The opinion of the court was delivered by: FULLAM
The Debtor owns all of the common stock of the Pennsylvania Tunnel and Terminal Company ("PT&T"). In 1928, PT&T leased all of its properties to the Debtor for a term of 999 years. As rental under this lease, the Debtor was required to pay, inter alia, sums sufficient to meet the carrying charges on PT&T's indebtedness (including future indebtedness approved by the Debtor).
In 1965, to refinance some of PT&T's indebtedness and to finance improvements to the property, the PT&T properties were mortgaged for $50 million. The Debtor consented to the mortgage, guaranteed its payment, subordinated its lease to the mortgage, and assigned to the mortgage indenture trustees ("loan trustees") rentals payable to the Debtor from certain sub-leases of the property (the "station leases").
Under the terms of the assignment, which was consented to by the tenants, the Debtor was entitled to continue to collect the rents under the station leases in the absence of default under the terms of the mortgage loan, but in the event of default, the rentals were to be paid directly to the loan trustees.
The Debtor's filing for reorganization under § 77 of the Bankruptcy Act arguably constituted an event of default; at any rate, it seems clear that the mortgage is now in default (as of January 1, 1973, accrued interest aggregating approximately $6,768,200, and overdue principal payments aggregating $3 million, remained unpaid).
Shortly after reorganization, the loan trustees asserted the right to collect rents under the station leases. The Debtor resisted this claim. Pursuant to Order No. 15, the rentals collected under the station leases have been held in escrow, pending resolution of the underlying dispute. As of January 1, 1973, approximately $5,702,900 had accumulated in the escrow account.
As further security for the obligations of PT&T, and of the debtor as guarantor, the Debtor pledged with the loan trustees 902,690 shares of common stock of the Madison Square Garden Corporation, pursuant to a pledge agreement dated December 31, 1968. The Debtor also owns 135,403 shares of Madison Square Garden stock not encumbered by the pledge, and 7,500 shares are held in the Debtor's contingent compensation fund. In a related aspect of the present petition, scheduled for final hearing on February 5, 1973, the Trustees are seeking authorization to dispose of all of their holdings in Madison Square Garden.
The Trustees now seek approval of a proposed compromise settlement with the loan trustees. Under the terms of the proposed settlement, rentals under the station leases held in escrow on September 30, 1971, or otherwise payable for periods prior to that date, will be divided equally between the loan trustees and the Trustees of the Debtor. Rentals accruing thereafter will be divided, 35% to the Trustees and 65% to the loan trustees. The loan trustees will consent to the sale of the pledged stock, and the proceeds from any sales of the pledged stock will be divided equally between the Trustees and the loan trustees. All sums payable to the loan trustees will be credited against the indebtedness of the Debtor's estate to the loan trustees, but the precise allocation as between principal, interest, and expenses will remain open for future determination.
Implementation of the proposed settlement would make immediately available to the Trustees approximately $2.4 million in cash, plus approximately $650,000 annually during the balance of the reorganization period. In the event the Madison Square Garden stock is sold, the Trustees would also obtain one-half of the proceeds from the pledged stock. In view of the precarious cash position of the Debtor's estate, these are indeed substantial advantages.
The proposed settlement is opposed by certain indenture trustees, on the basis of three lines of argument:
1. On the merits, the indenture trustees argue that the loan trustees have no right to sequester the income from the station leases, and that this Court's Opinion and Order No. 974 in connection with the sale of Park Avenue properties constitutes binding precedent to that effect. In short, the argument is that the Trustees should litigate the underlying dispute, and stand a good chance of winning. Were it not for the Trustees' pressing need for cash, this argument might well be acceptable. But as a practical matter (a) the Park Avenue sales order is the subject of a pending appeal to the Third Circuit; (b) the Trustees are faced with an arrangement negotiated by the Debtor in possession, before the Trustees were appointed, which has resulted in the deposit of the rentals in escrow; a present decision by this Court in favor of the Trustees' argument would not necessarily provide immediate access to the cash; and (c) the rights of the loan trustees in the present situation are not necessarily the same as the rights of the indenture trustees in the Park Avenue situation (here, there was a separate assignment of the rents, consented to by the tenants).
Under any view of the matter, it is clear that there is a valid dispute, and that the trustees' desire to achieve an immediate settlement of the dispute is not unreasonable.
2. It is argued that the reasonableness of the present proposal cannot be determined until the Trustees decide whether to affirm or reject the PT&T lease. If, in the final analysis, the PT&T lease is found to be burdensome, the Trustees will presumably reject it, in which case they will have been operating the property for the account of the lessor. The indenture trustees argue that the escrowed rentals should be held intact, so as to be available to meet "chargebacks" by the Trustees for deficit ...