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IN RE PENN CENT. TRANSP. CO.

May 2, 1974

In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor. In re The UNITED NEW JERSEY RAILROAD AND CANAL CO., Secondary Debtor. In re BEECH CREEK RAILROAD COMPANY, Secondary Debtor. In re The CLEVELAND, CINCINNATI, CHICAGO & ST. LOUIS RAILWAY COMPANY,Secondary Debtor. In re The CLEVELAND & PITTSBURGH RAILROAD COMPANY, Secondary Debtor. In re The CONNECTING RAILWAY COMPANY, Secondary Debtor. In re The DELAWARE RAILROAD COMPANY, Secondary Debtor. In re ERIE AND PITTSBURGH RAILROAD COMPANY, Secondary Debtor. In re The MICHIGAN CENTRAL RAILROAD, Secondary Debtor. In re The NORTHERN CENTRAL RAILWAY COMPANY, Secondary Debtor. In re PENNDEL COMPANY, Secondary Debtor. In re The PHILADELPHIA, BALTIMORE & WASHINGTON RAILROAD COMPANY, Secondary Debtor. In re The PHILADELPHIA & TRENTON RAILROAD COMPANY, Secondary Debtor. In re The PITTSBURGH, YOUNGS-TOWN AND ASHTABULA RAILWAY COMPANY, Secondary Debtor. In re PITTSBURGH, FORT WAYNE AND CHICAGO RAILWAY COMPANY, Secondary Debtor. In re UNION RAILROAD COMPANY OF BALTIMORE, Secondary Debtor. In re Proceedings Pursuant to 207(B) of the REGIONAL RAIL REORGANIZATION ACT OF 1973


The opinion of the court was delivered by: FULLAM

MEMORANDUM

Section 207(b) of the Regional Rail Reorganization Act of 1973 (hereinafter 'the Act') directs that certain findings be made in each pending railroad reorganization proceeding in the Midwest and Northeast. Application of the Act to the proceedings of the Secondary Debtors poses many legal and factual problems. In large measure, these problems are common to all of the Secondary Debtors, and can conveniently be considered together.

I. Procedural Background

 For almost a century it has been a frequent practice of railroad companies seeking to expand into other territories to achieve this goal by means of long term leases of existing rail lines. *fn1" Use of the operating property can thereby be acquired without the problems and complexities of full-blown corporate consolidations. Generally, rental of the leased line includes servicing the lessor's debt, payments in an amount equal to taxes and the lessor's corporate expenses, and a fixed or contingent annual rental available for distribution to the holders of the lessor's equity securities. Today, about half of the Penn Central's operating system is owned by Penn Central, and the remainder is leased to Penn Central by numerous lessor companies. Penn Central's predecessors successfully followed the industry-wide practice of acquiring substantial stock holdings in important leased lines. Although many of Penn Central's leased line lessors own important property, only 15 lessor companies are owned or controlled by Penn Central. However, these 15 companies own 9,304 route miles of the Debtor's system.

 Railroad leases are, of course, executory contracts, and subject to disaffirmance by a § 77 trustee; and even in the event the lease is affirmed by a 77 trustee, the lease may be rejected in the reorganization plan. § 77(b). Moreover, if a lease is disaffirmed, operations after the initiation of the § 77 proceeding are deemed to have been for the account of the lessor, and as a result the lessor may be obligated to make up losses sustained by the lessee in operating the leased line. *fn2" In the Penn Central case, pending decisions by the Trustees to affirm or disaffirm leases, rental payments have been deferred.

 Deferral of rental payments to lessors exposed the lessors to the possibility of defaulting on their own obligations, thereby triggering action by the lessor's creditors to enforce their rights against the lessors and their property. On the other hand, many of the parties felt that so long as Penn Central continued to operate the leased properties, and so long as the leases were not disaffirmed, this Court's jurisdiction to protect Penn Central's leasehold interest provided shelter for the lessors as well. In order to maintain a degree of control over the status of leased lines, at an early stage of the Penn Central reorganization virtually all of the interested parties agreed to the entry of a 'status quo' order in the Penn Central proceeding, to the effect that no one could take action to enforce any claims against the lessors, except upon 14 days' advance notice to all other parties (Order No. 170). Thus, an opportunity was provided the parties to apply to this Court for specific protection, if appropriate.

 From time to time, as the Penn Central proceedings continued, sales of excess properties owned by leased lines were effectuated. In some instances, it became necessary to resort to fairly cumbersome proceedings in order to be certain that the purchaser would acquire clear title, with assurance that liens against the lessors' reversionary rights had been discharged from the property. Yet, on the whole, the situation of the leased lines remained relatively stable compared to other aspects of the Penn Central proceeding.

 In 1973, it became apparent that, in the absence of Congressional action, Penn Central might be unable to continue operations. The Penn Central Trustees filed a proposed plan of reorganization which contemplated termination of rail operations, disposition of its rail property within a short time, and reorganizing around the proceeds plus the non-rail assets. On July 12 and 14, 1973, the 15 lessor companies which are owned or controlled by Penn Central filed separate reorganization petitions pursuant to § 77(a) of the Bankruptcy Act, seeking reorganization as part of or in connection with the plan of reorganization of the Penn Central. These 15 leased lines are hereinafter referred to as the 'Secondary Debtors.' Initially, in an effort to minimize the overall costs of the reorganization proceedings, I withheld appointment of trustees for the Secondary Debtors, and permitted the Secondary Debtors to function as debtors in possession. The passage of the 1973 Act and other intervening developments made it appear likely that the future course of the reorganization proceedings might well be such that the interests of the Secondary Debtors could best be protected by appointment of trustees. Accordingly, on March 11, 1974, trustees were appointed for all but one of the Secondary Debtors. In some instances, the same individual was designated for several Secondary Debtors, having similar, or at least non-conflicting, interests. So that the designated trustees could begin operations immediately, they were also designated temporary receivers, pending final action by the Interstate Commerce Commission upon their ratification. At present writing, the Commission has ratified five of the Trustees, but has announced no decision as to the other two.

 One of the Secondary Debtors, Connecting Railroad, continues in reorganization as a debtor in possession, without a trustee, pursuant to a stipulation worked out between all of the parties interested in that lessor.

 II. Necessity for Separate § 207(b) Findings for Each Secondary Debtor

 The Act requires a finding as to reorganizability with regard to every 'railroad in reorganization' ( § 207(b)). That term is defined as 'a railroad which is subject to a bankruptcy proceeding and which has not been determined by a court to be reorganizable or not subject to reorganization (under § 207(b)).' Section 102(12). And the term 'railroad' is defined as 'a common carrier by railroad as defined in § 1(3) of part I of the Interstate Commerce Act (49 U.S.C. § 1(3))' § 102(11).

 Initially, the government contended that § 207(b) findings would be inappropriate in the cases of the Secondary Debtors, because they were not 'railroads in reorganization' within the meaning of the statute, since they were not 'railroads' in the sense of being operating carriers. The government has now expressly abandoned that contention, perhaps because, if the contention were accepted, the possibility of acquisition of the lessors' interests in rail property through mandatory conveyance would be jeopardized. I am persuaded that the government's original contention was without merit in any event. Leased lines have always been regarded as 'railroads' for purposes of the Interstate Commerce Act and § 77(a) of the Bankruptcy Act. See, e.g., Warren v. Palmer, 310 U.S. 132, 60 S. Ct. 865, 84 L. Ed. 1118 (1970); Freeman v. Mulcahy, 250 F.2d 463, 466 (1st Cir. 1957). This Court has previously rejected similar arguments based upon unduly narrow readings of the Interstate Commerce Act. See Memorandum and Order No. 11, United New Jersey Railroad & Canal Company proceedings.

 The principal contention of the government now appears to be that all of the Secondary Debtors must be automatically found non-reorganizable if the Penn Central itself is found not to be reorganizable. The basis for this argument is the assertion that, having petitioned under § 77(a) of the Bankruptcy Act for reorganization 'as part of, or in connection with' a plan of reorganization of Penn Central, the Secondary Debtors cannot be permitted to reorganize as an independent operating company or by sale of lease of the Secondary Debtor's property to another carrier.

 For purposes of discussion, I am prepared to assume that the government is correct in its assertion that a secondary debtor, by petitioning under § 77(a), casts its lot with that of the principal debtor, at least to some extent. In my view, this means that both companies are committed to working towards achieving plans of reorganization which are compatible with each other, and to do so according to a somewhat similar timetable. But this surely does not rule out the possibility that a secondary debtor may emerge as an independent, operating company. One can readily visualize many situations in which the joint or related plans for reorganization of both the primary and secondary debtor would contemplate reallocation of the rail system between them; or disaffirmance of a lease between them. Clearly, under such circumstances independent reorganization of secondary debtors is appropriate.

 Decisions of the ICC in which the Commission declined to approve proposals for secondary debtors to 'go it alone' after having sought reorganization with the principal debtor are not to the contrary. In re Missouri, Pacific Railway Co., 290 ICC 674 (1954) and 275 ICC 203 (1949); Chicago, Rock Island & Pacific Railway Reorganization, 244 ICC 329 (1937). It is apparent that those cases do not purport to establish or apply a general rule of law on the subject, but rather were decided on their respective facts. The first Circuit Court of Appeals has intimated a contrary view. Boston Terminal v. Mutual Savings Bank Group Committee, 127 F.2d 707 (1st Cir. 1942).

 I also find unacceptable the proposition that any attempt to reorganize a secondary debtor under § 77 would necessarily be incompatible with reorganization of Penn Central pursuant to the 1973 Act. This is simply a non sequitur. The ability of the Association to devise a Final System Plan, and to ...


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