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In re Penn Central Transportation Co.

filed: February 3, 1978.

IN THE MATTER OF PENN CENTRAL TRANSPORTATION COMPANY, DEBTOR; CONSOLIDATED RAIL CORPORATION AND UNITED STATES RAILWAY ASSOCIATION, JOINT APPELLANTS IN NO. 76-1514; IN THE MATTER OF LEHIGH VALLEY RAILROAD COMPANY, CONSOLIDATED RAIL CORPORATION AND UNITED STATES RAILWAY ASSOCIATION, JOINT APPELLANTS IN NO. 76-1515; IN THE MATTER OF READING COMPANY, DEBTOR, CONSOLIDATED RAIL CORPORATION AND UNITED STATES RAILWAY ASSOCIATION, JOINT APPELLANTS IN NO. 76-1516


ON APPEALS FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA. D.C. Nos. B-70-347, B-70-432 and B-71-828 In Bankruptcy.

Adams, Van Dusen, Circuit Judges, and Teitelbaum, District Judge.*fn*

Author: Adams

ADAMS, Circuit Judge.

These appeals arise out of railroad reorganization proceedings pertaining to the Penn Central Transportation Company, the Reading Company and the Lehigh Valley Railroad Company. Specifically, the Consolidated Rail Corporation (ConRail) and the United States Railway Association (USRA) challenge rulings entered by the reorganization courts in the course of proceedings under § 211(h) of the Regional Rail Reorganization Act of 1973, as amended by the Railroad Revitalization and Regulatory Reform Act of 1976 (together referred to here as the "Rail Act").

Two issues are presented: first, whether we have jurisdiction over the orders in question that were entered by the reorganization courts; and second, whether the reorganization courts erred in ruling that as a matter of law it was not proper to identify the sums of money held in the escrow accounts in question as "cash and other current assets" within the meaning of § 211(h)(3)(A), and thus transferable to ConRail. We have concluded that both questions should be answered in the affirmative.

A.

The Rail Act, 45 U.S.C. §§ 701, et seq., arose out of a recognition of the crisis that resulted from the bankruptcies of a number of railroads in the Northeast and the Midwest. It represented Congress' response to this "threat to the national welfare." In Re Penn Central Transportation Company, 384 F. Supp. 895, 902 (Special Court, 1974).

An overriding theme of the Rail Act is the protection of the public interest in continued operation of rail services.*fn1 Among the principal tenets emerging from the Act itself, its legislative history and court decisions upholding its constitutionality are the following:

First, it was necessary to restructure the rail system in the affected region, in particular by creating ConRail;*fn2 second, ConRail was to be allowed to begin its existence with a relatively clean slate, so that rail properties, with a few express exceptions, were to be transferred to it free of liens and encumbrances;*fn3 third, the estates*fn4 were to continue rail operations until the day of conveyance of the rail properties to ConRail; fourth, to offset to some extent the financial burden imposed on the estates by requiring them to continue rail operations up to the date of conveyance, Congress provided for grants and loans to the estates under reorganization;*fn5 and fifth, a remedy under the Tucker Act was found to exist, and to be constitutionally sufficient, in the event that compensation received by the estates pursuant to the Rail Act proved inadequate to cover the erosion of assets, if any, which occurred during the period of operations.*fn6

§ 211(h), one of the 1976 amendments to the Rail Act, should be viewed against this background. It allows for the provision of financial means by which certain pre-conveyance obligations of the estates, unpaid at the date of the conveyance of the rail assets to ConRail, may be satisfied "in order to avoid disruptions in ordinary business relationships."*fn7 The section was predicated upon the realization that the estates, in maintaining rail operations up to the date of the conveyance, would accumulate unpaid obligations to other railroads, shippers, suppliers and labor sources; and that there should be some mechanism facilitating payment of such obligations in order to prevent disruption of service or a smooth transition. Pursuant to § 211(h)(3)(A), USRA was authorized to petition the reorganization courts for an order identifying "cash and other current assets" of the estates which were to be made available in the post-conveyance period to pay pre-conveyance obligations, as identified in Section 211(h)(1). And USRA could seek an order providing for the payment of such obligations.

The disputes regarding the merits of this appeal arose in the course of hearings held by the reorganization courts pursuant to § 211(h)(3). During the hearings, USRA sought an order to identify various accounts held by the estates - including escrow accounts - as "cash and other current assets" within the meaning of § 211(h)(3)(A). USRA also requested a directive that vacation pay which had accrued prior to the conveyances by the estates to ConRail continue to be an obligation of the estates. In response, the estates objected to the granting of an order to identify the accounts, and took the position that the accrued vacation pay was not an obligation of the estates after March 31, 1976, the date of the conveyances to ConRail.

In response to these motions, the reorganization courts ruled that (1) it was not proper to identify the sums of cash held in escrow accounts as "cash and other current assets," and (2) as of April 1, 1976, the vacation pay that had been a pre-conveyance obligation of the estates ceased to be such and instead became an obligation of ConRail. ConRail and USRA filed joint notices of appeal from the orders entered by each of the reorganization courts, and the appeals were then consolidated.

After oral arguments dealing with the consolidated appeals, the cases were held in abeyance at the request of the parties, who sought to resolve their differences amicably. Thereafter, the parties advised the Court that they had settled their differences regarding vacation pay, but not as to the status of the various escrow accounts. In practical terms, the effect of the rulings by the reorganization courts relating to the escrow accounts is that ConRail would have a lesser amount of cash available with which to pay pre-conveyance obligations than would ...


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