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KORN v. MERRILL

October 31, 1975

Korn Plaintiff
v.
Merrill, et al. Defendants


Carter, District Judge.


The opinion of the court was delivered by: CARTER

CARTER, District Judge.

Plaintiff has instituted this derivative action on behalf of defendant, American Express Investment Fund, which prior to April 27, 1970, was known as the Commonwealth Investment Company. The action was commenced on April 29, 1974, and alleges violations of the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq.; the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq.; the Investment Advisers Act of 1940, 15 U.S.C. § 80b-1 et seq.; and the rules and regulations issued pursuant to these statutes. Defendants have moved for an order, pursuant to F.R.Civ. P. 12(c) and 56(b), granting them judgment on the pleadings or summary judgment on the ground that the cause of action asserted in the complaint is barred by the statute of limitations. *fn1" The critical issue before the court is whether the undisputed facts in the record show, as a matter of law, that plaintiff cannot successfully refute defendants' plea of limitations. Since we agree that he cannot, the motion is granted.

 The Complaint

 Monroe Korn is a New York resident and a shareholder of American Express Investment Fund, Inc. (Fund), an open-end investment company, since at least January, 1968. In 1968 and for several years prior thereto defendant Fund American Investment Management Company (FAIMCO), now known as the American Express Investment Management Company (AEIMCO), served as investment advisor to Fund pursuant to an investment advisory agreement between Fund and FAIMCO. In addition, pursuant to an underwriting agreement between Fund and FAIMCO, in 1968 and for several years prior thereto, FAIMCO also served as principal underwriter for shares of stock of Fund sold to the public on a continuous basis. FAIMCO was, at that time, a wholly-owned subsidiary of defendant, the Fund American Companies (FAC), now known as FA Liquidating Corporation.

 The causes of action asserted arise out of the acquisition in the fall of 1968 of a newly formed and wholly-owned subsidiary of defendant American Express Company (AMEXCO) of substantially all the assets of FAC, including all the outstanding shares of FAIMCO, in exchange for shares of AMEXCO preferred stock, which shares were then distributed to the stockholders of FAC.

 The pertinent facts gleaned from the complaint and various affidavits of the parties are as follows. *fn2" Fund is a Delaware corporation with principal offices in California. As of September 28, 1968, Fund had net assets of $192 million and some 27,000 shareholders. While the record is devoid of any breakdown as to New York and California addresses of Fund shareholders in 1968, the figures as of September 28, 1973, indicate that there were 7,643 California shareholders holding over seven million outstanding shares of Fund, and 2,345 New York shareholders holding over one-and-one-half million shares.

 Both FAIMCO and FAC are California corporations with their principal offices in California. FAIMCO acted as investment adviser to Fund and as its principal underwriter for the continuous public sale of Fund stock. Pursuant to the advisory agreement entered into between FAIMCO and Fund, FAIMCO was to render investment advice to Fund, determine what securities Fund should buy and sell, and provide various management services to Fund including executive and other personnel, office space and equipment. As consideration for these services, FAIMCO received an annual advisory fee based on one-half of 1% of the average daily net assets of Fund up to $150 million, and 4/10th of 1% of the net assets in excess of that figure.

 In 1968, AMEXCO, a New York corporation with its principal place of business in New York, entered into an agreement to acquire control of FAIMCO by acquiring substantially all of the assets of FAC. The agreement provided that AMEXCO would issue to FAC shareholders shares of its preferred stock having an aggregate value in 1968 of approximately $415 million. Consummation of the agreement was made dependent on the fulfillment of two conditions precedent: (1) that the Fund shareholders approve reinstatement of the advisory agreement between Fund and FAIMCO after the AMEXCO takeover; and (2) that the Fund Board of Directors approve reinstatement of the Fund-FAIMCO underwriting agreement. *fn3"

 In August, 1968, Fund's Board approved reinstatement of the underwriting agreement, and authorized sending out a proxy statement with notice of the annual meeting on September 28, 1968, recommending approval of the reinstatement of the advisory agreement. The agreement, which constituted an effective merger of FAIMCO into American Express, was thereafter duly effectuated.

 At the time when these negotiations took place and the merger with American Express was accomplished, defendants Fred H. Merrill, Reid W. Dennis, S. Waldo Coleman, Herbert E. Dougall, Wallace H. Fulton, William Wallace Mein, Jr., George E. Osborne, Philip A. Ray and Richard F. Tharp were directors of Fund. Dennis (president) and Tharp (vice-president) were officers of Fund. Merrill, Dennis and Tharp were also directors of FAIMCO, and Dennis (president) and Tharp (vice-president) were officers of that company. Merrill was a director of FAC and he (president) and Tharp (senior vice-president) were officers of FAC.

 The gravamen of plaintiff's complaint is that FAIMCO, while Fund's investment advisor and a fiduciary of Fund, illegally sold its advisory status; that the proxy statement which was issued to Fund's shareholders in connection with the AMEXCO purchase of FAC assets (including FAIMCO) was false and misleading, and that the advisory and underwriting fees paid by Fund since the merger have been paid illegally and should be returned to Fund.

 The complaint asks that defendants, other than Fund, be required to pay to Fund and its shareholders the profits earned on the sale of FAIMCO. Furthermore, the complaint also asks that the Investment Advisory Agreement and the Underwriting Agreement between FAIMCO and Fund be rescinded, and that FAIMCO, AEIMCO and AMEXCO be required to return all consideration received by them since the merger by virtue of these agreements.

 Discussion

 II. The Statute of Limitations and the New York "Borrowing Statute"

 Defendants assert that this action, commenced on April 29, 1974, and based on a cause of action which accrued in 1968, is barred by the relevant California statute of limitations. Under the six-year New York statute of limitations, *fn4" ...


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