In re Penn Central Securities Litigation

• Decision Date: 06 December 1971
• Docket Number: M.D.L. Docket No. 56.
• Citation: 335 F. Supp. 1026
• Parties: In re PENN CENTRAL SECURITIES LITIGATION.
• Court: U.S. District Court — Eastern District of Pennsylvania

335 F. Supp. 1026

In re PENN CENTRAL SECURITIES LITIGATION.

M.D.L. Docket No. 56.

United States District Court, E. D. Pennsylvania.

December 6, 1971.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Robert W. Blanchette, Edwin P. Rome, Marvin Comisky, Morris L. Weisberg, Blank, Rome, Klaus & Comisky, Philadelphia, Pa., for Trustees of the Property of Penn Central Transportation Co.

David Berger, David Berger, P.A., Philadelphia, Pa., Alfred S. Julien, New York City, Liaison Counsel for plaintiffs.

Donald J. Farage, Farage & Shrager, Philadelphia, Pa., for defendant Penn Central Co.

OPINION AND ORDER

JOSEPH S. LORD, III, District Judge.

The Trustees in reorganization for the Penn Central Transportation Company (herein referred to as "Transportation Co.") have moved to intervene as of right as parties-plaintiff pursuant to F.R.Civ. P. 24(a) (2) and to be given exclusive control of thirteen (13) suits¹ which are part of the Penn Central Securities Litigation, M.D.L. Docket No. 56. The Penn Central Company (herein referred to as "Holding Co.") has cross-petitioned to be realigned as a party-plaintiff and to be given exclusive control of all of the cases in M.D.L. Docket No. 56. The shareholder-plaintiffs (herein referred to as "plaintiffs"), who commenced the M.D.L. Docket No. 56 suits, oppose both motions.

The Penn Central Securities Litigation involves numerous lawsuits filed by stockholders and bondholders of the related Penn Central companies. The suits allege violations of common law duties and federal securities laws by Penn Central companies, their present and former directors and officers and others. Opinion and Order of the Judicial Panel on Multidistrict Litigation, January 25, 1971. The suits include derivative actions commenced by the stockholders on behalf of Penn Central companies as well as direct claims by stockholders and bondholders against the defendants.

At the outset, it is important to distinguish the derivative actions from the direct or individual claims.

"If the injury is one to the plaintiff as a stockholder and to him individually, and not to the corporation, as where the action is based on a contract to which he is a party, or on a right belonging severally to him, or on a fraud affecting him directly, it is an individual action. On the other hand, if the wrong is primarily against the corporation, the redress for it must be sought by the corporation, except where a derivative action by a stockholder is allowable, and a stockholder cannot sue as an individual. The action is derivative, i. e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock or property without any severance or distribution among individual holders, or if it seeks to recover assets for the corporation or to prevent the dissipation of its assets." 13 W. Fletcher, Corporations § 5911 at 285 (1970).

The motions under consideration relate only to the derivative causes of action raised in the stockholders' suits. In essence, both Transportation Co. and Holding Co. support their motions on the ground that because a stockholder's derivative suit asserts a cause of action on behalf of the corporation, the corporation can take over the litigation of its own claim. Transportation Co. and Holding Co. do not, and could not, seek to become parties to or gain exclusive control of the individual claims of the stockholders and bondholders because by definition the corporation is not the injured party in such actions.

The petitions before us raise two separate issues with respect to Transportation Co. and Holding Co.:

(1) Should the Trustees of Transportation Co. be permitted to intervene as parties-plaintiff and/or should Holding Co. be permitted to realign itself as party-plaintiff in the derivative actions commenced by the stockholders; and

(2) Should either Transportation Co. or Holding Co. be given exclusive control of all or any part of the litigation.

Although two issues are raised on the face of the petitions, there is, in fact, little dispute over whether Transportation Co. or Holding Co. should be permitted to take part in the suits on the basis of their respective interests in the claims raised derivatively on their behalf. Rather, the dispute centers primarily on

(1) What are the respective interests of Transportation Co. and Holding Co. in the derivative claims; and, more importantly,

(2) Whether the interests of either Transportation Co. or Holding Co. justify the court in granting exclusive control of all or any part of the litigation to either party.

I. INTEREST OF TRANSPORTATION CO. AND HOLDING CO. IN CLAIMS FOR INJURIES TO PENN CENTRAL COMPANIES

In order to determine the respective interests of Transportation Co. and Holding Co. in the pending derivative actions, it is necessary to review the evolution of the present corporate relationship of the two companies.

(1) In 1846, the Pennsylvania Railroad Company was organized as a corporation under a special act of the Legislature of the Commonwealth of Pennsylvania.

(2) On February 1, 1968, the New York Central Railroad Company merged with the Pennsylvania Railroad Company, and the resulting corporation was known as the Pennsylvania New York Central Transportation Company. On May 8, 1968, the corporation name was changed to Penn Central Company (herein referred to as "Penn Central Co. (#1)").

(3) On April 1, 1969, a corporation known as Penn Central Holding Company was organized under the laws of the Commonwealth of Pennsylvania. Also, on April 1, 1969, a corporation known as PCT Company was organized under the laws of Pennsylvania as the wholly owned subsidiary of Penn Central Holding Co.

(4) On May 13, 1969, the shareholders of Penn Central Co. (#1) approved a plan of merger and reorganization which provided for PCT Company to merge into Penn Central Co. (#1). The holders of shares of stock of PCT Co. and Penn Central Co. (#1) participated in the following exchange of shares of stock:

(a) Penn Central Holding Co., the owner of all the stock of PCT Co., received in exchange for the PCT Co. stock all the stock of Penn Central Co. (#1);

(b) All the shareholders of Penn Central Co. (#1) received the same number of shares of stock of Penn Central Holding Co. as they then held in Penn Central Co. (#1);

(c) All of the stock of PCT Co. was thereafter cancelled.

(5) On October 1, 1969, the plan of merger and reorganization was consummated. The corporation resulting from the merger of PCT Co. into Penn Central Co. (#1) changed its name, effective October 1, 1969, to Penn Central Transportation Company (Transportation Co.). This corporation is the Debtor in proceedings No. 70-347 in this District before the Hon. John P. Fullam (the Reorganization Court) and the Trustees are the trustees of its property. On October 1, 1969, the Penn Central Holding Co. changed its name to Penn Central Company (Holding Co. or Penn Central Co. (#2)).

(6) As a result of the plan of merger and reorganization, all the stock of Transportation Co. is presently owned by Holding Co. and all the stock of Holding Co. is publicly owned.

(7) Before June 21, 1970, when Transportation Co. filed its petition for reorganization, the directors and officers of Transportation Co. interlocked with the directors and officers of Holding Co. Motion of Trustees of the Property of Penn Central Transportation Company to Intervene as Parties-Plaintiff, July 1, 1971, pp. 2-4.

Three categories of corporate claims are therefore asserted in the derivative actions:

(1) Injury to the railroad corporations which existed before October 1, 1969;

(2) Injury to Transportation Co. since October 1, 1969; and

(3) Injury to Holding Co. since October 1, 1969.

All parties agree that the Trustees of Transportation Co. have exclusive possession of all assets of Transportation Co. including choses in action, and therefore the Trustees represent whatever interests of Transportation Co. are raised by the derivative suits.² Memorandum in Support of Motion of the Trustees to Intervene, July 1, 1971, pp. 1-3; Plaintiffs' Supplemental Memorandum in Opposition to Trustees' Motion to Intervene, July 19, 1971, p. 2; Penn Central Co.'s Memorandum Contra Motion of Trustees to Intervene, July 2, 1971, p. 2. The task facing the court is therefore to determine what interest Transportation Co., through its Trustees, has in the pending derivative actions.

A. Pre-1969 Claims

The first issue in dispute is what interest, if any, does Transportation Co. have in the claims for injury to the railroad corporations which existed before October 1, 1969. Both the plaintiffs and Holding Co. argue that Transportation Co. has existed only since October 1, 1969 and therefore the Trustees cannot exercise power over claims of any railroad corporation which existed before that date. The Trustees argue that Transportation Co. is the successor in interest to Penn Central Co. (#1) and the Trustees, as representatives of Transportation Co., can assert the claims for injury to the railroad corporations which existed before October 1, 1969. For the reasons stated below, we have concluded that the Trustee's position is correct.

1. Merger of the Pennsylvania Railroad and New York Central Railroad Company

Holding Co. contends that the merger of the Pennsylvania and New York Central Railroads resulted in the creation of "an entirely new entity" whose separate corporate status was recognized by Penn Central Co.'s (#1) relinquishment of its 1846 charter and election to be chartered under the Pennsylvania Business Corporation Law. The Trustees state that the New York Central Railroad merged into the Pennsylvania Railroad Company and the surviving corporation (Penn Central Co. (#1)) was a continuation of the Pennsylvania Railroad Company and not a new entity. The effect of the 1969 reorganization and rechartering of Penn Central Co. (#1) will be examined infra, Section 2. However, it...