Schwabacher v. United States, No. 258

CourtUnited States Supreme Court
Writing for the CourtJACKSON
PartiesSCHWABACHER et al. v. UNITED STATES et al
Docket NumberNo. 258
Decision Date03 May 1948

334 U.S. 182
68 S.Ct. 958
92 L.Ed. 1305
SCHWABACHER et al.

v.

UNITED STATES et al.

No. 258.
Argued Jan. 6, 7, 1948.
Decided May 3, 1948.
As Amended May 10, 1948.

Appeal from the District Court of the United States for the Eastern District of Virginia.

Page 183

Mr. Carl McFarland, of Washington, D.C., for appellants.

Mr. Daniel H. Kuk el, of Washington, D.C., for appellee I.C.C.

[Argument of Counsel from page 183 intentionally omitted]

Page 184

Mr. George D. Gibson, of Richmond, Va., for appellee C. & O. Ry. Co. and others.

Mr. Justice JACKSON delivered the opinion of the Court.

This controversy grows out of the voluntary merger of Chesapeake & Ohio Railway Company and Pere Marquette Railway Company, which companies, together with Alleghany Corporation, sought approval by the Interstate Commerce Commission. Pere Marquette is incorporated under the laws of Michigan, while Chesapeake & Ohio is chartered by Virginia. Chesapeake & Ohio acquired and for some years exercised active control of Pere Marquette, whose properties and operations complement rather than compete with those of Chesapeake & Ohio. Late in 1945 merger proceedings were commenced under enabling statutes of the two states and were consummated with approval of considerably more than the number of shares made necessary by statutes of the respective states. The Interstate Commerce Commission found, and there is no attack upon the findings, that the public interest is served by merger and unification of these properties and operations. The Commission also concluded that the plan as a whole, and as applied to each group of shareholders, is just and reasonable, and there is no attack upon this conclusion except that by the appellants which is treated fully herein. Consequently, details of the plan are of little importance to this litigation.

Appellants are owners of 2,100 shares of $100 par 5% cumulative preferred stock of Pere Marquette. Their interests aggregate a little less than 2% of the outstanding stock of this class. Dividends on this stock have been unpaid since 1931 and, as of the commencement of this

Page 185

controversy, were in arrears in the sum of $72.50 per share, an amount that is increasing with time. The Pere Marquette charter provides for full payment of the stock at par, plus accrued unpaid dividends, 'in the event of dissolution, liquidation, or winding up of the company, voluntary or involuntary * * * before any amounts are paid to holders of the * * * common stock.' The appellants contend that the merger hereinafter described terminates the corporate existence and, under this clause as construed by Michigan law, amounts to a 'winding up.' They insist that since the merger makes provision for some compensation to common stockholders these appellants have the right, under Michigan law, to have their shares recognized on the basis of at least $172.50 each. The Commission found the market value per share ranged, at different times, from $87 to.$99, while the merger terms give stocks in exchange which would have realized about $90 and $111 per share on the same dates. Appellants dissented from the merger, but Michigan law provides no specific right or procedure for appraisal and retirement of the holdings of a stockholder dissenting from a railroad merger.

When application was filed with the Interstate Commerce Commission under § 5 of the Interstate Commerce Act as amended (49 U.S.C. § 5, 49 U.S.C.A. § 5), for approval and authorization of the merger,1 as well as for other relief,

Page 186

appellants intervened and asked that body to determine, recognize and protect their asserted right to the full legal liquidation figure. The Commission approved the merger and the merger terms, finding them just and

Page 187

reasonable as to each class of stockholders. However, it disclaimed jurisdiction to pass upon the further claims of the appellants asserted on the basis of their interpretation of Michigan law. It reviewed at some length the economic position of the stock. It recited that these shares had received no dividends since 1931 and that appellants' witnesses agreed that these stockholders could not expect to receive any dividends for many years, apart from the merger. The Commission also pointed out the deficit in operations of Pere Marquette for the first quarter of 1946 as contrasted with the net income of Chesp eake and Ohio, and concluded that 'On the whole it would seem that the prospects of Pere Marquette stockholders for returns on their investments would be enhanced by the merger of their company into Chesapeake & Ohio.' The Commission did not question that the stockholders, on liquidation, dissolution or winding up of Pere Marquette, would be entitled to be paid in full the par value of their shares and accumulated dividends before any payment to holders of common stock. It did not undertake to deter-

Page 188

mine the ultimate worth of these stocks in case of an actual liquidation, but it considered their present intrinsic value on a capitalized earnings basis, an actual yield basis, and its present market position and concluded: 'Accordingly, considering Pere Marquette's investment according to its books, other property values, the company's history as to earnings, its future prospects, and the market appraisal of its stocks, all as set forth above, we find that as to the stockholders of both parties generally the proposed ratios of exchange, stock issues and assumptions of indebtedness, are just and reasonable.'

The Commission then noted the contention of the appellants that as to them the terms were not just and reasonable, because they are deprived of contract rights under Michigan law, which they have not waived. It is contended that the Commission should not remit the dissenting stockholders to remedies in state courts as the Commission would thereby decline the jurisdiction conferred by § 5 and § 20a of the Act.2 But the Commission considered that it was entrusted with authority to decide the public interest aspects of the merger of these transportation facilities and that it could not be expected to enter into the question of 'compensation of dissenting stockholders on specified bases' before approval and merger. It thought that, having found the treatment of each class to be just and reasonable, it had done its full duty 'when we make certain that all stockholders of the same class are to be treated alike.' It declined to decide the Michigan law question as to what rights of dissenting stockholders were, and whether the merger was equivalent to a liquidation, but said: 'This does not mean that the Chesapeake & Ohio and the Pere Marquette do not remain free to settle controversies with dissenting stockholders through negotiation and litigation in the courts.'

Page 189

Taking into account the small percentage of the dissenting shares, the current assets position of the Chesapeake & Ohio, and the maximum possible cost to the merged company of the settlement of these claims on the basis most favorable to appellants, it considered that the company was amply able to bear 'any probable expenditure of cash that it might be required to make in connection with the merger. Accordingly it appears that consummation of the merger will not involve a burden of excessive expenditure.' The Commission thus left in a state of suspense, subject to further litigation or negotiation, these claims concerning the extent of the capital obligations of a constituent company, after examining them sufficiently to determine only that, however settled, they did not involve enough to affect the solvency of the new company or jeopardize its operations.

The Commission denied appellants' petition for rehearing and they filed suit in the United States District Court for the Eastern District of Virginia to set aside the order authorizing the merger. A court of three judges, convened as required by law,3 sustained the Commission, 72 F.Supp. 560. Appellants bring to us4 the question whether the Commission, in view of its authority over mergers, which is declared to be exclusive and plenary, could decline to determine just what the dissenting stockholders'l egal rights were under the Michigan law and the Pere Marquette charter, and to recognize them in full by the terms of the merger.

The disposition of appellants' claims, as well as the nature of the claims themselves, requires consideration of the relative function and authority of federal and state law in regulating and approving voluntary railroad mergers. The appellants contend that their share in the merged company is to be measured by, or their remedies

Page 190

as dissenters are to be found in, state law, but that the federal agency is bound to determine and apply that law. The Commission on the other hand refuses either finally to foreclose or to allow these claims. It apparently leaves it open to the state courts, or to the parties by negotiation, to add to the surviving carrier's capital obligations which the Commission has found to be just and reasonable, others founded only in state law and as to which it has made no such findings. We conclude that neither position is wholly consistent with the federal statutory plan for authorization and approval of mergers.

It is not for us to adjudicate the existence or the measure of any rights that Michigan law may confer upon dissenting stockholders. Neither the Commission nor this Court can make a plenary and exclusive decision as to what the law of a state may be, for the function of declaring and interpreting its own law is left to each state of the Union. But the effect of the state law in relation to a constitutional Act of Congress, in view of the constitutional provision, art. 6, cl. 2, that the latter shall be 'the supreme Law of the Land,' 'Laws of any State to the Contrary notwithstanding,' is for us to determine. Our first inquiry here, therefore, is whether the Interstate Commerce...

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