Missouri Pacific Railroad Company v. United States

• Decision Date: 15 August 1972
• Docket Number: No. 72 C 136(4).,72 C 136(4).
• Citation: 346 F. Supp. 1193
• Parties: MISSOURI PACIFIC RAILROAD COMPANY, Plaintiff, v. UNITED STATES of America and the Interstate Commerce Commission, Defendants, and Illinois Central Industries, Inc., a Corporation et al., Defendants-Intervenors.
• Court: U.S. District Court — Eastern District of Missouri

346 F. Supp. 1193

MISSOURI PACIFIC RAILROAD COMPANY, Plaintiff, v. UNITED STATES of America and the Interstate Commerce Commission, Defendants and Illinois Central Industries, Inc., a Corporation et al., Defendants-Intervenors.

No. 72 C 136(4).

United States District Court, E. D. Missouri, E. D.

August 9, 1972.

As Amended August 15, 1972.

Mark M. Hennelly, Guilfoil, Symington & Petzall, St. Louis, Mo., Leon Leighton, New York City, for plaintiff.

John H. D. Wigger, Atty., Dept. of Justice, Washington, D. C., Daniel Bartlett, Jr., U. S. Atty., St. Louis, Mo., for United States of America.

Fritz R. Kahn, Gen. Counsel and Geraldine R. Keyes, Atty., Interstate Commerce Commission, Washington, D. C., for I.C.C.

Voorhees & Summers, St. Louis, Mo., Robert Mitten, Howard D. Koontz, and John D. Morrison, Chicago, Ill., James N. Ogden, John W. Adams, Jr., Mobile, Ala., for intervening defendants.

Before MATTHES, Circuit Judge, and WANGELIN and COLLINSON, District Judges.

MATTHES, Circuit Judge.

This is an action by the Missouri Pacific Railroad Co. MoPac, pursuant to 28 U.S.C. § 1336(a), to set aside the Report and Orders of the Interstate Commerce Commission ICC dated December 28, 1971, and March 6, 1972, which authorized the merger of the Illinois Central Railroad Co. Central and the Gulf, Mobile and Ohio Railroad Co. Gulf into a new railway system, the Illinois Central Gulf Railroad Co. Central Gulf, to be controlled by Illinois Central Industries Industries, a non-carrier holding company which presently controls Central. See Illinois Cent. G. R. R. Co.—Acquisition—G.M. & O. R.R. Co., et al., 338 I.C.C. 805 (1971). Annulment of the order was also sought in a separate complaint filed by the Kansas City Southern Railway Co. in the United States District Court for the Western District of Missouri.¹ Separate three-judge courts composed of the same judges were convened pursuant to 28 U.S.C. § 2284, and temporary restraining orders were issued by consent (on March 16, 1972, in this proceeding) restraining implementation of the order pending disposition of this action. The cases were consolidated for argument and separate opinions are filed simultaneously today. See Kansas City Southern Ry. Co. v. United States, 346 F. Supp. 1211 (W.D.Mo.1972).

I. THE PROPOSED MERGER

Central and Gulf applied to the ICC on May 16, 1968, for authority under § 5(2) of the Interstate Commerce Act, 49 U.S.C. § 5(2), to merge the two systems into a new system. The merger method they proposed was described by the ICC as follows:

"The Plan seeks to effect a tax-free reorganization of the three companies while permitting the carrier operations of Central and Gulf to continue uninterrupted. Central Gulf, the vehicle through which this merger is to be effectuated, is to be organized and incorporated in Delaware following approval herein. The Plan calls for Gulf to form Central Gulf and to assign and transfer to the latter all of its properties. In consideration therefor, Central Gulf would transfer to Gulf all of its voting stock, which will consist of 1,000 shares of no-par common stock. Gulf would then be merged into Industries. In turn, Central would transfer substantially all of its assets to Central Gulf, and would then be liquidated and dissolved. Industries would then remain as the surviving parent corporation owning all the capital stock of Central Gulf, which itself would succeed to all the rights, privileges, power, and property of each constituent railroad and would assume their liabilities and obligations."

Illinois Cent. G. R.R. Co.—Acquisition— G.M. & O. R.R. Co., et al., 338 I.C.C. 805, 809 (1971). Additionally, authority was sought for Industries to issue a new series of stock with which to effect the merger.

The system to be created, Central Gulf, will be primarily a north-south carrier situated in the Mississippi Valley. (See the appended map, identified in the ICC hearings as Finance Docket No. 25203 et al. Part 6, Witness F. M. Dowling.) Central Gulf will operate some 9,484 miles of track, as compared to the following mileage for other railroads in the area: Seaboard Coast Line-L & N, 14,830 miles; Southern Pacific, 13,328; MoPac, 12,324; and Southern, 9,076.

II. THE INVOLVEMENT OF THE UNION PACIFIC

The fact which is at the heart of MoPac's complaint is the ownership by the Union Pacific Railroad UP of stock in Central's parent corporation, Illinois Central Industries. This stock has ranged from 30% near the turn of the century, to 16% during these ICC hearings, to 12.2% now; the diminution resulting from stock exchanges in other mergers and acquisitions. Furthermore, the intervenors, Central and Gulf, contend the stock exchange involved in the instant merger will reduce UP's share to 10.4%. The present market value of this stock is said by MoPac to be $79.5 million.

The nexus between UP's stock in Central and this merger is MoPac's contention that through this stock UP controls Central, has controlled it since 1906 when E. H. Harriman sold his Central stock to UP, and therefore that UP will control the newly merged Central Gulf.²

The consequences to MoPac if such UP control exists is that UP, whose eastern terminus is now Kansas City, would acquire by this merger Gulf's routes out of Kansas City which connect with Central's important terminals at Chicago and St. Louis, and thereby would link UP's western system with its allegedly controlled Central system in Mid-America. As a result, MoPac alleges, UP will divert to Central Gulf almost all the business it now gives MoPac, and thereby will cripple MoPac's competitive capacity.

MoPac first raised the contention of UP control of Central on November 16, 1967, six months before Central and Gulf filed their merger application. MoPac's complaint was filed in the proceedings wherein UP seeks to acquire the Rock Island Line,³ a merger which not coincidentally would also extend UP's lines from Kansas City to Chicago and St. Louis. By this complaint, MoPac sought an investigation by the ICC pursuant to § 5(7) of the Act to ascertain whether UP had violated § 5(4) of the Act by acquiring control of another carrier without authority from the ICC to do so.

In April of 1968, UP responded to this situation by filing with the ICC copies of trust agreements by which it placed all its holdings in Industries in three, separate voting trusts. On May 20, 1968, the ICC granted MoPac's request to withdraw its complaint seeking the investigation.

The issue of UP control of Central then arose in the present case when the Columbus and Greenville Railway Co., alleging UP control of Industries through a concert of the holdings and influence of UP, the Harriman family, Brown Brothers Harriman investment bankers BBH and Mr. Stephen Hord, a BBH partner who was then on the Executive Committee of Central,⁴ moved to dismiss the Central Gulf merger proceedings for want of jurisdiction on the ground that UP was an indispensable party. MoPac subsequently filed a new control complaint pursuant to § 5(7) alleging control by UP of Central in violation of § 5(4). Since these complaints related to the question of a violation of § 5(4) rather than the propriety of this merger under § 5(2), they were separately docketed. Accordingly, the Hearing Examiner in the Central Gulf merger case excluded evidence on the control question as beyond his assignment.

Although the question of illegal control under § 5(4) was ruled irrelevant, the question of the effect of such control on the propriety of this merger was obviously relevant. On this point, the Examiner found that the voting trusts effectively insulated Central Gulf from control by UP. However, the Examiner suggested in his June, 1970, report that to avoid the lengthy investigation under § 5(4) and subsequent litigation which would delay this merger and the UP-Rock Island merger, UP should consider voluntary divestiture in the manner ordered by the ICC in the Norfolk and Western merger,⁵ i. e., divestiture over a 10-year period.

UP acted upon the Examiner's suggestion and in August, 1971, filed in the separately docketed control case a stipulation between UP and its three trustees requiring the trustees to dispose of the stock over a 10-year period commencing when the ICC approved either the Central Gulf merger or the UP-Rock Island merger.

As will be discussed more fully below, the Commission accepted both the Examiner's finding that the trusts insulate Central Gulf from control by UP and UP's decision to divest over ten years.

III. THE PROCEEDINGS ON THE MERGER APPLICATION

Central and Gulf made their application for merger authority on May 16, 1968. Thereafter, the ICC held 73 days of hearings between November, 1968, and August, 1969. Among the protestants and intervenors were the United States Department of Justice Antitrust Division, 19 railroad companies (including the Chicago, Rock Island and Pacific; Louisville and Nashville; Chicago and North Western; St. Louis-San Francisco; Denver and Rio Grande Western; and Chicago, Milwaukee, St. Paul and Pacific), two ports and one state railroad commission. Of these, only MoPac and Kansas City Southern have opposed the merger in court.

The Hearing Examiner filed his 219 page Recommended Report and Order in June, 1970. After exceptions thereto were filed, the ICC heard oral argument on February 17, 1971, and filed its Report and Order on December 28, 1971. The Chicago & North Western joined MoPac and Kansas City Southern in seeking reconsideration of the Order. Accordingly, the Commission, on January 31, 1972, stayed its order, then on March 6, 1972, denied reconsideration and reaffirmed the order authorizing the merger.

In deciding whether the merger met the dispositive statutory command that it be in the public interest, the Commission found first that the economies it would allow Central and Gulf to effect would produce a new increase in pre-tax income of $12 million, as well as producing...