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IN RE PENN CENT. TRANSP. CO.

August 10, 1978

In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor. In re DISAFFIRMANCE of EXECUTORY CONTRACTS


The opinion of the court was delivered by: FULLAM

OPINION AND ORDER RE EXECUTORY CONTRACTS

Section 6.2 of the Penn Central Plan and Section 5.2 of each of the Plans of the Secondary Debtors, provide that all executory contracts other than those affirmed pursuant to §§ 6.1 or 5.1 of the Penn Central and Secondary Debtor Plans are disaffirmed. Specifically reserved from the operation of these sections are all issues relating to the leases between Penn Central and the Secondary Debtors, and between Penn Central and the nonbankrupt leased lines. (For convenience, the Penn Central Trustees, the Secondary Debtor Trustees, and the Connecting will be referred to as the Trustees).

 The Trustees' report on executory contracts (Doc. No. 14122), as amended (Doc. No. 14503), sets forth four classes of executory contracts to be affirmed and exceptions with respect to two of these classes. To be affirmed are all contracts in which the Debtors are lessors or lessees, subject to specific exceptions, all options to purchase in favor of the Debtors, and all tax allocation agreements. No one has objected to affirmance of these contracts, and the record demonstrates affirmance is in the best interest of the estate.

 In addition, the Trustees specifically reaffirm the Harlem lease which they previously affirmed with this Court's approval. The affirmance of the Harlem lease is subject to certain terms and conditions protective of the interest of the Harlem's equity and debt holders. The Indenture Trustees of the Harlem bonds and the Harlem have agreed on the terms of those conditions. Equity holders have been protected by a fund adequate to service the dividends due on the publicly held stock of the Harlem and to permit purchase of the outstanding stock, at least over time, if the reorganized company undertakes a purchase effort. The Court has reviewed those terms and finds that they are in accord with the suggestions of the Securities and Exchange Commission in its report in connection with the Plan and otherwise fair and equitable and, therefore, the conditions are hereby approved by the Court.

 A number of parties have objected to the Trustees' purported disaffirmance of their contracts, and after hearing some objectors have filed extensive briefs. It is clear that in a number of instances fundamental legal questions have been raised which are amenable to resolution without the need to further develop the factual evidence.

 A. RAILROAD-RELATED CONTRACTS

 The conveyance to ConRail terminated the Trustees' prior business activity supplying freight and passenger train service. As a consequence, the bulk of the contracts the Trustees seek to disaffirm, approximately 175,000 in number, relate in one way or another to their prior ownership of rail property or the provision of train service. The general categories of these agreements are as follows: wire, pipe and private grade-crossing agreements; joint facility and trackage right agreements; side-track agreements; bridge maintenance agreements; collective bargaining agreements with operating employees; agreements relating to the furnishing of material and supplies; agreements with respect to office, data processing and computer equipment; and utility agreements.

 Most, but not all, of these agreements have been assumed by ConRail pursuant to the Regional Rail Reorganization Act (RRRA). *fn1" With respect to the contracts assumed by ConRail, the Trustees' disaffirmance serves a rather limited procedural purpose, because no damages flow from disaffirmance. Disaffirmance in this context is merely a procedural convention for putting the other party on notice that any claim arising under the contractual relationship will have to be asserted in the reorganization proceedings. *fn2" The Trustees concede that with respect to claims arising between the filing of the § 77 petition and the conveyance of the properties to ConRail, the contracting party's claim will be an administration claim, and in most instances the amount will be determined in accord with the terms of the contract. Many, but not all, of these claims will be eligible for § 211(h) funding and will be paid in cash through the Agency Agreement with ConRail. The others will be classified as administration claims and satisfied pursuant to the Plan.

 Therefore, disaffirmance of the contracts assumed by ConRail is not even necessary because the result sought by the Trustees could be achieved as easily by simply directing that post-petition claims be filed. On the other hand, since there are some contracts which have not been assumed, and since the Trustees have initiated the procedure through the disaffirmance mechanism, it may well be that it will be simpler in the proof of claims process to denominate the claimants as executory contract claimants.

 The Long Island Railroad Company has filed the only objections on the merits of the Trustees' disaffirmance. The Long Island and the Penn Central entered into a joint facility agreement covering Penn Station in New York in 1966. The basis for the Long Island's objection to the disaffirmance of this agreement is somewhat obscure. ConRail assumed the agreement and thereafter assigned it to Amtrak. The Long Island recognizes that in this context disaffirmance is of little consequence. The real points in issue appear to be the Long Island's desire to have all its claims against the Trustees resolved in proceedings separate from those involving any other claimants (Tr. 17993-96), and the Long Island's assertion that administration claim status is inappropriate for its claim under the joint facility arrangement because the Trustees' obligations to the Long Island should be characterized as trust obligations. The second point may be mooted when the post-bankruptcy amount of the Long Island's claim is determined, because the claim appears to be eligible for payment under § 211(h). The reasoning of the Long Island for its conclusion that § 211(h) funding will not be available is simply without merit. With respect to the trust relationship theory, the Long Island is free to assert that status in connection with the Proof of Claims Program or otherwise.

 Separate handling of the Penn Central-Long Island relationship may well be what the future holds. Liquidation of unresolved claims will be a high-priority function of the new company, both because it is in everyone's interest that the claims be liquidated promptly, and also because this Court will require that the liquidation process proceed as quickly and fairly as possible. Failing amicable resolution of the Long Island's claim (a process which appears to have been pursued actively by the Trustees to date), its claims will have to be presented to this Court. It is understandable that the Long Island, and I am sure many other claimants, feel some frustration over the fact that their claims have not been liquidated or otherwise determined by now. The fact is, however, that the Trustees' efforts have been properly directed to the larger questions of providing rail services through April of 1976, and thereafter to the development and prosecution of a Reorganization Plan. In sum, while the Court understands the Long Island's position, it simply has no bearing on the question of disaffirmance of executory contracts.

 The Chessie System and the Committee of Interline Railroads have raised what is essentially a procedural objection: The Trustees must give notice to each contracting party of the precise contract or contracts disaffirmed. Notice has been given to potential claimants, but it is not possible at the present time to identify, except by classes, the contracts which are disaffirmed. The contracts are in the possession of ConRail, and even though a large commitment of time and money has been made by the Trustees and ConRail to sorting out which contracts were assumed and to identifying the contracting party, the process will not be completed for many years. This situation is simply another example of the pervasive effect of the RRRA on this reorganization. The lack of specific notice has two possible impacts: (1) the potential inability to raise arguments that a given contract is not an executory contract for the purposes of § 77; and (2) the inability to file a timely claim.

 Of the two, the first point is more troublesome but of limited effect. As to contracts assumed by ConRail, there can be no realistic objection to the idea that claims under the contracts may be asserted against the Trustees or the reorganized company. That is all that the disaffirmance petition seeks to accomplish. As to contracts not assumed, the acknowledgement of administrative claim status for post-bankruptcy-pre-conveyance obligations solves most of the problem. Damages flowing from rejection of contracts which were not assumed are somewhat different, but even here it seems highly unlikely that any party to a contract will have such a claim based on rejection unless the contract is in fact an executory contract which may be disaffirmed. With respect to the filing of claims, no order has yet been entered requiring the filing of post-bankruptcy claims or claims arising from disaffirmance. When that order is before the Court, appropriate accommodations may have to be made to take account of the Trustees' and the potential claimants' lack of information. However, it should be noted that it is consistent with general bankruptcy practice and Prima facie reasonable to expect claimants to determine whether or not they have a claim.


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