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IN RE LONG ISLAND R. CO.

October 30, 1951

In re LONG ISLAND R. CO.


The opinion of the court was delivered by: KENNEDY

These proceedings involve five features of the relationship between the debtor and the Pennsylvania Railroad (called hereafter 'Pennsylvania'). In connection with two of these features the trustee asks for authority to enter into new contracts with the Pennsylvania. As for the other three, the trustee has made an examination of the relationships and has reached and reported certain conclusions which will be mentioned at the appropriate point.

1. The Floating Freight Service Contract Between Greenville, N.J., and Long Island City.

 Ever since 1895 the debtor has been floating freight for the Pennsylvania between Greenville, N.J., and Long Island City. From January 1, 1926 until the present time the Long Island has been compensated at the rate of 35 cents per ton of merchandise. It has been repeatedly asserted that the contract was unfair to the debtor and should be revised. In 1950 the former trustees retained Messrs. Coverdale & Colpitts to study the matter. An independent study was made on behalf of the New York Public Service Commission by William Wyer & Co.

 Both experts were in substantial agreement on the point that the former arrangement was compensatory between 1926 and 1940, was profitable to the debtor during 1941 to 1947, and was sufficient in 1948 to cover the debtor's overhead cost and return a large profit. However, the experts were also in agreement that during 1949 the cost of performing the service took a sharp upward trend and that the debtor was losing money during 1949 and 1950. As a result of these studies and also of negotiations launched by the former trustees and continued by the present trustee, it is now proposed that the contract be revised and the debtor's charge be increased to 40 cents a ton, the Pennsylvania paying to the trustee $ 245,000 additional payment for floating services between March 1, 1949 and June 30, 1951. Provision is made for periodical revision of the contract on the basis of agreed standards of operating, overhead and other costs, the general idea being that the debtor is to perform the service on the basis of a cost plus 10% profit. I am satisfied that the proposed arrangement is fair and equitable, and that the trustee should be authorized to enter into the contract. I have signed an order to this effect.

 2. The New York Connecting Railroad Company.

 This feature of the relationship between the debtor and the Pennsylvania is fairly complicated. A company called the New York Connecting Railroad Company (hereinafter called 'Connecting') has, since 1918, exercised trackage rights over a portion of the debtor's property between Freeman Street near Fresh Pond Junction in Queens and Bay Ridge in Brooklyn. The Connecting is owned equally and Jointly by the New York, New Haven & Hartford Railroad and the Pennsylvania Railroad. On December 29, 1939, with the approval of the Interstate Commerce Commission, a new contract was made (effective as of January 1, 1938) under which Connecting paid 60% of the taxes on the jointly-used property. Other taxes and interest were apportioned according to use, but with a maximum proportion against Connecting of 75%. A proportion of expenses was allocated according to use but again the proportion against Connecting was not to exceed 75%.

 This agreement was the subject of a study ordered by the former trustees and conducted by Coverdale & Colpitts. At about the same time William Wyler & Co. made a similar analysis.

 The trustee reached the conclusion based upon the opinion of both experts that the 1938 contract was in fact inequitable and should be revised. It is now proposed that commencing January 1, 1951, Connecting will pay 75% of the amount of interest on the agreed value of all jointly-used facilities, the proportion of taxes which is indicated by use, and the proportion of maintenance expense which is indicated by use. The debtor will also receive the sum of $ 200,000. in settlement for under-charges during 1950 only. All questions about inequities prior to that date are left open, and susceptible of litigation if the trustee be so advised. Consummation of the agreement will mean that some $ 300,000. a year will be prospectively realized in the way of additional revenue, that an inequitable ceiling on Connecting's proportion of taxes and maintenance expenses will be removed, and that either party may request renegotiation and arbitration of the terms of the agreement.

 All parties interested in the estate (with the possible exception later noted) were satisfied that this temporary solution of an inequitable situation is the best that can now be devised. I, myself, feel that the new contract, while not perfect, will go far towards the equitable distribution of current and prospective expense, and I have signed an order authorizing the trustee to enter into this contract.

 3. The Question Whether the Debtor's Accounting Should be Conducted in Philadelphia or in Jamaica.

 From the beginning of the trusteeship frequent complaint has been made that Pennsylvania was overcharging the debtor for accounting services, and that anyway for debtor's books and records should be removed to Jamaica and it should have its own accounting department. A survey of this problem was made by Arthur Anderson & Co. and resulted in a report that an independent accounting system would cost the debtor $ 209,000. per annum more than is presently charged by the Pennsylvania for the same service. While it may be that at some future time the removal of the books and records to Jamaica and the installation of an independent accounting system will become essential, the trustee has concluded that it is unwise to incur that additional expense at this time and I agree with him.

 4. The Question of Insurance.

 The Pennsylvania at the present time insures the debtor through its own insurance department. This arrangement has been criticized, and as a result of that criticism the trustee has caused the matter to be investigated. He reports that independent coverage would impose an additional charge upon the debtor of some $ 50,000, per annum. Clearly there is no advantage to be served by saddling the estate with this additional burden.

 While the trustee was discussing this subject he pointed out that the former trustees carried wreck insurance in the amount of $ 1,000,000. with a deductible average of $ 400,000. At the time of the first wreck (Rockville Centre) the premium for this coverage was $ 13,000. At the time of the second wreck (Kew Gardens) the premium had been increased to $ 50,000. Thus in the space of less than a year the former trustees collected $ 2,000,000. in return for premiums aggregating $ 63,000. Now, however, the former insurer ...


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