APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA.
Hunter, and Higginbotham, Circuit Judges, and Gerry,*fn* District Judge.
1. Appellee Reading Company ("Reading") owns 500 shares of stock in appellant Trailer Train Company ("Trailer Train"). During Reading's reorganization proceedings under section 77 of the Bankruptcy Act of 1898 as amended ("the 1898 Act"), 11 U.S.C. § 205 (1976),*fn1 Reading's trustees petitioned for an order compelling Trailer Train to repurchase the stock, convert it into debt or preferred stock, or pay dividends. The United States District Court for the Eastern District of Pennsylvania, sitting as a reorganization court, ordered Trailer Train to repurchase the stock at book value. See In re Reading Co., 551 F. Supp. 1205 (E.D. Pa. 1982). Trailer Train appeals. We will reverse.
2. For many years prior to April 1, 1976, Reading ran an interstate railroad. On November 21, 1971, Reading entered into reorganization under section 77 of the 1898 Act. On April 1, 1976, pursuant to the Regional Rail Reorganization Act of 1973, 45 U.S.C. §§ 701-797m (1976 & Supp. V 1981), Reading conveyed its rail properties to the Consolidated Rail Corporation ("Conrail") and discontinued all rail operations. Reading emerged from reorganization on January 1, 1981. It has not reentered the railroad business.
3. Trailer Train was incorporated in 1955 by the Pennsylvania Railroad and others for the sole purpose of facilitating inter-railroad "piggyback" shipments by establishing a pool of standardized railroad flat cars. 551 F. Supp. at 1207; see app. at 1334. From an initial fleet of 500 cars, by 1979 Trailer Train had grown to own, operate, and maintain 87,494 intermodal (piggyback), autorack, and special use cars, approximately ninety percent of those in use in the country. See app. at 1334. Those cars are used by railroads in the United States under a pooling agreement entered into between Trailer Train and its shareholders with the approval of the Interstate Commerce Commission ("the ICC"). American Rail Box Car Co. -- Pooling, 347 I.C.C. 862 (1974). To participate in the pool, a railroad must purchase a 500-share block of stock and sign Trailer Train's Form A Car Contract. Any shareholder railroad, no matter how many blocks of stock it owns, is then entitled to use the cars from the pool on its own lines, and to interchange the cars with other shareholder railroads or with non-shareholder railroads.
4. Shareholder and non-shareholder railroads in possession of Trailer Train cars must pay car hire charges set by the Trailer Train rate policy. That policy, which Trailer Train has adhered to throughout its corporate existence, is set forth as part of the Form A Car Contract:
It shall be the policy of Trailer Train to maintain per diem, mileage and other charges at the lowest level required to meet Trailer Train's ordinary and necessary expenses, . . . and to accumulate retained earnings adequate to support continued reasonable enlargement of the number of cars in the pool, to that number found to be needed. It is the intention [of Trailer Train and each of its shareholders] that the total compensation paid to Trailer Train . . . shall be no greater than consistent with the foregoing policy.
551 F. Supp. at 1210. Thus, under its rate policy, Trailer Train does not try to maximize its profits. Instead, it tries to minimize the rates paid by its shareholders. In consequence, Trailer Train has never paid a dividend to its shareholders. The only benefit of owning Trailer Train stock is access to its large pool of standardized cars in return for payment of Trailer Train's car hire rates.
5. From 1956 to 1969, the aggregate car hire rates paid by shareholders for the use of Trailer Train cars were higher than the rates which those shareholders would have paid under the ICC per diem schedule had they chosen instead to use their own cars on other railroad's lines. In 1969 the ICC changed the formula by which it calculated its per diem rates. As a result, since 1969 the aggregate car hire rates paid by most shareholders for the use of most Trailer Train equipment have been lower than the rates which those shareholders would have paid under the ICC per diem schedule.
6. Between 1955 and 1964 forty operating railroads bought blocks of shares in Trailer Train. Since 1964 there have been no sales of stock except through combinations or reorganizations of existing shareholders. At present thirty operating railroads, representing approximately eighty-nine percent of the mileage of class 1 railroads in the United States, now own stock in Trailer Train. The other shareholders are a diversified freight forwarding company, Reading, and the trustees of the Erie Lackawanna Railway, which like Reading entered reorganization, conveyed its rail properties to Conrail and left the railroad business.
7. In 1961 Reading acquired its block of Trailer Train stock at the book value of $150,105.*fn2 At that time Reading signed the Form A Car Contract. In addition, Trailer Train informed Reading that
the car contract requires Trailer Train Company to set per diem and other charges on a basis that will enable the company to meet its expenses and to finance its car acquisitions without, however, yielding excessive profits to Trailer Train Company.
App. at 128. From 1961 to 1976, Reading used Trailer Train flat cars in rail service and paid car hire charges. Reading never challenged Trailer Train's rate policy while it was an operating railroad. App. at 300-02. Indeed, while in reorganization Reading joined with the other shareholders in requesting approval of the pooling arrangement from the ICC, which endorsed ...