Overfield v. Pennroad Corporation
| Decision Date | 20 December 1941 |
| Docket Number | 938.,No. 258,258 |
| Citation | 42 F. Supp. 586 |
| Parties | OVERFIELD v. PENNROAD CORPORATION et al. WEIGLE v. SAME. |
| Court | U.S. District Court — Western District of Pennsylvania |
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Daniel O. Hastings, of Wilmington, Del., Philip H. Strubing, of Philadelphia, Pa., R. E. Lee Marshall and George C. Doub, both of Baltimore, Md., Hugh F. O'Donnell, of New York City, Caleb R. Layton, 3rd, of Wilmington, Del., Harold J. Conner, of Philadelphia, Pa., Daniel Blumenthal, of New York City, and Macin E. Estill, Lynn L. Detweiler, Harry Reiss Axelroth, James McG. Mallie, and Hugh Roberts, all of Philadelphia, Pa., for plaintiffs.
C. B. Heiserman, John Dickinson, John B. Prizer, Philip Price, Robert T. McCracken, George G. Chandler, Wm. Clarke Mason, W. Heyward Myers, Jr., Thomas B. K. Ringe, Ernest R. von Starck, R. Sturgis Ingersoll, and Warwick Potter Scott, all of Philadelphia, Pa., Ballard, Spahr, Andrews & Ingersoll, Thomas Stokes, and John Sailer, all of Philadelphia, Pa., Elder W. Marshall, of Pittsburgh, Pa., and Lewis M. Stevens, Medford J. Brown, and Stradley, Ronon & Stevens, all of Philadelphia, Pa., for defendants.
This matter involves two complaints, one by Ione M. Overfield and the other by Grace Stein Weigle. They are substantially the same, in that they are derivative stockholders' suits brought on behalf of Pennroad against the Pennsylvania Railroad and the former directors of Pennroad. Jurisdiction in both actions is based on diversity of citizenship. The complaints allege an interlocking relationship between the individual defendants as directors and officers of the Pennroad and of Pennsylvania. They include and set forth letters dated April 24, 1929, to Pennsylvania stockholders, a voting trust agreement dated May 1, 1929, and aver that sales of Pennroad voting trust certificates of over $141,000,000 were made. It is charged that Pennsylvania, through its officers and agents and by means of the said voting trust agreement, took and retained control of Pennroad although it invested nothing in Pennroad securities.
The Weigle bill describes eight large purchases alleged to have been made pursuant to a premeditated and preconcerted fraudulent scheme to use the funds and powers of Pennroad for the benefit of the Pennsylvania, each of which are alleged to constitute a separate cause of action. The Overfield complaint originally involved only one of the investments complained of in the Weigle suit but was subsequently amended, with leave of court to include all of the charges of the Weigle bill. 39 F.Supp. 482.
As the record now stands the bills in the Weigle and the Overfield suits both contain, in addition to the allegations as to jurisdiction and to the general course of dealing between Pennsylvania and Pennroad, complaints based upon the following particular investments and transactions: The purchase by Pennroad of the
(1) stock and other securities of the Detroit, Toledo and Ironton Railroad for $36,000,000.
(2) substantially all of the stock of Canton Company for $13,432,817.90.
(3) 220,000 shares of the stock of the Pittsburgh and West Virginia Railway at $170 per share.
(4) 402,119 shares of Seaboard Airline Railway for $4,523,838.75.
(5) 10,000 shares of Lehigh Valley at a price largely in excess of its investment value.
(6) 148,800 shares of common and 1,200 shares of preferred stock of the New York, New Haven & Hartford Railroad Company for $17,301,851.25 and $149,300, respectively.
(7) securities of the Boston & Maine Railroad Company for $23,637,708.38, and
(8) the promotion by Pennroad in June, 1929, of National Freight Company, and the furnishing of its capital in the original amount of $2,300,000, and finally a total of over $4,000,000.
As to all of these investments, it is alleged that they had a special value to Pennsylvania apart from any value of the same as an investment to Pennroad, and that Pennsylvania fraudulently caused Pennroad to make such investments for its own benefit. In particular, it is alleged that Pennsylvania had previously considered purchasing the Detroit, Toledo & Ironton Railroad and had abandoned negotiations, but through its domination caused Pennroad to make the purchase at a price which Pennsylvania had considered excessive in the absence of certain assurances as to continuation of Ford freight traffic. Pennsylvania had likewise previously considered the purchase of the Canton Company for the express purpose of securing control of the Canton Railroad but had concluded that the special value of Canton Company to Pennsylvania as a traffic producing agency would not exceed $9,500,000. Upon discovering that Canton was about to be sold to a competing railroad, Pennsylvania directed its banking agents to purchase the Canton Company for Pennroad and that they did so at an excessive price. It is also alleged that prior to the purchase of the Pittsburgh and West Virginia by Pennroad, Pennsylvania deemed the acquisition of that company necessary to prevent it going to a competitor and thereby injuring Pennsylvania's strategic and competitive position, that the price paid by Pennroad as directed by Pennsylvania was greatly in excess of the intrinsic value, and that an enormous loss to Pennroad resulted. It is alleged that the purpose of Pennsylvania in causing the purchase of Seaboard Airline stock was to improve and strengthen the strategic position of Pennsylvania as a competitor for traffic of the Seaboard exchanged at Washington, and that the price paid was out of proportion to the real value of the stock and that the result was a complete loss to Pennroad, although Pennsylvania continuously enjoyed substantial benefits therefrom. It is alleged that the purchase of Lehigh Valley stock was to further secure Pennsylvania's control of that railroad so that in consolidation plans then pending, Pennsylvania might exercise complete domination over the Lehigh Valley, that Pennsylvania did so benefit, and that Pennroad suffered large losses by reason of said purchase. As to the New York, New Haven & Hartford, it is charged that Pennsylvania caused Pennroad to make this purchase to secure for Pennsylvania a working control of the New York, New Haven & Hartford for the improvement of Pennsylvania's strategic and competitive position. Pennsylvania had previously purchased 200,000 shares of that company. The purchases made by Pennroad inflated the market value beyond a normal investment level, made the cost of the stock considerably in excess of its investment value and caused Pennroad severe losses while greatly benefitting Pennsylvania. The purchase of the Boston & Maine was made in pursuance of Pennsylvania's desire to dominate New England railroad operations and for that purpose it caused Pennroad to purchase the stock at a price much higher than the investment value.
As to the National Freight Company, it is alleged that by promoting and causing Pennroad to make the capital investment in that company, Pennsylvania acquired control of the routing of less than carload lot traffic within its territory; that prior to organization of Pennroad, Pennsylvania had planned to accomplish the same results through an owned subsidiary or affiliate of Pennsylvania, but in May, 1929, Pennsylvania decided to cause Pennroad to put up all of the money, take all of the chances and losses, while Pennsylvania retained profits, advantages and benefits of the project without risk. Pennroad assumed responsibility for all financial requirements of the company, including the cost of leases from Pennsylvania, with the understanding that all traffic secured should be routed over the Pennsylvania lines. It is alleged that from the beginning and for a period of about four years National Freight suffered constant heavy losses all of which were paid by Pennroad, while during the same period the freight company continued to pay rentals and furnish Pennsylvania a large and profitable volume of traffic. Pennsylvania was advised by Pennroad of the losses and thereafter Pennsylvania made some efforts to lighten those losses without giving up any benefits. In March of 1933, Pennsylvania concluded to abandon the venture and so advised Pennroad, whereupon Pennroad sold the National Freight Company for $400,000 represented by notes which were sold for $381,000, resulting in a loss of over $4,000,000 to Pennroad, while Pennsylvania received freight revenues and rentals in excess of $5,000,000.
It is alleged that the defendants, except Wayne who was not originally a director, conspired and created the fraudulent scheme to cause Pennroad to make the investments complained of for the benefit of Pennsylvania and that the defendants concealed the scheme from Pennroad certificate holders. Plaintiffs aver that they did not learn of the facts concerning those investments until 1938 after the Wheeler investigation, and charge that the transactions complained of constitute reckless and wanton disregard by the defendants of their duties arising from dual relationships and conflicting interests.
The prayers of the complaints are that the defendants be jointly and severally held liable for all losses incurred by Pennroad, that Pennsylvania be adjudged liable for reimbursement to Pennroad for all benefits received by Pennsylvania by reason of the transactions described, that Pennsylvania account for and pay to Pennroad all gains and profits accruing to it from the said transactions, that an account be stated showing the losses suffered by Pennroad through its participation in the said transactions and that a judgment be entered in favor of Pennroad and against the defendants for such losses.
The various defendants filed answers to the Weigle complaint, which answers have been, with leave of court, taken as the answers to the Overfield complaint as amended.
The answers of Pennsylvania admit...
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