On Motions for Reargument April 13 and May 14, 1956.
On Renewed Motions for Summary Judgment March 15, 1957.
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Derivative action by stockholder of interstate carrier to rescind sale of land by carrier to potential shipper or, in the alternative, to recover amount of anticipatory rebate on contemplated freight charges allegedly effected through such sale. On defendant shipper's motions for summary judgment and for judgment on the pleadings, the Court of Chancery, Seitz, Chancellor, held that action was for monetary relief alone and was properly in equity solely because it was a derivative action and must therefore be treated as one within the concurrent jurisdiction of Court of Chancery and therefore barred by Delaware three-year statute of limitations, 10 Del.C. § 8106, in absence of special circumstances which would warrant a court of equity in holding statute inapplicable.
Motion for summary judgment granted and motion for judgment on the pleadings granted in part and denied in part.
[36 Del.Ch. 347] William E. Taylor, Jr., Wilmington, and William E. Haudek, Pomerantz, Levy & Haudek, New York City, Robert C. Barab, Wilmington, and Charles Rosenthal, New York City, for plaintiff.
Aaron Finger and Edmund N. Carpenter, II (of Richards, Layton & Finger), Wilmington, and Henry M. Hogan, Detroit, Mich., for defendant General Motors Corp.
[36 Del.Ch. 348] William Prickett, Wilmington, for defendant Baltimore & O. R. Co.
This is a derivative action filed in July 1952 by a stockholder of a carrier, Baltimore and Ohio Railroad Company (hereafter ‘ B & O’ ), seeking rescission of the sale of certain lands by B & O to a then potential shipper, General Motors Corporation (hereafter ‘ GM’ ). The basic theory of the action is that the price paid for the land was legally inadequate and constituted an advance rebate on contemplated freight charges on freight which would move to and from the plant which GM would build on the land. Alternatively, the complaint seeks a money judgment for the amount of the anticipatory rebate. Defendant GM has moved for summary judgment and for judgment on the pleadings on the following grounds.
1. The exclusive remedy in this situation is vested in the United States under the Federal law.
2. The action is barred because B & O was a party to the alleged illegal transaction (pari delicto and unclean hands).
3. The complaint fails to state a claim on which relief can be granted because it alleges that B & O sold the land to GM for less than cost but it does not allege that the price for which the land was sold to GM was less than the fair value of the land.
4. If plaintiff's claim is valid by analogy to a claim for rate undercharge, it is barred by the two year Statute of Limitations.
By deeds dated August 13, 1945, and June 29, 1948, GM acquired two tracts of land on Boxwood Road near the town of Newport, Delaware, from the subsidiaries or agents of B & O at a cost of $150,000. Plaintiff alleges that these tracts had been purchased by B & O for $284,991.28 (B & O's answer sets the price at $281,895.21). The answers for both B & O and GM deny plaintiff's allegation that the land was purchased by B & O at GM's request for resale to GM. The transfer has long since been fully consummated and GM has erected an automobile assembly plant on the property thus acquired from B & O. This plant is located along the B & O tracks and interstate [36 Del.Ch. 349] rail shipments to and from the plant travel over the B & O lines. They commenced February 1, 1947.
I now consider GM's first contention that the carrier has no remedy for the violation here alleged but that the sole remedy is in the United States. The pleadings first confined the plaintiff's claim to the Elkins Act amendment to the Interstate Commerce Act, 49 U.S.C.A. § § 41-43, but at oral argument it was agreed by plaintiff and GM that the matter should be disposed of as though plaintiff had amended his complaint to include the entire Interstate Commerce Act.
Under the Interstate Commerce Act of 1887, as then enacted, both rate undercharges and rebates, inter alia, were made unlawful. See 49 U.S.C.A. § 2 (rebates) and § 6, Para. (7) (rates). The Supreme Court of the United States early recognized the right and duty of the carrier to sue the shipper to collect any rate undercharge. The shipper had the same right with respect to an overcharge. These actions were recognized even though the Act did not explicitly provide for them. The reason for their recognition was to implement the public policy of the Act which was deemed to override purely private rights. Compare Gulf C. & S. F. R. Co. v. Hefley, 158 U.S. 98, 15 S.Ct. 802, 39 L.Ed. 910; and
see McFadden v. Alabama Great Southern R. Co., 3 Cir., 241 F. 562. These actions could be brought in the state courts.
See Artic Roofings v. Travers, 3 Terry 293, 32 A.2d 559.
A rebate of the type here alleged is in effect a form of rate undercharge. See Matter of Leases and Grants of Property by Carriers to Shippers, 73 I.C.C. Reports, p. 671. As to this point, see also Cleveland, C. C. & L. Ry.
Co. v. Hirsch, 6 Cir., 204 F. 849. Since a carrier could sue a shipper for an undercharge, and since a rebate has the consequence of a rate undercharge, it would seem to follow by parity of reasoning that a carrier could sue a shipper to recover a rebate. GM contends that unlike a rate under or overcharge case, a carrier cannot sue a shipper to recover a rebate.
[36 Del.Ch. 350] GM insists that the right given the United States under the Elkins Act, 49 U.S.C.A. § 41, to sue the shipper for three times the amount of a rebate is the exclusive civil remedy for such unlawful action and that the carrier has no right to sue the shipper. The right to sue was not given the United States until the enactment of the Elkins Act amendment of 1906. Yet, a rebate like an undercharge was made unlawful in 1887 under the original Interstate Commerce Act, 49 U.S.C.A. § 2. If before 1906 a carrier could not have sued the shipper for return of a rebate then there was no civil remedy to recover a rebate during that period. This would be a strange situation in the light of the decisional law even prior to 1906 holding that a carrier could sue a shipper for an undercharge, and this without an explicit statutory provision therefor. If the full public policy of the original Act was to be implemented, it was equally important to recognize the existence of a right of action in the carrier to recover a rebate. Otherwise,
a shipper receiving a rebate would have in effect paid less than the published rates without civil law consequence. I conclude that such an action existed in the carrier prior to the Elkins Act. Indeed, the Elkins Act explicitly preserves actions existing under the original Act.
Even under the Elkins Act there is a rebate if the shipper obtains an ‘ advantage’ tested by actual results, not intention. Union Pac. R. Co. v. United States, 313 U.S. 450, 61 S.Ct. 1064, 85 L.Ed. 1453. But before the Government can recover from the shipper, by way of penalty, three times the value of the rebate under § 41(3) of the Elkins Act, it must prove that the shipper ‘ knowingly’ accepted the rebate. Thus an action by a carrier to recover a rebate from a shipper would not be based on the penal theory underlying an action by the Government, and would not require a showing of ‘ knowing’ acceptance by the shipper. Rather it would be based on the public policy of the Act requiring the carrier to recover a rebate so that it will have collected its full published rates.
The Elkins Act provision for action by the Government does not prevent the filing of the present action.
It may also be noted that the Sixth Circuit Court of Appeals in Cleveland,
C. C. & L. Ry. Co. v. Hirsch, above-a case relied upon [36 Del.Ch. 351] by GM-recognized a right in the carrier to relief against a shipper to the extent necessary to implement the public policy of the original Act and the Elkins Act. This case would therefore seem to be authority for the proposition that a carrier can sue a shipper not only under the original Interstate Commerce Act but also under the Elkins Act in a rebate case. As will be noted later herein, I feel compelled to disagree with the Hirsch case insofar as it deems the pari delicto doctrine applicable.
I therefore conclude that the carrier is entitled to relief both under the original Interstate Commerce Act and under the later Elkins Act. It is not suggested that a state court is otherwise without jurisdiction to entertain such an action.
Since the complaint alleges that the rebate was the result of a conspiracy between B & O and GM, it is argued by GM that B & O is also a wrongdoer and is barred from recovery because it is in pari delicto with GM or is bound by the clean hands doctrine.
Although this action is by a stockholder of B & O, nevertheless, it is a derivative action on behalf of B & O and so, here at least, any defense available against B & O is available against plaintiff. See 13 Fletcher, Cyc. of Corps. (Perm.Ed.) § 5859.
Thus we must consider whether pari delicto would be available as a defense were this an action by B & O. GM cites two cases for the proposition that the doctrine is applicable. Cleveland, C., C. & St. L. Ry. Co. v. Hirsch, 204 F. 849; Oregon Short Line R. Co. v. American Smelting, 10 Cir., 269 F. 898. These cases appear to support GM's position. In the Oregon Short Line case the court refused to permit the carrier to recover amounts otherwise due under the Act because of the pari delicto doctrine. The court purported to distinguish decisions refusing to apply the pari delicto doctrine to rate cases on the ground that such cases only involved defenses of mistake or inadvertence. The fact is that the recovery in such actions is not limited to cases of those types but also embrace cases where there has been a wilful violation of the Act.
See Wash. & C. Ry. Co. v. Mobile & O. R. Co., 5 Cir., 255 F. 12. The Oregon Short Line decision [36 Del.Ch. 352] therefore appears to run contrary to the reasoning and policy exemplified by the rate cases.
The Hirsch case emphasizes the distinction between the completed and the uncompleted portion of an illegal contract but I cannot see the force of the distinction when even a partial recognition of the pari delicto defense defeats the public policy of
the Act. The fact that the Elkins Act was not involved in the rate cases mentioned does not change the result for the reasons heretofore stated.
While the doctrine of pari delicto is a vital principle in equity, nevertheless, this Court feels compelled to follow the rationale of the U.S. Supreme Court cases requiring the carrier to recover undercharges even though the carrier was guilty of conduct otherwise calling for the application of the pari delicto doctrine. The defenses of pari delicto, estoppel, unclean hands, etc., are just not recognized in these cases because to do so would be to override the public policy reflected in the Interstate Commerce Act.
See Kansas City Southern Ry. v. Carl, 227 U.S. 639, 33 S.Ct. 391, 57 L.Ed. 683; Baldwin v. Scott County Milling, 307 U.S. 478, 59 S.Ct. 943, 83 L.Ed. 1409; See also McFadden v. Alabama Great Southern Co., 3 Cir., 241 F. 562.
And as Justice Holmes said in an action by the Government to restrain a carrier from violating the Act, the benefits received by a carrier as a result of an agreement which violates the Act cannot justify the violation. Lehigh Valley R. Co. v. United States, 243 U.S. 444, 37 S.Ct. 434, 61 L.Ed. 839. It is therefore with great deference that I decline to follow the Oregon Short Line and the Hirsch cases to the extent they apply the pari delicto doctrine.
I conclude that the pari delicto defense is not applicable to this action.
I next consider GM's contention that the complaint fails to state a claim entitling plaintiff to relief. This contention is based entirely on the absence of an allegation that the land was sold to GM for less than its fair value.
[36 Del.Ch. 353] Plaintiff's pleadings show that he first charges that the sale of the land by B & O to GM was illegal and a fraud on B & O's stockholders because it was a rebate or offset (anticipatory, I presume) against B & O's regular transportation charges as found in its schedules published under the Act.
Under present rules of pleading (GM's motion for summary judgment apart) I believe plaintiff's allegation is a sufficient statement of claim. One reasonable inference from the charge of rebate is that the land was sold to GM for less than its fair value. This would be a rebate. Consequently, insofar as the motion for judgment on the pleadings is concerned, the motion must be denied.
GM has also moved for summary judgment and so it becomes necessary to consider whether it is entitled to judgment on the basis of the contention that plaintiff has failed to state a claim upon which relief can be granted. As GM views the complaint, it merely alleges that the property was sold by B & O to GM at less than B & O's costs. GM contends that the mere purchase of a property from a carrier ...