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In re Penn Central Transportation Co.

decided: January 31, 1973.

IN THE MATTER OF PENN CENTRAL TRANSPORTATION COMPANY, DEBTOR; MORGAN GUARANTY TRUST COMPANY OF NEW YORK, AS INDENTURE TRUSTEE UNDER THE NEW YORK CENTRAL AND HUDSON RIVER RAILROAD COMPANY REFUNDING AND IMPROVEMENT MORTGAGE, DATED OCTOBER 1, 1913, APPELLANT


Appeal from the United States District Court for the Eastern District of Pennsylvania (D.C. No. B-70-347 In Bankruptcy).

McLaughlin, Van Dusen and Adams, Circuit Judges.

Author: Adams

Opinion OF THE COURT

ADAMS, Circuit Judge.

The basis of this appeal is an order of the district court overseeing the reorganization of the Penn Central Transportation Company (Penn Central)*fn1 permitting the use of certain escrowed funds for the improvement of an important freight yard.

Morgan Guaranty Trust Company (Morgan Guaranty), trustee under one of the mortgages of the Penn Central, challenges the order, alleging that by allowing the expenditures the district court improperly permitted a dissipation of Morgan Guaranty's security interest in the assets of the Penn Central.

Proper resolution of this appeal requires that the provisions of the order, No. 437, dated September 30, 1971, D.C., 332 F. Supp. 1302 (E.D.Pa. 1971) be examined in some detail, and that the appropriate criterion, the four-pronged "Central of New Jersey"*fn2 test be explicated and applied. Before these two endeavors are begun, however, it is useful to recall the Supreme Court's admonitions regarding the purposes and principles of Section 77 of the Bankruptcy Act, 11 U.S.C. ยง 205, the Railroad Reorganization Statute:

first, the rights of the creditors must be guarded; second, the public's interest in the survival of the railroad as a going enterprise must be respected.*fn3

The decisions of this Court, too, reflect the efforts to follow these two fundaments. See e.g., In re Penn Central Transportation Company (Appeal of First Wisconsin National Bank), 453 F.2d 520, 522 (3d Cir.), cert. denied, 408 U.S. 923, 33 L. Ed. 2d 334, 92 S. Ct. 2493 (1972).

I. The Yard

In September, 1971, the district court granted the permission sought by the Penn Central, and entered an order allowing the Penn Central to make certain improvements to the railroad's Selkirk, New York freight yard. The highly-automated yard, located approximately 10 miles southwest of Albany, New York, is a central link for the Penn Central's freight lines, binding the railroad's services to New England, New York City and Long Island with its services to the West. Prior to the district court's order permitting the improvements, the yard could handle approximately 2700 freight cars per day. At that time, daily traffic through the yard had already exceeded the yard's capacity, and the volume was expected to increase further, with more freight being routed through the yard as the inefficient and costly New York Harbor "floating" operation was phased out. Excess traffic through the yard was increasing the cost and lowering the productivity of the yard. To increase the yard's ability to handle much of this excess traffic, and to thus reduce costs, Penn Central requested that it be allowed to make improvements to the yard. These improvements required approximately $2,074,549. to complete. Upon completion, it was estimated that annual savings of $1,076,000.*fn4 might be realized. Thus the yard and the efficiency the improvements would generate would be important elements in the rail system and the attempts to reinvigorate the road's freight business.

II. Financing the Improvements

The Selkirk yard is subject to three mortgages originally entered into by one of Penn Central's predecessors, the New York Central Railroad Company. In order of their priorities, and with their appropriate corporate indenture trustees, these mortgages are:

1. The New York Central and Hudson River Railroad Company 3 1/2% Gold Bond Mortgage of June 1, 1897 (Gold Bond Mortgage), ...


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