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IN RE READING CO.

June 7, 1973

In the Matter of READING COMPANY, Debtor. Re: Trustees' Petition for Approval of Memorandum of Understanding for SEPTA's Operation of Debtor's Passenger Service


The opinion of the court was delivered by: DITTER

OPINION AND ORDER NO. 414

The Reading Company, a bankrupt railroad, has consistently lost money on commuter operations since 1945. By the petition now before the Court, the railroad's trustees have submitted for approval the broad outlines of a plan by which a public authority would assume responsibility for the passenger services and the railroad would turn over to the authority certain valuable properties.

 In reaching any decision on whether this Court should give its approval to this agreement, the possible alternatives available to the Reading must be examined.

 BACKGROUND

 The debtor operates 1,138 miles of railroad of which 213 miles carry the passenger operations to be taken over by SEPTA. Of these 213 miles, 112 are owned by the Reading. The remaining 101 miles are parts of lines which the Reading uses under long-term leases from the North Penn and the PG & N railroads. *fn2" The passenger portion of the Reading is a vital link in the overall transportation system in the Delaware Valley, carrying approximately 50,000 persons each weekday. This service has operated at a substantial loss every year since 1945, even though public support payments have been made since 1960. When figured on a percentage basis, the passenger deficit for 1971 (before subsidy payments) of $ 8.9 million is about 93% of the passenger revenue, $ 9.6 million. In comparison, the freight loss, $ 7.4 million for the same year, is about 7.6% of total freight revenue, $ 96.6 million. This leads to an almost unescapable conclusion that there is no hope to make the passenger business profitable, but that the freight business might well become solvent.

 What are the viable alternatives open to the Reading Company?

 I. LIQUIDATION

 Liquidation is a drastic step and should be considered only as a last resort. This railroad's passenger service is made up of more than 13 million individual trips each year. The Reading's freight business generates in excess of $ 93 million a year. Over 5,600 persons are employed by the Reading Company, with a payroll in excess of $ 72 million. The economic and social importance of the debtor's freight and passenger service warrants the expenditure of every effort to maintain their operation. Certainly, liquidation would not be proper now. Section 77 of the Bankruptcy Act requires a balancing of interests of the creditors of a railroad on the one hand, and the interest of the public on the other. The Trustees are "thus charged with the dual responsibility of conserving the debtor's estate for the benefit of creditors and preserving an ongoing railroad in the public interest." New Haven Inclusion Cases, 399 U.S. 392, 90 S. Ct. 2054, 26 L. Ed. 2d 691 (1970). Liquidation is not called for until the futility of every reasonable effort to put the debtor into a sound financial condition becomes apparent.

 II. GOVERNMENTAL AID

 III. ABANDON THE PASSENGER SERVICE

 Terminating commuter operations, like liquidation, would be a drastic step. The Delaware Valley would indeed be paying a heavy price for the attempts to save the Reading. There is certainly no consideration of the public interest in this alternative. From the standpoint of the effect on the Reading's cash position, abandonment becomes even more untenable. Included in the present operating agreement with SEPTA is a provision that subsidies will immediately cease if the Reading attempts to abandon its passenger service. The time required for a final administrative decision would be a minimum of eight months. This would consist of four months before the Pennsylvania Public Utilities Commission and at least four months before the Interstate Commerce Commission. *fn4" This eight month period would probably become more like 18 months when inevitable appeals are considered. The cash drain for the minimum eight month period would be two-thirds of the annual SEPTA subsidy, or $ 4.34 million. Reading's current cash balance of $ 6 million would be insufficient to withstand ...


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