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LEWIS v. L. B. NELSON CORP.

August 25, 1980

Harry LEWIS and Levy and Levy, Plaintiffs,
v.
L. B. NELSON CORPORATION, Defendant



The opinion of the court was delivered by: CONNER

OPINION AND ORDER

Defendant L. B. Nelson Corporation has moved to reargue this Court's decision denying defendant's motion to dismiss this action for lack of subject matter jurisdiction. Defendant urges that Grace v. Ludwig, 484 F.2d 1262 (2d Cir. 1973) is controlling and mandates a dismissal of plaintiffs' claim for attorneys' fees incident to a Section 16(b) claim where less than $ 10,000 is at issue.

As this Court's previous Opinion and Order in this case stated, the Second Circuit has explicitly held that recovery of attorneys' fees is a "remedial incident" of Section 16(b) of the Securities Exchange Act, 15 U.S.C. § 78p(b). Gilson v. Chock Full O'Nuts Corporation, 331 F.2d 107 (2d Cir. 1964). In Blau v. Rayette-Faberge, 389 F.2d 469 (2d Cir. 1968), the Second Circuit, in allowing a claim for attorneys' fees under Section 16(b) even where, as here, the shareholder plaintiff and his attorney merely discovered the violation and notified the corporation, which then recovered by means of a settlement, stated:

 
"It must be recalled that the purpose of section 16(b) is to prevent "the unfair use of information' by insiders and to correct the "widely condemned evil' of speculation by insiders in the securities of their corporation. (citations omitted.) And we have recently been reminded that the Securities Exchange Act of 1934 was remedial legislation which "should be construed broadly to effect its purpose.' " Id. at 474.

 Subsequent cases in this Circuit have continued to approve awards of reasonable attorneys' fees to shareholders acting to secure enforcement of Section 16(b). Gagne v. Maher, 594 F.2d 336, 340 (2d Cir. 1979); Lewis v. Realty Equities, 396 F. Supp. 1026 (S.D.N.Y.1975).

 As defendant points out, neither Blau nor Chock Full O'Nuts specifically discusses whether, when, as in this case, an attorneys' fee claim based on a Section 16(b) settlement falls below the $ 10,000 jurisdictional amount required by 28 U.S.C. § 1331, the characterization of such a claim as a "remedial incident" to Section 16(b) enforcement under Blau and Chock Full O'Nuts is sufficient to bring that claim within the jurisdictional provision of Section 27 of the Exchange Act, 15 U.S.C. § 78aa, which gives district courts:

 
"exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder." *fn1"

 In Chock Full O'Nuts, Judge Friendly indicated that the amount of attorneys' fees a shareholder could recover after prompting the corporation to take action under Section 16(b) might well be minimal, since the shareholder's counsel should only receive payment for any services not duplicative of those subsequently rendered by counsel for the corporation. Id. at 110. Judge Friendly did not reach the jurisdictional issue, however, since the claim in that case was for $ 15,000 in attorneys' fees, an amount over the minimum required by Section 1331. See 326 F.2d at 246, 247 (amount at issue in Chock Full O'Nuts).

 In Blau, Judge Feinberg interpreted Chock Full O'Nuts expansively to encompass services no more extensive than a shareholder's attorney's letter to the corporation leading to corporate recovery by means of a settlement with the insider involved. Judge Feinberg could not have anticipated that attorneys' fees recoverable in such a case would be more than $ 10,000 in amount. In fact, he cites with approval Dottenheim v. Emerson Electric Manufacturing Company, 7 F.R.D. 195 (E.D.N.Y.1947), a case allowing a shareholder to recover attorneys' fees for investigating a Section 16(b) violation and notifying the corporation by letter, leading to corporate recovery without a lawsuit, in which the counsel fees allowed were $ 1,000. 389 F.2d at 472 (noting also that shareholder recovery of attorneys' fees in such a situation has been approved by Professor Loss, 2 Loss, Securities Regulation 1054 (2d ed.)) and 472, n.2.

 In the one case in this Circuit postdating Chock Full O'Nuts and Blau in which this particular jurisdictional issue was squarely presented, Gilson v. Pittsburgh Forgings Company, 284 F. Supp. 569 (S.D.N.Y.1968), plaintiff sought attorneys' fees of $ 2,500, an amount clearly lower than the minimum required by 28 U.S.C. § 1331, after notifying the corporation of four Section 16(b) claims on which the corporation then recovered without bringing suit. The court ruled that, regardless of the amount in controversy, federal jurisdiction was proper under Section 27 of the Exchange Act, as the claim for attorneys' fees in connection with enforcement of Section 16(b) was one "created by" the Securities Exchange Act. Judge Wyatt stated:

 
"the motion to dismiss for lack of jurisdiction over the subject matter is plainly without merit. Section 27 of the Act ... gives jurisdiction to this Court of "violations' of the Act and of "all suits in equity and actions at law brought to enforce any liability or duty created' by the Act. The liability under Section 16(b) is one patently created by the Act and the claim to compensation of an attorney in connection therewith is one of the "remedial incidents" to be governed by federal law (citing Gilson v. Chock Full O'Nuts)." Id. at 570.

 In the subsequent case of Grace v. Ludwig, supra, however, a case in which attorneys' fees were sought in connection with possible violations of the antifraud or affiliated company transaction provisions of the Securities Exchange Act and the Investment Company Act, the Second Circuit suggested that a federal court might lack jurisdiction over a claim for attorneys' fees in connection with enforcement of a Section 16(b) claim if the amount sued for were below the $ 10,000 required by 28 U.S.C. § 1331. Plaintiffs Grace and LLB were, respectively, certain minority shareholders of a 91%-owned closed-end investment company which had been merged into its parent, Berkshire Industries, Inc., and the law firm which represented those shareholders. As part of the merger proceedings, Berkshire had applied for an exemption under Section 17 of the Investment Company Act of 1940, 15 U.S.C. § 80a-17, which prohibits absorption of such a subsidiary by the short-form merger planned by Berkshire unless the SEC finds the proposed merger "reasonable, fair, free of overreaching and consistent with the general purposes of the Act." Id. at 1263. In proceedings before the Securities and Exchange Commission ("SEC") where the parties were Berkshire and the SEC's Division of Corporate Regulation minority shareholders including the plaintiffs were granted leave to participate and did so. At the close of the SEC hearing, Berkshire withdrew its Section 17 exemption application and the SEC denied LLB's application for attorneys' fees to be paid by the subsidiary or by Berkshire on the grounds that the SEC lacked jurisdiction to consider such a claim. Plaintiffs then brought an action for attorneys' fees and expenses incurred in connection with the SEC proceeding, alleging that, by their actions, they had prevented violations of Sections 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and 17(a) of the Investment Company Act. On Appeal from the district court's dismissal of that action, the Second Circuit stated:

 
"it would appear that the illicit behavior charged is encompassed within the substantive sections of the Investment Company Act and of the Securities Exchange Act relied upon in the complaint.
 
"However, the jurisdictional sections (Section 27 of the Exchange Act and Section 44 of the Investment Company Act) specify that federal courts shall have jurisdiction only of "violations' of these statutes and actions in equity and at law brought to ...

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