Appeals, Nos. 193, 194 and 195, Jan. T., 1961, from judgment of Court of Common Pleas No. 4 of Philadelphia County, June T., 1958, No. 1375, in case of Fidelity-Philadelphia Trust Company, trustee, v. Philadelphia Transportation Company. Judgment, as modified, affirmed.
Hamilton C. Connor, Jr., with him Peter Platten, Allan F. Ayers, Jr., and Ballard, Spahr, Andrews & Ingersoll, and Hodges, Reavis, McGrath & Downey, of the New York Bar, for appellant.
Ernest R. von Starck, with him Donald A. Scott, and Morgan, Lewis & Bockius, for appellee.
Before Jones, C.j., Bell, Musmanno, Jones, Cohen, Bok and Eagen, JJ.
OPINION BY MR. JUSTICE COHEN.
Fidelity-Philadelphia Trust Company (Trustee), appellee, brought this action in assumpsit in its capacity as trustee of the mortgage bondholders under a Trust Indenture securing the Consolidated Mortgage 3%-6% bond of Philadelphia Transportation Company (PTC), the defendant-appellant. Under this Indenture, PTC was to pay a fixed 3% interest per annum and up to 3% additional income-interest to the extent that "net income," as defined in the Indenture, was sufficient.
Under the Indenture the Board of Directors of PTC was to apply "accepted principles of accounting" to determine gross income and to make deductions for such items as depreciation and retirement "in accordance with sound accounting practice". The proper interpretation and application of these terms, contained in Article V, Section 2 of the Indenture, represents the major problem in this appeal.
The Trustee attacks PTC's determination that there was no net income for the years 1957 and 1958 and
therefore that there was no 3% income-interest available for both of those years.*fn1 The Trustee claims that these results were arrived at by accounting methods which fall below the standards spelled out in the Indenture. Specifically, the Trustee first claims that extraordinary charges which were allocated by PTC over the years 1956-1959 to the reserve for track depreciation should have been made in full by the end of 1956 by the application of "sound accounting practice," since the PTC had reason to know by the end of 1956 that its mass conversion program (from rail to bus) would render the existing track obsolete. Therefore, the Trustee claims that the charge to depreciation reserve should have been made when the loss occurred sometime before the end of 1956.
Secondly, the Trustee claims that PTC's treatment of the amortization of franchise paving costs was not in accordance with "sound accounting practice" because the paving, which had been eliminated from the rate base in 1953, did not contribute to income during the years in question. The third item involved in the dispute over the accounting methods employed by PTC concerns the treatment of repaving costs owed to the City of Philadelphia in 1957, which costs the PTC deducted completely in 1957 although it was permitted by the Pennsylvania Public Utility Commission (Pa. PUC) to reflect the repaving costs in the rate base for several years thereafter.
The lower court rendered an order on May 9, 1960, finding for plaintiff-Trustee on all of its claims and awarded a total of $1,420,242 with interest to represent the bond income-interest not paid in 1957 and 1958 and an additional $127,507 ...