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June 29, 1950


The opinion of the court was delivered by: BARD

This is an action by Beneficial Corporation (hereinafter called Beneficial), a Delaware corporation, against the Reading and Southwestern Street Railway Company (hereinafter called Railway), a Pennsylvania corporation, for a declaratory judgment. The City Bank and Trust Company of Reading (hereinafter called Bank), holder as trustee of 54% or the majority of Railway's outstanding capital stock, intervened as a defendant. It is now before me on the motion of the defendant and the intervening defendant for summary judgment.

In 1901 Railway leased to United Traction Company, its successors and assigns, for a term of 999 years, all of its physical properties and tangible assets together with all of its rights and franchises under which Railway had been operating a passenger railway on the streets of Reading, Pennsylvania, and adjacent territory. Through mergers, and purchases, the United Traction Company's leasehold interest is now vested in the Reading Street Railway Company.

 Under the terms of the lease the lessee convenanted to pay an annual rent to the defendant-lessor in the form of semi-annual dividends to be sent directly to Railway's shareholders, to pay the interest and principal on the bonded indebtedness of the lessor, to pay a nominal sum annually for the maintenance of the lessor's organization, to indemnify and hold the lessor free from probably all liability, and in general to take over the control and operation of the business and responsibility therefor.

 The effect of this lease was to leave Railway with only the mere shell of its corporate existence.

 However, in recent years Railway has incurred several debts. The sum total of this alleged indebtedness is $ 3,348.95 plus the costs and attorneys' fees for this suit and other suits presently pending in the state courts.

 The lessee has refused to pay these debts. Most of them have been paid by the Bank which in turn reimbursed itself from the dividends paid on the shares which it held as trustee, so that now the actual creditor of Railway is the beneficiary of the trust.

 In order to get the necessary funds to pay these debts, since Railway had no source of income except its annual rental income from the lease, which heretofore had been paid directly to the shareholders, its Board of Directors *fn1" resolved on July 11, 1949 that no more dividends would be paid until the Board so declared. On or about the following day Railway notified the lessee of its action and that all cash rental payments beginning with the semi-annual payment due August 1, 1949 should be paid to Railway until further notice. Since receipt of this notice the lessee has not made any rental payments direct to the shareholders.

 Beneficial, as minority shareholder of 40% of Railway's outstanding capital stock, filed its complaint under the Declaratory Judgments Act *fn2" on August 1, 1949. In effect, Beneficial prays this Court to declare the resolution of Railway's Board of Directors on July 22,1949 to be null and void, and to make such orders as are necessary for the lessee to pay the rental income direct to the shareholders.

 In their answers the defendant Railway and intervening defendant Bank have admitted all the pertinent facts, and this case is ripe for the determination of the defendants' joint motion for summary judgment.

 Jurisdiction of this Court is based upon diversity of citizenship. Since Erie Railroad Co. v. Tompkins, 304 U.S. 64, 58 S. Ct. 817, 82 L. Ed. 1188, 114 A.L.R. 1487, it is fundamental that in diversity actions it is the law of the state that controls. And there is no doubt but that the law of Pennsylvania governs since the contract or lease was made in Pennsylvania and is to be performed here. Restatement, Conflict of Laws, Secs. 332, 346, 358.

 To determine the defendants' motion it is not necessary for me to determine the validity of each claim against Railway, but some unquestionably are valid. Nor do I have to decide Railway's right of indemnity from the lessee. These issues are not raised by the pleadings.

 The issue is whether the minority shareholders are entitled, under the terms of the lease to receive the cash rental income as dividends regardless of the existence of corporate debts and ...

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