Overfield v. Pennroad

• Decision Date: 19 January 1943
• Docket Number: 938.,No. 258,258
• Citation: 48 F. Supp. 1008
• Parties: OVERFIELD et al. v. PENNROAD CORPORATION et al.
• Court: U.S. District Court — Western District of Pennsylvania

48 F. Supp. 1008

OVERFIELD et al. v. PENNROAD CORPORATION et al.

Nos. 258, 938.

District Court, E. D. Pennsylvania.

January 19, 1943.

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 W. Blumenthal, of New York City, and Macin E. Estill, Lynn L. Detweiler, Harry R. 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 C. Chandler, Wm. Clarke Mason, W. Heyward Myers, Jr., Thomas B. K. Ringe, Ernest R. von Starch, R. Sturgis Ingersoll, Warwick Potter Scott, 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.

WELSH, District Judge.

Following the filing of the opinion herein, three investment experts were appointed to advise the Chancellor as to the fairest possible measure of the defendant's financial liability in accordance with the conclusions and the principles discussed in the opinion. The experts have made a thorough study of the problem and have filed their report giving a comprehensive analysis of the transactions involved, and their combined opinion as to the measure of the damage in each investment instance, with one exception. The report recites that consideration has been given to all of the elements commented upon by the Court, including the purposes and relationships of the parties, the conditions and the trends of the times, and the relative equitable rights of the parties in interest. There is also included much of the material upon which their analysis was based. Thereafter the experts appeared for examination by counsel and an opportunity was had to determine the process by which their conclusions were reached and to test the soundness of their judgment.

Fortified by such report and the testimony of the able experts called by the plaintiff and defendant and the briefs and arguments of counsel, it becomes the Chancellor's duty to fix the measure of financial liability to be imposed upon the defendant Pennsylvania Railroad Company. It must be borne in mind, however, that in the performance of this duty the element of equitable justice must predominate rather than a resort to mathematical calculation, and that more weight must be given to the relative rights and obligations of the parties than to the establishment of a technical yardstick with which to exactly measure values, losses or liability.

In explanation of their conclusions and for the purpose of establishing a common basis for the comparison of Pennroad investments with other transactions of similar character, the experts prepared a composite schedule of the earnings, market values and dividends of 13 Class One railroads. They declared, however, that the figures so developed were not intended to be an exact standard against which the price of Pennroad's purchases could be compared; but that such figures do "develop a pattern that has a comparative, if not absolute, value", and that the dollar figures arrived at involved the exercise of judgment. In the exercise of that judgment founded upon their impressions and appreciation of conditions at and after the time of the investments and of the relationships of the parties, they concluded that the price paid for Detroit, Toledo & Ironton Railroad was a proper one, no loss has been suffered, the risk was justified, and that no liability therefor should be imposed upon the defendant.

Defendant's counsel concur in the conclusion reached by the experts as to D. T. I., but the complainants take exception on the ground that the composite capital earnings and dividend records of the 13 railroads as compiled by the experts does not form a proper basis for comparison of values or for the measurement of liability. It may be pointed out, however, that the composite schedule has not been used as the exact measure of value or liability, but only as a common basis for the comparison of railroad investments. The experts have noted that capitalization of expected earnings is a guide to a range of value, and past earnings to expected earnings. Past earnings may be of help in estimating the future earnings of any particular company, but the exercise of judgment, having regard to all the circumstances, is particularly essential. Investment has for its purpose the assurance of future benefits, through an estimation of trends and possibilities which necessarily involves judgment and discretion. The experts have exercised their judgment fairly and impartially and we are not disposed to disregard their reasoning as to D. T. I. by assuming that it is faulty or that the comparisons made are the sole basis of their conclusion. The Chancellor declines to hold the defendant financially liable for Pennroad's investment in D. T. I.

As to the Pittsburgh & West Virginia investment, it will be recalled that at the instance of the railroad president, who was also a director of Pennroad, the latter company authorized the purchase of 220,000 shares at $170.00 per share in pursuance of an agreement previously reached with the principal stockholders of P. & W. Va. stock. The facts disclosed at the trial, and the experts also found, that pools had been operated, and a reckless dividend policy followed, for the purpose of influencing the market price of the stock, and that therefore the market quotations formed no accurate basis of value.

The experts reviewed the history of the road, its financial structure, the uncertainties and hazards incident to investment therein, and they compared its financial structure, earnings and future prospects with the composite schedule of the 13 railroads previously referred to. Their analysis applied various standards to the investment and commented upon the elements which rendered it impossible to actually measure the loss or risk imposed upon Pennroad by its investment therein made for the benefit of the Penna. Railroad. Taking all factors into account and giving them the comparative weight which the experts' judgment indicated was in accordance with the opinion filed, they set $105.00 as a value for the common stock and $24.00 for the preferred as being within the fair price range for the stocks purchased. It was expressly declared, however, that they did not adopt such figures because they were a result of a calculation, but because they were within the price range which a purchaser might pay, taking all factors into consideration including the market value of control, but uninfluenced by a desire to acquire that control for the benefit of any particular railroad. The experts found that the difference between the price paid and the value fixed by them was $9,140,130.00 which represented the measure of liability which should be imposed upon the defendant by virtue of the Pittsburgh & West Virginia purchase.

Defendant takes exception on the ground that the experts' conclusion is predicated upon a number of assumptions which are either erroneous or subject to dispute, and because of their failure to attach to certain conditions and estimates the importance to which the defendant believed they were entitled. Complainants find no fault with the reasoning and the process by which the liability was reached, but contend that the damages should include an additional $4,633,595.57 representing the cost of underwriting the issue of Pennroad stock, the proceeds of which were used to purchase the Pittsburgh & West Va. securities.

A review of the facts, the comprehensive analysis and comments of the experts, and of the conditions and influences incident to the Pennroad investments, confirms the impression that the judgment of the experts is adequately supported by a proper appreciation of the problem, proof of the pertinent facts and a fair basis of comparison. It is obvious that their combined opinion is founded upon their understanding of the elements and influences which combined to justify a mental conclusion. Whether those elements or influences were comparisons, calculations, certain estimates, or their own knowledge and experience must be left to those charged with the duty of reaching the conclusion. If their opinion is reasonably supported by an intelligent appreciation of the circumstances and problem, there would appear to be no reason for disregarding it simply because they failed to adopt some other and different impression or interpretation of the elements before them.

The Chancellor is satisfied from all the evidence in the case that the measure of liability which should be imposed upon the defendant by virtue of the purchase of the Pittsburgh & West Virginia should be fixed at $9,140,130 and so finds.

This we are satisfied is a fair and equitable measure of the damages to be charged against the defendant arising out of the P. & W. Va. purchase. The expense of underwriting the issue of Pennroad stock sold with the view to buying the P. & W. Va. stock, although incurred at the instance of the Penna. Railroad, is not a part of the investment itself and should not be included in the damages. The underwriting expense was a necessary incident to the sale of the Pennroad stock, and the sale of such stock was the means by which the funds for the P. & W. Va. were provided. It was, however, incurred for corporate purposes, regardless of what was done with the proceeds of the issue and it would have been incurred in connection with such issue whether the proceeds were intended to be invested in a proper or improper investment, and at a fair price or otherwise. Such expense is not an inseparable part of the damages arising out of the P. & W. Va....