Matter of New York, New Haven and Hartford R. Co.
| Decision Date | 14 April 1980 |
| Docket Number | No. 30226.,30226. |
| Citation | 4 BR 758 |
| Parties | In the Matter of The NEW YORK, NEW HAVEN AND HARTFORD RAILROAD COMPANY, Debtor. |
| Court | U.S. District Court — District of Minnesota |
James Wm. Moore, New Haven, Conn., and Joseph Auerbach and Morris Raker of Sullivan & Worcester, Boston, Mass., for Richard Joyce Smith, trustee.
Lawrence W. Iannotti and Irving S. Schloss of Tyler, Cooper, Grant, Bowerman & Keefe, New Haven, Conn., for Lawrence W. Iannotti, Successor Trustee under the Debtor's First and Refunding Mortgage.
Lester C. Migdal and Lawrence W. Pollack of Migdal, Tenney, Glass & Pollack, New York City, for Debtor's First Mortgage 4% Bondholders Committee.
Elaine S. Amendola, of Zeldes, Needle & Cooper, Bridgeport, Conn., for Jacob D. Zeldes, Successor Trustee under the Debtor's General Income Mortgage.
Alfred Berman of Guggenheimer & Untermyer, New York City, for Regina Gruss.
John A. Friedman of Kaye, Scholer, Fierman, Hays & Handler, New York City, for Reliance Group, Inc.
TABLE OF CONTENTS
Page
I. HISTORY OF THE NEW HAVEN REORGANIZATION .................... 760
II. AMENDED PLAN OF REORGANIZATION OF THE NEW HAVEN ............ 767
A. THE REORGANIZED COMPANY ................................ 767
B. CLASSIFICATION OF CLAIMS AND INTERESTS AND
TREATMENT PROVIDED ..................................... 768
Class A Claims ....................................... 768
Class B Claims ....................................... 768
Class C and Class F Claims ........................... 768
Class D Claims ....................................... 770
Class E Claims ....................................... 770
Class I and Class J Claims ........................... 770
III. CLASS G AND CLASS H CLAIMS ................................. 770
A. THE PARTIES' VALUATION OF THE NEW HAVEN ESTATE ......... 772
The Trustee's Methodology ............................ 773
The First Mortgage Bondholders' Methodology .......... 785
The Income Bondholders' Methodology .................. 789
B. THE COURT'S RULINGS ON VALUATION ....................... 790
Cash ................................................. 791
The Securities ....................................... 791
Intangibles .......................................... 796
C. THE COURT'S RULINGS ON CLAIMS .......................... 797
D. DISTRIBUTION ........................................... 800
IV. RESERVATION OF JURISDICTION ................................ 800
On July 7, 1961, the New York, New Haven & Hartford Railroad Company ("New Haven") filed a petition for reorganization under Section 77 of the Bankruptcy Act, 11 U.S.C. § 205, in the United States District Court for the District of Connecticut. At the time the New Haven was a financially derailed and wrecked railroad. For the next 17 years, Chief Judge Robert P. Anderson, later Circuit Judge, painstakingly presided over the reorganization proceedings with extraordinary skill, patience, common sense, and perspicacity. The voluminous record discloses thousands of pages of petitions, briefs, moving papers, exhibits, transcripts of hearings, and other documents. Judge Anderson's numerous decisions and orders speak eloquently of his wise and effective judicial performance over the years in salvage efforts of the New Haven, with the result that it now emerges from the ruins with prospects of being a remarkably healthy enterprise of substantial value.
By May 1978, Judge Anderson had set in motion the procedural steps necessary to reorganize the New Haven and to terminate finally this complex and difficult case. Unfortunately, he died on May 2, 1978, and the matter was assigned to this Court for resolution.
In 1935 the New Haven first went into reorganization under Section 77 of the Bankruptcy Act and emerged 12 years later with a capitalization in part of 1) $95,703,700 principal amount of series A first and refunding mortgage bonds due July 1, 2007, bearing interest at the rate of 4 percent per annum, and 2) $87,881,500 principal amount of general mortgage income series A bonds, due July 1, 2022, bearing contingent interest at the rate of 4½ percent per annum.1 At the time, with some 1,500 miles of line extending from Boston to New York, it was the largest railroad in New England and the sixth largest in the Northeast region.2
After a few years of superficial prosperity, the financial condition of the New Haven again deteriorated. By 1961, with current liabilities exceeding current assets by over $36,000,000 and losing cash at the annual rate of $18,000,000, the company filed a petition for reorganization under Section 77.3 Judge Anderson approved the petition and three trustees were appointed to administer the rapidly declining railroad.4
There were three possible courses of action for the parties: 1) seek termination of the operations of the transportation system and liquidation of the assets; 2) sell the bankrupt railroad to other profitable carriers; or 3) merge with a larger successful trunkline railroad.5
Since it was immediately apparent that no other railroad was interested in purchasing the debt-ridden New Haven, Judge Anderson gave careful and thoughtful consideration to the remaining options. Initially it appeared that "the value of the property in the estate of the Debtor as a going concern should exceed by far its value for purposes of liquidation," and, therefore, he approved continued operations for the public good and in the interests of creditors.6 Through "life-sustaining transfusions of credit,"7 the trustees maintained the system's passenger and freight lines.
Despite spartan economies and a sizeable reduction in the number of employees, staggering losses continued to mount and it soon became obvious that no reorganization plan that contemplated the New Haven as an independent operating business would be feasible.8 Liquidation was deemed detrimental to the public interest9 and, therefore, merger with a large, financially healthy railroad seemed to be the most logical and promising means of sustaining the New Haven's transportation system.10
When the Pennsylvania Railroad and the New York Central Railroad applied to the Interstate Commerce Commission for permission to merge on March 9, 1962, the New Haven trustees promptly sought inclusion in a merged Penn Central system, both by private negotiations and by a petition to the Commission filed June 26, 1962.11 As noted by Judge Anderson, the "inclusion of the New Haven in the Penn Central merger was the only salvation for the New Haven as an operating railroad." In re New York, N.H. & H.R.R., 289 F.Supp. 451, 456 (D.Conn.1968).
On April 6, 1966, after more than four years of deficit operations by the New Haven, the Commission approved the Penn Central merger, subject to the condition that the merged railroad would purchase essentially all of the assets of the New Haven.12 In addition, the Commission directed that a plan for inclusion of the New Haven in the Penn Central system be filed by October 27, 1966, upon such fair and equitable terms and conditions as the Commission might determine, subject to the approval of the reorganization court.13 On April 21, 1966, a Purchase Agreement was executed between the New Haven trustees and representatives of the merging railroads by which the Penn Central would acquire the properties of the New Haven for a consideration consisting of cash, Penn Central stocks and bonds, and the assumption of certain of the New Haven's obligations.14
In October 1966, the New Haven trustees filed with the Commission a "two-step" plan of reorganization which provided for 1) the New Haven's assets to be sold to the Penn Central, and 2) thereafter, a determination of fair and equitable terms for the treatment of security holders. Certain creditor interests litigated the expenditure of the assets of the New Haven to implement the plan and in 1967, the Second Circuit ruled that the merits of the two-step process should be postponed until the Commission certified a plan to the reorganization court.15
On November 19, 1967, after an independent review, the Commission concluded that $125 million was a fair and equitable price for the sale of the New Haven's assets under the Purchase Agreement.16 This finding was promptly challenged by different classes of the New Haven's bondholders which on January 23, 1968, commenced a series of actions before a three-judge district court in the Southern District of New York to set aside the Commission's order.17 Shortly after the merger of the Pennsylvania and New York Central railroads on February 1, 1968, the Commission certified Step I of the reorganization plan for the New Haven — the sale of the New Haven's assets to Penn Central — to the reorganization court.18 The New Haven bondholders, pursuant to Section 77(e) of the Bankruptcy Act, responded with objections to the plan and, thus, the identical question concerning the price Penn Central would have to pay the New Haven was the subject of judicial review simultaneously in the reorganization court in this District and the three-judge district court in New York. Subsequently, both courts determined that the Commission had substantially undervalued the New Haven's assets to be conveyed and remanded the issue to the Commission for further proceedings. New York, N.H. & H.R.R., First Mortgage 4% Bondholders' Committee v. United States, 289 F.Supp. 418 (S.D.N.Y. 1968); In re New York, N.H. & H.R.R., supra,...
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