## Facts

- In June 1966, Isadore Blau, a Rayette-Faberge, Inc. (Rayette) stockholder, hired attorney Morris J. Levy to investigate whether Rayette insiders had realized short-swing trading profits recoverable by the corporation under Exchange Act § 16(b).
- Blau agreed to compensate Levy based on any benefit Rayette obtained from Levy’s work.
- After an extensive review of insider transactions, Levy concluded that Walter P. Niemec, a Rayette officer and director, had engaged in purchases and sales of Rayette stock within six-month periods that could trigger § 16(b) disgorgement to Rayette.
- One group of Niemec transactions appeared time-barred by § 16(b)’s two-year limitations period; another group still had time remaining, though a substantial part of the limitations period had already run.
- On July 28, 1966, Levy sent Rayette a detailed letter identifying the Niemec transactions and requesting that Rayette sue to recover the profits; the letter also stated that Blau would sue on Rayette’s behalf after the statutory 60-day waiting period if Rayette did not act.
- Rayette responded on August 4, 1966, stating that it was investigating the matter.
- As the 60-day period neared expiration, Levy prepared a complaint for Blau to file (September 22, 1966).
- On September 23, 1966, Rayette’s counsel informed Levy that Niemec had agreed to pay the claimed profits to Rayette and that litigation would not be necessary.
- Niemec paid Rayette $15,722.42 plus interest on September 26, 1966.
- Rayette refused Blau’s demand that the corporation reimburse Levy for attorneys’ fees.
- In November 1966, Blau and Levy filed suit seeking recovery of legal fees; the Southern District of New York granted Rayette summary judgment, and Blau and Levy appealed.

## Issues

1. Whether a stockholder’s attorney may recover reasonable attorneys’ fees from the corporation when the attorney’s investigation and demand substantially cause the corporation to recover § 16(b) short-swing profits, even though no derivative action is filed.
2. Whether summary judgment was proper where the record left factual questions about causation (whether counsel’s work was a substantial factor in the recovery) and the value of counsel’s services.

## Decision

- The Second Circuit reversed the grant of summary judgment to Rayette and remanded for further proceedings.
- The court held that a fee award is not categorically barred merely because the corporation recovered the § 16(b) profits without a filed derivative complaint.
- The court explained that the proper inquiry is whether the stockholder’s attorney’s work was a substantial factor in producing the corporate recovery and conferred a real benefit on the corporation.
- Because causation and the value of Levy’s services were fact-dependent and not resolved by the papers, the district court should not have ended the case on summary judgment.

## Legal Principles

- Exchange Act § 16(b) is enforced largely through private initiative; stockholders and their attorneys often identify short-swing profit claims that insiders and management may have little incentive to pursue.
- A corporation that obtains a monetary recovery due in significant part to a stockholder-attorney’s efforts may, in appropriate circumstances, be required to pay a reasonable fee for those services, even if the corporation settles or collects before a derivative suit is filed.
- Entitlement to fees turns on causation and benefit: the attorney must show that the work performed was a substantial factor leading to the recovery and that the services were of substantial value to the corporation.
- Fee recovery is not automatic for sending a demand letter; the court must assess what counsel actually did, whether the corporation was already acting, and whether counsel’s efforts materially advanced the result.
- Where material factual disputes exist regarding causation and the worth of the services, summary judgment is improper; the district court must develop the facts and then determine any reasonable fee.

## Conclusion

The Second Circuit held that a stockholder’s attorney may be entitled to fees if the attorney’s investigation and demand were a substantial factor in causing the corporation to recover § 16(b) short-swing profits, even though the corporation obtained payment without a filed derivative action; because those questions required factual development, summary judgment for the corporation was reversed and the case was remanded.


Blau v. Rayette-Faberge, Inc., 389 F.2d 469 (1968)