In re Dakota Rail, Inc., Bankruptcy No. 4-88-639.

• Decision Date: 04 August 1989
• Docket Number: Bankruptcy No. 4-88-639.
• Citation: 104 BR 138
• Parties: In re DAKOTA RAIL, INC., Debtor.
• Court: U.S. Bankruptcy Court — District of Minnesota

104 B.R. 138 (1989)

In re DAKOTA RAIL, INC., Debtor.

Bankruptcy No. 4-88-639.

United States Bankruptcy Court, D. Minnesota.

August 4, 1989.

William J. Joanis, David Bergquist, Hart, Bruner & O'Brien, Minneapolis, Minn., for debtor.

Kim Anderson, Minneapolis, Minn., for trustee.

MEMORANDUM ORDER DENYING APPROVAL OF DISCLOSURE STATEMENT

NANCY C. DREHER, Bankruptcy Judge.

The above entitled matter came on for hearing seeking approval of a Disclosure Statement filed on June 30, 1989 by Jerome A. Ross, the sole shareholder of the debtor; two partnerships, Sisseton Line Associates and Little Crow Partnership, of which Mr. Ross is a partner; and two unsecured creditors, Anderson Interiors, Inc. and Jerabek Machine Shop ("the proponents"). Appearances were as follows: William Joanis and David Bergquist for the Proponents; Kim Anderson for the Trustee; Sherry A. Enzler for the Minnesota Department of Transportation; and Clinton Cutler for Itel Corp., the successor in interest to Rex Leasing. The court has jurisdiction to hear and determine this matter pursuant to 28 U.S.C. §§ 157 and 1334, and Local Rule 103. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A).

FACTS

A. Procedural History

The debtor is a South Dakota corporation formed in 1982. Jerome Ross, one of the proponents of the Plan, is the sole shareholder of debtor. Mr. Ross is also an unsecured creditor, both by reason of the fact that he claims to be owed approximately $30,000.00 by the debtor and also by reason of the fact that he has purchased approximately $140,000.00 of the unsecured claims filed by others in this case. Until March 28, 1989, when his services were terminated by the trustee appointed in this chapter 11 railroad reorganization, Mr. Ross was the President and Chief Executive Officer of the Debtor.

According to the Disclosure Statement, Sisseton Line Associates, another plan proponent, is a general unsecured creditor owed past due equipment lease payments amounting to approximately $400,000.00 and an administrative expense of $34,612.00. Further according to the Disclosure Statement, Little Crow Partnership is a general unsecured creditor owed $6,270.41 on a pre-petition note issued to the debtor, $22,496.19 in pre-petition equipment lease payments, and a priority claim for post petition equipment lease payments of $10,829.19.

Debtor holds an Interstate Commerce Commission permit to operate as a common carrier by railroad. Since late 1985, debtor has been in the business of operating a short line railroad 43.66 miles in length between Wayzata and Hutchinson, Minnesota. Debtor purchased the track, adjacent properties and miscellaneous personal property from the Burlington Northern Railroad Company pursuant to a Purchase Agreement dated August 20, 1985. Burlington Northern had abandoned the line shortly prior to purchase. Under the terms of the Purchase Agreement, debtor agreed to pay the Burlington Northern a total purchase price of $2,090,000.00. The Contract for Deed, dated November 27, 1985 contained extremely liberal payment terms. Debtor's only obligation was to pay $100.00 at the closing and the remainder of principal, with no interest accruing, in five equal $100.00 installments due and payable on the first five successive anniversary dates of the execution of the Contract for Deed, until November 19, 1990, at which time the $2,089,400.00 remaining principal balance would become due and payable. The Contract for Deed further obligated debtor to pay all real estate taxes in the year 1985 and thereafter.

Following the purchase, Ross, his wife, and his adult children operated the railroad. The line serves principally two major shippers, Minnesota Mining and Manufacturing and Butler Manufacturing Company (Lester's). Debtor also for a time operated a dinner train. Because of continuing operating losses, the debtor discontinued dinner train operations during the bankruptcy proceedings.

At the time of purchase the railroad line was in need of substantial repair. On May 28, 1986 the debtor entered into an agreement with the State of Minnesota (Department of Transportation) and the Central Prairie Shippers Association, Phase One Rail Line Rehabilitation of Dakota Rail, pursuant to which Debtor received $314,088.00 from a federal grant administered by the Minnesota Department of Transportation and $44,870.00 by way of loan from the Central Prairie Shippers Association to be repaid (without interest) at the rate of $50.00 per freight car load shipped. Debtor was to match this infusion of capital by way of $89,739.00 in labor and material.

Debtor's railroad operations have consistently lost money. Between September 1985 and February 1988 the debtor incurred debt of approximately $764,600.00, or approximately $26,000.00 per month. For the year ending June 30, 1987, it sustained an operating loss of $452,189.00 and, at December 31, 1988, it showed a net operating loss of $125,232.00 for the first six months of fiscal year 1989. The dinner train has been an abysmal business failure. Debtor had sustained itself with the income from leases on the various parcels of adjacent properties purchased from Burlington Northern, occasional sales of certain of those properties, and the infusion of capital described above. Nonetheless, debtor's plight remained serious and debtor fell behind on its obligations to Burlington Northern to pay real estate taxes on the properties as they came due.

At the date of filing for relief under chapter 11 of the Bankruptcy Code, February 11, 1988, debtor owed Burlington Northern the unpaid principal balance on the Contract for Deed in the amount of $2,089,700.00. It had also failed to pay real estate taxes as they came due. At the date of filing, after setoffs, debtor owed Burlington Northern the sum of $156,611.39, in addition to the principal amount on the Contract for Deed. The bankruptcy filing was precipitated when negotiations with Burlington Northern broke down and Burlington Northern threatened to foreclose.

Shortly following the filing of the petition for relief, pursuant to 11 U.S.C. § 1163, this court appointed Thomas Lovett as trustee. Lovett has overseen the day to day operations of debtor since his appointment, with Ross and his family members operating the railroad on a day to day basis. On March 28, 1989, Lovett terminated Ross's services as CEO, but he has been retained as a consultant to assist the court appointed trustee in selling real property for the debtor.

During the bankruptcy proceedings, the trustee negotiated a complex refinancing of the debt to Burlington Northern. Pursuant to that refinancing agreement, Burlington Northern agreed to accept the sum of $1,350,000.00 in full satisfaction of the debts owed to it. The funds to pay Burlington Northern and an additional loan for operating expenses were contributed by debtor's two major shippers (3M and Lester's), the McLeod County Regional Rail Authority, and the State of Minnesota Department of Transportation. Pursuant to the refinancing package, debtor sold its interest in the line and its properties adjacent to it to the McLeod County Regional Railroad Authority. Concurrently therewith, the Authority repaid the reduced debt to Burlington Northern. The Rail Authority then mortgaged five adjacent properties to 3M and Butler to secure their $400,000.00 commitment to the refinancing; eighteen adjacent properties are mortgaged by the Regional Rail Authority to the debtor to cover a note of $550,000.00. Debtor is repurchasing the remaining parcels from the Regional Rail Authority under a long term Contract for Deed for a purchase price of $1,350,000.00. Debtor is prohibited from selling the mortgaged properties below certain release prices; at least 80 percent of the proceeds from the sales of such properties must be used to pay costs of reorganization and creditors, rather than current operating expenses.

The trustee is currently negotiating another financing package for the railroad, the proceeds of which will be used to upgrade and repair additional sections of the railroad line. This financing package, referred to as Phase Two Rail Line Rehabilitation of Dakota Rail, is expected to provide approximately $600,000.00 in federal funds (again administered through the Minnesota Department of Transportation), $100,000.00 in funds from the Central Prairie Shippers Association (to be paid again out of a surcharge on each load of freight hauled), and approximately $140,000.00 from the State of Minnesota. Again, debtor will be required to match these funds with its own infusion of labor and materials in the sum of approximately $200,000.00.

B. The Plan and Disclosure Statement

The plan and disclosure statement at issue have had a tortured history. Ross, as President of the Debtor, but without the authority of the trustee, first filed a Plan and Disclosure Statement in November of 1988. The trustee objected on numerous grounds, including his contention that Ross was required to, but had not, secured the authority of the trustee to file any such plan and disclosure statement on behalf of the debtor. The hearing on that disclosure statement was adjourned indefinitely to allow the parties to attempt to negotiate their differences. Then, after unsuccessfully taking steps to have this court appoint an equity security holders committee (there being only one shareholder), Ross took the route of filing a Plan and Disclosure Statement as a single creditor. The Plan and Disclosure Statement under consideration are the successors to his single proponent filings made in February of 1989. The additional proponents of the Plan joined in on the later amendments.

The Disclosure Statement and Plan under consideration have been amended three times. Each version has drawn strong opposition. Over the continuing objections of the trustee, the United States Trustee, a major creditor (Itel), and the Minnesota Department of Transportation, the court...