265 F. 817 | 3rd Cir. | 1920
Lead Opinion
In the court below Benjamin C. Allen, a citizen of Colorado, filed a bill in equity on behalf of himself and other bondholders, a-gainst the Philadelphia Company, Pittsburgh Railways Company, and United Traction Company, all corporations of Pennsylvania. The relief sought thereby was: (I) Discovery; (II) that Philadelphia Company be decreed liable for accrued and to accrue interest on the bonds of said issue; (III) that such bonds be decreed to be an obligation of Philadelphia Company and a lien on the property of all the defendants; and (IV) tha.t Philadelphia Company be enjoined from dismembering its street railway service.
To this bill the defendants duly answered. As there was virtually no dispute of the basic facts on which the bill must stand, and the plaintiff was desirous, before entering upon the labor and expense of taking the vast amount of testimony incident to the case, which testimony might in the end have been needlessly taken, the plaintiff accordingly after the answers were filed, in order to have these basic questions determined in limine and in pursuance of equity rule 29 (198 Fed. xxvi, 115 C. C. A. xjjvi) which provided, “Every
Without quoting, the exact language of the lengthy and somewhat complicated facts set forth in the bill and answer, we shall try to state in logical order the matters and things which throw light on the basic facts from which must be drawn the warrant for the entry of the decrees prayed for in the bill:
In 1897, the traction situation in the territory in and surrounding Pittsburgh and Allegheny City may, in a general way, be stated as follows: The Second Avenue Traction, through its own lines and those of its subsidiary companies, operated the lines extending from the center
It will thus be seen that the plan of unitary acquisition, control, and operation, to enable which to be carried out the plaintiff loaned his money to the United Traction Company, was duly carried out, and resulted in the unitary operation of these traction companies by
“Tlie properties above enumerated together consütutcd a complete railway system for the transportation of passengers in and through large sections of the cities of Pittsburgh and Allegheny and vicinity.”
But the operations of the United Traction Company, or of those who planned it, did not stop with these operations in 1897, for in 1916 the company, or the syndicate who had organized it and held $17,000,-000 of its common stock took another step in the way of further absorption, extension into other public utilities, and broader unitary street car operation. Whether this was part of the original plan, or a later conceived one, the hill does not aver.
At that time the Philadelphia Company, the principal defendant in this case, was a large public service corporation, operating in the Pittsburgh district, either by itself or through its subsidiary companies, hut in unitary control and operation, supplying to the public (a) natural gas by the Chartiers Natural Gas Company; (b) artificial gas by the Consolidated Gas Company; (c) electric light, heat, and power by the Allegheny County Light Company.
No consolidation, merger, or contract of merger or unitary operation was made with the Philadelphia Company; but the syndicate, who held the $17,000,000 common stock of the United Traction Company, bought from the individual stockholders of the Philadelphia Company the entire capital stock of that company. Plaving thus acquired control of the company, these new stockholders elected some of their members officers of the Philadelphia Company. Thereafter the Philadelphia Company took over the entire $17,000,000 capital stock .of the United Traction Company from the syndicate, paying therefor by the issue of its own stock, and in the same way it also took over and paid for the capital stock of its three subsidiary companies, the Consolidated Gas Company, the Allegheny County Light Company, and the Chartiers Valley Gas Company. The stock of the United Traction Company, which in this way passed to the Philadelphia Company, it held until 1912, when, as hereafter stated, it passed into the hands of the Pittsburgh Railways Company. Whether the original United Syndicate who received the stock of the Philadelphia Company, continued to hold their stock, or thereafter to act in concert, the bill does not state, and that they acted at all in common, or did they act as alleged, is denied in the answer.
Thereafter the Philadelphia Company used the United Traction Company as its subsidiary, and as such subsidiary the United Company continued to operate the unitary street car system as before. Later the Philadelphia Company acquired other street railways, so that by January 1, 1902, it owned or controlled practically all the railways and traction companies operating in Pittsburgh and vicinity. At that date the Pittsburgh Railways Company, one of the defendants, was a subsidiary of the Philadelphia, and it then entered into a contract with Ihe United Traction Company whereby it took over from the United Traction Company the unitary operation of the street car system and continued to so operate until it went into the receivership in
Such being a broad statement of the situation as disclosed by the untraversed averments of the bill, do they disclose a case justifying the prayers of the bill? Waiving for the present the question passed on by the court below, that the trustee of the mortgage under which plaintiff’s bonds were issued is an indispensable party to the bill but was not made one, and that the bill should be dismissed on that ground, we pass to the broad underlying question whether the Philadelphia Company should be adjudged liable for the plaintiff’s bonds. Before discussing that question, we note the present case is wholly different from cases of which B. & O. Tel. Co. v. Interstate Tel. Co., 54 Fed. 50, 4 C. C. A. 184, is an instance, where the holding company of the operative subsidiary company was so acting at the time the indebtedness complained of was incurred, and where there was there- . fore some ground for asserting that the real debt-incurring party itself impliedly invited credit, although its subsidiary operative agent made the purchase and formally obtained the credit extended.
In the present case the plaintiff loaned his money solely to the United Traction Company, and the Philadelphia Company had no connection or relation of any kind either to the plaintiff or to the United Traction Company when the plaintiff did so. Starting, then, with the foundation fact that the bonded indebtedness was contracted solely by the United Traction Company, and the credit extended was based on the security of the assets of the United Company, covered by the mortgage, it follows that the burden in the present case is upon such bondholder of the United to show that in some way the Philadelphia Company has, either (a) by a contract, express or implied, assumed responsibility for such bonds, or (b) that the Philadelphia has by some act of omission or commission, made it the duty of a chancellor to adjudge it responsible for such debt.
Moreover, this case has nothing in common with the line of cases where there was fraud, bad faith, concealment, oppression, unlawful procedure or ultra vires exertion of power and the like. In the absence of such elements which in the line of cases cited were pressed, and properly led to such decisions, the court below called attention -in the extract from its opinion quoted in the margin.
Sucli being the status under which the United Traction was formed, and its bonds purchased by the plaintiff, it is apparent that the relations between the Philadelphia Company and the United Company were not created, begun, or consummated by any corporate action of the Philadelphia Company, but wholly and solely by the action of stockholders of the United Company, and that, using the stock of the United Company, the stock of the Philadelphia Company was purchased, and by such stocks so purchased the Philadelphia Company was made an instrument or agency of the United Company, or of those who controlled it, in still further extending the original plan
But the contention of the plaintiff, in substance, is that, because such unitary operation of the roads of the United’s subsidiary companies was carried on by the Philadelphia Company through its subsidiary companies, and in doing so it used and mingled their properties as its own, thereby the Philadelphia Company, to follow the contention of the appellants’ brief, “has effected a substantial merger or consolidation of the United and other traction companies with itself, and by reason thereof the law imposes upon it liability for the bonded indebtedness of these companies.” And, as further urged in such brief, this result would follow by analogy to the—
“familiar principle of law that, when two or more corporations are consolidated by proper legal proceedings, the new consolidated corporation becomes subject to all the indebtedness and liabilities outstanding against the constituent companies at the time of the merger. This is expressly provided in this state by section 2 of the Act of May 29, 1901 (P. L. 349), and section 3 of the Act of May 3, 1909 (P. h. 408), each of which sections contains this language: ‘That all rights of creditors and all liens upon the property of each of said corporations shall continue unimpaired, and the respective constituent corporations may be deemed to be in existence to preserve the same; and all debts, duties and liabilities of each of said constituent corporations shall thenceforth attach to the said new corporation, and may be enforced against it to the same extent and by the same process as if the said debts, duties and liabilities had been contracted by it.’ ”
We are of opinion no such legal consequence followed as a sequence to unitary operation. We are shown no decision or principle of law which warrants such result. No bad faith, fraud, or absence of good faith is asserted. The creation and operation of this unitary system was in pursuance of statutory power, and just such an operation as the parties contemplated when this plaintiff loaned his money to aid in carrying out a well-understood course. In carrying out the general course, it will be noted the United Traction Company had" no property of its own and contributed none to the unitary system. It, too, was solely a holding company, having leaseholds, stocks, and bonds of subsidiary companies, which items were covered by the mortgage by which the plaintiff’s bonds were secured and on which alone he had a lien. Now, these items still remain, are still covered by the mortgage, and, in so far as they are of value, are still held for the benefit of the mortgage bondholders. • The substantial complaint of the bondholder is not that his security has been taken away, but that the unitary operation which he contemplated and intended has not proved profitable. For it is apparent that, when the plaintiff invested in his
The Court below committed no error in dismissing the bill.
“Having set forth the facts as they are to be found in the bill, it is well to note that the plaintiff does not ‘claim fraudulent intent on the part of the officer's of these companies,’ and does not ‘seek to recover by reason of any particular fraud,’ and that it does not ‘seek to recover on the ground of any improper or tortious acts committed by the officers of the Philadelphia Company and its subsidiaries.’ The language in the quotations immediately preceding is the language of the learned solicitors for the complainant as found in their brief. Their contention is ‘that the natural and inevitable result of the attempt of one corporation to actively operate numerous subsidiary companies, naturally competitive and with conflicting interests, was a diversion of the business of many of these companies in favor of others, and the growth of one at the expense of another.’ Because of the neglect to charge fraud and the disclaimer of any right to recover upon the ground of improper or tortious acts, the court has considered a number of averments of
Concurrence Opinion
I concur in the opinion that the bill was properly dismissed, but solely on the ground of the lack of an indispensable party plaintiff.
The bill charges equitable waste of a mortgage given to secure an issue of bonds, of which the plaintiff owns but a small part. The mortgage was not made to the plaintiff, but to a trustee. In my opinion, no one but the mortgagee has sufficient standing to prevent the wasting of the security or to proceed against the waster, and that this court should refrain from passing upon the issues tendered by the bill until presented by the trustee, or the latter shall on request of a bondholder decline so to do.