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IN RE PENN CENT. TRANSP. CO.

March 11, 1971

In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor. In re CONVEYANCE of LAND to the CITY of BOSTON

Fullam, District Judge.


The opinion of the court was delivered by: FULLAM

FULLAM, District Judge.

 The factual background is somewhat complicated. Prior to 1897, Summer Street in the City of Boston crossed the tracks of the New Haven Railroad at grade. In that year, Summer Street was elevated and a four-span bridge was erected above the tracks; three of the four spans traversed railroad property, and the railroad granted a perpetual easement of passage by means of the bridge above its tracks.

 On May 4, 1968, three of the four spans of this bridge were severely damaged by fire. The damaged portions were removed, at a net cost to the New Haven Railroad of $85,970, and negotiations were commenced with a view toward replacement of the damaged spans. Under applicable Massachusetts law, *fn1" if the work required constituted a "repair", the railroad would have been liable for 70% of the cost; if it were deemed an "alteration", the railroad would have been liable for about 39% of the cost. The Massachusetts Department of Public Utilities determined that the work was a "repair." This decision was appealed to the Supreme Judicial Court of Massachusetts, but while the appeal was pending a settlement was achieved, under the terms of which the City of Boston agreed to bear 50% of the estimated cost of the bridge construction, and the New Haven Railroad agreed to pay the remainder.

 Meanwhile, as of December 31, 1968, the assets and certain liabilities of the New Haven Railroad were acquired by the Penn Central Transportation Company (then known as Penn Central Company), as a condition of the merger of the Pennsylvania and New York Central railroads. The precise status of the Summer Street bridge obligation as between the New Haven Railroad and the Penn Central Transportation Company was in dispute, as were various other substantial matters arising out of the Southern railroads division litigation, and the ownership of certain insurance proceeds aggregating some $750,000, of which approximately $148,000 was attributable to the damage to the Summer bridge. *fn2"

 Ultimately, all of these matters were settled, with the approval of the New Haven Railroad Reorganization Court (Order No. 588, dated August 11, 1969). Under the terms of the settlement, Penn Central assumed certain substantial obligations in connection with the rate litigation, assumed the obligations of the New Haven with respect to the Summer Street bridge project, and received the insurance proceeds mentioned above.

 Bids for the reconstruction of the bridge were opened on May 8, 1970. The low bid was $1,050,000. A formal contract was entered into with the City of Boston, under which the City's obligation was limited to one-half of the contract price, viz. $525,000.

 Shortly thereafter, on June 21, 1970, Penn Central Transportation Company went into reorganization under § 77 of the Bankruptcy Act, and the proposed construction contract did not become a reality. In the meantime, construction costs have risen, so that the Debtor's obligations under its agreement with the City of Boston, if carried out, would require expenditures in excess of $550,000.

 On the basis of the foregoing facts, all of which are undisputed, it is clear that the proposed conveyance would be in the best interests of the Debtor's estate and should be approved. Accordingly, Order No. 179 has been entered, authorizing the conveyance, but reserving jurisdiction to determine the rights of the lien-claimants.

 As of December 31, 1968, the Debtor executed and delivered the Divisional First Mortgage, as a first lien on the assets then acquired from the New Haven, *fn3" in partial payment of the consideration for such acquisition. The indenture trustees under that mortgage, and the bondholders (the Trustee of the New Haven Railroad) have filed answers opposing the proposed conveyance or, in the alternative, requesting that approval of the conveyance be conditioned upon furnishing substitute security equal in value to the property conveyed. At the hearing, their opposition was limited to the alternative request.

 A somewhat analogous situation arose in connection with the reorganization of the Central Railroad of New Jersey. There, proceeds from sales of various parcels of real estate subject to mortgage had been deposited in a special account, also subject to the lien of the mortgage, in substitution for the real estate. The Reorganization Court permitted the Trustee to withdraw $408,000 from this account to pay for demolition and removal of a damaged drawbridge. In Central Railroad Company of New Jersey v. Manufacturers Hanover Trust Co., 421 F.2d 604 (3rd Cir. 1970), the Court of Appeals held that since the demolition project did not add to the operational plant or increase the value of the mortgaged property, the use of liened funds for that purpose should not have been permitted, unless upon condition that equivalent value be substituted for the funds withdrawn.

 The cited case differed from the present problem in several respects. There, the bridge was across navigable waters, and when it was removed, the railroad retained nothing of value. Moreover, the bondholders' lien had originally included the undamaged span. And finally, the adjacent span was not improved by the expenditure for demolition of the damaged span, but merely protected from possible further damage. In the present case, the lien attached only to whatever was left after the damaged spans had been removed; and the ...


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