This is the latest (and hopefully the last) chapter in a long saga involving the rights of the holders of Class B debentures of the Green Bay & Western R. R. Co. ("GB&W"). Plaintiffs are all holders of Class B debentures who claim that pursuant to the wording of the securities issued by GB&W, as well as the Articles of Incorporation, they, as holders of Class B debentures, are entitled to a pro rata distribution of the net proceeds of the recent sale of GB&W. plaintiffs claim that defendants, through a series of schemes, sought to destroy the value of the Class B debentures.
Defendant Itel is a Delaware corporation engaged in various businesses through its subsidiaries. Defendant Itel Rail is a wholly owned subsidiary of Itel that leases rail cars, and manages various short line railroads. In 1983, Itel, which owned 99.9% of the GB&W capital stock and a majority of the GB&W Class B debentures, transferred all of its railroad operation to Itel Rail, including the GB&W capital stock and the GB&W Class B debentures. The individual defendants are all current or past officers and/or directors of Itel, Itel Rail, or GB&W. Defendant Kloehn is an attorney with the Wisconsin law firm of Quarles & Brady ("Quarles"), which plaintiffs allege represented GB&W and Itel at all relevant times, and who were aware of the alleged scheme to defraud the Class B debenture holders and advised and counseled Itel and Itel Rail with respect to many of the alleged wrongful acts.
Plaintiffs claim that as holders of Class B debentures they are the true owners of the equity of GB&W, and that defendants have concocted various elaborate schemes to destroy the value of the Class B debentures such that their actual value never exceeded their face value. To accomplish this goal, plaintiffs allege that defendants developed schemes to: (1) fraudulently deprive the minority holders of Class B debentures of their right to receive payments out of annual net income of GB&W; (2) fraudulently misuse the monies withheld from the Class B debenture holders by "loaning" said monies to Itel; (3) materially decrease the value of the GB&W securities by withholding the payments due out of annual income so that the securities could be purchased at artificially low prices; (4) fraudulently transfer approximately $ 10 million of GB&W's operating assets' "value" to another railroad owned by Itel, so as to deny the minority Class B debenture holders their full equity value in GB&W; (5) fraudulently deny the minority Class B debenture holders the value of that part of the equity of GB&W to which the Class B debenture holders were entitled, which exceeded the $ 1,000 face amount of the Class B debentures; (6) fraudulently misrepresent to the Class B debenture holders, the state and federal governments, and state and federal courts through the use of the U.S. mail, the rights of the Class B debenture holders and the value of the Class B debentures in order that Itel could obtain possession of the Class B debentures at prices drastically below the face value; and (7) cause GB&W to lease rail cars from Itel on terms overly favorable to Itel and extremely unfavorable to GB&W, which reduced the annual net income of GB&W, reduced the value of the GB&W, and in turn reduced the value of the Class B debentures.
According to the complaint, in 1993 Itel Rail sold the GB&W assets and property to Wisconsin Central Transportation Corp. ("Wisconsin Central"), along with the assets of the Fox River Valley Railroad ("FRVR"), which was wholly owned by Itel Rail. At the time of the sale, Itel Rail owned 99.9% of the outstanding capital stock of GB&W, but only 78% of the Class B debentures. Plaintiffs allege that from the time Itel acquired GB&W in late 1978, until the time it sold GB&W, Itel sought to destroy the value of the Class B debentures by reducing the value of the GB&W assets. In addition, plaintiffs allege that Itel put into place a scheme to change the nature of the Class B debentures from equity status, which plaintiffs claim they enjoy under Green Bay & W. R. Co. v. Commissioner of Internal Revenue, 147 F.2d 585 (7th Cir. 1945), and Biltchik v. Green Bay & W. R. Co., 250 Wis. 177, 26 N.W.2d 633 (1978), to debt status.
To understand the nature of plaintiffs' complaint, it is necessary to review the history of GB&W, the history of the Class B debentures, and the history of the litigation surrounding those debentures.
From 1871 through 1873, Green Bay & Lake Pepin Railway Company built the railroad that is the subject of this lawsuit. In 1873, that company changed its name to the Green Bay & Minnesota Rail Road Company. On January 23, 1876, the Green Bay & Minnesota went into receivership, and the mortgage bondholders foreclosed on their mortgages. On May 16, 1881, a committee of the mortgage bondholders chartered the Green Bay, Winona & St. Paul Railway Company, which purchased the property of the Green Bay & Minnesota at a foreclosure sale. That company defaulted on the interest payments due on its first mortgage bonds on August 1, 1888, and went into receivership on July 31, 1890. A voluntary reorganization agreement was reached in 1892, but proved unsuccessful. On December 27, 1895, another foreclosure sale was ordered. At that sale in May 1896, a committee for the first consolidated mortgage bondholders purchased the property of the railroad.
On May 27, 1896, the GB&W charter was issued. That charter embodied a plan of reorganization between the securities holders of the Green Bay, Winona & St. Paul Railway Company. The members of the first consolidated mortgage bond committee were identified as the purchasers of the railroad and property and as the incorporators and first board of directors of GB&W. The articles of incorporation provided for three types of securities: $ 2,500,000 of $ 100 par value capital stock; $ 600,000 of $ 1,000 face value Class A debentures; and $ 7,000,000 of $ 1,000 face value Class B debentures.
The 25,000 shares of capital stock were distributed to the first mortgage and first consolidated mortgage bondholders of the Green Bay, Winona & St. Paul Railway Company. The 7,000 Class B debentures were to be distributed to the holders of the second mortgage income bonds and to the holders of the common and preferred stock of the Green Bay, Winona & St. Paul Railway, after the committee of the second mortgage income bonds and preferred and common stockholders of the Green Bay, Winona, St. Paul purchased the 600 Class A debentures for $ 570,000 in cash.
None of the three classes of securities have a fixed rate of return, and any annual payments that might have been paid are not cumulative. None of the securities have a maturity date; but the Class A and Class B debentures are payable only in the event of a sale or reorganization of the railroad and property of the company. Only the capital stock has voting power.
The capital structure of GB&W has remained unchanged since it was created in 1896. In January 1978, Itel acquired the GB&W through an amended tender offer. At that time, Itel acquired more than 97% of the outstanding common stock, more than 4,919 of the 7000 Class B debentures, and two of the three outstanding Class A debentures. The terms of the amended tender offer were $ 330 per share of common stock, $ 1,050 per Class A debenture, and $ 325 per Class B debenture.
HISTORY OF THE CLASS B DEBENTURES
As noted by Chief Judge Reynolds in Eliasen I (569 F. Supp. at 88):
The Class B debentures are an unusual security that cannot easily be classified. The rights that the holders of Class B debentures enjoy cannot be ascertained merely by referring to the terms of the instrument and the GB&W's articles of incorporation. Interpretation of their rights requires an understanding of the circumstances surrounding the organization of the GB&W in 1896, and of the litigation that has already occurred over these debentures.