The opinion of the court was delivered by: FULLIAM
MEMORANDUM IN SUPPORT OF ORDER NO. 1480
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.
A hearing on the Trustees' petition was held on February 26, 1974. The creditor interests all expressed, in varying degrees, their conviction that the proposed financing was contrary to the intent of the Regional Rail Reorganization Act of 1973, and also would violate the constitutional rights of the creditors. The New Haven Trustee flatly opposes the transaction. Substantially all of the other creditor interests, and the Trustees, expressed their willingness to have the Court approve the transaction, so long as it was clearly understood that this would not create a precedent for similar approvals in the future, and that all parties expressly reserved their rights to press all constitutional and legal arguments at the forthcoming hearings on the issues involved in § 207 of the Reorganization Act and in all other proceedings involving their rights under, and the constitutionality of, the statute.
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.
At the hearing, the Trustees submitted a proposed form of order, and the other parties expressed their views with respect to certain provisions thereof. It was agreed that the words "to any other party" should be inserted after the word "transferred" in the second sentence of paragraph 1(d) of the order; that change will be incorporated. Paragraph 1(f) of the order governs the right of the Secretary to make further payments on the equipment in question, in the event the Trustees advise him that they are unable to do so, on the same basis as that contemplated by the present transaction. The Trustees propose to make that right "subject to further Court approval after hearing duly noticed," whereas the government objects to inclusion of that condition. I do not believe it would be legally permissible for a reorganization court to grant present authorization broad enough to encompass the future creation of further indebtedness, indefinite as to amount, in the discretion of third parties. While I am confident that this was not the intention, the form of order sought by the government might enable the Secretary to insure that, contrary to the present understanding of all concerned, this transaction would indeed establish a pattern for resolving at least some cash crises which might arise in the future. I have concluded that the Trustees' form of order is preferable.
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' ...