## Facts

- Fremont General Corporation (Fremont) had equity securities registered under the Securities Exchange Act of 1934.
- Lee Emerson McIntyre beneficially owned more than 10% of Fremont stock (including through a family trust), making him a statutory insider subject to § 16(b).
- On February 18, 1988, McIntyre and his wife, through their partnership (L.E. McIntyre & Co.), loaned their son David $2 million; David executed a demand note and pledged 198,187 shares of Fremont stock as collateral.
- In December 1989, after Fremont terminated David’s employment, David wanted to sell his Fremont stock.
- On January 4, 1990, David and the partnership entered an agreement for the partnership to buy all 198,187 shares at $19.835 per share (total $3,931,039.15).
- By January 1990, Fremont’s stock price had risen so that only 141,193 shares were needed to satisfy the outstanding loan balance plus interest.
- After the loan was satisfied, the partnership acquired the remaining 56,694 shares from David at the same price; the partnership paid the remaining purchase price (about $1.124 million) with a negotiable promissory note.
- On March 28, 1990, within six months of the January 4 acquisition, McIntyre (through the partnership) sold 70,000 shares of Fremont stock on the open market at $20.75 per share.
- C.R.A. Realty Corp. (C.R.A.), a Fremont shareholder, demanded that Fremont seek recovery of McIntyre’s alleged short-swing profit under § 16(b). Fremont did not act within 60 days.
- C.R.A. filed a shareholder derivative action under § 16(b) against McIntyre and Fremont. On cross-motions for summary judgment, the district court granted summary judgment for McIntyre, reasoning that the transaction did not present even the potential misuse of inside information and treating the acquisition as covered by the “debt previously contracted” exemption.
- C.R.A. appealed.

## Issues

1. Does § 16(b)’s exemption for securities “acquired in good faith in connection with a debt previously contracted” cover only the shares transferred to satisfy the preexisting debt, or also additional shares acquired for new consideration in the same overall transaction?
2. Does a voluntary purchase of the additional 56,694 shares and a voluntary sale within six months trigger § 16(b) liability without inquiry into actual misuse of inside information?
3. Can an insider avoid § 16(b) liability by characterizing the later sale as a sale only of exempt shares when exempt and nonexempt shares are indistinguishable in the insider’s holdings?

## Decision

- The Ninth Circuit reversed the district court’s summary judgment for McIntyre and directed that judgment be entered for C.R.A.
- The court held that the “debt previously contracted” exemption applied to the 141,193 shares used to satisfy David’s preexisting debt, but did not apply to the additional 56,694 shares acquired after the debt was paid.
- The acquisition of the 56,694 shares for a promissory note constituted a “purchase” under § 16(b), and the March 28, 1990 sale within six months constituted a matching “sale,” requiring recovery of any profit attributable to that short-swing trading.
- The court rejected the district court’s reliance on a lack of potential abuse, emphasizing that § 16(b) operates by objective criteria and does not depend on proof of intent, fairness, or actual use of nonpublic information.
- The court also rejected treating the transaction as an “unorthodox transaction” under Kern County because McIntyre’s purchase and sale were voluntary, not compelled by a merger or similar event.
- McIntyre could not avoid liability by assigning the sale to only the exempt portion of shares; the relevant shares were treated as fungible for § 16(b) matching purposes.

## Legal Principles

- Section 16(b) imposes strict liability on statutory insiders for profits realized from any purchase and sale (or sale and purchase) of an issuer’s equity securities within a period of less than six months; the issuer may recover the profit, and a shareholder may sue derivatively after demand and lapse of the statutory period.
- The exemption for securities acquired in good faith “in connection with a debt previously contracted” is limited to the portion of securities received to satisfy the preexisting debt; it does not extend to securities acquired for additional consideration once the debt has been discharged.
- Courts apply § 16(b) using the statute’s objective triggers, not case-by-case assessments of whether the insider likely misused confidential information.
- The “unorthodox transaction” doctrine associated with forced or atypical corporate events does not protect voluntary, ordinary market purchases and sales by insiders.
- When exempt and nonexempt shares are held together, an insider generally cannot defeat § 16(b) by claiming that the shares sold were only the exempt shares.

## Conclusion

The Ninth Circuit held that § 16(b)’s debt-related exemption protected only the shares needed to satisfy David McIntyre’s preexisting loan obligation, not the additional 56,694 shares the partnership acquired for a promissory note; because McIntyre then sold shares within six months in a voluntary market transaction, § 16(b) required recovery of the short-swing profit attributable to the nonexempt purchase and sale.


C.R.A. Realty Corp. v. Fremont General Corp., 5 F.3d 1341 (1993)