New York Central Securities Corporation v. United States

• Decision Date: 20 May 1931
• Parties: NEW YORK CENTRAL SECURITIES CORPORATION v. UNITED STATES et al.
• Court: U.S. District Court — Southern District of New York

54 F.2d 122 (1931)

NEW YORK CENTRAL SECURITIES CORPORATION v. UNITED STATES et al.

District Court, S. D. New York.

May 20, 1931.

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House, Grossman & Vorhaus, of New York City (Frederick A. Henry, of Cleveland, Ohio, and Joseph Fischer, of New York City, of counsel), for the petitioner.

Jacob Aronson, of New York City (Crosby J. Beakes, and James L. Homire, both of New York City, of counsel), for defendants New York Central, the Cleveland, C., C. & St. L. Ry. Co. and the Michigan Cent. R. R.

Daniel W. Knowlton, of Washington, D. C., for defendant Interstate Commerce Commission.

George Z. Medalie, U. S. Atty., of New York City (Elmer B. Collins, Sp. Asst. to the Atty. Gen., of counsel), for the United States.

Before MACK, Circuit Judge, and WOOLSEY and COXE, District Judges.

MACK, Circuit Judge.

This is a petition under the Urgent Deficiencies Act (38 Stat. 208, 219, 220), 28 U. S. C. §§ 46, 47 (28 USCA §§ 46, 47) to annul and set aside two orders of the Interstate Commerce Commission relating to railroad leases, brought by a minority stockholder of each of the lessor companies and of the lessee company. The order of July 2, 1929 (150 I. C. C. 278; 154 I. C. C. 489),¹ authorized acquisition of control, through leasing, by the Cleveland, Cincinnati, Chicago & St. Louis Railway Company (the "Big Four") of the properties of the Cincinnati Northern and of the Evansville, Indianapolis & Terre Haute lines and acquisition of control, through leasing, by the New York Central Railroad of the systems of the "Big Four," the Michigan Central, and of the Chicago, Kalamazoo & Saginaw Railway Company; the terms of the leases were approved by the Commission. The order of December 2, 1929 (158 I. C. C. 317),² authorized the "Big Four" to assume obligation and liability under the leases as to securities of its lessors, and the New York Central to assume like obligation and liability as to securities of its lessors, including the "Big Four."

The first order was made pursuant to section 5 (2),³ the second to section 20a⁴ of the Transportation Act of 1920, 49 U. S. C. (49 USCA).

At the time of the first order, the New York Central owned, directly or through a subsidiary, 99.19 per cent. of the stock of the Michigan Central, 100 per cent. of the stock of the Kalamazoo and of the Terre Haute, and 97.72 per cent. of the stock of the Cincinnati Northern. It also held 91.31 per cent. of the common stock and 84.69 per cent. of the preferred stock of the "Big Four"; the increase of its holdings of the common stock from 64 per cent. in 1922 had been with the approval of the Commission. Control of Big Four by New York Central, 72 I. C. C. 96. The New York Central and its subsidiaries have common executives; thirteen of the fifteen directors of the "Big Four" and Michigan Central are also directors of the New York Central.

The proposed leases are for ninety-nine years, and include assignment by the lessors to the lessee of income from securities. The lessee agrees to maintain the lessors' corporate existence and to pay interest and other charges; further, to pay to the holder of each share of the capital stock of the lessors, not owned by the lessee, a specified amount as annual rental dividends. If unwilling to accept the rentals stipulated, the minority stockholders of the lessors have the alternative stipulated right to sell their stock to the lessee at values to be fixed by arbitrators; in the determination of the values, the effect of the leases is to be considered or disregarded at the option of the stockholder.

As a condition to the authorization of the leases, the Interstate Commerce Commission required the acquisition of certain intervening short lines by the New York Central, on the ground of public interest. These lines have been so acquired. 154 I. C. C. 489. Sixty-two other short lines, which connect with the unified, did not intervene; the Commission decided that for the present, at least, their acquisition was not a prerequisite to authorization of the leases.

Plaintiff corporation owns stock in the New York Central, the "Big Four," and the Michigan Central. It asserts its interest as a minority stockholder in each of them. Having intervened unsuccessfully in the application before the Commission, it filed its original petition, after entry of the order in Finance Docket No. 5690, and a supplemental petition, after entry of the order in Finance Docket No. 7744. The United States, the Commission, and the defendant railroads have moved to dismiss for lack of jurisdiction, and have also filed answers on the merits.

1. At the threshold, we are met with the defendant's contention that plaintiff has no standing to sue, because, as a minority stockholder in each corporation, its interest is not distinct from that of the respective defendant corporations, and its remedy, therefore, is by a stockholders' bill "in a suit involving the plenary equity jurisdiction of the District Court." See Pittsburgh & West Virginia Ry. v. United States, 281 U. S. 479, 486, 50 S. Ct. 378, 74 L. Ed. 980. And compare Sprunt & Son v. United States, 281 U. S. 249, 50 S. Ct. 315, 74 L. Ed. 832; Hines v. United States, 263 U. S. 143, 44 S. Ct. 72, 68 L. Ed. 216.

Plaintiff is a minority stockholder in two aspects: A. As a minority stockholder in the lessee corporation, its objection that the acquisition of the short lines adversely affected that corporation would not, standing alone, be heard in this suit, for clearly plaintiff cannot have sustained any injury in this respect other than indirectly through the lessee corporation. Pittsburgh & West Virginia Ry. v. United States, supra, page 487 of 281 U. S., 50 S. Ct. 378. B. As a minority stockholder of lessor corporations, however, its alleged injury is not merely derivative through its ownership of stock, but is an independent injury to itself as a member of a class created by the leasing agreements between lessors and lessee. The payments of rental dividends are to be made directly to the minority stockholders of the lessors; no payment is made by the lessee to itself as stockholder of the lessors; nor is any rental payment in the form of guaranteed annual dividends paid to the lessor corporations for distribution to their minority stockholders. The minority stockholders are, in effect, third party beneficiaries of the authorized lease agreements, and, as such, have an independent interest, even though, because of dissatisfaction with the provisions, they may be unwilling to assert the rights accorded to them thereunder. The controversy, moreover, is not merely an ordinary internal fight between minority and majority, for the New York Central itself is the majority in the lessors, and, as such, has an interest adverse to the minority stockholders of the lessors. Our conclusion is supported by the express statement in Pittsburgh & West Virginia v. United States, supra, at 487 of 281 U. S., 50 S. Ct. 378, that in some cases of acquisition and control the order does deal with "the interests of investors" as distinguished from their interests merely as minority stockholders in their corporation.⁵ In the Pittsburgh Case, a petition was filed to annul an order of the Interstate Commerce Commission granting a certificate of public convenience under section 1 (18). The present suit challenges orders made under sections 5 (2) and 20a. In the former case, the minority stockholder had no standing except through its corporation; in the latter, as in reorganizations, the minority acquired by the leases a new interest of a substantially independent character pursuant to the authority granted by the Commission. The motion to dismiss for lack of jurisdiction must therefore be denied.

The plaintiff argues upon somewhat inconsistent grounds. On the one hand, it asserts that, since there is already control through stock ownership and interlocking directorates, the leases add nothing to the status quo ante the orders, and that the Commission is, therefore, without power to grant the authority on the basis of "public interest." On the other hand, it urges that the leases, added to the existing stock control, effect a "consolidation" within the prohibition of section 5 (2).

First. Similar contentions have been overruled by the Interstate Commerce Commission in a series of decisions.⁶ Continuous departmental practice under a statute is a weighty consideration in the determination by the courts of nice questions of construction. See Logan v. Davis, 233 U. S. 627, 34 S. Ct. 685, 58 L. Ed. 1121.

On the matter here presented, we are entirely in accord with the Commission. The statute permits acquisition (on a finding of public interest) by lease, by purchase of stock, "or in any other manner not involving the consolidation of such carriers into a single system for ownership and operation."

There is no express limitation on the authority to permit such acquisition by lease when stock ownership already gives control. Nor does the control by lease for ninety-nine years involve a "consolidation" within the intendment of the statute. Section 5 (6) makes it "lawful for two or more carriers by railroad, subject to this chapter, to consolidate their properties or any part thereof, into one corporation for the ownership, management, and operation" under certain conditions. Section 5 makes a clear distinction between "acquisition of control" and "consolidation." The latter is qualified in section 5 (2) by "a single system for ownership and operation," and in section 5 (6) by "into one corporation." Apparently the "consolidation" so qualified is the consolidation prohibited under section 5 (2). Construing the several subdivisions of section 5 together, it is clear that Congress laid down no test for consolidation other than ownership by one corporate entity; anything short of this cannot be deemed a consolidation within the qualification of subdivision 2.

The danger that the ultimate...