Before L. HAND, SWAN and FRANK, Circuit Judges . 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*fn1 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*fn2
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*fn3 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 Blaustein 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. Burbage, 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. 1914A, 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 defendants, 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*fn4 , 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*fn5 It 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 DuMont, 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.
ON PETITIONS FOR REHEARING
1. In their petitions for rehearing, the individual defendants state that "the theory of liability and the measure of damages adopted by this court was neither briefed nor argued in this court or below by any of the counsel in the case." But the fact is that, in the court below, counsel for appellants argued that these defendants were liable "on the theory of conversion," and in his brief here cited cases based on that theory. Counsel for plaintiff-appellee in his brief filed in this court, describing appellants' argument, said, "Basis for such rule of damage was stated to be 'on the theory of conversion,'" and then proceeded for several pages to discuss decisions relating to "conversion of stock."
2. These defendants also object that in our opinion we said that they acquired the Majestic shares from Automatic; all the Majestic shares bought by these defendants, they now assert, were bought by them directly. Our version of the facts was based on the ...