Penn Cent. Transp. Co., Matter of

• Decision Date: 13 April 1898
• Docket Number: 78-1700 and 78-2315,Nos. 78-1699,s. 78-1699
• Citation: 596 F.2d 1127
• Parties: In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor (six cases). Appeal of MANUFACTURERS NATIONAL BANK OF DETROIT, Indenture Trustee under the Lake Shore Collateral Indenture, inAppeal of WILMINGTON TRUST COMPANY, as Successor Indenture Trustee under the New York Central and Hudson River Railroad Company, Michigan Central Collateral Indenture dated
• Court: U.S. Court of Appeals — Third Circuit

Page 1127

596 F.2d 1127

In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor (six cases) Appeal of MANUFACTURERS NATIONAL BANK OF DETROIT, Indenture Trustee under the Lake Shore Collateral Indenture in Nos. 78-1699, 78-1700 and 78-2315 Appeal of WILMINGTON TRUST COMPANY, as Successor Indenture Trustee under the New York Central and Hudson River Railroad Company, Michigan Central Collateral Indenture dated April 13, 1898, in Nos. 78-1703, 78-2311 and 78-2312 Appeal of Charles S. JEFFREY, a holder of The New York Central and Hudson River Railroad Company 3 1/2% Michigan Central Collateral Bonds, in Nos. 78-1702, 78- 2319 and 78-2320. Appeal of ERIE AND KALAMAZOO RAILROAD COMPANY, in No. 78-1710.

Submitted Under Third Circuit Rule 12(6) Oct. 16 and 17, 1978.

Appeal of IRVING TRUST COMPANY, as Indenture Trustee, in

Nos. 78-1698 and 78- 2314.

Appeal of The MAHONING COAL RAILROAD COMPANY and The

Mahoning and Shenango Valley Railway Company, in

No. 78-1711.

Submitted Under Third Circuit Rule 12(6) Oct. 16 and 17, 1978.

Nos. 78-1698 to 78-1700, 78-1702, 78-1703, 78-1710, 78-1711,

78-2311, 78-2312, 78-2314, 78-2315, 78-2319 and 78-2320.

United States Court of Appeals, Third Circuit.

Argued Oct. 16 and 17, 1978 (except where otherwise noted).

Decided Jan. 11, 1979.

Rehearing Denied in Nos. 78-1699-1700, 78-1703, 78-2311-12

and 78-2315

February 26, 1979.

J. Donald McLeod, John J. Iseman, Dahlberg, Mallender & Gawne, Detroit, Mich., for appellant Manufacturers Nat. Bank of Detroit, Nos. 78-1699, 78-1700 and 78-2315.

Richard G. Elliott, Jr., Michael A. Meehan, Richards, Layton & Finger, Wilmington, Del., for appellant Wilmington Trust Co., Nos. 78-1703, 78-2311 and 78-2312.

H. Theodore Cohen, Mary Ellen Neylon, Tyler & Reynolds & Craig, Boston, Mass., for appellant Charles S. Jeffrey, Nos. 78-1702, 78-2319 and 78-2320.

Steven R. Rivkin, Washington, D. C., for appellant Erie and Kalamazoo Railroad Co., No. 78-1710.

Stephen A. Weiner, Winthrop, Stimson, Putnam & Roberts, New York City, for appellant Irving Trust Co., Nos. 78-1698 and 78-2314; David M. Payne, Frederick I. Miller, New York City, of counsel.

Frank Buckhout McShane, Frederick J. Berman, Walsh & Frisch, New York City, for appellant Mahoning Coal Railroad Co., etc., No. 78-1711.

Carl Helmetag, Jr., James E. Howard, John J. Ehlinger, Jr., Philadelphia, Pa., Charles A. Horsky, W. Crosby Roper, Jr., Brice M. Clagett, Washington, D. C., Covington & Burling, Washington, D. C., for appellees, Trustees of Penn Central Transp. Co.; Covington & Burling, Philip R. Stansbury, Wesley S. Williams, Jr., Wynne M. Teel, Washington, D. C., of counsel.

Kenneth M. Kramer, Robert H. MacKinnon, George J. Wade, Shearman & Sterling, New York City, for Citibank, N.A.

Louis A. Craco, Richard L. Posen, Willkie Farr & Gallagher, New York City, Frederic L. Ballard, Vincent P. Hatton, Ballard, Spahr, Andrews & Ingersoll, Philadelphia, Pa., for appellee, Institutional Investors Penn Central Group; Walter H. Brown, Jr., Thomas L. Bryan, Michael B. Targoff, Debra M. Evenson, New York City, of counsel.

Michael L. Temin, Wolf, Block, Schorr & Solis-Cohen, Philadelphia, Pa., for appellees, Metropolitan Life Ins. Co., et al.

Spencer Ervin, Jr., Gratz, Tate, Spiegel, Ervin & Ruthrauff, Philadelphia, Pa., Morris Raker, Sullivan & Worcester, Boston, Mass., for appellee, Richard Joyce Smith; Joseph Auerbach, Boston, Mass., of counsel.

Walter C. Kelley, Donald B. McCann, Margaret Anne Foster, Kelley, McCann & Livingstone, Cleveland, Ohio, for Board of Ed., Cleveland City School Dist., as amicus curiae.

Before ALDISERT, GIBBONS and HIGGINBOTHAM, Circuit Judges.

OPINION OF THE COURT

ALDISERT, Circuit Judge.

We have before us numerous appeals from the Penn Central Transportation Company reorganization court's orders of approval, confirmation and consummation of a Plan of Reorganization. Satisfied that the Plan is fair and equitable as to these appellants, we affirm.

Plans of reorganization for Penn Central and for fifteen secondary debtors (collectively, The Plan) have been approved by the reorganization court, and upon submission to claimants for a vote, have been accepted by an overwhelming majority of claimants. Related appeals also decided this day are In the Matter of Penn Central Transportation Company, Debtor, (Irving Trust and Bank of New York Appeals), 596 F.2d 1102 (3d Cir. 1979). In the Matter of Penn Central Transportation Company, Debtor, (Stockholder Appeals), 596 F.2d 1155 (3d Cir. 1979). These appeals present issues which require us to review the basic framework of the monumental plan designed to resolve what may be the most complex set of interrelated and conflicting claims ever addressed under Section 77 of the Bankruptcy Act, 11 U.S.C. § 205.

The questions for decision are:

1. Whether the Plan, in providing Series A preference stock to certain bondholders whose mortgage liens were recognized by the reorganization court to have somewhat superior coverage (the so-called "super-secured" creditors), adequately provides for them.

2. Whether the Plan properly excludes certain bond issues from that "super-secured" class.

3. Whether the Plan adequately protects the interests of the Erie and Kalamazoo Railroad Company, a non-bankrupt leased line of Penn Central.

The history of this reorganization proceeding and the characteristics of the Plan are set forth in an extensive opinion by the Honorable John P. Fullam, judge of the reorganization court, 458 F.Supp. 1234 (E.D.Pa.1978). To put in proper perspective the nature of these appeals, it is necessary to understand the theory of the Plan, and to understand this theory it is first necessary to review the history which forms the backdrop for this mammoth reorganization.

I.

Penn Central Transportation Company (PCTC), the debtor, was formed in 1968 by the merger of the Pennsylvania Railroad Company and the New York Central Railroad Company. The "Pennsy" and the New York Central can be traced almost to the beginning of railroad transportation in the United States. By the 1870's they had created, by construction and purchase, railroad systems extending from the eastern seaboard to the Mississippi River. In spite of the difficulties facing the rail industry in the 1930's, both railroads, because of their financial strength, were able to function as viable, successful companies. Both systems had been created in large part through lease or purchase of stock of a large number of separate railroad companies, many of which had substantial amounts of their own securities outstanding. Both legal and financial obstacles made it difficult to change the original relationships and subsequently added to the complexity of the Penn Central reorganization.

The Interstate Commerce Commission conditioned its approval of the merger between the Pennsylvania and New York Central railroads on the acquisition of the New York, New Haven and Hartford Railroad Company (New Haven) by the newly formed Penn Central. The New Haven, a system in southern New England with many operating relationships to the merged companies, had been in reorganization proceedings under Section 77 of the Bankruptcy Act since 1961.

There is some suggestion in The Financial Collapse of the Penn Central Company, Staff Report of the Securities and Exchange Commission to the Special Subcommittee on Investigations (August 1972) (SEC Report), that the Pennsylvania-New York Central merger may not have been realistically planned:

No consideration was given in connection with this merger to the broad question of realinement of the Eastern roads or whether this was the best merger for the two roads. They were, in effect, the leftovers, after other combinations had been individually arranged. Furthermore, little consideration appears to have been given to the question of whether this particular merger would work at all. Certainly the combination of two already ailing and financially weak roads raises questions as to feasibility and in this situation the possibility also existed that the size and complexity of the merged company would preclude manageability.

SEC Report, Supra, at 17. Additionally, whatever flaws were inherent in the plan to merge were exacerbated by ICC requirements and labor difficulties:

By the time ICC's approval was obtained, two decisions had been made which many people have suggested sealed the doom of the company. Neither had been contemplated at the time of the original proposal. First, in May 1964, the two roads reached an accord with labor, the Merger Protective Agreement, whereby they, in effect, bought the cooperation of the unions, which had been opposing the merger. The result of this agreement would be to cause the company to incur costs far above those anticipated in the Patchell report and thus limit the savings projected. The second factor was the decision of the ICC to force the New Haven Railroad on the Penn Central, adding still a third financially and operationally weak road to the group.

Id., at 18. When merger was completed, the initial expectation that increased size would bring with it increased efficiency and profits began to fade into the dismal reality of misrouted cars, management problems, uncertainty of internal procedures, deterioration of the physical plant, and high-level in-fighting. An officer of the company, in a speech to a group of shippers in March 1969, described one aspect of the operations problem as follows:

This period of transition from two railroads to one harmonious system has not been easy. One of the reasons for our difficulty can be found in the size of the plant itself. While our lines paralleled each other in a number of areas and we shared many common points, the Pennsylvania and New York Central systems were not complementary. Our separate yards did not have the individual capacity to handle the combined business of the two railroads, and we have had to keep several yards in operation until...