Case Name: In re PHILADELPHIA RAPID TRANSIT CO.
Court: United States District Court for the Eastern District of Pennsylvania
Jurisdiction: United States
Decision Date: 1935-04-30
Citations: 11 F. Supp. 865
Docket Number: 
Parties: In re PHILADELPHIA RAPID TRANSIT CO.
Judges: Before DICKINSON, KIRKPATRICK, and WELSH, District Judges.
Reporter: Federal Supplement
Volume: 11
Pages: 865–870

Head Matter:
In re PHILADELPHIA RAPID TRANSIT CO.
District Court, E. D. Pennsylvania.
April 30, 1935.
See, also, (D. C.) 8 F. Supp. 51.
S. Davis Wilson, of Philadelphia, Pa., for petitioner.
Before DICKINSON, KIRKPATRICK, and WELSH, District Judges.

Opinion:
DICKINSON, District Judge.
We treat this petition as one for instructions to the special master. Ordinarily we would not feel called upon to grant it but leave the matters discussed to the able hands of the special master. There are, however, questions raised which have in them elements of novelty, the answers to which in advance may save time and discussion at a later stage. The final end oí any proceeding under Bankruptcy Act § 77B (11 USCA § 207), may be bankruptcy as commonly understood. Before this stage is reached the end proposed in the petition is the approval or disapproval of a plan of adjustment of the indebtedness of the debtor. This calls for the action of the court, but such action is preceded by a number of things. One is the approving vote of the required majority of creditors. Before a vote can be had the creditors must be found and classified so as to determine who has the right to vote. This determination, however, is solely for the purposes of the election. It determines the right to vote upon the acceptance or rejection of the plan when submitted. Failure to qualify as a voter does not exclude any one from participating as a creditor in the distribution of the assets of the debtor. Such distribution may never be reached. If it is, it is reached at a later stage of the proceedings. This qualification of voters is a preliminary stage and is the stage now reached. It is within the power of the court, as it is its duty, to find who are creditors and to classify them. This it may do through a special master. In the performance of this duty it may prescribe a form and method of proving claims. The practice followed in bankruptcy in voting upon an offer of composition may serve as an analogue and guide. Creditors who file formal proofs of their claims, to which no objections are interposed, may be admitted to vote as by unanimous consent. If such proofs of claim are objected to, the claims must be proven. Here again the Bankruptcy Law supplies a sufficient guide. The burden of proof and what is or is not the making out of a prima facie case is determined as in other cases. The court or special master may, however, apply the principles of the affidavit of defense law by not requiring formal proofs of what is not in dispute but take this as admitted. The primary purpose of the section 77B amendment should not be lost sight of. This is to reach an adjustment acceptable to creditors of the indebtedness of the debt- or, or if there is an objecting minority, to make sure that the adjustment is fair to them so as to save them from being made the victims of a "freeze-out" scheme. To assure this there must be a fair election, and to secure this every creditor must be given the right to vote and no one admitted who is not a creditor. The creditors who have this right are, however, the creditors of the debtor. The act has thus two successive objectives. The first is this preliminary finding of who are the creditors of the debtor with this right to vote; the second is to determine whether the plan submitted should be approved. These two things are separate and distinct and may be determined on wholly different considerations. If the plan involves nothing but a debt reduction as, for illustration, the abatement of 25 per cent, of the indebtedness, it might affect only creditors. The plan might, however, concern the public policy of the law and directly concern others than creditors. The Atlas, who bears upon his shoulders the whole weight of the plan in the case of transportation companies, is the car rider. If his patronage can-be assured and the fare he pays made high enough, a plan highly satisfactory to creditors and stockholders could easily be devised. A plan may in consequence vitally concern him. Again, creditors might be placated by being given mortgage bond securities whose value was in excess of their just claims, thus doing an injustice to stockholders who would then become directly concerned. Still again, the plan might contemplate the issue of securities which are prohibited by the policy of the law declared in the Pennsylvania statute of 1913, P. L. 1374 (66 PS Pa. § 1 et seq.), or other "Sky Blue" laws. Once again, in this particular instance, the plan might impinge upon the rights of the city of Philadelphia as a partner of the P. R. T. It is thus seen that the second question of the approval of the plan might bear upon other interests than those of mere creditors. Indeed, because of this the plan under the provision of the law cannot have the approval of the court until after it has first had the approval of other official functionaries, as for instance, the Public Service Commission. Many considerations other than that of debt adjustment may thus enter into the final approval of the plan by the court. Notwithstanding this, the truth remains that the plan must have this preliminary approval or disapproval of creditors, and it is the special function of the court to have this action taken.
So much • for the general principles. The specific question raised is this: One class-of creditors is composed of what are known as "Underliers." They began as the owners, and in some instances the operators, of short route street railways. It is averred that by methods well known to "High Finance" successive combinations were made through which the value of their property and franchises was pyramided until it was finally unloaded upon this debtor at what was far in excess of any fair value it had. They thus became creditors with highly inflated claims. Without taking the trouble to verify figures, it may be said that their claims now reach the nominal sum of $87,000,000; it is anticipated that this indebtedness will be adjusted at $54,000,000, while it is averred that their just claims should not exceed $30,000,000. It is complained that if they are given a vote on the basis of $87,000,000, they will be given an undue weight in the adoption or rejection of any plan submitted.
To these proofs of claims there are in consequence objections made, and it is asked that the Underliers be required to pro-, duce their books and papers so that the fair consideration . for their present debt holdings may be determined. As the indebted ness must be classified, it is not altogether clear that the result anticipated will follow, but it must be admitted that every creditor has an interest in the claim of every other creditor so far as it affects the vote. It must not be forgotten, however,-to what the present inquiry is limited. It may or may not be that a plan which gives to the Underlier creditors bonds secured by a mortgage for $54,000,000 or any other sum is not a plan which should have the approval of the court. That question will be met when it is reached. Obviously, it is now being prematurely raised. The question which now confronts us is the simple one of wheihef these Underliers are creditors of the "debtor," and for how much. To what extent their claims should be abated is a question not now before us. It may be that there are creditors of this debtor when as against others they could not show a claim. The question is the simple one of whether the P. R. T. has a defense to the claim as presented. If it has not, the creditors in question are its creditors and tlieir claims should be allowed, solely let it be repeated, for the purpose of voting upon any plan which abates their claim.
The special master is instructed to allow or reject claims in accordance with this opinion. Beyond that the petition presented is dismissed and the prayers thereof denied.