Appeal from an order of the United States District Court for the Southern District of New York, the Honorable Charles M. Metzner, Judge, granting defendants' motion for summary judgment in a case brought under § 16(b) of the Securities & Exchange Act of 1934, 15 U.S.C. § 78p(b) (1976).
Lumbard, Hays and Mulligan, Circuit Judges.
Appellant, S. & S. Realty Corporation, appeals from the grant of defendants' motion for summary judgment in a derivative action brought under § 16(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78p(b) (1976).*fn1 The complaint sets forth the efforts that were made by the appellant, as required by § 16(b), to obtain action on the part of the defendant corporation.
Appellant is the stockholder of record of two shares of the common stock of Kleer-Vu Industries, Inc. ("Kleer-Vu"), the corporate defendant. Kleer-Vu is a publicly traded company whose securities are listed on the American Stock Exchange and registered with the Securities & Exchange Commission. The individual defendant, Osher, was at all relevant times the president and chairman of the board of Kleer-Vu. The complaint alleges that Osher bought and sold Kleer-Vu securities within six months and requests that the profit he received be remitted to Kleer-Vu, the issuer, as prescribed by § 16(b). The facts are detailed below.*fn2
On November 9, 1972, the Board of Directors of Kleer-Vu authorized a five year, six percent loan of up to $300,000 to Osher. The loan was to be secured by shares of Kleer-Vu stock owned by Osher. The Board also approved the sale of up to 50,000 shares of Kleer-Vu stock at a price equal to the average price of those shares on the American Stock Exchange on the date of purchase. On March 20, 1973, Osher borrowed $212,500 from the corporation and purchased 50,000 shares of Kleer-Vu stock.
There was no indication either in the accountant's report that was made by Ernst & Ernst in connection with the 1972 audit or in the letter that was sent by Kleer-Vu's counsel to the accountants at the time of the transaction, that there were any defects in the transaction. However, when Price Waterhouse & Co. replaced Ernst & Ernst as Kleer-Vu's accountants, they raised some questions regarding the transaction. According to an internal memorandum of Price Waterhouse that was obtained by the appellant and is cited in its brief, the accountants met with Osher on April 12, 1974, to discuss the transaction. Osher made it clear that the transaction was, in substance, intended to be no more than the issuance of stock in exchange for a non-recourse note. As a result of this meeting, Kleer-Vu's counsel investigated the transaction and determined that it was voidable at the option of the Board. This was so because it was revealed that the loan was not effectuated as contemplated by the Board. Osher never received the money; it was redeposited in the company's account to pay for the stock. In addition, Osher never executed a promissory note or evidenced his indebtedness in any other manner or put up any stock as collateral for the loan. As a result, the only consideration that was received for the 50,000 shares was Osher's obligation to make future payments. Under N.Y.Bus.Corp. Law § 504(b) (McKinney 1963), that is not a permissible transaction.*fn3
Subsequently, the Board voted to rescind the transaction. It cancelled Osher's indebtedness in exchange for the return of the certificate for the 50,000 shares. It also agreed to indemnify Osher for the tax consequences of the rescission. In the 1973 financial statement, the accountants treated the rescission as if it had been made on the date of the original transaction.
Between March 20, 1973, the date of the original transaction, and May 17, 1974, the date of the first of the two Board meetings approving the rescission, the price of Kleer-Vu dropped from $4.25 a share to $1.50 a share. Appellant alleges that in light of the meager volume of trading in Kleer-Vu securities on the Exchange on the day of the rescission, the market value of a bloc of shares as large as 50,000 was no more than $15,000. Accordingly, it asserts a claim under § 16(b) on the theory that Osher bought the securities on March 20, 1973, and then, via a retroactive rescission, sold them back to the corporation on the same day at a price, the cancellation of the $212,500 loan, that was almost $200,000 more than the value of the shares.
In July 1976, the parties agreed to allow the appellant to depose Osher in connection with this and two other related lawsuits commenced by the appellant. Osher did not appear for that deposition. On December 8th, the appellant moved for an order pursuant to Fed.R.Civ.P. 37(d) to compel Osher to appear. The district court granted this motion on February 15, 1977, ordering Osher to appear for a deposition on February 28th. He did not. On March 1st, the defendants filed a notice of motion for summary judgment and on the 23rd they filed a motion for a protective order staying Osher's deposition pending the determination of the summary judgment motion. The motion for a protective order was dismissed as moot when the district court granted defendants' motion for summary judgment on May 17, 1977.
In granting the summary judgment motion, the district court held that Osher received no "profit" within the meaning of § 16(b). S. & S. Realty Co. v. Kleer-Vu Indus. Inc., [Current Binder] Fed.Sec.L.Rep., (CCH) para. 96,056 (S.D.N.Y. May 16, 1977). Because it disposed of the case on that ground, the district court did not reach some of the more difficult issues of law and fact presented in this case: Whether the rescission was bona fide -- i.e., whether there was a "purchase and sale," or whether it should be considered retroactively -- i.e., whether the purchase and sale occurred within six months.
On this appeal, the appellant urges that the avoidance of a loss was profit and that, in the alternative, the amount received by Osher as reimbursement for his tax liabilities on the transaction was profit. Appellant also argues that it was improper to grant summary judgment before discovery could be had. Because we agree with the district court's disposition of the ...