Stella v. Graham-Paige Motors Corp. , 232 F.2d 299 ( 1956 )

FRANK, Circuit Judge.

The facts are fully stated in the opinion of the district judge, reported in Stella v. Graham-Paige Motors Corporation, D.C., 132 F.Supp. 100.

1. The trial judge, we think correctly, adopted the reasoning of Judge Samuel Kaufman’s decision, denying a summary judgment, reported in D.C., 104 F.Supp. 957, in holding that Graham-Paige, for purposes of Section 16(b), 15 U.S.C.A. § 78p, became the “beneficial owner” of 10% of the Kaiser-Frazer stock at the very moment when Graham-Paige purchased that stock. Before Judge Kaufman, the S. E. C. filed a brief as amicus curiae in support of what became Judge Kaufman’s interpretation.

2. We agree with the trial judge that the purchase of the stock occurred on February 10, 1947, and that therefore sales made before August 8, 1947 were within the statutory period. The date when a purchaser becomes a “beneficial owner” is that on which he “incurred an irrevocable liability to take and pay for the stock”, when his “rights and obligations became fixed”. Blau v. Ogsbury, 2 Cir., 210 F.2d 426, 427. Here Graham-Paige was to pay, in part, $3,-000. 000 in cash. It did not have that sum when the contract with Kaiser-Frazer was made but in the contract agreed to use its best efforts to borrow that sum from a certain bank in accordance with a letter agreement. This letter agreement provided that the bank’s obligation to make the loan was on condition that the Henry J. Kaiser Company would guaranty it. The agreement with Kaiser-Frazer provided, in effect, that, if Graham-Paige was unable to obtain the loan from the bank in accordance with the letter agreement, Graham-Paige had the election to terminate the agreement with Kaiser-Frazer. As the trial judge said [132 F.Supp. 105]: “There is no evidence * * * that the Henry J. Kaiser Company became bound to execute the guaranty at any time prior to the closing meeting held on February 10, 1947 when it did so.” It follows that, until that date, Graham-Paige had not incurred “an irrevocable liability to take and pay for the stock.” ¹

In Blau v. Ogsbury, supra, the question was when the holder of an option to buy stock became the “beneficial owner.” We held that it was not (a) the date when he acquired the option, nor (b) the day when, having exercised it, he paid for the stock and obtained legal title to it, but (c) the day when he exercised the option with the result that he had then a fixed right and obligation under an ex-ecutory contract. See also Park & Tilford v. Schulte, 2 Cir., 160 F.2d 984, 987 where we said that, upon the exercise of an option, the optionee becomes an “insider” and thus within the Congressional purpose to “protect the outside stockholders against at least short-swing speculation by insiders with advance information.” Our reasoning was that one who holds an unexercised option is not usually in a position to obtain such information from the company. Here Graham-Paige, as long as it had an election to back out of the agreement to purchase, was not an “insider” under Section 16 (b). That election continued until the Henry J. Kaiser Company signed the guaranty of the loan on February 10, 1947.²

3. The trial judge found — we think correctly — that Graham-Paige’s statements of profit in the amount of $434,787.86 sufficed to establish a prima facie case for plaintiff. Significantly, the judge refused to make a finding, requested by defendant Graham-Paige, that there were no profits. But the judge apparently assumed that plaintiff, despite his prima facie case, continued to bear the burden of proving that there were profits and in what amount; therefore, as defendant’s proof left the judge uncertain in this respect, he decided for the defendant. So we incline to understand the judge’s reasoning as indicated, e. g., by his statement that, “Plaintiff’s prima facie proof * * * has been shown to be unacceptable.”

If so, we think the judge erred. In Gratz v. Claughton, 2 Cir., 187 F.2d 46 we held that, under Section 16(b), a “beneficial owner” who buys and sells within the statutory period is to be regarded as a fiduciary who breaches his duty of loyalty (i. e. his duty not to engage in self-dealing) and who, in such circumstances, must account for his profits. Elsewhere we have held that, once a cestui shows a breach of such a duty and prima facie proof of a maximum amount of profits made by the fiduciary, then the fiduciary has the burden of proving to what extent the profits were less than this maximum — especially where the fiduciary’s breach is responsible for the difficulty or impossibility of proving the amount with certainty — and that consequently, if the fiduciary’s proof leaves the amount uncertain, judgment goes against him for the maximum figure. See Perlman v. Feldmann, 2 Cir., 219 F.2d 173, 177, 178; York v. Guaranty Trust Co. of New York, 2 Cir., 143 F.2d 503, 517; Phelan v. Middle States Oil Corp., 2 Cir., 220 F.2d 593, 600-601, 613; President and Directors of Manhattan Co. v. Kelby, 2 Cir., 147 F.2d 465, 476; Upson v. Otis, 2 Cir., 155 F.2d 606; cf. Bigelow v. R. K. O. Radio Pictures, 327 U.S. 251, 265-266, 66 S.Ct. 815, 90 L.Ed. 1040; Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S. 555, 51 S.Ct. 248, 75 L.Ed. 544; Package Closure Corp. v. Sealright Corp., 2 Cir., 141 F.2d 972, 979.³

However, since it is not entirely clear what the judge would have found — as to whether Graham-Paige discharged its proof-burden — had he read! the foregoing, in the interest of justice we remand with directions that he make' a specific finding on that issue, in the light of what we have said above.⁴

1 . Defendant argues that the word “purchase” in Section 16(b) must be defined according to Section 3(a) (13) which provides, “When used in this chapter, unless the context otherwise requires * * * The terms ‘buy’ and ‘purchase’ each include any contract to buy, purchase, or otherwise acquire.” The words we have italicized destroy defendant’s contention. For the relevant portion of Section 16(b) deals with a person who is directly or indirectly “the beneficial owner” of more than 10% of any class of any registered equity security. Since Graham-Paige was not irrevocably bound to purchase until February 10, 1947, it was not previously the “beneficial owner,” directly or indirectly.

2 . The S. E. C.’s position on when a person becomes a “beneficial owner” by the purchase of stock coincides with our interpretation. In an opinion, the General Counsel stated;

“In my opinion an officer, director or stockholder is to be deemed to have acquired beneficial ownership of a security at the time when he takes a firm commitment for the purchase thereof, and to divest himself of such beneficial ownership at the time when he takes a firm commitment for the sale thereof. If it is necessary that certain conditions be satisfied prior to the consummation of the purchase or sale, and if it is uncertain whether such conditions will be satisfied, then it would appear that the officer, director, or stockholder would not acquire beneficial ownership, or divest himself thereof, until such time as such conditions are satisfied and the undertaking to purchase or sell becomes a firm commitment.” 11 Fed.Reg. 10968.(1946). See also, Cook and Feldman, Insider Trading Under the Securities and Exchange Act, 66 Harvard L.Rev. 385, 401-402; Rubin and Feldman, Statutory Inhibitions Upon Unfair Use of Corporate Information by Insiders, 95 U. of Pa.Law Rev. 468, 481-492 (1947).

3 . The judge ruled that, because there could be but one buyer of the Graham-Paige assets, the willing-seller-willing-buyer rule of fair market value was inapplicable. Perhaps we need not consider that ruling in view of the ground of our decision. But it may bé well to say that we think this ruling erroneous. The willing-seller rule is not abrogated by the-absence of a market; the trier of the-facts must look to other relevant evidence of the price which a buyer would) pay. See United States v. Toronto, Hamilton & Buffalo Nav. Co., 338 U.S. 396, 402, 70 S.Ct. 217, 94 L.Ed. 195; United States v. Miller, 317 U.S. 369, 374-375, 63 S.Ct. 276, 87 L.Ed. 336; De La Rama S.S. Co. v. United States, 2 Cir., 208 F.2d 651, 655; Westchester County Park Comm. v. United States, 2 Cir., 143 F.2d 688, 692.

4 . If, on the basis of such a finding, Graham-Paige is liable, interest should be-added from the date of sale. See Blau v. Mission Corp., 2 Cir., 212 F.2d 77, 82.