Bangor Punta Operations, Inc. v. Bangor & A. R. Co. - 417 U.S. 703, 94 S. Ct. 2578 (1974)

Rule:

Although a corporation and its shareholders are deemed separate entities for most purposes, the corporate form may be disregarded in the interests of justice where it is used to defeat an overriding public policy. In such cases, courts of equity, piercing all fictions and disguises, will deal with the substance of the action and not blindly adhere to the corporate form. Thus, where equity would preclude the shareholders from maintaining an action in their own right, the corporation would also be precluded.

Facts:

Respondent railroad's primary shareholder purchased 99 percent of respondent's shares from petitioner investment company long after alleged wrongdoings had occurred. Respondent filed an action against petitioner alleging corporate mismanagement under § 10 of the Clayton Act, 15 U.S.C.S. § 20, § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.S. § 78j(b), 17 C.F.R. § 240.10-b-5, and § 104 of the Maine Public Utilities Act, Me. Rev. Stat. Ann. tit. 35, § 104. Dismissing the action, the District Court held that although the action purported to be brought in the name of the railroad, the present owner was the real party in interest and the actual beneficiary of any recovery, and that under the contemporaneous ownership requirement which was applicable under both federal and state law, and which could not be evaded through the use of the corporate fiction, the fact that the present owner had not yet purchased the railroad's stock at the time of the alleged mismanagement precluded the action from being maintainable. Reversing the District Court's judgment, the Court of Appeals for the First Circuit held that the public's interest in the financial health of the railroad provided a separate interest, quite apart from the present owner's, which was served by the corporate cause of action, and that the action was not barred either by the failure of the present owner to own its stock at the time of the alleged wrongs or by the present owner's purchase of the stock from the alleged wrongdoers. Certiorari was granted. 

Issue:

Under the circumstances, could the respondent railroad’s action against the petitioner investment company be maintained? 

Answer:

No.

Conclusion:

On certiorari, the United States Supreme Court reversed, holding that the railroad's action against the former owners could not be maintained. It was a settled principle of equity that a shareholder may not complain of acts of corporate mismanagement if he acquired his shares from those who participated or acquiesced in the allegedly wrongful transactions. The present owner, the principal beneficiary of any recovery and itself estopped from complaining of the former owners' alleged wrongs, could not avoid the command of equity through the guise of proceeding in the name of the railroad which it owned and controlled. According to the Court, the Court of Appeals had made an unwarranted assumption that any recovery would necessarily benefit the public, and had overlooked the fact that the present owner, having sustained no injury, would be unjustly enriched.