In re Penn Central Transportation Company

• Decision Date: 02 July 1974
• Docket Number: No. 70-347.,70-347.
• Citation: 382 F. Supp. 856
• Parties: In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor. In re Proceedings for the REORGANIZATION OF A RAILROAD.
• Court: U.S. District Court — Eastern District of Pennsylvania

382 F. Supp. 856

In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor In re Proceedings for the REORGANIZATION OF A RAILROAD.

No. 70-347.

United States District Court, E. D. Pennsylvania.

July 2, 1974.

COPYRIGHT MATERIAL OMITTED

Covington & Burling by Charles A. Horsky and Brice Clagett, Washington D. C., and Paul R. Duke, John De Podesta, and John B. Rossi, Jr., Philadelphia, Pa., for the trustees, Penn Cent. Trans. Co.

Willkie, Farr & Gallagher by Louis A. Craco, and Walter H. Brown, Jr., New York City, and Ballard, Spahr, Andrews & Ingersoll by Frederic L. Ballard, Philadelphia, Pa., for Institutional Investors Penn Cent. Group.

Shearman & Sterling by Charles C. Parlin, Jr., New York City, and Fox, Rothschild, O'Brien & Frankel by Nochem S. Winnet, Philadelphia, Pa., for First National City Bank of New York.

James William Moore, Philadelphia, Pa., and Sullivan & Worcester by Joseph Auerbach, Morris Raker, and Charles W. Morse, Jr., Boston, Mass., and Gratz, Tate, Spiegel, Ervin & Ruthrauff by Spencer Ervin, Jr., Philadelphia, Pa., for Richard Joyce Smith, trustee, New York, New Haven & Hartford Railroad Co.

Wilmer, Cutler & Pickering by Lloyd Cutler, Washington, D. C., for U. S. Railway Ass'n.

Irwin Goldbloom, Deputy Asst. Atty. Gen., James F. Dausch, and Robert Ashbaugh, Washington, D. C., for the U. S. A.

David Berger, P. A. by David Berger, and Gerald Jay Rodos, Philadelphia, Pa., for Penn Cent. Co.

Leon Leighton, New York City, for minority stockholders of Mahoning Coal Railroad.

Morgan, Lewis & Dockius by Edward B. Cloues, II, Philadelphia, Pa., for the Fidelity Bank.

Curtin & Heefner by Edward I. Dobin, Morrisville, Pa., for Bank of New Jersey.

Kelley, Drye, Warren, Clark, Carr & Ellis by William Sorin, New York City, for Manufacturers Hanover Trust Co.

Gordon P. MacDougall, Washington, D. C., for Commonwealth of Pennsylvania.

John C. McTiernan, Albany, N. Y., for New York Dept. of Trans.

Mulholland, Hickey & Lyman by Geoffrey N. Zeh, Washington, D. C., for Railway Labor Executives' Ass'n.

Highsaw & Mahoney by William G. Mahoney, Washington, D. C., for Congress of Railway Unions.

Albert D. Brandon, Pittsburgh, Pa., for the City of Pittsburgh.

T. P. Shearer, Pittsburgh, Pa., for Pennsylvania State Legislative Board, United Trans. Union.

Theodore C. Knappen, Washington, D. C., for the Interstate Commerce Commission.

Collister Johnson, Jr., for Rail Services Planning Office, Interstate Commerce Commission.

Kenneth S. Levy, Deputy Atty. Gen., for the State of New Jersey.

MEMORANDUM IN SUPPORT OF FINDINGS AND ORDER NO. 1596 PURSUANT TO THE SECOND SENTENCE OF ž 207(b) of the Regional Rail Reorganization Act of 1973

FULLAM, District Judge.

I. Procedural Posture

After four years in reorganization under ž 77 of the Bankruptcy Act, the estate of the Penn Central Transportation Company has reached another crucial milestone. Pursuant to ž 207(b) of the Rail Reorganization Act of 1973 (hereinafter "RRRA" or the "ACT"), the reorganization court is required to determine whether or not the railroad "shall be reorganized by means of transferring some of its rail properties to the Corporation pursuant to the provisions of this Act." The Court is required to decide in favor of utilizing the RRRA unless it "finds that this Act does not provide a process which would be fair and equitable to the estate of the railroad in reorganization."

On June 25, 1974, in the case of Connecticut General Insurance Co., et al. v. United States Railway Association, et al., D.C., 383 F.Supp. 510, a three-judge court, of which the writer was one member, declared certain provisions of the RRRA to be unconstitutional, and granted an injunction partially restraining its enforcement. Specifically, the court held that the Act is unconstitutional insofar as it fails to provide compensation for the diminution in value of the Debtor's estate which would result from continuing losses from rail operations during the period preceding implementation of any Final System Plan under the statute.

The threshold question, therefore, is the effect of the Connecticut General holding upon the findings to be made by reorganization court under ž 207(b) of the Act. There are several possibilities. One would be to hold that, since the certification of a Final System Plan under the statute has now been enjoined, there is no "process" to be evaluated, and therefore no need for ž 207(b) findings at this time. But under ž 207(b) itself, implementation of which has not been enjoined, a failure by the reorganization court to make findings by July 1, 1974 would have the effect of requiring reorganization pursuant to the RRRA. A second possibility would be to treat the Connecticut General decision as controlling, and to hold that, since the statute is unconstitutional, it must obviously be found not to provide a process which is fair and equitable. But the majority of the Connecticut General court held that the issues as to the constitutional validity of the provisions of the RRRA concerning conveyances of rail properties pursuant to a Final System Plan were not yet ripe for decision. One of the reasons advanced for declining to reach those issues was the belief that reorganization courts might make 180-day findings on this subject which would preclude the possibility of such conveyances. It thus appears that the majority of the Connecticut General court did not regard its decision as obviating the necessity for ž 207(b) decisions by the reorganization courts.

At least two other factors must also be considered. The appeal period in the Connecticut General case has just commenced to run, and it would seem improvident to assume that there cannot possibly be any change in the situation during, or as the result of, the appellate process. Moreover, the Connecticut General case dealt only with issues of facial constitutionality, whereas the ž 207(b) process involves the actual application of the statute. Whether or not the conclusions reached must be the same, it would seem that a somewhat different approach is required.

For all of the foregoing reasons, I have concluded that a ž 207(b) determination should be made at this time and should be made on essentially the same basis as if the Connecticut General case had not been decided. However, rather than restate the analysis from my Connecticut General Opinion, that Opinion is incorporated herein.

II. Background

From the very outset of this reorganization proceeding, it was apparent that in order to achieve a successful financial reorganization, there would need to be drastic changes in the Debtor's operations and in the regulatory environment in which it functioned. The initial task of the Trustees was to ascertain the dimensions of the problem, and to keep the enterprise afloat while the necessary studies were being conducted. Faced with an immediate cash shortage, contributed to in large measure by a congressionally mandated wage settlement, the Trustees were unable to borrow money on trustees' certificates unless the certificates were to be guaranteed by the federal government. Congress responded to this initial crisis by passing the Emergency Rail Services Act of 1970, pursuant to which the Trustees were able to borrow $100 million from the private sector on the basis of government guarantees.

On February 10, 1971, seven months after their appointment, and shortly after their trustees' certificates were marketed, the Trustees filed their first report on the status of the reorganization. In that report, they stated:

". . . It is a fact that Penn Central is presently locked by circumstances beyond managerial control into a situation which had best be recognized now as completely precluding viability unless certain constraints are removed, or other arrangements are made to compensate for their effect" (emphasis in original).

The Trustees identified four areas in which changes were necessary: (1) elimination of losses on passenger service; (2) rationalization of the freight plant through elimination or subsidy of uneconomic lines; (3) more flexible rate and division procedures; and (4) improved labor productivity through reduction of excess employees. For convenience, these goals are referred to as "conditions to viability." Within a few months thereafter, the Trustees, aided by expert consultants, had reached a tentative conclusion that reduction of the total route mileage of the Penn Central system by about 40% (i.e., to a "core" of 12,000 to 15,000 miles) would probably be required in order to make the remaining system viable. Every study since that time, including the preliminary report of the DOT and the report of the Rail Services Planning Office of the ICC filed pursuant to the RRRA, has been consistent with that view.

Beginning in 1971, and continuing until immediately before enactment of the RRRA, the efforts of the Trustees were directed to attempting to achieve the conditions of viability. They met with limited success in some areas and near total failure in others. Through negotiations of contractual arrangements with Amtrak and various regional commuter authorities, the Trustees succeeded in substantially reducing, although not eliminating, the losses on passenger service. But available abandonment procedures failed to produce prompt disposition of abandonment applications. On the labor front, a nationwide settlement of the longstanding fireman-manning dispute provided some improvement, but persistent disputes over the appropriate sizes of train crews, and over work rules, were not resolved. The Trustees' reports of February and October 1972 stressed the need for greater progress in achieving the conditions to viability.

In their January 1973 report, the Trustees reported that, as a result of interim losses and the condition of the physical plant, substantial government funds would be needed in order to make the Penn Central viable within a permissible time period. At...