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Securities and Exchange Commission v. Long Island Lighting Co.

February 23, 1945


Author: Simons

Before HUTCHESON, SIMONS, and CLARK, Circuit Judges .

SIMONS, Circuit Judge .

The appellant sought temporary and permanent injunctions restraining the appellee from consummating a plan for its recapitalization until determination of proceedings pending before the Commission, involving the status of the appellee under the Public Utility Holding Act of 1935, 49 Stat. 803, 15 U.S.C.A. § 79 et seq.The District Court denied the preliminary injunction on the ground that it lacked power to grant the relief sought. A temporary restraining order pending hearing, having been dissolved, a judge of this court granted a temporary restraining order pending hearing on the appeal.

The Commission sought protection by the District Court in the carrying out of duties asserted to devolve upon it under the Public Utility Holding Act, by enjoining the appellee from taking further steps to effectuate a plan of recapitalization, until in an administrative proceeding before it, it was determined whether rights sought to be affected by the plan should be subjected to the reorganization standards of § 11 of the Act. The specific action sought to be enjoined is the over-printing of existing certificates for preferred stock and the issuance of new common stock, and the nature of the relief sought is the preservation of the status quo.

The appellee is a holding company as defined in § 2 (a) (7) of the Act, but exempt from the registration and regulatory provisions of the Act by an order of the Commission dated March 27, 1936. That order is, by its express terms, subject to revocation after hearing and a finding by the Commission that the circumstances which gave rise to its issuance no longer exist. The exemption is authorized by § 3 (a) of the Act and may be revoked in pursuance of § 3 (c).

On November 4, 1944, a petition was filed with the Commission by the preferred stockholders of the appellee, which led to the institution of proceedings by the Commission on November 10, to determine whether the exemption should be in whole or in part revoked. The stockholders represented that the appellee was endeavoring to effectuate a recapitalization plan unfair to them and had engaged in activities which burdened interstate commerce and the means and instrumentalities of interstate commerce. On November 21, 1944, the Commission instituted a separate proceeding under § 2 (a) (7) (B) of the Act, for the purpose of determining whether certain persons or corporations owning or controlling substantial amounts of oustanding common stock of the appellee, exercised such a controlling influence over its management or policies as to make it necessary, in the public interest and for the protection of investors or consumers, that the appellee be subjected to the obligations, duties, and liabilities imposed by the Act. On November 22 the two proceedings were consolidated and a hearing ordered for December 19, which, for reasons presently appearing, was not held. It is asserted that if it should be determined that the exemption granted to the appellee be revoked or modified, the consequence would be that the promulgation and consummation of the plan of recapitalization would then be subject to the jurisdiction, scrutiny, and approval of the Commission under the applicable standards of the Act.

On December 18, prior to the date set for hearing, it came to the Commission's attention, through the press, that the appellee was undertaking to consummate a plan under New York law without awaiting a determination whether it would be permitted to continue to enjoy its exemption, or whether it would be required to register as a holding company, or be subjected to the supervision of the Commission, and the present proceeding was at once begun to restrain such consummation.

Prior to its inauguration, the stockholders of the appellee had voted in favor of a plan of recapitalization proposed by its management, and on February 29, 1944, pursuant to requirements of the Stock Corporation Law, Consol. Laws, c. 59, and the Public Service Laws, Consol. Laws, c. 48, of the State of New York, it was submitted to the Public Service Commission of New York. After extensive public hearings from March through September, the recapitalization plan was approved by the State Commission on December 14, 1944. By law, that Commission is required to withhold approval unless it finds that the plan is in the interest of investors. Rochester Gas & Electric Corp. v. Maltbie, 284 N.Y. 626, 29 N.E. 2d 936. The appellee promptly filed its certificate of recapitalization together with the order of approval, in the office of the Secretary of the State of New York, in pursuance of the Stock Corporation Law. The plan became effective upon such filing (General Corporation Law, Consol. Laws, c. 23, § 8), the rights of the stockholders under the corporate structure thereupon came to an end, trading in the old stock ceased on the New York Curb Exchange on December 16, and trading in the new stock commenced on December 18. On December 19 the appellee was ordered to show cause why a preliminary and permanent injunction should not be entered restraining it from carrying out the recapitalization plan, and concurrently the temporary restraining order issued. Because of it and the order out of this court compelling further restraint pending hearing on appeal, the appellee says it is now a corporation without stockholders and unable to do any of the things which, by state law, require the approval of stockholders.

The court, without determining whether a case had been made out for equitable relief by a showing of irreparable harm if the injunction should be withheld, and without considering whether state law provided a remedy to the preferred stockholders which they failed to invoke, denied the relief sought solely upon the ground that the Commission was without power, conferred upon it by the Act, to seek, and the court without power, because of limitations upon its jurisdiction, to grant it.

The Commission bases its appeal mainly, if not solely, upon the asserted legal principle that a federal court has power, upon the application of an administrative agency before which an administrative proceeding is pending, to preserve the status quo until such proceeding is concluded. The necessity for the preservation of such status is sought to be demonstrated by argument that if further steps are taken by the appellee to consummate its recapitalization plan, the rights of preferred stockholders will be broken up into new preferred and common shares in distributable form, and it might become impossible to adjust their rights on a basis which would adequately reflect existing equities. Trading in the new common stock would cause intervening equities in the purchasers to arise, and there would be serious doubt that the new stock could once more be separated so as to permit fair treatment to all security holders. In any event, trading in Long Island securities would be upon a misleading basis and there would be substantial difficulties in achieving the fair and equitable result contemplated by the Act.

The Commission asserts, however, that it does not rely for its authority to seek relief, upon any specific grant of the statute. It disclaims reliance upon § 18 (f) as a basis for the jurisdiction of the court, for that section grants it authority to bring an action in a proper district court of the United States only for acts or practices which constitute or will constitute a violation of the provisions of the Act, or of any rule, regulation, or order thereunder, and it concedes there have been no such violations. It plants itself squarely upon the general equity powers of District Court under § 24 of the Judicial Code, 28 U.S.C.A., § 41, which extend, inter alia, to all suits of a civil nature at common law or in equity, brought by the United States or by any officer thereof authorized by law to sue. In support of its position it argues that the various branches of the federal government have certain implied and inherent powers which will be exercised, where appropriate, to protect the proper functioning of another branch of the government, that preservation of the status quo pending determination, is a traditional aspect of equity jurisdiction, and that the circumstances of the present case amply warrant its exercise to prevent circumvention of the Commission's jurisdiction under the Holding Company Act. It deems it an unnecessary refinement to determine whether particular cases relied on rest upon the fact that the action is brought by the United States or by an officer thereof authorized to sue, or upon the existence of a federal question, or upon the ground that the case falls within § 24 (8) of the Judicial Code applicable to "all suits and proceedings arising under any law regulating commerce." In seeking injunctive relief the Commission asserts it is asking the court to exercise the same kind of jurisdiction which a federal court would employ to protect its own jurisdiction, and to preserve a status quo pending proceedings before another tribunal.

The cases relied upon, however, which sustain the right of a federal equity court to preserve a status quo pending proceedings before it or another tribunal, are mainly those in which restraint is sought to protect a jurisdiction otherwise acquired. Such are the bankruptcy cases, typified by Continental Illinois Nat. Bank & Trust Co. v. Chicago R.I. Co., 294 U.S. 648, 55 S. Ct. 595, 79 L. Ed. 1110, and equity receivership cases, such as Graselli Chemical Co. v. Aetna Explosives Co., 2 Cir., 252 F. 456. No case has been cited to us, and none has been found, where a federal court has undertaken to protect by injunction a jurisdiction not presently existing, merely because upon speculative and problematical circumstances, such jurisdiction may at some uncertain time in the future, arise.

The Commission leans heavily upon Securities & Exchange Commission v. U.S. Realty and Improvement Co., 310 U.S. 434, 60 S. Ct. 1044, 84 L. Ed. 1293, as a compelling precedent. There the respondent brought reorganization proceedings under Chapter XI of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq., Chapter X, 11 U.S.C.A. § 501 et seq., also provides for reorganization, but permits participation by the Securities & Exchange Commission in proceedings in the District Court. The Commission was allowed to intervene in the Chapter XI proceeding on the ground that it is charged with the performance of important public duties under Chapter X, which will be thwarted if a debtor may secure adjustment of his debts under Chapter XI. The Court found that the Commission's duty and its interest extends not only to the performance of its prescribed functions where a petition is filed under Chapter X, but to the prevention, so far as the rules of procedure permit, of interference with their performance through improper resort to Chapter XI proceedings in violation of the public policy of the Act which it is the duty of the court to safeguard.Such permissive rule of procedure was found to be Rule 24 of the Rules of Civil Procedure, 28 U.S.C.A. following Section 723c, made applicable to bankruptcy proceedings by para. 37 of the General Orders in Bankruptcy, 11 U.S.C.A. following Section 53. By it a party may be permitted to intervene in an action when its claim or defense and the main action have a question of law or fact in common.This provision dispenses with any requirement that the intervenor shall have a direct, personal, or pecuniary interest in the subject of the litigation.

The right to intervene, however, does not imply a right to bring an original suit, Sprunt & Sons v. U.S., 281 U.S. 249, 255, 50 S. Ct. 315, 74 L. Ed. 832; Pittsburgh & W. Va. Ry. Co. v. U.S., 281 U.S. 479, 50 S. Ct. 378, 74 L. Ed. 980. In the U.S. Realty Company case jurisdiction of the court was originally invoked in the exercise by it of the bankruptcy power conferred upon a court of bankruptcy by §§ 74, 75, and 77 of the Act of March 3, 1933, 11 U.S.C.A.§§ 202, 203, 205, to which Chapters X and XI have succeeded. Under those sections, if the petition be approved, the court, during the pendency of the proceedings, is given exclusive jurisdiction of the debtor and its property wherever located, and it is not necessary to its validity that the proceedings should result in an adjudication of bankruptcy. Continental Illinois Nat. Bank & Trust Co. v. Chicago R.I. Co., supra . It is, of course, established doctrine that a federal court, having first acquired jurisdiction of the subject matter, may enjoin parties from proceeding in other courts where the effect of the action would be to defeat or ...

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