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IN RE PITTSBURGH & LAKE ERIE R.R. CO. SECS. & ANTI

December 6, 1974

IN RE THE PITTSBURGH AND LAKE ERIE RAILROAD COMPANY Securities and Antitrust Litigation


The opinion of the court was delivered by: GORBEY

 GORBEY, District Judge.

 Certain defendants have filed a motion for pretrial determination limiting recovery in this action to prorata recovery by certain shareholders and for other relief, and other defendants have joined in this motion. The defendants assign as a reason for the motion that if the plaintiffs prevail in these actions and recovery is allowed to go to P&LE, on whose behalf the claims have been derivatively asserted, the principal beneficiary of such recovery would be the Penn Central, the owner of approximately 93% of the outstanding stock of P&LE, and which has already been a principal beneficiary of the challenged transactions. Defendants also believe that of the remaining 7% of P&LE shareholders, many have acquiesced in or approved of such transactions. Therefore, defendants urge that in order to prevent injustice, a prorata recovery is indicated so as to limit recovery to shareholders who are free from actual participation in the allegedly wrongful acts and from acquiescence, laches, or other grounds for disqualification.

 Any discussion of the problem should begin with Perlman v. Feldmann, 219 F.2d 173 (2d Cir. 1955), which is significant not only because for the first time a direct prorata recovery was decreed in a case involving a publicly held corporation, but also because it does not involve federal antitrust law or violation of the Securities Act as do the Bristol and Crowell cases with which we are here concerned. Accordingly, in the Perlman case there were no policy considerations to prevent the application of relevant state law, equitable principles and restitution. As the Supreme Court of the United States has declared:

 
" We have often indicated the inappropriateness of invoking broad common-law barriers to relief where a private suit serves important public purposes." Such "purposes of the antitrust laws are best served by insuring that the private action will be an ever-present threat to deter anyone contemplating business behavior in violation of the antitrust laws. The plaintiff who reaps the reward of treble damages may be no less morally reprehensible than the defendant, but the law encourages his suit to further the overriding public policy in favor of competition. A more fastidious regard for the relative moral worth of the parties would only result in seriously undermining the usefulness of the private action as a bulwark of antitrust enforcement."
 
Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 138-139, 20 L. Ed. 2d 982, 88 S. Ct. 1981 (1968).

 Stated differently, Section 4 of the Clayton Act was designed to supply ancillary force of private investigators to supplement the Department of Justice in law enforcement. Quemos Theatre Company, Inc. v. Warner Bros. Pictures, Inc., 35 F. Supp. 949 (D.C. N.J. 1942); Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 23 L. Ed. 2d 129, 89 S. Ct. 1562 (1969); Weinberg v. Sinclair Refining Co., 48 F. Supp. 203 (D.C. N.Y. 1942).

 Another court has said that the allowance of the action for treble damages has as its purpose not merely the redress of injuries to individuals occasioned by prohibited practices but also aids in achieving the broad social object of the statute. Mach-Tronics, Inc. v. Zirpoli, 316 F.2d 820 (9th Cir. 1963).

 
"This case apparently, did not present any of the problems arising from the existence of bondholders, preferred shareholders, or ordinary creditors." XIX Wash. and Lee L.Rev., page 186, Footnote 77 (1962).

 Furthermore, the author of the aforementioned Law Review article specifically states:

 
"Perhaps when the defendants are directors guilty of flagrant and willful breaches of fiduciary duty toward the corporation, full payment of the corporate damages should be exacted. Even though such recovery may include a punitive element it could be justified as providing a deterrent against such breaches of fiduciary duty." Id. at 169, 170.

 Bangor Punta Operations, Inc. v. Bangor and Aroostook R. Co., 417 U.S. 703, 94 S. Ct. 2578, 41 L. Ed. 2d 418 (1974), relied upon by defendants, must be distinguished on its facts from the present cases. It is not a derivative action brought by minority stockholders but, as stated by the court:

 
"This case involves an action by a Maine railroad corporation seeking damages from its former owners for violation of federal antitrust and securities laws, applicable state statutes, and common-law principles. The complaint alleged that the former owners had engaged in various acts of corporate waste and mismanagement during the period of their control. The shareholder presently in control of the railroad acquired 98.3% of the railroad's shares from the former owner long after the alleged wrongs occurred. We must decide ...

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