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IN RE PENN CENT. TRANSP. CO.

UNITED STATES DISTRICT COURT, EASTERN DISTRICT OF PENNSYLVANIA


May 2, 1974

In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor. In re In Proceedings for the REORGANIZATION OF A RAILROAD

The opinion of the court was delivered by: FULLAM

MEMORANDUM AND ORDER NO. 1543, and FINDINGS PURSUANT TO THE FIRST SENTENCE OF 207(b) of the Regional Rail Reorganization Act of 1973

Section 207(b) of the Regional Rail Reorganization Act of 1973 (hereinafter the 'Act'), provides:

 'Within 120 days after the date of enactment of this Act each United States district court or other court having jurisdiction over a railroad in reorganization shall decide whether the railroad is reorganizable on an income basis within a reasonable time under section 77 of the Bankruptcy Act (11 U.S.C. § 205) and that the public interest would be better served by continuing the present reorganization proceedings than by a reorganization under this Act . . ..'

 The Debtor is a 'railroad in reorganization' as defined in the Act. The statute became effective January 2, 1974, which means that the decision as to reorganizability is to be made not later than May 2, 1974.

 By Order No. 1426, this Court directed that a hearing be held on March 25, 1974, in relation to the decision required by the quoted language of the statute, and invited all interested parties, at stated times in advance of the hearing, to specify and brief the legal and factual issues they deemed relevant to the required determination. In response to this invitation, a wide range of questions have been briefed and presented, but in view of the factual record developed at the hearing, not all of these issues need now be discussed.

 I. Jurisdictional and Other Preliminary Issues

 It is necessary to note at the outset that the constitutionality of the Act is being challenged on a variety of grounds in other litigation now pending in this District and elsewhere. *fn1" Many of the same constitutional issues have been raised in the present proceeding. For the most part, they will not now be considered. Apart from the question of whether this Court should attempt to avoid deciding the constitutional issues, in deference to the three-judge proceedings, it would seem that these issues can and should be deferred for consideration in connection with the findings contemplated by the second clause of § 207(b) (the so-called '180-day findings').

 The only constitutional issues which must be faced now are those expressing a challenge to the jurisdiction of this Court to make the findings required by § 207(b).

 The findings contemplated by the first sentence of § 207(b), the so-called '120-day' findings, embrace two areas of inquiry (1) whether the Debtor 'is reorganizable on an income basis within a reasonable time under section 77 . . .' and (2) '(whether) the public interest would be better served by continuing the present proceedings than by a reorganization under this Act . . ..' The New Haven Trustee contends that this Court lacks power to make findings on either subject because there is no 'case or controversy' before the Court; and further argues that making findings with regard to 'the public interest' is not a judicial function and cannot be delegated to a court, at least in the absence of adequately defined standards.

 A. 'Case or Controversy'

 I have concluded that a finding on the issue of reorganizability may properly be made by an Article III court. The reorganization proceeding itself is the 'case or controversy' which justifies judicial action. While there might perhaps be some question as to the validity of legislative intrusion into specific pending litigation by fixing deadlines for decision of particular issues (a question which has not been raised in the present proceeding, and as to which I intimate no view), it is entirely clear that a court may properly comply with such deadlines; its pre-existing jurisdiction would not be impaired.

 It is true that the Act does not prescribe procedural machinery for making the required findings in an adversary setting: there is no petitioner or respondent; indeed, the Act does not even mandate a hearing. But there is no requirement that the norms of procedural due process must be disregarded, and they have not been. All parties have been afforded ample opportunity to be heard.

 It is also true that the statute provides little or no guidance on the question of the proper allocation of the burden of proof; but that shortcoming is not, in my view, jurisdictional.

 In short, there appears to be no valid reason for reaching any conclusion other than the obvious one, namely, that a reorganization court does have jurisdiction to make findings concerning reorganizability of the Debtor.

 B. Public Interest

 The principal thrust of the New Haven Trustee's jurisdictional argument is that a determination as to whether the public interest would be better served by continuing the § 77 proceeding or by proceeding pursuant to the 1973 Act is essentially legislative in character, and cannot be delegated to an Article III court. The government and other parties counter with the argument that the Act itself adequately discloses what Congress intended to define as the public interest, and that all that is required is performance of the normal judicial function of fact-finding.

 Unless there is a finding that the Debtor is reorganizable under § 77, there is no necessity for making a public interest comparison under § 207(b). Since I have reached the conclusion that the Debtor is not reorganizable, there is no present necessity for resolving the second phase of the jurisdictional argument.

 II. Definition of 'Reorganizable on an Income Basis Within a Reasonable Time under § 77 of the Bankruptcy Act'

 The parties are not in complete agreement as to whether the standards for determining reorganizability under the Act are different from, or identical to, the standards of § 77. More importantly, there is lack of agreement as to what constitutes a valid plan of reorganization under § 77.

 For example, the New Haven Inclusion Cases, 399 U.S. 392, 90 S. Ct. 2054, 26 L. Ed. 2d 691 (1970) recognized as valid a plan of reorganization in which the Debtor would first dispose of its rail operations and then reorganize as a holding company. But when the Penn Central Trustees filed a somewhat similar plan, the ICC purported to hold that it would not constitute a plan of reorganization under § 77. While this ruling does not, of course, represent the final word on the subject, it serves to point up the potential for conflicting views.

 I find it unnecessary to resolve this doctrinal dispute at the present time. For it is at least clear that in adopting the 1973 Act, Congress was attempting to deal only with the rail assets of railroads in reorganization, and that, for purposes of § 207(b) only a reorganization of those rail assets, pursuant to a plan involving continuation of rail service by the Debtor, would pass muster.

 Moreover, I am persuaded that reorganizability must be determined on the assumption that the existing regulatory and operational setting will continue. From the very inception of these proceedings, it has been reasonably clear that, if certain conditions could be altered, the Debtor could be made viable. The needed changes -- elimination of plant redundancy, reductions in crew consists, full reimbursement for passenger service, improvement in rates and divisions, and, more recently, substantial governmental financial assistance -- are not within the control of the Trustees or this Court, and have not been realized.

 The issue, then, is whether there is now any reasonable prospect that continuation of the Debtor's rail operations under existing constraints will produce enough net income, soon enough, to support adequately a realistic re-capitalization of the enterprise. Applying the familiar figure of speech, we are concerned with the existence and relative intensity of the light at the end of the tunnel, and also with the length of the tunnel and the further burdens involved in traversing it.

 III. FINDINGS OF FACT

 1. During the period from the filing of the Debtor's reorganization petition on June 21, 1970, to December 31, 1973, the Debtor's operations have produced losses in ordinary income, calculated in accordance with ICC regulations (49 CFR Part 1201, 501-51) totalling $ 851.1 million.

 2. The Debtor has been able to continue operations during this period only by deferring payments of virtually all real estate taxes, rentals of leased lines, and interest (including mortgage and collateral trust bonds) other than equipment obligations.

 3. Non-recurring income aggregating $ 155.3 million from trustees certificates, sales of real property and equipment, sales of securities, and drawdowns from escrowed funds, have been utilized to sustain operations. 4. The charts below show the ordinary losses, deferrals, and applications of non-recurring income on an annual basis and the detail relating to non-recurring income. Summary of Financial Results //////////////////////-- ($ in millions) Deferred Taxes Leased Line Ordinary Rents and Non-Recurring Income Interst Sources (Loss) Oblig. * of Cash June 21 to Dec. 31, 1970 $ (179.7) $ 142.8 Year 1971 (284.5) 163.9 $ 96.6 Year 1972 (197.9) 156.1 25.0 Year 1973 (189.0) 143.1 33.7 Total June 21, 1970 to December 31, 1973 $ (851.1) $ 605.9 $ 155.3 ** Detail of Non-Recurring Sources of Cash /////////////////////////////////-- Sources 1971 1972 1973 /-- Trustees Certificates Drawdown $ 75.0 $ 25.0 Tenants Tax Escrow Account 3.1 Proceeds from New Haven Property Sale 9.1 Sale of Freight Cars to P & LE 7.3 Mortgage Trustees Drawdown-Selkirk Improvement 2.1 M. B. T. A. Settlement $ 9.1 Proceeds for Madison Square Garden 2.4 Proceeds from Sale of Contingent Compensation Fund 6.5 "Agnes" Flood Loan 15.7 Total $ 96.6 $ 25.0 $ 33.7

19740502

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