The opinion of the court was delivered by: FEINBERG
Does an action for damages under the federal securities acts survive the death of the alleged wrongdoer? This is the chief issue raised by the motion before the Court. The action is brought under Section 17(a) of the Securities Act of 1933 ('Securities Act'), 15 U.S.C. § 77q(a), and Section 10(b) of the Securities Exchange Act of 1934 ('Exchange Act'), 15 U.S.C. § 78j(b), and Rule 10b-5 thereto, against a corporation, a number of its directors and officers, a brokerage firm which served as its financial adviser, and the executors of a deceased corporate officer. The deceased officer is Robert A. Futterman, who died in November 1961. Futterman, before his death, was president and chairman of the board of directors of Futterman Corporation.
Plaintiff sues in his individual capacity as a purchaser of Futterman Corporation stock and as a representative of other purchasers. He alleges that defendants made false and misleading statements or omitted to state material facts which caused the stock of the corporation to be sold at inflated prices to the public, including plaintiff. The amended complaint also states that, on or about November 1, 1960, as a result of dealings with the corporation, Robert A. Futterman and his wife acquired 181,464 shares of its Class A stock and 105,000 shares of Class B stock,
the latter at a consideration of $ 1 per share. The corporation sold 660,000 shares of Class A stock to the public on July 19, 1960, at $ 12 a share and, on June 8, 1961, one million shares of Class A stock at $ 13.125 a share. Plaintiff alleges that the false and misleading statements and failure to disclose material facts caused the stock to sell at inflated prices up to at least early 1962. Damages for the class are alleged to be between $ 5 million and $ 25 million.
The Futterman estate argues that it should be dropped as a defendant because (1) any cause of action against Robert A. Futterman abated upon his death, and (2) the complaint contains no allegation of wrongdoing on the part of Robert A. Futterman personally or his executors.
The estate contends that a cause of action abates when there is no unjust enrichment of the decedent or when the statute relied on for recovery is essentially 'penal' in nature. Further, the executors argue that if there is unjust enrichment, recovery should be limited to that amount. Plaintiff contends that unjust enrichment is not the test of whether an action abates, and, in any event, claims that there is unjust enrichment in this case: the amount that the value of the stock owned by Robert A. Futterman was increased by the alleged misrepresentations and omissions.
This action is based upon the Securities Act and the Exchange Act. These two statutes make no reference to survival, and there is no general federal statute concerning abatement of actions.
When a federal statute creates a cause of action, the courts generally have ruled that federal law determines whether the cause of action abates or survives upon death. E.g., Heikkila v. Barber, 308 F.2d 558, 561 (9 Cir. 1962); Cinnamon v. Abner A. Wolf, Inc., 215 F.Supp. 833 (E.D.Mich.1963); Armstrong v. Emerson Radio & Phonograph Corp., 132 F.Supp 176 (S.D.N.Y.1955); but compare Pritchard v. Smith, 289 F.2d 153, 88 A.L.R.2d 1146 (8 Cir. 1961); Brazier v. Cherry, 293 F.2d 401 (5 Cir.), cert. denied, 368 U.S. 921, 82 S. Ct. 243, 7 L. Ed. 2d 136 (1961). Thus, whether an action based on the two federal statutes involved here abates upon death is to be determined on federal common law principles.
Kirk v. Comm'r, 179 F.2d 619, 15 A.L.R.2d 1031 (1 Cir. 1950); Barnes Coal Corp. v. Retail Coal Merchants Ass'n, 128 F.2d 645 (4 Cir. 1942); Armstrong v. Allen B. Dumont Labs., 137 F.Supp. 659 (D.Del.1955).
The common law treatment of abatement of actions on the death of a tortfeasor is an illustration of the growth and change of law. At one time all tort actions abated. This was perhaps attributable to early notions of a tort as an out-growth of a criminal wrong and the consequent view that punishment or blame could not survive death. Winfield, Death as Affecting Liability in Tort, 29 Colum.L.Rev. 237, 241-50 (1929). After a fourteenth century statute
and subsequent judicial gloss over hundreds of years, a differentiation between those torts affecting property rights and those affecting the person alone was made. If the injury upon which the cause of action was based affected property rights, it survived; if it affected the person alone, such as assault and battery or false imprisonment, it abated. Heikkila v. Barber, supra; Barnes Coal Corp. v. Retail Coal Merchants Ass'n, supra; Sullivan v. Associated Billposters & Distribs., 6 F.2d 1000, 1004- 05, 42 A.L.R. 503 (2 Cir. 1925). If the suit was brought against the estate of the tortfeasor, the common law at one time imposed an additional requirement: the plaintiff must seek to recover property, or the proceeds or value of property appropriated by the decedent and added to his estate. Thus, in a suit against the executors of a deceased marshal for damages resulting from the filing of false returns by his deputy, the Court stated:
'If the person charged has secured no benefit to himself at the expense of the sufferer, the cause of action is said not to survive; but where, by means of the offense, property is acquired which benefits the testator, there an action for the value of the property shall survive against the executor. * * * If the deputy marshal, in the misfeasance complained of, received money or property, the marshal being responsible for such acts, the cause of action survived against his executors.'
United States v. Daniel, 6 How. 11, 13, 47 U.S. 11, 13, 12 L. Ed. 323 (1848). See Iron Gate Bank v. brady, 184 U.S. 665, 22 S. Ct. 529, 46 L. Ed. 739 (1902); Kirk v. Comm'r, 179 F.2d 619, 15 A.L.R.2d 1031 (1 Cir. 1950). Thus, it was not sufficient to prevent an action from abating that the deceased caused plaintiff's property to be diminished. There also had to be a corresponding benefit to the deceased.
Two cases decided by the Second Circuit dealt with the concept of benefit in this context, United Copper Sec. Co. v. Amalg. Copper Co., 232 F. 574 (2 Cir. 1916) and Sullivan v. Associated Bill-posters & Distribs., 6 F.2d 1000, 42 A.L.R. 503 (2 Cir. 1925). In United Copper, it was held that a cause of action under the Sherman Act would not survive unless the decedent secured some benefit at the expense of the person wronged. However, whether there was a benefit and the nature of the benefit was left to be determined at trial.
Sullivan, some nine years later, was also a suit under the Sherman Act. Plaintiff there sought lost profits caused by an alleged conspiracy of defendants. One defendant died during the suit, and plaintiff moved to substitute the estate as a party defendant. Judge Learned Hand, then sitting in the District Court, denied the motion. He stated that the United Copper case 'did no more than follow the existing law' and that 'where no definite property has passed to the tort feasor I can find no suggestion anywhere that the cause of action survives.'
The Court of Appeals reversed. It found sufficient a claim that profits had been diverted to the tortfeasor from plaintiff's business on the ground that under the Sherman Act a claim of damage to one's business, rather than to one's property, survives a defendant's death. The Court reached this result even though it recognized that the action would not have survived under the orthodox property benefit rule because no property had passed from plaintiff to the decedent. Sullivan v. Associated bill-posters & Distribs., supra, 6 F.2d at 1011-12, 42 A.L.R. 503. See Moore v. Backus, 78 F.2d 571, 101 A.L.R. 379 (7 Cir.), cert. denied, 296 U.S. 640, 56 S. Ct. 173, 80 L. Ed. 455 (1935).
Since these decisions, other cases have marked a departure from the rule that a benefit to the tortfeasor in necessary in order for a cause of action to survive against his estate. This is particularly true in cases involving deficiency additions under the internal revenue laws. In Kirk v. Comm'r, supra, the Government sued for a fifty per cent addition to a tax deficiency because of fraud in the filing of a tax return. The estate of the deceased taxpayer argued that the action did not survive as to the fifty per cent addition, because, even though the Government had been wronged, there was no corresponding benefit to the taxpayer's estate. The Court of Appeals for the First Circuit held that a benefit to defendant's estate was not necessary to avoid abatement. It based its decision on general principles and not on the fact that the case involved the revenue laws, stating (179 F.2d at 621, 15 A.L.R.2d 1031):
'We are satisfied that the modern rule as to the survival of tort actions against decedents' estates is that although actions to recover penalties do not survive, actions to recover compensation for monetary losses or injuries inflicted by a decedent do, without regard to any enrichment of the decedent's estate. 'In the second place we feel at liberty to abandon enrichment of a decedent's estate as any criterion of survivability in cases like this because it is evident from the cases cited last above, and those cited therein, that the enrichment concept of the early law of survival was the product of archaic legal preconceptions identifying the representative personally with the estate in his charge which have little or no place in the law today, and the law of survival is not static but dynamic, capable of growth and development to meet present-day needs in conformity with modern concepts. Van Beeck v. Sabine Towing Co., 300 U.S. 342, 57 S. Ct. 452, 81 L. Ed. 685; Barnes Coal Corp. v. Retail Coal Merchants Ass'n, 4 Cir., 128 F.2d 645. In short, we think the general rule today with respect to the survival of tort actions against decedents' estates is that actions essentially for penalties do not survive for the reason that a decedent is beyond punishment, but that actions to recompense or compensate a plaintiff for a harm inflicted upon him by a decedent do survive, for an estate can, and we think should, compensate for injury to the same extent as the decedent had he lived.'
The Kirk decision has been accepted by a number of other Circuits. Estate of Rau v. Comm'r, 301 F.2d 51 (9 Cir.), cert. denied, 371 U.S. 823, 83 S. Ct. 41, 9 L. Ed. 2d 62 (1962) (two grounds are mentioned: the absence of the need for a benefit to the estate, and the importance of taxes to the Government); Lee v. Comm'r, 227 F.2d 181 (5 Cir. 1955), cert. denied, 351 U.S. 982, 76 S. Ct. 1048, 100 L. Ed. 1497 (1956) (without discussion of the ...