Daily Income Fund, Inc. v. Fox

PETITIONER: Daily Income Fund, Inc.
LOCATION: Sugar Camp Road

DOCKET NO.: 82-1200
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 464 US 523 (1984)
ARGUED: Nov 07, 1983
DECIDED: Jan 18, 1984

Daniel A. Pollack - on behalf of the Petitioners
Richard M. Meyer - on behalf of the Respondent

Facts of the case


Media for Daily Income Fund, Inc. v. Fox

Audio Transcription for Oral Argument - November 07, 1983 in Daily Income Fund, Inc. v. Fox

Warren E. Burger:

We'll hear arguments next in Daily Income Fund against Fox.

Mr. Pollack, I think you may proceed whenever you are ready.

Daniel A. Pollack:

Mr. Chief Justice, and may it please the Court:

The question presented in this case is whether a shareholder's action under Section 36(b) of the Investment Company Act is exempt from the director demand requirement of Rule 23.1 of the Federal Rules of Civil Procedure.

Underlying this seemingly narrow question are several questions of perhaps more profound dimension, some or all of which this Court may wish to consider.

First, what exactly is a derivative action or, stated another way, what are the necessary and sufficient conditions for a derivative action?

Second, what is the purpose of the director demand requirement?

Third, does an investment company have an implied right of action under Section 36(b)?

Petitioners' position in this case is that the director demand requirement does apply to a shareholder's action under Section 36(b) because the action is derivative; that the director demand requirement performs a most valuable function of permitting pre-litigation resolution or adjustment of disputes, thus avoiding needless litigation; and that the director demand requirement is consistent with two long-standing and salutary policies repeatedly upheld by this Court.

First, the exhaustion of intracorporate remedies, and, second, letting directors direct.

The facts in this case may be simply summarized, and they are in our blue brief.

The Daily Income Fund is a money market fund.

Reich & Tang are the investment advisors to Daily Income Fund.

A majority of the directors of Daily Income Fund are disinterested directors; that is they are in no way affiliated with or associated with the advisor.

In 1981, Martin Fox, a minority shareholder of the Daily Income Fund, instituted an action against Reich & Tang allegedly to recover excessive fees.

In doing so, he simply ignored the directors and by-passed entirely the board.

Judge Kevin T. Duffy in the Southern District of New York dismissed his complaint for failure to comply with the director demand requirement of Rule 23.1.

The Court of Appeals reversed and held that no compliance was required, because the action was not, in the words of the Court of Appeals, "strictly speaking derivative".

The Court of Appeals reached this conclusion because it said that the investment company itself had no right of action under Section 36(b).

The Court of Appeals also went on to hold in a supplementary holding that demand on the directors would be, in its words,

"an empty, unfruitful, and dilatory exercise. "

The starting point of the legal analysis seems not to be in dispute.

Rule 23.1 applies to and governs all derivative actions in the federal courts.

William H. Rehnquist:

Mr. Pollack, where in your brief will we find the full text of 23.1?

Daniel A. Pollack:

Your Honor, the full text is not in our brief.

William H. Rehnquist:

It is not in your brief even though that is the controlling--

Daniel A. Pollack:

That is correct, Your Honor.

I think it was an oversight on our part.

We did print it in the Second Circuit brief as an addendum.

Unfortunately, we did not print it in the Supreme Court brief.