Philadelphia Co v. Dipple

• Decision Date: 03 February 1941
• Docket Number: 243,Nos. 242,s. 242
• Citation: 312 U.S. 168,312 U.S. 656,85 L.Ed. 651,61 S.Ct. 538
• Parties: PHILADELPHIA CO. et al. v. DIPPLE et al
• Court: U.S. Supreme Court

312 U.S. 168

61 S.Ct. 538

312 U.S. 656

85 L.Ed. 651

PHILADELPHIA CO. et al.

v DIPPLE et al.

Nos. 242, 243.

Argued Jan. 8, 9, 1941.

Decided Feb. 3, 1941.

As Amended Feb. 10, 1941.

Messrs. W. A. Seifert and Lee C. Beatty, both of Pittsburgh, Pa., for petitioner.

Miss Anne X. Alpern and Mr. A. E. Kountz, both of Pittsburgh, Pa., for respondents.

Mr. Justice ROBERTS delivered the opinion of the Court.

This case presents a problem similar to that involved in No. 120. Here the debtor instituted a reorganization proceeding under § 77B of the Bankruptcy Act, 11 U.S.C.A. § 207 (now chapter X of that Act, 11 U.S.C.A. § 501 et seq.) ¹ and the question presented is whether the trustees should be directed to pay taxes owed by corporations whose properties the debtor operated under leases and operating agreements and the trustees continued to operate. Although the courts below did not refer to the Act of June 18, 1934,² the petitioners' insistence that the decision of the Circuit Court of Appeals is in the teeth of the provisions of the Act and conflicts with the decision of the Circuit Court of Appeals of the Second Circuit in Palmer v. Webster and Atlas National Bank, No. 120, 312 U.S. 156, 61 S.Ct. 542, 85 L.Ed. —-, caused us to grant certiorari. 311 U.S. 628, 61 S.Ct. 33, 85 L.Ed. —-.

The debtor, Pittsburgh Railways Company, has, for many years, possessed and used the properties of some fifty-five street railway companies and has operated those properties, in connection with its own, as a unified street railway system in Pittsburgh, Pennsylvania, and surrounding territory. The debtor obtained possession of the properties of the underlying companies through leases and operating agreements which required the debtor to pay all expenses of operation and maintenance and all the taxes of the underlying companies. The system comprises some 560 miles of track, incline plane railways, cars, car barns, and buildings. The debtor owns 28 miles of the track and owns cars and other property. Pursuant to the terms of the leases and agreements, the debtor has directly paid the expenses of operating, maintenance charges, and all taxes of the underlying companies. After the filing of the debtor's petition under § 77B, its approval, and an order continuing the debtor in possession, the court, June 14, 1938, appointed trustees with authority to maintain, manage, and operate the property in possession of, or owned by, the debtor; to manage and conduct its business; collect the revenues therefrom, and to pay all taxes and assessments due, or to become due, upon property in possession of, or owned by, the debtor. The trustees have since been operating the business, using therein the properties of the underlying companies. They have not affirmed or disaffirmed the leases and operating agreements.

March 10, 1939, the trustees petitioned the District Court for instructions respecting the payment, as administration expenses, of taxes assessed against the debtor, a subsidiary, and the underlying companies.³ The petition was referred to a master before whom objections were filed by the City of Pittsburgh, a creditor, and also by a creditors' committee, to the payment of the taxes assessed against the underlying companies. These consisted of Pennsylvania corporate stock taxes, Pennsylvania corporate net income taxes, Pennsylvania corporate loan taxes, and Federal income taxes, some of which accrued and became payable subsequent to the filing of the petition for reorganization and some of which accrued prior thereto. The present petitioners appeared before the master and advocated an order for payment of the taxes.

It appeared from the trustees' petition that they had on hand an amount sufficient to pay all the taxes as to which they requested instruction and that none of the underlying companies had funds with which to pay any of the taxes assessed against them. The testimony before the master showed that during the existence of the unified system no attempt was made to account for the revenues and operating expenses of individual underlying companies; that any attempt to account for the revenues and expenses of individual companies would be very expensive and the results would not be sufficiently accurate to form a basis for allocating the items; that it was impossible to operate each underlying company separately so as to ascertain the net earnings of each, and that it was probably impossible to determine what would be the fair proportion of rentals to be paid to the various underlying companies whose properties were utilized by the debtor and are now utilized by the trustees. There was testimony that it was impracticable at the time of the hearing for the trustees to state what properties of underlying companies would be embraced in the contemplated plan of reorganization.

In his report, the master recommended that the trustees be directed not to pay taxes assessed against the underlying companies at the present time. This recommendation was supported by a finding that it was uncertain that any of the leases would be affirmed by the trustees and that, in the absence of evidence that the net earnings of each underlying company equalled its taxes, payment of taxes might result in preferment or overpayment. Furthermore, the master found that claims of the debtor against certain of the underlying companies might extinguish any existing equities in the properties of the latter.

After a hearing on exceptions to the master's report, and after receiving a recommendation from the trustees as to what taxes of the underlying companies should be paid, the District Court entered an order that the bulk of the taxes of the underlying companies should be paid by the trustees. The decree was predicated upon the fact that the system had been operated as a unit for many years; that all income derived from the lines of the underlying companies had been kept in one fund, and that it was equitable that the taxes of the underlying companies be treated as taxes of the debtor.

Upon an appeal by the creditors' committee and by the City of Pittsburgh, the Circuit Court of Appeals reversed the order of the District Court so far as it applied to the taxes of the underlying companies.⁴ That court held that the debtor's undertaking to pay the taxes of the underlying companies was merely a portion of the consideration for...