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IN RE PENN CENT. TRANSP. CO.

September 18, 1979

In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor


The opinion of the court was delivered by: FULLAM

MEMORANDUM AND ORDER NO. 3997

General Motors Corporation ("GM") and two Connecticut-based corporations, Stratford Land and Improvement Company, Inc. and Stratford Industrial Corporation (jointly referred to herein as "Stratford") have filed petitions to compel Penn Central to pay, as a cost of administration, certain refunds allegedly due in connection with three sidetrack agreements. While each of the three agreements must be considered separately in light of their differing provisions, the petitions raise issues which are common to scores of similar agreements throughout the Penn Central system.

 I. BACKGROUND

 Generally speaking, a railroad is required by law to provide freight service to shippers, but is not required to incur the expense of constructing the sidings, lead tracks, and switch connections to provide service to the shipper's plant or other facility. But it is in the best interests of the railroad to increase its revenues by increasing its volume of freight business. Hence, a shipper who is willing to pay for the construction of a siding or lead track, switches, etc., is often permitted to recoup his investment in the form of reduced freight charges or rebates, or some equivalent schedule of reimbursement tied to the amount of freight business generated. Typically, the shipper would deposit with the railroad the entire cost of construction, and would convey to the railroad the necessary easements. The railroad would then cause the work to be done and, when the track was placed in service, would reimburse the shipper periodically, at the rate of X dollars per car load. In some instances, the railroad would be obliged to continue making refunds until the entire cost was reimbursed. In other instances, the reimbursement obligation would terminate after a specified number of years (usually, five years for a single siding, ten years for an industrial park) or when the full cost had been reimbursed, whichever should first occur.

 At an early stage in the Penn Central reorganization, on March 12, 1971, this Court entered Order No. 183, which (1) authorized the Trustees to negotiate renewals of side-track arrangements which were outstanding and not fully performed on the date of bankruptcy, and (2) conferred blanket authority upon the Trustees to enter into new sidetrack arrangements, in their discretion, so long as their reimbursement obligation did not exceed $ 100,000; and (3) contemplated continuation of the practice of submitting to the Court for approval all proposed new sidetrack arrangements where the reimbursable cost of construction was in excess of $ 100,000. The fundamental question presented by the petitions now before the Court is whether Penn Central has any obligation to reimburse to shippers that portion of the cost of sidetrack construction which remained outstanding on April 1, 1976, the date the railroad was conveyed to ConRail.

 On October 1, 1973, pursuant to the blanket authorization of Order No. 183, the Trustees and GM entered into the "Piquette Avenue Agreement." GM advanced the construction costs, amounting to $ 86,486, and was to be repaid at the rate of $ 20 per car originated. As of April 1, 1976, the Trustees had refunded a total of $ 7,740, leaving a balance of $ 78,746.

 On January 18, 1971, pursuant to the specific authorization set forth in Order No. 128 of this Court, the Trustees and Stratford entered into the "Stratford Agreement." Stratford advanced a total of $ 689,000, refundable at per-car rates ranging from $ 10 per car for cars yielding revenue of $ 150 to $ 200, to $ 50 per car for cars yielding more than $ 450 in revenues. As of April 1, 1976, the Trustees had refunded a total of $ 257,510, leaving an unreimbursed balance of $ 421,490.

 The petitioners brought suit in the Special Court seeking to compel either ConRail or Penn Central to carry out the balance of the reimbursement obligation. The Special Court concluded that these sidetrack agreements were not conveyed to ConRail, which acquired the properties free and clear; and that the Special Court lacked jurisdiction over the claims asserted by petitioners against Penn Central. Stratford Land and Improvement Company, Inc. v. Blanchette, 448 F. Supp. 279 (Special Ct., 1978). The Court noted the following circumstances:

 The conveyance documents (Bill of Sale and Assignment, Schedule E, annexed to conveyance order of March 25, 1976) specifically excluded "all industrial sidetrack agreements . . . which require the payment of refunds per car, trailer, or container to any person, firm, association . . . ." While this exclusion would be impermissible if inconsistent with the Final System Plan; and while the "general principles" established in the Final System Plan included the statement "executory contracts and agreements are designated in accordance with their subject matter: contracts relating to property to go with the property . . .," the Court concluded that U.S. Railway Association had adequately reserved the power to take a closer look at specific categories of administrative assets at a later time, and to depart from the stated "general principles." The Court reasoned that

 
". . . the Association anticipated, and Congress approved, precisely the sort of refinements USRA later effected in the Bill of Sale. The sidetrack exception was wholly consistent with the general scheme of the Rail Act and of the FSP that ConRail was to emerge with the rail properties designated for it, for which just compensation would be paid, but without the attending financial obligations . . . A requirement that ConRail assume all of a transferor's executory obligations related to the properties conveyed would run counter to the basic design of the FSP to develop a "financially self-sustaining and express service system in the region' (§ 206(a)(1)). We therefore hold that the sidetrack exception in the Bill of Sale was not inconsistent with the FSP" (448 F. Supp. at 284-85).

 The Special Court's decision has not been appealed, and thus stands as a final determination that ConRail has no liability to the petitioners under these sidetrack agreements. The Special Court, of course, expressed no view as to the existence of any residual liability of Penn Central under the agreements.

 II. THE TERMS OF THE AGREEMENTS

 The sidetracks are still generating freight business, the shippers are paying freight charges in full, and the shippers have not yet been reimbursed the full cost of the sidetrack improvements; but Penn Central is not receiving the freight revenues from which, in the contemplation of both parties, the per-car refunds were to be made. The ultimate question to be decided in each case is whether Penn Central's reimbursement obligation survived the conveyance to ConRail and the resulting cessation of revenues. The first task of the Court is to determine whether the contracts ...


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