In re Penn Central Securities Litigation

• Decision Date: 23 June 1972
• Docket Number: M.D.L. Docket No. 56. Civ. A. No. 70-2010,71-2838.
• Citation: In re Penn Central Securities Litigation, 347 F.Supp. 1324 (E.D. Pa. 1972)
• Parties: In re PENN CENTRAL SECURITIES LITIGATION. Richard S. ROBINSON et al. v. PENN CENTRAL COMPANY et al. Byron WILLIAMS et al. v. PENN CENTRAL COMPANY et al.
• Court: U.S. District Court — Eastern District of Pennsylvania

347 F. Supp. 1324

In re PENN CENTRAL SECURITIES LITIGATION.

Richard S. ROBINSON et al. v. PENN CENTRAL COMPANY et al.

Byron WILLIAMS et al. v. PENN CENTRAL COMPANY et al.

M.D.L. Docket No. 56. Civ. A. Nos. 70-2010, 71-2838.

United States District Court, E. D. Pennsylvania.

June 23, 1972.

David Berger, Philadelphia, Pa., for plaintiff Richard S. Robinson, and others.

Bardyl R. Tirana, Sundlun, Tirana & Scher, Washington, D. C., for defendant Executive Jet Aviation, Inc.

MEMORANDUM AND ORDER

JOSEPH S. LORD, III, Chief Judge.

Defendant Executive Jet Aviation, Inc. ("EJA") has moved to dismiss claims asserted against it in the above-captioned actions. We will postpone any ruling on EJA's motion in 71-2838 pending a decision by the Judicial Panel on Multidistrict Litigation on plaintiffs' motion to remand the action to the Northern District of Texas. For the reasons set forth below, we have concluded that defendant's motion should be granted in 70-2010.

The Robinson action is brought by present shareholders of Penn Central Company and asserts both derivative and direct claims against Penn Central companies, their present and former directors and officers, and others. The only claim asserted against EJA in 70-2010 is contained in Count IV of the second amended complaint.¹ Count IV alleges that actions of the defendants which resulted in the loss by Penn Central Transportation Company² ("Transportation Co.") of $21,000,000 through an investment in EJA constituted breaches of fiduciary duty and gross mismanagement and waste of the assets of Penn Central Company. The gravamen of the complaint against EJA is that

"the poor judgment of the Executive Jet Aviation, Inc. Directors, caused Executive Jet Aviation and, therefore, the Pennsylvania Railroad, its stockholders and the banks extending credit to Executive Jet Aviation through the Pennsylvania Railroad to lose millions of dollars in wasted financial material and human resources."

Paragraph 52, Amended Complaint 70-2010

Transportation Co., the successor in interest to the Pennsylvania Railroad, is the Debtor in proceedings No. 70-347 in this District before the Honorable John P. Fullam (the Reorganization Court). We have previously determined that all derivative claims asserted in 70-2010 on behalf of Transportation Co. belong to the Trustees in reorganization, and we have dismissed plaintiffs in 70-2010 as parties with respect to these claims. In re Penn Central Securities Litigation, 335 F.Supp. 1026 (E.D.Pa.1971). EJA maintains that the only allegations against it in the Robinson complaint are derivative, and therefore within the exclusive control of the Trustees. EJA and the Trustees have settled all Transportation Co. claims against EJA in connection with the sale of Transportation Co.'s interest in EJA pursuant to Order No. 561 of the Reorganization Court, In the Matter of Penn Central Transportation Co., No. 70-347 (E.D. Pa., filed January 24, 1972).³ Plaintiffs argue that Count IV asserts direct claims of Penn Central Company stockholders, as well as derivative claims against EJA, and therefore all claims against EJA have not been settled and the motion should be denied.

The general rule for determining whether an action asserts direct or derivative claims has been stated as follows:

"* * * 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 (1970). See also J. Moore, Federal Practice ¶ 23.1.16 1 (2d ed. 1969).

The issue presently before us is whether Count IV alleges any direct claim by Penn Central Company stockholders against EJA. Plaintiffs argue that Count IV charges defendants not only with causing damage to Penn Central Company but also with common law counts of fraud by which the defendants caused direct harm to Penn Central shareholders. We do not agree.

The allegations of Count IV are strictly derivative claims. Plaintiffs have not alleged any acts by EJA which can be construed as having injured the shareholders directly rather than the corporation. See Zahn v. Transamerica Corp., 162 F.2d 36 (C.A. 3, 1947); Borak v. J. I. Case Co., 317 F.2d 838 (C.A. 7, 1963).

Plaintiffs in...