In the Matter of Penn Central Transportation Company, Debtor.appeal of the New York, New Haven & Hartford Railroadcompany First Mortgage 4% Bondholders Committee, 455 F.2d 811 (3d Cir. 1972)

Substantially all of the assets and operations of the New Haven were sold to the Penn Central on December 31, 1968. This sale had been required by the Interstate Commerce Commission as a condition of its approval of the merger between the Pennsylvania Railroad and the New York Central Railroad into the Penn Central. See New Haven Inclusion Cases, 399 U.S. 392, 90 S. Ct. 2054, 26 L. Ed. 2d 691 (1970)

Under the terms of the Memorandum, Penn Central was to receive $7.2 million cash from the MTA and a cash annual rental from the CTA equal to 5% of the aggregate salvage value of the leased lines. (The CTA also was given an option to purchase the leased lines during the term of the lease at a price equal to their salvage value when the option is exercised.) The Memorandum also provided that Penn Central would retain free trackage rights over the transferred lines for 60 years and would receive a minimum cash toll of $2.9 million per year for the use by the MTA and the CTA of the Penn Central track between Woodlawn Junction and Grand Central Station (track not formerly owned by the New Haven). Provision was also made for a service contract under which Penn Central would continue to operate the transferred lines in exchange for an annual management fee of $100,000. plus reimbursement by the MTA and the CTA for any deficits Penn Central incurred in these operations

When the Penn Central purchased the assets and operations of the New Haven on December 31, 1968, a part of the consideration paid to the New Haven Trustee was an issue of Penn Central 5% Divisional First Mortgage Bonds, which were secured by a Divisional First Mortgage on all the New Haven assets which had been transferred to Penn Central. The New Haven Trustee is the only holder of these Penn Central 5% Bonds

The claim by the New Haven Committee is apparently based upon the following language in the Penn Central Divisional First Mortgage:

Section 10.09(a):

" [A]ll cash and securities receivable from any and all sales or condemnations of Mortgaged Properties, plus any cash required to be paid by the Company to the Corporate Trustee pursuant to Sec. 10.08, shall be deposited with the Corporate Trustee and held by it as Deposited Cash and Securities."

Section 10.08(4):

" [There shall also be deposited] [s]uch cash, if any, to be held by the Corporate Trustee as Deposited Cash and Securities as shall be equal to the excess of the fair value of the portion of the Mortgaged properties being released pursuant to section 10.01 over the fair value of the proceeds to be received, as shown by the officers' Certificate."

In view of our disposition of this appeal, we need not decide whether there is merit in the New Haven Committee's position (which apparently was first advanced and then compromised by the New Haven Trustee).

Presumably also reserved for future resolution was the issue raised by the New Haven Committee as to whether the 60-year lease to the CTA constitutes a sale within the meaning of the Penn Central Divisional First Mortgage. See footnote 4, supra

Pending these determinations, the Penn Central Trustees were directed to deposit all cash consideration received with respect to property released from the Divisional First Mortgage lien with the Mortgage Indenture Trustee (p 3(a)) and to deposit other cash received pursuant to the Memorandum in a special bank account (p 3(b)). But see footnotes 6 & 20, infra.

Paragraph 4 of Order No. 63 declares as follows:

"4. The obligations, if any, to be discharged by the Debtor's Trustees hereunder with respect to the claims of persons other than MTA and CTA are hereby limited to an amount which shall not exceed the sum of cash received from the sale of any property subject to the lien of the Divisional Mortgage leased to CTA pursuant to said lease plus annual rental payments as and when received by the Debtor's Trustees under said lease."

Because of our disposition of this appeal, we need not decide whether the limitation contained in this paragraph is appropriate. We note that the Penn Central Reorganization Court has an obligation to protect the interests of the creditors and the public interest. See Penn Central Merger Cases, 389 U.S. 486, 507-511, 88 S. Ct. 602, 19 L. Ed. 2d 723 (1968); New Haven Inclusion Cases, 399 U.S. 392, 489-495, 90 S. Ct. 2054, 26 L. Ed. 2d 691 (1970). Section 77(o) of the Bankruptcy Act, 11 U.S.C. § 205(o) declares that when the reorganization court orders the sale of property free from liens, the "proceeds derived from any such sales shall be received by the trustee . . . subject . . . to any liens thereon at the time of sale . . . ." Paragraph 2 of Order No. 63 appears consistent with the above-quoted language and paragraph 4 must be read in light of the other paragraphs of the order.

Order No. 147 of the Penn Central Reorganization Court dated January 26, 1971 (the substance of which was approved by the New Haven Reorganization Court on January 27, 1971, after a hearing on January 22, 1971), authorized the division between the Penn Central Trustees and the New Haven Trustee of approximately $18 million held by the Indenture Trustees of the Penn Central Divisional First Mortgage, which money included deposits made pursuant to p 3(a) of Order No. 63. The Penn Central Trustees contended that this division and distribution of funds permitted the continued operation of the Penn Central Railroad at a time when such operation was in extremis (N.T. 1133). See In Matter of Penn Central Transportation Co., Debtor, First Wisconsin National Bank, Appellant 453 F.2d 520 (3rd Cir., 1971), where Judge Hastie pointed out:

"Even secured creditors of a railroad must submit to the risk inherent in judicial suspension of the rights they normally would have to enforce their liens against property of the debtor during the pendency of a reorganization proceeding. New Haven Inclusion Cases, 1970, 399 U.S. 392, 489-494, 90 S. Ct. 2054, 26 L. Ed. 2d 691."

See also Central RR. Co. v. Manufacturers Hanover Trust Co., 421 F.2d 604 (3rd Cir. 1970). Further, the division of the $18 million between the New Haven Trustee and the Penn Central Trustees was in the nature of a settlement agreement (N.T. 1127-29, 1135 ff.) and such agreements, insofar as those participating in them are concerned, are favored by the law. See Kelly v. Greer, 365 F.2d 669, 671 (3rd Cir. 1966); Main Line Theaters, Inc. v. Paramount Film Distributing Corp., 298 F.2d 801 (3rd Cir.), cert. denied, 370 U.S. 939, 82 S. Ct. 1585, 8 L. Ed. 2d 807 (1962).

On October 27, 1970, the Penn Central Reorganization Court entered Order No. 72, which amended Order No. 63 to make it clear (1) that the New Haven Committee had not consented to Order No. 63, but (2) that no other party would be deemed to have agreed that the New Haven Committee had standing to object

The New Haven Committee filed its Notice of Appeal on October 23, 1970, but did not seek either a stay of execution from the Penn Central Reorganization Court or a supersedeas from this court. Accordingly, on January 4, 1971, the transfers contemplated by the Memorandum were concluded

On March 3, 1971, the Penn Central Trustees filed a motion in this court to dismiss the appeal of the New Haven Committee on the ground, inter alia, that it lacked standing to appeal. On May 4, 1971, after the filing of briefs and oral argument, this motion was continued for disposition by the panel hearing the merits of the appeal

The fact that the New Haven Committee was allowed to participate in the Penn Central Reorganization Court proceedings does not give rise to an automatic right of appeal. See Peckham v. Casalduc, 261 F.2d 120, 121 (1st Cir. 1958), cert. denied, 359 U.S. 958, 79 S. Ct. 798, 3 L. Ed. 2d 766 (1959) (Chapter X Reorganization)

Section 77(c) (13) also provides that "upon petition therefor and cause shown . . . any other interested party may be permitted to intervene." The New Haven Committee, however, did not petition to intervene, so that it cannot claim a right to appeal as an intervenor. On the other hand, the failure to formally intervene will not preclude an appeal if the appellant in fact had a right to be heard in the reorganization proceedings. See Horowitz v. Kaplan, 193 F.2d 64, 66 (1st Cir. 1951)

The New Haven Committee has argued that the broad language respecting standing in several recent decisions of the Supreme Court, particularly Association of Data Processing Service v. Camp, 397 U.S. 150, 90 S. Ct. 827, 25 L. Ed. 2d 184 (1970), and Flast v. Cohen, 392 U.S. 83, 88 S. Ct. 1942, 20 L. Ed. 2d 947 (1968), supports its right to appeal the entry of Order No. 63. This language, however, was manifestly not intended to apply to a railroad reorganization proceeding, where Congress has enacted a specific statutory scheme which outlines the parties entitled to participate and provides a means by which an "interested party" may be permitted to intervene (see footnote 11, supra.) See Association of Data Processing Service v. Camp, 397 U.S. 150, 154, 157, 90 S. Ct. 827, 25 L. Ed. 2d 184 (1970)

See footnote 1, supra

After extensive negotiations and proceedings, the New Haven Reorganization Court on December 24, 1968, approved the release of the New Haven assets to the Penn Central pursuant to a plan of sale under which the transfers were to be substantially free and clear of all liens and encumbrances; these liens and encumbrances shifted to the proceeds of the sale and thereby remained an obligation of the New Haven estate. See New Haven Inclusion Cases, 399 U.S. 392, 410 n. 45, 416, 90 S. Ct. 2054, 26 L. Ed. 2d 691 (1970). This transfer of the liens and encumbrances from the assets themselves to the proceeds of sale is authorized by the following language of Section 77(o) of the Bankruptcy Act, 11 U.S.C. § 205(o):

"The judge may order and decree any sale of property . . . subject to or free from liens. The proceeds derived from any such sales shall be received by the trustee . . . subject, in case the property was sold free from lien, to any liens thereon at the time of sale, and shall be applied or disposed of in such manner as the judge by further order shall direct."

The total price to be paid by Penn Central for the New Haven assets and operations has not yet been finally determined and is the subject of litigation which has already reached the Supreme Court. See New Haven Inclusion Cases, 399 U.S. 392, 90 S. Ct. 2054, 26 L. Ed. 2d 691 (1970). Of course, the Committee has a very substantial interest in the determination of this purchase price and, in fact, has actively participated in the New Haven Reorganization Court litigation. See 399 U.S. at 489-495, 90 S. Ct. 2054, 26 L. Ed. 2d 691

Standing to appeal an order of a railroad reorganization court requires a direct personal interest in the subject matter of the order and a showing that the appellant is aggrieved or prejudiced by the order. See, e. g., Comstock v. Thompson, 158 F.2d 151 (8th Cir. 1946); In Re Huntingdon & Broad Top Mt. RR. & Coal Co., 213 F.2d 411 (3rd Cir. 1954)

See pp. 7-8 and footnote 14, supra

The New Haven Committee argues that it is not entirely clear that the New Haven property has finally passed to the Penn Central in view of the Supreme Court's decision that the Penn Central must pay more for this property than the amounts originally determined by either the I.C.C. or the New Haven Reorganization Court. The New Haven Committee argues that the New Haven Trustee now holds an "equitable lien" on the former New Haven property because the I.C.C. and the New Haven Reorganization Court may yet decide that the entire transaction (that is, the sale of the New Haven to Penn Central) should be undone and the property returned to the New Haven. But even if the New Haven Trustee has such an "equitable lien" on this property (see holding of New Haven Reorganization Court quoted at footnote 2 of In Matter of Penn Central Transportation Company, Debtor, Smith, Trustee, appellant, 454 F.2d 210 (3rd Cir.)), it does not follow that the New Haven bondholders have a claim to the property within the meaning of Section 77(b) of the Act. As in the case of the claim to the proceeds of the sale of the New Haven assets to Penn Central (discussed below), the claim of the New Haven Committee is essentially derivative from the claim of the New Haven Trustee and thus does not fall within the terms of Section 77(b).

See footnote 3, supra

The New Haven Committee has suggested that its members should be considered "stockholders" of the Penn Central because of the possibility that they will own all the stock of the New Haven. Even if this were to occur, however, it would not aid the Committee, since it is clear that the stockholders of a creditor are not themselves "creditors" within the meaning of Section 77(b). See Callaway v. Benton, 336 U.S. 132, 139, 69 S. Ct. 435, 93 L. Ed. 553 (1949)

For example, the New Haven Committee is a party to the New Haven reorganization proceedings and it might have initiated an action in that court to challenge the New Haven Trustee's agreement to the entry of Order No. 63 if it felt that that this agreement violated the terms of the Penn Central Divisional First Mortgage. See footnotes 3 & 4, supra. Indeed, the appropriateness of this agreement was at least indirectly before the New Haven Reorganization Court at a hearing on January 22, 1971 sur Petition of Trustee For Approval of Agreement with Penn Central Trustees dated 1/20/71, reciting in paragraph 4 the agreement to divide the funds as stated in note 6 above, after which that court entered its Order No. 631 on 1/27/71 approving this agreement. The effect of Orders 631 and 147 (in which the Penn Central Reorganization Court approved this agreement on 1/26/71) was to modify p 3(a) of Order No. 63 to allow a distribution of the money held by the Mortgage Indenture Trustees (see footnotes 5 & 6, supra). The New Haven Committee, though a party to the New Haven reorganization proceedings, did not object to the court's aproval of the agreement (see N.T. of 1/22/71 hearing)