In re Philadelphia Rapid Transit Co., 17980.

• Decision Date: 19 September 1934
• Docket Number: No. 17980.,17980.
• Citation: 8 F. Supp. 51
• Parties: In re PHILADELPHIA RAPID TRANSIT CO.
• Court: U.S. District Court — Western District of Pennsylvania

8 F. Supp. 51

In re PHILADELPHIA RAPID TRANSIT CO.^*

No. 17980.

District Court, E. D. Pennsylvania.

September 19, 1934.

S. Davis Wilson, Joseph Sharfsin, and L. Stauffer Oliver, all of Philadelphia, Pa., for petitioners-creditors.

Allen Hunter White, Frederic L. Ballard (of Ballard, Spahr, Andrews & Ingersoll), and George Wharton Pepper, all of Philadelphia, Pa., for Philadelphia Rapid Transit Co.

Before DICKINSON, KIRKPATRICK, and WELSH, District Judges.

DICKINSON, District Judge.

At the first argument leave was granted to file supplementary paper books. These were filed and the cause ripe for a ruling. The cause was then set down for a reargument in order that it might be heard by a full bench. Further leave was given to file additional briefs. These we now have. We appreciate the help given us by the notably able arguments submitted.

The Question Presented.

The cause is before us on a creditors' petition under section 77B, amendment to the Bankruptcy Act (11 USCA § 207). The "debtor" has made answer and has likewise filed a motion to dismiss. The question is whether (1) the petition complies with section 77B, and (2) "has been filed in good faith." If the answer to both questions is in the affirmative, an order approving the petition is to be entered. If either is answered in the negative, the petition is to be dismissed.

The Procedure.

This legislation is too recent for the court to have formulated any rules of practice under it. The instant case, however, affects interests of such importance that it was directed to be submitted to the full bench rather than to a single judge. As one member of the court was unavoidably absent, the cause was set down for reargument.

We note that the record shows a motion on behalf of other parties to intervene, and that this was down for a hearing at the argument on July 11th. Our attention, however, was not called to this motion nor was anything said about it at the argument. Doubtless this was because Judge Welsh had previously disposed of a similar motion. We in consequence treat the motion to intervene as not pressed and as abandoned. For this reason, we do not discuss it.

We would not dwell upon the procedural features of the case except for the emphasis given some of them at the argument. Resort is often had to analogies, whether helpful or not. Here there is a formal motion to dismiss. This suggests the analogue of a demurrer, and again the rule that well pleaded averments are to be accepted as verities. The settled rule in bankruptcy cases is that, on a motion to dismiss a petition, the question is not whether a fact averment is true but whether it has been pleaded. For this is cited, among other cases, North Ward Radio Co. v. Grigsby Grunow Co. (C. C. A.) 67 F.(2d) 745.

So far as the formal fact averments of a petition go, it may be admitted that the cited doctrine applies. No pleader, as such, is bound to be frank nor (unless an affidavit is required) to be even truthful. All that is required of him is that he follow the rules of legal logic. This, however, only applies to the formalities of pleading. It must not be forgotten that this proceeding is unique. In the ordinary bankruptcy petition, all which is called for are certain fact averments. Section 77B petition requires more. What is called for are not merely formal fact averments, but the petition must be "in good faith." Of this, the judges to whom it is presented must be "satisfied." Obviously, the burden of so satisfying them is upon the petitioner or petitioners. They may be so "satisfied" upon the mere perusal of a debtor's petition or of a creditor's petition and the answer thereto or they may not. The judgment reached is a summary judgment. They may seek light through their own methods. They may decide it upon the face of the pleadings or upon arguments or upon hearing as they may prefer. What transpires upon any motion day in the bankruptcy court will make clear what Congress had in mind. There must, of course, be jurisdiction of the parties. On a debtor's petition, this the court gets by submission. On a creditor's petition, process issues in the form of an order on the "debtor." It appears by answer. The question of approval then arises. It may be presented through a motion of the petitioners to approve or a motion of the "debtor" to dismiss. If both or neither move, the question is none the less presented. There must be an order either of approval or dismissal. The judgment, as we have said, is a summary one. There is no need to await the leisurely processes of legal forms of inquiry nor do the technical rules of pleadings control. The judgment is one of sound discretion, having in mind its dual character. The petition must (1) conform to the formal requirements of the act; (2) the judge must be "satisfied" it is "filed in good faith." The first calls for a judicial judgment. The second is an appeal to judicial discretion. The final question is really one. Should the petition be approved? A refusal to approve is a dismissal. So much for the procedural features. The controlling fact feature is not in controversy.

The Fact Situation.

The history of the P. R. T., by which initials we shall designate the respondent, as it is presented does not make pleasant reading. It is the history of a public service corporation, which has come to have a monopoly of the local transportation system of a great city. It is a history of the exploitation of great and valuable public franchises by selfish financial interests; of the luring to their loss of people of moderate means, and especially of the employees of the system, to invest in its capital stock and the infliction upon the public of high transportation charges, and all other evils which always follow the creation of a great and powerful monopoly.

We have said that employees were lured into investing in its stock. They were partly lured and partly coerced. The real purpose was to use them in a struggle between equally selfish interests for control in the management of the system. That control has been attended all the way by the most ruthless exploitation of stockholders, the city, and the traveling public alike. The city, by devious methods, was drawn into partnership with the managers of the system upon such terms that the burden of debt incurred by the worse than mismanagement of the system fell upon the city, with little and indeed no hope of its ever being able to extricate itself. All income above what was absolutely necessary to operate the system was diverted to the pockets of its managers. Indeed, to increase the latter, operating expenses were met by the incurring of fresh loans. There is small wonder that an insistent demand for some form of relief culminated in a proceeding in the state court, and the placing of the management of the corporation, in part at least, in the hands of directors in part named by the court. This has been followed by the present petition. This perhaps rather lurid picture of present conditions bears upon the need of amendment. The question before us is a narrower one. Is this petition in good faith in the sense of a real creditors' petition?

Discussion.

A few very general observations will supply us with a guide to what disposition should be made of the pending motions.

The genesis of this amendment to the Bankruptcy Act is well known. We have always had with us debtors whom it would be a harsh judgment to call insolvent and yet who are in such financial straits as to be in need of a moratorium. To leave them to the rude methods of common-law debt collections would mean financial death to them and, because of the frightful waste which accompanies these methods, loss to creditors as well. More than this, creditors were forced by self-interest into a race to be first in at the death. Many a debtor was thus pushed into insolvency which might have been averted. Many expedients were resorted to for the purpose of dealing with such situations. One was a composition agreement; another an assignment for the benefit of creditors. The one was dependent upon agreement; the other did not fully serve because it provided only a method of liquidation. Resort was then had to an equity receivership. Equity has taken jurisdiction in cases of corporations charged with a public duty. When such a corporation was unable to perform its public functions, it could do so through a receivership. Receivership bills were then filed against private corporations. Such bills were not sanctioned by any principles of equitable jurisdiction, but the practice was so convenient and useful that the courts tolerated it when there was a confessing answer. The weak feature was that a composition or reorganization could be affected only by agreement. Then came attempts to force objecting creditors or stockholders to submit to the judgment of creditors who approved. These under the final rulings of the courts proved abortive. The desired objective could be reached only through a bankruptcy law. Hence we have the sections 74, 75, and 77B amendments (11 USCA §§ 202, 203, 207). The business depression through which we hope to pass and which we have in part passed, deepened the demand for relief. This history of what led up to 77B clearly discloses the policy of Congress. It was to afford a respite to corporations in financial difficulties so that their owners and creditors might have time to effect a rescue. It was not to force them upon the financial rocks and make of them utter wrecks. Hence we find the initiative is given primarily to the debtor. It is permitted to retain control and given authority to conduct its business as before. This is of necessity made subject to the power of its creditors to force liquidation who further may, if there is occasion for it, initiate such proceeding themselves. Any remedy may be best applied in the light of the evil which it was given to avert. The evil was that without section 77B, one or a few...