Truncale v. Blumberg

• Decision Date: 14 October 1948
• Citation: 80 F. Supp. 387
• Parties: TRUNCALE v. BLUMBERG et al.
• Court: U.S. District Court — Southern District of New York

80 F. Supp. 387

TRUNCALE v. BLUMBERG et al.

United States District Court S. D. New York.

October 14, 1948.

Millard & Greene, of New York City (Milton Pollack, of New York City, of counsel), for plaintiff.

H. G. Pickering of Mudge, Stern, Williams & Tucker, all of New York City (Robert E. Walsh, of New York City, of counsel), for defendant J. Cheever Cowdin.

Roger S. Foster, of Washington, D. C., Gen. Counsel for Securities and Exchange Commission, amicus curiae.

MEDINA, District Judge.

In this action by a stockholder of Universal Pictures Company, Inc., brought in the right and on behalf of the Company after non-compliance by the Company with plaintiff's statutory request that the action be brought by it pursuant to Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78p(b), to recover profits allegedly realized by certain officers and directors of the Company, from transactions involving the purchase and sale and/or sale and purchase of equity securities of the Company within periods of less than six months, the defendant J. Cheever Cowdin moves for summary judgment and the plaintiff has made a cross motion for similar relief. The facts are not in dispute but a number of questions of law are presented, some of which are important and are said to be of first impression.

On March 4, 1941 Cowdin entered into an employment contract with Universal Pictures Company, Inc., to act as Chairman of the Board and Chief Financial Executive for a period commencing on April 3, 1941 and ending on December 31, 1947. At that time Universal Pictures Company, Inc. was an operating company engaged in the production of motion pictures and Universal Corporation was the owner and holder of approximately 92% of the common stock of Universal Pictures Company, Inc. and all of the outstanding shares of second preferred stock of Universal Pictures Company, Inc. Accordingly, concurrently with the execution of the employment contract Cowdin entered into a contract with Universal Corporation by which "in consideration * * * of the execution of the aforesaid employment agreement by the said Cowdin * * * and as an inducement for him so to do" Universal Corporation guaranteed the performance by Universal Pictures Company, Inc. of all the terms and conditions of the employment contract and, in addition, agreed to issue to Cowdin on December 31, 1941, and annually thereafter during his term of employment, warrants for the purchase of 5,000 shares of common stock, hereinafter referred to as 5,000 warrants. The agreement with Universal Corporation also provided:

"The best interests of the Corporation and its affiliates would be served if Cowdin's holdings of the Corporation's stock were materially increased because his personal ownership of a larger investment in the Corporation, or his right to purchase the same, would act as an incentive to him to make the Corporation's stock more valuable and would insure his loyalty to the welfare of the Corporation and its security holders."

In June 1943 Universal Pictures Company, Inc. was merged into Universal Corporation and, at the time of the merger, Universal Corporation changed its name to Universal Pictures Company, Inc. The surviving corporation, under the name of Universal Pictures Company, Inc., is the corporate defendant herein.

The 5,000 warrants were duly issued to Cowdin in December 1941, and annually thereafter as agreed. With reference to the periods involved in the present action, it will suffice to identify only the dates of December 12, 1945, December 16, 1946 and December 16, 1947 as the dates on which the 5,000 warrants were issued in each of those years.

Within the period relative to this action, that is to say, subsequent to January 23, 1945, Cowdin did not purchase, acquire or otherwise receive in any other way, directly or indirectly, any other warrants covering shares of common stock of the corporate defendant; nor did he purchase, acquire, or otherwise receive in any way, directly or indirectly, shares of common stock or other equity securities of the corporate defendant, other than the warrants above referred to; he did not exercise any of the warrants covering common stock of the corporate defendant; he did not sell any warrants nor did he sell any common stock or other equity securities of the corporate defendant.

The transactions which give rise to the controversy here were all gifts of warrants, received as aforesaid, these gifts being made, mostly in amounts ranging from fifteen to one hundred shares, but a few in amounts as large as 500 shares, to a great variety of charitable organizations such as the Los Angeles Community Chest, Roosevelt Hospital, New York Infirmary for Women and American Cancer Society. In every case the donees are indisputably bona fide religious, charitable or philanthropic institutions or organizations. Cowdin is not shown to have any interest in or any control over any of these charities. The gifts were in every way bona fide, and completely divested Cowdin of any interest in the warrants thus transferred.

On the face of the matter it seems nothing short of absurd to consider these gifts as "sales" within the meaning of Section 16(b). The notion that gifts to charity might result in "profits" to the donor seems equally fanciful. Indeed, against the background of a statute designed to raise the standards of fiduciaries and thus protect the outside stockholders against short-swing speculation by insiders with advance information, Smolowe v. Delendo Corporation, 2 Cir., 1943, 136 F. 2d 231, 235, 148 A.L.R. 300; Kogan v. Schulte, D.C.S.D.N.J.1945, 61 F.Supp. 604, it is hard to see any relation whatsoever between gifts to charities and trading for profit in the market place.

The argument is made, however, not only that the delivery of the warrants on the dates above referred to was a "purchase," but that the gifts to charity constituted "sales" for profit. Thus it is said that the Section covers not only a real sale or one which may substantially be viewed as such, but that, by the definition of Section 3(a) (14), 15 U.S.C.A. § 78c(a) (14), any transaction by which an owner may sell "or otherwise dispose of" equity securities is a sale. The "profit" is established in a most ingenious manner. The gift to charity is characterized as a "tax dodge"; and it is pointed out that, by taking a deduction on his income tax return of the market value of the warrants at the time of the gift, the donor gains an economic benefit which is the equivalent of a profit.

In this case Cowdin did include these gifts in his tax returns as contributions to charity for which he claimed deductions, but counsel would not concede that it would make any difference even if, through inadvertence or for some other reason, deductions for charitable contributions had not been made. It is argued that there is "profit" none the less, apparently on the theory that any "economic advantage" which might have been taken by one skilled in the intricacies of the tax laws would serve as a sufficient "profit" under Section 16(b), whether or not the donor had availed himself thereof.

On the other hand, it is argued on behalf of Cowdin that there never was any "purchase" of the warrants as they were issued pursuant to the terms of a contract; that, even if a "purchase" be found, this must have been made at the time of the execution of the contract and not at the time of the delivery of the warrants; that the gifts could not constitute "sales" within the meaning of the statute; that there was no profit in any event; and that if the warrants be deemed to have been "purchased," they were within the exception which provides "unless such security was acquired in good faith in connection with a debt previously contracted," it being the view of counsel for Cowdin that the contract pursuant to which the warrants were issued constituted in substance a "debt."

A reading of Section 16(b) would scarcely warrant an inference that a gift would be regarded as a "sale" within the meaning of that Section. Nor does the definition contained in Section 3(a) (14) carry us much further. It is there stated:

"(14) The terms `sale' and `sell' each include any contract to sell or otherwise dispose of."

The natural meaning to attribute to this language would seem to be that, for the purposes of Section 16(b), an executed sale would be included and also "any contract to * * * otherwise dispose of" the securities. Here there was no "sale" nor was there any contract "to otherwise dispose of" the warrants.

That all "acquisitions" are not "purchases" and all "disposals" not "sales," within the meaning of Section 16(b) seems demonstrable, and in accord with the definitions contained in Section 3(a) (13), 15 U.S.C.A. § 78c(a) (13) and Section 3(a) (14). When a person dies leaving a will in which the equity securities of an issuer are bequeathed, it is commonly said that he "disposes" of the property by the will, which takes effect upon his death. But this is not a "contract to dispose of" the securities; nor is it a sale. The statute does not state that a sale "means" any disposition...