The opinion of the court was delivered by: FULLAM
The Trustees have petitioned for authorization to make certain improvements to the railroad's major interchange yard at Selkirk, New York. The proposed improvements include the construction of two additional tracks to facilitate westbound departures from the classification yard, a bridge over the departure yard area, an additional lead track, and a conductor's tower.
Substantially all east-west freight traffic to and from the New England and New York areas is classified and routed through this yard, a modern, automated facility. The yard at present can handle efficiently approximately 2,700 freight cars per day. When volume exceeds that level, costly delays result. It is estimated (affidavit of Richard B. Hasselman, Assistant Vice President for Transportation) that elimination of these delays would save the railroad approximately $726,000 per year; and that approximately $350,000 in costs at other yards could be saved annually if certain additional traffic were diverted through Selkirk. These amounts are over and above the substantial economies stemming from the substitution of "all rail" routing for the costly and time-consuming "floating" operation in New York harbor.
Traffic through the Selkirk Yard already exceeds the 2,700 per day figure and, by reason of the changes in operating methods mentioned above, appears certain to increase still more.
The project under consideration was started in 1969, at a cost, during that year, of $896,112.02. The cost to complete these improvements is $2,074,549.
The yard at Selkirk is subject to the liens of the following mortgages of the New York Central and Hudson River Railroad Company, in the following order of priority: (1) 3 1/2% Gold Bond Mortgage, dated June 1, 1897; (2) Consolidated Mortgage, dated June 20, 1913; and (3) Refunding and Improvement Mortgage, dated October 1, 1913. It is undisputed that the proposed improvements would constitute "additions and betterments" to the mortgaged property and would be subject to the liens of these mortgages.
In order to obtain the funds to complete the project, the Trustees propose to draw upon certain escrow funds now on deposit, representing (directly or indirectly) proceeds from the sale of mortgaged property. There is now on deposit (as of July 31, 1971) with the Girard Trust Bank, pursuant to Order No. 192 and Order No. 271 in these proceedings, approximately $333,214 attributable to sales of property subject to the three mortgages mentioned above. There is on deposit (as of August 27, 1971) with Manufacturers Hanover Trust Company, the indenture trustee of the first mortgage mentioned above, pursuant to Order No. 78 herein, and not subject to any other requests by the Trustees, a balance of approximately $100,264.67 similarly derived. In addition, there is on deposit with Manufacturers (as of August 27, 1971) the further sum of approximately $1,756,477.99, which, for present purposes, may likewise be deemed to represent proceeds from the sale of mortgaged property.
The provisions of the first mortgage expressly permit the use of proceeds from sales of mortgaged property for "the purchase of other property, real or personal, or in betterments of, or improvements upon, some part of the mortgaged premises" (first mortgage, section 1 of article 6). Substantially similar provisions are contained in the other two mortgages (second mortgage, section 6 of article 8; third mortgage, section 6 of article 11).
At the hearing the indenture trustees of the first and second mortgages expressed their willingness to have the Court grant the Trustees' application, if the Trustees would agree to replace the escrowed funds within two years, from the proceeds of sales of other properties, or otherwise. The Trustees are willing to accept this condition, it being clearly understood by all concerned that acquiescence in this solution is entirely without prejudice to the right of either party to assert a different position with respect to future applications, or with respect to the disposition of the replaced funds. A form of decree, acceptable to the Trustees and to the indenture trustees of the first and second mortgages, has been presented.
The only objection to the proposed arrangement comes from Morgan Guaranty Trust Company of New York, the indenture trustee under the third mortgage. Understandably enough, Morgan Guaranty prefers to have cash on deposit as security for its lien, rather than "bricks and mortar," and earnestly contends that the record does not justify permitting the use of liened cash to pay for additions and betterments to the mortgaged property.
As noted above, all parties agree that the proposed improvements would constitute "additions and betterments" within the mortgage terms. It is also agreed that the proposed improvements are necessary for the efficient operation of the railroad, and would benefit the Debtor's estate. And all parties recognize the validity of the criteria for approval of this kind of expenditure in railroad reorganizations, adopted in In re Central Railroad Company of New Jersey v. Manufacturers Hanover Trust Co., 421 F.2d 604 (3d Cir. 1970): (1) The funds are presently needed and cannot be obtained elsewhere; (2) the money drawn down and expended for additions and betterments will materially contribute to the possibility of successful reorganization and to the continuation of the transportation plant, or a substantial part thereof, as a going concern; (3) the interests of the bondholders are not thereby prejudiced; and (4) reorganization is probably feasible.
Morgan Guaranty argues that the record does not establish that the necessary funds cannot be obtained from some other source, or that the bondholders' interests would not be prejudiced, or that reorganization will probably be achieved.
There is clearly no merit to the suggestion that these funds could properly be obtained from some other source. While it is of course correct that the Trustees could pay for these improvements with cash on hand, this cash will obviously be required to meet operating expenses. Morgan Guaranty points out that the Trustees have not yet drawn down the last $25,000,000 of the $100,000,000 proceeds from the sale of government-guaranteed Trustees' certificates. However, these funds are expressly earmarked for operating expenses and, on the basis of current forecasts, will probably be exhausted during the next six months. No other source of funds has been suggested by Morgan Guaranty, and it is a matter of common knowledge that the Debtor is presently unable to obtain financing, except perhaps in the preferred category of equipment obligations, unless accompanied by government guarantee.
Since escrowed cash primarily secures the first mortgage, and would not likely be available to the third mortgage holder in any event, it seems doubtful that the proposed change in the form of security would be of much practical significance to the third mortgagee. Be that as it may, the circumstances demonstrate that none of the holders of the three mortgages here involved has valid ground for complaint. The value of their security has been increased to the extent of some $26,000,000 by previous additions and betterments at the Selkirk Yard, over and above previous draw downs. Whether the Trustees would be legally entitled to the outright release of escrowed funds by reason of these pre-bankruptcy additions and betterments is not now before me for decision, but ...