Oliff v. Exchange Intern. Corp.
| Decision Date | 22 May 1978 |
| Docket Number | No. 76 C 4712.,76 C 4712. |
| Citation | 449 F. Supp. 1277 |
| Parties | Seymour A. OLIFF, Plaintiff, v. EXCHANGE INTERNATIONAL CORPORATION, the Issuer, a Delaware Corporation, and Edward L. Sax, Samuel Wm. Sax and the Continental Illinois National Bank and Trust Company of Chicago, as Co-Trustees of the Marital and Residuary Trusts under the Last Will of George D. Sax, Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
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Jerrold M. Shapiro, Chicago, Ill., for plaintiff.
Donald E. Egan, Lee Ann Watson, Katten, Muchin, Gitles, Zavis, Pearl & Galler, Chicago, Ill., for defendant Exchange Intern. Corp.
William T. Kirby, Roger J. McFadden, Michael B. Roche, Hubachek, Kelly, Rauch & Kirby, Chicago, Ill., for defendant Rhoda Sax.
Walter Roth, Selwyn Zun, Robert W. Gettleman, Wilson P. Funkhouser, D'Ancona, Pflaum, Wyatt & Riskind, Chicago, Ill., for defendants Samuel Wm. Sax and Exchange Intern. Bank of Chicago.
Richard J. Prendergast, Kevin M. Forde, Chicago, Ill., for defendants Edward L. Sax and Continental Ill. Nat. Bank & Trust Co. of Chicago.
This cause is before the court on the crossmotions of plaintiff Seymour A. Oliff; defendant Exchange International Corporation hereinafter EIC; and defendants Edward L. Sax,1 Samuel Wm. Sax, and the Continental Illinois National Bank and Trust Company of Chicago,2 as co-trustees of the trusts of George D. Sax, for summary judgment.3 For the reasons hereinafter stated, the motion of the plaintiff is granted, and the motions of the defendants are denied.
Plaintiff has brought this action against EIC and the co-trustees of the trusts of George D. Sax — Edward L. Sax, Samuel Wm. Sax, and the Continental Illinois National Bank and Trust Company of Chicago. The jurisdiction of this court is invoked pursuant to section 27 of the Securities Exchange Act of 1934 (15 U.S.C. § 78aa) and is not disputed.
Plaintiff's action is a stockholder derivative suit in the name of and on behalf of the defendant EIC. Pursuant to section 16(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78p(b)) hereinafter section 16(b),4 he seeks to recover profits and interest from an alleged purchase and sale within six months by the co-executors of the estate of George D. Sax as 10 percent beneficial owners of EIC stock. Plaintiff states that he requested defendant EIC to compel an accounting by the co-executors of the estate of George D. Sax for the profits. Defendant EIC responded to plaintiff in a letter of November 23, 1976, that it would take no action with respect to the estate's transactions involving EIC stock. After EIC's letter, plaintiff brought his suit. Plaintiff seeks judgment in the amount of $115,976, the profit from the alleged purchase and sale, as well as interest and fees.
Plaintiff and defendants have filed cross-motions for summary judgment with briefs supporting, answering, and replying. Edward L. Sax and the Continental Illinois National Bank and Trust Company of Chicago, having been substituted as trustees of the trusts of George Sax for Rhoda Sax and Exchange National Bank of Chicago hereinafter ENB, respectively, have formally adopted the motions and briefs of their predecessor trustees (see notes 1-3 supra).
All parties agree that the transactions alleged to be a purchase and sale did occur within a six-month period. The parties further agree that the estate of George Sax was a beneficial owner of over 10 percent of the common stock of EIC. This percentage of stock ownership subjects the estate to the potential for section 16(b) liability. The only dispute is over whether the legal effect of the stock transactions, in which the estate of George Sax was involved, constituted a purchase and sale within the ambit of section 16(b). Neither party raises a material issue of fact; their disagreement is over the legal significance of the facts. Thus, with all parties moving for summary judgment and conceding no genuine issue of material fact, and the court agreeing, this case will be decided as a matter of law. Illinois Migrant Council v. Campbell Soup Co., 438 F.Supp. 222, 225 (N.D.Ill.1977).
George Sax, deceased, made two transfers of shares of EIC stock to the Sax Foundation in 1972 and 1973, respectively. These transfers were found to be acts of "self-dealing" by the Internal Revenue Service. After the Internal Revenue Service's determination, the estate of George Sax rescinded the acts of self-dealing and obtained the EIC shares previously transferred from the Sax Foundation. This transaction is alleged by the plaintiff to be a purchase within the meaning of section 16(b).
George Sax established the Sax Foundation and prior to his death on March 12, 1974, was one of the trustees of the Sax Foundation.5 At all times relevant to this litigation, the trustees, in addition to the estate of George Sax, were Dr. Harry Benaron, Barnet Hodes, Rhoda B. Sax, and Samuel Wm. Sax.
On December 28, 1972, George Sax donated $75,000 in cash to the Sax Foundation. On January 4, 1973, he sold 6,818 shares of EIC stock for $74,998 to Langill & Co., a registered broker-dealer. On the same day, the Foundation bought the 6,818 shares of EIC stock from Langill & Co. for $75,098.
A similar transaction took place on November 28, 1973, when George Sax sold 7,500 shares of EIC stock to Langill & Co. for $75,000. On the same day, the Foundation purchased 7,500 shares of EIC stock from Langill & Co. for $75,100, with payment being made on December 4, 1973. On December 3, 1973, George Sax gave $75,000 in cash to the Foundation.
The Internal Revenue Service determined that the stock transfers by George Sax to the Sax Foundation constituted taxable acts of "self-dealing" by a disqualified person with a private foundation, within the meaning of section 4941 of the Internal Revenue Code. By letter of July 28, 1975, from the Internal Revenue Service to the estate of George Sax and the trustees of the Sax Foundation, tax assessments on the estate and the trustees of the Sax Foundation were proposed. The proposed tax assessments were due only if the acts of self-dealing were not "undone" within the correction period specified in section 4941(e)(3) and (e)(4) of the Internal Revenue Code ().
An initial protest was filed to the assessment. Nonetheless, after an IRS District Conference, Joseph Golman, the certified public accountant for the estate of George Sax, the co-executors of the estate, and the attorneys for the estate concluded that the IRS position could not be successfully challenged. Accordingly, on December 22, 1975, the estate of George Sax paid the Sax Foundation $150,198 (the amount of money paid by the Foundation to Langill & Co. for the EIC stock), and the Foundation transferred 14,318 shares of EIC stock (the same number of shares of EIC stock as were sold to it by Langill & Co.) to the estate of George Sax. The shares were transferred at a price of $10.49 per share, the same price at which they were transferred two to three years previously. After the transfer of EIC stock to the estate, the Internal Revenue Service abated the proposed tax assessments, as the transaction constituted a correction of George Sax's acts of self-dealing.
In January and February of 1976, Rhoda Sax and the majority co-executors of the estate of George Sax filed separate petitions for court approval of offers made to purchase EIC stock held by the estate. On February 9, 1976, a judge of the Cook County probate court, upon hearing the parties' petitions, determined that the shares of EIC stock should be sold to the highest bidder through a private judicial sale. On May 7, 1976, the sale of the shares of EIC stock was made pursuant to secret bids submitted to the probate court. This transaction is alleged by the plaintiff to be a sale within section 16(b).
The Last Will of George D. Sax was executed on May 13, 1971, and was admitted to probate on May 15, 1974. By Article A-VII of the will, Rhoda Sax, Samuel Wm. Sax, and ENB were appointed as executors of the estate. The same parties were appointed as testamentary trustees of George Sax's marital, family, and other trusts. Edward L. Sax was named as the successor trustee to Rhoda Sax and Samuel Wm. Sax. (Section A7.02). Provision was made for the Exchange National Bank to resign and appoint a successor trustee. (Section A7.03). Successor trustees were vested with the rights and obligations of the trustees named in the will. (Section A7.03). By the will, the majority of the executors or trustees were authorized to act on behalf of the estate. The nonconcurring executor or trustee was relieved of responsibility and liability for any such action or inaction. (Section A7.05). As the wife of George Sax, Rhoda Sax was given the power, pursuant to the will, to determine whether to retain any unproductive property. The executor or trustee, upon notice, was directed to cause this property to become productive by sale within a reasonable time. (Section A7.11). The trustee was given complete power to sell personal property at any time through a public or private sale. (Section B2.02(B)). The executor was given the same power as the trustee with respect to the estate. In addition, the will provided that the executor could exercise its power without prior approval of any court. (Section B2.03). The co-executors — Rhoda Sax, Samuel Wm. Sax, and ENB — were issued letters testamentary on May 15, 1974. The transactions herein at issue concern the defendants in their capacity as executors of the estate of George Sax. This action has been brought against the defendants in their present capacity as testamentary trustees of the trusts of George Sax (see note 3 supra).
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