Ripley v. International Railways of Central America

• Decision Date: 06 June 1932
• Citation: 8 A.D.2d 310,188 N.Y.S.2d 62
• Parties: Charles B. RIPLEY, Ernesto Ayulo, John A. Bonaudi, Maria Louisa Pardo DeFellner, John C. Hefferon, Executor of the Estate of Vincent Hale, Deceased, Lehigh & Baldwin Company, Inc., Donald M. Liddell, Jr., William K. McKittrick, Alfonso P. Gonzales, Maurice P. Weller, Paul C. Conder, Richard O. Innes, A. Marie Kroemer, Spencer Peets, Stowell Rounds, Alma Sweeney, Charles L. Livingston, Jr., William Van A. Waterman, Morris Gross, Peter G. Thomson, Jr., Witham Smith, Trustee U/D of Trust made by Peter G. Thomson, Jr., dated
• Court: New York Supreme Court — Appellate Division

Page 62

188 N.Y.S.2d 62

8 A.D.2d 310

Charles B. RIPLEY, Ernesto Ayulo, John A. Bonaudi, Maria

Louisa Pardo DeFellner, John C. Hefferon, Executor of the

Estate of Vincent Hale, Deceased, Lehigh & Baldwin Company,

Inc., Donald M. Liddell, Jr., William K. McKittrick, Alfonso

P. Gonzales, Maurice P. Weller, Paul C. Conder, Richard O.

Innes, A. Marie Kroemer, Spencer Peets, Stowell Rounds, Alma

Sweeney, Charles L. Livingston, Jr., William Van A.

Waterman, Morris Gross, Peter G. Thomson, Jr., Witham Smith,

Trustee U/D of Trust made by Peter G. Thomson, Jr., dated

June 6, 1932, Anne T. Smith, Witham Smith, Fern B. Hughes,

Lawrence L. Hughes, Paul Emery Kern and Carl C. Lang,

individually and as stockholders of International Railways

of Central America, suing in behalf of themselves and for

the benefit of said corporation and all other stockholders

of said corporation, Plaintiffs and Plaintiffs-Intervenors-Respondents-Appellants, v. INTERNATIONAL RAILWAYS OF CENTRAL AMERICA,

Defendant-Respondent-Appellant and United Fruit

Company, Defendant-Appellant-Respondent.

Supreme Court, Appellate Division, First Department.

June 23, 1959.

T. Roland Berner and Aaron Lewittes, New York City (Julian S. Bush, M. Victor Leventritt, Shirley D. Brinsfield and Sidney Bender, New York City, with them on the brief), for plaintiffs and plaintiffs-intervenors-respondents-appellants.

Herman A. Bayless, Cincinnati, Ohio (Waite, Schindel, Bayless & Schneider, Cincinnati, Ohio, with him on the brief), for plaintiffs-intervenors Peter G. Thomson, Jr., et al.

Alexander Kahan, New York City (Harry Bijur, New York City, with him on the brief), for plaintiffs-cross appellants Carl C. Lang and Paul Emery Kern.

Bijur & Herts, New York City, for plaintiff John A. Bonaudi.

Louis H. O. Fischman, New York City, for plaintiff-intervenor Morris Gross.

Inzer B. Wyatt, New York City, of counsel (Sullivan & Cromwell, New York City, attys.), for defendant-respondent-appellant Internat. Railways of Central America.

Theodore Kiendl, New York City, of counsel (Porter R. Chandler, Edwin J. Jacob and A. Brooks Wilder, Jr., New York City, with him on the brief, Davis, Polk, Wardwell, Sunderland & Kiendl, New York City, attys.), for defendant-appellant-respondent United Fruit Co.

Before BREITEL, J. P., and M. M. FRANK, VALENTE, McNALLY and STEVENS, JJ.

VALLENTE, Justice.

In this derivative action brought by a group of minority stockholders of International Railways of Central America (hereinafter referred to as 'IRCA'), a judgment was entered, upon a decision of a Referee, (1) directing the defendant, United Fruit Company (hereinafter referred to as 'UFCo') to pay to IRCA the sum of $4,531,055.38--representing damages to IRCA and unjust enrichment to UFCo for the period ending December 31, 1955; (2) declaring the rates to be paid on shipments over IRCA facilities after December 31, 1955; and (3) giving leave to apply at the foot of the judgment to determine the amounts of payments to be made by UFCo after December 31, 1955.

UFCo has appealed from that judgment; and contends that the complaint should have been dismissed. Plaintiffs and IRCA have cross-appealed, urging that the dollar amount of restitution directed by the Referee is too small and should be increased to $65,300,000, and that the rates fixed for shipments after December 31, 1955 are unfairly low. In view of the inordinate size of the record and the extensive briefs, it will be impossible in this opinion to discuss all of the contentions and arguments of the parties although they have been fully considered by the Court. ¹

IRCA, a New Jersey corporation, owns and operates a railroad system in Guatemala and San Salvador. Its railroads in Guatemala connect the principal parts of the country with each other and with the Atlantic and Pacific seacoasts. UFCo, also a New Jersey corporation, has extensive banana plantations in Guatemala, some in the eastern and others on the Pacific slope around Tiquisate, operated by UFCo's subsidiary, Compania Agricola de Guatemala (hereinafter called 'Agricola'). This litigation is concerned, in essence, with a progressive series of long-term contracts under which IRCA transported UFCo bananas, as well as imports of goods and materials into Guatemala, for UFCo's plantations. The principal contracts under review were made in 1936, at which time UFCo owned 17% of the IRCA stock. Immediately thereafter, UFCo became the owner of 42.67% of the voting stock of IRCA, and to this date maintains that position.

The gravamen of plaintiffs' case is that UFCo by virtue of its stock ownership in IRCA, and other means, dominated and controlled IRCA so as to secure for UFCo unfairly low freight rates for its banana and import traffic.

The original complaint, served in 1949, was sustained by this Court in Ripley v. International Railways of Central America, 276 App.Div. 1006, 95 N.Y.S.2d 871. We then held that the six-year Statute of Limitations, Civil Practice Act, § 48, would bar any recovery for transactions occurring before February 14, 1963. We also gave defendants permission to plead the three-year Statute of Limitations, Civil Practice Act, § 49, in the event that evidence at the trial might show that particular transactions fell within it. An amended complaint was served in 1951. Defendants' motion addressed to the sufficiency of the amended complaint was denied by Mr. Justice Rabin in April, 1952 (Ripley v. IRCA, 127 N.Y.L.J. 1333, col. 1).

Trial was begun before Justice Hammer at Special Term. When Justice Hammer retired under the mandatory age requirements, the parties to this litigation stipulated to have Justice Hammer continue with the trial as a Referee to hear and determine. The Referee, after handing down his report and making findings of fact and conclusions of law, denied a motion by UFCo to re-open the case. UFCo's notice of appeal brings up for review, not only the judgment entered in December, 1957 but also the Referee's refusal to re-open the case, and a portion of the order of April, 1952 which denied defendant's motion for partial summary judgment based on a defense of the three-year Statute of Limitations.

At the trial defendant IRCA--on whose behalf the action was brought--opposed the plaintiffs and supported the position of UFCo in resisting the suit. Counsel for IRCA assert that its position at the trial was dictated by the fear that a money judgment against UFCo, based on higher rates than provided in the contracts, might terminate the agreements. In the light of the decision of the Referee, IRCA re-examined its position, and as a result, appeared in this Court as a cross appellant from the judgment below on the ground that the damages awarded against UFCo are inadequate.

The issues on this appeal involve the soundness of the Referee's decision on the following matters:

(1) Domination and control of IRCA by UFCo; (2) Demand or futility of demand, by stockholders of IRCA, upon its board of directors to sue; (3) Fairness of the rates and transactions between UFCo and IRCA; (4) Legal power in IRCA, under Guatemalan law, to charge more than 20 cents per stem for the transportation of bananas; (5) Defenses of Statute of Limitations; (6) Defenses based on Section 61, Gen.Corp.Law; (7) Adequacy of damages--presented on the cross appeals by plaintiffs and IRCA; and (8) Limitation of relief as to damages to December 31, 1955, the power to fix rates after that date, and the reservation of the right to apply at the foot of the judgment for fixing of damages thereafter.

(1) Domination and Control.

The Referee found that plaintiffs had sufficiently established that UFCo exercised such domination over IRCA that in effect it was bargaining with itself when the basic 1936 contracts were negotiated and executed.

The relationship between UFCo and IRCA began in 1904, when one Minor C. Keith--who had at one time owned three fifths of the stock of UFCo but who had sold all but about 10% of the stock to raise money to invest in IRCA--acquired control of the Guatemala Northern Railroad and a large tract of underveloped tropical jungle in Guatemala which was ceded to the railroad by the Guatemalan government. By the agreement of 1904, UFCo received 50,000 acres of the undeveloped jungle and undertook to plant approximately 5,000 acres of bananas within four or five years. IRCA was to afford the means for the expeditious transportation of UFCo bananas. In the 1904 contract, IRCA gave UFCo various special privileges and preferences which were not to be afforded to anyone else without UFCo's permission. Moreover, IRCA obligated itself not to encourage directly or indirectly any competition to UFCo in Guatemala and to give UFCo detailed reports on the movement by IRCA of bananas for any other shipper. UFCo has urged that the provisions of the 1904 contract in respect to precautions against potential competitors violated no law of Guatemala and were designed simply to furnish UFCo with the protection it considered essential before entering into a new and extremely hazardous business.

There were modifications of the 1904 contract in 1913 and 1920. By 1928, Keith, because of financial involvements, turned over his stock interest in IRCA to bankers, UFCo and other stockholders under a voting trust agreement.

The 1936 contracts govern the basic relations between the parties to this suit from 1936 to date. Under those contracts, UFCo agreed to purchase 185,000 shares of IRCA's unissued common stock and 3% notes at a par value of $1,750,000. Through Agricola, its subsidiary, UFCo paid IRCA $2,165,000 in cash, agreed to purchase 10 new locomotives and 300 banana cars for IRCA, and undetook, for a period of 20 years, not to build a port on the West Coast so as to insure the movement of the produce from the newly opened West Coast banana lands over IRCA's rail lines to East Coast ports. The cash received from Agricola was to be used to redeem 6% first mortgage...