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IN RE PENN CENT. TRANSP. CO.

May 16, 1975

In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor


The opinion of the court was delivered by: JOHN P. FULLAM

 MEMORANDUM IN SUPPORT OF ORDER NO. 1884

 FULLAM, J.

 May 16, 1975

 This proceeding arises out of an impasse in negotiations between the Federal Rail Administration (FRA) and the Trustees of the Penn Central Transportation Company concerning the character of the obligation which the Trustees should undertake in consideration for receipt of certain financial assistance under the Regional Rail Reorganization Act of 1973 (RRRA). *fn1" As a means of resolving the impasse, the United States has taken the extraordinary step of asking this Court to order the Trustees to execute an assistance agreement in the form tendered by the FRA. *fn2" Presumably, this petition is addressed to the Court's general supervisory power over the Trustees and the estate under § 77(c)(2).

 I. BACKGROUND

 A brief review of pertinent highlights of the reorganization proceeding to date points up the issues now before the Court. *fn3"

 It was early recognized that Penn Central's problems were deeper than those traditionally encountered in railroad reorganizations. In addition to deferring payment of interest and principal on outstanding bonds, the basic medicine of § 77, it was necessary in this case to defer as administration expenses state and local tax payments and rents due companies who have leased their rail properties to the Debtor. But even these measures proved inadequate, since the cost of material and supplies, wages, and the debt service on equipment have exceeded revenues. Thus, through the end of 1973 another $ 153.3 million in cash, generated by borrowings on Government-guaranteed trustees' certificates and from other sources, was required in order to keep the railroad running.

 It was necessary to continue to pay debt service on equipment because of § 77(j) of the Bankruptcy Act, which provides in part:

 
"The title of any owner, whether as trustee or otherwise, to rolling-stock equipment leased or conditionally sold to the debtor, and any right of such owner to take possession of such property in compliance with the provisions of any such lease or conditional sale contract, shall not be affected by the provisions of this section [§ 77]."

 Since defaults on equipment obligations would have risked repossession of the equipment and the consequent diminution in the service capacity of the Debtor, the Trustees in the early months of the case affirmed, under § 77(b), almost all equipment obligations. Continued payment of the debt service on equipment is essential if the Debtor is to continue to provide rail services to the public. As will be discussed in detail below, the financing of this debt service is the principal issue in the present controversy.

 By early 1973, it became apparent that the prospects for rehabilitation of most of the bankrupt Northeast railroads through the procedures of § 77 as it then existed were bleak, to say the least. In response, the Congress devised the RRRA as a solution to the problems of Penn Central and other bankrupt carriers in the Northeast. *fn4" The RRRA supplements § 77 by providing for the creation of a new operating company, Conrail, which is to take over ownership and operation of those portions of the rail properties to be designated by the United States Railway Association (USRA), the planning agency created by the Act. USRA may also designate rail properties of the bankrupts for acquisition by other solvent railroads. Thus, the RRRA envisions a regional solution to the Northeast railroad crisis.

 Particularly relevant to the instant petition are §§ 213 and 215 of the Act, which provided for financing during the period from the enactment of the RRRA to the conveyance to Conrail. *fn5" In essence, § 213 provided for grants to Penn Central and the other bankrupts to insure that these carriers were not forced to terminate rail operations for lack of cash. Section 215, on the other hand, provided funds to upgrade the rail properties which were to be conveyed to Conrail.

 Although initial judicial reaction to the RRRA was rather negative (this Court found the Act did not provide a fair and equitable process, In re Penn Central Trans. Co., 382 F. Supp. 856 (E.D. Pa. 1974), and a three-judge court held portions of the Act unconstitutional, Connecticut General Ins. Corp., 383 F. Supp. 510 (E.D. Pa. 1974)), the Special Court concluded that the Act was fair and equitable, In re Penn Central Trans. Co., 384 F. Supp. 895 (Sp. Ct. 1974), and the Supreme Court held that the Act was constitutional, Regional Rail Reorganization Act Cases, 419 U.S. 102, 95 Sup. Ct. 335, 42 L. Ed. 2d 320 (1974). The ultimate issue separating the courts was whether there was available to the bankrupts a Tucker Act cause of action to satisfy any unconstitutional taking of their property resulting from the RRRA. Two potential forms of taking were considered by the courts: (1) an interim erosion taking arising from losses sustained because of the required continuation of rail operations until conveyance of the bankrupts' rail properties to Conrail; and (2) the conveyance taking which would result if the value of the securities issued by Conrail in exchange for the bankrupts' property was less than the value of the property conveyed to Conrail. The Supreme Court held that if either an interim erosion taking or conveyance taking occurred, a Tucker Act judgment would be available, and would provide an adequate remedy.

 When the RRRA was enacted it was generally recognized, and soon became universally recognized, that the cash required by the Debtor and other carriers in reorganization to sustain operations until the conveyance to Conrail would exceed the amounts authorized by the RRRA. Congress responded by amending the RRRA on February 28, 1975, to increase the funds authorized under §§ 213 and 215. *fn6" In addition, as will be discussed below, the function of § 215 was dramatically reformulated.

 Improvements to all rail properties, irrespective of inclusion in the Final System Plan, are now eligible for § 215 funding; and by the addition of the language "program maintenance" the Act now clearly permits funding for most, if not all, of the maintenance to rail facilities and equipment which the Debtor ordinarily performs. *fn7" The latter clarification was necessitated by the construction of the original version of § 215, adhered to be some, that only maintenance expenditures which resulted in an improvement to the rail facilities were eligible. Finally, a new subsection, § 215(a)(3), has been added which authorizes the Secretary of DOT, with USRA approval, to guarantee funds

 
"to acquire rail properties for the lease or loan to any such railroads until the date such rail properties are conveyed under this Act, and subsequently for conveyance pursuant to the final system plan, or to acquire interests in such rail properties owned by or leased to such railroads or in purchase money obligations therefor."

 Immediately upon the enactment of the February amendment, continuing a process which had begun in late 1974, the Trustees and the FRA undertook a joint effort to determine the amount of cash necessary to support Penn Central's rail operations through March of 1976, the expected date of Conrail's takeover, and to devise a plan for utilization of §§ 213 and 215 funds for that purpose. To date, $ 57.5 million in § 213 funds authorized by the amendments have been received and expended by the ...


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