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February 17, 1959

UNITED STATES of America, Plaintiff,
NEW YORK, NEW HAVEN AND HARTFORD RAILROAD COMPANY, Tri-Continental Financial Corporation, A. C. Allyn and Company, Incorporated, American Transportation Enterprises, Inc., Equitable Securities Corporation, Carl M. Loeb, Rhoades & Co., Robinson-Humphrey Company, Inc., and John W. Clarke & Co., Defendants. Helene GLENMORE et al., Plaintiffs, v. John I. AHERN et al., Defendants

The opinion of the court was delivered by: MCGOHEY

Opinion and Order

Three motions in the Government's suit and two in the Glenmore suit are here considered. They are as follows.

 In the Government's suit all defendants, other than New Haven, moved under Rule 12(b), Fed.R.Civ.P. 28 U.S.C. for dismissal of the complaint on the ground that it fails to state a relievable claim; or, in the alternative, for judgment on the pleadings under Rule 12(c). The Government cross moved first for a preliminary injunction and later for summary judgment under Rule 56(a).

 In the Glenmore suit the plaintiffs moved for partial summary judgment on the 'sixth count' of their complaint. The defendant Tri-Continental Financial Corporation cross moved under Rule 12(c) for judgment on the pleadings on the 'sixth count.'

 Matters outside the pleadings were offered in affidavits and considered. Accordingly the motions under Rule 12(b) and 12(c) have been considered as motions for summary judgment under Rule 56. The five motions were argued together.

 All parties agree and I independently find that no genuine issue as to any material fact is raised on any of the motions. Decision of each turns solely on the following question of law: whether a written agreement entered into in November, 1955 and amended in April, 1956, between New Haven and a group of bankers, in which New Haven made a contingent commitment to buy 131,385 of its preferred shares from the banking group in December, 1959, is illegal and void because it lacks prior authorization by the Commission pursuant to Section 20a of the Interstate Commerce Act. *fn1" For the reasons hereafter stated, I hold it is not.

 The banking group consists of all the defendants, other than New Haven, named in the Government's suit. They acquired the shares by purchase from their then owners, of whom New Haven was not one, at or about the date of the challenged agreement, under circumstances hereafter related.

 The Government suit seeks judgment declaring the agreement illegal and void for lack of compliance with Section 20a; and a permanent injunction restraining New Haven from carrying out or giving any effect to it. It also seeks to enjoin the members of the banking group pendente lite from assigning or transferring any of the shares which are subject to the challenged agreement except on order of the court.

 The Glenmore suit is a derivative action by New Haven stockholders against a large number of defendants including the members of the banking group. The amended complaint is in multiple 'counts' or which only the sixth is here involved. That 'count' is based on the alleged illegality, for lack of compliance with Section 20a, of the agreement involved in the Government's suit.

 The banking group acquired the shares and entered into the challenged agreement under the following circumstances. In the summer and early fall of 1955, New Haven's properties sustained extensive hurricane and flood damage which it was estimated would cost several million dollars to repair. A loan of $ 10 million, to be guaranteed by the Government, was negotiated but could not be consummated until authorized by the holders of the amount and class of stock required by New Haven's charter. The holders of 131,385 preferred shares, whose votes were required for approval of the proposed loan, opposed it except upon conditions which New Haven's management was unwilling to approve and recommend to the holders of the common stock. The management thereupon arranged with the banking group to purchase the 131,385 preferred shares at $ 60 per share. As part of this arrangement the challenged agreement was made with the banking group. The proposed loan was thereafter approved by New Haven's stockholders and, having been guaranteed by the Government, was consummated. In 1956 an additional Government guaranteed loan of $ 6 million was made. Both loans, upon New Haven's application, were authorized by the Commission.

 The challenged agreement originally provided that the banking group had the right to call upon New Haven, in December, 1957, to buy all the shares at $ 70 per share; and New Haven had the right to call upon the banking group, in December, 1957, to sell all the shares to New Haven at the same price. The 1956 amendment extended the terminal date to December, 1959 and increased the price to $ 75 per share. During the life of the agreement the banking group may not sell any of the shares to others without giving New Haven opportunity to buy at the price offered by others. And if any shares are sold to others at a price higher than $ 75 per share, the banking group is obligated to pay the excess to New Haven.

 The statute makes 'unlawful' the issuance by a carrier of 'any share of capital stock or any bond or other evidence of interest in or indebtedness of the carrier * * * unless and until, and then only to the extent that, upon application by the carrier, and after investigation by the commission * * * the commission by order authorizes such (issuance).' It is conceded that New Haven made no application for authority to enter into the challenged agreement; and that the Commission made no order authorizing it to do so. However, there was no secret about the making of the agreement. It was, of course, disclosed to New Haven's stockholders in notices and financial statements; and to the Secretary of the Treasury who, on behalf of the United States, guaranteed both loans. But what is most significant here is that it was promptly disclosed to officials of the Commission and to the Commission itself.

 Among the documents submitted on the motions and considered by me, were the affidavit of William T. Griffin, Esq., Special Counsel to New Haven, and the Commission's 'reply' thereto. *fn2" Neither controverts the other and neither has been controverted in any respect by the other parties to the suits. Accordingly the facts alleged in each are taken as conceded by all parties in both suits. *fn3" Those facts are as follows.

 On November 29, 1955, at the Commission's office in Washington, D.C., Mr. Griffin and New Haven's treasurer conferred concerning the first loan with Commissioner J. Monroe Johnson, then Chairman of the Commission's Division 4 which has jurisdiction over matters arising under Section 20a, and Mr. Roger T. Boyden, then Director of the Commission's Bureau of Finance which also has some subordinate jurisdiction over such matters. The making of the challenged agreement in the circumstances above described was fully disclosed to these Commission officials and copies of the agreement were given to them. They were informed, moreover, that New Haven's counsel was of the opinion that the agreement was not within the purview of Section 20a and ...

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