Kogan v. Schulte

• Decision Date: 20 June 1945
• Citation: 61 F. Supp. 604
• Parties: KOGAN v. SCHULTE et al.
• Court: U.S. District Court — Southern District of New York

61 F. Supp. 604

KOGAN v. SCHULTE et al.

District Court, S. D. New York.

June 20, 1945.

Nathan B. Kogan, of New York City, for plaintiff.

Ernst, Gale, Bernays, Falk & Eisner, of New York City (Edwin A. Falk and Edgar A. Samuel, both of New York City, of counsel), for defendant David A. Schulte.

Hirson & Bertini, of New York City (Max L. Rothenberg, of New York City, of counsel), for defendant Park & Tilford, Inc.

Roger S. Foster, Sol., Milton V. Freeman, Asst. Sol., and W. Victor Rodin, Atty., all of Philadelphia, Pa., for Securities

and Exchange Commission, amicus curiae.

Francis M. Shea, Asst. Atty. Gen., John F. X. McGohey, U. S. Atty., and John B. Creegan, Asst. U. S. Atty., for the United States.

LEIBELL, District Judge.

Plaintiff, Marjorie D. Kogan, purchased 50 shares of Park & Tilford, Inc., common stock on the New York Stock Exchange on March 10, 1944. She sold 25 shares on April 28, 1944. The remaining 25 shares she registered in her own name on the transfer records of the corporation on May 3, 1944. Since March 10, 1944, she has been an owner of Park & Tilford common stock, and since May 3, 1944, she has been a stockholder of record. The corporation, Park & Tilford, Inc., is a Delaware corporation and its common stock is listed on the New York Stock Exchange.

On April 28th, 1944, her attorneys notified the corporation, Park & Tilford, Inc., that David A. Schulte had realized profits from purchases and sales of the stock of the corporation in violation of the Securities Exchange Act of 1934 (§ 16(b) and that the profits were recoverable by the corporation. Her attorneys requested that appropriate action be taken against Mr. Schulte within sixty days or else plaintiff would begin suit. On June 19th, as a result of that demand, the defendant Schulte submitted to the corporation a statement of his profits, pursuant to said section 16(b) of the Act, and enclosed his check for $264,580.50 "representing a sum equal to such profits". His letter of transmittal also added that no one participated with him in any of the transactions and that no brokerage account was maintained by him in the name of anyone but himself. Thereafter Mr. Schulte repaid an additional sum of $247.07, making a total of $264,827.57. Apparently this additional payment followed an examination of his statement by an accountant for plaintiff, but just what it represented is not clear.

The statement accompanying Mr. Schulte's payment of $264,580.50 covers sales made by him of stock which he purchased between October 20, 1942, and January 20, 1944. I have examined that statement and there are no records before me from which I can determine its accuracy, or whether the rule for computing profits as set forth in Smolowe v. Delendo Corporation, 2 Cir., 136 F.2d 231, 239, 148 A.L.R. 300, has been followed. Dates of purchases are given but no dates of sales and no prices for specific transactions. A footnote to the statement reads: "The Proceeds as above shown are from the highest priced sales within a six months period before and/or after the dates of the purchases." The rule laid down in the Smolowe case is stated as follows: "The only rule whereby all possible profits can be surely recovered is that of lowest price in, highest price out — within six months."

For 7,100 shares purchased between October 21, 1941, and September 22, 1942, the statement lists "no applicable sales". For purchases of 1,000 shares on December 10, 1942, 500 shares on December 18, 1942, 200 shares April 1, 1943, 343 shares April 2, 1943, 800 shares April 24, 1943, and 59 shares May 28, 1943, there is also the notation "no applicable sales", although there do appear sales for stock purchased between the dates of October 20, 1942, and June 2, 1943. I am not called upon to inquire further into those transactions on this motion because the motion is limited in its scope and seeks a partial summary judgment in relation to certain other transactions which admittedly are not included in the computations submitted by Mr. Schulte with his letter to the corporation dated June 19, 1944 enclosing the check for $264,580.50, nor are they covered by the later check of $247.07.

The present motion is for "* * * an order allowing the plaintiff to have partial summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure, against the defendant David A. Schulte, to the extent that the said David A. Schulte be directed to account for all profits made by him as a result of the purchase on January 31st, 1944, of 342 shares of $1.00 par common stock of the defendant Park & Tilford, Inc. on the conversion of 274 shares of 6% cumulative preferred stock of the said defendant Park & Tilford, Inc., and the subsequent sale or sales of 342 shares of common stock by the defendant David A. Schulte within a period of six months after the acquisition thereof on January 31st, 1944 and directing the defendant David A. Schulte to pay over the profits realized thereon together with interest to the defendant Park & Tilford, Inc. and for a severance of the action as to the other matters alleged in the complaint".

Park & Tilford, Inc., opposes plaintiff's motion on the grounds that the transactions for which summary judgment is requested are not embraced by the complaint, and that the motion threatens to prejudice the rights and interests of Park & Tilford, Inc. in a pending suit for $500,000 which the corporation has brought against the David A. Schulte Trust and which involves legal issues raised by the present motion.

Paragraph 12 of the complaint alleges that as a result of defendant Schulte's trading, and that of his 1924 corporation, in stock of Park & Tilford, Inc., between 1942 and 1944, during the six months' periods referred to in Title 15 U.S.C.A. § 78p (b), § 16(b) of the Securities Exchange Act of 1934, he earned profits at least in the sum of $1,000,000 to which Park & Tilford, Inc., is entitled under the provisions of the statute. And paragraph 15 charges that the representations by Schulte that his profits were $264,580.50 plus the $247.07 (a total of $264,827.57) were false and that he had derived additional undisclosed profits. It is also charged that the defendants Eisner and Pheifer, directors of Park & Tilford, Inc., conspired with Schulte to conceal such facts from the stockholders and to prevent the defendant, Park & Tilford, Inc., from instituting any action to recover the additional profits and failed and refused to have such action instituted. It is also alleged that the individual defendants were directors of Park & Tilford, Inc. and constituted a majority of the Board. Mr. Schulte's answer pleads as a special defense that he paid $264,827.57 to Park & Tilford, Inc., "in full of all money owing" said corporation. In my opinion the transactions, on which partial summary judgment is sought, are embraced within the broad allegations of the complaint, but if the complaint were not sufficiently broad, it might be deemed amended to include the essential allegations of the affidavits as to these particular transactions. Seaboard Terminals Corporation v. Standard Oil Co., 2 Cir., 104 F.2d 659.

I fail to see how the decision of this motion would prejudice the issues involved in the suit brought by the corporation against the Schulte Trust, which was instituted November 17, 1944. It appears that the Schulte Trust owned 6,604 shares of preferred stock of Park & Tilford, Inc. which the Trust converted into 8,255 shares of common stock on January 19, 1944. The Schulte Trust served an amended answer March 9, 1945, in that action, raising certain special defenses; and at least one of them is not involved in this litigation. The private arrangement with David A. Schulte to abide by the result of the suit against the Schulte Trust does not meet the requirements of section 16(b), which permits suit by an owner of a security against the insider for the profits if the issuer (Park & Tilford, Inc.) "shall fail or refuse to bring such suit within sixty days."

The individual defendants in the case at bar urge that partial summary judgment should not be granted because there is an issue of fact as to whether the demand the plaintiff made on Park & Tilford, Inc., to sue the defendant Schulte was broad enough to include the sale of the 342½ shares, and as to whether plaintiff's claim that further demand upon the corporation would be futile is well founded. I believe that the demand was broad enough. Further, the composition of the Park & Tilford's board of directors, their close business and family relationship to David A. Schulte, their failure to take any action against the defendant Schulte until demand was made by plaintiff, although some of them probably knew of his stock operations, and their failure to take any action against the Schulte Trust until one of the directors, Mr. Pheifer, received a letter from the Securities and Exchange Commission calling his attention to the conversion by the Trust of preferred stock into common stock on January 19, 1944, and its sale of the common stock at a profit within six months thereafter — all that presents a situation which in my opinion would excuse a further demand, if plaintiff's first demand were not broad enough. In the usual stockholder's derivative action against directors, a showing of such facts would support an allegation in the complaint that a demand on the directors to bring the suit in the name of the corporation would be futile. Cohen v. Industrial Finance Corporation, D.C., 44 F. Supp. 491, at page 495.

The defendant Schulte contends that the transactions on which partial summary judgment is sought are not covered by section 16(b) of the Securities Exchange Act of 1934.

The following facts appear to be undisputed: That on or prior to May 10, 1942, the defendant, David A. Schulte, became the owner of 274 shares of preferred stock of Park & Tilford, Inc.; that the board of directors of the corporation at a...