Lowry v. Baltimore & Ohio Railroad

707 F.2d 721, 1983 U.S. App. LEXIS 28101

• Court: Court of Appeals for the Third Circuit
• Decided: May 10, 1983
• Docket: No. 81-1976
• Status: Published

Opinions

OPINION OF THE COURT

PER CURIAM.

Lucile Lowry and Lowry-Zweig Corporation appeal from a summary judgment dismissing their class action complaint against the Baltimore & Ohio Railroad Company (B & 0), the Chesapeake & Ohio Railway Company (C & 0), and the Chessie System, Inc. The complaint alleged that defendants violated § 10(b) of the Securities Exchange Act of 1934,15 U.S.C. § 78j(b); Rule 10b-5 of the Securities and Exchange Commission promulgated thereunder, 17 C.F.R. § 240.-10b-5 (1981); and state common law when, on December 13, 1977, B & 0 declared a dividend in favor of its common shareholders in the form of the entire stock of the Mid-Allegheny Corporation. This action was taken without giving notice to holders of B & 0 convertible debentures, thereby precluding their participation in the dividend distribution. In a previous decision, this court allowed persons who held B & 0 convertible debentures as of December 13, 1977 to maintain an action under § 10(b) and Rule 10b-5. Here, appellants had purchased B & O convertible debentures from persons who held them as of December 13, 1977 and are attempting to assert their sellers’ federal cause of action.¹ We conclude that the dismissal of appellants’ federal claims was proper and affirm the district court’s action as to them. We vacate and remand for further consideration of appellants’ state law claims.

The B & O owns both rail and non-rail assets and has issued both common stock and convertible debentures. The C & O controls over 99% of B & O’s common stock. There are thirteen other common shareholders and the shares are not publicly traded. The Chessie System is a holding company managing the assets of the C & O. The present controversy arose after B & 0 sought to restructure its operations in order to avoid federal restrictions that inhibited development of its non-rail assets. To accomplish this it created the subsidiary corporation, Mid-Allegheny, to which it transferred all of its non-rail assets. Then on December 13,1977, B & 0 distributed all of the Mid-Allegheny stock to its own common shareholders. A consequence of this arrangement was that B & 0 convertible debentures, which previously could have been converted into B & 0 common stock representing both B & O’s rail and non-rail assets, became convertible into B & 0 common stock representing only B & O’s rail assets.

In a separate action, the debenture holders sued under the Securities Exchange Act of 1934 claiming that, as to them, the dividend declaration was fraudulent. They argued that the value of their conversion option, and hence of their convertible debentures, would be reduced unless they were allowed to convert in time to qualify for the Mid-Allegheny dividend. This court agreed, and concluded that B & 0 had a duty to provide debenture holders with advance notice of such a dividend declaration. Pittsburgh Terminal Corp. v. Baltimore & Ohio R.R., 680 F.2d 933 (3d Cir.), cert. denied, - U.S. -, 103 S.Ct. 476, 74 L.Ed.2d 621 (1982).

In the instant suit, appellants purchased B & O convertible debentures from persons who held them on December 13, 1977. Appellants argue that, even though they purchased with full knowledge of the dividend declaration and allege no injury therefrom, the federal cause of action established in Pittsburgh Terminal was automatically assigned to them upon their purchase of the debentures.

A majority of this court, albeit for diverse reasons, agree with the district court and conclude that appellants may not maintain a claim for which relief can be granted based on any violation of federal statutes or regulations. Two judges would overrule Pittsburgh Terminal and are of the opinion that B & 0 was under no legal obligation to provide holders of the convertible debentures with advance notice of the dividend. According to this view, if the prior holders have no federal cause of action, then a fortiori, neither do their purchasers, and the assignability issue need not be reached. Six members of the court are of the view that the holding in Pittsburgh Terminal should be honored here either because it is correct or binding. Three of the six judges who follow Pittsburgh Terminal conclude that the rights recognized in Pittsburgh Terminal are assignable only if there is an express provision to that effect. Because there was no express assignment here, these judges argue that appellants may not now assert their transferors’ rights. The remaining three judges are of the view that the cause of action was automatically assigned to appellants as purchasers. These three members of the court would reverse the dismissal of the federal claims.

As to appellants’ state law claims we vacate the judgment of the district court and remand with a direction that the district court consider whether appellants can maintain this part of their class action suit as a diversity action. The district court dismissed without explaining whether the jurisdictional requirements of 28 U.S.C. § 1332 were met under Zahn v. International Paper Co., 414 U.S. 291, 94 S.Ct. 505, 38 L.Ed.2d 511 (1973). The district court may also wish to consider the possibility of state claims under pendent jurisdiction asserted by other litigants.

Accordingly, the judgment of the district court dismissing the federal claims of appellants will be affirmed. As to appellants’ state law claims, the district court judgment will be vacated and remanded for further proceedings consistent with this opinion.

Each side to pay its own costs.

1 . The class certified by the district court actually included people who had purchased B & O convertible debentures after December 13, 1977, as well as people who had purchased the debentures before December 13, 1977, but had converted them after that date. The assignability question thus bears only on the claims of the first set of class members; we assume, without deciding, that the second set of class members will be covered by the stipulation fashioned by the parties to Pittsburgh Terminal Corp. v. Baltimore & Ohio R.R. Co., 680 F.2d 933 (3d Cir.), cert. denied, - U.S. -, 103 S.Ct. 476, 74 L.Ed.2d 621 (1982), which stipulation provided that holders of debentures as of December 13, 1977, would be treated in the same manner as the Pittsburgh Terminal plaintiffs.