Magida v. Continental Can Company

• Decision Date: 02 April 1956
• Docket Number: No. 275,Docket 23904.,275
• Citation: 231 F.2d 843
• Parties: Paul MAGIDA, a stockholder of The Vulcan Detinning Company, suing on behalf of himself and all other stockholders similarly situated, and on behalf and in the right of The Vulcan Detinning Company, Plaintiff-Appellee, v. CONTINENTAL CAN COMPANY, Inc., Defendant-Appellant, and The Vulcan Detinning Company, Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

231 F.2d 843 (1956)

Paul MAGIDA, a stockholder of The Vulcan Detinning Company, suing on behalf of himself and all other stockholders similarly situated, and on behalf and in the right of The Vulcan Detinning Company, Plaintiff-Appellee, v. CONTINENTAL CAN COMPANY, Inc., Defendant-Appellant, and The Vulcan Detinning Company, Defendant-Appellee.

No. 275, Docket 23904.

United States Court of Appeals Second Circuit.

Argued March 5, 1956.

Decided April 2, 1956.

Writ of Certiorari Denied June 4, 1956.

COPYRIGHT MATERIAL OMITTED

Mark F. Hughes, New York City (Willkie, Owen, Farr, Gallagher & Walton and Vincent R. FitzPatrick, New York City, on the brief), for defendant-appellant.

Morris J. Levy, New York City, for plaintiff-appellee.

Before CLARK, Chief Judge, MEDINA, Circuit Judge, and GALSTON, District Judge.

Writ of Certiorari Denied June 4, 1956. See 76 S.Ct. 1031.

CLARK, Chief Judge.

This is an action under § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), for recovery of shortswing profits claimed to be due The Vulcan Detinning Company on a purchase and sale of its common stock by Continental Can Company, Inc., owner of more than 10 per cent of Vulcan's equity securities. The action is brought by one Paul Magida, a stockholder of Vulcan. Judge Ryan gave judgment for plaintiff in right of the corporation for the amount of the profits, plus interest from the date of realization.

In April, 1950, Continental purchased 4,115 shares of Vulcan common stock at a cost of $118,279.25 from the executor of the estate of F. P. Assman, to whom letters testamentary were issued in September, 1947. At the time of Assman's death in August, 1947, he had owned 823 shares of Class A stock, which in February, 1948, were exchanged for the 4,115 shares later sold to Continental. On August 31, 1950, each share of Vulcan common stock was reclassified into two shares. On September 12, 1950, Continental sold 120,000 shares at $20.25 per share, resulting in a net profit on the 4,115 shares of $34,551.85. This is the amount here in issue.

In March, 1951, plaintiff purchased ten shares of Vulcan common stock; and in May, 1951, through his attorney, he requested Vulcan to institute suit to recover the profit concededly made by Continental on the sale. The president of Vulcan refused to do so on the grounds that the sale was made at Vulcan's suggestion and for the best interest of Vulcan stockholders, and that to bring such suit would clearly violate the principles of fair play. More than sixty days thereafter plaintiff instituted this suit against Continental and Vulcan.

Continental pleaded three affirmative defenses, and at the trial moved for leave to amend its answer so as to plead a fourth complete affirmative defense and an additional partial affirmative defense. Neither the third defense nor the additional partial defense is urged here.¹ Of those before us, the first defense alleged, in substance, that Vulcan and its stockholders were estopped from claiming any profits realized by it on the purchase and sale of Vulcan common stock and that any such recovery would be unjust, inequitable, and unconscionable, since the sale was made at the specific instance and request of Vulcan, was in its best interest and that of its stockholders, and was made pursuant to a plan conceived, developed, promoted, and consummated by Vulcan.

Conceding that the sale was made at Vulcan's request and for Vulcan's advantage, it also appears that the sale was of benefit to Continental because it would release to Continental a substantial amount of cash not presently available for use in its business. Further, Continental was the owner of more than a majority of Vulcan's voting securities, and Continental's affirmative vote was essential before any proposition could be approved by the stockholders of Vulcan. Judge Ryan could therefore justifiably find that the sale "was the free act, choice and decision of both Continental and Vulcan and that it served the interests of both."

But, apart from these factual considerations negativing the existence of an estoppel based on equitable principles, we think that as a matter of law the language and purpose of the statute preclude an estoppel based upon instigation by or benefit to the corporation whose shares are traded. See Park & Tilford v. Schulte, 2 Cir., 160 F. 2d 984, 989, note 1, certiorari denied 332 U.S. 761, 68 S.Ct. 64, 92 L.Ed. 347; Pellegrino v. Nesbit, 9 Cir., 203 F.2d 463, 467, 37 A.L.R.2d 1296; Jefferson Lake Sulphur Co. v. Walet, D.C.E.D.La., 104 F.Supp. 20, affirmed Walet v. Jefferson Lake Sulphur Co., 5 Cir., 202 F.2d 433, certiorari denied 346 U.S. 820, 74 S.Ct. 35, 98 L.Ed. 346. Even though Continental may have acted in good faith, may have overlooked the April purchase at the time of sale, and may not have made use of inside information of which the other stockholders were ignorant, these factors cannot operate to negate the statutory liability which exists "irrespective of any intention on the part of such beneficial owner * * *." Securities Exchange Act of 1934, § 16(b), 15 U.S. C. § 78p(b). See Gratz v. Claughton, 2 Cir., 187 F.2d 46, 49, certiorari denied 341 U.S. 920, 71 S.Ct. 741, 95 L.Ed. 1353; Smolowe v. Delendo Corp., 2 Cir., 136 F. 2d 231, 148 A.L.R. 300, certiorari denied Delendo Corp. v. Smolowe, 320 U.S. 751, 64 S.Ct. 56, 88 L.Ed. 446.

Since the policy of the statute is to protect minority stockholders and the public against manipulated market fluctuations, certainly this stockholder, who became such after the acts in question had taken place, cannot be estopped by corporate acts, even those having the apparent approval of a majority of stockholders. The action under § 16(b) is derivative in the sense that the corporation is the instrument, sometimes unwilling, for the effectuation of the statutory policy; but this so-called derivative nature of the right, when coupled with the doctrine of estoppel, cannot serve to defeat the very policy it was created to advance.

Appellant further contends that the securities are exempt from the operation of the Act by virtue of SEC Rule X-16A-4, 17 CFR § 240.16a-4, which at the time of these transactions exempted from the operation of § 16(a) and (b) "securities held in the estate of a deceased person during a period of 2 years following the appointment and qualification of the executor or administrator." Effective November 1, 1952, this rule was revised to read as follows:

"(a) During the period of twelve months following their appointment and qualification, securities held by the following persons shall be exempt from sections 16(a) and (b):

"(1) Executors or administrators of the estate of a decedent;"

Although appellant contends that this revised rule is a departure from the meaning of the previous one, it is in fact (except for the change in time period) only a clarification.² See Cook & Feldman, Insider Trading under the Securities Exchange Act, 66 Harv.L.Rev 385, 390. Under the old rule, therefore, the exemption attaches only during the 2-year period; and, since in this case the purchase admittedly took place more than 2 years after the qualification of the executor, the rule has no application. Appellant's position, apparently to the effect that once the shares have been held in an estate for the required 2...