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IN RE PENN CENT. TRANSP. CO.

April 1, 1978

In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor; Pittsburgh & Lake Erie Litigation


The opinion of the court was delivered by: FULLAM

 FULLAM, J.

 By Collateral Trust Indentures dated April 15, 1965 and April 15, 1968, Penn Central pledged, as collateral security for certain indebtedness, 22.5% of the common stock of the Pittsburgh & Lake Erie Railroad Company, to Irving Trust Company as Indenture Trustee for bondholders. In 1972, various lawsuits were filed by minority shareholders of the P&LE, in their own right and as derivative claims on behalf of the P&LE against various officers and directors of the P&LE, of the Penn Central Transportation Company, and against the P&LE itself, and certain accounting firms and financial institutions, charging a variety of improprieties in the financial relationships between the P&LE and the Penn Central, the owner of most of the P&LE stock. These actions were consolidated, before another judge of this District, under the caption In re Pittsburgh & Lake Erie Railroad Company Securities and Antitrust Litigation, M.D.L. Docket No. 134, 374 F. Supp. 1404.

 In 1975, a comprehensive settlement of that litigation was approved by the presiding judge. Upon petition of the Penn Central Trustees, I authorized them to enter into the proposed settlement, finding that it was in the best interests of the Debtor's estate and of its reorganization. I expressed no view as to the merits of the settlement with respect to the other parties involved.

 Under the settlement agreement, the P&LE itself was to contribute $2.1 million toward an escrow fund of $2.25 million, which was to be used to pay the damages allegedly sustained by the minority shareholders. Irving Trust Company in its capacity as Indenture Trustee under the Collateral Trust Indentures mentioned above, as pledgee of 22.5% of the outstanding P&LE common stock, objected to the settlement and appealed to the Third Circuit Court of Appeals, on the ground that the proposed payment by P&LE would have the effect of diluting the value of the pledged common shares. The Court of Appeals agreed, finding that "the pledgee's equity is being diluted to the extent of approximately $472,500." In re The Pittsburgh & Lake Erie Railroad Company Securities Antitrust Litigation, Appeal of Objector Irving Trust Company as Trustee, 543 F.2d 1058, 1069 (3d Cir. 1976).

 In 1977, the parties to the litigation amended their settlement arrangements in order to overcome the objections expressed by the Court of Appeals. After hearing, the presiding judge approved the new settlement agreement, and the Trustees have now petitioned this Court for leave to join in and carry out the terms of the modified settlement arrangement.

 The principal change in the settlement agreement is that it now provides for a special escrow fund in the amount of $918,522 plus accumulated interest to guard against the possibility that the interests represented by Irving Trust will suffer detriment by reason of the dilution of the value of the pledged P&LE stock resulting from the cash payments being made by P&LE in order to carry out the settlement. At least, that is what all of the parties except Irving Trust now agree is the correct interpretation of the settlement documents. Irving Trust, on the other hand, seems to be arguing that the escrowed funds are to provide an additional resource for the payment of the indebtedness underlying the pledge of the stock, which may be awarded to Irving Trust by the M.D.L. 134 Court, over and above what the Penn Central Reorganization Plan produces for those bondholders.

 The "Revised Stipulation of Settlement and Compromise" dated April 13, 1977 (Exhibit T-3 in these proceedings) contains the following provisions:

 
"(iv) If the Reorganization Court before which a Plan of Reorganization for the Penn Central Transportation Company, Debtor, is pending, shall finally determine that Irving and the bondholders do not have a valid and enforceable lien against the shares held by Irving as collateral (or against the proceeds of the sale thereof), then neither Irving nor the bondholders shall be entitled to receive any part of the [escrowed funds]."

 The agreement then provides for distribution of amounts not ordered payable to Irving or the bondholders.

 All of the parties except Irving Trust interpret this language as meaning simply that, if it should ever become legally permissible for Irving Trust to foreclose the pledge the escrow fund would stand as additional collateral for the indebtedness, and would be available to Irving Trust and the bondholders in the event they were unable to collect the debt by selling the stock. If the claims represented by Irving Trust are discharged, by reason of the consummation of the pending Plan of Reorganization for Penn Central, neither Irving Trust nor the bondholders would have any claim against the escrow fund. Irving Trust, on the other hand, argues that if the reorganization proceeding does not produce for the bondholders what they regard as payment in full for their claims, the M.D.L. Court can then use the escrow funds to pay them in cash whatever deficiencies they there establish.

 While the position now asserted by Irving Trust is, in my judgment, untenable, it must be conceded that the language employed by the draftsmen of the settlement agreement is lacking in precision. The following points should be noted:

 1. The Reorganization Court does not "finally determine" anything, since all of its Orders are subject to appellate review. Presumably, this wording was intended to refer to the final outcome of ...


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