Matter of Reading Co., Bankruptcy No. 71-828.
| Decision Date | 04 January 1980 |
| Docket Number | Bankruptcy No. 71-828. |
| Citation | 2 BR 719 |
| Parties | In the Matter of READING COMPANY, Debtor. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
Howard H. Lewis, James A. Sox, Philadelphia, Pa., for petitioner.
William P. Quinn, Stephen R. Bolden, Nicholas J. Scafidi, Philadelphia, Pa., for respondent.
In 1955 a group of railroads, including the Reading Company, formed Trailer Train Company to purchase rail equipment for lease to member shareholders. Reading invested $150,000. and was issued 500 shares of the corporation's stock. Trailer Train has never paid any dividends; instead, it has reinvested its profits in additional equipment for the use of its shareholders. In 1971, Reading went into bankruptcy and in 1976, pursuant to the Regional Rail Reorganization Act, 45 U.S.C. §§ 701-94 (1974), conveyed its operating assets to Consolidated Rail Corporation (Conrail), thus losing all benefits of its Trailer Train investment.
Reading's trustees have now filed a petition to require Trailer Train to purchase Reading's stock, convert it into a debt instrument, or convert it into preferred stock on which dividends would be paid. In response to an earlier petition from the trustees I had ordered Trailer Train to meet with Reading's representatives and negotiate the issues which surround Reading's inability to realize return on its Trailer Train investment. See, Memorandum and Order No. 1557. The negotiations were fruitless. As it did before, Trailer Train disputes the jurisdiction of this court, sitting as a reorganization court, to tell it to do anything or to make any order concerning the present controversy. Therefore, Trailer Train has moved to dismiss the trustees' petition on jurisdictional grounds as well as for other reasons which will be discussed below.
The first basis for Trailer Train's motion to dismiss is its contention that this court has no summary jurisdiction over the claim asserted by Reading.
The Supreme Court noted in Thompson v. Magnolia Co., 309 U.S. 478, 60 S.Ct. 628, 84 L.Ed. 876 (1940), that Id. at 481, 60 S.Ct. at 630 (emphasis added). See also, PIC Realty Corp. v. Evans, 605 F.2d 476, 479-80 (9th Cir. 1979).
The property of a debtor for purposes of section 77 jurisdiction has been construed to encompass choses in action. A chose in action is in the constructive possession of a bankrupt when the obligor does not question the estate's ownership and right to collect that which is due. It is only when an obligation is disputed by the alleged obligor that the trustee must resort to a plenary action in a court that has personal jurisdiction over the adverse claimant in order to establish that the chose is an asset subject to the jurisdiction of the reorganization court. In re Lehigh Valley Railroad Co., 458 F.2d 1041, 1043-44 (3d Cir. 1972).
Here, when Reading filed its petition in bankruptcy there was no dispute about its ownership of 500 shares of Trailer Train, nor is that ownership in dispute today. When Reading's petition in bankruptcy was filed, there was no dispute about its being entitled to benefit from its stock ownership. It continued to enjoy those advantages for more than four years, profiting from having equipment available under favorable lease terms. In short, there has never been any controversy about Reading's ownership or its right to benefit from ownership in the stock of Trailer Train. The only dispute is whether all incidents of ownership are forfeit because Reading conveyed its operating equipment and properties to Conrail. This is a question which is inextricably entwined with Reading's bankruptcy. Conrail was incorporated by Congress for the express purpose of creating a new railroad network from portions of eight bankrupt lines. But for Reading's bankruptcy and the Congressional enactment, there would have been no conveyance to Conrail and presumably no change in Reading's continued enjoyment of the rights accruing from its ownership of Trailer Train stock. Judicial economy, the smooth administration of justice, and the liberal jurisdiction given to reorganization courts to adjudicate all controversies involving the property of a bankruptcy dictate that Reading's dispute with Trailer Train is one for me to hear. See, Katchen v. Landy, 382 U.S. 323, 328-33, 86 S.Ct. 467, 472-74, 15 L.Ed.2d 391 (1966).
Trailer Train contends that the jurisdictional sections of the Bankruptcy Act of 1898 as amended do not allow a reorganization court to retain jurisdiction to enforce a chose in action against a debtor or obligor. This interpretation has been devised by reading section 23 with section 77. Section 23 allegedly withdraws from the bankruptcy court jurisdiction over plenary suits against adverse claimants which prior to bankruptcy may have been brought in a court of general jurisdiction.1 Section 23 is inapplicable here since the suit never could have been brought prior to bankruptcy. The whole question of the worth of the stock evolves from the bankruptcy and the fact that Reading no longer operates a railroad.
Two cases from the Third Circuit illustrate the importance of the bankrupt's possession at the time of bankruptcy. In re Penn Central Transportation Co., 453 F.2d 520 (3d Cir. 1972), dealt with the right of various banking institutions to set off a bankrupt railroad's bank deposits against debts it owed to such banks. The banks challenged the reorganization court's jurisdiction to decide the matter. The Third Circuit held that it was neither necessary nor desirable to have the issue tried in a court of general jurisdiction because the dispute was within the area of special concern and competency of the reorganization court and did not present any controversy about entitlement to property when reorganization began. In re Lehigh Valley Railroad Co., 458 F.2d 1041 (3d Cir. 1972), involved an attorney's right to a lien on a tax refund due a bankrupt railroad. The amount was admittedly due at the time reorganization commenced, and was thus in the constructive possession of the railroad at that time. For this reason, the attorney's challenge to the summary jurisdiction of the reorganization court was dismissed by the Court of Appeals.
To support its argument that this court lacks summary jurisdiction, Trailer Train cites the following cases: In re Lehigh and Hudson River Railway Co. (Baker v. Troiano), 468 F.2d 430 (2d Cir. 1972); In re Welded Construction, Inc., 339 F.2d 593 (6th Cir. 1964); Thompson v. Terminal Shares, 104 F.2d 1 (8th Cir.), cert. denied 308 U.S. 559, 60 S.Ct. 100, 84 L.Ed. 470 (1939); and In re Roman, 23 F.2d 556 (2d Cir. 1928). However, these cases involve factual situations wholly inapposite to the circumstances here, and more importantly, do not involve property undisputably in the actual or constructive possession of the bankrupt at the time of bankruptcy and thereafter. In re Warren, 387 F.Supp. 1395 (S.D.Ohio 1975), also cited by Trailer Train, involved consensual jurisdiction to a summary proceeding and is therefore not of precedential value under the instant circumstances.
An analysis of the case law persuades me that summary jurisdiction exists to determine the trustees' petition to obtain some type of return on its Trailer Train shares. It is clear that the stock was in the hands of the bankrupt prior to filing for reorganization, and any determination regarding the stock's proceeds logically flows from the power of this court to preserve the bankrupt's assets.
Moreover, as I stated in my earlier opinion in which I ordered Trailer Train to negotiate,2 this court would have plenary jurisdiction based on diversity of citizenship over the instant question.
Memorandum and Order No. 1557, pg. 3.
Trailer Train contends that the Reading's claim has nothing to do with the reorganization3 and that to adjudicate it in this court would prejudice its case. The relevance of this stock issue to the Debtor's estate inheres in the...
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