Lumbard, Chief Judge, Friendly and Hays, Circuit Judges. Friendly, Circuit Judge (concurring). Hays, Circuit Judge (dissenting).
Plaintiffs, the owners of both common and preferred stock of the Reading Company, a common carrier, brought this derivative action on behalf of Reading against the Baltimore and Ohio Railroad Company (B & O) and certain individuals who were directors of Reading in April 1963.*fn1 Jurisdiction was properly based on Section 4 of the Clayton Act, 15 U.S.C. § 15 (1964). Plaintiffs sought treble damages against B & O, claiming that B & O violated Section 10 of the Clayton Act, 15 U.S.C. § 20 (1964), when it purchased Reading's half-interest in a jointly-owned produce terminal in Philadelphia in 1963. Sitting without a jury, Judge Tyler gave judgment for the plaintiffs in the trebled amount of $1,662,000, having found actual damages of $554,000; he also ordered that B & O pay Reading an additional $220,000 as reasonable attorney's fees. We reverse and remand with instructions that the complaint be dismissed.
The facts of this case are fundamentally not disputed. The transaction giving rise to this suit is Reading's sale to B & O, on April 30, 1963, of securities representing its half-interest in the Philadelphia Products Terminal Company (Terminal). At the time of the sale B & O and Reading had three common directors, and B & O owned approximately 42% of Reading's equity. The sale was made without competitive bidding, allegedly in violation of Section 10. Plaintiffs claim that the consideration was inadequate and brought this action, seeking as damages under Section 4 triple the difference between the actual value of the interest and what was received.
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 as 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 finally executed 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, all the directors and officers of Terminal 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. At the time of the initiation of these discussions, B & O owned approximately 42% of Reading's stock, and the two roads had three common directors. No representative of either railroad discussed or even considered possible application of Section 10 of the Clayton Act to this sale. Neither Reading nor B & O ever made any attempt to determine whether a third party would be interested, and, apparently, none of the railroad officials involved thought this property could possibly be of any interest to anyone other than B & O.
The fair market value of the land and improvements of Terminal was determined by an appraiser to be $2,100,000. After some negotiating the parties accepted this figure as a fair price, and to it added some additional items, as will be discussed later, bringing the price to a rounded figure of $2,250,000. They had previously determined that the price to be paid for Reading's interest would be one-half of the value of Terminal, or $1,125,250. The final terms called for a cash down payment at closing of $225,250, with the balance of $900,000 to be paid in five equal installments bearing interest of 3%. The agreement was executed on April 30, 1963 with the down payment made, and in April 1964, when the first installment of $180,000 plus 3% interest was due, it was paid along with the entire balance less a 5% prepayment discount.
The B & O renews a series of arguments, rejected by the court below, that Section 10 does not prohibit the transaction here in question. In pertinent part the section provides:
"No common carrier engaged in commerce shall have any dealings in securities, supplies, or other articles of commerce, . . . to the amount of more than $50,000, in the aggregate, in any one year, with another corporation, firm, partnership, or association when the said common carrier shall have upon its board of directors or as its president, manager, or as its purchasing or selling officer, or agent in the particular transaction, any person who is at the same time a director, manager, or purchasing or selling officer of, or who has any substantial interest in, such other corporation, firm, partnership, or association, unless and except such purchases shall be made from, or such dealings shall be with, the bidder whose bid is the most favorable to such common carrier, to be ascertained by competitive bidding under regulations to be prescribed by rule or otherwise by the Interstate Commerce Commission . . ."
B & O first argues that the sale by Reading was not covered by the section, because it was not a "dealing in securities." It argues that Terminal was merely a paper, or dummy, corporation formed to hold mere title to the facilities, and having no duties, no independent employees, and no income. B & O would have us find that although the sale took the form of a transfer of Reading's 250 shares of Terminal stock and certain demand notes, it was in reality only a real estate transaction. We do not agree.
The phrase "securities" admittedly is nowhere defined in the Clayton Act, but the notes and shares here certainly fit within any normal and reasonable meaning of the word. B & O argues, however, that Congress' primary reason for including "dealings in securities" in the prohibition was to reach the common abuse where an investment banker with control of a common carrier passes off worthless paper on its captive.*fn2 But the words are broad enough to cover the collateral abuse of a common carrier accepting inadequate consideration for securities from the interlocked purchaser. Although the examples of improper transactions to be found in the legislative history are of the first type, we are not persuaded that Congress meant to exclude the sort of transaction presented here since it poses as great a danger.
B & O then argues that in fact this was not a securities transaction at all, but merely a sale of real estate, and urges us to look at the substance of the transaction, and not its mere form. But Reading and B & O chose the corporate form, and we think their choice, absent special consideration, should control. This is not a situation where a court will pierce the corporate veil because the corporate form is used to achieve some purpose contrary to public policy. See Schenley Distillers Corp. v. United States, 326 U.S. 432, 90 L. Ed. 181, 66 S. Ct. 247 (1945). Quite the contrary, as Congress here has imposed certain obligations on those who use the corporate form. Reading and B & O chose this mode of organization for Terminal and they must bear the disadvantages as well as the advantages. See Snow Crest Beverages, Inc. v. Recipe Foods, Inc., 147 F. Supp. 907 (D. Mass. 1956); Volasco Products Co. v. Lloyd A. Fry Roofing Co., 308 F.2d 383 (6 Cir. 1962), cert. denied, 372 U.S. 907, 9 L. Ed. 2d 717, 83 S. Ct. 721 (1963). It is no answer that by liquidating Terminal, distributing the assets, and then selling an undivided half-interest in land, they would not have been dealing in securities. We refuse to infer a Congressional determination that a statute was not meant to cover a certain sort of transaction from the fact that by restructuring the transaction the statute can be avoided.
Alternatively, B & O argues that Section 10 does not apply to transactions between railroads, but only those between a common carrier and another non-railroad corporation. Certainly the words of the section -- "no common carrier . . . shall have any dealings with another corporation, firm, partnership, or association . . ." -- does not compel this result; the phrase "any corporation" would seem intended to include any and all corporate business enterprises.
B & O argues, however, that the legislative history demonstrates that Congress did not intend the section to reach this far. As support, B & O notes that none of the examples in the legislative history involved inter-railroad dealings. But, though we might agree that the primary concern was interlocks between railroads and banks and large industrial concerns, we read Section 10 as broadly as it is written, since the potential for abuse arises from the nature of the relationship between the firms, and not from the kinds of companies involved. Congress has limited the potential scope of anti-interlock prohibitions here to situations where at least one party is a common carrier; we will not limit it further.
B & O puts great stress on the fact that at the same time the House Judiciary Committee was considering the predecessor of Section 10, the House Committee on Interstate and Foreign Commerce had before it the specific problem of railroad interlocks.*fn3 In 1914 Section 10 emerged from the Judiciary Committee. But the Commerce Committee deliberated on its problem for six years more, until 1920, and then produced what became Section 20 a of the Interstate Commerce Act, which requires prior ICC approval of any common directors or officers of railroads. 49 U.S.C. § 20 a (1964). B & O would have us read these events as evidencing a Congressional determination to exclude sub silentio interlocked railroads from Section 10, on the theory that by enacting Section 20 a Congress must have felt that Section 10 did not deal with the problem.
Finally, B & O argues that the statute was intended to apply only to "vertical" interlocks (i. e., between railroads and their suppliers, or purchasers of their securities), not to "horizontal" interlocks between railroads. This construction must be rejected for reasons similar to those just given: although the vertical situation may have been the prime evil before Congress, the statute on its face reaches both relationships and the danger is as great in either.*fn4
To recapitulate, we hold the transaction here was a "dealing in securities" within the prohibition of Section 10. Further, the section reaches transactions between railroads, despite the fact that they are in a horizontal relationship and that the relationship is also governed by Section 20 a of the Interstate Commerce Act.
In April 1963 the two railroads had three common directors and, as seen above, the transaction fell squarely within the prohibition of the statute. B & O, however, argues that the statute's civil liability reaches only to the violating carrier, its officers and directors, and any party that interferes with the competitive bidding process, not to the interlocked corporation. As Reading initiated the transaction and there was no proof of any interference by B & O, B & O claims that it has no liability under the statute.
The civil liability here alleged is governed by Section 4 of the Clayton Act which provides that any person injured "by means of anything forbidden in the antitrust laws" is entitled to treble damages against the malefactor. 15 U.S.C. § 15 (1964). The proper inquiry, therefore, is whether Section 10 imposes a duty upon any interlocked corporation dealing with a common carrier not to deal with that carrier except through competitive bidding. We find it does and that civil liability is imposed on one in B & O's position.
Of the section's four paragraphs, the second and fourth impose criminal liability: the second paragraph for anyone interfering with competitive bidding, the fourth on any common carrier (and its officers and directors) that violates the statute. The third paragraph merely directs the carrier to report all transactions with an interlock to the Interstate Commerce Commission, which in turn is to investigate possible violations and transmit its findings to the Attorney General. The first paragraph, quoted above, defines the prohibition, but prescribes no penalties.
B & O would have us read civil liability as coextensive with the criminal proscription, and it gains some support for this argument from the fact that, as written, the first paragraph only talks to the common carrier; it does not explicitly impose any correlative duty on the other party to the transaction. But we think that the statute does impose such a duty, and that civil liability, if it is to be effective as a deterrent, must reach both parties to the transaction.
In discussing the bill, witnesses and Congressmen repeatedly pictured the principal villain in an interlock as the other corporation, with the common carrier being bested in the transaction.*fn5 In Minneapolis & S.L.R.R. Co. v. United States, 361 U.S. 173, 4 L. Ed. 2d 223, 80 S. Ct. 229 (1959), the Supreme Court succinctly posed the dangers:
The evident purpose of § 10 of the Clayton Act was to prohibit a corporation from abusing a carrier by palming off upon it securities, supplies and other articles without competitive bidding and at excessive prices through overreaching by, or other misfeasance of, common directors to the financial injury of the carrier and the consequent impairment of its ability to serve the public interest.
Id. at 190. Although the Court's example is of the other corporation abusing the carrier by selling too dear, certainly buying something too cheaply is also within the purview of the section. It would be anomalous if the statutory duty were to be imposed only on the weaker party to the deal. Thus, we hold that by participating in the transaction B & O has violated a duty imposed by Section 10 and so is potentially liable.
B & O next argues that assuming it has violated a duty imposed by the statute, it still is not liable to Reading because plaintiffs have failed to show that any injury has been suffered by Reading as a result of what B & O has failed to do, participate in competitive bidding. B & O argues that there was no proof whatsoever that a request for competitive bids, as required by Section 10, would have elicited any responses. On the contrary, it points to convincing evidence that no one other than B & O would have been in any way interested in Reading's interest. Further, it argues that uncontradicted evidence in the record proves that the fair market value of the property to a hypothetical bidder was considerably less than the price that B & O actually paid.
The court below computed the fair market value on the basis of what Reading's interest would be worth to B & O, but we agree with B & O that in an action for damages under Section 10, the relevant inquiry into the value of the interest sold must be what price would have been reached by competitive bidding. For if the statutory procedure had been complied with, we must assume that B & O would have only paid just enough to top the highest bid, not what the interest was worth to it. And it is clear from this record that if there would have been any bidders under the Section 10 procedure, to them Reading's interest would have far less value than it had to B & O.
No railroad would have bid, as the Pennsylvania, the only other long -haul line in Philadelphia, had its own terminal in the area. And any potential non-railroad bidder would surely have been dissuaded by the contractual and statutory restrictions which made use of the land for anything but railroad purposes exceedingly difficult. A hypothetical, potential bidder would have known that the operating agreement between Reading, B & O, and Terminal could only be terminated on a year's notice, and more important, that termination of a terminal railroad operation required ICC approval. 49 U.S.C. §§ 1(18), 1(20), 5(2), 5(4) (1964); ICC v. Memphis Union Station Co., 360 F.2d 44 (6 Cir.), cert. denied, 385 U.S. 830, 87 S. Ct. 66, 17 L. Ed. 2d 66 (1966). Certainly, in this day and age a railroad desiring to maintain operations would be better received by the ICC than a non-railroad half-owner who petitions for permission to abandon operations in favor of a property development scheme.
Thus, B & O, if it were so minded, could create formidable difficulties for a third party purchaser who wanted to put the Terminal property to other uses. And a half-interest in the terminal operation in and of itself had virtually no value, since under the binding operating agreements Terminal earned virtually nothing. Judge Tyler suggested that a third party might be tempted to purchase the Reading interest to gain "at least negative control over operations of [Terminal]." 302 F. Supp. at 826. But this is much too speculative a basis for implying the existence of a competitive bidder. We think it much more likely that no one would have wanted to buy into ...