Ewen v. Peoria & E. Ry. Co.

• Decision Date: 04 June 1948
• Citation: 78 F. Supp. 312
• Parties: EWEN et al. v. PEORIA & E. RY. CO.
• Court: U.S. District Court — Southern District of New York

78 F. Supp. 312

EWEN et al. v. PEORIA & E. RY. CO.

District Court, S. D. New York.

April 24, 1948.

Rehearing Denied June 4, 1948.

COPYRIGHT MATERIAL OMITTED

John M. Harlan, Charles S. Aronstam, Archie S. Karp, Lyman M. Tondel, Jr., and William B. Shedd, all of New York City, for Income Bondholders.

Gerald E. Dwyer and Samuel H. Hellenbrand, both of New York City, for "Central."

F. W. H. Adams and Peter Keber, both of New York City, for "Peoria."

Before L. HAND, Circuit Judge, and COXE and HINCKS, District Judges.

L. HAND, Circuit Judge.

This case has now come back to us upon objections to the report of the Master under the rules.² On July 29, 1940, we passed a decree, Section 24 of which, as amended by our opinion on April 3, 1941, 37 F.Supp. 917, we quote in the margin.³ Early in 1943 the "Central" filed the annual account between the roads required by Article Fourth of the Operating Agreement, to which the director of the "Peoria" who had been appointed by the Bondholders filed objections. Thereafter and on April 1, 1943, the "Central" petitioned for a supplemental order, appointing a master under this decree to hear and report upon the validity and amount of their claim against the "Peoria" in the sum of $2,485,482.58, as of December 31, 1939; and by order entered May 20, 1943, we appointed a master to conduct such an inquiry. The parties to the accounting were the "Central," a protective committee of the Income Mortgage Bondholders, and the "Peoria." On July 2, 1943, we appointed an independent attorney to represent the "Peoria" upon a petition of the "Central" with the understanding that he should "to the best of his ability as an attorney, protect the interest of the Peoria & Eastern * * * and * * * look only to the best interest of the Peoria & Eastern without regard to any * * * control," by the "Central." The Bondholders engaged a firm of accountants who were given access to the books of the "Peoria" and of the "Central," and who reported to them on June 30, 1944. This report the "Central" took some six months to prepare to meet, and the hearings began on February 2, 1945. The Master took some four thousand pages of testimony, considered nearly six hundred exhibits, and filed his report on April 28, 1947. The original claim of the "Central" had grown by the end of 1945 to $2,600,441.68; but the account as stated by the Bondholders showed not only that no part of this was due, but that there was due to the "Peoria" over $12,000,000. By consent, neither party made any effort to carry the accounting back of January 1, 1920; but the Bondholders challenge the accounts for every year thereafter until the close of the year 1945. Before taking up the several items which make up their challenge, it is necessary to consider (1) the underlying relations between the "Central" and the "Peoria" which determined their mutual rights and duties; (2) the effect of the annual statements of account of the "Central" made to the "Peoria" and to the trustees for the Bondholders; and (3) the Statute of Limitations. Throughout we shall assume an acquaintance with our earlier decisions⁴; but we will endeavor in our discussion to state of the separate items enough of the facts to make understandable what we say.

I.

The Duty of the "Central" to the "Peoria," and The Burden of Proof.

As we said in our original opinion, the "Central" completely dominated the "Peoria" through the ownership of a majority of its shares, and the first question is, how far as a majority shareholder, it was free to use its power over the minority and the Bondholders to its own advantage; in short, to what extent it occupied the conventional position of a fiduciary. As the Bondholders point out, the Court of Appeals of New York in Farmers' Loan & Trust Company v. New York & N. R. Company⁵ and Ticonderoga R. Company v. Delaware & Hudson Company⁶ was concerned with the duties imposed upon one railroad as majority shareholder of another; but we cannot find in either decision any guidance in construing the agreement of February 22, 1890, under which the "Peoria" was operated throughout the period before us. We shall assume that, as its majority shareholder, the "Central" would have been subject to the usual limitations of a trustee in any dealings between the two, had it not been for the powers granted it in the "Agreement"; but both the Bondholders and the "Peoria" concede that these to some extent modified its duty. A moment's reflection shows that if it were to be held strictly accountable as a fiduciary in the conventional sense, the "Agreement" could not have been performed at all. Both parties entered into it because, as it recites, they thought that it would be "beneficial to the business and traffic of said railways that the same be put under one management"; and "one management" presupposed that the "Central" should have power to determine the interests of both in those mutual transactions which would constantly arise between the two. Moreover, it was apparent that those determinations could not be "beneficial" at once to the "business and traffic" of the "Central" and of the "Peoria," unless the "Central" were permitted to profit from the joint "business and traffic." Indeed there would have been no conceivable motive for its entering into the agreement at all, if it were bound to fix the terms of every transaction with an eye only to the interest of the "Peoria."

The law has dealt with situations in which it is understood that an agent or a trustee is to deal with his principal or beneficiary in the interest of both; and the usual solution has been to say that the fiduciary must be "fair" to the beneficiary.⁷ In International Radio Tel. Co. v. Atlantic Communications Co.,⁸ the Circuit Court of Appeals for the Second Circuit accepted as a test: "whether the proposition submitted would have commended itself to an independent corporation"; and that is very close to what seems to us to be the proper test, although it needs further analysis. Whatever the right rule, clearly it does not advance to a solution to say that the fiduciary must be "fair," or must not "abuse" his power, or that he shall use it as the parties "intend." Here, as so often, a court must "interpret" the words, by imputing to them that meaning which in the main it will gather from the dominant purpose of the document as a whole. When the "Central" and the "Peoria" declared their wish that both should "be put under one management," they could only have meant that the "Peoria" should be treated as though it were a division of the "Central," so far as concerned the routing of traffic, the upkeep, disposition and distribution of rolling stock, the maintenance of repair shops, engine-houses and other buildings. In short, the "Peoria" was to become part of a single railway system, operated as a constituent unit after the conventional pattern in such cases. There were advantages and disadvantages in this, the prospective balance between which seemed inducement enough to both. Implied was a duty of the "Central" not to discriminate against the "Peoria" by denying it that share of traffic which it would allocate to a wholly owned division; and implied on the other side was a surrender by the "Peoria" of any right to ask more; so much and no more was to be the general frame of their mutual relations. That does not, however, give any clue to what part of the income and of the expenses of the new system should be assigned to the "Peoria," and this is the source of most of the difficulties, because the "Peoria" did not, and could not, appear as an independent party in any of the transactions of the "Central" with third persons. The proper apportionment inevitably presupposed some hypothetical and fictitious dealings between the two, determined by the "Central" in the interest of both; and it is necessary first to decide what, if any, general principle should govern these.

Theoretically, the ideal principle, if only it were in practice capable of application, would be that the "Central" should not use its power to the prejudice of the "Peoria": That is, that it should fix the terms of any transactions between the two as though each had in fact exerted its bargaining power against the other at arm's length. Indeed, there are situations in which that can be done within a narrow margin of error. For example, an agent permitted to trade with his principal in fungibles, dealt in upon an active market, can fix with substantial accuracy the price at which the principal would buy or sell, if the two dealt at arm's length. In the case at bar, however, it must be at once admitted that in the transactions here involved, it is wholly impossible even approximately to set the terms upon which the "Central" and the "Peoria" would have agreed at arm's length. On the other hand it may in fact be possible, to set limits on either side outside of which one can say with some assurance that the parties would not have agreed at all: that is to say, that the "Peoria" would have been unwilling to accept less and would — with possible recourse to the Interstate Commerce Commission — have been successful in its refusal; and that the "Central" on the other hand would have been unwilling to give more. In other words, although it is impossible to know whether the "Central" did discharge its duty, as fiduciary, to divide the income and expenses as they would have been divided, had it and the "Peoria" traded it out against each other, it may be possible to learn whether the actual division was worse than the "Peoria" would have accepted, or could have been forced to accept. Under such a test the crucial question becomes who carries the burden of proof. If the "Peoria" carries it, it will not succeed as to a given division, unless it was outside the range we have described; if the "Central" carries it, it will not succeed unless it would have refused to deal at all on terms more favorable to the "Peoria"...