Bangor & Aroostook R. Co. v. Bangor Punta Operations, Inc.

• Decision Date: 29 December 1972
• Docket Number: Civ. No. 1933.
• Citation: 353 F. Supp. 724
• Parties: BANGOR AND AROOSTOOK RAILROAD COMPANY and Bangor Investment Company, Plaintiffs, v. BANGOR PUNTA OPERATIONS, INC. and Bangor Punta Corporation, Defendants.
• Court: U.S. District Court — District of Maine

353 F. Supp. 724

BANGOR AND AROOSTOOK RAILROAD COMPANY and Bangor Investment Company, Plaintiffs, v. BANGOR PUNTA OPERATIONS, INC. and Bangor Punta Corporation, Defendants.

Civ. No. 1933.

United States District Court, D. Maine, N. D.

December 29, 1972.

Roger A. Putnam, Portland, Me., Alan L. Lefkowitz and Edward T. Robinson, Ely, Bartlett, Brown & Proctor, Boston, Mass., for plaintiffs.

Sumner T. Bernstein and Herbert H. Sawyer, Portland, Me., James V. Ryan, New York City, for defendants.

OPINION AND ORDER OF THE COURT

GIGNOUX, District Judge.

This action arises under the Securities Exchange Act of 1934, the Clayton Antitrust Act, the Maine Public Utilities Act, and the common law of Maine. Plaintiff Bangor and Aroostook Railroad Company (BAR) is a Maine corporation which operates a railroad in the northern part of the State of Maine. Plaintiff Bangor Investment Company (BIC), a Maine corporation, is a wholly-owned subsidiary of BAR. Defendant Bangor Punta Corporation (Bangor Punta), a Delaware corporation, is a diversified holding company with operating units in various industries. Defendant Bangor Punta Operations, Inc. (BPO), a New York corporation, is a wholly-owned subsidiary of Bangor Punta. On October 13, 1964, Bangor Punta, through its wholly-owned subsidiary BPO, became the owner of approximately 98.3% of the stock of BAR when BPO acquired all the assets of Bangor and Aroostook Corporation (BAC), a Maine holding company which BAR had caused to be formed in 1960. From October 13, 1964 until October 2, 1969, Bangor Punta owned through BPO approximately 98.3% of all the outstanding stock of BAR. On October 2, 1969, BPO sold all its stock interest in BAR to Amoskeag Company (Amoskeag), a Delaware investment company controlled by Frederic C. Dumaine, Jr., for a consideration of approximately $5,000,000. Subsequently, Amoskeag has purchased additional BAR shares, and now owns over 99% of all the outstanding capital stock of BAR.

The complaint contains thirteen counts and seeks damages totaling approximately $7,000,000 for misappropriation and waste of corporate assets alleged to have been caused to BAR by four intercompany transactions, which allegedly took place between BAC or Bangor Punta and BAR during the period between 1960 and 1967, while BAC and then Bangor Punta were in control of BAR. Counts I and II are brought, respectively, under the common law of Maine (Count I) and Section 104 of the Maine Public Utilities Act (35 M.R.S.A. § 104) (Count II). They charge that BAC, and later BPO, improperly charged BAR for nominal legal, accounting, printing and other services furnished BAR by BAC and BPO. Counts III, IV, V and VI are brought, respectively, under the common law of Maine (Count III); Section 10 of the Clayton Antitrust Act (15 U.S.C. § 20) (Count IV); Section 104 of the Maine Public Utilities Act (Count V); and Section 10(b) of the Securities Exchange Act (15 U.S.C. § 78j(b)) and Rule 10b-5 (17 C.F.R. § 240.10b-5) promulgated thereunder by the Securities and Exchange Commission (Count VI). They are based upon the charge that BAC improperly acquired St. Croix Paper Company stock owned by BAR through its wholly-owned subsidiary BIC. Counts VII, VIII, IX and X are brought, respectively, under the common law of Maine (Counts VII and IX); and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder (Counts VIII and X). They charge that BAC and BPO improperly caused BAR to declare special dividends to its stockholders, including BAC and BPO, and improperly caused BIC to borrow so as to satisfy certain balance sheet ratios required by an earlier loan agreement in order to pay a regular dividend. Counts XI, XII and XIII are brought, respectively, under the common law of Maine (Count XI); Section 10 of the Clayton Antitrust Act (Count XII); and Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder (Count XIII). They allege that BAC improperly caused BAR to excuse payment by BAC and BPO of the interest due on a loan made by BAR to BAC. In substance, the complaint alleges that Bangor Punta and its predecessor in interest, BAC, while they were in control of BAR through ownership of 98.3% of its stock, "calculatedly drained the resources of BAR in violation of law for their own benefit" during the period between 1960 and 1967, prior to the time Amoskeag purchased Bangor Punta's interest in BAR.

Presently before the Court is defendants' motion for summary judgment dismissing the entire complaint, or in the alternative dismissing the two counts brought under the Maine Public Utilities Act (Counts II and V). Defendants seek dismissal of the entire complaint on the ground that Amoskeag, which would be the sole beneficiary of any recovery by the corporate plaintiffs, was not a stockholder of BAR at the time of the alleged improper transactions and itself has sustained no injury as a result thereof. The Court agrees. Since the Court therefore concludes that the entire complaint must be dismissed, it does not reach defendants' alternative motion for dismissal of Counts II and V.

It is true that, as plaintiffs assert, the present action is an action brought by the corporate plaintiffs in their own right, and does not purport to be a derivative action on behalf of either Amoskeag or the 1% minority stockholders in BAR. But, looking at the substance of the action, it is evident that the real party in interest is Amoskeag, the present owner of over 99% of the outstanding BAR shares. And having purchased the stock of BAR from Bangor Punta in 1969, long after the events complained of occurred, Amoskeag is clearly attempting, by having the corporations which it controls bring the action in their names, to recover the full $5,000,000 consideration paid to Bangor Punta for the BAR shares, plus $2,000,000 more, while still keeping the BAR shares. Amoskeag does not claim that it was deceived or defrauded by Bangor Punta when it purchased its BAR stock, or that it did not get full value for its purchase price. Nor do plaintiffs claim to bring this action on behalf of any creditors or in the public interest. It would accordingly be contrary to settled equitable principles to permit Amoskeag, by thus using the corporate fiction, to acquire a windfall for any past misbehavior on the part of Bangor Punta during the period when Amoskeag had no interest in BAR and sustained no injury, direct or indirect, as a result of Bangor Punta's alleged improper acts.

Plaintiffs admit that the alleged wrongs took place before Amoskeag purchased its BAR stock from Bangor Punta. Under these circumstances, there can be little doubt that Amoskeag would be barred from maintaining a derivative suit on behalf of BAR for the wrongs alleged to have occurred before Amoskeag purchased its BAR shares. As to the claims asserted under the Securities Exchange Act and the Clayton Antitrust Act, Fed.R.Civ.P. 23.1 would apply and in terms requires contemporaneous ownership for maintenance of a stockholder derivative action. Surowitz v. Hilton Hotels Corp., 342 F. 2d 596, 604 (7th Cir. 1965); Gottesman v. General Motors Corp., 28 F.R.D. 325 (S.D.N.Y.1961). To the extent that plaintiffs' claims arise under state law, jurisdiction being based upon diversity of citizenship, there is doubt as to whether the federal rule or state law applies. See 3B Moore's Federal Practice (2d ed. 1969) ¶ 23.1.152. The majority of states, however, also have adopted the contemporaneous ownership rule, either by judicial decision or by statute. Id. at note 6. And even in those cases where the rule has not been applied, it has been held that a subsequent shareholder cannot sue where, as in the present case, he acquired his stock from the alleged wrongdoer, who himself would have been barred by his participation and acquiescence.¹See, e. g., Bloodworth v. Bloodworth, 225 Ga. 379, 387, 169 S.E.2d 150, 156-157 (1969); Babcock v. Farwell, 245 Ill. 14, 40-41, 91 N.E. 683, 692-693 (1910); Home Fire Insurance Co. v. Barber, 67 Neb. 644, 661-662, 93 N.W. 1024, 1030-1031 (1903); Bookman v. R. J. Reynolds Tobacco Co., 138 N.J.Eq. 312, 372, 48 A.2d 646, 680 (Ch.1946). Plaintiffs instituted the present suit two days prior to the effective date of the new Maine Business Corporation Act, which adopts the contemporaneous ownership rule, 13-A M.R.S.A. § 627(1)(A) (1972). It is an open question in Maine whether the contemporaneous ownership rule applied at the time the present suit was brought. See Field, McKusick & Wroth, Maine Civil Practice (2d ed. 1970) § 23.2 at 393.² But there is no indication in the Maine cases that the Maine court would not have followed the prevailing rule. In such situations, where the law of the particular state is not shown to be in conflict with the federal rule, federal courts will apply Rule 23.1. Gallup v. Caldwell, 120 F.2d 90, 94-95 (3rd Cir. 1941); Mullins v. DeSoto Securities Co., 45 F.Supp. 871, 878 (W.D.La.1942); see 3B Moore's Federal Practice, ¶ 23.1.152 at n. 13. Thus, whether the federal rule or Maine law is applicable, Amoskeag could not maintain a derivative action against the defendants.

From the foregoing, it is evident that Amoskeag, by causing the plaintiff corporations to bring this action, is attempting to accomplish indirectly what it could not do directly. Plaintiffs contend that the Court cannot look beyond the corporate form to the substance of the corporate claims and the true beneficiary thereof. But the four intercompany transactions that are the basis of plaintiffs' claims are typical stockholder claims seeking an accounting for alleged misappropriation and waste of corporate assets by controlling stockholders. Equitable considerations must be applied in such actions. Amen v. Black, 234 F.2d 12 (10th Cir. 1956); Matthews v. Headley Chocolate Co., 130 Md. 523, 100 A. 645 (1917); Home Fire Insurance Co. v. Barber, supra. Nor does characterizing the actions as claims arising under federal statutes...