Bangor Punta Operations, Inc v. Bangor Aroostook Railroad Company 8212 718

• Decision Date: 19 June 1974
• Docket Number: No. 73,73
• Citation: 41 L.Ed.2d 418,417 U.S. 703,94 S.Ct. 2578
• Parties: BANGOR PUNTA OPERATIONS, INC., et al., Petitioners, v. BANGOR & AROOSTOOK RAILROAD COMPANY et al. —718
• Court: U.S. Supreme Court

417 U.S. 703

94 S.Ct. 2578

41 L.Ed.2d 418

BANGOR PUNTA OPERATIONS, INC., et al., Petitioners,

v BANGOR & AROOSTOOK RAILROAD COMPANY et al.

No. 73—718.

Argued April 15, 1974.

Decided June 19, 1974.

Syllabus

In 1964 petitioner Bangor Punta Corp. (Bangor Punta), through its wholly owned subsidiary, petitioner Bangor Punta Operations, Inc., acquired 98.3% of the outstanding stock of respondent Bangor & Aroostock Railroad Co. (BAR), a Maine railroad, by purchasing all the assets of BAR's holding company, Bangor & Aroostock Corp. (B&A). From 1964 to 1969 Bangor Punta controlled and directed BAR. In 1969 Bangor Punta, again through its subsidiary, sold all its BAR stock to Amoskeag Co., which then assumed responsibility for BAR's management and later acquired additional shares to give it 99% ownership of the outstanding stock. In 1971, BAR and its subsidiary filed an action against Bangor Punta and its subsidiary, alleging various acts of corporate mismanagement of BAR during the period of control from 1960 through 1967 by Bangor Punta and B&A, and seeking damages for violations of the federal antitrust and securities laws, the Maine Public Utilities Act, and the common law of Maine. The District Court first noted that Amoskeag would be the principal beneficiary of any recovery, and was thus the real party in interest, and that since Amoskeag had acquired its BAR stock long after the alleged wrongs had occurred, any recovery by it would be a windfall. The District Court then dismissed the action on the ground that since Amoskeag would have been barred from maintaining a shareholder derivative action due to its failure to satisfy the 'contemporaneous ownership' requirement of both Fed.Rule Civ.Proc. 23.1(1), and state law, equitable principles precluded the use of the corporate fiction to evade that requirement. The Court of Appeals reversed primarily on the ground that in view of BAR's status as a 'public' or 'quasi-public' corporation and the important nature of the services it provides, any recovery by BAR would also inure to the public's benefit, a factor the court found to be sufficient to support a corporate cause of action and to render any windfall to Amoskeag irrelevant. Held:

1. The equitable principles that a stockholder, who has purchased all or substantially all the shares of a corporation from a vendor at a fair price, may not seek to have the corporation recover against that vendor for prior corporate mismanagement, and that the corporate entity may be disregarded if equity so demands, preclude respondent corporations from maintaining the action under either the federal antitrust and securities laws or state law. Pp. 710—713.

(a) Amoskeag, having purchased 98.3% of the stock of BAR from Bangor Punta and alleging no fraud, would have no standing in equity to maintain this action for alleged corporate mismanagement. Home Fire Insurance Co. v. Barber, 67 Neb. 644, 93 N.W. 1024. Pp. 711—712; 713—714.

(b) As the principal beneficiary of any recovery and itself estopped from complaining of petitioners' alleged wrongs, Amoskeag cannot avoid the command of equity through the guise of proceeding in the name of respondent corporations which it owns and controls. Pp. 711—712; 713—714.

2. The Court of Appeals' assumption that any recovery would necessarily benefit the public is unwarranted and also overlooks the fact that Amoskeag, the actual beneficiary of any recovery, would be unjustly enriched since it has sustained no injury. Neither the federal antitrust and securities laws nor the applicable state laws contemplate a windfall recovery by Amoskeag in these circumstances. Pp. 714—716.

3. Deterrence of railroad mismanagement is not in itself sufficient ground for allowing respondents to recover. If such deterrence were the only objective, it would suffice if any plaintiff were willing to file a complaint, and no injury or violation of a legal duty to the particular plaintiff would have to be alleged. P. 317.

482 F.2d 865, reversed.

James V. Ryan, New York City, for petitioners.

Alan L. Lefkowitz, for respondents.

Mr. Justice POWELL delivered the opinion of the Court.

This case involves an action by a Maine railroad corporation seeking damages from its former owners for violations of federal antitrust and securities laws, applicable state statutes, and common-law principles. The complaint alleged that the former owners had engaged in various acts of corporate waste and mismanagement during the period of their control. The shareholder presently in control of the railroad acquired more than 99% of the railroad's shares from the former owners long after the alleged wrongs occurred. We must decide whether equitable principles applicable under federal and state law preclude recovery by the railroad in these circumstances.

I

Respondent Bangor & Aroostock Railroad Co. (BAR), a Maine corporation, operates a railroad in the northern part of the State of Maine. Respondent Bangor Investment Co., also a Maine corporation, is a wholly owned subsidiary of BAR. Petitioner Bangor Punta Corp. (Bangor Punta), a Delaware corporation, is a diversified investment company with business operations in several areas. Petitioner 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 subsidiary BPO, acquired 98.3% of the outstanding stock of BAR. This was accomplished by the subsidiary's pun- chase of all the assets of Bangor & Aroostock Corp. (B&A), a Maine corporation established in 1960 as the holding company of BAR. From 1964 to 1969, Bangor Punta controlled and directed BAR through its ownership of about 98.3% of the outstanding stock. On October 2, 1969, Bangor Punta, again through its subsidiary, sold all of its stock for $5,000,000 to Amoskeag Co., a Delaware investment corporation. Amoskeag assumed responsibility for the management of BAR and later acquired additional shares to give it ownership of more than 99% of all the outstanding stock.

In 1971, BAR and its subsidiary filed the present action against Bangor Punta and its subsidiary in the United States District Court for the District of Maine. The complaint specified 13 counts of alleged mismanagement, misappropriation, and waste of BAR's corporate assets occurring during the period from 1960 through 1967 when B&A and then Bangor Punta controlled BAR.¹ Damages were sought in the amount of $7,000,00 for violations of both federal and state laws. The federal statutes and regulations alleged to have been violated included § 10 of the Clayton Act, 15 U.S.C. § 20; and § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b); and Rule 10b—5, 17 CFR § 240.10b—5, as promulgated thereunder by the Securities and Exchange Commission. The state claims were grounded on § 104 of the Maine Public Utilities Act, Maine Rev.Stat Ann., Tit 35, § 104 (1965), and the common law of Maine.

The complaint focused on four intercompany transactions which allegedly resulted in injury to BAR.² Counts I and II averred the B&A, and later Bangor Punta, overcharged BAR for various legal, accounting, printing, and other services. Counts III, IV, V, and VI averred that B&A improperly acquired the stock of the St. Croix Paper Co. which BAR owned through its subsidiary. Counts VII, VIII, IX, and X charged that B&A and Bangor Punta improperly caused BAR to declare special dividends to its stockholders, including B&A and Bangor Punta, and also caused BAR's subsidiary to borrow in order to pay regular dividends. Counts XI, XII, and XIII charged that B&A improperly caused BAR to excuse payment by B&A and Bangor Punta of the interest due on a loan made by BAR to B&A. In sum, the complaint alleged that during the period of their control of BAR, Bangor Punta, and its predecessor in interest B&A, 'exploited it solely for their own purposes' and 'calculatedly drained the resources of BAR in violation of law for their own benefit.'

The District Court granted petitioners' motion for summary judgment and dismissed the action. 353 F.Supp. 724 (1972). The court first observed that although the suit purported to be a primary action brought in the name of the corporation, the real party in interest and hence the actual beneficiary of any recovery, was Amoskeag, the present owner of more than 99% of the outstanding stock of BAR. The court then noted that Amoskeag had acquired all of its BAR stock long after the alleged wrongs occurred and that Amoskeag did not contend that it had not received full value for its purchase price, or that the purchase transaction was tainted by fraud or deceit. Thus, any recovery on Amoskeag's part would constitute a windfall because it had sustained no injury. With this in mind, the court then addressed the claims based on federal law and determined that Amoskeag would have been barred from maintaining a shareholder derivative action because of its failure to satisfy the 'contemporaneous ownership' requirement of Fed.Rule Civ.Proc. 23.1(1). ³ Finding that equitable principles prevented the use of the corporate fiction to evade the proscription of Rule 23.1, the court concluded that Amoskeag's efforts to recover under the Securities Exchange Act and the Clayton Act must fail. Turning to the claims based on state law, the court recognized that the applicability of Rule 23.1(1) has been questioned where federal jurisdiction is based on diversity of citizenship.⁴ The court found it unnecessary to resolve this issue, however, since its examination of state law indicated that Maine probably followed the 'prevailing rule' requiring contemporaneous ownership in order to maintain a shareholder derivative action. Thus, whether the federal rule or state substantive law applied, the present action could not be maintained.

The United States Court of Appeals for the First Circuit reversed. 482 F.2d 865 (1973). The court stated that its disagreement with the District Court...