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WESTON ET AL. v. READING COMPANY (10/12/71)

decided: October 12, 1971.

WESTON ET AL., APPELLANTS,
v.
READING COMPANY



Appeal from decree of Court of Common Pleas, Trial Division of Philadelphia, March T., 1965, No. 6107, in case of J. Fred Weston et al. v. Reading Company, Baltimore & Ohio Railroad Company and Chesapeake & Ohio Railway Company.

COUNSEL

Jerome J. Shestack, with him Bernard J. Smolens and Schnader, Harrison, Segal & Lewis, for appellants.

Ernest R. von Starck, with him John H. Lewis, Jr., and Morgan, Lewis & Bockius, for appellee.

Fairfax Leary, Jr., with him John F. Meigs, Miles H. Shore, Eugene F. Waye, and Saul, Ewing, Remick & Saul, for appellee.

Jones, Eagen, O'Brien, Roberts, Pomeroy and Barbieri, JJ. Opinion by Mr. Justice Roberts. Mr. Justice Jones concurs in the result. Mr. Chief Justice Bell took no part in the consideration or decision of this case.

Author: Roberts

[ 445 Pa. Page 184]

Protesting shareholders and directors of the Reading Company have attempted to enjoin the Baltimore & Ohio Railroad Company and the Chesapeake & Ohio Railway Company from voting their Reading shares and otherwise mismanaging the Reading Company. They also sought an accounting with respect to various intercorporate transactions between the B&O, C&O and Reading which assertedly resulted in loss or injury to the latter. The protestors were successfully halted by preliminary objections, and the validity of the trial court's dismissal of their complaint is now before our Court.

Two principal issues are presented in this appeal: whether the protesting shareholders possess standing under Rule 1506 of the Pennsylvania Rules of Civil Procedure to obtain relief for defendants' alleged violation of their corporate fiduciary duties and whether any or all of the subject matter of this equity action is more properly within the exclusive or primary jurisdiction of the Interstate Commerce Commission. We affirm the chancellor's decree dismissing the complaint.

Background

The parties have stipulated some of the pertinent facts, and others are of public record. The relevant corporate structures are both important and complex. Pursuant to the Transportation Act of 1940, 54 Stat. 899, 49 U.S.C. ยง 1 et seq., the C&O and the B&O presented a plan to the Interstate Commerce Commission whereby the C&O was to acquire capital stock control of the B&O. The proposed affiliation was determined by the Commission to be consistent with the public interest, Chesapeake & Ohio Ry. -- Control -- Baltimore & Ohio R. R., 317 I.C.C. 261 (1962), and appropriate judicial tribunals have concluded that the Commission's

[ 445 Pa. Page 185]

    findings were supported by substantial evidence. See Brotherhood of Maintenance of Way Employees v. United States, 221 F. Supp. 19 (1963), aff'd, 375 U.S. 216, 84 S. Ct. 341 (1963) (per curiam). Thus, since 1963 the C&O has controlled the B&O.

The B&O has been a substantial stockholder of the Reading Company since 1902. As of December 7, 1904, the B&O owned 21.66% of Reading's outstanding shares. B&O's buying program continued, and by November 18, 1963, the B&O controlled 49.92% of Reading. Since 1965, B&O's proportional share of control has been reduced to 38.26%.

The instant litigation originated on May 24, 1965, with the filing of a complaint in equity in the Philadelphia Court of Common Pleas by seven Reading shareholders and directors naming the B&O, C&O, and Reading as defendants. The C&O filed preliminary objections asserting the court lacked proper jurisdiction in that the C&O owned no track or other real estate and operated no trains or other facilities within Pennsylvania.*fn1 The Reading demurred and also objected to the court's jurisdiction, contending, inter alia, that the ICC possessed primary jurisdiction over this litigation. The B&O challenged the specificity of the pleadings, asserted plaintiffs had no standing, and asked the complaint be dismissed because of laches.

Without passing on the other objections, the chancellor sustained Reading's and B&O's demurrers on January 17, 1967, because of a failure to sufficiently distinguish between a derivative and a representative cause of action.

An amended complaint was filed by two of the original plaintiffs and one new plaintiff (hereinafter termed "appellants") on August 21, 1967. In it, appellants contend they are bringing the action ". . . derivately

[ 445 Pa. Page 186]

[sic], in behalf of themselves and all other stockholders of Reading similarly situated." They allege that the C&O owns 10.71% of the Reading and that thus the C&O, through the B&O's 38.26% share of the stock, controls approximately 49% of Reading's outstanding voting shares. It is averred that the B&O and C&O have ". . . improperly and illegally maintained and exercised control of Reading." Appellants also stated that Reading owns 48.97% of the Central Railroad Company of New Jersey. They assert C&O owns 2.3% of Jersey Central, and through its control of Reading dominates the affairs of Jersey Central as well. Appellants claim that this pyramid and concentration of control has allegedly been employed by C&O and B&O to the disadvantage of Reading and Jersey Central. Nine specific transactions are listed being in furtherance of what amounted to a "plan or design" and an "improper conspiracy" of mismanagement on the part of B&O and C&O, the substance of which will be detailed below.

The Reading and the B&O renewed their preliminary objections, raising, inter alia, issues of jurisdiction, improper addition of a party, and lack of capacity to sue. A separate petition to dismiss was filed by the B&O asserting the ICC had primary jurisdiction over appellants' action.

On March 29, 1968, the chancellor wrote to the General Counsel of the ICC and requested an amicus brief concerning the Commission's view of its exclusive or primary jurisdiction over the issues in this litigation.*fn2 The Deputy General Counsel responded in a letter detailing the Commission's position.*fn3 Counsel for all litigants were then invited to submit their comments.

[ 445 Pa. Page 187]

Finally, on January 10, 1969, the chancellor sustained the preliminary objections concerning the primary jurisdiction of the Interstate Commerce Commission and appellant's standing to sue. Otherwise, the preliminary objections were not decided. The amended complaint was dismissed without prejudice to another complaint being filed in accordance with the chancellor's opinion issued that same day. Our review is limited to the chancellor's ruling, and we do not here consider the respective merits of the preliminary objections expressly left undecided.

The Amended Complaint

As will become evident, there is little disagreement in this litigation concerning the applicable principles of law. Rather the dispute centers on the nature of the amended complaint. Appellants urge they are not attacking the legality of the acquisition of control of Reading by B&O and C&O but only the improper and unlawful manner in which the control is being exercised to Reading's disadvantage. The railroads counter that the gist of the amended complaint is the existence of a conspiracy to effectuate a merger of Reading and Jersey Central into the C&O and B&O system at depressed merger values -- an issue purportedly within the primary jurisdiction of the ICC. Thus, prior to investigating either appellants' standing or the ICC's primary jurisdiction, we must examine the amended complaint in some detail.

The perimeters of the complaint have already been noted, and we now turn to the nine specific acts of mismanagement set forth in section 12 of the bill.

Paragraphs 12(a)-(d) recount four alleged incidences of improper control concerning Reading's interest in the Philadelphia Perishable Products Company, an enterprise which operated a warehouse and

[ 445 Pa. Page 188]

    terminal facilities for the handling of produce shipped to Philadelphia by rail. In 1931, the C&O and B&O purportedly caused Reading to enter into an agreement with the B&O concerning a division of expenses incurred in running Perishable Products whereby Reading shouldered more than its fair share of the costs. Then in 1953, appellees supposedly compelled Reading to grant an option to purchase 611,049 square feet of the Perishable Products terminal to a B&O subsidiary at a price that was assertedly one half of the terminal's fair market value. Next, in 1961 the C&O and B&O allegedly engineered a plan pursuant to which the Reading permitted the B&O to move its terminal agent's office force from Pier 24 in Philadelphia to the Perishable Products terminal where they obtained rent-free office space, even though rent-paying tenants were displaced. Finally, some time in 1963 the C&O and B&O supposedly caused Reading to transfer its interest in Perishable Products to the B&O for a "grossly inadequate consideration."

In paragraph 12(e) it is averred that the C&O and B&O effectuated the sale of a number of rehabilitated box cars by Reading Dispatch, Inc., a Reading Company subsidiary, to Railease, a C&O subsidiary, for inadequate consideration. The cars were then leased to B&O for a term of fifteen years.

The next paragraph in the complaint (12(f)) asserts that in June, 1964, appellees made Reading lease a number of used hopper cars to the B&O ". . . on terms and conditions which were arbitrarily arrived at ...


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