Amicus Curiae Brief — Bangor Punta Operations, Inc. v. Bangor & Aroostook R. Co.

rthe Supreme Court of the United States

OcroserR TERM, 1973

No. 73-718

<coR PuNTA OPERATIONS, INC. AND BaNGoR PUNTA

CoRPORATION, PETITIONERS

q v.

BaxgoR & AROOSTOOK RAILROAD COMPANY AND BANGOR

INVESTMENT COMPANY, RESPONDENTS

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE FIRST CIRCUIT

BRIEF OF THE INTERSTATE COMMERCE COMMISSION

; AS AMICUS CURIAE

OPINIONS BELOW

The opinion of the District Court is reported at

°%3 F. Supp. 724 (D. Me. 1972) (App. 30-41). The

an of the Court of Appeals for the First Circuit

pareperted at 482 F. 2d 865 (App. 54-67).

4 JURISDICTION

ag The petition for a writ of certiorari was granted

© on January 7, 1974. The judgment of the Court of

oi was entered on August 3, 1973. The jurisdic-

~ tion of this Court is invoked pursuant to 28 U.S.C.

§1254(1).

536-104—74—__1

(1)

2

STATUTES INVOLVED

The applicable sections of the Clayton Act, Securi-

ties Exchange Act of 1934, and the Interstate Com-

merce Act are set forth in Petitioner’s Appendix

(App. A-1-A-9).

QUESTION PRESENTED

Whether a railroad has standing to bring an action

in its own name against a former holding company

which has the effect of vindicating the public interest,

STATEMENT

‘The Bangor and Aroostook Railroad Company

(BAR) and its wholly owned subsidiary, Bangor In-

vestment Company (BIC), brought suit against the

Bangor Punta Corporation (Bangor Punta) and its

wholly owned subsidiary, Bangor Punta Operations

(BPO) in the District Court for the District of

Maine. Bangor Punta, a diversified holding company,

through its subsidiary BPO, formerly held a majority

interest in, and controlled BAR. At the time BAR

brought the action against its former holding com-

pany, Bangor Punta, BAR was substantially owned

and controlled by Amoskeag Company, another in-

vestment company.

In 1971, the Bureau of Accounts of the Interstate

Commerce Commission, after a study of the inter-

corporate financial transactions between the BAR and

its former holding company, forwarded a report to the

Commission, Report of Diversified Holding Company

Relationships And Transactions of Bangor Punta

Corporation. After analyzing certain intercorporate

3

transactions, the Bureau recommended that steps be

taken to have the former holding company make

restitution to the railroad for misappropriation of the

earrier’s assets.

In June of 1971, the Chairman of the Surface

Transportation Subcommittee, Senate Committee on

Commerce, requested that the Commission furnish the

Committee with all the information gathered by the

Commission on conglomerate mergers in the rail in-

dustry. The Bangor Punta study, along with other

information and studies, was forwarded to the

Committee.

Sometime thereafter the Board of Directors of

BAR obtained the study, and after deliberation, au-

thorized the chief executive officer of BAR to insti-

tute action against Bangor Punta and BPO in the

name of BAR. The complaint sought damages for

misappropriation and waste of corporate assets, and

was brought both under the common law of Maine,

and under various Federal statutes (see App. 2a).

The district court granted defendant Bangor Punta’s

motion far summary judgment dismissing the com-

plaint (App. la-12a). The district court held that the

present owner of the railroad, the Amoskeag Com-

pany, is the real party in interest and would be the

real beneficiary of the proceeds of the suit. The court

concluded that since Amoskeag was a subsequent pur-

chaser, it was “barred from maintaining a derivative

suit on behalf of BAR for the wrongs alleged to have

occurred before Amoskeag purchased its BAR shares”

(App. 4a).

4

On appeal, the First Circuit sent the matter back

to the district court to be determined on its merits, In

sending the matter back, the court held that the

public’s interest inherent in viable railroads is suff.

cient to provide standing for the Bangor & Aroos-

took—apart from Amoskeag’s interest—to maintain

the action. As the First Circuit stated (App. 19a-

20a) :

The public’s interest, unlike the private in-

terest of stockholder or creditor, is not easily

defined or quantified, yet it is real and cannot,

we think, be overlooked in determining whether

the corporation, suing in its own right, should

be estopped by equitable defenses pertaining

only to its controlling stockholder. Here we

think the public’s interest in the financial health

of BAR provides a separate interest, quite

apart from Amoskeag’s, which is served by the

corporate cause of action. Thus, regardless of

the latter’s motivations or potential receipt

of undeserved benefits, BAR should be per-

mitted, and indeed has a duty, to recover for

itself any assets which were divested from it in

violation of state or federal law. (Footnote

omitted.)

Thus, in finding the public’s ‘‘real, if inchoate inter-

est” (App. 24a) sufficient to provide BAR standing to

maintain the suit in its own name, the circuit court

remanded the matter to be determined on its merits.

In their Brief to this Court, the petitioners argue

inter alia that the circuit court erred in recognizing

the railroad’s standing to maintain an action which

would redound to the public interest because of some

5

alleged ability of the Interstate Commerce Commis-

sion to protect the public interest in this type of a

situation (Br. p. 15).

ARGUMENT

I

THE INTERSTATE COMMERCE COMMISSION HAS NO JURIS-

DICTION OVER ONE-RAILROAD HOLDING COMPANIES

Section 5(2) of the Interstate Commerce Act, 49

U.S.C. §5(2) (a eopy of which is attached) is the

section which vests the Commission with authority to

approve mergers or acquisitions of rail carriers. Sec-

tio 5(2)(a)(i) makes Commission authorization

necessary for “a person which is not a carrier to ac-

quire control of two or more carriers though owner-

ship of their stock or otherwise.’’ Commission author-

ity is also necessary when a single-railroad holding

company attempts to acquire control of a second rail-

road.

Section 5(3) of the Act, 49 U.S.C. §5(3) (also

attached as an appendix hereto) authorizes the Com-

mission to designate a non-carrier as a carrier and

subject it to certain requirements. Section 5(3) pro-

vides in part that “[w]henever a person which is

not a carrier is authorized, by an order entered under

paragraph (2), to acquire control of any carrier or of

two or more carriers, such person thereafter shall, to

the extent provided by the Commission in such order,

be considered as a carrier * * *”

Thus, in cases such as one here where a railroad

generates its own holding company, that holding com-

6

pany escapes the Commission’s regulation.’ Further.

more, even assuming the Commission had jurisdiction

over Bangor Punta as a designated carrier, it is stil]

questionable whether. the Commission could have reg.

ulated the intercorporate transfer of assets com.

plained of by BAR. Under section 5(3), when

person is designated a carrier it is subjected to see-

tions 20(1)-(10) and 20a of the Act, 49 U.S

§§ 20(1)-(10), 20a. Section 20 deals with the records,

reports, and accounts to be kept by carriers. See-

tion 20a subjects to the Commission’s jurisdiction the

carriers’ issuance of securities. But “securities,” as

defined by section 20a(2), does not embrace intercor-

porate asset transfers or advances to or from

affiliates.

That question aside, however, both the Commission

and its two overseeing committees of Congress recog-

nize the present gap in the Commission’s regulatory

authority. See hearings on Failing Railroads, before

the Senate Commerce Committee, Serial No. 91-90,

p. 166 et seq. (1970), and hearings on Emergency Rail

Services Legislation before the Subcommittee on

Transportation and Aeronautics, House Committee on

Interstate and Foreign Commerce, Serial No. 91-86,

pp. 199 et seq. (1970). Presently pending before

‘In addition to the clear case, as here, of the lack of juris-

diction over a a single-railroad holding company. the Commis-

sion has consistently held that, under the statute. it lacks

jurisdiction over holding companies which control a single

integrated railroad system, or “single established carrier system.”

See e.g. Louisville & J.B. & R. Co. Merger, 295 LCL.

(1955); Kansas City Southern Industries, Inc.—Control—Kan-

sas City Southern Ry. Co., 317 1.C.C. 1 (1962).

7

poth Houses are Bills to extend the Commission’s reg-

ulation to conglomerate holding companies, S. 2460,

jntroduced on September 20, 1973; H.R. 11092, intro-

duced October 24, 1973.

It is clear that, contrary to petitioners’ arguments,

the Commission was not empowered to protect the

public interest in the intereorporate dealings which

are the subject of thé instant controversy. This lack

of regulatory authority, in part, necessitates the posi-

tion taken by the First Circuit.

Il

THE COURT ACTED PROPERLY IN HOLDING THAT THE

RAILROAD HAD STANDING TO BRING THIS ACTION

The petitioners argue that the First Circuit disre-

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

This is not an action brought by a party claiming

representative status to vindicate a public interest.

Nor is it a derivative suit brought by Amoskeag.

Rather, the suit was commenced by the Bangor &

Aroostook Railroad in its own name.’

The continued financial health of railroads, as

necessary public utilities, is undeniably a matter of

major public concern. Here, the interests of the public

*The doctrine of contemporaneous ownership under Rule 23.1

of the Federal Rules of Civil Procedure does not apply to

a snit brought by a corporation itself to enforce its own rights.

Central Ry. Signal Co. v. Longden, 194 F. 2d 310 (7th Cir.

1952); Mauck vy. Mading-Dugan Drug Company, 361 F. Supp.

1314 (N.D. Hl. 1973). Here, after studying the Bureau of Ac-

counts’ report, the new directors of the Bangor & Aroostook

authorized the chief executive officer of the railroad to institute

suit in the carrier’s own name.

LONE gS

8

and the railroad plaintiff largely overlap—and the

“inchoate but real” public interest in viable railroads

brings the facts of the present case well beyond the

usual limits of the contemporary ownership rule.

The railroad brought the action in its own name,

and if successful the proceeds will redound to the

public interest.* Given these facts, it is respectfully

submitted that the First Circuit acted properly in

remanding the cause to the district court for a deter-

mination on its merits.

Respectfully submitted.

Fritz R. Kann,

General Counsel,

Betty Jo CuRIsTIAN,

Associate General Counsel,

CuarLes H. Wuitt, Jr.,

Attorney,

Interstate Commerce Commission.

* As the First Circuit pointed out (App. 25a), if the railroad

prevails on the merits, the district court can call on the aid

of state and federal agencies in insuring that the proceeds will

not be unreasonably diverted to the private enrichment of the

stockholders.

a RPE

APPENDIX

Section 5(2) of the Interstate Commerce Act, 49

U.S.C. §5(2) provides in pertinent part:

(2)(a) It shall be lawful, with the approval

and authorization of the Commission, as pro-

vided in subdivision (b)—

(i) for two or more carriers to consolidate or

merge their properties or franchises, or any

part thereof, into one corporation for the own-

ership, management, and operation of the prop-

erties theretofore in separate ownership; or for

any carrier, or two or more carriers jointly, to

purchase, lease or contract to operate the prop-

erties, or any part thereof, of another; or for

any carrier, or two or more carriers jointly, to

acquire control of another through ownership

of its stock or otherwise; or for a person which

is not a carrier to acquire control of two or

more carriers through ownership of their stock

or otherwise; or for a person which is not a

carrier and which has control of one or more

carriers to acquire control of another carrier

though ownership of its stock or otherwise; or

Section 5(3) of the Act, 49 U.S.C. §5(3), pro-

vides in pertinent part:

(3) Whenever a person which is not a carrier

is authorized, by an order entered under para-

graph (2), to acquire control of any carrier or

of two or more carriers, such person thereafter

shall, to the extent provided by the Commission

in such order, be considered as a carrier subject

to such of the following provisions as are ap-

plicable to any carrier involved in such aequisi-

tion of control: Section 20 (1) to (10), inclu-

536-104—74_2 (9)

10

sive, of this part, sections 204(a) (1) and ( 2)

and 220 of Part II, and section 313 of part If]

(which relate to reports, accounts, and so forth,

of carriers), and section 20a (2) to (11), in.

clusive, of this part, and section 214 of part II,

(which relate to issues of securities and assump-

tions of liability of carriers), including in each

case the penalties applicable in the case of yig-

lations of such provisions.

U.S. GOVERNMENT PRINTING OFFICE. 1974

Ee