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April 2, 1976

In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor. Re: Determinations under §§ 211(h)(2) and 211(h)(3) of the Rail Act

The opinion of the court was delivered by: FULLAM


 The Regional Rail Reorganization Act of 1973, as amended by the Railroad Revitalization and Regulatory Reform Act of 1976 (together hereinafter referred to as "the Rail Act"), now contains § 211(h), 45 U.S.C. § 721(h), which is intended to provide at least partial solutions to some of the problems surrounding the orderly transfer of rail assets and operating responsibilities from the bankrupt railroads to Consolidated Rail Corporation (Conrail) as of April 1, 1976. Section 211(h) requires that certain issues be presented to and determined by the reorganization courts in advance of the conveyance date. The proceedings now before the Court are pursuant to that mandate.

 In the extremely brief time between enactment of § 211(h) and the March 31, 1976 deadline for decision by the Court, the parties have been required to negotiate concerning, and formulate positions upon, numerous issues of great magnitude and complexity. In conformity with the schedule adopted at the suggestion of United States Railway Association ("USRA"), hearings were held in this Court on March 22 and March 25, 1976. The pre-hearing period was devoted to development of the necessary information, negotiation, and identification of the issues to be presented to the Court for decision. Evidentiary material submitted at the hearings included a number of depositions, the precise impact of which had not then been fully analyzed; and additional issues surfaced at the hearings. Accordingly, it was necessary to afford the parties until March 29, 1976, for the filing of briefs. Supplemental and reply briefs were filed thereafter; indeed, the brief of the Interstate Commerce Commission was received on the morning of March 31, 1976, the last day for rendering a decision in accordance with the Congressional mandate.

 In view of the time pressures, I filed, on the afternoon of March 31, 1976, a brief statement listing the conclusions reached by the Court on the issues submitted for decision, and entered Order No. 2297 incorporating those conclusions. This Opinion is now being filed, still in some haste, in order to set forth the reasons for the conclusions reached.

 I. Preliminary Analysis of § 211(h)

 The Rail Act contemplates that the bankrupt estates will be responsible for, and have the benefit of, all rail operations until midnight of March 31, 1976, and that Conrail will have these responsibilities and benefits from that time forward. The primary objective of § 211(h) is to insure that no unpaid pre-conveyance obligations of the debtor estates will hamper Conrail's ability to provide uninterrupted rail service.

 Many of the costs attributable to pre-conveyance operations will be billed and payable after conveyance, and many of the offsetting revenues will be billed and receivable after conveyance. As of the conveyance date, Conrail will be the owner of all materials and supplies on hand, as well as all of the other rail assets, but will not have paid for them. Moreover, and of immediate practical importance, Conrail will own the facilities and control the personnel needed to handle the myriad details involved in the processing of payments and collections.

 In essence, § 211(h) contemplates that Conrail, as agent for the Debtor, will collect the accounts receivable and pay the accounts payable which are attributable to pre-conveyance operations. With respect to obligations which, in the joint judgment of USRA and Conrail, must be paid in order to insure uninterrupted rail service, Conrail is expected to cause payment to be made, and is entitled to obtain reimbursement from the Debtor's estate. If necessary, Conrail is authorized to borrow money from USRA in order to pay certain kinds (but not all) of the obligations in this category. With respect to payments on behalf of the Debtor's estate which are made by Conrail from its own funds or from funds borrowed from USRA, its claim for reimbursement from the Debtor's estate constitutes a high priority, interest-bearing, administration claim.

 At the present stage, the Reorganization Court is required to enter two kinds of orders: (1) an order under § 211(h)(2) governing the terms of the agency agreement between the Debtor's estate and Conrail; and (2) an order under § 211(h)(3) specifying the "cash and other current assets" of the Debtor's estate, now on hand or to be received in the future, which are to be made available for payment of "the obligations of the estates identified in paragraph 1 of this subsection."

 These two sets of requirements are inter-related, since the Agency Agreement must specify what payables and receivables are to be "processed" by Conrail, and since the designation of cash and current assets must be "consistent with the principles of reorganization under § 77 of the Bankruptcy Act (11 U.S.C. § 205) and with the agency agreement . . . ." (§ 211(h)(3)(B))

 At the outset, it is important to note certain asymmetrical features of the statute. The Agency Agreement may (and, as a practical matter, must) embrace obligations in many categories, and not just obligations the non-payment of which might embarrass Conrail's operations. Moreover, there are many kinds of obligations which must be paid in the interest of uninterrupted rail service, but which are not eligible for funding by USRA under § 211(h)(1). For example, (h)(1) funding is available for payroll expenses only with respect to employees covered by collective bargaining agreements; substantial post-conveyance expenditures for pre-conveyance payroll for non-agreement personnel, and for payroll taxes, must be met from sources other than (h)(1) borrowings.

 II. Accounts to be Processed under the Agency Agreement

 The Agency Agreement, the terms of which are to be prescribed by this Court in the absence of agreement between the parties, is, according to the provisions of § 211(h)(2) of the Rail Act, to provide "for the processing of all accounts receivable and accounts payable attributable to operations prior to the conveyance of property pursuant to § 303(b)(1) of this Act." It seems clear that the word "operations" in this context refers to rail operations, and that the Agency Agreement should not impose upon Conrail any duties or obligations with respect to the non-rail properties retained by the Trustees after conveyance. It is also clear that, as mentioned above, the rail-related accounts to be processed by Conrail under the Agency Agreement should include all such accounts, and not merely accounts in categories eligible for § 211(h)(1) loans from USRA.

 The Trustees have set forth, in their proposed Appendix "A" and Appendix "C," the appropriate accounts receivable and payable which should be processed by Conrail under the Agency Agreement.

 III. Designation of "Cash and Other Current Assets" Pursuant to § 211(h)(3)

 Section 211(h)(3) requires the Court to enter an order which:

"(A) identifies that cash and other current assets of the estate of such railroad which shall be utilized to satisfy obligations of the estates identified in paragraph 1 of this subsection; and
"(B) provides for the application by the trustees of such railroads and their agents, consistent with the principles of reorganization under § 77 of the Bankruptcy Act (11 U.S.C. § 205) and with the agency agreement specified in paragraph 2 of this subsection, of all such current assets, including cash available as of or subsequent to such date of conveyance, to the payment in the post-conveyance period of the obligations of the estates identified in paragraph 1 of this subsection."
". . . to enter into loan agreements, in amounts not to exceed $230 million in the aggregate, with [Conrail] . . . under which [Conrail] will agree to meet existing or prospective obligations of the railroads in reorganization in the region which [USRA] . . . determines should be paid by [Conrail] in order to avoid disruptions in ordinary business relationships."

 The statute then further provides:

"Such obligations shall be limited to amounts claimed by suppliers (including private car lines) of materials or services utilized in current rail operations, claims by shippers arising from current rail services, payments to railroads for settlement of current interline accounts, claims of employees arising under the collective bargaining agreements of the railroads . . ., claims of all employees or their personal representatives for personal injuries or deaths and subject to the provisions of the Employer's Liability Acts . . . and amounts required for adequate funding of accrued pension benefits existing at the time of a conveyance or discontinuance of service. The Association shall not make such a loan unless it first finds
"(A) provision for the payment of such obligations was not included in the financial projections of the Final System Plan;
"(B) such obligations arose from rail operations prior to the date of conveyance . . . and are, under other applicable law, the responsibility of a railroad in reorganization in the region;
"(C) [Conrail concludes payment is necessary to avoid disruptions in ordinary business relationships].
"(D) the transferor is unable to pay such obligations within a reasonable period of time; and
"(E) [provisions for repayment of the loan have been approved by Conrail and the Finance Committee]."

 In short, § 211(h)(1) speaks in terms of loan agreements which may properly be made between USRA and Conrail, and provides that certain kinds of obligations may, subject to specified limitations, be satisfied through the use of § 211 funds. Since only USRA and Conrail can determine what obligations "should be paid by Conrail in order to avoid disruptions in ordinary business relationships," it is apparent that this Court simply could not comply with the requirements of § 211(h)(3)(A), if interpreted as contemplating some correlation between the amount of cash identified by the Court and the amount of (h)(1) obligations.

 Reading Subsections (A) and (B) of § 211(h)(3) together, it appears probable that what the Court is expected to do is to specify the "cash and other current assets" which may properly be used for the payment of the kinds of obligations categorized in Subsection (h)(1) as being potentially eligible for (h)(1) financing. This determination must be made without reference to the actual arrangements which may be worked out between USRA and Conrail.

 The next question is the correct interpretation of the term "cash and other current assets of the estate of such railroad." In the absence of any other criterion, and particularly in view of the requirement that the Court's order be "consistent with the principles of reorganization under § 77 of the Bankruptcy Act," I conclude that this means cash and all other items considered to be "current assets" in the ICC system of accounts, namely, ICC accounts Nos. 701 to and including 713. For obvious reasons, it does not include capital assets such as those embraced under ICC account No. 716.

 The parties have devoted a great deal of attention to debating whether or not the Trustees can lawfully be required to invade escrow funds and other liened assets in order to pay immediately the kinds of administration claims in the categories eligible for § 211(h)(1) funding, in view of the teachings of Central R.R. Co. of N.J. v. Manufacturers Hanover Trust Co., 421 F.2d 604 (3d Cir. 1970); In the Matter of Penn Central Trans. Co., Debtor ["Columbus Option"], 494 F.2d 270 (3d Cir.), cert. denied, 419 U.S. 883, 95 S. Ct. 147, 42 L. Ed. 2d 122 (1974), and the recent decision of the Third Circuit in In re Penn Central Trans. Co. ["Section 215 Appeals"], 533 F.2d 1347 (3d Cir. 1976). In my judgment, these arguments have no place in the present case. I fail to see how escrow accounts which are either deposited pending ...

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