D.C. No. 70-347 In Bankruptcy APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA.
McLaughlin, Gibbons and Rosenn, Circuit Judges. Rosenn, Circuit Judge, concurring.
This is an appeal, pursuant to Section 77(o) of the Bankruptcy Act, 11 U.S.C. § 205(o),*fn1 from five orders of the reorganization court authorizing the sale of separate properties of the debtor Penn Central Transportation Company. The orders resulted from four separate petitions by the trustees in reorganization. Each petition was prompted by the cash shortage projected by the trustees for the first quarter of 1973. The orders and the underlying petitions are summarized as follows:
In a petition dated November 20, 1972 the trustees requested authority to grant, for $10,000, a six-month option to purchase, for $825,000, 4.399 acres of the debtor's subproductive nonrail real estate in Columbus, Ohio. The trustees proposed to use the net proceeds, after payment of back real estate taxes and expenses of sale, to reimburse the general operating funds of the debtor. Order No. 1073 granted the petition and allowed the trustees, in the event the option was exercised, to reimburse general operating funds "for additions and betterments previously or hereafter made on unmortgaged property owned by the Trustees." The Columbus, Ohio property is not subject to any mortgage indenture but is subject to the lien of the United States securing trustees certificates issued pursuant to reorganization court Order No. 124 and Section 3 of the Emergency Rail Services Act of 1970, 45 U.S.C. § 662. At the time of argument of the appeal the option had not yet been exercised. The original option date had expired but had been extended. See Order No. 1330 (Sept. 28, 1973).
In a petition dated December 11, 1972 the trustees requested authority to sell a note owned by the debtor and secured by a second mortgage on real estate in Philadelphia, Pennsylvania, on which stands the Penn Towers office and apartment building, and receive the proceeds for general operating expenses. The unpaid principal of this note on December 11, 1972 was $1,750,000 and there was unpaid interest in the amount of $971,250. The note is not subject to any mortgage indenture or similar security interest but is subject to the lien of the United States securing trustees certificates issued pursuant to Order No. 124 and Section 3 of the Emergency Rail Services Act of 1970. Order No. 1103 authorized the sale for $2,721,250 and ordered that the net proceeds "be deposited in a general cash account of the Trustees and devoted to the fullest extent possible to the payment of expenses, which if not met would preclude the continued provision of essential transportation services"; that is, to general operating expenses. At the time of argument of the appeal the closing on the sale of the note had not yet taken place.
In a petition dated December 26, 1972 the trustees requested authority to liquidate $10,000,000 in securities held by the debtor as a part of its Contingent Compensation Reserve Fund and to use the proceeds for general operating expenses. The Fund is not subject to any mortgage indenture or similar security interest,*fn2 but is subject to the lien of the United States securing trustees certificates issued pursuant to Order No. 124 and Section 3 of the Emergency Rail Services Act of 1970. Orders No. 1087 and 1088 authorized the liquidation of $7,400,000 in securities from the Fund and the use of the proceeds to "meet current operating expenses." At the time of argument of the appeal the Fund had been liquidated and the proceeds dissipated in the trustees' general operations.
In a petition dated February 22, 1973 the trustees requested authority to sell 16.984 acres of nonrail real estate located in Toledo, Ohio for $134,173, and to use the net proceeds, after payment of selling expenses and back taxes, to reimburse their general operating funds. The Toledo, Ohio property was not subject to any mortgage indenture, but was subject to the lien of the United States for trustees certificates issued pursuant to Order No. 124 and Section 3 of the Emergency Rail Services Act of 1970. Order No. 1156 authorized the sale and provided that the proceeds "shall be kept in a special account and used by the Trustees to reimburse their general funds for additions and betterments previously or hereafter made on unmortgaged property owned by the Trustees." At the time of argument of the appeal the closing had taken place and the proceeds remained in the special account.
STANDING OF THE APPELLANTS
The several mortgage indenture trustees represent the bulk of the debtor's prereorganization secured creditors. None of the property subject to the orders appealed from is covered by their indentures. All of the property subject to those orders, however, prior to the entry of those orders, secured the post-reorganization trustees certificates. By virtue of Order No. 124's implementation of Section 77 (c)(3) of the Bankruptcy Act and Section 3(c) of the Emergency Rail Services Act of 1970, all the property subject to the mortgage indentures is also subject to the prior lien of the trustees certificates, as well as to the payment of other expenses of administration as priority claims. They urge that the sale of unmortgaged capital assets subject to the lien of the trustees certificates, without any application of the proceeds in reduction of that lien, results in an increase in the burden of prior secured debt to which the mortgaged properties securing their claims is subjected. Thus they are directly affected by the orders appealed from. They object to the sale of unmortgaged capital assets securing prior liens unless (1) the proceeds of sale are applied in reduction of those liens, or (2) under the equitable rule of marshaling the prior liens are reduced pro tanto, or (3) the court, before it permits expenditure of the proceeds, makes the findings required for a section 77(o) sale by Central Railroad Co. of New Jersey v. Manufacturers Hanover Trust Co., 421 F.2d 604 (3d Cir.), cert. denied, 398 U.S. 949, 26 L. Ed. 2d 289, 90 S. Ct. 1867 (1970) (Jersey Central) and In re Third Avenue Transit Corp., 198 F.2d 703 (2d Cir. 1952) (Third Avenue).
THE TRUSTEES' POSITION ON APPEALABILITY
The trustees would prefer not to have the appeal decided. They urge that since the proceeds of sale under Orders No. 1073, 1103 and 1156 have not yet been spent we should treat these orders as nonfinal under 11 U.S.C. § 205(o). This would be a strained construction of that subsection. The subsection permits the judge to order a sale of assets "in the interest of the debtor's estate and of ultimate reorganization".*fn3 It goes on to provide "any such order of the judge shall be a final order for the purposes of appeal." There is no question but that each of the orders in issue is "such order of the judge." The trustees suggest that the statutory language can be avoided by their tendered stipulation with respect to the proceeds of sale under Orders No. 1073, 1103 and 1156 that these proceeds will not be expended without a further order of the district court. Here, again, the internal structure of section 77(o) stands in the way of treating the orders as nonfinal, for after setting forth that "such order of the judge shall be a final order" the subsection goes on to provide:
"The proceeds derived from any such sales shall be received by the trustee . . . . and shall be applied or disposed of in such manner as the judge by further order shall direct."
It is clear, therefore, that neither the fact that the proceeds under Orders No. 1073, 1103 and 1156 are unspent nor the fact that the trustees are willing to subject those proceeds to a further order of the reorganization court takes those orders out of the category of final orders reviewable under § 77(o).
The trustees position with respect to Orders No. 1087 and 1088 obviously is different, since the proceeds of sale of the securities in the Contingent Compensation Reserve Fund have been received and expended. Conceding that these orders are final, the trustees urge that we should nevertheless postpone decision on the issues raised by the appeal of the indenture trustees. They contend that we should not consider whether the proceeds should have been applied to reduce prior liens, whether the marshaling rule is applicable, or whether the debtor's capital assets should be restored pending appropriate Jersey Central or Third Avenue determinations, because these issues can be dealt with in a plan of reorganization. For authority the trustees rely on In re Penn Central Transportation Company, 484 F.2d 323 (3d Cir. 1973), cert. denied, 414 U.S. 1066, 94 S. Ct. 574, 38 L. Ed. 2d 471, 42 U.S.L.W. 3334-35 (1973) (Park Avenue Properties).
The trustees misapprehend the thrust of the decision relied on. In that case we affirmed the reorganization court's holding that income from pledged shares was available to the trustees and need not be paid over to the pledgee, but we prohibited the sale, pursuant to § 77(o), of the underlying properties. The fundamental attack in the Park Avenue Properties appeal was on the extent of the court's power under § 77(o), and that issue was decided, not postponed. The appeal did not present the issue of use of the proceeds, since we prohibited the sales. A plan of reorganization cannot restore assets lost to the estate in deficit operations.
Finally, the trustees urge that at least with respect to Orders No. 1073, 1103 and 1156, assuming appealability, we should superimpose on § 77(o) a ripeness doctrine, and in view of their tendered stipulation that they will not spend the proceeds of sale of properties covered by these orders without a further court order, decline to decide the appeal until such order is entered. Putting aside the question whether we could legally contract our statutory appellate jurisdiction by inventing a ripeness doctrine, there is no reason for doing so in this case. If the district court did not believe the proceeds of sale could be used as proposed, it might not have authorized the sale at all. While the mortgagee appellants may be happy to have the lien of the trustees certificates secured by cash proceeds rather than by real estate or securities, the trustees may feel that if they cannot use the proceeds of sale of these real estate assets the sale is not provident at this time. Moreover, any analytical justification for contracting a grant of appellate jurisdiction by the invention of a ripeness doctrine must be found in some principle of appellate self-protection which avoids the necessity for pronouncing the law prematurely or unnecessarily. Since we must in any event review Orders No. 1087 and 1088, no self-protective principle is operative here. Rather we would be deciding, unnecessarily and prematurely, that the grant of appellate jurisdiction in § 77(o) could be limited by a ripeness doctrine.
In sum, we see no legitimate route by which we can avoid decision of the issues tendered by this appeal. That, incidentally, is the position on appealability of the United States as appellee.
THE UNITED STATES POSITION ON THE MERITS
The United States acknowledges that by resorting to first lien trustees certificates the trustees operating a railroad in reorganization can accomplish a substantial diminution of the security of the railroad's secured creditors, but urges
(1) that such result violates neither section 77 nor the fifth amendment,
(2) that its first lien is not, under the Emergency Rail Services Act of 1970, subject to the marshaling rule, and that the marshaling rule is not constitutionally required, and
(3) that the principles of the Jersey Central and Third Avenue cases are applicable only to property mortgaged by the ...