Feldman v. Pennroad Corporation, 568.

• Decision Date: 11 May 1945
• Docket Number: No. 568.,568.
• Citation: 60 F. Supp. 716
• Parties: FELDMAN v. PENNROAD CORPORATION.
• Court: U.S. District Court — District of Delaware

60 F. Supp. 716

FELDMAN v. PENNROAD CORPORATION.

No. 568.

District Court, D. Delaware.

May 11, 1945.

C. Stewart Lynch, of Wilmington, Del., and Mortimer S. Gordon and Leo Brady, both of New York City, for plaintiff.

Daniel O. Hastings, of Wilmington, Del., Morris Wolf, of Philadelphia, Pa., and A. D. Vaneish, of Washington, D. C., for defendant Penroad Corporation.

H. Albert Young, of Wilmington, Del., and Archibald Palmer, of New York City, for Dickheiser and others, stockholders of Pennsylvania R. Co.

Joseph B. Keenan, of Washington, D. C., amicus curiae.

BARD, District Judge.

This is a motion to dismiss the complaint under Rule 12(b) of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c. Plaintiff, a stockholder of defendant corporation, brought this suit (1) to enjoin respondent from negotiating or consummating a settlement and release of claims with Pennsylvania Railroad Company, and (2) to obtain the appointment of a receiver for respondent corporation in order to prosecute all claims in its behalf and to supervise the election by the stockholders of a competent and disinterested Board of Directors.

The relevant facts as alleged in the complaint are as follows:

Prior to 1929 Pennsylvania Railroad Company, hereinafter referred to as Pennsylvania, desired to obtain controlling interest in other railroads to eliminate competition. In order to carry out this plan without risk to itself, it conceived the idea of forming the Pennroad Corporation which would be dominated and controlled by Pennsylvania. The stock of Pennroad Corporation would be sold to the public and the proceeds therefrom used to acquire control of the various companies which Pennsylvania needed in order to extend its sphere of influence in accordance with the master plan.

Pursuant to this plan, Pennroad was incorporated in the State of Delaware in 1929 as a holding corporation. About 6,000,000 shares of stock were sold to the public and this investment by the public of about $140,000,000 became the operating capital of Pennroad. All of the stock sold participated in a voting trust composed of W. W. Atterbury, Jay Cooke and Effingham Morris, all important officers of Pennsylvania, as trustees. The Board of Directors consisted entirely of officers or directors of Pennsylvania. Thus, Pennsylvania completely dominated Pennroad and was in a position to use the $140,000,000 capital investment to its own advantage and for its own purposes.

Pennsylvania caused the Pennroad Corporation to purchase stocks of certain enterprises which Pennsylvania was anxious to control at prices and upon conditions which Pennsylvania itself had declined to purchase prior to the incorporation of Pennroad. These investments caused Pennroad to suffer tremendous losses in excess of $100,000,000.

In an effort to secure restitution for the alleged wrongful and collusive acts of Pennsylvania and Pennroad a suit was brought in 1932 in the Court of Chancery of the State of Delaware by Joseph W. Perrine and Julia A. Perrine, stockholders of Pennroad, against Pennroad and Pennsylvania. This suit is presently pending and undetermined. In 1939, Ione M. Overfield, another Pennroad stockholder, brought an action against the two corporations in the United States District Court for the Eastern District of Pennsylvania which resulted in judgment against Pennsylvania for $22,104,515.92. Overfield v. Pennroad Corporation, D. C., 42 F.Supp. 586, 48 F.Supp. 1008. This judgment was reversed on appeal by the Circuit Court of Appeals on the ground that the running of the statute of limitations barred the action. Overfield v. Pennroad Corporation et al, 3d Cir., 146 F.2d 889.

In furtherance of the master plan of Pennsylvania to despoil Pennroad for its own benefit, Pennsylvania then negotiated a proposed settlement whereby Pennroad is to accept $15,000,000 in full satisfaction and discharge of any liability which Pennsylvania has to Pennroad. Pennroad has petitioned the Delaware Court of Chancery in the Perrine v. Pennroad action to obtain court approval of the proposed settlement and the matter is now pending before that court.

Petitioner alleges that, to the present date, Pennsylvania completely dominates every act of Pennroad and is using this domination to conclude a fraudulent settlement for the benefit of Pennsylvania and to the detriment of Pennroad and its stockholders. The petition alleges that Pennroad and its stockholders have a meritorious claim against Pennsylvania for an amount far in excess of the $15,000,000 offered and that this claim can be adjudicated in the Perrine stockholder's bill instituted in 1932 which, unlike the Overfield suit, is not barred by the statute of limitations.

Upon the basis of these facts complainant prays that this court enjoin respondent from consummating the settlement and appoint a receiver to prosecute respondent's claims in its behalf and to supervise the election of a disinterested Board of Directors.

The motion to dismiss raises the question whether the facts alleged, as recited above, are sufficient in law to permit this court to grant the relief sought.

Section 265 of the Judicial Code¹ provides: "The writ of injunction shall not be granted by any court of the United States to stay proceedings in any court of a State, except in cases where such injunction may be authorized by any law relating to proceedings in bankruptcy."

The petition seeking judicial approval by the Chancery Court of Delaware of the proposed settlement is a proceeding within the meaning of this statute. The fact that the injunction herein requested is directed against Pennroad and not formally directed against the Chancery Court of Delaware is immaterial. The injunction, if granted, will discontinue the settlement proceeding now pending and being heard before the Chancery Court. Oklahoma Packing Co. v. Oklahoma Gas & Electric Co., 308 U.S. 530, 309 U.S. 4, 60 S.Ct. 215, 84 L.Ed. 447, 537. The injunction which plaintiff seeks is therefore clearly within the scope of the statute.

Section 265 of the Judicial Code enacts a principle of comity which obtains between courts of concurrent jurisdiction forbidding the interference by injunction or otherwise by the federal courts with the process of the courts of the states, Moran v. Sturges, 154 U.S. 256, 14 S.Ct. 1019, 38 L.Ed. 981, and is intended to give the force of positive law to the existing rules of comity between such tribunals. The statute is a limitation upon the equity powers of the federal courts. When application is made to a federal court to enjoin proceedings in a state court, the duty devolves upon the federal court to determine whether the petition has alleged facts for which relief is prohibited by the...