The opinion of the court was delivered by: FULLAM
The question before the Court is whether the Trustees should be authorized to borrow $100 million by issuing trustees' certificates, pursuant to § 77(c)(3) of the Bankruptcy Act, 11 U.S.C. § 205(c)(3), to be guaranteed on behalf of the United States by the Secretary of Transportation pursuant to the provisions of the Emergency Rail Services Act of 1970, P.L. No. 91-1510, which became law on January 8, 1971.
The Trustees' application is opposed by the Trustee of the New York, New Haven & Hartford Railroad Company (hereinafter "NH Trustee"); the Indenture Trustees of various mortgages; The Security Insurance Co. of Hartford, a shareholder of the parent company of the debtor, and other shareholders. The institutional investors' representatives, and the parent company of the debtor, decline either to approve or oppose the application. The Trustees' application is supported by the Justice Department.
In theory, two separate, but related, questions are presented: whether the issuance of certificates should be authorized, and whether the guaranty should be sought. But since it is abundantly clear on this record that trustees' certificates cannot be sold without such government guaranty, both questions will be considered together.
The immediate cause of the debtor's § 77 filing was the exhaustion of its liquid assets and credit, coupled with continuing operating losses. By virtue of the deferments made possible by the reorganization proceeding, and as a result of various economies and improvements achieved by the Trustees and present management, the debtor has been able to continue to function. By November 1970, it appeared that, in normal course, the railroad would be able to operate until March 1971 before experiencing a further cash crisis. However, such projections were based on continuation of existing wage levels, a prospect which all concerned recognized was doubtful, in light of the wage negotiations which had been in progress for several months. On December 10, 1970, in order to halt the nationwide rail strike then being instituted, Congress mandated an immediate retroactive wage increase. This has resulted in the further depletion of the debtor's cash at the rate of about $6 million per month, and the inevitable necessity of expending the further sum of approximately $50 million, not later than mid-February 1971, to cover retroactive payments. The total additional cash drain attributable to this wage increase will be about $75 million as of March 31, 1971.
It is desirable for the debtor to maintain a minimum balance of about $30 million in cash on hand at all times, but the debtor can operate adequately with a minimum cash balance of $20 million. The fluctuations in "float" occasioned by normal operations render it unwise to allow cash to fall below $20 million on any given day. The Trustees reported at the hearing that the debtor now has about $18.6 million in cash on hand, and even this precarious balance was made possible only by deferring payments due under certain equipment obligations to the full extent of the applicable grace periods. These equipment payments cannot be deferred beyond January 28, 1971. On or shortly after that date, rail operations will necessarily cease, unless additional cash is made available in the meantime. Indeed, preparations for an orderly shutdown would have to be implemented almost immediately.
The Trustees have assiduously explored all other conceivable alternatives, but it is clear that the issuance of trustees' certificates represents the only feasible source of the required funds; and, as noted at the outset, it is also clear that such certificates cannot be sold in the absence of federal guaranty.
II -- Best interests of estate; feasibility of successful reorganization
On December 18, 1970, I entered an order (No. 95) extending until March 22, 1971 the time for filing a proposed plan of reorganization. When this extension was granted, the wage increase had been legislated, but the Emergency Rail Services Act of 1970 had not yet been enacted. I pointed out that, while there were many uncertainties standing in the way of any firm conclusions as to the likelihood of successful reorganization, a conclusion of probable failure was unwarranted, and that further time for evaluation of the situation should be granted. Although the parties now objecting to the proposed issuance of trustees' certificates do not dispute the propriety of this extension of time, they nevertheless contend that the Trustees' application should be denied, on the theory that there is no present assurance that a successful reorganization can be accomplished.
Preliminarily, it should be observed that one of the principal uncertainties which existed at the time the extension was granted, namely, the possibility of meeting immediate cash needs, would be removed by the approval of the present application.
In the present proceeding, the Trustees, speaking through Mr. George P. Baker, former Dean of the Harvard Business School, and a nationally recognized expert on transportation matters, testified that, in their best business judgment, there is a reasonable prospect that the debtor can be restored to viability within three or five years. "Viability", in this context, ...