United States v. Reading Co.

• Decision Date: 08 August 1923
• Docket Number: 1095.
• Citation: 295 F. 551
• Parties: UNITED STATES v. READING CO. et al.
• Court: U.S. District Court — Eastern District of Pennsylvania

295 F. 551

UNITED STATES v. READING CO. et al.

No. 1095.

United States District Court, E.D. Pennsylvania.

August 8, 1923

Robert Dechert, C. J. Hepburn, and George Wharton Pepper, all of Philadelphia, Pa., for petitioners.

F. M Rivinus, of Philadelphia, Pa., and Richard V. Lindabury, of Newark, N.J., for respondent Central R. Co., of New Jersey.

Before BUFFINGTON and DAVIS, Circuit Judges, and THOMPSON, District judge.

DAVIS Circuit Judge.

The mandate of the Supreme Court in the above-stated cause required the Central Railroad Company of New Jersey hereinafter called the Railroad Company, to dispose of the stock which it held in the Lehigh & Wilkes-Barre Coal Company, hereinafter called the Coal Company. On June 6 1921, this court entered its decree directing the Railroad Company to sell within six months its stock in the Coal Company. 273 F. 848. Accordingly on November 17, 1921, the Railroad Company sold its stock to the Reynolds Syndicate. This proceeding is a petition by Isaac T. Starr and Mary T W. Starr, his wife, owning between them 200 shares of the stock of the Railroad Company, to set aside the sale and order a new sale. Several stockholders of the Railroad Company filed petitions for the same purpose, but later withdrew them. The first petition filed by Mr. and Mrs. Starr was a dependent petition, filed December 9, 1921. After the other petitions were withdrawn, they filed an independent petition on March 10, 1922, and a supplemental petition on July 5, 1922. In these petitions it is charged that the sale was not a 'good-faith compliance with the decree of sale made by this court,' in that, first, the sale was not 'so conducted as to yield the best price reasonably obtainable for the coal stock sold; and, second, that the value of his (Starr's) Jersey Central investment should not be jeopardized by a continuance of the same old unlawful combination between the Jersey Central and the Coal Company;' that the 'bids invited in this case were used only to cover a transfer of the coal stock to a favored purchaser for an inadequate price,' or that the sale was made 'under such circumstances suggesting an arrangement to retain for the Jersey Central the tonnage originated by the Coal Company. ' The Railroad filed an answer to the supplemental petition, and elaborate proofs have been submitted.

The Supreme Court said:

'That such disposition shall be made by the decree of the stocks and bonds of the Lehigh & Wilkes-Barre Coal Company, held by the Central Railroad Company of New Jersey, as may be necessary to establish entire independence between these two companies. ' United States v. Reading Co., 253 U.S. 26, 64, 40 Sup.Ct. 425, 435 (64 L.Ed. 760).

The question of first importance is whether or not the sale did establish entire independence between these companies, or whether the stock was sold on condition, or with the understanding, express or implied, that the output of the Coal Company was thereafter to be shipped over the lines of the Railroad Company. If there was such an understanding, it would continue the evil which the Supreme Court had declared illegal and had sought to remedy. In that event the sale should be set aside, even though the price be amply adequate. The Railroad Company may not do secretly and by indirection what it may not do openly and directly. The court will look through forms to facts. On the other hand, if a complete and honest separation of the rail and coal properties was effected, and entire independence established by the sale, the fact that the stock was sold to friendly purchasers, who, for economic advantage, may continue to ship the coal over the railroad, does not render the sale illegal, nor constitute ground for setting it aside.

That the directors desired to retain the tonnage was perfectly natural. To retain this freight may have been their main concern, their 'chief desideratum;' but that desire does not render the sale invalid. The test is whether or not the purchasers in good faith bought it for themselves, and not for the interest of the Railroad Company. If the sale was made in accordance with the decree of the court, and the entire independence of the companies established, the future retention of the traffic by the Railroad Company, not by agreement, but for natural economic reasons in marketing the coal, is not a violation of the Anti-Trust Act of July 2, 1890 (Comp. St. Sec. 8820 et seq.). The directors of the Railroad Company could not and would not be expected to be indifferent to the retention of freight paying annually $10,000,000. Our concern, however, is whether or not the purchasers, in buying the stock, were acting for or on behalf of any stockholder of the Railroad Company, or 'in concert, agreement, or understanding with any other person, firm, or corporation for the control of the Lehigh & Wilkes-Barre Coal Company, in the interest of the Central Railroad Company of New Jersey,' or were acting in good faith for themselves.

The decree of June 6, 1921, of this court provides among other things that:

'The Central Railroad Company of New Jersey shall dispose of all the capital stock of the Lehigh & Wilkes-Barre Coal Company now owned by it to persons or corporations who are not its own stockholders or stockholders in either the Reading Company, the Railway Company, or the Coal Company, and who previous to or at the time of purchase shall qualify as purchasers by a duly executed affidavit,' setting forth inter alia: 'That deponent does not own in his own right any shares of the capital stock of the Central Railroad Company of New Jersey, Reading Company, Philadelphia & Reading Coal & Iron Company, whether registered in his own name on the books of said companies or any of them, or registered in the names of others for deponent's use and benefit. That deponent in receiving the said certificate or certificates is not acting for or on behalf of any stockholder of the Central Railroad Company of New Jersey or of any others of the said companies, or in concert, agreement, or understanding with any other person, firm, or corporation for the control of the Lehigh & Wilkes-Barre Coal Company in the interest of the Central Railroad Company of New Jersey or any other of the said companies, but is acting in his own behalf in good faith.'

Every purchaser subscribed to an affidavit containing the above provision. These affidavits should be accepted as true, unless there is clear evidence to the contrary, and there is no such evidence. After careful investigation the Department of Justice stated to the court that these affiants were qualified as proper purchasers of the stock. If these affidavits are not true, not only has the Anti-Trust Act been violated, but every affiant is guilty of perjury, and the directors, who know and are parties to this entire transaction, are guilty of subornation of perjury. The evidence does not support such a conclusion.

Was the sale a compliance in good faith with the decree of this court? If it was, that is the end of this proceeding. The petitioners contend that it was not, and that the price was so inadequate as to indicate fraud. At their meeting on November 17, 1921, the directors had five bids before them, tabulated substantially as follows:

------------------------------------------------------------------------------- Interest on Total Deferred Payments, Total Without if Payments Not Including Interest. Anticipated. Interest. ------------------------------------------------------------------------------- Reynolds Syndicate ......... $31,410,780.00 $1,080,200.00 $32,490,980.00 Lehigh Coal & Navigation Company .................. 32,259,720.00 None 32,259,720.00 Franklin Securities Company 31,920,144.00 None 31,920,144.00 Massachusetts Gas Company .. 29,125,000.00 1,474,861.11 30,599,861.11 Brown Bros. & Co............ 28,694,172.00 1,101,924.12 29,796,096.12 -------------------------------------------------------------------------------

They also had before them the several values of the stock; book value, $30,167,000; the value based on its earnings for the last ten years, $30,342,000; the value based on its earnings for the last six years, including two abnormally good years, $34,102,000; and the value placed on it by Mr. Richards, as they understood his figures, $36,341,000. The average of these values is $32,728,000. The bid of the Reynolds Syndicate was $32,490,980, which is $247,020 less than the average, $3,850,020 less than the highest, and $2,323,980 more than the lowest. With these facts before them, did they act in good faith in selling to the Reynolds Syndicate, the highest cash bidder? Mr. Daniel Willard, president of the Baltimore & Ohio Railroad Company, one of the directors, recorded the following reasons, which we quote from the testimony, for voting to accept the bid of the Reynolds Syndicate:

'Mr. Willard seconded the motion to accept the bid of Jackson E. Reynolds and associates, stating he did so because it was in effect the highest bid, and in all respects the most satisfactory. He said he believed the price offered was one that under all the circumstances should be

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