The opinion of the court was delivered by: DIMOCK
Michael Stella, a stockholder in Kaiser-Frazer Corporation, suing in behalf of himself and all other stockholders similarly situated, brings this action against Graham-Paige Motors Corporation under section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), quoted in part infra, which gives a right of recovery of short swing profits made by insiders. Kaiser-Frazer, having refused to bring this action after being requested to do so by plaintiff, is also named as a defendant.
Graham-Paige, in 1947, transferred its automotive assets to Kaiser-Frazer and received in return, 750,000 shares of Kaiser-Frazer stock and Kaiser-Frazer's agreement to pay principal, interest and trustee's and paying agent's service charges with respect to an outstanding issue of Graham-Paige's debentures. Later in the year Graham-Paige sold 155,000 shares of the stock so acquired. Plaintiff's theory is that Graham-Paige by the initial transaction became the holder of more than 10% of Kaiser-Frazer's outstanding stock so as to come within the purview of section 16(b), that there was a 'purchase' and a 'sale' of the 155,000 shares of stock within a 'period of less than six months,' that Graham-Paige realized a profit of $ 434,787.86 which is recoverable under the statute and that Graham-Paige is estopped to say that it did not realize a profit.
Graham-Paige resists plaintiff's claim on a number of grounds. First, that its acquisition of Kaiser-Frazer stock was not a 'purchase' within the meaning of the statute and further that, if the statute were held to be applicable to this acquisition, it would be unconstitutional as so applied. Second, that the facts of this case bring it within a specific exception contained in section 16(b). Third, that in this case there was no 'purchase and sale * * * within any period of less than six months' within the meaning of that expression in the statute. Fourth, that, in any event, it realized no profit from the sale of the Kaiser-Frazer stock involved here. Fifth, that it is not estopped to say that it did not realize a profit.
The Initial Transaction As a 'Purchase'.
Graham-Paige's argument that section 16(b) is not applicable here is without merit. It is based upon the contentions that the transaction by which Graham-Paige acquired Kaiser-Frazer stock was intended by Graham-Paige to be a sale of its automotive assets to Kaiser-Frazer rather than a purchase by it of Kaiser-Frazer stock and that Graham-Paige had no speculative intent at the time of acquisition. It is not at all clear to me that Graham-Paige would have been as satisfied to have had cash substituted for the stock which it received but, even assuming that this would have been the case, the acquisition of stock was a 'purchase'. Section 16(b) specifically excludes as a factor to be considered in cases arising under it the presence or absence of speculative intent at the time of the critical purchase or sale. See, Smolowe v. Delendo Corporation, 2 Cir., 136 F.2d 231, 235-236, 148 A.L.R. 300. Graham-Paige cites only one case in support of the argument that its desire to sell assets rather than acquire stock prevents the acquisition from being a 'purchase'. That case, Roberts v. Eaton, 2 Cir., 212 F.2d 82, involved a reclassification of outstanding stock binding upon all stockholders. The Court of Appeals, in affirming the lower court's decision for defendant, said, at page 86, that 'the reclassification * * * could not possibly lend itself to the speculation encompassed by 16(b).' The court gave no consideration to subjective factors such as those which Graham-Paige would have me consider here. Thus the Roberts case is not apposite.
Graham-Paige admits that section 16(b) has been held to be constitutional and fails to give any reason for its assertion that application of the section here would be unconstitutional. I can think of no valid reasons in support of the argument and I therefore reject it.
I find that Graham-Paige's acquisition of 750,000 shares of common stock of Kaiser-Frazer was a 'purchase' of said stock within the meaning of section 16(b).
Purchaser's Ownership of 10% at Time of Purchase.
Graham-Paige's argument that the transaction at bar is within the specific statutory exception of section 16(b) is based upon the following language in that section:
'This subsection shall not be construed to cover any transaction where such beneficial owner was not such both at the time of the purchase and sale * * *.'
The argument is that, since Graham-Paige was not the beneficial owner of 10%, see section 16(a) of the Act, 15 U.S.C. § 78p(a), of Kaiser-Frazer stock before the time of the purchase, the transaction is exempted. This argument, presenting a pure question of law, was made to Judge S. H. Kaufman by Graham-Paige in support of a motion for summary judgment in this case. He rejected it and denied summary judgment for reasons which convince me. Stella v. Graham-Paige Motors Corp., D.C.S.D.N.Y., 104 F.Supp. 957. His decision is the law of this case and I would not be free to disturb it even if I disagreed with it.
The Transaction As Within the Short Swing Period.
Section 16(b) provides in part:
'(b) For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director, or officer by reason of his relationship to the issuer, any profit realized by him from any purchase and sale, or any sale and purchase, of any equity security of such issuer (other than an exempted security) within any period of less than six months, * * * shall inure to and be recoverable by the issuer, irrespective of any intention on the part of such beneficial owner, director, or officer in entering into such transaction of holding the security purchased or of not repurchasing the security sold for a period exceeding six months. * * *' (Emphasis supplied.)
Graham-Paige argues that this language means that in order that any profit realized be recoverable by the issuer both the 'purchase' and the 'sale' must occur within a period of less than six months. I agree. That is exactly what the statute says.
Graham-Paige contends that the 'purchase' and the 'sale' here did not both occur within a 'period of less than six months'. If that is so I shall not need to decide whether or not Graham-Paige realized a profit. As part of its argument Graham-Paige construes the words 'period of less than six months' to mean a period the first and last days of which each include the twenty-four hours from midnight to midnight, and the last day of which is the second day prior to the date corresponding numerically to that of the first day of the period in the sixth succeeding month. For example, the period from and including January 1st to and including June 29th would be a 'period of less than six months' but the period to and including June 30th would be a period of exactly six months. Thus profit realized from a purchase on January 1st and a sale on June 30th would not be recoverable under the statute.
That construction is correct. I cannot brush aside the congressional choice of the words 'less than'. To be less than six months the statutory period must be six months minus one full period from midnight to midnight since the law does not take into account fractions of a day. 2 Bl.Com. 141. This was the construction adopted without comment by Chief Judge Clark in Smolowe v. Delendo Corporation, 2 Cir., 136 F.2d 231, 234, 148 A.L.R. 300, supra, where he described the statutory period as running from December 1st to the following May 30th -- rather than to June 1st as the lower court had described it.
Plaintiff's argument that the statutory period embraces six months plus one day is based on decisions where the problem was to determine when a period of given length, reckoned 'from' or 'after' or 'before' a date, began. Burnet v. Willingham L. & T. Co., 282 U.S. 437, 51 S. Ct. 185, 75 L. Ed. 448; Cornell v. Moulton, 3 Denio, N.Y., 12; Joint Counsel, etc., v. Delaware, L. & W.R. Co., 2 Cir., 157 F.2d 417; Kimm v. Osgood's Adm'r, 19 Mo. 60; Dutcher v. Wright, 94 U.S. 553, 24 L. Ed. 130. Here the problem is to determine whether the two events occurred within any period of the given length. Fogel v. Commissioner of Internal Revenue, 5 Cir., 203 F.2d 347, 348, which held that goods purchased on June 19th and sold on December 19th were not 'held for more than six months,' seems to me to represent a construction of that statute as meaning 'held for more than six months after the purchase'. It would be a contradiction in terms to construe this statute as meaning 'purchase and sale within any period of less than six months after the purchase'. There could be no such thing as a purchase 'within' a period that did not start until after the purchase.
To support an argument that the period includes at least a full six months plaintiff points to the fact that section 16(b) goes on to say that the profit shall be recoverable irrespective of the intention of the purchaser of holding the security sold 'for a period exceeding six months.' I regard the expression as a mere referential inaccuracy which cannot prevail over the language used by Congress in creating the cause of action. Graham-Paige is correct in saying that, to create liability for the profit realized, both the purchase ...