Monongahela Street Railway Co. v. Philadelphia Co.

Decision Date27 November 1944
Docket Number160,161
PartiesMonongahela Street Railway Co. v. Philadelphia Company et al., Appellants
CourtPennsylvania Supreme Court

Argued September 29, 1944.

Appeals, Nos. 160 and 161, March T., 1944, from decree of C.P., Allegheny Co., April T., 1943, No. 1178, in case of Monongahela Street Railway Company v. Philadelphia Company and Consolidated Traction Co. Decree affirmed.

Bill in equity. Before DITHRICH, J.

Decree entered in favor of plaintiff. Defendants appealed.

The decree of the court below is affirmed at the cost of appellants.

Elder W. Marshall, with him W. A. Seifert, Frank W. Ittel, Reed Smith, Shaw & McClay, Philip A. Fleger and Henry G. Wasson Jr., for appellants.

Wm. S Moorhead and Earl F. Reed, with them A. W. Henderson, Judson A. Crane, Roy G. Bostwick, Thorp, Bostwick, Reed & Armstrong and Moorhead & Knox, for appellee.




This case comes before us on appeals of the Philadelphia [1] Company and the Consolidated [1] Traction Company from a final decree of the court below ordering the former company to perform certain covenants and to pay all taxes, charges, licenses and assessments now or hereafter lawfully imposed upon Monongahela or for which it is chargeable on account of its corporate existence, its franchises, property, real or personal, cars, business, earnings, bonds, capital stock, dividends or profits, including United States Income and Profits taxes, Pennsylvania Corporate Income, Capital Stock, and Corporate Loans taxes and municipal real estate taxes, and also ordering the Philadelphia Company to specifically perform and carry out its covenants and agreements to pay the interest accrued and payable and hereafter to accrue and become payable on the Refunding Bonds of Monongahela, and that Philadelphia immediately pay to the bearer or bearers of the Refunding Bonds the sum of $104,350, being the installment of interest thereon which became due and payable June 1, 1943, and pay in addition any installment of interest thereon which became due and payable since the filing of the supplemental bill in this proceeding.

On and prior to January 1, 1902, Monongahela owned and operated a railway system in the City of Pittsburgh and other municipalities in Allegheny County. On February 8, 1902, but as of January 1, 1902, Monongahela leased its entire railway system to Consolidated. Philadelphia guaranteed to Monongahela the prompt payment of the rental agreed to be paid and the faithful performance of the covenants agreed to be performed by Consolidated. The Special Act under which Philadelphia was incorporated gave it power to guarantee the performance of obligations of other corporations. The lease and guaranty were duly recorded. Since January 1, 1902, the only income of Monongahela consisted of that derived under the terms of the lease and a supplemental agreement thereto relating to the issuance of Refunding Bonds, hereinafter referred to. After the lease, Monongahela did not own any property not covered by the lease.

In consideration of the lease, Consolidated covenanted to pay as rental specified installments of money and to assume and pay all taxes then or thereafter lawfully imposed on Monongahela or for which Monongahela would otherwise be liable or chargeable on account of its franchises, property, earnings, dividends, or profits, it being the stated intention that the installments of rental should be a net rental available for dividends to stockholders of Monongahela. Monongahela was required to make all such reports and returns of its property, earnings, dividends, and profits for the purposes of taxation as Consolidated should require. Consolidated covenanted to pay and meet interest on bonds of Monongahela and its merged companies and interest on bonds issued for the purpose of taking up said bonds when they matured. Consolidated also covenanted, at its own expense, to do paving and repairing, defend suits against Monongahela during the lease, and pay verdicts and judgments thereon and other claims; at its own expense to keep up insurance; and at its own expense to operate the properties.

The lease and guaranty have been ever since their execution in full force and effect, except as modified by a supplemental agreement referring to the issuance of Refunding Bonds. Monongahela has duly performed and discharged all of the covenants and liabilities made by or resting on it under the original agreement of lease and the agreement supplemental thereto. During the entire term of the lease, Monongahela has made all reports and returns of taxes, including Federal and State income taxes, required of it, said returns and reports having been prepared and filed by the person who was Controller of both Pittsburgh Railways and Philadelphia.

At the time of the execution of its guaranty, Philadelphia owned over 93% of the preferred stock and over 72% of the common stock of Consolidated and, from time to time thereafter, acquired additional amounts of the said stock and now owns all of the common stock and over 97% of the preferred stock of Consolidated. Ever since the execution of the lease from Monongahela to Consolidated, the demised properties have been operated by Pittsburgh Railways (except during its receivership and reorganization proceedings) under an operating agreement between Consolidated and Pittsburgh Railways, the term of which was for five years from January 1, 1902, and thereafter until terminated on three months' notice by either party. All of the taxes imposed upon Monongahela, including Federal and State income taxes, continuously from 1902 until in or about the year 1938, were paid by Pittsburgh Railways except for a few years when they were paid by its Equity Receivers. Pittsburgh Railways paid such taxes in performance and discharge of the covenants of Consolidated under the said lease. Philadelphia caused Pittsburgh Railways to make these tax payments.

In 1938, Federal and State taxes became delinquent and later, in 1940, real estate taxes became delinquent. Neither Consolidated nor Philadelphia informed Monongahela of the non-payment of its taxes. Until November 20, 1942, Philadelphia never denied liability for the payment of Monongahela's taxes. In the Federal and State tax returns prepared by or under the direction of the Controller of the Accounting Department of Philadelphia and subsidiary companies, the address of Monongahela was given as 435 Sixth Avenue, being the offices of Philadelphia and subsidiary companies. All notices and demands for payment of taxes were mailed to that address. They were never sent direct to Monongahela or transmitted to it by the recipient thereof until the latter part of 1942. The principal place of business of Monongahela is at 514 Smithfield Street, Pittsburgh, Pennsylvania.

On May 22, 1942, Monongahela wrote a letter to Philadelphia stating that it had, only recently, received information that a large amount of Federal, State, and local taxes imposed on Monongahela had not been paid for a number of years. It expressed surprise at this information and formally demanded that Philadelphia inform Monongahela of the taxes and the amounts thereof which had not been paid and demanded that Philadelphia promptly pay and discharge such unpaid taxes. A copy of that letter was sent to Consolidated. Five weeks later, Philadelphia replied to this letter, but did not give the requested information and suggested that the disposition of the taxes be held in abeyance. On or about September 28, 1942, Monongahela received from the Trustees of Pittsburgh Railways a copy of a second notice and demand for income taxes made by the collector, dated August 15, 1942. The notice was directed to Monongahela at 435 Sixth Avenue, being the address of Philadelphia and subsidiaries. On October 9, 1942, Monongahela informed Philadelphia of its receipt of the notice from the collector and inquired what Philadelphia proposed to do concerning the payment of the taxes previously mentioned in Monongahela's letter of May 22, 1942. Three weeks later, Philadelphia replied to this letter, again requesting time and stating that it would reply to Monongahela's inquiry in a few weeks. On October 30, Monongahela received a letter from the attorneys for the Trustees of Pittsburgh Railways enclosing notices of levies and distraints from the Collector of Internal Revenue. On November 2, 1942, Monongahela informed Philadelphia of the levies and distraints and urgently requested that Philadelphia advise Monongahela what Philadelphia proposed to do about carrying out its guaranty of the payment of Monongahela taxes. Until Philadelphia's reply to this letter on November 20, 1942, it had never denied its liability as guarantor for the payment of Monongahela's taxes.

Consolidated never denied its liability for the payment of Monongahela's taxes until it filed its answer to the bill, on March 20, 1943. In his letter of November 20, 1942, to Monongahela's counsel, the general attorney for Philadelphia and subsidiaries stated that he had advised Philadelphia that it was under no obligation under its guaranty to pay Federal Income taxes of Monongahela, because Consolidated was under no obligation to pay those taxes; and stated that Philadelphia was unable to give Monongahela the unequivocal assurance which it had requested that Philadelphia would pay such taxes. The general attorney stated, however, that Philadelphia, as guarantor of the lease, gave its assurance that it would pay Pennsylvania capital stock and local real estate taxes owing by Monongahela.

Monongahela then prepared and filed a Bill of Complaint against Philadelphia for specific...

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