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In re Philadelphia Rapid Transit Co.

January 16, 1941


Appeal from the District Court of the United States for the Eastern District of Pennsylvania; George A. Welsh, Judge.

Author: Jones

Before CLARK, JONES, and GOODRICH, Circuit Judges.

JONES, Circuit Judge.

The question presented by these appeals is whether the Philadelphia Rapid Transit Company assumed liability for the payment of certain annuities bequeathed by the will of Thomas E. Mitten, deceased. The annuitants pressed such claims in the proceeding below for the reorganization of the Transit Company, a debtor. The District Court held that the asserted liability did not exist and directed that the debtor "discontinue payments of the sums of money bequeathed as annuities or legacies by the will of Thomas E. Mitten, deceased". From that order, the petitioning annuitants severally took the present appeals.

The possibility that a public service company, engaged in the business of transporting passengers for hire, could be obliged to discharge the testamentary benefactions of a private individual arises from the unusual procedure followed in an effort to invest the Transit Company with the assets of the testator's estate.

Mitten died October 1, 1929, leaving an estate which was inventoried and appraised for administration at a total gross value of $3,663,527.58 and for inheritance tax purposes at $3,333,667.21. By his will, the decedent created a trust of his residuary estate for the payment of specified annuities to his son and to certain others (principally relatives) with remainders over to the son, and appointed his son (Dr. Arthur A. Mitten) and a brother as executors and trustees under the will. The son subsequently renounced his interest in the father's estate so that his rights either as an annuitant or remainderman are in no way involved here.

Five days before Mitten's death, to wit, on September 26, 1929, Will B. Hadley, ostensibly acting in his official capacity as Controller of the City and County of Philadelphia, filed a bill in equity in a Court of Common Pleas of Ohiladelphia County against Mitten, the Philadelphia Rapid Transit Company, Mitten Management, Inc., and Mitten Bank Securities Corporation. The bill alleged certain unlawful transactions among the defendants, including conversion of assets of the Transit Company to the use of Mitten and the other defendants, and prayed for an accounting, restitution, cancellation of certain contracts and other equitable relief. Following Mitten's death, the record in the equity suit was amended by order of court so as to show the executors and trustees under Mitten's will as parties defendant in place of Mitten and the addition of Dr. Arthur A. Mitten, individually, and Mitten Men & Management Bank & Trust Company, a Pennsylvania corporation, also as parties defendant. The bill did not aver any interest or hurt, personal to Hadley, and none was proven. The suit, when instituted, was wholly unauthorized by the City of Philadelphia. According to the City's petition for leave to intervene, the proceeding was "illegal, improper and * * * [failed] of justification", Hadley having no legal right to sue as the City's representative. The City's intervention, as a party plaintiff, on December 12, 1929, was more than three months after Mitten's death.

Thereafter, the case proceeded to trial before the Court of Common Pleas where, after extensive hearings, the court on April 11, 1931, handed down what it entitled a "Statement of Pleadings, Findings of Fact, Discussion, Conclusions of Law, and Decree Nisi". Among several hundred separate findings of fact, the court found that " * * * [an] audit of the books, accounts and vouchers of the Philadelphia Rapid Transit Company shows that Thomas E. Mitten and/or Mitten Management, Inc. * * * caused payments to be made from Philadelphia Rapid Transit Company's funds resulting in losses to the Company * * * chargeable to the Estate of Thomas E. Mitten, Deceased, and/or Mitten Management, Inc." in a total sum of $15,069,150.12.How much of this total amount might be legally allocated as a charge against the Mitten estate, the court did not find or otherwise determine. As indicated by the findings of fact upon which the above quoted finding was based, the liability of the Mitten estate might possibly not have exceeded $2,048,792.02 - a sum considerably less than the gross value of the Mitten estate. In any event, neither then nor thereafter did the court make an adjudication of any definite liability against either Mitten or his estate. Nor was any money decree ever entered against either. The decree nisi, then entered by the court, was limited to placing the property and assets of the Philadelphia Rapid Transit Company in the hands of receivers for their operation, management and control within certain enumerated broad powers.

Upon dismissing exceptions to the decree nisi, the court by order of May 14, 1931, directed the cancellation of certain leases, the restitution of certain properties and the reorganization of the board of directors of the Transit Company with provision for appointment thereto by the court. The prior decree appointing the receivers was revoked, the court nothing its retention of jurisdiction for further proceedings.

On November 3, 1931, counsel for the board of directors of the Transit Company presented the company's petition, in the equity proceeding, wherein it was averred that in order to obtain fullest restitution from the Mitten defendants the Transit Company's board had required the Mitten defendants to place all of their assets in the company's control. The petitioner recommended that the assets of the Mitten estate and the interest of Dr. Arthur A. Mitten and Mitten Management, Inc., be accepted in full settlement of their liabilities and further stated that the legacies and annuities provided for in the will of Thomas E. Mitten could not be recognized as prior in legal right to the claims of the Transit Company. The petition concluded by praying that the decree to be entered should provide "that any action with reference to these legacies and annuities * * * be left in the discretion of the Board of Directors" of the Transit Company. The record clearly indicates that neither the court nor counsel was unaware of the burden which the presence of the undefeated annuities foreshadowed from a legal standpoint. In fact, counsel then openly stated that "probably the Court would be anxious to protect" the legacies and annuities. The qualification implied by the use of "probably" comported with the hope of escape for the company indicated by counsel's observation to the court that "the petition represents a maximum gain for P.R.T. and a minimum assumption of obligation".

Forthwith, upon the presentation of this petition, the court entered the decree of November 3, 1931, which directed the executors of the Mitten estate to transfer all of the decedent's assets to the Transit Company and assumed to empower the Company to "take whatever action, if any, it shall in its discretion see fit to take with reference to the annuities and legacies * * * ".

The executors of the Mitten estate, after having paid all of the annuitants, who are also the present appellants, the amounts of their respective annuities from October of 1929 to December of 1931, inclusive, and in apparent compliance with the decree of the Common Pleas Court, transferred all of the decedent's assets to the Transit Company. The equity suit was thereupon marked settled and discontinued of record as to all of the defendants except the Philadelphia Rapid Transit Company. The annuitants, or at least such as are appellants herein, had never been made parties to the equity suit nor had they been otherwise formally notified of its pendency.

On January 25, 1932, the Transit Company, then possessed of the assets of the Mitten estate, entered upon the payment of the annuities. A letter to the annuitants enclosed with the first payment stated, in part, that the payment should not be taken "as a precedent as the Board must continue to exercise the discretion lodged with it by the Court * * * ". However, the Transit Company thereafter continued to make the annuity payments regularly until October 1, 1934, when it filed its debtor petition in the District Court for reorganization under Section 77B of the Bankruptcy Act, 11 U.S.C.A. ยง 207.

Shortly thereafter, to wit, on January 25, 1935, the debtor petitioned the Bankruptcy Court for advice respecting payment of the annuities. Among other things, the petition set forth that the annuitants had had no day in court and had not waived their rights to the annuities; that the decree of November 3, 1931 in the equity proceeding had authorized the petitioner to pay the annuities in its discretion; that "The [Mitten] Estate [was] thereafter turned over to the Debtor and the Debtor accepted the Estate assets on the assumption that the annuities would be regarded as in the nature of a charge on the Estate assets and would be paid * * * "; and ...

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