Pellegrino v. Nesbit

• Citation: 203 F.2d 463
• Decision Date: 01 April 1953
• Docket Number: No. 13220.,13220.
• Parties: PELLEGRINO v. NESBIT et al.
• Court: U.S. Court of Appeals — Ninth Circuit

203 F.2d 463 (1953)

PELLEGRINO v. NESBIT et al.

No. 13220.

United States Court of Appeals Ninth Circuit.

April 1, 1953.

Kenny & Morris, Los Angeles, Cal., and Morris J. Levy, New York City, for appellant, Carmelo J. Pellegrino.

Latham & Watkins, Los Angeles, Cal., for appellee Consolidated Engineering Corp.

Willis Sargent and Sidney H. Wyse, Pasadena, Cal., for appellees William D. Nesbit, Hugh F. Colvin and James R. Bradburn.

Louis Loss, Associate General Counsel, Myer Feldman, Attorney, Securities and Exchange Commission, Washington, D. C., Arthur E. Pennekamp, Atty. S. E. C., San Francisco, Cal., amici curiae.

Before STEPHENS and ORR, Circuit Judges.

ORR, Circuit Judge.

This appeal is taken from an order of the District Court denying appellant's motion for leave to intervene, subsequent to entry of final judgments in the consolidated cases of Consolidated Engineering Corporation v. Nesbit (Consolidated Engineering Corporation v. Colvin, and Consolidated Engineering Corporation v. Bradburn), D.C. S.D.Cal.1951, 102 F.Supp. 112, for the purpose of appealing the decision in these cases to this court.

In October 1950 appellant, a stockholder in appellee corporation, requested the corporation to institute suit under the provisions of § 16(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78p(b),¹ against the individual appellees to recover profits realized by these officers of the corporation from their respective purchases and sales of the corporation's common stock within periods of less than six months. The letter in which this request was made also informed the corporation that in the event it did not institute suit within sixty days appellant himself would commence such suit on its behalf pursuant to the provisions of the statute. The corporation thereupon instituted suits against the named officers.²

The pleadings and a pre-trial stipulation of the original parties disclosed that the stock purchases had been made under option agreements entered into by the corporation and sixteen key employees for the purpose of encouraging these employees to remain in the employ of the corporation at a salary which the corporation was then able to pay. These options originally had little value, but had increased substantially in value by the time they were exercised. The employees found it necessary to sell concurrently a portion of the stock taken up under the option agreements in order to obtain sufficient funds for exercise of their rights under the options. The so-called short-swing profits which resulted were the subject of the suits. After trial on certain limited issues of fact as to which there had been no stipulation, the District Court entered judgments for the individual appellees, holding that the corporation was estopped "to recover profits of a transaction which the corporation itself initiated and set up and which it (at least inferentially) assured defendants was valid." 102 F.Supp. at page 114.

Upon being notified by the corporation of the trial court's action and that the corporation's board of directors had decided not to appeal from the adverse judgments, appellant made his motion for leave to intervene as plaintiff for the purpose of appealing from these judgments. The present appeal from denial of this motion is being contested by both the individual officers who were defendants below and the corporation which, prompted by appellant's request, initiated the original suits. The Securities and Exchange Commission, which participated as amicus curiae in support of the plaintiff below, has filed an amicus curiae brief with this court supporting the position of the appellant.

Appellees first contend that the motion for leave to intervene was not made upon "timely application" as required by Rule 24(a) of the Federal Rules of Civil Procedure.³ In determining the timeliness of such a motion a court should consider not only the period of time that has passed, but also the circumstances contributing to the delay. Thus, appellant forcefully argues that it was unnecessary to seek intervention at an earlier stage of the present litigation because a failure "diligently to prosecute" on the part of the corporation occurred within the meaning of § 16(b) of the Securities Exchange Act, 15 U.S.C.A. § 78p(b), for the first time when the corporation's board of directors decided not to appeal from the judgments of the District Court.

Intervention should be allowed even after a final judgment where it is necessary to preserve some right which cannot otherwise be protected. Wolpe v. Poretsky, 1944, 79 U.S.App.D.C. 141, 144 F.2d 505, certiorari denied 323 U.S. 777, 65 S.Ct. 190, 89 L.Ed. 621; United States Casualty Co. v. Taylor, 4 Cir., 1933, 64 F.2d 521, certiorari denied 290 U.S. 639, 54 S.Ct. 56, 78 L.Ed. 555; American Brake Shoe & Foundry Co. v. Interborough Rapid Transit Co., D.C.S.D.N.Y.1942, 3 F.R.D. 162. Such a right which cannot otherwise be protected than by intervention is the right to appeal from the judgments entered on the merits by the District Court. This principle was applied to litigation under § 16(b) in Park & Tilford v. Schulte, 2 Cir., 1947, 160 F.2d 984, certiorari denied 332 U.S. 761, 68 S.Ct. 64, 92 L.Ed. 347, where the Second Circuit allowed a stockholder to intervene subsequent to final judgment in a suit to which the stockholder had not been a party. In the instant case appellant had no right to intervene so long as the corporation was diligently prosecuting the action. Appellant was first informed of the decision by the corporation not to appeal the judgments by a letter dated November 15, 1951, and mailed from New York City to Los Angeles. The motion for leave to intervene was filed on November 27, 1951. Such motion was, under the circumstances, timely. Appellees assert that certain defects existed in the form of the motion as made, but the record is silent as to whether these matters were raised before the District Court. The alleged defects not being jurisdictional we, therefore, refuse to consider them. Where, as here, intervention is sought as a matter of right, an order denying intervention has the degree of definiteness and finality necessary to support an appeal therefrom, since there is no other way in which the stockholder can assert the particular interest which he alleges warrants intervention. Dickinson v. Petroleum Conversion Corp., 1950, 338 U.S. 507, 70 S.Ct. 322, 94 L.Ed. 299; Brotherhood of Railroad Trainmen v. Baltimore & Ohio R. Co., 1947, 331 U.S. 519, 67 S.Ct. 1387, 91 L.Ed. 1646; Park & Tilford v. Schulte, supra.

The sufficiency of the interest appellant is seeking to protect is challenged by appellees. They have emphasized that since appellant averred in his affidavit that he now owns but two shares of stock in the corporation any recovery in behalf of the corporation will result in an exceedingly small gross recovery applicable to appellant's stock interest. We are not convinced that this factor is significant. Section 16 (b) establishes a statutory policy intended to prevent the abusive practices which were found to result from short-swing insider trading of securities, practices which are harmful both to the other stockholders and to the general public. See Sen.Rep.No. 1455, 73d Cong., 2d Sess.(1934). To the extent the statute is intended to protect the public from market fluctuations intentionally caused by or within the prior knowledge of corporate insiders seeking short-swing profits, the plaintiff in a § 16(b) suit is merely an instrument for effectuating the statutory policy. The statute states that where an issuer fails to bring suit within sixty days after request or fails diligently to prosecute the same thereafter "the owner of any security of the issuer" (italics ours) may institute suit. Such suit is "in behalf of the issuer" rather than for the personal benefit of the stockholder plaintiff. Thus the stockholder need not have owned stock at the time the transaction of which he complains took place. Benisch v. Cameron, D.C.S.D. N.Y.1948, 81 F.Supp. 882. In view of the statutory policy involved we need not be concerned with either the substantiality of appellant's shareholder interest, see Twentieth Century-Fox Film Corp. v. Jenkins, D.C.S.D.N.Y.1947, 7 F.R.D. 197, or appellant's motive in seeking to take part in the litigation. Magida on behalf of Vulcan Detinning Co. v. Continental Can Co., D.C. S.D.N.Y.1951, 12 F.R.D. 74; cf. Young v. Higbee Co., 1945, 324 U.S. 204, 214, 65 S. Ct. 594, 89 L.Ed. 890. We note, however, that there is no indication in the record that appellant's motive in seeking leave to intervene was improper.

Appellant was entitled to intervene, as a matter of right, in accordance with the provisions of § 16(b) if appellee corporation has failed "diligently to prosecute" the suits it instituted to recover the short-swing profits of its officers. Appellees rely upon the general rule that a corporation's board of directors may, subject to the exercise of good faith and a reasonable business judgment, determine whether the best interests of the corporation and its stockholders would be served by engaging in litigation. This argument ignores the limitations imposed upon the usual discretion of a board of directors by the language of § 16(b). Any stockholder has a right to institute suit if the corporation fails to do so, regardless of the good faith or reasonable business judgment of the board of directors. Moreover, once it commences litigation, the company's duty is not merely to determine diligently whether prosecution of the suit should continue, but, rather, the company has a duty diligently to prosecute the suit. A realistic approach to § 16(b) litigation requires recognition that a corporation will generally be reluctant to bring suit against its own beneficial owners, directors or officers. Such reluctance may have been the reason why the instant suits were not commenced until after formal request was made...