The opinion of the court was delivered by: LEIBELL
This is an action under Title 28 U.S.C. § 1336, to enjoin, set aside and annul an order of Division 4 of the Interstate Commerce Commission, dated October 14, 1954.
A subsequent order made in a General Session of the Commission on February 21, 1955
denied reconsideration of the October 14, 1954 order and made said order effective as of February 21, 1955. The order of October 14, 1954 approved, with some slight modifications, a Plan
filed by Western Maryland Railway Company April 1, 1953 for alteration and modification of its capital stock structure.
The primary objective of the Plan of Western Maryland was the elimination of the dividends which had accumulated on its first preferred stock in the years 1921 to 1939 and the issuance of stock in place of the dividend arrearages.
The plaintiffs, owning a total of 2760 shares of the first preferred stock of Western Maryland, intervened before the Examiner in opposition to the Plan
and supported before Division 4 the Examiner's adverse report.
The Baltimore and Ohio Railroad, as the beneficial owner of about 94% of the first preferred stock, intervened in support of the Plan. In addition to its holdings of first preferred stock, B & O also owned about 13% of Western Maryland's second preferred stock and almost 30% of its common stock. Its holdings of all classes of Western Maryland's stock totaled 334,177 shares, or about 43%.
Because the B & O's holdings of stock in a competing railroad, the Western Maryland, was so large as to give it control of Western Maryland, the I.C.C. had issued a restraining order in January 1930. (I.C.C. v. Baltimore & Ohio Railroad Co., 160 I.C.C. 785.) In order to meet the provision of that order that B & O divest itself of voting control of Western Maryland the B & O deposited its Western Maryland stock with the Chase National Bank, as trustee, under a trust agreement, dated January 13, 1932 (supplemented December 1, 1942) which gave Chase, as trustee, a proxy to vote Baltimore & Ohio's stock in Western Maryland.6A The extent of that proxy and the scope of the trust agreement -- whether they were limited to matters connected with management and control of Western Maryland and whether Baltimore & Ohio, as beneficial owner, retained the right to vote the stock on any plan for the reorganization of the capital structure of Western Maryland -- were among the points argued before the Commission and this Court. Plaintiffs contend that B & O did not have the right to vote its first preferred stock in favor of the Plan and that therefore the Plan lacked the necessary 75% of assents from the first preferred stockholders. 20b(2) of T. 49 U.S.C.A. The Commission has ruled that the right to assent6B the stock rested with B & O as the beneficial owner of the shares. Of course, Chase did not vote the stock.
The April 1, 1953 plan of Western Maryland was assented to without objection by the second preferred stockholders and by the owners of the common stock. The Baltimore & Ohio voted all its stockholdings in favor of the Plan. What the B & O would receive under the Plan would increase the percentage of B & O's total stock ownership in Western Maryland from 43.3% to 56.8%. There were advantages that Baltimore & Ohio could derive from the Plan that were not available to the plaintiffs, whose ownership is limited to first preferred stock, and there appear to be certain disadvantages to plaintiffs in the Plan as approved. But it will not be necessary to discuss the merits of the Plan, in view of the jurisdictional grounds on which this Court will rest its decision.
The opinion filed by Division 4 states: -- 'The primary objective of the applicant's proposed alterations and modifications is the elimination of the dividend arrearages on its first preferred stock thereby making a declaration of immediate dividends on its second preferred and common stocks possible; the elimination of the provisions of its first-preferred stock for unlimited cumulations of unpaid dividends; a reduction in the rate of dividends per share of first preferred stock; and the opening of a way for future equity financing'.
The plaintiff's brief in this action states that: --
'The question raised by this case is whether the Railway, which is in good financial condition and has even better prospects for the future, nevertheless has a right to resort to Section 20b to impose upon objecting first preferred stockholders a plan to modify its capital stock structure to eliminate accumulated dividend arrears on that stock solely in order to make payment of dividends on common and second preferred stock.'
The Examiner, who took testimony and reported on the Plan, held in effect that the Commission did not have jurisdiction to consider the Plan under § 20b of the Interstate Commerce Act, because the defendant railroad had not shown that the proposed alteration and modification was within the purposes of § 20b or met the requirements of said section. The Examiner's report (January 21, 1954) held that the railroad was in good financial condition; that it was able to meet its current obligations and all debt and dividend charges; that it had been able to pay the dividends on the first preferred stock as they accrued since 1939 and had even reduced the old accruals by a total of $ 14 a share though payments on account made in 1951 and 1952, so that the old accruals amounted to $ 126 per share, covering about eighteen years at the rate of $ 7 a share, when the Plan was filed April 1, 1953.
The Examiner's report came on before Division 4 of the I.C.C. and that Division reversed the Examiner on October 14, 1954 by a vote of 2 to 1, and approved the Plan filed by Western Maryland, with minor modifications. Commissioner Mahaffie dissented. (290 I.C.C. 445) On reconsideration before the full Commission, the report of Division 4 was in effect upheld on February 21, 1955.
In the present action the plaintiffs contend (1) that Western Maryland did not establish the existence of the conditions prerequisite to the exercise by the Commission of its powers under § 20(b) to reorganize the Railroad's capital equity structure; (2) that Baltimore & Ohio did not have the right to vote its stock holdings in favor of the Plan; and (3) that the Plan is inequitable and unjust and should not be imposed on plaintiffs as the holders of 2760 shares of Western Maryland first preferred stock without their consent.
The I.C.C. and the Baltimore & Ohio have intervened as defendants in this action. 28 U.S.C. § 2323. The United States of America is party defendant as required by 28 U.S.C. §§ 2321 and 2322.
The answer filed by the United States and the brief submitted by the Attorney General have confessed error in this case. The Attorney General contends that the proposed stock modification plan does not come within the scope of § 20b of the Interstate Commerce Act, as set forth in the Preamble to the 1948 statute of which it is a part, and that the action of the Commission was not exercised under circumstances described in and for the purposes set forth in the said Preamble of the statute, § 1 of 62 Stat. 163. The Attorney General also contends that the statutory requirement that at least 75% of the outstanding stock of each class be voted in favor of the stock modification plan was not met in this case because the Baltimore & Ohio stockholdings, which had been trusteed to the Chase National Bank, should not have been considered as having voted for the Plan. The Attorney General does not discuss the merits of the Plan.
The brief of the Commission argues that plaintiffs misconceive the purpose of Section 20b; that the proposed Plan is in the public interest, is in the interest of Western Maryland Railway, and to the best interest of each class of stockholders of Western Maryland; that the Baltimore & Ohio had the right to vote its trusteed stock in favor of the Plan; and that the Commission's action did not deprive plaintiffs of any rights as owners of the present first preferred stock without 'due process'.
The brief of the Baltimore & Ohio deals with the right of that railroad to accept or reject ...