International Rys. of Cent. Amer. v. United Brands Co.

• Decision Date: 08 May 1973
• Docket Number: No. 65 Civ 479.,65 Civ 479.
• Citation: 358 F. Supp. 1363
• Parties: INTERNATIONAL RAILWAYS OF CENTRAL AMERICA, Plaintiff, v. UNITED BRANDS COMPANY, Defendant. INTERNATIONAL RAILWAYS OF CENTRAL AMERICA, Plaintiff, v. COMPANIA AGRICOLA de GUATEMALA, Defendant.
• Court: U.S. District Court — Southern District of New York

358 F. Supp. 1363

INTERNATIONAL RAILWAYS OF CENTRAL AMERICA, Plaintiff, v. UNITED BRANDS COMPANY, Defendant.

INTERNATIONAL RAILWAYS OF CENTRAL AMERICA, Plaintiff, v. COMPANIA AGRICOLA de GUATEMALA, Defendant.

No. 65 Civ 479.

United States District Court, S. D. New York.

May 8, 1973.

COPYRIGHT MATERIAL OMITTED

Leventritt, Lewittes & Bender, New York City, for plaintiff.

Kaye, Scholer, Fierman, Hays & Handler, New York City, for defendants.

GURFEIN, District Judge.

This is an antitrust and contract action brought by International Railways of Central America (IRCA) against United Brands Company (UB), successor in interest to the United Fruit Co. (UF) and Compania Agricola de Guatemala (CAG), a subsidiary of UB.¹ The amended complaint alleges essentially (1) that as a consequence of a predominant influence of UF in the Guatemalan banana industry IRCA was deprived of revenues from the shipment of bananas by competitors of UF, who, but for the violations, would have shipped more bananas over the plaintiff's railroad; (2) that as a result of UF's virtual absolute control of IRCA, UF deterred the shipment over IRCA of bananas competitive to UF and CAG with a consequent loss of profits to IRCA; and (3) that in violation of a contract between UF and IRCA executed in 1948, UF deliberately, as a reprisal for IRCA's success against it in a New York State action, stopped growing bananas in Western Guatemala, with a concomitant loss to IRCA of profits which could have been realized from the shipment of bananas. In the aggregate, IRCA demands judgment in the sum of $169,000,000 trebled, or $507,000,000. As a result of Judge Friendly's opinion on the appeal relating to a prior motion in this case (see below), the amount of damages which IRCA can properly claim will be far less. UB has now moved for summary judgment on several grounds.

The background of the controversy is as follows. At the turn of the century one Minor C. Keith owned a controlling interest in UF. In 1904 Keith acquired control of the Guatemala Northern Railroad and a large tract of undeveloped jungle ceded to the Railroad by the Guatemalan Government. In order to raise funds for his Railroad investment he sold all but 10% of his interest in UF. IRCA transferred some 50,000 acres of unplanted jungle to UF which was to undertake to plant 5,000 acres of bananas over the next 4 to 5 years. IRCA obligated itself not to encourage directly or indirectly any competition to UF in Guatemala, and to give UF detailed reports on the movement by IRCA of bananas for any other shipper. These original arrangements between UF and IRCA were confined to banana growing and shipping in Eastern Guatemala. The only deepwater ports are located in Eastern Guatemala, the primary one being Puerto Barrios. The Pacific Coast of Guatemala has no natural deepwater ports.

All of UF's bananas destined for the United States and Europe were shipped via IRCA. During the 1920s UF conceived a plan to expand its banana plantations into Western Guatemala, and to increase its control over IRCA. In 1928, a syndicate which included UF, purchased Keith's interest in IRCA. UF with 71,000 shares of common stock, became the largest single stockholder. The stock purchased by the syndicate was placed in a voting trust under which UF through a trust company as its agent, nominated two of the five trustees. From 1928 on UF exercised a dominating, though secret, influence in IRCA.²

As UF's interest in Western Guatemalan banana development increased, it sought further to consolidate its control over IRCA to insure favorable rates and service on its own products, and to prohibit the same favorable rates to its competitors' products. In 1936, CAG, UF's subsidiary which operated UF's Western Guatemalan banana plantations at Tiquisate acquired 185,000 shares of IRCA stock from IRCA at a low price and the voting trust was dissolved. In Judge Friendly's words, "from this time 1936 UF could and did control the election of IRCA's nine directors, although it regularly allowed the banking interests to submit four nominees for its approval. UF's control was exercised even more potently by the designation, from 1928 on, of the officer in charge of its tropical operations as `special adviser' to IRCA's board, chairman and president. For many years, the extent of UF's stock ownership and dominance of IRCA was concealed." International Railways of Central America v. United Fruit Company, 373 F.2d 408, 410 (2 Cir. 1967).

In 1933, UF and IRCA entered into a contract whereby a freight rate was established for UF which amounted to only slightly more than half of what UF's competitors were required to pay. In 1936, the 1933 rates were reaffirmed with additional provisions added. It was this 1936 contract which provided for the purchase by CAG of the 185,000 shares of IRCA's unissued stock and 3% notes for $2,165,000 in cash. CAG also agreed to purchase ten new locomotives and 300 banana cars for use on IRCA tracks and agreed not to build a West Coast port so as to insure the movement of the produce from the newly opened Tiquisate banana lands over IRCA's rails to East Coast ports. Moreover, in this contract CAG agreed to use IRCA's lines to ship its bananas and import its supplies to Tiquisate.

In a separate agreement, trackage rights were granted CAG to operate its banana trains over IRCA's lines. In another separate agreement, IRCA undertook to operate CAG's trains and to maintain CAG's locomotives and rolling stock; and CAG was to reimburse IRCA for the costs incurred.

In a supplementary letter agreement, the parties added a provision for the adjustment of rates upon a change in price affecting the costs and charges of producing, acquiring, selling and transporting Guatemalan bananas. In the event the parties could not agree on such adjustments, an arbitration clause was provided.

In 1948 CAG and IRCA entered into new agreements. Essentially, the 1948 contracts simply reaffirmed the 1936 contracts and extended them. Modifications in the freight rates were also made. The "main" contract was extended until December 31, 1963 and the supplemental contracts (the trackage and operating agreements) were extended until December 31, 1967. Another supplementary letter agreement as to arbitration was executed in 1948.

SYNOPSIS OF PRIOR LITIGATION

In February 1949 certain shareholders of IRCA instituted a derivative suit against UF in the New York Supreme Court, following unsuccessful efforts to readjust UF-IRCA relations and rates. After extensive discovery a trial commenced in 1953 before Mr. Justice Hammer of the New York State Supreme Court. After Judge Hammer's retirement, the trial continued before him as Referee. In June 1957, Referee Hammer filed a long report and concluded that UF had breached its fiduciary duty to IRCA. He found that the plaintiffs had established that UF exercised such domination over IRCA that it was really bargaining with itself when the basic 1936 contracts were negotiated and executed, and that UF had used its control to obtain unduly low freight rates for itself and CAG. He awarded a judgment for over 4½ million dollars for the period before 1956, and ordered an increase in freight rates prospectively to the termination of the contracts. In March 1961 a supplemental judgment awarded IRCA close to 4 million dollars more representing the increased rates from January 1956 through December 1960.

The Appellate Division, First Department, affirmed the Referee's findings (Ripley v. International Railways of Central America, 8 A.D.2d 310, 188 N. Y.S.2d 62 (1959)). It agreed that the finding of domination and control by UF was abundantly supported by the evidence. It observed that "the existing relationship precluded any possibility of genuine arm's length bargaining between IRCA and UF." 8 A.D.2d at 317, 188 N.Y.S.2d at 72. The Appellate Division upheld the award of damages, as well as the determination fixing a fair rate for the future at $130 per banana car.

The Court of Appeals affirmed the Appellate Division, 8 N.Y.2d 430, 209 N.Y.S.2d 289, 171 N.E.2d 443 (1960). The Court of Appeals held that the rates were divisible from the rest of the contracts. Divisibility was essential to the decision, for without it, the Court would have been met with the principle that "where a fiduciary contracts with its cestui regarding the individual property rights of the fiduciary, the transaction may be rescinded where there has been overreaching, but the cestui cannot knowingly retain the benefits which it receives under such agreements and simultaneously repudiate its obligations thereunder." 8 N.Y.2d at 436-437, 209 N.Y.S.2d at 292, 171 N.E.2d at 445. The Court affirmed the Referee's Judgment which had upheld the continued validity of the 1948 contracts and which had awarded compensation for unjustifiably low past rates and had adjusted the rates upward for the future.

During the progress of the Ripley litigation, the United States filed a civil antitrust complaint against UF in the Eastern District of Louisiana. This action was terminated early in 1958 by a consent decree, one section of which required UF to dispose of its IRCA stock not later than June 30, 1966. In January 1962, UF sold substantially all such stock to the BSF Company which in turn sold the great bulk of it to Trans Caribbean Airways; the latter has purchased additional stock so that it owns 340,000 of IRCA's 500,000 shares of common.

Beginning in 1961 UF began to liquidate its banana plantations in Tiquisate through sale, lease and otherwise. By the end of 1964 no more bananas were being grown in Tiquisate. It is alleged that UF required purchasers and lessees not to plant bananas on its former Tiquisate holdings.

On February 16, 1965, apparently in response to UF's abandonment of banana production in Tiquisate, IRCA instituted the present action in the Southern District of New York. It employed the attorneys who had represented the ...