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In re Lehigh Valley Railroad Co.

decided: January 23, 1975.

IN THE MATTER OF LEHIGH VALLEY RAILROAD COMPANY, DEBTOR, COMMONWEALTH OF PENNSYLVANIA, APPELLANT IN NO. 74-1356, TRUSTEES OF LEHIGH VALLEY RAILROAD COMPANY, DEBTOR, APPELLANTS IN NO. 74-1363, DELAWARE & HUDSON RAILWAY COMPANY, APPELLANT IN NO. 74-1379, PENNSYLVANIA STATE LEGISLATIVE BOARD, UNITED TRANSPORTATION UNION, APPELLANT IN NO. 74-1388, CHEMICAL BANK, THE FIDELITY BANK, FIRST NATIONAL CITY BANK, AND GIRARD TRUST BANK, INDENTURE TRUSTEES, APPELLANTS IN NO. 74-1424


APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA. (D.C. No. B-70-432 In Bankruptcy).

Adams, Gibbons and Weis, Circuit Judges.

Author: Gibbons

Opinion OF THE COURT

GIBBONS, Circuit Judge

This is an appeal pursuant to 11 U.S.C. § 47 from Order No. 226 of the district court in proceedings under § 77 of the Bankruptcy Act for reorganization of the Lehigh Valley Railroad Company. The order, made as a result of a petition filed by the Trustees of Penn Central Transportation Company, directs the Lehigh Valley trustees to pay post-reorganization net interline balances due to Penn Central on a current basis. The district court judge who supervises both the Lehigh Valley and the Penn Central reorganizations, held that the post-reorganization net interline balances from Lehigh Valley to Penn Central were administration expenses of the Lehigh Valley reorganization, and were to be paid on a current basis beginning with those incurred in January, 1974. Unpaid interline balances from July 31, 1970, the closest settlement of accounts date following the Lehigh Valley petition for reorganization, were held to be administration claims against the Lehigh Valley estate. In re Lehigh Valley Railroad Co., 371 F. Supp. 210 (E.D. Pa. 1974) (Claim of Penn Central Trustees for Interline Balances).

Order No. 226 was entered over the objection of The Commonwealth of Pennsylvania (appellant in No. 74-1356); United Transportation Union (appellant in No. 74-1388) which is the collective bargaining representative for some Lehigh Valley employees; the Delaware & Hudson Railway Co. (appellant in No. 74-1379) which interchanges freight with Lehigh Valley; the Lehigh Valley mortgage indenture trustees (appellants in No. 74-1424); and the Lehigh Valley trustees (appellants in No. 74-1363).

All the appellants argue that requiring Lehigh Valley to make current payment of interline balances will endanger the continued ability of Lehigh Valley to maintain rail operations. They contend that a condition of the 1968 merger between the Pennsylvania Railroad and the New York Central, imposed in the Interstate Commerce Commission's approval of that merger was that Penn Central must keep the Lehigh Valley operational. The appellants urge that the Penn Central trustees hold the Penn Central franchises subject to the I.C.C. condition, and that the condition precludes their demand for current payment of the net interline balances. The Lehigh Valley trustees also urge that the I.C.C. condition precludes treatment of post-reorganization net interline balances as expenses of administration. The Lehigh Valley mortgage indenture trustees contend that the post-reorganization net interline balances due Penn Central must be subordinated to the pre-organization claims of Lehigh Valley's secured creditors. Order No. 226 in effect rejected each of these contentions. Order No. 233 stayed the current payment provisions of Order No. 226 and directed that the net current interline balances be placed in escrow pending appeal.

The Lehigh Valley Railroad runs from Buffalo, New York to the Port of New York. It connects with the Delaware & Hudson with which it interchanges New England and Canadian traffic, at Owego, New York and Wilkes-Barre, Pennsylvania. It connects with the Penn Central, with which it interchanges western and southern traffic, at Buffalo, New York, and Wilkes-Barre, Pennsylvania. In 1962, while the Pennsylvania Railroad and the New York Central were still competitors, the former acquired ownership of 97.3% of the common stock of Lehigh Valley. It continued to operate Lehigh Valley as a separate entity with independent management, except that Pennsylvania's accounting department undertook accounting services for the Lehigh Valley, and both companies had a common treasurer. The Buffalo interchange with Lehigh Valley was of great significance since it gave Pennsylvania a route to the Port of New York and to New England competitive with the New York Central route through Albany, New York. In 1962, negotiations looking toward merger were also going forward between the Pennsylvania and New York Central. An important feature of what became the proposed merger were the economies to be achieved by routing incoming western traffic over the New York Central lines from Buffalo through Selkirk, New York, to the New York metropolitan area, and to New England over other lines in the New York Central System. However, these economies would eliminate any incentive for a merged Penn Central to interchange traffic with Lehigh Valley at Buffalo, and cast doubt upon the latter's ability to operate. In addition such a development could, in turn, damage the Delaware & Hudson which interchanged considerable freight traffic with Lehigh Valley at Wilkes-Barre, Pennsylvania.

The merger between the Pennsylvania and the New York Central required the approval of the Interstate Commerce Commission. Under § 5(2)(b) of the Interstate Commerce Act, 49 U.S.C. § 5(2)(b)

"if the Commission finds that, subject to such terms and conditions and such modifications as it shall find to be just and reasonable, the proposed [merger] transaction . . . will be consistent with the public interest, it shall enter an order approving and authorizing such transaction, upon the terms and conditions, and with the modifications, so found to be just and reasonable . . . ."

The Commission is specifically required to give weight to

"(1) The effect of the proposed transaction upon adequate transportation service to the public; (2) the effect upon the public interest of the inclusion, or failure to include, other railroads in the territory involved in the proposed transaction . . .." 49 U.S.C. § 5(2)(c).

The Commission's Report of April 6, 1966, which approved the Penn-Central merger, described the legal effect of conditions imposed under § 5 of the Act:

"The Commission's power under section 5 is limited to the application before it and the consequences thereof. Orders issued pursuant thereto are permissive, and obligations imposed upon applicants as conditions of approval are inchoate, attaching with binding force only if the proposed transaction is consummated. If the transaction is not consummated, though approved, the conditional obligations under our order ...


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