled the statute. At page 449 of 247 U.S., at page 574 of 38 S. Ct., the court said, "When Congress passed the act in question the rule of Bailey v. Glover 21 Wall. 342, 22 L.Ed. 636 was the established doctrine of this court. It was presumably enacted with the ruling of that case in mind. * * * It is not our belief that Congress intended that the Government should be deprived of title to public lands by those who add to the fraud by which they were obtained artifices which enabled them to conceal the fraudulent manner in which they were secured until the action was supposed to be barred by the lapse of six years."

3. Very recently, in Holmberg v. Armbrecht, 1946, 327 U.S. 392, 397, 66 S.Ct. 582, 585, 90 L.Ed. 743, 162 A.L.R. 719, the Supreme Court announced the proposition that into every federal statute of limitation is read the old chancery rule "that where a plaintiff has been injured by fraud and `remains in ignorance of it without any fault or want of diligence or care on his part, the bar of the statute does not begin to run until the fraud is discovered, though there be no special circumstances or efforts on the part of the party committing the fraud to conceal it from the knowledge of the other party.' * * * If the Federal Farm Loan Act had an explicit statute of limitation for bringing suit under § 16, the time would not have begun to run until after petitioners had discovered, or had failed in reasonable diligence to discover, the alleged deception by Bache which is the basis of this suit."

4. To contrue the statute as advocated by the defendant would defeat the principal purpose for which the statute was enacted. The provision of subdivision (a) which calls for the filing of monthly reports and the provisions of subdivision (b) which provide a remedy for the recovery of short-term profits are asserted to be complementary. The former provides the information which is essential for the application of the latter. It is incongruous to permit an insider to escape repayment of his profits by compounding his fault in failing to file the required reports.

These conflicting arguments focus upon the question whether, as defendant contends, the action is barred in compliance with the statutory command that no such suit shall be brought more than two years after the date such profit was realized, or whether, as plaintiffs and the Securities and Exchange Commission propose, there shall be read into this statute the "mitigating construction" which is "read into every federal statute of limitation", namely, that "the bar of the statute does not begin to run until the fraud is discovered". Holmberg v. Armbrecht, 327 U.S. 392, 397, 66 S.Ct. 582, 585, 90 L.Ed. 743, 162 A.L.R. 719. For light in resolving such a problem, we normally turn to the legislative history. In this instance such recourse is fruitless because the questioned language was first inserted in the statute by the conference report. No debate preceded it and none followed.

Appropriate hereto is the familiar comment which appears in...