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IN RE PENN CENT. TRANSP. CO.

April 16, 1973

In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor. In re PENNCO SETTLEMENT AGREEMENT

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

 FINDINGS OF FACT

 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 ...


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