The opinion of the court was delivered by: WHIPPLE
This matter comes before the Court on the United States Railway Association's (hereinafter referred to as 'USRA') petition for an Order for Identification of Cash and Other Current assets pursuant to Section 211(h)(3) of the Regional Rail Reorganization Act of 1973, as amended, 45 U.S.C. § 721(h) (3). See Order No. 816. A hearing was held on March 23, 1976. Decision was reserved. The Court has also had the benefit of pre- and post-hearing briefs and memoranda of law.
Because the facts relating to this particular railroad in reorganization have weighed heavily in the Court's determination of the issues presented, a brief historical recapitulation is in order. The Central Railroad Company of New Jersey (hereinafter referred to as 'CNJ'), filed for bankruptcy pursuant to Section 77 of the Bankruptcy Act, 11 U.S.C. § 205 et seq., on March 22, 1967. The next seven years were devoted to an attempt to reach a viable reorganization plan.
The Regional Rail Reorganization Act of 1973, 45 U.S.C. § 701 et seq. (hereinafter referred to as the 'RRRA'), became Public Law 93 -- 236 on January 2, 1974. The purpose of this legislation was 'to salvage the rail services operated by seven insolvent class I railroads in the Midwest and Northeast region of the Nation . . . by replacing them with a new and viable rail services system.' U.S. Code Cong. & Admin.News, 1973, Vol. 2, p. 3242. The means by which Congress hopes to achieve its purpose is the Consolidated Rail Corporation (hereinafter referred to as 'ConRail'), a private, for profit, state-incorporated corporation. See also Regional Rail Reorganization Act Cases, 419 U.S. 102, 109 -- 17, 95 S. Ct. 335, 341, 42 L. Ed. 2d 320, 334 (1974); In re Penn Central Transp. Co., 384 F.Supp. 895, 904 -- 910 (Sp.Ct.1975); In re Penn Central Transp. Co., 533 F.2d 1347, 1354 Nos. 75 -- 1902, etc. (3d Cir. 1976) (dissenting opinion of Gibbons, Cir. J). All rail properties designated in the Final System Plan, see 45 U.S.C. § 716, will be transferred to ConRail or other designated entities at midnight on March 31, 1976. 45 U.S.C. § 743. Substantially all of the CNJ's rail properties have been designated for transfer in the Final System Plan.
Although ConRail will take portions of seven bankrupt railroads,
the bankruptcy of the Penn Central was the impetus behind the passage of RRRA. See In re Penn Central Transp. Co., 384 F.Supp. 895, 902 -- 903 (RRRA Court, 1974); U.S. Code Cong. & Admin.News, 1973, Vol. 2, pp. 3245 and 3246 -- 54. The papers submitted by ConRail and USRA indicate that their model for negotiations with all railroads is the Penn Central.
Sec. 207(b)(1) of the RRRA required the reorganization courts to decide whether the bankrupt railroads were reorganizable within a reasonable time under Section 77 of the Bankruptcy Act, 11 U.S.C. § 205. In Memorandum and Order No. 661, issued on April 30, 1974, the Honorable Anthony T. Augelli, United States District Judge, held that the CNJ was not reorganizable, under Section 77. He held as follows:
That no reorganization of the Debtor on an income basis can be effected within a reasonable time is obvious in light of the record in this case. The Debtor, since 1958, has suffered continuous losses in each year of its operations, totaling more than $ 100,000,000.00. During the period of reorganization (from 1967 -- 1973) these losses have exceeded $ 60,000.00. The losses continued in 1974 at increased levels. . . . Projections beyond February, according to the Trustee, show continued cash and income losses. These losses have resulted in an erosion of the assets of the Debtor . . . (emphasis added)
Memorandum and Order No. 661, p. 6. Section 207(b)(1) also required a ruling as to whether a railroad unreorganizable under Section 77 should be reorganized under the RRRA. On June 28, 1974, Judge Augelli held that the RRRA 'does not provide a process which would be fair and equitable to the estate of the Debtor.' Memorandum and Order No. 684, p. 10.
Order No. 684 was stayed pending appeal to the Special Court, pursuant to Section 207(b)(1). Order No. 685, July 15, 1974. The Special Court reversed Judge Augelli, upheld the RRRA, and remanded for entry of an Order for reorganization under the Act. In re Penn Central Transp. Co., supra, 384 F.Supp. at 954 -- 955. See also Regional Rail Reorganization Act Cases, 419 U.S. 102, 95 S. Ct. 335, 42 L. Ed. 2d 320 (1974).
As a railroad in reorganization pursuant to the RRRA
, the CNJ was and is required to maintain rail service until 11:59 p.m. on March 31, 1976, other law to the contrary notwithstanding. Section 304(f) of the RRRA, 45 U.S.C. § 744(f); Regional Rail Reorganization Act Cases, supra, 419 U.S. at 116 -- 17, 95 S. Ct. at 345, 42 L. Ed. 2d at 337; In re Erie Lackawanna Ry., 393 F.Supp. 352, 358 (N.D.Ohio 1975). While the RRRA does provide for financial assistance for the continuation of rail service, Sections 213 and 215 of RRRA, those funds have proved inadequate. See Opinion filed December 18, 1975. Despite this inadequacy, the operation was required to continue.
* * * (I)nterim operations of the railroad at a loss may constitutionally be continued because the United States will be required to indemnify the creditors and stockholders for interim erosion of the debtor's estate in an action in the Court of Claims. * * *
In re Penn Central Transp. Co., 508 F.2d 270, 273 (3d Cir. 1975). There can be little question that an erosion of the CNJ estate has taken place. See Memorandum and Order No. 661, supra.
There is no need to recount all the details of the struggle to keep the railroad in operation.
That struggle is about to end. Conveyance to ConRail is not far off. The matter now before the Court involves post- conveyance problems. The Court must now concern itself with the orderly administration of the remainder of the CNJ estate.
Fortunately, the questions of valuation and erosion compensation must be decided by other judges. See Section 209 of the RRRA, 42 U.S.C. § 719.
Section 211(h) was added to the RRRA by the Railroad Revitalization and Regulatory Reform Act of 1976, Pub.L. 94 -- 210, Section 606. Section 211(h)(1) provides for loans from USRA to ConRail to allow ConRail to pay certain obligations of the reorganization railroads in order to avoid a disruption in 'ordinary business relationships.' Section 211(h)(2) provides for an agency agreement
between the bankrupt railroads and, in most cases, ConRail.
Section 211(h)(3), the subject of this hearing, requires the reorganization courts, upon petition by USRA, to issue an order which:
(a) identifies that cash and other current assets of the estate of such railroad which shall be utilized to satisfy obligations of the estates identified in paragraph (1) of this subsection; and
(b) provides for the application by the trustees of such railroads and their agents, consistent with the principles of reorganization under section 77 of the Bankruptcy Act (11 U.S.C. § 205) and with the agency agreement . . ., of all such current assets, including cash available as of or subsequent to such date of conveyance, to the payment in the post conveyance period of the obligations of the estates identified in paragraph (1) of the subsection. (emphasis added)
USRA has petitioned the Court for such an order.