Fried v. United States

• Decision Date: 09 January 1963
• Citation: 212 F. Supp. 886
• Parties: Albert FRIED, Dolores Feldman, Dr. Martin Feldman, Irving Fried, Howard Serlin, Max Albinder, Kive Feintuch, Max Feintuch, Max Wexler and Morton Fried ("Dissenting Lackawanna Stockholders"), Plaintiffs, v. UNITED STATES of America and The Interstate Commerce Commission, Defendants, and Erie-Lackawanna Railroad Company, Intervenor-Defendant.
• Court: U.S. District Court — Southern District of New York

212 F. Supp. 886

Albert FRIED, Dolores Feldman, Dr. Martin Feldman, Irving Fried, Howard Serlin, Max Albinder, Kive Feintuch, Max Feintuch, Max Wexler and Morton Fried ("Dissenting Lackawanna Stockholders"), Plaintiffs, v. UNITED STATES of America and The Interstate Commerce Commission, Defendants and Erie-Lackawanna Railroad Company, Intervenor-Defendant.

United States District Court S. D. New York.

December 18, 1962.

As Amended January 9, 1963.

Greenwald, Kovner, Goldsmith & Berger, New York City, for plaintiffs; Mark H. Berger, Margaret A. Berger, New York City, of counsel.

Vincent L. Broderick, U. S. Atty., New York City, Arthur S. Olick, Asst. U. S. Atty., Lee Loevinger, Asst. Atty. Gen., John H. D. Wigger, Dept. of Justice, Washington, D. C., for the United States, defendant.

Robert W. Ginnane, Gen. Counsel, I. K. Hay, Assoc. Gen. Counsel, Interstate Commerce Commission, Washington, D. C., for Interstate Commerce Commission, defendant.

Ralph L. McAfee, Rowland L. Davis, Jr., Cravath, Swaine & Moore, New York City, for Erie-Lackawanna Railroad Co., intervenor-defendant; Thomas D. Barr, Jeremiah D. Lambert, New York City, of counsel.

Before KAUFMAN, Circuit Judge, MacMAHON and FEINBERG, District Judges.

FEINBERG, District Judge.

This is an action by ten alleged stockholders of The Delaware, Lackawanna and Western Railroad Company ("Lackawanna") to enjoin in part or void entirely an order of the Interstate Commerce Commission ("Commission") authorizing the merger of the Lackawanna and the Erie Railroad Company ("Erie"). The action is brought pursuant to 28 U.S.C. §§ 1336, 1398 and 2321-25. The merged railroad has intervened as a party defendant.

The merger under attack was accomplished pursuant to the Commission's order on October 17, 1960. Two days later, plaintiffs filed a complaint in this Court seeking only to set aside and enjoin that portion of the Commission's order approving the exchange ratio of common stock of Erie and Lackawanna for common stock of the merged company. For almost two years thereafter, plaintiffs apparently did absolutely nothing affirmatively to prosecute the action. Plaintiffs finally moved to convene a three-judge court only when compelled to do so by an order of this Court, dated June 27, 1962, which required them to do so upon pain of dismissal. It was apparently at that point that plaintiffs' present counsel entered the case. In their brief filed before this Court, plaintiffs for the first time, about two years after the merger was formally consummated, challenge the Commission's order in its entirety as void and beyond the Commission's jurisdiction. For the reasons indicated below, plaintiffs' complaint is dismissed.

The background leading to the present litigation is not in dispute. On July 6, 1959, the Lackawanna and Erie, facing financial difficulties operating alone,¹ jointly applied to the Commission under Section 5(2) of the Interstate Commerce Act (the "Act"), 49 U.S.C. § 5(2), for authority to merge pursuant to a Joint Agreement of Merger dated June 24, 1959. Hearings were conducted by an Examiner on September 29 through October 1, 1959, at Buffalo, New York, and on October 5-8, 15-16, and 19-22, 1959, inclusive, at Washington, D. C. The record before the Examiner, totalling 1710 pages, includes the testimony of many witnesses and voluminous exhibits, including detailed financial studies.

Plaintiffs, among others, intervened in that proceeding. Plaintiffs challenged the fairness of the stock exchange ratio of 1.25 shares of the merged company for each share of Erie stock, and one share of the merged company for each share of Lackawanna stock. Although the hearings before the Examiner were held almost three months after the filing of the joint application, plaintiffs did not present any witnesses or offer any evidence at the hearings, did not make "any suggestion of precise inequities of the agreed plan," and did not submit any alternative plan for the guidance and consideration of the Commission.² The Examiner's report recommended approval of the proposed merger, and referred, inter alia, to the savings which the merger would permit along with the resulting greater financial stability of the unified company.³

On September 13, 1960, the Commission issued its report and order adopting the findings and conclusions of the Examiner, with some supplementation, and authorizing consummation of the merger.⁴ The Commission specifically provided that the order should not become effective until thirty days after service (September 15, 1960) to allow "intervenors including plaintiffs adequate time within which to take such steps as they deem warranted to protect their interests."⁵ After the passage of thirty days, plaintiffs filed their complaint in this Court.⁶

Plaintiffs current contentions concern not only the ratio for the exchange of stock referred to above but also the Erie and Lackawanna proxy statements sent to stockholders prior to a stockholder vote on the merger, and various questions of procedure before the Examiner.

I

Section 5(2) (a) of the Act, 49 U.S. C.A. § 5(2) (a), provides that it shall be lawful, with the approval of the Commission, for two carriers to merge into one corporation. After a public hearing on the application for merger,

"* * * If the Commission finds that, subject to such terms and conditions and such modifications as it shall find to be just and reasonable, the proposed transaction * * * will be consistent with the public interest, it shall enter an order approving and authorizing such transaction, upon the terms and conditions, and with the modifications, so found to be just and reasonable * * *." 49 U.S.C. § 5(2) (b).

Plaintiffs argue that the evidence presented before the Commission fails to establish that the stock exchange ratio of the plan for merger between the railroads was "just and reasonable," as found by the Commission, and that such ratio was unfair and inequitable to the Lackawanna shareholders.

Plaintiffs point to several factors which they claim were ignored or given too little weight by the Commission in permitting Erie stockholders to receive 1.25 shares in the unified company for each share previously owned, whereas Lackawanna shareholders received stock in the new company on only a one-for-one basis. Plaintiffs claim, among other things, that the Commission failed to give appropriate consideration to book value and current and long term ratios of assets to liabilities of the respective railroads. Moreover, preemptive and cumulative voting rights granted to shareholders under state law were not, according to plaintiffs, accorded proper significance by the Commission.

In the absence of an overreaching of the Commission's constitutional power, its order should not be set aside by a reviewing court unless convincing proof is offered to show that it is unjust and unreasonable or not supported by substantial evidence. See Stott v. United States, 166 F.Supp. 851, 855 (S.D.N.Y. 1958), and cases cited therein. Any reviewing court must be aware of the extensive facilities, specialized knowledge, and expertise which the Commission brings to the constitutional exercise of its statutory power, and must defer to the judgment and experience of the Commission in weighing complicated facts, balancing conflicting interests, and predicting future consequences of a complex transaction. See, e. g., McLean Trucking Co. v. United States, 321 U.S. 67, 87-88, 64 S.Ct. 370, 88 L.Ed. 544 (1944); Mississippi Valley Barge Line Co. v. United States, 292 U.S. 282, 286-87, 54 S.Ct. 692, 78 L.Ed. 1260 (1934). The function of the reviewing court under Section 10(e) of the Administrative Procedure Act, 5 U.S.C. § 1009(e), has been ably summarized in Stott v. United States, supra, which reviewed a challenged portion of a Commission order approving, as just and reasonable, the stock exchange ratio of a merger plan between two railroads. Judge Bryan, speaking for a three-judge statutory court, stated (166 F.Supp. at 857):

"* * * A reviewing court must scrutinize the record and the findings to determine whether the Commission has considered all the factors which the statute requires to be taken into account in making the decision under review * * *. There is no requirement that the reviewing court comb through the record for insubstantial or non-prejudicial error, or substitute its own judgment for that of the agency, or consider the expediency or wisdom of the decision, or whether on like testimony it would have made a similar ruling. Nor is the reviewing court permitted to do so. Its sole function is to determine whether the Commission gave consideration to all of the factors which it was required to consider in making its decision, and whether on the record as a whole there was `substantial evidence' to support its findings and its order."

In that case, the Court found that the exchange was "just and reasonable," that the Commission properly applied the standards set forth in the Act, and that in considering all of the factors determining what the stockholders of each railroad involved in the merger received, it fully carried out its duty of protecting the interest of the minority.

In Schwabacher v. United States, 334 U.S. 182, 68 S.Ct. 958, 92 L.Ed. 1305 (1948), the Supreme Court also considered the meaning of the phrase "just and reasonable" as applied to an exchange ratio of securities attacked by dissenting stockholders. Schwabacher makes perfectly clear that when passing upon a voluntary merger the Commission is required to use only those standards established by the Act, and that dissenting stockholders are not entitled to any premium solely by reason of their dissent. Thus, the Court said (334 U.S. at 198-200, 68 S.Ct. at 967-968):

"* * * It is equally clear that the Commission must look for standards in passing on a voluntary merger only to the Interstate Commerce Act. In matters within its scope it is the supreme law of the

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