In re Penn Central Transportation Company, 70-347.
| Decision Date | 20 October 1972 |
| Docket Number | No. 70-347.,70-347. |
| Parties | In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor. In re SALE OF PARK AVENUE PROPERTIES. |
| Court | U.S. District Court — Eastern District of Pennsylvania |
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Covington & Burling by Charles Horsky, Washington, D. C., and Blank, Rome, Klaus & Comisky by Marvin Comisky, and Dennis Faucher, Robert W. Blanchette, and Edwin K. Taylor, Philadelphia, Pa., for the trustees, Penn Central Transportation Co Sullivan & Worcester, New York City by Joseph Auerbach, Boston, Mass., and Tate & Ervin by Spencer Ervin, Jr., Philadelphia, Pa., for Richard Joyce Smith, trustee, New York, New Haven & Hartford Railroad.
Cornelius C. O'Brien, Jr., Philadelphia, Pa., for Beatrice Brown.
Kelley, Drye, Warren, Clark, Carr & Ellis by Edward Roberts, III, and Robert L. Crawford, New York City, for Manufacturers Hanover Trust Co., as indenture trustee.
Ballard, Spahr, Andrews & Ingersoll by Richardson Blair, and Alan S. Fellheimer, Philadelphia, Pa., for Girard Trust Bank.
Ballard, Spahr, Andrews & Ingersoll by Frederic L. Ballard, and Alan S. Fellheimer, Philadelphia, Pa., for Morgan Guaranty Trust Co., as R & I indenture trustee.
Fox, Rothschild, O'Brien & Frankel by Nochem S. Winnet, Philadelphia, Pa., White & Case by Robert L. Clare, III, New York City, for Bankers Trust Co. and Morgan Guaranty Trust Co. of New York, as trustee of the Lake Shore collateral mortgages.
Davis, Polk & Wardwell by John R. Leekley, New York City, for Morgan Guaranty Trust Company of New York, as Harlem indenture trustee.
Wolf, Block, Schorr & Solis-Cohen by Michael L. Temin, Philadelphia, Pa., for First Pennsylvania Banking & Trust Company, as indenture trustee.
Morgan, Lewis & Bockius by John N. Schaeffer, Jr., Philadelphia, Pa., for The Fidelity Bank.
Willkie, Farr & Gallagher by Walter H. Brown, Jr., New York City, for Institutional Investors, Penn Central Group.
Clark, Ladner, Fortenbaugh & Young by W. Charles Hogg, Jr., and Edward C. Toole, Jr., Philadelphia, Pa., for Atchison, Topeka & Santa Fe Railway Co., Burlington Northern, Inc., Chicago & Eastern Illinois Railroad, and Soo Line Railroad Co.
The Trustees seek authorization to sell certain major real estate holdings of the Debtor located in the Park Avenue area of the City of New York, for prices totalling $59,549,000. Conditional or absolute objections to some or all of the proposed sales have been interposed by several interested parties, on a variety of legal and factual grounds.
The following issues, directly or indirectly related to the proposed sales, are presented for decision:
Issues applicable generally:
1. Would the proposed sales, as a matter of business judgment, be in the best interests of the Debtor's estate and its reorganization?
(a) Should the sales be approved on the assumption that the Trustees cannot or will not disaffirm existing leases?
2. Does § 77(o) of the Bankruptcy Act empower the Court to approve the proposed sales, or must approval await the adoption of a reorganization plan?
3. May the proposed sales be carried out without the consent of the New Haven Trustee?
4. Are the trustees entitled to use the income from the properties for operating expenses, or must the income be sequestered, either
(a) by reason of the rights of the New Haven trustee? or
(b) by reason of the rights of certain indenture trustees?
Issues applicable to properties leased from the New York and Harlem Railroad Company ("Harlem")
5. Is the Harlem lease valid and subsisting?
6. May the Trustees affirm the Harlem lease, or may the Harlem now terminate it instead?
(a) If the Trustees affirm the lease, does this require present payment of the (accelerated) principal of the bonds secured by the Harlem mortgages?
(b) If the Trustees affirm the lease, must they now pay dividends on the Debtor's Harlem stock pledged as collateral for the R&I mortgage?
7. May the Trustees carry out the proposed sales without the consent of the Harlem?
8. May the Trustees carry out the proposed sales without the consent of the indenture trustees of the Harlem mortgages?
For the reasons hereinafter expressed, I have concluded that the proposed sales may lawfully be consummated at this time, that whether they should or should not be authorized is primarily a matter of business judgment, and that certain of the sales should be approved, while others should not.
Because of the magnitude of the transactions and the complexity of the issues involved, it is necessary to set forth the facts in some detail.
1. The Debtor's estate includes various real estate holdings in the Borough of Manhattan, in the City of New York, commonly known as the Park Avenue Properties (the "Properties").
2. In general, the Debtor has constructed rail facilities below the street level of these properties. The use of the subsurface rights for the Debtor's rail operations has not detrimentally affected the value or usefulness of the surface and air rights for commercial development.
3. The Properties have been developed during this century for office or hotel use.
4. The Debtor's interests in the Properties are of two kinds: fee interests originally acquired by the Debtor's corporate predecessors; and leasehold rights under a 401-year lease executed in 1873 by the New York and Harlem Railroad Company (the "Harlem") in favor of the New York Central and Hudson River Railroad Company. Certain of the Properties were developed on parcels in which the Debtor has combined fee and leasehold rights.
5. The Trustees own the fee interest in the following Properties either directly or through a wholly-owned subsidiary:
6. The Harlem owns the fee interest in the following, subject to the Trustees' leasehold interest pursuant to the Harlem lease:
7. In the majority of cases the Debtor's estate is the lessor under long-term ground leases, the improvements having been constructed by the ground lessee or other entity.
8. The annual cash flow to the Debtor from the Properties is subject to fluctuations occasioned by the participation provisions or similar arrangements found in many of the ground leases. The actual rental payment received by the Debtor from the Properties exclusive of tax payments made directly to the City of New York under the respective leases or pursuant to orders of this Court is approximately $20 million to $22 million per annum. Capital improvements to the hotels cost the Debtor between $2 million and $3.5 million per annum, and the Debtor's annual tax liabilities on the Properties, over and above taxes paid directly by the lessees total approximately $6.5 million per annum.
9. Assuming continued deferral of taxes, the annual cash flow from the Properties is in the area of $16 to $17 million. If taxes were to be paid on a current basis, the cash flow would be about $10 to $11 million per year.
10. The Trustees' fee interests and leasehold rights in the Properties are subject to three mortgages known as the Hudson River Mortgages:
a. The New York Central & Hudson River Railroad Company 3½% mortgage dated June 1, 1897;
b. The New York Central and Hudson River Railroad Company Consolidated Mortgage dated June 20, 1913;
c. The New York Central and Hudson River Railroad Company Refunding and Improvement Mortgage dated October 1, 1913 ("R & I Mortgage").
11. Security for the Hudson River Mortgages consists in part of approximately 2,000 route miles and 4,000 track miles of the Central's operating property east of Buffalo. The R & I Mortgage is also secured by a lien of various rankings on an additional 1,700 route miles and 3,500 track miles as well as a lien on the Debtor's leasehold rights under six lease agreements covering 2,300 route miles and 4,200 track miles.
12. Definitive segregation studies are not available to determine the losses incurred by various segments of the Debtor's system. It is estimated that the losses on the line constituting the security for the Hudson River Mortgages is equal to or greater than the annual cash flow from Park Avenue Properties.
13. The Harlem's reversionary fee interest in the Properties is subject to two mortgages:
a. The New York and Harlem Railroad Company 3½% Gold Bond Mortgage dated June 1, 1897;
b. The New York and Harlem Railroad Company 4% Mortgage dated July 1, 1943 (the Second Harlem Mortgage).
14. In May of 1971, the Trustees decided to solicit bids for the Properties in order to determine whether any or all of the Properties could be sold for prices consistent with fair market value. On June 21, 1971, the Trustees authorized the issuance of an invitation to the public to submit bids, not later than October 15, 1971, for the purchase of any one or more of the Properties.
15. The Trustees were not bound to accept any bids. Evaluations of the bids and decisions to accept or reject the bids were made by the Trustees upon recommendations of in-house personnel, and two retained consultants, Mr. John Guest of the Trustees' financial consultants, Kuhn, Loeb & Company, and the Trustees'...
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Matter of Penn Central Transp. Co.
...that the dividends on the pledged stock need not be paid as a condition of affirmance. In re Penn Central Transp. Co. (Sale of Park Avenue Properties), 354 F.Supp. 717, 736-37 (E.D.Pa.1972), aff'd in part and rev'd in part, 484 F.2d 323 (3d Cir.), cert. denied, 414 U.S. 1079, 94 S.Ct. 598, ......
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In re Penn Central Transportation Company
...in banc. Circuit Judges VAN DUSEN and ALDISERT join in the foregoing opinion. 1 In the Matter of Penn Central Transportation Company (Sale of Park Avenue Properties), 354 F.Supp. 717 (E.D.Pa. 1972). 2 The six properties which the Trustees sought to sell 52 Vanderbilt Avenue 280 Park Avenue ......
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In re Penn Central Transportation Company
...to the judge petitions . . . for authority . . . to sell any such property. . . ." In In Matter of Penn Central Transportation Co. (Sale of Park Avenue Properties), 354 F.Supp. 717 (E.D.Pa., 1972), I expressed the view that § 77(o) authorizes the sale of income-producing assets, in appropri......
- IN RE PENN CENTRAL TRANSPORTATION COMPANY, 70-347.