If the initial premise were sound, the Indenture Trustees' argument would be persuasive indeed. But the real issue, which was expressly reserved for later decision when the sale was originally approved, is whether the Indenture Trustees are entitled to recognition of their lien as to the full sum of $744,324.52. In other words, the Court is now required to determine how much of the escrowed sum truly represents "net proceeds" from the sale of the liened property, and how much of it should be attributable to the costs of sale.
The Trustees of the Debtor point out that the arrangement with the purchaser necessitated these expenditures; the sale could not have been consummated unless the Trustees were willing to incur the expenses, and the estimated amount of these costs was taken into account in negotiating the sale price. From their point of view, all of the relocation expenditures were necessary in order to make it possible to sell the Buffalo property at all. The Indenture Trustees, on the other hand, argue that a substantial part of the relocation expenses would not have been necessary merely to sell the property at Buffalo, but rather were necessary in order to enable the Trustees to continue to operate the railroad at other locations. I am persuaded that both sets of assertions are valid. The expenditures were necessary in order to enable an operating railroad to sell the property at Buffalo and continue to be an operating railroad. Does this make the expenditures operating expenses, or expenses of sale?
At this point, I believe certain practical aspects of the situation must be recognized. The Trustees were operating a railroad. They had an opportunity to sell property which was not being fully utilized, and which could be rendered surplus by some relatively minor relocations. They had no immediate prospect of being relieved from their common carrier responsibilities. They had in their files a 1972 appraisal of the property, as of June 30, 1971, showing a maximum value of approximately $633,000 for transportation purposes, and a liquidation value of $624,000. They rejected earlier offers
from this same purchaser in the amounts of $650,000 and $715,000, because those prices would not adequately cover the expense and trouble of relocation. Eventually, the Trustees agreed to accept an offer of $750,000. If the reimbursement now sought is permitted, the Indenture Trustees will have a lien upon escrowed cash substantially in excess of the appraised value of the property for any purpose, and a further lien on approximately $22,000 worth of salvaged materials usable on other portions of the railroad covered by their liens.
While it is undoubtedly correct that lien values may not be reduced in order to meet operating expenses (in the absence of special circumstances not shown here) the general creditors and other creditors of the estate cannot be required to permit their property rights to be invaded in order to enhance the salability of liened property.
The basic defect in the Indenture Trustees' argument is the assumption that $750,000 must represent the fair market value of the property, and thus the value of their lien rights in it. The record does not support that assumption. I am satisfied that the net liquidation value of the property in question did not exceed $630,000, and its fair market value for any purpose did not exceed $650,000, as of the time of sale. The fact that the purchaser was willing to pay an additional amount toward relocation expenses, and that these expenses were less than originally estimated, should not inure solely to the benefit of the secured creditors represented by the Indenture Trustees, to the detriment of the general estate. Permitting the Indenture Trustees a lien on escrowed cash totalling $675,209.52, plus salvage of about $22,000, leaves them in a far better position than they occupied before the sale, gives full recognition to their rights, and reflects an accurate and equitable allocation of the expenses of the sale. The Trustees' petition will be granted.
ORDER NO. 259
And now, this 24th day of July, 1974, upon consideration of the Petition of the Trustees for Reimbursement of Relocation Expenses Incident to the Sale of Property in Buffalo, New York, and upon notice being duly given in accordance with the Order of Notice, it is Ordered that:
1. Philadelphia National Bank is hereby authorized and directed to pay to the Trustees of Debtor, upon demand, the sum of $69,115.00 from the net proceeds deposited in the special account maintained therein pursuant to Order No. 26 in these proceedings, as reimbursement for necessary relocation expenses incident to the sale of the Buffalo, New York, property as described in the Petition for this Order.