The opinion of the court was delivered by: FULLAM
The Government has applied for further relief in its continuing efforts to acquire interests in equipment obligations covering some of the Debtor's rolling stock, as a means of providing cash to support interim operation of the railroad through the use of funds obtained pursuant to § 215 of the Regional Rail Reorganization Act of 1973 (hereinafter RRRA).
The specific issue presented is whether it is legally permissible and appropriate for this Court to require the present holders of equipment obligations to assign a subordinated pro rata interest therein to the Government in exchange for payment by the Government of certain interest installments, notwithstanding the holders' unwillingness to make such assignments, and notwithstanding the protections accorded equipment obligations pursuant to § 77(j) of the Bankruptcy Act and §§ 211 and 303(b)(3) of the RRRA. But because of the relationship between this specific issue and the issues heretofore determined in Orders Nos. 1884 and 1971, and because counsel for the Government in the present proceeding have to a large extent reargued those earlier issues, and have asserted, in effect, that this Court's earlier decisions on this subject were based upon a misunderstanding of the Government's true position, and an erroneous view of the legal consequences which would flow from implementation of the Government's proposals, discussion of the specific issue now before the Court properly begins with a recapitulation of the earlier proceedings, and a brief sketch of the relevant context.
1. Interim funding under RRRA as originally enacted.
In the original enactment of the RRRA, Congress appropriated funds for use by the Secretary of Transportation to make cash grants to the bankrupt railroads to enable them to meet operating expenses, pending implementation of the Final System Plan pursuant to the statute ( § 213). Congress also authorized the United States Railway Association (USRA) to raise additional funds through securities guaranteed by the United States Government, for use in upgrading and improving the rail properties which would ultimately be included in the Final System Plan. ( § 215) Under § 213, the Government was to provide cash to the railroads as necessary in order to enable them to remain in operation at existing levels of service. Under § 215, USRA was enabled to commence the process of upgrading the physical rail plant which would be taken over by Conrail, without awaiting the final determination of the ultimate structure of the rail network or the actual creation of Conrail. While it is true that the grants under § 213 were to be made upon such reasonable conditions as the Secretary might prescribe, it is altogether too clear for argument that Congress contemplated grants, not loans. On the other hand, § 215 funds were to be used in the form of loans to Conrail in advance of its formation.
The differing provisions of §§ 213 and 215 were not accidental, but reflected Congress' awareness of the delicate balance between the public and private interests involved, and the attendant constitutional issues which then loomed large in the minds of all concerned. For it must be remembered that the RRRA governed only those bankrupt railroads which had been conclusively determined to be incapable of reorganization on an income basis and thus, under familiar constitutional principles, presumably entitled to terminate their common carrier responsibilities and dispose of their properties, but for the alternative course of action mandated in the RRRA.
2. The 1975 amendments to the RRRA.
The first year of operations under the RRRA brought to light several problems in the implementation of §§ 213 and 215 as written. The primary problem, of course, was that the total amount of the funding was clearly insufficient for the purposes intended. In addition, however, it had proved to be exceedingly difficult to implement § 215. In its existing form, § 215 required at least a preliminary judgment as to what properties would be included within the Final System Plan. Moreover, it proved difficult to draw a satisfactory line between expenditures which would upgrade the property and expenditures which would merely prevent further deterioration. A particular proposal would often include some elements of maintenance as well as improvement.
The 1975 amendments to the RRRA addressed both sets of problems. In addition to increasing the amount of funding under both § 213 and § 215, Congress expanded § 215 so as to make it possible for § 215 funds to be used in ways which would have a substantial positive impact upon the Debtor's cash flow. Under the original provisions of the Act, as noted above, § 215 funds were not available to alleviate cash flow problems, since they could be used only for expenditures which would not ordinarily have been made by the bankrupt estates. The amended § 215 now permits the use of these funds for "program maintenance" as well as for purchases of equipment and of interests in equipment obligations. To the extent that expenditures in these categories had been budgeted by a particular bankrupt railroad, or otherwise included in the base upon which the railroad's projected cash needs were calculated, the use of § 215 funds for those purposes can have the effect of supplementing § 213 funding in relieving cash drain and thus insuring continued operation of the railroads until the conveyance date.
But implementation of the Act as amended has given rise to complex and probably unforeseen problems. One facet of overall difficulty is the use of almost $ 30 million in § 213 funds for work in the Amtrak corridor. This action tends to reduce the grant funds available and thereby necessitates use of § 215 funds for high cash impact projects. Within the § 215 program the program maintenance and equipment obligations methods present distinct issues. Under a § 215 program maintenance agreement the value of the property subject to the agreement is determined as of the date of the agreement. Thus, the value of property is not increased by use of the Government's money. Even though the Government has not disclaimed an intention to argue that these § 215 funds must eventually be treated as "other benefits" which reduce the amount due the Trustees, a number of § 215 program maintenance agreements have been approved. However, the § 215 agreements covering equipment obligations are much different in that it is decidedly more likely these agreements will have essentially the same effect as the issuance of first priority trustees certificates. As previously discussed in my Opinions in Support of Orders Nos. 1884 and 1891, to which further reference will hereinafter be made, I am persuaded that Congress did not intend to impose a requirement that the bankrupt railroads incur additional high-priority debt to meet interim operating expenses; and that imposition of any such requirement is inconsistent with the rationale employed by the Supreme Court in upholding the constitutional validity of the original statute. Regional Rail Reorganization Act Cases, 419 U.S. 102, 95 S. Ct. 335, 42 L. Ed. 2d 320 (1974). Moreover, the determination as to whether a particular bankrupt railroad would receive grants to enable it to continue in operation until the conveyance date, or would be required to borrow money for that purpose, would be fortuitous rather than rational, since it would depend upon the amount of budgeted but unperformed routine maintenance included in its cash flow projections.
Finally, Conrail may be subject to serious adverse consequences from the use of § 215 funds to meet current expenses. Whereas it made sense to have the bankrupt estates act as vehicles by means of which USRA could lend money to Conrail in advance of its formation for the purpose of improving the rail properties to be conveyed, it arguably does not make sense thus indirectly to lend money to Conrail for the purpose of mere maintenance, particularly with respect to properties which may never be included in the Final System Plan. It is true that the authority granted by § 215(c) to permit forgiveness of some or all the § 215 obligations assumed by Conrail may be used to mitigate the adverse effect on Conrail. On the other hand, it is the failure to consider the similar problem which the Trustees face in these equipment obligation transactions that has generated the present litigation.
I hasten to emphasize my awareness of the fact that the matters of policy and problems of administration referred to are not assigned to this Court for resolution. They are mentioned here only for the light they may shed upon the true intent of Congress, a matter of statutory interpretation which is within the judicial province.
3. History of the Government's equipment proposals.
Included in all of the cash projections of the Debtor, inevitably, are expenditures to meet installments on the purchase of rolling stock as they fall due. The Government has proposed to provide the funds to meet these payments, but under a three-way arrangement between the Debtor, the obligees, and the Government whereby such payments would not extinguish the debt, but the obligation to make such payments, both as to principal and interest, would remain. The obligees would assign to the Government, pro tanto, their claims against the Debtor's estate for such installments, but the Government's rights would be subordinated in all respect to the rights of the obligees. While the Debtor's estate would not be discharged from its obligation to make these installment payments, the obligation would not be enforced so long as the Debtor continued in possession of the equipment, and so long as no other default occurred. The Trustees would have the right to reimburse the Government and discharge the obligation pro tanto by repaying the amount involved, without interest, at any time up until the conveyance date. The precise legal consequences of the proposed arrangement will be discussed further below.
The Government first advanced a comparable proposal in the spring of 1974, using § 213 funds for that purpose. Strenuous objections were interposed by creditor interests. The Trustees, however, acquiesced in the Government's proposal, but with the distinct understanding, which was spread upon the record, that this would not be deemed to establish a precedent for similar transactions in the future. Since it appeared that, under the emergency cash shortage then prevailing, the transaction was absolutely necessary in order to prevent a much greater loss to the Debtor's estate through the loss of the equipment, this Court approved the transaction, in Order No. 1480. In re Penn Central Transportation Co., 373 F.supp. 185 (E.D.pa.1974), appeal dismissed In Re Penn Central Transportation Co., 508 F.2d 270 (3d Cir.1975).
The particular equipment installments covered by Order No. 1480 were payable to First National City Bank (Citibank) as agent for groups of investors. The question of whether the transaction could be consummated without the consent of the investors did not arise in that proceeding, since the Government eventually succeeded in persuading the investors to agree. In the more recent hearings on this subject, the Court has been advised that the substantial legal fees of the nongovernment parties which were incurred in negotiating and consummating that transaction were borne by the Debtor's estate.
After the 1975 amendments to § 215 were enacted, the Government petitioned this Court to direct the implementation of a similar proposal with respect to equipment obligations falling due during the month of May 1975, with the announced intention of implementing similar transactions with respect to all equipment installments falling due between May 1, 1975, and March, 1976, totaling approximately $ 62 million. In Memorandum and Order No. 1884, I denied the Government's petition, holding that, insofar as a particular installment payment represented interest and depreciation, clearly chargeable to current operations, the Trustees could not lawfully, under § 77 of the Bankruptcy Act, incur additional indebtedness which would prime the rights of secured creditors, at least in the absence of a showing of necessity; and that the Government had failed to demonstrate that the expenses of current operations could not be met from other, permissible, sources. 395 F.Supp. 567. I suggested that the perceived legal impediment could readily be removed if the Trustees' obligation to repay were limited to that portion of each installment attributable to equity build-up, or if some equivalent arrangement were made.
The Government has appealed Order No. 1884, but in the meantime filed a further application covering installments falling due in August and September, and sought to remedy its earlier failure of proof by demonstrating that implementation of its proposal was necessary to insure both the continued operation of the Debtor's railroad, and the operation of the other bankrupt railroads, until the conveyance date. In Memorandum and Order No. 1981, I expressed the view that the Government had not succeeded in demonstrating the necessity or legal propriety of its proposals, but that the Trustees would be directed to comply with the Government's proposals on a temporary basis, so as to provide an opportunity for re-evaluation of the situation in the light of succeeding events. The Government had contended that the Trustees' cash flow projections were unduly optimistic, while the Trustees and creditors argued that the Government had seriously overstated the future cash needs; and none of the parties had taken into account the effects of a proposed rate increase which was then pending and which, if approved, might become effective in October. By directing the Trustees to permit the Government to make the installment payments for August and September, and further directing the Trustees to repay ...