Pittsburgh Terminal Corp. v. Baltimore and Ohio R. Co., 86-3540
| Decision Date | 22 July 1987 |
| Docket Number | 86-3542,No. 86-3542,Nos. 86-3540,No. 86-3540,86-3540,s. 86-3540 |
| Citation | 824 F.2d 249 |
| Parties | Fed. Sec. L. Rep. P 93,407, 8 Fed.R.Serv.3d 775 PITTSBURGH TERMINAL CORPORATION v. The BALTIMORE AND OHIO RAILROAD COMPANY, W. James Price, Alonzo G. Decker, Jr., James Parker Nolan, Frederick Deane, Jr., James L. O'Keefe, Gregory S. Devine, Fay A. Le Fevre, Nicholas T. Camicia, Dr. Milton S. Eisenhower, Steven Muller, John K. Stevenson, Hays T. Watkins, Howard E. Simpson, and Cyrus S. Eaton, All directors or former directors of The Baltimore and Ohio Railroad, The Chesapeake and Ohio Railroad and/or The Chessie System, the Chesapeake and Ohio Railroad and the Chessie System, Inc. Monroe GUTTMANN, Loretta Guttmann, Janet Rees, and Evelyn Bittner v. The BALTIMORE AND OHIO RAILROAD COMPANY, W. James Price, Alonzo G. Decker, Jr., James Parker Nolan, Frederick Deane, Jr., James L. O'Keefe, Gregory S. Devine, Fay A. Le Fevre, Nicholas T. Camicia, Dr. Milton S. Eisenhower, Steven Muller, John K. Stevenson, Hays T. Watkins, Howard E. Simpson, and Cyrus S. Eaton, All directors or former directors of The Baltimore and Ohio Railroad, The Chesapeake and Ohio Railroad and/or The Chessie System, the Chesapeake and Ohio Railroad and the Chessie System, Inc. Appeal of PITTSBURGH TERMINAL CORPORATION, Monroe Guttmann, Loretta Guttmann, Janet Rees, and Evelyn Bittner, Appellants inAppeal of Matthew E. HARLIB, Appellant in |
| Court | U.S. Court of Appeals — Third Circuit |
Michael P. Malakoff (argued), Ellen M. Doyle, Berger Kapetan Malakoff & Meyers, P.C., Pittsburgh, Pa., for appellants.
Richard T. Wentley (argued), Anthony J. Basinski, Joseph W. Klein, Reed Smith Shaw & McClay, Pittsburgh, Pa., for appellees.
Before HIGGINBOTHAM, MANSMANN, and ROSENN, Circuit Judges.
These consolidated appeals challenge the court to untangle two strands of a complex web of litigation arising out of a 1977 securities laws violation by the Baltimore & Ohio Railroad Company (B & O). At the center of both appeals is the question of the scope of the remedy granted by the district court to the appellants in No. 86-3540 in a May 1984 order: specifically, whether or not persons in the position of Matthew E. Harlib, the appellant in No. 86-3542, are entitled to share in that relief. Because we agree with the appellants that Harlib and others in his position are within the scope of the relief and that therefore the district court erroneously denied the motion requesting the district court to prohibit B & O from limiting relief to those debenture holders who still held a security interest in B & O, we vacate the order appealed from in No. 86-3540 and dismiss the appeal in No. 86-3542 as moot in light of our disposition of the former appeal.
The appellants in both appeals were holders as of December 13, 1977, of debentures issued by B & O. The debentures were listed and traded on the New York Stock Exchange and were convertible to B & O common stock at any time before maturing. In December 1977, the Chesapeake & Ohio Railroad Company (C & O), a wholly owned subsidiary of the Chessie System, Inc., a holding company, owned 99.63% of B & O's common stock.
B & O common stock had been listed and traded on the New York Stock Exchange until 1964 when C & O had acquired more than 99% of the stock. Thirteen individuals still held some stock. No dividends were declared after 1960.
In 1977, B & O owned many rail and non-rail assets. To avoid Interstate Commerce Commission regulations hindering development of nonrail assets, B & O reorganized, transferring its considerable nonrail assets to a wholly owned subsidiary, Mid-Allegheny Corporation (MAC), and distributing MAC common stock to B & O common shareholders share for share.
B & O wished to avoid the delay and not inconsiderable expense of appraisals of the transferred assets (including large amounts of real estate) required for registration of the MAC stock with the Securities Exchange Commission (SEC). B & O therefore sought a no-action letter from the SEC. As there were so few B & O shareholders, B & O was likely to get the letter, but this likelihood would be jeopardized if all debenture holders received notice of the proposed distribution of MAC stock and converted to common stock.
On December 13, 1977, B & O transferred selected assets to MAC and declared the dividend of MAC stock to all B & O shareholders as of that date. B & O, however, gave no prior notice of the dividend, thus depriving the debenture holders, including the appellants, of the opportunity to convert to B & O common stock before the record date and participate in the dividend. B & O thereby kept the number of shareholders low and avoided registration of the MAC stock.
Some holders of the convertible debentures on December 13, 1977, the appellants in No. 86-3540 ("the PTC/Guttmann plaintiffs") brought actions (later consolidated) against B & O for violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b), and state securities laws. Harlib, appellant in No. 86-3542, owned ten debentures on December 13, 1977, but converted them to 100 shares of B & O common stock on January 2, 1979, which he sold on March 23, 1985.
The PTC/Guttmann -plaintiffs moved for certification as a class. The district court denied the motion, based at least in part on B & O's stipulation to treat all similarly situated debenture holders in the same manner as the plaintiffs. The stipulation, set down in the May 2, 1980, affidavit of Robert F. Hochwarth, a general attorney for Chessie System, memorialized a November 1978 agreement between B & O and the Chase Manhattan Bank, N.A., the trustee for the indenture under which the debentures had been issued. The stipulation in pertinent part stated that
should the plaintiffs in the Pittsburgh Terminal and Guttmann actions prevail on the merits of their claims at trial or should a settlement of these claims be reached before trial, all holders of debentures as of December 13, 1977, whether or not they were subsequently converted, will be permitted to participate in the court judgment or settlement on the same terms as the plaintiffs.
The district court granted summary judgment for B & O Pittsburgh Terminal Corp. v. Baltimore & Ohio R.R., 509 F.Supp. 1002 (W.D.Pa.1981). This court reversed 1 and remanded for the fashioning of an appropriate remedy for the violation it found. 680 F.2d 933 (3d Cir.), cert. denied, 459 U.S. 1056, 103 S.Ct. 475, 74 L.Ed.2d 621 (1982).
On remand, the district court accordingly granted the PTC/Guttmann plaintiffs the opportunity to convert their debentures and receive the MAC dividend as well as dividend income on the B & O and MAC shares since December 13, 1977, less interest received on the debentures. 586 F.Supp. 1297 (W.D.Pa.1984). In stating the scope of the remedy, the district court said:
Defendants previously agreed to extend any remedy obtained in this suit to other similarly situated debenture holders. There was some discussion and apparent confusion on appeal as to the make-up of this "class." We endeavor to define it.
The remedy ordered here is limited to those persons who owned the subject debentures at the time of the violation, December 13, 1977, and who still own those debentures. Those persons who owned debentures on December 13, 1977 and subsequently converted to B & O common stock may also elect to participate in this remedy, obtaining MAC and its dividends, offset by interest accruing on the debentures after December 13, 1977. Those persons who acquired B & O debentures after December 13, 1977 are within the class of Lowry plaintiffs, and their claims will be resolved in that litigation. Those persons who owned B & O debentures on December 13, 1977 and subsequently sold their debentures are not within the scope of either this action or Lowry.
Id. at 1305. We affirmed by memorandum opinion. 760 F.2d 257 (3d Cir.), cert. denied, 474 U.S. 919, 106 S.Ct. 247, 88 L.Ed.2d 256 (1985). 2
On June 2, 1986, B & O filed for the first time a registration statement for the MAC stock. The prospectus included the following statement of eligibility:
During the litigation, the B & O and the Indenture Trustee of the B & O Debentures, Chase Manhattan Bank, agreed that all holders of the B & O Debentures who held them on December 13, 1977, and still hold them or who own B & O stock as a result of having converted them into B & O stock would be afforded the same treatment as the successful litigants ("Stipulation"). Therefore, even though the litigation was not a class action as that term is commonly used, those eligible under the Stipulation may obtain the same treatment as the litigants if they meet the eligibility requirements set forth below and elect to participate.
Those eligible to participate in the distribution are (1) the successful litigants in the cited civil actions who meet the requirement of the District Court's order and who elect to participate and (2) those holders of B & O Debentures who: a) owned the B & O Debenture on December 13, 1977, and b)(i) still own the B & O Debenture or (ii) have subsequent to December 13, 1977, converted the B & O Debenture for B & O common stock which they still hold, and c) elect to participate and so take advantage of the Stipulation....
(emphasis added).
On June 13, 1986, the PTC/Guttmann plaintiffs filed a "Motion to Enforce [the] Court's Judgment Order." In that motion, the plaintiffs asserted that the registration statement's "eligibility requirement" (2)(b)(ii) constituted a "unilateral alteration of the scope of the persons entitled to relief under [the district court's] May 8, 1984, Order as amended ... taken without notice to the Plaintiffs or approval by the Court," which had the effect of impermissibly excluding persons like Harlib, who had held debentures on December 13, 1977, subsequently converted them to B...
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