Breswick & Co. v. Briggs

• Decision Date: 28 September 1955
• Citation: 135 F. Supp. 397
• Parties: BRESWICK & CO. and Myron Neisloss, as stockholders of Alleghany Corporation and on behalf of themselves and all other stockholders similarly situated, Plaintiffs, v. O. Henry BRIGGS, Thomas J. Deegan, Jr., Walter W. Foskett, Henry J. Guild, Allan P. Kirby, Herman R. Neff, Andrew Van Pelt, Robert R. Young, Clint W. Murchison, Sid W. Richardson, John D. Murchison, Clint W. Murchison, Jr., Murchison Brothers and Alleghany Corporation, Defendants.
• Court: U.S. District Court — Southern District of New York

135 F. Supp. 397

BRESWICK & CO. and Myron Neisloss, as stockholders of Alleghany Corporation and on behalf of themselves and all other stockholders similarly situated, Plaintiffs, v. O. Henry BRIGGS, Thomas J. Deegan, Jr., Walter W. Foskett, Henry J. Guild, Allan P. Kirby, Herman R. Neff, Andrew Van Pelt, Robert R. Young, Clint W. Murchison, Sid W. Richardson, John D. Murchison, Clint W. Murchison, Jr., Murchison Brothers and Alleghany Corporation, Defendants.

United States District Court S. D. New York.

September 28, 1955.

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Rosston, Hort & Brussel, New York City (George Brussel, Jr., Eugene G. King, Joseph B. Hyman, New York City, of counsel), for plaintiffs.

Lord, Day & Lord, New York City (Thomas F. Daly, Saul L. Sherman, New York City, of counsel), for defendants Alleghany Corporation, O. Henry Briggs, Thomas J. Deegan, Jr., Walter W. Foskett, Henry J. Guild, Allan P. Kirby and Herman R. Neff.

Satterlee, Warfield & Stephens, New York City (William E. Stockhausen, New York City, of counsel), for defendants John D. Murchison, Clint W. Murchison, Jr., Murchison Brothers and Sid W. Richardson.

Peter George Martin, New York City, for defendant Alleghany Corporation in Zenn, et al. v. Anzalone, et al.

Pomerantz, Levy & Haudek, New York City (Abraham Pomerantz, New York City, of counsel), for plaintiffs in Zenn, et al. v. Anzalone, et al.

WALSH, District Judge.

Plaintiffs in this derivative action in the right of Alleghany Corporation, move for summary judgment as to five of the seven counts alleged in their complaint and for a stay of proceedings in the New York State Supreme Court to approve a settlement of substantially the same causes of action, negotiated by defendants and counsel for other groups of stockholders.

Defendants move to consolidate this action with the other derivative actions already consolidated in this court and for the designation of the general counsel in those actions as general counsel for the consolidated action.

Summary Judgment

Alleghany is a holding company devoted to investments in other enterprises. Defendant Young is Chairman of its Board of Directors. Defendant Kirby is its President. Several other defendants are its officers and directors. Defendant Murchison and his sons and defendant Richardson hold no office in Alleghany but as private investors have dealt with it in several of the transactions included in the complaint.

Plaintiffs' claims grow out of three principal transactions:

(1) The New York Central Railroad proxy fight of 1954;

(2) A proposed new issue of Alleghany preferred stock;

(3) Alleghany's relinquishment of control of Investors Diversified Services, Inc. by exchanging its voting stock for non-voting stock held by the Murchisons.

Plaintiffs allege that these acts and omissions violated the Investment Company Act, and that they are in derogation of the common-law obligation of corporate directors and those acting in concert with them.

Common to all counts is the question of whether Alleghany is an investment company subject to the Investment Company Act or excluded from its operation by Section 3(c) (9) because it is a "person authorized to control a carrier" subject to regulation under Section 5(3) of the Interstate Commerce Act. The defendants during the period in question have admittedly acted upon an assumption that Alleghany was not subject to the Investment Company Act and they urge as a defense that this is in fact correct and further that in any event they in good faith believed that it was. As a matter of law they were wrong and it will simplify the discussion of the motions if these defenses are disposed of first.

Admittedly Alleghany was not subject to the Investment Company Act from 1945 to January 19, 1954. With the authorization of the Interstate Commerce Commission it held control of the Chesapeake & Ohio Railroad. The Securities and Exchange Commission had recognized its status and terminated its registration as an investment company.

On January 19, 1954, however, Alleghany sold its interest in the C. & O., the only carrier of which it had control. From then until May 26, 1954, it admittedly had control of no carrier. Since May 26, 1954, defendants claim Alleghany in fact controls the New York Central but concededly there has been no order of the I.C.C. authorizing this control if in fact it exists. An order of the I.C.C. which obliquely attempted to validate Alleghany's claim to exemption from the Investment Company Act was temporarily stayed by a three-judge court in Breswick & Co. v. United States, D.C., 134 F.Supp. 132, Per Dimock, D. J., and is presently sub judice. Although further action by the I.C.C. may in the future establish Alleghany as a person authorized to control a carrier pursuant to Subdivisions (2) and (3) of Section 5 of the Interstate Commerce Act, this cannot dispose of the claim that at the time of the acts and omissions alleged, Alleghany was subject to the Investment Company Act.

Defendants claim they relied on the continuing effect of the I.C.C. and S.E.C. orders even though they, of course, knew that the sale of the C. & O. terminated the only fact upon which these orders were based. That these orders had in law no effect after January 19, 1954, the date of the sale of the C. & O., was more fully explained in Breswick & Co. v. United States, supra. It now seems to me that, as a matter of law, their lack of legal effect was so obvious that professed reliance upon them in good faith is patently frivolous.

The I.C.C. order determining Alleghany's status upon the basis of its control of C. & O. contained the usual language of a regulatory order that it continues until changed by subsequent order. Even though Alleghany's acceptance of such an order might estop it from noncompliance, there is no basis for concluding that it could shield Alleghany from complying with the Investment Company Act. There was nothing actually inconsistent between Alleghany's submitting required reports to the I.C.C. and complying with the Investment Company Act too. And if in fact its compliance with the Investment Company Act did produce any conflict this would have led to the prompt termination of the I.C.C. order.

The S.E.C. order did not even by its terms purport to exempt Alleghany from compliance with the Investment Company Act. This order provided:

"It is hereby declared that Alleghany Corporation has ceased to be and is not now an investment company within the meaning of the Investment Company Act of 1940; and

"It is ordered that the registration of Alleghany Corporation under the Investment Company Act of 1940 shall forthwith cease to be in effect, provided, however, that if in the future Alleghany Corporation ceases to be subject to regulation under the Interstate Commerce Act as set forth in such Findings and Opinion, this order may be revoked, suspended or modified after appropriate notice and opportunity for hearing."

It is no more than a finding that on the date of promulgation Alleghany was not an investment company and an order that its registration should "cease to be in effect". The proviso merely reserved the S.E.C.'s right to change the order by proceeding brought on its own motion. It did not absolve Alleghany in perpetuity from its obligation of voluntary compliance with the law as circumstances changed.

Accordingly the application for summary judgment is considered with recognition that during the period in question Alleghany was not conforming to the Investment Company Act and it had no basis in good faith for failing to do so.

The New York Central Proxy Fight (First, Second and Sixth Counts)

During the months before the annual meeting of New York Central on May 26, 1954, while defendants Young and Kirby prepared for their successful proxy fight to elect a Board of Directors for the Central, Alleghany Corporation took certain action which was instrumental to this ultimate success. The dispute centers on plaintiffs' contention that these acts were pursuant to a conspiracy to use the corporate facilities of Alleghany for the personal gain of Young, Kirby, the other defendant directors, and their alleged affiliates, the Murchison group and Richardson. The undisputed facts are:

(a) The market price of New York Central stock increased substantially between December 1, 1953 and June 14, 1954. Young and Kirby bought 200,000 shares of Central stock in December, 1953, but prior to June 14, 1954 they only acquired 11,400 shares for Alleghany.

(b) Alleghany loaned Murchison and Richardson $7.5 million without security to assist them in purchasing for themselves 800,000 shares of Central stock from Alleghany's former subsidiary, the C. & O.

(c) Alleghany committed itself to purchase from Murchison and Richardson 300,000¹ of these shares at 25 (equal to or above the then market) at the option of Murchison and Richardson.

(d) Alleghany expended $1,369,775 to finance the successful proxy fight.

(e) Murchison and Richardson voted their stock in support of the nominees supported by Young and Kirby.

(f) These nominees were elected and they in turn elected Young, Chairman of the Board of the Central.

Plaintiffs contend that these facts show that Young and Kirby appropriated for their personal benefit, business opportunities available to Alleghany and that they caused Alleghany to spend and lend its money in support of concerted action by Young, Kirby, the Murchisons and Richardson to take over the management of the Central for their personal benefit, Alleghany having so little stock that it stood to profit little from the victory. Plaintiffs also contend that the Murchisons and Richardson act with the defendant directors in concert to control Alleghany and that therefore the loan to Murchison and Richardson was a loan to affiliated persons and to persons in control, in violation of Sections 17(a) (3) and 21(b) of the Investment Company Act. Further they claim that the money advanced by...