Document: 417 U.S. 703 94 S.Ct. 2578 41 L.Ed.2d 418 BANGOR PUNTA OPERATIONS, INC., et al., Petitioners,v.BANGOR & AROOSTOOK RAILROAD COMPANY al. No. 73—718. Argued April 15, 1974. Decided June 19, Syllabus In 1964 petitioner Bangor Punta Corp. (Bangor Punta), through its wholly owned subsidiary, Operations, Inc., acquired 98.3% of the outstanding stock respondent Aroostock Railroad Co. (BAR), a Maine railroad, by purchasing all assets BAR's holding company, (B&A). From to 1969 controlled and directed BAR. Punta, again sold BAR Amoskeag Co., which then assumed responsibility for management later additional shares give it 99% ownership stock. 1971, subsidiary filed an action against alleging various acts corporate mismanagement during period control from 1960 1967 B&A, seeking damages violations federal antitrust securities laws, Public Utilities Act, common law Maine. The District Court first noted that would be principal beneficiary any recovery, was thus real party in interest, since had long after alleged wrongs occurred, recovery windfall. dismissed on ground have been barred maintaining shareholder derivative due failure satisfy 'contemporaneous ownership' requirement both Fed.Rule Civ.Proc. 23.1(1), state law, equitable principles precluded use fiction evade requirement. Appeals reversed primarily view status as 'public' or 'quasi-public' corporation important nature services provides, also inure public's benefit, factor court found sufficient support cause render windfall irrelevant. Held: 1. stockholder, who has purchased substantially vendor at fair price, may not seek recover prior mismanagement, entity disregarded if equity so demands, preclude corporations under either laws law. Pp. 710—713. (a) Amoskeag, having no fraud, standing maintain this mismanagement. Home Fire Insurance v. Barber, 67 Neb. 644, 93 N.W. 1024. 711—712; 713—714. (b) As itself estopped complaining petitioners' wrongs, cannot avoid command guise proceeding name owns controls. 2. Appeals' assumption necessarily benefit public is unwarranted overlooks fact actual unjustly enriched sustained injury. Neither nor applicable contemplate these circumstances. 714—716. 3. Deterrence railroad allowing respondents recover. If such deterrence were only objective, suffice plaintiff willing file complaint, injury violation legal duty particular alleged. P. 317. 482 F.2d 865, reversed. James V. Ryan, New York City, petitioners. Alan L. Lefkowitz, respondents. Mr. Justice POWELL delivered opinion Court. 1 This case involves former owners statutes, common-law principles. complaint engaged waste their control. presently more than railroad's occurred. We must decide whether 2 * Respondent corporation, operates northern part State Investment Petitioner Delaware diversified investment company with business operations several areas. Inc. (BPO), Punta. 3 On October 13, 1964, BPO, accomplished subsidiary's punchase (B&A), established 1969, about 2, $5,000,000 corporation. 4 present United States specified 13 counts misappropriation, occurring when B&A BAR.1 Damages sought amount $7,000,00 laws. statutes regulations violated included § 10 Clayton 15 U.S.C. 20; 10(b) Securities Exchange Act 1934, 78j(b); Rule 10b—5, 17 CFR 240.10b—5, promulgated thereunder Commission. claims grounded 104 Rev.Stat. Ann., Tit 35, (1965), 5 focused four intercompany transactions allegedly resulted BAR.2 Counts I II averred overcharged legal, accounting, printing, other services. III, IV, V, VI improperly St. Croix Paper subsidiary. VII, VIII, IX, X charged caused declare special dividends stockholders, including borrow order pay regular dividends. XI, XII, XIII excuse payment interest loan made B&A. sum, BAR, predecessor 'exploited solely own purposes' 'calculatedly drained resources benefit.' 6 granted motion summary judgment action. 353 F.Supp. 724 (1972). observed although suit purported primary brought hence owner occurred did contend received full value purchase transaction tainted fraud deceit. Thus, Amoskeag's constitute because With mind, addressed based determined 23.1(1).3 Finding prevented proscription 23.1, concluded efforts fail. Turning recognized applicability 23.1(1) questioned where jurisdiction diversity citizenship.4 unnecessary resolve issue, however, examination indicated probably followed 'prevailing rule' requiring contemporaneous rule substantive applied, could maintained. 7 First Circuit 865 (1973). stated disagreement centered court's 'sole beneficiary' thought public. sufficed rendered addition, permit provide needed deterrent 'patently undesirable conduct' railroads. Id., 871. Finally, confronted possibility might diverted enrich shareholders, mainly rather re-invested improve Although troubled prospect, nonetheless better served insuring petitioners immune civil liability wrongful conduct. Without deciding suggested devising 'court-imposed limitations' make insure actually benefitted. 8 application certiorari. 414 1127, 863, 38 752 (1974). now reverse. A. 9 turn question 20, 78j(b), 240.10b—5. resolution issue depends upon settled principle complain he his those participated acquiesced transactions. See, e.g., Bloodworth Bloodworth, 225 Ga. 379, 387, 169 S.E.2d 150, 156—157 (1969); Bookman R. J. Reynolds Tobacco 138 N.J.Eq. 312, 372, 48 A.2d 646, 680 (Ch. 1946); Babcock Farwell, 245 Ill. 14, 40—41, 91 N.E. 683, 692—693 (1910).5 invoked force purchases seeks Matthews Headley Chocolate 130 Md. 523, 532—535, 100 645, 650—651 (1917); 661—662, 1024, 1030—1031 (1903). See Amen Black, 234 12, 23 (CA10 1956). considerations precluding cases explicated ago Dean (then Commissioner) Roscoe Pound supra. Pound, writing Supreme Nebraska, shareholders they wrongdoers disputed price. windfall, enable them obtain funds just title claim. Moreover, effect allow recoup large price agreed shares, notwithstanding bargained for. reap profit done others, encouraging further speculation. consequences highly inequitable mandated dismissal suit. supporting are especially pertinent case. pointed out, obtained well said does deceit, less money. Indeed, assert all. Nor appear continuing involved shares.6 Nevertheless, causing corporations, indirectly equal paid stock, plus $2,000,000. All form inflicted, but shares. words, railroad.7 At same time reaps desires retain Under Fire, evident action.8 11 met argument, we look behind true substance beneficiaries. contrary. deemed separate entities most purposes, interests justice used defeat overriding policy. Colonial Ice Helvering, 292 435, 442, 54 788, 791, 78 L.Ed. 1348 (1934); Chicago, M. P.R. Minneapolis Civic Assn., 247 490, 501, 553, 557, 62 1229 (1918). cases, courts equity, piercing fictions disguises, will deal blindly adhere form. right, precluded. supra; Capitol Wine Spirit Pokrass, 227 App.Div. 184, 98 N.Y.S.2d 291 (1950), aff'd, 302 N.Y. 734, N.E.2d 704 (1951); It follows B 12 Respondents fare actions specifically Rev.Stat.Ann., Tit. Forbes Wells Beach Casino, 307 210, 223 n. (1973), Judicial recently declared accepted 'stockholder wrong . ..' Hyams Old Dominion 113 Me. 294, 302, 747, 750 (1915).9 petitioners, wrongdoers. demands precedents. Bonnar-Vawter, Johnson, 157 380, 387—388, 173 141, 145 (1961). III reaching contrary conclusion, accept proposition F.2d, 868. essential identifiable financial health. accrue improvement economic position quality 14 outset, note unwarranted. explicitly recognized, namely reinvested do believe can avoided respondents' suggestion impose limitations recovery.10 There result entitled distribute lawful manner choose, even distribution private enrichment. there assurance receive funds. appears overlook injury.11 subsequent deny No deceit kind transaction.12 reaping exhancing bargain extent entire worth $12,000,000 $5,000,000. circumstances.13 16 conduct Our difficulty argument proves too much. deferrence logic suffice. prerequisite agree lest supposed wrongdoer allowed escape reckoning. Suffice say referred authority novel result, decline adopt it.14 therefore conclude action.15 18 So ordered. 19 MARSHALL, whom DOUGLAS, BRENNAN, WHITE join, dissenting. 20 suit, conversion misappropriation committed latter majority railroad. Ordinarily, course, redress defrauded assets. And so: 'A stockholders generally treated entities. Only exceptional circumstances difference disregarded.' Burnet Clark, 287 410, 415, 53 207, 209, 77 397 (1932). (1934). 21 finds here because, view, approximately corporation's concludes set forth 1024 22 agree. Having read precedents relied majority, respectfully submit support, indeed directly contradict reached today. While purporting rely sadly mistakes facts powers court. my inevitable, likely, But disregards creditors, substantial continued viability Nation's railroads heavily plagued ignores conditions protected. Court's decision inconsistent decisions limiting defenses impede vindication, damage actions, policies places reliance Pound's case, giving rise causes complaint. Since none held transactions, injured thereby. pursuing claim 24 clear, opposite 25 'are defendant past company; for, entitled, doubt right maintainable though wrong-doers share proceeds.' Neb., 655, N.W., 1028. 26 Cf. 277 186, 291, 293 (1951). 27 rationale distinction drawn simple enough. sole defrauds mismanages hurts himself. For sue him simply take money out pocket put left. appropriate intervene pierce veil. minority injure shareholder. imposes directors fiduciary obligation care ensure detriment shareholders.1 bring action, behalf enforce it, turned down request relief.2 belong individuals, enforces individual rights, rights has. Meyer Fleming, 327 161, 167, 66 382, 386, 90 595 (1946); Ross Bernhard, 396 531, 538, 733, 738, 729 (1970); Koster Lumbermens Mutual 330 518, 522, 828, 830, 1067 (1947). 28 These elementary should great record shows many underlying took place, still 1971 filed.3 Any one 1960—1967 period, thereafter, states, brought, 'even 29 ironic, then, see bars bringing behalf. peculiar, least, prevent fulfilling devolves them. Such derived conflict holding. 30 Even assuming, extended situation features distinguishing calling recognition To begin with, clear 31 relies principally observation Amoskega deceived money, whatsoever. ante, 711. record, 'findings.' That specific allegation otherwise understandable, lawsuit name. 32 Furthermore, reading indicates likely suffered relate involving stockholder between 1967. events. nowhere concession that, purchase, fully aware misuses contrary, asserts Interstate Commerce Commission's Bureau Accounts middle investigation into relationship Its report, until July laid bare intercorporate subject recommended remedies explored require back carrier taken without compensation charges performed. plain import know disclosure report. fact, introductory paragraph alleges: 'All hereinafter complained discovered new management's facets inter-corporate relationships previously known management.' App. 6. stage litigation, allegations true, inquiring truth claims. accordingly basis presuming victim deception. 33 assuming close means inevitable aims serve. makes much lack power recovery. Ante, 715. 'Traditionally,' 'equity characterized practical flexibility shaping facility adjusting reconciling needs.' Brown Board Education, 349 300, 75 753, 756, 99 1083 (1955). discretion exercise grant relief performance condition safeguard interest.' SEC Realty Improvement 310 434, 455, 60 1044, 1053, 84 1293 (1940).4 informed voluntarily enter stipulation upgrading right-of-way equipment, join requested. Brief 30. 34 Improved equipment rights-of-way, increasing some equity. expenditures hardly dollar-for-dollar increase sell solvent factors—earning capacity; historical income, excluding nonrecurring items; balance sheet strength; divided history; plant equipment. decree, last factors enhanced current basis, event, deeming 35 let us assume correct finding consider determining best veil bar recoveries significant consider. clearly outweighed considerations, equally deserving maintenance 36 Equity account, example, creditors. owes debt $23 million, indicating almost 90% enterprise. 7. placed brink bankruptcy, certain alleges net revenue 1970 loss $1.3 million. 5. procured declaration dividend unlawful mortgage bond indenture insufficient working capital. 15—18. 37 Surely independent assuring meet how unless remains free fear, gives added incentive abuses discourage—allowing advantage protections while bleeding permitting remain wrongdoing. More importantly, account stake litigation. indicated: 39 'The unlike creditor, easily defined quantified, yet cannot, think, overlooked suing pertaining controlling stockholder.' 868 (CA1 1973). 40 health Court: '(R)ailways organized valuable franchises privileges, among property citizen invitum donees tracts lands gifts municipal duties higher earning shareholders. nature, closely affecting classes community Trans-Missouri Freight 166 U.S., 290, 332 333, 540, 556, 1007 (1897). 42 wide variety legislative enactments. early Transportation 1920, 'Congress undertook develop maintain, people States, adequate railway system. preservation capacity, conservation resources, carriers matter national concern Texas Pacific Gulf, C. S.F.R. 270 266, 277, 46 263, 70 578 (1926). Later, Congress Chapter VIII Bankruptcy providing reorganization ailing achieved public, creditors stockholders. Haven Inclusion Cases, 399 392, 492, 2054, 2109, 691 (1970). 43 significance well-being self-evident times, our dire straints lines thrown recorganization proceedings. prospect large-scale insolvency Northeast emergency, prompting enactment Regional Rail Reorganization 1973, Pub.L. 93—236, 87 Stat. 985 (1974), Federal Government, time, tax dollars long-term commitment preserve service Nation. held, given background, 'it unrealistic treat attempt secure reparation misappropriated 870. '(T)he real, inchoate, interest' 44 short shrift, interest. recognizing designed conceding statutorily designated plaintiffs nevertheless holds violate 716—717, 13. agree, purpose always weighed frequently necessary serve paramount Schenley Distillers 326 432, 437, 247, 249, 181 Anderson Abbott, 321 349, 362, 64 537, 88 793 (1944), 'where obstacle protection enforcement rights.' 791. Here, recognize undercuts 45 impairs bases two provides: 'No commerce shall dealings securities, supplies, articles $50,000, aggregate, year, another board president person director (or) manager bidder whose bid favorable carrier, ascertained competitive bidding 47 earlier occasion note, ordinary conflict-of-interest statute, protect Boston 380 157, 85 868, 728 (1965); Louis 361 173, 190, 80 229, 239, (1959). 'was prohibit abusing overreaching by, misfeasance of, directors, consequent impairment ability S.Ct., 240. vindicate congressional Klinger Baltimore Ohio 432 506 (CA2 1970). barring serves section petitioners,5 frustrates ends Congress. encourages very prohibit. convert misappropriate improper 'consequent interest,' wash hands statutory selling off interest.6 49 find counsel instead Perma Life Mufflers International Parts Corp., 392 134, 138—139, 1981, 1984, 982 (1968). '(w)e often inappropriateness invoking broad barriers purposes.' 50 'the purposes everpresent threat deter anyone contemplating behavior reward treble morally reprehensible defendant, policy favor competition. A fastidious regard relative moral parties seriously undermining usefulness bulwark enforcement.' 51 greater here, 'whatever neither participant wrong.' 870—871. 52 final analysis, disservice doctrines, reflected maxim '(e)quity suffer remedy.' Independent Wireless Tel. Radio America, 269 459, 472, 166, 171, 357 Because follow serves, dissent. Several Liability imposed period. apparent agreement instant 'all debts, obligations, contracts liabilities' effected BPO. clarity, attribute BPO's specifies requirements states aver member complains provision 3B Moore, Practice 23.1 seq. (2d ed. 1974). announced Hawes Oakland, 450, 827 (1882), soon thereafter adopted 97. incorporated finally 23.1. After Erie Tompkins, 304 64, 58 817, 82 1188 (1938), arose contemporaneous-ownership procedure substantive, regime validly applied permitted non-contemporaneous 23.1.01—23.1.15(2) procedure, never resolved issue. Ibid. obtains jurisdictions. Russell Melind 331 Ill.App. 182, 72 869 (1947); Klum Clinton Trust 183 Misc. 340, 267 (1944); Clark American Coal 86 Iowa 436, (1892); Boldenweck Bullis, Colo. 253, 634 (1907). W. Fletcher, Cyclopedia Corporations 5866 (1970 ed.); H. Ballantine, 148 (1946 ed.). effects 662, 1031. '(t)he surviving aforesaid sale BPO Amoskeag.' contention exception inapplicable. 724, 727 apparently renew appeal. Similarly, before themselves Conceding dissent argues maintained 1% 'during filed.' Post, 722. existence innocent entitles $7,000,000 damages. Aside illogic approach, dissent's war precedents, wrongs. cited 5, supra, accompanying text. factual posture institute discussion infra. Business Corporation adopts actions. 13—A, 627.1.A became effective days filed. noted, open time. F.Supp., 727. Field, McKusick Wroth, Civil 23.2, p. 393 absence indication view,' applied. 'is conditioned court-imposed uses recovery.' Counsel admitted oral Tr. Oral Arg. 17. unjust enrichment inevitable. obviously investment. increased dramatic proportions, influx infusion capital, devoted 'plant equipment,' enhance 'earning capacity' 'balance strength' (post, 725) come surprise regulatory bodies, management, investors. conceded, belief alternatively, unregulated involved. Respondents, 28—29; 19—20. 723—724) sophisticated investor, record. Not ever asserted, briefs, argument. granting judgment, expressly transaction. 726. statement stood uncontroverted Amoskeag. short, today, acquire exactly what benefited 724—725, 730. disses point. is, substance, typical accounting previous owed extends tangible provided intended compensate, generally, breach duty. design effectuated indiscriminate every citizen. Rather, create vest alone. corporations. But, stated, reply similar Fire: 'But reason delinquencies, ask think function administer punishment. When wronged within jurisdiction, spare effort injured, restitution device technicality. desire punish wrong-doer deserves punished, others expense strength weakness defendant's wrong-doing, disclosed degree wrong-doing avail him.' 673, 1035. rests conclusion reveal hold remaining fraction stand Some concept pro-rata distributed individually proportional rights. 536—540, 650—652 (1971). disavowed intent reach appropriate. 'close bankruptcy' 2590—2591. respect, redraft contended. conceded excellent. 18. 1012 (1965). reasonable personal liability. Briggs Spaulding, 141 132, 924, 662 (1891); Kavanaugh Commonwealth York, 103, 119 237 '(Stockholders' suits) situations neglect declines proper steps has.' (1946). irrelevant small percentage total Ashwander TVA, 297 288, 318, 56 466, 469, 688 (1936); Subin Goldsmith, 224 761 (CA2), cert. denied, 350 883, 76 136, 779 According 1950's, 6—7, 22—23. interesting majority's restrictive notions direct protecting 718 15. lacks apply proceeds fashion, some, all, shareholders? illegal 'served deprive source cash utilized acquisitions replacements, serves.' 16. arguments provides part: utility doing contract arrangement, furnishing owning excess 25% voting capital arrangement commission adverse (sic) written approval.' different details (applying utilities carriers, relying supervision administrative agency bidding), statute purpose: major governs have, general wrong, 714, applying doctrine leave remediless

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