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IN RE PHILADELPHIA RAPID TRANSIT CO.

November 6, 1936

In re PHILADELPHIA RAPID TRANSIT CO.


The opinion of the court was delivered by: WELSH

This is a claim by the Union Traction Company against the Philadelphia Rapid Transit Company, hereinafter called P.R.T., for use and occupation under lease of the street railway system of Philadelphia, excluding the city-owned Broad Street Subway and Frankford Elevated. We referred the claim to a special master for consideration and recommendation, and he has recommended a payment of $3,500,000.

Exceptions to the special master's recommendation have been filed by the P.R.T., by the trustees of the P.R.T., by the city of Philadelphia, and by the Public Service Commission of Pennsylvania.

 The claim was filed by the Union Traction Company in a dual capacity, (1) as owner and lessor in its own right of a part of the street railway system of Philadelphia, and (2) as lessee of other underlying companies claiming ownership of the remaining parts of the system. It was an additional finding of the special master that present ownership of the entire transit system of Philadelphia is in the Union Traction Company and its allied underliers. The exceptions filed challenge this additional finding of the special master also.

 We consider first the finding of the special master awarding present ownership of the City's entire transit system, to the Union Traction Company and its allied underliers. The claim of the Union Traction Company for use and occupation of the entire transit system obviously depends upon the correctness of this award of ownership.

 The starting point on the question of ownership is an agreement of July 1, 1902, entered into between the Union Traction Company and the P.R.T., and at the outset the very integrity of that agreement is questioned by some of the exceptions filed. Among other things, proofs have been offered that in the execution and ratification of the agreement a majority of five out of eight of the directors of P.R.T., present and voting, were at the same time interlocking directors and stockholders of the Union Traction Company, and it is urged that, while this circumstance may not be of itself affirmative evidence of fraud, any agreement shown to have been the product of the action of interlocking directorates should be scrupulously scrutinized by the court. We entirely agree with this contention, and with the further statement of counsel as to the difficulty of proving actual fraud after the lapse of 34 years and the passing away of the actors to the agreement. We pass, therefore, to a careful scrutiny of the agreement of July 1, 1902.

 We shall say but little of a 999-year lease of a street railway system which requires the delivery of the property at the end of 999 years, in the same good order and condition as when leased. Such a lease may or may not be a fiction resting on a false analogy, and unfounded in logic or reason. We simply say that the lease, as thus far examined, on its face imports full ownership of the demised property in the Union Traction Company, and an unquestioned acquiescence by the P.R.T. in that ownership.

 But there are further terms to the lease. The P.R.T. was to make repairs, renewals, and replacements to the demised property; and it also was to make "improvements and extensions" thereto, to the end that there should be delivered to the Union Traction Company, upon the termination of the lease, "the entire system and all parts thereof and everything pertaining thereto including all extensions, fully equipped in a thoroughly first-class manner in all respects, with all improvements which may be then in general use on similar first-class railway systems of like extent." We particularly note that the "extensions" were to be made not only upon the streets in which the Union Traction Company was under lease obligations of its own to construct additional lines; they were also to be made to railway and traction systems "besides those herein demised." Section 18.

 It appears to be undisputed that, notwithstanding the long interval since the execution of the lease, some of the original demised property is still extant, and we do not understand it to be questioned that ownership of such extant property is in the Union Traction Company and its allied underliers.

 The special master's finding, however, is that not only is such extant property the property of the underliers, but that title to all the "improvements and extensions" made to the demised property during the last 34 years vested in the Union Traction Company and its allied underliers at the time of the installation of the improvements and extensions, and has remained so to the present time.

 As we have said, such a finding is essential to the maintenance of the large use and occupation claim before us. The claim is expressly predicated upon the ownership derived under the lease which we have been examining. The brief of counsel for the Union Traction Company distinctly informs us that "the money is claimed by Union from P.R.T. under the lease of 1902." No default under that lease is at present being pressed. The lease continues in unchallenged full force and effect. As the learned special master well points out, the whole theory of the P.R.T.'s pending reorganization proceeding under section 77B, Bankr.Act (11 U.S.C.A. § 207) hangs upon a continuance of the lease of 1902, and counsel for the Union Traction Company at the hearing before us on October 7, speaking of the long delay in submitting a plan of reorganization which would enable the Court to proceed with its duties expeditiously, said: "I am going to work on it now, and I think in the course of a week we can present something to you."

 We are unable to approve and adopt the special master's finding that title to the "improvements and extensions," vested in the Union Traction Company and its allied underliers at the time of the installation of the improvements and extensions, and has remained so to the present time.

 We find in the lease of 1902 that upon the termination of the agreement the Union Traction Company is to have the right to reject any improvement made to the demised property which it may deem unsuitable or unadaptable to its purposes at that time, with the further right to demand from the P.R.T. such sum of money as will enable it to equip the property as it may think it ought to be equipped, at that time. Section 21. We fail to see how the Union Traction Company could be the owner of the improvements at the time of ...


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