Perrine v. The Pennroad Corp.

• Decision Date: 19 July 1933
• Court: Court of Chancery of Delaware
• Parties: JOSEPH W. PERRINE AND JULIA A. PERRINE, v. THE PENNROAD CORPORATION, a corporation of the State of Delaware, THE PENNSYLVANIA RAILROAD COMPANY, a corporation of the Commonwealth of Pennsylvania, WILLIAM W. ATTERBURY, EFFINGHAM B. MORRIS, JAY COOKE, LEVI I. RUE, RICHARD B. MELLON, ALBERT J. COUNTY, HENRY H. LEE, JOSEPH WAYNE, JR., AND A. H. S. POST AND EFFINGHAM B. MORRIS, WILLIAM M. POTTS AND JOSEPH WAYNE, JR., as Voting Trustees under Voting Trust Agreement dated May 1, 1929, in respect of the common stock of THE PENNROAD CORPORATION, a corporation of the State of Delaware

168 A. 196

19 Del.Ch. 368

JOSEPH W. PERRINE AND JULIA A. PERRINE, v. THE PENNROAD CORPORATION, a corporation of the State of Delaware, THE PENNSYLVANIA RAILROAD COMPANY, a corporation of the Commonwealth of Pennsylvania, WILLIAM W. ATTERBURY, EFFINGHAM B. MORRIS, JAY COOKE, LEVI I. RUE, RICHARD B. MELLON, ALBERT J. COUNTY, HENRY H. LEE, JOSEPH WAYNE, JR., AND A. H. S. POST AND EFFINGHAM B. MORRIS, WILLIAM M. POTTS AND JOSEPH WAYNE, JR., as Voting Trustees under Voting Trust Agreement dated May 1, 1929, in respect of the common stock of THE PENNROAD CORPORATION, a corporation of the State of Delaware

Court of Chancery of Delaware, New Castle

July 19, 1933

STATEMENT OF THE CASE. The bill in this cause seeks to declare void a voting trust agreement dated May 1, 1929, to which all the issued stock of the Pennroad Corporation is subject. The total outstanding stock deposited in the voting trust is 9,090,000 shares. The Pennroad Corporation issued the stock in the first instance to three voting trustees, and the voting trust certificates received in exchange therefor were offered for subscription. They were all sold, yielding to the corporation something like $ 141,285,000.00.

The bill alleges that the Pennroad Corporation was organized as an investment trust by the Pennsylvania Railroad Company and that the railroad company has ever since Pennroad's organization controlled its policies and management. This control has been effected, the bill charges, through the voting trustees, provided for in the voting trust, who have at all times been responsive solely to the dictation of the railroad's officers.

The bill is a lengthy one and need not, for the present purpose be described in detail. Its general drift is to the effect that the Pennroad Corporation has not been managed as an investment trust with the view to its own welfare, but solely in the interest of the Pennsylvania Railroad Company and for the purpose of forwarding its scheme and design to acquire stock ownership in other railroad companies in order that it might be in a position of tactical advantage in the matter of the consolidation of railroad properties which the Act of Congress of February 28, 1920 (49 USCA § 5), authorizes. The bill alleges that the said Pennsylvania Railroad Company could not itself purchase the stocks it desired to acquire in furtherance of its design, and that it conceived the idea of organizing the Pennroad Corporation as an investment trust placing all of its stock in a voting trust, the trustees under which would be controlled by it, the railroad, and then have the Pennroad Corporation use the large sum of money realized from the sale of voting trust certificates to purchase stocks in such railroad companies as would serve the peculiar interests of the Pennsylvania Railroad Company. By this plan, the bill alleges, the Pennsylvania Railroad Company circumvented the inhibiting powers of the Interstate Commerce Commission with respect to the purchase of the stock and securities of one railroad company by another, and enabled itself, through its control of the voting trustees to acquire such railroad properties as would enable it to exercise a powerful influence in the matter of the consolidation problem which the Act of Congress had referred to the Interstate Commerce Commission for solution. The bill alleges that the formation of the voting trust was conceived in fraud and that the purchasers of the voting trust certificates were not advised of the ulterior designs which its originator, the Pennsylvania Railroad Company, intended it to serve. It therefore prays that the voting trust may be declared to be null and void, and that the trustees and the Pennroad Corporation be required to release the stock owned by the complainants and all other holders of voting trust certificates from the terms of the trust, giving to each holder a certificate for the number of shares of the stock of the Pennroad called for by his voting trust certificate.

The foregoing is one phase of the bill.

The bill, however, does not stop there. It has another phase. This consists of an allegation of facts upon which, it is claimed, a large liability, running into millions of dollars rests upon the trustees and others of the defendants. The facts referred to may in general be described as showing that the managers of the Pennroad Corporation, the trustees co-operating, caused it to buy such railroad stocks as the Pennsylvania Railroad Company required in advancement of its own selfish schemes, that such purchases were made in disregard of the interests of the Pennroad Corporation at prices that were far in excess of their value as investments, and that because of market operations, thus inspired by the desires of the Pennsylvania Railroad Company and in disregard of the interests of the Pennroad Corporation as an investment trust, the latter suffered losses running into millions of dollars, for which the trustees and all the other defendants who participated with them in thus inflicting losses upon the Pennroad Corporation should be required to account and be held liable.

The subpoena was returned non sunt inventi as to the defendants, Morris, Potts and Wayne, Jr., the three persons now acting as voting trustees, who are residents of Pennsylvania. Thereupon the complainants secured an order for substituted service upon them by publication, under Section 3850, Revised Code 1915 (as amended by 36 Del. Laws, c. 268), and Rule 19 of this court, supplemented by notice by mail addressed to them at their places of residence. Publication was made as ordered by advertisement in the Morning News, a daily paper of general circulation, published at Wilmington, Delaware, directing the three named defendants as voting trustees to appear by a certain day and answer the bill, or the same would be taken pro confesso against them.

Before the day named, the three voting trustees asked and secured leave to file a special appearance for the purpose of moving to vacate the order for substituted service and to quash the alleged constructive service or notice attempted to be had or given pursuant to said order.

Upon the entering of a special appearance, the three named defendants, through their solicitor, duly entered their motion to vacate and to quash.

The motion came on for hearing before the Chancellor who filed the following opinion in disposing of the same.

Motion overruled.

Aaron Finger, of the firm of Richards, Layton & Finger, (Frank M. Swacker and Hugh F. O'Donnell, both of New York City, on the brief), for complainants.

Hugh M. Morris and Ivan Culbertson, for intervening complainants.

Christopher L. Ward, Jr., of the firm of Marvel, Morford, Ward & Logan, for moving defendants.

OPINION

THE CHANCELLOR:

The order for constructive service entered in this cause was based on Section 3850, Section 7, of the Revised Code of 1915, as amended by the Act of April 29, 1929, 36 Del. Laws, c. 268. The Section in its amended form is as follows:

"3850 Sec. 7. ORDERS FOR APPEARANCE; UPON FAILURE OF SERVICE AND AFFIDAVIT; PUBLICATION OF; UPON DEFAULT; DECREE PRO CONFESSO; ENFORCEMENT BY SEIZURE OR DELIVERY OF PROPERTY DEMANDED; PAYMENT UPON SECURITY FOR RESTITUTION; PROCEEDINGS IF SECURITY NOT GIVEN; FOREIGN ATTACHMENT:--If, after subpoena or other process issued, any defendant therein named shall not appear in obedience to said process and according to the rules of the Court, the Court may, on affidavit that such defendant is out of the State, or cannot be found to be served with process and that there is just ground to believe that he intentionally avoids such service, make an order for his appearance on a certain day and publish such order as the Chancellor shall direct not less than once a week for three consecutive weeks. And if the defendant shall not appear, after such publication, according to such order, the Court may order the plaintiff's bill to be taken pro confesso, and may thereupon issue process to compel the performance either by seizure of the real and personal property of such defendant or part thereof, sufficient to satisfy the plaintiff's demand, or by causing possession of the estate, or effects, demanded by the bill, to be delivered to the plaintiff, or otherwise, as the case requires. And the Court may also order the plaintiff to be paid his demand out of any property so seized, upon his giving approved security, in a sufficient sum, to abide any order of the Court for the restitution thereof upon the defendant's appearing to defend the suit, and paying such costs as the Court shall order. If such security be not given, the property seized, or whereof possession shall be decreed to be delivered, shall remain under the direction of the Court in the hands of a receiver or otherwise, until the defendant's appearance, or until such order shall be made therein as the Court shall think just.

"If it shall appear in the bill of complaint that the defendant or any one or more of the defendants is a non-resident of the State of Delaware, it shall be lawful for the Chancellor to make an order directing such non-resident defendant or defendants to appear by a day certain to be designated. Such order shall be served on such non-resident defendant or defendants by mail or otherwise, if practicable, and shall be published in such manner as the Chancellor may direct, not less than once a week for three consecutive weeks. The Chancellor shall have power to compel the appearance of the defendant by the seizure of all or any part of his property, which property may be sold under the order of the Chancellor to pay the demand of the complainant, if the defendant shall not appear, or shall otherwise default. Such property shall remain subject to said seizure and may be sold to...