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IN RE LEHIGH VALLEY R.R. CO.

January 12, 1979

In the Matter of LEHIGH VALLEY RAILROAD COMPANY, Debtor


The opinion of the court was delivered by: FULLAM

RE: OBJECTIONS OF FIDELITY BANK AND CHEMICAL BANK TO THE PROPOSED AMENDED PLAN OF REORGANIZATION

 ORDER NO. 529

 The Trustee of the Lehigh Valley Railroad has petitioned the Court for approval of an Amended Plan of Reorganization ("the Plan"). Before reaching a final decision in this matter, I deem it desirable to file this Interim Opinion addressing the objections to the Plan filed on behalf of Fidelity Bank, Indenture Trustee of the Lehigh Valley Consolidated Mortgage (CM) and the Chemical Bank, Indenture Trustee of the Lehigh Valley General Consolidated Mortgage (GCM), for the purpose of inviting the parties to comment upon the Court's analysis of certain issues presented by these objections, and upon the accuracy of the various calculations embodied therein. While this may slightly delay final disposition of the pending petition for approval, it should, in my view, contribute greatly to the quality of the ultimate product.

 Both for the purpose of determining the extent to which a given mortgage is fully secured, and for the purpose of distributing the various new securities of the reorganized company, the Plan assigns to retained assets their actual appraised value, on the assumption that these assets will produce that amount in cash pursuant to the Asset Disposition Program; but assigns to the assets which have been conveyed to ConRail only the values estimated by United States Railway Association in the Final System Plan. *fn1" The Final System Plan values are only a fraction of what the Trustee and other parties to the reorganization believe the conveyed assets will generate for the estate through the mechanism of the Valuation Case litigation, but proponents of the Plan concluded that it was simply not practicable to use any figure other than the Final System Plan figure for the conveyed assets, for purposes of determining the extent to which various creditors' claims should now be regarded as secured. *fn2"

 Under the Plan, the assets securing the various mortgages consist of the principal amount of escrowed cash proceeds from sales of mortgaged assets, the appraised value of retained assets, and the "reduced," USRA-derived, value of conveyed assets. *fn3" The total of these asset values determines the percentage of the claim which is treated as secured. The secured portion of each claim is to be paid, 20% In cash and the balance in First Mortgage Bonds. The unsecured portion of each claim is to be paid by a combination of Second Mortgage Bonds and common stock. *fn4" The issues being considered in this Opinion concern only the relative distributions of First Mortgage Bonds and Second Mortgage Bonds.

 Cash-flow projections indicate that approximately 25% Of the First Mortgage Bonds will be redeemed within the next few years from the proceeds of the Asset Disposition Program; the balance of the First Mortgage Bonds, and all of the Second Mortgage Bonds, must look to the outcome of the Valuation Case for payment. Under the Plan, the proceeds of the Valuation Case would be devoted first to the payment of the principal and accrued interest on the Administrative Notes; next to the payment of the principal of the First Mortgage Bonds; next to the payment of contingent interest on the First Mortgage Bonds, at the rate of 7% Compounded semi-annually; next to the payment of principal of Second Mortgage Bonds; and thereafter to the payment of contingent interest on the Second Mortgage Bonds. The balance, if any, would go to junior interests.

 If the Valuation Case produces a recovery sufficient to assure payment in cash of all of the First and Second Mortgage Bonds and their contingent interest (approximately $ 60 million base value), creditors receiving Second Mortgage Bonds in payment of their claims will fare as well as those receiving First Mortgage Bonds, and the issues presented by the objections of Chemical Bank and Fidelity will prove academic. The Plan, however, uses the $ 20 million base value assumed by USRA in the Final System Plan. *fn5" If the Valuation Case produces only a $ 20 million base value recovery, there is again no problem; the objectors concede that, if that proves to be the value of the conveyed assets, it is properly reflected in the distributions proposed in the Plan. But if the recovery falls somewhere between $ 20 million and $ 60 million base value, the objectors contend that the Plan will produce an unfair result, primarily because the contingent interest on the First Mortgage Bonds primes both principal and interest on the Second Mortgage Bonds.

 Solely for the purpose of illustrating the claimed unfairness, the objectors have presented a series of calculations based upon a hypothetical Valuation Case recovery of approximately $ 35 million. This figure has been selected because it is at that level of assumed recovery that the claimed unfairness to these objectors is most apparent. For purposes of present discussion, therefore, I shall adopt the same hypothetical illustration. I wish to emphasize, however, that this most assuredly is not to be regarded as a prediction of the outcome of the Valuation Case litigation. *fn6"

 The following chart shows the allocation to each mortgage of security represented by conveyed assets, under the Plan's assumption of a $ 20 million base value, and under the hypothetical assumption of a $ 35 million base value recovery: *fn7"

 To the extent that Second Bonds were to be converted into First Bonds, the amount necessary to pay off the First Bonds with accrued interest would be increased, and the claims of other holders of First Bonds would be diluted. And, needless to say, the rights of the holders of unconverted Second Bonds, as to both principal and contingent interest, would be adversely affected. The impact of acceptance of Chemical Bank's proposed amendment upon particular secured creditors would, of course, vary depending upon the extent to which the claim is secured by conveyed, rather than retained assets.

 Accompanying this Opinion is a Technical Appendix which develops a comparison between what the bondholders under each mortgage would receive under the present Plan if the Valuation Case produces a $ 35 million base-value recovery, and what they would receive if the Plan, for marshalling purposes, had initially assigned a $ 35 ...


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