Upson v. Otis

155 F.2d 606

• Court: Court of Appeals for the Second Circuit
• Decided: May 23, 1946
• Docket: 267
• Status: Published

Opinions

FRANK, Circuit Judge. .

As Automatic had not registered under the Investment Company Act at the time of the occurrence of the transactions covered by the complaint, § 17(a) of that Act has no bearing here.¹ Under Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188, 114 A.L.R. 1487, we must therefore look to New York decisions. It would seem that they follow the usual conflict of laws rule in referring to Delaware “law” to determine the fiduciary obligations of directors of a Delaware corporation.²

The Delaware decisions are in accord with Irving Trust Company v. Deutsch, 2 Cir., 73 F.2d 121; see Guth v. Loft, Inc., 23 Del.Ch. 255, 5 A.2d 503, 511 ; cf. Bovay v. H. M. Byllesby & Co., Del. Sup., 38 A.2d 808. Whether, on the facts now presented, the individual defendants would have been liable had they bought the Majestic stock from DuMont we need not consider.³ For Automatic bought that stock from DuMont, and these directors not only bought it from Automatic but borrowed the purchase price from that company. Thus (on the facts as now presented), in the most flagrant and inexcusable manner, they violated their obvious fiduciary obligations. Even if New York internal “law” applied, the directors would be liable in such circumstances. See Blau-stein v. Pan American Petroleum Co., 293 N.Y. 281, 56 N.E.2d 705.

The Delaware courts, applying to wrongdoing directors the rules of accountability applicable to wrongdoing trustees, hold that a wrongful sale by directors to themselves of property owned by their corporation is treated as a conversion. Consequently, they hold that, where a director, has improperly purchased stock from his company and then resold it, the company may elect either to hold the director for the profits he has made or ask a recovery which will restore the company “to the status quo ante as nearly as the facts and circumstances * * * will permit”; if it elects the latter, it may recover “the highest intermediate value of the stock from the time of its conversion up to a reasonable time after knowledge is acquired of the unlawful act or conversion.” Cahall v. Bur-bage, 14 Del.Ch. 55, 121 A. 646, 649.

So far as appears on this record, the improper purchases by the directors of the Majestic stock from Automatic seem to have occurred in Delaware; if so, the Delaware rule as to damages applies. But it might be urged that, as the evidence concerning the place of those purchases is not clear, we should assume that they occurred in New York. Were that true, probably the New York courts would follow Delaware in treating those purchases as conversions, on the ground that the law of the place of incorporation determines the nature of the wrong; but, since the wrongs occurred in New York, the New York rule of damages in conversion cases would control. That rule, however, is the same as Delaware’s. Baker v. Drake, 53 N.Y. 211, 13 Am.Rep. 507; Griggs v. Day, 158 N.Y. 1, 22, 52 N.E. 692; Mayer v. Monzo, 221 N.Y. 442, 117 N.E. 948. We reach the same result if we assume that the New York courts would apply New York internal "law” in determining the nature of the wrong. For New York, like Delaware, treats directors, for most purposes, as trustees; Continental Securities Co. v. Belmont, 206 N.Y. 7, 16, 99 N.E. 138, 51 L.R. A.,N.S., 112, Ann.Cas.l914A, 777; People ex rel. Manice v. Powell, 201 N.Y. 194, 201, 94 N.E. 634; and conduct by a trustee, similar to that of the directors here, is held in New York to call for damages as on a conversion. People ex rel. Manice v. Powell, supra; Hart v. Ten Eyck, 2 Johns.Ch. 62, 115, 116; Mooney v. Byrne, 163 N.Y. 86, 96, 97, 57 N.E. 163.

One way or another, then, the critical question is the date when a “reasonable time” began to run. Clearly here it ran from the time when Automatic was first able to take steps, independent of the domination of the individual defendí nts, to go into the market to purchase the number of shares unlawfully acquired and resold by those defendants. As the market price rose after the resales by those defendants and as the price rise occurred when Automatic was not free of the domination of these defendants,³ *Automatic would plainly be better off to elect to ask for recovery on the basis of the “highest intermediate value” rather than for the profits made by those defendants. We reject the suggestion that, if these defendants had not dominated Automatic, it might, at some earlier date, have sold the Majestic stock as the result of disinterested business judgment; since the misconduct of defendants renders it impossible to ascertain whether Automatic would have done so, they may not assert that it would or might.⁵ 6It follows that, on the facts presented to the district judge, the liability of the individual defendants' was indubitable and the amount of recovery beyond doubt greater than that offered in the settlement. Accordingly, it was an abuse of discretion to approve the settlement. This conclusion relates not only to the individual defendants other than Tracey but also to 31,500 of the shares bought by Tracey.

As to the other 40,000 shares which Tracey and his wife purchased, the situation is somewhat different. As, on the facts now presented, Tracey surrendered his option, previously obtained from Du-Mont, on 40,000 shares, in order to enable DuMont to sell to Automatic, there would have been no wrong, had he received from Automatic an option on 40,000 shares on the same terms as the surrendered option, i.e., at an average of $2.25 per share. He did receive such an option from Automatic as to 10,000; with respect thereto he is not liable. But the remaining 30,000, he bought from Automatic at a price of $1.20 per share. Consequently, on those shares, he made an unlawful profit of $1.05 a share or $31,500. As he showed no defense against that liability, to that extent the approval of the settlement also constituted an abuse of discretion.

Since the release which Tracey was to receive was not to be a general release, it would have had no effect on any claims against him with respect to the other options to which appellants refer; accordingly, we need not here consider the effect of the S. E. C. exemption order, which expressly excepted the transactions alleged in Upson’s complaint. As the S. E. C. suit did not terminate in a decree on the merits, we need not consider whether, if it had, it would have barred recovery in the instant suit. Nor need we on this appeal explore the issue whether Automatic’s sale of assets, the proceeds of which were used to buy the Majestic stock, was wrongful, and, if so, whether Majestic sustained resultant recoverable damages.

The district court’s order must be vacated, with the consequence that the action will proceed as if no settlement had been offered. In the circumstances, appellants should be permitted to intervene.

Reversed and remanded.

1 § 17(a) is 15 U.S.C.A. § 80a — 17(a) which reads as follows:

“Transactions of certain affiliated persons and underwriters, (a) It shall be unlawful for any affiliated person or promoter of or principal underwriter for a registered investment company (other than a company of the character described in section 80a — 12(d) (3) (A) and (E), or any affiliated person of such a person, promoter, or principal underwriter, acting as principal—

“(1) knowingly to sell any security or other property to such registered company or to any company controlled by such registered company, unless such sale involves solely (A) securities of which the buyer is the issuer, (B) securities of which the seller is the issuer and which are part of a general offering to the holders of a class of its securities, or (O) securities deposited with the trustee of a unit investment trust or periodic payment plan by the depositor thereof;

“(2) knowingly to'purchase from such registered company, or from any company controlled by such registered company, any security or other property (except securities of which the seller is the issuer); or

“(3) to borrow money or other property from such registered company or from any company controlled by such registered company (unless the borrower is controlled by the lender) except as permitted in section 80a — 21(b).”

2 Restatement of Conflict of Laws, § 199; New York Annotations of Restatement of Conflict of Laws (1935) pp. 165, 166; German-American Coffee Co. v. Diehl (No. 2), 86 Misc. 547, 149 N.Y.S. 413, affirmed 168 App.Div. 913, 152 N.Y, S. 1113; Stratton v. Bertles, 238 App. Div. 87, 263 N.Y.S. 466. See also German-American Coffee Co. v. Diehl, 216 N.Y. 57, 109 N.E. 875.

3 In all probability they would, under the Delaware decisions on the facts now before us. The same would seem to be true under the New York decisions.

3 We leave open, for determination in the district court, the date when Automatic can be said to have been free of such domination.

5 Bigelow v. RICO Badio Pictures, Inc., 66 S.Ct. 574; Package Closure Corp. v. Sealright Co., 2 Cir., 141 F.2d 972, 979.

In the Bigelow case, supra [66 S.Ct. 580], the Supreme Court said: “The most elementary conceptions of justice and public policy require that the wrongdoer shall bear the risk of the uncertainty which his own wrong has created. See Package Closure Corp. v. Sealright Co., 2 Cir., 141 F.2d 972, 979. That principle is an ancient one, Armory v. Delamirie, 1 Str. 505, and is not restricted to proof of damage in antitrust suits, although their character is such as frequently to call for its application. In cases of collision where the offending vessel has violated regulations prescribed by statute, see The Pennsylvania, 19 Wall. 125, 136, 22 L.Ed. 148, and in cases of confusion of goods, Great Southern Gas & Oil Co. v. Logan Natural Gas & Fuel Co., 6 Cir., 155 F. 114, 115; cf. F. W. Woolworth Co. v. N. L. R. B., 2 Cir., 121 F.2d 658, 663, the wrongdoer may not object to the plaintiff’s reasonable estimate of the cause of injury and of its amount, supported by the evidence, because not based on more accurate data which the wrongdoer’s misconduct has rendered unavailable. And in cases where a wrongdoer has incorporated the subject of a plaintiff’s patent or trade-mark in a single product to which the defendant has contributed other elements of value or utility, and has derived profits from the sale of the product, this Court has sustained recovery of the full amount of defendant’s profits where his own wrongful action has made it impossible for the plaintiff to show in what proportions he and the defendant have contributed to the profits. Westinghouse Electric & Mfg. Co. v. Wagner Electric & Mfg. Co., 225 U.S. 604, 32 S.Ct. 691, 56 L.Ed. 1222, 41 L.B.A.,N.S., 653; Hamilton-Brown Shoe Co. v. Wolf Brothers & Co., 240 U.S. 251, 36 S.Ct. 269, 60 ; see also Sheldon v. Metro-Goldwyn Corp., 309 U.S. 390, 406, 60 S.Ct. 681, 687, 84 L.Ed. 825. * * * Any other rule would enable the wrongdoer -to profit by Ms wrongdoing at the expense of his victim. It would be an inducement to make wrongdoing so effective and complete in every case as to preclude any recovery, by rendering the measure of damages uncertain. Failure to apply it would mean that the more grievous the wrong done, the less likelihood there would be of a recovery.” See also Griggs v. Day, 158 N.Y. 1, 20, 52 N.E. 692.