259 U.S. 156 (2019), Continental Insurance Company v. United States

Citation:259 U.S. 156, 42 S.Ct. 540, 66 L.Ed. 871
Party Name:Continental Insurance Company v. United States
Case Date:May 29, 1922
Court:United States Supreme Court
 
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259 U.S. 156 (2019)

42 S.Ct. 540, 66 L.Ed. 871

Continental Insurance Company

v.

United States

United States Supreme Court

May 29, 1922

APPEALS FROM THE DISTRICT COURT OF THE UNITED STATES

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

Syllabus

1. Upon an appeal under the Expedition Act of February 11, 1903, as modified by Jud.Code, § 291, from a decree entered under a mandate of this Court directing the dissolution of a combination in restraint of interstate trade, this Court has jurisdiction, of its own motion and independently of the assignments of error, to determine whether the mandate has been properly complied with, and to require such compliance. P. 165.

2. A plan decreed by the district court (summarized in the opinion, post, 166) for dissolving the combination adjudged unlawful in United States v. Reading Co., 253 U.S. 26, approved, insofar as it provides for merging the Philadelphia & Reading Railway Company in the Reading Company, shorn of corporate capacity to do other than a railroad business, for separating the Central Railroad Company of New Jersey from the Reading Company by sale or disposition of the shares of the former held by the latter (p. 175), for separating tho Lehigh & Wilkes-Barre Coal Company by sale of its stock held by the Central Railroad Company of New Jersey (p. 175), and for separating the Reading Company from the Philadelphia & Reading Coal & Iron Company by transfer of all the stock of the latter (held by the former) to a new coal company, to be organized by trustees of the court, the stock of which shall be issued under conditions assuring that those who acquire it shall not be interested in the Reading Company, but disapproved, insofar as it leaves the capital stock and properties of the Philadelphia & Reading Coal & Iron Company subject to the lien of an outstanding

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general mortgage covering also much of the property of the Reading Railway Company, payment of which, as between these two, is assumed by the Reading Company, and insofar as it provides that the Philadelphia & Reading Coal & Iron Company shall give a new mortgage of all its property to secure bonds to be delivered by it to the Reading Company in the adjustment of their financial relations. P. 167.

3. The court has power under the Sherman Anti-Trust Act, in dissolving a combination of two corporations, to disregard the letter and legal effect of a general mortgage of their properties and of the bonds secured thereby in order to achieve the purpose of the act. P. 171. United States v. Southern Pacific Co., post, 214.

4. In this case, the general mortgage of the Reading Company and the Philadelphia & Reading Coal & Iron Company gave notice on its face of the unlawful union and purpose of which it was the necessary instrument, and those who took the bonds thus secured, although they may have done so innocently, relying on legal advice and surrendering valid underlying liens created before the Sherman Act, hold them subject to the judicial power to free the two properties from the consolidating tendency of the mortgage by relieving one of them from the lien and substituting a judicial equivalent in protection of the bondholders. P. 171.

5. The decree in this case should modify the liability under the general mortgage and bonds so that the obligation of each mortgagor company upon the bonds, and the lien upon its property, shall be reduced to an amount proportionate to the ratio of the value of its property subject to the mortgage to the value of all the property so mortgaged, and should make specific provisions for foreclosure of the resulting separate liens in case of default. P. 173.

6. Any injury to the security caused by this modification of the terms of the debt and mortgage may be compensated by such payment to the bondholders by either or both mortgagor companies, as may seem equitable and convenient. P. 174.

7. Authority is given the district court to amend the plan of dissolution for the purpose of leaving the Reading Company properly financed, and to make such detailed changes as, after full hearing of all the parties, it may find practically necessary in following the general outlines of the modifications here made. P. 174.

8. The decree should provide not only that all stockholders of the new coal company, upon receiving and registering their stock, shall make affidavits that they are not owners or the agents or representatives of owners of stock in the Reading Company, but also

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should require the merged Reading Company to adopt a bylaw, effective until the further order of the court, permitting registration of transfers of its stock only in the names of persons who make affidavit that they are not stockholders of the new or old coal companies and have not been and are not holders of proxies to vote shares therein. P. 175.

9. The plan of dissolution provides that the stock of the new coal company shall be disposed of primarily by sale to the preferred and common stockholders of the Reading Company, share and share alike, of assignable certificates exchangeable for the new coal company's shares by holders who prove at the time that they are not stockholders or representing stockholders of the Reading Company or in any agreement in its interest for the control of the coal company.

Held:

(a) That the so-called sale is, in effect, a distribution of forbidden surplus assets of the Reading Company to its stockholders, small payments being required for the purpose of providing the company with additional capital for the operation of its railway system. P. 176.

(b) That the distribution as between the preferred and common stockholders must be determined by the organization agreement of the Reading Company defining their rights, and must be pro rata, whether under that agreement the net profits of any past year, after paying preferred shareholders their full percentage, may be divided among the common stockholders or not, since the declaring of any dividend is left to the honest discretion of the board of directors, and undivided profits are to be regarded as capital assets and distributed on liquidation, the board not having applied them as dividends. P. 177.

10. It is a general rule that stockholders, common and preferred, share alike in the assets of a liquidating corporation if the preference be only as to dividends. P. 181.

11. Whether, under the federal Commodities Clause and the Constitution of Pennsylvania, it will be proper and lawful that the Reading Company, becoming reorganized as a railroad corporation, continue to own stock of the Reading Iron Company, an iron manufacturing concern, will be determined, and the plan of dissolution modified accordingly, by the district court. P. 181.

273 F. 848 affirmed with modifications.

[42 S.Ct. 540] This case presents the questions, first, whether a decree of the district court, entered under a mandate from this

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Court in United States v. Reading Co., 253 U.S. 26, is in accordance therewith, and second, whether it does equity to the appellants.

[42 S.Ct. 541] The original suit was instituted by the United States to dissolve the relation existing between the Reading Company, the Philadelphia & Reading Railway Company, the Philadelphia & Reading Coal & Iron Company, all corporations of Pennsylvania, the Central Railroad Company of New Jersey, a corporation of New Jersey, and the Lehigh & Wilkes-Barre Coal Company, a corporation of Pennsylvania, as a combination to restrain and monopolize interstate commerce in anthracite coal, and to violate the commodities clause of the Act of June 29, 1906, 34 Stat. 585.

This Court found that, by a scheme of reorganization, adopted in December, 1895, the Philadelphia & Reading Railway Company and the Philadelphia & Reading Coal & Iron Company combined to deliver into the complete control of the board of directors of a holding company, the Reading Company, all of the property of much the largest single coal company operating in the Schuylkill field, and almost 1,000 miles of railway over which its coal must find its access to interstate markets, and that this constituted a combination unduly to restrain and monopolize interstate commerce in anthracite coal; that the Philadelphia & Reading Railway Company and the Philadelphia & Reading Coal Company had thereafter but one stockholder, the Reading Company, and that thus the Reading Company served to pool the property, the activities, and the profits of the three companies. The Court further found that, through the acquisition by the Reading Company of a majority of the stock of the Jersey Central Railroad Company of New Jersey, which itself owned 90 percent of the stock in the Lehigh & Wilkes-Barre Coal Company, the illegal power of the combination was greatly increased, and that the relation of common control through

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stock ownership of the Philadelphia & Reading Railway Company and the Philadelphia & Reading Coal Company, and that of the Jersey Central Railroad Company and the Lehigh Valley & Wilkes-Barre Coal Company were violations of the commodities clause, requiring dissolution. The court therefore remanded the case to the district court, directing a decree in conformity to the opinion dissolving the whole combination of the four companies with the Reading Company and such disposition of the shares of stocks and bonds and other property of the Reading Company as might be necessary to establish the entire independence of each company from the others, to the end that the affairs of all of them might be conducted in harmony with law.

For convenience the Philadelphia & Reading Railway Company will be called the Reading Railway Company, the Philadelphia & Reading Coal & Iron Company the Reading Coal Company, the Central...

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