Bangor & Aroostook R. Co. v. BANGOR PUNTA OPERATION, INC.

• Decision Date: 03 August 1973
• Docket Number: No. 73-1059.,73-1059.
• Citation: 482 F.2d 865
• Parties: BANGOR AND AROOSTOOK RAILROAD COMPANY et al., Plaintiffs, Appellants, v. BANGOR PUNTA OPERATIONS, INC., et al., Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

482 F.2d 865 (1973)

BANGOR AND AROOSTOOK RAILROAD COMPANY et al., Plaintiffs, Appellants, v. BANGOR PUNTA OPERATIONS, INC., et al., Defendants, Appellees.

No. 73-1059.

United States Court of Appeals, First Circuit.

Heard May 7, 1973.

Decided August 3, 1973.

Edward T. Robinson and Alan L. Lefkowitz, Boston, Mass., with whom Ely, Bartlett, Brown & Proctor, Boston, Mass., and Roger A. Putnam, Howard H. Dana Jr., and Verrill, Dana, Philbrick, Putnam & Williamson, Portland, Me., were on brief, for plaintiffs-appellants.

James V. Ryan, New York City, with whom C. Kenneth Shank, Jr., Bruce Topman, Webster, Sheffield, Fleischmann, Hitchcock & Brookfield, New York City, and Sumner T. Bernstein, Herbert H. Sawyer and Bernstein, Shur, Sawyer & Nelson, Portland, Me., were on brief, for defendants-appellees.

Before COFFIN, Chief Judge, McENTEE and CAMPBELL, Circuit Judges.

LEVIN H. CAMPBELL, Circuit Judge.

A Maine railroad corporation and its wholly-owned subsidiary bring this action against their former owners, seeking damages under the federal anti-trust and securities laws, and under state law, for the alleged "looting" of the railroad in 1960-67 when the defendants were in control. Over 99% of its stock was purchased from the old owners after the alleged wrongs. The district court granted defendants' motion for summary judgment, holding that the railroad could not maintain what it termed "typical stockholder claims seeking an accounting for alleged misappropriation and waste of corporate assets by controlling stockholders" since the present owner was not a stockholder at the time of the alleged improper transactions and was not injured thereby. 353 F.Supp. 724, 728 (D. Me. 1972).

Plaintiff, Bangor and Aroostook Railroad Company (BAR),¹ operates a railroad in northern 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 the stock of which is listed upon the New York Stock Exchange, is a diversified holding company. Defendant, Bangor Punta Operations, Inc. (BPO), a New York Corporation, is a wholly-owned subsidiary of Bangor Punta.

Bangor Punta, in 1964, through its subsidiary BPO, acquired 98.3% of the stock of BAR, by acquiring all the assets of Bangor and Aroostook Corporation (BAC), a Maine holding company established by BAR in 1960. Bangor Punta, through BPO, continued to own 98.3% of BAR's outstanding stock until October 2, 1969, at which time, for $5,000,000, it sold its stock interest in BAR to Amoskeag Company (Amoskeag), a Delaware investment corporation controlled by Frederick C. Dumaine, Jr. Amoskeag later bought additional BAR shares, and now owns over 99% of all the outstanding stock of BAR.

The complaint contains thirteen counts. Damages totalling $7,000,000, for BAR only, are sought on grounds of mismanagement, misappropriation and waste of corporate assets caused by four intercompany transactions taking place among BAC, Bangor Punta, BAR and BIC during the years 1960-67, while BAC and then Bangor Punta were in control of BAR and BIC. The defendants are said to have violated § 10 of the Clayton Act, 15 U.S.C. § 20, and § 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder. They are also alleged to have violated the Maine common law and Section 104 of the Maine Public Utilities Act, 35 M.R.S.A. § 104.

The wrongful acts allegedly included overcharge by BAC and BPO for services to BAR; causing BAR to excuse BAC and BPO from interest payments due on loans and to pay improper dividends; the improper acquisition of St. Croix Paper Company stock owned by BAR through BIC; and causing BIC to engage in improper borrowings. In essence, defendants are alleged to have "dominated and controlled BAR and exploited it solely for their own purposes, to the injury of BAR and without regard to BAR's future obligations both to its creditors and to the public which it serves. By such domination, control and exploitation, defendants calculatedly drained the resources of BAR in violation of law for their own benefit. . . ."

The defendants moved for summary judgment "dismissing the entire complaint, as amended herein, with prejudice, for the reason that the complaint fails to state a cause of action on behalf of the corporate Plaintiffs; or in the alternative . . . dismissing each of Count II and Count V brought under the Maine Public Utilities Act of the amended complaint herein, with prejudice, for the reason that each of them fails to state a cause of action."

The district court granted defendants' motion, stating,

"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 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." 353 F.Supp. at 726.

Starting with the proposition that F. R.Civ.P. 23.1, the so-called contemporaneous ownership rule, would apply to a shareholder's derivative action brought to enforce the claims asserted here, the district court reasoned that Amoskeag, by causing the plaintiff corporations (essentially BAR) to bring this action, was attempting to accomplish indirectly what it could not do directly; namely, to bring "typical stockholder claims" for misappropriation and waste. Since Amoskeag,

"which did not itself incur any damage as a result of defendants\' wrongful acts, and not the corporate plaintiffs, is the real beneficiary of any recovery which might be had in the name of the corporate plaintiffs, the corporate claims must fail for lack of equity on the part of those who would ultimately benefit from any corporate recovery." 353 F.Supp. at 728.

The district court relied on Commissioner Roscoe Pound's opinion in Home Fire Ins. Co. v. Barber, 67 Neb. 644, 661-662, 93 N.W. 1024, 1030-31 (1903), and like cases. See, e. g., Capitol Wine & Spirit Corp. v. Pokrass, 277 App.Div. 184, 98 N.Y.S.2d 291, aff'd, 302 N.Y. 734, 98 N.E.2d 704 (1951); Amen v. Black, 234 F.2d 12, 23 (10th Cir. 1956). Matthews v. Headley Chocolate Co., 130 Md. 523, 100 A. 645 (1917). Home Fire and its successors hold that a person who was not a stockholder at the time of the alleged mismanagement of a corporation may not later sue derivatively, nor, if he becomes the sole stockholder, may he cause the corporation itself to sue. Central to the conclusion that even the corporation may not sue is the assumption that "the stockholders are the real and substantial beneficiaries of a recovery." Home Fire Ins. Co. v. Barber, supra, 67 Neb. at 669, 93 N.W. at 1033. Equity, "penetrating all fictions and disguises", treats the corporation as the alter ego of its stockholders: because it would be unjust to enrich them, the corporation may not be enriched. A corollary is that the corporation is barred from suing only if recovery would inure solely to the benefit of the estopped stockholders. If other eligible interests, such as creditors or minority shareholders, would benefit, the corporation may sue; since recovery is for the corporation the estopped stockholders would also benefit, but that is "an injustice which might be necessary to be suffered. . . ." Capitol Wine & Spirit Corp. v. Pokrass, supra, 98 N.Y.S.2d at 293.

The Home Fire rule prevents a purchaser of all or most of the corporate stock, who probably purchased it at a price tied to the value of the assets at the time of sale, from recovering a windfall. Where maintenance of the corporate cause of action serves no other interest, such a result seems reasonable — although we leave open whether the equities reflected in Home Fire should be permitted to prevent suits under laws, such as the federal anti-trust and securities acts, that were enacted to protect interests other than, or in addition to, those of the current stockholders. Cf. Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 139, 88 S.Ct. 1981, 20 L.Ed.2d 982 (1968).

Our difficulty here, however, is more fundamental. Even accepting Home Fire, we doubt its applicability. We reject the premise — critical both to the district court's holding and to the Home Fire rationale — that BAR's chief stockholder, Amoskeag, would be the "sole beneficiary" of a recovery by BAR. The premise, applied to a rail carrier, seems to us to be an over-simplification, although, without doubt, BAR's recovery would be highly beneficial to Amoskeag. Because of the nature of their services and of regulatory restrictions affecting them, and, more generally, because of their legal status as "quasi-public corporations", railroads cannot realistically be described as mere alter egos of their chief stockholders. If BAR's management complies with the law, recovery of monies by BAR may be expected not only to benefit its stockholders but to improve the economic position of the carrier, enabling it to enhance its services and helping stave off the financial crisis faced today by so many railroads. The net result likely will be of benefit to the public. Such considerations might be irrelevant in cases involving ordinary, closely held businesses; their survival is not usually deemed to be of public concern and they are typically viewed as mere projections of their stockholders. But courts — even before passage of extensive regulatory laws — have for years held that the public has an identifiable interest in a railroad corporation and in its ability — including its financial ability — to provide services and, indeed, to survive.

The public's interest, unlike the private interest of stockholder or creditor, is not easily defined or quantified, yet it is real and cannot, we think, be overlooked in...