UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
August 11, 1977
In the Matter of READING COMPANY, Debtor
The opinion of the court was delivered by: J. WILLIAM DITTER, JR.
MEMORANDUM AND ORDER No. 1322
August 11, 1977
The Trustees of Reading Company, a railroad in reorganization, have petitioned for an order authorizing Consolidated Rail Corporation ("Conrail") to borrow $ 16 million from the United States Railway Association ("USRA") on their behalf, pursuant to Section 211(h)(1) of the Regional Rail Reorganization Act of 1973 ("Rail Act"), 45 U.S.C. § 721(h)(1).
The loan will be used to liquidate debts incurred for goods and services, to settle interline accounts, and to pay shippers' employees', and personal injury claims.
At the hearing on this matter, the State of New Jersey (State) appeared in opposition, seeking as a condition of the loan full payment of real estate taxes owed by Reading to New Jersey but deferred since July 18, 1972.
The State argued that Congress did not intend to authorize loans pursuant to Section 211(h), which would invest Conrail with a "super-priority" against the Reading estate for the repayment of such loans,
unless the reorganization court could be sure that the estate had sufficient assets to satisfy fully all administrative claimants at the consummation of a plan of reorganization or at liquidation. Following a somewhat abbreviated argument on the record, I approved the petition (Order No. 1287). I added, however, that if their loan application was approved by USRA,
the Trustees would not be permitted to utilize the funds until New Jersey's contention had been more carefully considered. Both parties have now submitted briefs and the issue is ripe for determination. I find that the State's challenge to the petition must be denied for two reasons.
First, as the Trustees point out, there is absolutely nothing in the Act itself, its legislative history, or that of the amending legislation which imposes upon a railroad seeking the benefits of a loan under Section 211(h) the requirement of demonstrating that its assets will be sufficient to satisfy all administrative claimants. Rather, it is obvious that Congress was well aware that it was conferring preferred status to claimants of the type Reading wishes to pay.
The Conference Committee reporting on the Rail Transportation Improvement Act of 1976, commented:
It is the Conference Committee's judgment that, given the nature of the claims not yet ascertained as to amount and the somewhat extensive time period required for those claims to be ascertained, reasonable relief could be afforded to all claimants. In the actions taken last February [the Railroad Revitalization and Regulatory Reform Act], the Congress gave special status to certain employee-related claims. We reaffirm the judgment that such matters should have special status, due to the nature of those claimants, [emphasis added].
H. R. Conf. Rep. No. 94-1743, 94th Cong., 2d Sess. 34, 1976 U.S. Code Cong. & Admin. News 5846, 5857.
It is without question, as the State argues, that a railroad is under a duty to pay state and local taxes as they accrue during a reorganization 28 U.S.C. § 960. There can also be no doubt that, under normal circumstances, the administrative expenses of a Section 77 reorganization must be paid in full or on a pro rata basis. In the Matter of Columbia Ribbon Co., 117 F.2d 999 (3d Cir. 1941); In the Matter of Cent. R. Co. of New Jersey, 412 F. Supp. 927, 931 (D. N.J. 1976); In re Penn Central Trans. Co., 325 F. Supp. 294, 298 (E.D. Pa. 1970), aff'd 452 F.2d 1107, 1108 (3d Cir. 1971), cert. denied 406 U.S. 944, 92 S. Ct. 2040, 2043, 32 L. Ed. 2d 331, 92 S. Ct. 2043 (1972); 3 A Collier on Bankruptcy (14th Ed.), P64.02; 11 U.S.C. §§ 104(a)(1), 205(1). Indeed, the Third Circuit held in Columbia Ribbon, supra, that the general equitable powers of a bankruptcy court cannot be used to alter the statutory scheme:
The court may not by granting a priority which it deems equitable set aside the clear congressional mandate that no such priority shall be accorded. Id. at 1002.
In reliance upon these general principles, New Jersey argues that had Congress sought to repeal provisions of the Bankruptcy Act in order to provide for the payment of selected administrative claimants, it would have clearly done so Therefore, it contends, Congress did not ignore these principles but instead first required an assurance that all other administrative claims be eventually satisfied.
This rigid adherence to abstract principles of priority, however, ignores two countervailing arguments. In the first place, the Third Circuit has also recognized a rule of "necessity," which allows for the immediate payment of some administrative expenses while others are deferred.
... Pro rata participation ... does not necessarily imply that all claims are entitled to simultaneous participation. To do so would unduly impair the flexibility so essential to a reorganization proceeding
... But a proceeding under § 77 is not an ordinary proceeding in bankruptcy. It is a special proceeding which seeks only to bring about a reorganization, if a satisfactory plan to that end can be devised. And to prevent the attainment of that object is to defeat the very end the accomplishment of which was the sole aim of the section, and thereby to render its provisions futile. In re Penn Central Transp. Co., 452 F.2d 1107, 1108 (3d Cir. 1971), cert. denied 406 U.S. 944, 92 S. Ct. 2040, 2043, 32 L. Ed. 2d 331, 92 S. Ct. 2043 (1972), quoting Continental Illinois National Bank & Trust Co. v. Chicago, R. I. & Pac. Ry., 294 U.S. 648, 676, 55 S. Ct. 595, 606, 79 L. Ed. 1110 (1935).
The deferral of the real estate taxes in this case is only temporary; it has not been suggested that Order 186 was designed to alter to any extent the State's participation in a plan of distribution. Secondly, Congress itself has chosen on at least one prior occasion to afford priority to an administrative claim in the context of a rail reorganization. In the Emergency Rail Services Act of 1970, 45 U.S.C. § 661 et seq., Congress granted the United States the highest lien on the property of a debtor railroad in return for the government guaranteeing trustees' certificates. 45 U.S.C. § 662(c).
When faced with this clear Congressional intent and the fact that Congress has previously granted priority to one administrative claim over another, New Jersey's contentions simply cannot survive.
The second reason for denying the State's challenge is that there has been no showing that ultimately Reading's assets "will be inadequate to meet in full the reasonably foreseeable first priority claims." In re Penn Central, supra, 452 F.2d at 1109. Or, if this is an affirmative duty on the Trustees' part, I would readily conclude that they have sufficiently demonstrated the reasonable expectation that all administrative claims will be satisfied, including New Jersey's taxes. As the financial statement submitted by the Trustees (attached as Exhibit A) reveals, available assets
exceeded the railroad's administrative debt as of December 31, 1976, by over 21 million dollars. Absent some evidence to the contrary, this is an adequate assurance that all those debts incurred by Reading during its reorganization will eventually be met.
ORDER NO. 1322
AND NOW, this 11th day of August, 1977, for the reasons stated in the foregoing memorandum, the draw down of Section 211(h) loan proceeds for the purposes set forth in Trustees' petition is hereby authorized.
BY THE COURT:
J. William Ditter, Jr.
Adminstrative Debt Vs. Available Assets
As Of December 31, 1976
Current Assets $ 2,762,531
Agency Account - Assets 5,765,380
Special Funds (ICC Account 716) 13,983,541
Certificate of Value 22,205,340
Accrued Interest - Certificate of Value 1,072,539
Current Liabilities $1,017,085
Agency Account 18,125,224
Trustees' Certificates: 8,198,948
Hurricane Agnes $1,405,490
57 Locomotives 4,801,000
Interest - Hurricane Agnes 272,348
Interest - 57 Locomotives 1,720,110
211(h) Loan to meet Pre -
Conveyance Payroll Obligations 4,321,884
Interest - 211(h) Loan 226,068 4,547,952
Pension, Welfare & Casualty Reserves 554,004
Interest in Default (Subsequent to 11/23/71): 16,401,838
Series "D" Bonds 8,625,656
U.S. Govt. Guaranteed Loan 7,776,182
Railway Tax Accruals: 17,590,551 *
Tax Liability (Subsequent to 11/23/71) 14,978,601
Interest on Liability 2,611,950
Amounts Due Affiliated Companies 4,879,849
Liabilities Deferred Pending Litigation
Resulting from Rail Act (Principally Vacation Pay) 7,054,365
Excess of Available Assets over Administrative Debt
as of December 31, 1976 21,569,585
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