The opinion of the court was delivered by: FULLAM
The Trustees have petitioned for determination of the issues raised by the proof of claim filed by the reorganization Trustee of the New York, New Haven and Hartford Railroad Company (hereinafter "New Haven Trustee"), and certain related applications by the Trustees for interim relief. The claim in question is an outgrowth of the litigation which culminated in the decision of the Supreme Court in the New Haven Inclusion Cases, 399 U.S. 392, 90 S. Ct. 2054, 26 L. Ed. 2d 691 (1970). The New Haven Trustee asserts that these issues have already been decided by the United States District Court for the District of Connecticut, which has jurisdiction over the New Haven reorganization.
On March 6, 1962, the Pennsylvania Railroad Company and the New York Central Railroad Company made application to the Interstate Commerce Commission under Section 5(b) of the Interstate Commerce Act (49 U.S.C. § 5(b) (1)) for approval of a proposed merger of the two railroads into what ultimately became the Penn Central Transportation Company, the Debtor herein.
On June 26, 1962, the New Haven, then in reorganization for the second time in less than 20 years, sought inclusion in the merger. Eventually, over the objections of the merger proponents, the Commission, by its order of April 6, 1966, made its approval of the merger conditional upon inclusion of the New Haven, on terms to be negotiated by the parties, subject to the approval of the I.C.C. and the New Haven reorganization court. 327 ICC 475, 553. It was recognized that any attempt to recapitalize the New Haven and include it as an operating company would be pointless, in view of its hopelessly deteriorating financial condition. Accordingly, the outright sale of the New Haven's assets was the method of inclusion selected. This transaction was to constitute the first step of a two-step reorganization plan for the New Haven. New Haven Inclusion Cases, 399 U.S. 392, 410 at n. 45, 90 S. Ct. 2054, 26 L. Ed. 2d 691 (1970).
The New Haven Trustee and the merger proponents originally agreed that a fair purchase price for the New Haven assets would be $ 125,000,000. The Commission also approved this price,
which was to be paid by a "package" consisting of $ 8,000,000 in cash, $ 23,000,000 in (divisional) first mortgage bonds, the assumption of certain New Haven liabilities, closing adjustments, and the issuance of shares of common stock in the new corporation. The parties, and the Commission, valued the common stock at $ 87.50 per share; thus the stock constituted the major part of the consideration flowing to the New Haven estate. It is conceded that this feature of the transaction was eagerly sought by the New Haven estate.
While the transaction as thus formulated was designed to produce the equivalent of $ 125,000,000 for the New Haven estate, the Commission further found that it would cost Penn Central the equivalent of $ 157,000,000, largely because of the interim and continuing losses of the New Haven which the Penn Central would be required to assume. Thus, Penn Central would pay $ 157,000,000 in exchange for assets having only negative earning power. But, apparently convinced that the merger would "save" upwards of $ 80,000,000 per year, the Commission concluded that the inclusion of the New Haven on the above terms "would be both 'just and reasonable' as a condition of the merger under § 5 and 'fair and equitable' as part of a plan of reorganization under § 774)4B"B" New Haven Inclusion Cases, 399 U.S. 392, 413, 90 S. Ct. 2054, 2069, 26 L. Ed. 2d 691 (1970).
At this point, procedural complications developed. The I.C.C. order was subject to dual review: in the Connecticut District Court, and in a three-judge statutory court in the Southern District of New York. The former had jurisdiction over the reorganization of the New Haven, the latter over the merger (and the related inclusion) under § 5 of the Interstate Commerce Act. Appeals were taken to both courts, by New Haven creditor groups asserting that the price was too low, and by various parties opposed to the merger, the New Haven inclusion, or both.
The Connecticut Court concluded that the New Haven assets were worth between $ 33,000,000 and $ 55,000,000 more than the agreed price, In re New York, N. H. & H. R. R. Co., 289 F.Supp. 451, 465 (D.C.Conn.1968), while the merger court concluded that the deficiency was in the range of $ 45,000,000 to $ 50,000,000. New York, N. H. & H. R. R. Co., First Mtg. 4% Bondholders' Committee v. United States, 289 F.Supp. 418, 440 (S.D.N.Y.1968).
On remand, again in a combined proceeding involving both the merger and the reorganization, the I.C.C. increased the price by some $ 37,700,000, but allowed certain further deductions totaling $ 22,100,000, thus producing a net price increase of $ 15,600,000. The total price set by the Commission was approximately $ 145,600,000. The increase was to be paid by issuing $ 7.4 million more of divisional mortgage bonds, and by assuming certain additional liabilities.
By this time, the New Haven was in such desperate straits that cessation of rail services appeared imminent. Accordingly, the I.C.C. concluded that the assets should be immediately transferred to Penn Central, and Penn Central should be required to take over the New Haven's operations, without awaiting final judicial review of the price. This was accomplished, pursuant to the I.C.C. opinion and an order of the New Haven reorganization court, as of December 31, 1968, by an outright conveyance to Penn Central "free and clear of liens." The price set by the I.C.C. was paid, subject to adjustment on appeal.
On the second round of appeals, the merger court generally upheld the I.C.C., but made some adjustments which increased the price by about $ 990,000. New York, N. H. & H. R. R. Co., First Mtg. 4% Bondholders' Committee v. United States, 305 F.Supp. 1049 (S.D.N.Y.1969). This, too, was paid. However, the reorganization court increased the price by some $ 29,000,000. In re New York, N. H. & H. R. R. Co., 304 F.Supp. 793 and 304 F.Supp. 1136 (D.Conn.1969).
When the merger was originally approved in 1966, in hearings before the I.C.C. the median price projected of Penn Central Stock was $ 87.50. By the time of the conveyance of the New Haven assets on December 31, 1968, the price had declined to an average of about $ 69.50 per share, see : New Haven Inclusion Cases, 399 U.S. at 485, 90 S. Ct. 2054, 26 L. Ed. 2d 691, but all concerned apparently felt that the long-range benefits of the merger would improve the market. Accordingly, in authorizing the New Haven Trustee to accept 950,000 shares of Penn Central stock as representing payment of $ 83,125,000 of the purchase price, the Connecticut court imposed on Penn Central an underwriting plan which in effect required Penn Central to guarantee that the stock would reach $ 87.50 per share by February 1, 1978; otherwise, Penn Central would pay the New Haven Trustee the difference in cash. See 304 F.Supp. at 808-810.
Appeals from the orders of both courts were pending before the Supreme Court when the Penn Central went into bankruptcy. Eight days later, on June 29, 1970, the Supreme Court decided the pending appeals. New Haven Inclusion Cases, 399 U.S. 392, 90 S. Ct. 2054, 26 L. Ed. 2d 691 (1970). The Court (a) affirmed the New Haven reorganization court's determination that the correct price for the New Haven assets was $ 174,000,000; (b) vacated that part of the reorganization court's judgment which set up the underwriting plan; and (c) directed the merger court to abstain "pending the further proceedings before the I.C.C. and the reviewing courts under Section 77 of the Bankruptcy Act."
As can be seen from the foregoing recital, there were two separate issues involved throughout these proceedings: the value of the New Haven assets, and the value of the consideration to be furnished by Penn Central. When the I.C.C. and the lower courts considered the case, the value of the assets was decreasing, even negative; whereas the value of the consideration was thought to be likely to increase. By discarding going-concern, or income-producing, approaches, and choosing a liquidation hypothesis, the reorganization court established a floor under the declining asset value. And its underwriting provision was designed to insure that the consideration value would correspond to the price thus fixed.
By the time the Supreme Court decided the case, it was apparent that the underwriting scheme was no longer feasible.
Before attempting to discuss the precise extent of this Court's jurisdiction and the desirability vel non of its exercise, it may be helpful to review the issues which, in consequence of the Supreme Court's decision, remain open for further consideration. Unfortunately, even this subject is not free from doubt.
It is clear that the value of the New Haven assets which were conveyed to Penn Central as of December 31, 1968, has been finally and unalterably fixed at $ 174,000,000. If the "package" of consideration previously furnished by Penn Central were to be valued as of the time of payment and treated as an accomplished fact, then the only remaining issue would be the form of payment of the $ 28,000,000 balance. But the Court has expressly stated that, in the light of intervening events, the underwriting scheme which was designed to produce a value of $ 87.50 per share of the common stock "may be wholly unrealistic." From this it can be argued, either that the Court intended that only the underwriting scheme should be reconsidered, or that the true value of the "package" as of December 31, 1968, should be reappraised in the light of subsequent events, or that the entire "package" should be reevaluated as of present day values. There is language in the Court's opinion which can be construed as lending support to each of these possible constructions.
"Accordingly, we set aside the order of the Connecticut District Court insofar as it determines that an intrinsic value of $ 87.50 inheres in the Penn Central common stock and implements an underwriting plan to secure payment of that sum. Further proceedings before the Commission and the appropriate federal courts will be necessary to determine the form that Penn Central's consideration to New Haven should properly ...