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April 16, 1973


Fullam, District Judge.

The opinion of the court was delivered by: FULLAM


FULLAM, District Judge.

 The Debtor owns 100% of the common stock of the Pennsylvania Company, which is essentially a holding company for a variety of corporate enterprises, principally in non-railroad fields. In early 1969, and for some time previously, the Debtor was indebted to a group of banks in the sum of $100 million, represented by short-term unsecured notes. In April of 1969, the line of credit was increased to $300 million, and the Debtor pledged its Pennco stock as security. Some 53 banks throughout the country were parties to or ultimately participated in the loan transaction.

 Through a series of petitions (Documents Nos. 3960, 4077, 4624, 5010, and 5042) the Trustees seek approval of a settlement agreement, pursuant to which the claims of 49 of these 53 banks would be discharged, in exchange for transfer to these banks of 95 2/3% of the common stock of Pennco.

 The proposed settlement appears to have the express or tacit approval, not only of the settling banks and the Trustees, but also of the Institutional Investors group, and certain indenture trustees. The United States government and the Interstate Commerce Commission both oppose consummation of the settlement agreement at the present time, although for different reasons. The bondholders represented by the "special representatives" (substitute fiduciaries appointed for purposes of this case with respect to certain bond issues in which the settling banks are named as indenture trustees, and therefore have a conflict of interest), the New Haven trustee, the Penn Central Company (parent of the Debtor), and the preferred shareholders of the Pennsylvania Company all actively oppose the proposed settlement. At least partial opposition has also been expressed on behalf of the Detroit Bank, one of the original participants in the loan transaction, which has not accepted the proposed settlement agreement.

 All facets of the proposed settlement have been fully explored through discovery, and extensive hearings have been held in this Court. Upon consideration of the entire record, I now enter the following


 1. Pursuant to credit and pledge agreements entered into in the spring of 1969, by the Debtor and 48 banks acting through the First National City Bank of New York as the agent bank, the banks made available to the Debtor a $300 million revolving line of credit to be secured by the Debtor's common stock interest in Pennco. Appropriate promissory notes were executed to reflect the principal and interest attributable to each drawdown.

 2. Five additional banks acquired participation under the credit and pledge agreements.

 3. By June 21, 1970, the full credit line had been utilized, and in accordance with the pledge agreement, the agent held the Debtor's stock certificate for Pennco's common stock accompanied by a stock assignment executed in blank. Paragraph 6 of the pledge agreement authorized the agent, upon default on the notes, to sell the Pennco stock to satisfy the obligations reflected by the promissory notes.

 4. The Trustees have made no payments on the promissory notes. Accrued interest on the respective promissory notes to June 21, 1970 was $4,495,653, and simple interest since June 21, 1970 to October 31, 1972, is approximately $42.5 million.

 5. The agent has declared the notes in default and accelerated the entire principal. By the general injunctive provisions of Order No. 1, the agent is enjoined from exercising its rights under the pledge agreement. However, Order No. 10 precludes the Debtor from causing Pennco to declare and pay dividends to the Debtor and, in addition, grants the agent certain rights to information concerning Pennco's operations.

 6. Pennco is a Delaware corporation formed in 1870 by the Debtor's corporate predecessors to operate certain leased lines west of Pittsburgh, Pennsylvania. At the present time, Pennco is primarily a holding company for both rail and non-rail assets.

 7. Pennco's outstanding common stock of 4,985,000 shares is owned by the Debtor subject to the pledge agreement mentioned in Findings 1 and 3.

 8. Pennco's 206,440 preferred shares are publicly held and traded on the New York Stock Exchange. The preferred shares have the following rights:

 (a) Annual cumulative dividends of $4.625 per share.

 (b) A liquidation preference of $100 per share prior to any payout to common stockholders.

 (c) An option to convert the Pennco preferred shares into common stock of the Norfolk & Western Railway Company ("N&W").

 9. Pennco has escrowed 158,248 shares of N&W stock to satisfy the conversion option of the Pennco preferred. As of January 1, 1972, five quarterly preferred dividends had been missed, amounting to a total cumulative arrearage in excess of $1.35 million. On January 15, 1972, preferred dividend payments were resumed.

 10. Pennco's principal assets are described briefly below.

 Non-Rail Assets

 (a) Arvida Corporation is a Delaware corporation conducting a land bank and development enterprise in Florida. It owns $24.3 million in interest-bearing mortgages and contract notes, 30,000 acres of raw land in Florida, and the Boca Raton Hotel complex. 58.4% of Arvida's common stock is owned by Pennco. The remainder of the stock is publicly held and traded over-the-counter.

 (b) Buckeye Pipeline Company, an Ohio corporation, is wholly owned by Pennco and is engaged in the operation of oil and petroleum product pipeline systems in nine eastern and mid-western states. The stock of Buckeye is pledged to secure a $35 million loan to Pennco.

 (c) Clearfield Bituminous Coal Corporation ("Clearfield"), a Pennsylvania corporation, is wholly owned by Pennco. Essentially, it is a passive enterprise managing mineral rights in coal-rich lands and debt and equity securities of other corporations, including railroad companies related to the Debtor.

 (d) Great Southwest Corporation ("GSC"), a Texas corporation, conducts business on its own account and through certain subsidiaries and partnerships. Its main capital ventures are amusement parks, real estate holdings, including an industrial park, and the manufacturing of mobile homes. Exclusive of Pennco's ownership of 81% of the common and 82% of the preferred stock (90% of the voting stock), GSC stock is traded over-the-counter.

 (e) Fifteen percent of the common stock and $32.9 million in convertible debentures of the N&W, a major rail carrier in the east. Ninety-eight percent of Pennco's N&W stock is pledged to secure various Pennco obligations. The ICC has ordered divestiture of the N&W holdings by 1979.

 (f) Six percent of the common stock of Madison Square Garden in unregistered form.

 (g) Sixty percent of the outstanding preferred stock of Strick, Incorporated, and warrants to purchase 27% of Strick's common.

 (h) A subordinated note, due in 1978, in the amount of $2,661,000, plus accrued interest of $612,500 as of March 31, 1972, of Transport Pool Corporation, which leases trailers and is an affiliate of Strick.

 (i) Sixteen percent of the outstanding common stock of Pullman Company.

 (j) Two-thirds of the common stock of Penn Towers, Inc., the owner of an apartment building in Philadelphia.

 (k) Seven percent of the 4 1/2% preferred stock of the Wabash Railroad.

 Assets Related to Debtor's Rail Operations

 (l) 245,329 shares of the 245,333 outstanding shares of the Detroit, Toledo & Ironton Railroad Company.

 (m) Fifty percent of the common stock of the Toledo, Peoria & Western Railroad Company.

 (n) Fifty percent of the common stock of the Montour Railroad Company.

  (o) Seventy-four percent of the common stock of the Connecting Railway Company.

 (p) Thirty-five percent of the common stock of the Philadelphia, Baltimore & Washington Railroad Company (the Debtor owns the remaining common stock).

 (q) Twenty-eight percent of the common stock of West Jersey & Seashore Railroad Company (the Debtor owns 57% of the common stock of WJS).

 (r) Through Pennco's wholly-owned subsidiary Clearfield, 40% of the common stock of the Cambria & Indiana Railroad Company, 30% of the common stock and 2% of the preferred stock of the Fort Wayne & Jackson Railroad Company and slightly less than 1% of the stock of the Mahoning Coal Railroad Company (a majority of the outstanding stock of which is owned by the Debtor).

 (s) In addition to the above stock interests in railroad companies, Pennco has debt obligation of railroads as follows:

 (i) A $20,305,000 principal amount open account indebtedness plus interest against American Contract Company;

 (ii) A substantial number of bonds of the Lehigh Valley Railroad Company in unpaid principal amount of $3,166,000;

 (iii) A $2,225,000 principal amount open account indebtedness plus accrued interest against the Detroit, Toledo & Ironton Railroad Company.

 Obligations of the Debtor or its Subsidiaries to Pennco

 (t) A $49 million principal amount 9 1/4% promissory note of the Debtor to Pennco.

 (u) A $33,176,893 principal amount open account indebtedness owed by PB&W to Pennco.

 (v) General mortgage bonds of the Pennsylvania Railroad Company in principal amount of $11,637,000.

 (w) $3,194,000 in principal amount of 5% general mortgage bonds, Series D, due August 1, 1975, of the Pittsburgh, Cincinnati, Chicago & St. Louis Railroad Company.

 11. Upon ratification of their appointments by the Interstate Commerce Commission on July 28, 1970, the Trustees were required to direct immediate attention to the financial condition of Pennco and its subsidiaries. In particular, GSC was in need of a substantial cash infusion within the near future. Moreover, effort was expended to secure new management personnel for Pennco and its subsidiaries to replace the Debtor's personnel that had provided the major management component for Pennco and its subsidiaries prior to the filing of the reorganization petition.

 12. The Trustees have succeeded, in large measure, in eliminating or at least reducing the intensity of the financial and management problems of Pennco and its subsidiaries.

 13. Within the first few months of their appointment, the Trustees determined that as a general policy it would be in the best interest of the estate to divest nonrailroad assets, if appropriate terms and methods were available.

 14. Within this early period the Trustees' financial advisor, Mr. John Guest of Kuhn, Loeb & Co., proceeding on the premise that the value of Pennco was less than the $300 million debt which the Pennco stock secured, undertook to explore the possibility of the sale or transfer of the Debtor's Pennco stock to the lending banks. In March of 1971, a formal meeting was held between the agent bank and the Trustees. As a result of this meeting, a negotiating team was appointed by the Trustees. Prior to the March meeting and thereafter, the Trustees were advised by their financial advisor and staff that the value of Pennco, and therefore the Pennco stock, was substantially less than the $300 million debt owed to the lending banks.

 15. A number of studies compiled by the staff of Pennco, its subsidiaries, or retained advisors, were in existence during the period mentioned in Finding 14. These studies were relevant on the question of the value of Pennco. These reports were not specifically relied upon by the Trustees in formulating their decision to enter into negotiations with the lending banks.

 16. On May 25, 1971, a summary of points of agreement was executed (Document No. 1590) by almost all of the banks and the Trustees subject to the necessity of drafting a more formal agreement satisfactory to the parties and the eventual approval of this Court. A formal agreement was executed on March 14, 1972. Since that time amendments to the original agreement have been executed. It is this agreement, as amended, which the Trustees seek authority to implement.

 17. Prior to execution of the settlement agreement, the Trustees authorized Kuhn, Loeb & Company to perform a formal appraisal study of Pennco to determine the value of the Pennco Stock. The final written report was rendered on July 17, 1972. 18. Kuhn, Loeb's appraisal of Pennco is summarized below: Investments in companies other than PCTC and its leased lines $ 360,764,000 Investments in PCTC and its leased lines 28,292,000 Pennco assets other than investments 756,000 Total assets and investments $389,813,000 Less: Pennco liabilities and preferred stock 166,688,000 Net value of Pennco stock $223,125,000


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