Schwabacher v. United States

• Decision Date: 09 May 1952
• Docket Number: No. 1738-51.,1738-51.
• Citation: 104 F. Supp. 875
• Parties: SCHWABACHER et al. v. UNITED STATES et al.
• Court: U.S. District Court — District of Columbia

104 F. Supp. 875

SCHWABACHER et al. v. UNITED STATES et al.

No. 1738-51.

United States District Court District of Columbia.

May 9, 1952.

Kenneth L. Kimble, Washington, D. C., McFarland & Sellers, Washington, D. C., of counsel, for plaintiffs.

Robert W. Strange, Sp. Asst. to Atty. Gen., H. G. Morison, Asst. Atty. Gen., James E. Kilday, Sp. Asst. to Atty. Gen., of counsel, for U. S.

C. H. Johns, Attorney, I. C. C., Washington, D. C., Daniel W. Knowlton, Chief Counsel, I. C. C., Washington, D. C., of counsel, for Interstate Commerce Commission.

William E. Miller and Stephen Ailes, both of Washington, D. C., R. W. Purcell and Joseph C. Kauffman, both of Cleveland, Ohio, and Steptoe & Johnson, Washington, D. C., of counsel, for Chesapeake & O. R. Co.

Before FAHY, Circuit Judge, and HOLTZOFF and TAMM, District Judges.

TAMM, District Judge.

Factual Background.

This is an action to enjoin, set aside, annul and suspend in part two orders of the Interstate Commerce Commission (hereafter called the Commission). This Court has jurisdiction under Section 1336 of Title 28 United States Code. The first order challenged in this action was published April 1, 1947, and was entered in a proceeding before the Commission designated Finance Docket No. 15228. That order approved a merger of Pere Marquette Railway Company (hereafter called Pere Marquette) into The Chesapeake and Ohio Railway Company (hereafter referred to as Chesapeake and Ohio) under Section 5(2) of the Interstate Commerce Act as amended, Section 5(2), Title 49 U.S.C.A. After review of this order by the Supreme Court and remand to the Commission, a Supplemental Order was entered under the same docket number on May 9, 1949. This second order, except for a modification described below, affirmed the provisions of the earlier order.

The plaintiffs in this action own, in the aggregate, 2,100 shares of $100 par value 5% cumulative preferred stock of Pere Marquette. Their combined interests represented 2% of the outstanding stock of that class. The defendants are the United States of America and the Interstate Commerce Commission. The Chesapeake and Ohio has intervened as a defendant under the provisions of Section 2323 of Title 28 United States Code.

In March, 1946, The Chesapeake and Ohio, Pere Marquette and the Allegheny Corporation (which controlled the Chesapeake and Ohio) filed a joint application with the Commission under Section 5 of the Interstate Commerce Act, Section 5, Title 49 U.S.C.A., for approval of a merger agreement. Under the agreement, the Pere Marquette was to be merged into the Chesapeake and Ohio, and its stock was to be exchanged for stock of the Chesapeake and Ohio. Shortly after the application was filed with the Commission, the agreement was approved by the requisite number of stockholders of each railroad, as required by state law.

The Commission's hearings on the proposed merger were held in April, 1946, at which representatives of some of each of the three classes of stockholders of Pere Marquette participated as protestants. Following the closing of the record and the filing of briefs, a proposed report recommending approval of the merger was served upon the parties. Several weeks later, in November, 1946, the plaintiffs here asked leave to intervene to file exceptions to the proposed report. Their request was granted.

Under the merger, each share of plaintiffs' stock would be converted into eight-tenths of one share of 3½% convertible Chesapeake and Ohio preferred stock (a new issue) and four-tenths of one share of common stock. Each new share of the Chesapeake and Ohio could be converted into 1.6 shares of common stock on a fixed conversion price of $100 for the preferred stock and an initial conversion price of $62.50 for the common stock. Plaintiffs were opposed to the terms of the merger because they claimed that under the liquidation provisions of Pere Marquette's charter and the laws of the State of Michigan they were entitled, as of February 1, 1946, to cash or an equivalent of $172.50 (par value plus arrearages) for each share. The plaintiffs sought to have the Commission treat the merger as a liquidation and to give effect in determining the ratios of stock exchanges to the liquidation provisions of the Pere Marquette charter and the laws of Michigan. This the Commission had not done.

On January 10, 1947, the parties, including plaintiffs, were heard on oral argument by Division 4 of the Commission. On April 1, 1947, Division 4 issued its report and order approving the proposed merger and the issuance of securities in accordance with its terms, but declined to determine whether dissenting stockholders as members of a class created by the merger were entitled to any better treatment by virtue of their charter contract. Petitions for reconsideration were denied by the entire Commission on May 20, 1947.

On May 29, 1947, plaintiffs filed an action in the United States District Court for the Eastern District of Virginia to set aside the Commission's order on the grounds that "failure to include protection for plaintiffs as dissenting shareholders, as a distinct class created by the merger is contrary to law and a direct violation of the Commission's statutory duty to impose just and reasonable conditions for the protection of all interests involved." Schwabacher v. United States, D.C., 72 F.Supp. 560, 561. On June 4, 1947, that Court heard argument on plaintiffs' request for a temporary stay of the Commission's order. The temporary stay was denied, and on June 6, 1947, the merger was consummated. The Court subsequently dismissed the complaint, and the plaintiffs then appealed to the Supreme Court.

The question which plaintiffs presented to the Supreme Court was whether the Commission, in view of its authority over mergers, could decline to determine just what the dissenting stockholders' legal rights were under the State law and the Pere Marquette charter and to recognize them in full by the terms of the merger. Schwabacher v. United States, 334 U.S. 182, 189, 68 S.Ct. 958, 968, 92 L.Ed. 1305. The Court held that neither party's position was correct; that the Commission should have considered the liquidation rights under the charter "to the extent that they may affect intrinsic or market values", and since it was not clear from the report that the Commission had done this, the judgment of the lower court was reversed and the case remanded to the Commission for reconsideration upon the principles expressed. With respect to the asserted claim under state law, the Court said:

"* * * In appraising a stockholder's position in a merger as to justice and reasonableness, it is not the promise that a charter made to him but the current worth of that promise that governs, it is not what he once put into a constituent company but what value he is contributing to the merger that is to be made good. * * * Consequently the liquidation preferences were only one factor in valuation rather than determinative of amounts payable. * * * Since the federal law clearly contemplates merger as a step in continuing the enterprise, it follows that what Michigan law might give these dissenters on a winding-up or liquidation is irrelevant, except insofar as it may be reflected in current values for which they are entitled to an equivalent." 334 U.S. at pages 199, 200, 68 S.Ct. at page 967.

The case was remanded to the Commission because it was not clear under the language of the First Report whether the Commission had given consideration to the "current worth", if any, of plaintiffs' liquidation rights. Thus, the Court said:

"While the Commission has found that what the appellants are given in this plan is just and reasonable, the record indicates that it may have declined to consider these claims, even if they are found to have some effect on the intrinsic value of the stock, because it thought it lacked jurisdiction. Under these circumstances, we cannot be sure that in arriving at its conclusion that the plan was just and reasonable it did not exclude some factors that it should consider under the views set out in this opinion." 334 U.S. at page 201, 68 S.Ct. at page 968.

Briefs were submitted to the Commission in connection with its reconsideration under the terms of the Supreme Court's opinion. On May 9, 1949, the Commission issued its second report (hereafter referred to as the Report on Reconsideration) and entered an order as of that date approving the merger agreement for the second time. This latter report recounted the proceedings on appeal, analyzed the decision of the Supreme Court, and stated that the Commission's only function on reconsideration was to make sure that the liquidation rights of the Pere Marquette cumulative preferred stock were considered to the extent that they might affect the intrinsic or market value of the stock. The Commission noted that the likelihood of liquidation of Pere Marquette, as one of the essential transportation facilities of the country, was extremely remote. It then held that the preferred stock's prior right to dividends rather than its liquidation preferences were significant in evaluating the stock. After this analysis, the Commission held that Division 4 had adequately considered these matters.

Plaintiffs, in substance, seek from this Court an order directing the Commission to revise the merger terms and to award to plaintiffs more Chesapeake and Ohio stock in exchange for their holdings of Pere Marquette cumulative preferred stock than is provided for in the present merger terms. They attack both the first and supplemental orders on three principal grounds. As stated by the plaintiffs, these grounds are: (1) The findings in the Report on Reconsideration are materially inconsistent with the findings in the First Report relating to the justness and the reasonableness of the terms for exchange of stock and demonstrate the errors in those earlier findings; (2) The findings in both reports...