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March 18, 1974


The opinion of the court was delivered by: FULLAM


The Court is confronted with a number of issues concerning the commuter service furnished by the Debtor in the Philadelphia area, and certain proposed arrangements between the Debtor and Southeastern Pennsylvania Transportation Authority (SEPTA) affecting that service.


 Description of the Service

 The Philadelphia area commuter service embraces some 137 route miles of commuter railroad, serving an average of 35,000 commuters each week-day. The system extends to Trenton, New Jersey, on the north, Newark, Delaware, on the south, and the vicinity of Paoli, Pennsylvania, on the west. Portions of this rail system are devoted almost exclusively to commuter service, but substantial portions are also used for intercity passenger service pursuant to a contract between the Debtor and the National Rail Passenger Corporation (Amtrak), and for freight service. The Debtor owns some of the lines, but some are owned by other railroads which lease them to the Debtor. The latter include the Philadelphia, Baltimore & Washington Railroad, the Connecting Railroad, and the Philadelphia & Trenton Railroad, all of which are also in reorganization, as Secondary Debtors in this proceeding.



 A concise description of SEPTA is found in the opinion of the Commonwealth Court in the case of SEPTA v. Yellow Limousine Service, Inc., 10 Pa. Cmwlth. 572, 312 A.2d 79 (1973):

 'SEPTA is an authority formed pursuant to the Metropolitan Transportation Authorities Act of 1963, 66 P.S. § 2001 et seq. Its constituent members are the City of Philadelphia and the Counties of Bucks, Chester, Delaware and Montgomery. It is charged by the legislature with the duty of combining, improving, extending and supplementing public transportation systems in the Philadelphia metropolitan area, which systems the Legislature found to be so underdeveloped and obsolete as to have harmed the economic and social health of the area, depreciated property values, reduced tax revenues and generally made the area a less desirable place to live and work . . . SEPTA's mission, as specifically provided by the Act, is that of planning, acquiring, holding, constructing, improving, maintaining, operating, and otherwise functioning with respect to a transportation system in the metropolitan area . . ..'

 SEPTA has been granted the power of eminent domain, but has no taxing power. It is financially dependent upon annual appropriations by the constituent municipalities and by the Commonwealth of Pennsylvania.


 Background of the Problems

 For many years, the service has produced annual operating losses. For the year ended June 30, 1973, the loss was approximately $ 18 million; and the losses have been increasing each year.

 The service has been operated under a series of contractual arrangements between the Debtor and SEPTA, pursuant to which SEPTA has provided subsidies which partially reimburse the Debtor's losses. Until recently, this reimbursement has been calculated on a 'solely related' basis (i.e., taking into account only those costs which would be entirely eliminated if the Debtor did not operate the commuter service); for the year ended June 30, 1973, the SEPTA subsidy amounted to $ 8 million.

 For several years, the Trustees of the Debtor have been negotiating with SEPTA with a view toward achieving (a) an acceptable permanent arrangement for the service, and (b) pending consummation of such a permanent solution, acceptable interim subsidy arrangements adequate to cover fully distributed costs plus a return on capital assets devoted to the service.

 In mid-1973, these negotiations culminated in a proposed 'Memorandum of Understanding,' discussed below, and, pending final approval of the Memorandum of Understanding, interim operating agreements providing, in essence, for reimbursement by SEPTA on a fully distributed cost basis, without provision for return on investment. The interim agreement for the balance of 1973 was approved by this Court, but SEPTA has made no payments thereunder because the Commonwealth of Pennsylvania has insisted upon withholding the necessary funds from SEPTA until the 'Memorandum of Understanding' is finally approved. Approval of the proposed Memorandum of Understanding has been withheld by this Court, in part because of what I regard as insurmountable objections to the proposals on its merits (discussed below), and partly in the hope that appellate guidance on these issues would shortly be forthcoming (on September 12, 1973, Judge Ditter approved a somewhat similar Memorandum of Understanding between SEPTA and the Reading Company, and his Order is pending on appeal before the Third Circuit).

 More recently, the Trustees have petitioned for leave to withdraw their earlier petition for approval of the proposed Memorandum of Understanding, and a further hearing thereon was held on January 21, 1974. At this hearing, the parties who had originally objected to the Memorandum of Understanding renewed their objection, and also urged the Court not to approve any further interim agreement which did not make adequate provision for return on investment. The Indenture Trustees and institutional investors also asserted, as they had at the original hearing, that this Court should proceed to make findings as to the value of the property devoted to the service, such value to constitute an 'upset price' for acquisition of the property by SEPTA, and the basis for calculating return on investment.

 These latter issues are somewhat clouded by procedural problems. Counsel for SEPTA was present at the initial hearing, but took no part therein, although it was clear that SEPTA had approved the Memorandum of Understanding, and presumably favored its approval by this Court. Counsel for SEPTA was present at the recent hearing, and participated therein to the extent of providing an explanatory statement of SEPTA's dilemma. The position of the Commonwealth of Pennsylvania is even more anomalous; it did not appear at either hearing, but it is a party to these reorganization proceedings, and was duly notified of both hearings. Its sole contribution to the record in this matter is in the form of a letter to this Court, stating that, ...

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