Neisloss v. Bush

• Citation: 293 F.2d 873,110 US App. DC 396
• Decision Date: 08 June 1961
• Docket Number: No. 15774.,15774.
• Parties: Myron NEISLOSS and Randolph Phillips, Appellants, v. John W. BUSH et al., Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

110 US App. DC 396, 293 F.2d 873 (1961)

Myron NEISLOSS and Randolph Phillips, Appellants, v. John W. BUSH et al., Appellees.

No. 15774.

United States Court of Appeals District of Columbia Circuit.

Argued January 25, 1961.

Decided June 8, 1961.

Mr. Joseph L. Rauh, Jr., Washington, D. C., with whom Mr. John Silard, Washington, D. C., was on the brief, for appellants.

Mr. Robert W. Ginnane, Gen. Counsel, I. C. C., of the bar of the Court of Appeals of New York, pro hac vice, by special leave of court, with whom Asst. Atty. Gen. George C. Doub, at the time the brief was filed, and Messrs. Morton Hollander, Atty., Dept. of Justice, and Arthur J. Cerra, Asst. Gen. Counsel, I. C. C., were on the brief, for appellees.

Before Mr. Justice REED, retired,^* and WASHINGTON and DANAHER, Circuit Judges.

Mr. Justice REED, sitting by designation.

This case is a proceeding arising from the acquisition of control of the New York Central Railroad Company by Alleghany Corporation, a Maryland corporation engaged in the investment business. Appellants are two common stockholders of Alleghany. They appeal from the summary dismissal in the District Court of a complaint seeking declaratory and mandatory relief against certain actions taken by the Interstate Commerce Commission with respect to Alleghany's acquisition of control of the railroad. The dismissal was on the ground that no claim was stated upon which relief could be granted.

Since appellants' complaint was dismissed on the pleading, we accept, for purposes of this appeal, the following statement of facts in appellants' complaint. In 1953 Robert R. Young and Allan P. Kirby, Chairman and President of Alleghany Corporation and its controlling stockholders, formed a plan to obtain control of the New York Central by entering and winning a proxy contest in the May, 1954, election of Central's Board of Directors. Young and Kirby personally owned 200,000 shares of Central stock. In addition, Alleghany Corporation at that time held a controlling interest in the Chesapeake & Ohio Railway, and the C. & O. owned 800,000 shares of stock in the New York Central. Young and Kirby naturally wished to vote these shares in the Central election, but were not at once free to do so. The shares were held in a voting trust pursuant to an order of the I.C.C. designed to limit the number of carriers under Alleghany's control.¹

In order to free this Central stock from the voting trust, it was arranged that all of Alleghany's stock in the C. & O. should be sold to Cyrus S. Eaton and that six of Alleghany's nominees on the C. & O. Board of Directors should be removed and a majority of the directorships filled by nominees of Eaton. It was arranged that the C. & O. should sell its 800,000 shares of Central stock to Clint W. Murchison and Sidney W. Richardson, with the buyers agreeing to vote the shares for the directors supported by Young and Kirby. The purchase price of these 800,000 shares was $20,000,000. The buyers obtained this money from two "advances" of $7,500,000 each by Alleghany Corporation and by certain "banking groups associated with Cyrus S. Eaton interests," and from Kirby's "advance" to Richardson of another $5,000,000. Under certain joint venture agreements, it was agreed that Richardson and Murchison might resell up to 400,000 shares of Central stock to Alleghany within a three-month period at the same price they had paid for the stock. This agreement amounted to an assumption by Alleghany of the risk of loss caused by fluctuations in the market value of the 400,000 shares within the three-month period. Alleghany also loaned $1,300,000 without interest to Young, Kirby, Richardson and Murchison for a period of about three months to finance expenditures in the New York Central proxy contest.

The result was the ouster of the old management of the Central and the election in May, 1954, of the Young-Kirby slate of directors. A concomitant result, it is alleged, was the diversion of a great amount of Alleghany capital from profitable ventures into wasteful expenses and profitless investments. It is alleged that the transactions caused serious financial injury to the corporation and its stockholders.

These transactions formed the basis of three proceedings before the Commerce Commission. Appellants here challenge the disposition in each of the proceedings.

In March, 1954, before the May election which gave Alleghany control of Central, the New York Central petitioned the Commission (presumably under § 13(2) of the Interstate Commerce Act, 49 U.S.C.A. § 13(2), to investigate "upon its own motion" the sale of 800,000 Central shares to Murchison and Richardson, and to determine whether Alleghany still controlled the C. & O. and whether the stock transactions violated the antitrust laws or the Commission order imposing a voting trust on the Central shares. The Commission, finding no sufficient grounds for investigation, denied the petition.² Immediately upon rendering this denial, the Commission received another petition from the New York Central requesting a declaratory order under § 5(d) of the Administrative Procedure Act, 5 U.S.C. A. § 1004(d), that the acquisition of control of Central by Alleghany, Young and Kirby would result in their control of two or more carriers and would therefore require Commission approval under §§ 5(2) and 5(4) of the Commerce Act.³ The Commission, noting that the petition was directed to its sound discretion, denied the petition.⁴ Appellants took no part in either of these proceedings before the Commission.

The third proceeding arose out of the application on September 20, 1954, by Alleghany and Central (by that time under the control of Alleghany) for Commission approval of the merger of one subsidiary of Central into another and for continuation of Alleghany's status as a carrier as provided by § 5(3) of the Commerce Act.⁵ Appellant Phillips intervened as a party to this proceeding. Appellants state that Alleghany had no real interest in the merger itself, which had little or no effect on the operation of the railroads, but used the application as a means of obtaining carrier status under § 5(3). Once such status had been obtained, Alleghany would come under the exclusive jurisdiction of the I. C. C. and would escape what was considered to be the less sympathetic regulation of the Securities and Exchange Commission under the Investment Company Act.⁶

The full Interstate Commerce Commission, affirming a decision of Division 4, approved the merger.⁷ Appellant Phillips argued that the Commission had no power to consider Alleghany as a party because its acquisition of control over Central had not been approved by the Commission. Commission approval is required under § 5(2) of the Commerce Act, 49 U.S.C.A. § 5(2), whenever a non-carrier acquires control of "two or more carriers," and, it was argued, the Central was not one carrier but a system of 73 carriers. The Commission held, however, that because the Central was "a single established system," 295 I. C. C. at 17, it was a single carrier for purposes of § 5(2) and Alleghany had not needed Commission approval of its acquisition.

It was also held that under § 5(2) Commission approval was required of the merger of the subsidiaries of Central and that Alleghany was a necessary party to the merger proceedings. Section 5(2) provides that the Commission must approve whenever a non-carrier which already controls one or more carriers acquires control of another carrier; and the merger of one Central subsidiary into another was deemed the acquisition of control of the merged carrier by Alleghany, a non-carrier already controlling a carrier (Central). Having authorized this acquisition by Alleghany under § 5(2), the Commission was empowered by § 5(3) to establish its exclusive jurisdiction by declaring that Alleghany should be considered a carrier, and the Commission did so.

Shortly after this Commission decision, an action was brought by appellant Phillips and another common stockholder in a three-judge district court, convened pursuant to the Urgent Deficiencies Act, 28 U.S.C. §§ 1336, 1337, 2321-2325, to set the order aside, and also to set aside a subsequent order approving a new issue of preferred stock by Alleghany. The Supreme Court, reversing the District Court, upheld the orders. Alleghany Corp. v. Breswick & Co., 1957, 353 U.S. 151, 77 S.Ct. 763, 1 L.Ed.2d 726. The Court agreed with the Commission that Alleghany had "control" of Central within the meaning of § 5(2) and that it was thus a necessary party to the merger proceedings. It held therefore that the Commission had the power under § 5(3) to give Alleghany carrier status. The Court expressly declined to decide whether Commission approval of Alleghany's acquisition of Central should have been obtained before Alleghany's take-over of Central. If this acquisition violated the provisions of § 5(4), remedies were available in other proceedings under other sections of the act. The only issue under § 5(2) was, the Court held, whether Alleghany had actual control over Central, not whether it had approved control.⁸

In their complaint before the District Court and in this court these appellants raise two objections to the Commission action described above. First, they say that the Commission erred in holding, in the course of its opinion in the merger proceeding, that Alleghany was not required under § 5(2) of the Commerce Act to obtain Commission approval of its acquisition of control of the Central system. This is the question the Supreme Court found it unnecessary to decide in upholding the Commission's approval of the merger. Appellants' second claim is that all three Commission decisions — the denial of the two petitions of Central as well as the approval of the merger — are the product of improper influences brought to bear on members of the Commission. Allegations are made of "the giving of considerations of value" to members of the Commission...