The opinion of the court was delivered by: WELSH
Fortified by such report and the testimony of the able experts called by the plaintiff and defendant and the briefs and arguments of counsel, it becomes the Chancellor's duty to fix the measure of financial liability to be imposed upon the defendant Pennsylvania Railroad Company. It must be borne in mind, however, that in the performance of this duty the element of equitable justice must predominate rather than a resort to mathematical calculation, and that more weight must be given to the relative rights and obligations of the parties than to the establishment of a technical yardstick with which to exactly measure values, losses or liability.
In explanation of their conclusions and for the purpose of establishing a common basis for the comparison of Pennroad investments with other transactions of simlar character, the experts prepared a composite schedule of the earnings, market values and dividends of 13 Class One railroads. They declared, however, that the figures so developed were not intended to be an exact standard against which the price of Pennroad's purchases could be compared; but that such figures do "develop a pattern that has a comparative, if not absolute, value", and that the dollar figures arrived at involved the exercise of judgment. In the exercise of that judgment founded upon their impressions and appreciation of conditions at and after the time of the investments and of the relationships of the parties, they concluded that the price paid for Detroit, Toledo & Ironton Railroad was a proper one, no loss has been suffered, the risk was justified, and that no liability therefor should be imposed upon the defendant.
Defendant's counsel concur in the conclusion reached by the experts as to D.T.I., but the complainants take exception on the ground that the composite capital earnings and dividend records of the 13 railroads as compiled by the experts does not form a proper basis for comparison of values or for the measurement of liability. It may be pointed out, however, that the composite schedule has not been used as the exact measure of value or liability, but only as a common basis for the comparison of railroad investments. The experts have noted that capitalization of expected earnings is a guide to a range of value, and past earnings to expected earnings. Past earnings may be of help in estimating the future earnings of any particular company, but the exercise of judgment, having regard to all the circumstances, is particularly essential. Investment has for its purpose the assurance of future benefits, through an estimation of trends and possibilities which necessarily involves judgment and discretion. The experts have exercised their judgment fairly and impartially and we are not disposed to disregard their reasoning as to D.T.I. by assuming that it is faulty or that the comparisons made are the sole basis of their conclusion. The Chancellor declines to hold the defendant financially liable for Pennroad's investment in D.T.I.
As to the Pittsburgh & West Virginia investment, it will be recalled that at the instance of the railroad president, who was also a director of Pennroad, the latter company authorized the purchase of 220,000 shares at $170.00 per share in pursuance of an agreement previously reached with the principal stockholders of P. & W. Va. stock. The facts disclosed at the trial, and the experts also found, that pools had been operated, and a reckless dividend policy followed, for the purpose of influencing the market price of the stock, and that therefore the market quotations formed no accurate basis of value.
The experts reviewed the history of the road, its financial structure, the uncertainties and hazards incident to investment therein, and they compared its financial structure, earnings and future prospects with the composite schedule of the 13 railroads previously referred to. Their analysis applied various standards to the investment and commented upon the elements which rendered it impossible to actually measure the loss or risk imposed upon Pennroad by its investment therein made for the benefit of the Penna. Railroad. Taking all factors into account and giving them the comparative weight which the experts' judgment indicated was in accordance with the opinion filed, they set $105.00 as a value for the common stock and $24.00 for the preferred as being within the fair price range for the stocks purchased. It was expressly declared, however, that they did not adopt such figures because they were a result of a calculation, but because they were within the price range which a purchaser might pay, taking all factors into consideration including the market value of control, but uninfluenced by a desire to acquire that control for the benefit of any particular railroad. The experts found that the difference between the price paid and the value fixed by them was $9,140,130.00 which represented the measure of liability which should be imposed upon the defendant by virtue of the Pittsburgh & West Virginia purchase.
Defendant takes exception on the ground that the experts' conclusion is predicated upon a number of assumptions which are either erroneous or subject to dispute, and because of their failure to attach to certain conditions and estimates the importance to which the defendant believed they were entitled. Complainants find no fault with the reasoning and the process by which the liability was reached, but contend that the damages should include an additional $4,633,595.57 representing the cost of underwriting the issue of Pennroad stock, the proceeds of which were used to purchase the Pittsburgh & West Va. securities.
A review of the facts, the comprehensive analysis and comments of the experts, and of the conditions and influences incident to the Pennroad investments, confirms the impression that the judgment of the experts is adequately supported by a proper appreciation of the problem, proof of the pertinent facts and a fair basis of comparison. It is obvious that their combined opinion is founded upon their understanding of the elements and influences which combined to justify a mental conclusion. Whether those elements or influences were comparisons, calculations, certain estimates, or their own knowledge and experience must be left to those charged with the duty of reaching the conclusion. If their opinion is reasonably supported by an intelligent appreciation of the circumstances and problem, there would appear to be no reason for disregarding it simply because they failed to adopt some other and different impression or interpretation of the elements before them.
The Chancellor is satisfied from all the evidence in the case that the measure of liability which should be imposed upon the defendant by virtue of the purchase of the Pittsburgh & West Virginia should be fixed at $9,140,130 and so finds.
This we are satisfied is a fair and equitable measure of the damages to be charged against the defendant arising out of the P. & W. Va. purchase. The expense of underwriting the issue of Pennroad stock sold with the view to buying the P. & W. Va. stock, although incurred at the instance of the Penna. Railroad, is not a part of the investment itself and should not be included in the damages. The underwriting expense was a necessary incident to the sale of the Pennroad stock, and the sale of such stock was the means by which the funds for the P. & W. Va. were provided.It was, however, incurred for corporate purposes, regardless of what was done with the proceeds of the issue and it would have been incurred in connection with such issue whether the proceeds were intended to be invested in a proper or improper investment, and at a fair price or otherwise. Such expense is not an inseparable part of the damages arising out of the P. & W. Va. investment and we decline to include it.
The investment experts, after briefly reviewing the circumstances of the Canton Co. purchase and the conditions of the respective parties, acknowledge their inability to render any assistance in measuring the defendant's liability as to that investment. They point out that the earning experience of this company means little, and that there are no satisfactory market values which could be of assistance in appraising the Canton Railroad as a terminal property. Its value was relatively small compared to the other properties of the Canton Co., although the acquisition of the Canton Railroad was clearly the moving reason for Pennroad's purchase.
The purchase of Canton Co. stock by Pennroad constituted an investment made as a result of Penna. negotiations, prompted by the railroad's desire to acquire the Canton Railroad and to prevent it from being taken over by competitors. This was found to be a breach of the fiduciary obligation of the defendant in that it was intended primarily to benefit the Penna. Railroad. The possible remedies for breach are, either an award of the whole sum, or an award of the difference between the price paid and the actual value of the property purchased. We have previously said that "the equities of this case do not demand the imposition of the full possible liability upon the defendant", and have tried, with the assistance of the experts, to establish a fair and equitable measure of redress consistent with the relative rights of the parties and the degree of their participation and responsibility in the transactions in question.
From the experts' report it may be assumed that it is impossible, as a practical matter, to establish a difference between cost and actual market value, and that such measure of damages may not be used in this case. It is likewise inadvisable to charge the defendant with the whole investment and to hold that it is entitled to the property. The alternative suggested by counsel, that the stock he sold at public sale with certain limitations and that the defendant be charged with the loss resulting, offers no assurance that the price received would be adequate or a proper measure of the value of the property to either Pennroad or to the Penna. Railroad.
The purchase price of Canton Co. was $13,432,814.00 or $611.00 per share. Stock exchange transactions were so few and infrequent that the sale prices furnished no fair measure of value. Much of the income of the Canton Co. was from the sale of real estate holdings and the usual rules of valuation based on earnings from operations are not applicable. The complainants fixed valuations ranging from $2,772,000.00 to $6,241,000.00 based respectively upon average net worth, average earnings, dividends, and stock market prices. They also call attention to the valuation of $9,500,000.00 at which the Penna. Railroad believed the Canton Co. should be bought prior to 1929, and urged that the difference between the price paid and such of those valuations as the Court shall choose is the measure of damages to be imposed. On the other hand the defendant contends that the $14,000,000.00 appraisement made at the instance of the Canton Co. early in 1929 represented the actual value, that the investment has been a profitable one to Pennroad, and that no financial liability should be imposed upon the defendant.
In view of the manifest difficulties attendant upon the fixing of a fair value of Canton Co. as of 1929, the grave doubt as to whether any real damage has been suffered by Pennroad from its Canton Co. investment, and the failure of the complainants to clearly establish a basis of damages suffered as a result of defendant's breach of trust, it does not seem essential that the Chancellor should in this case make an award based upon the Canton Co. purchase. Under the present circumstances any measure of damages determined upon might with some justification be deemed an arbitrary one, and in view of the evidence that Pennroad has not and probably will not suffer financially because of its purchase of Canton Co. for the benefit of the railroad, the defendant will not be charged with any loss arising out of the Canton Co. investment.
The report of the experts on the investment in the Seaboard Air Line Railway Co. appears to have been based upon an analysis of the underwriting agreement under which the stock was acquired, and resume of the market transactions in the stock at and about the time of the investment. The experts declare that a return on the stock was "speculative as to both time and amount, but in the light of the proposed reorganization and refinancing, investors, as reflected by a reasonably broad and accurate market, believed there was a future for the equity in this property." They concluded that the substantial loss suffered by Pennroad was clearly due to the general break in the security market between October 1929 and January 1930, and that no part of the loss should be charged to the defendant.
Bearing in mind the finding that the Seaboard investment, inter alia, was prompted by the Penna. Railroad to further its interests and influence, and that the risk thereof was solely upon Pennroad, it is important to inquire more extensively into the elements which might determine the actual value, the prospects of the Seaboard and the responsibility for the loss sustained. This purchase differs materially from the D.T.I. and others, and in measuring the liability to be imposed, consideration must be given to the general background, experience and prospects of the line. The experts, although characterizing the investment as speculative, justify the hospefulness and optimism of the investors upon the market activity and the expectation that the refinancing would improve the equity of the stockholders.On the other hand it is argued by the complainants that an analysis of the railroad shows conclusively that the common stock had no value whatever, that the only possible purpose to be served was that of the Penna. Railroad and that the entire loss must therefore be charged to the defendant.
The acquisition of Seaboard, unlike the other railroad investments, grew out of an underwriting arrangement. Pennroad and others entered into an agreement on October 9, 1929 to underwrite a proposed offering of 1,900,000 shares of Seaboard stock at about $12. It undertook to purchase 25% of all stock taken up by the syndicate, but not less than 125,000 shares if that much were acquired by the syndicate, and if the amount were less, it was to receive certain compensation for the underwriting. Although the arrangement has been variously described in the arguments as a purchase, an underwriting, and a reinsurance of the underwriting, it is obvious that its object was to enable Pennroad to acquire not ...