this transaction; he did not take part in any phase of it, nor was he present at the board meetings, when the matter was considered, nor did he vote. Aside from his mandatory absence, it is evident nothing more could be done to relieve Col. Mellon of all implications of bad faith. The Interstate Commerce Commission reached a like conclusion on this matter.
Applying the principles stated, I find no negligence on the part of the officers and directors.
Parenthetically it may be stated that with respect to those defendants who are directors of P.O. & D., the standard of care, skill and diligence in Ohio and Michigan is no greater than that by which I have tested the liability of the officers and directors of P.R.R. See Goff v. Emde, 1928, 32 Ohio App. 216, 167 N.E. 699, citing 3 Thompson, Corporations (3rd ed.) Sec. 1520; 3 Fletcher, Cyclopedia (1931) Sec. 1037 n. 64.
It was the duty of the officers, in the course of business, to be on the alert for an opportunity for refunding an outstanding bond obligation in a manner which would result in a saving to their business, and there is no question that the management of the defendant corporations did seize an opportune time for the refunding operation. Clement, the president, and Pabst, the vice president in charge of finance and corporate relations, were obviously well acquainted with the finances of the railroad. They had in mind the refunding plan for approximately a year prior to its consummation; they acquainted themselves with market conditions, and surveyed the situation with respect to P.R.R. and other bonds which bore some resemblance to that which they proposed to issue. On the basis of their knowledge and investigation Clement concluded they could market the $ 28,000,000 issue of 3 3/4% bonds at par, and he directed Pabst to negotiate with Kuhn, Loeb & Co. As a result of arms-length dealing, Clement obtained what was considered the 'best obtainable price.' At the P.R.R. and P.O. & D. board meetings of June 23, 1943, full disclosure of the facts was made, and the directors, experienced men in the field of finance and business, acting on the basis of their own knowledge and on the recommendations of the officers, authorized the sale and guarantee. Although the P.R.R. board authorized the guarantee of a bond issue, the terms and conditions of which were to be settled by the P.O. & D. board, and the P.O. & D. board authorized a sale at the 'best obtainable price,' it is evident that they were aware of the tentative agreement which Pabst and Clement had made with Kuhn, Loeb and Co.
The plaintiff contends that this is not a case of error in business judgment, but rather it is a case where there was no satisfactory collection of data or information on which judgment could have been exercised. Furthermore, plaintiff asserts, the only proper way to determine the actual 'best obtainable price' was to obtain offers from more than one investment house; this could be done by 'shopping around,' or better, by submitting the issue to competitive bids. In support of this contention, plaintiff cites the admission of the defendants that the bond issue involved was actually a 'test' of the bond market, since no large bond issue had been marketed for some time previously.
That recourse was not had to competitive bidding does not, of itself, afford a basis of liability. Casey v. Woodruff, supra. It is highly significant that the Interstate Commerce Commission refused to require competitive bidding, although plaintiff earnestly urged it to do so. I have already set out at length, in my opinion of November 1, 1944, 57 F.Supp. 680, at page 682, the view of the Commission and its justification of the refusal of the defendants to require competitive bidding; it is only necessary to repeat my summation, 'The manner in which the defendant corporations floated the bond issue has been in use * * * almost since 'Iron Horse Days' -- it is apparently a matter of corporate policy pursued by railroads generally.' That the Commission later passed a regulation requiring competitive bidding
does not aid the plaintiff, for the Commission also found that competitive bidding was not appropriate because of the possible effect on the market of the bonds to be called and refunded. 254 I.C.C. 473, 479. On this, I may accept the opinion of the Commission as an expert department of the government.
The defendants unquestionably had the right to negotiate privately with Kuhn, Loeb & Co. Although there is no charge of bad faith, or conspiracy, it seems clear that in choosing that firm, the defendants were following another custom in railroad history. See In re Competitive Bidding, 1944, 257 I.C.C. 129, 153, 156. Kuhn, Loeb & Co. have long been 'the' banking house to P.R.R.
In dealing with Kuhn, Loeb & Co. the defendants were dealing with a firm in which they had the confidence of years of satisfactory banking relations and which was well acquainted with their financial situation, structure and requirements. Although the Commission felt no special advice was necessary, the record of the Commission's proceedings reveals that from time to time Kuhn, Loeb & Co. did advise the railroad company as to their estimate of the market, what it might absorb, the trend, and the terms of bonds and similar matters. Again, the finding of the Commission on this matter may be considered determinative, 254 I.C.C.at page 481
'2. There is no suggestion in the record that the Pennsylvania, with an investment of over 3 billion dollars, is under any obligation to any banker; rather, the proposed transaction is the result of arms-length dealing between competent parties in which negotiations covering a considerable period culminated in a mutually satisfactory purchase and sale at a price confirmed by applicants' boards of directors composed of able businessmen.'
It may also be noted that in dealing with Kuhn, Loeb & Co., defendants were not contracting with another firm in which they were interested, nor did the directorates or managerial positions interlock. There is no contention that fraud existed and fraudulent acts will not be presumed. Casey v. Woodruff, supra, 49 N.Y.S.2d at page 645.
As to the plaintiff's contention that the Commission was not convinced that the best obtainable price was received by the railroads, it is indeed difficult to determine in what way the Commission construed the words 'best obtainable price'. However, it is at once evident that the Commission substituted its judgment for that of the directors' in increasing the price, and while this may be done by that body, see Casey v. Woodruff, supra, 49 N.Y.S.2d at page 641, it is well settled that the courts will not similarly engage themselves. On the matter of the spread, at the hearings before the Commission there was submitted a tabulation showing an average spread of 1.2841 in four transactions where the bond issue was submitted to competitive bidding. Nevertheless, it appears that in one of the four instances the spread was as high as 1.9423. It can hardly be concluded that a spread of 1.75 even suggests negligence, especially where, as here, leeway must have been allowed for the risk in undertaking a large issue which 'broke the ice' in the bond market. Insofar as the fact that the bonds were favorably received is concerned, it is clearly true that the monetary situation and the condition of the market are not exactly foretellable. Failure to foresee what at best is uncertain does not constitute negligence or mismanagement: what the market would absorb and the terms and conditions that would meet with greatest success were, at the time the issue involved here was planned, at most a matter of judgment; now they are fact. If the defendants used their honest business judgment, as I am convinced they did, they cannot be liable for failing to accurately foretell the welcome the market would give their efforts. I am of the opinion no more was required of the individual defendants.
In summary then I find that the bond issue was adequately deliberated and planned, properly negotiated and executed; there was no lack of good faith, no motivation of personal gain or profit; and there was no lack of diligence, skill or care in selling the issue at the price approved by the Commission, and which resulted in a saving of approximately $ 9,000,000 to the corporations. The various directors were aware of the proposed transaction and its course of conduct; copies of telegrams and letters from Halsey, Stuart & Co., and Otis & Co. were sent to them; in any event they had a right to rely on the information supplied by, and the good faith judgment of, those in whose hands the conduct of the everyday affairs of the corporation was placed.
For the reasons stated, the defendants' motion for summary judgment is granted.