REA Express, Inc. v. Alabama Great Southern R. Co.

• Decision Date: 18 November 1976
• Docket Number: No. 71 Civ. 4278.,71 Civ. 4278.
• Citation: 427 F. Supp. 1157
• Parties: REA EXPRESS, INC., Plaintiff, v. ALABAMA GREAT SOUTHERN RAILROAD COMPANY et al., and the United States of America, Defendants. Interstate Commerce Commission, Intervenor.
• Court: U.S. District Court — Southern District of New York

427 F. Supp. 1157

REA EXPRESS, INC., Plaintiff, v. ALABAMA GREAT SOUTHERN RAILROAD COMPANY et al., and the United States of America, Defendants.

Interstate Commerce Commission, Intervenor.

No. 71 Civ. 4278.

United States District Court, S. D. New York.

November 18, 1976.

Robert L. Wright, Washington, D. C. (Arthur M. Wisehart, Wisehart, Friou & Koch, New York City, of counsel), for plaintiff.

Edwin M. Zimmerman, Washington, D. C. (S. William Livingston, Jr., Covington & Burling, Washington, D. C., Frank H. Gordon and Rogers, Hoge & Hills, New York City, of counsel), for defendants Alabama Great Southern R. Co., and others.

Carl E. Newton, New York City (Thomas J. Ahlf, John W. Wall and Donovan, Leisure, Newton & Irvine, New York City, of counsel), for defendants The Chesapeake & Ohio R. Co., The Baltimore and Ohio R. Co., and Western Maryland R. Co.

Peter M. Shannon, Jr., Washington, D. C. (Arthur J. Cerra, Gen. Counsel, and Peter A. Fitzpatrick, Acting Associate Gen. Counsel, I. C. C., Washington, D. C., of counsel), for intervenor.

Thomas E. Kauper, Asst. Atty. Gen., Carl D. Lawson and Catherine G. O'Sullivan, Dept. of Justice, Washington, D. C., for U. S. on the brief.

Before FRIENDLY, Circuit Judge, and KNAPP and GRIESA, District Judges.

FRIENDLY, Circuit Judge:

REA Express, Inc. (REA) here is both suing its former railroad owners and other holders of REA notes issued in 1959 and seeking the invalidation of Interstate Commerce Commission action taken in connection with those REA obligations. The complaint and the petition for review center upon the issuance of the 1959 notes and the creation of their antecedent, the so-called "non-negotiable debt," raising claims under section 10 of the Clayton Act, 15 U.S.C. § 20, section 1 of the Sherman Act, 15 U.S.C. § 1, sections 5(1) and 20a of the Interstate Commerce Act, 49 U.S.C. §§ 5(1) & 20a, and state fiduciary duty and contract law.

I. The Facts and the Proceedings

Since the facts of REA's corporate life are set out at length in several of the sources cited below, our exposition can be confined to outlining the background of the present controversy over the 1959 notes and the non-negotiable debt.

REA was formed in late 1928 and early 1929 as a railroad non-profit joint venture to engage in the railway express business. The new corporation's initial 1,000 shares of common stock were to be sold to certain "participating" railroads in proportion to their 1923-26 express business. "Standard Express Operating Agreements" (SEOA's) which were executed by REA and all the railroads, including the "short line" non-shareholder roads, governed the REA — railroad relationship. These agreements provided that REA would be the exclusive express agency of the railroads and that REA's revenues, after the deduction of various operating expenses, would be distributed as "Rail Transportation Revenue" to the railroad signatories in proportion to their provision of services to the express company.

To finance its acquisition of the assets of the existing express company and to obtain working capital, REA was to sell $32 million of 5% bonds. The indenture called for semi-annual sinking fund payments of $800,000 over the 20-year term of the bonds. The original 1929 SEOA provided in Article V(4)(j) for an account # 409, "Surplus Applied to Sinking and other Reserve Funds;" moneys deposited in that account as sinking fund payments would be treated as REA expenses and therefore deducted from REA revenues prior to the computation of "rail transportation revenue" and distribution of this to the railroads.

In December 1928, application was made to the Interstate Commerce Commission for approval of these railroad plans for an express company. Approval of the "pooling" provisions of the SEOA was sought under § 5(1); of the railroads control of REA under § 5(2); and of REA's issuance of the common stock and the bonds under § 20a. On February 11, 1929, ICC approval was granted. Securities and Acquisition of Control of Railway Express Agency, Inc., 150 I.C.C. 423 (1929).

By resolution of April 11, 1929, the REA board of directors adopted a different arrangement for funding the sinking fund. That resolution provided for semi-annual deductions of $800 per share of REA stock from the rail transportation revenues owed the shareholding railroads and a corresponding credit to those roads in an REA account entitled "non-negotiable debt to affiliated companies — advances." The reason for the change, as explained in the recent report of the Commission, Railway Express Agency, Inc., Notes, 348 I.C.C. 157, 170-73, 178-79 (1975), was that the original method would have resulted in railroads whose services were disproportionately higher than their stock-holdings (including all the short lines) building up the equity of the stockholders through sinking fund payments. The resolution provided for annual interest of 5¼% on the debt.

In 1939, the outstanding 1929 bonds were refinanced at lower interest with notes also requiring semi-annual $800,000 installments to be paid again through shareholder railroad advances treated as further non-negotiable debt with an interest rate of up to 5% as set by the REA board. The note issue was approved by the Commission under § 20a in F.D. No. 12242, Railway Express Agency, Inc., Notes, 230 I.C.C. 478 (1938). The Commission's Director of Finance advised that there was no need to obtain § 20a approval of the non-negotiable debt.

In 1959, dissatisfaction with the profitability of the express business led to the substitution of a new agreement for the 1954 SEOA, which had replaced the original 1929 SEOA. The new agreement sought to improve REA's efficiency through the gradual ending of its nonprofit status. As part of this rethinking of the REA — railroad relationship, it was deemed desirable for REA to issue notes to the railroad shareholders in replacement of the non-negotiable debt. Unlike the non-negotiable debt, which was wholly subordinated to other creditors, the notes were subordinated only to certain existing REA fixed debt.¹ ICC approval of the 1959 SEOA's "pooling" provision was sought and an application for § 20a approval of the note issue was filed. The Commission approved the "pooling" provision on September 21, 1959. Express Contract, 1959, 308 I.C.C. 545 (1959). The issuance by REA of 5% notes to its shareholders was approved under § 20a by order of September 25, 1959 in Finance Docket No. 20812.

In the following years, several unsuccessful attempts were made to sell the railroads' REA stock. To facilitate such a sale, the majority of the stock was deposited in a voting trust in 1968 and it was agreed that the 1959 SEOA would be terminated at the end of the year; "Carrier's Agreements" terminating the SEOA provided for the post-1968 REA-railroad relationship. In June 1969, five REA executive officers who were part of a new management team assembled by February 1969 offered to purchase the REA stock through their REA Holding Corporation for over $2 million and warrants in the holding company. The deal was consummated in August 1969.

On September 30, 1971, REA filed a five-count complaint in this court attacking the notes and the non-negotiable debt. Count I alleged that the railroads violated § 10 of the Clayton Act in causing REA to create the non-negotiable debt in 1929 and again in 1938, to repay part of that debt prior to 1938 and to replace the debt with the notes in 1959. The second count charged that both the non-negotiable debt and the notes were void under § 20a(11) of the Interstate Commerce Act: the debt because it was "securities" within § 20a(2) of the Act but never approved under that section by the Commission, and the notes because the Commission's 1959 § 20a approval was conditioned on the continued operation of the 1959 SEOA which had been terminated in 1968. The absence of ICC approval of the debt also formed the basis of a third count contending that the notes were void despite their § 20a approval because the invalidity of the debt meant that the notes had been issued without consideration. The 1968 termination of the 1959 SEOA also served to support the claim in Count IV that the termination destroyed a condition of the notes. A fifth count charged that the conduct alleged in the prior counts constituted a breach of fiduciary duty by the REA board caused by the railroad defendants. The complaint sought damages under several of the counts as well as a declaration that the debt and the notes were void.

Three of the railroad defendants moved on February 18, 1972 to dismiss the complaint for lack of jurisdiction on the ground that it amounted to an attack upon the validity of ICC orders so as to require a three-judge court under the Urgent Deficiencies Act, 28 U.S.C. §§ 2321-25. Judge Metzner granted the motion in part in a decision of June 5, 1972, holding that two of REA's claims — that the issuance of the notes violated § 10 of the Clayton Act and that the notes were unenforceable because the debt had never been approved by the ICC under § 20a — "directly attack a valid and subsisting ICC order — the order of September 25, 1959, approving the notes." REA Express, Inc. v. Alabama Great Southern Railroad, 343 F.Supp. 851, 859 (S.D.N.Y. 1972).

In an order of December 5, 1972, Judge Knapp, to whom the case had been assigned, granted REA leave to serve a second complaint. That complaint alleged jurisdiction under the Urgent Deficiencies Act, added the United States as a defendant, and included a new count alleging that the April 11, 1929 resolution of the REA board constituted price-fixing in violation of § 1 of the Sherman Act. On a motion by the defendants who had not joined in the original motion decided by Judge Metzner, Judge Knapp also dismissed for lack of single-judge court jurisdiction the same portions of the complaint dismissed by Judge Metzner, stating that the new motion "seeks to place the bulk of the...