The opinion of the court was delivered by: TYLER
On October 1, 1968, this court denied a joint motion for summary judgment filed by defendants The Baltimore & Ohio Railroad Company ("B&O") and Reading Company ("Reading"). 291 F. Supp. 456 (S.D.N.Y.1968). Thereafter, on February 17, 18, 19 and 21, 1969, this action was tried before the court without a jury. On consideration of the evidence adduced at trial and the post-trial memoranda of law submitted by the parties, this opinion is filed to constitute the findings of fact and conclusions of law required by Rule 52, F.R.Civ.P.
This is a derivative action brought on behalf of Reading by plaintiffs, the owners of four shares of Reading common stock and one share of Reading second preferred stock against B&O, Reading and others
upon the claim that there was a violation by defendants of Section 10 of the Clayton Act, 15 U.S.C. § 20, with resultant damage to Reading. Consequently, plaintiffs seek treble damages under Section 4 of the Clayton Act, 15 U.S.C. § 15.
Although most of the salient facts are not in serious dispute, and notwithstanding that many of these essential facts have already been recited in the earlier opinion of this court, it nevertheless is useful to set forth here the facts as they unfolded at the trial. The key transaction giving rise to this litigation, of course, is the sale on April 30, 1963 to B&O by Reading of securities representing the latter's one-half interest in the Philadelphia Perishable Products Terminal Company ("Terminal"). At the time of this transaction, there were three common directors on the boards of B&O and Reading, and B&O owned 42% of the equity of Reading. The sale of the Reading one-half interest in Terminal was made without competitive bids as required by Section 10 of the statute.
Late in 1925, Reading and B&O had agreed in general terms to acquire land and assemble thereon a joint fruit and produce terminal in South Philadelphia, Pennsylvania. The land was to be assembled with each railroad contributing 50% of the cost thereof and 50% of the cost of construction of the terminal facilities. The two railroads eventually decided to form a new company to take title to the terminal property. Thus, the Terminal was formed and denominated a holding company; Reading and B&O were each issued 250 shares of the capital stock.
Written documents evidencing the agreements between the parties and Terminal were executed finally on December 22, 1931. Under the terms of an operating agreement between B&O and Reading, each company made capital contributions in equal shares with the understanding that profits and depreciation costs were to be shared on a user basis. The three-party contract between the two railroads and Terminal provided, inter alia, that the two railroads would have the use of the terminal as a joint facility and would receive all income and revenues therefrom as if title to the property and Terminal were vested in them.
From December, 1931 until April 30, 1963, directors and officers of Terminal consistently and exclusively were officers, directors, employees and lawyers of B&O and Reading. In the initial period of operation of Terminal, both railroads made advances to Terminal, each in the total amount of $2,000,000. In 1936, notes were issued to evidence these advances, with Reading and B&O each receiving $2,000,000 in face amount of Terminal demand notes.
Sometime in the early summer of 1962, representatives of Reading and B&O began discussions about the possibility of B&O acquiring Reading's interest in Terminal. Although substantially irrelevant to the controversy, I accept B&O's position that these discussions were initiated by Reading.
Concededly, at the time of the initiation of these discussions in the summer of 1962, B&O owned approximately 42% of Reading's stock. Thus, as B&O's counsel admit, B&O had the power to control Reading and in fact exercised that power on occasions during the period relevant to this litigation. B&O, of course, did nothing affirmative to prevent Reading from seeking competitive bids. On the other hand, none of its representatives ever suggested to Reading that the latter seek such bids. No representative of either railroad discussed or even considered possible application of Section 10 of the Clayton Act to this sale of Reading's one-half interest in Terminal represented by its shares of capital stock and the demand notes evidencing its advances of $2,000,000. Neither Reading nor B&O ever made any attempt to determine whether a third party would be interested in purchasing Reading's interest. Apparently, none of the railroad officials involved thought this property could possibly be of any interest to anyone other than B&O.
There can be no doubt that in 1962 and in early 1963, the principal impetus for this transaction came from Reading, which then was in straitened financial condition. In December, 1962, the president of Reading had approached the president of B&O to see whether or not B&O could recommend someone to give Reading financial assistance and advice. At that time, the Chesapeake & Ohio Railway Company ("C&O") was in the process of obtaining stock control of B&O. Consequently, as a result of conversations between representatives of the three railroads, a Mr. Kerslake, who was then Assistant Vice President-Finance officer of C&O, was asked by B&O to work with Reading on a consulting basis. Thus, from December, 1962 until at least mid-1963, Kerslake worked at Reading in an effort to solve its financial problems. Among other things, he was the principal negotiator of the transaction in question in his capacity as de facto chief finance officer of Reading.
Prior to Kerslake coming into the picture, representatives of Reading had obtained an appraisal of the Terminal property from the Philadelphia real estate firm of Albert M. Greenfield & Co. A vice president of that company, Meltzer, was in charge of this particular appraisal of the land and improvements of Terminal. His written appraisal was prepared and dated November 1, 1962. He therein stated that the fair market value of the land and improvements of Terminal was the sum of $2,100,000. At trial, he testified that the allowable range of fair market value was somewhere between $1,500,000 and $2,100,000. According to the evidence, the officials of Reading were thoroughly satisfied with Meltzer's appraisal and accepted its conclusions without much question.
The property of Terminal consisted of about 34.6 acres. The southern portion of that property, containing about 611,000 square feet (approximately 14 acres), had been leased in 1953 to a wholly-owned subsidiary of B&O called Schuylkill River East Side Railroad Company ("Schuylkill"). This was a five-year lease which granted Schuylkill an option to purchase the leased subdivision at a price of $.57 per square foot. In 1958, this lease was renewed on the same terms and conditions to expire on June 30, 1963. In other words, up until June 30, 1963, B&O through Schuylkill had an option to purchase this property from Terminal at a price of $.57 per square foot.
Certain improvements, including most particularly concrete platforms, loading ramps, railroad tracks, controls and switches, were located on the terminal property. Also, there were buildings and improvements on the premises which Meltzer valued at $600,500. Meltzer, however, did not ascribe a specific value to the tracks, ballast, ties, concrete platforms, ramps or any controls or switches in the Greenfield appraisal.
In January, 1963, representatives of B&O and Reading inspected the Terminal property incident to entering into detailed negotiations. Negotiations continued with Kerslake acting for Reading and first Baukhages and then Brown representing B&O. Finally, the parties agreed that the fair value of Terminal property and assets consisted of the appraised value of the improvements (Meltzer appraisal), the appraised value of $1.00 per square foot for all of the property not under lease to Schuylkill, the option price of $.57 per square foot for the 611,000 square feet under that lease, the face value of a purchase money mortgage from Quaker City Cold Storage Company and an amount representing book value of the tracks less approximately $45,000 for wear and tear. These figures came to a rounded total of $2,250,000, of which one-half, of course, equals $1,125,000.
Interestingly, not only Reading but also B&O was in poor financial condition in late 1962 and early 1963.
These circumstances undoubtedly influenced the negotiations and the terms of sale which were finalized on April 30, 1963. The final terms included an agreement by Reading to accept from B&O a cash down payment of $225,250.
It was also agreed that the balance of $900,000 due to Reading was to be paid in five equal annual installments bearing interest at 3%. It appears that the 3% interest was conceived as a means of giving Reading approximately the equivalent of the amount credited to it from the operations of Terminal in 1962.
As already stated, the written contract for the sale of Reading's interest in Terminal to B&O was executed as of April 30, 1963. Interestingly, in April, 1964, the first of the five annual installments in the amount of $180,000 was paid in cash, plus $27,000 representing 3% of $900,000. At the same time the balance of the four installments totalling $720,000 was paid in cash less a pre-payment discount of 5%.
Understandably, the parties at trial and thereafter in their post-trial briefs have focused principally upon the difficult questions of injury and resultant damages claimed by plaintiffs. Thus, the ultimate question to be determined here is whether or not there is a substantial difference between what Reading received for its Terminal stock and notes and what Reading would have received had public bidding been used as required by the statute. Nevertheless, there is a preliminary legal issue which is raised by B&O by leave of this court. In effect, this is another argument by B&O in support of its earlier announced position on the motion for summary judgment that its involvement or non-involvement in this transaction is such to take it out of the ambit of Section 10. Accordingly, the balance of this opinion will be devoted, first, to a discussion of the legal question of coverage raised by B&O and, second, to the legal and factual problems incident to the questions of injury and damages as contended by plaintiffs.
Did B&O Violate Section 10?
A. Prior Proceedings on the Violation Issue
In the earlier opinion in this action, I denied the joint motion by Reading and B&O for summary judgment which was based primarily on the theory that Section 10 did not prohibit the transaction here in question.
In rejecting defendants' theories, it was concluded that this was the type of transaction with which the Congress was concerned when it passed Section 10. Developments at trial confirmed this view, and, in addition, it became clear from the evidence that Congress' concern with common carriers dealing with companies having interlocking directors was fully warranted. The testimony of Kerslake, who negotiated this deal for Reading, is illustrative of the dangers inherent in transactions where personnel of the buyer and seller are intermingled.
As stated heretofore, Kerslake at the time was an officer of the C&O, which was parent of B&O. Because of his position at C&O, he was well acquainted with high level B&O employees, some of whom had occasion to become involved in this transaction. Despite this obvious interest in the affairs of B&O, it was Kerslake who negotiated for Reading in its sale of Terminal securities to B&O.
Assuming that Kerslake negotiated the deal in good faith, which on the basis of his demeanor and testimony I have no reason to doubt, his conflicting relationships with the three railroads may have subconsciously affected his ability to be a staunch negotiator for Reading. It is in the context of these circumstances that B&O's involvement in this transaction must be evaluated.
Subsequent to the filing of the earlier opinion of October 1, 1968, B&O moved again to dismiss the complaint against it, essentially on the ground that although Section 10 may have prohibited the sale of Terminal securities (and hence Reading and others may have violated the statute), B&O violated no provision of Section 10. In order to ...