Appendix — Philadelphia Transportation Co. v. Southeastern Pennsylvania Transportation Authority
Supreme Court brief1968
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Supreme Court of the United & ode s cum
October Term, 1967.
No.9 49 *
PHILADELPHIA TRANSPORTATION COMPANY, PHIL- ;
ADELPHIA MARKET STREET SUBWAY-ELEVATED
RAILWAY COMPANY, MOTOR REAL ESTATE COM-
PANY, HILL TOP LAND COMPANY, and a i
PHILADELPHIA COACH COMPANY, i
and . ' &§
JOSEPH N. JANNEY, E. GRIGGS ADAMS, STANLEY E.
DANNECKER, W. WRIGHT and ELIZABETH B. g
- HUMPHREYS, THOMAS A. MARSTON, H. MELVIN z
POWELL, CARL SCHMIEG, and CHARLES F. and.
cman F. TROUTS, Petitioners,
v. - 4
. SOUTHEASTERN PENN SYLVANIA TRANSPORTATION a
AUTHORITY
and
CITY OF PHILADELPHIA.
APPENDIX TO PETITION FOR A WRIT OF
CERTIORARI TO THE SUPREME COURT
OF THE COMMONWEALTH
OF PENNSYLVANIA’ .
Of. Counsel: . : ARNOLD R.- GINSBURG,
1030 Suburban Station Building, .
Reavis & McGratu, * Philadelphia, Pennsylvania. 19103
_ Decuert, Price & RHOADS. RosBert THRUN,
1 Chase Manhattan Plaza,
New York, New York. 10005
GeorcE J. MILLER,
1600 Three Penn Center Plaza,
.. Philadelphia, Pennsylvania. 19102
- Attorneys for Philadelphia i
Transportation Company, -
eth. :
Francis T. ANDERSON, -
1103 Alfred Avenue,
Yeadon, Pennsylvania. 19050
Attorney for Joseph N.
Janney, et al. .
PGE MOLE OLIT TT ee ree Te
ee
.
International, 711 So. 50th St., Phila., Pa. 19143—Tel. SA 7-8711 Area Code 215
INDEX TO APPENDIX.
Page’
APPENDIX A—Opinions of the Supreme Court of Pennsylvania
Affirming the Declaratory: Judgment .................. la
APPENDIX B—Opinions ‘of the Supreme Court of Pennsylvania
Affirming the Preliminary Injunction ........ AOE ors: 4la-
APPENDIX C—Opinions of the Supreme Court of Pennsylvania
in Previous : ‘Appeal SaveceNveseeegreee server udeeenes 42a
APPENDIX D—Opinion ‘of the Trial pee in Support of the
I NN Bog Ps dad iw pe on nee 45a
APPENDIX E—Opinion ‘of the Court’of Common Pleas en banc 19la
ApPpENDIx F—Opinion of the Trial Judge i in | Support of Pre-
Mine SU oi oka ck bc ces boca BBs 195a .
Aprenpix G—Metropolitan Transportation Authorities Act of
SP soe tcces phinenees see ecepeceeeces ee eA ee 232a
APPENDIX H—Pennsylvania Constitution, Art. 17, §9 ....... 298a
AppenpIXx I—Act of April'15, 1907, P.L. 80, § 1, 67 P. S: § 1256 299a
APPENDIX J—Act of May 4 1933, P.L. 364, Art. VI, 3 PS...
§ 2852-701 aueaes rere’ Peery eseears hive ruakeues 300a
Appenpix-K—Act of May 28, 1937, P.L. 1053, Art. III, § 301, |
as Amended, 66 P.S. §-1141 . IP PROCES rae e aoe. J03a
ApreNnDIx L—Act of July 11, 1957, P.L. 711, § 703, 13 PS.
IE dace dnes.seek exes encuee hese nas aginsck ys 304a
_ APPENDIX M—Paragraph Eleventh m 1907 Agreement Between
Philadelphia Rapid Transit eer and City of Phila-
MUI nth ccescs WiNeEwer gens bas TANsabeacb ane cueues 305a
AppenpDIxX N—Order of. hada tinie Public Utility Comnis- |
ales, DT, WUE nus coe cares bie kecdceuveascs 306a
Appenpix O—Exchange of Letters Between i McShain and
sia csi telco tue uenndengas PPP RS . 38a
re ae et
*
| Dave oe apmnpuinnepemmemacnumascaiaaas
_ INDEX TO APPENDIX (Continued). ~~
’ Page’
Apprenpix P—Issues Raised in SOE CE 6 ic cesecerises 3lla
. APPENDIX Q—Portion of PTC’s Supreme Court Brief on the
| Preliminary Injuinction ......+..00sseseseeveg eeewered 316a
'» AppENDIx R—Portion of PTC’s Brief Before the Court of
I ee nod onc bob 400 ba eneadicns 322a
Appenpix S—Portion of PTC’s Supreme Court Brief-en the
Declaratory Judgment ........... pee edvivareseutiases 360a:
>
'
‘
at ARI 2. a Ae i al
APPENDIX A.
Opinions of the Supreme Court of Pennsylvania .
Affirming the Declaratory Judgment.
Couen, J. oo Finep: July 27, 1967,
These appeals involve two separate actions concerning
the same matters. The first (appeals number 188 and 194)
presents a petition seeking a declaratory judgment, which
action was brought June 18, 1965 by Southeastern Pennsy]l-
-vania Transportation Authority (SEPTA) and the City of
Philadelphia against Philadelphia Transportation Com-
-pany (PTC) and its subsidiaries. Plaintiffs’ petition re-
quested the court to determine (1) the right of SEPTA as
the city’s assignee to purchase the assets of PTC pursuant
to an option to purchase contained in paragraph Eleventh
+ of an agreement dated July 1, 1907, as’ amended; (2) the
meaning. of the purchase price formula set forth in the
agreement; and: (3) such other matters necessary to effect
the transfer of PTC’s property. Thereafter, certain mi-
nority shareholders of PTC petitioned to intervene as de-
’ fendants, and their petition was granted by this Court on
May 13, 1966. After hearing extensive testimony, the trial
court held on July 14, 1966 (approved by the court en bane
on Sept. 16, 1966) that (1) the city’s reserved right of pur-
chase under the agreement of 1907, as amended, was valid;
(2) the city’s assignment of that right to SEPTA was
valid ; (3) SEPTA, as the city’s assignee, must pay to PTC .
8 sum composed of the following amounts reflected by
PTC’s balance sheet as of the date of payment: (a) an
amount equal to PTC’s then outstanding bond, mortgage.
and ground rent indebtedness; (b) an amount equal to ten
dollars per share for all then outstanding common stock of
PTC-and (c) the amount of the then ‘‘Retained Earnings”’ |
of PTC.
(1a)
TNT ee Fe Ey Fe eee
~~ ‘. Appendix A
The sonal. action (appeals number 189 pon 192) in-
; volves a complaint i in equity filed July 8, 1966 by. Edmond
G. Thomas (a taxpayer) and PTC against the City, the
Mayor, and the Commissioner of Public Property of Phila-
delphia, and against SEPTA. Plaintiffs’ complaint prayed,
inter alia, for- an injunction restraining defendants from:
carrying out’ the agreement of June 8, 1965, whereby the
city assigned to SEPTA its right to purchasé PTC. The
. eity and SEPTA filed preliminary objections, and gn Sep-
tember 16, 1966 the complaint was dismissed for the reasons
_, Stated ‘in the opinion of the court en bane filed that day in |
the declaratory judgment proceeding.
The lower court’s opinion, we believe, sets forth a com- -
| prehensive well:reasoned analysis of the problems involved
and proposes, in every instance, a solution which this Court :
deems fair and proper. Accordingly, we recommend to the .
interested reader that he closely study that opinion, for we
, intend here only to highlight the matters of importance.
‘ In 1902, the Philadelphia Rapid Transit Company
(PRT) was formed as a consolidation of the various transit
systems previously existing in Philadelphia. On its own
or through subsidiaries, PRT leased, owned and operated
- high speed lines, and bus and taxi facilities throughout the
city. On July 1, 1907, the city and PRT entered into a
written agreement which provided i in Section Eleventh:
eee City reserves the right to purchase all the
property, leaseholds and frarithises of the Compaiiy,
subject “to all indebtedness . . ~ upon July 1st, 1957,
or upon the first day of any July thereafter by serving
“six months’ notice . . . [for] an amount equal to par -
for its capital stock then outstanding, to wit: the thirty |
million (30,000,000) dollars of capital stock now au-
thorized plus any additional capital stock issued with
_ the consent of the City hereunder. . . ..”’
--}
Appendiz A , | 3a
In the decades ‘that followed, PRT suffered financial
* misfortune. Finally, in 1938 the Pennsylvania Public Utility
Commission approved a reorganization plan filed by PRT.
On May. 20, 1939, City Council consented to the reorganiza-
tion and enacted an ordinance authorizing the execution of °
an amendment to the 1907 agreement. On June 12, 1939,
the amendment was executed. It made five major changes
in Section Eleventh: |
1. The 1939 agreement caabted the city to purchase
the entire transportation system (since PTC, «unlike
* PRT, owned the leaseholds and franchises of the under-
_liers and’ traction companies),: not just PRT’s lease-
holds and franchises, ¢ as provided. in the 1907. agree-
ment.
2. ‘Tt allowed the Pry to aisles PTC’s asscts
free and clear and not subject to PTC’s indebtedness.
3. Jt permitted the city to exercise its reserved
right of purchase on any July 1, with 6 months’ notice
to PTC. ‘>
4. The formula for determining the purchase price
was changed to the following:
a. The amount of PTC’s outsianding bonds, mort-
gage and ground rents;
b. The par value of PT€’s neteinnane preferred
stock;
c. $10.00 per share of PTC’s vetteeidies common
stock ; |
d. The amount of PTC’s then undistributed cor-
. porate surplus. if
5. The city reserved the right of condemnation.
4
%
4a
°The 1907 agreement was further amended on Octo-’
ber 26, 1950, July 1, 1987, July 5, 1962 and February 25, -
Appendix A ~
~ 1965.
PTC argues that the purchase option was void under
the
rule against perpetuities. As the lower court said:
‘“‘The best way to state PTO’s siciaed is to
_ state its best case.
“In Barton v. Thaw, Appellant, 246 Pa. 348
(1914), plaintiffs were children of Joseph Barton, who
had conveyed coal under certaincland to Thaw’s prede-
cessors in title, by a deed that provided that
‘And in case. the said parties of the second part,
their heirs or assigns, should at: any future time
’. whatsoever desire to purchase any of said land in
fee:simple, then the said parties of the first part,
for themselves, their heirs or assigns, hereby cove-
nant and agree to sell and convey the same to the
said parties of the second part, their heirs or as-
signs, hereby covenant and agree to sell and convey
‘the same to the said parties of the second part,
their heirs or assigns, at a price not exceeding
one hundred dollars per acre.’ (246 Pa. at 350)
Son
“Phe sale of the coal was admittedly good, but
plaintiffs claim, by a bill to remove a cloud upon title,
that ‘the option to purchase the surface of the land ©
was void because in violation of the rule against per-
petuities. ‘It [was] conceded by counsel that the case
presents for the first time to the courts of Pennsyl-
vania the question whether an option or right te pur-
chase land, unlimited in point of time, violates the rule
against perpetuities, and therefore is void... .’
(246 Pa. 350-351). The lower court in a careful opin-
a
eth LL By OA FMA D LEDER ADL ALIS ALLL CRIA TS Pa
Appendix A | 5a
‘ion held that the option did vieiiie the baad and the
Supreme Court affirmed. :
‘‘PTC’s argument is that the City’s reserved right »
of purchase is also an option ‘unlimited in point of ‘ -
time,’ and therefore it is also void. It-has been seen,
_ above, that indeed the City’s right of purchase is thus
unlimited. Is it, however, therefore void?’’ .
The historical purpose of the rule against perpetuities == |
was to destroy serious hindrances to the beneficial and :
prosperous use of property. “PTC. claims that under
_Barton v. Thaw, supra, Pennsylvania law recognizes a |
blanket condemnation of all remote options. That is not
so, for Barton stated at 246 Pa. 364 that its result is de-
pendent | on the interests. of the community at large. In
this case, the danger of fettering the free use of property. |
is outweighed by considerations ’ of public concern and
welfare. ) hy
Furthermore, the wasihinen option is not an impress.
on land. but is solely a contract right not within the rule
against perpetuities. In Philadelphia v. Philadelphia
Transportation Co., 386 Pa. 205, 125 A.2d 594 (1956), this
Court stated that-until-exercised the opti option gave the city
no right in PTC’s property as such, but merely a con-
' tractual right.. With regard to exclusively contractual
rights, the Restatement of Property, § 401 provides, ‘‘A
transaction which is exclusively contractual’ is not subject”
to the rule against perpetuities. ’*, This Court took the
same view in a v. Pittsburgh, 375. Pa. 268, 100 A.2d
380 (1953). °'
oo, even assuming that the purchase ‘nities fell
within and did violate the commor law rule against per- .
_ petuities the Estates Act of 1947, Act of April 24, 1947, «+
P.L. 100; 20 P.S. § 301.4 makes that rule inapplicable.
Sub-sections 4(a) and (b) provide, ‘‘No interest shall be
a. " . Appendia A
void as a perpetuity except . . . [u]pon the expiration
of the period allowed by the.common law rule against per- ©
petuities as, measured by actual rather than possible
events.''.... .”?
With regard to this matter, the lower court stated:
‘Thus, if an option void at common law actually
vests withiri 21 years, it i is valid-even though it might
. not have vested that soon. Or, as Bregy puts the
point, at page 5307 of his treatise on the Estates Act:
a 6. ge agreements will no longer be void‘
from the beginning as in Barton v. Thaw. Under
| the statute.an unlimited option should be allowed
. to run until the expiration of the permissible pe-
riod, and-stricken down only if it remains unexer-.
- cised at that time.’ (footnotes omitted).
“Tf the City and PRT had made no further agree-.
ments after the Agreement of 1939, the Estates Act
of 1947 would not be pertinent. Howeyer, as was
seen in ‘discussing the duration of the City’s reserved
right of purchase, the City and PRT made the Agree-
- ments of 1957, 1962, and 1965. The importance of
‘ this fact appears when one considers Section 21.of the
Estates Act, 20 P.S. § 301.21. This provides that
the Estates Act ae
.*, . . shall take effect on the first day of
January, one ‘thousand “nine -hundred forty-eight, ©
_and-[except in respects not here material] shall
apply only to conveyances effective on. or after |
that day. As to conveyances effective before that ’
- day, the existing laws shall voyiain in full force
and effect.’ ’’ > .
Section 1 of the Estates Act defines a conveyance as
_ *£, , . an act hy which it is intended to create an interest
¢ .
—
‘Appendix A s_— ae
in real or personal property ‘whether the act is intended
to have inter vivos or testamentary operation.’’ If the
1957 agreement’ is. a conveyance under that definition,
the Estates Act of 1947 applies, and the ‘‘wait and see’’.
rule was complied with, for the option was in fact exer- 7
cised within the time limitation of the rule against aie
petuities dating from July: 1, 1957. .
_ Based on the premise that the city’s reserved right 3
of purchase-expired July 1, 1957, and was extended by
agreement to December 31, 1964, PTC further argues that |
SEPTA’s attempt, to exercise the purchase option was in- .
' . effective because it was not timely and that the option
period was not further extended by the 1965 agreement
because the latter ‘agreement was never approved by PTC’s
shareholders. We agree with the lower court’s conclusion
that the premise of those arguments is unsound because
‘under the 1939 agreement the reserved right *. purchase
aa
remained effective until exercised. | - ee
" The intervening minority shareholders argue that the
agreement of 1965 was not intended to extend the reserved
right of purchase, but by ‘‘fraud, accident or mistake’’ the
- 1965 agreement failed to.express this limitation. ‘Again, .
we agree that the court’s evaluation of intervenors’ evi-
_ dence in this Tespect to the effect: that they were unsuc- —
cessful in proving fraud, accident or mistake. Rather, the
testimony of their. witnesses tended to prove that the city
intended to preserve the option t purchase PTC, and not
to allow it to expire’so that.there was no mutual mistake ;
nor were the représentatives of PTC misled by the city
during negotions of the 1965 agreement.
PTC asserts that the assignment to SEPTA was in-
valid because it was made without public auction. The
lower court carefully analysed this qneehes in*the follow.
ing manner.
~
LAER OL EDEL LN LOLOL HA ELF
< catae
ow
ss —
.
Sa se ; Appendix A |
Section Eleventh of the 1907 agreement, which was
carried over into the 1939 agreement, provides that the
city may assign its reserved right of purchase and that
the company may become~a bidder for that right. On
June 8, 1965, the city made the assignment to SEPTA,
_ which exercised the right on the same day.. No notice of
- the assignment was given to PTC, nor was a aac ‘aue-
tion or competitive. bidding permitted.
‘PTC does not argue that the agreement of 1907 re-
quires public auction because it says ‘‘may be put up at |
‘public auection.’’ (Emphasis supplied.) Instead, PTC -
argues that the Home Rule Charter of 1951 requires a
public auction. The Home Rule Charter 18, vein
irrelevant.
| Section WW of the First Class City Home Rule Act,
Act of April 21, 1949, P.L. 665, 53 P.S. § 13111 provides
that no contract existing at the time of adoption of any
home rule charter shall: be affected thereby. Since the
agreement of 1939 does not require. public auction, the
Philadelphia Home Rule Charter cannot affect that agree- —
> ment.no matter what it says about public auctions.
Moreover, public policy does not require assignment ..
by public auction. The reason for requiring competitive
bidding is to prevent private business from: gaining favors —
of government or from corrupting government. Here, the
assignee i is another government agency and the reasons in
favor of bidding competitively are absent. :
The most perplexing problem concerns interprétation
of the purchasé price formula. Four factors are involved:
‘(1) an amount equal to the sum of .the face amount,
or call price if any, and accrued interest of all -
then outstanding bonds of, and all then outstand-
ing prior lien bonds, mortgages and ground rents
on the property of,. Company and its wholly-owned
subsidiaries. ange
—
Appendix A hs eee
‘“‘2) plus the par - value of all then outstanding pre-
ferred stock of Company. . : . ;
‘¢3) and an amount equal to ten (10) dollars per share
«3 forall then. outstanding common stock of ~—_:
pany. ... 35
““4) and. the amount of the then undistributed cor-
porate surplus, if any, of Company. sil
‘The word ‘‘then’? refers with respect to each factor |
to the particular July 1st-named in the notice of intent to
_ exercise’ the options SEPTA named July 1, 1966 as the |
settlement date, and the parties extended this. date to —
January 1, 1967.
The first three factors present no o problem of intuupns-
tation or computation. The amount of the outstanding «
bonds, mortgages and ground rents can readily be ascer-
tained; there is no outstanding preferred stock because
PTC converted its preferred- stock to common stotk in <
1955; and the amount of outstanding common siock can be
determined without difficulty. . Only’ the meaning of ‘‘un-
distributed corporate surplus”’ is at issue.
' PTC and'the minority shareholders propose that ‘“on- |
distributed corporate surplus’’ is the excess of the ap-
-praised value of PTC’s assets over the value of its. liabili-
ties and capital as of the settlement‘date. The trial court
rejected this argument and held that the fourth factor of
the formula was reflected on PTC’s balance sheet figure as
‘Retained EKarnings.’’ As the court observed:
‘‘One of the great attractions of a purchase price
formula is that the buyer can figure out what the price
will. be before he exercises his option and commits him-
self to purchase. A valuation proceeding after the
option j is exercised defeats this purpose.
Spee Om
OP LETS LOLS IIE LIE BELLE ELIE
.
.
LOL LAL NE IT EOE ES
b ian peatltids torical WWE Ys gig? ¢
10a
Appendix A
“This is ‘so on general principles. Thus the Su-' ©
preme Court, in Philadelphia v. Phila. T. Co., Aplnt.;
386. Pa. 231, 239 (1956), said of. the pusshinne price
formula:, -% .
O : _ the price. to the paid for the aan
according to the option is determinable by a fixed.
formula whereas a condemnation proceeding must
depend upon the. uncertain decisién of a fact-
finding tribunal as to the value of the property
then being acquired.’ (footnote omitted.)
‘‘In addition,. the history of the ‘underliers and: .
PRT, the other provisions of the agreement, and the
legislative history of the formula itself, all demon-
strate that ‘undistributed corporate surplus’ is not a
valuation but a balance sheet, figure. |
“‘Moreover)\the other provisions of the Agreement
of 1939 gave the City control over the other factors
of the formula. Section First of the Agreement of
1907, which was not amended but continued in effect
by the Agreement of 1939, provided that ‘No further
‘increase of capital stock or funded indebtedness . . .
shall be made by the Company . . . without the con-
sent of the City... . .’ Also, if more bonds were
issued. by the Company, there would be ‘@.correspond-
«ing increase of assets, which the City would acquire
if it exercised its right to purchase. .Still further, the
City was entitled to representation on the board of
directors (Section Fourth of the Agreement of 1907 and
. Section 1{a) of the Agreement of 1939), and the City
Controller.was empowered to examine the Company’s
books (Section, Fifth of the Agreement of 1907, con-
tinued in effect by the Agreement of 1939).
‘‘Thus PTO’s argument comes down to an asser-
tion that of the four factors of the formula, all could °
ges . § Appendia A ey ? lla
be controlled by the City, and could be determined 2, &
by. an examination of the balance sheet, before the City
-decided whether to exercise its right of purchase, ex-
cept for one factor—‘undistributed corporate surplus.’ | :
This assertion is almost: self-defeating. In any case, te,
the “hearings before’ the Transportation and Public —~
“Utilities Committee; of City Council in April and May :
of 1939 demonstrate that both PR'P (seeking the City’s :
consent to be reorganized as PTC) and the City under- ‘
stood the formuld to be a simple matheniatical calcu-
lation based on book figures.
= “Tn essence, ‘what the hearings demonstrate i is that
PTC’s present argument as to the meaning of, ‘undis- f
tributed surplus’ is based upon a practice precisely - |
contrary to the purpose of the Agreement of 1939. In ° | ,
PTOC’s present yiew the 1939 amendment called for %
PTC to -reap the benefits of any increase in the un-.
realized value of its assets in the event. of a’sale to the
City under the City’s option. The hearings make: it
clear that the formula was to do just the opposite:
the City was to reap any increase in the unrealized
value of PTC’s assets; if, but only if, the City exer- is
cised its option and thereby purchased the PTC: sys-
-tem as a‘whole.’’ ¢.. . é
» .
PRETO ae %.
By providing for a purchase price formula ‘and by |
electing to exercise the option to purchase, rather than to
proeeed by condemnation, SEPTA was assured of being ae
able to determine for itself the price to be paid by an q
examination of PTC’s balance sheet figures, rather than by
a lengthy valuation process which would leave the purchase.
price determination to a fact-finding body. Clearly, ‘‘un-
distributed corporate surplus’’ is not a valuation, but a
balance sheet eae, as are the other three factors.
oe cer Appendia A
‘‘Undistributed corporate surplus’’ is a factor. ‘which
represents earnings ‘accumulated by PTC rather than earn-,
ings paid out as dividends. That language assured the
* shareholders that when the option was exercised, they
would receive so much of the accumulated earnings as were
_ \not paid to them as dividends. ‘Had the only class of share-
| holders of PTC in 1939 been tommon shareholders, the
"phrase “retained earnings” o r ‘‘earned surplus’’ would |
have accomplished that purpose. However, PTC had pre-
‘*> ferred shareholders whose dividend rights upon liquidation
+ were, pursuant to the articles of incorporation, cumulative
if, in fact, dividends were ‘earned. Thus, it was ‘possible
for PTC to have at the end of a given year earned, accumu-
lated, but unpaid. dividends on preferred shares of stock in _
an amount that would exceed the amount of ‘‘earned sur-
_ plus”? (or ‘‘retained earnings’’). On account of this situa-
tion, the draftsmen of the 1939 agreement did not use as a
price factor a sum equal to PTC’s ‘‘then retained earn- .
ings,’’ because in such a situation had the option been exer-
cised the common shareholders would have: received iess
than ten dollars-per share. The draftsmen clearly desired
to insure that the common stockholders received ten dol-
lars a share if the city exercised its option and not a lesser
sum because of an obligation by PTC i in liquidating to pay
preferred shareholders earned, accumulated, but unpaid
dividends. Accordingly; so long as there. were preferred
stockhdtders, ‘‘uhdistributed corporate surplus’’ meant the
greater of PTC’s retained earnings or its earned, accumu-
lated, but unpaid dividends as of the settlement date. Since
1955, when PTC converted its preferred stock to common
_ stock, there have been no Karned, accumulated, but unpaid
dividends. Accordingly, by paying an amount equal to
PTC’s retained earnings, ‘the city will achieve the purpose
of the formula—that the common ‘sintohowers get back
¢ "hei
* Appendia: 4 gat Foe 18a
what — risked: so much of the a earnings as
were not paid to them i in dividends. And this is what ‘‘un-
_ distributed corporate surplus’’ means.
This means PTC’s retained’ earnings, eecaiie in the
language of the court below:
‘‘PTC’s present ‘iia int carries two ac-
“counts: ‘Capital Surplus’ and ‘Retained Earnings’
As has just been seen, ‘undistributed corporate sur-
plus’ means a fund available for the payment of cash
. dividends.. Therefore, it includes only PTC’s ‘Retained
Earnings’ account. It does not*include the ‘Capital
Surplus’ account because under. Pennsylvania law cash |
dividends cannot be paid from capital surplus. Branch,
Trustee, v. Kaiser, et al., Appellant,291 Pa. 543 (1938) ;.
Berks Broadcasting Co. v. Gaumer et al., we Pa. 620
(1947).’’ (Footnote omitted.)
PTC’s retired employees receive pension benefits on a
pay-as-you-go basis. PTC has no funded pension plan;
pension benefits are paid out of the fare box from current
revenues. Actuarial studies reveal that the amounts re-
quired to fund past service costs would be approximately
$11, 939,392 for non-supervisory retirees and $4,973,304 for
supervisory and executive retirees. The parties have stipu-
lated that this $17,000,000 obligation is-a present vested
liability. The question presented is whether PTC’s ‘‘un-
distributed corporate surplus.’ is extinguished by its obli-
gation to its retired employees. SEPTA’s accounting ex-
pert testified that minimum standards of accounting prin-
ciples require that a vested pension liability be carried on
the liability side of the balance sheet. PTC did not, in fact,
do so because the pension obligation was never funded.
Rather, the actuarily determined amount of the obligation
was revealed in a footnote to their annual financial reports.
f
>
l4a Appendix A :
SEPTA argues that if this liability were placed on the
books, it would eliminate all surplus, because there is no
offsetting asset onthe books. Consequently, there would be
no retained earnings or ‘‘undistributed corporate surplus.’’
Accordingly, contends SEPTA, the purchase price need
not include any amount representing PTC’ s ‘‘undistributed
corporate surplus. ’’ 7
PTC, on the other hand, presented expert alee
justifying its accounting techniques with respect to its pen-
sion liability because as.a public utility its rates were fixed -
by taking into account pay-as-you-go pension payments in
the rates for the year of payment. Thus, argues PTC, it
does not have a fund available for cash dividends (re-
tained earnings), which is part of the purchase price for-
mula.
As the lower court indicated, the accounting testimony
is neither necessary nor appropriate to a resolution of this
issue. Rather an examination of the agreements is sufficient
to dispose of the matter. As the trial court stated:.
‘Section Eleventh of the Agreement of 1907. pro-
- _vided.that for a price equal to the par value of PRT’s
stock the City or its ,assignee could acquire ‘all the
property, leaseholds and franchises of the Company,
subject to all indebfedness now existing or hereafter
_ lawfully created hereunder upon July 1st, 1957. re,
This was changed by the Agreement of 1939, so that the |
City or its assignee, upon payment of the formula price
_ provided in that Agreement, would acquire ‘all the
property, leaseholds, and franchises of the Company
and its wholly owned subsidiaries upon any first day of
July thereafter. . > .’ The clause ‘subject to all in- -
debtedness . . [ete.]’ was eliminated. It follows,
_ therefore, that if SEPTA pays the formula price, it
°* » acquires PTC’s assets not subject to PTC’s obligations,
Ser Ne ss - a
Appendix A
ie., that SEPTA ‘after the acquisition’ will not be sub-
ject to PTC’s pension obligation, which is only another
way ¢ of saying that SEPTA may not refuse to pay the
full formula price by charging against it PTC’s pension
obligation as though SEPT As would be —— to ogy
(Footnotes omitted.)
On this point, PTC carries the argument further and |
contends that SEPTA must not only pay for PTC’ 'S Te-
. tained earnings but also must assume PTC’s pension obli-
gation. We have already decided that SEPTA must, under
the formula, pay for PTC’s retained earnings. It is, how-
ever, not required under the agreement of 1939 to assume
PTC’s pension obligations.
The lower court further concluded that SEPTA may
not.reduce the purchase price’ by PTC’s cost of financing ©
and organization expenses because the 1939 agreement in-
tended the option price to be a single price for all of PTC’s
leases, franchises and assets, and SEPTA must pay the
full purchase price. We agree. ,
In addition, the trial court decided that in heave
payment for ‘‘accrued interest of . . . then outstanding
. mortgages,’*» SEPTA must pay PTC a sufficient
amount.to compensate PTC for any prepayment penalties
PTC is called upon to pay if PTC retires its mortgage debt
before the maturity date. Again, we agree.
- Finally, the court’ below held that the dni when
SEPTA must make payment to PTC be extended for a
‘period of not less than six months after final disposition
of this case. This is certainly a reasonable extension in
view of the fact that SEPTA will not know with certainty
the amount it must pay until this case is finally concluded.
It must then be allowed sufficient time to raise the money
necessary to effect the purchase.
l6a | Appendia A <
\ - 2
‘In appeals number 188 and 194, the judgment is
affirmed. In appeals number 189 and 192, the order is -
affirmed. | | :
Mr. Justice Rite files a dissenting opmnion in which
Mr. J ustice O’Brien Joins. :
Mr. Chief Justice Bell files a dissenting opinion.
Mr. Justice Musmanno files a concurring opinion.
os -
Appendix A 17a
CONCURRING OPINION.
3 MusManno, J. , | — FILep: July 27, 1967
No commercial eriterprise can achieve success without —
manpower. The financial resources of the Philadelphia
Transportation Company could never have been amassed
without the-work of its maintenance and transportation
employees. Now that PTC is to be sold, the pension rights
of the men who manned the tramway cars and buses, and
kept them in running condition, must not be lost or mislaid
in a labyrinth of complicated. fiscal proceedings. _
The lower Court properly declared that:
- «PTC is required to provide for the payment of
retired employees’ pensions before it may distrib-
‘ute the money that will be-received from SEPTA
~ when SEPTA purchases PTC’s assets.’?—
___The Transport Workers Union of Amerie and Trans-
~- port ‘Workers Union of Philadelphia, Local No. 234 (known
as TWU) correctly point out in their brief that their
primary concern is that, out of the purchase price paid by .
SEPTA to PTC, PTC is required to hold back, and not
distribute to the PTC shareholders, a sum equal to the
liability due and owing the retired employees. This propo-
sition is eminently just and legally unassailable. What
the TWU employees have put into their -daily toil is as
’ much a part of the PTC assets as bricks are an integral
part of the building of which it consists. Every street car
and bus is held together by the perspiration of — who
toiled to maintain and operate it.
Thus, the moneys due the retired pensioner is a vested
liability which PTC may not shed or cast off. . This liability
cannot be shifted to another track or derailed and certainly
not abandoned. I repeat the lower Court’s finding, namely,
18a : Appendix A.«
“PTC is required to provide for the EIEN of
retired employees’ pensions before it may distrib-
ute the money that will be received’from SHPTA
when SEPTA purchases PTC’s assets.”
Under this language, which is as plain and clear as a
street car passing over a trestle bridge, the money due
the retired employees must be deducted from the purchase
price and held for the.employees’ ” pension fund. J Any action
which would distribute that fund to anyone éther than
the PTC pensioners, to whom it belongs, would constitute a
- contempt of the wording and spirit of decision of the court
below: This pension money is in effect a trust fund for the
protection of the pensioners and must be respected as such.
The pension fund is a bread box for the retired employees.
- It must be kept safe and secure so ‘that the bread it con-
tains will continue to be fresh and life- sustaining.
| In addition, it is clear from the record below that, ©
to the extent that that such fund, deducted from the pur-
chase price, should be insufficient to carry out the pension
obligation, SEPTA has a liability i in the future to pay that
pension obligation, if, for any reason whatsoever, PTC
might deplete the amount of the purchase price without
fully providing for the sdgunael angry to retired em-
ployees.
There is a reservoir of moneys in the amounts payable
to PTC under the SEPTA purchase. The pensions must
be drawn from that reservoir. The time to end the long-
drawn out litigation in this case is now. The employees
should not be required to seek with a broken tin cup for —
water in the desert of any further legal controversy.
I affirm, with the majority of the Court, the Order of '
the Court below.
= Appendix A 19a
DISSENTING OPINION. ©
Bru, C. J. a Furep: July 27, 1967
I dissent for each of the following reasons:
‘The Option Is Illegal and Void.
1. SEPTA/’s claim is based upon the Option which was
contained in the 1907 contract between the City of Phila-
delphia and Philadelphia Rapid Transit Company (now |
Philadelphia Transportation. Company) and which was as-
signed by the City"to SEPTA for no consideration. This
Option violated the Rule against Perpetuities and is void!
In 1907, the City of Philadelphia entered into an Agree-
ment with the Philadelphia Rapid Transit Company. Para-
graph Eleventh of this Agreement provided:
“The City reserve[s] the right to purchase all the
property, leaseholds and franchises of the Company, sub-
ject to all indebtedness . . . upon July 1st, 1957, or upon
the first day of any July thereafter * by serving six months’
notice . . . [for] an amount equal to par for its capital
stock then outstanding, to wit: the thirty million.
($30,000,000) dollars of capital stock now authorized plus
any additional capital stock issued with the consent of the
City hereunder. . . .”’ ;
Complementing this right to purchase, Seguanesite
fe .
First of the Agreement included the provision ‘nor shallthe _-
Company, during said term, part with any of its stocks,
leaseholds or franchises without like [City ’s] consent,’’
In 1939, the 1907 Agreement was replaced by a new ©
Agreement between the City and the Philadelphia Trans-
portation Company. Paragraph Eleventh of the 1907
* Italics throughout, ours.
Py REP bse ariat
.
rr en ee
20a ime : Appendix A
Agreement was amended. Although many changes were
made by the parties, thé most pertinent changes were as
follows: The City was given the.right to purchase the en-
tire transportation system; it changed the time when the ~~
"City could exercise its right of purchase from ‘*July Ist,
1957, or upon the first day of any July thereafter’’ to ‘‘any
first day of July hereafter.’’ : Also, the: ‘price that the City
was to pay by exercising the right to purchase was changed |
to a price made up of four factors: (1) the amount of PTC’s
‘outstanding bonds, mortgages and ground rents; (2) the
par value of PTC’s outstanding preferred stock (of which
presently there is none); (3) $10 for each share of _—
outstanding common stock; and (4) ‘‘the amount of .
[PTC’s] then undistributed. corporate purplus, if any.’
Furthermore, the City reserved “‘whatever right to con-
demn it now has or shall hereafter have,’’ a reservation
which was not in the Agreement of 1907.
This 1907 Agreement, as amended by the 1939 Agree-
ment, was amended or extended by Agreements entered
into between the City and the PTC in 1950, 1957, 1962 and
1965, the latter two Agreements specifically stating that the
_extensions were without prejudice to the claim of the PTC
that the 1907 Agreement terminated either on December
31, 1964 or on June 30, 1965. The City.was thus given the
right or option to purchase all of the properties of the -
PTC without any time limit specifically imposed on this
right, and until such purchase option was exercised, the
PTC could not sell, or alienate any of its property, stocks,
leaseholds or franchises wi Cut the City’s consent. Since
the City’s interest in the ‘PTC properties would not vest
until it exercised its purchase option, which clearly and
undoubtedly could be exercised later than the period of 21
years allowed by the Rule against. Perpetuities, the Option
violates the Rule.
. ppendis A =} 21a
In apholding the City’ s right to purchase under the
_ Rule against Perpetuities, the majority relies on three
” grounds.. First, the right to purchase is a contractual right
to which the Rule does not apply: Second, if the Rule does
apply, the extension Agreement of 1957 acted as a ‘‘con-
veyance’’ to bring it within the Estates Act of 1947 and the ©
so-called ‘‘ wait and see’’ rule incorporated therein. Third,
the Rule should not operate on the City’s right to pur-
‘chase for reasons of public policy. I find no merit in any
of these contentions.
_An option is an offer to sell to the sien or, con-
versely, a right given to the optionee to buy certain property .
at or within.a stated period of time and for a specified
price, and when supported by consideration is a ‘contract.
However, the fact that an option gives what amounts in
this case to a contractual right does not insulate it from the
Rule against Perpetuities. .
The leading case on this point is havlon v. Thaw, 246
Pa. 348, 92 Atl. 312 (1914): It involved an option and
is squarely in point and controlling. That case arose sur
a bill in equity to remove a cloud upon title. In 1881, the
owners of land conveyed the-coal ‘and other minerals under-
lying the land to grantees. This conveyance contained an
option to the grantees, their heirs or assigns ‘‘at any future
time whatsoever . . . to purchase any of said land in fee |
simple . . . at a price not exceeding $100 per acre.’’ Ob-
viously, there was no time limit within which _ ‘option
_ had to be exercised.
This Court adopted the lower Court? s learned Opinion
in which it traced and reviewed the Rule against Perpuetui-
ties from its ancient beginings and held ‘that it was taken
from the common law. of England and was part of and
imbedded in the common law-of our Commonwealth. |
22a oe Appendix A
The, Court accurately stated that the Rule against Per-
- petuities is a restriction against fettering the alienation
of property, that under the Rule vesting. must take effect _
within lives in being and 21 years thereafter (including the °
period of gestation), that the Rule operates as a nullifica-
tion and destruction of the intention of the parties, and
_ is a peremptory command of law based upon public policy,
and that because of the public policy. favoring alienability,
“the Rule must be remorselessly applied. The Court further - _
said (pages 355, 358, 364, 366) :
_ “ (When lives cannot be taken oe a measure, the per- -
petuity period is twenty-one ‘years.’ ' Goodwin, on Real
Property, 280. ‘Tlie period of twenty-one years may be
taken in gross, that is, limited: simply as a space of time,
without reference to. any minority, and without being
preceded by a life or lives in being.’ Foulke on Rule against
Perpetuities, sec, 340. ‘If an absolute term is taken, and ~
no anterior term for a life in being is referred to, such
absolute term cannot be longer than twenty-one years.’
Perry on Trusts, 349.. ‘As to the time within which an
executory estate or interest must arise, it is evident that
‘some time limit must be fixed, for if an unlimited time were |
allowed for the creation of these future and indestructible
‘estates the alienation of lands might be henceforward for-
ever prevented by the'innumerable future estates which
‘the caprice or vanity ‘of some owners would prompt them
4 create. A limit has, therefore, been fixed on for the
creation of executory interests, and every executory inter- —
est which might, under. any circumstanées, transgress this _
limit is void altogether. If no lives are fixed on then the -
term of twenty-one years only is allowed.’ Williams on
Real Property (6th Am. Ed.), 317. ‘The rule is that where’
the testator fails to avail himself of lives in being, and
adopts a term of years, without reference to any*life in
Appendix A | a 23a |
being, the term cannot extend beyond twenty-one years
from his death.’ Johnston’s Est., 185 Pa. 179.
sc,
| ee)
‘Arpriviless to aoquire such right {under the option]
was given by the Barton deed,’ but no such right was con-
veyed thereby. The event upon which the estate is to’arise,
to wit, the acceptance of the option to purchase, is uncer-
tain, being. unconfined as to limit of time. The interest
* ereated by this option, therefore, is not vested but contin-
gent, and is within the rule against perpetuities. In that
respect this case differs from one where the owner of land |
conveys the coal thereunder, with general mining | rights
and the right to use surface for mining purposes, as in
Dewey v. Great Lakes Coal Company, 236 Pa. 498; cited
‘by counsel for the defendants. Ina case like that the rights
are conveyed by the deed and yest immediately. ‘There a
present fixed right of future enjoyment is conveyed, al. _
though the right of enjoyment may not be exercised im-
mediately.
‘“«.'. . By its terms the option . . . is limited only
by the confines of eternity. We cannot conceive of a more
violent breach of the rule against perpetuities. . . . And
’-the rule must be rigidly enforced. In Coggins’ App., 124
Pa. 10, Mr. Chief Justice Paxson designates the rule against
perpetuities as a ‘rule of property founded upon the high- ©
est considerations of public policy, and too firmly imbedded —
in our system of jurisprudence to be disturbed save by an
act of assembly.’
03. The option or right to purchase in this case con-
stitutes a cloud upon the title of the plaintiffs which they
_ are entitled in equity to have removed by cancellation.’’
24a ee: Appendix A
’ This: Court, in its Opinion in Barton v. Thaw, said
(page 366) : ‘‘The covenant in question was declared to be
void because in violation of the rule against perpetuities.
We quite agree with the learned court below that it would
_be difficult to conceive any case which could be deemed more
violative of the rule and a greater hindrance to alienation
than the one a bar.. The case turns very.largely upon the
character of the interest in the surface which the optionees
took under the covenant. If it was a present fixed and
vested interest in the land the rule against perpetuities
would have no application. But is a mere option to pur-
chase land, unlimited as to time and indefinite in ‘duration,
which may be exercised in ten years, or in a hundred years,
or in a thousand years, or which may never be exercised
at all, depending upon the wish or pleasure of the optionee,
a present vested intetest? To ask this question would seem °
to answer it. .In no proper legal sense can a mere privilege
of exercising a future right to purchase be deemed a pres-
ent vested interest in land. The optionees may never exer-
cise their,option, and failing to do so, they would never
acquire a vested interest in the land.’’
Barton v. Thaw has been cited with approval in Mather
Estate, 410 Pa. 361, 189 A.2d 586 (1963); Newlin Estate,
. 367 Pa. 527, 80 A.2d 819 (1951) ; Lockhart’s Estate, 306 Pa.
394, 159 Atl. 874 (1932); Lilley’s Estate, 272 Pa.-148, 116
Atl: 392 (1922); Vilsack v. Wilson, 269 Pa. 77,.112 Atl..17 .
(1920) ; Green v. Green, 255 Pa. 224,-99 Atl. 801 (1916); _
Caruthers v. Peoples Natural Gas Company, 155 Pa. Super.
Ct. 332, 38 A.2d 343 (1944)5 Morgan v. Griffith Realty Co.,
192 F.2d 599 (10th Cir., 1951) ; and Middleton v. Western
Coal & Mining Co., 241 F. Supp. 418 (W.D. Ark.). See
‘ also: Lewis Estate, 349 Pa. 571, 37 A.2d. 482; Ledwith v.
Hurst, 284 Pa. 94, 130 Atl. 315.
The Majority has ignored this clear and .well settled
law of Pennsylvania and relies instead on Section 401 of —
Appendia A. 25a
the Restatement of the Law of Property, which states that
‘*A transaction which is exclusively contractual is not sub-
ject to the rule against pereptuities.’’. Of course, this is
not controlling but even if it were, an examination of the
Illustrations and Comment under Section 401 clearly and
- without the slightest doubt demonstrates that the Section
does not apply to the type of contractual right asserted
here by SEPTA. The rationale of Section 401 is set forth
in the Comment to that Section:
‘a. Rationale. The rule against perpetuities has as
its sole objective the prevention of ‘inconvenient fetterings
of property’ (defined in § 370, Comment %). When a trans-
action is ‘exclusively contractual’ (defined Comment b) it
involves no fettering of any property and hence there is
no. occasion for applying the rule against perpetuities
thereto.’ :
—
But an option desia involve the. Snenieia of property
and certainly the 1907 Option provision did! As Corbin
_ points out in his: Treatise on Contracts (Vol. 1A, page
481)-: “When an owner, by an Option Contract, gives to a
promisee an Option to Purchase for a stated period, he
has restrained alienation for that period, . ...’? That is—
precisely why this Court held in Barton v. Thaw, 246 Pa.,
supra, that the Rule against Perpetuities applies.to option
contracts. The 1907 City-PTC Agreement not only gives
the City a right, during an unlimited future, to purchase
the franchises and other properties of the PTC, but further -
‘ prohibits the PTC from “parting with any of its stocks,
- Jeaseholds or franchises without [the City’s] consent.’’ It -
is difficult to imagine a greater fettering of alienation of |
“ property. 3
The restrictive effect of the option in this case is
further emphasized -by the fact that, as the City and
SEPTA claim, the City’s right to purchase could be exer-
4 -
j
26a on Appendix A
cised at any time in the future without limit. Could any
statement or contention more clearly demonstrate that
this Option unquestionably violates the Rule? Poetically
expressed, the Option may be exercised at any time before
the stars are old and the sun grows cold and the leaves
of the judgment book unfold.
The majority Opinion next states that ‘‘If the 1957
agreement is a conveyance under that definitionythe Estates _ .
Act of 1947 applies, . . . for.the option was in fact exer-
cised within. the time edition of the rule against per-
petuities dating from July 1, 1957.’ The Estates Act of
1947 took effect January 1, 1948 and applies ‘‘only to con-
' veyances effective on or after that day. As to conveyances
effective before that day, the me laws shall remain
in full force and effect.’’
The 1957 Agreement a not give . the City a new
option or right to purcliase, nor does it expressly modify
the original Option given in 1907. Furthermore, (1) an
option has never heretofore been ‘‘a conveyance,’’ and
(2) an option does not create a legal-or equitable title in
property: Synes Appeal, 401 Pa. 387, 394, 164 A.2d 221;
and (3) an option is not ‘‘a conveyance’’ as defined in the
Estates Act of 1947. It is clear that prior to any exercise
of the Option by the City under Paragraph Eleventh of
the 1907 Agreement, the optionee had no interest, legal or
equitable, in or to the property subject to the Option, and
a right which is void ab initio cannot be revived by one or
even by both of the parties. ,
Finally, the Majority states that the Option should be —
upheld on the grounds of public policy. It disposes of
the Rule against Perpetuities in two sentences: ‘‘. . . Bar-
ton stated at 246 Pa. 364 that its result is dependent on
the interests of the community at large. In this case, the
danger of fettering the free use of property is outweighed
Appendia A 7 27a.
by considerations of public concern and welfare.” The
Majority has mistaken the principle of public policy and has
blindly put the shoe on the wrong foot. SEPTA, if ably
managed (which, because of its multifarious functions and
the varied and complicated problems which are certain to
arise, is doubtful of accomplishment) is a desirable objec-
tive and a worthwhile public policy, but that does not and
cannot legalize the violation of any law or the destruction
or abolition of the public policy of the Commonwealth, or
the evasion of the many controlling decisions of this Court °
to the contrary. The Majority cites no authority to sup-
port it and obviously proceeds on the recently adopted
theory that. a worthy objective validates and Constitu-
tionalizes anything and everything, and every case is.to be
decided on a personal ad hoé basis. This substitutes un-
certainty and confusion for certainty, clarity and stability,
as well as for long-established and well-settled law, and
borders on the ridiculous. I believe, although no one can
be sure from the majority-Opinion, that the practical result
of that Opinion on this point is to judicially exterminate the
Rule against ‘Perpetuities, which it now writes off as ‘‘gone °
with the wind. sad
Barton v. Thaw, 246 Pa. , supra, makes it ree clear
‘ that there are compelling velit policy: reasons*for not
permitting unlimited restraints on alienation of property.
Furthermore, the public interest of thg City and also of
SEPTA is adequately and completely protected by the fact
that the City and SEPTA may condemn the entire trans-
portation system if, in the public interest, either so desires.
‘In addition, the Majority conveniently overlooked the
fact and the law that neither 4 Muncipality nor an Author-
ity is a Sovereign, and what might apply to a Sovereign
does not apply to a Municipality or an Authority. A Mu-
nicipality, not only in its private or proprietary but even in
28a Appendix A
its governmental capacity, has no vested rights in its func-
tions or powers and is Constitutionally subject to change,
repeal or total abolition at the will of the Legislature. In
Lighton v. Abington Twp., 336 Pa. 345, 9 A.2d 609, the
Court, in an Opinion by Justice Linn, said (pp. 352, 353) :
‘In Commonwealth.v. Moir, 199 Pa. 534, at p. 541, 49 A. 351,
MITcHELL, J., said: ‘Municipal corporations are“agents of x
the state, invested with certain subordinate governmental
functions for reasons of convenience and public policy.
They are created, governed, and the extent of their powers
determined by the legislature, and subject to change, repeal,
or total abolition at its will. They have no vested rights in
their offices, their charters, their corporate powers, or even
their corporate existence. This is the universal rule of -
constitutional law, and in no state has it been more clearly
AG and more uniformly applied than in Pennsyl-
vania.’ See also Shirk v. Lancaster, 313 Pa. 158, 162, 169
A. 557.’’ Accord: Cleaver v. Board of Adjustment, 414 Pa.
367, 200 A.2d 408; Schultz v. Philadelphia, 385 Pa. 79, 83,
122 A.2d 279; White Oak Borough Authority Appeal, 372 |
Pa. 424, 427, 93 A.2d 437; Genkinger v. New Castle, 368 Pa.
547, 549, 84 ‘A2d 303; Philadelphia v. Fox, 64 Pa. 169, 180-
181. | ;
It is equally true that in its private or proprietary
-eapacity a municipality is subject to-the same duties and
obligations as is a private corporation. Said the Court in
Commonwealth v. PRT, 287 Pa. 70, 134 Atl. 452, at page 76:
‘‘Our cases are humerous in which it has been held that,
where the municipality is not engaged in public business, it
acts as do others likewise engaged, and ‘is subject to the
same duties and obligations as to its contracts and the
- responsibility for the acts of those employed by it: [citing
eases].’’ In that particular case, the Court held that the
City was engaged in its private or proprietary capacity, and
Appendix A oe : 29a
not in its public or governmental capacity, in the operation
of transit facilities leased to PRT.
Declaratory Judgment Proceedings.
2. A declaratory judgment proceeding is not a proper
- remedy and cannot be granted in this case because both the
majority of this Court,and the Court below reform the Op-
tion and grant SEPTA, contrary to the clear and express
_terms of the Option, the right to make payment and settle-
- ment within a period of not less than six months after the’
final disposition of this case, in lieu of the time period ex-
pressly and specifically required by the Option: Baskind
v. National Surety Corp., 376 Pa. 13, 16, 101 A.2d 645.
Cf. also McWilliams v. McCabe, 406 Pa. 644, 657-8, 179 A.2d
ar , a
The proper remedy in this case, dssuming that the City
and SEPTA wish to exercise whatever rights either pos-
sesses, would be (a) a. bill in equity for specific perfor-
mance, which could include an extension of the time for
settlement, or (b) condemnation by eminent domaiit: *
_For the aforesaid reasons, I would reverse the judg-
ment and the Order of the lower Court and dismiss the
petition for a declaratory judgment.
Assuming arguendo that SEPTA-has the legal right to
exercise the City’s aforesaid options, and that a Declaratory
Judgment proceeding will lie, I would construe the City’s S
- Option formula as follows:
First: SEPTA must assume the jahinma pension ob-
ligations of PTC. This subject was not covered in the Op-
tion or in any other part of the Agreements and was never
within the contemplation of:the parties. Section 24 of the
Act of August 14, 1963, P.L. 984, as amended, 66 P.S. § 2024,
requires that SEPTA ‘‘shall recognize and be bourid by |
existing labor union agreements where they exist between
30a . Appendix A
labor unions. and transportation companies that fre ac-
quired, purchased, condemned or leased by the board.’’
. Moreover, these unfunded pension obligations have always
been treated by PTC with the approval of the City and of
the Pennsylvania Public Utility Commission as a current
operating expense when actually paid. It is therefore fair,
. equitable and just that PTC’s pension obligations be as-
sumed by SEPTA. Cf. Pittsburgh v. Pa. P.U.C., 370 Pa.
305, 88 A.2d 59, 82 P.U.R. (n.s.) 161.
Furthermore, there is a stronger and even more com-
pelling reason why SEPTA must assume the pension obli-
gations. The City’s Option provides in the clearest lan-
guage that the City must pay the PRT stockholders (for all
the Company’s property, lock, stock and barrel). ‘‘an
amount equal to ten (10) dollars per share for all then out-
standing common stock of. Company, a and the amount of the
then undistributed corporate surplus, | if any, of Company.”’
The Option makes it mandatory to pay the stockholders (an
amount equal to) $10 a share—not $10 conditionally or sub-
ject to any deductions whatsoever—and in addition thereto
the amount of said surplus, if any. If no. undistributed |
corporate surplus exists or if the liabilities exceed the
assets, the City under said Option must pay $10 per share,
which, in no event, can be reduced by pensions or by any
other liabilities real or assumed, vested or contingent. The |
Majority’s interpretation, which would greatly reduce or
completely eliminate said $10 per share, completely ignores _
and violates this clear provision of the Option and radically. |
alters the terms of the City’s Option. |
For these reasons, as well as for the reasons so ably
set forth in Justi¢e Roserts’ Opinion, I. specifically dissent
to this part of the majority Opinion.
Second: Item (4)(d) of the purchase price tieniile
‘(as used in this Option), namely, ‘‘and the amount of the
——
Appendix A 3la
then undistributed corporate surplus, if any, of Company
[PTC]”’ is difficult to interpret. There is no designation
of surplus on the books of PTC under the heading ‘‘undis-
tributed corporate surplus’’ or ‘‘corporate surplus,’’ or
merely ‘‘surplus.’’ The headings nearest thereto are car-
ried on its books a8 ‘‘capital surplus’’ and ‘‘retained earn>
ings.’? The meaning of .‘‘corporate surplus’”’ is at.times .
indefinite and uncertain and is dependent on the particular
agreement or particular Act (as the case may be). How-
ever, I agree with the. Opinion of the Majority to the extent
that the prima facie intent and the general rule means ‘‘the
viele surplus shown on the balance sheet of the Com-
pany.’
In Branch v. Mitess. 291 Pa. 543, 549, 140 Atl. 498, 500
(1928), this Court followed and adopted the following
general rule which was thus stated i in Edwards v. Douglas,
269 U.S. 204, 214:
66
.
. The word ‘surplus’ is a term commonly em-
ployed in Meoniib finance and accounting to designate an
account on corporate books. . . . The surplus account: rep-
- resents the net assets of a corporation in excess of all
liabilities including its capital stock. This surplus may be
‘paid-in-surplus,’ as where the stock is issued at a price
above par; it may be ‘earned surplus’ as where it was
derived wholly from undistributed profits; or tt may,
among other things, represent the increase in valuation of
land or other assets made ei a revaluation of the com-
pany’s ficed property. ... .”” |
Moreover, it is a matter of common kuowledes that
a corporation changes from time to time the carried or
book value of its corporate or capital surplus, and the
methods or factors for determining the same, and further
that the Federal Government or the State Government has
at times employed a different formula for the ascertainment
POL ALOT Fe
‘ ee
.
32a : Appendix A
thereof. Consequently, I believe that ‘undistributed corpo-
rate surplus’’ means prima facie ‘‘book value,’’ but that
the. various assets of the Company may be revalued and
_ their actual value established by relevant and convincing
evidence.: _—
I believe and would hold; that the ‘candistribated corpo-
rate surplus’%# means (a) PTC's retained. earnings, and
(b) its capital surplus as shown on the-books of the Com- -
pany at the date of settlement, or its actual capital surpine
on that date as proved: fash a revaluation thereof.
Appendix: A
DISSENTING OPINION.
Roserts, J. Fiuep: July 27, 1967
The majority opinion, as it frankly states, is merely
a highlighting of the opinion of the court below; indeed
the majority seems to adopt that opinion in toto. Of neces-
sity, therefore, my disagreement must be with the source
of this Court’s opinion: ‘ a
1. Perhaps the most ‘eqidtabile aspect of the Court’s
duniatiien 3 is its saddling PTC with the obligation of pay-
_ ing future pension rights due its retired employees, thereby
~ depriving PTC’s stockholders of approximately $17,000,000.
_ As a result the amount they will actually receive for their
stock will be considerably less than the $10.00 per share ~
envisioned by the 1939 formula. Indeed the amount re: .
quired to meet the pension fund obligation is practically. °
equal to the amount received in exchange for PTC’s stock.
Thus the effect of the disposition on this aspect is to wipe
out entirely Item 3 of the option formula.
Yet in choosing to exercise its option, SEPTA i is obli-
gated to take over PTC as an operating transportation
system in its entirety. Logically this ought to include
PTC’s pension obligation. ‘‘Pensions are wages and con- “
stitute a present benefit, and therefore upon the establish-
ment of a pension plan, whether based on past or future |
- gervices, or both, the entire charge becomes an operating
expense not an income deduction or a charge to surplus.”’
Re: Uniform System of Accounts for Electric Corpora-
tions, 82 P.U.R.-(NS) 161 (N.Y. 1950). In Pittsburgh v,
Pennsylvania Public Utility Comm’n, 370 Pa. 305, 88 A.2d
59 (1952), this Court held that the burden of pension pay-
~~
\e
34a = Appendix A
ments, including those attributable to past services, should
be assumed by present and future ratepayers, rather than
the stockholders. The following paragraphs from the
Court’s opinion seem to me to: be equally applicable to the ~
present case:
‘‘The Superior Court and the City of Pittsburgh
rely upon the argument that a decision allowing the
‘freezing payments places a burden on present and
' future ratepayers which should have been borne by
those in the past. It is obvious, as the City argues
and the Superior Court stated, that as a result of the
-Commission’s decision present. and future ratepayers
_ must pay that portion of the cost of pensions which is
more properly attributable to past services. But the
criterion for determining whether present and future
ratepayers or the investors nm Bell should bear this
portion of the cost is not whether past ratepayers
should have paid it. If it were, it was illogical for —
the Superior Court to permit the Company to allow
that portion of the pension costs attributable to serv-
ices rendered between 1913 and 1927 since such costs
should have been placed upon ratepayers between those
years. Furthermore, even the ratepayers in 1913, by
that test, should not have borne the amount which was
paid out in pensions: on a pay-as-you-go basis and
which was attributable to services rendered before 1913.
‘*Reduced. to its simplest terms, the situation is
this: Pensions are now recognized as a proper operat-
ing expense. It is fundamental that in order to afford
an adequate retirement program any pension plan
must take into consideration past services of employes:
Osborne et al. v. United Gas Improvement Co. et al.,
354 Pa. 57, 63, GE, 46-A. 2d 208. Someone must pay
Appendia A oe 35a ,
for the’ pension . ‘costs properly attributable to vast
services. At'the present time such costs can be placed 7
upon present and future ratepayers or the investors in __ .
the Company. In the present situation the test for > jet a
determining where the burden should be placed as be-* |
tween these, two classes of individuals is whether man-
agement abused its discretion in 1927 by not placing’
the full cost on the ratepayers from that time on. If,’
they did, the investors for whom they. acted should |
_ bear the cost. If they did not, there is no valid” legal
objection to placirig the burden on.present_ and future
ratepayers. Since we have already demonstrated it .
cannot properly be held that management abused its
diserétion in 1927, the costs of pensions including the
freezing payment were correctly included by the Com- “~~
mission as an operating expense.
‘‘The view which we take of this phase of the case
is supported by ample authority. On the other hand,
the contention of the City of Pittsburgh that these pen-
sion costs should be borne by the Bell stockholders: t
is not _— by a decision of any court of last
resort... .°% ° : |
370 Pa. at 320- 21, 88 A.2d ia 66-67. (Emphasis supplied |
and footnote omitted.) ; 7 :
- PTC has always followed the normak procedure of |
treating the pension obligations as part ‘of its current
operating expense. Accordingly these obligations . have
been reflected in its current rate structure. For over
twenty-five years this has been done with express knowl-
edge and approval of the City of Philadelphia, SEPTA’s
assignor, who during this entire period was represented on
PTC’s Board of Management. Moreover, PTO’s handling ~
of its pension obligation had’ the approval of the Pennsyl-
vania Public Utilities Commission. It seems to me, there-
36a - | Appendia A
fore, to be totally irrelevaggt to the issue before us for
SEPTA to suggest that if it had been in control of PTC’s
management, it would have made different arrangements
in order to meet its pension obligation. Had SEPTA
chosen to acquire PTC by means of condemnation, the price ~
SEPTA would, have paid would have included the value of
PTC’s past pension obligations.. Metropolitan Transpor-
tation Act, Act of August 14, 1963, P.L: 894, §8, 66° P.S.
§ 2008(f) (24) (1) (iii). In exercising the option SEPTA is
purchasing PTC ‘‘lock, stock, and. barrel,’’ and ‘is obligated
_ to purchase it as it.is—not as it might have been. __
In addition, SEPTA’s failure to assume. PTC’s pen-
sion obligation is in conflict with the legislative intention
set forth in the statute creating SEPTA, Metropolitan
Transportation Authorities Act, Act of August 14, 1963,
P.L. 894, 66 P.S. § 2001 et seq. Section 24, 66 P. S. § 2024
provides that SEPTA “shall recognize and be bound by —
existing labor union agreements where they exist between
labor unions and transportation companies that are ac-
_. quired, purchased, condemned or leased.’’ It is evident
- that the legislature was thus concerned with the welfare -
of the transportation companies’ employees.: The existing
anion agreemént specifically provides that retired em-
ployees shall ‘‘continue to receive benefits in accordance
‘with the provisions of the contracts ‘which were in effect
. .at the times of their respective retirements on- pension.’’
Yet, as the amicus brief points out, SEPTA can hardly be
bound by this provision of the union contract, which it
assumes on the settlement date, and: at the same time in-
sist that retired —— look not to. it, but to PTC, for
their benefits. 7
Thus I believe the Court” S treatment of the $17, 000, 000.
pension obligation is doubly burdensonie. First, it retro-
\ actively compels PTC to -utilize past ‘earnings in order to
Appendix A ) . Bla
pay for future obligations. This is not only contrary to the _
manner which PTC, with the express approval of the City -
and the P.U.C., has in the past treated said obligations, but
also contrary to thé*intent of the 1939 agreement itself.
Secondly, since these pension obligations have always been
‘Inet on a pay-as-you-go basis, it contravenes the legislative
intention by. unnecessarily depriving retired employees of
the security of the fare-box.
2. Under the 1939 agreement, the hist price of
_PTC’s entire operations is to be determined in accordance
with a four factor formula contained therein. The only
dispute concerning this formula is the meaning of the term .
‘‘undistributed corporate surplus.’’ I am unable to agree,
with either SEPTA’s definition, adopted by the Court, that
- undistributed corporate surplus means only the balance. -
. sheet figure described as retained earnings, or PTC’s defi-
nition that the term means the excess of the fair valuation of
all th® assets over the liabilities plus capital stock, thus 7
requiring all the asséts to be valued prior ‘to their inclusion
in the formula. — |
° /PTC derives its position from the classic definition of
corporate surplus in.Edwards v. Douglas, 269 U.S. 204, 46
* §. Ct. 85 (1925), and approved by this Court in Branch v.
Kaiser, 291 Pa. 543, 549, 140 Atl. 498, 500 (1928) :
‘*The -word ‘surplus’ is a term commonly employed in
corporate finance and accounting to designate: an ac-
count on corporate books. But this is not true of the
words ‘undivided profits.’ The surplus account repre-
‘sents the net assets of a corporation in excess of all
’ liabilities including its capitdl stock. This surplus may
_be ‘paid-in-surplus,’ as where the stock is issued at a
price above par; it'may be ‘earned surplus’ as where it
was derived wholly from, undistributed profits; or it
38a Appendiz A
may, among other things, represent the increase in.
valuation of land or other assets made upon a revalua-
tion of the company’s peoperty. ” 269 US. at 214, 46
S. Ct. at 88.
While I have no quarrel with this definition, I believe
that it is inapplicable in the present case because the entire
purpose of the 1939 agreement was to establish a fixed for-
mula which would permit the. buyer to know the price he
would have to pay at the time he exercised his option.
Philadelphia. v. Philadelphia Transp. Co., 386 Pa. 231, 239,°
126 A.2d 132, 135-36 (1956). A valuation proceeding after
the option is exercised, as PTC urges, would defeat this
purpose; hence I agree with the court below that ‘‘undis-
_ tributed corporate surplus’’ is not a valuation but a balance
sheet figure.
On the other hand, the conclusion that undistributed
corporate surplus is limited to the retained earnings of PTC
is a non sequitur. In my view, which incidentally is sup-
ported by the opinion of the court below, the purpose of
the formula price was not only to permit the optionee ‘to
purchase the company at a known price but also to insure
PTO’s stockholders that in the event the option was exer-
cised their equity in the corporation as the same appeared
on the company’s books would at least be returned to them.
On its books, PTC has divided its stockholders’ equity into
three catagories: 1) capital stock, for which the formula
compensates the stockholders by requiring the purchaser to
pay $10.00 per share for each outstanding share of stock ; 2)
retained earnings, for-which, under the opinion of the court
below, the stockholders aré compensated for by its inclusion
in the term undistributed.corporate surplus;’’ 3) capital
surplus, for which under the Court’s determination the
stockholders receive no compensation.
” i
aed
2
bi lanl at en clleth tM Lh oes Vite! Cea ine Pee epee wre
A ppendix A . | 39a
I can see no justification for giving SEPTA the capital
surplus as a windfall. This account is not a recently
created entry but has had the unchallenged acceptance and.
approval of both the City and the P.U.C. for more than a
quarter of a century. Every advantage of a known cer-
tainty which is true about the retained earnings balance
sheet figure is equally true about the capital surplus ac-
count. As the court below observed: ‘‘There was no fraud
or deceit—either alleged or proved—in the way PTC kept
its books. The essence of the formula price, as had been
seen, is that it is‘a book price. SEPTA is therefore bound
to accept PTC’s books in computing the formula price.’’
Accordingly, I would hold that the term ‘‘undistributed
_ corporate surplus’’ as used in the 1939 formula means
PTC’s retained earnings and capital surplus as reflected on
its balance sheet at date of settlement. |
3. Additionally, I am disturbed by the uncertainty gen-
erated by the Court’s treatment of PTC’s current cash.and
liabilities.- All agree that under the agreemept SEPTA will
purchase PTC’s cash as well as its other assets, and that
- PTC is liable for the excess of its current liabilities over
and above its current cash. However, there is considerable
uncertainty as to what the Court’s disposition is with re-
_ gard to PTC’s current cash and liabilities. As I read the
opinion of the court below, on the one hand, it permits PTC
to pay its current liabilities before settlement date, thereby
reducing the amount of cash transferable to SEPTA. Pre-
sumably, PTC could liquidate all its cash by satisfying as
much of its current liabilities as the cash would cover. It
is also possible for SEPTA and PTC to make an arrange-
ment so that SEPTA will assume the current liabilities to
the extent of PTC’s current cash account thus not neces-
' sitating PTC to dispose of its cash in a desperate effort to
meet a settlement deadline. On the other hand, the court
~~
40a Appendix A
states that if for any reason-no such agreement is made
PTC remains responsible for any liabilities existing on
settlement date even though in its cash account there is an
~ amount which could theoretically be utilized to.reduce cur-
rent liabilities.
- In my view this niielanliale which is not necessary. and
could produce a most inequitable result, should, especially
in view of the intensity of this litigation, be ikrifed. Vader
‘"the Court’s decree SEPTA has six months in which to
- raise the money to purchase PTC. Under these circum-
stances PTC. might not know until settlement date whether
- or not SEPTA will actually secure the necessary funds to
assume control of its operations, and it may be impossible
for PTC to settle its current liabilities on such short notice. -
On the other hand, if SEPTA fails to purchase the com-
-. pany, PTC may find itself with an inadequate cash posi-
tion -with which to properly operate the transportation
system. I see no. problem in making it crystal clear that
the current cash is to be applied to the payment of current:
‘liabilities. On the settlement date SEPTA should only
receive that portion of current cash which is in excess of
PTC’s current liabilities, unless there is an agreement that
SEPTA will assume an amount of current liabilities equal
to the amount of current cash it obtains.
Mr. Justice O’Brien joins in this opinion.
mA
Appendix B
APPENDIX B.
Opinions of the Supreme Court of Pennsylvania .
Affirming the Preliminary Injunction.
| Fitep: July 27, 1967
Per Curiam. . |
~ Decree affirmed.
Mr. Justice Roberts files a dissenting opinion in which
Mr. Chief Justice Bell and Mr. Justice O’Brien joins.
Dissenting Opinion
Fitep: July 27, 1967 -
Roserts, J. |
| In view of the decision in the declaratory judgment
“action between the same parties, decided today, the issues
raised by this appeal have become moot. I would there-
fore dismiss this appeal without expressing any views as
to the propriety of the restraining order. -
Mr.-Chief Justice Bell and Mr. Justice O’Brien join
in this dissent. |
42a Appendix .C
’ APPENDIX 0.
4
Opinions of the Supreme Court of Pennsylvania
in Previous Appeal.
Per Curiam. oa, November 29, 1965.
This is a declaratory judgment proceeding. seeking a ~
determination: (1) of the validity and enforceability of a
provision in a.contract consummated in 1907, as amended,
giving the City of Philadelphia the right to purchase ‘‘all
the property and franchises’’ of the. Philadelphia Trans-
portation Company; and, (2) the formula to be applied in
determining the purchase price, as provided for in the |
contract.
This appeal, under the Act of March 5, 1925, P.L. 23,
§1, 12 P.S. § 672, questions the jurisdiction of the court
to resolve the issues involved in a declaratory cases
proceeding.
Our examination of the record is convincing that the
lower court properly overruled the jurisdictional objec-
- tion, and that every issue, presently pertinent, is correctly
and adequately answered in the excellent opinion of the
court below. ° ,
Order affirmed.
Dissenting Opinion by Mr. Chief Justice Bell
It is apparent from the written record and certainly
from the oral argument that this case is bristling (1) with
disputes and conflicts of many material and complex facts,*
and (2) with mixed questions of fact and law, and (3) with
_ a number of highly controversial legal issues which are not
* This involved a total of over $15,000,000.
Appendix C «48a
‘‘decidable’’ in this proceeding. Under such circamstances,
or, indeed, if a dispute as to material facts exists ‘‘or such
controversy may arise,’’ or if another appropriate remedy
is available, we have always hitherto held that a declaratory
judgment proceeding will not lie. Sheldrake Estate, 416
Pa. 551, 553, 207 A.2d 802; Mohney Estate, 416 Pa. 107,
109, 204 A.2d 916; Carlsson v. Pa. General Ins. Co., 417
Pa. 356, 207 A.2d.759; State Farm M. A. Ins. Co. v. Semple,
407 Pa. 572, 180 A.2d 925; Allstate Ins..Co. v. Seward, 407 °
Pa. 628, 631, 182 A.2d 715. See also: McWilliams v. Mc-
Cabe, 406 Pa. 644, 179 A.2d 222; Keystone Ins. Co. v. Ware-
housing and Equipment. Corp., 402 Pa. 318, 320-322, 165.
A.2d 608; Stofflet & Tillotson v. Chester Housing Author-
ity, 346 Pa. 574, 578, 31 A.2d 274.* |
In Sheldrake Estate, 416 Pa., supra, the Cnet, quoting
from Mohney Estate, 416 Pa., supra, said (pages 553-554) >"
_ ‘© 6(1) While the grant of a petition for a declaratory judg-
ment is a matter of sound judicial discretion: |
‘¢ ¢ <¢TMhis Court now adheres to the view ‘that declara-
tory judgment. proceedings must not be entertained if
there exists another available and appropriate remedy,
whether statutory or not: McWilliams v. McCabe, 406 Pa.
644, 179 A.2d 222; State Farm Mutual Automobile Insur-
ance Co. v. Semple, 407 Pa. 572, 180 A.2d 925.’? Lakeland
Joint School District Authority v. Scott Township: School
District, 414 Pa. 451, 200 A.2d 748. .
* Stevenson v. Stein, 412 Pa. 478, 195 A.2d 268, is clearly dis-
tinguishable because, as the Court in that case said (page 481):
.. . it is clear that this is an unusual and not the ‘ordinary’ case.
Moreover, no other ‘appropriate’ remedy is. available.” Furthermore,
Lakeland Jt. Sch. DA. v. Scott Twp. Sch. D., 414 Pa. 411, 200 A.
2d 748, whichis relied upon by the lower Court, is clearly distinguish-
able, not only because Of its _very unusual facts but also and more
importantly because “there is no other appropriate and available
remedy nor are any facts in dispute.”
44a : A ppendic C
“In State Farm Mutual Automobile. Insurance Co.
v. Semple, 407 Pa:, supra, the Court said (pages 574-575) :
‘The principles to guide .the lower courts in determining
whether or not a declaratory judgment proceeding should
be entertained was recently clarified by this Court in McWil-
liams v. McCabe, 406 Pa. 644, 179 A.2d 222 (1962). Therein
we declared, inter alia, (1) that a declaratory judgment pro-
ceeding is not an optional substitute for established and
available remedies; (2) that it should not be granted where
a more’appropriate remedy is available; (3) that it should
not be granted unless compelling and. unusual circum-
stances exist; (4) that it should not be granted where there
is a dispute of facts, or such controversy may arise; and
(5) that it should not: be granted unless there is a clear
manifestation that the declaration sought will be a practical
help in terminating the controversy.’’ ’’
The majority néw ignore, evade, undermine and ‘im-
pliedly overrule over a half-dozen recent decisions of this
Court and the tests and principles therein set forth. This -
_ is especially regrettable and unjustifiable because Equity
furnishes—what this declaratory judgment proceeding does .
not and admittedly cannot possibly furnish—a full, ade-
quate, complete and final remedy. This can be attained by,
and only by, a complaint for specific performance with ap-
propriate prayers.
Moreover, ‘a declaratory judgment proceeding will not
lie for the additional reason that all indispensable parties
have not been joined in this proceeding: Carlsson v. Pa. -
Geperal Ins.-Co., 417 Pa., supra (pp. 356, 357); Mohney
Estate, 416 Pa., supra (p. 110); Ladner v. Siegel, _ Pa.
368, 372, 144 Atl. 274.
For each and all of these reasons, , strongly tices
fon
“Appendia D
APPENDIX D.
Opinion of the Trial Judge in Suppart of ia
Declaratory J udgment.
ABSTRACT OF THE CASE
In one way, this case is like a pretty girl, who is vain.
It cannot be described briefly. _Nor should it be.
~ It cannot be, because it starts in 1857, and winds”
through five agreements—of 1907, 1939, 1957, 1962, and
1965—and a corporate reorganization that was in the
_ Federal Courts and before the Public Utility Commission
for years. It’should not be, because it is too important. A
great deal of money is at stake—many, many millions of
' dollars. And the City of Philadelphia and its surrounding
‘communities may develop differently, depending upon how
this case is decided. Moreover, a Court should not only
_ decide. It should explain. Therefore, as best it can, this
Court will state and respond to the arguments that have
been made; but the arguments rise like: bees, and many
pages will be needed, which few persons will wish or have
time to peruse. Yet they are entitled to know in general
what the case is about. This abstract is for them. |
The two main questions are: Shall PTC be obliged to
keep its promise to sell its transit system, upon any July
Ist, after six months notice, to the City’s assignee, SEPTA?
_. And if so, what must SEPTA pay?
PTC seeks to avoid its promise by invoking the com-
~ mon law rule against perpetuities. The rule was invented:
by the Courts to prevent property being tied up too long.
Since this evil is not threatened here, the rule will not be
- applied here. Even if the rule were applied, it would not
‘+ invalidate the City’s right to purchase PTC, for the Estates
a
~~)
46a Appendix D
Act of 1947 liberalized the rule so as to save the City’s
right. Therefore, PTC must keep its promise to sbll.
But, PTC says, it need not sell to SEPTA, for when the
‘City assigned its right to SEPTA, the City did nat seek
competitive bids. The Philadelphia Home Rule Charter .
does require competitive bids in many situations, but not
here; and, the basic point, when the Charter was adopted,
PTC’s contract to sell to the City or its assignee was ex-
empted.
A minority. of PTC’s shareholders have asserted that
the assignment to SEPTA could not have been made except
that someone committed fraud; ‘or made a mistake. Now
that they have had their day in Court the record is clear
- that there was no fraud or mistake. :
The price that SEPTA must pay is a fixed price, set
by a formula in the contract. PTC’s argument that the
price is to be determined by'a valuation of its assets is in
the teeth of the contract, which provides that the transit
system may be acquired in either of two ways: by condem-
nation, where there would be a valuation of PTC’s assets,
or by purchase at the formula price.
« Under the formula SEPTA must pay three amounts:
(1) the amount of PTC’ s liabilities that are. in the form
- of bonds, mortgages, and ground rents; (2) $10 for sing
share of PTC’s outstanding stock ; and (3) PTC’s ‘“‘u
distributed corporate’ surplus.’’
The only element of the formula about which there,
can be reasonable dispute is ‘‘undistributed corporate
surplus.’? On balance, however, it seems clear that this:
means earned surplus and retained earnings, which could
be distributed as dividends, and does not include capital
surplus. SEPTA does not want to pay for PTC’s earned
surplus, but wants to extinguish it by charging against it
PTC’s pension obligation to retired PTC employees.
*
La]
.
a aE sins Catia ee
ROSEY 45 ac eds de SY ee tae t tise CLs ra
Appendix D. a 47a
SEPTA will not be allowed to do this, but must pay for
the earned surplus, as required by the formula. However,
neither will PTC be permitted to shift its pension obligation
to SEPTA, for the formula does not ane SEPTA to
assume such a liability. —
“Tt is a presupposition of the ere economic order,’’
Roscoe Pound once said, ‘‘that promises will be kept.’’
PTC must keep its promise. It will be so ordered.
48a 7 a = Appendix. D
| OPINION.
Spars, J. |
NW ATURE OF THE CASE
The Southeastern Pennsylvania Piiiiineubatinns die
thority (SEPTA) and the City of Philadelphia have peti-
’ tioned for a declaratory. judgment to determine -whether
SEPTA. as the City’s, assignee. has the right under certain -
agreements to buy the asséts of the Philadelphia Transpor-
tation Company (PTC), and if it does, what is the meaning
|. of a certain formula that, states the —_ to be paid for the
assets. Nae aan a ee
History OF THE Case F
SEPTA end the City filed their. petition for declara-
'- tory judgment, on June 18, 1965. On July 6 PTC filed an
. answer Taising. questions of law concerning” jurisdiction.
On August 27 this Court dismissed the answer ahd ordered
PTC to file an answer on the merits. PTC appealed to the
‘Supreme Court. By an opinion filed on’ November 29 the
. Supreme Court-affirmed this Court’s order per'curiam, Mr.
Chief Justice Bell dissenting. S.E: Trans. Auth. v. Phila.
Trans. Co., 419 Pa. 471 (1965). .
. On’ December13 PTC filed ‘its answer on the merits. to
the petition for: declaratory judgment. On December. 14
_ certain minority shareholders of PTC filed a petition for
leave to. intervene, on which a rule was allowed, returnable
December 20.. The rule was not heard, however, but was
continued, for shortly after PTC filed ‘its answer on the
- merits, its attorneys. and the attorneys for SEPTA and the
City entered into settlement negotiations. The negotiations
continued into the early part of 1966, when a settlement was
agreed upon subject to and — of. PTC’ 8 See:
iw *
» ?- : .- ARP.
RPS
Appendix D ae . 49a
-holders.* On April 26 the shareholders met and voted to -
reject, the settlement.**
With SEPTA’s and the City’s petition for dodiedtery
_ judgment thus renewed, a pretrial conférence was held by
this Court on May 3, and trial was set for May 9. - Also:
. , on May 3 the minority shareholders’ petition for leave to
. intervene was heard. The petition was denied by order of
May 5, with leave to file an amended petition on May 6.°
An amended petition was filed. It was heard on May 9
~ and ‘denied on May 10. The minority shareholders ap-
-pealed the denial to the Supreme Court, and asked this
Court to issue a supersedeas to stay the trial until the
_ appeal was disposed of, which normally would have been
_after argument .to the Supreme Court in November, 1966.
The request for a supersedeas was. denied, whereupon P'I'C
petitioned the Supreme Court for a. writ of prohibition.
The: Supreme Court allowed a rule on the petition, return-
- able May 13. _This Court made its return ‘to the rule on
May 12. The Supreme Court ordered that ™~-
_“Anp Now, May 13, 1966, because of the. very
exceptional circumstances in this matter and the tre-
mendous public importance of this litigation and the
_ issues raised therein, the appeal is sustained. The _
case is hereby remanded to the lower Court with di- .
rections !
(1) (a) to grant ihe amended petition ¢ to inter-
vene, and
* An incident of the negotiations was the cessation of an action in
mandamus brought by SEPTA: to require PTC to permit SEPTA to
examine PTC’s records. See this Court’s decision in SEPTA 8, PTC,
38 D. & C.2d 653 (1965), dismissing PTC’s preliminary objections
and requiring PTC to file an answer to SEPTA’s complaint.
** The vote, which was 782,137 against the settlement to 778,654 '
. for it, was not counted until “May 2.
50a . Appendix D
(b) to permit all the parties including the
petitioning intervenors-to present testimony
- and evidence, and
(2) to forthwith proceed to a hearing of this case
and make appropriate findings and conclu-
sions.
‘“‘The Petition for Supersedeas, together with a
Rule to Show Cause why a Supersedeas should not be
granted is denied.
‘“‘The Rule to Show Cause why a Writ of Pro-
hibition should not be granted, issued by this Court
on May 10, 1966, returnable on May 13, 1966 at 10:00
.o’clock A.M., is hereby discharged.
‘¢ Justice Jonss did not participate in this matter.
‘‘ Justice CoHEN and Justice Eacren concur in the
denial of the writ of prohibition and the refusal to
grant supersedeas, but dissent from the balance of the
_Court’s Order.”’ . &
| A hearing was held according to this order. The
hearing started on May 16 and extended through June 3.
SEPTA and the City presented their case on May 16 and '
17, PTC presented its case on May 17 through June 2,
and the intervenors’ presented theirs on June 2 and 3;
SEPTA and the City presented rebuttal on June 8.. Briefs
and requests for findings of fact: and conclusions of law
ewere submitted, and on June 28 oral argument was heard.
QuEsTIONS PRESENTED
The questions presented may be arranged in five sec-
tions, which is not always as the parties have arranged
them, but which will be useful to an understanding of how
the different parts of the case relate to each other. |
os
atl a o¥
Appendix D a 5a
1. SEPTA, as the City’s assignee, seeks to buy PTC’s
assets under a reserved right of purchase stated in an
agreement between the City and PTC of June 12, 1939.
. This agreement is an amendment of an agreement between
the City and the Philadelphia Rapid Transit Company
(PTC’s predecessor) of July 1, 1907. PTC contends that
the 1907 Agreement was void ab initio because of the rule
against perpetuities, and that therefore so was the 1939
Agreement void. Whether this is so is the first question
to be decided.
2. If die teserved right of siaiiaees 3 is not void be-
cause of the rule against perpetuities, it must next be de-
cided whether it is void, or at least unenforceable, because
‘it had expired or attempts to extend it were ineffective.
PTC contends that the exercise of the reserved right
of purchase depends upon agreements between the City -
‘and PTC of July 1, 1957, July 5, 1962, and February 25, .
1965, which ‘‘extended’’ the Agreements of 1907 and 1939,
but that these ‘‘extension agreements’’ are invalid ~be-
cause never ratified by PTC’s shareholders. Further-
more, PTC contends that under the Agreement of July ‘5,
1962, notice of intent to exercise the reserved right of pur-
chase had to be. by December 31, 1964, whereas in fact it
was not until June 8, 1965, or, in PTC’s view, too late.
In considering these contentions, the first problem will
~ be whether the reserved right of purchase does depend
upon the Agreements of 1957,. 1962, and 1965. -SEPTA
and the City say it does not. In Suit view the right con- .
tinued in effect until SEPTA exercised it on June 8, 1965,
and the Agreements of 1957, 1962, and 1965 did not ‘‘ex-
tend’’ the right but rather recognized it. ‘If this view is ;-
correct, the validity of the Agreements of 1957, 1962, and
1965 need not be considered. If it is not correct, it will
o2a . Appendix D
be necessary to decide whether the Agreements of 1957,
1962, and 1965 did require ratification by the shareholders,
‘and. if so, whether there was ratification, and if there was,
whether the condition regarding time of notice was met.
Also to be considered with these questions will be the
claim of the intervening minority shareholders. They say
that the reserved right: of purchase expired on Decem-
ber 31, 1964, and that its exercise, which was on June 8,
1965, therefore depended upon the Agreement of Febru-
_ ary 25, 1965, which, in the intervenors’ view, was.procured
by ‘‘fraud, accident and mistake.’? SEPTA and the City
deny ea fraud, accident, or mistake. | can
3. If it is decided that the reserved right of purchase
is valid, the third question to be considered involves the
assignment of the right by the City to SEPTA. PTC
contends that the assignment, which was on June 8, 1965, |
was invalid because it was made without public’auction,
which, PTC contends, was required by the Philadelphia —
‘Home Rule Charter. SEPTA and the City assert that the .
Charter does not require public auction.
4. The reserved right of purchase states a formula by —
which the price of PTC’s assets is to be determined. One
factor is ‘‘undistributed corporate surplus.’’ If it is de- ©
cided that SEPTA has properly exercised the right of
purchase, it will be necessary to decide what ‘‘undistributed
| _ corporate surplus’? means. SEPTA and the City contend
that it means only the amount stated .on PTC’s balance
_ sheet as ‘‘Rétained Earnings.”’ PTC replies that it means.
- the present fair value of its assets as compared to its pres-
ent liabilities; at least, PTC urges, ‘‘undistributed corpo-
rate surplus’? includes not only PTC’s ‘‘Retained Earn-
ings’’ but also its ‘‘Capital Surplus’’ as shown on its bal-
Q
. Appendix D a. 53a
wane sheet. SEPTA and the City further coutend that in
computing the amount of ‘‘undistributed corporate sur-
plus’’ it is necessary to deduct the amount that would be |
needed, according to a footnote to PTC’s balance sheet,
to create a fund from which to pay pensions to retired 7
PTC employees. PTC replies that there should be no de-
duction. SEPTA also contends that it should not have to
pay PTO’s financing and organization expenses, since PTC
will retain its corporate franghise.
5. When SEPTA exercised the reserved right of pur-
chase, it gave notice that it.intended to buy PTC’s assets
on July 1, 1965. As part of the settlement negotiations,
this date was extended to January 1, 1967. SEPTA con-
_tends that PTC’s shareholders rejected the settlement be-
cause of improper conduct by one of PTC’s directors and
certain of its shareholders, with the consequent. delay of
_ the litigation now before this Court, and that this Court
should, therefore, as.part of. its decree, further extend the
date when SEPTA must pay for PTC’s assets.
As will appear, the answers to these questions depend
almost entirely upon conclusions of law, for except per-
haps with respect to the fifth question (which may involve
an issue of agency),.there is no dispute about any pertinent ~
fact; the disputes are rather about the legal’ consequences
of facts (principally documents) either stipulated, or not
denied, or of which judicial notice may be taken. Since
this is a declaratory judgment proceeding, it is appropriate
that this should. be so, and that the issues should be legal
rather than. factual. Under extraordinary circumstances a -
declaratory judgment proceeding may resolve complex is-
sues of fact. Stevenson, Appellant v. Stein, 412 Pa. 478
(1963). However, that will not be necessary here.
oy
1
54a | - Appendix D
Discussion
A. Preliminary Statement. ‘2
Frequently the findings of fact suai the discussion
of acase. Here, however, it will be better tq start with the
discussion ; if the findings are stated afterwards, they will
be more readily understood.
. The central issue around which the present litigation
rages is the meaning of the Agreement of 1907, as amended
by the Agreement of 1939. ° These agreements were
products of the history of public transit in Philadelphia.
_ Unless the history is understood, the agreements cannot be
understood. Accordingly, in the opening section of the
discussion, the origin of the provisions of the Agreements
of 1907 and 1939 will be stated, and the provisions of ‘the
Agreements will be: ‘compared to each other.
_. Once the history of the Agreements of 1907 and 1939
.is understood, there is no difficulty in understanding them,
- or in understanding the Agreements of 1957, 1962, and
. 1965, and in the ensuing sections of the discussion, the
questions about the various agreements as presented by
this litigation will be considered, in the five sections, and
in the order, in which the questions have been just stated
above. After that? findings of fact and conclusions of law
will be entered, with an order. | a
The provisions of the ce of 1 1907 and 1939,
' and their origin.
1. Public transit in Philadelphia before the A greement
of 1907.
On April 4, 1854, the Philadelphia and Delaware River
Railroad Company (Frankford and Southwark Philadel-
phia City Passenger Railroad Company) was incorpo-
rated.* On January 20, 1858, it operated the first street
*PL.759. bn
Appendix D ay, dda
railway car, a horse car, in Philadelphia, between 5th and
6th Streets.** From 1858 to 1874 at least ital more
street railway companies were chartered. eee
' These street railway companies, with minor excep-
tions, owned the surface system in Philadelphia. They
came to be known as ‘‘the underliers.’? - Their franchises
had no stated date of termination.(*) They were, however,
subject.to the Ordinance of July 7, 1857,(**) which provided
** These facts will be found in Report of Transit Advisory Com-
’ mittee to General Conference on Transit Situation in Philadelphia,
pagé 4, transmitted to the Honorable Harry S. McDevitt, President
Judge of Court of Common Pleas No. 1, on May 24, 1930, and on file
with the Philadelphia City Council and the Philadelphia Bar Asso-
ciation Law Library... See, too, the lettér of September 30, 1937, from .
the Mayor of Philadelphia, the Honorable S. Davis Wilson, to City
Council, Volume II of Journal of City Council, July 8, 1937, to Décem-
ber 29, 1937, Appendix No. 194, pages 353-355, in which the Mayor
states that the conference before Judge McDevitt, and the appointment
of consulting experts to report to the Judge, arose from a proposal that
the City take over the entire transit system. Accordingly, it is appro-
priate for this Court to take judicial notice of the Advisory Committee
- Report. Commonwealth v. Ball et al., Appellants, 277. Pa..301, 306
(1923) (“Judicial notice may be taken of the existence of public mat-
' ters, such as general history known to the community at large, or
‘salient facts of local history known generally in the particular com-
munity . . .”; notice therefore taken of “the actual origin of the
highways as turnpikes’’) ; and see: 14 P.L.E.; “Judicial Notice”,
280 et seq.; Morgan, “Tudicial Notice”, 57 Harv. L.R. 269 ( 1944) ;
Davis, “Judicial Notice”, 55, Columbia ‘L.R.. 945 (1955), see also
McCormick on Evidence §§ 323-331.
*** Act of March 25, 1858, P.L. 166; Act of April 9, 1858, PL.
237; Act of April ‘10, 1858, P.L. 240; Act of April 13, 1858, P.L.
257; Act of A orl 15, 1858, P.L. 300; Act of April 16, 1858, P. L.
320; Act of A pril 21, 1858, P.L. 399; Act of April 21, 1858, P.L. 447:
Act of March "6, 1859, P.L. 243; Act of March 28, 1859, P.L. 264:
Act of April 1, 1859, PL. 462 ; Act of April 6, 1859, P.L. 389; Act of
April 8, 1859, P.L. 429; Act of April 12, 1859, P.L. 711; Act of May
16, 1861, P.L. 704; Act of April 8, 1864, P.L. 297; Act of April 16,
1866, PL. 934 ; ‘Act of February 10, 1869, P.L.. 130. -After 1874,
‘when the new Pennsylvania Constitution was adopted, such special
laws as these were prohibited. See Article 3, section 7, of the Pennsyl-
* vania Constitution.
(*) Advisory Committee Report, pages 4 and 25.
(**) Exhibit P-4.
d6a A ai ‘D
in Section 3 ‘‘That all Railroad Companies . . . shall be
at the entire cost and expense of maintaining, paving, re-
pairing and repaving that may be necessary upon any road, |
street, avenue or alley occupied by them,’’ and in Section
8 that ‘“‘The Directors of any such Company . . .. shall
. fille .’. . a detailed statement . . . of the entire
sat: of the same; and the City of Philadelphia reserves the
right at any time to purchase the same, by paying the origi-
nal cost of said road or roads, and cars at a fair valuation.”’
By other ordinances the City permitted electrification, re-
serving the right to order all wires, including trolley wires,
to be placed underground.***
' In 1883 the Legislature authorised the formation of
traction, companies.**** These companies did not have the
power to build or own street railway companies but did have
the power to lease, maintain, improve, and operate them. |
In 1883 the Philadelphia Traction Company was formed,
and in 1893 the Electric Traction Company and the Peoples
Traction Company were formed.***** 4
The underliers then proceeded to lease their perpetual
franchises to the traction companies. Most of the leases
were for 900 years or more, the underliers having a right of
reversion. . Typically a lease provided for turning over to
the traction company all railway property, the underlier
reserving only the right to continue its corporate existence
and to receive the rental. Many of the leases contained
_ strict maintenance and replacement clauses, with provisions
‘wee* Advisory Committee Report, page 25. And see Philadelphia
Western Railway Co., 143 Pa. 444 (1891), holding that the Ordinance: °
of 1857 is to be “read into and made part of the [Girard College
Passenger Railway Company’s] charter” (143 Pa. at 471), and per-
mitting the City to recover the cost of repaving that the City con-
. sidered necessary but the Company had refused to do.
**** Act of June 13, 1883, P.L. 123, Section 6.
**#%* Advisory Committee Report, pages 4-5.
Appendix D —~57a
. that in case of default the. underlier could take over. its
property with additions and improvements.* ;
_ Between them,.the Philadelphia, Electric, and Peoples
Traction Companies leased almost all of the franchises of
the underliers. ‘‘This done, they had the right to possess
and operate their systems for 999 years for whatever profit
they could make after meeting the rents. Their capital was
spent on improvements to their leased systems, principally
in electrification.’’ **
In 1895 the Union Traction Company was formed. It
effected the first consolidation of the ‘transit system. in
Philadelphia ‘‘by taking over the leases and rental com-
‘mitments of the three original Traction: Companies and
leasing them for 999 years at fixed annual rentals.’’ ***
Finally, in 1902, the Philadelphia Rapid Transit Company
was formed, and it ‘‘leased Union Traction Company, tak-
ing over its existing leases and rental commitments.’’ ****
PRT also acquired certain franchises of its own for high
speed lines and created subsidiaries for me and taxi opera-
tions.
Thus, by 1902, a rigid pyramid of leases had eae |
created: PRT leased from Union Traction; Union leased
from the Philadelphia, ‘the Peoples, and the Electric Trac-
tion Companies; and Philadelphia, Peoples, and. Electric
leased from the underliers; who had perpetual franchises.
In Citizens Passenger Ry: Co. v. Pub. Ser. Com., 271 Pa.
39, 43-44 (1921), Mr. Justice —— described: this pyra- °
mid as follows:
eae ar it was provided that the lessee company
should carry out the terms and conditions of the pre-
* Advisory Committee Report, pages 21-23.
** Advisory Committee Report, page 5.
*** Advisory Committee Report, page 5.
**** Advisory Committee Report, page 5.
' 58a _ Appendia D .
ceding leases, for which its lessors were responsible,
Those contracts’ provided for specified rentals to be
paid by the lessee to the lessors, sufficient to cover the
fixed charges of the latter and a stated dividend to its
stockholders; and, since the leases included the fran- .
- chises of the original companies, the latter were de-
nuded of everything except their mere corporate ex-
istence.’’ —
It was in these circumstances that the City and PRT
mace the agreement of 1907.*
2. The Agreement of 1907.
The first four recitals of the Agreement of 1907 sum-
marize the history that has just been stated; these recitals
also state that ‘‘The Company has . . . acquired... .
the franchises . . . for the construction of elevated and
underground passenger railways within the city and has
under construction and in partial operation an elevated -
underground railway from the western end of Marke
‘Street along Market Street to Delaware Avenue, and also
has franchises for the construction of a subway on Broad
Street and an elevated railway to Frankford.’’ ‘The next
three recitals state that
‘AND Wueraas, The City should have a voice in |
_ the management of the Company and a supervision, of
its accounts and expenditures ; \
- “Anp Wuerzsas, A large sum of money is required
to improve, complete and extend the present system:of
the Company in order that it shall better serve the
_~ public; and for this purpose it is essential that the posi-_
* Exhibit P-1; the exact date of the Agreement i is July 1,.1907.
The City was given ‘the power to make the Agrespient of 1907 by the
Act of April 15, 1907, copied.as‘Exhibit P-3. ~
ef
Appendix D | ? ss 59a
tion, of the Company be clearly defined, and the securi-
*s questioned, and its right to make extensions in the fu-
ture assured, in order that it may obtain credit to fi-
nance the increased transit facilities so necessary for
- the welfare of the public and the development of the
City; 3
‘‘Anp Wuengas, It is desirable that arrangements
should be made requiring the direct payment into the
City Treasury of a fixed sum in lieu of a license fee
per car, and a further sum to represent the cost of -
maintaining‘street pavements. and caring for the streets
occupied by passenger railway tracks, in order toe enable
the City to have control of this municipal work. And
it is further desirable that provision should be made
for the sharing by the City in the earnings of the Com- \.
pany from further growth of the City (without in any
way, making the City liable for any of the obligations
of the Company), and :the ultimate acquisition by the
City of-the leaseholds and property of the Company. ig
To achieve these objectives the City gave up its ‘rights
"ss ties. of. itself’ and its underlying properties un-~
a
under the Ordinance of 1857 andthe ordinances related to —
it: the right to require the PRT to repave the streets used
-by it; the right to require that PRT’s wires be put under-
ground; and, most important, ‘‘the’ right at any time’’ to
purchase the underliers’ perpetual franchises (which, as
has been stated, had been leased up through the various
.traction companies to PRT). The surrender by the City of
these rights was accomplished by the Ordinance of July 1,
1907,* which authorized the City to execute the Agreement
1857 and ‘‘all -other ordinances’’ inconsistent with the
* Exhibit P-2.
of 1907, and which, in Seetion 3, repealed the Ordinance of —
| 4 60a , a aaa D- .
ibiicsalienk of 1907, and by Section Eighth of the a
of 1907, which provided that
‘<The City eesy confirms to the Company ‘nd its
subsidiary companies ** all of the consents, rights and
franchises heretofore gr: nted to, and exercised by
them, including the right of opefation: by the overhead
trolley system, free of all terms,.conditions and regula-
tions not herein provided for, and does further give up
and surréhder and agree not to exercise any rights
which it may pogsess in respect to a repeal or resump-
tion of any of the said rights now possessed or here-
tofore granted,.or a taking over of any of said: proper-
ties, any law, ordinance or contract now in force, or
- hereafter passed to the contrary notwithstanding: Pro-
vided, however, That the present rates of fare may be
changed fiom: time to time, but only with the consent
of. the parties hereto: And Provided further, That
nothing in this contract contained shall be construed to ©
limit the power of the City to make all rules and.regu-
lations, relating to the operation and management of -
. the lines controlled by the Company, necessary and
proper to be made under the police power.’’
The point to note, and never to be forgotten when re-_ .
flecting upon the history of public transit in Philadelphia,
_.is that by Section 3 of the Ordinance of 1907 and Section
Kighth of the Agreement of 1907 the underliers’ perpetual
franchises were put beyond the City’s reach.. The fran-
" chises were. already beyond the tenant traction companies’
‘reach, for'as has been seen, the underliers held a reversion
if their tenants defaulted, and their tenants’ rent was at .
least trebly guaranteed: PRT had to pay the rentals of
+*'The fourth recital of the Agreement of 1907 defined “sub-
sidiary companies” to include the underliers and the traction.com-
panies that leased the underliers’ franchises.
f— :
“Appendix B ncn eae ad - -
Union Disitten: Union had " pay the rentals of the Phila- :
delphia, the Peoples, and the Electric Traction Companies; ;
_and. Philadelphia, Peoples, and Electric had to pay the
-. rentals of the underliers.* At least, however, before the
Agreement. of 1907 the underliers’ franchises could he
bought back by the City; after the ee of 1907, ‘ete
could not be.(*)
The City did get some return for this drastic modi-
fication of its position.
‘Section First of the Agreement of 1907 coma
that PRT. could not increase its capital stock or funded
indebtedness without the City’ s consent: -Section Fourth
provided for City representation on PRT’s board of. direc-
‘tors. Section Fifth provided for examination of PRT’s
books, accounts, and vouchers: by the City Controller. Sec-
tion Sixth gave the City an equal share with PRT’s com-
‘mon stockholders in all net earnings, properly distributable
as dividend beyond 6 per cent per annum cumulative from
January 1, 1907. Section Tenth provided that ‘‘in’ lieu
and satisfaction of. all obligations on the part of the Com- -
pany, and its subsidiary Companies, for the paving, repav-
* The Advisory Committee Report' at page 22 cites one case
where there were “six successive layers . . . ., each after the first
successively bound to pay the guaranteed rentals and perform lease-
hold obligations for all companies preceding it.” .
(*) Cf: the remarks of Mr. Scott, in opposition to the passage of
the Act of April 15, 1907 (Exhibit P- 3), which authorized the City
to make the Agreement of 1907. He said, in part:
“The city is to give up its right to purchase, which is the only
way that it has to'get back its undeterminable and perpetual fran-
chises. The city is to have no right, for the next —_ years to
regulate its fares.
“The city is to give up its right to make the traction company
remove its wires, and what does it get in return? It gets the right -
to purchase what the rapid transit company owns, and what the .
rapid transit company owns is principally made tip of leases upon
which there are liabilities of enormous capitaliZgtion and dividends
to be paid.” (Pennsylvania Legislature, Record, 1907, Vol. 1, —
page 1749). | 7
62a + ° | Appendix D
ing and repair of the streets occupied by their surface lines,
the. obligation to remove[e] . . . snow therefrom, and all
license fees with respect to the cars run upon the said
streets . . _. +,’’ the Company was to pay the City monthly
$500,000 per annum for first 10 years
. $550,000 per annum for next 10 years
$600,000 per annum for next 10 years
$650,000 per annum for next 10 years
$700,000 per annum for ‘next 10 years.
~ But probably the most important right the City got
‘by the Agreement of 1907 was provided by Section Hlev-
enth, as supplemented by Section Ninth. By - Section
. Eleventh ©
“‘The City aimdit: the right rm ne all -
‘the property, leaseholds, and franchises of the Com-
-pany, subject to all indebtedness °. . . upon July 1st,
1957, or upon the first day of any July thereafter by
serving six months’ notice . . . [for] an amount equal
' to par for its capital stock then outstanding, to wit: —
the thirty million (30,000,000) dollars of capital stock
now authorized plus any additional capital stock issued
with the consent of the City hereunder .: . .’’
And. Section Ninth provided that there should be a sinking —
fund, which Section Eleventh provided should ‘‘be avail-
able to the City”? i in paying for the Company’ s assets if the
City exercised its reserved right to purchase. ‘The sinking
fund was
$120,000 per annum for the first 10 years after July
1, 1912
$180,000 per annum for next 10 years
$240,000 per annum for next 10 years
$300,000 per annum for next 10 years .
) $360,000 per annum for balance of term of. contract. -
°@
Appendix D «68a .
Thus, it will be noted—and the observation is simply
another way of examining the fact that was mentioned
‘above as’never to be forgotten in reflecting upon public
transit in Philadelphia—that by the Agreement of 1907 .
the City gave up its. right to buy*the underliers’ franchises
in return for the right to: buy the assets of PRT, ‘that is,
in return for the right to replace PRT as the tip of the
pyramid of lessees who guaranteed the underliers’ rentals:
instead of PRT paying rentals to Union Traction, and so
on down to the underliers, the City would pay the rentals.
3., Events subsequent to the Agreement af 1907, mad |
| PRT” 8 failure.
It is evident, from the “Agreement of 1907 that ea’
City and PRT hoped, and expected, that the rearrange-
ment of the City’s and PRT’s positions would stimulate
such private investment that the transit system i in the City
would become so profitable that the pyramid of guaranteed
rentals would present no difficulty. Thus, Section First
of the Agreement’ of 1907 aia that PRT should make
a call ———
6é
eeepc ee an is pation of i its capital stock unpaid
- §.. . payable not later than December 31st, 1908. All
of said fund ‘shall be expended for the completion of
improvements now undertaken, the providing of new .
lines, power and equipment, and the general improve-
‘ment of the transit system.’’
And for its part, the City,°beginning -in 1912, en my
build, with City funds, certain transit facilities, particularly
high speed lines, which it then leased to PRT. In a deci-
sion filed on August 2, 1938, on Application of Philadelphia
Rapid “Transit Co., the Pennsylvania Public Utility Com-
mission described this development as follows: *
‘ * Just before the passage to. be quoted, ‘the Commission sum-
marized the history that has been stated above.
=<
G4a _ | Appendix D |
‘‘The inability of Philadelphia Rapid Transit Com-
pany to provide adéquate and essential rapid transit
has been partially overcome by the construction of
high-speed lines by the City of Philadelphia. One of
these, the Frankford Elevated, completed in 1922 at a
cost of more than $15,000,000, is connected physically
with the line of the PRT-owned Market Street Elevated
‘Passenger Railway Company and is operated as part
of a through route for this line. Another expensive
high-speed project built by the City ifthe Broad Street
- Subway System, costing to date about $125,000,000. .
‘Both of these high-speed facilities are leased by the
City to PRT. . . . That the City of Philadelphia
recognizes the tremendous importance of* adequate
local transportation is shown by its philanthropic
gesture in building with taxpayers’ money the West
Market Street Subway which when completed is to be
turned over to PRT and its underliers without com- +
pensation—principal, interest or rental. The City even
contraeted- to transfer title in this improvement to
the Market Street Elevated Passenger Railway so that”
property, built with taxpayers’ money, may be pledged.
under the mortgages of the Market Street line. About
$15,000,000 has been expended by the City to date and
many millions more will be needed before the project
is completed. ” (18 Decisions of Pa. P.U.C: 599-600.) *
_It-is-an unhappy fact of Philadelphia history that the
‘efforts of PRT and the City were not successful. This
* And see Advisory Committee Report, page 3, noting that the
annual rental for the Frankford elevated, and Bustleton line, “is insuffi-
cient by $188,000 to meet the carrying charges‘on the City’s bonds, and
those bonds are today [i.e., May 24, 1930] a charge against the City’ s
borrowing capacity.” Also see Commonwealth v. Phila. Rapid T. Co.,
Aplnt., 287 Pa. 70, 72-73 (1926), which tells how the City built the
Frankford and Bustleton lines at its expense, and how i in 1922 PRT
lensed and started to aed the lines.
hil SE en
-
Appendia D - - 65a. :
_may perhaps best be seen from an examination of the Ad-
visory Committee Report, the 1938 decision of the Public
Utility Commission, just quoted, supre, and PTC’s Exhibit .
' D-37A. *
At pages 7-8 and 32-41 of its ae i Advisory Cian
' mittee gives a ‘‘Financial Resume’’. of PRT.** In this
_ resume the Committee notes the unusual position of PRT
in that the assets in its balance sheet do-not include either
the property of the underliers, which ‘‘is not owned by
the P.R.T. Co. or any of its subsidiaries,’’ or reflect the
‘Cover $115,000,000 “[expended by the City as of Decem-
° ber 31, 1929] upon rapid transit property . . . as this ‘
represents no investment by the P.B.T. Co... . .°9 9% .
According to PRT’s éonsolidated balance sheet, it had a—
surplus of just over $6,000,000. However, after noting that
annual rentals and _ interest due the underliers were just
over $8,900, 000," vitae the Committee states that
‘‘The income account of the P.R.T. Co. and its
subsidiaries for the year-1929:, . . shows that after
‘payment of operating expenses, the Company had
gross income for the -year 1929, of $15,236,854. All of
this amount. except $106,730 was paid out as rentals ©
to Underliers, rental to the City for Frankford: ele-
‘vated, interest, and dividends. No rental was paid —
during the year 1929, for the use of the Broad Street _
Subway. It is apparent that from the earnings of
1929 the P.R.T. Co. could not have paid any substan-
tial rental for the Broad Street Subway to the City
without either an increase in its revenues or a decrease |
** The Committee explains, at page 33, that it “has made no.
‘ athemipt to,audit or even to critically analyze the paported figures” but
has accepted “tlie data submitted by the P.R.T. Co.”
*** Advisory Committee Report, pages 33-34. ”
**** Advisory Committee Report, page 6. ;
”
SARS LINE Ts ELT te OS” EIT LPNS Sy NE OF
°
a 5 st a tee Serge nu gfe eae catme
. . ™
66a Appendia D
in its operating expenses, fixed charges, or dividends .
to its stockholders.”? * |
- PRT’s financial position was deseribed by the Public
Utility Commission as follows:
‘“«The grandiose plans for pene es monopdly of
- local-transit facilities embraced: control of the taxicab —
companies, purchases of which: were begun in 1926
‘and continued in 1927. ‘The’ disastrous conclusion of
_ this venture was reached in the latter part of 1935
with the sale by Applicant of the taxicab properties
at a heavy loss. ‘Excessive prices paid in purchasing
the taxicab companies together with Applicant’s finan-
‘ ‘gial inability to acquire modern equipment led to fail-
ure of this venture. The taxicab episodes are severely
condemned in the adjudication of the Court of Com-
mon Pleas No. 1 in the City of .Philadelphia’s suit
against PRT underats 1907 Agreement with —
(C.P. No. 1, Phila. Co. Sept. Term 1929, No. 2827).
‘¢ Applicant has several times acquired -and op-
erated intercity and even interstate motorbus com-
panies but these companies have been disposed of. In
increases in street railway fare, Applicant even estab-
lished an interstate airplane service which was con- .
the optimism of the. 1926 era after several successive.
tinued for several months with the losses eventually . .
- falling upon the car-rider.
‘‘The financial history of - Philadelphia transit
from 1857 until the formation of Union Traction Com-
pany indicates that large returns were obtained from
the monopoly. The Union Traction did not have the
financial success of the earlier companies because of
the heavy rental payments it had assumed. Philadel-
* Advisory Committee Report; pages 7-8.
Appendia D . | 67a
\
| ?
em POT
phia Rapid Transit Company had a difficult time until
the. reorganization of personnel:in 1911 brought out | ~~ i
the possibilities latent in good management. Some a
of the benefits of this management were passed or to :
the stockholders in the form-of dividends and more
would have been available had not the possibilities of
‘the management been exploited to the limit for the
benefit of itself. Several increases in carfare added
to the financial possibilities of manipulation by the .
management. This exploitation was curbed by the in- ,
, Stitution of an equity suit by the City of Philadelphia- _ &
against Philadelphia Rapid Transit Company, Mitten 7
Management, Inc., Mitten Bank Securities Corporation, -
et al., in the Court of Common Pleas No. 1 of Phila~ = |
delphia County (No. 2827—September Term 1929). -
_ The adjudication filed in that case on April 11, 1931,
“included a decree nisi which inter: alia appointed re-
ceivers for Philadelphia Rapid Transit Company. This
decree was modified on May 14, 1931, to provide for the
election under a five year voting trust, of six directors, .
to the board of directors. of Applicant upon the nomi-. mi
“nation of the Court. In September 1934 the court- ,
appointed directors petitionéd the ‘Court of Common
Pleas No. 1 for authority to file an original debtor’s
petition in the United States District Court under Sec-
tion 77B of the Federal Bankruptcy Act. This peti-
tion was granted and the original petition in reorgani-
zation: was filed in‘the District Court October 1, .1934;
since which time Applicant has been operated under
the direction of the District Court.’’ tess Decisions of
Pa. P U. C. 600-601.)
The accuracy of thé Public Utility Commission’s re-.
marks is attested by Exhibit D-37A, which is PRT’s con-
solidated balance sheet as of December 31, 1938. This re-
Sn Pe ees eee
68a . } Appendia D
Prony a seta ate Deficit’? | of $18,899,109.13. Among
“‘Qurrent Liabilities’? is included ‘‘Matured Interest, Divi-
" dends, Rents; ete. due to. Leased ‘Companies (without court
orders for payment) ” of $28,693,295.94. Thus, as the Public
Utility: Commission observed,
| “The drafters of such leases and contracts out-
‘ssmarted themselves by their grasping thoroughness.
» ‘The present reorganization proceedings proved that,
within’the short space of 32 years,* such leases become
[sic] ineffective through inability: to meet the terms of
999 leases.’’ (18 Decisions of Pa. P.U.C. 604.)
4; Proposed solutions of. the transit situation,
It was apparent that there were several possible ‘ways
to try to solve the difficulties created by PRT’s financial
failure. One would be for the City: to aéquire PRT ; but this
would require a modification of the Agreement of 1907,
which, as has been seen, provided that the City’s right to
purchase could not be exercised before July 1, 1957; and,
a more fundamental problem, it would only have made the
City a tenant of the underliers in place of PRT, which if
anything would have aggravated matters by making the
underliers’ franchises even more valuable because backed |. ~
« by the City’s credit instead of PRT’s. Another approach
would be for the City to acquire the underliers, A third -
approach would be f6r the City to acquire both PRT and |
- underliers. This third approach was recommended in
e ‘*McChord Report.’’
_C. C. MeChord was.a former Chairman of the a
state Commerce Commission when, on: January 5, 1927, the
Public Service Commission of Pennsylvania ‘‘called upon
_ [him] to make a survey and report of the urban transpor-
* I.e., from the — oF 1907 until the Commission’s
‘remarks. |
5
Appendix D 69a
tation facilities of the City of Philadelphia... .?(**) In
‘his report Mr, McChord recommended that the City acquire |
the entire fransit system by condemning the underliers, as
the first step, and by acquiring PRT in 1907, under the
Agreement’ of 1907, as the second step. .
| Before arriving’ at, his recommendation, it was neces-
sary for Mr. McChord to estimate the value of the under-
liers’ franchises, which in turn required him to decide what
would be a fair capitalization figure. Mr, MeChord’s analy-
sis of the underliers’ net return on their rentals appears
in Schedule 3 apd on pages’ 21 and 22 of his Report:* It
shows that on the basis of the paid-in capital of the under-
liers, the rate of return from rentals ranged from 4.0% to
73.8%. For the Philadelphia Traction stockholders. the
rateof return was 8%, and for the stockholders of its under-
liers the rate was 31.1%, for an average of 11.4%; for the.
Peoples Traction stockholders the rate was 10. 1%, and for
‘its underliers it was 27.7%, for an average of 13.7%; for
the Electric Traction stockholders the rate was 7%, and for
its underliers it was 37.9%, for an average of 14.9%; and
for the Union Traction stockholders the rate was 17.3%,
and for its underliers (not including the three traction sys-
tems just mentioned), it was 7.1%, for an average of —
- 16.7%,**. From this analysis Mr. McChord concluded that
‘a fair capitalization rate would be 7%, and he accordingly -
estimated the total cost of City condemnation of the under-
liers at $135;480,633."** By comparing this amount with the
(**) See page 2 of the McChord Report, submitted to the Public
‘Service Commission on March 17, 1927, and on file with the Clerk of
the City Council, and accordingly now judicially noticed.
* Tt also appears, with some changes, on page 45 of the Advisory
‘Committee Report.
. S* At page 14 of his Vinies Mr. McChord characterized this:
situation as ! . an accumulation of fixed charges probably never.
paralleled in the history of street railway exploitation ... . .
*** McChord — page 47. !
Wa Appendix D
cost to. the City of borrowing the amount as against the
savings to: the City and the returns that if would receive,
‘he estimated {hat the condemnation would save. the City
each year $4°523,138.* eS:
What happened next is best summarized " the Be :
visory Committeé, as follows :
‘¢ After the publication and ee discussion of the
McChord Report, the Legislature enacted the Act of
May 3, 1927, P.L. 508, known as the’ Daix ‘Act, which
superseded the Hecht Act. It contained two important
_hew: provisions, viz., a prqvision authorizing condem-
Pad
- nation of underliers without P.R.T. and a provision —
authorizing condemnation subject to any or all existing
indebtedness. Thereafter, on May 17, 1928, the City
passed an ordinance directing an application to be
made to the Public Service Commission, petitioning the _
Commission to fix the price to be paid for underlier
condemnation pursuant to the Daix Aét. Such a peti-
tion was filed on May 25, 1928, and after hearings and
investigation, the Commission on September 18, 1928,
handed down its report, fixing the price of all_under-
liers, subject to a $10,000,000 mortgage. to be “left out-
standing on the Market Street subway-elevated line, at
$138,376,907.16 or a total price of $148,376,907.16.
‘‘On December 18, 1928, the City filed a petition in
the Court of Common Pleas No. 4, for'a declaration by
the Court that the properties of the underliers, pro-
posed so to be acquired, could rea8onably be expected
to yield net earnings sufficient to meet‘ the carrying
charges on the indebtedness to be incurred for that pur-
pose. The City Controller refused to attest this pe-
tition and the Court held that he could not be. compelled |
McChord Report, pages 48-49.
Appendiz .D | or : Tia
by mandamus te do so. On October 1, 1929, the City
passed an ordinance abandoning the proceedings look-
ing to underlier condemnation upon the Commission. - ’
basis.’?* .
For a less ‘itainiadtuaiaitin summary, see the letter —
Honorable S. Davis. Wilson, Mayor, to City. Council,
dated September 30, 1937. walt Said the Mayor, in part:
“The City of Philadelphia has more than $150,- -° :
000,000. invested in transit extensions, in subways,- in
_ elevated and surface railways, a large portion of which a
is now part of the City’s funded debt. It-owns _the
streets used by the transit company and for many years
has sustained great financial loss and its citizens have
been burdened by excessive -rates of fare and many
other inconveniences because of the giving away of the
’ underliers’ franchises.
ys)
‘Millions of dollars hii been collected by under-
lying interests for franchises for which practically
nothing was paid and which at the present time repre-
sent very little in the way of actual property or assets. . &£
‘Some of these franchises ran as long as 999 years and |
all attempts to bring about an equitable ‘adjustment, —
- fair to all sides, including the City of Philadelphia, the — g
holders of underlying stock and the a — ,
failed.
‘Tt is the me of the City of: Philadelphia to cof- ss
rect these evils.
‘<The transit situation has become a veritable foot-
ball .... and it is imperative at this time that’ some
step be taken to bring about a waa A solution .
of!
nd havens Committee Report, page 44. j
** The letter appears in Volume II, Journal of the City Council ;
pay * 1937, to December 19, 1937, Appendix No. 194, pages 353-385.
&
ae Appendix D
éé
« eeee
ae
eeee
46) transit has been in and out of the courts, the
Public Service Commission and City Council, and al-
though we were successful in showing that the assets ©
of the underliers consisted of ‘dead horses’ and pre-
vented the taxpayers from being gouged of nearly
-$150,000,000 for buying their own property, the final
settlement of the matter has been delayed through the
dilatory tactics used by the underliers.’’
5. The reorganization of PRT. .
After the effort to’condemn the underliers was ab-
solved, PRT went into receivership, first in equity in the
Court of Common Pleas, and then in the District Court un-,
der the Federal Bankruptcy Act.* :
On December 4, 1934, PRT filed in the District Court a
plan of reorganization, dated December 1, 1934, and known
as the Original Plan. This plan provided for some $174,-
000,000 of capital securities. The Public’ Service Commis-
sion filed with the District Court a certificate of public in-
terest, and during 1935, 1936, and 1937, it undertook to
determine the original-historical cost of the property to be
_ acquired by the new company that would be formed as a,
result of the organization proceeding. : Meanwhile the Origi-
nal Plan was superseded by the First Revised Plan, which
provided for outstanding capital securities of some $133,-
000,000. On September 29, 1937, the District Court, Welsh, |
J., declared the ‘First Revised Plan unworkable because of
over-capitalization.(*) On December 6, 1937, PRT filed a
* For this and the ensuing history, see 18 Decisions of Pa. P. UC.
595-598 (1938).
(*) Judge Welsh r ed in a memorandum opinion “
that instead of arriving at sothething like an actual or adequate value
Appendiz a a «Ba
Second Revised Plan of Reorganization, dated December 1,
1937, providing for capitalization of $100,000,000. The Pub-
lic Utility Commission started hearings on thig early in
1938, During the hearings an amendment of June 1, 1938, |
to the Second Revised Plan was filed. Testimony on this
was ‘concluded before the Public Utility Commission on
June 23, 1938, and the ensuing opinion and order appear in
18 Decisions of Pa. P.U.C. from pages 595 through 693.
In its order the Commission disapproved the Second
- Revised Plan as amended June 1, 1938; and the opinion
‘accompanying the order must be one of the most bitterly
and vehemently worded opinions ever handed down by the
Commission. At page 602 the Commission observes that
‘“‘Ordinarfly the securities distributed to partici-
pants in exchange for outstanding securities of merg-
ing companies are definitely related to the property for
which bonds and stocks are merely evidence of debt
or equity interest. The relationship between property
and securities is not available to the Commission-in this
proceeding due to the reluctance and inability of each
‘of the underliers to describe and evaluate that prop-
erty, if any .... - Applicant [PRT] seemed reluctant
to attempt any determination of property allocation
~ among the underliers although it is in the position of
having spent large sums obtained from the issuance of
its own securities for improvements, additions, better-
ments, and replacements of these wrematine since
1902.’
‘Then, after rejecting a great deal of PRT’s suggestions as
to the proper value to be assigned to its physical prop-_
of the interests of the participants an arbitrary and apparently un-
estimated claim of valuation is made and then a proposed plan of
reorganization is built around “a arbitrary claims.” (18 Decisions -°
of Pa. P.U.C. 604.)
74a | “ Appendix D
_ erty, the Commission found as : follows, at pages 690-691 of
its opinion: >
- . ~*7, The Commission finds that the fairness 6f the
Plan had not been demonstrated for the following”
reasons: ‘=
66
eeee
66
‘‘c. There is reason to believe that. selfish inter-
ests are being served to the detriment of PRT em-
ployees, stockholders and car-riding-public-stockhold-
‘ers who, have, in many instances, contributed not only
hardearned savings, but years of willing and painstak-
ing labor .... to these people ..-. . the Plan proposes
to give practically nothing of value... . If the under-
liers are to secure not only first dates upon, but also
essentially all income from, the entire transit system,
we believe that the employees and the vitally interested
public should know it. Such innocent investors are ap-
parently uninformed of the claims of the underliers to
_ all property purchased with funds derived from the
sale of PRT securities. ‘If such claims are pressed and
sustained, PRT stockholders would have nothing of
value. We do not believe that PRT stock was pur-
chased with the knowledge that the property acquired
‘with such funds would become the property of the un-
derliers. An attempt is being made to continue to pull
the wool over the eyes of the public and PRT em- -
ployees'....”’ |
As a result of this opinion and order, the Second Re- ©
vised Plan of Reorganization was further amended, on
November 15, 1938. As thus further amended it is in the
record as Exhibit P-8.) On November 22, 1938, the Public
A
Appendix D 75a
_ Utility Commission, Commissioner Buchanan dissenting,
approved the plan, with the following statement:
‘‘The plan presently before us does not ye a
‘meet all the objections raised by us in our previous
ordérs. Nevertheless, it represents substantial con-
cessions: The amount ef Consolidated Mortgage Bonds
of the proposed company, which are to be issued to _
holders of securities in underlying companies, has been |
reduced from $40,710,218.67 to $32,569,997.78. In place
of this difference of $8,200,000.00, it is proposed to in-
crease the total par value of new Participating Pre-
. ferred’ Stock given this group from $10,305,000 to
$12,301,340.00. At the same time the par value of the
. Participating -Preferred Stock has been reduced from
- $30.00 to $20.00 per share (as compared with $15.00 par _
value suggested in our order), The-stated value of the
Common Stock has been reduced from $20.00 to $10.00 »
_ per share, which is the figure suggested in our order.
Certain fixed obligations such as Divisional Lien
Bonds, Real Estate Mortgages, and Ground Rents will .
remain the same, likewise in accordance with our order.
The total amount of securities which it is proposed to
issue is thus $85,015,193.42 as compared with. $99,- .
986,334.31. As a result of this change in capitalization,
the fixed interest charges of the proposed company will
be:reduced approximately $500,000.
‘‘Several objections to the plan before us, still
exist. We realize, however, that the debtor must face *
the practical problem of securing approval of the plan’
by its security holders. At the same time, the reduc-
tion in fixed charges is sufficiently close to the standard
‘suggested by us as to make it unlikely that the new com- ©
pany will in the near future become financially em-
barrassed and be forced once more to undergo reorgan-
76a ©
| Appendix D
ization. Likewise, the sizeable reduction in funded debt
adds to the value of the equity which the holders of .
cémmon stock of the proposed company will have. All
of this new common stock will be distributed to present
holders of Philadelphia: Rapid Transit Company pre-
ferred and common stock. As we pointed out in our
revious orders, preferred .and common stockholders
“Of Philadelpiha Rapid Transit Conipany were responsi-
ble to a large extent for financing t the improvements in
_ the company ’s system, and we have been anxious that
this class of applicant’s security holders. participate
; adequately i in the ownership of any new company.
‘‘The present application is before us merely by
the approval required under Section 77b of the Federal
Bankruptcy Act. This report and order should not be
- construed as requiring the Commission in any proceed-
‘ing brought before it under the Public Utility Law of
_ the Commonwealth of Pennsylvania for any purpose
to fix a valuation which shall be equal to the total of
the securities proposed under the‘applicant’s plan, or
to approve or prescribe a rate which shall be sufficient
"to yield a return on said securities: THEREFORE, ...
the proposed plan of reorganization filed by applicant, »
Philadelphia Rapid Transit Company,.and dated De- |
‘gember 1, 1937, as amended June 1, 1938, as amended
’ November 15, 1938, be and same is hereby approved.’’
" (19 Decisions of Pa. P.U.C. 342-3.);
6. The events leading up to the Agreement. of 1939.
With the Public Utility Commission’s approval of the
reorganization of PRT obtained, it remained for the trus-
tees in reorganization to obtain the consent of PRT’s share-
‘holders and underliers and of the City. The present litiga-
tien cannot be understood, and hence cannot be disposed of
_ Appendix D | _ %Ta |
intelligently, without understanding the pulling and hauling
- that finally did result in getting the consent of these parties.
So far as PRT’s shareholders and the underliers are con-
cerned, the terms of consent are embodied in the articles of
incorporation of the company that emerged from the reor-
ganization, i.e., the Philadelphia Transportation Company.*
So far as the ‘City i is concerned, the terms of its consent are
embodied i in-the Agreement of 1939.** As has been men-
tioned, it is this agreement that contains the City’s right to
purchase PTC’s assets, and that is accordingly the storm
‘center of the present litigation. ©
From the point of view of the trustees in reorganiza-
tion, the great and essential gain to PTC as the new, re-
organized, company would be that it would be freed from
what. had proved to be the crushing burden on PRT of
guaranteed rentals. This objective would be achieved be.
cause the underliers and the traction companies would be
‘consolidated and merged with the new company, PTC.
Thus, the underliers’ perpetual franchises, and the pyramid
of leases, with their guaranteed rentals, would become
PTC’s property.*** So unburdened, seated PTC would
become a solvent operation. ;
The underliers and traction companies and their stock-
, holders, however, could not be expected to agree to thus
relieving PTC unless their interests were protected, and
their efforts to secure the maximum protection, in the form -
* PTC’s articles of incorporation appear as part of Exhibit P-8.
** Exhibit P-6; the exact date of the agreement is June 12,1939.
*** See in particular Article VIII of PTC’s Articles: “Each cor-
poration, party hereto [1.e., including the underliers and the traction
companies], shall surrender for cancellation . . . and shall release
or discharge all leases, agreements, claims, . . . to the end that all
property, rights and franchises of each corporation hereto . . . to be
included in the merger effected by this agreement shall be and become ©
the property, right and franchises of the corporation [i.e., PTC]”.
(Page 30 of Exhibit P-8.)
EPR OO Oe ge eee BP eee OL
78a ia com Appendix D
of ‘ensuring that the lion’s share of the capitalization of
PTC would be issued to them, are reflected in the successive
plans of reorganization referred to in the passages from
the decision of the Public Vanier Commission that have
been quoted above.
In ‘the meantime, PRT’s stockholders, whose invest- .
' ment in PRT had been wiped out," reacted unfavorably to
the underliers’ demands. As has been seen, the. Public |
Utility Commission. was sympatheti¢ to the -stockholders,
especially since the money that the stockholders had paid
for their stock-had been used to improve property that PRT.
only leased, and the Commission reduced the proposed capi-
talization of PTC from $174,000, 000 to $85,000,000, It was
the stockholders’ desire to obtain a fair share of this capi- .
talization, for it would be backed by property that PTC did |
not merely lease but, because of the consolidation with the
-underliers and traction companies, owned. |
The upshot of these conflicting demands has already
been’ indicated in the passage quoted above from the Public
Utility Commission’s approval of the reorganization. But
before noting the City’s interest in the reorganization, it
may be well to state it as it was stated in the Second Re-
vised: Plan of Reorganization, as amended November 15,
1938.** The underliers’ and traction companies’ stockhold-
-ers received, as the price of their consent to the reorgani-
zation, consolidated mortgage bonds of some $32,000,000
face value, participating preferred stock of some $12,000,000
par value, and some $2,000,000 in cash, PRT’ s preferred
stockholders waived accumulated dividends . received |
for each share of PRT preferred stock one’half share of
PTC participating preferred, one half share of PTC com-
mon, and $1.00 cash. PRT’s common stockholders received
for each share of PRT common one share of PTC common.
* See Exhibit D-37A.
** Exhibit P-8, page 1 (“The Nature of the Plan”).
Appendia D- | ' . + (9a
It is now in order to consider what was s the City’ s price
for consenting to the reorganization.”
Having obtained the: Public Utility. Commission’s ap-
proval of the Second Revised Plan of Reorganization, as
amended Heremner 15, 1938, counsel for the trustees in re-
organization Wand for PRT appeared at public hearings be-
fore the Committee on Transportation and Publie Utilities
of the Philadelphia City Council. The proceedings at the
second, third, and fourth hearings, which were on April 26,
May 1, and May 5, 1939, were transcribed and are on file __
witli the Clerk of City Council.
The form the hearings took was this: It was a eee
that the City should consent to the reorganization of PRT
by agreeing to an amendment of the Agreement of 1907.
This amendment would be an agreement between the City
. and PTC as the reorganized company. Accordingly, there
was presented to the Committee on Transportation a draft
of the proposed amendment of the Agreement of 1907, and —
public hearings regarding the draft were held. ie
As a result of the hearings, City Council did accept, with
certain changes, the proposed amendment to the Agree- ©
- ment of 1907. Its acceptance was by Ordinance of May 20,
1939,* which authorized the execution of the proposed
amendment, which when executed became the Agreement
of June 12, 1939.** This Agreement of 1939 was then made —
part of the Articles of Incorporation of PTC.***
* Exhibit P-7.
** Exhibit P-6.
*** See Articles III and V, which appear as part of the Agree-
ment of Consolidation and Merger, which in turn appears as part of
the Second Revised Plan, Exhibit P-8. (“.-. . ‘the contract...
between the City of Philadelphia and Philadelphia Rapid Transit Com- .
pany dated July 1, 1907 and amended June 12,1939 . . . will con-
tinue in effect between the City of Philadelphia and the om ?
[i. e., PTC) . aad F
NES I Ee ee
ae ee Appendix D
7. The Agreement of 1939, and how it compares with
the Agreement of 1907.
The critical provision of the Aaaveuiiniih of 1939, so far
_as this litigation is concerned, was the. provision that
amended Section Eleventh of the Agreement. of 1907.****
This provision appears in Section 1(d) of the Agreement
of 1939, and the extent of the amendment may best be seen
by superimposing Section 1(d) of the Agreement of 1939 on
Section Eleventh of the Agreement of 1907, as follows:
‘‘Bleventh. The City reserves the right to pur-
‘ chase all the property, leaseholds and franchises of the
“ Company and its wholly-owned _subsidiaries* [subject
to all indebtedness now existing or hereafter lawfully -
» .ereated]** upon [July 1st, 1957, or upon the first day
of July thereafter] any first day of July hereafter,*by |
_ serving six months’ noti¢e onthe Company of its in-
tention so to do [,] and upon paying to the Company
upon the date named in said notice, an amount equal -
to [par for its capital stock then outstanding, to wit:
thirty million (30,000,000) dollars of capital now au-
**** Other amendments: Section Fourth of the Agreement of
1907 had provided for three City directors (the Mayor and two
citizens) ; by the Agreement of 1939 this was increased to five (the
Mayor and four citizens). Section Sixth was amended to change the
City’s right to participate in dividends. Section Tenth: was amended
to eliminate the Company’s right to a reduction of annual payments
for pavement in case streets were abandoned. Also, Section 2 of the
Agreement of 1939\extended the leaseby the City to PTC of the
Broad Street subway and other subway lines, and modified the rentals
under the lease; Sections 3, 6, and 7 recognized the reorganization
proceedings ; by 'Séction 5 PTC agreed to a rehabilitation and modern-
ization program ; and Section 4 orofided that as amended the Agree-
ment of 1907 and the Broad Street subway lease “shall remain in full
forceand effect.”
* The underlined portions were added to Section Eleventh of the
_Agreement of 1907 by Section 1(d) of the Agreement of 1939.
** The bracketed portions were eliminated from.Section Eleventh
of the Agreement of 1907 by Section 1(d) of the Agreement of 1939,
Appendi D 8la
thorized plus any additional capital stock issued with
the consent of the City hereunder] the sum of the face
amount, or call price if any, and accrued interest .of
all then outstanding bonds:of, and all then outstanding
prior lien bonds, mortgages and ground rents on the
property of, Company .and its ‘wholly-owned subsidi-
aries, plus the par value of all then outstanding pre-
ferred stock of Company, and an ‘amount equal to
ten (10) dollars per share for all then outstanding com-
mon stock of Company, and the amount of the then un- »
distributed “corporate. surplus, if any, of Company.
[The fund in the sinking-fund, if not theretofore paid
over to the City, shall be available to the City for the ,
purpose of inaking or assisting in making the said pay- .
-ment for the property of the Company. ] The City’s
aforesaid right fo purchase shall cover the entire trans-
portation system and property, leasehol s and fran-
chises of the Company and its wholly-owned subsidi-
aries, as a whole, at the time the City exercises said
right to purchase and said option to purchase is in lieu
of all existing options which the City now has in any |
form, whether applicable to the whole system or parts
thereof or interest therein: Provided, however, That
the City reserves to itself whatever right to condemn
it now has or shall hereafter have under any present or -
future legislation giving the City the right to condemn.,
-This contract shall continue in force until such right
is exercised, but whenevér ‘the right is exercised the
_ City shall succeed to and become the owner, [subject
as aforesaid, ] all of the franchises, leaseholds (includ-
ing all leaseholds from the City to the Company),
rights, property and privileges theretofore vested in
the Company and its wholly-owned subsidiaries, and
the City may either operate the same or lease the right
e)
Pr
82a -— *Appendia D-
to operate the same for such terms and upon such con-
ditions as it may deem fit. The right[s]-of the City
to purchase under this paragraph shall be assignable
and may be put up at’public-auction to the highest bid-
der therefor, The Company reserved its franchise to
be-a corporation with the power to operate passenger
[railway] transportation systems and may become a
bidder for such right[s]”’ .
Thus, Section 1(d) of the Agreement of 1939 made five
' Major changes in Section Eleventh of the Agreement of
1907 :
1. The first, and the most important, change is not evi-
dent from the face of the amendment but only from its his-
_ tory, which has been stated above ift some detail. When the
Agreement of 1907 reserved to’the City the right to’ pur-
chase ‘‘all the property, leaseholds and franchises of the
- Company,’’ it meant, by ‘‘the Company,’’ PRT, and it
therefore only enabled the ‘City té replace PRT as the .un-
derliers’ and traction companies’ ultimate lessee. But, when
- the Agreement of 1939 reserved to the City the right to pur- —
chase ‘‘all the property, leaseholds and franchises of the
Company,’’ it meant, by ‘‘the Company,’* not PRT but
PTC; and because of the manner in which PRT was re-
organized and PTC was created, PTC owned the underliers’
and traction companies’ leaseholds and franchises ;.there-
- fore, the City was by the Agreement of 1939 restored to the .
position that it had enjoyed when the Ordinance of 1857 was
in effect, but that it had-surrendered by the Agreement of
' 1907: it could again purchase the entire transit system, not
by purchasing the underliers under the Ordinance of 1857,
but by purchasing, under the Agreement of 1939, the assets
of the new company, PTC, which now owned the underliers’ |
and the traction companies’ leaseholds and franchises.
| Appendix D mtd are 83a
2. The City’s reserved right of purchase was changed
from a right to,purchase PRT’s assets ‘‘subject: to all in-
debtedness’”’ to a right to purchase PTC’s assets free and
_ Clear.
3. The Gane ae the City could exercise its~reserved
right of purchase was accelerated from ‘‘ July 1st, 1957, or
-. upon the first day of any July thereafter” to ‘‘any saad day
of July hereafter.’’
4, The price that the City had to pay for the assets that
it would acquire by exercising its reserved right of Ypur-
chase was changed from the par value of PRT’s outstand-
ing capital stock to.a price made up of four factors: the
amount of PTC’s outstanding bond mortgages, and ground -
rents; the par value of PTC’s outstanding preferred stock;
$10 for each share of PTC’s outstanding common stock;
and ‘‘the amount of ....{PTC’s] then undistributed corpo-
rate surplus, if any. ” |
5. Finally, by the io of 1939 the City reserved
‘‘whatever right to. condemn it riow has or shall hereafter
have.’? There was no such reservation, nor any reference
to condemnation, in the Agreement of 1907.
The full significance of these changes will become ap-
parent as the various questions presented by this litigation
are considered. But before proceeding to that considera-
tion, one further historical fact, of major importance, must
be stated. ;
When the proposed Agreement. of 1939, making the
changes in the Agreement of 1907 that have just been enu-
merated, was submitted to City Council’s Committee on
Transportation, the Councilmen asked a‘number of ques-
tions. These were often answered by the Assistant. City So-
licitor, but still more often. by Frederic L. Ballard, Esquire,
counsel for PRT. Among the questions thus asked and
Sta Appendix D
answered were included the very question now argued to
this Court. ‘The hearings before the Committee on Trans-
portation are, therefore, most pertinent in understanding
the Agreement of 1939, and they will be judicially noticed
by this Court as legislative history.*
Specifically, i in considering whether the City should con- ©
sent to the reorganization of PRT, the Councilmen asked:
‘What would happen to the City’s right under the Agree-
ment of 1907 to purchase the assets of PRT? Would the
City be able to purchase the assets of PTC as the reorgan-
-jzed company? When could it make such a_ purchase?
What assets would the City get by such a ‘purchase? What
would it have to pay? And how would its right to purchase
be related to, or affected by, its right of condemnation?. —
_. These aré not all of the questions presented by the
present litigation; but they are most of them; and as to
‘them, the answers are so clearly stated both in the discus-
* The use of legislative history in the interpretation of statutes
and ordinances, and of contracts resulting from them, is an established
judicial practice. See Labor Board v. Jones & Laughlin, aes 0.5. i,
41 (1936). The fundamental rule in interpreting contracts is that the
‘Court should construe contracts according to the intention of the con-
tracting parties as gathered from the words of the instrument and the.
circumstances surrounding the parties at the time the agreement was
made. 3° Corbin on Contracts § 539 (1960). The Pennsylvania
Statutory Interpretation Act, Act of May 28, 1938, 46 PS 551, pro-
vides that “When the words of a law aré not explicit, the intention of
the Legislature may be ascertained by considering, among other mat-
ters—(1) the occasion and -necessity for the law;. (2) the circum-
stances under which it was enacted; (3) the mischief to be remedied ;
- (4) the object to be attained; (5) the former law, if any, including
other faws upon the same or similar subjects; (6) the consequences
of a particular interpretation; (7) the contemporaneous legislative
history ; and (8) legislative and administrative interpretations of such
law.” This was so before the Act. See, e.g., Miles’s Estate, 272
-Pa. 329, 339 (1922), and Orlosky, Appellant v. Haskell, 304 Pa. 57,
66 (1931). See also Philadelphia, to Use, Apints. v. Phillips, 179 Pa.
Superior Ct. 87, 91 (1955), where the Court states that “The rules
of construction applicable to statutes are to be applied with equal force
and effect when construing an ordinance.” And see McCormick on
‘Evidence § 329 (1954).
6
4 preety D. 85a
sions of the City Councilmen at the public hearings, and in
the ‘Agreement of 1939, that there can be no reasonable
doubt about what should, and must, be their _—— by
this Court. |
C. Is either the Agreement of 1907 or the Agreement of
1939 void because of the rule against perpetuities? (Ques-
tions Presented, Question No. 1.) :
- 1. What is the period within which the City’s reserved
right of purchase must be exercised?
In advancing the argument that the Agreements of 1907 .
and 1939 are void because of the rule against. perpetuities,
PTC attacks only the City’s reserved right of purchase; it
does not question the validity of the other terms of the
Agreements.
The period within which the City’s reserved right of
purchase must be exercised has been stated above, in out-
lining the history of the Agreements of 1907 and 1939, but
for convenience it will be restated. Section Eleventh of
the-Agreement of 1907 provided that ‘‘The City reserves
the right to purchase all the property, leaseholds and fran-
chises of [PRT] . . upon July Ist, 1957, or upon the first
. day of any July thevenfied by serving six months notice. .
This contract shall continue in force until such right is exer-
cised....’? By Section 1(d) of the Agreement of 1939 this
was changed to provide that ‘‘The City reserves the right:
to purchase all the property, leaseholds and franchises
of [PTC] upon any first day of July hereafter, by serving
six months’ notice .... This contract shall continue in force
until such right is caaoal: - °
; The term of the City’s sight to purchase was, there- ~
fore, indefinite. Until the Agreement of 1939 the right
- could not be exercised before July 1, 1957, but it could be’
exercised ‘‘upon the first day of any July thereafter.’? By
86a" | Appendix D
the Agreement of 1939 this limitation was removed, and the
right could thereafter be exercised ‘‘upon any first day of
July.’? Both agreements emphasized that there was no
time limit upon the exercise of the right to purchase “w pro-
viding that the right should “continue in force until .
exercised....’’
Warthermore; Section Ninth of the Agreement of 1907
confirmed that the City’s right to purchase was without
time limit. By Section Ninth a sinking fund was created;
which the City could apply toward the price of PRT’s.
assets if the City exercised its right to purchase. The pay-
ments to the fund started on July 1, 1912, and continued for
four ten year terms, or until July 1, 1952, in increasing
amounts until they were at the rate of $25,000 a month.
Then, Section Ninth provided, the payments were to be
‘‘finally at the rate, of thirty thousand (30,000) dollars
monthly for the balance of the term of this contract.’? No
expression different from this could have been used. The
draftsmen could not have provided that the $30,000 pay-
ments should ‘‘continue until July 1, 1957,’’ for although
the City could, and: hence might, exercise its right to pur- -
chase then, it did not have to, and hence might not, for it
could exercise the right ‘‘upon the first day of any July’’
after July 1, 1957. Accordingly, the draftsmen were obliged
in Section Ninth to use the open-ended expression, ‘‘for the
balance of the term,’’ i.e., until whenever the City did exer-
cise its right to purchase. When the Agreement of 1939
was executed this indefinite term was confirmed, for-Section -
Ninth was not amended, and Section 3 of the Agreement of
1939 provided that ‘‘In all other repsects [i.e., other than
as amended by the Agreement of 1939] all the terms and
provisions of said contract made July 1, 1907 [i.e.. the.
Agreement of 1907)... . . shall remain in full force and
effect.”? — |
that
Appéendiza D 87a
_In subsequent agreements with PTC the City consist- .
ently preserved the term of its right to purchase as indefi- ©
nite, and it never agreed to any limitation on that term, ‘
although, as will appear, PTC asserted, unilaterally, for the
~ first time in July, 1962, that the term was not indefinite.
The first agreement between the City and PTC after the
Agreement of 1939 was executed on Oct
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