Klinger v. Baltimore and Ohio Railroad Company, No. 398-399
| Decision Date | 30 September 1970 |
| Docket Number | No. 398-399,Dockets 34086-34110. |
| Citation | 432 F.2d 506 |
| Parties | Charlotte KLINGER and Eric Klinger Plaintiffs-Appellees, v. The BALTIMORE AND OHIO RAILROAD COMPANY, Defendant-Appellant, and Edward C. Rose et al., Defendants. |
| Court | U.S. Court of Appeals — Second Circuit |
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Sidney B. Silverman, New York City, (Abraham L. Pomerantz, William E. Haudek, and Robert B. Block, New York City, on the brief), for plaintiffs-appellees.
Eugene Z. DuBose, New York City, (Alexander & Green, John L. Rogers, Jr., Baltimore, Md., David S. Pennock and Kenneth P. Carroll, New York City, on the brief), for defendant-appellant.
Before LUMBARD, Chief Judge, and FRIENDLY and HAYS, Circuit Judges.
Plaintiffs, the owners of both common and preferred stock of the Reading Company, a common carrier, brought this derivative action on behalf of Reading against the Baltimore and Ohio Railroad Company (B & O) and certain individuals who were directors of Reading in April 1963.1 Jurisdiction was properly based on Section 4 of the Clayton Act, 15 U.S.C. § 15 (1964). Plaintiffs sought trebled damages against B & O, claiming that B & O violated Section 10 of the Clayton Act, 15 U.S.C. § 20 (1964), when it purchased Reading's half-interest in a jointly-owned produce terminal in Philadelphia in 1963. Sitting without a jury, Judge Tyler gave judgment for the plaintiffs in the trebled amount of $1,662,000, having found actual damages of $554,000; he also ordered that B & O pay Reading an additional $220,000 as reasonable attorney's fees. We reverse and remand with instructions that the complaint be dismissed.
The facts of this case are essentially not in dispute. The transaction giving rise to this suit is Reading's sale to B & O, on April 30, 1963, of securities representing its half-interest in the Philadelphia Products Terminal Company (Terminal). At the time of the sale B & O and Reading had three common directors, and B & O owned approximately 42% of Reading's equity. The sale was made without competitive bidding, allegedly in violation of Section 10. Plaintiffs claim that the consideration was inadequate and brought this action, seeking as damages under Section 4 triple the difference betwen the actual value of the interest and what was received.
Late in 1925, Reading and B & O had agreed in general terms to acquire land and assemble thereon a joint fruit and produce terminal in South Philadelphia, Pennsylvania. The land was to be assembled with each railroad contributing 50% of the cost thereof and 50% of the cost of construction of the terminal facilities. The two railroads eventually decided to form a new company to take title to the terminal property. Thus, the Terminal was formed as a holding company; Reading and B & O were each issued 250 shares of the capital stock.
Written documents evidencing the agreements between the parties and Terminal were finally executed on December 22, 1931. Under the terms of an operating agreement between B & O and Reading, each company made capital contributions in equal shares with the understanding that profits and depreciation costs were to be shared on a user basis. The three-party contract between the two railroads and Terminal provided, inter alia, that the two railroads would have the use of the terminal as a joint facility and would receive all income and revenues therefrom as if title to the property and Terminal were vested in them.
From December 1931 until April 30, 1963, all the directors and officers of Terminal were officers, directors, employees and lawyers of B & O and Reading. In the initial period of operation of Terminal, both railroads made advances to Terminal, each in the total amount of $2,000,000. In 1936, notes were issued to evidence these advances, with Reading and B & O each receiving $2,000,000 in face amount of Terminal demand notes.
Sometime in the early summer of 1962, representatives of Reading and B & O began discussions about the possibility of B & O acquiring Reading's interest in Terminal. At the time of the initiation of these discussions, B & O owned approximately 42% of Reading's stock, and the two roads had three common directors. No representive of either railroad discussed or even considered possible application of Section 10 of the Clayton Act to this sale. Neither Reading nor B & O ever made any attempt to determine whether a third party would be interested, and, apparently, none of the railroad officials involved thought this property could possibly be of any interest to anyone other than B & O.
The fair market value of the land and improvements of Terminal was determined by an appraiser to be $2,100,000. After some negotiating the parties accepted this figure as a fair price, and to it added some additional items, as will be discussed later, bringing the price to a rounded figure of $2,250,000. They had previously determined that the price to be paid for Reading's interest would be one-half of the value of Terminal, or $1,125,250. The final terms called for a cash down payment at closing of $225,250, with the balance of $900,000 to be paid in five equal installments bearing interest of 3%. The agreement was executed on April 30, 1963 with the down payment made, and in April 1964, when the first installment of $180,000 plus 3% interest was due, it was paid along with the entire balance less a 5% prepayment discount.
The B & O renews a series of arguments, rejected by the court below, that Section 10 does not prohibit the transaction here in question. In pertinent part the section provides:
"No common carrier engaged in commerce shall have any dealings in securities, supplies, or other articles of commerce, . . . to the amount of more than $50,000, in the aggregate, in any one year, with another corporation, firm, partnership, or association when the said common carrier shall have upon its board of directors or as its president, manager, or as its purchasing or selling officer, or agent in the particular transaction, any person who is at the same time a director, manager, or purchasing or selling officer of, or who has any substantial interest in, such other corporation, firm, partnership, or association, unless and except such purchases shall be made from, or such dealings shall be with, the bidder whose bid is the most favorable to such common carrier, to be ascertained by competitive bidding under regulations to be prescribed by rule or otherwise by the Interstate Commerce Commission. * * *" (Emphasis added)
B & O first argues that the sale by Reading was not covered by the section, because it was not a "dealing in securities." It argues that Terminal was merely a paper, or dummy, corporation formed to hold mere title to the facilities, and having no duties, no independent employees, and no income. B & O would have us find that although the sale took the form of a transfer of Reading's 250 shares of Terminal stock and certain demand notes, it was in reality only a real estate transaction. We do not agree.
The phrase "securities" admittedly is nowhere defined in the Clayton Act, but the notes and shares here certainly fit within any normal and reasonable meaning of the word. B & O argues, however, that Congress' primary reason for including "dealings in securities" in the prohibition was to reach the common abuse where an investment banker with control of a common carrier passes off worthless paper on its captive.2 But the words are broad enough to cover the collateral abuse of a common carrier accepting inadequate consideration for securities from the interlocked purchaser. Although the examples of improper transactions to be found in the legislative history are of the first type, we are not persuaded that Congress meant to exclude the sort of transaction presented here since it poses as great a danger.
B & O then argues that in fact this was not a securities transaction at all, but merely a sale of real estate, and urges us to look at the substance of the transaction, and not its mere form. But Reading and B & O chose the corporate form, and we think their choice, absent special consideration, should control. This is not a situation where a court will pierce the corporate veil because the corporate form is used to achieve some purpose contrary to public policy. See Schenley Distillers Corp. v. United States, 326 U.S. 432, 66 S.Ct. 247, 90 L.Ed. 181 (1945). Quite the contrary, as Congress here has imposed certain obligations on those who use the corporate form. Reading and B & O chose this mode of organization for Terminal and they must bear the disadvantages as well as the advantages. See Snow Crest Beverages, Inc. v. Recipe Foods, Inc., 147 F.Supp. 907 (D.Mass.1956); Volasco Products Co. v. Lloyd A. Fry Roofing Co., 308 F.2d 383 (6th Cir. 1962), cert. denied, 372 U.S. 907, 83 S.Ct. 721, 9 L.Ed.2d 717 (1963). It is no answer that by liquidating Terminal, distributing the assets, and then selling an undivided half-interest in land, they would not have been dealing in securities. We refuse to infer a Congressional determination that a statute was not meant to cover a certain sort of transaction from the fact that by restructuring the transaction the statute can be avoided.
Alternatively, B & O argues that Section 10 does not apply to transactions between railroads, but only those between a common carrier and another non-railroad corporation. Certainly the words of the section — "no common carrier * * * shall have any dealings with another corporation, firm, partnership, or association * * *" — does not compel this result; the phrase "any corporation" would seem intended to include any and all corporate business enterprises.
B & O argues, however, that the legislative history demonstrates that Congress did not intend the section to reach this far. As support, B & O notes that none of the examples in the legislative history involved...
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