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February 3, 1972

In the Matter of FLYING W AIRWAYS, INC. and Its Wholly Owned Subsidiary, Red Dodge Aviation, Inc., Debtors in Proceedings for Reorganization Under Chapter X of the Bankruptcy Act

Edward R. Becker, District Judge.

The opinion of the court was delivered by: BECKER


EDWARD R. BECKER, District Judge.


 This is a Chapter X bankruptcy reorganization matter. It presents a myriad of complex issues, with each of which we shall deal in this lengthy opinion. The case is capped, however, by an ultimate question: is there a reasonable prospect of success of the reorganization proceedings? If there is such prospect, then the Court should act in two directions:


First, it should adhere to a turnover order entered by this Court on September 25, 1970 requiring the Girard Trust Bank and the Farmers Bank of the State of Delaware ("Banks"), secured creditors of reorganization debtor Flying W Airways, Inc. ("Flying W"), to turn over to Robert C. Duffy and Eugene M. Bernstein, trustees of Flying W, two Lockheed L-100-20 Hercules aircraft, denominated N30FW and N40FW. *fn1" These aircraft, which are owned by Flying W and are presently being operated by its wholly owned subsidiary, Red Dodge Aviation ("Red Dodge"), the other reorganization debtor, are the vehicles by which the debtor's principal business -- the carriage of cargo from Anchorage and Fairbanks to the oil rich North Slope of Alaska ("Slope") -- is carried out; moreover, these aircraft are the security for a large loan from the Banks to Flying W.


Second, the court should grant the trustees' petition to extend the time within which to file a plan of reorganization from December 13, 1971 (by which date the trustees were heretofore ordered to file but were unable to file a plan) to some suitable date in the future.

 On the other hand, if a reasonable prospect of success of the reorganization proceeding does not exist, then the court should order the trustees to return the aircraft to the Banks, and should refuse to extend the time for filing a plan of reorganization. Such actions would abort the chapter X proceedings and lead to the liquidation of the debtors.

 The issues which we here adjudicate arise in large measure out of a mandate given to us by the United States Court of Appeals for the Third Circuit in an Opinion filed May 11, 1971 In The Matter of Flying W Airways, Inc., Debtor, 3rd Cir., 442 F.2d 320. In its opinion, the Court of Appeals remanded the case to us:


"* * * so that the district court may conduct promptly a plenary hearing to consider fully whether adherence to and enforcement of its ex parte turnover order would facilitate a successful corporate reorganization, while minimizing the likelihood of loss to the secured creditor. Among the factors that the district court should consider are the probability of success of the reorganization, whether the debtor has any equity in the airplanes and the relationship of the trustees' possession of the airplanes to the trustees' reorganization efforts. Should the district court decide to adhere to its turnover order, it should consider the appropriate use of income and profits from the operations of the airplanes, with a view toward fashioning an order designed to minimize the possibility of loss to the secured creditor. Any district court order permitting the trustees to retain possession of the airplanes should also require the trustees to obtain adequate insurance coverage for the airplanes." (footnote omitted) 442 F.2d at 323-324.

 We have conducted the plenary hearing as we were bade by the Court of Appeals. Out of it developed some 4,400 pages of testimony, replete with financial data, and hundreds upon hundreds of documentary exhibits, many of which are voluminous in character. The major portion of this record was developed on the issues remanded for our consideration by the Court of Appeals. However, two other significant matters were included within the parameters of the plenary hearing:


First: the debtor, Flying W, has raised the question of whether it was in fact in default on its obligation to the Banks with respect to installment payments on the aircraft loan when the chapter X petition was filed. Flying W, with the support of the trustees, *fn2" claims that it was not in default: (1) because of the existence of a tripartite agreement (the "refinancing agreement") among itself, the Banks, and PSL Air Lease Corp. ("PSL"), a subsidiary of Pepsico, Inc., which relieved Flying W of its obligation to the Banks through the vehicle of the sale of the aircraft to PSL which would in turn lease them to Flying W, and the refinancing of the aircraft by means of a loan from the Banks to PSL which would pay off the Flying W loan; and (2) because the Banks and PSL breached the alleged agreement. Alternatively, Flying W asserts that the Banks and PSL are estopped from denying the agreement's existence or asserting default on the loan, because of their own inequitable conduct. The Banks and PSL, conceding that negotiations took place looking towards a refinancing agreement, deny that any such agreement was ever reached; they further deny that they were guilty of any inequitable conduct. However, if Flying W is correct in either of the just recited contentions, then Flying W was not in default of its obligations to the Banks at the time of the filing of the reorganization petition, may not be in default even now (the Banks and PSL might also be liable in damages to Flying W), and if there is no default, there can be no turnover of the aircraft. Therefore, the question raised by these contentions is a threshold question which we were not only forced to consider during the plenary hearing, but must deal with in this Opinion before reaching the question of prospects of success.


Second, trustees raised the question of whether or not they are entitled to the granting of their petition for a turnover order against the Provident Bank of New Jersey and the First National Bank of Beverly, New Jersey ("New Jersey Banks"), which hold some $50,000 in funds claimed by PSL to be security for Flying W's obligations to PSL under a certain lease agreement for a third Hercules Lockheed aircraft denominated N50FW, which is owned by PSL and was leased to Flying W and used by it in Alaska. This matter was considered because the issues involved in its determination were essentially covered during the plenary hearing, and because the infusion of $500,000 in working capital, if the New Jersey Banks were ordered to turn over the funds, might be relevant to prospects of success.

 The plenary hearing was conducted in two stages: the first from June 21 to July 2, 1971 and August 25 to 27, 1971 dealing principally with prospects of success, and the second from September 21 to 27, 1971 dealing principally with the alleged refinancing agreement. We have also conducted an extended hearing on the trustees' application to extend the time for filing a reorganization plan. The evidence adduced at that hearing dealt principally with prospects of success. We consider that evidence on the question of turnover of the aircraft and also consider the evidence developed on the question of prospects of success at the plenary hearing in deciding the trustees' application to extend time.

 The case has been a fascinating one. In a way, more than a case, it is a saga, in which a once viable business enterprise, seemingly on the threshold of a bonanza, has become a victim of an historic collision, occurring on the Arctic's trackless waste, between man's quenchless thirst for the oil which he needs to power his combustion engines, and the dawning age of ecology. The bonanza was the lucrative cargo carriage business, then in its nascent stage, which had been generated by the commencement of oil drilling operations on the Slope, and which was expected to be brought to fruition by the "imminent" issuance of the permit for construction of the forty-eight inch trans Alaska pipeline which would transport the oil from the Slope across the Brooks Mountain Range and on to Valdez on the south coast of Alaska with its ice-free port and railhead. The age of ecology, on the other hand, dawned in the late 1960's and has now spread across the land, focusing nationwide attention upon the Slope's treeless tundra, the permafrost beneath, and the massive herds of caribou which migrate each year through the masses in the Brooks Range to bear their calves upon the Slope. The ecologists' aim is to preserve nature's delicate balance from the threat of destruction by the pipeline construction and oil production activities.

 The ingredients in this historic collision are not the determinative factors in this lawsuit. They do, however, provide the backdrop and the perspective which one must at least understand before deciding the issues involved, hence this brief prologue.

 The Brooks Mountain Range runs some 600 miles east to west across northern Alaska. It has been called America's last wilderness. North of the Brooks Range, the land slopes in a wide, gentle plain to the shores of the Arctic Ocean. This vast flatland, stretching from the Bering Sea to the Canadian border, is known as the North Slope. The surface of the Slope is know as the tundra, a thin vegetation mat composed of the fragile interrelationship of mosses, lichens and grass. Below the tundra is the permafrost -- permanently frozen earth, which prevents deep-rooted plant life from growing. Any scraping of the tundra insulation can lead directly to spring and summer melting of the permafrost, which in turn causes erosion. Erosion results in a slowing of the growing cycle, and, arctic plant life, once disturbed, can take a long period of time to revegetate in the affected area. The ecologists fear scraping of the tundra by the construction equipment which will be involved in the construction of the pipeline; they also fear that the heat generated by the oil removed hot (150 degrees F.) from the ground will escape from the drilling rig or the pipeline and melt the permafrost through which much of the pipeline must be built, causing subsidence and cave-ins.

 In the summer, when the tundra thaws, much of the Slope is a swampland which even breeds mosquitos; the temperature averages forty degrees above zero, and often reaches seventy degrees. In the winter, however, the Slope is a land of harsh and frozen desolation, its climate inhospitable to man. The sun is up for but two hours per day, and the biting winds of the polar ice-cap send temperatures plummeting to 55 and 60 degrees, and often even 70 degrees below zero, where they remain for many months.

 The Slope is the home of an abundance of wildlife. It is estimated that some 400,000 caribou migrate yearly to the Slope. There they join countless bear, moose, dall sheep, fox, hare, squirrel, lemming, and wolf, as well as geese, duck and numerous other species of water fowl. Moreover, the Slope is traversed by some 350 rivers which spawn a variety of fish. The ecologist fear that the pipeline will obstruct the migration of the caribou, that oil spills will pollute the rivers and destroy the fish, and that any upsetting of nature's balance will make the Slope as inhospitable to wildlife as it is to man.

 It had been suspected for many years that oil deposits might lie under the Slope. Shortly after the turn of the century, the United States Geologic Survey made a report on geologic conditions in the area, with a view to the location of oil. The first intensive exploration for oil and gas on the Slope came after the Second World War and was conducted by the United States government, concerned over the security of the nation's oil supplies. In 1958, oil exploration by private oil companies commenced. After many failures, in July of 1968 Arco and Humble reported a major strike near Prudhoe Bay. In the months that followed, other oil companies made similar discoveries in the Prudhoe Bay Field. It was soon estimated that the eons of geologic development had resulted in the trapping of some ten billion barrels of recoverable oil in the Prudhoe Bay Field. Other oil fields were soon discovered on the Slope and the estimates ran to a total of 30 billion barrels of recoverable oil and many billion cubic feet of recoverable gas. The oil discovery appeared to be the most important in the history of North America.

 Understandably, the strike had enormous impact upon the State of Alaska, creating an atmosphere reminiscent perhaps of the days when gold was discovered there at the turn of the century. On September 10, 1969, the State of Alaska auctioned off oil leases on the Slope. Various major oil companies participated in the bidding and shortly thereafter commenced oil drilling operations on the tracts for which they had successfully bid. The drilling operations, however, required logistical support: construction materials to build the network of facilities necessary to conduct the drilling operations and to accommodate the men who were to work on the Slope; drill casing for the rigs which have to bore many thousands of feet to reach the oil; and fuel for power and heat, without which the drilling operations cannot be carried on nor life sustained. Similar logistical support was expected to be required for the men constructing the pipeline should the pipeline permit be issued.

 Because of the climatic conditions on the Slope, there is only one feasible way to consistently supply this logistical support: by air. Red Dodge Aviation possesses a contract carrier certificate issued by the Alaska Transportation Commission to transport cargo from Anchorage and Fairbanks to the Slope. Red Dodge carries cargo under contract with various oil and construction companies, utilizing the two Lockheed Hercules aircraft, N30FW and N40FW which are the subject matter of the turnover petition before us. Shortly after the oil strike, negotiations were concluded for the sale of Red Dodge Aviation stock by its then owner, Earl "Red" Dodge, to Flying W, theretofore a New Jersey based executive jet and charter flight operator with extensive real estate holdings, including an airfield on which was located the so-called "Flying W Ranch". Flying W was and is a publicly held corporation whose stock is traded over the counter; presently there are some 1700 shareholders located all over the United States.

 As the facts which we find from the plenary hearing will show (see infra), following the acquisition of Red Dodge, Flying W embarked on a major financial commitment in Alaskan cargo aviation. Infected, at it were, by the exuberant Klondike-like spirit which gripped Alaska in the fall of 1969 when the oil lease sale was held in Anchorage, and anticipating the early issuance of the permit to the Alyeska *fn3" Pipeline Company, a consortium formed by the oil companies for the construction of the trans Alaska pipeline, Flying W staked its corporate future in the Frontier State. Five of Flying W's major shareholders, Edwin, Brooke and Robert Matlack, and James and William Whitesell, through the instrument of personal guarantees of corporate obligations, staked their personal fortunes there as well. *fn4" Perhaps the most graphic illustration of the exuberant spirit, in view of the difficulties visited upon Flying W by its involvement with three Lockheed Hercules aircraft, is the fact that, during the winter of 1969, Flying W placed orders for two additional Hercules aircraft with delivery scheduled for the spring of 1970!

 The events occurring since the fall and winter of 1969 are the sinews of this lawsuit. Suffice it to say, for purposes of this prologue, that the question of the trans Alaska pipeline has become a national cause celebre and that, because of the objections raised by the ecologists, both in the form of public discourse and of litigation, the pipeline permit has not been issued by the Interior Department, and no one knows when it will be; nor, for that matter, can anyone be certain of the ultimate pipeline route. *fn5" As the result of the delay, the level of activity on the Slope has fallen off from the original flurry, and with it has fallen off the business of Red Dodge Aviation. These events have led Red Dodge and its parent, Flying W, into bankruptcy reorganization court.

 This has been a vexatious litigation, but, after all, the stakes are high. The shareholders of Flying W have their entire investment on the line and several of them have their personal fortunes at stake because of their guarantees of corporate obligations. The Banks, which seek recovery of the aircraft which are their security for a loan balance of well over $7 million on which no principal or interest has been paid for over two years, are properly concerned about impairment of their security by continued flying operations; they contend that they are being deprived of fundamental rights by continuation of reorganization proceedings which they believe to have no reasonable prospect of success. PSL, owner of the N50FW, which Red Dodge formerly used in Alaska, and of three spare aircraft engines, which Red Dodge is presently using, has huge claims as well as the engines at stake. And, needless to say, the general creditors whose claims total some $3,258,073 must be concerned about the outcome, for the general creditors will probably be "wiped out" along with the shareholders if the reorganization aborts. However, it is regrettably impossible to reconcile and accommodate in this adjudication the interests of all of the contending parties.

 Many of the facts set forth in this prologue are not of record. Most of those which are not of record are matters of a judicial or of common knowledge. *fn6" In any event, the facts just recited are only at the threshold. We have related them because they are necessary to an understanding of those findings of fact which we now make and the conclusions of law which we draw therefrom.

  Because of the protracted and complex nature of the case, the high stakes involved, and the high probability of an appeal, we have set forth extremely extensive findings. We feel that the parties and the reviewing court are entitled to no less. This Opinion will constitute our findings of fact and conclusions of law under Fed. R. Civ. P. 52(a).


 According to the docket of the clerk of the court, there have been over 230 papers docketed in the case to date. Full understanding of the case requires that we set forth a procedural history by describing the more significant aspects of the proceedings.

 A. The Flying W Petition, and Order Number One

 On September 24, 1970, at 9:25 a.m., Flying W filed with this Court a petition for reorganization under chapter X of the bankruptcy act. On the same day, Judge Kraft entered an order appointing the trustees, which, inter alia, provided:


"4. That Robert C. Duffy, Esq., and Eugene M. Bernstein . . . be and are hereby appointed trustees of the estate of the said Debtor and that the said trustees upon filing a bond as hereinafter provided shall be vested with all of the right, title and interest of the Debtor, as of the date of the filing of the said Petition for Reorganization, in all of its property . . .";


"5. That the said trustees shall qualify by entering into bond to the United States in the sum of $100,000 with such sureties as shall be approved by the Court . . ."; "11. That the said trustees shall be vested with full power and authority, and he is hereby instructed and directed to take all the properties, assets and business of the Debtor, real and personal, wherever situated and of whatever nature, into his exclusive possession and control, and the Girard Trust Bank, Farmers Bank of the State of Delaware, PSL Air Lease Corporation, or any other person, their officers, directors, agents, employees, attorneys, nominees, successors, assigns, or other representatives, be and they are hereby jointly and severally, ordered and directed to surrender and turn over to the possession and control of the trustee any of the above properties, assets and business of the Debtor, real, personal or mixed, now in its or their possession and control, and the said Girard Trust Bank, Farmers Bank of the State of Delaware, PSL Air Lease Corporation, or any other person, and each and every of its or their said officers, directors, agents, employees, attorneys, nominees, successors, assigns, and other representatives, be and they [sic] hereby jointly and severally restrained, enjoined and stayed from, in any manner whatsoever, interfering with or disturbing the trustee's right to exclusive possession and control of said properties, assets and business, real, personal or mixed." (emphasis added).

 The trustees' bond was approved by the Court and filed on September 25, 1970. On November 4, 1970, the Banks filed an answer to the petition for reorganization, averring that there was no reasonable prospect of success and that the petition was not filed in good faith. The answer also asked dismissal of the reorganization petition.

 B. Turnover Proceedings in re N30FW and N40FW

 Shortly after the entry of order number one, and despite notice of its provisions (see infra), the Banks caused the N30FW and N40FW to be flown from Alaska to Wilmington, Delaware. On September 25, 1970, the trustees petitioned the Court that the Banks be ordered to return the aircraft to the trustees in Alaska. Judge Kraft conducted a brief hearing on the matter. During the course of the hearing, the Banks moved to vacate the turnover portion of order number one and requested a plenary hearing on the motion to vacate. Judge Kraft refused to conduct a plenary hearing, denied the motion to vacate, and entered an order requiring the Banks to return the aircraft to Alaska at their sole cost and expense. The Banks appealed Judge Kraft's order, and on May 4, 1971 the Court of Appeals filed its opinion and judgment ordering the plenary hearing. In their November 4, 1970 answer, the Banks also requested reclamation of the N30FW and N40FW. This prayer raised essentially the same issues as were heard in the plenary hearing.

 C. The Red Dodge Aviation Petition and Consolidation of Proceedings

 On September 29, 1970, Red Dodge Aviation, Inc. filed with this Court a petition for reorganization under chapter X of the Bankruptcy Act. On the same day, the Court approved the petition, appointing as trustees Messrs. Bernstein and Duffy, the trustees of Flying W, and fixing bond at $25,000. The bond of the trustees was filed on October 7, 1970. On December 29, 1970, the Court ordered the reorganization proceedings of Red Dodge consolidated with those of Flying W under the above caption.

 D. Order of Reference to Referee as Special Master

 On October 2, 1970, Judge Kraft ordered that all matters in the proceedings were to be referred to Referee in Bankruptcy Emil F. Goldhaber, as special master. On January 15, 1971, the undersigned referred certain petitions to Referee Goldhaber to hear and report and reaffirmed Judge Kraft's general Order of Reference. However, since the advent of the Court of Appeals mandate, most of the matters of substance in connection with the proceeding have been recalled by the Court from the Referee.

 E. Petition for Turnover Order in re New Jersey Banks

 The trustees' petition for turnover of the $500,000 held as a deposit to secure Flying W's obligations to PSL with respect to the N50FW lease was first referred to Referee Emil F. Goldhaber as special master to hear and report. Referee Goldhaber made a partial record, but, because of the overlapping of issues with the plenary hearing, the matter was recalled by the Court during the course of the plenary hearing and will be adjudicated in this opinion.

 F. PSL's Petition for Reclamation of Engines

 On December 11, 1970, PSL filed a petition for reclamation of: (1) three spare Allison engines usable interchangeably on the N30FW and N40FW; and (2) certain Hercules loading equipment. This matter is pending before Referee Goldhaber. The matter is significant because one of the original N40FW engines is now on the N50FW which is in storage at Lockheed, Georgia, and therefore the reclamation of all of the spares which are in actual use in Alaska might abort the reorganization proceedings regardless of any other aspect of the case, because of the insufficiency of engines in Alaska.

 G. Proceedings Involving the Alaska Transportation Commission

 Several petitions have been filed by the trustees throughout the course of these proceedings seeking to stay proceedings instituted by Alaska Airlines and/or Interior Airways, Red Dodge's principal competitors, in either Alaskan state courts or before the Alaska Transportation Commission. These Alaskan proceedings have questioned the legality of Red Dodge's operations under its air carrier certificate, and an adverse result to Red Dodge could abort the chapter proceedings. The trustees also sought to stay an investigation by the Commission into the competitive situation involving Hercules operators. On two occasions the Court has stayed proceedings in Alaska. It is sufficient to say that, as of this date, the proceedings have not threatened Red Dodge's certificate.

  H. Section 167 Investigation

 Pursuant to petition of both the trustees and the Banks, the Court ordered the trustees to conduct an investigation under section 167 of the Bankruptcy Act. The investigation was conducted, and a section 167 report was filed. The Banks filed objections to the report, alleging that it was inadequate in certain particulars. The Court deemed it unnecessary to act upon the Banks' objections in view of the voluminous record developed at the plenary hearing which has illuminated the condition of the reorganization debtors far better than even the most comprehensive section 167 report.

 I. Medford Real Estate

 Pursuant to petition of the trustees, and after two lengthy hearings, the Court, on July 8, 1971, granted permission to the trustees to dispose of the Flying W Ranch, including the motel property, airfield and the equipment, for the sum of $708,000.00. The Court approved the sale: (1) because the maintenance of the Medford facility, which was non-operational, was a considerable financial burden ($ 6,000 a month expense) on the estate, and the sale thereof would lessen that burden; and (2) because it was persuaded that the offer was a good one, representative of the market value of the real estate. *fn7" Settlement has been held and the proceeds of sale held in escrow pending order of the Court with respect to distribution.

 J. Petition for Appointment of Counsel for the Debtors

 The debtors have actively participated in the proceedings through counsel. However, in an opinion which may be found at D.C., 332 F. Supp. 56, the Court denied the petition of the debtors for formal appointment of counsel, holding that:


"the Bankruptcy Act does not confer power upon the Court to formally appoint counsel for a debtor out of possession in a chapter X proceeding, except in the instance where counsel, for good cause and with the court's acquiescence, is acting as de facto counsel for the trustee." *fn8"

 K. Filing of Claims

 The Court ordered that proofs of claim by creditors be filed with Referee Goldhaber by September 15, 1971 and that proofs of interest as stockholders be filed with Referee Goldhaber by November 1, 1971.

 262 creditors' claims totalling $15,576,410.68 have been filed with the referee. This figure includes both secured and unsecured claims but does not include the claims of EBR Corporation and the Whitesells. The secured claims total over $12 million; the priority claims total $174,400, and the balance of the claims are unsecured. Some 1650 shareholders have filed proofs of interest representing 2,214,698 shares.

 L. Order in re Filing of Reorganization Plan

 As indicated above, the Court, on September 3, 1971, entered an order that by December 13, 1971 the trustees file a Plan of Reorganization or a report of why such a plan could not be effected, and that a hearing be held on such plan or report on January 3, 1972. On December 8, 1971, the trustees petitioned the Court to extend the time for filing a plan. We thereupon stayed our order of September 3, 1971 and have held a hearing on the trustees' petition.

 M. Interim Compensation

 On November 1, 1971, pursuant to petition by the trustees, the Court allowed interim and partial compensation in the sum of $15,000.00 to the trustees, $20,000 to counsel for the trustees, and $8,000.00 to Laventhol, Krekstein, Horwath & Horwath, accountants employed by the trustees. The S.E.C. supported the trustees' position that the interim compensation was fair and reasonable and necessary to the continuance of the proceedings.


 We find the following facts with respect to the business and property of the debtors, and their financial condition prior to the filing of the petitions for reorganization.

 Flying W Airways, Inc. is organized under the laws of the State of New Jersey and is a publicly held corporation. *fn9" As of September 24, 1970, 2,555,335 shares of its common stock were issued and outstanding, and registered in the name of approximately 1700 shareholders. Until the spring of 1969, Flying W was engaged in various business activities, including aviation sales, charter flying, flight training, operation of an airport, motel and restaurant, and rental of industrial and office buildings and land development. To conduct these activities Flying W had a fleet of seven (7) executive jet and propeller powered cargo aircraft and seven (7) small and medium size propeller powered cargo aircraft. In addition, Flying W operated the Flying W Ranch in Medford, New Jersey and an office building in Cinnaminson, New Jersey, which was under lease to R.C.A. These activities were conducted through various subsidiary corporations owned by Flying W. Of the several subsidiaries, only Longhorn Airways, Inc., Thunderbird Airways, Inc. and Continental Aircraft Sales, Inc. remain in existence today. None of these corporations are operating entities, they have been dormant for some period of time, and they are without operating assets.

 On April 16, 1969, Flying W entered into an agreement with Earl "Red" Dodge, the sole shareholder of Red Dodge Aviation, Inc., a corporation organized in January 1968 under the laws of the State of Alaska, to acquire from him all of the outstanding stock of Red Dodge Aviation, Inc. in exchange for 104,000 shares of the common stock of Flying W. At the time of this acquisition, which was consummated in May 1969, Red Dodge held Alaska Air Commerce Certificate Number 16 which authorized it to operate fixed wing aircraft as a contract carrier of cargo within the state of Alaska. Red Dodge is also certified by the Federal Aviation Agency as a commercial operator for carriage of cargo only under Part 121 of the Federal Aviation Act. This certificate is issued annually and has been renewed each year. After the acquisition of Red Dodge, Flying W pursued contract cargo operations within the State of Alaska as its major line of business, and disposed of its propeller driven equipment and replaced it with jet-prop and pure jet aircraft.

 As of September 24, 1970, the date of the filing of its reorganization petition, Flying W's principal assets were: its stock interest in its wholly-owned subsidiary, Red Dodge; the two Lockheed Hercules L-100-20 aircraft N30FW and N40FW, which were used by Red Dodge; *fn10" a leasehold interest in a North American Sabreliner jet airplane, which Flying W sub-leased to Philco-Ford as an executive airplane; *fn11" and parcels of improved real estate in Cinnaminson and Medford, New Jersey.

 The Cinnaminson property, which is leased by Flying W to RCA Corporation under agreements expiring June 30, 1972, consists of seven acres on which is located an office building of 144,000 square feet. The property is subject to three mortgages: a first mortgage to the First Pennsylvania Bank of approximately $575,000; a second mortgage to Charlotte Aircraft Corporation (a supplier of used aircraft parts) of approximately $224,000; and a third mortgage to EBR Corporation of approximately $2,300,000. The annual rent amounts to $278,279.11, which is assigned to First Pennsylvania Bank. The trustees are studying the possibility of selling the Cinnaminson property to RCA. *fn12"

 The Medford property, known as the Flying W Ranch, consists of 144 acres and contains, inter alia, two air strips, a motel, restaurant, bar, office buildings, and two large hangars. The property is subject to three mortgages: a first mortgage to First Pennsylvania Company of approximately $500,000; a second mortgage to Chan-Air Corporation (a subsidiary of PSL) of approximately $160,000; and a third mortgage to EBR Corporation of approximately $2,300,000. As noted above, the trustees have proposed and the Court has approved a sale of the Medford property for $708,000.

 Red Dodge's business is essentially that of a contract air carrier of cargo. Under its certificate from the Alaska Transportation Commission, authorizing it to conduct such a business within Alaska, Red Dodge flies from Anchorage and Fairbanks to the North Slope and largely to air strips in the vicinity of Prudhoe Bay. Its principal customers are oil companies and oil well drilling or construction companies. Red Dodge does lease some hangar space to others and does have some fuel sales business, but those aspects of its business are minor. Red Dodge uses the N30FW and N40FW for the carriage of cargo. The firm also owns a B-25 World War II bomber it uses during the summer under contract with the Bureau of Land Management in Alaska for fire prevention, observation and spraying. In addition to this equipment, Red Dodge has four spare Allison engines which may be used interchangeably on the Hercules aircraft; three are leased from PSL and one is owned by Flying W. Red Dodge also uses spare parts for Hercules aircraft which are owned by Flying W.

 Red Dodge has various facilities at the Anchorage Airport from which its flying operations are directed. Its hangar, known as the Cordova Hangar, is currently the subject of litigation between Red Dodge and The Cordova Development Company over ownership. Red Dodge leases ground at the airport adjacent to the hangar, for staging and the storage of supplies. It also leases four parcels of real estate directly from the State of Alaska. On one parcel sits a partially constructed hangar, about 40% complete; if finished, it would be the largest hangar in the State of Alaska and would permit indoor maintenance work on Hercules aircraft. However, at the time of the filing of the reorganization petition, the trustees had incurred an obligation of $235,000 to the general contractor it had engaged for this purpose, and the cost of completion would be in excess of $500,000, which Red Dodge cannot now afford. At the Fairbanks airport, Red Dodge leases an office facility and an adjacent staging area. For a period during the winter of 1970-71, the trustees leased a hangar at Fairbanks so that aircraft maintenance work might be done inside. *fn13"

 The Hercules aircraft (often referred to in the record as "Herks") are, in and of themselves, of paramount importance in these proceedings, hence the following description. The Hercules aircraft is a high-wing monoplane powered by four Allison turbojet engines which drive propellers. Its cargo compartment is aftloaded at truckbed height which permits loading and unloading more quickly and less expensively than side-loaded cargo aircraft. Lockheed has built the military version of the Hercules, the C130, for 15 years. Lockheed's commercial program started in 1966. The commercial Hercules has progressed from the basic L-100 model through the L-100-20 (the so-called stretched Hercules) and L-100-3013a (the so-called superstretched Hercules).

 The Hercules L-100-20 is 106 feet long, has a wing span of 132 feet and a gross weight of 155,000 pounds. It can carry a payload of approximately 50,000 pounds approximately 2,100 nautical miles. The main cargo compartment is 49 feet long, can take objects 108 inches high by 120 inches wide, and has a volume of 4,400 cubic feet. The three models of commercial Hercules differ from each other principally in the length of their cargo compartments. The cargo compartment is about 41 feet long in the L-100, and about 55 feet long in the L-100-30. Each of the three models of commercial Hercules can carry about the same weight of cargo.

 The Hercules was designed for the support of military front-line combat situations requiring short take-off and landing capabilities and the capacity to carry heavy loads. The Hercules L-100-20 is extremely well-suited for the carriage, from Fairbanks and Anchorage to the North Slope, of pipe used in oil well drilling operations (and prefabricated huts for drilling sites) because it can accommodate a 48 foot length of casing used in oil drilling, and because the short takeoff and landing capability enables the Hercules to utilize the relatively short landing strips on the North Slope. Economic considerations require that as long a piece of pipe as possible be transported. For example, neither the DC-8 nor the Boeing 707, which are used for cargo and have large payloads, would be suitable for Slope cargo operations, because they load from the side and at greater than truck bed height, and because they lack short take-off and landing capability. No other aircraft is as wellsuited as the Hercules for operations on the Slope.

 The principal customers of Red Dodge during the period of the reorganization have been the oil companies which have been conducting drilling operations on the Slope: BP Alaska, Inc., Humble Oil and Refining Company, McCulloch Oil Corporation, Forest Oil Corp. and the Atlantic Richfield Co. Other major customers have included the State of Alaska, Hamilton Brothers (a construction firm), Brinkerhoff Drilling Company, Rivers Construction Company, Frontier Rock & Sand, Rock Island Oil Company, and Burgess Construction Company. For a long period of time, BP was Red Dodge's principal customer. However, since the conclusion of the plenary hearing, Red Dodge has lost BP's business to Interior Airways (see infra). The cargo carried for BP Alaska, Inc. included drilling rig material, oil casing and drill stems, and was hauled principally from Fairbanks to Prudhoe Bay. The same type of cargo is carried for Humble to Mikkelson Bay, approximately 80 miles east of Prudhoe Bay, and for Forest Oil Corp. to Kemick, approximately 150 miles southeast of Prudhoe Bay. Red Dodge hauls the same type of cargo for McCulloch Oil to Finn Creek, which is also on the Slope. Red Dodge hauls drilling rigs, trucks and fuel for Brinkerhoff Drilling Company, which performs the drilling operations in Alaska for McCulloch Oil Corp. Red Dodge hauls heavy construction equipment, such as road graders, caterpillars, trucks and trailers for the State of Alaska, Rivers Construction Company and Frontier Rock & Sand. From time to time, however, Red Dodge hauls other cargo, such as fish. Approximately 85% of Red Dodge's business is attributable to no more than 10 oil companies or oil well drilling companies.

 As of June 29, 1971, during the plenary hearing, the only companies with which Red Dodge had written contracts for the carriage of cargo were Atwood Enterprises, BP Alaska, Inc., Brinkerhoff Drilling Co., Inc., Petroleum Distributing Company, Inc. and McCulloch Oil Corp. The typical Red Dodge Oil contract obligates it to provide L-100-20 aircraft upon request of the customer but does not require the oil company to make any payment to Red Dodge other than those arising from the use of the aircraft. The contract provides that the customer is obligated to use Red Dodge for the carriage to the Slope of its cargo requiring the use of a Hercules L-100-20, and is terminable at any time by the customer upon a short written notice.

 The amount of air cargo carried to the North Slope is, in large measure, seasonal. The peak months are in the late fall and winter when the ground surface is solid ice and snow. Supplies and equipment are then carried from the airstrips to the drilling or operational sites over the ice and snow. In the summer, however, most of the airstrips on the Slope, which are constructed on tundra with overlying gravel, are too soft to land on. The flights fall off in May and June; July and August are light, and the flights begin to pick up in September. While there are some all-weather roads (just as there are some all-weather airfields), to protect the tundra, there are governmental restrictions limiting permits for additional roads and operations after the tundra thaws. When the thaw comes, many drilling or operational sites are closed because they become inaccessible except by helicopter.

 The N30FW and N40FW are being financed by the Girard Trust Bank ("Girard") and Farmers Bank of the State of Delaware ("Farmers"). Girard and Farmers are the joint holders, as mortgagees, of an Aircraft Chattel Mortgage -- Security Agreement ("Mortgage Agreement") executed by Flying W on April 10, 1969, and amended by a written agreement ("Mortgage Amendment") dated May 7, 1969 (the Mortgage Agreement as so amended is hereinafter called "Mortgage"). N30FW and N40FW are the Federal Aviation Agency ("FAA") registration numbers for the Lockheed Hercules aircraft serial numbers 4302 and 4303, which are referred to in the mortgage by FAA registration numbers N7952S and N9237R. The Mortgage Agreement was recorded with the FAA on April 16, 1969 (assigned FAA Conveyance Number G47069) and the executed Mortgage Amendment was recorded with the FAA on May 16, 1969 (assigned FAA Conveyance Number D43884). At the time of its execution, the Mortgage secured the payment by Flying W of its promissory note dated April 10, 1969 in the principal amount of $7,500,000 with interest thereon (payable over a term of eight years) and the payment and performance by Flying W of its other obligations recited in the Mortgage. The loan received by Flying W from the Banks was used by Flying W to purchase the aircraft and certain spare parts. The total amount of the loan was $7,323,796.07.

 On November 3, 1969, Flying W did not pay the installments of principal and interest then due. The principal balance on that date was $7,055,938.91. Interest had been paid to October 1, 1969. Since October 1969, the following payments on account of interest were made by Flying W on or about the dates and in the amounts as follows: March 9, 1970, $64,952.59; April 6, 1970, $69,592.06; and May 12, 1970, $64,952.06. Although Flying W has made no payment on account of principal since November 3, 1969, the principal balance was reduced by a set-off of two bank accounts in the combined amount of $42,906.00 maintained by Flying W with Farmers Bank. As of September 24, 1970, the date of filing the reorganization petition, the unpaid principal balance exceeded $7,013,000. As of that date, the books of Flying W, prior to any auditor's adjustments, showed $7,055,938.91 as due and payable on account of the principal of the Banks' loan to Flying W and $724,954.55 as accrued interest payable.

 The debtors have been operating the N30FW and N40FW in Alaska since they were purchased. For a time Red Dodge operated a third Hercules N-100-20 aircraft in Alaska -- the N50FW. Prior to September 1969 Flying W had contracted with Lockheed to purchase the N50FW at a price initially set at $3,350,000 and later amended to $3,375,800. However, by letter of September 9, 1969, PSL proposed to purchase the N50FW from Lockheed and lease it to Flying W. Flying W thereupon assigned PSL its rights under the contract, with the consent of Lockheed, and on December 30, 1969, PSL purchased the N50FW from Lockheed and immediately leased it to Flying W under a lease agreement bearing the same date. Under the terms of the Lease, Flying W was to pay as rental for the N50FW the sum of $124,866 each calendar quarter in advance commencing December 30, 1969. The rental was paid for the first quarter, but no quarterly rental payments have been made since that date. Red Dodge used the N50FW in its North Slope operation until April 1970, when it developed a wing crack and was flown to Lockheed in Marietta, Georgia for repairs, where it has remained to this day. The wing section has now been repaired, and the airplane is in storage, but Lockheed's repair bill of $147,862.00 is still unpaid and Lockheed has filed suit in the United States District Court for the Northern District of Georgia against PSL. PSL was denied leave by this Court to join the trustees and debtor as a third party defendant in that action, but has included in its claim filed with the Referee the amount of the repair bill. On October 21, 1970, by stipulation approved by the Court, the trustees relinquished their right to possession of the N50FW. As of September 24, 1970 (the date of the filing by Flying W of the reorganization petition) the books of account of Flying W and its subsidiaries showed, on a consolidated basis as reflected in the statement of auditors employed by the trustees, assets of $12,816,322 and liabilities as follows: Liabilities having priority (payroll taxes and payroll) $ 153,434 Liabilities having collateral 9,513,737 General liabilities 4,285,443 Deferred credits 192,959 Due to related interests (E.B.R. Corp. and Whitesells, who are principal shareholders of Flying W) 3,388,502 Total $ 17,534,075


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