Lorenz v. CSX Corp.

• Decision Date: 27 April 1990
• Docket Number: 87-971.,Civ. A. No. 87-866
• Citation: 736 F. Supp. 650
• Parties: William F. LORENZ and Karen M. Lorenz, his wife; Victor A. Czerny; John Schmidt, and Janice J. Schmidt, his wife; Marjorie Slapin; Thaddeus E. Drake and Celia Drake, his wife; and Edith E. Berenkey: individually and on behalf of a class of former debentureholders similarly situated, Plaintiffs, v. CSX CORPORATION (formerly Chessie Systems, Inc.), The Chesapeake & Ohio Railroad Company and The Chase Manhattan Bank, N.A., Defendants. Ethel B. SAVIN, Individually and on behalf of a Class of former debentureholders similarly situated, Plaintiffs, v. CSX CORPORATION (formerly Chessie System, Inc.), The Chesapeake & Ohio Railroad, The Baltimore & Ohio Railroad Company and The Chase Manhattan Bank, N.A., Defendants.
• Court: U.S. District Court — Eastern District of Pennsylvania

736 F. Supp. 650

William F. LORENZ and Karen M. Lorenz, his wife; Victor A. Czerny; John Schmidt, and Janice J. Schmidt, his wife; Marjorie Slapin; Thaddeus E. Drake and Celia Drake, his wife; and Edith E. Berenkey: individually and on behalf of a class of former debentureholders similarly situated, Plaintiffs, v. CSX CORPORATION (formerly Chessie Systems, Inc.), The Chesapeake & Ohio Railroad Company and The Chase Manhattan Bank, N.A., Defendants.

Ethel B. SAVIN, Individually and on behalf of a Class of former debentureholders similarly situated, Plaintiffs, v. CSX CORPORATION (formerly Chessie System, Inc.), The Chesapeake & Ohio Railroad, The Baltimore & Ohio Railroad Company and The Chase Manhattan Bank, N.A., Defendants.

Civ. A. Nos. 87-866, 87-971.

United States District Court, W.D. Pennsylvania.

April 27, 1990.

COPYRIGHT MATERIAL OMITTED

Michael P. Malakoff, Berger Kapetan Malakoff & Meyers, P.C., Pittsburgh, Pa., for plaintiffs.

Edwin J. Mills, Stull, Stull & Brody, New York City, for Ethel B. Savin.

Anthony J. Basinski, Reed, Smith, Shaw & McClay, Pittsburgh, Pa., for Chesapeake & Ohio R. Co. and Baltimore & Ohio R. Co.

Robert C. Myers and Michele Gapinski, Dewey, Ballantine, Bushby, Palmer & Wood, New York City, and H. Woodruff Turner, Kirkpatrick & Lockhart, Pittsburgh, Pa., for Chase Manhattan Bank.

OPINION

COHILL, Chief Judge.

This is the latest chapter in a long, tortuous history of litigation between the defendant railroads and holders of convertible debentures. This multi-faceted case traces its origins back 13 years and in that time it has spawned 8 separate but related lawsuits in this district¹ and several more loosely related cases in other states.² The litigation in this district alone has generated 8 published opinions, 6 appeals, and 2 petitions for certiorari to the United States Supreme Court which were mercifully denied. The litigation has outlived two fine, dedicated district court judges, the Honorable William Knox and the Honorable Gerald J. Weber, who struggled manfully with the case and succeeded in resolving the core of the dispute, leaving the undersigned with the motions we address today.

I. FACTS AND PROCEDURAL HISTORY

As hinted above, the litigation history here is quite extensive, and a detailed understanding may be gleaned from prior Opinions.³ Nonetheless, the two cases before us today must be viewed in the larger context of the prior litigation, and we therefore embark on a review of the ground covered by others before us.

In 1956 the Baltimore and Ohio Railroad Company (B & O) created a class of convertible debentures maturing in the year 2010. The debentures are convertible to B & O common stock at any time prior to maturity. By the terms of the Indenture, defendant Chase Manhattan Bank, N.A. (Chase) serves as indenture trustee.

Although B & O common stock was once listed and traded on the New York Stock Exchange, by 1964 the Chesapeake & Ohio Railroad Co. (C & O) had acquired 99% of the outstanding common stock. Trading ceased, and B & O stock was delisted.

By December 1977, the C & O owned 99.63% of B & O common stock, the remainder being in a few private hands. The C & O in turn was wholly owned by the Chessie Systems, Inc., now known as CSX Corporation (CSX), a defendant here.

In the mid-1970's, this railroad empire began studying a reorganization. Interstate Commerce Commission regulations hampered the development of non-rail assets owned by railroads, such as timberland and mining rights. To properly realize the development potential of these non-rail assets while avoiding the strictures of the ICC, company officials devised a plan to segregate B & O's rail and non-rail assets. Under the plan, non-rail assets were transferred to a subsidiary, the Mid Allegheny Corporation (MAC). MAC common stock was then distributed to B & O shareholders as a dividend on a share for share basis.

As part of the reorganization strategy, company officials sought to avoid registration of MAC stock with the Securities Exchange Commission (SEC). Registration would have required expensive appraisals of all non-rail assets, a process which would have taken years. Because B & O had so few shareholders, the Company believed it would receive a "no-action" letter from the SEC, excusing the registration of MAC stock. However, if sufficient numbers of debenture holders converted to B & O common stock to participate in the dividend, registration of MAC stock, with all its attendant expense and delay, would be required.

To avoid this possibility, management devised the ill-fated plan which provided the seed for this litigation. Under the plan, all B & O non-rail assets were transferred to MAC on December 13, 1977. On that same date, B & O declared the dividend in MAC stock, payable to all B & O shareholders of record on that date. No prior notice of the reorganization or the dividend was provided and the B & O debenture holders were thus effectively deprived of any opportunity to convert and participate in the dividend.

The first of these many lawsuits was filed soon after and, following a hearing, Judge Knox issued a preliminary injunction prohibiting distribution of MAC stock. Pittsburgh Terminal Corp. v. B & O Railroad Co., 446 F.Supp. 656 (W.D.Pa.1978). Subsequently the B & O agreed to reserve sufficient shares of B & O and MAC stock to satisfy plaintiffs and any other similarly situated debentureholders in the event plaintiffs were successful in their suit. As a result, the Court of Appeals dissolved the injunction without published opinion. 578 F.2d 1375 (3d Cir.1978).

After extensive, hotly contested discovery and a non-jury trial, Judge Knox rejected each of plaintiffs' claims and entered judgment for the defendants. 509 F.Supp. 1002 (W.D.Pa.1981). The Court of Appeals reversed, its majority opinion resting on one narrow ground—that SEC Rule 10b-17 required the defendant railroads to give prior notice of the MAC dividend to debentureholders, affording them an opportunity to convert if so desired. 680 F.2d 933 (3d Cir.1982); cert. den. sub nom., Price v. Pittsburgh Terminal Corp., 459 U.S. 1056, 103 S.Ct. 476, 74 L.Ed.2d 621 (1982).

Unfortunately Judge Knox passed away during the pendency of the appeal, and Judge Weber picked up the standard his good friend had carried.⁴ On remand, with directions from the Court of Appeals to fashion a remedy for the securities violation, Judge Weber issued an Opinion which was subsequently affirmed. 586 F.Supp. 1297 (W.D.Pa.1984); aff'd sub nom. Guttmann v. B & O Railroad Co., 760 F.2d 257 and 760 F.2d 260 (3d Cir.1985); cert. den. 474 U.S. 919, 106 S.Ct. 247, 88 L.Ed.2d 256 (1985).

The remedy fashioned by Judge Weber was designed to place plaintiffs in status quo ante—that is, plaintiffs were afforded the opportunity they would have had in December, 1977 if defendants had provided prior notice of the dividend. Plaintiffs were given the opportunity to convert their debentures, share in the distribution of MAC stock, and also receive any other dividends on B & O and MAC stock declared after December 13, 1977. To balance the scale, plaintiffs choosing to convert and participate in the remedy were also required to disgorge any interest earned on the debentures after December 13, 1977.

Our present dispute has its origin in the fact that the original litigation was not conducted as a class action. There is considerable dispute among the present parties as to why class certification was denied in the principal prior actions,⁵ but we need not address that matter. Despite the absence of a formal class under Fed.R.Civ.P. 23, defendant railroads nonetheless entered into an agreement with Chase, the Indenture Trustee, and filed a stipulation with the Court, agreeing to extend any remedy ultimately obtained by plaintiffs to non-party, similarly situated debenture holders. Since then, the meaning of "similarly situated debenture holders" has generated considerable controversy.

Fortunately for us, Judge Weber provided guidance on this matter in his remedy Opinion:

V. SCOPE OF REMEDY

Defendants previously agreed to extend any remedy obtained in this suit to other similarly situated debenture holders. There was some discussion and apparent confusion on appeal as to the make-up of this "class". We endeavor to define it.

The remedy ordered here is limited to those persons who owned the subject debentures at the time of the violation, December 13, 1977, and who still own those debentures. Those persons who owned debentures on December 13, 1977, and subsequently converted to B & O common stock may also elect to participate in this remedy, obtaining MAC and its dividends, offset by interest accruing on the debentures after December 13, 1977. Those persons who acquired B & O debentures after December 13, 1977 are within the class of Lowry plaintiffs, and their claims will be resolved in that litigation. Those persons who owned B & O debentures on December 13, 1977 and subsequently sold their debentures are not within the scope of either this action or Lowry.

586 F.Supp. at 1305. The Court of Appeals subsequently affirmed this construction of the stipulation and scope of the remedy in an unpublished Opinion, noted sub nom. Guttmann v. B & O Railroad Co., 760 F.2d 257 and 760 F.2d 260 (3d Cir.1985). (Higginbotham, J., dissenting).⁶

The present actions before the Court were filed on behalf of a class described in the last sentence of the above-excerpt: "Those persons who owned B & O debentures on Dec. 13, 1977 and subsequently sold their debentures ..." 586 F.Supp. at 1305. Because these persons were found to be outside the scope of the parties' stipulation in the underlying litigation, they were not entitled to participate in the remedy obtained there. However, they may have independent causes of action. Whether those claims are viable or timely are the questions before us today.

ANALYSIS

The Complaints in the two above-captioned actions are...