Continental Insurance Company v. United States

[Syllabus from pages 156-158 intentionally omitted]

This case presents the questions, first, whether a decree of the District Court, entered under a mandate from this court in United States v. Reading Co. et al., 253 U.S. 26, 40 Sup. Ct. 425, 64 L. Ed. 760, is in accordance therewith; and, second, whether it does equity to the appellants.

The original suit was instituted by the United States to dissolve the relation existing between the Reading Company, the Philadelphia & Reading Railway Company, the Philadelphia & Reading Coal & Iron Company, all corporations of Pennsylvania, the Central Railroad Company of New Jersey, a corporation of New Jersey, and the Lehigh & Wilkes-Barre Coal Company, a corporation of Pennsylvania, as a combination to restrain and monopolize interstate commerce in anthracite coal, and to violate the commodities clause of the Act of June 29, 1906, 34 Stat. 585 (Comp. St. § 8563, subd. 6).

This court found that by a scheme of reorganization, adopted in December, 1895, the Philadelphia & Reading Railway Company and the Philadelphia & Reading Coal & Iron Company combined to deliver into the complete control of the board of directors of a holding company, the Reading Company, all of the property of much the largest single coal company operating in the Schuylkill field, and almost 1,000 miles of railway over which its coal must find its access to interstate markets, and that this constituted a combination unduly to restrain and monopolize interstate commerce in anthracite coal; that the Philadelphia & Reading Railway Company and the Philadelphia & Reading Coal Company had thereafter but one stockholder, the Reading Company; and that thus the Reading Company served to pool the property, the activities, and the profits of the three companies. The court further found that, through the acquisition by the Reading Company of a majority of the stock of the Jersey Central Railroad Company of New Jersey, which itself owned 90 per cent. of the stock in the Lehigh & Wilkes-Barre Coal Company, the illegal power of the combination was greatly increased, and that the relation of common control through stock ownership of the Philadelphia & Reading Railway Company and the Philadelphia & Reading Coal Company, and that of the Jersey Central Railroad Company and the Lehigh Valley & Wilkes-Barre Coal Company were violations of the commodities clause, requiring dissolution. The court, therefore, remanded the case to the District Court, directing a decree in conformity to the opinion dissolving the whole combination of the four companies with the Reading Company and such disposition of the shares of stocks and bonds and other property of the Reading Company as might be necessary to establish the entire independence of each company from the others, to the end that the affairs of all of them might be conducted in harmony with law.

For convenience the Philadelphia & Reading Railway Company will be called the Reading Railway Company, the Philadelphia & Reading Coal & Iron Company the Reading Coal Company, the Central Railroad of New Jersey the New Jersey R. R. Company, and the Lehigh & Wilkes-Barre Coal Company the Wilkes-Barre Coal Company.

The situation, at the time the District Court was directed to enter its decree, was as follows: The Reading Company, the holding company, had a special charter under the laws of Pennsylvania granted prior to the adoption of the Constitution of that state of 1874, with unusually broad powers. It was not engaged directly in operating a railroad, and was not subject to regulation by federal or state authorities having jurisdiction over common carriers. It owned the entire capital stock of the Reading Railway Company, being $42,481,700, par value, and $20,000,000 of its bonds; $8,000,000, par value, being the entire capital stock of the Reading Coal Company; the real estate, rolling stock, and floating equipment used upon or in connection with the Reading Railway System; shares of stock and bonds of other railroads and terminal companies, constituting a part of the Reading Railway System; $14,504,000, par value, being more than a majority, of the stock of the New Jersey R. R. Company, all of which was pledged except 40 shares, under a collateral trust mortgage to secure $23,000,000 worth of bonds. These were not all its holdings, but they are all that are important here.

On January 5, 1897, the Reading Company and the Reading Coal Company jointly gave a mortgage to the Central, now the Central, Union Trust Company of New York, trustee, hereafter to be referred to as the general mortgage. The security under this mortgage was all the property of the Reading Coal Company and all of its capital stock, together with all of the capital stock of the Reading Railway Company and all the railroad equipment and certain real estate essential to the operation of the Reading Railway Company, which was held by the Reading Company, together with certain bonds of the Railway Company. The bonds now outstanding under this mortgage amount in round figures to $93,000,000.

A combination of the Reading Railway Company and the Reading Coal Company had been maintained for years, and the property of the Reading Coal Company had been greatly enlarged by purchases and improvements, through money advanced by the Reading Railway Company, resulting in an indebtedness of the Reading Coal Company to the Reading Railway Company which ultimately amounted to about $70,000,000. In 1896, when the Reading Company became the holding company under the then formed combination, this indebtedness of the Coal Company to the Railway Company appeared as a credit on the books of the Reading Company, and a debit on the books of the Coal Company, but it is quite clear that they were mere bookkeeping entries and that it had been agreed that they should be canceled They are canceled in the proposed plan.

Under the plan embodied in the decree of the District Court, the Reading Company is, as between it and the Reading Coal Company, to assume the whole liability under the general mortgage, and agrees to save the Coal Company and its property harmless therefrom. The Reading Company is to receive from the Reading Coal Company $10,000,000 in cash or current assets, and $25,000,000 in 4 per cent. bonds of the Reading Coal Company, secured by mortgage on its properties its interest, subject to the lien of transfer its interest, subject to the lien of the general mortgage, in all the stock of the present Reading Coal Company, amounting to $8,000,000 in par value, but actually worth many times that amount, including the right to vote and receive dividends thereon, to a new Reading Coal Company, a corporation to be created under the supervision of the District Court, and over which that court is to retain control, so as to prevent its being used to thwart the decree.

The new Coal Company agrees to issue as its total capital stock 1,400,000 shares, without par value, to a trustee or trustees appointed by the District Court, who are to transfer to the Reading Company assignable certificates of interest in the stock of the new Coal Company, for distribution to its stockholders. The certificates are to be exchangeable for such stock only when accompanied by an affidavit, stating among other things that the holder is not an owner of any stock of the Reading Company, and is not acting for or on behalf of any stockholder of the Reading Company, or in concert, agreement, or understanding with any other person, firm, or corporation for the control of the coal company in the interest of the Reading Company, but in his own behalf in good faith.

The certificates of interest are to be offered for so-called sale by the Reading Company to its stockholders, preferred and common, share and share alike, for $2 for each share of the Reading Company. Such stockholders cannot, however, continue as stockholders of the Reading Company and become stockholders of the new Coal Company during the conversion period, but each must dispose of his certificates of interest in the new Coal Company or of his stock in the Reading Company. If, after July 1, 1924, any of the certificates shall remain outstanding, the court, in its discretion and after a hearing, may order the shares covered by such certificates to be sold, and the proceeds distributed to the owners of such certificates. The Attorney General is given access to the transfer books of both companies to enforce compliance with the order. This secures to the Reading Company in cash $5,600,000.

Second. The Reading Company will merge into itself the Reading Railway Company and all the railway property of the Reading Railway Company is to be made subject to the direct lien of the general mortgage. The existing charter of the Reading Company authorizes such a merger. The Reading Company is to accept the Pennsylvania Constitution of 1874, and to proceed under the Pennsylvania act of 1856 to surrender those of its franchises which are inappropriate for a railroad corporation of Pennsylvania. It will thus become a railway company, subject in all respects to the regulation of the state and federal authorities as a common carrier.

Third. The Reading Company is to transfer to trustees appointed by the District Court, subject to the lien of the collateral trust mortgage already mentioned, all of its interest in the stock of the New Jersey R. R. Company. The final disposition of this stock is to be deferred in view of the possible groupings of railroads by the Interstate Commerce Commission under the Transportation Act of 1920 (41 Stat. 456), but is to be subject to an order of sale by the court in its discretion before that time. The trustees are directed to select directors and secure a management of the New Jersey R. R. Company entirely independent of the Reading Company, which shall discharge its duties under the supervision of the court.

Fourth. The stock of the Wilkes-Barre Coal Company, held by the New Jersey Railroad Company is by the decree to be sold to persons not stockholders of the New Jersey Railroad Company, the Reading Company, the Reading Railroad Company, or the new Reading Coal Company, and who shall qualify as purchasers of the same by an affidavit like the one already mentioned. It appears that this provision of the decree has already been carried out, because not appealed from, and that the stock of the Wilkes-Barre Coal Company has been sold, though there is pending an application to set the sale aside.

The appeals in this case were taken by the insurance companies, who own 8,400 shares of the common stock of the Reading Company, less than 1 per cent. of the entire common stock, and by the so-called Prosser committee, also interveners, who represent 407,728 shares of the common stock, which is somewhat less than 30 per cent. of the total common stock, and less than 15 per cent. of the entire capital stock of the Company. Their appeals are based on the claim that the right to subscribe for the certificates of interest in the stock of the new Coal Company belong to the common stockholders of the Reading Company and to them alone, to the exclusion of the preferred stockholders.

After the first argument of these appeals, the court directed a second argument upon the questions (1) whether the plan adopted by the District Court was in conformity with this court's mandate, in establishing the entire independence of the companies found in unlawful combination from each other; (2) whether there was any legal or practical difficulty in selling the Reading Coal Company's stock free from the lien of the general mortgage; and (3) what was the basis of the adjustment of the indebtedness between the Reading Company and the new and old Reading Coal Companies. 257 U.S. 622, 42 Sup. Ct. 270, 66 L. Ed. --.

Mr. R. C. Leffingwell, of New York City (Messrs. Charles Heebner and William Clarke Mason, both of Philadelphia, Pa., and Leonard D. Adking and A. I. Henderson, both of New York City, on the brief), for Reading Co.

Mr. John M. Perry, of New York City (Mr. Arthur H. Van Brunt, of New York City, on the brief), for Central Union Trust Co., trustee.

Mr. Alfred A. Cook of New York City (Messrs. Frederick F. Greenman and Robert Szold, both of New York City, on the brief), for Continental Ins. Co.

Mr. George W. Wickersham, of New York City (Mr. Edwin P. Grosvenor, of New York City, on the brief), for Iselin and others.

Mr. J. M. Hartfield, of New York City (Messrs. J. du Pratt White and Allen McCarty, both of New York City, on the brief), Prosser and others.

Mr. Thomas R. White, of Philadelphia, Pa., for Kurtz and others.

Mr. Solicitor General Beck, of Washington, D. C. (The Attorney General, and Messrs. Guy D. Goff, and Abram F. Myers, both of Washington, D. C., on the brief), for the United States.

Mr. Chief Justice TAFT delivered the opinion of the Court.