Lorenz v. CSX Corp.

Baltimore & Ohio Railroad Company (B&O) (defendant), a subsidiary of CSX Corporation (defendant), issued debentures pursuant to an indenture under which Chase Manhattan Bank (Chase) (defendant) was trustee. The debentures were convertible into B&O common stock. B&O segregated its rail assets from its other assets, transferring the latter to a subsidiary, Mid Allegheny Corporation (MAC). B&O planned a dividend of MAC common stock to B&O stockholders. However, B&O sought to minimize the number of shareholders of MAC common stock for purposes of avoiding registration of the stock with the Securities and Exchange Commission (SEC). Because B&O wanted to prevent holders of its debentures from exercising their conversion privileges prior to the stock dividend, no notice was given to the holders. Several debenture holders brought suit. In a series of letter agreements, B&O and Chase agreed that B&O debenture holders were entitled to participate in the resulting judgment regardless of whether they exercised their conversion rights. However, no notice of this agreement was given to the debenture holders who were not part of the litigation. The court gave the plaintiffs the opportunity to convert their debentures into stock and receive the MAC dividend. Later, a new group of B&O debenture holders (plaintiffs)—those who were not part of the previous litigation—brought suit in federal district court, claiming that Chase Manhattan breached both a fiduciary duty and the implied covenant of good faith and fair dealing by failing to inform the debenture holders of the MAC dividend and their rights to participate in the previous judgment. The court dismissed the claims. The debenture holders appealed. The United States Court of Appeals for the Third Circuit granted certiorari.