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Lorenz v. CSX Corp.

filed: August 6, 1993.

WILLIAM F. LORENZ AND KAREN M. LORENZ, HIS WIFE; VICTOR A. CZERNY; JOHN SCHMIDT AND JANICE J. SCHMIDT, HIS WIFE, MARJORIE SLAPIN; THADDEUS E. DRAKE AND CELIA DRAKE, HIS WIFE; AND EDITH E. BERENKEY; INDIVIDUALLY AND ON BEHALF OF A CLASS OF FORMER DEBENTUREHOLDERS SIMILARLY SITUATED, APPELLANTS IN 92-3667
v.
CSX CORPORATION (FORMERLY CHESSIE SYSTEMS, INC.); THE CHESAPEAKE AND OHIO RAILROAD; THE BALTIMORE AND OHIO RAILROAD COMPANY AND THE CHASE MANHATTAN BANK, N.A. ETHEL B. SAVIN, INDIVIDUALLY AND ON BEHALF OF A CLASS OF FORMER DEBENTUREHOLDERS SIMILARLY SITUATED, APPELLANT IN 92-3694 V. CSX CORPORATION (FORMERLY CHESSIE SYSTEMS, INC.), THE CHESAPEAKE AND OHIO RAILROAD; THE BALTIMORE AND OHIO RAILROAD COMPANY AND THE CHASE MANHATTAN BANK, N.A.



On Appeal from the United States District Court for the Western District of Pennsylvania. (Civ. Nos. 87-00866 and 87-00971).

Before: Scirica, Cowen and Weis, Circuit Judges.

Author: Cowen

Opinion OF THE COURT

COWEN, Circuit Judge.

Prior to December 13, 1977, the plaintiffs in these two related actions purchased convertible debentures issued by the defendant Baltimore and Ohio Railroad Company ("B & O"). At that time, 99.63% of the B & O's shares were owned by defendant Chesapeake and Ohio Railway Company, which in turn was a wholly-owned subsidiary of Chessie Systems, Inc., the corporate predecessor to defendant CSX Corporation ("CSX"). The indenture trustee was defendant Chase Manhattan Bank. Plaintiffs allege that the defendants defrauded them from 1977 to 1986 by failing to disclose material information which would have enabled them to convert their debentures into B & O common stock and receive a lucrative dividend. Plaintiffs appeal the dismissal of their claims for breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, civil RICO, and violations of section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 ("'34 Act"). We will affirm.

I. FACTS AND PROCEDURAL HISTORY

The defendants have been involved in litigation against their debentureholders for the past fifteen years in a series of closely related actions. A detailed description of the facts and procedural history can be found in earlier district and circuit court opinions in the Pittsburgh Terminal Corp./Guttmann litigation. See, e.g., Pittsburgh Terminal Corp. v. Baltimore & Ohio R.R. Co., 509 F. Supp. 1002 (W.D. Pa. 1981), aff'd in part, rev'd in part, 680 F.2d 933 (3d Cir.), cert. denied, 459 U.S. 1056, 103 S. Ct. 475, 74 L. Ed. 2d 621, 103 S. Ct. 476 (1982); Pittsburgh Terminal Corp. v. Baltimore & Ohio R.R. Co., 824 F.2d 249 (3d Cir. 1987) (PTC IV). We will recite only those facts which are relevant to these appeals.

The plaintiffs were holders of debentures*fn1 in the B & O Railroad as of December 13, 1977. The debentures were convertible into B & O common stock at any time before maturing in the year 2010. To avoid Interstate Commerce Commission regulations hindering the development of non-rail assets owned by railroads, B & O devised a plan to segregate its rail and non-rail assets. Non-rail assets were transferred to a wholly owned subsidiary, Mid Allegheny Corporation ("MAC"), and MAC common stock was distributed as a dividend on a share-for-share basis to B & O shareholders. B & O sought to avoid the registration of its shares with the Securities and Exchange Commission ("SEC"), a time-consuming process which would have required appraisals of the transferred assets. Because B & O had few shareholders, the company thought that the SEC would issue a "no-action" letter excusing the registration of MAC stock. This plan would have been foiled if large numbers of B & O debentureholders exercised their conversion option in order to receive the MAC dividend.

To avoid this occurrence, B & O transferred its non-rail assets to MAC on December 13, 1977 and declared the dividend in MAC stock on the same date, without prior notice. As a result, the debentureholders could not convert their shares in time to receive the MAC dividend. Some of the debentureholders brought actions, later consolidated, under section 10(b) of the '34 Act against B & O, C & O, and Chessie Systems.*fn2 This suit is known as the PTC/Guttmann litigation. In 1978 and 1979, B & O and Chase Manhattan Bank entered into a series of letter agreements, whereby B & O agreed that if the PTC/Guttmann plaintiffs prevailed or obtained a settlement, debentureholders would be allowed to participate equally in that judgment or settlement regardless of whether they had converted their debentures.

The PTC/Guttmann plaintiffs moved for class certification. The district court denied the motion, at least in part because Chessie Systems' general counsel, Robert F. Hochwarth, filed an affidavit dated May 2, 1980 memorializing the earlier letter agreements with Chase Manhattan Bank. The affidavit, known as the "Hochwarth Stipulation," states that if plaintiffs prevail or a settlement is reached, "all holders of debentures as of December 13, 1977, whether or not they were subsequently converted, will be permitted to participate in the Court judgment or settlement on the same terms as the plaintiffs." App. at 279.

After a bench trial, the district court entered judgment in favor of the defendants. Pittsburgh Terminal Corp., 509 F. Supp. at 1017-18. We reversed. A divided panel agreed only that the failure to provide the debentureholders with advance notice of the dividend violated Rule 10b-17 of the '34 Act. Pittsburgh Terminal Corp. v. Baltimore & Ohio R.R. Co., 680 F.2d 933, 941-42 (3d Cir.) (PTC II), cert. denied, 459 U.S. 1056, 103 S. Ct. 475, 74 L. Ed. 2d 621, 103 S. Ct. 476 (1982); id. at 945-46 (Garth, J., Concurring in part and Concurring in the judgment). We remanded to the district court to fashion an appropriate remedy. On May 8, 1984, the district court granted plaintiffs the opportunity to convert their debentures into shares and receive the MAC dividend plus dividend income accruing since December 13, 1977. Pittsburgh Terminal Corp. v. Baltimore & Ohio R.R. Co., 586 F. Supp. 1297, 1304-05 (W.D. Pa. 1984), aff'd, 760 F.2d 257 (3d Cir.), cert. denied, 474 U.S. 919, 106 S. Ct. 247, 88 L. Ed. 2d 256 (1985). The district court, construing the Hochwarth Stipulation, described the scope of the remedy:

The remedy ordered here is limited to those persons who owned the subject debentures at the time of the violation, December 13, 1977, and who still own those debentures. Those persons who owned debentures on December 13, 1977 and subsequently converted to B & O common stock may also elect to participate in this remedy, obtaining MAC and its dividends, offset by interest accruing on the debentures after December 13, 1977. . . . Those persons who owned B & O debentures on December 13, 1977 and subsequently sold their debentures are not within the scope of . . . this action . . . .

Id. at 1305. The defendants were ordered to give notice to the debentureholders of the district court's order. In December of 1986, after the denial of certiorari, defendants published notice of the remedy in the New York Times and Wall Street Journal.

In a subsequent appeal, we held that under the terms of the Hochwarth Stipulation, the district court's remedy also included persons who held B & O debentures on December 13, 1977, converted them to B & O common stock, and subsequently sold the stock. PTC IV, 824 F.2d at 256.

The plaintiffs in the present actions are those persons who are outside the scope of the PTC/Guttmann remedy. They held debentures on December 13, 1977 but subsequently sold them without having ever converted them into stock. On July 25, 1986, plaintiff Ethel B. Savin filed her complaint in the United States District Court for the Southern District of New York on behalf of a class of similarly situated former B & O debentureholders. The case was transferred to the Western District of Pennsylvania because of the related litigation there. On April 23, 1987, the Lorenz plaintiffs filed their complaint in the United States District Court for the Western District of Pennsylvania on behalf of a class of similarly situated former B & O debentureholders. The complaint alleged violations of section 10(b) and Rule 10b-5 of the '34 Act, civil RICO, and breach of fiduciary duty. The RICO claim was directed only against defendants CSX and C & O. In May of 1987, plaintiff Savin amended her complaint to contain substantially the same allegations.

In July of 1987, the defendants moved to dismiss under Fed. R. Civ. P. 12(b)(6). In August of 1987, with the consent of both parties, plaintiff Savin amended her complaint to alter a paragraph which described when she received notice of the MAC dividend. In September of 1987, the plaintiffs filed their RICO case statement. On July 14, 1989, Savin filed her motion to amend her amended complaint in order to add factual allegations to her RICO claim.

On August 27, 1990, the district court denied the motion to amend, dismissed all claims against defendant Chase Manhattan Bank, and dismissed all claims against defendants CSX, C & O, and B & O except for the section 10(b) claims. Lorenz v. CSX Corp., 736 F. Supp. 650 (W.D. Pa. 1990). Motions for reconsideration were filed by the plaintiffs and the defendant railroads. On August 8, 1991, the district court reinstated plaintiff Lorenz's RICO claim and dismissed plaintiff Savin's section 10(b) claim for exceeding the applicable statute of limitations. Savin appealed. While her appeal was pending, we remanded for reconsideration in light of the recent enactment of 15 U.S.C. § 78aa-1(a). On August 18, 1992, as amended October 7, 1992, the district court dismissed Lorenz's section 10(b) and RICO claims. On November 3, 1992, the district court dismissed Savin for the reasons stated in its Lorenz opinion of August 18. Plaintiffs filed these appeals.

We have jurisdiction under 28 U.S.C. § 1291. We exercise plenary review over the grant of a motion to dismiss. General Elec. Co. by Levit v. Cathcart, 980 F.2d 927, 931 (3d Cir. 1992). We accept all factual allegations in the complaints and all reasonable inferences to be drawn therefrom in the light most favorable to the plaintiffs. We may affirm only if it is certain that no relief could be granted under any set of facts which could be proven. Id.

II. RICO CLAIMS AGAINST DEFENDANTS CSX AND C & O

The plaintiffs brought civil RICO claims under 18 U.S.C. § 1962(c) against defendants CSX and C & O, alleging that they conducted their subsidiary B & O's enterprise through a pattern of racketeering activity. The district court held that the plaintiffs' amended complaints failed to state a RICO claim because the defendants were not sufficiently distinct from the enterprise.

Section 1962(c) makes it unlawful "for any person employed by or associated with any enterprise . . . to conduct or participate, directly or indirectly, in the conduct of such enterprise's affairs through a pattern of racketeering activity." 18 U.S.C. § 1962(c) (1988). In B.F. Hirsch v. Enright Refining Co., 751 F.2d 628, 633 (3d Cir. 1984), we held that the defendant "person" charged with violating that statute cannot be the same entity as the alleged "enterprise." We observed that the statute, by its plain language, requires that the defendant be employed by or associated with an enterprise. The defendant Enright Refining Co. therefore could not simultaneously be both the defendant and the enterprise, because it would be illogical to say that a corporation was employed by or associated with itself. Id. at 633. We also observed that requiring the defendant and enterprise to be separate entities was consistent with the congressional purpose to punish criminals who infiltrate legitimate corporations, without punishing those corporations which may be the innocent victims of racketeering activity. Id. at 633-34.

We expanded the Enright rule in Brittingham v. Mobil Corp., 943 F.2d 297 (3d Cir. 1991). Plaintiffs accused Mobil Oil Corp. and its wholly owned subsidiary Mobil Chemical Co. of participating in an association-in-fact enterprise consisting of both corporations, their advertising agents, and other agencies which helped to fraudulently market trash bags in violation of section 1962(c). We affirmed a grant of summary judgment in favor of both corporations because the alleged enterprise was not sufficiently distinct from the defendants. Id. at 301, 303. We reasoned that Enright 's requirement of distinctiveness would be eviscerated if a plaintiff could successfully plead that an enterprise consists of a defendant corporation associated with the employees, agents, and affiliated entities acting on its behalf. Id. When a RICO defendant is a ...


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