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ABBE v. GOSS

October 8, 1975

Nancy Abbe, Plaintiff
v.
Goss, et al., Defendant


Duffy, District Judge.


The opinion of the court was delivered by: DUFFY

DUFFY, District Judge:

The plaintiff, Nancy Abbe, purchased twenty-five shares of common stock of Tenna Corporation (hereinafter "Tenna") on August 31, 1970, at a cost of $163.38. On October 9, 1970, some five and a half weeks later, she filed this shareholder's derivative action under Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), to recover profits made by the individual defendants as insiders on short swing transactions. Prior to the filing of this shareholder derivative suit no demand was made on Tenna's directors.

 The five individual defendants admit their liability under Section 16(b) but claim that they have already disgorged the profits they made on the questioned transactions. Plaintiff acknowledges that payments have been made to the corporation but argues that her suit is still viable because (1) defendants' computations of their gains were incorrect and (2) interest should have been paid on the disgorged profits.

 Motions for summary judgment were made on behalf of each of the individual defendants and I denied those motions in a memorandum endorsed on April 9, 1973. A motion for reargument was subsequently made and, after holding argument, I have concluded that the contested issues involve solely questions of law and can therefore be decided on this renewed motion for summary judgment. See Judge Motley's June 26, 1972 opinion in this case, pp. 2-3.

 Before reaching the merits of the arguments concerning (1) the method of computing profits under Section 16(b) and (2) the imposition of interest, there is a threshold question of whether the complaint should be dismissed for plaintiff's failure to comply with the demand requirements of Rule 23.1 of the Federal Rules of Civil Procedure. That rule requires, in pertinent part, that in a shareholder derivative action "[the] complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors . . . and the reasons for his failure to obtain the action or for not making the effort."

 Plaintiff, Nancy Abbe, admits that no demand has ever been made on Tenna's directors but claims that any demand would have been futile since the individual defendants control Tenna. The complaint alleges that "Tenna's Board of Directors is dominated and controlled by defendant Ludwig, who together with his son, Harvey A. Ludwig, and daughter, defendant Mendes, own more than 44 per cent of the common stock of Tenna." Complaint para. 17.

 The defendants alleged that a demand would not have been futile and point to the fact that prior to the institution of this suit Tenna was conducting negotiations with the Securities and Exchange Commission in an attempt to settle the insider trading problems that are the subject of this complaint. Defendants also state that the fact that three of the individual defendants made payments to Tenna on the very day this complaint was filed shows that a demand would not have been futile. Defendants' position is weakened by a document they supplied, i.e., the defendant Mendes' separation agreement which states that her "family owns the controlling interest in The Tenna Corporation."

 The law is indeed unclear and imprecise in defining what constitutes sufficient "futility" to excuse a Rule 23.1 demand. Compare Nussbacher v. Continental Illinois Nat'l Bank, 518 F.2d 873 (7th Cir. 1975) with In re Kauffman Mutual Fund Actions, 479 F.2d 257 (1st Cir.), cert. denied, 414 U.S. 857, 38 L. Ed. 2d 107, 94 S. Ct. 161 (1973). Professor Moore summarizes the law on this point: "There is no unanimity of opinion amongst the courts, and probably the most straightforward approach is to admit frankly that it lies with the sound discretion of the court to determine the necessity for a demand." 3B Moore's Federal Practice, 23.1.19 at 254 (2d ed. 1974).

 Applying "sound discretion" to the facts of this case it would appear that the individual defendants' control of Tenna was sufficient to excuse a Rule 23.1 demand. See Cathedral Estates, Inc. v. Taft Realty Corp., 228 F.2d 85 (2d Cir. 1955); Papilsky v. Berndt, 59 F.R.D. 95 (S.D.N.Y. 1973).

 Having thus disposed of the threshold "demand" question, the next area of controversy involves the proper method for computing the Section 16(b) profits of the defendants Goss and Mendes. As to Goss, the applicable formula is set out in Rule 16b-6 as follows:

 
sale price
 
- lowest market price within 6 mos. of date of sale
 
§ 16(b) profit

  There is no dispute as to either Goss' sale price ($178,081.12) or the lowest market price within six months of the date of his sale ($36,663.00). Inserting these figures into the formula, Goss' profit was $178,081.12 11/3/69 sales price - 36,663.00 lowest market price with- ...


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