244 F.Supp. 51 (S.D.N.Y. 1965), Schwartz v. Bowman

Citation:244 F.Supp. 51
Party Name:Sandor SCHWARTZ, Plaintiff, v. Robert J. BOWMAN et al. and the Chesapeake & Ohio Railway Co., Defendants.
Case Date:July 19, 1965
Court:United States District Courts, 2nd Circuit, Southern District of New York

Page 51

244 F.Supp. 51 (S.D.N.Y. 1965)

Sandor SCHWARTZ, Plaintiff,

v.

Robert J. BOWMAN et al. and the Chesapeake & Ohio Railway Co., Defendants.

United States District Court, S.D. New York

July 19, 1965

Page 52

J. Milton Fainer, New York City, for plaintiff; Sidney L. Garwin, New York City, of counsel.

Donovan, Leisure, Newton & Irvine, New York City, for defendants, Cyrus S. Eaton, Walter J. Tuohy and Cyrus S. Eaton, Jr.; Carl E. Newton, Helmut F. Furth, M. Lauck Walton, Deward F. McCabe, New York City, of counsel.

Lord, Day & Lord, New York City, for defendant, Anita O'Keeffe Young, executrix of the estate of Robert R. Young, deceased; Thomas F. Daly, Robert D. Bentley, New York City, of counsel.

Watters & Donovan, New York City, for defendant Alleghany Corp.; James M. Fitzsimons, Thomas D. Wellington, New York City, of counsel.

Kissam & Halpin, New York City, for defendant Allan P. Kirby; Leo T. Kissam, Anthony S. Genovese, New York City, of counsel.

Satterlee, Warfield & Stephens, New York City, for defendant Clinton W. Murchison; Henry J. Formon, Jr., New York City, of counsel.

John Howley, New York City, for defendant Chasapeake & Ohio Ry. Co.

FREDERICK van PELT BRYAN, District Judge:

Plaintiff, the holder of 100 shares of common stock of The Chesapeake & Ohio Railway Company (C. & O.), brings this derivative action on behalf of C. & O. against Alleghany Corporation (Alleghany),

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various persons who are or were officers and directors of either Alleghany or C. & O. or both and the executrix of a deceased director. C. & O. is named as a nominal defendant.

Jurisdiction over the subject matter is alleged to be based on § 44 of the Investment Company Act of 1940, 15 U.S.C. § 80a-43, and diversity of citizenship, 28 U.S.C. § 1332(a).

Service on defendants Eaton, Eaton, Jr., Tuohy, Murchison and the Young executrix was made outside the State of New York under purported authority of § 44 of the Investment Company Act. Defendants Kirby and Alleghany were both served in New York. The nominal defendant C. & O. appeared generally. The other defendants named have not been served.

This litigation and the related case of Annenberg v. Alleghany and C. & O. (Civ. 135-152) were commenced in January 1957 and July 1958, respectively. Both cases attack the same transaction between Alleghany and C. & O., this case being brought by a stockholder of C. & O. and the other by a stockholder of Alleghany. Motions to dismiss on similar grounds in both cases were argued at the same time before me, and counsel in both submitted joint papers in opposition.

Both cases relate to transactions in 1954 by which Alleghany relinquished control of C. & O. and acquired control of the New York Central Railroad Company (Central). Various questions involved in these two suits have been before the Interstate Commerce Commission, the Securities and Exchange Commission, federal district judges, a three judge court, the court of appeals for this circuit, the United States Supreme Court and the New York State Courts, on numerous occasions over a period of more than ten years. See Chesapeake & Ohio Ry. Purchase, 261 I.C.C. 239 (1945), 271 I.C.C. 5 (1948); Louisville & J. B. & R. R. Merger, 290 I.C.C. 725, aff'd, 295 I.C.C. 11 (1955); Alleghany Corp., 20 S.E.C. 731 (1945), 37 S.E.C. 424 (1956); Breswick & Co. v. Briggs, 130 F.Supp. 953 (S.D.N.Y.), 135 F.Supp. 397 (S.D.N.Y. 1955); Breswick & Co. v. United States, 134 F.Supp. 132 (S.D.N.Y.1955), 138 F.Supp. 123 (S.D.N.Y. 1956), (per curiam) rev'd, sub nom. Alleghany Corp. v. Breswick & Co. 353 U.S. 151, 77 S.Ct. 763, 1 L.Ed.2d 726, 156 F.Supp. 227 (S.D.N.Y. 1957) rev'd, per curiam sub nom. Alleghany Corp. v. Breswick & Co., 355 U.S. 415, 78 S.Ct. 421, 2 L.Ed.2d 374, 160 F.Supp. 754 (S.D.N.Y. 1958); Neisloss v. Bush, 110 U.S.App.D.C. 396, 293 F.2d 873 (D.C.Cir. 1961); Schwartz v. Bowman, 156 F.Supp. 361 (S.D.N.Y. 1957), appeal dismissed sub nom. Schwartz v. Eaton, 264 F.2d 195 (2 Cir. 1959); Zenn v. Anzalone, 1 A.D.2d 662, 146 N.Y.S.2d 286 (1st Dep't 1955) (per curiam), leave to appeal denied, 1 A.D.2d 773, 149 N.Y.S.2d 213 (1st Dep't 1956), 4 A.D.2d 945, 168 N.Y.S.2d 479 (1st Dep't 1957) (per curiam), 17 Misc.2d 897, 191 N.Y.S.2d 840 (Spec. Term, N.Y. County 1959), appeals dismissed without opinion, 11 A.D.2d 938, 210 N.Y.S.2d 748 (1st Dep't 1960); Freeman v. Kirby, 27 F.R.D. 395 (S.D.N.Y. 1961); Murchison v. Kirby, 27 F.R.D. 14 (S.D.N.Y.), 201 F.Supp. 122 (S.D.N.Y. 1961); Alleghany Corp. v. Kirby, 218 F.Supp. 164 (S.D.N.Y. 1963), aff'd, 333 F.2d 327 (2 Cir. 1964), aff'd en banc by an evenly divided court, 340 F.2d 311 (2 Cir.), cert. granted sub nom. Holt v. Kirby, 85 S.Ct. 1772, 14 L.Ed.2d 698 (June 1, 1965), 344 F.2d 571 (2 Cir.), cert. granted sub nom. Holt v. Alleghany Corp., 85 S.Ct. 1772, 14 L.Ed.2d 698 (June 1, 1965). 1 The issues have become increasingly complicated through this maze of litigation.

On January 19, 1954, Alleghany sold 104,854 shares of C. & O. stock, which represented a controlling interest in C. & O., to defendant Eaton. On February

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23, 1954, C. & O. sold 800,000 shares of Central stock to defendants Murchison and Richardson, who are alleged to be nominees of Alleghany. The sale of the Central stock enabled Alleghany to oust the then current management of Central and to obtain control of that railroad system on May 26, 1954.

The complaint in the case at bar proceeds upon the theory that the sale of Central stock by C. & O. to Alleghany was void under § 47 of the Investment Company Act, 15 U.S.C. § 80a-46, because Alleghany was then an investment company which had failed to register with the SEC as the act required. It asserts a claim under the Investment Company Act for rescission of the Central transaction between Alleghany and C. & O.

The complaint alleges that both the sale of C. & O. stock to Eaton and the sale of Central stock to Alleghany nominees were carried out pursuant to a conspiracy by the individual defendants and Alleghany to enable Alleghany to gain control of Central and for their own profit and aggrandizement. As part of the scheme Alleghany is alleged to have sold its block of 104,854 shares of C. & O. to Eaton at an inadequate price. By virture of the control of C. & O. thus obtained Eaton is alleged to have then caused C. & O. to sell to the Alleghany nominees the 800,000 shares of Central at an inadequate price.

Plaintiff seeks to have the Central transaction set aside, and to compel to individual defendants and Alleghany to account to C. & O. for profits and damages. He also seeks to have Eaton account to C. & O. for alleged profits on his purchase of C. & O. stock from Alleghany on what is apparently a common law corporate opportunity theory.

The answers admit the two transactions took place but in substance deny all other material allegations of the complaint, including the assertion of federal jurisdiction under the Investment Company Act and the sufficiency of the claim for relief under that act.

Each of the defendants has moved for dismissal of the complaint and for summary judgment pursuant to Rules 12(b) and 56(b), F.R.Civ.P., on a variety of grounds, a number of which are common to all.

Defendants all contend (1) that this court lacks jurisdiction to entertain the action because the subject matter is under the primary jurisdiction of the Interstate Commerce Commission and the action necessarily involves an attack on outstanding orders and decisions of the Commission with respect to the subject matter; (2) that under these orders and decisions of the ICC Alleghany was subject to regulation under the Interstate Commerce Act and therefore was expressly exempt from the Investment Company Act; (3) that assuming Alleghany was subject to the Investment Company Act, plaintiff has no claim for relief under that act and (4) that if there is no jurisdiction under the Investment Company Act or no claim for relief under that act, any pendent non-federal claim against defendants necessarily falls.

I. The federal aspects of the complaint.

The sole federal ground for relief alleged in the complaint is based on the Investment Company Act of 1940.

The foundation on which the claim under the Investment Act rests is (a) that at the time C. & O. sold the 800,000 shares of Central to Alleghany nominees, Alleghany was an investment company required to register with the SEC under the Investment Company Act; (b) that Alleghany failed so to register; and (c) that in consequence the Central transaction was void under the terms of that act. Upon this foundation plaintiff asserts that a claim on behalf of C. & O. arose under the Investment Company Act for rescission of the Central transaction and an accounting by the defendants for profits and damages.

Assuming the basic premises, there are, as the defendants urge, serious questions here as to whether plaintiff suing on behalf of C. & O. has status to sue under the Investment Company Act on transactions of this nature, and, even if he has such status, whether he is entitled to relief under that act absent a demonstrated

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causal connection between the violation of the act alleged and the damages suffered. See Barnett v. Anaconda Co., 238 F.Supp. 766 (S.D.N.Y.1965), and cases there cited. Before such questions are reached, however, it must be determined whether the foundation on which the claim under the Investment Company Act is based is sound and, indeed whether this court has jurisdiction to consider that question at all.

Plainly, if Alleghany was not subject to the Investment Company Act when the transactions complained of took place, it was under no duty to register with the SEC, the basic premise falls and the claim under the Investment Company Act falls with it.

Defendants assert that the ICC by a succession of orders and decisions has determined that at all times relevant here Alleghany was subject to regulation under the...

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