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IN RE PENN CENT. TRANSP. CO.

November 18, 1971

In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor. In re HARLEM-HUDSON COMMUTER SERVICE; Proposed Agreements with Metropolitan Transportation Authority

Fullam, District Judge.


The opinion of the court was delivered by: FULLAM

FULLAM, District Judge.

 The Trustees have petitioned for approval of a group of proposed agreements between the Trustees, the Metropolitan Transportation Authority and, as to one agreement, National Rail Passenger Service Corporation ("Amtrak") relating to suburban passenger train service on the Harlem-Hudson lines of the Debtor.

 By way of background, it may be noted that the Trustees are the owners in fee of the rail property constituting the Hudson Division of the railroad, extending generally from Mott Haven to Albany in the State of New York. The proposed agreements relate essentially to the main tracks of this Division, between Mott Haven and Poughkeepsie. The New York and Harlem Railroad Company is the owner in fee of the rail property constituting the Harlem Division of the railroad, but, in 1873, leased the entire property for a term of 401 years to the Debtor's predecessors; under the lease, the Trustees have, for all purposes presently material, the right of fee owners. The Harlem Division extends generally from Grand Central Terminal to Chatham, New York. The proposed agreements involve essentially the main tracks between Grand Central Terminal and Dover Plains, New York.

 Approval is sought for proposed agreements in three categories: (1) a lease of the property to MTA, and sale to MTA and lease-back of certain railroad cars; (2) a service contract, for the operation of the passenger service by the Debtor; and (3) a "tripartite" agreement between MTA, the Trustees, and Amtrak for the purpose of ironing out possible areas of conflict between the other proposed agreements and the antecedent agreement between the Debtor and Amtrak relating to inter-city passenger service.

 I. THE PROPOSED AGREEMENTS

 1. The MTA Lease. It is proposed that the Debtor lease to MTA the specified rail lines, stations, etc. for a term of 60 years, with successive options granted to MTA to renew the lease for as many as six additional five-year periods. For certain designated stations and facilities, MTA would pay rental ranging from $977,390 the first year, downward to $173,408 for the year 2022 and all succeeding years during the initial term. For the balance of the demised premises, MTA would pay only nominal rental of $1 annually. After the original 60-year term, MTA would be required to pay, during any renewal periods, the fair rental value of the property north of the Harlem River lift bridge, based upon the use to which the property is then being applied, and the fair rental value of the bare land south of the bridge.

 The Trustees would reserve trackage rights, permitting them to operate freight service at present levels without additional charge. MTA would indemnify the Debtor against all taxes and ad valorem levies on the leased premises.

 The Trustees would sell to MTA certain designated railroad cars for the cash sum of approximately 3.7 million dollars, and MTA would then lease these cars back to the Trustees, at a nominal rental, for use in providing service on the property pursuant to the service agreement hereinafter discussed.

 It is contemplated (although not actually required by any of the agreements) that MTA would invest substantial sums in improving and upgrading the leased facilities (upwards of $44,000,000). With respect to these improvements, the lease provides, in paragraph 6:

 
"6. Title to any improvements made to the leased premises by Lessee shall be in Lessor upon completion thereof, unless the same consists of a fixture which may be removed without causing permanent damage to the realty, in which event Lessee shall have title to such fixture and may remove the same . . . [at expiration or termination of lease]."

 This language is apparently intended to incorporate decisional law in the State of New York on the subject of removable fixtures, under which a tenant who makes improvements retains title thereto and may remove them unless the real estate would be permanently damaged by such removal. See generally: 23 N.Y. Juris. Fixtures paras. 23 et seq.; Davis v. Bliss, 187 N.Y. 77, 79 N.E. 851, 1907; Mine Realty Corporation v. 2131 Broadway Corporation, 253 App. Div. 299, 1 N.Y.S. 2d 979 (1938).

 It is the stated position of MTA that the quoted clause would give the railroad title to high-level platforms and similar "building improvements," but that MTA would retain title to, and could remove, such items as transformer rectifier units, wiring, rail, switches, etc. The railroad's witness, Mr. Adams, was of the view that the railroad would acquire title to all facilities necessary for the operation of rail service. However, his interpretation of paragraph 6 of the lease, quoted above, may have been based upon the fact that, elsewhere in the proposed agreements, it is made clear that, in the event of termination of the lease, so long as the Debtor is required to provide rail service, MTA would be required to make the necessary facilities and equipment available at nominal rental.

 The distinction between the vesting of title in the railroad, and the right to use the improvements even after termination of the lease, is of considerable importance in passing upon the objections filed by certain indenture trustees, who assert that the proposed lease would improperly diminish the ...


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