In re Penn Central Transportation Company

• Court: Special Court — Regional Rail Reorganization Act
• Writing for the Court: FRIENDLY, Presiding
• Citation: 384 F. Supp. 895
• Docket Number: No. 74-8,74-12,74-11,74-6,74-10,74-7 and 74-9.
• Decision Date: 30 September 1974
• Parties: In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor. In the Matter of The UNITED NEW JERSEY RAILROAD AND CANAL CO. and Other Secondary Debtors of Penn Central Transportation Company, Debtor. In the Matter of LEHIGH VALLEY RAILROAD COMPANY, Debtor. In the Matter of The CENTRAL RAILROAD COMPANY OF NEW JERSEY, Debtor. In the Matter of The LEHIGH AND HUDSON RIVER RAILWAY COMPANY, Debtor. In the Matter of READING COMPANY, Debtor. In the Matter of The ANN ARBOR RAILROAD COMPANY, Debtor.

384 F. Supp. 895

In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor In the Matter of The UNITED NEW JERSEY RAILROAD AND CANAL CO. and Other Secondary Debtors of Penn Central Transportation Company, Debtor In the Matter of LEHIGH VALLEY RAILROAD COMPANY, Debtor In the Matter of The CENTRAL RAILROAD COMPANY OF NEW JERSEY, Debtor In the Matter of The LEHIGH AND HUDSON RIVER RAILWAY COMPANY, Debtor. In the Matter of READING COMPANY, Debtor. In the Matter of The ANN ARBOR RAILROAD COMPANY, Debtor.

Nos. 74-8, 74-12, 74-11, 74-6, 74-10, 74-7 and 74-9.

Special Court. Regional Rail Reorganization Act.

Argued August 27 and 28, 1974.

Decided September 30, 1974.

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Before FRIENDLY, Presiding Judge, and McGOWAN and THOMSEN, Judges.

FRIENDLY, Presiding Judge:

We have here a number of appeals from orders of district courts under the second sentence of ? 207(b) of the Regional Rail Reorganization Act of 1973 (generally hereafter the Act), 87 Stat. 985 (1974), which subsection we quote in its entirety in the margin.¹ The district courts made the orders in the reorganization proceedings under ? 77 of the Bankruptcy Act which were before them. Appendix A to this opinion lists the various appellants and appellees and counsel for them.

In the first five cases in the caption ?€” those dealing with the Penn Central, the Penn Central secondary debtors, the Lehigh Valley (LV), the Central Railroad of New Jersey (CNJ), and the Lehigh & Hudson River Railway (L&H) ?€” the respective judges² concluded that the Act "does not provide a process which would be fair and equitable to the estate of the railroad in reorganization . . . ."³ In the cases of the Reading and the Ann Arbor, Judge Ditter in the District Court for the Eastern District of Pennsylvania and Judge Pratt in the District Court for the Eastern District of Michigan took a contrary view and ordered that reorganization should proceed under the Act.⁴

Broadly speaking, the parties who are appellants in the first five cases ?€” the United States, the Interstate Commerce Commission, the United States Railway Association (USRA), and railroad labor organizations ?€” are appellees in the last two, whereas creditor and stockholder interests support the orders in the first five cases and attack those in the Reading and Ann Arbor proceedings.⁵ The Penn Central trustees support the Act only if the Supreme Court rules that a remedy under the Tucker Act is available. See Parts VII and VIII infra. In two other ? 77 proceedings which the Judicial Panel on Multi-district Litigation referred to us by its order of March 1, 1974,⁶ those concerning the Erie-Lack-awanna, in the District Court for the Northern District of Ohio, and the Boston & Maine, in the District Court for the District of Massachusetts, the respective judges⁷ entered orders under the first sentence of ? 207(b), finding that "the railroad is reorganizable on an income basis within a reasonable time under section 77 of the Bankruptcy Act (11 U.S.C. 205) and that the public interest would be better served by continuing the present reorganization proceedings than by a reorganization under this Act."⁸ Since these conclusions have not been contested by anyone, the Erie-Lackawanna and Boston & Maine cases are not before us.⁹ The court wishes to express its appreciation to counsel for their cooperation in limiting the number and size of briefs by allowing most of the major legal issues to be presented in the Penn Central appeal by counsel for the United States and its agencies; the Penn Central Trustees; institutional investors, indenture trustees, certain creditors, and shareholders of the Penn Central; and the New Haven trustee as a large creditor and stockholder of Penn Central.

The Act was a Congressional response to the threat to the national welfare posed by the bankruptcy of the railroads in the northeastern United States we have listed. The most dramatic was the bankruptcy of the Penn Central on June 21, 1970, little more than two years after consummation of its widely heralded merger.¹⁰ These bankruptcies differed from earlier railroad insolvencies in an essential respect. Whereas earlier insolvencies had typically been caused by inability to meet fixed charges or debt maturities,¹¹ the causes of current railroad bankruptcies in the northeastern region went much deeper; the roads were unable to pay taxes and operating expenses, even with substantial undermaintenance of plant which, in turn, led to revenue losses and increased expense, particularly for freight car hire.¹² Although it was at first believed that the problems of the Penn Central could be overcome within the existing legal framework,¹³ early in 1973 the Penn Central Trustees reported to the reorganization court that substantial governmental assistance, later quantified as between $600 and $800 million, was needed to improve Penn Central's plant and equipment in such a manner as to secure the traffic increases on which a successful income-based reorganization would depend. Trustees' Interim Report of February 1, 1973, at 1; Trustees' Interim Report of January 1, 1973, at 2 (submitted to Judge Fullam in In re Penn Cent. Trans. Co., Bky. No. 70-347, (E.D.Pa.1974)).

Congress thereupon passed a joint resolution, 87 Stat. 5 (1973), directing the Secretary of Transportation to submit within 45 days "a report which . . . provides a full and comprehensive plan for the preservation of essential rail transportation services in the Northeast. . . ." Id. at 6. The Secretary rendered a report on March 26, 1973. In the meantime, however, Judge Fullam had entered an order directing the Penn Central Trustees to file either a plan of reorganization or a proposal for liquidating the road. In re Penn Cent. Transp. Co., 355 F.Supp. 1343 (E.D.Pa., 1974). While acknowledging that "the legislative and executive branches of government must be looked to for solutions" of the problems of Penn Central, id. at 1345, he found those problems to be so severe that "the point of unconstitutionality is fast approaching, if it has not already arrived," id. at 1344, and suggested that it was "highly doubtful that the Debtor could properly be permitted to continue to operate on its present basis beyond October 1, 1973." Id. at 1346. Spurred by Judge Fullam's warning, see House Report at 27, Congress engaged in the extensive consideration which led to passage of the Act.

While the Act is titled a reorganization statute, its drafters acknowledged that the northeastern railroad problem cannot be solved simply by resort to the traditional procedures available under ? 77 of the Bankruptcy Act and the Interstate Commerce Act, 49 U.S.C. ? 1 et seq. (1970). See House Report at 29. The Act therefore contains provisions, of which more hereafter, designed to eliminate duplicative trackage of one or more railroads and also to permit abandonment of unprofitable mileage without the delays and uncertainties characteristic of proceedings under ? 1(18) of the Interstate Commerce Act, to provide governmental assistance in meeting the onerous labor protective conditions imposed by the Interstate Commerce Commission or provided in collective bargaining agreements, to assist in the sale of passenger facilities to the National Railroad Passenger Corporation (Amtrak) or state, local or regional authorities, and to provide funds for rehabilitation and modernization of neglected physical plant and for subsidy of non-economic service. Recognizing the existence of new problems, Congress devised imaginative and innovative solutions, in an endeavor to avoid the national disaster that would result from cessation of the bulk of railroad operations in the north-east.

The basic scheme of the Act is as follows: It relates to railroads in reorganization under ? 77 of the Bankruptcy Act in a region defined in ? 102(13), which may be generally described as the north-eastern United States from the Canadian border on the north to Virginia, West Virginia, and the Ohio River on the south, and from the Atlantic Ocean on the east to Michigan and Illinois on the west.¹⁴ The Act provides for two new entities. One is the United States Railway Association (USRA), a government nonprofit corporation of the District of Columbia. See generally Title II. USRA is vested with powers and duties of three major sorts: One is to develop a "final system plan," ? 202(a)(1), determining, inter alia, which rail properties of the bankrupt railroads that are to be reorganized under the Act shall be conveyed to Consolidated Rail Corporation (hereafter described), sold to profitable railroads operating within the region, purchased, leased, or otherwise acquired from the Corporation by Amtrak, purchased or leased from the Corporation by states or public transportation authorities for providing rail passenger service, or devoted to other public purposes; which rail properties of profitable railroads operating in the region may be offered for sale to the Corporation or other profitable railroads operating in the region; and what the consideration will be. ? 206(c), (d). The second is authority to issue obligations, not more than $1.5 billion of which shall be outstanding at any one time, guaranteed by the Secretary of Transportation, whose possible uses are described below. ? 210. A third is the power to make loans to assist in carrying out the Act. ? 211. The other new entity is a for-profit corporation, Consolidated Rail Corporation (Conrail), see generally Title III, established under the laws of a state, which "shall not be an agency or instrumentality of the Federal Government." ? 301(b). Conrail is to acquire and operate the rail properties provided for conveyance to it in the "final system plan." ? 302(a), (b).

After proceedings here unnecessary to detail, USRA is to submit to Congress a final system plan within 450 days of ...