Petition — REA Express, Inc. v. Travelers Insurance Co.

Supreme Court of the United States

OcTOBER TERM,

wee):

REA Express, Inc., on its own behalf and on

behalf of certain of its former employees now retired,

Petitioner,

v.

THE TRAVELERS INSURANCE COMPANY, et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

DISTRICT OF COLUMBIA CIRCUIT

ArTHUR M. WISEHART

WISsEHART, Friou & Kocn

Bar Building

36 West 44th Street

New York, New York 10036

(213) 730-0044

Attorney for Petitioner

S. CHESTERFIELD OPPENHEIM

1730 Pennsylvania Avenue, N.W.

Washington, D. C. 20006

Of Counsel

Paess or Byron S. ADAMS PRINTING, INC., WASHINGTON, D.C.

a og

TABLE OF CONTENTS

Page

ELIE Seta Gee FEY Fe ES 1

Ne ee cca uaes 2

I nS ee ee 2

a ads aed ccUbudn 2

EE Sr ne ee 3

Basis FoR FepERAL JURISDICTION ..........00ce0ceees 4

Reasons roR GRANTING THE WRIT ..............0005: 6

Question 1: Whether Bangor Punta Encompasses

EF TE SES ig) aso as ge Ra a 6

1. Creditors’ Interests .......ccccccccccces 8

ee as ec a ceeenee 10

yp GS exc avenwceuoeaasun 11

4. Distinction Between Legal and Equitable

PCA SECTORS 12

i Gt vi wccndecotcdebscedee 14

6. The Contemporaneous Ownership Rule .. 15

Question II: The Impact of Illinois Brick ....... 17

Question III: The Propriety of Summary Judg-

BD. ed gekkecddscbdeekaed bina tenenensiaeay 19

- .. s cicasetetassaddebenelanumineke 22

Aprenpix A: Section 1 of the Sherman Act, 15 U.S.C.

Dt ives duueecanckeredinasneediacnen eee la

Appenpix B: Opinion of the United States Court of

Appeals for the District of Columbia ........... 5a

Appenpix C: Memorandum and Order of the United

ee EO eee 8a

ii INDEX OF CITATIONS

CasEs: Page

Bangor Punta Operations v. Bangor & Aroostook

ailroad Co., 417 U.S. 703 (1974) ............ passim

Continental Ore Co. v. Union Carbide & Carbon Co.,

Dee Weems Ge CREE ccvecdecnenscenss dens dawns 17

Fleitmann v. Welsback Street Lighting Co., 240 U.S.

Oy COMO os os dao n4atkdvidiadecs eee 13

Fortner Enterprises, Inc. v. U.S. Steel Corp., 394 U.S.

oR ee BR re ere ee 17

Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975) .. 7

Hanover Shoe, Inc. v. United Shoe Machinery Corp.,

ee eras Ge Oe COG CRe v6 vnc casauies checane

Home Fire Insurance Co. v. Barber, 67 Neb. 644, 93

Ss UE 0 0b Dr ccths bnesde bee ciao 6, 14

Illinois Brick Company v. State of Illinois, ——~— US.

—, 45 U.S.L.W. 4611 at 4615 .......... 2, 13, 17,18

Minnesota Mining & Mfg. Co. v. New Jersey Wood

Finishing Co., 381 U.S. 311 at 318 (1965) ........ 17

Northern Pacific Railroad Co. v. United States, 356

7 AE Reel ee Ser erie et are 7

Pepper v. Litton, 308 U.S. 295, 306-307 (1939) ...... 21

Perma Life Mufflers, Inc. v. International Parts Corp.,

a I FR erry 8, 13, 16

Poller v. Columbia Broadcasting System, Inc., 368 U.S.

— Freer sdutneatdueconee 19

Radiant Burner v. People Gas Light & Coke Co., 364

ek SEE nsnwakantees vents absce bar ea 17

Radovich v. National Football League, 352 U.S. 445 at

Sy EE os b's KR b Man bdannd os dbeet ant ds toes 8,17

REA + ¥* Inc. v. Travelers Insurance Co., et al.,

Ge hn SI, Bie MIE cevccccdccsccdcnvdsess 2

Ross v. Bernhard, 396 U.S. 581 (1970) .............. 13

Timken Roller Bearing Co. v. United States, 341 U.S.

EE och ni.deb iin’ daben seed tuseawdhaasse 16

United Mine Workers v. Gibbs, 383 U.S. 715 (1977) .. 3

United States v. Diebold, Inc., 369 U.S. 654, 655

EE 64 cba idlndddedeiedkedd saab xk éhoda 9,11

United States v. National Association of Real Estate

Boards, 339 U.S. 485 (1950) ..........esceeeees 7

United States v. Soconoy-Vacuum Oil Co., 310 U.S.

CEE n'tn 6 tang nda chbelduvand éuaka weknenbe 7

United States v. Trenton Potteries Co., 273 U.S. 392

EN ch bnd-ns ab be maidens dade akdedhieaalans 7

White Motor Co. v. United States, 372 U.S. 253 (1963) 19

Index of Citations Continued ili

Page

Rute:

Federal Rule of Civil Procedure 15(b) .............. if)

STaTuTes:

Clayton Act, 15 U.S.C. §$ 15, 20 ............ 2, 4, 6, 12, 13

Sherman Antitrust Act, 15 U.S.C. §1-3 ............ 2,4

EE ED cc ccudiSb.ccoedccvccacoeesegaess 2

Se RS Ee EE TE IS, o De ccccccecceectesoesone 4

i Ns os cee teesesabeesdetég wet 4

OrHer AUTHORITIES:

4A Collier on Bankruptcy 70.29[3] .............545. 21

New York Debtor & Creditor Law § 276 ............ 10

Report of the Attorney General’s National Committee

to Study the Antitrust Laws, page 30, fn.106.... 16

Report of Dermott Noonan, C.P.A., to Robert L.

Wright, Esq., special counsel to the trustee, dated

September 27, 1976, and filed in the Bankruptcy

Court, S.D.N.Y., in Matter of REA Express,

Inc., a bankrupt, 75-B-253 ..........+eeeeeeeee 20

Rosenberg, ‘‘Intercorporate Guaranties and the Law

of Fraudulent Conveyances: Lender Beware,’’ 125

U.Pa.L.Rev. 235 at 259 (1976) ...5.....- cee ee ee 10

RET CET eee =

TR a

RES - = UT

IS Ss a i I TI I cs se

IN THE

Supreme Court of the United States

OcToBER TERM,

No.

REA Express, INc., on its own behalf and on

behalf of certain of its former employees now retired,

Petitioner,

v.

THE TRAVELERS INSURANCE COMPANY, et al.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

DISTRICT OF COLUMBIA CIRCUIT

REA Express, Inc., (‘‘REA’’), through its trustee

in bankruptcy, C. Orvis Sowerwine, petitions for a

writ of certiorari to review a judgment in the above

entitled case by the United States Court of Appeals for

the District of Columbia Circuit. The judgment affirms

in part and reverses in part a decision of the United

States District Court for the District of Columbia.

OPINIONS BELOW

The opinion of the Court of Appeals is set forth at

pp. 5a-7a of the appendix annexed hereto. The District

Court’s opinion is at pp. 18a-19a. It is also reported

2

as REA Express, Inc. v. Travelers Insurance Co., et al.,

406 F.Supp. 1389 (1976).

JURISDICTION

The judgment of the Court of Appeals was dated

and entered on April 21, 1977. The jurisdiction of this

Court is invoked under 28 U.S.C. § 1254(1).

QUESTIONS PRESENTED

1. Whether the reach of this Court’s decision in

Bangor Punta Operations v. Bangor & Aroostook Rail-

road Co., 417 U.S. 703 (1974), encompasses the circum-

stances of this case, which include inter alia per se

antitrust violations, substantial insurance companies

not involved in the prior ownership of the plaintiff,

creditor fraud, and a subsequent bankruptcy in the in-

terest of which this case is now being pursued.

2. Whether those guilty of per se antitrust viola-

tions will be permitted to escape liability altogether if

no proper party plaintiff exists under this Court’s

rulings in Bangor Punta and Illinois Brick.

3. Whether the District Court improperly used

summary judgment to pretermit trial on important

factual issues on which defendants’ claim of an anti-

trust exception is based.

STATUTES INVOLVED

The statutes involved are Sections 1-3 of the Sher-

man Antitrust Act, 15 U.S.C. §1-3, and §§4 and 10

of the Clayton Act, 15 U.S.C. §§15, 20, which are set

forth in Appendix A annexed hereto.

3

STATEMENT OF THE CASE

The case presented by this petition is simple, but im-

portant. It involves antitrust claims based upon the

purchase of group benefits for former employees of the

bankrupt, REA Express, Inc. As a result of REA’s

bankruptcy, the life insurance benefit of the retired

employees has lapsed. They and others are creditors

of the bankrupt estate. It appears that the assets of the

bankrupt will be inadequate to pay any part of the

claims of the general creditors unless substantial re-

coveries are obtained from petitioner’s antitrust liti-

gation. Claims exceed assets by substantially in excess

of $40 millicn.

The District Court dismissed petitioner’s claims

with prejudice on the basis of motions for summary

judgment by respondents.

In a per curiam decision, the Court of Appeals af-

firmed in part and reversed in part. It affirmed re-

garding the antitrust claims, stating simply, without

analysis, that they ‘‘are foreclosed by Bangor Punta

Operations v. Bangor & Aroostook Co., 417 U.S. 703

(1974).’’ However, regarding the pendent state claims,

the Court of Appeals reversed the District Court’s

‘“‘with prejudice’’ dismissal, quoting from United Mine

Workers v. Gibbs, 383 U.S. 715 (1977). Finally, the

Court of Appeals said (7a) :

‘It is our view that the insurance claims of for-

mer employees of appellant are not part of this

litigation, so nothing herein or in the District

Court’s opinion should be read as affecting those

claims. Nor are the claims of creditors of the bank-

rupt appellant before this court. Consequently any

claims they may have against appellees herein also

remain unaffected by our judgment and the judg-

ment of the District Court.’’ (Footnotes omitted.)

4

BASIS FOR FEDERAL JURISDICTION

The District Court’s jurisdiction in this case is con-

ferred under Section 4 of the Clayton Act (15 U.S.C.

§15), for violations of the antitrust laws, 28 U.S.C.

§§ 1321 and 1337, D.C. Code § 11-501, and under the

doctrine of pendent jurisdiction.

The amended complaint alleges inter alia, an illegal

per se price-fixing combination and conspiracy between

The Travelers Insurance Company (‘‘Travelers’’),

the railroad defendants, and their collective bargain-

ing conference committees, in violation of Sections 1,

2 and 3 of the Sherman Act. The complaint also alleges

violation of Section 10 of the Clayton Act, based upon

the interlocks between railroad officials and REA’s

Board of Directors, and pendent state claims including

breach of fiduciary duty by the interlocked directors,

unjust enrichment, and excision of insurance benefits

without consideration.

The focal claim of REA revolves around the pur-

chase by REA, then owned and dominated by a rail-

road-interlocked Board of Directors, of a Travelers

group insurance policy for its employees, which re-

quired REA to pay the same uniform premiums per

employee/month as did the railroads. REA was co-

erced into participation in the master Travelers policy,

since all of REA’s officers were under the control of a

Board of Directors composed of railroad officers.

The Travelers’ master policy uniform premiums

were fixed collusively by Travelers and the railroads

without reference to the costs of an individual em-

ployer. As revealed in discovery, a number of other

large insurance companies participated as ‘‘re-insur-

ers’’, further extending the effect of the anti-competi-

tive activity.

5)

Absent competitive bidding and price competition,

REA was thus compelled to pay substantially higher

uniform rates fixed by the defendants than it could

have obtained individually from other insurance com-

panies. By an Amendment 16 to the master policy,

adopted without the participation of REA, and in

anticipation of its sale by the railroads, insurance un-

der the policy regarding a given class of employees,

ineluding previously retired employees, was made to

terminate on the date the employer withdrew from

the policy. REA did withdraw from the policy and

prior to its adjudication as a bankrupt on November

6, 1975, REA obtained insurance coverage for its em-

ployees at premiums lower than the uniform premiums

conspiratorially fixed by the defendants. When REA

was adjudicated a bankrupt, the insurance benefits of

its former employees, including the life insurance of

those who retired prior to REA’s sale by the railroads,

lapsed because premiums could no longer be paid.

This iilegal per se price-fixing conspiracy caused

substantial injury to REA, while giving the railroads

the benefits from the excess premiums paid by REA

and greater profits for Travelers and the large insur-

ance companies participating as re-insurers.

Following three years of extensive discovery through

interrogatories and production of documents, REA

filed a motion for partial summary judgment based on

its belief of undisputed facts related to the above-

described illegal per se price-fixing conspiracy. The

defendant railroads and Travelers filed cross-motions

for summary judgment based on this Court’s 5-4 ruling

in Bangor Punta.

6

REASONS FOR GRANTING THE WRIT

Question I: Whether Bangor Punta Encompasses This Case

The holding in Bangor Punta was that the controll-

ing shareholder of over 99 per cent of the railroad’s

stock, Amoskeag Company, the real beneficiary of any

corporate recovery, lacked standing to sue in equity

on the principle that a stockholder may not reap a

‘‘windfali’’ profit from acts of corporate mismanage-

ment, if he acquires his shares from the alleged wrong-

doers after the wrongs occurred. 417 U.S. at 711, 712.

The majority relied principally on Home Fire Insur-

ance Co. v. Barber, 67 Neb. 644, 93 N.W. 1024 (1903).

This petition is based on the importance of resolv-

ing the important and novel issue of the conflict be-

tween standing to sue for treble damages in a private

antitrust suit, under Section 4 of the Clayton Act, for

an alleged illegal per se price-fixing combination and

conspiracy, in violation of the Sherman Act, and stand-

ing in an equity suit grounded on private corporate

law principles pertaining to corporate waste and mis-

management.

The decision of the District Court, affirmed by the

Court of Appeals in a per curiam opinion, holding that

REA’s federal claims are foreclosed by Bangor Punta,

totally misconceives the rationale and ruling of the ma-

jority opinion in that case. The decision also results in

an unjust and harsh result, which petitioner believes is

erroneous as a matter of law, and not intended by the

limited ruling of the Bangor Punta majority.

Petitioner’s basic position is that the two lower

courts indiscriminately applied the decision in Bangor

Punta to the radically different circumstances in

7

REA’s suit. In doing so, the rulings below are in direct

conflict with this Court’s series of decisions upholding

private treble-damage suits under Section 4 of the

Clayton Act as a Congressional enactment to redress

injury to a nerson’s property or business causally re-

lated to an antitrust violation and as a deterrent to

other such violations.

This Court has repeatedly condemned conspiratorial

price-fixing as conclusively presumed to be unreason-

able per se restraints, without elaborate inquiry into

the precise injury to competition or the business justifi-

eation for their use. See Northern Pacific Railroad

Co. v. United States, 356 U.S. 1 at 5 (1958).

The Court has not receded from its condemnation of

horizontal, illegal per se price-fixing agreements as

reflected in the recent application of that rule even to

minimum fee schedules of bar associations in Goldfarb

v. Virginia State Bar, 421 U.S. 773 (1975). There the

opinion of a unanimous Court stressed that ‘‘more

comprehensive’”’ language than that of the Sherman

Act ‘‘is difficult to conceive.’’ 421 U.S. at 787. Con-

spiratorial price-fixing has been repeatedly regarded

by this Court as a classic illegal per se Sherman Act

violation. The uniform premiums fixed by the defend-

ants in REA’s suit, including inordinate profit margins

and costs, clearly fall within the Congressional con-

demnation of concerted price-fixing, which this Court

has construed strictly ever since its landmark rulings

in United States v. Trenton Potteries Co., 273 U.S. 392

(1927) and United States v. Socony-Vacuum Oil Co.,

310 U.S. 150 (1940). Those ruling were later applied

to conspiratorial prices for services in United States

v. National Association of Real Estate Boards, 339

U.S. 485 (1950).

8

In all those cases, this Court has emphasized the Con-

gressional intent that the strong public policy against

price-fixing combinations be construed strictly against

any claims of exception thereto.

Petitioner submits that the grounds for granting the

writ in this case are as compelling as those recognized

by the Court in Perma Life Mufflers, Inc., v. Interna-

tional Parts Corp., 392 U.S. 134 (1968). There Mr.

Justice Black’s majority opinion revealed that because

the ruling by the Court of Appeals ‘‘seemed to threaten

the effectiveness of the private antitrust action as a

vital means for enforcing the antitrust policy of the

United States, we granted certiorari... .’’, 392 U.S. at

136. In Radovich v. National Football League, 352 U.S.

445 at 454 (1957), the Court stressed that ‘‘require-

ments to burden the private litigant beyond what is

specifically set forth by Congress’’ should not be added

to the antitrust laws by the courts,

For convenient reference, we present below excerpts

from the majority opinion in Bangor Punta to show

that substantial questions exist as to whether its reach

encompasses the radically different circumstances of

this case.

1. Creditors’ Interests

The Bangor Punta opinion notes that the action was

not brought on behalf of any creditors, that it was

never so contended by the plaintiffs, and that ‘‘the

financial health of the railroad is excellent.’’ Footnote

15, 417 U.S. at 718.

As the District Court below itself recognized, the

aspect of this case ‘‘perhaps most troubling’’, is the

argument (16a-17a)

9

‘*. .. that the interests of the REA employees

and creditors make Bangor Punta inapplicable.

The caption of the complaint asserts that REA

sues in its own capacity and on behalf of its em-

ployees. Moreover, REA was adjudicated a bank-

rupt on November 6, 1975, so that any recovery

in this lawsuit would first inure to the benefit of

the estate, and be distributed ultimately to the

ereditors of REA.”’

The Court of Appeals, in that portion of its per

curiam opinion quoted above at p. 3, states that ‘‘the

insurance claims of former employees of appellant are

not part of this litigation’’. However, this is not an

insurance claim, but an antitrust claim, the proceeds

of which are sought to fund the insurance benefits of

the employees which lapsed, converting them into credi-

tors, and to pay other creditors monies to which they

are rightfully entitled for furnishing goods and

services.

In addition to being contrary to the admonition of

United States v. Diebold, Inc., 369 U.S. 654, 655 (1962),

regarding the proper procedure on summary judg-

ment, the handling of this case by the courts below is

wholly inconsistent with the fact that under Federal

Rule of Civil Procedure 15(b), the pleadings ought to

be deemed amended to conform to the proof. This is

especially important here since the bankruptcy of

REA interceded following the initial pleading in the

ease, and the ‘‘with prejudice’’ dismissal was on mo-

tions for summary judgment. Neither reasons of judi-

cial efficiency nor the limited resources of the bank-

rupt estate support that cavalier treatment of the anti-

trust claims which, in the light of present circum-

stances, are the chief hope of recovery of thousands

of creditors.

10

2. Fraud or Deceit

‘*Amoskeag does not contend that the purchase

transaction was tainted by fraud or deceit... .”’

417 U.S. at 710.

Count V of the complaint alleges that Amendment

No. 16 to the policy, wiping out the vested life insur-

ance benefits of 4,000 employees was adopted by the de-

fendants without consideration to REA. The effect of

this amendment was to wipe out the vested life in-

surance benefits from the railroads’ group policy for

several thousand employees who retired while REA

was still owned by the railroads. These employees are

now creditors of the bankrupt as a result. Such a trans-

action with inadequate consideration, made with intent

to hinder or delay either present or future creditors,

is deemed fraudulent under the Uniform Fraudulent

Conveyances Law (adopted in New York where the

bankrupt’s principal place of business was located).

N. Y. Debtor & Creditor Law § 276.

While the word ‘‘fraud’’ was not used in the com-

plaint, lack of consideration and breach of fiduciary

duty were alleged, and the action was brought by plain-

tiff on its own behalf ‘‘and on behalf of certain of its

former employees now retired’’. Actual ‘‘fraud’’ may

be inferred in such circumstances when, as here, the

transactions were not at arm’s length and the parties

were affiliated corporations. See Rosenberg, ‘‘Inter-

corporate Guaranties and the Law of Fraudulent Con-

veyances: Lender Beware,’’ 125 U.Pa. L.Rev. 235 at

259 (1976).

Further, creditor fraud was clearly put in issue by

plaintiff’s affidavits and its statement of genuine issues

of fact necessary to be litigated:

esie tee ee ee. Oe ee ee. ee. cele ~

aes ree ee -<

11

‘‘Amendment No. 16 and the circumstances of

the sale of REA were fraudulent with respect to

REA, its creditors, employees, retired employees

and purchasers.’’ (J.A. 89).

The only further requirement under the Uniform

Fraudulent Conveyances Act is insolvency or under-

capitalization when the transaction occurred, a cireum-

stance which also was put in issue by the statement of

disputed issues (ibid.) :

‘‘On or about the time of the sale of their REA

stock by the railroads, REA was undercapitalized,

and the effect of Amendment No. 16, adopted with-

out consideration for REA, was to aggravate that

condition as to REA’s present and future credi-

tors.”’

We stress the foregoing discussion of creditor fraud

not to establish an independent basis of an action for

fraudulent conveyances, but to show that a substantial

question exists whether, under Bangor Punta, federal

antitrust causes of action should be viewed as having

been extinguished.

Thus, having in mind that ‘‘[o]n summary judgment

the inferences to be drawn from the underlying facts

contained in such material [affidavits, exhibits and

depositions] must be viewed in the light most favor-

able to the party opposing the motion’’, this case, un-

like Bangor Punta, must be regarded as one involving

fraud or deceit. United States v. Diebold, Inc., 369

U.S. 654, 655 (1962).

3. Non-Prior Owners

The holding in Bangor Punta is premised upon

claims against former owners and the inequitable effect

12

of recovery resulting in a windfall profit for those who

purchased stock from them. 417 U.S. 716.

However, the principal defendant in this case is

Travelers, a company in no way involved in the prior

ownership of REA. Further, discovery in the case

revealed collusive price-fixing action between Travelers

and other large insurance companies which acted as

re-insurers. Like Travelers, the re-insurers were not

former stockholders of REA. These other insurance

companies are not named as defendants in the com-

plaint, but that is unnecessary. Travelers would be

jointly and severally liable for damages resulting from

their collusive activity.

Such a situation was not involved in Bangor Punta,

and it is important that the question of whether collu-

sive activity by non-prior owners with prior owners

can be used to insulate the former from joint and sev-

eral liability for antitrust violations not otherwise pro-

tected.

4. Distinction Between Legal and Equitable Causes of Action

The Bangor Punta opinion characterizes the action

there as ‘‘in substance, a typical derivative suit seeking

an accounting from the previous controlling share-

holder for various acts of corporate waste and mis-

management.’’ 417 U.S. at fn. 13,

On the other hand, the case at bar involves the claim

of per se Sherman Act violations not involved in

Bangor Punta. Bangor Punta, like the present case,

also involved the claim of Section 10 Clayton Act viola-

tions. 417 U.S. at 706, 710. The Section 10 claim was

subsumed by the majority under the ‘‘corporate waste

and mismanagement’”’ category of claims, although the

13

four dissenting Justices disagreed. No claim of Sher-

man Act violations was made, however.

Treble damage suits under the Sherman Act have

been consistently treated by this Court as legal in na-

ture, not equitable, see Fleitmann v. Welsback Street

Lighting Co., 240 U.S. 27 (1916), and the merger of

law and equity through adoption of the Federal Rules

in 1938 was not to cut down on legal remedies, but to

supplement them in a single action. See Ross v. Bern-

hard, 396 U.S. 531 (1970).

As this Court recently stated in Illinois Brick Com-

pany v. State of Illinois, —— U.S. ——, 45 U.S.L.W.

4611 at 4615, ‘‘.. . considerations of stare decisis weigh

heavily in the area of statutory construction, where

Congress is free to change this Court’s interpretation

of its legislation.’’ Prior decisions regarding construc-

tion of Section 4 of the Clayton Act, under which the

antitrust claims hereunder are brought, are entitled to

a ‘presumption of adherence’’. Ibid.

It therefore is important for a determination to be

made in the context of this case whether the presump-

tion of adherence is to be applied to prior decisions

that treble damage Sherman Act claims are actions at

law, contrasted with the equitable nature of the treat-

ment of the claims in Bangor Punta, in order to pre-

serve ‘‘the effectiveness of the private antitrust action

as a vital means for enforcing the antitrust policy of

the United States,’’ the basis upon which this Court

granted certiorari in Perma Life Mufflers, Inc. v. In-

ternational Parts Corp., 392 U.S. 134 at 136 (1968).

The inapplicability of the equitable concepts relied

upon by the opinion in Bangor Punta in an action at

law was made clear by Dean Pound’s pivotal opinion

14

in Home Fire Ins. Co. v. Barber itself, which states

that ‘‘where a corporation is proceeding at law, .. . the

corporation is regarded as a person separate and dis-

tinct from its stockholders, or any or all of them’’

(93 N.W. at 1033), and goes on as follows (93 N.W.

at 1035) :

‘‘As we have seen, even if Barber had owned all

the stock in the company, he would have had no

title to the corporate property, so far as to be able

to deal with it in his own rather than in the cor-

porate name. But he was only a majority stock-

holder. When he withdrew money or assets of the

corporation, and converted it to his own use, there

was as clear a conversion as if the transaction had

taken place between natural persons. If he con-

cealed and covered up these transactions by avail-

ing himself of the opportunity afforded him as

secretary and manager of the company, and they

were not discovered until a change in management

resulted in an investigation of the books, we see

no reason why the company should not recover the

sums so misappropriated,”’ (Emphasis added.)

5. Continuing Injury

The opinion in Bangor Punta pointed out that any

claim of a continuing injury exception was inapplica-

ble in the circumstances of that case. 417 U.S. at fn. 6.

In the case at bar, on the other hand, the life insur-

ance benefits placed in jeopardy by Amendment No. 16

did not lapse until REA’s bankruptcy in 1975 made

continuation of the premium impossible. This was over

six years after the sale of REA by the railroads, and

a situation clearly giving rise to the question of whether

it is inequitable to insulate the railroads from antitrust

liability because of the continuing effect created by

the adoption of Amendment No. 16.

15

6, The Contemporaneous Ownership Rule

The opinion in Bangor Punta relies heavily upon

the ‘‘contemporaneous ownership’’ rule as setting

forth a principle of equity which governs a suit which

the new owners of a corporation cause it to bring

against its former parent. 417 U.S. at 711, 712.

We submit that the transmutation of this rule to a

governing principle in antitrust litigation is by no

means made clear by the fact that a Section 10 Clayton

Act claim was included in the allegations of corporate

waste and mismanagement which characterized the

Bangor Punta complaint as a whole.

We have already pointed out that Bangor Punta did

not involve allegations of per se Sherman Act viola-

tions.

Another distinction of great importance is the fact

that in Bangor Punta, there was a relationship be-

tween a parent corporation and a subsidiary, whereas

in this case, REA was owned by over sixty railroads,

not by a single parent.

Petitioner submits that as a matter of law and fact,

REA was not correctly considered as a subsidiary cor-

poration.

Not only was Bangor Punta correctly regarded as in-

volving a true wholly-owned parent/subsidiary rela-

tionship, but the owning parent in that case was not a

competitor. REA’s sixty-odd stockholding railroad

owners, on the other hand, were competitors of REA,

and for REA’s business. Since no single railroad had

anything approaching a majority of the stock, a ‘‘com-

bination’’ was involved each time the railroad-inter-

locked Board of Directors took action.

i6

The 1955 Report of the Attorney General’s National

Committee to Study the Antitrust Laws, at page 30,

footnote 106, defined a subsidiary ‘‘as a corporation

wholly-owned by a parent or a corporation with a ma-

jority of voting stock owned by a parent and a minority

held by non-competitors of the parent only for invest-

ment’’. (Emphasis added.)

Petitioner knows of no antitrust case where 60 com-

panies with widely distributed affiliation by stock own-

ership has or can claim to be a ‘‘parent.’’

As this Court said in Timken Roller Bearing Co. v.

United States, 341 U.S. 593 (1950), common ownership

or control of the contracting corporations does not

liberate them from the impact of the antitrust laws.

Even the label ‘‘joint venture’’ cannot justify, this

Court said, ‘‘agreements between legally separate per-

son and corporations to suppress competition among

themselves and others.’’ 341 U.S. at 598. To the same

effect, see Perma Life Mufflers, Inc. v. International

Parts Corp., 392 U.S. 134 at 141-142 (1938).

In sum, the paramount federal question as presented

by petitioner, and on whieh the antitrust bar urgently

needs clarification by this Court, is the fundamental

difference stressed in the majority opinion in Bangor

Punta between private corporate law principles of

standing, in what was considered in essence a typical

derivative stockholder suit, and the overriding public

policy of Section 4 of the Clayton Act in this REA’s

suit grounded in an illegal per se conspiratorial price-

fixing agreement.

Unless that basic difference is made clear, the mis-

application of the rationale of Bangor Punta by the

District Court and the Court of Appeals below

ee oe

6 eine, SI we we

ee

17

threatens to negate and conflict with this Court’s re-

peated pronouncement that the strong incentive of

treble damage suits was designed by Congress itself

both to redress injury to private parties causally re-

lated to antitrust violations—especially illegal per se

price fixing—and also to serve as a general deterrent

to potential antitrust violators. See Hanover Shoe, Inc.

v. United Shoe Machinery Corp., 392 U.S. 481 at 494

(1968) ; Radovich v. National Football League, supra;

Radiant Burner v. People Gas Light & Coke Co., 364

U.S. 656 (1961); Continental Ore Co. v. Union Car-

bide & Carbon Co., 370 U.S. 690 (1962); Minnesota

Mining & Mfg. Co. v. New Jersey Wood Finishing Co.,

381 U.S. 311 at 318 (1965); and Fortner Enterprises,

Inc. v. U.S. Steel Corp., 394 U.S. 495 at 502 (1969)

where the Court said:

‘‘Congress has encouraged private antitrust liti-

gation not merely to compensate those who have

been directly injured but to vindicate the impor-

tant public interest of free competition.”’

Question II: The Impact of Illinois Brick

This Court’s June 9, 1977 decision in J/linois Brick

Company v. State of Illinois, —— U.S. ——, 45

U.S.L.W. 4611, concerns the treble damage remedy

in a ‘‘pass-on’’ situation. Although differing conclu-

sions are reached, the emphasis in both the majority

and dissenting opinions is upon making that an effec-

tive remedy, not in emasculating it. As stated in the

majority opinion (45 U.S.L.W. at 4618) :

‘‘We think the longstanding policy of encour-

aging vigorous private enforcement of the anti-

trust laws, see, e.g., Perma Life Mufflers, Inc. v.

International Parts Corp., 392 U.S. 134, 139

(1968), supports our adherence to the Hanover

18

Shoe rule, under which direct purchasers are not

only spared the burden of litigating the intricacies

of pass-on but also are permitted to recover the

full amount of the overcharge.”’

This result was reached even though the possibility that

the direct purchaser as plaintiff might be ‘‘over-com-

pensated’’ was clearly recognized.

Insofar as the case here is concerned, REA is the

direct purchaser of the insurance coverage in question.

Therefore, unless certiorari is granted to review this

important question of who is the proper party plaintiff,

Illinois Brick may be regarded as saying that the anti-

trust suit can only be brought in the name of REA.

Ironically, however, the present law of the case, under

the Circuit Court’s per curiam decision, seems to be

that the only party which Jllinois Brick appears to say ©

may bring the action, is prevented from doing so by

Bangor Punta.

The seriousness of the problem thus created is not

limited to the fact that the preclusion of an antitrust

remedy, in view of REA’s bankruptcy, has a direct

effect upon its creditors by depriving them of the bene-

fit of a treble damage remedy. Deterrence of future

antitrust violations is also a chief purpose of the anti-

trust laws. The importance of deterrence in this case

is underscored by the continuation of the collusive re-

lationship between Travelers, the other large insurance

companies who are ‘‘re-insurers’’, and the railroads, to

this day. And in that context, the assistance offered by

the railroads to Travelers and its friends in the insur-

ance industry, by seeking to help stretch the Bangor

Punta tent to cover them as well, becomes a matter of

concern, if the important public purpose embodied in

Be Oe a ee etre ee et 2 a iy

en ee Lee wees

eC atns acle + stl te 0G tet Oe

19

treble damage actions as a means of enforcing the anti-

trust laws is to be served.

Question III: The Propriety of Summary Judgment

Poller v. Columbia Broadcasting System, Inc., 368

U.S. 464 (1962), warns against indiscriminate and

hasty application of summary judgment of dismissal

in an antitrust action where there are genuine issues of

material fact. Cf. White Motor Co. v. United States,

372 U.S. 253 (1963).

As pointed out above, issues of creditor fraud have

been raised in the statement of disputed factual issues.

Proof of motive and intent would be directly relevant

to such issues. If creditor fraud is found to exist, the

foundation for establishing antitrust recovery through

the non-applicability of Bangor Punta would appear

clear.

Further, Count VII of the complaint raises an issue

of unjust enrichment as against Travelers. This is an

issue of fact, not a determination to be made on sum-

mary judgment. Notwithstanding the issue, the Dis-

trict Court made a determination on unjust enrich-

ment, a clear abuse of discretion.

The railroads can be expected to assert, as they have

in the past, that the REA bankruptcy trustee would

be overcompensated by treble damages because the

amount claimed as damages in this and other pending

antitrust actions exceeds the amount of in excess of

$40 million by which REA’s liabilities exceeded its

assets. However, it is well known that the amount of

damages pleaded in a complaint, drafted before dis-

covery has taken place, is not evidence, and may tend

to be visionary. The prejudice caused by this kind of

20

fallacious assertion by the railroads can not be used

to defeat plaintiff’s right to a trial on the issue of dam-

ages. If damages in excess of the $40 million deficit

are proved, then is the time for the unjust enrichment

issue to be confronted, not before.

The importance of such a determination has been

increased by this Court’s decision, on June 13, 1977,

affirming, in Docket 76-1203, the decision of the Inter-

state Commerce Commission upholding the issuance of

more than $27 million in notes from REA to the rail-

roads in 1959. The railroads have filed claims of in

excess of $40 million, including the notes and accrued

interest, in REA’s bankruptcy proceeding, as credi-

tors.* It is paradoxical indeed that those who pur-

chased the express company for only $100,000 in 1929,

and as owners were permitted to milk it of millions

of dollars over the years from 1929 to 1969, when they

sold it for over $2 million plus warrants, in a condi-

tion already burdened with in excess of $27 million in

notes from REA to themselves, should on one hand

‘‘crowd out”’ other creditors and aggravate the bank-

rupt’s extreme undercapitalization, created by them-

selves, by filing claims of in excess of $40 million as

creditors of REA in its bankruptcy proceeding, and

yet be permitted to prejudice still further the interests

of the other creditors, such as REA’s former em-

ployees, by contending that any antitrust recovery,

utilized for their benefit, would constitute unjust en-

richment.

* Report of Dermott Noonan, C.P.A., to Robert L. Wright, Esq.,

special counse] to the trustee, dated September 27, 1976, and filed

in the Bankruptcy Court, S.D.N.Y., in Matter of REA Express,

Inc., a bankrupt, 75-B-253.

— a

- i Tr ee

om a Sere ea

21

Also anomalous, in the light of this Court’s holding

that controlling stockholders are fiduciaries to credi-

tors in the event of bankruptcy, see Pepper v. Litton,

308 U.S. 295, 306-307 (1939), would be a result which,

because of Bangor Punta, excuses those same former

stockholders from antitrust liability for acts which

occurred when they were the controlling stockholders,

to the detriment of the other creditors including those

who were employees at the time, and the objects of

their fiduciary duty—by depriving them of the benefits

of antitrust claims against the same former stock-

holders.

This result would stand the controlling stockholders’

ereditor-fiduciary rule of Pepper v. Litton on its head.

It would be particularly inequitable as to the creditors

who are former employees, hired while the railroads

still owned the company, whose life insurance, after

they retired (at a time when railroad ownership con-

tinued) later lapsed because of manipulations placed

in issue by this litigation. Former employees are essen-

tially ‘‘involuntary creditors’’. They cannot change jobs

at whim without jeopardizing seniority and other bene-

fits built up by years of work. If they have retired, they

ean do nothing to change their former employment, ob-

viously.

Bangor Punta involves estoppel in a situation limited

to the relative equities of the present and former stock-

holders of a corporation. But in bankruptcy, estoppel

as against the former stockholders does not estop the

trustee in bankruptcy from pursuing a corporate cause

of action for the benefit of the creditors. See 4A Collier

on Bankruptcy 1 70.29[3].

22

Nor does the concept of a ‘‘windfall’’ profit em-

bodied in Bangor Punta have economic validity as ap-

plied to the claims of creditors generally. To conclude

that those who have not been paid for goods and ser-

vices furnished by them receive a ‘‘windfall’’ if the

trustee in bankruptcy is later enabled to pay their

claims by virtue of a treble damage antitrust recovery,

would be flagrantly unjust and incorrect as a matter of

economic principle; yet that is the result of the deci-

sions below.

Full scale consideration of the reach of Bangor

Punta in a bankruptcy context therefore is clearly

warranted in place of the cursory short circuiting by

summary judgment which this case received below.

CONCLUSION

For the foregoing reasons, this petition for a writ

of certiorari should be granted.

Respectfully submitted,

ARTHUR M. WISEHART

WIseEHART, Frou & Kocu

Bar Building

36 West 44th Street

New York, New York 10036

(213) 730-0044

Attorney for Petitioner

S. CHESTERFIELD OPPENHEIM

1730 Pennsylvania Avenue, N.W.

Washington, D. C. 20006

Of Counsel

APPENDIX

la

APPENDIX A

Section | of the Sherman Act, 15 U.S.C. § 1.

§1. Trusts, etc., in restraint of trade illegal; exception of

resale price agreements; penalty

Every contract, combination in the form of trust or

otherwise, or conspiracy, in restraint of trade or commerce

among the several States, or with foreign nations, is de-

clared to be illegal: Provided, That nothing contained in

sections 1 to 7 of this title shall render illegal contracts

or agreements prescribing minimum prices for the resale of

a commodity which bears, or the label or container of

which bears, the trademark, brand, or name of the producer

or distributor of such commodity and which is in free and

open competition with commodities of the same general

class produced or distributed by others, when contracts

or agreements of that description are lawful as applied

to intrastate transactions, under any statute, law, or public

policy now or hereafter in effect in any State, Territory, or

the District of Columbia in which such resale, and the

making of such contracts or agreements shall not be an

unfair method of competition under section 45 of this title:

Provided further, That the preceding proviso shall not

make lawful any contract or agreement, providing for the

establishment or maintenance of minimum resale prices

on any commodity herein involved, between manufacturers,

or between producers, or between wholesalers, or between

brokers, or between factors, or between retailers, or be-

tween persons, firms, or corporations in competition with

each other. Every person who shall make any contract or

engage in any combination or conspiracy declared by sec-

tions 1 to 7 of this title to be illegal shall be deemed guilty

of a misdemeanor, and, on conviction thereof, shall be

punished by fine not exceeding fifty thousand dollars, or

by imprisonment not exceeding one year, or by both said

punishments, in the discretion of the court.

July 2, 1890, c. 647, $1, 26 Stat. 209; Aug. 17, 1937, c. 690,

Title VIII, 50 Stat. 693; July 7, 1955, c. 281, 69 Stat. 282.

2a

Section 2 of the Sherman Act, 15 U.S.C. § 2.

§2. Monopolizing trade a misdemeanor; penalty

Every person who shall monopolize, or attempt to mo-

nopolize, or combine or conspire with any other person or

persons, to monopolize any part of the trade or commerce

among the severa] States, or with foreign nations, shall

be deemed guilty of a misdemeanor, and, on conviction

thereof, shall be punished by fine not exceeding fifty thou-

sand dollars, or by imprisonment not exceeding one year,

or by bot said punishments, in the discretion of the court.

July 2, 1890, c. 647, § 2, 26 Stat. 209; July 7, 1955, ¢. 281,

69 Stat. 282.

Section 3 of the Sherman Act, 15 U.S.C. § 3.

$3. Trusts in Territories or District of Columbia illegal ;

combination a misdemeanor

Every contract, combination in form of trust or other-

wise, Or conspiracy, in restraint of trade or commerce in

any Territory of the United States or of the District of

Columbia, or in restraint of trade or commerce between

any such Territory and another, or between any such Ter-

ritory or Territories and any State or States or the District

of Columbia, or with foreign nations, or between the Dis-

trict of Columbia and any State or States or foreign na-

tions is declared illegal. Every person who shall make

any such contract or engage in any such combination or

conspiracy, shall be deemed guilty of a misdemeanor, and,

on conviction thereof, shall be punished by fine not exceed-

ing fifty thousand dollars, or by imprisonment not exceed-

ing one year, or by both said punishments, in the discre-

tion of the court.

July 2, 1890, ¢. 647, § 3, 26 Stat, 209; July 7, 1

69 Stat. 282. Spite rans te

3a

Section 4 of the Clayton Act, 15 U.S.C. § 15.

$15. Suits by persons injured; amount of recovery

Any person who shall be injured in his business or prop-

erty by reason of anything forbidden in the antitrust laws

may sue therefor in any district court of the United States

in the district in which the defendant resides or is found

or has an agent, without respect to the amount in contro-

versy, and shall recover threefold the damages by him sus-

tained, and the cost of suit, including a reasonable at-

torney’s fee.

Oct. 15, 1914, ¢. 323, § 4, 38 Stat. 731.

Section 10 of the Clayton Act, 15 U.S.C. § 20.

§ 20. Purchases by common carriers in case of interlocking

directorates, etc.

No common carrier engaged in commerce shall have any

dealings in securities, supplies, or other articles of com-

merce, or shall make or have any contracts for construction

or maintenance of any kind, to the amount of more than

$50,000, in the aggregate, in any one year, with another

corporatica, 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 substantia] 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 Commis-

sion. No bid shall be received unless the name and address

of the bidder or the names and addresses of the officers,

4a

directors, and genera] managers thereof, if the bidder be

& corporation, or of the members, if it be a partnership or

firm, be given with the bid.

Any person who shall, directly or indirectly, do or at-

tempt to do anything to prevent anyone from bidding, or

shall do any act to prevent free and fair competition among

the bidders or those desiring to bid, shall be punished as

prescribed in this section in the case of an officer or director.

Every such common carrier having any such transactions

or making any such purchases shall, within thirty days

after making the same, file with the Interstate Commerce

Commission a full and detailed statement of the transac-

tion showing the manner of the competitive bidding, who

were the bidders, and the names and addresses of the

directors and officers of the corporations and the mem-

bers of the firm or partnership bidding; and whenever the

said commission shall, after investigation or hearing, have

reason to believe that the law has been violated in and

about the said purchases or transactions, it shall transmit

all papers and documents and its own views or findings

regarding the transaction to the Attorney General.

If any common carrier shall violate this section, it shall

be fined not exceeding $25,000; and every such director,

agent, manager, or officer thereof who shall have know-

ingly voted for or directed the act constituting such viola-

tion, or who shall have aided or abetted in such violation,

shall be deemed guilty of a misdemeanor and shall be fined

not exceeding $5,000 or confined in jail not exceeding one

year, or both, in the discretion of the court.

Oct. 15, 1914, c. 323, § 10, 38 Stat. 734,

a

nd A ee eee a eh Me

5a

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 76-1450

REA Express, Inc., on its own behalf and on behalf of

certain of its former employees now retired, Appellant

Vv.

Tus TraveLers [NsuRANCE Company, et al.

==

Appeal from the United States District Court

for the District of Columbia

(D.C. Civil Action No. 2141-71)

—_ —— —-———

Argued March 29, 1977

Decided April 21, 1977

Arthur M. Wisehart, with whom S. Chesterfield Oppen-

heim was on the brief, for appellant. Frederick L. Wood

also entered an appearance for appellant.

Edwin M. Zimmerman, with whom William D. Iverson

was on the brief, for railroad appellees The Atchison,

Topeka & Sante Fe Railway Company et al.; also argued

on behalf of all other appellees.

6a

Michael M. Maney, William Piel, Jr., and Mark I. Fish-

man were on the brief for appellee The Travelers Insur-

ance Company.

Francis M. Shea, Richard T. Conway, and John D.

Aldock were on the brief for appellees National Rail-

way Labor Conference and Eastern Carriers Conference

Committee.

Before Bazeton, Chief Judge, and Wricut and Ross,

Circuit Judges.

Per Curiam: The background and facts relating to this

case are adequately stated in the opinion of the District

Court, see REA Express, Inc. v. Travelers Ins. Co., 406

F.Supp. 1389 (D. D.C. 1976), so we shall not repeat them

here. We agree with that opinion insofar as it holds that

appellant’s federal claims are foreclosed by Bangor Punia

Operations, Inc. v. Bangor & Aroostook R. Co., 417 US.

703 (1974). Consequently, we affirm that part of the Dis-

trict Court’s judgment which dismissed those claims with

prejudice.

The District Court also dismissed appellant’s pendent

state claims with prejudice on the basis that Delaware

law would govern and that Delaware precedents con-

formed to the doctrine adopted in Bangor Punta. See 406

F.Supp. at 1394. However, the issues involved in this case

are novel and the trial court found them ‘‘troubling.’’ Jd.

at 1395. In these circumstances, the admonition of the

Supreme Court in United Mine Workers v. Gibbs, 383

U.S. 715 (1966), should have been followed:

Needless decisions of state law should be avoided

both as a matter of comity and to promote justice

between the parties, by procuring for them a surer-

footed reading of applicable law. Certainly, if the

federal claims are dismissed before trial, even though

not insubstantial in a jurisdictional sense, the state

claims should be dismissed as well.

SRM OBE ns te ee ree oe

7a

Id. at 726 (footnotes omitted). Following Gibbs, we affirm

the dismissal of appellant’s state claims, but require their

dismissal to be without prejudice.’

It is our view that the insurance claims? of former

employees of appellant are not part of this litigation, so

nothing herein or in the District Court’s opinion should

be read as affecting those claims. Nor are the claims

of creditors of the bankrupt appellant before this court.’

Consequently any claims they may have against appellees

herein also remain unaffected by our judgment and the

judgment of the District Court.

So ordered.

* Appellant agrees that the state claims should be dismissed

if we affirm the District Court’s disposition of the federal claims.

It only contests the dismissal with prejudice.

? See 406 F.Supp. at 1392 & 1395.

* See id. at 1395.

8a

APPENDIX C

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

Memorandum and Order

In this action, REA Express, Inc. (REA) has sued

Travelers Insurance Company [Trevelers], twenty-two

railroad companies [railroad defendants], the National

Railway Labor Conference [NRLC], the Eastern Carriers’

Conference [ECC], and the Eastern Carriers’ Conference

Committee [ECCC]. Counts I and II allege, respectively,

violations of Section 10 of the Clayton Act, 15 U.S.C. § 20

(1970), and Section 1 of the Sherman Act, 15 U.S.C. $1

(1970). Counts III through IX allege common law causes

of action based on breach of fiduciary duty, unjust enrich-

ment, wrongful interference with business relations, and

breach of contract. REA has moved for partial summary

judgment with respect to the issue of defendants’ liability

under Section 1 of the Sherman Act for alleged price-fix-

ing. The railroad defendants, ‘he ECCC and the NRLC

have jointly moved for summary judgment with respect

to the entire case. Travelers has separately moved for

complete summary judgment. Finally, ECCC and NRLC

have moved for summary judgment with respect to Counts

III through IX, the common law claims. The various mo-

tions now pending before the Court raise numerous issues

with respect to the various defendants’ liability. Those

motions have been fully briefed and the Court has heard

argument of counsel. The Court need not reach the merits

of those issues, however, since one threshhold issue—

REA’s standing in equity to sue these defendants—is

dispositive of REA’s complaint.

BacKGROUND

In January 1929, substantially all the railroads in the

United States joined to form the Railway Express Agency,

now REA Express, Inc., to conduct the railway express

9a

business in this country. The railroads accomplished this

result by purchasing all the assets of the sole express

agency then operating, the American Railway Express

Company, and transferring these assets to the newly

formed REA. All of the capital stock in REA was sold to

85 participating railroads, and operating agreements were

executed between REA and the railroads using the express

service. These agreements provided that REA would be

the exclusive express agency of the railroads and that

annual revenues of REA, after deduction of operating ex-

penses, would be distributed to the railroads executing

the operating agreements in proportion to their express

business. On February 11, 1929, the ICC approved in cer-

tain respects this arrangement. 150 ICC 423 (1929).

Until June 1968, all the capital stock in REA continued

to be owned by the various railroads. Moreover, while the

agreement for division of earnings had been modified or

replaced between 1929 and 1968, the sole beneficiaries of

REA’s earnings were the railroads.

In June 1968, in order to prepare for sale of REA, the

stockholding railroads deposited their stock in a voting

trust. The voting trustees took over formal management

of REA in June, and continued in such position until the

sale of REA’s stock on August 21, 1969. The stock was

sold to the REA Holding Corporation, which was formed

by a group of REA executive officers who had been em-

ployed by the voting trustees in 1968 and 1969. The Hold-

ing Corporation presently owns more than 99 per cent of

the REA stock.

DispuTED TRANSACTIONS

Between 1929 and June 1968, the Board of Directors of

REA consisted of officers or directors of various of the

stockholding railroads. Although REA’s complaint is

framed in a number of different legal theories involving

both federal and common law causes of action, at bottom

10a

it is a typical suit seeking recovery for waste and misman-

agement by the Board of Directors. REA challenges two

transactions undertaken by the REA Board in 1956 and

1968. In 1956, the Board approved REA participation in

GA 23000, then a health insurance policy written by Trav-

elers and held by the railroads for the benefit of their

employees. REA was directed to participate at a premium

rate which was identical to the rate paid by all other par-

ticipating railroads. REA claims that this uniform pre-

mium provision denied it the benefit of a higher experience

rating’ which it allegedly enjoyed. To force REA’s par-

ticipation in GA 23000 at this uniform premium rate, ac-

cording to REA, constituted illegal price-fixing, waste, and

mismanagement. Further, REA claims that the railroad

defendants violated Section 10 of the Clayton Act by fail-

ing to require competitive bidding before awarding the in-

surance contract to Travelers.

In 1965, GA 23000 was amended to provide life insur-

ance benefits. It is REA’s contention that those benefits

vested immediately in employees who were covered by the

plan and later retired, a contention which Travelers and

the railroad defendants disputed in 1968. Therefore, in

March 1968, the railroads and REA, acting at the behest

of the Board and through its agent, the ECCC, approved

Amendment 16 to GA 23000, which provided that life in-

surance benefits did not vest in the retired employees, and

that such benefits would lapse if any participant withdrew

from the policy. Since certain REA officers had previously

voiced their intention to seek REA’s withdrawal from GA

23000, REA contends that this action constituted illegal

monopolization by Travelers of the railroad insurance

market, as well as waste and mismanagement by the REA

Board.

* An experience rating measures the safety record of employees

over a period of time. REA claims that its employees enjoyed a

better safety record than the employees of other railroads, which

should have reduced the rates payable by REA.

lla

=

REA withdrew from participation on March 31, 1968,

except as to a small number of employees represented by

the International Association of Machinists.’ It claims that

Amendment 16 has forced it to seek life insurance for its

4,000 retired employees to replace the allegedly vested

benefits they enjoyed prior to approval of the amendment.

REA’s Stanpinc 1n Equity To Sve

With one exception to be addressed later, the factual

posture of this case is almost identical] to that in Bangor

Punta Operations v. Bangor @ A.R. Co., 417 U.S. 703

(1974). There the Supreme Court held that the plaintiff

had no standing in equity to sue, a result which this Court

feels compelled to reach in this case as well.

In Bangor Punta, the following factual setting was pre-

sented. In 1964, Bangor Punta acquired through a subsidi-

ary 98.3% of the stock of the Bangor and Aroostock Rail-

road. It thereafter controlled and directed the railroad

until 1969, when it sold its entire stock interest to the

Amoskeag Company. Then in 1971, the railroad filed suit

against Bangor Puuta and its predecessor in interest for

mismanagement, misappropriation, and waste of the rail-

road’s assets during the period of Bangor Punta’s owner-

ship of the railroad. Damages were also sought for viola-

tions of Section 10 of the Clayton Act and Section 10 of

the Securities and Exchange Act.

Without analyzing the merits of any of the railroad’s

claims, the Court immediately framed the issue as Amo-

skeag’s* standing in equity to sue Bangor Punta for vio-

* REA finally withdrew as to these employees on June 1, 1972.

* Although the named plaintiff was the railroad, the Court stated

that ‘‘Amoskeag, the principal beneficiary of any recovery and

itself estopped from complaining of petitioners’ alleged wrongs,

cannot avoid the command of equity through the guise of proceed-

ing in the name of respondent corporation which it owns and

controls. 417 U.S. at 713.

12a

lations of the Clayton Act and Securities and Exchange

Act during Bangor Punta’s term of ownership:

The resolution of this issue depends upon the applica-

bility of the settled principle of equity that a share-

holder may not complain of acts of corporate mis-

management if he acquired his shares from those who

participated or acquiesced in the allegedly wrongful

transactions.

417 U.S. at 710. Amoskeag could not point to any injury

which it had suffered. All of the acts complained of had

occurred during the term of Bangor Punta’s ownership;

there were no allegations that Amoskeag had been misled

or defrauded in its purchase of the railroad or received

less than the true value of its purchase; and there was no

showing that the alleged wrongful acts had a continuing

effect on the railroad or on the value of Amoskeag’s stock.

As the Court summarized, ‘‘In other words, Amoskeag

seeks to recover for wrongs Bangor Punta did to itself as

owner of the railroad.’’ 417 U.S. at 712.

Based upon these facts, the Court found Amoskeag with-

out standing in equity to sue. Since Amoskeag owned

98.3% of the railroad’s stock, and would receive any re-

covery in the railroad’s name, the Court further held that

the railroad had no standing to sue. Particularly persua-

sive to the Court in reaching this decision was the realiza-

tion that Amoskeag, if it were to recover, would have pur-

chased the railroad at its fair value and in addition would

have received a windfall for injuries which presumably

were reflected in the purchase price. 417 U.S. at 712, 716.

The Court of Appeals had upheld Amoskeag’s standing

to sue in the name of the railroad. It focused on the bene-

fit which would accrue to the public from enforcement of

the antitrust and securities laws. The Supreme Court ex-

pressly rejected this as a consideration which could over-

13a

come equity’s aversion to unjust enrichment. The Court

stated in footnote 13:

The dissent argues that respondents’ complaint is

based on federal antitrust and securities statutes and

that such laws are designed in part to benefit the

public. With that much we agree. But the statutory

design has not been effectuated through the indiscrim-

inate provision of causes of action to every citizen.

Rather, these statutes create specifically defined legal

duties to particular plaintiffs and vest the appropriate

causes of action in them alone. Here the statutorily

designated plaintiffs are respondent corporations. But

as we have stated, these plaintiffs cannot maintain the

present action because a recovery by Amoskeag would

violate the established principles of equity.

417 U.S. at 716-17 n.13. The clear thrust of the Court’s

opinion is that the unjust enrichment which would benefit

Amoskeag precludes it—or its wholly-owned subsidiary—

from recovering, regardless of the public interest involved.

The Court further found that the equitable principle

which precluded Amoskeag’s recovery based on the federal

causes of action likewise precluded recovery on the com-

mon law causes of action, since Maine recognized the va-

lidity of that principle. 417-U.S. at 714.

REA’s situation is identical to that of the railroad in

Bangor Punta, with one exception that will be addressed

later. The REA Holding Corporation owns, as did Amos-

keag, over 98% of REA’s stock, which it had purchased

from the defendant railroads in 1969. REA has alleged no

fraud or deceit in the sale to the Holding Corporation. In-

deed, the Holding Corporation was the corporate instru-

mentality for the new management sain which entered

the REA structure when the railroads‘established the vot-

ing trust to sell REA, and REA does not dispute that the

group knew as well as anyone the value of REA. More-

l4a

over, the two acts complained of, the uniform premium

provision of the 1956 insurance contract and the alleged

divesting of retired employee life insurance benefits em-

bodied in Amendment 16, were inflicted by the railroads

on their wholly owned subsidiary REA during their own-

ership of REA. If these transactions harmed anyone, they

harmed the railroads. The allegedly higher premiums

would ultimately affect the income of the railroads as

stockholders, and the railroads would have been required

to maintain the Travelers policy after Amendment 16 if

they wished to continue their retired employees’ life in-

surance benefits.

That the railroad defendants anticipated selling REA

when Amendment 16 was adopted is immaterial since the

Holding Company through the new management group had

full knowledge of both transactions, as well as the effect on

REA. There are no allegations that this effect was not a

factor in the purchase price, or that the railroad defend-

ants failed to disclose the transactions; hence the Court

must assume that the purchase price reflected REA’s true

value. To allow the Holding Corporation, through REA,

to recover, would permit the Holding Corporation to pur-

chase REA for its true value and then receive additional

**compensation’’ for damage to REA which was previously

reflected in the purchase price. Such a result is clearly

condemned by the Bangor Punta Court:

The equitable principles of Home Fire preclude Amos-

keag from reaping a windfall by enhancing the value

of its bargain to the extent of the entire purchase

price plus an additional $2,000,000. Amoskeag would

in effect have acquired a railroad worth $12,000,000

for only $5,000,000. Neither the federal antitrust or se-

eurities laws nor the applicable state laws contemplate

recovery by Amoskeag in these circumstances.

417 U.S. at 716.

15a

Delaware law applies to REA’s common law claims as-

serted in Counts III through IX of its complaint, since it

is the state of REA’s incorporation. See Weiss v. Kay

Jewelry Stores, Inc., 152 U.S. App. D.C. 350, 359, 470

F.2d 1259, 1268 (1972). Delaware recognizes the same

equitable principle articulated in Bangor Punta. See Good-

man v. Futrovsky, 42 Del. Ch. 468, 213 A.2d 899, 903 (Sup.

Ct. 1965). Therefore, REA’s common law claims cannot

be maintained for the reasons stated above. See 417 U.S.

at 713-14.

REA attempts to escape the Bangor Punta doctrine in

several ways. First, REA claims that Bangor Punta is in-

applicable to this case because it involves allegations of

price-fixing, which are per se violations of the antitrust

laws. While a per se violation of the antitrust laws was

not involved in Bangor Punta, the Court’s clear emphasis

on equity’s aversion to unjust enrichment as the basis for

its holding renders irrelevant the nature of the antitrust

violation. Second, REA attempts to apply the intra-enter-

prise conspiracy doctrine of antitrust law to this case.

That doctrine holds that an agreement between a parent

corporation and its subsidiary can constitute a combina-

tion or conspiracy under the antitrust laws. See United

States v. Citizens & Southern National Bank, 422 U.S. 86,

116-117 (1975). Even assuming that a Sherman Act or

Clayton Act violation could be established by REA through

the use of the intra-enterprise conspiracy doctrine, how-

ever, the equitable principle established by the Bangor

Punta Court would preclude recovery by REA. 417 USS.

at 716-17 n.13. The court was not concerned with the na-

ture or method of the antitrust violation; it was the un-

just enrichment of Amoskeag (here, REA Holding Cor-

poration) which denied the railroad (here, REA) stand-

ing in equity to sue. Thus, applicability of the intra-enter-

prise conspiracy doctrine is irrelevant. Third, REA argues

that since in the instant case several railroads, rather than

l6a

one parent corporation as in Bangor Punta, inflicted the

injury on the subsidiary, Bangor Punta is inapposite. As

noted earlier, the Court’s rationale is avoidance of unjust

enrichment; it did not focus on the defendant’s conduct or

corporate structure. Whether there be one or several par-

ent corporations is simply irrelevant to the Bangor Punta

doctrine.

Fourth, REA attempts to distinguish Bangor Punta by

proffering a ‘‘continuing wrong’’ exception. In Bangor

Punta, the Court noted, ‘‘Nor does it appear that the al-

leged acts of prior mismanagement have had any continu-

ing effect on the corporations involved or the value of

their shares.’’ 417 U.S. at 711. The Court did not elabor-

ate on this apparent exception to the rule it enunciated,

and the railroad defendants argue that the exception does

not and should not exist since it would ‘‘swallow the rule.’’

See also Bangor ¢ Aroostook R. Co. v. Bangor Punta

Operations, Inc., 353 F. Supp. 724, 727 n.1 (D. Maine

1972). Whether the exception is indeed valid need not be

decided since there are no facts to support its application.

If there is any continuing injury, it has flowed from

Amendment 16, which forced REA to continue paying the

allegedly higher premiums or lose all life insurance bene-

fits for its retired employees. If REA has had to pay

higher premiums to reestablish these benefits after its

withdrawal from the policy on March 30, 1968, it is not

alleged anywhere that the purchase price—agreed to Au-

gust 20, 1969—did not reflect this increased liability. In

short, any wrong inflicted by the railroad defendants

through Amendment 16 was known to the Holding Cor-

poration and should have been reflected in a lower pur-

chase price. The railroad defendants were injured thereby,

not the Holding Company.

Fifth, and perhaps most troubling, REA argues that the

interests of the REA employees and creditors make Ban-

gor Punta inapplicable. The caption of the complaint as-

17a

serts that REA sues in its own capacity and on behalf of

its employees. Moreover, REA was adjudicated a bankrupt

on November 6, 1975, so that any recovery in this lawsuit

would first inure to the benefit of the estate, and be dis-

tributed ultimately to the creditors of REA.

Even if REA had not been adjudicated bankrupt, the re-

mote interest of the employees in any recovery would not

justify excepting REA from application of the Bangor

Punta doctrine. A similar argument was made in Bangor

Punta that Amoskeag could use its recovery to benefit the

public. The Court rejected this argument as a basis for

granting Amoskeag standing to sue because ‘‘there is no

assurance that the public would receive any benefit at all

from these funds.’’ 417 U.S. at 715. Similarly here, there

is no assurance, whether bankrupt or not, that REA would

use its recovery to benefits its employees.’’ *

Nor can the more immediate interests of the creditors

justify REA’s exemption from the Bangor Punta doc-

trine. To be sure, the Supreme Court observed in a foot-

note, in response to an argument by Justice Marshall in

dissent, that the railroad had not brought the action on

behalf of creditors, and that the financial health of the rail-

road was ‘‘excellent.’’ 417 U.S. at 718 n.15. The extent

and importance of this observation is unclear and unde-

veloped. It is this Court’s opinion, however, that an excep-

tion to Bangor Punta should not be made on the facts of

the case presented.

First, this suit is not brought on behalf of creditors. It

is only because of REA’s recent bankruptcy that the cred-

itors now pose a prominent interest. Surely, if the pending

motions had been argued and decided prior to November

‘Although REA asserts that it has ‘‘implicit authorization’’

from the unions representing employees to sue on behalf of the

employees, there is no binding agreement that REA use the money

it would recover for the benefit of the employees.

18a

6, 1975, the date of the bankruptcy, there would be no

question that Bangor Punta would require dismissal of

this action. The illogie of allowing REA to recover now

only serves to underscore the artificiality of an exception

to Bangor Punta which would permit a corporation to re-

cover only if it became bankrupt during the pendency of

the proceeding. It cannot be gainsaid that the creditors

would benefit from a recovery by REA; but the creditors

of Amoskeag in Bangor Punta would also have benefitted,

their position being strengthened by the increased financial

stability of Amoskeag. Moreover, counsel for REA at oral

argument did not know of any instance of a creditor (other

than the railroad defendants) who had a debt outstanding

prior to the change of ownership in 1969. Since that time,

any creditor would have or should have been fully ap-

prised of the financial condition of REA. To that extent,

the creditors in the instant case stand in the same shoes

as the Holding Corporation which purchased REA, and

Amoskeag in Bangor Punta.’ Both the post-1969 creditors

and the Holding Corporation had knowledge of the finan-

cial condition of REA when entering into their respective

transactions, and to allow them to now recover more than

the value of the bargain they freely entered would clearly

constitute unjust enrichment.

In short, REA has not shown any injury which accrued

to anyone but the railroad defendants. To allow REA, the

Holding Corporation, or REA’s creditors, to recover for

wrongs inflicted by the defendants on themselves, would

* Pre-1969 creditors, tc the extent that they had been wronged

by actions of the REA board after entering into the credit arrange-

ment with REA, might have a stronger interest if they were before

this court. Whether a recovery would be appropriate even in that

instance reed not now be decided, since, as noted earlier, this is

not a creditors’ suit, and no pre-1969 creditors other than the rail-

road d-fendants have any interest in REA’s assets.

—

19a

clearly be unjust enrichment and cannot be permitted un-

der the doctrine of Bangor Punta.

In light of the foregoing, it is this 2d day of February,

1976

Orperep that the motions of Travelers, the railroad de-

fendants, the NRLC, and the ECCC for summary judg-

ment be and the same hereby are granted; and it is

FurTHER Orperep that plaintiff’s complaint be and the

same hereby is dismissed with prejudice.

/s/ Wirutram B. Jones

Chief Judge.

* Travelers and the conference defendants, of course, cannot be

held liable, either, since the basis of Bangor Punta is avoidance

of unjust enrichment, not deterrence of allegedly illegal or im-

proper conduct. See 417 U.S. at 717.