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July 3, 1979


The opinion of the court was delivered by: WHIPPLE


A. Introduction

 1. The Central Railroad Company of New Jersey (Debtor) filed a petition for reorganization under § 77 of the Bankruptcy Act on March 22, 1967 and was operated as a railroad by successive trustees until March 31, 1976 when most of its rail assets were conveyed to ConRail pursuant to the Regional Rail Reorganization Act of 1973, at amended, 45 U.S.C. § 701, Et seq. (the "Rail Act"). The retained assets have thereafter been administered by the present Trustee.

 2. On June 1, 1976 the present Trustee filed a Plan of Reorganization which was subsequently held to be illegal in a number of material respects. In re Central Railroad Company of New Jersey, 425 F. Supp. 1055 (D.N.J.1976); Vac. and rem. 579 F.2d 804 (3d Cir. 1978). On December 9, 1978 the Trustee filed an amended plan; and on May 31, 1979 the Trustee filed an amendment to the amended plan (as amended "Amended Plan"). This Court entered an order scheduling hearings on the Amended Plan for June 26, 1979. Affidavits of counsel are on file with the Court with respect to the giving of notice of the Amended Plan and the Amendment thereto and these hearings. In considering the Amended Plan, this Court has applied, where applicable, the provisions of § 77 of the Bankruptcy Act, the provisions of § 601(b) of the Rail Act, and the Rules of the United States Supreme Court effective August 1, 1976 governing § 77 proceedings.

 B. CNJ'S Financial Condition

 3. The present assets of the estate largely consist of cash and receivables, real estate holdings, securities of subsidiaries, and various claims. The cash on hand and in various special accounts held by the Reorganization Trustee and the Indenture Trustee approximates $ 30 million. This amount includes the receipt by the Trustee in February, 1979 of approximately.$ 2.5 million arising out of a recent condemnation by the State of New Jersey of approximately 50 acres formerly owned by the Debtor in Elizabeth. The 50 acres are to be used in connection with a highway interchange to be built for the New Jersey Turnpike. The remaining CNJ real estate consists of approximately 550 acres of land situated in various localities throughout the State and approximately 69 miles of right-of-way (including the track and other appurtenances thereon) owned by the Debtor and its subsidiaries. Included within the 550 acres of real estate are 240 acres which are under long-term lease to the Port Authority of New York and New Jersey and generate approximately $ 900,000 a year in net rentals to the estate. Detailed information concerning securities of subsidiaries owned by the Debtor and the land and rights-of-way owned by the Debtor and its subsidiaries in June of 1976 was set forth in Schedules A, B and C of the Plan of Reorganization filed by the Trustee on June 1, 1976. Information concerning material sales of property since such date can be found in the periodic reports filed with the Court by the Trustee. The testimony of CNJ's Court appointed real estate appraiser and sales agent who is thoroughly familiar with the properties, places the value of the real estate and rights-of-way still owned by the Debtor and its subsidiaries at between $ 15 million and $ 30 million, depending upon the circumstances of sale. The Trustee, for many years, has been trying to sell the principal properties other than the 240 acre parcel leased to the Port Authority.

 4. The principal claim owned by the estate is its claim for compensation for the transfer of most of its rail assets to ConRail under the Rail Act, which claim is presently being prosecuted by the Trustee in the Special Court created by the Rail Act with exclusive jurisdiction to adjudicate the matter. The Final System Plan issued under the Act valued CNJ's conveyed assets (including those of its subsidiaries) at $ 10.3 million; the Trustee contends that the market value of CNJ's interest in the conveyed assets approximates $ 100 million; and the Special Court has expressed skepticism about the Final System Plan's valuation of the assets conveyed and suggested that in the absence of adequate proof of market value, it might consider book values less reductions for deterioration as a principal valuation measure. In re Valuation Proceedings Under the Regional Rail Reorganization Act of 1973, 445 F. Supp. 994, 1029 (Sp. Ct. RRRA, 1977). CNJ's balance sheet reports the book value of its conveyed assets at $ 63.3 million and reflects as well an investment in subsidiaries and other companies of $ 5.6 million.

 5. The estate has a number of other claims as well. There are two claims presently pending in the state courts of New Jersey to recover amounts in excess of the deposits made by the State of New Jersey in the course of condemning approximately 350 acres of land formerly owned by the estate in Jersey City taken for development of Liberty Park and approximately 50 acres of land taken for the Turnpike interchange. The Trustee is seeking about $ 18 million more, principally in the Liberty Park matter; and the State of New Jersey denies anything further is owing. The Trustee has various other claims (which have previously been the subject matter of extensive petitions before this Court) against the State of New Jersey, arising out of prior subsidy arrangements, which he proposes to release as part of the Amended Plan of Reorganization, as well as certain claims reflected in its open accounts receivable and against ConRail.

 6. These assets are charged with substantial liabilities to creditors. Creditor claims include (a) over $ 5.3 million in principal and interest on unpaid trustee certificates; (b) approximately $ 24.7 million in anticipated § 211(h) claims (including for purposes of the plan $ 724,000 for railroad retirement and $ 700,000 for freight car rental owed to the United States) (which the Amended Plan proposes to settle for $ 22.5 million); (c) approximately $ 30.1 million in other liquidated administration claims including taxes and unpaid interest on taxes at December 31, 1978; (d) a potential administration claim of the United States for the expenses incurred in taking down the Newark Bay Bridge which it has estimated at $ 14 million; (e) pre-bankruptcy secured claims of general mortgage bonds consisting of $ 42,890,000 in principal and $ 16,822,254 in accrued interest at December 31, 1978; (f) pre- bankruptcy secured claims on two collateral trust notes held by the United States for $ 12,386,398 in principal and $ 9,970,533 in interest at December 31, 1978; (g) the claims of possible six month creditors which the Trustee estimates at approximately.$ 1.8 million; and (h) the claims of other pre-bankruptcy creditors which the Trustee estimates at approximately $ 5.4 million. These claims exceed $ 163 million.

 7. In addition to these claims, further charges on the estate include such allowances for fees and expenses as may be allowed by the Court under § 77(c) (2) and (c)(12), various current obligations routinely incurred by the Trustee's administration, accruals on the enumerated claims since January 1, 1979, and various disputed claims asserted against the estate principally by the State of New Jersey (which will release such claims if the Amended Plan is approved) and by ConRail. There is additionally an administrative obligation totaling $ 250,000 at April 30, 1979 incurred pursuant to the interline settlement agreement approved by Order No. 866. This claim is being paid monthly and is expected to be discharged by August.

 8. The Debtor reported substantial losses in operations prior to filing its petition for reorganization in 1967; and the losses continued throughout the administration of the estate and resulted in the large accruals of administration claims that have been earlier summarized. The size of the accrued administration claims relative to the lesser assured values of the retained assets led this Court to conclude in its opinion of March 31, 1976, disposing of the § 211(h)(3) hearings required by the Act, that there was a risk that the administration of the estate itself may be insolvent. Were this the case, all administration claims would not be paid in full and pre-bankruptcy debt secured and unsecured would receive nothing on their claims.

 9. As a result of the continued losses in operations, the Debtor accumulated substantial tax loss carryforward which totalled approximately $ 63 million when it ceased operating as a railroad in 1976. The financial reports periodically submitted by the Trustee to the Court and the parties since the conveyances to ConRail reflect that the annual losses have declined as the rental income from the estate's properties and the interest income on its cash reserves routinely exceed the estate's ongoing administrative expenses though such income has not been sufficient to cover as well the continuing large accruals of interest on pre-bankruptcy funded debt and post-bankruptcy real estate taxes. By January 1, 1979 approximately $ 35 million of the former $ 63 million in tax loss carryforwards had expired. However, Section 374(e) of the Internal Revenue Code preserves such expired loss carryforwards for application against any gain that may be recognized on the proceeds to be received for the conveyances to ConRail under the Rail Act. The expired loss carryforwards appear adequate to cover any gain the estate may realize over the $ 63 million in book value of the CNJ assets transferred to ConRail plus CNJ's interest in the assets of its subsidiaries so transferred.

 C. The Amended Plan of Reorganization

 10. The Amended Plan evolved out of a lengthy series of negotiations among the Trustee and representatives of the principal administrative and secured creditors of the estate; I. e., the United States, the State of New Jersey and the general mortgage bondholders. As such, the Amended Plan is essentially a consensual one, proposed with the agreement of the persons largely entitled both by priority and amount to the reasonably foreseeable assets of the estate. The three creditors involved in the negotiations represent claims which are expected to total over $ 148 million of the approximate $ 163 million in claims against the estate. The remaining claims consist of approximately $ 7 million owed on local taxes, about $ 7.2 million in pre-bankruptcy unsecured and six-month claims, and the balance to various other ...

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