Reading Co., Matter of, s. 82-1557

• Citation: 711 F.2d 509
• Decision Date: 16 June 1983
• Docket Number: 82-1726,Nos. 82-1557,s. 82-1557
• Parties: In the Matter of READING COMPANY, Debtor. Appeal of TRAILER TRAIN COMPANY.
• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Page 509

711 F.2d 509

In the Matter of READING COMPANY, Debtor Appeal of TRAILER TRAIN COMPANY.

Nos. 82-1557, 82-1726.

United States Court of Appeals Third Circuit.

Argued April 11, 1983.

Decided June 16, 1983.

William P. Quinn (argued), Nicholas J. Scafidi, Eric M. Hocky, Rubin, Quinn & Moss, Philadelphia, Pa., for appellant.

A. Grant Sprecher (argued), Howard H. Lewis, John J. Ehlinger, Jr., Joseph P. Kane, Obermayer, Rebmann, Maxwell & Hippel, Philadelphia, Pa., for appellee.

Before HUNTER and HIGGINBOTHAM, Circuit Judges, and GERRY, ^* District Judge.

OPINION OF THE COURT

JAMES HUNTER, III, Circuit Judge:

Appellee Reading Company ("Reading") owns 500 shares of stock in appellant Trailer Train Company ("Trailer Train"). During Reading's reorganization proceedings under section 77 of the Bankruptcy Act of 1898 as amended ("the 1898 Act"), 11 U.S.C. § 205 (1976), ¹ Reading's trustees petitioned for an order compelling Trailer Train to repurchase the stock, convert it into debt or preferred stock, or pay dividends. The United States District Court for the Eastern District of Pennsylvania, sitting as a reorganization court, ordered Trailer Train to repurchase the stock at book value. See In re Reading Co., 551 F.Supp. 1205 (E.D.Pa.1982). Trailer Train appeals. We will reverse.

I

For many years prior to April 1, 1976, Reading ran an interstate railroad. On November 21, 1971, Reading entered into reorganization under section 77 of the 1898 Act. On April 1, 1976, pursuant to the Regional Rail Reorganization Act of 1973, 45 U.S.C. §§ 701-797m (1976 & Supp. V 1981), Reading conveyed its rail properties to the Consolidated Rail Corporation ("Conrail") and discontinued all rail operations. Reading emerged from reorganization on January 1, 1981. It has not reentered the railroad business.

Trailer Train was incorporated in 1955 by the Pennsylvania Railroad and others for the sole purpose of facilitating inter-railroad "piggyback" shipments by establishing a pool of standardized railroad flat cars. 551 F.Supp. at 1207; see app. at 1334. From an initial fleet of 500 cars, by 1979 Trailer Train had grown to own, operate, and maintain 87,494 intermodal (piggyback), autorack, and special use cars, approximately ninety percent of those in use in the country. See app. at 1334. Those cars are used by railroads in the United States under a pooling agreement entered into between Trailer Train and its shareholders with the approval of the Interstate Commerce Commission ("the ICC"). American Rail Box Car Co.--Pooling, 347 I.C.C. 862 (1974). To participate in the pool, a railroad must purchase a 500-share block of stock and sign Trailer Train's Form A Car Contract. Any shareholder railroad, no matter how many blocks of stock it owns, is then entitled to use the cars from the pool on its own lines, and to interchange the cars with other shareholder railroads or with non-shareholder railroads.

Shareholder and non-shareholder railroads in possession of Trailer Train cars must pay car hire charges set by the Trailer Train rate policy. That policy, which Trailer Train has adhered to throughout its corporate existence, is set forth as part of the Form A Car Contract:

It shall be the policy of Trailer Train to maintain per diem, mileage and other charges at the lowest level required to meet Trailer Train's ordinary and necessary expenses, ... and to accumulate retained earnings adequate to support continued reasonable enlargement of the number of cars in the pool, to that number found to be needed. It is the intention [of Trailer Train and each of its shareholders] that the total compensation paid to Trailer Train ... shall be no greater than consistent with the foregoing policy.

551 F.Supp. at 1210. Thus, under its rate policy, Trailer Train does not try to maximize its profits. Instead, it tries to minimize the rates paid by its shareholders. In consequence, Trailer Train has never paid a dividend to its shareholders. The only benefit of owning Trailer Train stock is access to its large pool of standardized cars in return for payment of Trailer Train's car hire rates.

From 1956 to 1969, the aggregate car hire rates paid by shareholders for the use of Trailer Train cars were higher than the rates which those shareholders would have paid under the ICC per diem schedule had they chosen instead to use their own cars on other railroads' lines. In 1969 the ICC changed the formula by which it calculated its per diem rates. As a result, since 1969 the aggregate car hire rates paid by most shareholders for the use of most Trailer Train equipment have been lower than the rates which those shareholders would have paid under the ICC per diem schedule.

Between 1955 and 1964 forty operating railroads bought blocks of shares in Trailer Train. Since 1964 there have been no sales of stock except through combinations or reorganizations of existing shareholders. At present thirty operating railroads, representing approximately eighty-nine percent of the mileage of class 1 railroads in the United States, now own stock in Trailer Train. The other shareholders are a diversified freight forwarding company, Reading, and the trustees of the Erie Lackawanna Railway, which like Reading entered reorganization, conveyed its rail properties to Conrail and left the railroad business.

In 1961 Reading acquired its block of Trailer Train stock at the book value of $150,105. ² At that time Reading signed the Form A Car Contract. In addition, Trailer Train informed Reading that

the car contract requires Trailer Train Company to set per diem and other charges on a basis that will enable the company to meet its expenses and to finance its car acquisitions without, however, yielding excessive profits to Trailer Train Company.

App. at 128. From 1961 to 1976, Reading used Trailer Train flat cars in rail service and paid car hire charges. Reading never challenged Trailer Train's rate policy while it was an operating railroad. App. at 300-02. Indeed, while in reorganization Reading joined with the other shareholders in requesting approval of the pooling arrangement from the ICC, which endorsed Trailer Train's financial policy. American Rail Box Car Co.--Pooling, 347 I.C.C. 862, 907-08 (1974).

When Reading transferred its rail properties to Conrail in 1976, Reading's trustees successfully requested that its Trailer Train stock not be transferred. App. at 130-31. The trustees did so because in their view the stock "was a valuable asset of the Reading Estate which would eventually produce substantial value for its creditors and stockholders." App. at 271-72. Since its cessation of rail operations, however, Reading has been unable to derive any benefit from its ownership of the stock.

After offering its stock to Trailer Train for repurchase at book value, ³ Reading's trustees tried to sell the stock but found that there was no demand for it. The trustees subsequently discussed with Trailer Train the possibility that the latter might change its dividend policy, repurchase the stock at book value, or exchange it for newly-created debt instruments reflecting Reading's proportionate ownership. Trailer Train told Reading's trustees that its board of directors was opposed to such changes in its policy of operations.

On February 1, 1978, Reading's trustees filed a petition in its reorganization proceedings. The petition alleged that as a result of the Regional Rail Reorganization Act, Reading was no longer able "to profit from its membership in [Trailer Train]." App. at 12. Until that "problem" was solved, the trustees stated, they could not finalize or file a plan of reorganization. App. at 13. The trustees requested that the court order Trailer Train to negotiate a solution to the problem.

Trailer Train moved to dismiss the petition, arguing that the reorganization court lacked jurisdiction in a summary proceeding to decide the issues raised. Such issues, Trailer Train contended, had to be litigated in a plenary suit in a court of appropriate jurisdiction. On January 12, 1979, the court denied Trailer Train's motion. The court held that it had jurisdiction and ordered the parties to negotiate. App. at 23-26. On January 4, 1980, the reorganization court again rejected Trailer Train's renewed argument that the court had no jurisdiction. In re Reading Co., 2 B.R. 719 (D.C.E.D.Pa.1980).

After initial negotiations proved fruitless, the Reading trustees filed an amended petition requesting an order to compel Trailer Train either to purchase the stock at book value, or to convert it into interest-bearing debt instruments or dividend-paying preferred stock. Reading's trustees subsequently filed a second amended petition in which they asserted that Trailer Train's policies constituted a breach of fiduciary duty to Reading as a minority stockholder. The petition suggested that the court direct Trailer Train to pay dividends on the stock or to pay a share of the savings realized by pool users on account of Trailer Train's lower car hire rates. ⁴

On August 11, 1982, the court below held that Trailer Train had breached its fiduciary duty to Reading, and granted Reading's petition to compel Trailer Train to repurchase the stock at current book value. In re Reading Co., 551 F.Supp. 1205 (E.D.Pa.1982). After the parties stipulated that the stock's current book value was $9,830,707, the court entered a judgment ordering Trailer Train to pay the stipulated price upon the tender of the stock by Reading. App. at 221.

II

On appeal Trailer Train argues that the district court lacked summary jurisdiction as a reorganization court to hear Reading's petition as amended. Trailer Train also disputes that it breached any fiduciary duty owed to Reading as a minority shareholder. ⁵

A. Jurisdiction

The court below held that it had jurisdiction to hear the trustees' claim both as a reorganization court and as a district court sitting in diversity. We hold that the court below did not...