James Blackstone Mem. Lib. Ass'n v. GULF, M. & OR CO.

• Decision Date: 09 March 1959
• Docket Number: No. 12430.,12430.
• Citation: 264 F.2d 445
• Parties: JAMES BLACKSTONE MEMORIAL LI BRARY ASSOCIATION et al., Plaintiffs-Appellants, v. GULF, MOBILE AND OHIO RAILROAD COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

264 F.2d 445 (1959)

JAMES BLACKSTONE MEMORIAL LI BRARY ASSOCIATION et al., Plaintiffs-Appellants, v. GULF, MOBILE AND OHIO RAILROAD COMPANY, Defendant-Appellee.

No. 12430.

United States Court of Appeals Seventh Circuit.

March 9, 1959.

Watson Washburn, New York City, Alfred W. Craven, Jr., Chicago, Ill., for appellant. Washburn & Gray, New York City, Notz, Craven & Price, Chicago, Ill., of counsel.

Kenneth F. Burgess, D. Robert Thomas, Walter J. Cummings, Jr., Arthur R. Seder, Jr., Chicago, Ill., for appellee. Sidley, Austin, Burgess & Smith, Chicago, Ill., of counsel.

Before MAJOR, PARKINSON and KNOCH, Circuit Judges.

MAJOR, Circuit Judge.

This action was commenced November 4, 1953, by former minority stockholders of Joliet & Chicago Railroad Company (herein called Joliet) against the Gulf, Mobile & Ohio Railroad Company (herein called Gulf), to whose subsidiary (Gulf, Mobile & Ohio Land Company) plaintiffs, on or about February 14, 1950, sold 4,312 shares of stock of Joliet at a price of $240.00 per share. The stock was so-called guaranteed stock, all of the property of Joliet (a railroad line between Joliet and Chicago) having been leased in 1864 to Chicago and Alton Railroad Company (herein, with successor corporations, called Alton), under a perpetual lease. This lease was assumed by Gulf in 1947 in connection with the Alton reorganization proceeding in the district court for the Northern District of Illinois.

The complaint sought damages of varying amounts up to the difference between $240.00 per share, the receiving price, and $1,087.70 per share, for total damages of $3,659,594.00. Plaintiffs' claim was based on Gulf's alleged stoppage of guaranteed dividend payments on plaintiffs' stock prior to purchase, and Gulf's failure, when purchasing plaintiffs' stock, to disclose material facts affecting its value in violation of Gulf's fiduciary obligations, by which Gulf was enabled to reap large profits at plaintiff's expense. Jurisdiction is asserted upon diversity of citizenship and upon a violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b).

After formulation of the issues, the case was referred by Judge Philip L. Sullivan, on March 7, 1957, to Master in Chancery Augustine J. Bowe. Hearings were held before such master on May 21 and May 22, 1957, during which two witnesses testified for plaintiffs and five for defendant. The transcript of such testimony contains 287 pages. In addition, plaintiffs introduced in evidence depositions of four witnesses, and defendant, the depositions of five witnesses, such depositions comprising 517 pages, which by stipulation were introduced without being read, the special master having stated that he was acquainted with and would read them in detail. In addition, the parties introduced 74 exhibits comprising 269 pages, making a total record of 1639 pages for consideration by the special master.

The report of the special master was filed December 13, 1957. It is set forth in its entirety in the appendix submitted by plaintiffs and comprises 150 pages. It reviews in great detail the evidence considered by the special master, including testimony heard by him, testimony submitted by depositions and the many exhibits introduced. Following this summary and based thereon, the special master made detailed findings of fact and entered his conclusions of law.

The findings and conclusions were adverse to plaintiffs and, in conformity therewith, the special master recommended to the court that a decree be entered dismissing the complaint for want of equity and that the cost, including master's fees to be determined by the court, be assessed against plaintiffs. Plaintiffs appropriately filed objections to the master's report and also objections to his certificate of fees and expenses. The court, after considering the briefs filed by the parties before the special master and also supplemental briefs filed by the parties in support of and in opposition to plaintiffs' objections to the report, overruled all objections. The report was confirmed in all respects, and the findings of fact and conclusions of law of the special master were adopted as those of the court, which directed that a decree be entered in favor of the defendant, with the allowance of fees and expenses of the special master.

The court accordingly, on July 1, 1958, entered its decree in favor of defendant and allowed the sum of $8,000 as a reasonable and proper fee for services rendered by the special master, plus certain expenses incurred by him, and directed that such fee and expenses be allowed as taxable cost against plaintiffs. It is from this decree that plaintiffs appeal.

Plaintiffs in their brief state two contested issues: (1) whether defendant violated the fiduciary duties which it owed to plaintiffs when it purchased their stock and (2) whether the case was properly referred to a special master. Defendant acquiesces in the issues as stated by plaintiffs. Plaintiffs also state a third issue relative to the measure of damages, which obviously we shall not reach unless we reverse the holding of the district court that plaintiffs were not entitled to recover. We have read the voluminous summary of evidence, the findings of fact and conclusions of law contained in the special master's report and adopted, over plaintiffs' objections, by the district court. We have also read and studied the cases cited by the parties in support of their respective positions. The conclusion which we have reached obviates the necessity for more than a brief description of the factual situation.

Joliet, an Illinois corporation organized prior to 1862, issued a total of 15,000 shares of $100 par value capital stock, all of one class. In 1864, Joliet leased to Alton in perpetuity all of the former's real and personal property, including 37 miles of railroad between the cities of Joliet and Chicago. As rent under the lease Alton covenanted to guarantee and pay to the holders of Joliet's 15,000 shares of stock an annual dividend of seven percent upon the par value of the stock, or $7.00 per share, payable quarterly. The lease required Alton to make timely deposits with United States Trust Company of New York of sums sufficient to cover the dividends, the Trust Company to distribute such to the stockholders.

The lessee agreed that the sums of money to be deposited with the Trust Company "shall be free of all federal taxes which are now or may hereafter be levied by the Government of the United States, upon the payment of dividends declared or made upon the capital stock of incorporated companies, and that the dividend hereinafter provided to be paid in full and without any deduction therefrom for any Federal tax whatsoever upon the payment of said dividend, and that all taxes which may at any time hereafter be due to the United States Government on account of said dividends so paid from time to time shall be paid by the lessee to the United States Government."

The original lease was amended and supplemented in 1923 and 1939, by contracts between Joliet and Alton. By the supplemental contract of 1939, the original lease was amended so as to demise and lease to the lessee in perpetuity certain lands and property of Joliet not included in the original lease and described as follows:

"Also, all real and personal property hereafter acquired or constructed by the Joliet Company and wheresoever situated and in whatsoever form, including (without in anywise limiting or impairing, by the enumeration of the same, the scope and intent of the foregoing) all rights of the Joliet Company in and to any and all property, real and personal, all tracks, buildings, bridges, viaducts, trestles, and other structures, leases, leaseholds, easements, licenses, permits, franchises, privileges, rights of way and rights of whatsoever description."

The 1939 supplement also amended the rental clause of the original lease by providing that no dividend should be payable on any Joliet shares which on any dividend payment date were registered on Joliet's books in the name of the lessee or in the name of any assignee of lessee's leasehold interest.

By a decree entered in the district court in Chicago on May 31, 1947, in the reorganization of Alton, Gulf assumed the lease, with all rights and liabilities provided in the original lease. The assumption agreement provided that the lease should be deemed a lease and not a conveyance in fee, and also that Gulf "reserves the right to obtain judicial construction of all tax provisions and to contest liability for the payment of taxes under the Joliet lease, and nothing herein contained shall be considered as a limitation upon or waiver of such right."

Between the time of Gulf's assumption of the lease and the purchase of plaintiffs' shares, Gulf had acquired a majority of the shares of Joliet.

While an element of damages, as alleged in plaintiffs' complaint, is based on Gulf's stoppage of guaranteed dividend payments on plaintiffs' shares, this contention is not pressed here. This is apparent from the fact, as already noted, that plaintiffs' sole contested issue, on the merits, is that Gulf violated its fiduciary duties toward plaintiffs when it purchased their stock. Plaintiffs do argue, however, that the activities of Gulf in connection with the stoppage of the payment of dividends is material as disclosing a preconceived plan to take advantage of the minority stockholders in the subsequent purchase of their shares.

In United States v. Joliet & Chicago R. Co., 315 U.S. 44, 62 S.Ct. 442, 86 L.Ed. 658, the court held that Joliet was liable for an income tax on dividends paid directly to its shareholders by the lessee on the theory of constructive receipt. For some reason not discernible, it appears that following that case the legal advisors of Gulf decided that it was not liable for Federal income taxes on rental payments made to shareholders. Dividend payments were...