Opposition Brief — Philadelphia Co. v. Guggenheim

Preliminary statement-.--....-----------------------------

Opinions below- - - - - -------------------------------------

a

Question presented ------.--------------------------------

Statement........----.------------ +--+ 22+ +e o-oo ee

Formation of the system—The underliers_--_--..--------

Unitary character of the system__...-----..-------------

The system in reorganization—The guarantee problem- --

Argument-_----------------------------------------------

NN eT

CITATIONS

Cases:

American Surety Co. v. Sampsell, No. 142, Oct. Term, 1945.

Anderson v. Abbott, 321 U. S. 349_.....----------------

Central Republic Bank & Trust Co. v. Caldwell, 58 F. 2d 721-

Chicago, Milwaukee, St. P. & P. R. Co., Matter of, N. D.

Ill., E. Div., No. 60463, Order of Sept. 19, 1945,

IIE oo oink on een dcscnausubad bee hodeunnte

Columbia Ry., Gas & Electric Co. v. South Carolina, 27 F.

2d 52, affirming In re Columbia Ry., Gas & Electric Co.,

Commerce Trust Co. v. Woodbury, 77 F. 2d 478_..--------

Continental Illinois Nat’l Bank & Trust Co. v. Chicago,

aS Se ee ee ee ee

Corsicana National Bank v. Johnson, 251 U. S. 68--------

Duparquet Huot & Moneuse Co. v. Evans, 297 U. 8. 216...

Grafton Gas & Electric Light Co., In re, 253 Fed. 668__----

Group of Institutional Investors v. Chicago, Milwaukee, St. P.

Se Ne kg ee ee aera ere

Heiser v. Woodruff, No. 496, Oct. Term, 1945..-..-.----

SS Se ee eee

Irving Trust Co. v. Kaminsky, 22 F. Supp. 362__..-------

Isaacs v. Hobbs Tie & Timber Co., 282 U.S. 734_-.------

Monongahela Street Ry. Co. v. Philadelphia Company, et al.,

Es ee, OL it IO as woah ncawecessdebsaki wank

New York Trust Co. v. N. Y. & Greenwood Lake Ry. Co.,

No. 8943, 3rd circuit, July 17, 1946, amended July 23,

713197—46——_-1

A ee

II

Cases—Continued Page

Philadelphia Company v. Dipple, 312 U. 8. 168___-_-- 16, 32, 33

EUS VW SO; BN es Ti DO in on nhc nocmcccenenesene 26

Reconstruction Finance Corp. v. Denver & R. G. W. R. Co.,

Nos. 278-282, Oct. Term, 1945----.----------------- 27

Securities and Exchange Commission v. United Siates Realty

& Improvement Co., 310 U.S. 434_--_.--------------- 23

Smith v. Hoboken Railroad, Warehouse and S. S. Connecting

Co., decided April 29, 1946, No. 384, Oct. Term, 1945__ 22

Steclmen v. All Continent Company, 301 U. 8. 278___-_-_-. 25

Stone v. Eacho, 127 F. 2d 284, certiorari denied, 317 U. S.

ee aga eee ape ee aes ee am OER: Ae eeeee Speraey Sema 26

Trustees System Co. of Penna. v. Payne, 65 F. 2d 103__-_-. 26

Warren v. Palmer, 310 U. G. 138... .. ne cccn ccc. 31

Wright v. Union Central Life Ins. Co., 311 U. 8. 273_____- 27

Young v. The Higbee Company, 324 U. S. 204___________- 21

Statutes:

Bankruptcy Act, as Amended by the Act of March 3, 1933,

c. 204, 47 Stat. 1467, 1474, Sec. 77 (a) (11 U. S. C.

Minas decwisspesen ice seebei pecan skeen dino 30

Bankruptcy Act, as Amended by the Act of June 7, 1934,

ec: 7m Comber 11°. 6. 0, 207)... . cn ct 30, 31

Bankruptcy Act, as Amended by the Act of June 22, 1938,

c. 575, 52 Stat. 840:

OR. STEN Ws WB Rok Seip cdc dav csc cdcwanwccc 31

ee ee eR ee 23

Ry AEE SEE Be Re acces ecdusnecccus sueedeku 30

Sy RE See Ws Pt, OS oe any ck co ccw deen ccences 31

ee. SOO AEE Uh Wi Oe inna kdecucchscaccivcceusce 31

Rs ee RON Ws RO Rs ae onc kd aonpenden denen 17, 19

es Ee Ee Sos Se es cs ov bcuseae esecekencucedn 3t

Miscellaneous:

Byrne, The Foreclosure of Railroad Mortgages in the United

States Courts, in Some Legal Phases of Corporate Financing,

Reorganization and Regulation, 1917, p. 77__----------- 25

Cutcheon, An Examination of Devices Employed to Obviate

the Embarrassments to Reorganizations Created by the Boyd

Case, in 8 Lectures on Legal Topics (1931), p. 35_____- 25

2 Gerdes, Corporate Reorganizations (1936), pp. 1360-1365,

SP ckanncctinacsheeolncecen shbkckecbekencktac ses 30, 31

H. Rep. No. 1409, 75th Cong., Ist Sess., p. 37, et seg_-_- 23

Note, Insolvency as a Requisite to Piercing the Corporate

Fi, ee Ue Bk es Oe CD oe eden cca can occenns 33

S. Rep. 1916, 75th Cong., 3d Sess., p. 34___________--_-- 31

Swaine, Reorganization of Corporations: Certain Develop-

ments of the Last Decade, in 8 Lectures on Legal Topics

[REO Bre eein sp Sakeeeenseretekuses est ueamreee 25

Inthe Supreme Court of the Bnited States

OcTOBER TERM, 1946

In THE MATTER oF PirrssurcH Rattways Com-

PANY, DEBTOR

No. 359

PHILADELPHIA COMPANY, PETITIONER

Vv.

JULES GUGGENHEIM ET AL.

No. 360

PHILADELPHIA COMPANY, PETITIONER

Vv.

City oF PITTSBURGH

No. 361

PHILADELPHIA COMPANY, PETITIONER

v.

Horace F. BAKER AND JOHN A. BEATTIE, PROTEC-

TIVE COMMITTEE, ETC.

(1)

2

No. 362

MoNONGAHELA STREET Rarm.way COMPANY AND

PITTSBURGH AND BIRMINGHAM TRACTION Com-

PANY, PETITIONERS

Vv.

JULES GUGGENHEIM, ET AL.

No. 363

MoNONGAHELA STREET Ramway CoMPANY AND

PITTSBURGH AND BIRMINGHAM TRACTION Com-

PANY, PETITIONERS

Vv.

Crry or PIttsBuRGH

No. 364

MONONGAHELA STREET Ratmway COMPANY AND

PITTSBURGH AND BIRMINGHAM TRACTION Com-

PANY, PETITIONERS

v.

Horace F. BAKER AND JOHN A. BEATTIE, PROTEC-

TIVE COMMITTEE, ETC.

ON PETITIONS FOR WRITS OF CERTIORARI TO THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE THIRD

CIRCUIT

BRIEF FOR THE SECURITIES AND EXCHANGE

COMMISSION IN OPPOSITION

3

PRELIMINARY STATEMENT

The Securities and Exchange Commission, pur-

suant to Section 208 of the Bankruptcy Act (Act

of June 22, 1938, ¢. 575, § 1, 52 Stat. 894, 11

U. S. C. § 608), became a party to the proceed-

ings for the reorganization of Pittsburgh Rail-

ways Company, debtor, under Chapter X of the

Bankruptey Act in the District Court for the

Western District of Pennsylvania. The district

court, adopting a Special Master’s findings of

fact with immaterial modifications, and also his

conclusions of law, held that it lacked jurisdiction

to comprehend in the debtor’s reorganization

numerous so-called underlier corporations com-

prising integral parts of the debtor’s street rail-

way system. The Commission had taken a con-

trary view before the district court and was a

party to the appeals from its order. The cir-

cuit court reversed, holding that the necessary

jurisdiction existed.

OPINIONS BELOW

The opinion of the circuit court of appeals

(R. 939-952) is reported at 155 F. (2d) 477.

The opinion of the district court (R. 133a—-151a)

is reported at 60 F. Supp. 600.

JURISDICTION

The judgments of the circuit court of appeals

were entered May 7, 1946 (R. 952-954). <A peti-

tion for clarification of opinion was denied June

3

28, 1946 (R. 955-964, 970). Petitions for writs

of certiorari were filed August 5, 1946. Juris-

diction of this Court is invoked under Section

240 (a) of the Judicial Code, as amended by the

Act of February 13, 1925, ¢. 229, §1, 43 Stat.

938, 28 U.S. C. § 347.

QUESTION PRESENTED

Whether a reorganization court for the debtor,

which operates an inextricably integrated urban

traction system comprising its properties and

those of forty-nine ‘‘underlier’’ corporations, can

assert jurisdiction over such corporations and

their properties for the purpose of entertaining

a plan of reorganization comprehending the en-

tire system, where the properties in question are

in the custody of the court, where the functional

unity of the system as well as the public interest

prevents its dismemberment, where the under-

liers’ right to repossession under their leases

and operating agreements is therefore purely

theoretical, where the bulk of the underliers are

insolvent, and where no feasible alternative ap-

pears to a system-wide reorganization.

STATEMENT

In the view of the Commission, the determination

of the question of jurisdiction depends wholly

upon the unusual factual situation the case pre-

sents. It is impracticable to present here all the

details and complexities confronting the courts

5

below; accordingly we confine our statement to

the facts that are important to an understanding

of the Commission’s position. Basic to its views

is the finding that the assets comprising the debt-

or’s street railway system have for nearly half

a century been operated as an inseparable eco-

nomic and physical unit (R. 951).

Formation of the system—The underliers

The present system came into being in 1902,

when several transit groups operating in Pitts-

burgh were amalgamated by Philadelphia Com-

pany, petitioner in Nos. 359-361, into one unified

system operated by the debtor, which it controlled

(R. 639, I1 91-92"). This was the culmination

of a process of integration which, assertedly pur-

suant to Pennsylvania statutes authorizing street

railway unification,’ had been under way previ-

ously and in which Philadelphia Company par-

ticipated (R. 632-638, 1161-82). The 1902 uni-

fication took the form of (1) long-term leases

from several underliers to Consolidated Traction

Company and United Traction Company of Pitts-

burgh (both being underliers whose stocks were

controlled by Philadelphia Company and both

already lessees of numerous other underliers) (R.

* Paragraph references are to the Special Master’s Report

(R. 604-837) on the petition of the City of Pittsburgh (R.

40a-83a) to assert jurisdiction over the underliers. A sum-

mary of the facts found by the Special Master appears in

his report at R. 806-814, ¢§ 1001-1026.

* See statutes cited at R. 948, n. 11, 12; R. 826-828, | 1072.

=

634-635, 1 68; R. 637-639, I1 75-78, 92) and (2)

so-called short-term operating agreements author-

izing the debtor to operate the properties owned

by or leased to United and Consolidated.

The system at present contains 49 underliers

over which jurisdiction was asserted.’ Of these,

36 are controlled by the debtor by 100% or ma-

jority stock ownership, or are its affiliates through

similar stock ownership by Philadelphia Com-

pany, the debtor’s parent (R. 806, 11001). These

36 are referred to as ‘‘Philadelphia Underliers.”’

The stocks of the thirteen other underliers, while

largely held by the public (td.), are in part

owned by Philadelphia Company (R. 618, 126),

and these underliers are in addition linked to the

debtor by physical and contractual ties. Of the

13, nine (4 companies, one having stock control

_over 5 others, R. 794-803, 11 831-876; R. 538a-

539a) are the so-called ‘‘Guaranteed Underliers,”’ *

whose leases were guaranteed by Philadelphia

Company.

These guarantees resulted from a contract, en-

tered into as part of the 1902 unification, be-

tween Philadelphia Company and A. W. Mellon,

then in control of Pittsburgh & Birmingham Trac-

* The underliers are listed at R, 77a-80a, and tables and

charts of their intercorporate relations appear at R. 81a,

82a, 538a, 539a, 584, 650-651, and 846. In addition to the 49

underliers there are 3 others over which jurisdiction was not

sought (R. 547).

“ One other Guaranteed Underlier, Mount Oliver Incline

Railway Co., is not included in the total of nine. It is one

of the three underliers over which jurisdiction was not sought.

7

tion Company and Monongahela Street Railway

Company. Pursuant to the contract, the two Mel-

lon companies executed 900-year leases of their

properties* to United and Consolidated, respec-

tively, while a third company, Suburban Rapid

Transit Railway, executed a similar lease of its

properties to Consolidated (R. 639-643, 11 91-

122). These leases imposed upon United and

Consolidated the obligation, inter alia, to pay as

rentals to the lessor companies sums ‘available

for dividends” on their stocks, to pay the lessor

companies’ taxes, to meet their interest payments

and to ‘unite’? in meeting their maturities (R.

889-892, 906, 908, 926, 928). These lease ob-

ligations were undertaken by the debtor pursuant

to its contemporaneous operating agreements with

United and Consolidated (R. 654, 655, T1164,

166). Performance by the lessees under the three

leases was guaranteed by Philadelphia Company

(R. 900, 909, 936). The principal companies

among the nine Guaranteed Underliers are the peti-

tioners in Nos. 362-364.

The four remaining companies, whose stock is

publicly held and whose contractual ties with the

debtor lack Philadelphia Company’s guarantee (R.

804-806, TT 891-901), are called “‘Unguaranteed

Underliers.”’

‘The properties of Pittsburgh & Birmingham comprised

leasehold interests conveyed by its five stock-owned com-

panies and one other lessor company (R. 798, { 851, R.

902-905).

713197 —46——2

8

The foregoing three groups of underliers, to-

gether with the debtor and some other companies

not here involved, comprise the present system.

Unitary character of the system

The properties of the debtor and the underliers

are operated by the debtor through a complicated

series of direct and indirect leases, assignments

and operating agreements (R. 648-653, 1158).

Since the 1902 amalgamation, operations have

been conducted on a unified basis, and with a

commingling of the properties of the debtor and

the individual underliers and a disregard of the

corporate entities of most if not all of them.

The system is centrally administered (R. 667-

669, 11 214-219). Routes, schedules, fares, trans-

portation, maintenance and renewals, and account-

ing for revenues and expenses are performed on

a system-wide basis, with no concern for the

underliers (R. 669-675, 11 221-255; R. 540a). As

the court below observed (R. 945-946) :

* * * the system operates as a_ unit.

This is more clearly demonstrated when a

few particulars are given. For instance,

one trolley route covers thirty different

franchise segments belonging to ten under-

liers. Other routes use the franchises of

thirteen different underliers. Operating

employees know nothing about the separate

i

9

underlying companies and neither does the

travelling public. All receipts are put in

a common pot.

Underliers’ assets have been commingled and

disposed of in accordance with system needs.

Under the debtor’s control of the system, numer-

ous stretches of underliers’ franchised track were

abandoned (R. 730-733, 1515), and reconstitution

of the lines of the pre-1902 operating companies

is either impossible (R. 795, 799, 11834, 852) or

would require extremely impracticable rearrange-

ment of trackage rights (e. g., R. 758-770, 11 671-

702). In 1902 the underliers owned nearly 1,300

cars; only 32 of these remain, none in passenger

service (R. 729-730, 1514), and title to the 1,000

passenger cars now in use has been taken in the

name of the debtor, whose property they are

presumed to be (R. 754, 739, 11633, 541).

Power properties and carhouses belonging to un-

derliers in 1902 have been dismantled, razed or

sold (R. 727-729, 11 512, 513; R. 733-738, 11 517,

521-529) ; those remaining are put to the serv-

ice of system needs rather than to the use of the

underlier having record title to them (R. 738,

745, 11525, 572). Separate repair shops have

been closed, the system now utilizing one central

shop (R. 756, 11 651-652), located on the lines

of an underlier (R. 406a-408a).

10

During the 40-odd years of the system’s con-

trol by the debtor, much if not all of the under-

liers’ physical properties has been retired from

use and has been replaced by the debtor. In a

registration statement filed with the Securities

and Exchange Commission in 1941, Philadelphia

Company, after a brief inventory of the system’s

assets, stated (R. 466a) :

Very little, if any, of the above enumer-

ated property, other than land and build-

ings, was in existence at the time the Pitts-

burgh Railways System was unified in

1901 through leases, operating agreements

and stock ownership. Most of it repre-

sents replacements and betterments either

in respect of property in existence at that

time, or as is more frequently the case, in

respect of replacements to or betterments

of such property. An accurate determina-

tion of what corporation in the system now

has title to particular units of property,

such as cars, tracks and overhead struc-

tures, would, in many instances, be most

difficult and might involve recourse to the

courts, and no attempt is made herein to

allocate such property to the several corpo-

rations which comprise the system.

The treatment of the Guaranteed Underliers’

properties in the unified operation was identical

with that accorded the assets of the other under-

liers. The commingling, abandonment, disposal,

11

alteration and replacement of system property

have applied equally to the Guaranteed Underliers.°

Thus, none of these companies has kept any

records of its properties since 1902 (R. 795-796,

: 800, 803, Il 836, 838, 859, 872-873). Two officers of

| Suburban expressly admitted that they could not at

| present identify its properties (R. 523a-527a,

| 535a-537a). An officer of Monongahela, Pitts-

, burgh & Birmingham and the latter’s subsidiaries

made a similar admission as to properties other

than real estate, franchises and rights of way

(R. 505a-508a). The president of Pittsburgh In-

cline Plane Co., another Guaranteed Underlier,

was not sure of what its properties consisted, or

when they were electrified, or whether its lease

gave it an absolute right to the electrical equip-

ment installed since the date of the lease (R.

535a-536a). The officers of these companies be-

* Alteration of routes, R. 762-763, 795, 799, §§ 692 (3),

834, 852.

Abandonment of track, R. 762, 795, §§ 692 (2), 834.

Disposal of real estate, R. 795, 798, J§ 834, 849.

Sale of power plants, R. 727, 800, F 512, 858.

Dismantling and disposal of car barns, R. 728-729, § 513.

Replacement of original track and overhead, R. 508a-

510a; R. 798, § 848.

Relocation of original poles and feeder wires, R. 510a-

5lla; R. 798, § 848.

Abandonment of bridges, R. 798, § 848.

Scrapping of original rolling stock, R. 795, 796, 798, 799,

"4 834, 838, 848, 851, 856.

See generally, R. 733-737, § 517.

12

lieve a continuation of unified operation desirable,

have not contemplated withdrawal of their prop-

erties from the system, and have no plans to

resume separate operation (R. 383a—400a; R. 796-

797, 801-802, 803, 11 841, 863-864, 876). The

Special Master found that separate operation of

the Guaranteed Underliers was ‘‘not a very prac-

ticable proposition”? (R. 803, 1 880). It is incon-

ceivable in any case that they could undertake

independent public service.

Since 1902 these companies’ only business has

been the receipt of rentals and other income

under their leases and the disbursement of bond

interest and dividends (R. 185a, 187a, 191a; R. 795,

798, 11833, 847). Irrespective of the insolvency

of the debtor’s street railway system as a whole,

they are concerned only with the revenues they

derive from the “‘beautiful guarantee of the Phila-

delphia Company” (R. 393a, 397a, 797, 802, 11 842,

864-865). They have acquiesced in the amalga-

mation of their properties into a single system

from which they cannot withdraw.

The unitary character of the system is further

indicated by various factors concerning the debtor

and the Philadelphia Underliers evidencing the

disregard of their separate corporate entities.

Among other points may be noted a thorough

interlocking of the officers and directors of the

debtor and these underliers with their common

parent, Philadelphia Company (R. 698-700,

T1 382-390); various adjustments of operating

13

deficits through intercorporate loans, security

transfers and other devices (R. 704-706, 720-724,

{1 405-416, 474-482) ; the payment of dividends to

Philadelphia Company simultaneously with the

taking of loans from it (R. 702, 720, 11395,

474-475) ; and the lack of books or the mainte-

nance of only skeleton books by various underliers

(R. 678, 1 283; ef. R. 301a). While numerous leases

contained provisions specifying whether or not a

lessor underlier was chargeable by its lessee for

capital expenditures on the lessor’s lines (R. 690-

695, 1 344-355), the provisions were in practice

not observed (R. 690, 810, 11344, 1011), result-

ing at present in the virtual unascertainability of

sums owing the underliers or the debtor on ac-

count of such expenditures (R. 575-576; cf. R.

689, 697-698, I1 339, 366). Accounting for capi-

tal expenditures subsequent to 1924 was admitted

by Philadelphia Company’s expert accounting

witness to be ‘‘largely a matter of convenience in

bookkeeping’’ (R. 332a). There were other ac-

counting practices which were inconsistent with

the status of the debtor and the Philadelphia

Underliers as independent entities (R. 698,

11 367-370).

The system in reorganization—T he guarantee

problem

Almost since its inception the enterprise has

had repeated and mounting deficits because of

its crushing burden of fixed charges (R. 701,

14

1391). Neither minor palliatives nor efforts at

major adjustments, including an equity receiver-

ship in 1918-24 (which, however, failed to modify

the debtor’s obligations appreciably, R. 718-719,

Ii 470-471), proved availing. On May 10, 1938, at

the instance of Philadelphia Company (R. 724,

{1 483), the debtor filed a voluntary petition for

reorganization in which it stated:

A financial reorganization of the Debtor

is imperative to the end that its street rail-

way system may be continued as a unified

system of transportation and the Debtor

may continue to render adequate public

service. [Not in printed record. ]

Since that time the entire system has been in the

custody of the court, the trustees continuing the

system’s operation on its unified basis (R. 58a;

R. 675, 11 256-262). They have since neither af-

firmed nor disaffirmed the debtor’s leases and

operating agreements and have made no payments

to the underliers for use and occupancy or on the

debtor’s lease or contract liabilities.

The two types of the debtor’s obligations should

be distinguished—interest requirements on the

debtor’s own outstanding securities, and fixed

charges imposed upon the debtor by its under-

takings pursuant to the leases and operating

agreements running to it. As of May 10, 1938

the annual requirements on the debtor’s out-

—

standing securities (other than car trust bonds)

were as follows :“

15

Bonds and collateral notes_----------------------------- $424, 032

Interest on demand notes, approximately.---------------- 500, 000

Total, approximately------- 924, 082

As of the same date the annual fixed charges of

the debtor pursuant to its leases and operating

agreements (other than securities intercom-

pany owned) were nearly thi8 times this amount,

as follows:

Rentals to underliers_.....------- Lice a daenaionen anal $829, 775

Interest on underliers’ bonds__-- 1, 516, 645

Interest on underliers’ demand notes, approximately_-_--- 100, 000

Total, approximately--_-_--- " 2, 446, 420

Of this sum of $2,446,420, the amount of $898,-

920’ is an annual charge payable by the debtor

to the Guaranteed Underliers (R. 585-588, Com-

«The figures in this and the following table have been

compiled from R. 585-588.

* The court below put the sum so owing at “half a million

dollars a year plus taxes” (R. 951). It presumably arrived

at this figure from R. 619, { 32, which states that “In 1941,

the net amount paid out by Philadelphia Company under

the guaranteed leases was $467,413.52”, exclusive of taxes.

This, however, was a net figure, and did not include pay-

ments of rentals available for dividends on stocks of the

} Guaranteed Underliers or interest on their bonds held by

Philadelphia Company itself, (id. ef. R. 721-722, { 480). On

such stocks and bonds it would be unnecessary for Philadel-

phia Company as guarantor to make a circuitous payment to

itself, but the debtor was nevertheless obligated on them

under operating agreements to which it was a party.

713197—46—8

7

16

panies Nos. 29-36, 42, 45), in addition to those

companies’ taxes.*

The existence of the guaranteed leases is as-

signed as a principal reason for the impasse in

the reorganization which has been pending for

eight years.

Asked in hearings before the Special Master

why Philadelphia Company, after bringing the

system into the custody of the court, objected to

the inclusion of the underliers in the reorganiza-

tion, its senior vice-president and general counsel

(R. 156a) gave two reasons. First, he stated, the

company was charged with wrongdoing in the

petition of the City of Pittsburgh initiating the

present proceeding, and it felt obliged to resist

(R. 727, 1510).° Secondly, he gave it as his legal

opinion that if the leases guaranteed by Phila-

delphia Company were to be terminated or de-

stroyed by operation of law, without the partici-

pation or acquiescence of Philadelphia Company,

the guaranteed lessors would be limited to the

® While under Philadelphia Company v. Dipple, 312 U.S.

168, the trustees have not paid the taxes owed by the under-

liers, the liability of the debtor for such taxes, including those

owed by the Guaranteed Underliers, cannot be disputed. Cf.

Monongahela Street Ry. Co. v. Philadelphia Company, et al.,

350 Pa. 603, 39 A. 2d 909, which held Philadelphia Company

liable as guarantor for taxes owed by a Guaranteed Under-

lier. See R. 796, 800-801, % 840, 861, 862.

*It should be noted, however, that Philadelphia Com-

pany opposed the inclusion of the underliers even prior to

the City’s petition (R. 724-726, 9€ 484-490).

17

assertion of a claim for damages not exceeding

three years’ rent (apparently under Section 202 of

Chapter X, 11 U. S. C. § 602), and the liability

of Philadelphia Company as guarantor would be

limited correspondingly. This limitation, he

feared, would not be available if Philadelphia

Company could be successfully charged with hav-

ing aided or acquiesced in the termination of the

leases (R. 726, 1 491), which would presumably

be possible if jurisdiction were held to encompass

the underliers. In preference to its aiding a sys-

temwide plan, therefore, Philadelphia Company,

continuing the payments on its guarantees, has

refused to place its underliers in reorganiza-

tion voluntarily,” except on obviously impossible

‘conditions (R. 724-726, 1487-490), and has

opposed systemwide jurisdiction. Its guarantee

obligations have thus forced it to insist upon a

position not only. contrary to its understanding of

reorganization practicalities but contrary to what

it considers its own self-interest. Presumably,

the reason for its objections to systemwide juris-

diction would be removed if such jurisdiction is

imposed despite its best efforts to the contrary.

The Guaranteed Underliers, for their part, are

presumably unwilling to litigate the extent of

Philadelphia Company’s liability on the guaran-

1° The underliers’ matured and unpaid bond issues are

largely held 100% by Philadelphia Company or by the debtor

(R. 539a; R. 629-631, § 54; R. 721-724, [¥ 480-482).

18

tees any earlier than is essential.. While the

Philadelphia and Unguaranteed Underliers with

debt securities outstanding have been found in-

solvent (R. 631, 1155-56), and while, as to the

Guaranteed Underliers, there is reason to believe

that, were they dependent for their income solely

upon their contribution to system earnings, they

would also be insolvent, their solvency has been

maintained by reason of Philadelphia Com-

pany’s payments on its guarantees, and the Spe-

cial Master found no insolvency as to them (R.

631, 157). They have denied the jurisdiction

of the reorganization court over them.

With the reorganization thus deadlocked and

in the unique situation presented by the fore-

going combination of facts, the assertion of juris-

diction over the whole economic entity was the |

sole possible method for solving its interrelated

financial problems.

ARGUMENT

The question presented arises out of the de-

cision below that a reorganization court has the

power, for plan purposes, to encompass corpo-

rations whose properties and economy are so

inextricably commingled with those of the debtor

in a single public utility operating unit, as to

make their inclusion essential if the reorganiza-

tion process is to be effective. While the funda-

mental question regarding the scope and flexibil-

»

19

ity of the Chapter X process in dealing with com-

plex and relatively unique economic enterprises

is important in the administration of the Bank-

ruptey Act, the precise issue here is not likely to

be recurring, and since the holding below was

clearly correct and no conflict of decisions is in-

volved, it is our position that there is no occasion

for further review.

1. A limitation of jurisdiction to the debtor

alone would be useless as a means of achieving a

reorganization. The debtor’s fixed charges con-

sist in only a minor degree of obligations on its

own outstanding securities. The bulk of them,

as we have shown, consist of rentals to underliers

and liabilities on underliers’ securities. These

were assumed by the debtor pursuant to only

seven leases and operating agreements running

directly to it (R. 653-654, 11161-163); other

ieases and agreements binding the debtor’s system

together run to various underliers, primarily

United and Consolidated (R. 650-651). The re-

organization process as applied to the debtor

alone provides the means for the debtor’s re-

jecting its seven undertakings, Bankruptcy Act,

§ 202, 11 U. S. C. § 602, but it provides no man-

datory means for effecting their modification.

So long as the court limits its authority to the

debtor alone, modification of these contracts can

be achieved only by the voluntary negotiation by

the debtor and its seven contracting underliers of

20

new agreements on lower terms. The negotia-

tions between the debtor and these mediate under-

liers, however, would require that such underliers,

in turn, have some means of modifying their ob-

ligations to further lessor underliers and security

holders. Efforts at voluntary negotiations would

inevitably meet the resistance of hold-outs among

security holders or lessor companies." To bind

dissenters, underlier companies in successive tiers

would have to enter separate reorganization pro-

ceedings. Assuming this could be done without

Philadelphia Company’s assistance, which is

doubtful, supra, n. 10, each such reorganization

would be conducted with a wary eye watching the

progress of all the others. Since the modification

of each lease would be based upon a practical ree-

ognition of the inability of the debtor to meet

existing rental charges, no single lessor could

afford to accept a new lease at lower rental ex-

cept in consideration of the simultaneous reduc-

tion of rentals on each of the other leases. For

if the acknowledged objective of all the proceed-

ings would be the continuation of the unified sys-

tem on the basis of reduced intercompany obliga-

tions, each underlier and each _ securityholder

would resist being subject to what it or he re-

garded as a disproportionately large cut (cf. R.

34a-35a). However, ‘“‘one of the prime purposes

" (’'f, R. 37a-39a.

21

of the bankruptcy law has been to bring about a

ratable distribution among creditors of a bank-

rupt’s assets; to protect the creditors from one

another.”” Young v. The Higbee Company, 324

U. S. 204, at 210. A reorganization court should

not subject securityholders to so doubtful a rem-

edy as voluntary negotiations thus conducted,

whose results depend on bargaining skill rather

than a genuine attempt to ascertain values, and

which can only generate pressures towards a

larger and larger over-all capitalization.

Any alternative procedure which contains as

one of its elements the separation of an important

underlier’s properties from the system must con-

template its separate operation as a working pos-

sibility. Since no such possibility exists,” any

such alternative is obviously unfeasible. The

trustee’s power to reject the debtor’s leases and

2 Cf. the opinion of the court below (R. 941-942) :

«* * * During the argument some suggestion was made

by certain of the appellees that separate operation of certain

of the underlying systems was physically possible. We do

not doubt that fact. A trolley company with a franchise en-

titling it to run its cars on two city blocks may physically

travel up and down that route. But nobody would contend

that this kind of arrangement gave the type of public trans-

portation service that a modern community needs. So here,

even though some of the underlying companies have fran-

chises for routes of very considerable distance and could, in

some instances, get patrons into the center of town under

their own separate systems, it is not seriously claimed that this

method of operation would adequately meet community re-

quirements.”

an

22

agreements is therefore purely theoretical. So is

his power to submit to a vote of security holders

a genuine choice between their acceptance of a

lease on luwer terms or withdrawal.“ The under-

liers and their security holders are similarly lim-

ited by the meaninglessness, on the facts here, of

their theoretical right to repossession, and by the

undoubted power of the reorganization court to

preserve the unity of the system in the public

interest. Their ability to compel the trustee to

choose between affirmance and disaffirmance is

therefore highly dubious, and so is their right to

declare a forfeiture, assuming that such right

exists at all without approval of the appropriate

regulatory agency or perhaps the court. Smith

v. Hoboken Railroad, Warehouse and S. S. Con-

necting Co., decided April 29, 1946, No. 384,

Oct. Term, 1945. It is significant on these points

that, notwithstanding the fact, noted above, that

neither payments of rent nor of use and occu-

pancy have been made to the underliers since

the inception of the reorganization and that the

several leases and operating agreements have

#8 Such a set of alternatives, successfully presented to the

Terre Haute security holders after this Court’s decision in

Group of Institutional Investors v. Chicago, Milwaukee, St.

P. & P. R. Co., 318 U. S. 523, see order of Sept. 19, 1945, in

Matter of Chicago, Milwaukee, St. P. & P. R. Co., N. D. Il,

E. Div., No. 60463, unreported, on its face implies that with-

drawal of a company’s properties from the system is physi-

cally and economically practicable.

23

been neither affirmed nor disaffirmed, no effort

has been made by anyone to declare a forfeiture,

to demand use and occupancy payments, or to

compel an election by the trustee.

Other alternatives are equally unpromising.

Straight bankruptey proceedings are probably

barred by statute to the debtor and the other

system companies, because of the public interest

in maintaining intact an operating public utility.“

Dismissal of the Chapter X proceedings would

invite the institution of individual actions seek-

ing judgment or mortgage foreclosure. The

consequent threat of the system’s dismember-

ment would warrant a receivership. But apart

from the fact that receivership proceedings are

subject to the very vices and deficiencies that

reorganization in bankruptcy was designed to

remedy,” the receivership court would inevitably

be confronted with the necessity in the public

interest of exercising unitary jurisdiction over

the entire system. With all its practical disad-

* Bankruptcy Act, § 4a, 11 U. S. C. § 22 (a); Columbia

Ry., Gas & Electric Co. v. South Carolina, 27 F. 2d 52 (C.

C. A. 4), affirming /n re Columbia Ry., Gas & Electric Co.,

24 F. 2d 828 (E. D. S. C.); but cf. Jn re Grafton Gas &

Electric Light Co., 253 Fed. 668 (N. D. W. Va.).

*H. Rep. No. 1409, 75th Cong., Ist Sess., p. 37 e¢ seq.;

Duparquet Huot & Moneuse Co. v. Evans, 297 U. S. 216,

218-219; Securities and Exchange Commission v. United

States Realty & Improvement Co., 310 U. S. 434, 448-450.

24

vantages, this procedure would still leave the

court with the same legal problem which confronts

it in this case; namely, whether it possessed the

power to effectuate a reorganization plan for the

entire system.

The court below, unwilling to permit the debtor

and the underliers to remain indefinitely in cus-

todia legis (R. 942-943), adopted the only avail-

able course in holding that jurisdiction for plan

purposes extended to the constituent system

companies. Any other result would have been

an intolerable impairment of the functions of a

reorganization court.

2. This ruling, required by a unique fact situa-

tion, was admittedly without direct precedent.

There were, however, ‘‘signposts to mark the

way,’’ as the circuit court of appeals put it (R.

950), and its decision was along judicially ac-

cepted lines.

The traction properties of the underliers have

all been in the possession of the reorganization

court since the inception of the proceeding and

in that of the debtor prior thereto. Such posses-

sion alone is sufficient to confer jurisdiction.

Isaacs v. Hobbs Tie & Timber Co., 282 U. 8S. 734,

737-738. While with respect to property to which

title is claimed adversely or as to which a lien is

asserted, the court may confine the exercise of its

powers to passing on the question of title or the

25

validity of the lien, the ‘‘malleable processes of

courts in bankruptcy give assurance of a remedy

than can be moulded and adapted to the needs

of the occasion’’, Steelman v. All Continent Com-

pany, 301 U. S. 278, 290, and clearly permit

jurisdiction to the extent defined by the court

below.* The properties allegedly belonging to the

debtor and individual underliers are, as we have

shown, inextricably commingled. The value of

any underlier’s interest obviously depends on the

utilization of its assets as part of the unitary sys-

tem. In addition, there is a paramount public

interest in retaining the system as a unit. Under

such circumstances the court below was clearly

correct in deciding that the interests of the vari-

ous underliers and their security holders could be

determined only by means of a systemwide reor-

ganization plan, and that jurisdiction to this end

existed.

A common administration of an insolvent parent

and its subsidiaries where required by the facts

has been held within the powers of a court in

*See, on the flexibility of the reorganization process,

Byrne, The Foreclosure of Railroad Mortgages in the United

States Courts, in Some Legal Phases of Corporate Financ-

ing, Reorganization and Regulation, 1917, p. 77; Cutcheon,

An Examination of Devices Employed to Obviate the

Embarrassments to Reorganizations Created by the Boyd

Case, in 8 Lectures on Legal Topics, 1931, p. 35; Swaine,

Reorganization of Corporations: Certain Developments of

the Last Decade, id. at p. 133.

26

equity receivership (Trustees System Co. of

Penna. v. Payne, 65 F. 2d 103 (C. C. A. 3);

Commerce Trust Co. v. Woodbury, T7 F. 2d 478

(C. C. A. 8)), and in bankruptey (Central Repub-

lic Bank & Trust Co. v. Caldwell, 58 F. 2d 721

(C. C. A. 8); Stone v. Eacho, 127 F. 2d 284, (C.

C. A. 4), certiorari denied, 317 U. S. 635). These

cases were based on the often utilized principle

that separate corporate entities will be ignored

where their recognition would defeat the remedial

purpose of a statute. E. g., Anderson v. Abbott,

321 U. S. 349, Higgins v. Smith, 308 U. S. 473,

477-8. On this ground jurisdiction was extended in

the Trustees System Co., Commerce Trust Co. and

Central Republic Bank cases, supra, to subsid-

iaries not alleged or found insolvent. The sub-

jection of the Guaranteed Underliers here to the

reorganization powers of the court is thus in ac-

cord with equity receivership and bankruptcy

precedents.

Furthermore, insofar as system earnings are

concerned, all the underliers appear to be in-

solvent. None of them is capable of function-

ing independently and of meeting obligations

to both security holders and the public. And

* Language in Price v. Gurney, 324 U. S. 100, 107, indicat-

ing the necessity for the filing of a petition by a person

authorized to do so by the terms of the Bankruptcy Act was

not addressed to the situation where the disregard of sep-

arate corporate entities was involved, or where unlike that

case (324 U. S. at 105) other remedies were unavailable.

a

27

a “unitary economic foundation’? for the en-

terprise (R. 951) is, as the court below pointed

out, impossible if the rental, interest and tax ob-

ligations of the Guaranteed Underliers alone are

to be borne undiminished by the operations of

the system. Whatever the effect of Philadelphia

Company’s guarantees, a fair and equitable equiv-

alent, based upon the contribution of their assets

to the earnings of the system, is all that the Guar-

anteed Underliers and their security holders can

claim as against the debtor. Reconstruction

Finance Corp. v. Denver & R. G. W. R. Co.,

decided June 10, 1946, Nos. 278-282, Oct. Term,

1945, slip sheet opinion, pp. 26-27; Wright v.

Union Central Life Ins. Co., 311 U. 8. 273, at 278.

The disregard of a corporate entity normally

permits a court to look directly to the entity’s

stockholders or to an affiliate through stock own-

ership. Here the operational unity embraced the

assets of the Guaranteed Underliers as inextrica-

bly as those of the Debtor and the other under-

liers. The Guaranteed Underliers knowingly con-

tributed their properties to it and in the public

interest it must be preserved unbroken. Cf. Re-

construction Finance Corp. v. Denver & R. G. W.

R. Co., swpra, slip sheet opinion at p. 29. Thus,

notwithstanding the fact that the stockholdings

linking the Guaranteed Underliers to the debtor

were not as extensive as those linking the Phila-

delphia Underliers (R. 618, 1 26), there was an

_—_

28

adequate factual basis for the step taken by the

court below.”

3. Because of the parties’ contentions the

opinion below discussed the question of a possible

impingement of bankruptcy powers upon state

law. But its holding that state law did not forbid

or limit its jurisdiction in reorganization did

not involve, either as a premise or a conclusion,

the determination of any question contrary to

state law.

None of petitioners contends that a systemwide

reorganization, of itself, is contrary to Pennsyl-

vania law in the sense that a state insolvency or

equity receivership proceeding for a debtor under

present circumstances has been held by a Pennsyl-

vania court not to comprehend an aggregation of

underliers comprising a unitary system. Nor was

local law violated by any other ruling of the lower

court. The circuit court of appeals did not hold

that the underliers were not valid corporations.

It did not hold that the leasing arrangements

authorized by state law were invalid. It did not

This question was not involved in Vew York Trust Co.

v. V. ¥. & Greenwood Lake Ry. Co., No. 89438, 3d circuit,

July 17, 1946, amended July 23, 1946, for there the appellee

company, which, partially on the authority of the decision

here sought to be reviewed, was subjected to the jurisdiction

of the court in which Erie Railroad was in reorganization,

was 95% stock owned by the Erie. The issue there was the

power of a court other than the reorganization court to fix

the fees of an indenture trustee and its counsel for services

rendered the appellee.

Cn

—

29

hold that the leases were conveyances or had any

legal effect other than that of leases.” It did not

hold that, in determining the substantive rights

of security holders to receive their equitable

equivalents under a systemwide plan, the property

which under state law is an underlier’s should

under the plan be treated as belonging to another

underlier or as the debtor’s. The prayer which

it ordered granted, as pointed out by the Special

Master, “‘asks for no surrender of anything in

the possession of the underliers, and asks for

no conveyance from or coercion of the under-

liers’’ (R. 815, 1 1052). The court merely held

that with the debtor’s system an integral unit, the

formal interecorporate arrangements, while per-

mitted under state law, could not thwart the indis-

pensable exercise of bankruptcy jurisdiction (R.

948).

Petitioners contend, however, that state law

was violated in that Chapter X of the Bankruptcy

Act limits jurisdiction of the reorganization court

© We may add that, despite the absence of such a ruling by

the court, we have serious question whether on the facts here,

where effective repossession by lessor underliers is impossible

and has not been attempted, the leases are anything other

than security devices giving rise to contractual rights to re-

payment. Such rights are replaceable in reorganization by

new evidences of interest, whose total will be commensurate

with the earning power of the system and which will be dis-

tributed so as to give a fair and equitable equivalent of the

rights they supplant. But the issue is not raised until the

lessors’ interests are so treated under a plan.

See

30

to the property of the debtor. Asserting that

under state law the leases reserved property in

the system assets to the underlier corporations,

they argue that such property is beyond the juris-

diction of the court. The contention appears to

be based on a misapprehension of the provisions

relied on in its support.

Section 111 of Chapter X, 11 U. S. C. § 511,

which confers upon the court ‘‘exclusive jurisdic-

tion of the debtor and its property, wherever

located’’ was not intended to confine the powers

of the reorganization court to property to which

a debtor had title. In straight bankruptcy, the

court, upon adjudication, secures jurisdiction over

all property in the possession of the bankrupt

whether or not he has title. Isaacs v. Hobbs Tie

& Timber Co., 282 U. S. 734, at 737. This was

true also in equity receivership as to property in

a debtor’s possession within the territorial juris-

diction of the court. 2 Gerdes on Corporate

Reorganizations (1936), pp. 1360-1365. The effect

of the quoted language of Section 111, which also

appears in Sections 77(a) and 77B(a), 11

U.S. C. § 205(a) and former § 207(a), was to ex-

tend the reorganization court’s exclusive jurisdic-

tion to property in the debtor’s possession whether

or not within the territorial jurisdiction of the

court. Cf. Continental Illinois Nat’l Bank & Trust

Co. v. Chicago, R. I. & P. Ry. Co., 294 U. 8. 648.

The language was not designed to deny to a re-

_—

31

organization court jurisdictional powers, already

vested in courts of straight bankruptcy or re-

ceivership, over assets in the possession of a

debtor although admittedly not his property. On

the contrary, under Sections 114 and 115 of Chap-

ter X, 11 U. S. C. §§514, 515, such powers are

expressly conferred upon the court in reorgani-

zation proceedings. See also Bankruptcy Act,

Sections 2a, 2a (6), 11 U. S. C. §§ Lla, lla (6).

In the exercise of such powers the court may deal

in a binding way with the reversionary interest

of a lessor to a debtor. Warren v. Palmer, 310

U.S. 132, at 138.

Nor was Section 216 (2), 11 U. S. C. § 616 (2),

permitting a plan to ‘‘deal with all or any part

of the property of the debtor,’’ designed to have

a limiting effect. It was derived from Section

77B(b) (10), formerly 11 U. 8. C. § 207(b) (10), see

S. Rep. 1916, 75th Cong., 3d Sess., p. 34, and was

intended, in the interests of flexibility, to permit a

plan to deal with less than the entire estate. 2

Gerdes on Corporate Reorganizations (1936),

p. 1760. Neither this provision, however, nor Sec-

tion 111, supra, limits jurisdiction solely to assets

over which the debtor has legal title under state

law.”

*° No acquiescence is intended by this argument in peti-

tioners’ contention that, on the facts here, the underliers have

present legal title under state law to specific indentifiable

assets in the system. See supra, p. 10.

—_—e

32

Conceivably the differentiation of properties be-

longing respectively to the debtor and the indi-

vidual underliers, insofar as is possible in their

present commingled state, may become necessary

or useful in determining such problems as the

effect of after-acquired property clauses, the va-

lidity of liens or the value of collateral assets for

purposes of distribution under a plan. The de-

termination of these and similar issues by plan

approval and confirmation may give rise to such

reviewable questions as whether or not ‘“‘appro-

priate regard’’ was shown “‘for rights acquired

under state law,’’ Heiser v. Woodruff, decided

April 22, 1946, No. 496, Oct. Term, 1945, ef.

American Surety Co. v. Sampsell, decided Feb-

ruary 25, 1946, No. 142, Oct. Term, 1945. No

such substantive determinations have been made

by the circuit court of appeals, however, and

no conflict with state law appears in its ruling.

4. Nor did the court below, in reaching its con-

clusion, depart from the decision of this Court in

Philadelphia Company v. Dipple, 312 U. S. 168.

That case held that taxes of the underliers could

not be paid as expenses of administration of the

estate. As the court below pointed out (R. 947),

the case did not involve the public interest in

maintaining the unified system. Nor did it con-

cern the question of finding the method for ter-

minating the protracted reorganization (R. 942).

It was not inconsistent to recognize the formal

—_—_—

33

legal entities comprising the system as separate

for tax purposes and to insist upon their unity

for the different problems of plan jurisdiction.

Irving Trust Co. v. Kaminsky, 22 F. Supp. 362

(S. D. N. Y.), citing Corsicana National Bank v.

Johnson, 251 U. 8. 68, 88, 89. Note, Insolvency as

a Requisite to Piercing the Corporate Veil, 82 U.

Pa. L. R. 868 (1934).

Furthermore, the Court in the Dipple case

wes concerned over the possibility of preferences

in favor of certain underliers if taxes which it

was sought to have the trustees pay on their be-

half should exceed sums properly due them for

use and occupation or for rent, for it recognized

the great difficulty in apportioning system re-

ceipts among underliers in ratio to their contri-

bution to the enterprise. 312 U.S. at 174. Some

effort to ascertain the individual underliers’ con-

tribution to the enterprise must presumably be

made before system earnings can be fairly dis-

tributed to them and in turn to their security

holders, and the proposed systemwide plan in

fact represents an attempt at such a determina-

tion (R. 573-575). The various theoretical alter-

natives outlined above (pp. 19 ff.) fail to achieve

this result, while one such method—negotiation

for reduced intercorporate obligations and the

binding of dissenters by the entry into reorganiza-

tion of successive tiers of underliers—is, apart

from obvious difficulties, rife with the possibility

34

of preferences. Jurisdiction for a systemwide

plan, rather than contravening Philadelphia Com-

pany V. Dipple, actually carries out its intent.

CONCLUSION

The petitions for writs of certiorari should be

denied.

Respectfully a aye

J. Howarp McoGrata,

Solicitor General.

/ Roaer S. Foster,

Solicitor, |

Rosert 8S. Rusin, ““

Assistant Solicitor,

GrorGE ZOLOTAR,

Special Counsel,

SAMUEL M. KOENIGSBERG,

Attorney,

Securities and Exchange Commission.

|

J

SEPTEMBER 1946.

U. S. GOVERNMENT PRINTING OFFICE: 1946