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In re Penn Cent. Transp. Co.

United States District Court, E.D. Pennsylvania

August 28, 2012

IN THE MATTER OF PENN CENTRAL TRANSPORTATION CO

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[Copyrighted Material Omitted]

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For PENN CENTRAL TRANSPORTATION COMPANY, Debtor-in-Possess: MICHAEL L. CIOFFI, LEAD ATTORNEY, BLANK ROME LLP, CINCINNATI, OH; CARL M. BUCHHOLZ, DLA PIPER U.S. LLP, PHILADELPHIA, PA; JOSEPH M. PROFY, BLANK ROME LLP, PHILADELPHIA, PA; RUDOLPH J. DI MASSA, DI MASSA AND ASSOCIATES, LTD., PHILA, PA.

OPINION

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MEMORANDUM

Harvey Bartle III, J.

On Sunday, June 21, 1970, at 5:40 p.m., Judge C. William Kraft, Jr. of this court signed the petition of the Penn Central Transportation Company (" PCTC" ) for reorganization under § 77 of the Bankruptcy Act of 1898, 11 U.S.C. § 205 (repealed 1978). Order No. 1. The matter was then assigned to Judge John P. Fullam, who oversaw this massive proceeding for more than forty years until April 15, 2011 when he ceased hearing cases. Thereafter, it was transferred to the undersigned.

The reorganized company that emerged from the reorganization proceedings in 1978 was known as The Penn Central Corporation (" PCC" or the " Reorganized Company" ). [1] It has now moved for summary judgment, challenging its liability to 32 former employees of PCTC or their estates (the " Claimants" ) for a $14,761,238 judgment entered against " the Penn Central" in the United States District Court for the Northern District of Ohio. The judgment confirms an arbitration award, as modified by the Surface Transportation Board (" STB" ), in favor of Claimants for benefits and pre-judgment interest owed under a 1964 collective bargaining agreement. Claimants have filed a cross-motion for summary judgment in which they ask the court to enforce against the Reorganized Company the judgment entered in the Northern District of Ohio.

I.

Summary judgment is appropriate " if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a); see also Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). A dispute is genuine if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 254, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Summary judgment is granted where there is insufficient record evidence for a reasonable jury to find for the non-movant. Id. at 252. " The mere existence of a scintilla of evidence in support of the plaintiff's position will be insufficient; there must be evidence on which the jury could reasonably find for the plaintiff." Anderson, 477 U.S. at 252. We view the facts and draw all inferences in favor of the non-moving party. Boyle v. Cnty. of Allegheny, 139 F.3d 386, 393 (3d Cir. 1998). When ruling on a motion for summary judgment, we may only rely on admissible evidence. See, e.g., Blackburn v. United Parcel Serv., Inc., 179 F.3d 81, 95 (3d Cir. 1999).

II.

There are no genuine disputes as to any material facts. In 1962, the Pennsylvania Railroad Company and the New York Central Railroad Company agreed to enter

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into a merger. As required by § 5(2)(f) of the Interstate Commerce Act, 49 U.S.C. § 5(2)(f), the two railroads and a union, the Brotherhood of Railroad Trainmen, executed an " Agreement for Protection of Employees in Event of Merger of Pennsylvania and New York Central Railroads." That agreement, referred to by the parties as a Merger Protection Agreement or " MPA," was signed on November 16, 1964 but effective as of January 1, 1964. It provided in § 1(b):

On the date the said merger of [New York] Central [Railroad Company] into Pennsylvania [Railroad Company] is consummated the merged company will take into its employment all employees of Pennsylvania and Central as of the effective date of this Agreement ... who are willing to accept such employment, and none of the present employes [sic] of either of the said Carriers shall be deprived of employment or placed in a worse position with respect to compensation, rules, working conditions, fringe benefits or rights and privileges pertaining thereto at any time during such employment.

The MPA also stated in § 1(e) that if a dispute arose among the railroads, the merged railroad, or the union with respect to " interpretation or application" of the MPA, any party to the agreement may refer the dispute to an arbitration committee " for consideration and determination." The MPA provided for the appointment of arbitrators, one to be chosen by each party and a neutral arbitrator chosen by the others. The decision of the majority, and in some instances, the decision of the neutral arbitrator alone, was to be " final and binding."

Following several years of proceedings before the Interstate Commerce Commission (" ICC" ), the United States District Court for the Southern District of New York, and the Supreme Court, the railroads consummated their merger and formed PCTC on February 1, 1968. See generally Penn-Cent. Merger & Norfolk & W. Inclusion Cases, 389 U.S. 486, 492-500, 88 S.Ct. 602, 19 L.Ed.2d 723 (1968). Twenty days later, on February 21, 1968, PCTC furloughed 29 employees of the Central Union Terminals Company (" CUTC" ), a PCTC subsidiary operating in Cleveland, Ohio. Prior to the merger, CUTC had been a subsidiary of the New York Central Railroad. PCTC did not pay these employees benefits under the MPA for time spent on furlough because, in its view, the MPA did not provide benefits to CUTC employees. See Pa. R.R. Co.-Merger-N.Y. Cent. R.R. Co., 347 I.C.C. 536 (1974). In 1969, 17 of the 29 furloughed employees filed a lawsuit against PCTC in the United States District Court for the Northern District of Ohio, Knapik v. Penn Central Co., No. 69-722, to obtain MPA benefits. [2]

In January 1969, PCTC abolished the positions of six rate clerks who has been employees of the New York Central Railroad prior to the merger. PCTC also denied MPA benefits to these six employees, and in 1969, they filed two separate

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lawsuits against PCTC in the Northern District of Ohio for such benefits. These cases were captioned Watjen v. Penn Central Co., No. 69-675 and Bundy v. Penn Central Co., No. 69-947.

As noted, PCTC initiated a reorganization proceeding under § 77 of the Bankruptcy Act of 1898 in this court on June 21, 1970. [3] From the date of the merger until shortly after the reorganization petition was filed, the MPA program was a significant expense. Between February 1, 1968 and September 1970, PCTC paid over $87.7 million in MPA benefits. Pa. R.R. Co.-Merger-N.Y. Cent. R.R. Co., 347 I.C.C. 536 (1974). August 28, 2012

In 1973, during the reorganization, this court approved a stipulation related to the Knapik case, one of the three Ohio lawsuits filed by the Claimants against PCTC in 1969. [4] That stipulation (Doc. No. 5383) stated:

IT IS HEREBY STIPULATED AND AGREED, by and between counsel for Michael J. Knapik, et al, plaintiffs in a civil action against Penn Central Transportation Company, et al, formerly pending in the United States District Court for the Northern District of Ohio, Eastern Division, and being action No. C69-722 on the docket of said Court, and counsel for Trustees of the Debtor, that the aforementioned civil action may be reinstated on the docket of said Court and may continue to a conclusion in said Court. Provided, however, ... that no judgment which may hereinafter be entered in said civil action shall be enforced except as hereinafter authorized by this Court.

In 1974, while this reorganization proceeding was still pending, the ICC ruled that employees of PCTC subsidiaries, including CUTC, were entitled to merger protection benefits under the MPA. Pa. R.R. Co.-Merger-N.Y. Cent. R.R. Co., 347 I.C.C. 536 (1974). That same year, an additional 16 former CUTC employees sued PCTC in the Northern District of Ohio. Sophner v. Penn Cent. Co., No. 74-914 (N.D. Ohio). These employees were continuously employed by PCTC after the merger. They alleged that they were nevertheless entitled to MPA benefits and that PCTC failed to pay them what was owed. In 1975, this court approved a stipulation regarding the Sophner lawsuit nearly identical to the stipulation it approved two years earlier with respect to

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the Knapik lawsuit. Although allowing the action to proceed to a conclusion in the Northern District of Ohio, it also ordered that " no judgment which may hereafter be entered in the Action shall be enforced except as authorized by this Court." Doc. No. 8600.

In the meantime, Congress enacted the Regional Rail Reorganization Act of 1973 (" RRR Act" ) in an effort to prevent the disruption or cessation of rail service in the Midwest and Northeast as a result of many railroads, including PCTC, entering reorganization. RRR Act § 101, Pub. L. No. 93-236, 87 Stat. 985 (1974). Among other things, the RRR Act established the Consolidated Rail Corporation, commonly known as Conrail, and required the trustees of the various railroads in reorganization to sell the debtor railroads' assets to Conrail or other profitable railroads. RRR Act § 303(b), 45 U.S.C. § 743(b). The RRR Act also required Conrail to offer employment to the employees of the railroads in reorganization, including PCTC, and to assume liability for certain collective bargaining agreements to which the railroads had been parties. RRR Act § § 502(b), 504, 45 U.S.C. § 772(b); see Moss v. Int'l Ass'n of Machinists & Aerospace Workers, No. 92-3542, 996 F.2d 1216 (6th Cir. June 30, 1993).

In accordance with the terms of the RRR Act of 1973, PCTC's railroad employees became Conrail employees on April 1, 1976. That same year, Congress added § 211(h) to the RRR Act. See In re Penn Cent. Transp. Co., 596 F.2d 1127, 1133-35 (3d Cir. 1979); see also 45 U.S.C. § 721(h). As explained by our Court of Appeals, " Section 211(h) created a mechanism by which Conrail borrowed from [the United States Railway Association, a federal agency] in order to pay certain classes of the debtor's payables. In turn, the estate was obligated to recognize as a current cost of administration the amount of 211(h) funds expended by Conrail on the estate's behalf." In re Penn Cent. Transp. Co., 596 F.2d at 1136. In short, the PCTC Trustees paid certain labor expenses with the government's money. As a result, the government held claims against PCTC possessing the " questionable virtues of astronomic size and statutory priority." Id. at 1136-37.

In September 1977, the PCTC Trustees drafted and submitted to this court a report addressing executory contracts arising from PCTC's pre-petition operations. Doc. No. 14,122, Order No. 3150. The report began by quoting § 6.1 and § 6.2 of the proposed PCTC plan of reorganization. Those two sections provided as follows:

6.1 Assumption of certain executory contracts. Certain executory contracts, to be described in an exhibit hereto, which exhibit will be filed with the Court prior to its approval of the Plan, will be assumed by the Reorganized Company subject in each instance to the terms and conditions, if any, of any disaffirmance by the Trustees.
6.2 Treatment of other executory contracts. In accordance with § 77(b) of the Bankruptcy Act, all executory contracts of the Debtor, with the exception of those assumed in accordance with Section 6.1 of the Plan, are rejected as of the date of the filing of the petition for reorganization by the Debtor provided that
(a) With respect to the executory contracts of the Debtor heretofore assumed by Conrail or other transferees pursuant to the RRR Act, such rejection is deemed to be rejection solely of the Debtor's and the Trustees' remaining obligations and liabilities, if any, under such contracts.

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The categories of executory contracts that the Trustees desired to affirm were listed in Exhibit I to the report. The MPA is not encompassed within any such category.

In ¶ ¶ 10 through 12 of the report, the Trustees note that they originally reviewed all contracts with the goal of affirming those that would be advantageous for the reorganized company's operation as a railroad following bankruptcy. They then observed that " [t]he situation has now radically changed" because most assets, including track, stock, and other equipment, were transferred to other entities pursuant to the RRR Act. Because the reorganized company that would emerge from bankruptcy would not be in the railroad business, the Trustees concluded that it was " desirable" to terminate all obligations under most of the 175,000 existing executory contracts.

Following notice to potentially affected groups, the court held a hearing on the Trustees' report on November 4, 1977. Docket No. 14,122, Order No. 3150. During that hearing, Hewlett Skidmore, appearing pro se, addressed the court. He explained to Judge Fullam that he was an employee of PCTC and had a disagreement with the railroad because it " did not live up to the agreement in accord with the Interstate Commerce Act, Section 5(2)(f)," [5] a contract between PCTC " and the Brotherhood." Skidmore told the court that it was his position that the court had no authority under § 77(n) to limit his rights under that agreement. Judge Fullam interrupted Skidmore to say that he agreed: " I rather doubt that this proceeding affects any rights under collective bargaining agreements; it can't. There is no question about that. ... This proceeding can't possibly have any [effect] on your claims." As discussed below, the report of the trustees with respect to executory contracts was subsequently incorporated into § § 6.1 and 6.2 of Amended Plan of Reorganization.

On March 17, 1978 (Order No. 3455), this court approved an " Amended Plan of Reorganization" (the " Plan" ) that would govern the liabilities of the debtor PCTC as it would be reorganized at the conclusion of the § 77 proceeding. The court confirmed the Plan on August 17, 1978. Order No. 3707. See In re Penn Cent. Transp. Co., 458 F.Supp. 1234 (E.D. Pa. 1978). The Plan in § 1.31 provided for the formation of a " Reorganized Company," which the Plan defined as

the corporation (the present Penn Central Transportation Company with appropriate changes to its articles of incorporation and bylaws) which has retained or is vested with all assets of the Debtor, including Valuation Case Proceeds, and which is the issuer of and obligor under the securities to be issued and assumed as provided by the Plan.

Section 3 of the Plan explained that it " continue[d] the existence of the debtor [PCTC]." The Plan also specified the assets that the Reorganized Company would hold, the classes of claims by PCTC creditors that the Reorganized Company would pay, and the securities that the Reorganized Company would issue to pay those claims. Certain creditors were allowed to recover interest that had accrued on their claims against PCTC during the reorganization, and some of the securities that the Reorganized Company issued to PCTC creditors also accrued interest. The Plan

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stated that claims not provided for in the Plan would be discharged.

Sections 6.1 and 6.2 of the Plan governed the liability of the Reorganized Company for the executory contracts of PCTC. Section 6.1 stated that the Reorganized Company would assume the contracts listed in an exhibit to the report of the trustees with respect to executory contracts, as discussed above. Section 6.2 explained that, subject to certain exceptions, all other executory contracts " are rejected as of the date of the filing of the petition for reorganization by the Debtor." [6] One exception was that " [w]ith respect to executory contracts of the Debtor heretofore assumed by Conrail ... pursuant to the RRR Act, such rejection is deemed to be a rejection solely of the Debtor's and the Trustees' remaining obligations and liabilities, if any, under such contracts."

Section 7 of the Plan governed " Reservation of Claims." It stated:

Any Claim against the Debtor or the Trustees included in a class provided for in the Plan, which was not finally settled or adjudicated prior to the Consummation Date and which is thereafter settled, determined, or adjudicated to be valid, will participate under the Plan in the same manner as if it had been finally adjudicated or otherwise liquidated prior to the Consummation Date. The obligation of the Reorganized Company to such claimants will be limited to their participation under the Plan. Such Claims against the Debtor or the Trustees will be defended, settled or compromised by the Reorganized Company as determined by its Board of Directors, subject to the continuing jurisdiction of the Court. Obligations which result from any such actions and which are not treated in the Plan will be obligations of the Reorganized Company. ... The Reorganized Company will have the power and authority to employ, retain or replace attorneys and other experts to prosecute or defend any action or proceeding involving the Debtor or the Trustees.

On the same date that this court confirmed the Plan, August 17, 1978, it issued a " Consummation Order and Final Decree" (the " Consummation Order" ). Order No. 3708. The Consummation Order decreed that PCTC would close its books at 11:59 p.m. on the " consummation date," October 24, 1978, and PCC, the Reorganized Company, would open its books at 12:00 a.m. on October 25, 1978.

Section 3.06 of the Consummation Order, " Discharge and Release of Claims," provided:

Subject to the provisions of Section 6.03 below relating to the payment, assumption or satisfaction by the Reorganized Company of certain claims, the Debtors and the Trustees of the properties of the Debtors shall, as of the Consummation Date, be discharged and released forever from
(a) all obligations, debts, liabilities and claims against any of the Debtors, whether or not filed or presented, whether or not approved, acknowledged or allowed in these proceedings ...

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