In re New York, New Haven and Hartford Railroad Co.

• Decision Date: 28 July 1969
• Docket Number: No. 30226.,30226.
• Citation: 304 F. Supp. 1121
• Parties: In Proceedings for the Reorganization of a Railroad. In the Matter of the NEW YORK, NEW HAVEN AND HARTFORD RAILROAD COMPANY, Debtor.
• Court: U.S. District Court — District of Connecticut

304 F. Supp. 1121

In Proceedings for the Reorganization of a Railroad.

In the Matter of the NEW YORK, NEW HAVEN AND HARTFORD RAILROAD COMPANY, Debtor.

No. 30226.

United States District Court D. Connecticut.

July 28, 1969.

Lester C. Migdal, Migdal, Low, Tenney & Glass, New York City, and Lander, Greenfield & Krick, New Haven, Conn., for Harry Rebell and Lester W. Rubin as The New York, NH and HRR Co. First Mortgage 4% Bondholders Committee.

Dennis N. Garvey, New Haven, Conn., and Mulholland, Robie & Hickey, Washington, D. C., for Railway Labor Executives' Assn.

Louis J. Lefkowitz, Atty. Gen. State of New York, Albany, N. Y., for State of New York.

Myron S. Isaacs, New York City, for Oscar Gruss & Son.

Frank J. Fazzano, Director of Business Regulation, State of Rhode Island, Providence, R. I., for State of Rhode Island.

Robert K. Killian, Atty. Gen. of Connecticut, Hartford, Conn., for State of Connecticut.

Ulrich Schweitzer, Gen. Corporate Counsel, New York City, for Penn Central Co.

Robert H. Quinn, Atty. Gen. Commonwealth of Massachusetts, Boston, Mass., for Commonwealth of Massachusetts.

Wilkie Bushby, Dewey, Ballantine, Bushby, Palmer & Wood, New York City, for Chase Manhattan Bank.

Simpson, Thacher & Bartlett, New York City, for Manufacturers Hanover Trust Co. Hale, Grant, Meyerson, O'Brien & McCormick, New York City, for Providence & Worcester R. Co.

Paul A. Sweeney, Sp. Asst. to Atty. Gen., U. S. Dept. of Justice, Washington, D. C., for the United States.

Walter A. Kernan, Carter, Ledyard & Milburn, New York City, for United States Trust Co. of New York.

James William Moore, counsel to trustee, New York, New Haven & Hartford Railroad Co., New Haven, Conn., for Interstate Commerce Commission.

MEMORANDUM OF DECISION ON DISTRIBUTIVE OR STEP II PORTION OF FOURTH SUPPLEMENTAL REPORT AND ORDER OF INTERSTATE COMMERCE COMMISSION

ANDERSON, Circuit Judge (sitting by designation).

Following the Fourth Supplemental Report and Order of the Interstate Commerce Commission, 334 I.C.C. 25, dated November 25, 1968 and the Commission's certification of a Plan of Reorganization to this court on December 2, 1968, this court on December 24, 1968, by its Order No. 559 and its accompanying Memorandum of Decision, approved and ordered the transfer of substantially all of the assets of the Debtor railroad (New Haven) to the Pennsylvania Central Company (Penn Central), free and clear of all liens. The transfer was to be effected by January 1, 1969; Penn Central was concurrently to pay to the Trustees of the New Haven the consideration which the Commission in its Report found to be fair and equitable; and all of this was to be without prejudice to the right of any party to contest the fairness and adequacy of the consideration. The foregoing was accomplished on December 31, 1968.

Subsequently, after notice to all parties in interest, this court held a hearing on March 31-April 2, 1969 on the issue of price and the distributive or Step II provisions of the Plan; and on May 28, 1969 filed its Memorandum of Decision on the Issue of Price, 304 F.Supp. 793.

The court then believed, or at least hoped, that in a short time it would be feasible for it to pass definitively on all remaining issues, i. e., the distributive provisions of the Plan of Reorganization, as certified to this court by the I.C.C.; and that a remand of the Plan to the Commission might not be necessary. It was encouraged in this belief by the constructive opinion of the Commission's counsel that a remand to the Commission would not be required to overcome the objections of the administration claimants in Class A and Class B. These classes deal, respectively, with counsel fees, and with the trustees' certificates. Their treatment is hereinafter discussed. A more troublesome problem concerns the settlement and payment in cash of claims, up to the time of the consummation of the Plan, where that would be mutually beneficial to the claimant and to the estate. It is not unlikely that this problem could also have been resolved without a remand to the Commission, or by a very restricted remand limited to that matter.

A subsequent event of major impact, however, has altered this promising outlook and it now appears that it is necessary to remand the Plan and that it be held by the Commission in abeyance until the matter of price is determined with finality. The Three Judge Court in the Southern District of New York rendered its opinion on June 18, 1969, one judge dissenting in part, concerning the same issue of price dealt with by this Reorganization Court on May 28th; but that court approached the most important issues in a substantially different manner and reached a widely different result. The additional price to be paid by Penn Central, as fixed by this Reorganization Court, is approximately $29 million more than the Commission by its Fourth Supplemental Report ordered Penn Central to pay. The Three Judge Court's majority opinion, however, approved in substance the Commission's order although it directed the Commission to serve a proposed decree, which "among other things, shall reflect in dollar amounts the changes directed in this opinion". Pursuant thereto the Commission by its Fifth Supplemental Report and Order of July 10, 1969, service date July 11, 1969, 334 I.C.C. 528, purported to increase by $5.33 million the consideration to be paid by Penn Central. But erroneously included in this ostensible price increase is $3.38 million, which represents a debt due by Penn Central to New Haven for the latter's one-half interest in the excess income of the Grand Central Terminal properties for 1967 and 1968, and is not a part of the price to be paid by Penn Central for New Haven's assets. Since the Three Judge Court has not yet acted upon the Commission's Fifth Supplemental Report, it is not known whether it agrees with the position of this, the Reorganization Court, although its opinion reads as if it were in accord. Be that as it may, the increase in price ordered by the Commission's Fifth Supplemental Report is only $1.95 million; and, therefore, the present price differential between the Reorganization Court and the Commission is approximately $27 million.

This price difference alone makes appeals and cross-appeals from both courts inevitable. If this conclusion needs buttressing, it is supported by at least three additional factors:

(1) The payment by Penn Central and receipt of the consideration by New Haven on December 31, 1968, as heretofore mentioned, was without prejudice to the right of any party (including Penn Central) to contest the fairness and adequacy of the consideration.

(2) The ultimate value of New Haven's interest in the Grand Central Terminal properties might far exceed that which this court has found. Take, for example, only one item, although a major one, and that is the value of New Haven's right of access to the Grand Central Terminal, which the I.C.C. found to be of no value — a determination which this court finally concluded in its Memorandum of May 28, 1969, could not be disturbed, although in its opinion of August 13, 1968 (289 F.Supp. 451, at 463), it was of the view that on remand the I.C.C. should reconsider on the basis that the New Haven's right was valuable. If on appeal the existence of such a right were to be recognized, the evidence presently in the record would show a potential worth of approximately $70 million.

(3) The price of $87.50 attached by the Commission and this court to the Penn Central stock for purposes of partially satisfying Penn Central's obligation to New Haven raises a serious issue, even though this court provided a formula for payment in its Memorandum of May 28, 1969, which has since been adopted in substance by the I.C.C. in its Fifth Supplemental Report.

The ultimate matter of price is far too much at large for the Reorganization Court presently to determine whether the Plan of Reorganization "affords due recognition to the rights of each class of creditors", § 77(e), which includes not only the bondholders but also one other pre-reorganization class of claimants — claims of state and local authorities for pre-reorganization secured tax claims (Class H)—and six classes (Class A through Class F, inclusive)¹ of administration claimants. Further, if this court were now so venturesome as to approve the Plan in substance, how could the various classes of creditors vote intelligently on it? It is abundantly clear in the present posture of the case that approval must await a final determination as to price and, presumably, that issue can be definitely determined only by the Supreme Court, unless a settlement between the parties in litigation can be effected and approved by this court and other authorities, if necessary.

Some comment and rulings on the distributive, or Step II, provisions of the Plan are, however, in order. First the three matters in the Plan to which reference has been made will be discussed: counsel fees, trustees' certificates, and settlement, even after approval of the Plan, of certain other claims. This done, there will follow a discussion of certain other matters.

Counsel Fees and Trustees' Certificates

Section II of the Plan classifies administration claims, within which these two types of asserted obligations are included, as follows:

"Class A. — Costs and expenses incurred in connection with the reorganization proceedings and the plan, as may be fixed by the Commission and allowed by the court in accordance with the provisions of sections 77(c) (2) and 77(c) (12) of the Bankruptcy Act.

"Class B. — Trustees' certificates."

Section V of the Plan then provides for the method of payment of such claims as follows:

"1. Administration claims.

"Class A. — Payment of expenses and allowances, as distinguished from fees, shall be made in cash. Fees shall be paid by issuance and delivery of installment notes equal in principal to the claims at the effective date or as

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