Case Name: Southeastern Pennsylvania Transportation Authority v. Philadelphia Transportation Co., Appellant
Court: Supreme Court of Pennsylvania
Jurisdiction: Pennsylvania
Decision Date: 1967-07-27
Citations: 426 Pa. 377
Docket Number: Appeals, Nos. 188, 189, 190, 192 and 194
Parties: Southeastern Pennsylvania Transportation Authority v. Philadelphia Transportation Co., Appellant.
Judges: Before Bell, C. J., Musmanno, Jones, Cohen, Eagen, O’Brien and Roberts, JJ.
Reporter: Pennsylvania State Reports
Volume: 426
Pages: 377–417

Head Matter:
Southeastern Pennsylvania Transportation Authority v. Philadelphia Transportation Co., Appellant.
Argued March 14, 1967.
Before Bell, C. J., Musmanno, Jones, Cohen, Eagen, O’Brien and Roberts, JJ.
reargument refused September 26, 1967.
Philip Price and Arnold R. Ginsburg, with them George J. Miller, and Dechert, Price & Rhoads, for Philadelphia Transportation Company, appellant.
Francis T. Anderson, for appellants.
Daniel B. Pierson, V, with him Raspin, Espenshade, Heins, Er shine & Stewart, for appellant.
Edward G. Bauer, Jr., City Solicitor, with him Matthew W. Bullock, Jr., Second Deputy City Solicitor, for appellees.
WilUam T. Coleman, Jr. and Lewis H. Van Dusen, Jr., with them Richardson Dilworth, J. Alan Kugle, David P. Bruton, and Dilworth, Paxson, Kalish, Kohn é Levy, and Drinker, Biddle & Reath, for appellee.
Eugene John Lewis, for amicus curiae.
July 27, 1967:

Opinion:
Opinion by
Mr. Justice Cohen,
These appeals involve two separate actions concerning the same matters. The first (appeals numbers 188 and 194) presents a petition seeking a declaratory judgment, which action was brought June 18, 1965 by Southeastern Pennsylvania Transportation Authority (SEPTA) and the City of Philadelphia against Philadelphia Transportation Company (PTC) and its subsidiaries. Plaintiffs' petition requested the court to determine (1) the right of SEPTA as the city's assignee to purchase the assets of PTC pursuant to an option to purchase contained in paragraph Eleventh of an agreement dated July 1, 1907, as amended; (2) the meaning of the purchase price formula set forth in the agreement; and (3) such other matters necessary to effect the transfer of PTC's property. Thereafter, certain minority shareholders of PTC petitioned to intervene as defendants, and their petition was granted by this Court on May 13, 1966. After hearing extensive testimony, the trial court held on July 14, 1966 (approved by the court en banc on September 16, 1966) that (1) the city's reserved right of purchase under the agreement of 1907, as amended, was valid; (2) the city's assignment of that right to SEPTA was valid; (3) SEPTA, as the city's assignee, must pay to PTC a sum composed of the following amounts reflected by PTC's balance sheet as of the date of payment: (a) an amount equal to PTC's then outstanding bond, mortgage and ground rent indebtedness; (b) an amount equal to ten dollars per share for all then outstanding common stock of PTC; and (c) the amount of the then "Retained Earnings" of PTC.
The second action (appeals numbers 189 and 192) involves a complaint in equity filed July 8, 1966 by Edmond G. Thomas (a taxpayer) and PTC against the City, the Mayor, and the Commissioner of Public Property of Philadelphia, and against SEPTA. Plaintiffs' complaint prayed, inter alia, for an injunction restraining defendants from carrying out the agreement of June 8, 1965, whereby the city assigned to SEPTA its right to purchase PTC. The city and SEPTA filed preliminary objections, and on September 16, 1966 the complaint was dismissed for the reasons stated in the opinion of the court en banc filed that day in the declaratory judgment proceeding.
The lower court's opinion, we believe, sets forth a comprehensive well-reasoned analysis of the problems involved and proposes, in every instance, a solution which this Court deems fair and proper. Accordingly, we recommend to the interested reader that he closely study that opinion, for we intend here only to highlight the matters of importance.
In 1902, the Philadelphia Rapid Transit Company (PRT) was formed as a consolidation of the various transit systems previously existing in Philadelphia. On its own or through subsidiaries, PRT leased, owned and operated high speed lines, and bus and taxi facilities throughout the city. On July 1, 1907, the city and PRT entered into a written agreement which pro vided in Section Eleventh: "The City reserves the right to purchase all the property, leaseholds and franchises of the Company, subject to all indebtedness . . . upon July 1st, 1957, or upon the first day of any July thereafter by serving six months' notice . . . [for] an amount equal to par for its capital stock then outstanding, to wit: the thirty million (30,000,000) dollars of capital stock now authorized plus any additional capital stock issued with the consent of the City hereunder. . . ."
In the decades that followed, PRT suffered financial misfortune. Finally, in 1938 the Pennsylvania Public Utility Commission approved a reorganization plan filed by PRT. On May 20, 1939, City Council consented to the reorganization and enacted an ordinance authorizing the execution of an amendment to the 1907 agreement. On June 12, 1939, the amendment was executed. It made five major changes in Section Eleventh:
1. The 1939 agreement enabled the city to purchase the entire transportation system (since PTC, unlike PRT, owned the leaseholds and franchises of the underlies and traction companies), not just PRT's leaseholds and franchises, as provided in the 1907 agreement.
2. It allowed the city to purchase PTC's assets free and clear and not subject to PTC's indebtedness.
3. It permitted the city to exercise its reserved right of purchase on any July 1, with 6 months' notice to PTC.
4. The formula for determining the purchase price was changed to the following: a. The amount of PTC's outstanding bonds, mortgage and ground rents; b. The par value of PTC's outstanding preferred stock; c. $10 per share of PTC's outstanding common stock; d. The amount of PTC's then undistributed corporate surplus.
5. The city reserved the right of condemnation.
The 1907 agreement was further amended on October 26, 1950, July 1, 1957, July 5, 1962 and February 25, 1965.
PTC argues that the purchase option was void under the rule against perpetuities. As the lower court said: "The best way to state PTC's argument is to state its best case.
"In Barton v. Thaw, 246 Pa. 848 (1914), plaintiffs were children of Joseph Barton, who had conveyed coal under certain land to Thaw's predecessors in title, by a deed that provided that 'And in case, the said parties of the second part, their heirs or assigns, should at any future time whatsoever desire to purchase any of said land in fee simple, then the said parties of the first part, for themselves, their heirs or assigns, hereby covenant and agree to sell and convey the same to the said parties of the second part, their heirs or assigns, at a price not exceeding one hundred dollars per acre.' (246 Pa. at 350).
"The sale of the coal was admittedly good, but plaintiffs claim, by a bill to remove a cloud upon title, that the option to purchase the surface of the land was void because in violation of the rule against perpetuities. 'It [was] conceded by counsel that the case presents for the first time to the courts of Pennsylvania the question whether an option or right to purchase land, unlimited in point of time, violates the rule against perpetuities, and therefore is void. . . .' (246 Pa. 350-351). The lower court in a careful opinion held that the option did violate the rule, and the Supreme Court affirmed.
"PTC's argument is that the Oily's reserved right of purchase is also an option 'unlimited in point of time,' 'and therefore it is also void. It has been seen, above, that indeed the City's right of purchase is thus unlimited. Is it, however, therefore void?"
The historical purpose of the rule against perpetuities was to destroy serious hindrances to the beneficial and prosperous use of property. PTC claims that under Barton v. Thaw, supra, Pennsylvania law recognizes a blanket condemnation of all remote options. That is not so, for Barton stated at 246 Pa. 364 that its result is dependent on the interests of the community at large. In this case, the danger of fettering the free use of property is outweighed by considerations of public concern and welfare.
Furthermore, the purchase option is not an impress on land but is solely a contract right not within the rule against perpetuities. In Philadelphia v. Philadelphia Transportation Co., 386 Pa. 231, 126 A. 2d 132 (1956), this Court stated that until exercised the option gave the city no right in PTC's property as such, but merely a contractual right. With regard to exclusively contractual rights, the Eestatement of Property, §401 provides, "A transaction which is exclusively contractual is not subject to the rule against perpetuities." This Court took the same view in Caplan v. Pittsburgh, 375 Pa. 268, 100 A. 2d 380 (1953).
Moreover, even assuming that the purchase option fell within and did violate the common law rule against perpetuities the Estates Act of 1947, Act of April 24, 1947, P.L. 100, 20 P.S. §301.4 makes that rule inapplicable. Sub-sections 4(a) and (b) provide, "No interest shall be void as a perpetuity except . . . [u]pon the expiration of the period allowed by the common law rule against perpetuities as measured by actual rather than possible events. . . ."
With regard to this matter, the lower court stated: "Thus, if an option void at common law actually vests within 21 years, it is valid even though it might not have vested that soon. Or, as Bregy puts the point, at page 5307 of his treatise on the Estates Act: '. . . such agreements will no longer be void from the beginning as in Barton v. Thaw. Under the statute an unlimited option should be allowed to run until the expiration of the permissible period, and stricken down only if it remains unexercised at that time.' (Footnotes omitted.)
"If the City and PTC had made no further agreements after the Agreement of 1939, the Estates Act of 1947 would not be pertinent. However, as was seen in discussing the duration of the City's reserved right of purchase, the City and PTC made the Agreements of 1957, 1962, and 1965. The importance of this fact appears when one considers Section 21 of the Estates Act, 20 P.S. §301.21. This provides that the Estates Act . . shall take effect on the first day of January, one thousand nine hundred forty-eight, and [except in respects not here material] shall apply only to conveyances effective on or after that day. As to conveyances effective before that day, the existing laws shall remain in full force and effect.' "
Section 1 of the Estates Act defines a conveyance as ". . . an act by which it is intended to create an interest in real or personal property whether the act is intend-i ed to have inter vivos or testamentary operation." If the 1957 agreement is a conveyance under that definition, the Estates Act of 1947 applies, and the "wait and see" rule was complied with, for the option was in fact exercised within the time limitation of the rule against perpetuities dating from July 1, 1957.
Based on the premise that the city's reserved right of purchase expired July 1, 1957, and was extended by agreement to December 31, 1964, PTC further argues that SEPTA's attempt to exercise the purchase option was ineffective becausé it was not timely and that the option period was not further extended by the 1965 agreement because the latter agreement was never approved by PTC's shareholders. We agree with the lower court's conclusion that the premise of those arguments is unsound because under the 1939 agree ment the reserved right of purchase remained effective until exercised.
The intervening minority shareholders argue that the agreement of 1985 was not intended to extend the reserved right of purchase, but by "fraud, accident or mistake" the 1985 agreement failed to express this limitation. Again, we agree with the court's evaluation of intervenors' evidence in this respect to the effect that they were unsuccessful in proving fraud, accident or mistake. Bather, the testimony of their witnesses tended to prove that the city intended to preserve the option to purchase PTC, and not to allow it to expire so that there was no mutual mistake; nor were the representatives of PTC misled by the city invalid because it was made without public auction, during negotiations of the 1965 agreement.
PTC asserts that the assignment to SEPTA was The lower court carefully analyzed this question in the following manner.
Section Eleventh of the 1907 agreement, which was carried over into the 1939 agreement, provides that the city may assign its reserved right of purchase and that the company may become a bidder for that right. On June 8, 1965, the city made the assignment to SEPTA, which exercised the right on the same day. No notice of the assignment was given to PTC, nor was a public auction or competitive bidding permitted.
PTC does not argue that the agreement of 1907 requires public auction because it says "may be put up at public auction." (Emphasis supplied.) Instead, PTC argues that the Home Buie Charter of 1951 requires a public auction. The Home Buie Charter is, however, irrelevant.
Section 11 of the First Class City Home Buie Act, Act of April 21, 1949, P.L. 665, 53 P.S. §13111 provides that no contract existing at the time of adoption of any home rule charter shall be affected thereby. Since the agreement of 1939 does not require public auction, the Philadelphia Home Rule Charter cannot affect that agreement no matter what its says about public auctions.
Moreover, public policy does not require assignment by public auction. The reason for requiring competitive bidding is to prevent private business from gaining favors of government or from corrupting government. Here, the assignee is another government agency and the reasons in favor of bidding competitively are absent.
The most perplexing problem concerns interpretation of the purchase price formula. Four factors are involved:
"1) an amount equal to the sum of the face amount, or call price if any, and accrued interest of all then outstanding bonds of, and all then outstanding prior lien bonds, mortgages and ground rents on the property of, Company and its wholly-owned subsidiaries....;
"2) plus the par value of all then outstanding preferred stock of Company. . . .;
"3) and an amount equal to ten (10) dollars per share for all then outstanding common stock of Company. . . .;
"4) and the amount of the then undistributed corporate surplus, if any, of Company."
The word "then" refers with respect to each factor to the particular July 1st named in the notice of intent to exercise the option. SEPTA named July 1, 1966 as the settlement date, and the parties extended this date to January 1, 1967.
The first three factors present no problem of interpretation or computation. The amount of the outstanding bonds, mortgages and ground rents can readily be ascertained; there is no outstanding preferred stock because PTC converted its preferred stock to common stock in 1955; and the amount of outstanding common stock can be determined without difficulty. Only the meaning of "undistributed corporate surplus" is at issue.
PTC and the minority shareholders propose that "undistributed corporate surplus" is the excess of the appraised value of PTC's assets over the value of its liabilities and capital as of the settlement date. The trial court rejected this argument and held that the fourth factor of the formula was reflected on PTC's balance sheet figure as "Retained Earnings." As the court observed: "One of the great attractions of a purchase price formula is that the buyer can figure out what the price will be before he exercises his option and commits himself to purchase. A valuation proceeding after the option is exercised defeats this purpose.
"This is so on general principles. Thus the Supreme Court, in Philadelphia v. Phila. T. Co., 386 Pa. 231, 239 (1956), said of the purchase price formula: 1 . . the price to be paid for the property according to the option is determinable by a fixed formula whereas a condemnation proceeding must depend upon the uncertain decision of a fact-finding tribunal as to the value of the property then being acquired.' (Footnote omitted.)
"In addition, the history of the underliers and PRT, the other provisions of the agreement, and the legislative history of the formula itself, all demonstrate that 'undistributed corporate surplus' is not a valuation but a balance sheet figure.
"Moreover, the other provisions of the Agreement of 1939 gave the City control over the other factors of the formula. Section First of the Agreement of 1907, which was not amended but continued in effect by the Agreement of 1939, provided that 'No further increase of capital stock or funded indebtedness . . . shall be made by the Company . . . without the consent of the City. . . .' Also, if more bonds were issued by the Company, there would be a corresponding increase of assets, which the City would acquire if it exercised its right to purchase. Still further, the City was entitled to representation on the board of directors (Section Fourth of the Agreement of 1907 and Section 1(a) of the Agreement of 1939), and the City Controller was empowered to examine the Company's books (Section Fifth of the Agreement of 1907, continued in effect by the Agreement of 1939).
"Thus PTC's argument comes down to an assertion that of the four factors of the formula, all could be controlled by the City, and could be determined by an examination of the balance sheet, before the City decided whether to exercise its right of purchase, except for one factor — 'undistributed corporate surplus.' This assertion is almost self-defeating. In any case, the hearings before the Transportation and Public Utilities Committee of City Council in April and May of 1939 demonstrate that both PET (seeking the City's consent to be reorganized as PTC) and the City understood the formula to be a simple mathematical calculation based on book figures.
"In essence, what the hearings demonstrate is that PTC's present argument as to the meaning of 'undistributed surplus' is based upon a practice precisely contrary to the purpose of the Agreement of 1939. In PTC's present view the 1939 amendment called for PTC to reap the benefits of any increase in the unrealized value of its assets in the event of a sale to the City under the City's option. The hearings make it clear that the formula was to do just the opposite: the City was to reap any increase in the unrealized value of PTC's assets, if, but only if, the City exercised its option and thereby purchased the PTC system as a whole."
By providing for a purchase price formula and by electing to exercise the option to purchase, rather than to proceed by condemnation, SEPTA was assured of being able to determine for itself the price to be paid by an examination of PTC's balance sheet figures, rather than by a lengthy valuation process which would leave the purchase price determination to a fact-finding body. Clearly, "undistributed corporate surplus" is not a valuation, but a balance sheet figure, as are the other three factors.
"Undistributed corporate surplus" is a factor which represents earnings accumulated by PTC rather than earnings paid out as dividends. That language assured the shareholders that when the option was exercised, they would receive so much of the accumulated earnings as were not paid to them as dividends. Had the only class of shareholders of PTC in 1939 been common shareholders, the phrase "retained earnings" or "earned surplus" would have accomplished that purpose. However, PTC had preferred shareholders whose dividend rights upon liquidation were, pursuant to the articles of incorporation, cumulative if, in fact, dividends were earned. Thus, it was possible for PTC to have at the end of a given year earned, accumulated, but unpaid dividends on preferred shares of stock in an amount that would exceed the amount of "earned surplus" (or "retained earnings"). On account of this situation, the draftsmen of the 1939 agreement did not use as a price factor a sum equal to PTC's "then retained earnings," because in such a situation had the option been exercised the common shareholders would have received less than ten dollars per share. The draftsmen clearly desired to insure that the common stockholders received ten dollars a share if the city exercised its option and not a lesser sum because of an obligation by PTC in liquidating to pay preferred shareholders earned, accumulated, but unpaid dividends. Accordingly, so long as there were preferred stockholders "undistributed corporate surplus" meant the greater of PTC's retained earnings or its earned, accumulated, but unpaid dividends as of the settlement date. Since 1955, when PTC converted its preferred stock to common stock, there have been no earned, accumulated, but unpaid dividends. Accordingly, by paying an amount equal to PTC's retained earnings, the city will achieve the purpose of the formula — that the common shareholders get back what they risked: so much of the accumulated earnings as were not paid to them in dividends. And this is what "undistributed corporate surplus" means.
This means PTC's retained earnings, because, in the language of the court below: "PTC's present balance sheet carries two accounts: 'Capital Surplus' and 'Retained Earnings.' As has just been seen, 'undistributed corporate surplus' means a fund available for the payment of. cash dividends. Therefore, it includes only PTC's 'Retained Earnings' account. It does not include the 'Capital Surplus' account because under Pennsylvania law cash dividends cannot be paid from capital surplus. Branch v. Kaiser, 291 Pa. 543 (1928); Berks Broadcasting Co. v. Craumer, 356 Pa. 620 (1947)." (Footnote omitted.)
PTC's retired employees receive pension benefits on a pay-as-you-go basis. PTC has no funded pension plan; pension benefits are paid out of the fare box from current revenues. Actuarial studies reveal that the amounts required to fund past service costs would be approximately $11,939,392 for nonsupervisory retirees and $4,973,304 for supervisory and executive retirees. The parties have stipulated that this $17,000,-000 obligation is a present vested liability. The question presented is whether PTC's "undistributed cor porate surplus" is extinguished by its obligation to its retired employees. SEPTA's accounting expert testified that minimum standards of accounting principles require that a vested pension liability be carried on the liability side of the balance sheet. PTC did not, in fact, do so because the pension obligation was never funded. Bather, the actuarily determined amount of the obligation was revealed in a footnote to their annual financial reports. SEPTA argues that if this liability were placed on the books, it would eliminate all surplus, because there is no offsetting asset on the books. Consequently, there would be no retained earnings or "undistributed corporate surplus." Accordingly, contends SEPTA, the purchase price need not include any amount representing PTC's "undistributed corporate surplus."
PTC, on the other hand, presented expert testimony justifying its accounting techniques with respect to its pension liability because as a public utility its rates were fixed by taking into account pay-as-you-go pension payments in the rates for the year of payment. Thus, argues PTC, it does not have a fund available for cash dividends (retained earnings), which is part of the purchase price formula.
As the lower court indicated, the accounting testimony is neither necessary nor appropriate to a resolution of this issue. Bather an examination of the agreements is sufficient to dispose of the matter. As the trial court stated: "Section Eleventh of the Agreement of 1907 provided that for a price equal to the par value of PBT's stock the City or its assignee could acquire 'all the property, leaseholds and franchises of the Company, subject to all indebtedness now existing or hereafter lawfully created hereunder upon July 1st, 1957. . . .' This was changed by the Agreement of 1939, so that the City or its assignee, upon payment of the formula price provided in that Agreement, would acquire 'all the property, leaseholds, and franchises of the Company and its wholly owned subsidiaries upon any first day of July thereafter. . . .' The clause 'subject to all indebtedness . . . [etc.]' was eliminated. It follows, therefore, that if SEPTA pays the formula price, it acquires PTC's assets not subject to PTC's obligations, i.e., that SEPTA after the acquisition will not be subject to PTC's pension obligation, which is only another way of saying that SEPTA may not refuse to pay the full formula price by charging against it PTC's pension obligation as though SEPTA would be subject to it." (Footnotes omitted.)
On this point, PTC carries the argument further and contends that SEPTA must not only pay for PTC's retained earnings but also must assume PTC's pension obligation. We have already decided that SEPTA must, under the formula, pay for PTC's retained earnings. It is, however, not required under the agreement of 1939 to assume PTC's pension obligations.
The lower court further concluded that SEPTA may not reduce the purchase price by PTC's cost of financing and organization expenses because the 1939 agreement intended the option price to be a single price for all of PTC's leases, franchises and assets, and SEPTA must pay the full purchase price. We agree.
In addition, the trial court decided that in making payment for "accrued interest of . . . then outstanding . . . mortgages," SEPTA must pay PTC a sufficient amount to compensate PTC for any prepayment penalties PTC is called upon to pay if PTC retires its mortgage debt before the maturity date. Again, we agree.
Finally, the court below held that the date when SEPTA must make payment to PTC be extended for a period of not less than six months after final disposition of this case. This is certainly a reasonable extension in view of the fact that SEPTA will not know with certainty the amount it must pay until this case is finally concluded. It must then be allowed sufficient time to raise the money necessary to effect the purchase.
In appeals number 188 and 194, the judgment is affirmed. In appeals number 189 and 192, the decree is affirmed.