Lowry v. Baltimore & Ohio R. Co., 81-1976
| Citation | 707 F.2d 721 |
| Decision Date | 10 May 1983 |
| Docket Number | No. 81-1976,81-1976 |
| Court | United States Courts of Appeals. United States Court of Appeals (3rd Circuit) |
| Parties | Fed. Sec. L. Rep. P 99,196 Lucile LOWRY and Lowry-Zweig Corp., Appellants v. The BALTIMORE & OHIO RAILROAD COMPANY, The Chesapeake & Ohio Railroad Company and Chessie System, Inc. |
Robert B. Block (Argued), Pomerantz, Levy, Haudek & Block, New York City, Leonard M. Mendelson, Hollinshead & Mendelson, Pittsburgh, Pa., for Lucile Lowry and Lowry-Zweig Corp.
Richard T. Wentley (Argued), Anthony J. Basinski, Terrance K. Livingston, Reed, Smith, Shaw & McClay, Pittsburgh, Pa., for Baltimore and Ohio R. Co., The Chesapeake and Ohio R. Co. and Chessie System, Inc.
Michael P. Malakoff, Berger, Kapetan, Malakoff & Meyers, P.C., Pittsburgh, Pa., for amicus curiae, Pittsburgh Terminal Corp., Monroe Guttmann, Loretta Guttmann, Janet Rees and Evelyn Bittner.
Argued Dec. 16, 1981.
Before ADAMS, GIBBONS and GARTH, Circuit Judges.
Reargued In Banc Nov. 8, 1982.
Before SEITZ, Chief Judge, and ALDISERT, ADAMS, GIBBONS, HUNTER, GARTH, SLOVITER and BECKER, Circuit Judges.
Lucile Lowry and Lowry-Zweig Corporation appeal from a summary judgment dismissing their class action complaint against the Baltimore & Ohio Railroad Company (B & O), the Chesapeake & Ohio Railway Company (C & O), and the Chessie System, Inc. The complaint alleged that defendants violated Sec. 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b); Rule 10b-5 of the Securities and Exchange Commission promulgated thereunder, 17 C.F.R. Sec. 240.10b-5 (1981); and state common law when, on December 13, 1977, B & O declared a dividend in favor of its common shareholders in the form of the entire stock of the Mid-Allegheny Corporation. This action was taken without giving notice to holders of B & O convertible debentures, thereby precluding their participation in the dividend distribution. In a previous decision, this court allowed persons who held B & O convertible debentures as of December 13, 1977 to maintain an action under Sec. 10(b) and Rule 10b-5. Here, appellants had purchased B & O convertible debentures from persons who held them as of December 13, 1977 and are attempting to assert their sellers' federal cause of action. 1 We conclude that the dismissal of appellants' federal claims was proper and affirm the district court's action as to them. We vacate and remand for further consideration of appellants' state law claims.
The B & O owns both rail and non-rail assets and has issued both common stock and convertible debentures. The C & O controls over 99% of B & O's common stock. There are thirteen other common shareholders and the shares are not publicly traded. The Chessie System is a holding company managing the assets of the C & O. The present controversy arose after B & O sought to restructure its operations in order to avoid federal restrictions that inhibited development of its non-rail assets. To accomplish this it created the subsidiary corporation, Mid-Allegheny, to which it transferred all of its non-rail assets. Then on December 13, 1977, B & O distributed all of the Mid-Allegheny stock to its own common shareholders. A consequence of this arrangement was that B & O convertible debentures, which previously could have been converted into B & O common stock representing both B & O's rail and non-rail assets, became convertible into B & O common stock representing only B & O's rail assets.
In a separate action, the debenture holders sued under the Securities Exchange Act of 1934 claiming that, as to them, the dividend declaration was fraudulent. They argued that the value of their conversion option, and hence of their convertible debentures, would be reduced unless they were allowed to convert in time to qualify for the Mid-Allegheny dividend. This court agreed, and concluded that B & O had a duty to provide debenture holders with advance notice of such a dividend declaration. Pittsburgh Terminal Corp. v. Baltimore & Ohio R.R., 680 F.2d 933 (3d Cir.), cert. denied, --- U.S. ----, 103 S.Ct. 476, 74 L.Ed.2d 621 (1982).
In the instant suit, appellants purchased B & O convertible debentures from persons who held them on December 13, 1977. Appellants argue that, even though they purchased with full knowledge of the dividend declaration and allege no injury therefrom, the federal cause of action established in Pittsburgh Terminal was automatically assigned to them upon their purchase of the debentures.
A majority of this court, albeit for diverse reasons, agree with the district court and conclude that appellants may not maintain a claim for which relief can be granted based on any violation of federal statutes or regulations. Two judges would overrule Pittsburgh Terminal and are of the opinion that B & O was under no legal obligation to provide holders of the convertible debentures with advance notice of the dividend. According to this view, if the prior holders have no federal cause of action, then a fortiori, neither do their purchasers, and the assignability issue need not be reached. Six members of the court are of the view that the holding in Pittsburgh Terminal should be honored here either because it is correct or binding. Three of the six judges who follow Pittsburgh Terminal conclude that the rights recognized in Pittsburgh Terminal are assignable only if there is an express provision to that effect. Because there was no express assignment here, these judges argue that appellants may not now assert their transferors' rights. The remaining three judges are of the view that the cause of action was automatically assigned to appellants as purchasers. These three members of the court would reverse the dismissal of the federal claims.
As to appellants' state law claims we vacate the judgment of the district court and remand with a direction that the district court consider whether appellants can maintain this part of their class action suit as a diversity action. The district court dismissed without explaining whether the jurisdictional requirements of 28 U.S.C. Sec. 1332 were met under Zahn v. International Paper Co., 414 U.S. 291, 94 S.Ct. 505, 38 L.Ed.2d 511 (1973). The district court may also wish to consider the possibility of state claims under pendent jurisdiction asserted by other litigants.
Accordingly, the judgment of the district court dismissing the federal claims of appellants will be affirmed. As to appellants' state law claims, the district court judgment will be vacated and remanded for further proceedings consistent with this opinion.
Each side to pay its own costs.
I.
In Pittsburgh Terminal Corp. v. Baltimore & O. R.R., 680 F.2d 933 (3d Cir.), cert. denied, --- U.S. ----, 103 S.Ct. 475-76, 74 L.Ed.2d 621 (1982), a panel of this court held that Rule 10b-17, 17 C.F.R. Sec. 240.10b-17 (1982), required notice to holders of convertible debentures of a dividend declared by B & O on December 13, 1977. 1 However, the panel was divided in its vote on Lowry, argued and considered by the panel with Pittsburgh, to the extent that no judgment could be entered. This in turn led to a recommendation that the full court sitting in banc entertain Lowry's appeal. The primary issues that divided the Lowry panel were: (1) whether federal law or state law controlled; and (2) if federal law controlled, what was the content of that law. In order to focus the parties' attentions on the concerns of the court, supplemental briefs were sought with respect to the following issues:
1. Upon the sale on the New York Stock Exchange of convertible debentures of the Baltimore and Ohio Railroad Company, does federal or state law govern whether accrued causes of action arising under the federal securities laws are automatically assigned to the subsequent purchasers of those debentures?
2. If federal law applies, what is the content of that law?
3. If state law applies, which state's law governs, and what is the content of that law?
4. What law governs the assignability of any accrued common law or state statutory causes of action pleaded in the complaint?
5. If a different law of assignability applies to causes of action arising under federal and state law, what persons will be covered by the stipulation in Pittsburgh Terminal Corp. v. Baltimore & Ohio R.R. Co., 680 F.2d 933 (3 Cir.1982), that convertible debenture holders who are not parties will receive any benefits ultimately decided to be due to the individual plaintiffs in that case?
6. If it is concluded that the plaintiffs have no federal cause of action, what disposition should be made of the remainder of the complaint?
The supplemental briefs filed by both of the parties agreed that federal law controlled. Lowry argued that federal law would recognize automatic assignability, while the B & O argued otherwise. At oral argument before this court, in addition to the arguments found in their briefs, B & O argued for the first time that N.Y.Jud. Law Sec. 489 (McKinney 1968) 2 would, in any event, prohibit the Lowry plaintiffs from obtaining an assignment of their transferors' causes of action. B & O raised this section 489 argument ostensibly to counteract the reliance by Lowry on Phelan v. Middle States Oil Corp., 154 F.2d 978 (2d Cir.1946), and N.Y.Gen.Oblig. Law Sec. 13-107 (McKinney 1978), 3 which Lowry claims permits causes of action to be assigned without an express assignment. 4
The per curiam opinion, which is entitled "Opinion of the Court," curiously makes no mention of the significant issue which divided the panel: i.e. whether federal or state law dictates the assignability of the Pittsburgh cause of action. Indeed, the per curiam opinion, without reference to whether federal or state law controls, reports that two members of the court do not reach the issue of assignability; that three...
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