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In re Penn Central Transportation Co.

decided: June 14, 1973.

IN THE MATTER OF: PENN CENTRAL TRANSPORTATION COMPANY, DEBTOR. MORGAN GUARANTY TRUST COMPANY OF NEW YORK, AS TRUSTEE UNDER THE NEW YORK AND HARLEM RAILROAD COMPANY GOLD BOND AND SECOND MORTGAGES, APPELLANT IN NOS. 72-2116, 72-2117; MORGAN GUARANTY TRUST COMPANY OF NEW YORK, AS INDENTURE TRUSTEE UNDER THE NEW YORK CENTRAL AND HUDSON RIVER RAILROAD COMPANY REFUNDING AND IMPROVEMENT MORTGAGE DATED OCTOBER 1, 1913, APPELLANT IN NOS. 72-2118, 72-2119; THE FIDELITY BANK, AS A STOCKHOLDER IN AND ON BEHALF OF THE NEW YORK AND HARLEM RAILROAD COMPANY, APPELLANT IN NOS. 72-2120, 72-2121, 72-2123; THE FIDELITY BANK, ON BEHALF OF: (A) ITSELF AND ALL OTHER STOCKHOLDERS OF THE NEW YORK AND HARLEM RAILROAD COMPANY OTHER THAN PENN CENTRAL TRANSPORTATION COMPANY; AND (B) THE NEW YORK AND HARLEM RAILROAD COMPANY, APPELLANT IN 72-2122; MANUFACTURERS HANOVER TRUST COMPANY, AS INDENTURE TRUSTEE UNDER THE NEW YORK CENTRAL AND HUDSON RIVER RAILROAD COMPANY THREE AND ONE-HALF PERCENT GOLD BOND MORTGAGE, DATED JUNE 1, 1897; BANKERS TRUST COMPANY, AS INDENTURE TRUSTEE UNDER THE NEW YORK CENTRAL AND HUDSON RIVER RAILROAD COMPANY CONSOLIDATION MORTGAGE DATED JUNE 20, 1913; AND MORGAN GUARANTY TRUST COMPANY OF NEW YORK, AS INDENTURE TRUSTEE UNDER THE NEW YORK CENTRAL AND HUDSON RIVER RAILROAD COMPANY LAKE SHORE COLLATERAL INDENTURE DATED FEBRUARY 4, 1898, AND THE NEW YORK CENTRAL AND HUDSON RIVER RAILROAD COMPANY MICHIGAN CENTRAL COLLATERAL INDENTURE, DATED APRIL 13, 1898, APPELLANTS IN NO. 72-2124; RICHARD JOYCE SMITH, TRUSTEE OF THE PROPERTY OF THE NEW YORK, NEW HAVEN AND HARTFORD RAILROAD COMPANY, DEBTOR, APPELLANT IN NO. 72-2125; PENN CENTRAL COMPANY, APPELLANT IN NO. 72-2126


No. 70-347 in Bankruptcy. APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA.

Adams, Gibbons and Weis, Jr., Circuit Judges.

Author: Adams

Opinion OF THE COURT

ADAMS, Circuit Judge.

An order of the district court permitting the Trustees of the Penn Central Transportation Company (Trustees) to sell four New York office buildings, located in the area adjacent to Grand Central Terminal, is the basis of this appeal. The district court's decree*fn1 was the most recent step in a protracted attempt by the Trustees to dispose of the highly valuable holdings of The Penn Central Transportation Company (Penn Central) in office buildings situated along both sides of Park Avenue from Forty-Second Street beyond Fiftieth Street in midtown Manhattan.

On June 21, 1971, almost one year to the day that the Penn Central filed for reorganization, the Trustees extended to the public invitations to bid on twenty-three separate parcels of Manhattan real estate. The bids received on the majority of the properties fell sufficiently below the Trustees' expectations that they did not pursue the opportunity to sell those properties. On six of the properties tendered, however, the Trustees, satisfied with the offers, petitioned the district court for permission to sell.*fn2 The district court, in an exhaustive and thorough opinion, granted permission as to four of the properties, for a total of approximately $14 million. The court refused authorization to sell two of the parcels, for which about $45 million had been bid.*fn3

The action of the Trustees and the limited approval of the district court has prompted appeals by the Morgan Guaranty Bank, the Trustee of the property of the New Haven Railroad, the Fidelity Bank, the Penn Central Company, Manufacturers Hanover Trust Company and the Bankers Trust Company. The appellants, representing different creditor, bondholder and shareholder interests, raise two separate legal theories. By order of this Court, the appeals were consolidated and oral argument was heard one day each for the two different issues.

One contention, advanced by all appellants, challenged the district court's authority, jurisdiction and wisdom in approving the sales. Resolution of this issue requires that this Court examine section 77(o)*fn4 of the Bankruptcy Act, and analyze its place in the general program for railroad reorganization established by the Act.*fn5

The second branch of the appellants' argument focuses on questions arising from the nature of the interest Penn Central holds in a number of the properties it is seeking to sell. In several of the properties, Penn Central's interest was not in fee but was a leasehold estate,*fn6 or a tenancy in common,*fn7 with the New York and Harlem Railroad Company (Harlem) in both cases holding the remaining interest. The appellants contend that, as to these properties, the interest of Penn Central may be transferred only if certain conditions are present and satisfied.

Before beginning an examination of the history of the railroads involved, their intertwined financial arrangements, and the proper scope of proceedings under section 77(o), all of which are essential to understanding and resolving this dispute, it should be noted that one important problem is not present in this appeal. The proceeds from any sale of the Park Avenue Properties are not to be available to the Trustees to be used for railroad "additions and betterments" or to augment railroad working capital. Rather, the proceeds are to be invested in government securities.*fn8 Thus, the appellants do not contend that this sale constitutes a taking of their property without compensation, as they might if the proceeds from the sale of these properties were to be used to attempt to improve or keep alive an arguably dying railroad.*fn9

I. Brief History of the Three Railroads: The Harlem, New York Central and New Haven

The buildings the Trustees sought permission to sell are built over railroad tracks that link Manhattan with upstate New York and New England, including the suburban counties of Westchester, New York and Fairfield, Connecticut. Placing these tracks underground in the first decade of the twentieth century provided the railroads with an extensive area of midtown Manhattan suitable for development.*fn10 Defining the property rights held by the various parties in the tracks and the extensive group of buildings raises a complicated problem.

a. The Harlem

In 1831, the New York and Harlem Railroad (Harlem) was incorporated by the New York legislature. By 1872, its tracks extended from Forty-Second Street, in Manhattan, to Chatham Four-Corners, 130 miles up the Hudson River. During the Civil War, Commodore Vanderbilt decided to enter the railroad business, which he saw as both the transportation of the future and an arena for the manipulation of stock.*fn11 He purchased sufficient shares to control the Harlem, pushing up the price per share as he bought. Through generous contributions to the powers that controlled municipal government in New York, Vanderbilt secured for the Harlem a franchise to run streetcars from Forty-Second Street to the Battery. The New York state legislators, incensed at what they conceived to be a usurpation of their power to dispense lucrative franchises, and apparently desirous to avail themselves of an opportunity to make large profits in stocks, indicated their intention to cancel the Harlem's streetcar franchise.

While deliberating legislatively, the assemblymen began selling "short" shares (shares they did not own) of the Harlem. Vanderbilt soon became aware of this scheme and, to defeat it, proceeded to purchase all the outstanding shares of the Harlem. When the date arrived when the legislators had to deliver the shares they had sold "short," they were forced to acquire the shares from Vanderbilt who showed them but slight mercy in establishing the price. Thus, by the mid-1860's, Commodore Vanderbilt had firm control of a railroad line running from mid-Manhattan to a point about one-third the distance to Albany.

b. The New Haven

The New York and New Haven Railroad Company (New Haven) was chartered by the State of Connecticut in 1844, and built rail lines extending from New Haven to the New York State border.*fn12 Unable to obtain the consent of the New York legislature to extend its railroad into New York, the New Haven, in 1846, entered into an agreement with the Harlem that provided that their respective lines would be built so as to meet near the New York-Connecticut border. The New Haven was granted the right to operate its trains over the tracks of the Harlem from this junction as far into New York as the Harlem extended. This 1846 agreement was, in effect, ratified by the New York legislature which, in 1848, amended the Harlem's charter to permit this action. The legal effect of the 1846 agreement and the ensuing legislation has been held to be that the New Haven possessed a perpetual easement in the Harlem road, akin to a franchise.*fn13 Thus, the New Haven had an important interest in the tracks running into Manhattan.

c. New York Central

Another railroad taken over by Vanderbilt was the Hudson River Railroad Company. Its lines paralleled the Harlem's up the Hudson River and then continued to Albany. The New York Central Railroad, a combination of ten small railroads, consolidated in 1853, extended from Albany to Buffalo. By the time of Vanderbilt's entry onto the railroad scene, the New York Central had become very profitable, lacking only a link to New York City. Not surprisingly, it looked covetously at Vanderbilt's Hudson River Railroad and Vanderbilt returned the compliment. In the contest over who was to acquire what, Vanderbilt displayed his usual dexterity. Claiming to rely on a long-forgotten law, Vanderbilt, whose trains had crossed the Hudson River at Albany to meet the New York Central, ordered his trains halted on the east bank of the Hudson, in the middle of the winter. Forcing passengers to cross the river on an icy and treacherous railroad bridge resulted in a decline in business for the New York Central and a consequent drop in the price of its stock to the point that Vanderbilt acquired the New York Central quite easily.*fn14 Hence, by the end of the 1860's, three railroads, the newly combined New York Central and Hudson River Railroad Company (Central), the Harlem and the New Haven were running into Manhattan from the North and Northeast. And each terminated at Forty-Second Street.*fn15

On November 1, 1872, the three railroads entered into an agreement to erect a new station at Forty-Second Street to be known as the Grand Central Depot. The station was to be built by the Harlem, which would lease it to the New Haven and Central for the joint use of the three companies.*fn16

On April 1, 1873, the Central and the Harlem entered into a 401 year lease (the Harlem lease).*fn17 As the district court explained, long-term leases were a commonly utilized method for acquisitions in the railroad industry, providing the advantages of combined operations while avoiding legal and practical difficulties inherent in a formal merger.*fn18 In this case, the legal difficulties may have appeared especially imposing since the franchise of the Central was for only fifty years while the Harlem's was for 999 years.*fn19 The lease between the two railroads reflected the domination of each by the Vanderbilts: it was signed by W. H. Vanderbilt for the Harlem and C. Vanderbilt for the Central.

The Harlem lease provided that the Central was to fulfill all the obligations of the Harlem regarding the erection of the Grand Central Depot at Forty-Second Street.*fn20 The New Haven's rights under the 1872 agreement, providing that its easement to use the tracks and terminal for the life of its charter that was perpetual, were unaffected.*fn21 After the Harlem Lease was signed and the Grand Central Depot completed, there remained three parties with interests in the land, station and tracks running into Manhattan from the north: the New Haven with a perpetual easement, the Harlem with the fee interest in some of the land, and the Central with a fee interest in a portion and a leasehold in the remainder.*fn21a

In 1903 and 1904 the New York legislature passed statutes requiring that the tracks be placed underground for the fifteen blocks north of the then-existing Grand Central Depot. To obey the legislature's mandate, and realizing the tremendous opportunity for development available if buildings were constructed in the air-space over the sunken tracks, the Central and the New Haven entered into a contract, in 1907, for the construction of a new Grand Central Terminal,*fn22 and the operation of the approaches to this terminal. By this agreement, the New Haven's right to the use of tracks and the railroad terminal was reaffirmed. "'Railroad terminal' was ...


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