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INTERSTATE INVESTORS, INC. v. UNITED STATES

July 22, 1968

INTERSTATE INVESTORS, INC., Plaintiff,
v.
UNITED STATES of America and Interstate Commerce Commission, Defendants, and Transcontinental Bus System, Inc., Intervenor-Defendant



The opinion of the court was delivered by: BRYAN

FREDERICK van PELT BRYAN, District Judge:

This is an action under 28 U.S.C. §§ 2321-25 to set aside and enjoin the enforcement of an order of the Interstate Commerce Commission.

The order dated August 10, 1966, approved the acquisition by the intervenor defendant Transcontinental Bus Lines, Inc. (Transcon), a major intercity bus carrier, of three other bus carriers in the southeastern United States, Virginia Stage Lines, Inc. (Virginia), Safeway Trails, Inc. (Safeway) and Queen City Bus Lines, Inc. (Queen). The acquisition was to be effected through an exchange of stock between Transcon and the three acquired carriers. Each of the acquired carriers in turn controlled several subsidiary bus carriers.

 The intercity nationwide bus industry is dominated by the Greyhound System. Transcon, though only one-fifth the size of Greyhound prior to the acquisitions under review, is its major competitor. Transcon also is a member of National Trailways Bus System (N.T.S.), a non-profit association whose membership consists of a large number of intercity bus carriers, including the three acquired companies. To foster competition with Greyhound's nationwide operations, the N.T.S. members have adopted Trailways as a common trade name, use uniform paint schemes and markings on their busses, have joint terminals, some through bus arrangements and coordinate advertising, purchasing and other essential functions.

 The applications of Transcon to the I.C.C. for approval of the acquisition of Virginia, Safeway and Queen, pursuant to Section 5 of the Interstate Commerce Act, 49 U.S.C. § 5, were made to improve its competitive position in the southeastern United States where it had almost no operations. All three applications were opposed by Greyhound which did not join in this action, and as to the Queen acquisition by Interstate Investors, Inc. (Interstate), the plaintiff here.

 Interstate is a Delaware corporation with its principal office in New York. The nature of its business is not clear but it is not a bus operator. Immediately prior to the time when Transcon reached agreement with Queen, Interstate claims to have made an oral agreement to purchase Queen as a first step toward the formation of a so-called third force of bus carriers in the southeast to compete with Transcon and Greyhound. Interstate further claims that Transcon caused Queen stockholders to breach their oral understanding with Interstate and enter into the exchange of stock acquisition agreement with Transcon instead.

 During the pendency of the acquisition proceedings Interstate also filed a complaint with the I.C.C. pursuant to § 11 of the Clayton Act, 15 U.S.C. § 21, alleging that Transcon's conduct prior to the I.C.C.'s approval of the acquisition amounted to an unlawful acquisition of control of Queen and constituted consummated anti-trust violations contrary to § 7 of the Clayton Act. *fn1" The I.C.C. dismissed this proceeding on the ground that it pertained to issues of fact and record in the acquisition proceedings. *fn2"

 After extensive hearings on the acquisition applications the I.C.C. approved acquisition of Virginia, Safeway and Queen by Transcon and issued the order to that effect here under review. See Transcontinental Bus System, Inc. - Control - Virginia Stage Lines, 101 M.C.C. 529 (1966). In MC-F-8744, embraced in the order under review, Transcon acquired control of Virginia and Safeway, Inc. *fn3" In MC-F-8774 the I. C. C. approved Transcon's acquisition of control of Queen. *fn4" Authority was granted to Transcon to issue additional shares of its common stock to exchange for the stock of the acquired companies. *fn5" The order also dismissed Interstate's petition for reconsideration of its complaint filed pursuant to § 11 of the Clayton Act which had been previously dismissed. *fn6"

 Interstate then commenced this action to annul and set aside the order. The prolix and confused amended complaint alleges in substance that the order of the I.C.C. was contrary to law, was unsupported by substantial evidence and was procured by fraud upon the Commission upon the part of Transcon. In addition, it contains a private anti-trust claim for relief against Transcon under the Sherman and Clayton Acts and a private claim for deceit.

 The present posture of the action is complex. Interstate brought on its application for the appointment of a three-judge court under 28 U.S.C. §§ 2321-25, 2284, by an order to show cause which contained an ex parte temporary restraining order against the enforcement of the I.C.C. order under attack. At the initial hearing before the district judge sitting in motion part the application for the appointment of this three-judge court was granted and Transcon was given leave to intervene as a defendant. However, the temporary restraining order was vacated. Interstate's motion for preliminary injunctive relief was reserved for the three-judge court. Both the I.C.C. and Transcon have answered the amended complaint.

 During the course of the proceedings a number of motions have been made by the parties which include the following:

 1. A motion by Interstate for preliminary injunctive relief which was reserved to the three-judge court at the initial hearing.

 2. Motions by the I.C.C. and Transcon to dismiss the action on the ground that Interstate lacks standing to attack the order of the I.C.C. under review.

 3. A motion by Interstate to set aside the vacation of the initial temporary restraining order and for other equitable relief on the ground that the decision was brought about by fraud upon the court on the part of Transcon.

 4. Several motions by Interstate for discovery against both Transcon and the I.C.C. on a wide variety of subjects.

 5. A motion by Transcon to dismiss the private anti-trust and deceit claims alleged by Interstate.

 The merits of the action and all pending motions were argued before this three-judge court at the same time and will be considered and decided together.

 I.

 We will deal first with Interstate's claim that the order of the I.C.C. under attack here was obtained by fraud upon the I.C.C. on the part of Transcon and that Transcon has continued such fraudulent conduct in this court. Compare Hazel-Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238, 64 S. Ct. 997, 88 L. Ed. 1250 (1944); Chas. Pfizer & Co. v. Davis-Edwards Pharmacal Corp., 385 F.2d 533 (2d Cir. 1967); Root Refining Co. v. Universal Oil Products, Co., 169 F.2d 514 (3d Cir. 1948), cert. denied, Universal Oil Products Co. v. William Whitman Co., Inc., 335 U.S. 912, 69 S. Ct. 481, 93 L. Ed. 444 (1949); Chicago Title & Trust Co. v. Fox Theatres Corp., 182 F. Supp. 18 (S.D.N.Y.1960). In order to understand Interstate's claim of fraud, a brief review of the background of this case is necessary.

 For several years Transcon, the largest member of N.T.S., has been seeking control of other N.T.S. members. At the time of the events in suit Transcon's routes were nationwide with the exception of through-routes running north and south along the Atlantic Coast. Several other N.T.S. members, including Virginia, Safeway and Queen, operated routes in this area. By agreements among these and other companies, N.T.S. was able to offer through service along the Atlantic Seaboard.

 In the 1960's, Interstate and its President, Burt, became interested in welding the Trailways carriers running along the Atlantic Seaboard into a single unit. Having acquired financial backing, Burt on behalf of Interstate sought to purchase control of some of these companies. He directed his attention primarily to two, Queen and Tamiami. *fn7" By early 1964 talks between Interstate and the controlling stockholders of Queen had progressed toward agreement. By March 28, 1964, Burt and Interstate claim they had a deal to purchase all of Queen's stock for approximately $8,000,000.

 Transcon had long been interested in acquiring Queen and had conducted negotiations on and off with several major Queen stockholders for some years. When it learned of the possible Queen-Interstate deal, either from Queen or by letter from Interstate, Transcon immediately started negotiating in earnest.

 By letter dated April 28, 1964, the President of Queen proposed an arrangement to Transcon. The suggested purchase price was about $8,000,000, approximately the same as offered by Interstate, but involved an exchange of stock. The letter also stated four conditions, the last of which was a guarantee by Transcon to buy back from some of the Queen's stockholders who wanted to cash the Transcon stock at a fixed price of $31.50 per share. Interstate focuses on this fourth proposed condition of guaranteed repurchase.

 On May 21, 1964, the Queen board approved a counter-offer by Transcon which did not mention any conditions of the April 28 letter. Prior to such approval, the Queen directors implemented all of the other conditions of the letter, but no mention was made of any arrangement to provide Queen's stockholders with cash for their Transcon stock.

 The purchase agreement provided for the exchange of 7.25 shares of Transcon common stock for each share of Queen stock. *fn8"

 Queen stockholders were to assent to the transaction by delivering their Queen shares to a named bank as depository. The depository bank would then issue a receipt corresponding to the number of shares delivered. The stock deposited would be held by the bank pending determination of Transcon's application to the I.C.C. for approval of control. If approval were granted, the deposited stock would be transferred to Transcon and Transcon would issue shares of its common stock in return for the deposit receipts. During the period of deposit, the holders of the receipts had the voting and dividend rights to the Queen stock. Prior to consummation, Queen was not to perform any act or enter into any transactions outside its ordinary course of business and Transcon was to take no action which would dilute the value of its common stock. The entire agreement, as well as Transcon's application to the I.C.C. for approval of control, *fn9" was conditioned on a favorable ruling from the Internal Revenue Service that the exchange of stock was tax-free.

 Before the I.C.C. examiner opened hearings in the fall of 1964, two significant events occurred. Interstate filed suit against Queen and the Queen stockholders in the United States District Court for the Western District of North Carolina for breach of contract, seeking money damages and not specific performance. Transcon was not a party to the action. During the same period, several Queen shareholders sold their deposit receipts for cash. *fn10" It is not presently disputed that the receipts ultimately came into the hands of a Transcon subsidiary. *fn11" Interstate alleges that these purchases were made pursuant to a secret agreement by Transcon to purchase the receipts of these Queen's stockholders who wanted cash.

 When the hearings opened in Washington on September 9, 1964, Interstate questioned the Transcon witnesses in an effort to establish that such a secret agreement existed. Moore, the President of Transcon, testified in response to questions from Greyhound's counsel that Transcon did not make a market for the deposit receipts. *fn12"

 Similar questions were asked by Interstate of Scheitel, the Vice-President of Transcon, who negotiated the contracts with Queen, Virginia and Safeway. He testified that while he had learned some of the deposit receipts had been sold, he did not know who had bought them. *fn13" He emphasized that Transcon had made no commitment to provide a market for the deposit receipts. *fn14"

 Plaintiff argues that this chain of testimony establishes that Transcon had a side agreement to purchase deposit receipts from those Queen shareholders who wanted cash. Interstate points out that prior to Commission approval deposit receipts representing 2004 Queen shares, or approximately 10% of Queen stock outstanding, were sold through various brokers. *fn15" It now appears that these receipts were purchased in the first instance by four Transcon officers, including Scheitel, *fn16" evidently for the account of Highway Insurance Company of Zurich, Switzerland, a company controlled by Transcon. *fn17" ...


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