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TRUNCALE v. UNIVERSAL PICTURES CO.

February 24, 1948

TRUNCALE
v.
UNIVERSAL PICTURES CO., Inc., et al.



The opinion of the court was delivered by: RIFKIND

This is a motion by defendants for summary judgment under Rule 56(b), Federal Rules of Civil Procedure, 28 U.S.C.A.following section 723c.

I.

 The first cause of action is attacked on two grounds of which the first is that it is barred by a three-year statute of limitations. The first cause of action is a derivative stockholders' suit, brought on behalf of defendant Universal Pictures, Inc., against some of its directors and officers. A condensed version of the allegations of the complaint and uncontradicted affidavits will be sufficient for purposes of this motion.

 The defendants are holders of options to buy from Universal specified numbers of its shares (Voting Trust Certificates of stock, at $ 10 per share. These options are evidenced by warrant certificates which are exercisable at any time up to 1956. In order to secure a ruling and agreement from the Commissioner of Internal Revenue that, for tax purposes, the excess of the market price over the option price of the stock, at the time of the exercise of the options, would not constitute taxable income to the defendant directors, the latter caused the corporation to agree with the Commissioner that, in computing its own taxable income, it would not deduct such excess. *fn1" Closing agreements to this effect were executed by the corporation . and by the defendant directors and finally approved by the Acting Secretary of the Treasury on May 9, 1944, *fn2" at which time the market price of a share of stock was greatly in excess of $ 10. In accordance with the terms of the closing agreement, the defendant directors, in the computation of their personal income taxes, have not declared such excess of market price over warrant price of the stock as taxable income and have caused the corporation, in the computation of its taxes, to abstain from deducting these amounts from its income. By reason of these agreements and the action taken and to be taken in pursuance thereof, the corporation has suffered losses in that it has paid more taxes than it should have paid and the directors have enjoyed gains through diminution of their personal tax liabilities

 This action was brought to recover both the losses suffered by the corporation and the tax savings of the directors, insofar as these exceed the losses of the corporation.

 In support of the motion, defendants argue that, under the allegations of the complaint, all that the corporation may recover is the loss it has sustained and that such a claim belongs to the category of injuries to property, governed by the three-year statute of limitations, N.Y. Civil Practice Act, Sec. 49(7), *fn3" as explained by Sec. 48(8). *fn4" The closing agreements having been made final on May 9, 1944, and this action having been commenced on June 3, 1947, it is the contention of defendants that the action is barred and that summary judgment should be granted

 Plaintiff contends that the benefits inuring to the directors which exceed the losses of the corporation constitute profits realized by them through a breach of fiduciary duty to the corporation and are recoverable in an action for an accounting for profits, governed by the six-year statute of limitations, Sec. 48(8).

 The recent history of the law of limitations in New York has squeezed the stockholder into an ever narrower time vise. At first all derivative stockholder suits were subject to a ten-year statute of limitations applicable to all actions whose limitations were not otherwise specifically provided for N.Y.C.P.A. Sec. 53. In 1937, Otter v. Walker, 276 N.Y. 15, 171 N.E.2d 335, held that the ten-year statute governed stockholders' derivative actions for the recovery of profits wrongfully received by directors but that where the action was based up-n the negligence of directors who did not profit from their negligence, it was governed by the statute relating to injuries to property, then six years. Subsequently, Dunlop's Sons v. Spurr, 1941, 285 N.Y. 333, 34 N.E.2d 344, construed Potter v. Walker to hold that in an action against directors to recover profits, the ten-year statute was not applicable where such profits did not exceed the losses caused the corporation by their wrong. In 1936, an amendment to the Civil Practice Act reduced the period of limitations on injuries to property to three years. L. 1936, ch. 558, N.Y.C.P.A., Sec. 49(7). Finally, Sec. 48(8), effective in 1942, completely eliminated the ten-year statute as applied to stockholders' derivative suits. Such actions for waste or injury to property or accounting in connection therewith are now limited by a three-year period and other stockholder actions, legal or equitable, are governed by a six-year statute.

 Thus, it seems that if, as a matter of substantive law, the corporation is entitled to recover from the directors the profits which accrued to them from the breach of their fiduciary duty to the corporation, and these profits exceed the losses sustained by the corporation, the action cannot be characterized as one for injury to property, but is one for an accounting and is governed by the six-year statute. The defendants contend that as a matter of law the corporation may not recover the profits; they find a generic difference and a legal insulation between the director's gain and the corporation's loss. The contention is that the corporation could never have enjoyed the tax gains of the directors, since they depended upon the personal incomes of each of the individual directors, factors entirely irrelevant to corporate affairs. Since the corporation could never have received the benefits which accrued to the directors, it is not in a position to demand that they account therefor. They claim that this case is not analogous to one involving a corporate opportunity appropriated, or corporate funds diverted, or any other situation wherein the corporation could establish a right to the profits yielded by further exploitation.

 The recovery demanded by the stockholders in this action stems from a unique fact situation. Accepting the allegations of the complaint, the corporation's most favorable tax arrangement would have been to deduct from its income the directors' profits on exercise of their options. Its waiver of the power so to do resulted in its liability to pay corporation taxes on income which included that amount. The waiver resulted also in tax savings to the directors, different in basis, computation and amount from the tax liability of the corporation.

 The generalized question which is thus presented is: Are directors who are liable to a corporation for losses caused by a wrong inflicted by them upon the corporation, accountable for their profits, resulting from the wrong, which are in excess of the losses suffered by the corporation, when the corporation itself could not have earned those profits?

 The general rule governing profits made by corporate directors is stated as follows in 3, Fletcher on Corporations, Sec. 884:

 'Directors and other officers of a private corporation cannot either directly or indirectly, in their dealings on behalf of the corporation with others, or in any other transaction in which they are under a duty to guard the interests of the corporation, make any profit for themselves, or acquire any other personal benefit or advantage, even though such officer or director may own practically all of the stock of the corporation, and if they do so, they may be compelled to account therefor to the corporation in an appropriate action.'

 The New York cases subsumed under the general rule which have come to my attention reveal fact situations which show a corporate opportunity appropriated or a diversion of corporate assets or profits growing out of an abuse of the fiduciary relationship depriving the corporation of the profit the corporation might have made had the directors acted in the true interests of the corporation. See, e.g. Sialkot Importing Corporation v. Berlin, 1946, 295 N.Y. 482, 68 N.E.2d 501. The facts in the case at bar do not ...


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