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RIESER v. BALTIMORE & O. R. CO.

June 30, 1954

RIESER et al.
v.
BALTIMORE & O. R. CO.



The opinion of the court was delivered by: MURPHY

This is a motion made by defendant, The Baltimore and Ohio Railroad Company, for summary judgment pursuant to Rule 56(b), Federal Rules of Civil Procedure, 28 U.S.C.A., dismissing the consolidated amended complaint. The motion is made upon the ground that the complaint, and all the claims alleged in it, are barred either by the New York statute of limitations of three years *fn1" or six years. *fn2" In the alternative, defendant moves for dismissal of all claims accruing prior to May 7, 1942, as barred in any event by the New York ten-year period of limitations. *fn3"

The complaint undertakes to state a claim in the nature of a representative class suit by former bondholders of the Alton Railroad Company (hereinafter called the Alton). The gist of the complaint is that, during the period January 7, 1931 through November 25, 1942, when defendant owned and controlled all the voting stock in the Alton, it so mismanaged the affairs of that railroad, while favoring its own interests, as to cause the Alton to become insolvent. Such mismanagement, it is alleged, made necessary a reorganization of the Alton, under Section 77 of the Bankruptcy Act, 11 U.S.C.A. § 205, in which the Alton bondholders realized only $ 375 for each $ 1,000 principal amount of bonds. In the reorganization proceeding the claim on the Alton bonds was allowed in the full amount, so that plaintiffs assert that they are judgment creditors whose proven claim has been only partially satisfied. Plaintiffs apparently sue in the capacity of creditors in aid of execution on their debtor's claim against defendant: viz., the Alton's claim for damages due to the alleged mismanagement during the period of defendant's control.

 Jurisdiction is alleged on the ground of diversity of citizenship, defendant asserted to be a Maryland corporation, and plaintiffs to be citizens of states other than Maryland.

 The complaint sets forth two separately stated claims with material allegations all stated in the first count which seeks damages due to alleged mismanagement of the Alton. The second count repeats the allegations of the first one and alleges that those facts also constituted a fraud upon the Alton and its creditors; that the action is one for fraud within the contemplation of the applicable internal time limitation of New York; and that plaintiffs did not discover the facts constituting such fraud until long after the commencement of certain reorganization proceeding. Defendant in its answer denies any wrongdoing or mismanagement with respect to the Alton and concedes that substantial issues of fact exist on this issue. Defendant's present motion is based entirely on the ground of time limitations and, for the purposes of deciding this motion, the factual allegations of the complaint must be taken as true.

 Such allegations are of two sorts: (1) those relating to plaintiffs' rights as bondholders of the Alton; and (2) those relating to the alleged claim against the defendant.

 (1) With respect to their rights as bondholders plaintiffs allege that they own bonds of the Alton which were secured by a mortgage constituting a first lien upon all of its assets. In April, 1941, the Alton defaulted in payment of interest on these bonds, and their entire principal amount then became due. On November 25, 1942, the Alton filed in the United States District Court for the Northern District of Illinois, and that court approved, a petition for reorganization under § 77 of the Bankruptcy Act, with order enjoining commencement of suits against the Alton or seizure of or interference with its property. A claim, filed in the reorganization proceeding on behalf of all bondholders by a trustee representing them, was allowed for the full amount of the bonds. Application, made on behalf of creditors in the reorganization proceeding to require the Alton's trustee to prosecute a claim against defendant for alleged mismanagement, or to permit the bondholders to do so was denied, and the injunction already mentioned remained effective until termination of the reorganization proceeding. In May of 1947, a consummation order and final decree was entered in the reorganization proceeding canceling the mortgage securing the Alton bonds and voiding the bond certificates. The Alton bondholders received securities of the purchasing corporation claimed to have had a market value of about $ 375 for each $ 1,000 principal amount. In addition, they were permitted to retain the bond certificates perforated with a legend reciting that the subject bond had been canceled for all purposes '* * * except for purpose of evidencing right of the bearer or registered owner to a claim, if any, against The Baltimore and Ohio Railroad Company.'

 By reason of the foregoing, plaintiffs allege that they, and all other bondholders similarly situated, stand in the position of judgment creditors who have issued executions which have been satisfied to the extent of 37 cents on the dollar, and whose debtor, the Alton, has no other assets.

 (2) With respect to their claim against defendant, plaintiffs allege that on January 7, 1931, defendant acquired all the voting stock of the Alton, and thereafter elected all its officers and directors. These are claimed to have acted as defendant's servants and in accordance with its directions and policies. Defendant's control of the Alton continued until November 25, 1942, when the Alton went into reorganization. During the period of its control, defendant is charged with having diverted revenue-bearing traffic from the Alton's lines to its own, and revenue-bearing interchange traffic from railroads with which the Alton had profitable business relations to railroads with which defendant had profitable business relations, thereby enriching defendant and damaging the Alton and its bondholders in the amount of $ 17,500,000.

 Plaintiffs claim that defendant during this period failed to keep the Alton's rolling stock in repair, stored it on open side tracks where it became valueless. As a result the rolling stock is asserted to have been damaged to the extent of $ 19,500,000, and the Alton said to have lost an additional $ 5,000,000 which it would have earned as profits from its use.

 Defendant is further charged during this time to have used the Alton's tracks, equipment and facilities without paying for such use, and having caused the Alton to repair defendant's rolling stock free of charge. Resulting damage to the Alton is claimed to have been $ 1,000,000.

 Defendant is also claimed at this time to have diverted purchases of company equipment and supplies from potential shippers over the Alton's lines to potential shippers over the defendant's lines, thereby enriching defendant and damaging the Alton and its bondholders in the amount of about $ 3,000,000.

 Plaintiffs say also that defendant within the period of their control caused the Alton to negotiate new contracts with three designated companies upon terms less favorable to the Alton and more favorable to defendant, thereby enriching defendant and damaging the Alton and its bondholders in the amount of about $ 1,000,000.

 It is claimed that defendant filed income tax returns in respect of the Alton's operations and its own for the years 1940 and 1941 upon a consolidated basis. During those years the Alton suffered a net operating loss of about $ 2,000,000 which defendant charged against its own profits for those years. Such losses could have been set off against profits said to have been made by the Alton during 1942 and 1943, with a consequent income tax saving to the Alton. That saving was lost to the Alton. In addition defendant is said to have discriminated against the Alton in dividing revenues derived from traffic interchanged between them, retaining an excessive proportion during its control.

 Finally, defendant is charged with having deprived the Alton, by all of the foregoing acts, of its opportunity to improve its competitive position, thereby preventing it from capitalizing on its opportunities and from earning substantial net returns; and with having practiced, by all the foregoing acts, a fraud upon the Alton and upon the Alton bondholders, including plaintiffs.

 The complaint seeks appointment of a receiver, judgment against defendant in the amount of at least $ 28,343,753, payment of plaintiffs' expenses, and distribution of the balance among Alton's bondholders.

 In respect of time limitations, the answer sets up the three, six and ten-year periods under New York statutes as well as the five-year ...


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