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June 6, 1972

REA Express, Inc.
The Alabama Great Southern Railroad Company, et al.

Metzner, District Judge.

The opinion of the court was delivered by: METZNER

METZNER, District Judge:

Defendants Chesapeake and Ohio Railway Co., Baltimore and Ohio Railroad Co. and Western Maryland Railway Co. move pursuant to Rule 12(b)(1), Fed. R. Civ. P., to dismiss the complaint on the ground that the court lacks jurisdiction over the subject matter. The moving defendants assert that plaintiff's complaint constitutes an attack upon the validity of existing orders of the Interstate Commerce Commission, which must be brought before a three-judge court pursuant to the Urgent Deficiencies Act, 28 U.S.C. §§ 2321-2325.

 Plaintiff REA Express is a Delaware corporation with its principal place of business in New York City. It is a common carrier under the jurisdiction of the Interstate Commerce Commission. Of the 61 defendants, 56 are railroad corporations which currently hold notes issued to them by REA in 1959, two are railroad corporations which formerly held such notes, and three, including the United States, are named as assignees of REA notes.

 Jurisdiction is asserted under § 4 of the Clayton Act, 15 U.S.C. § 15, under 28 U.S.C. § 1331, under diversity of citizenship, 28 U.S.C. § 1337, and under pendent jurisdiction. Plaintiff seeks damages for alleged breaches of the antitrust laws, breaches of fiduciary relationship and violations of the Interstate Commerce Act. In addition, it seeks a declaratory judgment that the notes in suit are void.

 An understanding of the issues raised by the present motion requires a rather detailed review of the factual background of this case. On January 23, 1929, substantially all of the railroads in the United States entered into a joint venture to conduct the railway express business in this country. Pursuant to that end, they formed REA as their exclusive agent for carrying on the business.

 REA was to have 1,000 shares of common stock, to be distributed to the railroads participating in the joint venture in proportion to the express business done by them during a base period from 1923 to 1926. There were 15 members on the board of directors, each an officer or director of one of the participating railroads. Uniform operating agreements were executed between REA and each participating railroad. Identical agreements were to be executed with railroads which used the facilities, but chose not to participate as shareholders. Under these agreements, annual revenues of REA, after deduction of operating costs, would be distributed to all railroads executing operating agreements in proportion to their use.

 In order to procure funds with which to purchase the assets of the existing express company and to provide working capital, REA proposed to issue $32,000,000 of 5% bonds (the 1929 bonds) for sale to the public. REA undertook to make semi-annual sinking fund payments to the indenture trustee in the amount of $800,000, which were to be treated as business expenses and deducted from operating revenues before any distributions to the user railroads.

 Pursuant to §§ 5(1), 5(2) and 20a of the Interstate Commerce Act, 49 U.S.C. §§ 5(1), 5(2), 20a, the railroads applied to the ICC for approval of these transactions, and the Commission issued an opinion and order expressly approving the issuance of the bonds, the distribution of common stock, and the pooling of earnings. Securities and Acquisition of Control of Railway Express Agency, Inc., 150 I.C.C. 423 (1929). This order and the other orders of the ICC involved in this matter will be discussed below.

 Subsequently, on April 11, 1929, the board of directors of REA adopted a resolution which altered the method of making the sinking fund payments. This resolution, adopted just before the first payment was due, provided that the payments were to be made proportionately by the shareholding railroads directly to the trustee, with these railroads being credited on REA's books as holders of "Non-Negotiable Debt to Affiliated Companies -- Advances". Thus the distributable revenue of REA was to be calculated without deducting the sinking fund payments. REA was to be charged interest of 5 1/4% per annum on the Non-Negotiable Debt.

 Approximately $15,200,000 had been paid into the sinking fund by December 31, 1938, of which $2,600,000 had been repaid to the railroads by REA, leaving an outstanding Non-Negotiable Debt of $12,600,000. An additional $800,000 sinking fund payment was due on March 1, 1939, and was paid by the railroads.

 By 1938 REA was desirous of retiring the 1929 bonds because of the lower interest rates then prevailing. To that end, the board of directors determined to call the remaining $16,000,000 in outstanding bonds for redemption on March 1, 1939. To obtain the funds necessary, the board proposed to issue a like amount of serial notes bearing lower interest rates. These notes (the 1938 notes) were to be sold to the public and would mature in 20 semi-annual installments in the amount of $800,000. Funds for the payment of the notes as they matured were to be advanced by the shareholding railroads and treated as additional Non-Negotiable Debt. REA was to be charged 5% interest on this new Non-Negotiable Debt. Pursuant to § 20a of the Interstate Commerce Act, REA applied for and received approval by the ICC to issue the notes. Railway Express Agency, Inc., Notes, 230 I.C.C. 478 (1938).

 By July of 1959 the 1938 notes had been paid off. However, the Non-Negotiable Debt had reached a level of $27,637,053.80, and the REA board of directors authorized a new set of promissory notes to be issued in exchange for and as evidence of the Non-Negotiable Debt to each creditor railroad in proportion to its share of the debt. A sinking fund was established for the purpose of paying interest and principal on the notes into which REA undertook to pay each year an amount equal to 10% of its net income for the year. In an unpublished order dated September 25, 1959, the ICC approved issuance of these notes pursuant to § 20a of the Interstate Commerce Act. Approval noted Railway Express Agency, Inc., Notes, 307 I.C.C. 805 (1958). REA paid about $525,000 into the sinking fund, leaving $27,206,375.84 principal amount of the 1959 notes outstanding on September 30, 1971.

 In addition, in 1959 the railroads entered into a new and amended standard operating agreement, to become effective on October 1, 1959, and continue until December 31, 1973. Pursuant to § 5(1) of the Interstate Commerce Act, the railroads applied for and received ICC approval of the new agreement. Express Contract, 1959, 308 I.C.C. 545 (1959).

 The motivating factor for the new operating agreement was the increasing dissatisfaction of the railroads with REA's earnings record. The withdrawal and amendment terms were liberalized to appease some railroads which wanted to end the joint venture altogether and liquidate REA. In the next several years, the earnings picture for the company got no better, and in 1967 and 1968 REA management made several unsuccessful attempts to find a purchaser for the REA stock owned by the railroads.

 REA's financial adviser informed management that no interested purchaser would be found unless the 1959 operating agreement was terminated and REA freed from railroad control. In light of this advice, most of the shareholding railroads deposited their stock in a voting trust on June 10, 1968, the trustees of which were not associated with the railroads. The trustees were given full powers of shareholders, including the power to sell their shares if the owners of voting trust certificates representing a majority of the deposited stock approved the sale. In addition, by June 18, 1968, it was agreed that the 1959 operating agreement be terminated on December 31, 1968.

 On June 23, 1969, the voting trustees received an offer to purchase their REA stock from 5 executive officers of that company. The purchase price was $1 per share plus 3/10 of a warrant in a new company to be called the REA Holding Corporation. The offer was to remain in effect until July 9, 1969.

 By that date the voting trustees had received consents to the offer from a majority of the deposited stock and the offer was accepted. On August 1, 1969, the formal agreement of sale was executed, and by August 21, 1969, the deal had been consummated. Slightly more than two years later the present lawsuit was filed.

 REA asserts that various of the transactions described above were caused by the shareholding railroads through their control of REA's board of directors and violated § 10 of the Clayton Act, 15 U.S.C. § 20, and § 20a of the Interstate Commerce Act. § 10 of the Clayton Act makes it unlawful for any common carrier to deal in securities, supplies, or other articles of commerce with another corporation with which it has an interlocking directorate unless those dealings are carried out by means of competitive bidding. § 20a of the Interstate Commerce Act provides that any issuance of stocks, bonds or other evidence of indebtedness of a common carrier shall be void unless authorization therefor has been given by the ICC after an investigation into the purposes and uses of the proceeds of the issuance and a finding that the issuance is for a lawful object, compatible with the public interest, and necessary for performance by the carrier of its services.

 REA's complaint contains, in essence, four claims. The first is based on purported violations of § 10 of the Clayton Act. It charges that the Non-Negotiable Debt constituted "securities" or "articles of commerce" within the meaning of § 10 and that the following transactions between REA and its ...

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