276 F.2d 525 (2nd Cir. 1959), 109, United States v. New York, N.H. & H.R. Co.

Docket Nº:109, 25793, 25879.
Citation:276 F.2d 525
Party Name:UNITED STATES of America, Plaintiff-Appellant, v. NEW YORK, NEW HAVEN AND HARTFORD RAILROAD COMPANY, Tri-Continental Financial Corporation, A.C. Allyn and Company, Incorporated, American Transportation Enterprises, Inc., Equitable Securities Corporation, Carl M. Loeb, Rhoades & Co., The Robinson-Humphrey Company, Inc., and John W. Clarke & Co., Def
Case Date:November 02, 1959
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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276 F.2d 525 (2nd Cir. 1959)

UNITED STATES of America, Plaintiff-Appellant,


NEW YORK, NEW HAVEN AND HARTFORD RAILROAD COMPANY, Tri-Continental Financial Corporation, A.C. Allyn and Company, Incorporated, American Transportation Enterprises, Inc., Equitable Securities Corporation, Carl M. Loeb, Rhoades & Co., The Robinson-Humphrey Company, Inc., and John W. Clarke & Co., Defendants-Appellees.

Helene GLENMORE et al., Plaintiffs-Appellants,


John I. AHERN et al., Defendants-Appellees.

Nos. 109, 25793, 25879.

United States Court of Appeals, Second Circuit.

November 2, 1959.

Argued Oct. 6, 1959.

Rehearing Denied Dec. 2, 1959.

On Suggestion of Lack of Appellate Jurisdiction, Jan. 29, 1960.

Jan. 29, 1960

Application for Hearing In Banc Denied March 23, 1960.

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[Copyrighted Material Omitted]

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George Cochran Doub, Asst. Atty. Gen., and Morton Hollander, Peter H. Schiff, Attys., Department of Justice, Washington, D.C. (S. Hazard Gillespie, Jr., U.S. Atty. New York City, Peter H. Schiff, Robert W. Ginnane, and Harvard R. Osmond, Washington, D.C., on the brief), for plaintiff-appellant in Docket 25793.

Mathias F. Correa, New York City (James A. Fowler, Jr., J. Bernard Quigley, H. Richard Schumacher and Cahill, Gordon, Reindel & Ohl, New York City on the brief), for defendants-appellees Tri-Continental Financial Corporation et al in Docket 25793, and for defendant-appellee Tri-Continental Financial Corporation in Docket 25879.

Julius Levy, New York City (Irving Bizar and Pomerantz Levy & Haudek, New York City, on the brief), for plaintiffs-stockholders in Glenmore et al. v. Ahern et al., as amicus curiae in Docket 25793 and for plaintiffs-appellants in Docket 25879.

William T. Griffin, New York City, submitted a brief for defendant-appellee, New York, New Haven & Hartford R. Co.

Before LUMBARD, WATERMAN and FRIENDLY, Circuit Judges.

Opinion of November 2, 1959, on the merits in Docket 25793.

FRIENDLY, Circuit Judge.

The question here is whether a railroad subject to 20a of the Interstate Commerce Act, 49 U.S.C.A. 20a, can lawfully provide by agreement for significant changes in the rights and privileges of holders of 27% Of its preferred stock without having obtained authorization from the Interstate Commerce Commission

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under 20a(2). 1 We hold it cannot.

The question arises as follows: In August and October, 1955, the New York, New Haven & Hartford Railroad Company sustained extensive hurricane and flood damage. In an effort to raise funds required for repairs the New Haven management sought a $10, 000, 000 bank loan, which was to be guaranteed by the United States pursuant to 302 of the Defense Production Act of 1950, 64 Stat. 798, 801, as amended, 50 U.S.C.A.Appendix, 2092. The New Haven's charter required that such a loan be approved by the affirmative vote of two-thirds of the shares of its preferred stock considered as one class and of a majority of all the preferred and common shares considered as another. The management gave notice of a special meeting of the New Haven's stockholders to vote such approval.

After the notice was mailed, Amoskeag Company and the Dumaine family, owning 76, 570 of the 491, 540 shares of preferred, asked that the stockholders' approval be conditioned upon a proviso that the New Haven should not declare or pay any dividend on its common stock so long as the proposed loan remained unpaid. The New Haven's management then abandoned the proposed special meeting. It did this on the basis of a professed belief that Amoskeag, the Dumaine family, and other holders of preferred who normally voted with them could block the needed two-thirds vote of the preferred if the proviso were not included and that the needed majority vote of the preferred and common considered as one class could not be attained if it were.

The New Haven management thereupon entered into negotiations with a banking group to have the latter acquire the preferred shares owned by Amoskeag, the Dumaine family and others allied with them. These negotiations led to an agreement, dated November 10, 1955, between the New Haven and Union Securities Corporation on behalf of the banking group. The agreement provided that the banking group would purchase from specified sellers not less than 120, 000 nor more than 140, 000 shares of New Haven preferred stock at a price ultimately fixed at $60 per share. The New Haven agreed that it would declare a $5 dividend for 1955 on the preferred not later than April 1, 1956, and that the purchasers should have the right to sell, or, in the language of the market, to 'put' to the New Haven on and after November 18, 1957, and prior to December 18, 1957, all of the preferred stock purchased by them, less any stock sold in accordance with the agreement, at a price $10 above the purchase price. During the same period the New Haven could 'call' on the purchasers to sell the stock to the New Haven at the same price. The 'put' to the New Haven was buttressed by a provision that if 'for any reason such right should not, in the opinion of counsel for the Purchasers, be immediately enforceable in accordance with its terms, or if, for any reason, the New Haven shall fail to purchase the Preferred Stock, ' the purchasers might sell the stock and hold the New Haven liable for the difference between the agreed repurchase price and what was realized. The purchasers also agreed that prior to November 18, 1957, they would not sell any of the preferred stock

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without the approval of the New Haven, and that if they sold any of it at such prices that the net proceeds exceeded the amount payable by the New Haven under its 'call, ' they would pay such excess to the New Haven.

The agreement was consummated on November 18, 1955. The seven members of the banking group purchased 131, 385 shares of the New Haven's preferred stock at $60 per share. They received 'stock certificates registered in the names of the several purchasers' bearing specified certificate numbers. And the New Haven delivered to Union Securities on behalf of the group an instrument granting the 'put' relating to these specific shares required by the November 10 agreement and providing that all other provisions of that agreement should continue in full force and effect.

The New Haven then gave another notice of a special meeting of stockholders to vote on the proposed $10, 000, 000 loan. The proxy statement disclosed the facts summarized above. The necessary stockholder approval was given, and the loan was made with authorization of the Interstate Commerce Commission.

By the spring of 1956 it had become apparent that the New Haven required additional funds to repair the flood damage. As a condition to securing an additional loan the New Haven was required to and did obtain a modification of the agreement with the banking group. This modification included a waiver of the New Haven's obligation to pay a $5 dividend on its preferred stock for 1955; a two-year postponement of the period of the put; 2 a change so that both the put and the call should apply to all or any part of the total amount of stock held by the group; an acceleration of one year in the period for the call; and a provision that if the put or call should be exercised after repayment of the proposed loan and prior to payment of the $5 dividend for 1955, the put or call price should be $75 rather than $70 per share.

The New Haven did not seek authorization of the Interstate Commerce Commission to enter into these agreements. However, on November 29, 1955, the New Haven's Vice President-Treasurer, its Vice President-Law, and another attorney conferred with the chairman of the Interstate Commerce Commission's Finance Division and the Director of the Commission's Bureau of Finance with respect to the proposed $10, 000, 000 loan. The agreements between the New Haven and the banking group were disclosed to the Commission officials and copies were given them. The Vice President-Law informed them that the New Haven did not intend to apply for Commission approval of the agreements under 20a because he did not think it was required, that for this reason he was not filing the contracts officially, but that the New Haven desired the Commission to know about the transaction.

On March 13, 1956, the Commission issued a press release announcing that it would 'institute an inquiry concerning agreements entered into recently by the New York, New Haven & Hartford Railroad Company whereby it undertook to repurchase certain of its outstanding securities, and concerning the accounting practices of that carrier to determine whether there has been any violation of the Commission's regulations or of the statutes administered by it, or any practices indulged in which are contrary to the best interests of the carrier or of the public.' The record is not very informative as to the course of this 'inquiry.' Apparently no docket number was assigned, no hearings were held, no briefs filed or arguments made, and the

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inquiry was concluded without order of any sort. Our best information regarding it comes from the Commission's report in New York, New Haven & Hartford R. R. Loan Guarantee, 307 I.C.C. 105, 112 (1959). This states that the inquiry revealed certain accounting irregularities for the years 1954, 1955, and 1956; that these irregularities were corrected through administrative action taken by the Commission; that the new management took steps to comply with the Commission's accounting regulations in the future; and that 'The aforementioned informal inquiry was closed late in 1956.' 3

On November 17, 1958, the United States, suing on behalf of the Interstate Commerce Commission pursuant to 49 U.S.C.A. 12(1), brought this action in the Southern District of New York. It sought a declaratory judgment that the agreement between the New Haven and the banking group with respect to...

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