Brief for the Respondents in Opposition — Bangor Punta Operations, Inc. v. Bangor & Aroostook R. Co.

bs baa SIF ET NISBET

No. 73-718

IN THE

Supreme Court of the United States

October Term, 1973

BANGOR PUNTA OPERATIONS, INC. and

BANGOR PUNTA CORPORATION,

Petitioners

v.

BANGOR & AROOSTOOK RAILROAD COMPANY and

BANGOR INVESTMENT COMPANY,

Respondents

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

BRIEF FOR THE RESPONDENTS IN OPPOSITION

Epwarp Q. Proctor

Avan L. LerKow!tTz

Epwarp T. Rosinson

Exy, Barttett, Brown & Proctor

225 Franklin Street

Boston, Massachusetts 02110

Counsel for Respondents

VerriLL, Dana, PHILBRICK,

Putnam & WILLIAMSON,

Of Counsel.

November 29, 1973

Opinions WOUOW oe os ao coy en 6s beens eee nk een aens

TeReOe: x x55 s oan sce eee eeeseense ceeds <esares

Questions Presented <....... 0.62 .ssceeesessesnaesas

Statutes, Rules, and Regulations Involved ...........

Statement of the Case ............. 0... cee eee eee

Proceedings in the District Court and the Court of

DIOOUIN oo oe hs oo 956494 nos eRe ey ee ee eee

Reasons for Denying the Writ ......................

I.

III.

THE DECISION BELOW CORRECTLY AP-

PLIED TRADITIONAL EQUITABLE PRIN-

CIPLES TO HOLD THAT A CORPORATION

CAN SUE IN ITS OWN NAME AND BE-

HALF FOR. DEPREDATIONS COMMITTED

UPON IT BY A FORMER MAJORITY

STOCKHOLDER WHERE THE RECOVERY

WILL BENEFIT PERSONS IN ADDITION

TO PRESENT STOCKHOLDERS .........

THE DECISION BELOW DOES NOT CON-

FLICT WITH THE CONTEMPORANEOUS

OWNERSHIP REQUIREMENT OF RULE

23.1, F.R.CIV.P., BECAUSE THIS SUIT IS

BROUGHT BY THE CORPORATION IT-

SELF AND NOT DERIVATIVELY BY A

STOCKHOLDER ....................00000-

THE DECISION BELOW DOES NOT CON-

FLICT WITH SIERRA CLUB v. MORTON,

405 U.S. 727 (1972), BECAUSE THIS CASE

INVOLVES CLAIMS BETWEEN PRIVATE

10

PS Cn ea a,

i

- PAGE

PARTIES AND NOT REVIEW OF ADMIN-

ISTRATIVE ACTION UNDER THE AD-

MINISTRATIVE PROCEDURE ACT

Comelusion .......-. ccc ccc ccc cc ccc cece eee e eee eeee

Appendix A: Rule 10b-5 [17 C.F.R. §240.10b-5],

adopted by the Securities and Exchange Commission

pursuant to §10(b) of the Securities Exchange Act

of 1934 [15 U.S.C. § 78j(b)] ... 22... eee eee eee

Appendix B: Section 10 of the Clayton Act [15 U.S.C.

SS) er eer ren Ter eer

Appendix C: Section 104 of the Maine Public Utilities

Act [35 M.R.S.A. § 104] and § 15 of the Maine Pub-

lic Utilities Act [35 M.R.S.A. § 15] ................

Appendix D: Role 23.1, F.R.Civ.P. .............-.-- 18

CITATIONS

CasEs:

Affiliated Ute Citizens v. United States, 406 U.S. 128

(UGTA): aces cess deccewcereeens couses sas eeuceis

Central Ry. Signal Co. v. Longden, 194 F.2d 310 (CA7

| nr er eT 10, 11

Data Processing Service v. Camp, 397 U.S. 150 (1970) 12

Home Fire Ins. Co. v. Barber, 67 Neb. 644, 93 N.W.

LOBE (1908) 0... cnn nc ccccccwecccccenccccccees

Janigan v. Taylor, 344 F.2d 781 (CA1 1965), cer-

tiorari denied 382 U.S. 879 ...........--.----+: 10

Liken v. Shaffer, 64 F.Supp. 432 (ND Iowa 1946) .. 11

Norte & Company v. Huffins, 416 F.2d 1189 (CA2

WOOD) a cickvcrgsad sa nssvsun er ceoea eens taenees?

Overfield v. Pennroad Corp., 48 F.Supp. 1008 (ED Pa

WOES). gon esses ueciacscadesccesstesencexes hes ll

iii

PAGE

Ross v. Bernhard, 396 U.S. 531 (1970) ............. 11

Sierra Club v. Morton, 405 U.S. 727 (1972) ........ 7 MS be

STATUTES :

Section 10 of the Administrative Procedure Act, 5

a ame Ee; | - een a a aa ee 12

Section 10 of the Clayton Act, 15 U.S.C. § 20..... 3, 5, 14

Section 8 of the Investment Company Act of 1940, 15

OP oi ooo os set ee eee tees 7

Section 1254(1) of the Judiciary Code, 28 U.S.C. §

BONED ane eas cannot bees nee ete eee oe 2

Section 15 of the Maine Public Utilities Act, 35

AST Cer ee ee 3, 6, 16

Section 104 of the Maine Public Utilities Act, 35

a ae eG eee en er 3, 5, 6,15

Section 10(b) of the Securities Exchange Act of 1934,

MC STB) ecco echoes so ts eaneseesce 3, 4, 14

Ruies aNp REGULATIONS:

Rule 23.1, F.R.Civ.P. ..............00- 3, 8, 10, 11, 12, 17

Rule 10b-5 [17 C.F.R. § 240.10b-5] .............. 3,5, 14

MISCELLANEOUS:

Report to the Commission — Review of Diversified

Holding Company Relationships and Transactions

of Bangor Punta Corporation, by the Bureau of

Accounts, Interstate Commerce Commission ..... 3,4

_

: IN THE

Supreme Court of the United States

October Term, 1973

No. 73-718

BANGOR PUNTA OPERATIONS, INC. and

BANGOR PUNTA CORPORATION,

Petitioners

v.

BANGOR & AROOSTOOK RAILROAD COMPANY and

BANGOR INVESTMENT COMPANY,

Respondents

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

BRIEF FOR THE RESPONDENTS IN OPPOSITION

ee

=

~

ao

Opinions Below

The opinion of the District Court is reported at 353

F.Supp. 724 (D. Me. 1972). The opinion of the Court of

Appeals is reported at 482 F.2d 865 (CA1 1973).

Jurisdiction

The judgment and order of the Court of Appeals was en.

tered August 3, 1973. The jurisdiction of this Court js

invoked under 28 U.S.C. § 1254(1).

Questions Presented

1. Whether the decision below correctly allowed a corpo-

ration to sue in its own name and behalf for depredations

committed upon it by a former majority stockholder where

the recovery will benefit persons in addition to present

stockholders, distinguishing a 1903 state court equity deci-

sion, Home Fire Ins. Co. v. Barber, 67 Neb. 644, 93 N.W.

1024, and like cases.

2. Whether the decision below correctly held that the

contemporaneous ownership requirement for derivative ae-

tions brought by stockholders does not apply to a suit

brought by a corporation in its own name and behalf.

3. Whether the decision below, which involves the scope

of an equitable defense in a suit between private parties,

conflict with Sierra Club v. Morton, 405 U.S. 727 (1972),

which involves review of administrative action under the

Administrative Procedure Act.

Statutes, Rules, and Regulations Involved

Respondents maintain that no statutes, rules, or regula-

tions are involved in the decision below. The text of the

following statutes and rules are set out in the appendixes

for the convenience of the court:

3

1) Rule 10b-5 [17 C.F.R. § 240.10b-5], adopted by the

Securities and Exchange Comission pursuant to

§ 10(b) of the Securities Exchange Act of 1934 [15

U.S.C. § 78}(b) ] Appendix A, at p. 14

2) Section 10 of the Clayton Act [15 U.S.C. § 20]

Appendix B, at p. 14

3) Sections 15 and 104 of the Maine Public Utilities Act

[35 M.R.S.A. $§ 15 and 104] Appendix C, at p. 15

4) Rule 23.1, F.R.Civ.P. Appendix D, at p. 17

Statement of the Case

This suit is brought by the Bangor and Aroostook Rail-

road Company (BAR) and its wholly owned subsidiary the

Bangor Investment Company (BIC). BAR is a Maine cor-

poration organized in 1891. It operates a railroad provid-

ing essential services for those persons and businesses

located in the northern half of Maine. Its Comparative

General Balance Sheet as contained in the Railroad Annual

Report, Form A, for the year ending December 31, 1972, as

fled with the Interstate Commerce Commission, shows

assets of $67,726,890.

This suit was authorized by the BAR Board of Directors.

During the summer of 1971 there had been made public a

report to the Interstate Commerce Commission prepared

by the Bureau of Accounts of the Commission, entitled ‘‘Re-

view of Diversified Holding Company Relationships and

Transactions of Bangor Punta Corporation.’’ The Report

stated :

4

‘‘The purpose of the review was to explore the impact

of the Bangor Punta Corporation on the Bangor &

Aroostook Railroad while it was owned by and under

the control of this diversified holding company and to

determine whether or not the intercompany relation-

ships and resulting financial transactions were detri-

mental to the carrier.”’

The Report included a recommendation :

‘‘We recommend that all legal remedies be explored to

require the holding company, which sold the carrier, to

pay back to the carrier for assets taken with no com-

pensation and charges made where no services were

performed.”’

This Report was discussed at a meeting of the BAR board,

attended by fifteen of the seventeen directors, held on July

29, 1971. Since some of the directors were not familiar with

the Report, no formal action was taken. On August 26, 1971,

copies of the Report were mailed to all the BAR directors.

At a subsequent meeting held December 8, 1971, attended

by ten directors, outside counsel discussed in detail a draft

complaint, naming Bangor Punta Corporation ( BP) and

Bangor Punta Operations (BPO) as defendants, and ex-

plained the legal basis of the various claims contained

therein. It was unanimously voted to authorize the BAR

Chief Executive Officer to. commence and conduct litigation

against BP and BPO.

The original complaint was filed in the U.S. District Court

for the District of Maine on December 30, 1971, and an

amended complaint was filed on August 18, 1972. Both com-

plaints contained thirteen counts asserting violations of

§ 10(b) of the Securities Exchange Act [15 U.S.C. § 78j(b))

CIPI a AE MO oe

IL POM LLL ED! LOS LI IOLE GONE DEE SELL OE TET

5

and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5], § 10 of

the Clayton Act [15 U.S.C. § 20], § 104 of the Maine Public

Utilities Act [35 M.R.S.A. § 104], and the Maine common

law. As examples, one count under each theory will be dis-

cussed in detail. |

1) Rule 10b-5

Count VI alleges that in September 1962, BIC owned

67,789 shares of stock in the St. Croix Paper Company,

worth in excess of $2,000,000. The Bangor & Aroostook Cor-

poration (BAC), the predecessor of BP and BPO, learned

from inside sources that the Georgia Pacific Corporation

was negotiating with St. Croix to make a tender offer to

St. Croix stockholders. Before the information became pub-

lie and without disclosing this information to either BAR

or BIC, BAC caused BAR and BIC to enter into a three-way

agreement whereby BAC ended up owning all the 67,789

shares of St. Croix stock. As a result BAR and BIC snf-

fered damages of approximately $1,500,000, which is the

profit that BAC made on the exchange of St. Croix stock

for Georgia Pacifie stock, which occurred shortly thereafter,

and on the subsequent appreciation of Georgia Pacifie stock.

2) Section 10 of the Clayton Act

Count IV alleges that in September 1962, BAR and BAC,

which owned around 97% of the stock of BAR at the time,

had nine overlapping directors. As part of the three-way

transaction involving the St. Croix stock between BAC,

BAR and BIC, described above, some $1,018,000 par value

of BAC preferred stock was transferred to BAR at its par

value of $100 per share. There was no bidding conducted,

as required under § 10 of the Clayton Act, to determine the

hither LSS IEE LOGE IOS FOIE:

6

most favorable bid for the BAR. The fair market value of

: the BAC preferred stock was substantially less than par

and than the fair market value of the St. Croix stock where.

by BAR suffered damages.

| 3) Maine Public Utilities Laws: 35 M.R.S.A. § 104

: Count IT alleges that through the years, first BAC and then

its suecessor BPO, all the while owning in excess of 97% of

: BAR’s voting stock, billed BAR for ‘‘corporate charges”

and received payment from BAR of the following amounts:

Year Amount

| 1962 $ 70,000

1963 96,000

F 1964 155,000

1965 165,000

1966 204,000

; 1967 120,000

$810,000

None of these contracts, arrangements or payments was

submitted to the Maine Public Utilities Commission for

approval as required,* and, in fact, these arrangements

were adverse to the public interest and would have been dis-

approved if submitted, because virtually no services were

actually performed for BAR. Thus, BAR was damaged by.

paying out cash without receiving any consideration in

return.

* Under Maine law railroads are public utilities. 35 M.RSA

§ 15. See Appendix C. p. 16-17.

Speer ere atone geesngememamen

= intial ° 1S ELT EGE LPN T FO Te RP PONS RNS compre ay Sr nae

7

4) Maine Common Law: Conversion

Count I alleges that the same $810,000 in payments to

BAC and to BPO, as discussed immediately above, were

paid out in consideration for nothing but nominal services,

and that the payments were authorized by officers and direc-

tors who were also officers and directors of BAC or BPO,

and hence who had conflicting loyalties,jand who placed the

interests and welfare of BAC and BPO ahead of BAR’s.

Thus, these payments amount to conversion and misappro-

priation of assets of BAR.

5) Other Counts

The other counts in the complaint included causing BAR

to pay illegal special dividends, causing BAR to excuse for

no consideration interest payments on debts owed to BAR,

and causing BIC to engage in illegal borrowing.

Approximately 99% of the stock of BAR is now owned by

the Amoskeag Company (Amoskeag), a diversified operat-

ing company, registered under the Securities Exchange Act

of 1934*, with its stock publicly held and traded. Amoskeag

had purchased about 98% of the stock of BAR from BP and

BPO on October 2, 1969, and acquired the other 1% in mis-

cellaneous small transactions since that time. It is alleged

that the domination and control of BAR by BP, BPO, and

their predecessor, BAC, ‘‘resulted in fraudulent conceal-

ment of the systematic exploitation of BAR and, further,

prevented any effective investigation being made of such

exploitation and the commencement of any suit with respect

thereto until after BAR was sold in 1969.”’

*Amoskeag formerly was an investment company, registered

under § 8 of the Investment Company Act of 1940, 15 U.S.C. § 80a-8,

~~ this registration ceased by S.E.C. order effective November 3,

8

Proceedings in the District Court and the Court of Appeals

On September 14, 1972, BP and BPO filed in the district

court a motion for summary judgment, and on December 24,

1972, the district-court entered an order granting this mo-

tion. The accompanying opinion read in part:

‘«[W]hether the federal rule [Rule 23.1, F.R.Civ.P.] or

Maine law is applicable, Amoskeag could not maintain

a derivative action. ... Amoskeag . . . is attempting to

accomplish indirectly what it could not do directly. ...

[P]laintiffs’ [BAR and BIC’s] claims are typical

stockholder claims . . . Equitable considerations must

be applied in such actions. . . . Since Amoskeag ... is

the real beneficiary ... , the corporate claims must fail

for lack of equity on the part of those who would ulti-

’ mately benefit from any corporate recovery.’’ 353

F.Supp. at 728

BAR and BIC filed a Notice of Appeal on January 26, 1973.

In an opinion dated August 3, 1973, the court of appeals

reversed the district court and held that BAR and BIC

could proceed to assert their claims both under federal and

state law.

BP and BPO filed their petition for a writ of certioran

with this Court on October 31, 1973.

Reasons for Denying the Writ

I. The decision below correctly applied traditional equitable

principles to hold that a corporation can sue in its own name

and behalf for depredations committed upon it by a former

majority stockholder where the recovery will benefit persons

in addition to present stockholders.

OO EE Ee

9

The district court relied upon a 1903 state court equity

decision, Home Fire Ins. Co. v. Barber, 67 Neb. 644, 93 N.W.

1024, to dismiss plaintiffs’ suit on the grounds that BAR’s

chief stockholder, Amoskeag, as the sole beneficiary, would

be unjustly enriched by any recovery. The court of appeals

found differently:

‘‘We reject the premise—critical both to the district

court’s holding and to the Home Fire rationale—that

BAR’s chief stockholder, Amoskeag, would be the ‘sole

beneficiary’ of a recovery for BAR. The premise, ap-

plied to a rail carrier, seems to us an oversimplification,

although, without doubt, BAR’s recovery would be

highly beneficial to Amoskeag, because of the nature of

their services and of regulatory restrictions affecting

them, and, more generally because of their legal status

as ‘quasi-public corporations’, railroads cannot be de-

scribed as mere alter egos of their chief stockholders.’’

482 F.2d at 868

Having found that there were interests affected by a recov-

ery beyond that of the chief stockholder, the court of appeals

concluded, on equitable principles, that the action should be

allowed since to do otherwise would be to grant the alleged

wrongdoers *‘an undeserved immunity from suit, to the

disadvantage of the public, solely to avoid a windfall to

Amoskeag which, whatever its own lack of equity. is neither

a wrongdoer nor a participant in any wrong.’’ 482 F.2d

at 870-1

The above, we submit, is all that is involved in the court

of appeals decision. It is merely an application of tradi-

tional equitable principles to avoid letting wrongdoers

eseape liability for their wrongful actions.

10

The decision does not enlarge the scope of any federal or

state cause of action. It does not deal with the questions of

whether plaintiffs have indeed stated causes of action under

the Clayton and Securities Exchange Acts, and it specifi-

cally reserves the question of whether there are private

causes of action under the Maine Public Utilities Act. 482

F. 2d at 867 and 871-2. It does not raise any issues so as to

create a conflict with any decision of any federal or state

court.

In Janigan v. Taylor, 344 F.2d 781, 786 (CA1 1965) cer-

tiorari denied 382 U.S. 879, cited with approval in Affiliated

Ute Citizens v. U.S., 406 U.S.. 128, 155 (1972), the Court of

Appeals for the First Circuit stated that ‘‘it is more appro-

priate to give the defrauded party the benefit even of wind-

falls than to let a fraudulent party keep them.’’ This case

applies that earlier language to the facts of this case.

Since the court of appeals has done nothing more than

determine that equitable principles allow maintenance of

the action, there is, we respectfully submit, no need for fur-

ther review by this court.

II. The decision below does not conflict with the contempora-

neous ownership requirement of Rule 23.1, F.R.Civ,P.,

because this suit is brought by the éorporation itself and

not derivatively by a stockholder.

Rule 23.1, F.R.Civ.P., requiring contemporaneous owner-

ship, applies only to actions brought by a stockholder in

behalf of a corporation that has ‘‘failed to enforce a right

which may properly be asserted by it.’’? Rule 23.1, F.R.Civ.P.

In this case, the corporation, BAR, has acted to enforce its

rights; Rule 23.1 does not apply. Central Ry. Signai Co. v.

Sh id

. + a

11

Longden, 194 F.2d 310, 321 (CA7 1952) (alternate holding).

The court of appeals in its opinion did not treat Rule 23.1

as applying to this case. 482 F.2d at 868, n.2. The con-

temporaneous ownership rule determines the standing of a

stockholder to assert a claim of his corporation in behalf of

the corporation. See Ross v. Bernhard, 396 U.S. 531, 538

(1970). If the stockholder lacks standing, the court will

‘‘abate the action without respect to the merits’’ so that an-

other stockholder may pick up the suit. Liken v. Shaffer, 64

F.Supp. 432, 442 (ND Iowa 1946). But here the BAR board

of directors authorized the suit to be brought by BAR itself.

‘Clearly, Rule 23.1 is not applicable.

Nor are the purposes of Rule 23.1 served by applying it

in this case. As the court of appeals decision observes: ‘‘ The

underlying policies for the adoption of the Rule—prevent-

ing transfer of a few shares to a non-resident to acquire

diversity jurisdiction and to discourage strike suits—relate

to abuses associated with minority stockholder proceed-

ings.’’ 482 F.2d at 868, n.2. This is neither a strike-suit

nor a suit where jurisdiction has been collusively created.

' There is no basis for the assertion in BP-BPO’s petition,

p. 11, that the purpose of Rule 23.1 is to prevent uninjured

stockholders from benefiting from a corporate recovery.

The cases hold that, when a corporation wins a lawsuit, it

recovers its full damages, and the damages are not reduced

by the percentage of stockholders who acquired their stock

after the wrongs for which the corporation was suing.

Norte € Company v. Huffins, 416 F.2d 1189, 1190-1, (CA2

1969), Central Ry. Signal Co. v. Longden, 194 F.2d 310, 322

CA7 1952), Overfield v. Pennroad Corp., 48 F.Supp .1008,

1018 (ED Pa 1943).

Since the decision below does not conflict with either the

| 12

contemporaneous ownership requirement of Rule 23.1 or the

purposes behind the requirement, certiorari should not be

granted on this ground.

Ill. The decision below does not conflict with Sierra Club y.

Morton, 405 U.S. 727 (1972), because this case involves

: claims between private parties and not review of adminis

trative action under the Administrative Procedure Act.

In this ease two private parties, BAR and BIC, are seek-

‘ ing to recover from two other private parties funds that

were wrongfully taken from BAR and BIC. This is not a

case involving review of administrative action taken under

the Administrative Procedure Act as is Sierra Club v. Mor-

4 ton, 405 U.S. 727 (1972). where the court viewed its task as

F the interpretation of § 10 of the Administrative Procedure

: Act, 5 U.S.C. § 702. The case of Data Processing Service \.

Camp, 397 U.S. 150 (1970), also involved review of adminis-

trative action under the Administrative Procedure Act and

under the federal banking laws.

esa ety Pare

The absence of conflict with Sierra Club and Data Proc-

essing is highlighted by the failure of BP and BPO even to

mention them, either in brief or in oral argument, before

either the district court or the court of appeals. Further

neither of the courts below discussed or even cited in their

opinions Sierra Club or Data Pro essing.

Thus. the decision below does not conflict with Sierra Club

or with Data Processing.

EE Ses eo aety

u POOPY nT ta bi Pata pee, i

> LICL DOOM 2 5 FG on x

a Te le a eee 7

13

Conclusion

Since the decision below correctly applies traditional

equitable principles and does not conflict with existing law,

the petition for a writ of certiorari should be denied.

Epwarp O. Proctor

Avan L. LerKowitTz

Epwarp T. Rosixson

Attorneys for Respondents

Of Counsel:

VerRILL, Daxa, PHILBRICK,

Putxam & WILLIAMSON

eee e————————————eeeeE

14

Appendix A —

Rule 10b-5 (17 C.F.R. § 240.10b-5), adopted by the Seeuri-

ties and Exchange Commission pursuant to §10b of the

Securities Exchange Act of 1934 [15 U.S.C. § 78}(b)], reads

as follows:

It shall be unlawful for any person, directly or indi-

rectly, by the use of any means or instrumentality of

interstate commerce, or of the mails or of any facility

of any national securities exchange,

(a) To employ any device, scheme, or artifice to

defraud,

(b) To make any untrue statement of a material fact

or to omit to state a material fact necessary in order to

make the statements made, in the light of the circum-

stances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of busi-

ness which operates or would operate as a fraud or

deceit upon any person

in connection with the purchase or sale of any security.

Appendix B

Section 10 of the Clayton Act [15 U.S.C. § 20] reads in

- pertinent part as follows:

No common carrier engaged in commerce shall have

any dealings in securities, supplies, or other articles of

commerce, or shall make or have any contracts for con-

15

struction or maintenance of any kind, to the amount of

more than $50,000, in the aggregate, in any one year,

with another corporation, firm, partnership, or associa-

tion 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 particu-

lar transaction, any person ‘who is at the same time a

director, manager, or purchasing or selling officer of,

or who has any substantial interest in, such other cor-

poration, 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 Com-

mission. No bid shall be received unless the name and

address of the bidder or the names and addresses of the

officers, directors, and general managers thereof, if

the bidder be a corporation. or of the members, if it be a

partnership or firm, he given with the bid.

Appendix C

Section 104 of the Maine Public Utilities Act [35 M.R.S.A.

§ 104] reads as follows:

No publie utility doing business in this State shall

extend credit or make loans to or make any contract or

arrangement, providing for the furnishing of manage-

_Ment, supervision of construction, engineering, account-

ing, legal, financial or similar services, or for the fur-

nishing of any service other than those enumerated,

with any corporation, person, partnership or trust,

holding, controlling or owning in excess of 25% of the

EE ES ES eae

16

: voting capital stock of such public utility, or with any

4 other corporation which is itself owned or controlled by

é or affiliated with any corporation, person, partnership

or trust, holding, controlling or owning a majority of

the voting capital stock of such public utility, unless and

until such contract or arrangement shall have been

found by the commission not to be adverse to the public

interest and shall have received their written approval.

The commission shall in the case of any utility have the

d power to exempt herefrom, from time to time, such

classes of transactions as it may specify in writing in

3 advance and which in its judgment will not affect the

public interest.

ee pe eee es

4 Section 15 of the Maine Publie Utilities Act [35 M.R.S.A.

; § 15] reads as follows:

Wherever used or referred to in chapters 1 to 17,

unless a different meaning clearly appears from the

context:

3. Common carrier. ‘*Common carrier’’ includes

every railroad company, express company, dispateh,

sleeping car, dining car, drawing-room car, f reight line,

refrigerator, oil, stock, fruit, car loaning, car renting,

car loading and every other car corporation or person,

their lessees, trustees, receivers, or trustees appointed

by any court whatsoever, operating for compensation

within this State: and every corporation or person,

their lessees, trustees, receivers or trustees appointed

by any court whatsoever, owning, controlling, operating

or managing any vessel regularly engaged in the trans-

¢

allel Se eae x

LOL ELLE Fe LOTS PRICED POM ELT SL I _ —_ —

17

portation of persons or property for compensation upon

the waters of this State or upon the high seas, over

regular routes between points within this State. 1961,

e. 395, § 23.

13. Public utility. ‘‘Public utility’’ includes every

common carrier, gas company, natural gas pipeline

company, electrical company, telephone company, tele-

graph company, water company, public heating com-

pany, wharfinger and warehouseman, as those terms are

defined in this section, and each thereof is declared to be

a public utility and to be subject to the jurisdiction,

control and regulation of the commission, and to chap-

ters 1 to17. 1955, c. 127, § 1.

Appendix D

Rule 23.1, F.R.Civ.P., reads as follows:

In a derivative action brought by one or more share-

holders or members to enforce a right of a corporation

or of an unincorporated association, the corporation or

association having failed to enforce a right which may

properly be asserted by it, the complaint shall be veri-

fied and shall allege (1) that the plaintiff was a share-

holder or member at the time of the transaction of which

he complains or that his share or membership there-

after devolved on him by operation of law, and (2) that

the action is not a collusive one to confer jurisdiction

on a court of the United States which it would not other-

wise have. The complaint shall also allege with par-

ticularity the efforts, if any, made by the plaintiff to

Seo ne eae SIDR TIE IIE, baa aay

18

obtain the action he desires from the directors or com-

parable authority and, if necessary, from the share-

holders or members, and the reasons for his failure to

obtain the action or for not making the effort. The

derivative action may not be maintained if it appears

that the plaintiff does not fairly and adequately repre-

sent the interests of the shareholders or members sim-

ilarly situated in enforcing the right of the corporation

or association. The action shall not be dismissed or

compromised without the approval of the court, and

notice of the proposed dismissal or compromise shall

be given to shareholders or members in such manner

as the court directs.

ey ee eee

veins

i,

MICHAEL RODAK,

——

In THE

Supreme Court-of the United State

Octoser Term, 1973

No. 718

BANGOR PUNTA OPERATIONS, INC. and BANGOR

PUNTA CORPORATION,

Petitioners,

Vv.

BANGOR & AROOSTOOK RAILROAD COMPANY and

BANGOR INVESTMENT COMPANY,

Respondents.

On Wait or CERTIORARI TO THE UNITED STATES

Court or APPEALS FOR THE First Circuit

BRIEF FOR THE PETITIONERS

James V. Ryan

Rocer L. WaLpMAN

Auuan J. Gar

One Rockefeller Plaza

New York, New York 10020.

Counsel for Petitioners

Wesster SHEFFIELD FLEISCHMANN

Hircucock & BrooKFIELD

Begystein Sour Sawyer & NELson,

Of Counsel.

February 21, 1974.

9 OD ASME ty ERT ORES 99 TO RES SRT TOPE S EE RE LO a

INDEX

PAGE

dicen cetsaiansiiin sh 1

ii Mlctc incite ia . 1

oie Peeeied —...__-_-___--.} 2

Statutes and Regulations Involved _______________ 2

NE OE TRO RD oii ici btnncencheannate 2

Argument :

I. The decision below disregards the funda-

mental principle that a litigant that has it-

self suffered no injury lacks standing to bring

an action to vindicate the rights of the public 6

II. The decision below creates a new public right

of action unsanctioned by common law or

statute and based on a totally speculative

I eis rciteiscnninn 11

III. The Court of Appeals rejected a universally

recognized principle correctly applied by the

See TENORIO R UTS FATE 17

eee en paleesiconems 21

Appendix :

United States Constitution art. ITI § 2 ____-_____ A-1

United States Constitution amend. XI __________ A-1

Clayton Act § 10, 15 U.S.C. § 20 ___ see A-1

Securities Exchange Act of 1934, §10(b), 15

Uae 8 ee A-2

SEC Rule 10b-5, 17 C.F.R. § 240.10b-5 __-_-_____ A-2

Interstate Commerce Act, Part I, §1(14), 49

RE OE it ecw A-3

Interstate Commerce Act, Part I, §1(18), 49

U.S.C. § 1(18)

PAGE

Interstate Commerce Act, Part I, §1(21), 49

TER Ay © ROD ii i hw ;

Interstate Commerce Act, Part I, §5(2)(a), 49

U.S.C. § 5(2) (a) — A4

Interstate Commerce Act, Part I, § 8, 49 U.S.C.48 A5

Interstate Commerce Act, Part I, §15(1), 49

VE 6A) nk A5

Interstate Commerce Act, Part I, §20a(2), 49

TAL SU 2 ee As

Maine Public Utilities Act § 104, 35 M.R.S.A. § 104 A-7

Federal Rule of Civil Procedure 23.1 __________- AS

CITATIONS

Cases:

Amen v. Black, 234 F.2d 12 (10th Cir. 1956) _____- 18

Asbury v. Chesapeake & Ohio Ry., 314 F. Supp.

310 (D.D.C. 1970) _----- " ‘

Atlantic Coast Line v. Riverside Mills, 219 U.S.

186 (1911)... oe... 15

Barlow v. Collins, 397 U.S. 159 (1970) _-----__--- 7

Billy Baxter, Inc. v. Coca-Cola Co., 431 F.2d 183

(2nd Cir. 1970), cert. denied, 401 U.S. 923 (1971) 1B

Birnbaum v. Newport Steel Corp., 193 F.2d 461

(2nd Cir. 1952), cert. denied, 343 U.S. 956 (1952) 18

Bivens v. Sia Unknown Narcotics Agents, 403 U.S.

388 (1971) —-- iicaisinceonst anced 12

Calderone Enterprises Corp. v. United Artists

Theatre Circuit, 454 F.2d 1292 (2nd Cir. 1971),

cert. denied, 406 U.S. 930 (1972) ______-------- 13

Cohen v. Beneficial Loan Corp., 337 U.S. 541 (1949) 19

PAGE

Commonwealth Edison Co. v. Allis-Chalmers

Mfg. Co., 315 F.2d 564 (7th Cir. 1963), cert.

denied sub nom., Illinois v. Commonwealth

Edison Co., 375 U.S. 834 (1963) -------------- 12

Data Processing Service v. Camp, 397 U.S. 150

(1970) ae 7

Eason v. General Motors Acceptance Corp., C.C.H.

Fed. Sec. L. Rep. (Current Transfer Binder)

O6, O56 C7 Cee. TOS) ok. 13

First State Bank v. Morton, 146 Ky. 287, 142 S.W.

694 (1912) ms 18

Hawaii v. Standard Oil Co., 405 U.S. 251 (1972) __ 9,13

Herpich v. Wallace, 430 F.2d 792 (5th Cir. 1970) __ 13

Home Fire Ins. Co. v. Barber, 67 Neb. 644, 93 N.W.

1024 (1903) icin ee a, 17, 18, Zh

In re Ayers, 123 U.S. 443 (1887) _--------------- 20

Iroquois Industries, Inc. v. Syracuse China Corp.,

417 F.2d 963 (2nd Cir. 1969), cert. denied, 399

U.S. 909 (1970) ___- 13

J.I. Case v. Borak, 377 U.S. 426 (1964) _-_------ 10, 12

Joint Anti-Fascist Refugee Committee v. McGrath,

341 U.S. 123 (1951) _- 15

Kahan v. Rosenstiel, 424 F.2d 161 (3d Cir. 1970),

cert. denied sub nom., Glen Alden Corp. v.

Kahn, BE US. EOS) 13

Linda R. S. v. Richard D., 410 U.S. 614 (1973) __10, 16

Mathews v. Fort Valley Cotton Mulls, 179 Ga. 580,

16 ER, Oe OO 2... 18

Matthews v. Headley Chocolate Co., 130 Md. 523,

AONE 18

Miller & Luz v. East Side Canal Co., 211 U.S. 293

sindcieacateiaiheatupaiei eo ae

Montana Dakota Utilities Co. v. Northwestern

Public Service Co., 341 U.S. 246 (1951) -------

National Railroad Passenger Corp. v. National

Association of Railroad Passengers, No. 72-1289

(U.S. Sup. Ct., January 9, 1974) ------------ 1), 16

New Hampshire v. Louisiana, 108 U.S. 76 (1883)

O’Shea v. Littleton, 42 U.S.L.W. 4139 (U.S. Sup.

20

ye Jannary 15, 1974) __._____-_-__--------- 10, 16

a

rk Terrace, Inc. v. Burge, 249 N.C. 308, 106 S.E.

2d 478 (1959)

Perma Life Mufflers, Inc. v. International Parts

Corp., 392 U.S. 134 (1968) “s

Poindexter v. Greenhow, 114 U.S. 270 (1885) __--

Productive Inventions,.Inc. v. Trico Products

- Corp., 224 F.2d 678 (2nd Cir. 1955), cert. denied,

350 U.S. 936 (1956) __ Cae pte oe diieaoba

Pueblo Foundry & Machine Co. v. Lannon, 68 Colo.

131, 187 P. 1031 (1920) ~---------___---------

S. H. & W. Lumber Co. v. California & Oregon

Coast R.R., 154 F. Supp. 152 (D. Oregon 1957)

SierflClub v. Morton, 405 U.S. 727 (1972) ------

Simmons v. Wolfson, 428 F.2d 455 (6th Cir. 1970),

cert. denied, 400 U.S. 999 (1971) sa

Southern Realty Co. v. Walker, 211 U.S. 603 (1909)

State Trust & Savings Bank v. Hermosa Land &

Cattle Co., 30 N.M. 566, 240 P. 469 (1925) ----

Superintendent of Insurance v. Bankers Iife €

Casualty Co., 404 U.S. 6 (1971) -----==-------

T.1.M_E. Inc. v. United States, 359 U.S. 464 (1958)

PAGE

Constitution:

United States Constitution art. III $2 _--------- 7, 20

United States Constitution amend. XI ____-___- 20

Rules:

Federal Rule of Civil Procedure 23 _______-_____ 13

Federal Rule of Civil Procedure 23.1 _________ 5, 19, 20

Federal Rule of Civil Procedure 56 _____________ 3

SEC Rule 10b-5, 17 C.F.B. § 240.10b-5 _-_________ 3, 13

Statutes

Administrative Procedure Act §§ 701 et seq., 5

US8.C. §§ 701 ef seq. ------ ~

Clayton Act § 10, 15 U.S.C. § 20 3

Interstate Commerce Act, Part I, §1(14), 49

U.S.C. § 1(14)

Interstate Commerce Act, Part I, §1(18), 49

U.S.C. §1(18) - seine 15

Interstate Commercg) Act, Part I, $1(21), 49

U.S.C. §1(21) 15

Interstate Commerce Act, Part I, §5(2)(a), 49

U.S.C. § 5(2) (a) 15

Interstate Commerce Act, Part I, § 8,49 U.S.C.§8 15

Interstate Commerce Act, Part I, §15(1), 49

BE CEE cided ee 15

Interstate Commerce Act, Part I, §20a(2), 49

US.C. §20a(2) ----- 15

‘Maine Public Utilities Act 4 15,35M.BS.A.§15_. 3

Maine Public Utilities Act § 104,35 M.R.S.A.§104 3

Securities Exchange Act of 1934, §10(b), 15

US.C. § 78j(b) 3

Miscellaneous :

Davis, Administrative Law Text (3d ed. 1972) __ 11

Henn, Law of Corporations (2d ed. 1970) ______- 12

In THE

Supreme Court of the Anited States

October Term, 1973

No. 718

Bancor Punta Orgrations, lye. and

Bancor Punta Cogporation,

Petitioners,

v.

Bancor & Aroostook Ramzoap Company and

Bancor Investment Company, -

Respondents.

On Wait or CERTIORARI TO THE UNITED STATES

Court or APPEALS FOR THE First Cracuir

BRIEF FOR THE PETITIONERS

Opinions Below

The opinion of the District Court is reported at 353

F. Supp. 724 (D. Me. 1972) and is reproduced at pp. 30-41

of the Appendix (App.). . The opinion of the Court of

Appeals for the First Circuit (App. 54-67) is reported at

482 F. 2d 865.

Jurisdiction

The Judgment of the First Circuit, reversing the decision

of the District Court, was entered on August 3, 1973. The

Petition for a Writ of Certiorari was filed October 31, 1973,

and was granted January 7, 1974. The jurisdiction of this

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

2

Questions Presented

(1) Whether a litigant who has himself suffered no

injury can bring suit in a federal court to vindicate the

rights of the general public.

(2) Whether the fact that a corporation is a railroad

or other ‘‘public’’ or ‘‘quasi-public’’ corporation changes

the applicable rules with respect to standing so as to

permit actions by the general public for alleged violations

of the federal securities and anti-trust laws and for common

law corporate waste and mismanagement.

(3) Whether the requirement of contemporaneous share

ownership embodied in Rule 23.1 of the Federal Rules of

Civil Procedure may be evaded in actions involving corpo-

rations whose business affects the public welfare.

Statutes and Regulations Involved

The following statutes and regulations are involved:

U.S. Const. art. III, § 2; U.S. Const. amend. XI; Clayton

Act § 10, 15 U.S.C. § 20; Securities Exchange Act of 1934,

§10(b), 15 U.S.C. §78j(b); SEC Rule 10b-5, 17 C.FR.

§ 240.10b-5; Interstate-Commerce Act, Part I, §$1(14),

1(18), 1(21), 5(2) (a), 8, 15(1), 20a(2), 49 U-S.C. §§1(14),

1(18), 1(21), 5(2)(a), 8, 15(1), 20a(2) ; Maine Public Util -

ities Act § 104, 35 M.R.S.A. §104; and Bule 23.1 of the

Federal Rules of Civil Procedure. The text of pertinent

parts of the statutes and regulations are set forth in an

appendix to this brief. :

Statement of the Case

Plaintiff-respondent Bangor and Aroostook Railroad

(‘*BAR’’) is a Maine corporation which operates a rail-

road within the State of Maine. Plaintiff-respondent Ban-

gor Investment Company (‘‘BIC’’) is its wholly owned

subsidiary. Both companies are controlled by Amoskeag

Company, (‘‘Amoskeag’’), a Delaware corporation which

owns 99.3% of the outstanding capital stock of BAR.

‘

3

Defendant - petitioners Bangor Punta Corporation

(“Bangor Punta’’), a publicly held Delaware corporation,

and Bangor Punta Operations (‘‘BPO”’’), its wholly owned

subsidiary, are former owners of a controlling interest in

BAR. BPO owned 98.3% of the capital stock of BAR prior

to October 2, 1969, on which date it sold its holdings of BAR

stock to Amoskeag for approximately $5,000,000.

The instant action, brought nominally by BAR and BIC,

was commenced on December 30, 1971 and seeks damages

of $7,000,000. Although the complaint frames various

causes of action under the common law of Maine; Section

10(b) of the Securities and Exchange Act of 1934, 15 U.S.C.

§78j(b) and SEC Rule 10b-5 (17 C.F.R. § 240.10b-5) there-

under; Section 10 of the Clayton Act, 15 U.S.C. 4 20; and

Sections 104 and 15 of the Maine Public Utilities Act (35

M.B.S.A. §§ 104 and 15), all the counts essentially allege mis-

management and waste of BAR’s corporate assets during

the time Defendant-petitioners controlled BAR, claims .

customarily found in the usual shareholders derivative ac-

tion. The complaint makes no allegation of injury to the

public, nor does it allege the suit is brought on the public’s

behalf. ;

On September 14, 1972, Defendant-petitioners moved for

summary judgment pursuant to Rule 56 of the Federal

Rulés of Civil Procedure. By order dated December 29,

1972, the United States District Court for the District of

Maine (Edward T. Gignoux, D.J.) granted Defendant-

petitioners summary judgment and dismissed the action on

the ground that, from the undisputed facts of the case,

Plaintiff-respondents were precluded by well established

equitable principles from maintaining the action.

The District Court’s opinion emphasized three crucial

and uncontested facts (App. 32-33) :

(1) the real plaintiff and party in interest, and

the beneficiary of any recovery, was Amoskeag, the

more than 99% owner of the corporate plaintiffs ;

(2) Amoskeag has made no claim that it was

defrauded or received less than full value for its