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IN RE PENN CENT. TRANSP. CO.

June 8, 1979

In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor. In re COAL SLURRY PIPELINE OF CONSOLIDATION COAL COMPANY


The opinion of the court was delivered by: FULLAM

MEMORANDUM AND ORDER NO. 3971

During the 1950s, Pittsburgh Consolidation Coal Company became interested in building a coal slurry pipeline from its mines and preparation plant at Georgetown, Ohio, to the generating plant of one of its customers, Cleveland Electric Illuminating Company, at Eastlake, Ohio, some 107 miles away. It therefore undertook negotiations with the various railroads whose tracks the pipeline would cross.

 There were 13 crossings of railroad rights-of-way involved, 7 owned by Penn Central or its predecessors (6 by Pennsylvania Railroad Company, 1 by New York Central), and 6 by predecessors of the Norfolk & Western. Eventually, the negotiations culminated in a written agreement, dated March 1, 1958, between the coal company, on the one hand, and the various railroads, on the other. Pursuant to this agreement, the railroads granted the necessary crossing permits, the coal company built the pipeline (at a cost of some $ 12 million) and placed it in operation; and the railroads were assured of certain periodic payments for use of the crossings, and were granted the options discussed below.

 Paragraph 2 of the 1958 agreement gave the railroads the right to require the coal company, upon written notice at any time within 10 years after March 1, 1958, to form a new corporation for the purpose of owning and operating the pipeline. In the event such notice was given, the coal company was required immediately to convey the pipeline to the new corporation, and to sell to the railroads a 45% Interest in the new corporation, at a price pegged to book value.

 Paragraph 5 of the 1958 agreement provides:

 
"5. So long as one or more of the Railroads is an optionee under this Agreement or is . . . a shareholder in the new corporation, (the coal company) . . . shall not sell the pipeline or its stock in the new corporation without offering the same at book value to the Railroads . . . then owning stock in the new corporation or retaining options hereunder to purchase such stock, and, if (the coal company) . . . elects to sell the pipeline or its stock, one or more of said Railroads . . . shall be entitled to purchase on an equal basis said pipeline or its stock at the book value of (coal company's) interest therein. . . ."

 Thus, for a period of 10 years from and after March 1, 1958, the railroads had (1) an option to acquire a 45% Interest in the pipeline, through the formation of a separate corporation to own and operate the pipeline, and the acquisition of a 45% Minority interest therein; (2) the right of first refusal with respect to any proposed sale of the remaining interest in the new corporation formed to own and operate the pipeline; and (3) the right of first refusal with respect to any proposed sale of the pipeline itself. According to the agreement, all of these options were to expire on March 1, 1968.

 The various crossing agreements were, by their terms, effective only so long as the pipeline was being used to transport coal. In 1963, after the pipeline had been operating for about five years, the coal company determined to suspend operation of the pipeline. Apparently, implementation by the railroads of the "unit-train" approach to rate-making had made it cheaper to transport coal by railroad than by the slurry pipeline. Accordingly, the parties entered into a First Supplemental Agreement, dated July 31, 1963, modifying the 1958 agreement discussed above. In pertinent part, the 1963 agreement provides that the suspension of operation of the pipeline "shall not constitute an abandonment, cessation, or discontinuance of the use of the pipeline pursuant to said crossing agreements, nor shall such deactivation or suspension adversely affect, modify or terminate the rights of (coal company) or Railroads pursuant to the agreement or said crossing agreements;" and that "the option to exercise the rights and privileges granted and contained in Paragraphs 2, 3, 4, 5, and 7 of the Agreement . . . may be exercised by the Railroads during the period of suspension and during a period immediately following reactivation of the pipeline equal to that part of the original option period of ten (10) years still remaining at the time the suspension is effected. . . ."

 The pipeline has not been operated since August 15, 1963, and, giving effect to the First Supplemental Agreement, the option rights of the railroads have been extended to a date five years after reactivation of the pipeline, if that should ever occur.

 In 1966, Pittsburgh Consolidation Coal Company sold all of its assets to a newly created, wholly owned subsidiary of Consolidated Oil Company ("Conoco"); the new owner was named Consolidation Coal Company, and assumed all of Pittsburgh's liabilities as well as its assets.

 On August 14, 1975, after extended negotiations, Consolidation Coal Company entered into an "Option and Sales Agreement" purporting to grant to Bill D. Vaught, trading as Vaught Oil Company ("Vaught") an option to purchase the pipeline for $ 4 million. The railroads were not notified of this proposal, nor were they afforded an opportunity to exercise the option rights conferred by the 1958 and 1963 agreements discussed above. Upon learning of these developments, the railroads promptly protested and, when their protests proved unavailing, instituted the present proceeding to enjoin the proposed sale to Vaught. *fn1"

 I

 II

 In my judgment, there is no merit whatever in the assertion that Consolidation became a Bona fide purchaser for value without notice by virtue of its 1966 acquisition of the property from Pittsburgh Consolidation Coal Company. That transaction was not a sale, but a merger, in which Consolidation expressly assumed all of the liabilities of Pittsburgh. Moreover, all of the officers of Pittsburgh Consolidation Coal Company became the officers of Consolidation Coal Company, including the very individuals who had negotiated, and were thoroughly familiar with, both the 1958 and 1963 agreements with the railroads. Thus, even if the 1966 transaction were treated as a sale rather than a merger, it is clear that the "purchaser' had actual knowledge of the railroads' option rights.

 With respect to the status of Vaught, the following circumstances are decisive. While the 1958 and 1963 agreements were not recorded, all of the 13 crossing agreements were duly recorded, and at least two of these agreements (the New York Central agreement and the Wheeling agreement) contained express reference to the railroads' option rights.

 Throughout the negotiations between Consolidation and Vaught, it was clearly understood by both sides that Vaught intended to use the pipeline for the transmission of natural gas, whereas the various railroad crossing agreements permitted the pipeline to be used only for coal slurry. The 1975 option and sale agreement between Consolidation and Vaught therefore contains the following provisions:

 
"(C) . . .
 
"Consol does hereby further covenant and agree to transfer, assign and set over unto Vaught, his heirs, executors, administrators and assigns, all highway permits (101) railroad crossing permits (15) and other legal documents specifically relating to said pipeline.
 
"Anything herein to the contrary notwithstanding, Consol makes no representation or warranty as to the legal sufficiency or efficacy of said existing easement agreements for purposes of transportation through said pipeline of solids, liquids, gasses and mixtures thereof, or otherwise. Permission is hereinafter granted to Vaught to approach landowners directly for purposes of adapting and upgrading the quality of certain existing easement agreements so as to meet the requirements of Vaught."

 Attached to the Option and Sale Agreement is a list of the recorded documents which would be assigned to Vaught; included are all 13 of the recorded railroad crossing agreements.

 It is very clear that representatives of the Vaught Company and its associate, Petrolane, *fn2" thoroughly examined these documents, and were aware that all of the crossing agreements were ...


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