Alleghany Corp. et al. v. James Foundation of New York, Inc, 214 F.2d 446 (2d Cir. 1954)

As the facts are fully stated in the opinion and findings of the district judge, reported in 115 F. Supp. 282, we shall not repeat them.

We shall assume, arguendo, that the James Foundation had conferred upon W & P authority to make a contract for the sale of the stock constituting control of the Western Pacific Railroad Company, and also authority to delegate that authority to S & Co. and Baird; that W & P did thus delegate that authority; that accordingly, on either February 5 or 8, 1951, a contract for the purchase and sale of the stock was made which bound both Alleghany and the James Foundation; and that that contract did not run afoul of the Statute of Frauds. Nevertheless, we affirm for the following reasons:

The agreement between the James Foundation and W & P provided that, if any contract of sale were made, then delivery of the stock by the James Foundation and payment by the purchaser were to occur on the third business day after the date of such contract. If a contract was made on either February 5 or February 8, then it was necessary that Alleghany be able to pay the purchase price, and for the James Foundation to deliver the stock, on either February 8 or February 11. For, considering the circumstances and the character of the agreement between the James Foundation and W & P, time was plainly of the essence.

Alleghany then had control of the Chesapeake & Ohio Railroad. Under 49 U.S.C.A. § 5, the Chesapeake & Ohio is a common carrier as are Western Pacific and Allegheny (because of the latter's control of Chesapeake & Ohio). 49 U.S.C.A. § 5(4) provides that "It shall be unlawful for any person," without the approval of the Interstate Commerce Commission, "to enter into any transaction" by which a carrier will "acquire control of another carrier," or "to accomplish or effectuate, or to participate in accomplishing or effectuating" the control or management in a common interest of any two or more carriers. * * *" It is highly improbable that, in the brief period available,¹  Alleghany could have procured the approval of the Interstate Commerce Commission of the acquisition of the controlling interest in Western Pacific.²  Alleghany had the burden of proving that it could have done so. This burden Alleghany did not discharge. Indeed, it never took any steps to submit the matter to the Commission.³ 

It follows that (ignoring for the moment the Commission's decision in Chesapeake & O. Ry. Co. Purchase, 261 ICC 239) Alleghany could not lawfully have become owner of the stock within the required period and therefore would have been unable to perform the contract with the James Foundation. For, although Alleghany and the James Foundation could validly contract for the purchase and sale of this controlling interest without previous Interstate Commerce Commission approval,⁴  nevertheless, absent such approval, the performance of that contract — the "accomplishing" or the "effectuating" of the acquisition of the stock — would have been illegal, and, under 49 U.S.C.A. §§ 5(4), 5(7), and 10 (1),⁵  would have made each of the parties guilty of a crime. No court should encourage violation of the clear statutory policy by enforcing performance of such a contract — whether by awarding specific performance of the acquisition or damages for not performing — when Commission approval could not be had within the time limit.^5a

It may be suggested that, had the James Foundation itself (i. e., not through an agent) entered into the contract, there would have been an implied waiver of the time provision. Such a suggestion would be of doubtful cogency since, in the face of that provision, it would seem that Alleghany took the risk of not in time procuring the Commission's approval. But we need not now so decide, since here the sales contract was made by agents whose sole authority, contained in the agreement between the Foundation and W & P, gave no power to waive the time provision, and the Foundation did not in any way ratify such an implied waiver.

We think the Interstate Commerce Commission, by its decision in Chesapeake & O. Ry. Co. Purchase, 261 ICC 239 (1945), did not give advance approval of any future purchase by Alleghany of the controlling stock of any railroad, provided only Alleghany deposited the stock with the Chase National Bank under the trust agreement which conferred on that bank as trustee the exclusive power to vote the stock, since, in its opinion in that case, the Commission stated (p. 241): "It is the intention of Alleghany to acquire or dispose of securities of other corporations from time to time, including securities of carriers subject to regulation under the Interstate Commerce Act. It is, however, Alleghany's intention to limit its control of such carriers to the Chesapeake & Ohio and its affiliated carriers so long as such control continues and subject to the right of Alleghany to apply for control of such other carrier or carriers as it may consider to be in the public interest."⁶  The Commission also said (p. 261): "We have given careful consideration to the proposal by Alleghany in its petition filed on April 13, 1945, and heretofore described more in detail, with respect to limiting its control of carriers subject to the Act to only the Chesapeake & Ohio and its affiliated companies, unless further authorization be granted by us. We conclude that such restriction of control is desirable and shall impose conditions in this respect."⁷ 

These statements must, we think, be read as qualifying the approval the Commission gave in 1945 of the retention or purchase by Alleghany of the stocks then specifically under consideration. Otherwise, there would have been a surprising advance benediction of all Alleghany's future acquisitions of control. 49 U.S.C. A. § 5(2) (b) requires that, "Whenever a transaction [for control] is proposed", the Commission, before entering an approval order, "shall notify the Governor of each State in which any part of the properties of the carriers involved in the proposed transaction is situated," shall "afford reasonable opportunity for interested parties to be heard", and shall make a finding that the transaction "will be consistent with the public interest". This requirement, we think, precludes the entry of any blanket Commission order approving future control-acquisitions of any un-named railroad whatsoever.

Affirmed.

On Petition for Rehearing.

Plaintiffs, in a petition for rehearing, virtually concede that our opinion is correct except insofar as it relates to the meaning and effect of the decision and order of the Commission in Chesapeake & Ohio Ry. Co. Purchase, 261 ICC 239 (1945). Plaintiffs' arguments may be summarized thus:

(a) The Commission's 1945 opinion, as interpreted in a subsequent opinion of the Commission, allowed Alleghany to purchase controlling blocks of stock, of any number of railroads, without further ICC approval, provided only that Alleghany trusteed such stock. (b) "Alleghany planned immediately on purchase to deposit the stock under the trust deed" with the Chase Bank, and thus would not acquire control within the meaning of Section 5(2) of the Interstate Commerce Act. This court, therefore, erred in holding that Alleghany could not lawfully acquire the Western stock without new Commission approval, and accordingly erred in holding that Alleghany had, and failed to sustain, the burden of proving that it could have obtained such approval within the short period for delivery provided in the contract. We shall discuss these contentions in turn.

1. Contention that the ICC in 1945 authorized Alleghany in the future to ac- quire, without further ICC approval, the controlling shares of stock of any number of railroads, provided only these shares were deposited with the Chase under the trust agreement.

In their rehearing petition, plaintiffs for the first time refer to Matter of Chesapeake & Ohio Ry. Co. Purchase, 271 ICC 5, decided in 1948. In that case, the Commission had before it an application to modify its earlier 1945 order — Chesapeake & Ohio Ry. Co. Purchase, 266 ICC 239 — (1) to permit the transfer of legal title from Chase to Chesapeake & Ohio of 400,000 shares of the New York Central deposited with Chase, and (2) to permit Young and Bowman to become directors of New York Central while retaining their positions as directors of the Chesapeake & Ohio.¹  The evidence showed that, sometime before 1947, Alleghany, without any specific Commission approval had acquired the New York Central shares, had deposited them under the trust agreement with Chase, and had so advised the Commission.²  Subsequently, Alleghany had transferred to Chesapeake & Ohio the voting trust certificates representing these deposited shares. The Commission in this 1948 case, refused the requested permissions on the ground that they would violate Sections 5(4) and 20a(12) of the Interstate Commerce Act, 49 U.S.C.A. §§ 5(4), 20a(12), and Section 7 of the Clayton Act, 15 U.S.C.A. § 18.

As we understand plaintiffs' rehearing petition, they argue thus: (1) The Interstate Commerce Commission in 1948 knew that, without specific Commission approval, Alleghany, some time after 1945, had acquired the New York Central shares and had transferred legal title to these shares to the Chase by depositing them under the trust agreement. (2) The Commission, in denying authorization of the transfer of legal title to the New York Central shares from Chase to Chesapeake & Ohio, held that such a transfer would put Chesapeake & Ohio in control of the New York Central Railroad, within the meaning of Section 5(2) of the Interstate Commerce Act. (3) Thus the Commission held, in effect, that by the deposit of these shares with Chase, the Chase had obtained control of the New York Central Railroad. (4) Therefore, the Commission in 1948 inferentially interpreted its earlier (1945) opinion and order as authorizing Alleghany, without further approval, to acquire in the future the controlling shares of any and all railroads, provided only that Alleghany deposited such shares with Chase. (5) Consequently (so plaintiffs assert in their petition) if the Western stock were similarly deposited with Chase simultaneously with the delivery of that stock to Alleghany, then "Alleghany would never acquire the control of Western that would require the specific approval of the Interstate Commerce Commission. That `control' would have passed directly to the Chase Bank."

We think this contention rests on a mistaken view of the Commission's 1948 opinion. The Commission did not there hold that the 400,000 shares of New York Central — comprising but 6.2% of its outstanding voting shares — constituted control of that railroad. The Commission explicitly stated that the proceeding was not an application "pertaining to control of the New York Central" under Section 5 of the Interstate Commerce Act. The Commission's opinion dealt at length with the two requests — to acquire title to the shares and to authorize the Chesapeake & Ohio directors to become New York Central directors — as intertwined. It pointed out that, according to the evidence, Alleghany and Young hoped that, if these two requests were granted, the result would soon be that the two railroads would be "managed in a common interest." The Commission stated that Young had testified he hoped to achieve this result through the exercise "of our persuasive powers" on the other New York Central directors, and that, if those persuasive powers failed, the petitioners would soon ask the Commission for permission to exercise control of that railroad. The opinion quoted Section 20a(12) of the Interstate Commerce Act as to interlocking directors of railroads.³  It also quoted Section 7 of the Clayton Act,⁴  and said that "the effect of the release of the stock of the New York Central from the trust together with the interlocking directorates sought by the applicants would be to substantially lessen competition between the New York Central and the Chesapeake & Ohio," adding that "the policy of Congress is to be found not only in the consolidation provisions of the Interstate Commerce Act, but also in the anti-trust Acts," and noted that Section 20a(12) of the Interstate Commerce Act should be considered in connection with the Clayton Act.

We think the Commission's opinion cannot be read as holding (1) that the mere ownership of the 400,000 New York Central shares constituted control and (2) that, absent any specific Commission approval, a deposit by Alleghany of controlling shares of any railroad in trust with Chase satisfied Section 5 of the Interstate Commerce Act.

Plaintiffs have supplied further light on this 1948 opinion. After the filing of the petition for rehearing, this court asked both parties to answer questions which were substantially as follows: If, absent specific Commission approval, Chase, through deposits, acquired control of more than one railroad, would Chase itself not violate Section 5 of the Interstate Commerce Act? Therefore, if the 400,000 shares of the New York Central conferred control of that railroad, did Chase validly hold these shares? If these shares conferred such control, would not participation in accomplishing the deposit with Chase of the Western stock, while Chase continued to control the New York Central, make Alleghany, James and Chase violators of the Act? In a memorandum filed with us, plaintiffs, answering these questions, replied that the Commission, in its 1948 opinion, did not determine "whether the ownership of the 400,000 shares of the New York Central actually constituted control of that carrier."⁵ 

As we said in our original opinion in this case, we think that "Section 5 of the Interstate Commerce Act precludes the entry of any blanket Commission order approving further control-acquisitions of any unnamed railroad whatsoever." Only the most unequivocal statement by the Commission would induce us to believe that it had entered such a blanket order.⁶ 

The foregoing alone disposes of plaintiffs' petition. However, we think it well to consider also plaintiffs' second contention.

2. Contention that Alleghany intended immediately to trustee the Western stock.

Neither plaintiffs' original nor their amended complaint says a word about any deposit with Chase. The amended complaint alleges that Alleghany contracted to "purchase" the Western stock; states that this stock "could afford to its owner practical control and a voice in the management of the railroad," and "that Alleghany purchased the common stock because of its investment value and the qualities of control which it possessed"; and prays that defendant be directed to "deliver" that stock "to plaintiffs."

The pleadings, and even more pronouncedly the evidence at the trial, raised the issue of the intent or purpose of Alleghany in its effort to buy the stock of Western. The trial judge reached no legal conclusion on the issue of illegality, because he held that no purchase agreement had ever been made. But, as an able and experienced trial judge, he wisely found the facts relative to that issue, in order to avoid another trial, should we deem that issue important. Having heard and seen the witnesses testify, he found that "the purpose of Alleghany in offering to purchase the James' Western Pacific common stock was to acquire control of Western. * * *"⁷  We think this finding amply supported by the evidence and therefore not "clearly erroneous." The evidence includes the following:

When Baird first approached Young on February 3, Baird "sounded out" Young on his possible interest in the purchase of a large block of Western, "amounting in effect to working control." Young replied that "we might well be interested." Baird testified that he had approached Young because he felt, from previous talks with Young, "that it would fit into his philosophy of a transcontinental railroad system." Young testified that alleghany sought to buy "control" of Western Pacific, and that this purchase "was moving in (the) direction of a transcontinental system," on which, Young said, "I have always set my heart." If, however, the stock were deposited in trust, so as to deprive Alleghany of voting power, Young's aim to acquire a transcontinental system would not be achieved.⁸  Young further testified that Baird hold him that Pflugfelder was "the controlling interest in the Denver & Rio Grande, and that if we accepted the Baird offer, his relationship with Mr. Pflugfelder was such that he could induce him to cooperate with us in a community of interests." Breck testified he had said to Baird "that were Alleghany Corporation to make this purchase through Mr. Wyer and ourselves, that we might establish a community of interests between the Western Pacific and the Denver & Rio Grande railroad at its principal connection in Salt Lake City, that it might increase the community of interests that already existed." These suggestions would have been meaningless unless Alleghany were to control the Western Pacific.⁹ 

Perhaps the foregoing is not conclusive. More important is Young's testimony that Breck said to him that, if Alleghany purchased the Western stock, Breck would like, through Young, to become a Western director. But if the stock were deposited with a trustee which would "independently" vote for directors, Young would have no means of satisfying Breck's desire.

True, Young testified that, when, on February 4, Kirby asked what would be the position of the Commission, Young responded that "there was no reason to believe that it would not be exactly similar to the position that it had taken on our purchase of large and possibly controlling blocks of the Rock Island and other railroads, which had been deposited with the Chase Bank under the agreement and without the slightest repercussion or question of any kind"; that "there was not the slightest thing to be concerned about"; and that he would take up the matter with Purcell. Purcell testified he had told Young on February 4 that it would be necessary to deposit the Western shares with Chase under the trust agreement, and that Young had "replied * * * that of course we would deposit the shares immediately upon purchase."

But — and here we come to crucial facts — no one on Alleghany's behalf took any steps to arrange for such a deposit, or to confer with Chase about the matter — even after, on February 5, Wyer reported to Breck, Breck to Baird, and Baird to Young, that the trustees of the James Foundation would not accept any offer from Alleghany (outside the agreement with W & P) unless prior Commission approval were obtained.

The failure to take such steps is underscored by the following: Purcell testified that on February 4 — the very day on which, according to the testimony of Young and Purcell, there had been a discussion of a deposit under the trust agreement with Chase — Young told Purcell that, if they went ahead with the purchase, Purcell should talk to Alleghany's banks with a view to substituting the Western Pacific stock for other items of collateral in Alleghany's bank loans. On February 5, when Young reported that he had made the purchase, he asked Purcell to take up this question with the banks. Anzalone, a vice president of Alleghany, testified that on February 5, he told the Chase that Alleghany was purchasing a substantial amount of Western Pacific stock and would like the Chase to substitute, as collateral under that bank's loans to Alleghany, as much Western Pacific common as possible for cash and governments. The Chase agreed. Significantly, although Chase was also the trustee under the trust agreement, there is no evidence that anything was said by Alleghany to Chase about depositing the Western stock in trust. On February 5, the Executive Committee of Alleghany passed a resolution authorizing the purchase of the Western stock; this resolution contains no reference to any deposit under the trust agreement.

In a letter dated February 8, authorized by Young, Alleghany's attorneys wrote Seligman and Baird, saying they "had sold to Alleghany" the Western common stock, demanded delivery to Alleghany, and referred to suggestions about facilitating that delivery. The letter mentions nothing of a deposit with the Chase — although plaintiffs, in their petition for rehearing, say that the transfer would have been by James direct to the Chase, or to Alleghany, accompanied by simultaneous transfer by Alleghany to the Chase.

Considering the foregoing, and especially the omission from anything in writing concerning Alleghany's intent to deposit the stock in trust, we think the trial judge could properly refuse (as he obviously did) to credit the oral testimony on the subject, introduced by Allehany, of witnesses he saw and heard.

Petition denied.

Appendix.

In its 1945 opinion, the Commission had excepted, from the requirement that Alleghany trustee certain railroad stocks, "Alleghany's holdings of the stock of the Missouri Pacific Railroad Company which is now in reorganization under Section 77 of the Bankruptcy Act [11 U.S.C.A. § 205]." In 1947, in a proceeding for authority to merge the Pere Marquette into the Chesapeake & Ohio — Pere Marquette Railway Co. Merger, 267 ICC 207 — an independent director of the Missouri Pacific intervened and asked the Commission to require Alleghany, as a preliminary to approval of the merger, to trustee its Missouri Pacific stock. The Commission refused. It said (267 ICC at 253): "The effect of the order in Chesapeake & Ohio Ry. Co. Purchase, supra, is to require the trusteeing of stock of the Missouri Pacific or any successor corporation that the Alleghany may receive in the reorganization of that company. In addition, the Alleghany has committed itself in this proceeding to deposit under the trust agreement any such stock so received by it. The trust agreement with the Chase National Bank, in that proceeding, contemplates the further depositing of stock such as that here considered."

Plaintiffs argue that this language supports their interpretation of the 1945 opinion and order. We cannot agree. The statement in the 1947 opinion, that the trust agreement "contemplates the further depositing of such stock as that here considered," was made in the context of a consideration of the stock of Missouri Pacific or a successor which might emerge from a reorganization.

All the Interstate Commerce Commission said in effect was that its 1945 order required the trusteeing of the stock of Missouri Pacific, or such successor, received by Alleghany; that Alleghany in that proceeding had committed itself to trusteeing such stock; and that the trust agreement embodied such commitment as to such stock. The fact that Alleghany's holdings of Missouri Pacific stock were 33.81% of the common did not of course mean that Alleghany would receive an equivalent percentage, or even any, of the voting stock on the consummation of the reorganization, or that whatever amount it might receive would constitute control. All that the ICC could determine at the time, in the light of the situation then before it, was that any Missouri Pacific voting stock which Alleghany might later receive would be subject to the terms of the trust agreement. Future events alone would determine whether the ICC would ever face a question of control. The ICC was not dealing with an existing control situation. The Missouri Pacific shares presented a unique problem. While the Commission did not require Alleghany at that time to trustee those shares, since they were then not voting shares — Missouri Pacific being then in reorganization — the ICC stated that, "Should Alleghany acquire any voting stock at the conclusion of the court proceedings, such stock would be covered" by Alleghany's proposals, which included a proposal to trustee all voting stocks of carrier corporations then owned or thereafter acquired (261 ICC 239, 241). The Missouri Pacific situation was given special consideration by the ICC because of its special circumstances. Accordingly, nothing in the ICC's treatment of Missouri Pacific can properly be taken as having general application to any other carriers, unnamed, whose stocks were not in Alleghany's portfolio at the time the ICC approved the trust indenture. The authorization of the future deposit of the stock of the reorganized Missouri Pacific was clearly limited to that unique situation with which the ICC, because of its function under Section 77 of the Bankruptcy Act, was, of course, entirely familiar. We think the Commission did not intend to extend that authorization to any number of other future control situations concerning which it was not advised.