Burks v. Lasker

PETITIONER: Burks
RESPONDENT: Lasker
LOCATION: Monroe County Courthouse

DOCKET NO.: 77-1724
DECIDED BY: Burger Court (1975-1981)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 441 US 471 (1979)
ARGUED: Jan 17, 1979
DECIDED: May 14, 1979

ADVOCATES:
Daniel A. Pollack - for petitioners
Joseph H. Einstein - for respondents
Ralph C. Ferrara - for the Securities and Exchange Commission, Washington, D

Facts of the case

Question

Media for Burks v. Lasker

Audio Transcription for Oral Argument - January 17, 1979 in Burks v. Lasker

Warren E. Burger:

We’ll hear arguments next in Burks against Lasker.

Mr. Pollack you may proceed whenever you are ready.

Daniel A. Pollack:

Mr. Chief Justice and then may it please the Court.

The central issue in this case may be stated as follows.

Does the Investment Company Act of 1940 deprive the disinterested directors of the mutual fund of their power to terminate a stockholders' derivate action, which those directors in good faith have concluded is contrary to the best interests of the fund and its shareholders?

The District Court held that the disinterested directors in the exercise of their good faith business judgment have the power to terminate such an action.

The Court of Appeals held that as a matter of law, the directors have no such power irrespective of the fact that they acted in good faith.

Certain subsidiary issues are also raised in this case and they will emerge in my later discussion of the plaintiffs point in this case.

The facts are set forth chronologically in our main brief, the white covered brief that pages 4 through 19.

In the interest of moving promptly to the central legal issue in this case I will simply summarize the highlights at this point.

In November 1969, Fundamental Investors, the mutual fund involved in this case, purchased $20 million of the commercial paper of Penn Central.

The commercial paper of Penn Central was rated, prime, the highest rating by NCO, a subsidiary of Dun & Bradstreet which is the foremost independent rating agency in the United States.

In June 1970, Penn Central filed for reorganization and defaulted on the notes.

Numerous people were caught in the default as well as Fundamental Investors, banks, trust companies, charities, universities many other sophisticated and able investors.

In November 1970, the Board of Directors of Fundamental authorized a lawsuit against Goldman Sachs, the dealer which had sold the paper.

That suit proceeded vigorously for several years as part of a multi-district proceeding.

In February 1973, three years after the purchase, two stockholders holding very minimal shares filed a derivate action against Anchor Corporation, the investment advisor to Fundamental, and against the Directors of Fundamental at the time of the purchase, that is to say the 1969 directors.

That action was stayed by Judge Gurfein, pending resolution of the claims of Fundamental Investors against Goldman Sachs.

In July 1974, on the eve of trail of the action between Fundamental and Goldman Sachs there was a settlement pursuant on to which Fundamental was paid five million two hundred fifty thousand dollars in cash and also the balance of their claim in the notes of Penn Central and reorganization.

The board of directors --

Potter Stewart:

Has the value of those yet been ascertained?

Daniel A. Pollack:

The exact value is not a matter of record, Your Honor.

However, I believe that the card indication is that the additional paper may be worth as much as $3 million or $4 million.

The Board of Directors of Fundamental promptly convened and determined that it would review the Lasker action, that is to say the derivative action, and that the five disinterested Directors among them who were not defendants in the Lasker action, who had not been Directors at the time of purchase and who were not affiliated in any way with Anchor, would constituting quorum, determine what posture the fund should take with respect to that action.

Those five disinterested Directors there upon retained independent special counsel, former Chief Judge of the State of New York, Stanley H. Fuld and they instructed him to prepare a comprehensive memorandum and report on the subject.

Judge Fuld studied the matter for several months and in December issued a report to the disinterested directors, in which he concluded that neither Anchor nor any of the fund directors had violated any law or any contractual or other obligation to Fundamental Investors.

The disinterested directors then deliberated the matter among themselves in a serious of special meetings.

They interrogated people in the fund, they interrogated people from Anchor, they questioned Judge Fuld, they communicated extensively and among themselves they had no contact with anyone from Anchor.

In early January 1975, those five disinterested directors put the matter to a vote and unanimously determined that the maintenance of these derivative action against the advisor and the directors was contrary to the best interests of the fund and they determined that they would move to dismiss the suit.

The motion to dismiss was filed.