Opposition Brief — Philadelphia Co. v. Guggenheim

SRPPESTES Pee

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LE COPY

IN THE

Supreme Court of the United

Ocrosper TERM 1946

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>

IN THE MATTER OF PITTSBURGH RAILWAYS COMPANY,

Debtor.

No. 359

PHILADELPHIA COMPANY, Petitioner,

ves.

JULES GUGGENHEIM, et al.

No. 360

PHILADELPHIA COMPANY, Petitioner,

vs.

CITY OF PITTSBURGH.

No. 361

PHILADELPHIA COMPANY, Petitioner,

vs.

HORACB BAKER and JOHN A. BEATTIE, Protection Committee for

the Southern Traction Company 50 year First Mortgage and Collat-

eral Trust 5% Gold Bonds.

No. 362

MONONGAHELA STREET RAILWAY COMPANY and PITTSBURGH

AND BIRMINGHAM TRACTION COMPANY, Petitioners,

vs.

JULES GUGGENHEIM, et al.

No. 363

MONONGAHELA STREET RAILWAY COMPANY and PITTSBURGH

AND BIRMINGHAM TRACTION COMPANY, Petitioners,

ve.

CITY OF PITTSBURGH.

No. 364

MONONGAHELA STREET RAILWAY COMPANY and PITTSBURGH

AND BIRMINGHAM TRACTION COMPANY, Petitioners,

vs.

HORACE F. BAKER and JOHN A. BEATTIB, Protective Committee, etc.

BRIEF IN OPPOSITION TO PETITION FOR

CERTIORARI

ee

emeamienatelt aanemenneal

\ JOSEPH NEMEROV,

135 Broadway,

New York 6, N. Y.,

CHARLES B. PRICHARD,

Grant Building,

Pittsburgh 19, Pa.,

Attorneys for Jules Guggenheim, et al.

MAURICE J. DIX,

AARON SCHWARTZ,

Of the New York Bar

Of Counsel.

TABLE OF CONTENTS

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Pen onc iccccccccccnccccccccccscesececceses

Question Presented ..........ccccccccccccccccuecs

The FAM oc nnnccnnsaseccccccccsccescescucncans

The realistic decision of the Circuit Court was

plainly correct. The underliers’ juridical con-

ception was properly sacrificed for the reason

that only thus can we overcome a perversion

of the privilege to do business in the corporate

form. Unity of life of debtor and of all under-

liers effected an equitable merger and an equi-

table consolidation in the common undertak-

ing for a unified system of transportation.

The Circuit Court has not departed from the

accepted and usual course in holding that the

District Court has jurisdiction of, and a Reor-

ganization Plan may treat with, all under-

lier property, franchises and creditors (stock-

holders) thereof, without the filing or approv-

ing of separate reorganization petitions by or

UTES WI nnn cdi ccnncccuccencnncs

II. There is no conflict of decisions on the point

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III. The questions presented by petitioner are not

of sufficient importance to require review by

GED ND. Akh os ccnncccecenudacaeeenscaas

Conclusion

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1l

ii

Cases Cited:

Berkey v. Third Ave. Ry. Co., 244 N. Y. 84 at 85; re-

argument at 244 N. Y. 602 .............. waebanen 13, 15

Anderson v. Abbott, 312 U. S. 349 .......... 13, 15, 19, 22

Centmont v. Marsch, 1 Cir., 68 Fed. (2) 460 ........ 13

Davis v. Alexander, 269 U. S. 114, 70 L. ed. 186 .... 15

Southern Pacific vy. Lowe, 247 U. S. 330, 62 L. ed.

Cee C CU Esee hehe akGeb ne boas ah OES hECE SWE 15, 18

U. S. v. Reading Co., 253 U. S. 26, 64 L. ed. 760 .... 15

Chicago, ete. v. Minn. Civic, 247 U. S. 490, 62 L. ed.

ETT TES TORTIE CLIC CET OCTCTETE TTC T TC 15, 16

NORE RA SINS cats, SRS an a 15, 16

U. S. v. Delaware L. & W. R. Co., 238 U.S. 516 .... 15

Linn & Lane v. U. S., 236 U. 8S. 574;59 Lied. 725... 15, 16

U. 8. v. Lehigh Valley, 220 U. S. 257, 55 L. ed. 458 .. 15

Southern Pac. v. I. C. C., 219 U. 8S. 498, 55 L. ed. 310... 15, 16

McCaskill v. U. 8., 216 U. 8S. 504, 54 L. ed. 590 .... 15

Lehigh Valley Railroad vy. Delachesa, 2 Cir. 145, Fed.

iii

PAGE

New York Trust Co. v. Carpenter, 6 Cir. 20 Fed.

G88, GTB occ cece cece e cere eee eeeneees TT TTT 15

Mills v. Central R. R., 41 N. J. Equity 1 ......-+++-- 19

The St. Paul M. M. Ry. v. Western Union, 8 Cir. 118

Sad, BBE ccccccrncccesscesansvansce adveadoune 19

Black y. St. Louis S. F. R. Co., 118 Mo. App. 198;

BEB. We. OB onc ccccncccccccccsccnccccccvcccnes 19

Helvering v. Metropolitan Edison, 306 U. S. 522 .... 19

U. 8. v. Milwaukee R. T. Co., 142 Fed. 247 ......-. 20

Wabash Ry. v. American Refrigerator Transit (C. C.

A. 8) 7 Fed. (2) 385 20... eee cece eee eee eee eee 20

Westinghouse y. Allis Chalmers, 176 Fed. 362, 367... 19

Minnesota Mutual vy. McGirr, 8 Cir. 263 Fed. 847 .... 19

Second Ave. Co. v. United Traction Co.—Appeal of

Pittsburgh Railways, 328 Pa. 257; 195 Atl. 25 .... 21

Monongahela Street Railway Co. v. Philadelphia Com-

pany and Consolidated Traction Co., 350 Pa. 603 ;

39 Atl. (2) 902 ...... cece rece cece ee eeeeees 19, 21

Continental Ill. Nat. Bank & Trust Co. vy. Chicago

R. B., 204 U. 8. GAS 20... cece ewww cree eceee 22

Northern Securities v. U. S., 193 U. S. 197, 326; 48

L. edd. G79, COG 2... cece cee ec cee n cece cc enes 16

Luckenbach v. Grace, 4 Cir. 267 Fed. 676 .......... 16

iv

Palmer v. Massachusetts, 308 U. 8S. 79 ........... y

Wright v. Union Central, 311 U. 8. 273 ...... Acuna

Weiser v. Mursam, 2 Cir. 127 Fed. (2) 344 ........

Darling v. Young, 8 Cir. 121 Fed. (2) 112 ..........

Trustees System v. Payne, 3 Cir., 65 Fed. (2) 108 ...

Stone v. Eacho, 4 Cir. 127 Fed. (2) 284 ........ es

Simon v. Chambers, 5 Cir. 86 Fed. (2) 569 ........

Commerce Trust v. Woodbury, 8 Cir. 77 Fed. (2)

478 cert. denied 296 U. S. 614; 80 L. ed. 485 ......

Nelson v. Guaranty Trust, 9-Cir. 60 Fed. (2) 463 ..

Central v. Caldwell, 8 Cir. 58 Fed. (2) 721 ........

In re Eiler’s Music House, 9 Cir! 270 Fed. 915, cert.

Se Oe Ge hen wc cede cnn cussesieeens

In re Riegers, Kapner & Altmark, 157 Fed. 609 ....

In re Muncie Pulp Co., 2 Cir. 139 Fed. 546 cert.

denied, sub non Great Western vy. Oppenheimer,

ee Goa ee ES OA ls EE nc ccc an ewdbovensdvas

Allen v. Philadelphia, 3 Cir. 265 Fed. 817 ....../.

Cock v. Bailey, 146 Pa. 328: 23 Atl. 370 .....4....

Corn Exchange y. Klander, 129 Fed. (2) 894 ......

IN THE

Supreme Court of the United States

OcrToBER TERM 1946

=

—

IN THE MATTER OF PITTSBURGH RAILWAYS COMPANY,

Debtor.

No. 359

PHILADELPHIA COMPANY, Petitioner,

v8.

JULES GUGGENHEIM, et al.

No. 360

PHILADELPHIA COMPANY, Petitioner,

v8.

CITY OF PITTSBURGH.

No. 361

PHILADELPHIA COMPANY, Petitioner,

vs.

HORACE BAKER and JOHN A. BEATTIE, Protection Committee for

the Southern Traction Company 50 year First Mortgage and Collat-

eral Trust 5% Gold Bonds.

No. 362

MONONGAHELA STREET RAILWAY COMPANY and PITTSBURGH

AND BIRMINGHAM TRACTION COMPANY, Petitioners,

v8.

JULES GUGGENHEIM, et al.

No. 363 we

MONONGAHELA STREET RAILWAY COMPANY and PITTSBURGH

AND BIRMINGHAM TRACTION COMPANY, Petitioners,

vs.

CITY OF PITTSBURGH.

No. 364

MONONGAHELA STREET RAILWAY COMPANY and PITTSBURGH

AND BIRMINGHAM TRACTION COMPANY, Petitioners,

vs.

HORACE F. BAKER and JOHN A. BEATTIE, Protective Committee, etc.

a

>

BRIEF IN OPPOSITION TO PETITION FOR

CERTIORARI

Statement.

In this bankruptcy reorganization pending since 1938, the

petitions for certiorari are directed against a decision of

the Circuit Court. which. acting on a petition of the City

2

Statement.

of Pittsburgh, Pa., filed in the District Court in 1942,

pierced the conpernti veil of the various corporate units or

divisions of the system of transportation in Pittsburgh, Pa.,

unified for approximately half a century. The petitioners

contend that separate reorganization petitions (25 in num-

ber) should be filed by or against each underlier, which peti-

tioners refuse to do, although that is within their power,

The petitioners are: Philadelphia Company, parent of

debtor and of 36 divisions, called the 36 Philadelphia under-

liers; Monongahela, in which Philadelphia has a 24.7% in-

terest stock, and Pittsburgh & Birmingham, with their sub.

sidiaries. They are joined by Suburban, by Pittsburgh In-

cline and by South Side Passenger. Together they are called

the guaranteed underliers, 9 in number.

The District Court said that “The system should be re-

organized as a unit if it can legally be done”, acknowledged

that the “general purpose of the (City’s) petition was to

facilitate reorganization” and then dismissed the City’s

petition as recommended by the Special Master. The Dis-

trict Court’s opinion is reported at 60 Fed. Supp. 600.

Three separate appeals were taken to the Circuit Court:

No. 8964: Jules Guggenheim, et al. on behalf of our-

selves and all similarly situated Public Secu-

rity holders of debtor and of underliers,

No. 8967. City of Pittsburgh.

No. 8996. Horace F. Baker, et al., Debtor's Bondholder

Committee.

The three appeals were heard together. The Circuit Cou:t

unanimously reversed; its opinion is reported at 155 Fed.

(2) 477. No petition for rehearing was filed below.

W. D. George, a trustee of the debtor, petitioned the Cir-

cuit Court for clarification of its opinion. That petition,

3

Statement.

restating arguments in the Circuit Court made by the peti-

tioners and to this court was denied by the Cireuit Court.

The Transcript of Record accompanying the instant peti-

tions does not contain our opposition to the petition for

clarification in the Circuit Court.

The Circuit Court said (155 Fed. (2) 480, 482):

“A]l the various corporate units or divisions, by what-

ever name they are designated, are welded to the oper-

ating company, Pittsburgh Railways (the debtor) * * *”

“The community need for the operation of this public

transportation system as an integrated unit is clear”

(p. 480).

“Ags we see the question, the issue is whether the

demand of the facts is to control or whether obeisance

must be made to the doctrine of separate corporate

entities of these concerns, which from the business point

of view, constitute one operation and one enterprise”

(p. 482).

“Since 1938 this system has been in the federal court

and operated under trustees appointed by the court.

This state of affairs cannot continue indefinitely and

be utilized as a means of integration of a transporta-

tion system” (p. 480).

This, is but another chapter in the long history of vicissi-

tudes of this unified transportation system.

This is the second time, the debtor, with consent of its par-

ent, Philadelphia, invoked the shelter of the District Court

for the Western District of Pennsylvania. An episode of this

chapter, over six years old, is presented by this controversy

begun in 1942 by the City’s petition.

Sa BAe cae mon eat Pu SO i

4

The Underliers.

1913: The Master’s finding 391-416 treat with the man-

ner in which the instant parent petitioner, Vhiladelphia

Company, adjusted the deficit of debtor and underliers. New

securities were created, some of which came into the hands

of the investing public.

1918-1928: A consent equity receivership of debtor was

instituted and withdrawn by Philadelphia Company (ff.

453-46) .(@) Equity Receiver Fagan opposed lifting the re.

ceivership which had not effected any reorganization or any

adjustment of the financial difficulties (f. 470) (R. 718).

The other equity receiver did not oppose Philadelphia Com-

pany’s application to terminate the receivership (f. 470)

(R. 718). He was George, the debtor's present trustee (f.

470) (R. 718).

1938- ?: On May 10, 1938, debtor filed a voluntary

petition for reorganization under Section 77B of the Bank-

ruptcy Act (f. 1) (R. 613). On November 7, 1938, the

Chandler Act was made applicable.

The Underliers.

Philadelphia Company's classification of the underliers

is misleading (Phiadelphia petition, pp. 7-8). The under-

liers were not so classified by the Circuit Court (155 Fed.

(2) 479-480).

Some of these 49 underliers are linked to the debtor by

operating agreements that have been in effect since 1902.

Others are tied by long term lease agreements (155 Fed.

(2) 480).

36 Philadelphia underliers are directly or indirectly con-

trolled by the common parent, Philadelphia (Company,

(a) (“t” or “ff” followed by a numeral indicates the Master’s finding

having that number.)

5

_ Pleadings.

through stock majorities at various levels and interlocking

directorates of various degrees (155 Fed. (2) 480).

9 guaranteed underliers transferred their property and

franchises to the Philadelphia underliers in 1902 under 900

year lease device in consideration of the guarantee of such

leases by Philadelphia Company. The stock of these 9

guaranteed underliers is publicly controlled. Since the

reorganization Philadelphia Company infiltration has oc-

curred in Monongahela, Philadelphia Company owns 24.7%

of the petitioner guaranteed underlier Monongahela and

6.6% of the petitioner guaranteed underlier Suburban.

4 underliers transferred their property and franchises in

1896 to one of Philadelphia underliers under 950 year lease

device without any guaranty thereof. These 4 are called

unguaranteed underliers.

The facts lay bare, that, the issue is not one of jurisdic-

tion, but a contest between classes of creditors.

Pleadings.

The Trustee Reorganization Plan was systemwide. It

provides that petitions for reorganization would be filed,

not by all of the underlier companies but only by 25 com-

panies (R. 614).

Philadelphia underliers answer to a rule obtained by

Trustees, on the underliers and indenture trustees why each

underlier should not file a separate petition (f. 484) (R.

617), provided by Philadelphia Company, stated the condi-

tions under which the Philadelphia underliers would go

along. The “third condition” related to the guaranteed un-

derliers and required assurances satisfactory to Philadelphia

Company preserving any defenses it might assert in mitiga-

6

/ Pleadings.

tion of its annual liability of $516,422., exclusive of taxes

under Philadelphia Company’s guarantee (ff. 29, 32, 33, 489)

(R. 618, 619, 725).

Subsequently in October, 1942, The City of Pittsburgh

petitioned the District Court to exercise jurisdiction in

bankruptcy reorganization over all underliers of the debtor

—‘“to determine the rights and interests of all stockholders

and as creditors thereof” (155 Fed. (2) 479).

The guaranteed underliers moved to dismiss the City’s

petition. Each separately stated that each (City Appendix

pp. 92-98a incl.) :

“makes no claim in the proceedings on account of

dismantling, destroying, abandoning or wearing out by

use of trackage power and transmission equipment, car

barns or street cars * * *

“Philadelphia Company is a strong corporation finan-

cially and amply able to assume and perform its liability

under said guarante®”

“

The unguaranteed underliers conditionally joined in the

prayers of the City’s petition. The conditions were that

hearings be held for consideration of objections and amend-

ments to the Reorganization Plan and to determine the

relative substantation rights, priorities, liens, claims and

interests of all creditors and stockholders of debtors and of

underliers (ff. 891, 1018, 1078) (R. 804, 812, 832). No such

hearings were held. Subsequently we instituted and have

pending in the District Court, a proceeding to eliminate

Philadelphia Company participation in the benefits of Re-

organization Plan or to subordinate Philadelphia Company’s

asserted claims to the claim of Public Security holders (63

7

Question Presented.

Fed. Supp. 7; 64 Fed. 231). If we are successful and the

underlier separate corporate form is dishonored, every pub-

lic security holder of debtor and of all underliers will be

paid in full. The result would be full payment for the pub-

licly held guaranteed underlier stock instead of being wiped

out under the Trustees’ Reorganization Plan.

Separate petitions for each underlier is impossible with-

out Philadelphia Company’s consent (see its answer to

Trustee’s petition page 5 supra).

If, similarly, statutory consolidation or statutory merger

or any further conveyance or execution of any document

were required from any of the underliers that, likewise,

would be impossible without consent of the Philadelphia

Company which obviously cannot be had.

No hearings have been held on the reorganization plan.

It has not been submitted to security holders.

Question Presented.

Shall the demand of the facts control or must obeisance

be made to the doctrine of the separate corporate entities of

concerns which constitute one operation and one enterprise.

The Facts.

In 1902, the petitioner Philadelphia Company, brought

about the unification of debtor and underliers (ff. 89, 95, 98,

100) (R. 639, 640) and welded them into one system in such

fashion that a single route or a single passenger ride may

involve the use of a number of the underlying companies’

properties. Ascertainment of a proper apportionment of

8

The Facts.

the receipts of the system as a whole to the respective con-

tributions of the underlying companies’ properties is ob-

viously almost an impossible task.

The unified transportation system functioned through a

series of departments, all operated from one headquarters,

The general departments which have been in existence for

a great number of years, operate under the supervision of

common general executives for debtor and all underliers

(ff. 214) (R. 667). These general or joint departments in-

clude the Secretary’s office, the Treasurer's office, the Ac-

counting Department, the Adjustment Department, General

Purchasing Agent, Director or Personnel and Advertising

managers. The heads of these departments and certain of

their employees are joint employees, in that they do not de-

vote their time exclusively to the services of any one under-

lier or even one of Philadelphia Company's numerous en-

terprises (ff. 17, 214) (R. 667).

Four primary functions of the operating departments are

on a system basis (ff. 221) (R. 669). Before the commence-

ment of this reorganization, the Trustee Fitzgerald, formerly

of the Philadelphia Company, was General Manager of this

system. Under him were many departments and divisions,

including those which have charge of routes, schedules and

fares, operation of transportation, maintenance and _re-

newals; accounting for revenues and expenses; all these

functions have been performed on a system-wide basis in

about the same manner since 1902 (ff. 221) (R. 669).

The Directors of Traffic Promotion in the Commercial

Department has to do with the quantity and quality of

services furnished, questions of routing and fare rates, ex-

tensions and alterations of service and such matters as the

location of car stops and the erection of shelters. The heads

9

The Facts.

and staffs of the various divisions of the Commercial De-

partment are not concerned with and do not know of the

lines of demarcation between the underliers. In routing or

scheduling or fixing fare zones, no weight is given to the

original franchise locations of the underliers (ff. 222) (R.

669).

The group of men in charge of car house operations receive

the schedules from the Traffic Promotion Division, assign

men and cars to the routes on the schedule so prepared and

send out the cars manned and ready for operation (ff. 229)

(R. 669). Once these cars leave the barns, they are under

the control of the superintendent of road operations (ff. 230)

(R. 670).

The Chief Traffic Despatcher has charge of the entire oper-

ation of cars (ff. 237) (R. 671).

Maintenance and renewal of physical property of the

System, consisting of overhead lines, cars, buildings, bridges

and structures and under the charge of the Maintenance

and Construction Departments which have 903 employees,

exclusive of four supervisors, the General Superintendent

and the head of three divisions (ff. 240) (R. 672).

There is just one shop in existence since 1902. It is at

Homewood. It is here that the cars are inspected and

repaired. The others were closed (ff. 242, 248, 244) (R. 672,

673).

“The employees who maintain the property have no

knowledge of the underlier groups and franchises, * sailed

(244).

“In general, in performing any of the functions of

maintenance and operation of the system, the manage-

ment pays no attention to the underlying companies,

except in maintaining records of replacements, renewals

and retirements” (ff. 248) (R. 674).

10

The Facts.

Fares are co-mingled. The Treasury Department * * * >

counts the amount of cash and tokens so received and reports

such amounts by car houses to the anditors of receipts in

the Accounting Departments, another such general depart-

ment” (ff. 251). The Auditor of Receipts allocates to each

route a portion of the cash and total fares collected at the

car barn. “Thus, if one car house served ten routes and

each route had collected 1/10 the total number of fares

(regardless of what percentage was actually cash or in

tokens), then each route would receive, on allocation, 10%

of the total actual collections in the car house” (ff. 251) (R.

674).

“For general accounting purposes, however, all receipts

from passenger revenues are lumped as one item * * *”

(ff. 253) (R. 674).

“All expenditures are also accounted for on a system

wide basis except certain capital expenditures for under-

liers * * *” (ff. 254) (R. 674).

“The method of accounting does not reflect separately the

revenues or expenses of the underlying companies other

than inclines. No accounting whatever is maintained

of the receipts of the use or facility of any individual

underlier than the inclines or of the expenses with

respect to the sum of such facilities” (ff. 255) (R. 675).

11

SUMMARY OF ARGUMENT

I.

The realistic decision of the Circuit Court was plainly

correct. The underliers’ juridical conception was prop-

erly sacrificed for the reason that only thus can we

overcome a perversion of the privilege to do business

in the corporate form. Unity of life of debtor and of

all underliers effected an equitable merger and an

equitable consolidation in the common undertaking for

a unified system of transportation. The Circuit Court

has not departed from the accepted and usual course

in holding that the District Court has jurisdiction of,

and a Reorganization Plan may treat with, all underlier

property, franchises and creditors (stockholders) there-

of, without the filing or approving of separate reorgani-

zation petitions by or against underlier.

Il.

There is no conflict of decisions on the point in issue.

Ill.

The questions presented by petitioner are not of suf-

ficient importance to require review by this Court.

Argument.

I.

The realistic decision of the Circuit Court was plainly

correct. The underliers’ juridical conception was prop-

erly sacrificed for the reason that only thus can we

overcome a pervision of the privilege to do business in

——

12

Argument.

the corporate form. Unity of life of debtor and of all

underliers effected an equitable merger and an equita-

ble consolidation in the common undertaking for a

unified system of transportation. The Circuit Court has

not departed from the accepted and usual course in

holding that the District Court has jurisdiction of, and

a Reorganization Plan may treat with, all underlier prop-

erty, franchises and creditors (stockholders) thereof,

without the filing or approving of separate reorganiza-

tion petitions by or against underlier.

A Reorganization Court is the one in which an enterprise

may be brought with a view of having its difficulties ironed

out.

In order to expedite reorganization, the Bankruptcy Act’s

broad and general provisions suffice to confer upon the

District Court power appropriate to adjust property rights

in a debtor's estate to prevent a breaking up of an estab-

lished enterprise.

One trolley ride covers many different franchise segments

belonging to ten underliers. Other routes use the franchises

of thirteen different underliers.

The petitioners’ contention is as unreal as that of the

drayman’s team with each horse insisting he is separately

incorporated and is working under a written operating

agreement to pull the leased truck.

Petitioner Philadelphia is blowing hot and cold. If the

juridical conception of its 36 underliers is to be preserved,

each of these 36 underliers should have been an appellee

below and a petitioner here. Their battle is being waged by

Philadelphia in its name and not in theirs. Thus. Phila-

delphia and its underliers acquiesce in the disregard of the

separate form of the 36 Philadelphia underliers.

13

Argument.

In their motions to dismiss the City’s petition, the guaran-

teed underliers petitioners Monongahela (in which Phila-

delphia has stock interest) and Pittsburgh & Birmingham

acknowledged inability to repossess property contributed to

the common undertaking for a unified system of transporta-

tion, and state they rely on the outstanding guarantee of

Philadelphia Company (p. 6 supra). They do no business

except that connected with the receiving of money derived

from their connection with the unified system of transporta-

tion and the paying out of it to security holders. In the

Circuit Court the guaranteed underlier says:

“The Debtor has been engaged in the business of operat-

ing street railway properties. Monongahela and Bir-

mingham have not been engaged in that business since

1902” (Monongahela brief, p. 70).

With formal logic, they say, they do all the realistic acts

which a careful lawyer would advise a corporation to main-

tain its appearance of corporate individuality. Therefore,

they conclude, that the separate corporate form must be

honored. A difficulty with that conclusion is that “at times

unity is ascribed to parts which at least for many purposes

retain an independent life, for only thus can we overcome

a perversion of the privileges to do business in the corporate

form.” Cardozo, J., in Berkey v. Third Ave. Ry. Co., 244

N. Y. 84 at 85; reargument at 244 N. Y. 602. -inderson Vv.

Abbott, 312 U. 8. 349 and Centmont vy. Marsch, 1 Cir., 68

Fed. (2) 460 pierced the corporate veil after the separate

form had been honored in a former controversy. In the Ber-

key case, Judge Cardozo pointed out that the New York Pub-

lie Service Commission Law at Section 54 does not allow

one carrier to use the franchise of another. The Pennsyl-

14 ,

Argument,

vania statute is otherwise. The authority contained in the

Pennsylvania Traction Act upon which petitioner relies does

not require recognition of the form and disregard of the facts.

The Pennsylvania statute is not an insulator.

The evidence, at bar, is clear that, except for outstanding

Philadelphia guarantee (1) there has been a welding, as-

similation, merger of the properties of the debtor and of

underliers in a single enterprise. (2) The day to day

business of debtor and of each underlier was not kept sepa-

rate. (3) No formal barriers were maintained between the

debtor and each underlier. (4) Individuals functioned in-

discriminately for debtor and for all underliers. (5) Debtor

and all underliers were represented at and since 1902 func-

tioned as a single business enterprise with unity of life.

(6) Each of the underliers surrendered its rights under its

franchise to operate independent lines of transportation.

(7) Each corporation in the common undertaking became an

agent or instrumentality of the other to the debtor’s unified

system of transportation.

The Master’s fact findings establish :

(a) complete unity of life of debtor and underliers for

forty-three years—almost half a century;

(b) that the identity of the underliers was obliterated in

1902, since which time there has been this unified system of

transportation of debtor and of underliers;

(c) that when remitted to the tests of honesty and just-

ice, it is inequitable to disregard the substance and to honor

the separate form ;

(d) that sacrifice of the separate underliers’ form is es-

sential to defend and uphold the public interest and public

policy ;

15

Argument,

(e) that control over all underliers was so complete, in-

terference so obstructive that by the general rules of agency,

each corporation in the system was an agent of the other

in furtherance of the common enterprise—the unified system

of transportation.

In the light of these facts the Courts will not permit them-

selves to be blinded or deceived by mere form.

Anderson v. Abbott, 321 U. S. 349, 88 L. ed. 793;

Davis vy. Alexander, 269 U. 8. 114, 70 L. ed. 186;

Southern Pacific v. Lowe, 247 U. S. 330, 62 L. ed.

1142;

U. 8. v. Reading Co., 253 U. S. 26, 64 L. ed. 760;

Chicago, etc. v. Minn. Civic, 247 U. 8. 490, 62 L. ed.

1229 ;

Chicago, etc. v. Des Moines, 254 U. 8. 196, 65 L. ed.

219;

U. S. v. Delaware L. & W. R. Co., 238 U. 8. 516;

Linn & Lane v. U. S., 236 U. 8. 574; 59 L. ed. 725;

U. &. v. Lehigh Valley, 220 U. S. 257, 55 L. ed.

458 ;

Southern Pac. vy. I. C. C., 219 U. 8S. 498, 55 L. ed.

310;

McCaskill vy. U. S., 216 U. 8. 504, 54 L. ed. 590;

Lehigh Valley Railroad vy. Delachesa, 2 Cir. 145,

Fed. 617;

Lehigh v. duPont, 2 Cir. 128 Fed. 840.

The benefits of separate corporate existence may be de-

stroved in the absence of any stock ownership, upon appli-

cation of the rules of ageney (New York Trust Co. v. Car-

penter, 6 Cir. 250 Fed. 688, 673: Berkey Vv. Third Avenue,

244 N. Y. 84, 95). Monongahela and Pittsburgh and Bir-

mingham stress the time of their incorporation (p. 19).

16

Argument.

Prior incorporation is not an insulator in a group of

corporations engaged in a common undertaking. (Weiser

v. Mursam, 2 Cir. 127 Fed. (2) 344; Darling y. Young, 8 Cir.

121 Fed. (2) 112.)

The debtor was merely a facility, tool, part, segment,

agency and instrumentality of each underlier in the operation

of this comprehensive system of transportation (Compare

Linn & Lane y. U. S., 236 U. S. 574), precisely as if the

debtor has “built, owned and operated” the underliers and

their property (compare Northern Securities vy. U. S., 193

U. 8., 197, 326; 48 L. ed. 679, 696).

It is sheer sophistry to argue, that, because each underlier

is a separate legal entity, it is an independent carrier in the

conduct of its business free from the other underliers in

this system (Chicago, etc. v. Des Moines, 254 U. 8S. 196;

Chicago, etc. v. Minn., 247 U. S. 490). Southern Pacific v.

I. C. C., 219 U.S. 498, 521). Where, as here, the debtor and

the underliers carried on their common venture through

the medium of these underliers, it makes little difference

what such underliers may be called.

While most of the cases in which the Courts have pierced

the corporate veil involve a parent—subsidiary relationship

—the rule is no different where affiliates are involved.

~~

Weiser v. Mursam, 2 Cir. 127 Fed. (2d) 344;

Darling v. Young, 8 Cir. 121 Fed. (2d) 112;

Luckenbach vy. Grace, 4 Cir. 267 Fed. 676.

The same theories of jurisprudence—(1) Law of Agency,

(2) Principles of Equity, and (3) Doctrines of Public Pol-

icy—test the armor of every entity in a group of corpora-

tions, even when the challenge is made in equity receiver-

ship or in bankruptcy proceedings.

17

Argument.

Trustees System v. Payne, 3 Cir., 65 Fed. (2) 103;

Stone v. Eacho, 4 Cir. 127 Fed. (2) 284;

Simon v. Chambers, 5 Cir. 86 Fed. (2) 569;

Commerce Trust v. Woodbury, 8 Cir. T7 Fed. (2)

478 cert. denied 296 U. S. 614; 80 L. ed. 435;

Nelson v. Guaranty Trust, 9 Cir. 60 Fed. ¢(2) 463 ;

Central vy. Caldwell, 8 Cir. 58 Fed. (2) 721;

In re Eiler’s Music House, 9 Cir. 270 Fed. 915,

cert. denied, 257 U. 8. 646;

In re Riegers, Kapner & Altmark, 157 Fed. 609 ;

In re Muncie Pulp Co., 2 Cir. 139 Fed. 546 cert.

denied, sub non Great Western V. Oppenheimer,

202 U. S. 621; 50 L. ed. 1175.

As it was with these Siamese twins when they were well,

so it must be now that they are ill.

Disregarding that Bankruptcy Courts pierce the corpo-

rate veil to reach and administer property, petitioners argue

that the local Pennsylvania law requires the federal court

to honor form and to disregard substance. None of the cases

cited by petitioners sustain so absurd a contention.

The cases in the guaranteed underliers’ brief, pages 23-25,

do not support their contention that all property rights,

treatment of leases and conveyances, in bankruptcy pro-

ceedings are to be determined by application of state law.

These cases do no more than apply the bankruptcy rule,

that, unless the state law is satisfied, a lien is invalid

against the challenge of a trustee, and an innocent third

party. That does not arise at bar. tv piercing the corpo-

rate veil of the indenture (contracting) parties and their

privies, a merger is effected. (Cock v. Bailey, 146 Pa. 328:

93 Atl. 370 dealt with a union of obligor and obligees ).

Circuit Judge Goodrich, who was a member of the Circuit

Court majority in Corn Exchange V. Klander, 129 Fed. (2)

894, said at bar:

18

Argument.

“The Pennsylvania statutes do not, nor could they for-

bid or limit the jurisdiction of the federal bankruptcy

court.”

The unity of life of corporations engaged in a common

enterprise, as here, effects a merger of them, which is not

defeated by a lease between them giving to the one the opera-

tion and control of the other. In Southern Pacific v. Lowe,

247 U. S. 330, the Court struck down the armor of separate

existence of lessor and lessee and said:

“While the two companies were separate legal en-

tities, yet in fact, and for all practical purposes, they

were merged, the former being a part of the latter,

acting merely as its agent, and subject in. all things to

its proper direction and control.”

Allen vy. Philadelphia, 3 Cir. 265 Fed. 817, stated “that

leases for 900 years were, for operative purposes, to be

treated as practical ownership equivalent to ownership by

the operator’. The preference for a lease instead of a

statutory merger and consolidation might be termed psy-

chological rather than procedural.

Seven states provide for an appraisal of the shares of

dissenting stockholders of the lessor in precisely the same

manner as that appraisal is provided for in statutory

merger and consolidation. (>)

(b) Del. Rev. Code (1935) S 2178; Ind. Stat. Ann. (Burns 1935)

S 55-2515; Md. Ann. Code (Flack 1935) Art. 23 S 221; N. H.

Public Law (1942) Ch. 296 S 25; N. J. Rev. Stat. (1937) Title

48 Ch. 12 S 132: N. Y. R.R. Law § 161; Ohio General Code Ann.

S 8810-8812.

In other states including Conn., Idaho, Illinois, Missouri, Montana

and Virginia, there are provisions in the railroad statutes which

might give a dissenter the right to an appraisal. In some instances

where a railroad was organized under a special act, the act would

provide for the dissénting shareholders, sometimes those of the

lessee as well as those of the lessor. Boston & M. R.R. v. Graham,

179 Mass. 62; 60 N. E. 405 (1901).

19

Argument.

The essential idea in the leases and operating agreement

for joinder of underliers with the debtor, like instruments

in a merger and consolidation, is, that “lock, stock and bar-

rel” went from all underliers to the debtor (Mills v. Central

R. R., 41 N. J. Equity 1). The Courts have held that a

merger is effected by lease, in the absence of intercorporate

stock ownership or control. (The St. Paul M. M. Ry. Vv.

Western Union, 8 Cir. 118 Fed. 497; Black v. St. Louts

S. F. R. Co., 118 Mo. App. 198; 85 8. W. 96.) (None of the

cases cited at pp. 21-26 of Monongahela brief are to the con-

trary.) Equity supplies the gaps between strict legal rules

and the realism of modern business (Helvering V. Metropol-

itan Edison, 306 U. 8. 522). An equitable merger and an

equitable consolidation arises as a natural consequence of

the maxim “equity looks upon that as done which ought to be

done’ (c). The parties to the leases understood that the

underliers should go into a comatose condition.

A “court of equity may well look behind the corporate

screen—” (Westinghouse vy. Allis Chalmers, 176 Fed. 362,

367). “We are dealing here with realities not forms” (An-

derson v. Abbott, 321 U. 8. 349, 363; 88 L. ed. 793, 803). We

are here interested in things not in looks. We must apply

the motto: “Esse quam videre” ; “to be rather than to seem.”

Minnesota Mutual y. McGirr, 8 Cir. 263 Fed. 847, ad-

justed equities of parties to a transaction for which corpo-

rations should have been formed. The Court said (856) :

“The agreement between the parties is one that a court

of equity would not and could not specifically enforce,

but it is a case for equity to treat as having been done

that which ought to have been done.”

Monongahela and Pittsburgh € Birmingham say, page 18:

(c) Emmons Coal vy. Sir R. Ropner (3 Cir.), 31 Fed. (2) 948

affirming 17 Fed. (2) 386, cert. denied 280 U. S. 577; 74 L. ed.

628 was an action for demurrage charges as a condition of re-

leasing a cargo. The bond on which suit was brought was con-

sidered as given prior to release instead of after release.

20

Argument.

“The disregard of the corporate entities of Petitioners

would not result in their properties being vested in the

debtor; and the objective aimed at by the City, and,

apparently by the Circuit Court, would not be attained.”

As authority for this erroneous contention they cite U. 8.

v. Milwaukee R. T. Co., 142 Fed. 247. That case does not

so hold. In that case the United States applied to enjoin

the payment of alleged rebates on freight, not to the ship-

ping corporation, but to a transit company, as commissions

for obtaining the business. Piercing the corporate veil, the

Court held that the bill was not subject to demurrer in al-

leging that the Transit Company was controlled by the

managing agent of the Shipping Corporation. The Court

said, Sanborn, J. (p. 255) :

“Tf any rule can be laid down, in the present state of au-

thority, it is that a corporation will be looked upon as

a legal entity as a general rule, and until sufficient rea-

son to the contrary appears; but, when the notion of

legal entity is used to defeat public convenience, justify

wrong, protect fraud, or defend crime, the law will re-

gard the corporation as an association of persons.”

Judge Sanborn was a member of the unanimous court which

in Wabash Ry. v. American Refrigerator Transit (C. C. A.

8) 7 Fed. (2) 335 said at pages 343-344:

“There is no particular divinity surrounding the term

‘corporation’. The courts will look through the form

to get at the real intent of the association of indi-

viduals or corporations forming the organization, and,

if rights of third parties have not intervened, will give

effect to the real purpose of the organization in order to

promote square dealing and effectuate justice.”

21

Argument.

It is idle, for petitioners to say that disregard of the

separate corporate form will not attain the objectives aimed

at by the Circuit Court and by the City. Piercing the corpo-

rate veil effects a merger (see pp. 17-19 supra).

Quite apart from the fact that the Court did not test the

armor of the juridical conception in Second Ave. Co. Vv.

United Traction Co.—Appeal of Pittsburgh Railways, 328

Pa. 257; 195 Atl. 25 (Monongahela Petition p. 22) and

that case was decided shortly before the present reorganiza-

tion was begun, that case, as a precedent, is impaired by

the fact that was a family controversy of Philadelphia sub-

sidiaries and cannot be considered as a vigorously contested

adversary litigation.

In Monongahela Street Railway Co. v. Philadelphia Com-

pany and Consolidated Traction Co., 350 Pa. 603; 39 Atl.

(2) 902 at page 912: ‘“Monongahela—filed a bill of com-

plaint against Philadelphia for specific performance of the

covenant by Consolidated in the agreement of lease”. “As to

the guaranty of Philadelphia with respect to the covenant

to pay taxes; Philadelphia being a compensated surety any

doubt as to the meaning of the guaranties is to be resolved

against it” (916). That Court was not required and

did not attempt to determine the effect of the instrument

between the underliers.

If the separate corporate form is to be honored, then this

system must break up contrary to the public convenience

contemplated by the Pennsylvania Public Utility Commis-

sion. In Palmer vy. Massachusetts, 308 U. S. 79, this Court de-

clined to permit destruction of a public convenience that

had approval of the state regulatory body.

If we look to the spirit rather than to the letter, if we re-

gard the substance rather than the form, if we fix the judi-

Fi

22

Argument.

cial eye on essentials rather than incidentals, the debtor and

the underliers are one, without need for any further in-

struments or proceedings.

As a result of this coalescence of this unity of life for

about 50 years, it is as impossible to resurrect each under-

lier as it is to make again sand, stone, pebbles, cement and

water out of concrete. Each lost its separate identity.

The petitioners’ arguments that the underliers are still the

owners of the leased property rests on the legal construction

of the leases and operating agreements, and ignores the

equitable consequence of the merger and the consolidation

that has taken place.

The power of a Bankruptcy Court is not a rigid thing

narrowly circumscribed by the Bankruptcy Statute (Conti-

nental Ill. Nat. Bank & Trust Co. v. Chicago R. R., 294 U.S.

648).

The Bankruptcy Act should be liberally construed to ac-

complish the purpose for which it was enacted (Wright v.

Union Central, 311 U. 8S. 273).

The facts call for treatment of debtor and underliers

as one entity, with unity of life. The Circuit Court was

plainly correct in concluding that, with the exception of

Philadelphia Company’s guarantee, all of the underliers

property should be treated as if it were the property of the

debtor without any further conveyance, or any statory mer-

ger or consolidation and that the public security holders of

the underliers should be treated as creditors of the debtor.

“Tf the judicial power is helpless—then indeed it has be-

come a handy implement of high finance” (Anderson V.

Abbott, 321 U. S. 349 at p. 366.)

_—

Il.

There is no conflict of decisions on the point in issue.

Il.

The questions presented by petitioner are not of suf-

ficient importance to require review by this Court.

The extent, if any, to which Philadelphia shall benefit in

a fair and feasable reorganization plan, and how Philadel-

phia shall clear up its guarantee is not of importance to

burden this Court at this time.

CONCLUSION

It is respectfully submitted that the petitions for writs

of certiorari prayed for should be denied.

Respectfully submitted,

JOSEPH NEMEROV,

CHARLES B. PRICHARD,

Attorneys for Jules Guggenheim et al.

Maurice J. Drx,

AARON SCHWARTZ,

of the New York Bar

Of Counsel.