The opinion of the court was delivered by: DIMOCK
This action was originally brought for an injunction requiring the Interstate Commerce Commission to set aside two of its orders to the extent that they granted the application of Alleghany Corporation to be 'considered as a carrier' subject to the provisions of sections 20(1) to (10) inclusive and sections 20a(2) to (11) inclusive of the Interstate Commerce Act, 49 U.S.C. §§ 20(1)-(10) inclusive, 20a(2)-(11) inclusive.
By supplemental complaint and stipulation the scope of the action has since been extended so as to include a prayer for an injunction against the enforcement of two orders of the I.C.C. approving a proposed exchange of preferred stock of Alleghany.
The matter now before this court is an application for an interlocutory injunction vacating the said orders that Alleghany be considered as a carrier and enjoining the enforcement of the two orders dealing with the preferred stock.
On September 17, 1954, Alleghany, The New York Central Railroad Company and two subsidiaries of the New York Central, Louisville & Jeffersonville Bridge & Railroad Co. and The Cleveland, Cincinnati, Chicago and St. Louis Railway Company, known as 'the Big Four', filed with the I.C.C. an application pursuant to section 5(2) of the Interstate Commerce Act, 49 U.S.C. § 5(2). On its face, the principal object of the application was to obtain approval for a merger of the Bridge Company into the Big Four. The substantial effect of the granting of the application, however, would have been, as claimed by Alleghany, to constitute Alleghany, pursuant to the provisions of section 5(3), a noncarrier 'considered as a carrier' subject to the above-designated provisions of the Interstate Commerce Act for the purpose of the issuance of securities, etc. It is agreed on all hands that, except for the effect of such an order that Alleghany should be 'considered as a carrier', it would be an investment company subject to the provisions of the Investment Company Act, 15 U.S.C. § 80a-1 et seq., for the purposes of the issuance of securities, etc. Thus, according to Alleghany's theory, the granting of the application constitutes a determination that Alleghany in issuing securities is subject to supervision of the I.C.C. rather than the Securities and Exchange Commission. The immediate importance of this is in connection with the issuance of a new class of preferred stock pursuant to a voluntary exchange offer authorized by the Alleghany directors, made public on February 2, 1955 and approved by the I.C.C. in the orders under review but not by the S.E.C.
Alleghany filed with the I.C.C. its application for leave to issue the new class of preferred stock on February 18, 1955.
On March 2, 1955, the I.C.C., through its Division 4, approved the merger application and, on May 24, 1955, the I.C.C. through the whole Commission, affirmed this approval. These two orders of approval are the ones now being reviewed by this court and which were included in the original complaint. Since their effect was the same they will usually be referred to herein in the singular.
On May 26, 1955, two days after the order of he full Commission approving the merger, Division 4 of the I.C.C. approved the issuance of the preferred stock.
On June 6, 1955, the complaint in this action was filed and, on June 15, 1955, plaintiffs made this application seeking a preliminary injunction against enforcement of the jurisdiction assuming orders. Attack on the preferred stock order was postponed prior to the action of the full Commission on the theory that review would be premature.
On June 22, 1955, the entire Commission affirmed the preferred stock order of Division 4. These two preferred stock orders are also now being reviewed by this court but they were added by supplemental complaint. Like the jurisdiction assuming orders they will usually be referred to in the singular.
On June 23, 1955, Alleghany, immediately upon learning of the full Commission's order finally approving the issuance of the preferred stock, began distribution of the new stock pursuant to the exchange offer. That distribution was halted by a temporary restraining order issued by this court but not before more than half of the proposed issue had been exchanged. The effect of that temporary restraining order has been to prevent the transfer of the shares of new preferred stock and consequently to halt trading therein on the New York Stock Exchange. We are advised that, before trading was actually stopped, there had been sales amounting to 2,400 shares of stock.
Since the institution of the proceeding, The New York Central Railroad, Alleghany and two holders of Alleghany preferred stock, Gruss & Co., a copartnership, and Samuel A. Mehlman, have been granted leave to intervene as defendants.
As above indicated, Alleghany's theory is that, as a result of the determination of the merger application, Alleghany obtained the status of a non-carrier deemed to be a carrier for the purpose of coming under the supervision of the I.C.C. for matters relating to the issuance of securities, as distinguished from the status of an investment company coming under the supervision of the S.E.C. for such matters.
The statutory provisions involved are the following:
Interstate Commerce Act, § 5, 49 U.S.C. § 5.
'(2) Unifications, mergers, and acquisitions of control.
'(a) It shall be lawful, with the approval and authorization of the Commission, as provided in subdivision (b) --
'(i) for two or more carriers to consolidate or merge their properties or franchises, or any part thereof, into one corporation for the ownership, management, and operation of the properties theretofore in separate ownership; or for any carrier, or two or more carriers jointly, to purchase, lease, or contract to operate the properties, or any part thereof, of another; or for any carrier, or two or more carriers jointly, to acquire control of another through ownership of its stock or otherwise; or for a person which is not a carrier to acquire control of two or more carriers through ownership of their stock or otherwise; or for a person which is not a carrier and which has control of one or more carriers to acquire control of another carrier through ownership of its stock or otherwise; * * *.
'(3) Non-carrier deemed carrier upon acquiring control.
'Whenever a person which is not a carrier is authorized, by an order entered under paragraph (2), to acquire control of any carrier or of two or more carriers, such person thereafter shall, to the extent provided by the Commission in such order, be considered as a carrier subject to such of the following provisions as are applicable to any carrier involved in such acquisition of control: Sections 20(1) to (10), 304(a)(1) and (2), 320 and 913 of this title, (which relate to reports, accounts, and so forth, of carriers), and sections 20a(2) to (11), and 314 of this title, (which relate to issues of securities and assumptions of liability of carriers), including in each case the penalties applicable in the case of violations of such provisions.'
At the threshold defendants make two objections: first, that the jurisdiction assuming order is not reviewable and second, that, even if it is reviewable, plaintiff has no standing to review it.
Reviewability of the Orders.
Shannahan v. United States, 303 U.S. 596, 58 S. Ct. 732, 82 L. Ed. 1039, is said to be authority against the reviewability of the jurisdiction assuming order. The determination there held to be unreviewable was a finding that the carrier concerned was not an interurban railroad and was therefore subject to certain provisions as to labor dispute mediation.
The Supreme Court in Rochester Tel. Corp. v. U.S., 307 U.S. 125, 59 S. Ct. 754, 83 L. Ed. 1147, seemed to disagree with the Shannahan decision on the facts but Justice Frankfurter, 307 U.S. at page 131, 59 S. Ct. at page 757, explained its principle by quoting the statement of Justice Brandeis in United States v. Los Angeles & S.L.R.Co., 273 U.S. 299, 310, 47 S. Ct. 413, 71 L. Ed. 651, to the effect that there can be no review of an order 'which does not change the carrier's existing or future status'.
Here the status of Alleghany, absent an order of the I.C.C. under sections 5(2) and 5(3) that it should be considered as a carrier subject to the Interstate Commerce Act, was that of an investment company subject to the provisions of the Investment Company Act. The orders sought to be reviewed changed its 'existing or future status'. Hence the quoted principle of the Shannahan case does not prevent their review.
Justice Frankfurter in the Rochester case, besides quoting from Justice Brandeis, stated the rule for himself as follows, 307 U.S. at page 132, 59 S. Ct. at page 758, 'Where a complainant seeks the Commission's authority under the terms of a statute and the Commission's action is followed by legal consequences * * * or where the Commission's order denies an exemption from the terms of the statute * * * the road to the courts' jurisdiction seems to be clear.'
Here the I.C.C. granted an exemption from the terms of the Investment Company Act. That act, by section 3(c)(9), 15 U.S.C. § 80a-3(c)(9), excepts from the 'investment company' class, 'any company subject to regulation under the Interstate Commerce Act'. Section 5(3) of the Interstate Commerce Act, under which the I.C.C. acted in making the order here, provides that the non-carrier shall, 'to the extent provided by the Commission in such order', be considered as a carrier subject to the enumerated provisions of the Interstate Commerce Act. By making Alleghany subject to the Interstate Commerce Act, the I.C.C. exempted it from the Investment Company Act and thereby brought the order within the test for reviewability laid down in the Rochester case.
There is no room here for any idea that might be generated by the Shannahan case that an attempt to review the jurisdiction assuming orders is premature. The jurisdiction has been exercised by the adoption of the order approving the issue of the preferred stock.
Defendants intimate that the order approving the issue of preferred stock is permissive only and that it is therefore unreviewable citing a statement in Miller v. United States, D.C.S.D.N.Y., 277 F. 95, that an order of the I.C.C. approving the issuance of securities does not direct the issuance but only puts the carrier in a position where, if the securities are issued they will be valid.
If this statement were intended to lay down a rule that permissive orders of the I.C.C. may not be reviewed, the law has since been settled to the contrary. In New York Central Securities Corp. v. United States, D.C.S.D.N.Y., 54 F.2d 122, affirmed 287 U.S. 12, 53 S. Ct. 45, 77 L. Ed. 138, a stockholder was allowed to review an order of the I.C.C. which authorized, but did not direct, action by the corporation. Accord: Chicago Junction Case, 264 U.S. 258, 263, 44 S. Ct. 317, 68 L. Ed. 667.
Plaintiffs' Standing to Review the Orders and 'Irreparable Damage'.
The Investment Company Act, Aug. 22, 1940, c. 686, Title I, §§ 1-53, 54 Stat. 789, tit. 15 U.S.C. §§ 80a-1 to 80a-52, begins with legislative findings and a declaration of policy. Section 1(b) declares that the 'interest of investors' is 'adversely affected * * * when investment companies are * * * operated (or) managed * * * in the interest of directors, officers, investment advisors, depositors, or other affiliated persons thereof'. That section ends with a declaration 'that the policy and purposes of this subchapter * * * are to mitigate and, so far as is feasible, to eliminate the conditions enumerated in this section which adversely affect the national public interest and the interest of investors.'
One of the purposes of the Investment Company Act is thus to protect investors in investment companies against the managing of those companies in the interests of persons other than the investors.
The complaint here charges in substance that one Robert R. Young and one Allan P. Kirby are in control of Alleghany and have been conducting Alleghany's affairs primarily in the interest of themselves and a small group of insiders and secondarily in the interest of the other stockholders. It further charges that the application for the orders under review was made at the instance of Young and Kirby for the purpose of escaping the provisions of the Investment Company Act.
The stockholders here allege that, by obtaining an erroneous ruling from the I.C.C., persons in control of the corporation have succeeded in escaping the provisions of an act passed for the express purpose of protecting stockholders from persons in control. Since the corporation, by hypothesis, is helpless, plaintiffs say that they have standing to sue to prevent the thwarting of the declared will of Congress. We are convinced that a stockholder, who seeks only that which Congress has provided for him as matter of right, need not show money damage to entitle him to sue. It is enough if he shows that no one else will act on his behalf. Here the corporation, which is controlled by those he is attacking and which has sought the ruling to which he objects, will not help him. While it would perhaps be too much to expect of the S.E.C. to engage in a jurisdictional fight with another great administrative body of coordinate standing, the hard fact is that it has limited its participation to a request to the I.C.C. to surrender part of its jurisdiction as a matter of grace. Moreover no such remedy via the S.E.C. is provided by statute. See Goldstein v. Groesbeck, 2 Cir., 142 F.2d 422, 154 A.L.R. 1285.
A plenary action by the stockholders against Alleghany to enjoin the issuance of the preferred stock while the orders of the I.C.C. stand in full force and effect would quite properly be met with the defense that they were collaterally attacking an administrative body's determination.
The present proceeding, where the I.C.C.'s orders are directly attacked and where as a party it may be heard in their behalf, affords fair play to both sides.
Where the question is that of unlawful usurpation of regulatory control as distinguished from the reasonableness of regulatory action by an agency with conceded jurisdiction, a stockholder has standing to attack an administrative order in which the corporate management has acquiesced even though he cannot show an interest other than a derivative one on behalf of the corporation. See Ashwander v. Tennessee Valley Authority, 297 U.S 288, 56 S. Ct. 466, 80 L. Ed. 688. There relief was accorded to stockholders against a 'breach of duty (which consists) in yielding, without appropriate resistance, to governmental demands which are without warrant of law or are in violation of ...