Oscar Gruss & Son v. United States

• Decision Date: 28 November 1966
• Docket Number: 3425.,No. 66 Civ. 3413,66 Civ. 3413
• Citation: 261 F. Supp. 386
• Parties: OSCAR GRUSS & SON, Plaintiff, v. UNITED STATES of America and Interstate Commerce Commission, Defendants. The NEW YORK, NEW HAVEN AND HARTFORD RAILROAD COMPANY FIRST MORTGAGE 4% BONDHOLDERS COMMITTEE, Plaintiff, v. UNITED STATES of America and Interstate Commerce Commission, Defendants.
• Court: U.S. District Court — Southern District of New York

261 F. Supp. 386

OSCAR GRUSS & SON, Plaintiff, v. UNITED STATES of America and Interstate Commerce Commission, Defendants.

The NEW YORK, NEW HAVEN AND HARTFORD RAILROAD COMPANY FIRST MORTGAGE 4% BONDHOLDERS COMMITTEE, Plaintiff, v. UNITED STATES of America and Interstate Commerce Commission, Defendants.

Nos. 66 Civ. 3413, 3425.

United States District Court S. D. New York.

November 28, 1966.

Myron S. Isaacs, New York City (Myron S. Isaacs and Paul M. Gartner, New York City, of counsel), for plaintiff Oscar Gruss & Son.

Migdal, Low, Tenney & Glass, New York City (Lester C. Migdal, Lawrence W. Pollack, and David Y. Handelman, New York City, of counsel), for plaintiff Bondholders Committee.

Robert W. Ginnane, Washington, D. C., for defendant Interstate Commerce Commission.

Sullivan & Worcester, Boston, Mass. (Joseph Auerbach, Arthur Blasberg, Jr., and Robert G. Bleakney Jr., Boston, Mass., of counsel) Robert M. Peet, New York City, and James W. Moore and Robert W. Blanchette, New Haven, Conn., for intervening defendants Trustees of The New York, New Haven and Hartford Railroad Co.

Conboy, Hewitt, O'Brien & Boardman, New York City (Windsor F. Cousins, Philadelphia, Pa., and David J. Mountan, Jr., New York City, of counsel) for intervening defendant Pennsylvania Railroad Co.

Gerald E. Dwyer, New York City (James B. Gray and Jerome H. Shapiro, New York City, of counsel), for intervening defendant New York Central Railroad Co.

Before FRIENDLY, Circuit Judge, WEINFELD and LEVET, District Judges.

FRIENDLY, Circuit Judge:

In these actions against the United States and the Interstate Commerce Commission, Oscar Gruss & Son, which has acquired some $10,500,000 of the First and Refunding Mortgage 4% bonds of The New York, New Haven and Hartford Railroad Company (NH), and a bondholders' committee claiming to have authorizations from holders of some $20,000,000 of such bonds,¹ which has also intervened as plaintiff in Gruss' action, seek to enjoin consummation of the merger of the New York Central Railroad Company (NYC) with the Pennsylvania Railroad Company (PRR) the proposed merged company being hereafter referred to as the Transportation Company, as authorized by the Commission in its report served April 27, 1966, 327 I.C.C. 475, and its report on reconsideration of September 16, 1966, 328 I.C.C. 304. A decision in which this court, by a divided vote, refused to enjoin consummation at the instance of competing railroads, Erie-Lackawanna R. R. v. United States, 259 F.Supp. 964, is under appeal to the Supreme Court, with argument set for January 9, 1967 and the merger stayed until determination by the Court. NYC, PRR and the Trustees of NH have intervened as defendants and join the Interstate Commerce Commission in opposing the grant of a temporary injunction. The Commission has moved under Rule 12(b) to dismiss the complaints; NYC and PRR have moved for the same relief, also asking for summary judgment under Rule 56 on the basis of the record in the merger proceeding before the Commission and of the reorganization proceeding of NH under § 77 of the Bankruptcy Act in the District Court for Connecticut. Appended to the memorandum of the NH trustees is an affidavit of their counsel outlining the various steps taken by them with copies of relevant papers, which we may also consider on the motion for summary judgment.

The Commission's order approving the merger contained the following condition with respect to NH, 327 I.C.C. at 553:

"8. The Pennsylvania New York Central Transportation Company shall be required to include in the transaction all the New York, New Haven, and Hartford Railroad Company—the inclusion of passenger operations being subject to the findings and determinations of the Commission as set forth in Finance Docket No. 23831 issued simultaneously with this report—upon such fair and equitable terms as the parties may agree subject to the approval of the Bankruptcy Court and the Commission. Within 6 months after the date this report is served, the parties shall file with the Commission for its approval, a plan for such inclusion. In the event the parties are unable to reach an agreement (and subject to approval by the Bankruptcy Court) such inclusion shall be upon such fair and equitable terms and conditions as the Commission may impose.

* * * * * *

"Jurisdiction is hereby reserved for such purposes. Consummation of the merger by applicants shall indicate their full and complete assent to these requirements."

Although the defendants and intervening defendants in the Erie-Lackawanna case, including the four states served by NH, argued to us that this condition was one of the strong public interest considerations favoring the merger and no one disagreed, Gruss and the Committee claim it is entirely inadequate. They point to a passage in the Commission's report, 327 I.C.C. at 522-27, where, after discussing the more limited recommendation of the hearing examiners on the subject of inclusion of NH, the Commission found "that this merger, without complete inclusion of NH, would not be consistent with the public interest, and, accordingly, we will require all the New Haven railroad" —passenger as well as freight service— "to be included in the applicants' transaction." 327 I.C.C. at 524. Yet, say the plaintiffs, despite this and a further finding that "the Transportation Company, with new routings and improved service, could undoubtedly wean substantial traffic away from NH and leave that already moribund carrier in perhaps an irretrievable situation," 327 I.C.C. at 522, the Commission imposed no such protective traffic and financial conditions for the interval prior to actual inclusion of NH — probably a fairly long one in view of reorganization problems under § 77 — as it did with respect to the Erie-Lackawanna, the Delaware & Hudson and the Boston & Maine. They ask in consequence that we enjoin consummation of the merger until NH is effectively protected by actual inclusion.

Much of the seeming anomaly dissolves quite speedily. From a practical standpoint the interim relationship of the Transportation Company to NH will be altogether different from its relationship to the three protected lines. The overwhelming likelihood is that the latter will remain significant competitors, probably as future components of the Norfolk & Western system, see Erie-Lackawanna R. R. v. United States, supra, 259 F.Supp. at 969 n. 4; although the Commission reserved jurisdiction to entertain petitions for their inclusion in the Transportation Company in the event of denial of their pending petitions for inclusion in the Norfolk & Western, 327 I.C.C. at 553, no one could have believed that to be the likely outcome. In contrast the expectation was that NH would become a part of the Transportation Company— indeed, there is rather general agreement that it must if it is to continue operations at all. It is thus somewhat unrealistic to suppose that the Transportation Company will immediately embark on a wholesale campaign of diversion from a future component, breaking the historic bonds between PRR and NH initially forged by geography and welded by millions of dollars of expenditures, only to renew them again some time hence; and plaintiffs' reliance on findings of the hearing examiners and the Commission with respect to the drastic effects of the merger on NH in the absence of any requirement of inclusion is wholly misplaced. But they argue that, despite the strong prospect of inclusion of NH in the Transportation Company, the latter nevertheless has an incentive to engage in some diversion since although PRR, NYC and the NH Trustees have agreed upon the purchase price, this is still an open issue in view of the dissatisfaction of NH bondholders, and diversion of NH freight revenues to NYC's competing service would benefit the Transportation Company both directly and by justifying what plaintiffs consider the unduly low figure to which the Trustees agreed. Moreover, they find a further incentive for diversion in the possibility that NH may never be included; although NH has a call on the Transportation Company, decision whether to exercise this depends on the course of the reorganization and the bankruptcy court may be persuaded, or compelled, to liquidate NH rather than cause it to be sold to the Transportation Company as a going concern.

The argument would seem to be sufficiently answered by the powers vested in the Commission under § 5(2) of the Interstate Commerce Act. It has been settled for four decades that the requirement of § 5(2) (b) and its predecessors that the Commission find the conditions of a merger to be just and reasonable makes it "the duty of the Commission to protect both the public and private interests" and to withhold approval of a transaction that is otherwise in the public interest unless it finds "that the consideration, terms and conditions thereof are just and reasonable" to the parties and holders of their securities. Cleveland, C., C. & St. L. Ry. v. Jackson, 22 F.2d 509, 510-511 (6th Cir. 1927); see United States v. Lowden, 308 U.S. 225, 233 n. 1, 60 S.Ct. 248, 84 L.Ed. 208 (1939); Schwabacher v. United States, 334 U.S. 182, 198-199, 68 S.Ct. 958, 92 L.Ed. 1305 (1948); 3-A Sharfman, The Interstate Commerce Commission 466-72 (1935). Combination of this general principle with the express authority now given by § 5(2) (d) to require merging carriers to include other railroads "upon equitable terms" would surely empower the Commission, if so advised, to base the acquisition price of NH upon a value not adversely affected by the NYC-PRR merger itself—whether by using the value of the property as of the date of the merger as a base, by adjusting subsequent earnings to restore diverted revenues, or by other appropriate means; the availability of such relief differentiates NH sharply from the three protected roads. On being queried why this was not adequate protection, plaintiffs' attorneys answered...