Blau v. Rayette-Faberge, Inc.

In June 1966, Isadore Blau (plaintiff), a stockholder of Rayette-Faberge, Inc. (Rayette) (defendant) hired attorney Morris Levy (plaintiff) to investigate whether insiders of Rayette had realized trading profits in Rayette securities that were recoverable by Rayette under § 16(b) of the Securities Exchange Act of 1934. Blau agreed to pay Levy a fee for any benefit realized by Rayette from Levy’s efforts. Levy discovered that Walter Niemec, an officer and director of Rayette, had several purchases and sales of Rayette stock within six-month periods, which generally would entitle Rayette to recover from Niemec any profits from those transactions. Section 16(b)’s two-year statute of limitations had already expired for one set of Niemec’s transactions, and approximately three-quarters of the limitations period had run on another set of Niemec’s transactions. On July 28, 1966, Levy sent a letter to Rayette informing Rayette of Levy’s discovery of Niemec’s trading profits and requesting that Rayette sue Niemec to recover those profits. The letter said that Blau would sue Niemec on Rayette’s behalf after 60 days, the mandatory waiting period under § 16(b), if by that point Rayette had not recovered Niemec’s profits or filed suit against Niemec. On August 4, 1996, Rayette told Levy that Rayette was investigating the matter. On September 22, 1966, Levy drafted a complaint for Blau in anticipation of filing suit once the 60-day waiting period expired. The next day, Rayette’s counsel informed Levy that Niemec agreed to pay Rayette the profits alleged in Levy’s July 28 letter, which Niemec paid on September 26, 1966. After Rayette refused Blau’s demand that Rayette pay Levy’s fees, Blau and Levy sued Rayette. The district court granted Rayette’s motion for summary judgment, and Blau and Levy appealed to the United States Court of Appeals for the Second Circuit.