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IN RE PENN CENT. TRANSP. CO.

March 1, 1974

In the matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor

Fullam, District Judge.


The opinion of the court was delivered by: FULLIAM

MEMORANDUM IN SUPPORT OF ORDER NO. 1480

FULLAM, District Judge.

 Faced with the immediate prospect of exhaustion of available cash, the Trustees seek approval of an emergency arrangement with the Secretary of the United States Department of Transportation whereby the Secretary will make available approximately $10.8 million in order to prevent the occurrence of defaults by the Trustees in connection with certain equipment obligations.

 Section 213 of the Regional Rail Reorganization Act of 1973 (P.L. 93-236) authorizes the Secretary to expend up to $85 million for the purpose of enabling railroads in reorganization to continue to provide essential rail services pending completion of the process contemplated by that statute; of this sum, $35 million has actually been appropriated. Section 215 of the Act authorizes the advance of up to $150 million for the purpose of interim acquisition, maintenance and improvement of rail assets which would eventually be conveyed to the new operating corporation contemplated by the statute, as part of the final system plan (increases in value resulting from such expenditures are not to be reflected in the consideration to be paid for such transfers, and the obligation to repay is to be assumed by the new corporation).

 The Secretary has thus far declined to approve any grants under § 213, and is not yet in a position to implement § 215. To meet the present emergency, the Secretary is apparently willing to use § 213 funds, but not on a grant basis. The proposal contemplates that, instead of providing funds to the Trustees to meet operating expenses, the Secretary will, in effect, transfer funds equal to certain current installments due on equipment, and in return acquire a pro tanto interest in the Trustees' equity in that equipment. Meanwhile, it is contemplated that the parties will attempt to determine the extent to which § 215 funds can appropriately be made available to relieve future cash shortages.

 As all parties recognize, unless these funds are provided immediately, the Trustees will be forced to default in the payments due on equipment in which they have an equity in excess of $70 million. Section 77(j) of the Bankruptcy Act severely restricts the power of a reorganization court to preclude equipment creditors from exercising the rights granted under the financing documents. No other source of cash to meet these installments has been suggested (and it is difficult to imagine any alternative source which would not involve repayment, and thus the same constitutional issues as in the present proceeding).

 In short, if the creditors are correct in asserting that the obligations undertaken by the Trustees in connection with this transaction constitute an unconstitutional erosion of the Debtor's estate and the interests of its creditors, it nevertheless appears that vindication of that position must take place after the event, rather than before; otherwise, the Debtor's estate and the interests of the creditors would necessarily suffer an even greater erosion, through loss of the equipment.

 I do not wish to pre-judge the constitutional and other issues which will be fully briefed and presented in connection with the § 207 proceedings and in other pending litigation. But it is appropriate to point out, again, that there are constitutional limits upon the extent to which erosion of the Debtor's estate may be permitted to continue. The underlying problems were discussed by this Court as long ago as July 14, 1972 (Opinion in support of Order No. 830), 347 F. Supp. 1356 (E.D. Pa. 1972). One year ago, on March 6, 1973, I noted the probability that "the point of unconstitutionality is fast approaching, if it has not already been reached," and expressed grave doubt that the Debtor's rail operations could constitutionally be permitted to continue beyond October 1, 1973. Memorandum and Order No. 1137, 355 F. Supp. 1343 (E.D. Pa. 1973). The erosion issues were throughly aired before the Interstate Commerce Commission during the summer of 1973, and were a constant subject of discussion in the legislative proceedings which produced the Regional Rail Reorganization Act of 1973. And the recent Opinion of the Third Circuit Court of Appeals in the "Columbus Option" case, In re Penn Central Transportation Co., 494 F.2d 270. (3d Cir. 1974), discusses some of these issues, forcefully. See, also, In the Matter of Central Railroad Co. of N.J., 485 F.2d 208 (3d Cir. 1973). In light of this history, and the expressed desire of the New Haven Trustee to proceed with the dismissal petition filed last November, it seems appropriate to suggest that the parties would do well not to assume that future cash crises can be met on any basis involving eventual reimbursement by the Debtor's estate, or that present cash flow forecasts will necessarily remain unaffected by interim developments.

 This transaction will be approved. There is no alternative.

 Counsel for certain indenture trustees initially suggested a possible ambiguity in the language of paragraph 2(d) of the order. I do not believe any change is required. The reservation is framed in the broadest of terms and the interpretation spread upon the record by the indenture trustees is undoubtedly correct.

 For all of the foregoing reasons, I have entered an Order (No. 1480) approving the Trustees' ...


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