Penn Cent. Transp. Co., Matter of

• Decision Date: 01 October 1913
• Citation: 596 F.2d 1102
• Parties: Bankr. L. Rep. P 67,103 In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor. Appeal of the BANK OF NEW YORK, as successor trustee under the New York Centraland Hudson River Railroad Company Refunding and Improvement Mortgage dated
• Court: U.S. Court of Appeals — Third Circuit

Page 1102

596 F.2d 1102

Bankr. L. Rep. P 67,103

In the Matter of PENN CENTRAL TRANSPORTATION COMPANY, Debtor Appeal of the BANK OF NEW YORK, as successor trustee under the New York Centraland Hudson River Railroad Company Refunding and Improvement Mortgage datedOctober 1, 1913, in Nos. 78-1692, 78-1693, 78-1694, 78-2316, 78-2317 and 78-2318 Appeal of the IRVING TRUST COMPANY, as Indenture Trustee, in Nos. 78-1698 and78-2314 Appeal of Harriet SIGNER, Seymour Gillman, Anne Frank and McMaster Holding Co., in No. 78-1716.

Nos. 78-1692 to 78-1694, 78-1698, 78-1716, 78-2314, 78-2316

to 78-2318.

United States Court of Appeals Third Circuit.

Argued Oct. 16 and 17, 1978.

Decided Jan. 11, 1979.

J. Donald McLeod, Dahlberg, Mallender & Gawne, Detroit, Mich., for appellant Manufacturers Nat. Bank of Detroit, as Indenture.

Richard G. Elliott, Jr., Richards, Layton & Finger, Wilmington, Del., for appellant Wilmington Trust Co.

Emil T. Bayko, White & Case, New York City, for appellant Bankers Trust Co.

Mary Ellen Neylon, Tyler, Reynolds & Craig, Boston, Mass., for appellant Charles S. Jeffrey.

Cletus P. Lyman, Lyman & Ash, Philadelphia, Pa., for Joseph A. Schafer.

Larry M. Lavinsky, James J. Fuld, Philip M. Hahn, Gary B. Bettman, New York City, for appellant The Bank of New York, as Indenture Trustee; Proskauer, Rose, Goetz & Mendelsohn, New York City, of counsel.

Stephen A. Weiner, Winthrop, Stimson, Putnam & Roberts, F. Martin Bowne, Windels, Marx, Davies & Ives, New York City, for appellant Irving Trust Co., as Indenture Trustee.

Donald S. Reisman, Max Rothenberg, Hallandale, Fla., for appellants Harriet Signer, et al.

Charles A. Horsky, W. Crosby Roper, Jr., Brice M. Clagett, Washington, D. C., James E. Howard, John J. Ehlinger, Jr., Philadelphia, Pa., for the Trustees of Penn Cent. Transp. Co.; Covington & Burling, Philip R. Stansbury, Wesley S. Williams, Jr., Wynne M. Teel, Washington, D. C., Carl Helmetag, Jr., Philadelphia, Pa., of counsel.

Louis A. Craco, Willkie Farr & Gallagher, New York City, Frederic L. Ballard, Ballard, Spahr, Andrews & Ingersoll, Philadelphia, Pa., for Institutional Investors Penn Central Group; Walter H. Brown, Jr., Thomas L. Bryan, Michael B. Targoff, Richard L. Posen, New York City, Vincent P. Hatton, Philadelphia, Pa., of counsel.

George J. Wade, Shearman & Sterling, New York City, for Citibank, N.A., as Agent for the Committee of Secured Bank Creditors; Robert H. MacKinnon, Kenneth M. Kramer, New York City, of counsel.

Morris Raker, Sullivan & Worcester, Boston, Mass., for Richard Joyce Smith, Trustee of the Property of the New York, New Haven and Hartford Railroad Co., Debtor; Joseph Auerbach, Boston, Mass., of counsel.

Walter C. Kelley, Jr., Donald B. McCann, Margaret Anne Foster, Kelley, McCann & Livingstone, Cleveland, Ohio, for Board of Ed., Cleveland City School Dist.

Jerome K. Walsh, Richard M. Auerbach, Walsh & Frisch, New York City, for appellee George W. Betz, Jr., Trustee of the Property of the Cleveland, Cincinnati, Chicago and St. Louis Railway Co., Secondary Debtor.

Before ALDISERT, GIBBONS and HIGGINBOTHAM, Circuit Judges.

OPINION OF THE COURT

GIBBONS, Circuit Judge:

We deal in this opinion with appeals by two indenture trustees, representing four secured bond issues, from orders of the district court approving and confirming the Amended Plan of Reorganization of Penn Central Transportation Company (PCTC or the Debtor) and related debtors in reorganization under § 77 of the Bankruptcy Act, 11 U.S.C. § 205. ¹ Judge Aldisert's opinion in In re Penn Central Transportation Co. (Reorganization Plan Appeals), 596 F.2d 1127, Nos. 78-1698/1700, 78-1702/03, 78-1710, 78-2311/12, 78-2314/15 and 78-2319/20 (3d Cir. January 11, 1979), filed simultaneously herewith, rejects challenges by other secured creditors to the Plan of Reorganization. Reference is made to that opinion for an account of the history of the proceedings, and a description of the debtor estates, the structure of the Plan, and the legal justifications for that structure. Judge Higginbotham's opinion in In re Penn Central Transportation Co., 596 F.2d 1155 (Stockholder Appeals ), Nos. 78-1715, 78-2321, and 78-2336 (3d Cir. January 11, 1979) rejects challenges to the Plan made on behalf of shareholders in the Penn Central Company, the Debtor's sole stockholder.

This opinion considers specific objections to the treatment of certain secured creditors. ^1a The Irving Trust Company is indenture trustee under a Collateral Trust Indenture dated April 15, 1965, made by New York Central Railroad Company (a predecessor of the Debtor) securing a claim of $7,800,000 principal amount of New York Central 6% Bonds due April 15, 1990 (the New York Central 6's). It is also trustee under a Collateral Trust Indenture dated April 15, 1968, made by Penn Central Company (a predecessor of the Debtor) securing a claim of.$7,641,800 principal amount of Penn Central 61/2% Bonds due April 15, 1993 (the Penn Central 61/2's). Finally, Irving Trust is successor indenture trustee under a First Mortgage dated July 1, 1892, made by The Mohawk and Malone Railway Company (a predecessor of the Debtor), which secures a claim of $1,489,000 principal amount of 4% Gold Bonds due September 1, 1991 (the Mohawk & Malone Bonds). Interest arrearages on the Mohawk & Malone Bonds total $478,000 as of December 31, 1977. The Bank of New York is successor indenture trustee under The New York Central and Hudson River Railroad Company Refunding and Improvement Mortgage of October 1, 1913 (the R & I Mortgage). That mortgage secures a claim of $214,470,000, representing $125,351,000 41/2% Series A Bonds and $89,119,000 5% Series C Bonds held by the public. Appellant Harriet Signer is a holder of R & I Bonds.

The indenture trustees representing these creditors do not object to the basic structure of the Plan of Reorganization, but only to the allocation of securities to them within that structure. The three Irving Trust issues all of which were accorded "super secured" status in the final Plan contend that the distributions proposed to be made to them under the Plan do not provide them with compensation that is the equitable equivalent of the well-secured claims that they will be required to surrender. Therefore, they contend, the Plan violates the rule of absolute priority, originally applied in diversity railroad equity receiverships, Northern Pacific Ry. v. Boyd, 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931 (1913), and subsequently in proceedings under § 77 as well. E. g., Group of Institutional Investors v. Chicago, M., St. P. & Pac. R.R., 318 U.S. 523, 63 S.Ct. 727, 87 L.Ed. 959 (1943). The R & I bondholders' more modest assertion is that the proposed distribution to them is insufficient because of the Plan's failure to treat certain assets of the estate as properly subject to the lien of the R & I Mortgage. We will deal with these distinct contentions separately under the captions "I. The Irving Trust Appeals" and "II. The R & I Appeal." Our resolution of these issues, which requires some modification of the distributions to these appellants, does not affect the confirmation or consummation of the Plan.

I. THE IRVING TRUST APPEALS

A. THE FACTUAL SETTING

1. The Claims and Their Underlying Security

The claims of the two Collateral Trust Bond issues, ² although they differ slightly in their details, are essentially similar. The New York Central 6's have a claim of $7,800,000 principal amount. As of December 31, 1977, accrued unpaid interest on the bonds amounted to $332,000. That claim is secured by 78,000 shares of the capital stock of the Pittsburgh & Lake Erie Railroad Co. (P&LE) pledged under the Trust Indenture. The P&LE is an independent, profitable railroad, 92.61% Of whose stock is held by the Debtor. None of the Debtor's P&LE stock was conveyed to ConRail pursuant to the Regional Rail Reorganization Act (RRRA). The Trustees treated the P&LE stock, for purposes of the Plan, as having a value of $100.15 per share, and the reorganization court, by confirming the Plan, implicitly approved that valuation. ^2a While there was conflicting evidence as to the value of the stock, we think that the Trustees' proposed valuation, approved by the reorganization court, is not clearly erroneous, and we adopt it here. In addition, the 6's are secured by $3,900,000 principal amount of R & I 5% Series C Bonds. In the Plan, these bonds are treated as secured by retained assets to the extent of 35.9% Of their face amount. Based on these figures, the value of the retained asset security underlying the claim of the New York Central 6's is $9,211,800. Their ratio of retained asset security to secured debt is thus 113.28%.

The Penn Central 61/2's have a claim of.$7,641,800 principal amount, and accrued interest as of December 31, 1977, of $353,000. The claim is secured by 83,698 shares of P&LE stock, and $4,185,000 principal amount of R & I 5% Series C Bonds. The value assigned this security under the Plan was $9,884,770, and the ratio of retained asset security to the total claim is 123.64%.

The Mohawk & Malone claim, including interest, totals $1,967,000. It was originally secured by all of the railroad's assets. In July, 1972, the Interstate Commerce Commission approved a petition by the Trustees to abandon the railroad's Lake Placid branch. In February, 1975, the State of New York condemned the abandoned line. Pending a final judicial determination of the condemnation award, the State of New York has paid over to the estate the sum of $3,900,000, representing its offering price less certain expenses. That sum, along with proceeds of sale of other encumbered assets, has been deposited in an escrow account which now totals $4,535,000. In addition the bonds are secured by other retained assets worth $850,000. Thus the total security for $1,967,000 is a first lien on $5,385,000 in assets. On the basis of escrowed cash alone this mortgage indenture is 230.55%...