273 F. 848 (E.D.Pa. 1921), 1095, United States v. Reading Co.

Docket Nº:1095.
Citation:273 F. 848
Party Name:UNITED STATES v. READING CO. et al. May 21, 1921.
Case Date:June 06, 1921
Court:United States District Courts, 3th Circuit, Eastern District of Pennsylvania
 
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Page 848

273 F. 848 (E.D.Pa. 1921)

UNITED STATES

v.

READING CO. et al.

May 21, 1921.

No. 1095.

United States District Court, E.D. Pennsylvania.

June 6, 1921

Decree June 6, 1921.

Abram F. Myers, Sp. Asst. Atty. Gen., of Washington, D.C., for the United States.

Charles Heebner and William Clarke Mason, both of Philadelphia, Pa., and R. C. Leffingwell, of New York City, for Reading Co.

Page 849

Robert W. De Forest and Charles E. Miller, both of New York City, for Central R. Co. of New Jersey.

Alexander S. Lyman, of New York City, for intervener New York Cent. R. Co.

Hugh L. Bond, Jr., of Baltimore, Md., for intervener Baltimore & O.R. Co.

Edwin P. Grosvenor and Cadwalader, Wickersham & Taft, all of New York City, for intervener preferred stockholders' protective committee.

Allen McCarty and White & Case, all of New York City, for intervener common stockholders' protective committee.

Arthur H. Van Brunt and Larkin, Rathbone & Perry, all of New York City, for Central Union Trust Co.

George Wharton Pepper, of Philadelphia, Pa., for intervener Penn Mut. Life Ins. Co.

Michael J. Ryan, of Philadelphia, Pa., for intervener Girard Ave. Trust Co.

Maurice Bower Saul and Saul, Ewing, Remick & Saul, all of Philadelphia, Pa., for intervener Pennsylvania Co. for Insurance on Lives and Granting Annuities.

Thomas Raeburn White, of Philadelphia, Pa., for interveners Kurtz.

Alfred A. Cook, F. F. Greenman, and Robert Szold, all of New York City, for interveners Continental Fire Ins. Co. and Fidelity-Phoenix Ins. Co.

George S. Ingraham, of Brooklyn, N.Y., for interveners Ingraham and others.

Before BUFFINGTON and DAVIS, Circuit Judges, and THOMPSON, District judge.

BUFFINGTON, Circuit Judge.

On the return to this court of the mandate of the Supreme Court of the united States directing, inter alia, this court to enter a decree 'dissolving the combination of the Reading Company, the Philadelphia & Reading Railway Company, the Philadelphia & Reading Coal & Iron Company, the Central Railroad Company of New Jersey and the Lehigh & Wilkes-Barre Coal Company, existing and maintaining through the Reading Company, with such provision for the disposition of the shares of stock and bonds and other property of the various companies, held by the Reading Company, as may be necessary to establish the entire independence from that company and from each other of the Philadelphia & Reading Railroad Company, the Philadelphia & Reading Coal & Iron Company, ' etc., we called before us the counsel for the United States and the counsel for the Reading Company, and directed the latter, in consultation with the former, to formulate a dissolution plan in conformity with the said mandate. In accordance with these directions, and after consultation by all of said counsel from time to time with the court, a tentative plan was eventually drafted and placed on file in the clerk's office, for the inspection of all parties concerned. Subsequently the court gave a hearing to all parties who

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desired to be heard, and signified its willingness to receive for consideration petitions to intervene. Numerous parties and representatives of various interests having thus been heard, and numerous briefs having been filed showing the views of the parties concerned, the court was thereby placed in possession of such information as enabled it to determine what parties should be allowed to intervene, and also to formulate such questions, issues, and objections to the proposed plan as would afford a basis for an enlightening and constructive discussion on the part of all parties of record. Accordingly this court, by its order of April 12, 1921, directed it would on May 2, 1921, hear arguments on the following questions:

'1 (a) Whether the sale provided for in paragraph 5 of the Reading plan is such a disposition of the interest of Reading company in the stock of the Philadelphia & Reading Coal & Iron Company as accomplishes the express purpose of the mandate of the Supreme Court of the United States requiring disposition by Reading Company of such stock because the holding of it has been and would be unlawful; (b) and if the mandate is thereby complied with, whether such disposition confers upon any one class of stockholders of Reading Company any benefit to the prejudice of the legal rights of any other class of stockholders.

'2. Whether the stock of the Coal Company should be sold free from the lien of the general mortgage, or whether a sale of certificates of interest therein would be a compliance with the provisions aforesaid of the mandate of the Supreme Court of the United States.

'3. Whether the Reading Company should offer a premium of 10 per cent. to the general mortgage bondholders for release of the Coal Company's property from the lien of the mortgage, or whether the requirements of the mandate of the Supreme Court of the United States may be fulfilled by proper injunctive provisions in the decree to be entered in this cause'

-- and directed that all parties who desired to be heard should file briefs on April 30, 1921, containing in substance their proposed arguments. Having thus in advance the advantage of the proposed arguments, the court found on the day set for argument that, due to a modification of the plan agreed to by the Attorney General of the United States, the counsel for the Reading Company and counsel representing certain holders of bonds secured by the general mortgage of the Reading Company, substantially all of the above questions were disposed of, save those arising under subdivision (b) of the first question. And this feature, briefly stated, resolved itself into an issue as to the relative rights of the preferred and common stock of the Reading Company, arising out of the disposition of the stock of the Philadelphia & Reading Coal & Iron Company, which latter stock was owned by the Reading Company. The stock of the Philadelphia & Reading Coal & Iron Company so owned by the Reading Company has a par value of $8,000,000. It will be noted that this stock holding by the Reading Company in the Coal Company was decreed by the Supreme Court an unlawful holding, and was one as to which the Supreme Court directed this court to enter a decree--

'with such provision for the disposition of the shares of stock and bonds and other properties of the various companies, held by the Reading Company. as may be necessary to establish the entire independence from that company and from each other of the Philadelphia & Reading Railway Company, the Philadelphia & Reading Coal & Iron Company,' etc.

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In the plan proposed this order was complied with, in that the offending stock was, under proper restrictions and elections, to be disposed of to all the stockholders, both common and preferred, of the Reading Company. By this stockholding passing from the ownership of the Reading Company and being vested in the disassociated ownership of the individual stockholders with such provisions for safeguarding against an unlawful combination between them as is provided in the proposed decree, and as will be hereafter described, it will be seen the letter and spirit of the mandate of the Supreme Court are complied with. The offending stock passes out of the ownership of the unlawful holder, and neither it nor the proceeds of its sale can be hereafter used in unlawful combination. In that connection it will be noted that the mandate directs a 'disposition of shares of stock and bonds and other property held by the Reading Company,' and in that respect the mandate has been complied with precisely, in that there has been a 'disposition' of the stock, it being taken from the Reading Company, and it has not even been distributed by that company, but, treated as an unlawful holding of that company, it is to be taken by the court and disposed of absolutely by it, by sale through the agency of a corporation created under the provisions of this decree, to such persons as have qualified to lawfully acquire it. The mere circumstance that those persons are stockholders of the Reading Company is attributable to the fact that, in the application of equitable principles and without sacrifice of the spirit of the mandate, they compose a class of suitable recipients, in the manner above stated, of the stock which was unlawfully held by the company of which they were stockholders. In other words, if the carrying out of the mandate had necessitated the use of this stock to reduce, for example, the bonded or other indebtedness of the Reading Company, the stockholders of that company, which unlawfully held the stock to be disposed of, would have no claim in law to prevent such disposition.

From these considerations it is apparent that, whatever this disposition of the stock may be called, it is in no sense an earning of the Reading Company, which is to be disposed of by that company as a dividend. It is a taking by the law of an asset of that company, a dividend. It is a taking by the law of an asset of that company, a stock asset, which was and has been owned in specie by Reading Company since the Reading reorganization was formed, and which never was earned or could be earned by the Reading Company itself. Indeed, it is now disposed of in substantially the same way as the law would dispose of the property of that company, were it being dissolved, and in that connection we deem it proper to say that, under the facts and circumstances before us, the legal question of dividend distribution between different classes of stockholders is not here involved, and on that question we express no present opinion for the simple reason that we are not dividing profits or earnings.

Seeing, then, that this...

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