Before BIGGS, GOODRICH and McLAUGHLIN, Circuit Judges.
The City of Pittsburgh petitioned the District Court to exercise jurisdiction in bankruptcy reorganization over all underliers of the debtor, Pittsburgh Railways Company, and to determine the rights and interests of all stockholders and creditors thereof. This case arises on appeal from the dismissal of that petition as recommended by the Special Master.
The highly involved financial structure and complicated interrelation of companies in the Pittsburgh transportation system is responsible for our ultimate question of how far the District Court may reach in reorganizing to effectuate a financially operable system. For our purposes the story begins in 1902. Immediately prior to that time there were six principal systems in operation with a seventh being developed.*fn1 Philadelphia Company, the holding Company parent of the operating company, Pittsburgh Railways, through various agreements with the others, effectuated a single unified system by having all the properties transferred to the possession of Pittsburgh Railways, for operation. With the growth of the city in following years came expansion of the system. New companies were created in which Philadelphia Company controlled all the stock and had directorate majorities through interlocking. These companies secured the available new franchises and were then taken into the system as underliers. Inter se the status of the original companies has not been altered since the 1902 orientation.
Let us examine this original group. Pittsburgh Railways, the operating company (then known as Southern Traction Company), is entirely stock owned by the Philadelphia Company. Consolidated Traction Company is also a direct subsidiary of Philadelphia Company. United Traction Company on the other hand is a direct subsidiary of Pittsburgh Railways; Pittsburgh and Charleroi Street Railway Co. (hereafter Charleroi) is similarly controlled. Of the 49 companies that might be involved in a complete reorganization, 36 are directly or indirectly controlled by Philadelphia Company in much the same manner through stock majorities at various levels and interlocking directorates of various degrees. Monongahela Street Railway Company, the Suburban Rapid Transit Street Railway Company and Pittsburgh and Birmingham Traction Company (hereafter Birmingham) comprise the remainder of the original group. Their stock ownership is publicly controlled, though even here some Philadelphia Company infiltration has occurred. Thus it has a minority stock interest of 24.7% in Monongahela and of 6.6% in Suburban.
For convenience, the 36 companies under Philadelphia Company control may be called the "Philadelphia underliers". Monongahela, Suburban and Birmingham together with Birmingham's six lessor company affiliates may be designated the "guaranteed underliers" comprising nine companies. Finally, excluding three companies not now deemed essential to any reorganization plan, we have two remaining companies, each in turn having a single underlier. This last group of four we may term the "unguaranteed underliers". The reasons behind the distinction between Philadelphia underliers from the others is patent from what has been said. The distinction between guaranteed and unguaranteed underliers will become clearer as the facts are developed further.
All the various corporate units or divisions, by whatever name they are designated, are welded to the operating company, Pittsburgh Railways. Consolidated and United are linked with Pittsburgh Railways by operating agreements that have been in effect since 1902. Birmingham and Charleroi are tied to United by long term lease arrangements. Similarly, Monongahela and Suburban are tied to Consolidated by long term lease arrangements. Charleroi is not in the same class with Birmingham, Monongahela and Suburban, since they are publicly controlled while it is merely a Philadelphia underlier.
The community need for operation of this public transportation system as an integrated unit is clear. It has, heretofore, been noted by this court.*fn2 During the argument some suggestion was made by certain of the appellees that separate operation of certain of the underlying systems was physically possible. We do not doubt that fact. A trolley company with a franchise entitling it to run its cars on two city blocks may physically travel up and down that route. But nobody would contend that this kind of arrangement gave the type of public transportation service that a modern community needs. So here, even though some of the underlying companies have franchises for routes of very considerable distance and could, in some instances, get patrons into the center of town under their own separate systems, it is not seriously claimed that this method of operation would adequately meet community requirements. All the parties agree with the finding of the Master*fn3 that such operation, even though physically possible, would not be economically successful. It is quite obvious, we think, that the street car system must not only run its cars but pay its bills if it is to fulfil the community need it purports to serve.
Since 1938 this system has been in federal court and operated under trustees appointed by the court. This state of affairs cannot continue indefinitely and be utilized as a means of integration of a transportation system. A reorganization court is one in which an enterprise may be brought with a view to having its difficulties ironed out under the procedure Congress has provided for the purpose, but it never was intended as a permanent plan for running the business of the country. We are very firm in our conviction that this transportation system must find a way to work out its problems in court and be on its way to a solution presently or else be left to work out its own salvation by extra judicial arrangements. We do not propose to permit the parties to postpone the facing of their business questions indefinitely under the protection of a reorganization court. The Securities and Exchange Commission has cited authorities to the effect that straight bankruptcy proceedings are not available to the system companies.*fn4 The decision is in point but we are not called upon at this time to express either agreement or disagreement with the question there decided. If a plan of reorganization is not found and ordinary bankruptcy is not available, the debtor must leave the haven of the court below. It will be anybody's guess as to what will eventuate insofar as all security holders are concerned and public transportation in Pittsburgh by trolley cars virtually may cease.
We have then this situation: There is undoubted need on the part of Pittsburgh and the surrounding country for a unified transportation system. There is a necessity that that transportation system be put on a sound economic basis if it is to continue to do its public work. The reorganization court cannot indefinitely be called upon to provide that unification. The business problem appears pretty clear. Working out of the answer is no esay matter. We do not, in any way, pass upon the merits or demerits of the tentative plan which has been evolved.
Our problem at the present time is confined to a single but very important legal question. That question relates to the power of the court to grant the city's petition by pulling into the reorganization, willy nilly, the underliers. The learned District Judge had the question before him as did the Special Master appointed by him. The Master's report is full and complete and most carefully done; it is so thorough and well considered that all the parties in the argument before us have taken the facts as the Master found them. The controversy before us relates only to the legal conclusions to be drawn from the facts found. The District Judge said that, "The system should be reorganized as a unit if it can legally be done", and expressed regret that the guaranteed underliers and the Philadelphia underliers "have been unable to remove their objections."
We shall consider the problem based on the objection of the guaranteed underliers. If it should be found that the guaranteed underliers can be included in the reorganization it seems to us a very easy conclusion that the Philadelphia Company and all its corporate relatives, which are involved in the ...