The opinion of the court was delivered by: DITTER
OPINION RELATING TO ORDER NO. 1519
The trustees of the bankrupt Reading Company (Reading) petitioned for approval of a real estate tax settlement with one of its largest creditors. The issues before me were whether this settlement was in the best interest of the bankrupt and whether it would create unlawful consequences or undesirable precedents for other taxing authorities. This opinion will explain why I gave my approval.
Although Reading is currently paying real estate taxes, it owes $ 6,500,000
to the City and School District of Philadelphia (Philadelphia). Reading has some funds which can be applied toward its tax liabilities. The most important asset in this category has been realized from the sale of Reading properties and is held in an account established by Order No. 200 maintained with debtor's mortgage trustee, Manufacturers Hanover Trust Company. More importantly, Reading expects to receive a considerable amount of money from the valuation case presently in litigation before the Special Court for properties conveyed to ConRail.
Reading has negotiated an agreement with Philadelphia utilizing the anticipated assets of the valuation case as well as monies from the account established by Order No. 200 in exchange for the satisfaction of this significant tax debt.
The main features of the settlement are the cash payment of 30 percent of the taxes which Reading and its subsidiaries owe Philadelphia for the years 1971 through 1977, the possible payment of the remaining 70 percent of the tax claim from the proceeds of the valuation case,
interest on this deferred balance to accrue at the rate of eight percent compounded annually, the waiver of Philadelphia's right to vote or participate in the plan of reorganization, and protection for Philadelphia in the event that the Reading makes a more favorable arrangement with some other taxing authority.
Certain objections to this settlement have been raised. The holders of Reading series "D" First Mortgage Bonds contend that the trustees of Reading present little data from which the court can conclude that the settlement is fair and equitable. I do not agree. It is apparent from the face of the agreement that by virtue of this settlement, for the time being Reading will be relieved of the impact of a $ 6,500,000 debt by the present payment of approximately $ 2,000,000.
The bondholders raise the additional criticism that interest on the deferred tax claim is excessive in that eight percent interest compounded annually instead of the legal six percent interest rate will cost the estate thousand of dollars if applied to all agreements with the estate. The realities of today's money market plus the fact that Judge Fullam in the Penn Central case allowed the identical rate of interest on C-1 notes convinces me that an eight percent interest rate compounded annually is fair and equitable as to taxing authorities in this reorganization. In the Matter of Penn Central Transportation Co., 458 F. Supp. at 1279-80 (E.D.Pa. 1978). Furthermore, eight percent compounded annually is the interest rate which Reading will be paid on any additional compensation it receives in the valuation case. Regional Rail Reorganization Act § 306(c)(4)(D), as amended, 45 U.S.C. § 746(c)(4)(D) (1976).
The State of New Jersey is concerned that the settlement agreement might constitute a waiver by any accepting taxing authority of its claims against ConRail for the balance of taxes due in 1976. Under the Final System Plan, Reading's operating assets were conveyed to ConRail as of March 31, 1976. This split the tax year so that Reading owned the property for three months and ConRail owned it for nine. The Special Court in Section 4(a) of its Order of March 2, 1976, (Sp.Ct.Rptr. M-000073-M000076), held that ConRail has the obligation with respect to those nine months. The settlement agreement deals only with claims admittedly due by Reading to Philadelphia. Reading does not admit that it has any obligation to any taxing authority or to ConRail for the nine months in 1976 following April 1, 1976. Thus, the settlement agreement and this court's order have no effect on any taxing authority's right to assert a claim against ConRail or the trustees for any taxes based on the last nine months of 1976. The taxing authorities are free to assert such claims, and the trustees are free to deny any obligation with respect to them.
The State of New Jersey expresses concern that nontax claimants (other than the government's 211(h) claims) may assert priority over the claims of taxing authorities which have compromised their real estate taxes. New Jersey seeks to have this settlement agreement establish a priority structure in favor of taxing authorities accepting the settlement. This cannot be done. The settlement agreement does not attempt to establish priorities among the creditors of the estate. The agreement simply limits Philadelphia's rights with respect to the balance of its claim, plus interest, to the additional compensation defined in the agreement, so that the city will share the additional compensation ratably with other taxing authorities and those of like priorities. It would be inappropriate at this time to give accepting taxing authorities a higher priority; these matters are best left to hearings on the Plan of Reorganization.
In summary, the agreement is intended to deal with real estate tax claims asserted by Philadelphia and admitted to be due by Reading for the years 1971 to 1977. According to the fair and equitable requirement of Section 77(e)(1) of the Bankruptcy Act the same offer must be made to all taxing authorities to which Reading owes real estate taxes. However, the trustees have the right to challenge tax claims other than real estate or claims made against Reading for the period after April 1, 1976, as to properties conveyed to ConRail. The financial impact of this settlement on the bankrupt will depend on the extent to which it obtains additional compensation from the valuation ...