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July 20, 1945


The opinion of the court was delivered by: KALODNER

This secondary, or derivative action was brought by Otis & Co., a stockholder in the Pennsylvania Railroad Co., against that Company, its officers and directors, and the Pennsylvania, Ohio and Detroit Railroad Co., and certain of its officers and directors. The latter is a wholly-owned subsidiary of the Pennsylvania Railroad. The matter is presently before the Court on a motion for summary judgment for consideration on the merits. Previously this Court determined an adjective issue in the instant case, and in the opinion, filed November 1, 1944, 57 F.Supp. 680, briefly described the interests and status of the parties. The statement therein is sufficient to suggest that the broad question involved is whether the individual defendants are liable for alleged losses suffered by the Pennsylvania R.R. Co. arising out of the issuance and sale of over $ 28,000,000 in bonds by the Pennsylvania, Ohio and Detroit R.R. Co., which guaranteed the bonds.

The motion raises a preliminary question as to whether there now exists any genuine issue concerning a material fact, excepting, of course, amount of damages. Federal Rules of Civil Procedure, rule 56(c), 28 U.S.C.A.following section 723c. In addition to the pleadings, there are on record, admissions, affidavits, counter-affidavits, and certain exhibits, one of which is a transcript of proceedings before the Interstate Commerce Commission when the bond issue here in controversy was submitted for approval. Careful examination discloses no material issue of fact remaining with the exception of damages; the plaintiff conceded this at the oral argument (Transcript, page 101).

 The Court has before it all the facts which a formal trial would produce and since this cause came on to be heard without a jury, and there is no substantial conflict concerning the evidentiary facts, but only as to the inferences to be drawn therefrom, this is a proper case for summary judgment. Fox v. Johnson & Wimsatt, Inc., 1942, 75 U.S.App.D.C. 211, 127 F.2d 729, 736, 737; see Toebelman v. Missouri-Kansas Pipe Line Co., 3 Cir., 1942, 130 F.2d 1016.

 Approaching the main interests of this case, it is appropriate at this point, because of certain unusual characteristics, to set out the essential facts.

 The Pennsylvania R.R. Co. (hereinafter referred to as P.R.R.) directly or indirectly owns all of the capital stock of the Pennsylvania, Ohio & Detroit R.R. Co. (hereinafter referred to as P.O. & D.) In the Spring of 1943, the latter company had outstanding a total of $ 28,483,000 'Series A' bonds, maturing April 1, 1977, bearing interest at the rate of 4 1/2%, payable semi-annually, and redeemable on any interest payment date subsequent to April 1, 1932, at 102.5 upon 60 days' notice. This bond issue was guaranteed, both as to principal and interest, by P.R.R.

 The possibility of refinancing this series of bonds had been under consideration by Mr. Clement, president of P.R.R., and Mr. Pabst, vice president in charge of finance of P.R.R. and president of P.O. & D., for approximately a year prior to June, 1943. During the latter part of April, 1943, the bond market became so favorable to refinancing that Clement directed Pabst to contact Kuhn, Loeb & Co. to determine whether it was possible to sell at a price not less than par, a new issue of P.O. & D. bonds, guaranteed by P.R.R., in the same amount as the Series A bonds but bearing interest not exceeding 3 3/4%. The negotiations with Kuhn, Loeb & Co. continued through May and part of June, the parties reaching an understanding, not legally binding, on the afternoon of June 22, 1943. On the following day the directors of P.O. & D. approved a resolution authorizing the sale of the new Series D 3 3/4% bonds, at the 'best obtainable price,' and the directors of P.R.R. approved a resolution authorizing a guarantee agreement. On the same day, June 23, 1943, the bonds were sold to Kuhn, Loeb and Co. at par and accrued interest from July 1, 1943, to date of settlement, subject to approval by the Interstate Commerce Commission.

 It is not necessary here to set out in full the terms and conditions of the planned Series D issue; a complete discussion appears in the Interstate Commerce Commission's report, 1943, 254 I.C.C. 473. However, it may be said that the bonds were to mature July 1, 1968, and were to be redeemable as a whole only, except for the purposes of the sinking fund, upon 60 days' notice on any interest bearing date to January 1, 1959, at 105 and accrued interest, and thereafter at a premium. A sinking fund provision, not contained in the original Series A bond issue, specified that Series D bonds could be called at 103 and accrued interest, to and including July 1, 1956, and thereafter at a premium. The bonds were offered to the public at 101.75, a spread of 1.75. The last day for settlement under the contract was July 31, 1943, since the purchase price must have been received prior to the first publication of notice of redemption of the Series A bonds, on August 2, 1943, the redemption being effective upon such publication. According to the undisputed calculations and the Interstate Commerce Report, the refinancing would result in a net saving of $ 7,583,664.70, plus an estimated tax saving of $ 1,500,000.

 On June 22, 1943, before the action by the directors and before the contract of sale to Kuhn, Loeb & Co. was executed, a Mr. Claflin, representing Halsey, Stuart & Co., Inc., visited Pabst in an effort to learn whether there might be a refinancing of the P.O. & D. bonds, but Pabst declined to give any information and, in response to another question, stated that he did not think it was likely Halsey Stuart & Co. would have an opportunity to bid if there were a refunding. On June 23, 1943, Halsey, Stuart & Co. and Otis & Co. by telegrams to Clement and other directors of P.R.R. requested an opportunity to submit a competitive bid for the P.O. & D. bonds. The defendants assert that the telegram was not received until June 24th and on that day Clement telegraphed a reply to Otis & Co., acknowledging the joint telegram and advising that the 'railroad has transacted the business referred to in a very satisfactory way, and in what is considered the best interests of the railroad.' Subsequently, on June 28, 1943, Halsey, Stuart & Co. and Otis & Co., in a telegram addressed to Pabst and Clement, criticized a 25-year bond issue and offered to guarantee a price of 101, at a competitive bidding sale, for 3 3/4% 35-year bonds. Copies of the telegram were sent to the Interstate Commerce Commission. No reply was made by Pabst or Clement. Finally, on July 9, 1943, Halsey, Stuart & Co. and Otis & Co. sent a letter to Pabst offering to guarantee a minimum bid of 102 at a competitive bidding sale for the Series D bonds, subject to adjustment of call prices, or a minimum bid of 101 at a competitive sale for 34 or 35 year bonds; it invited a conference on desirable changes in terms and conditions and stated that the offer would be kept open until July 19. The letter further advised that copies were being sent to P.R.R., to its directors, and to the Interstate Commerce Commission.

 Application to the Interstate Commerce Commission for approval of the Series D bonds was made by P.R.R. and P.O. & D. on June 25, 1943. Otis & Co., a stockholder of P.R.R., was granted leave to intervene, but such leave was denied Halsey, Stuart & Co. The issues presented to the Commission are briefly summarized in the Commission's report, 254 I.C.C. 473 at page 477:

 'The intervener contends that this application is one where the conditions are such as to make competitive bidding imperative and asks that we so decide, while the applicants insist that a refunding issue is peculiarly inappropriate for competitive bidding, because the publicity incident to that method of sale would disrupt the market for the bonds to be called and refunded before definite arrangements for the refunding could be consummated. The applicants argue that the question is whether the proposals contained in the pending application are such as show that sufficient savings will result therefrom, while the intervener contends that the application should be denied because savings would be greater if a higher price had been received for the bonds, and that the failure of the Pennsylvania to consult with more than one banker was a disservice to the stockholders.'

 A majority of the Commissioners were not convinced that the applicants received the best possible price and felt that because of negotiations with only one investment house the applicants failed to explore the possibility of effecting greater savings, such as through the issue of serial bonds. However, they determined that competitive bidding was not appropriate, but could find no reason why more than one investment house should not have been consulted. They also found that the transaction with Kuhn, Loeb & Co. was 'the result of arms-length dealing,' and that the offers submitted by 'a rival investment company' were made on the spur of the moment and without adequate consideration; therefore, because of the debt reduction provisions and because the sale would result in a saving of approximately 9 million dollars which might not be realized if approval were withheld, it was determined to approve the sale at a price not less than 100 1/4, considering the spread of 1 3/4 to be too great. This price was considered just and reasonable. One Commissioner dissented. 1943, 254 I.C.C. 473.

 The gist of the complaint is that the individual defendants failed and refused to exercise ordinary care and judgment in the sale of the Series D bonds. The individual defendants, it is alleged, kept secret the bond issue and refused to deal with any investment house other than Kuhn, Loeb & Co. Furthermore, it is charged that as a result of failing to 'shop around,' a half million dollars was lost, and another half million dollars was lost in failing to put the issue to competitive bidding. In addition, it is also asserted that certain of the directors were influenced because of their position as directors of several institutions which had made agreements with Kuhn, Loeb & Co. to purchase and/or sell part of the bond issue.

 The defendants, however, go further and invoke what amounts to the doctrine of res adjudicata; as they stated it: 'The jurisdiction of this Court is excluded in the present case by the fact that the same issues were presented to and decided by the Interstate Commerce Commission, under its statutory authority, with the same objecting stockholder before it, and the Commission's order of approval, not having been subjected to judicial review in the manner provided therefore by statute, has become judicially unassailable and not subject to collateral attack in this proceeding.' It should be pointed out that the plaintiff does not attack the validity of the Commission's ...

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