Matter of Reading Co.
| Decision Date | 11 August 1982 |
| Docket Number | Bankruptcy No. 71-828. |
| Parties | In The Matter of READING COMPANY, Debtor. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
A. Grant Sprecher, Howard H. Lewis, John J. Ehlinger, Obermayer, Rebmann, Maxwell & Hippel, Philadelphia, Pa., for Reading Co.
William P. Quinn, Nicholas J. Scafidi, Eric M. Hocky, Rubin, Quinn, Moss & Girard di-Carlo, Philadelphia, Pa., for Trailer Train Co.
ADJUDICATION
This matter comes before the Court on a petition filed by the trustees of the Reading Company ("Reading")1 seeking to compel the Trailer Train Company ("Trailer Train") to negotiate a means by which Reading can obtain some benefit from its ownership of Trailer Train capital stock. The problem arises because Trailer Train was created for the sole purpose of providing equipment to railroads at advantageous rates and Reading is no longer in the railroad business. By Order No. 1557, I required the parties to seek agreement on a way for Reading to realize a return on its investment even though it no longer could use Trailer Train equipment. The negotiations proved fruitless. Reading then filed an amended petition to compel Trailer Train to repurchase the stock at a value adequately reflecting Reading's equity interest or, alternatively, to exchange the stock for a subordinate debt instrument or preferred stock having a face value in that amount and bearing a market rate of interest. After extensive discovery, the parties presented evidence at a four-day hearing. Pursuant to Fed.R.Civ.P. 52(a), I make the following:
FINDINGS OF FACT
1. The Reading Company is a Pennsylvania corporation having its corporate headquarters in Plymouth Meeting, Pennsylvania. For many years prior to April 1, 1976, Reading's principal business was as an interstate railroad, transporting both passengers and freight. From November 21, 1971, until January 1, 1981, Reading was in reorganization pursuant to section 77 of the Bankruptcy Act, 11 U.S.C. § 205.
2. Trailer Train is a Delaware corporation, having been incorporated in Delaware on November 9, 1955. The Company's corporate headquarters are located in Chicago, Illinois.
3. Trailer Train owns, operates, and maintains a pool of standardized railroad flat cars used by railroads in the United States under a pooling agreement entered into between it and its shareholders with the approval of the Interstate Commerce Commission ("ICC"). (Stipulation of Facts ("Stip.") No. 4)
4. As of December 31, 1979, the Trailer Train flat car pool consisted of 87,494 intermodal, autorack, and special use cars.
As of June, 1979, Trailer Train owned or leased approximately 92 percent of all intermodal flat cars, and approximately 87-88 percent of all automotive rail cars, used in rail service in the United States. (Stip. No. 6)
5. Reading owns 500 of the 20,500 shares, or 2.44 percent of the outstanding capital stock of Trailer Train. (Stip. No. 3)
6. The remaining capital stock of Trailer Train is owned by 30 operating railroads, the trustees of the estate of the Erie Lackawanna Railway Company, and Transway International Corp., a diversified freight forwarding company. The 30 operating railroads represent approximately 89 percent of the mileage of the class 1 railroads in the United States. (Stip. No. 5; Tr. 122)
7. The shareholders of Trailer Train, and the percentage of outstanding stock held by each, are:
(Stip. No. 15).
8. Trailer Train was incorporated in 1955 by the Pennsylvania Railroad Company, its then affiliate, Norfolk and Western Railway Company, and Rail Trailer Company, a consulting firm to the railroad industry. (Stip. No. 10; Tr. 118).
9. Trailer Train added new shareholders from 1956 to 1964 as follows:
Since 1964, there has been no sale of Trailer Train stock except through combinations or reorganizations of its existing shareholders. (Stip. No. 11; Exh. 28).
10. The first 11 shareholders of Trailer Train acquired 500 shares of the company's stock at the par value of $100.00. Thereafter, each additional shareholder which purchased its block of stock from Trailer Train paid then current book value for its initial subscription of 500 shares. The highest book value paid by any subscriber was $484,900.00. (Stip. No. 12)
11. Originally, each of the Company's individual equipment financings was jointly and severally guaranteed by every Trailer Train shareholder. These individual guarantees were replaced by "Keep Well" agreements which allowed the Company to finance new equipment acquisitions on its own balance sheets.
The first of the "Keep Well" agreements was the shareholders' agreement of October 25, 1960, wherein all shareholders jointly and severally guaranteed all pre-1962 equipment obligations. Each shareholder that joined Trailer Train after 1960 has executed this shareholder's agreement.
A subordination agreement dated May 15, 1963, provides that a shareholder's claims against the Company will be junior to any claim against the Company by owners of equipment obligations.
A note purchase agreement of January 1, 1967, required each shareholder to purchase agreed proportions (in accordance with each shareholder's usage of Trailer Train equipment) of up to $50,000,000 in notes issued by the Company. Reading purchased $88,000. of a total of $20,000,000 of such notes. The period of time for purchase of additional notes was not extended beyond December 31, 1974. (Stip. No. 14; Tr. 120-21)
12. Reading acquired its 500 shares of Trailer Train stock in 1961, at $300.21 per share, or a total of $150,105. (Stip. No. 23)
13. From the time it purchased Trailer Train stock in 1961 until April 1, 1976, Reading paid a total $908,159.00 for use of Trailer Train flatcars. (Tr. 133 Appendix A).
14. Each of Trailer Train's shareholders purchased a 500 share block of capital stock and entered into a Form A Car Contract with Trailer Train. Execution of the Form A Car Contract by a shareholder is a prerequisite to participation in the flatcar pooling plan. (Stip. No. 19).
15. The Form A contract sets forth the terms and conditions under which Trailer Train furnishes cars to its shareholders and the method and amount of payment for use of Trailer Train cars. This contract also covers such items as responsibility for loss or damage to cars, provision of payment of ad valorem property taxes by Trailer Train, switching and hauling charges, storage and turnback of cars, per diem relief, maintenance, and repairs. (Stip. No. 20).
16. The Trailer Train Form A car contract provides that no shareholder will sell or otherwise dispose of its stock in Trailer Train without first offering such stock to Trailer Train for repurchase, at its option, at then current book value. The Form A car contract also provides that in the event that the contract is terminated in any manner, the affected shareholder or shareholders shall offer to sell to Trailer Train, at its option, such stock at current book value. (Stip. No. 21)
17. Trailer Train cars are provided to shareholders upon request. The shareholder may use the car on its own lines or may interchange the car with other railroads, which may or may not be shareholders...
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