Court Opinion

ID: 9425777
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:15:49.162457+00
Date Added: 2024-06-11T17:22:57.488815
License: Public Domain

*719Mr. Justice Marshall,
with whom Mr. Justice Douglas, Mr. Justice Brennan, and Mr. Justice White join,
dissenting.
This suit, brought by and in the name of respondent railroad and its wholly owned subsidiary, seeks to recover damages for the conversion and misappropriation of corporate assets allegedly committed by petitioners, Bangor Punta and its wholly owned subsidiary, during a period when the latter was the majority shareholder of the railroad. Ordinarily, of course, a corporation may seek legal redress against those who have defrauded it of its assets. And when it does so: “A corporation and its stockholders are generally to be treated as separate entities. Only under exceptional circumstances . . . can the difference be disregarded.” Burnet v. Clark, 287 U. S. 410, 415 (1932). See also New Colonial Ice Co. v. Helvering, 292 U. S. 435, 442 (1934).
The Court finds such exceptional circumstances here because, in its view, any recovery had by the corporation will be a windfall to Amoskeag, the present owner of approximately 99% of the corporation’s stock, which purchased most of that stock from the petitioners, the alleged wrongdoers. The Court therefore concludes that this suit must be barred under the equitable principles set forth in Home Fire Insurance Co. v. Barber, 67 Neb. 644, 93 N. W. 1024 (1903).
I cannot agree. Having read the precedents relied upon by the majority, I respectfully submit that they not only do not support, but indeed directly contradict the result reached today. While purporting to rely on settled principles of equity, the Court sadly mistakes the facts of this case and the established powers of an equity court. In my view, no windfall recovery to Amoskeag is inevitable, or even likely, on the facts of this case. But even if recovery by respondents would in fact be a wind*720fall to Amoskeag, the Court disregards the interests of the railroad’s creditors, as well as the substantial public interest in the continued financial viability of the Nation’s railroads which have been so heavily plagued by corporate mismanagement, and ignores the powers of the court to impose equitable conditions on a corporation’s recovery so as to insure that these interests are protected. The Court’s decision is also inconsistent with prior decisions of this Court limiting the application of equitable defenses when they impede the vindication, through private damage actions, of the important policies of the federal antitrust laws.
I
The majority places primary reliance on Dean Pound’s decision in Home Fire Insurance Co. v. Barber, supra. In that case, all of the shares of the plaintiff corporation had been acquired from the alleged wrongdoers after the transactions giving rise to the causes of action stated in the complaint. Since none of the corporation’s shareholders held stock at the time of the alleged wrongful transactions, none had been injured thereby. Dean Pound therefore held that equity barred the corporation from pursuing a claim where none of its shareholders could complain of injury.
Dean Pound thought it clear, however, that the opposite result would obtain if any of the present shareholders
"are entitled to complain of the acts of the defendant and of his past management of the company; for if any of them are so entitled, there can be no doubt of the right and duty of the corporation to maintain this suit. It would be maintainable in such a case even though the wrong-doers continued to be stockholders and would share in the proceeds.” 67 Neb., at 655, 93 N. W., at 1028.
Cf. Capitol Wine & Spirit Corp. v. Pokrass, 277 App. Div. *721184, 186, 98 N. Y. S. 2d 291, 293 (1960), aff’d, 302 N. Y. 734, 98 N. E. 2d 704 (1951).
The rationale for the distinction drawn by Dean Pound is simple enough. The sole shareholder who defrauds or mismanages his own corporation hurts only himself. For the corporation to sue him for his wrongs is simply to take money out of his right pocket and put it in his left. It is therefore appropriate for equity to intervene to pierce the corporate veil. But where there are minority shareholders, misappropriation and conversion of corporate assets injure their interests as well as the interest of the majority shareholder. The law imposes upon the directors of a corporation a fiduciary obligation to all of the corporation's shareholders, and part of that obligation is to use due care to ensure that the corporation seek redress where a majority shareholder has drained the corporation’s resources for his own benefit and to the detriment of minority shareholders.1 Indeed, minority shareholders would be entitled to bring a derivative action, on behalf of the corporation, to enforce the corporation’s right to recover for the injury done to it, if the directors turned down a request to seek relief.2 And any recovery *722obtained in such an action would belong to the corporation, not to the minority shareholders as individuals, for the shareholder in a derivative action enforces not his own individual rights, but rights which the corporation has. See Meyer v. Fleming, 327 U. S. 161, 167 (1946); Boss v. Bernhard, 396 U. S. 531, 538 (1970); Koster v. Lumbermens Mutual Co., 330 U. S. 518, 522 (1947).
These elementary principles of corporate law should control this case. Although first Bangor Punta and then Amoskeag owned the great majority of the shares of respondent railroad, the record shows that there are many minority shareholders who owned BAR stock during the period from 1960 through 1967 when the transactions underlying the railroad's complaint took place, and who still owned that stock in 1971 when the complaint was filed.3 Any one of these minority shareholders would have had the right, during the 1960-1967 period, as well as thereafter, to bring a derivative action on behalf of the corporation against the majority shareholder for misappropriation of corporate assets. As Dean Pound states, such an action.could be brought, “even though the wrongdoers continued to be stockholders and would share in the proceeds.” 67 Neb., at 655, 93 N. W., at 1028.
It is ironic, then, to see the Court adopt a result which bars the corporation itself from bringing a suit which a minority shareholder could have brought in the corporation's behalf. And it is peculiar, to say the least, that the law should prevent the directors of BAR from fulfilling the fiduciary obligation to minority shareholders which the law devolves upon them. Such a result not only cannot be derived from Home Fire, but is directly in conflict with its holding.
*723II
Even assuming, however, that the equitable principles of Home Fire should be extended to the situation where the present majority shareholder does not own all the outstanding shares, there are other features distinguishing this case from Home Fire and calling for the recognition of the railroad’s right to maintain this action. To begin with, it is not at all clear from the record that any recovery had by the railroad will in fact be a windfall to Amoskeag, its present majority shareholder.
The Court relies principally on its own observation that Amoskeag was not defrauded or deceived in its transaction with petitioners, that it received full value for its money, and that it has received no injury whatsoever. See ante, at 711. The record, in my view, simply will not support these “findings.” That there is no specific allegation in the complaint that Amoskeag was deceived or otherwise injured by petitioners is understandable, since this lawsuit is not brought by Amoskeag, but rather by respondent railroad in its own name.
Furthermore, a fair reading of the complaint indicates that Amoskeag most likely has suffered injury. The causes of action relate primarily to transactions involving the railroad and its former majority stockholder between 1960 and 1967. Amoskeag purchased its shares from petitioners on October 2, 1969, after these events. But nowhere in the record is there any concession that, at the time of its purchase, Amoskeag was fully aware of the misuses of corporate assets alleged in the complaint. To the contrary, the complaint asserts that at the time of Amoskeag’s purchase, the Interstate Commerce Commission’s Bureau of Accounts was in the middle of an investigation into the relationship between the railroad and its majority shareholder. Its report, not made public until July 1971, laid bare for the first time the wrongful *724intercorporate transactions that are the subject of the present suit and recommended that legal remedies be explored to require petitioners to pay back to the carrier assets taken without compensation and charges made where no services were performed. The plain import of tire complaint is that Amoskeag did not know of these wrongful transactions prior to public disclosure of this report. In fact, an introductory paragraph of the complaint alleges: “All wrongs hereinafter complained of were discovered by BAR’s new management’s investigation of all facets of the inter-corporate relationships and were not previously known to the new BAR management.” App. 6. At this stage in the litigation, such allegations must be accepted as true, the District Court having dismissed the suit without inquiring into the truth of any of its claims. There is accordingly no basis in the record for presuming that Amoskeag was not the victim of any deception.
But even assuming that Amoskeag received close to full value for its money, it is by no means inevitable that any recovery obtained by the railroad will inure to Amos-keag’s benefit, rather than to the benefit of the corporation, its creditors, and the public it aims to serve. The Court makes much of the supposed lack of power of a court of equity to impose limitations on the use BAR might make of the recovery. Ante, at 715. “Traditionally,” however, “equity has been characterized by a practical flexibility in shaping its remedies and by a facility for adjusting and reconciling public and private needs.” Brown v. Board of Education, 349 U. S. 294, 300 (1955). “A court of equity may in its discretion in the exercise of the jurisdiction committed to it grant or deny relief upon performance of a condition which will safeguard the public interest.” SEC v. United States Realty & Improvement Co., 310 U. S. 434, 455 *725(1940).4 Indeed, if there be any doubt as to the power of a court of equity, BAR informed the District Court that the railroad would voluntarily enter into a stipulation to ensure that any recovery would be reinvested in the railroad, for upgrading the right-of-way and for new equipment, and that Amoskeag would voluntarily join the stipulation if requested. Brief for Respondents 30.
Improved equipment and rights-of-way, of course, might benefit Amoskeag indirectly by increasing to some extent the value of its equity. But such expenditures would hardly bring a dollar-for-dollar increase in the price Amoskeag would receive if it were to sell its stock. The value of a solvent railroad’s stock is determined by many factors — earning capacity; historical income, excluding nonrecurring items; balance sheet strength; dividend history; and condition of plant and equipment. Under an appropriate decree, only the last of these factors would be enhanced by the railroad’s recovery. It is therefore not inevitable that any recovery had by the railroad would benefit its current majority shareholder and there is no basis, in any event, for deeming such a benefit a windfall.
Ill
But let us assume that the majority is correct in finding some windfall recovery to Amoskeag inevitable in this case. This is still but one of several factors which a court of equity should consider in determining whether *726the public interest would -best be served by piercing the corporate veil in order to bar this action. The public interest against windfall recoveries is no doubt a significant factor which a court of equity should consider. But in this case it is clearly outweighed by other considerations, equally deserving the recognition of a court of equity, supporting the maintenance of the railroad’s action against those who have defrauded it of its assets.
Equity should take into account, for example, the railroad’s relationships with its creditors. BAR owes a debt of approximately $23 million, indicating almost 90% debt ownership of the enterprise. App. 7. If the allegations of the complaint are true, the conversion and misappropriation of corporate assets committed by petitioners placed the railroad close to the brink of bankruptcy, to the certain detriment of its creditors. The complaint alleges that net revenue in 1970 was a loss of approximately $1.3 million. Id., at 5. And one of the specific causes of action in the complaint is that Bangor Punta procured the declaration by BAR of a dividend which was unlawful under a mortgage bond indenture due to insufficient working capital. Id., at 15-18.
Surely the corporation, as an entity independent of its shareholders, has an interest of its own in assuring that it can meet its responsibility to its creditors. And I do not see how it can do so unless it remains free to bring suit against those who have defrauded it of its assets. The Court’s result, I fear, only gives added incentive to abuses of the corporate form which equity has long sought to discourage — allowing a majority shareholder to take advantage of the protections of the corporate form while bleeding the corporation to the detriment of its creditors, and then permitting the majority shareholder to sell the corporation and remain free from any liability for its ■wrongdoing.
*727More importantly, equity should take into account the public interest at stake in this litigation. As the Court of Appeals indicated:
“The public’s interest, unlike the private interest 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.” 482 F. 2d 865, 868 (CA1 1973).
The public’s interest in the financial health of railroads has long been recognized by this Court:
“[R]ailways are public ■ corporations organized for public purposes, granted valuable franchises and privileges, among which the right to take the private property of the citizen in invitum is not the least,.. . many of them are the donees of large tracts of public lands and of gifts of money by municipal corporations, and . . . they all primarily owe duties to the public of a higher nature even than that of earning large dividends for their shareholders. The business which the railroads do is of a public nature, closely affecting almost all classes in the community . . . United States v. Trans-Missouri Freight Assn., 166 U. S. 290, 332-333 (1897).
The same public interest has been recognized in a wide variety of legislative enactments. As early as the Transportation Act of 1920, “Congress undertook to develop and maintain, for the people of the United States, an adequate railway system. It recognized that preservation of the earning capacity, and conservation of the financial resources, of individual carriers is a matter of national concern . . . .” Texas & Pacific R. Co. v. Gulf, C. & S. F. R. Co., 270 U. S. 266, 277 (1926). Later, *728Congress added § 77 to Chapter VIII of the Bankruptcy-Act, providing that financial reorganization of ailing railroads should be achieved for the benefit of the public, and not simply in the interests of creditors or stockholders. See New Haven Inclusion Cases, 399 U. S. 392, 492 (1970).
The significance of the public interest in the financial well-being of railroads should be self-evident in these times, with many of our Nation’s railroads in dire financial straits and with some of the most important lines thrown into reorganization proceedings. Indeed, the prospect of large-scale railroad insolvency in the Northeast United States was deemed by Congress to present a national emergency, prompting enactment of the Regional Rail Reorganization Act of 1973, Pub. L. 93-236, 87 Stat. 985 (1974), in which the Federal Government, for the first time, committed tax dollars to a long-term commitment to preserve adequate railroad service for the Nation. As the Court of Appeals held, given this background, “it would be unrealistic to treat a railroad’s attempt to secure the reparation of misappropriated assets as of concern only to its controlling stockholder.” 482 F. 2d, at 870. “[T]he public has a real, if inchoate, interest” in this action. Id., at 871.
The Court gives short shrift, however, to the public interest. While recognizing that respondents’ complaint is based primarily on federal antitrust and securities statutes designed to benefit the public, and while conceding that the statutorily designated plaintiffs are respondent corporations, the Court nevertheless holds that these plaintiffs cannot maintain this action because any recovery by Amoskeag would violate established principles of equity. Ante, at 716-717, n. 13. I cannot agree, for the public interest and the legislative purpose should always be heavily weighed by a court of equity. As this Court *729has frequently recognized, equity should pierce the corporate veil only when necessary to serve some paramount public interest, see Schenley Corp. v. United States, 326 U. S. 432, 437 (1946); Anderson v. Abbott, 321 U. S. 349, 362 (1944), or “where it otherwise would present an obstacle to the due protection or enforcement of public or private rights.” New Colonial Ice Co. v. Helvering, 292 U. S., at 442. Here, however, it is the failure to recognize the railroad's own right to maintain this suit which undercuts the public interest.
The Court's result substantially impairs enforcement of the state and federal statutes upon which the railroad bases many of its claims. For example, § 10 of the Clayton Act, 15 U. S. C. § 20, relied on in two substantial counts of the complaint, provides:
“No common carrier engaged in commerce shall have any dealings in securities, supplies, or other articles of commerce ... to the amount of more than $50,000, in the aggregate, in any one year, with another corporation . . . when the said common carrier shall have upon its board of directors or as its president . . . any person who is at the same time a director [or] manager . . . of . . . such other corporation . . . unless . . . such dealings shall be with, the bidder whose bid is the most favorable to such common carrier, to be ascertained by competitive bidding ....”
As we have earlier had occasion to note, § 10 is not an ordinary corporate conflict-of-interest statute, but is part of our Nation's antitrust laws, specifically designed to protect common carriers such as railroads. See United States v. Boston & Maine R. Co., 380 U. S. 157 (1965); Minneapolis & St. Louis R. Co. v. United States, 361 U. S. 173, 190 (1959). The purpose of § 10 “was to prohibit a *730corporation from abusing a carrier . . . through overreaching by, or other misfeasance of, common directors, to the financial injury of the carrier and the consequent impairment of its ability to serve the public interest.” 361 U. S., at 190.
The private causes of action brought by respondent railroad under § 10 serve to vindicate this important congressional policy. See Klinger v. Baltimore & Ohio R. Co., 432 F. 2d 506 (CA2 1970). And by barring this suit, notwithstanding the plain allegations in the complaint that the carrier as well as the public interest it serves were injured through violations of this section committed by petitioners,5 the Court directly frustrates the ends of Congress. Indeed, the Court encourages the very kind of abuses § 10 was designed to prohibit. The majority shareholder of a carrier can convert and misappropriate its assets through improper intercorporate transactions, with the “consequent impairment of its ability to serve the public interest,” and then wash its hands of and remain free from any legal liability for its statutory violation by selling off its interest.6
*731I would find counsel instead in this Court’s opinion in Perma Life Mufflers v. International Parts Corp., 392 U. S. 134, 138-139 (1968). The Court took note in that case that “[w]e have often indicated the inappropriateness of invoking broad common-law barriers to relief where a private suit serves important public purposes.” As we recognized,
“the purposes of the antitrust laws are best served by insuring that the private action will be an ever-present threat to deter anyone contemplating business behavior in violation of the antitrust laws. The plaintiff who reaps the reward of treble damages may be no less morally reprehensible than the defendant, but the law encourages his suit to further the overriding public policy in favor of competition. A more fastidious regard for the relative moral worth of the parties would only result in seriously undermining the usefulness of the private action as a bulwark of antitrust enforcement.”
These principles have even greater force here, since Amoskeag, “whatever its own lack of equity, is neither a *732wrongdoer nor a participant in any wrong.” 482 F. 2d, at 870-871.
In the final analysis, the Court’s holding does a disservice to one of the most settled of equitable doctrines, reflected in the maxim that “[e]quity will not suffer a wrong without a remedy.” Independent Wireless Tel. Co. v. Radio Corp. of America, 269 U. S. 459, 472 (1926). Because I would follow that maxim here and permit respondent railroad to maintain this action to seek redress for the wrongs allegedly done to it and to the public interest it serves, I respectfully dissent.

 See generally 3 W. Fletcher, Cyclopedia Corporations § 1012 (1965). Indeed, the failure to exercise reasonable care to seek redress for wrongs done the corporation might well subject the directors to personal liability. See, e. g., Briggs v. Spaulding, 141 U. S. 132 (1891); Kavanaugh v. Commonwealth Trust Co. of New York, 223 N. Y. 103, 119 N. E. 237 (1918).

 “[Stockholders’ derivative suits] are one of the remedies which equity designed for those situations where the management through fraud, neglect of duty or other cause declines to take the proper and necessary steps to assert the rights which the corporation has.” Meyer v. Fleming, 327 U. S. 161, 167 (1946). And it is irrelevant that the shareholders bringing the derivative action own only a small percentage of the total outstanding shares. See Ashwander v. TVA, 297 U. S. 288, 318 (1936); Subin v. Goldsmith, 224 F. 2d 753, 761 (CA2), cert. denied, 350 U. S. 883 (1955).

 According to the complaint, there were 20 individual minority shareholders, many of whom acquired their shares in the 1950’s. App. 6-7, 22-23.

 It is interesting to note that the majority’s restrictive notions as to the power of a court of equity to direct the application of a recovery are in conflict with the majority’s own suggestion for protecting the interests of innocent minority shareholders. See ante, at 718 n. 15. If a court of equity lacks power to direct a corporation to apply the proceeds of a recovery in any particular fashion, how can the court direct the corporation to distribute a pro-rata recovery to some, but not all, of its shareholders?

 The complaint alleges that the special and illegal dividends which petitioners caused BÁR to declare “served to deprive plaintiff BAR of a source of cash which could and would have been utilized for necessary maintenance and equipment acquisitions and replacements, all to the injury of BAR and the public which it serves.” App. 16.

 These arguments are applicable as well to the causes of action stated under § 104 of the Maine Public Utilities Act, Maine Rev. Stat. Ann., Tit. 35, § 104 (1965), which provides in pertinent part:
“No public utility doing business in this State shall . . . make any contract or arrangement, providing for the furnishing of . . . services . . . with any corporation . . . owning in excess of 25% of the voting capital stock of such public utility . . . unless and until such contract or arrangement shall have been found by the commission *731not to be adverse to the public interest and shall have received their [sic] written approval.”
While different from § 10 of the Clayton Act in certain details (applying to all public utilities rather than only to carriers, and relying on the supervision of an administrative agency rather than the device of competitive bidding), the Maine statute clearly has the same underlying purpose: to protect the public interest from abuses of public utilities through intercorporate transactions with a major shareholder. While Maine law governs the causes of action under this section and the courts of Maine have, in other cases, accepted the general equitable principle that a stockholder has no standing to sue if he or his vendor participated in the wrong, see ante, at 714, there is no basis in Maine law for applying this equitable doctrine where the direct result is to leave remediless the very abuses § 104 was designed to prohibit.