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IN RE PENN CENT. TRANSP. CO.

November 17, 1971

In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor. In re FIDELITY BANK PETITION

Fullam, District Judge.


The opinion of the court was delivered by: FULLAM

OPINION AND ORDER NO. 496

FULLAM, District Judge.

 The Debtor is the lessee of the property of the New York and Harlem Railroad Company, under a 401-year lease executed in 1873. Under the terms of the lease, the lessee has the right to sell such portions of the demised premises as are not needed in railroad operations, without accounting for the proceeds until the end of the lease.

 The Trustees of the Debtor are considering possible sales of various properties in the City of New York, including properties demised under the New York and Harlem lease. After extensive public advertisement, bids have been received, and are now being studied.

 The Fidelity Bank has, with the consent of this Court, filed a derivative action in this District (Civil Action No. 71-2592 consolidated with the reorganization proceedings) seeking, inter alia, to have the 1873 lease declared null and void. The same plaintiff has also filed an action in the Supreme Court of the State of New York, in which the named defendants are the New York and Harlem Railroad Company and various of its officers and directors. The Trustees are not named parties to that action. The issue before this Court is whether the New York action should be permitted to proceed.

 The Debtor owns 95% of the outstanding stock of the New York and Harlem Railroad Company, and all of the officers and directors of the New York and Harlem are also officers of the Debtor. The New York action seeks the following relief:

 1. To enjoin the defendants from conveying the properties leased to the Debtor except upon compliance with Section 909 of the New York Business Corporation Law (requiring consent of shareholders);

 2. To enjoin the defendants from conveying these properties unless provision is made to segregate the proceeds for the account of the New York and Harlem;

 3. To set aside any conveyances heretofore made; and

 4. "Such other relief as may be deemed just and proper."

 Neither the Debtor nor the Trustees have been named defendants, as noted above. Whether they should be classified as necessary parties to that litigation is not before me. It should be noted, however, that the definition of a necessary party, under New York Civil Practice Law and Rules § 1001(a), includes anyone who "might be inequitably affected by a judgment in the action." If the Trustees and the Debtor are deemed to be necessary parties in the New York action, the issue before this Court is whether permission should be granted to make them parties to that action. It is conceded by all concerned that this Court does have jurisdiction to render such a determination.

 Fidelity relies principally upon the case of Callaway v. Benton, 336 U.S. 132, 69 S. Ct. 435, 93 L. Ed. 553 (1949) for the proposition that this Court has no jurisdiction to enjoin the New York proceeding. In Callaway, a railroad in reorganization was lessee under a 100-year lease, renewable for like terms in perpetuity. See Benton v. Callaway, 165 F.2d 877, 885, n. 2 (5th Cir. 1948). One of the alternatives provided in the final plan of reorganization of the railroad involved the purchase of the reversionary interest by the debtor from the lessor. A state court had held that, under state law, unanimous consent of the shareholders of the lessor was required in order to carry out such a sale, and had entered an injunction prohibiting the sale. The reorganization court enjoined further proceedings in the state court and voided the injunction. The Supreme Court held (two Justices dissenting) that "under the narrow facts presented here" the reorganization court was in error. In holding that the state court had jurisdiction to determine the issues of state law involved, and that the reorganization court exceeded its jurisdiction in interfering with the state litigation, the Court pointed out that the reorganization plan had been finally approved, and constituted merely an offer to the lessor to sell the reversion; that the bankruptcy court had no jurisdiction over the internal affairs of the lessor; that the state court injunction would not impede the carrying out of the reorganization plan according to its terms, nor would it interfere with continuation of rail service; that while the reorganization court undoubtedly had jurisdiction over the leasehold interest, as "property of the Debtor," the reversionary interest was not within the jurisdiction of the bankruptcy court. The Court also noted, although without specifying the significance thereof, that the lessor in that case could not have been brought within the reorganization proceedings, since it was not owned or controlled by the Debtor.

 The distinctions between Callaway and the present situation are clear: The lessee's right to sell the demised premises and to retain the proceeds until the end of the lease, a period of over 300 years, is obviously a substantial property interest of the Debtor; and the New York action, which would, if successful, frustrate that right, constitutes a claim against the Debtor's property which the reorganization court may properly enjoin. Moreover, this is a reorganization in progress, rather than one which is completed except for carrying out an approved plan. In Callaway, the actual dispute was between shareholders of the lessor, as to whether a minority could successfully block the proposed sale. In the present case, while some aspects of the alleged dispute may be similar, the dispute also involves, necessarily, the Debtor's rights of sale under its lease. Moreover, with respect to issues involving merely the rights of shareholders of the lessor, it is significant in the present case that the Debtor owns 95% of lessor's stock, and that all of the officers and directors of the lessor are officers of the Debtor. In Callaway, there was no ...


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