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April 28, 1959


The opinion of the court was delivered by: DAWSON

There is before the Court for its approval, pursuant to the provisions of the Bankruptcy Act, a plan of reorganization proposed by the Trustee in Bankruptcy, which appears to have the support of representatives of all of the creditor groups. The plan has been submitted to the Securities and Exchange Commission for its advisory opinion and the Commission has, with one exception hereinafter referred to, found the plan to be feasible and fair and equitable.

The Court is simultaneously herewith filing its findings of fact and conclusions of law, which summarize the plan and the facts found by the Court, which facts justify approval of the plan by the Court.

 The only opposition to the plan expressed at the hearings on the plan comes from representatives of equity interest. The Court has found the Debtor to be insolvent (Finding No. 111) and on the basis of the evidence before the Court there was no other finding which could be made.

 The argument of representatives of the stockholders is that they should get some type of security which would give them an interest in the property in the event that future developments in the commuter transportation industry around New York would justify a value greater than can reasonably be found to be the value of the Debtor's properties, or can reasonably be anticipated from earnings that now can be developed from such properties. The Court agrees thoroughly with the view of the Securities and Exchange Commission on this problem when that Commission stated:

 'The amended plan provides no participation for preferred and common stockholders on the ground that the Debtor is insolvent. As may be noted from Table IV above, aggregate claims exceeding $ 65,000,000 would be required to be satisfied in full before any participation could be accorded holders of preferred and common stock. Clearly there is no basis on present valuation for any participation by these security holders. It has been urged, however, that some recognition be given to the possibility that a sale of the railroad properties will realize net proceeds sufficiently great to satisfy all creditors' claims and leave a balance distributable on account of stockholder interests. In light of the valuation of approximately $ 17,000,000 for the real estate properties, this would require net proceeds from liquidation of the railroad properties in excess of $ 48,000,000. We have noted previously that, on the most optimistic basis, the Trustee could not anticipate such a price. In our view, such a possibility is so remote as to be of no cognizable value. Moreover, to distribute securities in the nature of warrants or contingent interest certificates to stockholders in these circumstances would in our view create a highly deceptive and speculative security which would be injurious to the public interest and the interest of investors and would render the amended plan unfeasible.'

 The Securities and Exchange Commission has suggested that the plan be modified to provide for the selection of the initial boards of directors of the reorganized companies from among the nominees of the bondholders. I am advised that the Trustee is agreeable to this suggestion and that a proposed amendment to the plan so providing will be submitted shortly. Such proposed amendment will be acceptable to the Court, keeping in mind, however, that the ability of the proposed directors and the propriety of their appointment must, in the final analysis, be determined by the Court.

 The proposed plan is found by the Court to be fair and equitable. It is also feasible. The railroad company, which is to be established as a subsidiary of the real estate company, will have sufficient plant, equipment and resources to enable it to continue the railroad operations. However, candor would compel any person to admit that for the long range view we will have to look forward to governmental assistance, either in the form of tax relief, or otherwise, if the operations are to continue at the present rate. It is comforting to realize that the Governors of New York and New Jersey, and the legislatures of those two states, are cognizant of the fact that government subsidized forms of competitive commuter transportation have brought railroad commuter transportation to the brink of disaster. Various types of relief are now in the discussion stage. When overall plans are finally worked out there is no reason why the reorganized Hudson Tubes should not be a part of a revitalized commuter transportation network in this community.

 The plan is approved. So ordered.

 Findings of Fact and Conclusions of Law

 1. The Trustee of Hudson & Manhattan Railroad Company, Debtor in reorganization proceedings pending in this Court pursuant to Chapter X of the Bankruptcy Act ('the Act'), 11 U.S.C.A. § 501 et seq., has filed an Amended Plan for the reorganization of the Debtor. Two proposed amendments suggesting modifications of the Trustee's Amended Plan have been filed by representatives of certain bondholders of the Debtor.

 2. Hearings have been held on due notice to all security holders and creditors. Argument has been heard and memoranda filed. The Securities and Exchange Commission ('SEC') has filed its Report pursuant to Section 173 of the Act, 11 U.S.C.A. § 573. Full opportunity to be heard has been accorded to the security holders of and claimants against the Debtor, to the regulatory commissions having jurisdiction over the Debtor, and to all interested persons. The Trustee's Amended Plan, and the proposed modifications thereof, are now before the Court for approval.

 The Reorganization Proceedings

 3. These proceedings were commenced on August 11, 1954, when three bondholders of the Debtor filed in this Court an involuntary petition for the reorganization of the Debtor pursuant to Chapter X of the Act. It alleged that the Debtor was insolvent, had committed various acts of bankruptcy, and was unable to meet its debts as they matured.

 4. The Debtor moved to dismiss the involuntary petition on the ground that Section 77 of the Act, 11 U.S.C.A. § 205, rather than Chapter X, governed the reorganization of the Debtor. Subsequently the Debtor filed in this Court a petition for reorganization pursuant to Section 77, alleging its inability to meet its debts. On November 29, 1954, the Court appointed William W. Golub as Receiver of the Debtor. On December 1, 1954, the Court denied the Debtor's motion to dismiss the Chapter X petition and the Debtor's application for approval of its Section 77 petition. D.C.1954, 126 F.Supp. 359.

 5. Early in the 'interim period' between August 11 and November 24, 1954, the Court by order authorized the Debtor to operate its business and to pay all proper expenses and obligations incurred by it in so doing. An appeal was taken from that order, but the appeal has never been prosecuted.

 6. The Debtor thereafter filed an answer consenting to reorganization pursuant to Chapter X. On December 14, 1954, the Court approved the Chapter X petition, and appointed Herman T. Stichman as Trustee of the Debtor.

 7. Subsequently, lengthy hearings were held upon the answer of an individual stockholder, denying that the Debtor was insolvent or unable to meet its debts as they matured. The Court found that, at the time of the filing of the involuntary petition, the Debtor was unable to meet its debts, and on January 9 1956, again approved the Chapter X petition for reorganization, and reaffirmed its previous approval thereof. D.C.1956, 138 F.Supp. 195.

 8. The Trustee's report pursuant to Section 167(5) of the Act, 11 U.S.C.A. § 567(5), summarizing his investigation of the property, liabilities, and financial condition of the Debtor, the operation of its business, and the desirability of the continuance thereof, was filed December 28, 1956. Thereafter notice was given to all creditors and stockholders, pursuant to Section 167(6) of the Act, that they might submit to the Trustee suggestions for the formulation of a reorganization plan or proposals in the form of plans. On August 30, 1957, the Trustee filed his Plan for the reorganization of the Debtor. Copies of the Plan were mailed to all creditors and stockholders, and notice of hearings on the Plan was mailed and published.

 9. Hearings were held on the Trustee's Plan, and a comprehensive record made. On May 7, 1958, pursuant to Section 177 of the Act, 11 U.S.C.A. § 577, the Trustee's Plan was submitted to the Interstate Commerce Commission ('ICC'), the New Jersey Board of Public Utility Commissioners, and the New York Public Service Commission for suggested amendments of or objections to the Plan. After a hearing on the statements filed by such regulatory commissions the Court entered an order finding the Trustee's Plan worthy of consideration, and submitting it to the SEC for examination and an advisory report, pursuant to Section 172 of the Act, 11 U.S.C.A. § 572.

 10. Thereafter, conferences were held among representatives of the three classes of bonds of the Debtor, looking toward agreement upon plan provisions. Substantial agreement was reached by the conferees and on October 31, 1958, the Trustee filed Amendment No. 1 to his Plan, revising it in essential conformity with the agreement of these bondholder representatives. Two additional amendments were proposed on behalf of certain bondholders. None of these amendments changed or proposed to change the basic structure of the Trustee's Plan.

 11. By order dated November 3, 1958, the Court found the Trustee's Amended Plan and the proposed amendments thereof worthy of consideration, and submitted them to the SEC for examination and report in lieu of the Plan previously so submitted.

 12. On December 3, 1958, the SEC filed its Report on the Trustee's Amended Plan and the proposed amendments. The Report of the SEC concluded that the Trustee's Amended Plan is feasible; that it is fair in excluding preferred and common stockholders from participation; that it provides a fair settlement of the claims of bondholders and other creditors; and that it should incorporate a revised provision for selection of the initial directors of the reorganized companies.

 13. Further hearings were held upon the Trustee's Amended Plan. Objections were filed by representatives of certain stockholders and bondholders. Another plan proposal, incomplete on its face, was filed on behalf of certain bondholders and subsequently withdrawn from consideration. Oral argument was heard and briefs submitted. The Court has fully considered the record, briefs, and argument.

 The Debtor and its Business

 14. The Debtor is a corporation organized in 1906, pursuant to the laws of the States of New York and New Jersey, by the merger and consolidation of three predecessor corporations. It is engaged in two types of business activities: the ownership and operation of the Hudson Tubes, an interurban electric railroad; and the ownership and operation of certain real estate in downtown Manhattan, New York City.

 15. The Debtor's real estate is located in the two-block area bounded by Church, Cortlandt, Greenwich, and Fulton Streets and divided by Dey Street. The land area of approximately 107,400 square feet includes the entire block south of Dey Street and the entire Church Street frontage. The improvements consist of the Hudson Terminal buildings, two 22-story office buildings located at 30 and 50 Church Street, together with loft and store buildings fronting on Fulton, Dey, Cortlandt, and Greenwich Streets.

 16. The Hudson Terminal buildings were constructed in 1907 and 1908. With their five-story annexes, erected in 1912, they cover an area of approximately 86,100 square feet and are of fireproof steel and reinforced concrete construction, with facades of brick and limestone. They are connected below grade at the concourse level, and by bridges across Dey Street at the third and seventeenth floors.

 17. At grade level, the Hudson Terminal buildings are subdivided into stores on all street frontages and office space at the rear. The floors above grade are used for office space. There are three levels below grade, extending from Cortlandt to Fulton Streets and including the area under Dey Street, between the buildings. The concourse level, directly below grade, is served by ramps from Cortlandt and Fulton Streets and stairs from Dey Street. Stands and shops are located on the ramps and on the concourse. Some of the concourse space is used for railroad ticket offices, change booths, and baggage rooms.

 18. Below the concourse level, connected with it by stairs, is the level at which the Hudson Terminal facilities of the railroad are located. Below the track level is a basement containing mechanical and power equipment and storage space, used in connection with the operations of the railroad and the office buildings.

 19. The gross floor area of the Hudson Terminal buildings is approximately 1,427,000 square feet. The net rentable area as presently divided is approximately 973,000 square feet, including approximately 44,000 square feet of store space, 40,000 square feet at the concourse level, and 889,000 square feet of office space.

 20. Prior to the commencement of the reorganization proceedings, the buildings were substantially as they had been when originally erected, except for renovation of ground floor lobbies in 1940 and 1941, and partial substitution of alternating current for direct current. During the reorganization proceedings it become apparent that substantial modernization was required in order to retain and attract major tenants. Pursuant to Court authorization, toilet facilities were modernized in 1956, additional alternating current risers were installed in 1958, and programs are currently under way for the rehabilitation of elevators and elevator lobbies, and for the installation of air conditioning in space leased at rentals which reflect charges therefor.

 21. The railroad system of the Debtor provides passenger service only, under the Hudson River, between stations in downtown and midtown Manhattan and stations in Jersey City and Hoboken, New Jersey. In conjunction with the Pennsylvania Railroad, the Debtor operates a joint rapid-transit electric service between Hudson Terminal and Newark, New Jersey ('the joint service'). The Debtor owns approximately 7.9 miles of double-track main lines, all in subaqueous or subterranean tunnels, and leases approximately .6 miles of double track from the Pennsylvania Railroad in Jersey City, between the Journal Square station and the end of the Debtor's owned trackage east of that station.

 22. The Debtor's downtown line includes two single-track tubes under the Hudson River between Hudson Terminal in Manhattan and Exchange Place in Jersey City. At Journal Square, this line connects with a line of the Pennsylvania Railroad running to Newark.

 23. The Debtor's uptown line includes two single-track tubes under the Hudson River between its Christopher Street and Hoboken stations. In Manhattan, the uptown line extends easterly to Sixth Avenue and uptown to its terminal at 33rd Street and Sixth Avenue.

 24. On the New Jersey side of the Hudson River, a line of the Debtor's railroad connects the downtown line in Jersey City, at a point west of Exchange Place, with the uptown line in Hoboken.

 25. The Debtor operates local service trains between Hudson Terminal and Journal Square; between Hudson Terminal and Hoboken; between 33rd Street and Hoboken; and between 33rd Street and Journal Square. The joint service trains carry local service passengers of the Debtor between Hudson Terminal and Journal Square; passengers of the Pennsylvania Railroad between Journal Square and Newark; and 'joint service passengers' between Newark and the Debtor's stations other than Journal Square. Joint service passengers between Newark and stations of the Debtor north of the downtown line transfer at Journal Square, Grove Street, or Exchange Place, in Jersey City.

 26. The Debtor's operating arrangements with the Pennsylvania Railroad were embodied in two basic agreements made in 1903 and 1906, which were modified by numerous amendatory and supplemental agreements and by many letters between the Debtor and the Pennsylvania Railroad. Revisions of these agreements have been negotiated by the Trustee and included in two basic contracts, a joint service and operating agreement and an easement agreement. The new agreements were recently approved by order of the Court authorizing the Trustee to apply for such ICC approval as may be necessary.

 27. The new agreements between the Debtor and the Pennsylvania Railroad represent both a consolidation and a revision of the agreements formerly in effect. They provide generally (as did the prior agreements) for a division of revenues and expenses of the joint service operations, 40% to the Debtor and 60% to the Pennsylvania Railroad. On the basis of 1958 operations, the revisions, which were made retroactive to July 1, 1957, result in increases in revenues and decreases in expenses of the Debtor agregating a net annual benefit to the Debtor of approximately $ 87,000.

 28. The major part of the Debtor's railroad revenues is derived from the interstate local service. In 1958, when gross passenger revenues aggregated $ 6,950,000, approximately $ 5,936,000 was supplied by the interstate local service, and $ 152,000 by the intrastate local services in New York and New Jersey. The Debtor's share of gross passenger revenues from the joint service amounted to approximately $ 862,000.

 29. The Debtor has approximately 200 motorized passenger cars, the so-called 'black cars,' for its local services. A majority of these cars were acquired during the years 1908 through 1911, and the balance during the years 1921 through 1928. Thirteen of the black cars were given a major overhauling during the period 1952 through 1956. The others have never been so overhauled.

 30. During the reorganization proceedings it appeared that the passenger cars used in the joint service, some owned by the Pennsylvania Railroad and some by the Debtor, presented a serious hazard to safety of operation. Pursuant to authorization of the Court, the Trustee purchased 20 new cars at an aggregate price of approximately $ 1,700,000 for the joint service. Harding v. Stichman, 2 Cir., 1957, 240 F.2d 289. At the same time, the Pennsylvania Railroad purchased 30 such cars. The new joint service cars have been delivered and are now in service.

 31. The Debtor has three minor subsidiary companies, wholly-owned which perform services incidental to its operations, substantially at cost. Such services include the sale of advertising in railroad cars and at railroad stations, cleaning, painting and porter service in the office buildings, and certain porter services at terminal stations.

 Causes of Bankruptcy

 32. The financial difficulties of the Debtor stem from an initial overcapitalization with debt securities, combined with a progressively increasing squeeze on the railroad operations from rising operating expenses and loss of passengers to publicly-financed vehicular crossings of the Hudson River by bridge and tunnel.

 33. Attempts by predecessor companies to construct the Debtor's tunnels date from 1873. Owing to financial and construction difficulties the tunnels had not been completed in 1906, when three constituent companies with outstanding funded debt aggregating $ 56,500,000 were consolidated to form the Debtor. In 1908 the Hudson Terminal buildings were opened for occupancy, and railroad service began on the uptown line. By the end of 1911 the Debtor had outstanding $ 67,148,000 of First Mortgage bonds, and was also obligated on $ 5,000,000 of bonds of a predecessor company, assumed in 1906.

 34. The Hudson Terminal buildings were almost fully rented and the railroad lines carried 58,000,000 passengers in 1912. However, this was not enough to cover the fixed interest on more than $ 72,000,000 of indebtedness and the combined operation showed a net loss of almost $ 76,000 for the year, without accrual of depreciation for the last nine months.

 35. In 1913 a plan for the readjustment of its debt was proposed by the Debtor and carried into effect. The 1913 Readjustment Plan provided for the issuance, in exchange for each $ 1,000 First Mortgage bond, of a $ 500 First Lien and Refunding Mortgage bond bearing fixed interest at the rate of 5% per annum and a $ 500 Adjustment Income Mortgage bond bearing interest at the same rate, contingent on earnings. The contingent interest was non-cumulative prior to January 1, 1920, and cumulative thereafter, payable out of subsequent earnings or upon maturity of the bonds. The maturity date of the new bond issues was the same as that of the First Mortgage bond issue, February 1, 1957.

 36. Pursuant to the 1913 Readjustment Plan, $ 66,204,000 principal amount of First Mortgage bonds were exchanged and were deposited by the Debtor with the Refunding Mortgage indenture trustee as collateral security for both the Refunding Mortgage bonds and the Adjustment Income Mortgage bonds. This left outstanding $ 944,000 principal amount of First Mortgage ...

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