UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
decided: January 27, 1972.
IN THE MATTER OF PENN CENTRAL TRANSPORTATION COMPANY, DEBTOR. APPEAL OF THE NEW YORK, NEW HAVEN & HARTFORD RAILROAD COMPANY FIRST MORTGAGE 4% BONDHOLDERS COMMITTEE
Van Dusen and James Rosen, Circuit Judges, and Layton, District Judge.
Author: Van Dusen
Opinion OF THE COURT
VAN DUSEN, Circuit Judge.
This case involves an appeal by the New York, New Haven & Hartford Railroad Company First Mortgage 4% Bondholders Committee ("the New Haven Committee") from an order of the District Court for the Eastern District of Pennsylvania sitting as a Reorganization Court In the Matter of Penn Central Transportation Company, Debtor. The order in dispute, Order No. 63, resulted from a petition filed on September 11, 1970, by the Penn Central Trustees, requesting authority to affirm a Memorandum of Intent with the New York Metropolitan Transportation Authority ("the MTA") and the Connecticut Transportation Authority ("the CTA"). This Memorandum provided for the sale to the MTA of the Penn Central line between Woodlawn Junction and Port Chester in New York (a line formerly owned and operated by the New York, New Haven & Hartford Railroad Company ("the New Haven"))*fn1 and a 60-year lease to the CTA of the Penn Central lines extending from the New York-Connecticut boundary to the Connecticut cities of New Haven, Waterbury, Danbury and New Canaan (lines also formerly owned and operated by the New Haven).*fn2 A hearing on the Trustees' petition was held on September 23, 1970, by the Penn Central Reorganization Court. The Trustee of the New Haven and the New Haven Committee appeared at this hearing to object to the conveyances contemplated by the Memorandum unless the Penn Central Trustees deposited with the Indenture Trustees of a Penn Central Divisional First Mortgage*fn3 an amount in cash equal to the fair value of the properties transferred, not simply the cash which Penn Central was to receive in direct payment for the transfers.*fn4 After some discussion, the hearing was recessed to allow the parties to effect a compromise.
A settlement agreement reached between all the participants except the New Haven Committee was reflected in Order No. 63 of the Penn Central Reorganization Court, dated September 29, 1970. This order authorized the Penn Central Trustees to affirm the Memorandum, but reserved jurisdiction to determine the valuation and disposition of the consideration to be received by the Trustees from the MTA and the CTA.*fn5 Paragraph 4 of the order, however, appears to limit the Penn Central Trustees' obligations to the New Haven Trustee under the Divisional First Mortgage.*fn6 The New Haven Committee objected to the entry of this order, largely because of the limitation contained in paragraph 4.*fn7 This appeal followed.*fn8
A threshold issue in this appeal involves the authority of the New Haven Committee to appeal the entry of Order No. 63 by the Penn Central Reorganization Court.*fn9 For the reasons to be stated, we conclude that the New Haven Committee is not authorized by the controlling bankruptcy statutes to prosecute this appeal. We therefore grant the motion made by the Penn Central Trustees to dismiss the appeal.*fn9
The standing of a participant to a railroad reorganization to appeal from an order of the reorganization court turns on whether Section 77(c) (13) of the Bankruptcy Act, 11 U.S.C. § 205(c) (13) (1964), grants him a right to be heard.*fn10 See Horowitz v. Kaplan, 193 F.2d 64, 66 (1st Cir. 1951); In re Keystone Realty Holding Co., 117 F.2d 1003, 1005 (3d Cir. 1941). Section 77(c) (13) grants this right to be heard to the "debtor, any creditor or stockholder."*fn11 Thus the New Haven Committee is authorized to bring this appeal only if it is a "creditor" or a "stockholder" of the Penn Central as these terms are defined in the Bankruptcy Act.*fn12
The New Haven appears to argue that it is a "creditor" of the Penn Central because of the very substantial interest which its members have in the property which the New Haven Trustee receives from the Penn Central. The members of the New Haven Committee are the holders of New Haven First Mortgage 4% Bonds which were outstanding at the time that the assets and operations of the New Haven were sold to Penn Central on December 31, 1968.*fn13 The transfer of assets to Penn Central, however, was made free of this mortgage lien, with the lien attaching to the proceeds of the sale held by the New Haven Trustee.*fn14 Thus the New Haven bondholders represented by the Committee have a lien on substantially all of the assets held by the New Haven Trustee, including the Penn Central 5% Divisional First Mortgage Bonds.*fn15 These New Haven bondholders, therefore, have a substantial derivative interest in assuring that the terms of the mortgage which secures these bonds are complied with. Put in the simplest terms, the more cash that is deposited with the Mortgage Indenture Trustees when former New Haven assets are sold, the more likely it is that the Penn Central's obligations to the New Haven Trustee will be met, and therefore the more likely it is that the New Haven Committee bondholders will have their claims against the New Haven satisfied.
The relevant language of the Bankruptcy Act indicates, however, that Congress did not intend that those with simply a derivative interest in a railroad reorganization proceeding have a right to be heard and to appeal. See Callaway v. Benton, 336 U.S. 132, 139, 69 S. Ct. 435, 93 L. Ed. 553 (1949); Boston & Providence Railroad Stockholders Development Group v. Smith, 333 F.2d 651 (2d Cir. 1964). Cf. Peckham v. Casalduc, 261 F.2d 120 (1st Cir. 1958).*fn16 Section 77(b) of the Act, 11 U.S.C. § 205(b), provides as follows:
"The term 'creditors' shall include, for all purposes of this section all holders of claims of whatever character against the debtor or his property. . . ." (emphasis added.)
This record requires the conclusion that the members of the New Haven Committee do not hold claims against either the Penn Central or the property of the Penn Central, as required by the language of Section 77(b). The lien which these New Haven bondholders once had on the New Haven property (some of which Penn Central has transferred to the MTA and the CTA pursuant to Order No. 63) was explicitly released when this property was transferred to Penn Central on December 31, 1968.*fn17 Furthermore, the lien which the New Haven bondholders have against the proceeds of the sale to Penn Central*fn18 does not give them a claim against the Penn Central. The claim against the Penn Central for these proceeds is held by the New Haven Trustee; the New Haven bondholders have a claim only against the amounts which the New Haven Trustee receives from Penn Central. Thus, since the members of the New Haven Committee do not have claims either against Penn Central property or against the Penn Central, they are not "creditors" of Penn Central within the applicable language of the Bankruptcy Act and, therefore, had no automatic right either to be heard in the Penn Central reorganization or to appeal the entry of Order No. 63.*fn19
This result will effectuate the purposes of Section 77 of the Bankruptcy Act. If those with purely derivative interests in a railroad reorganization were allowed not only to participate in these proceedings but also to appeal from the resulting decisions, the already complicated and elaborate reorganization process developed by Congress might become hopelessly confounded. Further, there is no reason to believe that the New Haven Trustee will not adequately protect the interests of creditors of the New Haven, including the members of the New Haven Committee, in the Penn Central reorganization proceedings. Finally, we have held only that the New Haven Committee has no right to appeal from a decision reached in the Penn Central Reorganization Court. This is not to say, however, that the New Haven Committee was prevented from contesting the terms of the arrangement embodied in Order No. 63 in another, more appropriate forum.*fn20
For the foregoing reasons, we grant the Penn Central Trustees' motion to dismiss the appeal.