The opinion of the court was delivered by: J. WILLIAM DITTER, JR.
MEMORANDUM AND ORDER No. 1322
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 ...