The opinion of the court was delivered by: FRIENDLY
In these actions against the United States and the Interstate Commerce Commission, Oscar Gruss & Son, which has acquired some $10,500,000 of the First and Refunding Mortgage 4% bonds of The New York, New Haven and Hartford Railroad Company (NH), and a bondholders' committee claiming to have authorizations from holders of some $20,000,000 of such bonds,
which has also intervened as plaintiff in Gruss' action, seek to enjoin consummation of the merger of the New York Central Railroad Company (NYC) with the Pennsylvania Railroad Company (PRR) [the proposed merged company being hereafter referred to as the Transportation Company], as authorized by the Commission in its report served April 27, 1966, 327 I.C.C. 475, and its report on reconsideration of September 16, 1966, 328 I.C.C. 304. A decision in which this court, by a divided vote, refused to enjoin consummation at the instance of competing railroads, Erie-Lackawanna R.R. v. United States, 259 F. Supp. 964, is under appeal to the Supreme Court, with argument set for January 9, 1967 and the merger stayed until determination by the Court. NYC, PRR and the Trustees of NH have intervened as defendants and join the Interstate Commerce Commission in opposing the grant of a temporary injunction. The Commission has moved under Rule 12(b) to dismiss the complaints; NYC and PRR have moved for the same relief, also asking for summary judgment under Rule 56 on the basis of the record in the merger proceeding before the Commission and of the reorganization proceeding of NH under § 77 of the Bankruptcy Act in the District Court for Connecticut. Appended to the memorandum of the NH trustees is an affidavit of their counsel outlining the various steps taken by them with copies of relevant papers, which we may also consider on the motion for summary judgment.
The Commission's order approving the merger contained the following condition with respect to NH, 327 I.C.C. at 553:
"8. The Pennsylvania New York Central Transportation Company shall be required to include in the transaction all the New York, New Haven, and Hartford Railroad Company - the inclusion of passenger operations being subject to the findings and determinations of the Commission as set forth in Finance Docket No. 23831 issued simultaneously with this report - upon such fair and equitable terms as the parties may agree subject to the approval of the Bankruptcy Court and the Commission. Within 6 months after the date this report is served, the parties shall file with the Commission for its approval, a plan for such inclusion. In the event the parties are unable to reach an agreement (and subject to approval by the Bankruptcy Court) such inclusion shall be upon such fair and equitable terms and conditions as the Commission may impose.
"Jurisdiction is hereby reserved for such purposes. Consummation of the merger by applicants shall indicate their full and complete assent to these requirements."
Although the defendants and intervening defendants in the Erie-Lackawanna case, including the four states served by NH, argued to us that this condition was one of the strong public interest considerations favoring the merger and no one disagreed, Gruss and the Committee claim it is entirely inadequate. They point to a passage in the Commission's report, 327 I.C.C. at 522-27, where, after discussing the more limited recommendation of the hearing examiners on the subject of inclusion of NH, the Commission found "that this merger, without complete inclusion of NH, would not be consistent with the public interest, and, accordingly, we will require all the New Haven railroad" - passenger as well as freight service - "to be included in the applicants' transaction." 327 I.C.C. at 524. Yet, say the plaintiffs, despite this and a further finding that "the Transportation Company, with new routings and improved service, could undoubtedly wean substantial traffic away from NH and leave that already moribund carrier in perhaps an irretrievable situation," 327 I.C.C. at 522, the Commission imposed no such protective traffic and financial conditions for the interval prior to actual inclusion of NH - probably a fairly long one in view of reorganization problems under § 77 - as it did with respect to the Erie-Lackawanna, the Delaware & Hudson and the Boston & Maine. They ask in consequence that we enjoin consummation of the merger until NH is effectively protected by actual inclusion.
Much of the seeming anomaly dissolves quite speedily. From a practical standpoint the interim relationship of the Transportation Company to NH will be altogether different from its relationship to the three protected lines. The overwhelming likelihood is that the latter will remain significant competitors, probably as future components of the Norfolk & Western system, see Erie-Lackawanna R.R. v. United States, supra, 259 F. Supp. at 969 n. 4; although the Commission reserved jurisdiction to entertain petitions for their inclusion in the Transportation Company in the event of denial of their pending petitions for inclusion in the Norfolk & Western, 327 I.C.C. at 553, no one could have believed that to be the likely outcome. In contrast the expectation was that NH would become a part of the Transportation Company - indeed, there is rather general agreement that it must if it is to continue operations at all. It is thus somewhat unrealistic to suppose that the Transportation Company will immediately embark on a wholesale campaign of diversion from a future component, breaking the historic bonds between PRR and NH initially forged by geography and welded by millions of dollars of expenditures, only to renew them again some time hence; and plaintiffs' reliance on findings of the hearing examiners and the Commission with respect to the drastic effects of the merger on NH in the absence of any requirement of inclusion is wholly misplaced. But they argue that, despite the strong prospect of inclusion of NH in the Transportation Company, the latter nevertheless has an incentive to engage in some diversion since although PRR, NYC and the NH Trustees have agreed upon the purchase price, this is still an open issue in view of the dissatisfaction of NH bondholders, and diversion of NH freight revenues to NYC's competing service would benefit the Transportation Company both directly and by justifying what plaintiffs consider the unduly low figure to which the Trustees agreed. Moreover, they find a further incentive for diversion in the possibility that NH may never be included; although NH has a call on the Transportation Company, decision whether to exercise this depends on the course of the reorganization and the bankruptcy court may be persuaded, or compelled, to liquidate NH rather than cause it to be sold to the Transportation Company as a going concern.
The argument would seem to be sufficiently answered by the powers vested in the Commission under § 5(2) of the Interstate Commerce Act. It has been settled for four decades that the requirement of § 5(2)(b) and its predecessors that the Commission find the conditions of a merger to be just and reasonable makes it "the duty of the Commission to protect both the public and private interests" and to withhold approval of a transaction that is otherwise in the public interest unless it finds "that the consideration, terms and conditions thereof are just and reasonable" to the parties and holders of their securities. Cleveland, C., C. & St. L. Ry. v. Jackson, 22 F.2d 509, 510-511 (6th Cir. 1927); see United States v. Lowden, 308 U.S. 225, 233 n. 1, 60 S. Ct. 248, 84 L. Ed. 208 (1939); Schwabacher v. United States, 334 U.S. 182, 198-199, 68 S. Ct. 958, 92 L. Ed. 1305 (1948); 3-A Sharfman, The Interstate Commerce Commission 466-72 (1935). Combination of this general principle with the express authority now given by § 5(2)(d) to require merging carriers to include other railroads "upon equitable terms" would surely empower the Commission, if so advised, to base the acquisition price of NH upon a value not adversely affected by the NYC-PRR merger itself - whether by using the value of the property as of the date of the merger as a base, by adjusting subsequent earnings to restore diverted revenues, or by other appropriate means; the availability of such relief differentiates NH sharply from the three protected roads. On being queried why this was not adequate protection, plaintiffs' attorneys answered that even though the Commission had the power we have indicated, there was no assurance it would use this, or use it fully, especially in view of the position of the NH Trustees that the agreement already concluded by them with NYC and PRR confers adequate protection;
they pointed also to the possibility that bondholders might prevail on the reorganization court to liquidate NH in order to realize on its valuable real estate holdings, in which event no acquisition under § 5(2) would occur. All this reflects a mistaken notion of NH's rights. The Commission is not under a mandate to protect against all diversion as a condition to the grant of immunity under the antitrust laws, as plaintiffs seem to think; it is concerned with diversion only as this bears on the "public interest," and that concept "has direct relation to adequacy of transportation service, to its essential conditions of economy and efficiency, and to appropriate provision and best use of transportation facilities," New York Central Sec. Corp. v. United States, 287 U.S. 12, 25, 53 S. Ct. 45, 48, 77 L. Ed. 138 (1932), with investor interest an element only insofar as its protection will serve to attain these goals. Decision on the degree of protection to be afforded is thus vested in the agency charged with responsibility for the transportation system, subject only to the usual limited judicial review. New York Central Sec. Corp. v. United States, supra, 287 U.S. at 29, 53 S. Ct. 45. We would agree with Judge Anderson's statement, in authorizing the Trustees to proceed before the Commission, that it is for that agency "to determine in passing upon the plan for the inclusion whether these provisions [negotiated by the Trustees] adequately protect the estate for any possible losses in the time between consummation of the Penn-Central merger and inclusion of the New Haven, or whether additional terms are required."
In fact, however, we do not need to decide whether the condition with respect to inclusion of NH gives adequate protection since, in our view, plaintiffs are not now in a position to raise it. For we read the decisions of the Supreme Court as holding that on an application for merger of two carriers the interests of other carriers are to be represented by their managements and not by individual investors.
In Pittsburgh & West Virginia Ry. v. United States, 281 U.S. 479, 50 S. Ct. 378, 74 L. Ed. 980 (1930), the Pittsburgh, a minority stockholder in the Wheeling & Lake Erie, sought to enjoin an I.C.C. order authorizing the Wheeling to abandon its passenger station in Cleveland, Ohio, which was to be sold to a new terminal building company, and to use the new terminal and certain temporary facilities pending completion. The complaint alleged, inter alia, that the price being obtained by the Wheeling was inadequate and that the Commission had erred in holding it had no jurisdiction to consider that question. The Court held that the Pittsburgh "had no standing to bring this suit as one to set aside an order of the Commission." 281 U.S. at 486, 50 S. Ct. at 380. Although the Pittsburgh had been an intervenor before the Commission,
Mr. Justice Brandeis said, despite an arguably contrary earlier statement by him in The Chicago Junction Case, 264 U.S. 258, 268, 264 U.S. 258, 44 S. Ct. 317, 68 L. Ed. 667 (1924), that such intervention did not entitle the Pittsburgh "to institute an independent suit to set aside the Commission's order in the absence of resulting actual or threatened legal injury to it." 281 U.S. at 486, 50 S. Ct. at 381. As to this, "the claim that the order threatens the Wheeling's financial stability, and consequently appellant's financial interest as a minority stockholder, is not sufficient to show a threat of the legal injury necessary to entitle it to bring a suit to set aside the order. This financial interest does not differ from that of every investor in Wheeling securities or from an investor's interest in any business transaction or lawsuit of his corporation. Unlike orders entered in cases of reorganization, and in some cases of acquisition of control of one carrier by another, the order under attack does not deal with the interests of investors. The injury feared is the indirect harm which may result to every stockholder from harm to the corporation." 281 U.S. at 487, 50 S. Ct. at 381. The "some cases" phrase was illuminated by a footnote referring to various I.C.C. decisions considering the fairness of acquisitions to security holders of the roads to be acquired.
A few years later, this court, speaking through Judge Mack, further elucidated and applied the distinction the Supreme Court had drawn. New York Central Securities Corp. v. United States, 54 F.2d 122 (S.D.N.Y. 1931). That suit attacked an order authorizing NYC to acquire control by lease of various railroads in which it was a majority and plaintiff a minority stockholder; the leases provided for payment of guaranteed annual dividends directly to the minority stockholders, with nothing paid to the lessors themselves. Judge Mack ruled that under the Pittsburgh & West Virginia decision plaintiff's interest as a stockholder in the lessee did not invest it with standing but its claimed injury as a stockholder in the lessors did, since that interest "is not merely derivative through its ownership of stock, but is an independent injury to itself as a member of a class created by the leasing agreements between lessors and lessee." 54 F.2d at 126. The Supreme Court agreed, 287 U.S. at 19-20. This same line of distinction was drawn in Alleghany Corp. v. Breswick & Co., 353 U.S. 151, 77 S. Ct. 763, 1 L. Ed. 2d 726 (1957), where the Court held that common stockholders of Alleghany Corporation did not have standing to obtain judicial review of I.C.C. orders authorizing a merger of railroads in whose common parent Alleghany was a large stockholder and determining that Alleghany was a carrier subject to regulation by the Commission and therefore exempted from the Investment Company Act, but that they did have standing to attack a further order in the exercise of the Commission's asserted jurisdiction authorizing Alleghany to issue a new convertible preferred stock which plaintiffs claimed would unfairly dilute their stock interests in Alleghany.
Plaintiffs' case is governed by Pittsburgh & West Virginia and the rulings in Breswick with respect to the merger and to the status of Alleghany. The PRR-NYC merger as proposed by the parties did not involve any transaction relating to NH. While it threatened injury to NH, it posed no "individualized threat," 353 U.S. at 173, 77 S. Ct. 763, to plaintiffs as distinguished from all other claimants against the NH estate. Protection of the interests of plaintiffs and all other NH creditors and stockholders was and is the responsibility of the Trustees in the § 77 proceeding. Trustees in such a proceeding have all the powers of a trustee under § 44 of the Bankruptcy Act, § 77(c)(2), and thus are "vested by operation of law with the title of the bankrupt as of the date of the filing of the petition * * *," § 70(a). Any rule permitting creditors or stockholders of a railroad affected by a proposed merger of other lines to interpose themselves in the main ring of the merger proceeding would be impracticable from an administrative standpoint. Such a proceeding is sufficiently complex without the Commission or a reviewing court also having to choose among the conflicting views of security holders of third lines, some of whom regarded the merger with favor, others of whom opposed it and still others who wanted conditions of varying sorts. A carrier claiming to be adversely affected by a merger must speak at this stage with a single voice; what the voice shall say is normally determined in the case of a solvent carrier by its board of directors, and in the case of an insolvent one by its trustees subject to instruction by the reorganization court. While it is true in a pragmatic sense that the transaction may affect "the interests of investors" in the third carrier, it does so only in the way that every significant transaction does, and as the important one in the Pittsburgh & West Virginia case surely did. The Supreme Court's requirement is more stringent; in order for investors to have standing the order under attack must not merely affect but "deal with" their interests - their securities, rights, priorities and so on - as did the order in the New York Central Securities case and the order authorizing Alleghany to issue convertible preferred stock, or as the instant order did with respect to the stockholders of PRR and NYC.
Plaintiffs contend that even if this be so, they have standing because the Trustees of NH have disabled themselves from effectively representing the bondholders' interests. This is claimed to be true because the agreement of the Trustees with NYC and PRR for inclusion of the properties of NH in the Transportation Company, initially embodied in a Memorandum dated December 22, 1964 and February 5, 1965, made it a condition of the purchaser's obligation to close that the former "shall not have made or filed any further statement, stipulation or other document in the pending Penn-Central merger proceedings before the I.C.C., or any judicial review thereof, other than in connection with (a) a position relating to the New Haven taken by any other party, or (b) a failure of the Examiners of the I.C.C. to find either that the New Haven should be included in such merger or that jurisdiction is to be retained for later determination of any petition by the New Haven for such inclusion, provided, however, that any such statement, stipulation or other document made or filed shall be consistent with the provisions and intent of ...