C.R.A. Realty Corp. v. Fremont General Corp.

Lee Emerson McIntyre (defendant) owned more than 10 percent of the stock of Fremont General Corporation (Fremont) (defendant), which was required to register its securities under the Securities Exchange Act of 1934. In February 1988, McIntyre and his wife, through their partnership (the partnership), loaned $2 million to their son, David, who worked for Fremont. As security for the loan, David pledged 198,187 shares of Fremont stock. In December 1989, Fremont terminated David’s employment, prompting David to consider selling all of his Fremont stock. In January 1990, the partnership agreed to purchase David’s shares at $19.835 per share. By that time, the value of Fremont’s stock had increased such that David needed to sell only 141,193 shares to satisfy the outstanding loan balance plus interest. Once David paid off the loan, the partnership purchased 56,694 Fremont shares from David at the agreed-upon price. In March 1990, McIntyre, through the partnership, sold 70,000 shares of Fremont stock on the open market for $20.75 per share. Thereafter, C.R.A. Realty Corporation (C.R.A.) (plaintiff), a Fremont stockholder, demanded that Fremont recover the short-swing profit that McIntyre allegedly made from the sale of the 56,694 shares. After Fremont failed to respond, C.R.A. sued McIntyre and Fremont pursuant to § 16(b) of the Securities Exchange Act of 1934. C.R.A. and McIntyre both moved for summary judgment. The district court viewed the loan as overcollateralized and found that § 16(b) did not apply to the shares in question under the statutory exemption for shares acquired in good faith in connection with a debt previously contracted because the transaction purportedly did not present the potential for abuse of insider information. Thus, the district court granted summary judgment for McIntyre. C.R.A. appealed.