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IN RE PENN CENT. TRANSP. CO.

September 28, 1979

In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor


The opinion of the court was delivered by: FULLAM

MEMORANDUM AND ORDER NO. 4001.

Order No. 1087, In re Penn Central Trans. Co., 354 F. Supp. 408 (E.D.Pa.1973), Aff'd, 484 F.2d 1300 (3d Cir. 1973), Cert. denied, 415 U.S. 951, 94 S. Ct. 1475, 39 L. Ed. 2d 567, 94 S. Ct. 1476 (1974) determined the extent to which claims of employees and former employees under certain unfunded pension plans and a contingent compensation plan should be paid during reorganization as operating expenses of the Debtor. The Trustees were authorized to continue their funding of the funded pension programs, and entitlements thereunder were not affected by Order No. 1087. However, the Order imposed two important limitations upon payment to employees or former employees under unfunded programs, as current operating expenses: (1) entitlements under the Contingent Compensation Plan were to be calculated on the basis of a formula tied to the allotments made to the program on behalf of each employee (thus excluding appreciation in value from investments by the fund); and (2) no payments to an employee under any unfunded program could be made if, by reason thereof, such employee would receive from the Debtor more than $ 50,000 per year, in the aggregate, under the Debtor's pension programs or otherwise.

 In conformity with the Plan of Reorganization, Penn Central Corporation has assumed liability for continued payment, on a current basis, of the benefits which were authorized to be paid by Order No. 1087. The difference between the level of payments contemplated by Order No. 1087, and the full amounts provided under the terms of the various plans, gives rise to valid claims against the Debtor's estate. They are, however, plainly claims arising under prebankruptcy executory contracts of the Debtor, and therefore, one would suppose, to be treated as unsecured general obligations of the Debtor, Class M. The petitions now before the Court seek better treatment of these claims.

 Had it not been for the $ 50,000 limitation imposed by Order No. 1087, the petitioners would each have received current benefits, in cash, greatly in excess of the amounts they were actually paid. It is argued that the $ 50,000 limit (and, indeed, the other limitations) were imposed in order to preserve cash needed to operate the railroad, and because it was deemed fitting to limit pension payments to former executives so long as the Debtor was unable to pay state and local taxes, prebankruptcy personal injury claims, etc.; that these reasons no longer prevail, and cash is now available; and that the $ 50,000 limitation should therefore now be vacated. The effect of vacating the $ 50,000 limitation, in the petitioners' view, would be to treat petitioners' claims as unpaid administration expenses, payable in cash.

 It is my opinion that petitioners' claims cannot and should not be treated as claims of administration entitled to payment in cash, except to the extent contemplated by Order No. 1087. In the first place, I believe it is at least arguable that that Order, affirmed on appeal, represents the "law of the case" and is Res judicata. While both this Court and the Court of Appeals expressly left open the question of the proper classification of such claims in a Plan of Reorganization, to order petitioners' claims paid in cash would be inconsistent with the rationale employed by the Court of Appeals in affirming Order No. 1087. The Court of Appeals pointed out that these are unsecured claims based upon pre-bankruptcy executory contracts. It acknowledged that, as this Court had held, it has become customary in railroad reorganizations to permit the trustees to continue to honor such unfunded pension obligations to some extent, in order to maintain the morale of current and future employees. But the Court was careful to avoid endorsing that holding. The Court stated:

 
"Apparently payment of unfunded pension liabilities during a railroad reorganization is a recognized tradition in the industry . . . This Court has not explicitly ruled on the practice. Since no party to this appeal challenges it, we accept it, for present purposes, as a governing rule. . . ." (484 F.2d 1300, at pp. 1304-1305.)
 
"Accepting, as have the parties, the general principle that some payments of unfunded pension liabilities are a practical necessity if a railroad is to be successfully operated in reorganization, it does not follow that in applying the principle the reorganization court must enforce each executory pension contract exactly in accordance with its terms . . . Accepting the principle of some payment of unfunded pension liabilities, no more is required than a responsible exercise of equitable discretion. . . ." (Ibid., pp. 1305-1306.)
 
"We emphasize that because the parties agree that some payments on unfunded pension liabilities during a railroad reorganization are at least proper, this opinion has not dealt definitively with questions of the extent of or the limitations upon the reorganization court's power in this respect. We also emphasize that the orders appealed from do not determine how the appellants' claims should be dealt with in a plan of reorganization or a liquidation." (Ibid., p. 1306.)

 The plain import of the Court of Appeals' Opinion is that the only possible justification for according prebankruptcy unfunded pension obligations treatment as current expenses of operation is a valid determination by the district court, in the course of the reorganization proceedings, that certain levels of current payments are, as a practical matter, necessary to the smooth functioning of the railroad. That level of payments was determined in this case by Order No. 1087 in 1973. That determination was not revised while the Debtor was operating the railroad, and there is no rail-related justification for revising it now. The cash payments sought by the petitioners will not be authorized.

 The remaining question is the proper classification of these claims under the Plan of Reorganization. Should they be treated like any other prebankruptcy unsecured claim, or do they have unique characteristics which warrant some form of priority?

 It is first necessary to specify just what claims are made by each of the petitioners. Mr. Bevan has a claim for $ 325,815 for amounts which would have been paid to him pursuant to Order No. 1087 under the Contingent Compensation Plan, but for the $ 50,000 limitation; contract pension payments of $ 210,000 and unpaid salary of $ 22,500, both of which would have been paid him but for the $ 50,000 limitation. He also claims annual future contract pension payments during his lifetime at the rate of $ 27,627. Mr. Saunders has a claim for $ 412,000 under the contingent compensation formula approved by Order No. 1087, contract pension payments of $ 304,783, and unpaid salary of $ 20,000; plus annual future contract pension payments at the rate of $ 37,356 during his lifetime and one-half of that amount for his widow, if she survives. The Symes estate has a claim for $ 70,000 under a special annual pension of $ 10,000 awarded him by the Board of Directors of the railroad on October 23, 1968.

 These claims might appropriately be classified under the Plan as either Class M (general unsecured) or Class H (unsecured claims entitled to some priority). It seems to me that claims arising from unpaid compensation for services performed present a more appealing case for inclusion in Class H than do claims for unfunded retirement benefits, in this context.

 All other employees of the Debtor have been paid their agreed-upon compensation in full. The formula payments under the Contingent Compensation Fund represent, in effect, reimbursement to each participant of the amount he or she actually paid into the fund. All participants in the Contingent Compensation Plan, including these petitioners, are relegated to Class M with respect to their claims under the Plan in excess of the formula payments. Thus, according Class H priority to petitioners' claims for amounts unpaid under the Contingent Compensation Plan formula established by Order No. 1087 would mitigate the disparity among participants in the Contingent Compensation Plan.


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