The opinion of the court was delivered by: WHIPPLE
The Central Railroad Company of New Jersey (hereinafter referred to as "CNJ") filed a petition for reorganization pursuant to Section 77 of the Bankruptcy Act, 11 U.S.C. § 205 et seq. on March 22, 1967. On April 1, 1976, the bulk of the CNJ's rail assets were transferred to the Consolidated Rail Corporation (hereinafter referred to as "ConRail") pursuant to the Regional Rail Reorganization Act of 1973 as amended by the Railroad Revitalization and Regulatory Reform Act of 1976, 45 U.S.C. § 701 et seq. (the amended act will hereinafter be referred to as the "RRRA"). On June 1, 1976, Robert D. Timpany, the trustee of the CNJ, submitted a Plan of Reorganization (hereinafter referred to as the "Plan").
Section VI of the Plan calls for hearings on numerous issues of fact and/or law. On July 29, 1976, this Court heard oral argument on issues (1) and (3), issues of law which will be discussed in detail infra. The parties have been given ample opportunities to submit pre- and post-hearing briefs. This opinion is the result.
RRRA is for the purposes of this opinion a reorganization statute.
It supplements but does not displace Section 77. See, In re Central Railroad Company of New Jersey, B.N. 401-67 (D.N.J., February 2, 1976) (Letter Opinion) and the cases cited therein. Section 601(b)(4) of the RRRA makes a substantial change in the reorganization procedure for those estates, such as the CNJ, which are no longer operating rail lines. The section provides, in pertinent part, as follows:
The powers and duties of the Commission [I.C.C.] under Section 77 of the Bankruptcy Act (11 U.S.C. 205), with respect to a railroad in reorganization in the region which conveys all or substantially all of its designated rail properties to the Corporation [ConRail], . . ., pursuant to the final system plan, and the requirement that plans of reorganization be filed with the Commission, shall cease upon the date of such conveyance. * * * Thereafter, such powers and duties of the Commission shall vest in the district court of the United States which has jurisdiction of the estate of any such railroad in reorganization at the time of such conveyance. Such court shall proceed to reorganize or liquidate such railroad in reorganization pursuant to such section 77 on such terms as the court deems just and reasonable, or pursuant to any other provisions of the Bankruptcy Act, if the court finds that such action would be in the best interests of such estate. * * * (emphasis added)
This change has the potential to streamline the reorganization process. All hearings and determinations are now to be made by the reorganization court.
The trustee's Plan seeks an early reorganization of the estate. Plan, Section I.D. The trustee contends that an early reorganization will materially benefit the estate in a number of ways. Early reorganization would permit "a cutting of the continued accumulation of accruals." Plan, p. 8. It would also allow dedication of "cash resources to higher yield opportunities -- with their potential for increasing revenues and for taking advantage of the existing tax loss carry-forward." Ibid. Early reorganization is also said to be favored by "the interests of judicial economy." Plan, p. 9. The trustee points to the fact that these proceedings are in their tenth year.
Finally, the trustee argues that reorganization, as opposed to liquidation, would afford "the greatest opportunity for fair treatment among the parties inter sese." Plan, p. 9. The trustee proposes to deal with each party as the equities of the overall situation require.
In furtherance of his equitable goal, the trustee proposes to, in effect, hoist the governmental
parties on their own petard.
The central and indispensable element of the plan proposed here is the dedication of the ConRail Preferred Stock and the Common Stock, which the estate is to receive under the Final System Plan, to the satisfaction of the high-priority claims against the estate held by the United States of America, ConRail -- USRA, and the State of New Jersey -- thereby leaving to the private parties the residual assets the estate retains for the satisfaction of such private claims. * * Plan, pp. 9-10 (footnote omitted)
The trustee contends that the governmental parties, having argued that the ConRail securities were fair compensation for the assets of the estate, cannot now argue that they would not be fair compensation for their high priority claims. The governmental gander, however, would appear to want no part of the sauce it forced upon the goose. The government parties prefer to be paid in cold, hard cash.
The interline railroad's claims for thirty-five monthly cash payments under the pre-petition interlines settlement comprise Class E.
Class F includes all other administration claims. Class G consists of the mortgage bondholders. Class H comprises the claims of the United States under certain trust notes.
All other pre-petition claims are contained in Class I. The Plan makes no separate provision for "six-month" creditors. Finally, the interest of the stockholder is denominated Class J.
Class A claims will be paid in cash or assumed by the reorganized company. Classes B, C, and D are to be satisfied, initially, by means of the ConRail securities. Class E claims will be paid in thirty-five monthly cash installments.
The Class F creditors will receive certain installment notes to be issued by the reorganized company. The Class G creditors, i.e., the bondholders, will receive the initial common stock of the reorganized company. The Class H debts will be satisfied by the release of the securities of certain of the CNJ's subsidiaries. The stockholders, Class J, will receive nothing unless certain contingencies, as stated in Section II B of the Plan, should occur.
The Trustee has proposed that two questions of law relating to the Plan be decided before extensive hearings are held. Those issues are framed, in Section VI of the Plan at page 25, as follows:
(1) whether as a matter of law there is any impediment to the proposed utilization of the ConRail securities;
(3) the propriety of the trustee's position that ConRail has primary responsibility for employee-related claims including the question of whether the estate is obligated for pension benefits and, if so, the extent of the liability and whether such liability should be satisfied as an offset in the valuation proceedings;
These are the issues now before the Court.
An early determination of issue (1) is certainly in the best interest of the estate and "judicial economy." Were the Court to determine that, as a matter of law, the proposed use of ConRail securities was impermissible, there would be no need to hold further hearings on the Plan. Since there is no likelihood that the parties who are to receive the securities would consent, such a legal determination would not be premature. See Regional Rail Reorganization Act Cases, 419 U.S. 102, 140, 95 S. Ct. 335, 42 L. Ed. 2d 320 (1974). Such a determination would be similar to a motion for partial summary judgment. F.R.Civ.P. 56.
Most of sub-issues contained in issue (3) are also ripe for decision at this time. A resolution of those issues would more clearly define the relationship between the estate and ConRail as governed by RRRA. The Court refused to decide such issues in the context of the Section 211(h)(3) hearing when urged to do so by the government parties. The future time alluded to in that opinion has now arrived. Matter of Central R.R. Co. of New Jersey, 412 F. Supp. 927, 934 (D.N.J., 1976).
In considering the applicability of the changes worked by the new Act, the Court will be concerned with several questions apart from the construction of the amendments. First, to the extent the amendments change the prior law, do those changes interfere with any rights which may have become vested under the previous law. Second, to the extent the amendments purport only to clarify prior law, what effect must be given to later legislative "clarification." The Court does not intend to limit the parties to these questions alone.
I. THE USE OF CONRAIL SECURITIES
Issue (1) relates to the trustee's proposal that the ConRail securities to be received by the estate in exchange for the transferred rail properties
be used to satisfy the high priority debt owing to the United States, the State of New Jersey, certain of its political subdivisions, USRA, and ConRail. Those parties do not consent to the trustee's proposal. They argue that such a treatment of administrative claims violates certain provisions of Section 77, as well as the RRRA and other law.
While this Court is not unsympathetic to the trustee's goal of dealing equitably with the administrative claimants inter sese, the Plan's proposed use of the securities cannot be sustained as a matter of law. The Court is persuaded that Section 77 of the Bankruptcy Act requires that administrative expenses be paid in cash, at least if the administrative claimants do not consent to an alternative means of payment.
Section 77(e), in pertinent part, provides as follows:
* * * [The] judge shall approve the plan if satisfied that: . . . (3) the plan provides for the payment of all costs of administration and all other allowances made or to be made by the judge, except that allowances provided for in subsection (c), paragraph (12) of this section, may be paid in securities provided for in the plan if those entitled thereto will accept such payment, and the judge is hereby given power to approve the same.
The parties who oppose the Plan argue that this statutory language mandates the payment of administrative claims in cash. The trustee takes a contrary position.
The governmental parties cite several cases and I.C.C. reports to support their position. In Group of Investors v. Milwaukee R. Co., 318 U.S. 523, 554, 63 S. Ct. 727, 744, 87 L. Ed. 959 (1943), the Supreme Court characterized section 77(e)(3) claims as "demands on the cash resources of the estate or the new company." It should be noted, however, that the Court was not specifically ruling upon a plan of reorganization which proposed other than cash payment. In New York, Ontario & Western Ry. Reorganization, 295 I.C.C. 346, 361 (1956), the I.C.C. report rejected two proposed plans of reorganization and recommended dismissal of the reorganization.
Under the statute, it is necessary that a plan, if it is to be approved, shall provide for the payment of all costs of administration in cash. As hereinbefore indicated, neither proposed plan, in terms or method of treatment, makes such provision, nor would it be possible under the reorganizations contemplated by them, to pay cash, either presently or in the foreseeable future, substantial portions of the administration expenses, including large amounts of unpaid tax accruals, both federal and local. * * *
295 I.C.C. at 361. Again, the plans of reorganization under consideration did not call for payment through securities.
In St. Louis-San Francisco Ry. Reorganization, 257 I.C.C. 399, 416 (1944), the report modified a plan which it then approved.
The bondholder's plan provides that the expenses of reorganization as allowed by the Court, subject to the provisions of Section 77 of the Bankruptcy Act, shall be paid in cash or assumed by the reorganized company as a cost of administration prior in lien to the new securities issued under the plan. In our view, and in order to conform to plans heretofore approved by us in other cases, it should be provided that such expenses shall be paid in cash. (See also In Re New Housing Corporation, 117 F.2d 569, 571). The approved plan will so provide. * * *
257 I.C.C. at 416. In Re New Era Housing Corporation, 117 F.2d 569 (3d Cir., 1941), cited in the report, is a case dealing with the former section 77B of the Bankruptcy Act. Section 77B(6)(3) is similar to Section 77(e)(3) except that it specifically requires that payment be made in cash with one stated exception. As will be seen infra, the phrase "in cash" was dropped in subsequent revisions, but the revised section has been interpreted to require cash payment.
In Alton R.R. Reorganization, 261 I.C.C. 343, 382 (1945), the report stated:
The expenses of the reorganization as allowed by the court, subject to the provisions of Section 77 of the Bankruptcy Act, should be paid in cash. See St. Louis-S.F. Ry. Co. Reorganization, decided July 4, 1974, 257 I.C.C. 394. We further find that such claims are not affected by the plan.
Again, the Commission was not faced with a plan similar to the plan before the Court. See also, Rutland R.R. Reorganization, 267 I.C.C. 89, 125 (1946); Alabama, Tennessee & Northern R.R. Reorganization, 247 I.C.C. 453, 468-9 (1940); Erie R.R. Reorganization, 239 I.C.C. 653, 731 (1940); Spokane Ry. Reorganization, 228 I.C.C. 387, 407 (1938).
The trustee argues that section 77(e)(3) does not govern the operating expenses incurred during reorganization. According to his interpretation, the phrase "costs of administration and all other allowances" refers exclusively "to matters such as the trustee's salary, allowances and disbursements of various counsel and representatives of interested parties, and auctioneer, accounting and appraisal fees and the like." Trustee's Initial Brief, page 45. The trustee cites no cases which make the distinction he urges on the Court.
This distinction cannot be supported in the light of the above cited cases. In Group of Investors v. Milwaukee R. Co., supra, the Supreme Court characterized claims against an estate for post-petition net income and rent as section 77(e)(3) claims. 318 U.S. at 554, 63 S. Ct. 727. In New York, Ontario & Western Ry. Reorganization, supra, the Commission characterized tax accruals as costs of administration. 295 I.C.C. at 361. This Court is of the opinion that "costs of administration" includes debts incurred in continuing the operation of the railroad pending reorganization. These creditors of the reorganization are to be distinguished from the creditors of the debtor whose claims may be altered or modified by the issuance of new securities or otherwise. Section 77(b).
The trustee also argues that, even if subsection (e)(3) governs the claims involved here, it does not mandate payment in cash. He contends that it merely forbids payment in the securities of the reorganized company except to subsection (c)(12) claimants.
Payment in other types of securities are not, according to this argument, excluded. The trustee seeks to push aside the weight of the traditional interpretations requiring cash payment by characterizing them as dicta. See, Regional Rail Reorganization Act Cases, 419 U.S. 102, 150-151, 95 S. Ct. 335, 42 L. Ed. 2d 320 (1974). While it is true that none of those authorities were faced with the factual situation now before this Court, the ...