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June 3, 1980


The opinion of the court was delivered by: BECKER

I. Preliminary Statement

This opinion addresses yet another motion for summary judgment interposed by defendants in this massive antitrust case. The present motion raises the question whether plaintiff, National Union Electric Corporation (NUE) has standing to maintain the action. While, because of the prominence of co-plaintiff Zenith Radio Corporation in the American television market, the case is often referred to as "the Zenith case," Zenith did not enter the litigation until 1974. Rather, suit was first instituted by NUE, on December 21, 1970. *fn1" In its complaint NUE, the successor to Emerson Radio Corporation, one of the pioneers in the radio and television industry, alleged that its television business was destroyed as the result of a mammoth conspiracy perpetrated by defendants and others to sell television sets in the United States at artificially low prices.

 After NUE ceased manufacturing television sets in 1970, its principal lines of commerce were air conditioners and vacuum cleaners. Following the death in December, 1973, of C. Russell Feldmann, Chairman of NUE and its controlling stockholder, the executors of his estate decided to sell its interest in NUE, since the estate was obligated to various banks for large sums of money under loans made prior to Mr. Feldmann's death. *fn2" One of the companies expressing interest in NUE was a large Swedish manufacturer of vacuum cleaners, Aktiebolaget Electrolux (Electrolux). In July, 1974, Electrolux made a cash tender offer for one hundred percent of the outstanding shares of NUE at $ 28 per share. Through acceptance of the tender offer and a subsequent Delaware "freeze-out merger" effected at the same $ 28 per share figure, Electrolux became, on August 1, 1975, the owner of all the outstanding stock of NUE, and the sole ultimate beneficiary of any recovery in this action. *fn3"

 Based upon the extensive pretrial discovery record addressed to this issue, defendants submit that the $ 28 per share price paid by Electrolux represented the fair value of the assets and potential sales and earning power of NUE and that in negotiating to acquire NUE, Electrolux was motivated solely by a desire to enter the American vacuum cleaner market. While conceding that Electrolux was well aware that NUE owned, as a chose in action, this major lawsuit, defendants maintain that NUE placed no dollar value on the lawsuit, and that in fact nothing "extra" was paid for it. Under these circumstances defendants contend that, viewed in the light of a pierced corporate veil, any recovery by NUE in this action would amount to a pure "windfall" to Electrolux. Consequently, they argue, under the equitable doctrine announced by the United States Supreme Court in Bangor Punta Operations, Inc. v. Bangor & Aroostook R. Co., 417 U.S. 703, 94 S. Ct. 2578, 41 L. Ed. 2d 418 (1974) (Bangor Punta ), described in detail infra, summary judgment should be entered dismissing the complaint of NUE because Electrolux has sustained no harm by virtue of defendants' conduct and hence NUE, as its wholly owned subsidiary, lacks standing to sue. *fn4"

 In defendants' view:

 Brief of Certain Defendants at 3-4. In Bangor Punta terms, since Electrolux is the sole owner of NUE shares, it is the real party in interest in the NUE action and would be the exclusive beneficiary of any damages NUE might recover. Since Electrolux "got what it paid for" in acquiring NUE, paid nothing as such to acquire the lawsuit, and has itself suffered no injury, defendants contend that recovery by NUE would unjustly enrich Electrolux in violation of the principles of equity relied upon in Bangor Punta. Thus we refer to the matter before us as the "Bangor Punta " motion.

 Plaintiffs, on the other hand, conceive of Bangor Punta as a doctrine limited to cases in which a plaintiff seeks to recover damages from the prior owners of corporate stock (from whom the plaintiff acquired the stock) for wrongs in the nature of mismanagement or waste of corporate assets perpetrated upon the acquired corporation prior to acquisition. In such a circumstance the prior owners, as sole owners of the harmed corporation, have, in effect, committed harm upon themselves, and, since the acquiring company, in the absence of fraud in the sale, "got what it paid for" (paying a value for the stock of the distressed corporation that reflected the mismanagement) to permit it to recover damages from the former owner would constitute a recoupment of the purchase price. Accordingly, plaintiffs submit that the Bangor Punta doctrine is inapplicable where, as here, the defendants are not former owners but strangers to the subject corporation. Because the facts of Bangor Punta are very different from those before us, plaintiffs distinguish Bangor Punta and urge us not to apply it or its principles to this case.

 Obviously we must commence the substantive portion of this opinion with an exegesis of Bangor Punta so as to determine its scope and its applicability at bar. The latter inquiry will turn not just on the language of Bangor Punta, but also upon more general principles of the law of equity and of property as well as antitrust law policy considerations.

 For reasons that will in due course appear, we find that Bangor Punta may not be read expansively and that it should not be applied here. While that conclusion would be enough to dispose of the motion, we prefer, in view of the nature and magnitude of this case, and our proximity to trial, to leave no aspect of the motion undecided. We shall therefore reach the second aspect of this motion: assuming arguendo that Bangor Punta does apply to the case, is there a genuine issue of material fact as to whether the present lawsuit was a factor in the Electrolux acquisition (or whether Electrolux paid any consideration for the lawsuit).

 This inquiry in turn implicates certain appraisal proceedings in Delaware Chancery Court that have occurred in the wake of the freeze-out merger, as well as a lawsuit filed in the United States District Court for the Western District of Texas by disgruntled former NUE shareholders who object to the price per share paid in the merger. In particular, defendants point to certain findings of the court-appointed appraiser in the Delaware proceeding and NUE's endorsement of those findings, especially the appraiser's conclusion that the lawsuit had no asset value. *fn5" According to defendants, these facets of the Delaware proceeding not only make clear that no consideration was paid for the lawsuit, but also call into play the doctrines of collateral estoppel and judicial estoppel, barring NUE from contending that consideration was paid. For reasons that will also appear, we find it plain that there is a genuine issue of material fact as to Electrolux's payment of consideration to acquire the lawsuit, and that the estoppel arguments do not change that result.

 II. Bangor Punta

 A. Bangor Punta Explained-Its Facts and Its Reasoning

 In 1964, the Bangor Punta Corporation purchased, through its subsidiary, Bangor Punta Operations, 98.3% of the stock of plaintiff Bangor & Aroostook Railroad (BAR). In 1969, Bangor Punta sold all of its stock to Amoskeag Company, which later obtained additional shares so that it ultimately held in excess of 99% of the BAR stock. In 1971, BAR filed suit against Bangor Punta alleging violations of § 10 of the Clayton Act, 15 U.S.C. § 20, various sections of the federal securities laws, and Maine statutory and common law, and seeking seven million dollars in damages for mismanagement, misappropriation, and waste of BAR's assets during the period Bangor Punta controlled BAR. The district court (Gignoux, J.) granted summary judgment for the defendants and dismissed the complaint, Bangor & Aroostook Railroad Co. v. Bangor Punta Operations, Inc., 353 F. Supp. 724 (D.Me.1972), reasoning that, although the suit purported to be a primary action brought in the name of the corporation, the real party in interest in the suit, and the actual beneficiary of any recovery, was Amoskeag, which had suffered no injury because it owned no stock at the time the alleged wrongful acts occurred and got full value for its purchase price. Any recovery under these circumstances would constitute a "windfall" for Amoskeag "contrary to established equitable principles." Id. at 727. The court noted that Amoskeag would have been barred from bringing a derivative suit because of the requirement of Fed.R.Civ.P. 23.1 that a plaintiff in a derivative action must have been a shareholder at the time of the act of which he complains (the contemporaneous ownership requirement, see infra) and thus viewed the BAR suit as an attempt by Amoskeag to accomplish indirectly, by bringing suit in the corporate name, what it could not do directly.

 The Court of Appeals for the First Circuit reversed, finding that the equitable principles relied upon by the lower court were outweighed by the public interest in the financial stability of railroads. The court disagreed with the district court's conclusion that Amoskeag would be the sole beneficiary of any recovery by BAR, noting that recovery would also inure to the benefit of the public. This fact was viewed as sufficient to support the corporate cause of action and rendered irrelevant any windfall to Amoskeag. In addition, the court noted that recovery would provide a deterrent to future acts of mismanagement.

 The Supreme Court reversed the court of appeals, adopting much (but not all, see infra) of the reasoning of the district court and concluding that in view of the absence of fraud in the sale of stock of Amoskeag, Amoskeag had not been injured and thus had no standing in equity to pursue the action. The Court determined that the case was an appropriate one in which to ignore the distinction between the corporation, in whose name suit was brought, and its principal shareholder, Amoskeag. Since Amoskeag was "itself estopped from complaining of petitioner's alleged wrongs," it could not avoid the command of equity "through the guise of proceeding in the name of the respondent corporations which it owns and controls." 417 U.S. at 713, 94 S. Ct. at 2584. "(W)here equity would preclude the shareholders from maintaining an action in their own right, the corporation would also be precluded." Id.

 In determining that Amoskeag, as principal shareholder of BAR, would be precluded from maintaining the action in its own right, the Court relied primarily on Dean (then Commissioner) Roscoe Pound's decision in Home Fire Insurance Co. v. Barber, 67 Neb. 644, 93 N.W. 1024 (1903), which held that where all the shareholders of a corporation had purchased their stock from a wrongdoer at a price that reflected the acts of mismanagement later sought to be complained of, the corporation had no standing in equity to sue the former owners: " "whatever will estop the stockholders will estop the corporation ....' " 67 Neb. 644, 93 N.W. at 1033. The Home Fire decision rested on three interrelated and largely overlapping equitable principles: (1) the "tainted shares" doctrine, which precludes a shareholder from complaining of acts of corporate mismanagement if his transferor participated or acquiesced in the wrongdoing; (2) the contemporaneous ownership rule, which requires that the plaintiff have been a shareholder at the time of the alleged wrongful acts (any person who would be prevented from maintaining an action by virtue of the tainted shares doctrine would also be precluded under the contemporaneous ownership rule, though the converse would not be true in all cases); and (3) the inequity of permitting shareholders who had acquired a large part of their interest through the very acts of management complained of and who had paid a fair market value to recover back their purchase price, i. e., to prevent the new shareholders from reaping a windfall by in effect obtaining a corporation for nothing.

 Because the applicability of these principles to the Electrolux purchase of NUE and their effect on the viability of this lawsuit are at issue here, we set them forth in some detail.

 The Tainted Shares Rule

 The tainted shares rule precludes a purchaser of stock from complaining of acts of corporate mismanagement if he acquired his shares from a vendor who participated or acquiesced in the wrongdoing. The rationale for the rule is that, because shares are not negotiable paper, a seller cannot transfer any better litigious rights than he himself possesses. If the seller is estopped from maintaining a suit, so too is his buyer.

 The Contemporaneous Ownership Rule

 The contemporaneous ownership requirement for shareholder derivative actions was first announced in Hawes v. Oakland, 104 U.S. 450, 26 L. Ed. 827 (1882), and later was adopted as Equity Rule 97. At present it is codified in Fed.R.Civ.P. 23.1(1) which provides that the complaint shall allege "that the plaintiff was a shareholder at the time of the transaction of which he complains or that his share ... devolved on him by operation of law." The original purpose of the contemporaneous ownership requirement was to prevent transfers of shares to a nonresident in order to confer federal diversity jurisdiction. More recently the rule has been deemed designed to prevent champertous or speculative litigation, particularly as manifested in strike suits. See generally 7A Wright and Miller, Federal Practice and Procedure § 1826 and 3B Moores Federal Practice P 23.1.15. In Home Fire, Dean Pound gave the contemporaneous ownership rule life independent of its federal roots, positing that, "so long as (the new shareholder) is not injured in what he got when he purchased, and holds exactly what he got and in the condition in which he got it, there is no ground of complaint." 67 Neb. 644, 93 N.W. at 1029. The focus of Dean Pound's discussion of the contemporaneous ownership rule is on the lack of injury to the new shareholder, who paid fair market value for his stock. Since the breach of fiduciary duty was to his vendor, the new shareholder has no cause to complain. Underlying Dean Pound's discussion of the contemporaneous ownership rule is the assumption that the vendor has chosen not to complain of the acts of mismanagement. "The right to complain of (corporate mismanagement) is one which the stockholders injured may or may not exercise as they choose. Where such transactions are not absolutely void, they may, if they so elect, acquiesce and treat them as binding. The discretion whether to sue to set them aside or to acquiesce in and agree to them is incapable of transfer ... (The new shareholder) can take no advantage of the power which was in his vendor and the latter did not care to exercise." Id. at 1030.

 Thus it is clear that while Dean Pound was concerned about the lack of injury to the present shareholders, this concern was accompanied by the assumption that the former shareholders had not complained about the injury inflicted upon them, presumably acquiescing in it to the extent that they accepted a price that reflected the acts of mismanagement. The injustice of the enrichment lay in the new shareholders asserting a cause of action that had never been asserted by the old shareholders. *fn6"

 Unjust Enrichment

 The third equitable principle relied upon in Home Fire essentially consists of further ruminations on the subject of unjust enrichment. As discussed in Home Fire, that principle is related to the notion of speculation that underlies the contemporaneous ownership rule. "(To permit the new shareholders to recover) would be to give them moneys to which they have no just title or claim whatever, and enable them to speculate upon wrongs done to others with which they have no concern. It would enable them to recover back a large part of the purchase money they paid and agreed to pay for the stock, notwithstanding the stock was worth all that they paid for it, and notwithstanding they obtained and now retain all that they bargained for." Id. at 1031. The emphasis throughout Dean Pound's discussion in this section of Home Fire is on the inequity of permitting the present shareholders to recoup their purchase price and recover from the defendant moneys that in equity belonged to him, as major shareholder, when he wrongfully appropriated them, i. e., to permit recovery for wrongs the defendant had done not to plaintiffs but to himself.

 The factual postures of Home Fire and of Bangor Punta are remarkably similar. *fn7" Both involved attempts by new shareholders to recover damages from the former owners in the name of the corporations they now controlled, in effect to rescind contracts knowingly and voluntarily entered into while nevertheless retaining the benefits of their bargains. Justice Powell found the considerations supporting what he termed "the Home Fire principle" to be "especially pertinent" in Bangor Punta since Amoskeag, the principal beneficiary of any recovery, had acquired its shares long after the wrongs occurred and did not assert that it had sustained any injury at all on account of defendant's acts of mismanagement.

 Rejecting the notion relied on by the court of appeals that any recovery would inure to the benefit of the public through the improvement of the corporation's economic position and the quality of its services, the Bangor Punta Court determined that the assumption that any recovery would necessarily benefit the public was unwarranted, since BAR could divert recovery to its shareholders rather than reinvest it in the railroad. Throughout Bangor Punta, the Court emphasizes the fact that recovery in these circumstances would constitute a "windfall." As for the deterrent value of such suits and the effective immunity from punishment that the wrongdoers would enjoy, Justice Powell commented somewhat ascerbically that "if deterrence were the only objective, then in logic any plaintiff willing to file a complaint would suffice." 417 U.S. at 717, 94 S. Ct. at 2586. Refusing to "indiscriminately extend causes of action to every citizen," he concluded that the action could not be maintained.

 The four dissenters quarrelled with the majority's reading of the precedents relied upon-particularly Home Fire -positing that the Home Fire principles were applicable only where none of the corporation's shareholders held stock at the time of the alleged wrongdoing. *fn8" Where, as in Bangor Punta, there were minority shareholders who held stock at the time the wrongs occurred, recovery by the corporation either in its own name or through a derivative action brought by the minority shareholders would, in their view, be perfectly appropriate even if the wrongdoers continued to hold stock and would thereby benefit from the recovery. The dissenters further argued that even if Home Fire could be read to preclude recovery where there were minority shareholders, the equitable principle it announced should not be permitted to bar recovery given the public's interest in the vitality of its railroads, the interests of BAR's creditors, and the important policies expressed in the antitrust laws, policies whose furtherance is dependent in large ...

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