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In re New York

May 10, 1973

IN THE MATTER OF THE NEW YORK, NEW HAVEN AND HARTFORD RAILROAD COMPANY, DEBTOR.


Before Breitenstein,*fn* Kaufman and Mansfield, Circuit Judges.

Author: Kaufman

IRVING R. KAUFMAN, Circuit Judge:

This appeal involves a skirmish in the larger and seemingly endless battle of the bankrupt New York, New Haven and Hartford Railroad ("New Haven") and the bankrupt Penn Central Transportation Co. ("Penn Central") to achieve a workable long-term solution to their financial problems. We are asked to enter the fray and interpret § 77(c)(2) of the Bankruptcy Act, 11 U.S.C. § 205(c)(2), which provides, in pertinent part, that the "trustees [appointed by the district court under § 77(c)(1) to administer the railroad's affairs] and their counsel shall receive only such compensation from the estate of the debtor as the judge may from time to time allow within such maximum limits as may be approved by the [Interstate Commerce] Commission."*fn1 Our intervention is sought in the context of an appeal from two orders of Judge Anderson, sitting in the District Court for the District of Connecticut, who was ably supervised the current New Haven reorganization proceedings since their inception in July, 1961. In Order No. 652, entered on August 30, 1971, Judge Anderson awarded to Foster Kent Sistare, Esq., $8,425.00 as compensation for services rendered and $3,144.40 for expenses. Sistare previously had been appointed by the court as "court's counsel" to perfect an equitable lien and constructive trust declared by Judge Anderson upon New Haven assets transferred to the Penn Central. The payment was ordered without prior submission of the claim to the Commission. Order No. 656, entered on November 9, 1971, concerned a claim, unrelated to the claim presented by Sistare, filed by Tate & Ervin,*fn2 a Philadelphia law firm, in connection with services performed as a Special Counsel to the New Haven trustee. Although Judge Anderson referred to the Commission Tate & Ervin's request for $4,646.00 compensation, he allowed, without referral, payment of $2,055.28 for disbursements.

The Commission appealed from both orders. It argues here that under § 77(c)(2) of the Bankruptcy Act, any payments to these attorneys out of the debtor's estate that have not been submitted to the Commission are invalid. The New Haven trustee asserts, however, that § 77(c)(2) cannot control payments to Sistare - for either compensation or disbursements - because he is neither one of the "trustees" nor "their counsel". As for the expense claims of Tate & Ervin, it is the trustee's position that the term "compensation" as used in § 77(c)(2) does not include disbursements and, accordingly, § 77(c)(2) does not govern the award of expenses to that firm. As to Sistare, we agree with the trustee that no prior submission to the Commission was required because Sistare was not counsel to the trustee. Accordingly, Order No. 652 is affirmed. We were informed at oral argument, however, that all disbursement claims of Tate & Ervin, including the claim that is the subject of this appeal, have been submitted voluntarily to the Commission. In light of this development, we conclude that the appeal from Order No. 656 should be dismissed for mootness.

I.

A discussion of the New Haven reorganization proceedings, especially their relationship to the ill-starred merger of the Pennsylvania Railroad and the New York Central Railroad, will prove helpful in placing the orders under consideration in their proper context.

Prior to its inclusion in the Penn Central system, the New Haven was the largest railroad in New England and the sixth largest in the Northeast region. New Haven Inclusion Cases, 399 U.S. 392, 401, 90 S. Ct. 2054, 26 L. Ed. 2d 691 (1970). In addition to a crucial role as a commuter line, most particularly in the New York City area, "its freight service [was] considered to be of extreme importance to the industrial wellbeing of southern New England." New York, N.H. & H.R.R. Trustees Discontinuance of Passenger Service, 327 I.C.C. 77, 80 (1965). Despite its importance, however, "[the] financial history of the New Haven... for decades [has been] a history of extreme vicissitudes," 399 U.S. at 402, 90 S. Ct. at 2063. To its dismay, the railroad is no stranger to the Bankruptcy Court. The New Haven first filed a petition for reorganization in 1935 and did not emerge from those proceedings until 1947. Although all but the most senior secured interests were eliminated during this reorganization, the New Haven was still unable to operate as a viable enterprise. By 1961, the railroad's monthly cash deficit approached $1.5 million and on July 7, 1961, its management again filed a petition for reorganization under § 77 of the Bankruptcy Act. The Connecticut district court approved the petition and trustees were appointed to administer the failing railroad.

During succeeding years, the court appointed trustees continued to operate the New Haven's passenger and freight lines despite staggering losses. Since the previous decade had demonstrated convincingly that the New Haven's traffic patterns could not generate sufficient revenues to meet its costs, no serious consideration was ever given to a reorganization plan that left the New Haven as an independent operating enterprise. Instead, the trustees concentrated their efforts on seeking a merger with a larger, financially healthy railroad. The eagerly hoped for panacea soon appeared when, in March, 1962, the Pennsylvania Railroad and the New York Central Railroad formally sought merger approval from the Commission. Within three months, the New Haven trustees filed a petition with the Commission seeking inclusion of the New Haven's operations in the merged railroad system.

On April 6, 1966, after more than four years of continued deficit operations by the New Haven, the Commission approved the proposed merger, subject to the condition that the "Pennsylvania New York Central Transportation Company... be required to include in the transaction all the New York, New Haven and Hartford Railroad Company... upon such fair and equitable terms as the parties may agree subject to the approval of the Bankruptcy Court and the Commission." Pennsylvania R.R. - Merger - New York Central R.R., 327 I.C.C. 475, 553 (1966), modified in other respects, 330 I.C.C. 328, aff'd sub nom., Erie-Lackawanna R.R. v. United States, 279 F. Supp. 316 (S.D.N.Y.1967), aff'd sub nom., Penn-Central Merger and N & W Inclusion Cases, 389 U.S. 486, 88 S. Ct. 602, 19 L. Ed. 2d 723 (1968). After the Commission's decision was filed, the New Haven trustees and the Pennsylvania and New York Central Railroads submitted to the Commission a Purchase Agreement which contemplated an exchange of all of the New Haven's assets for cash and securities of the Penn Central. Upon receipt of the Purchase Agreement, the Commission conducted an independent review and concluded that $125 million was a "fair and equitable" price for New Haven's assets. Pennsylvania R.R. - Merger - New York Central R.R., 331 I.C.C. 643 (1967). Almost immediately thereafter, different classes of New Haven bondholders challenged the Commission's evaluation. Review was sought simultaneously in a three-judge district court in the Southern District of New York, pursuant to 28 U.S.C. § 2325,*fn3 and in the Connecticut district court. Both courts independently concluded that $125 million was an inadequate price and remanded to the Commission for further proceedings. New York, N.H. & H.R.R. Co., First Mortgage 4% Bondholders' Committee v. United States, 289 F. Supp. 418 (S.D.N.Y.1968); In the Matter of New York, N.H. & H.R.R. Co., 289 F. Supp. 451 (D.Conn.1968).

The Commission then proceeded to hold further hearings. On December 2, 1968, it announced a reevaluation of New Haven's assets at $140 million. New Haven bondholders again challenged the Commission's evaluation in both district courts.

By this time, however, New Haven's financial condition had become so desperate that despite a compelling public need for its services, train operations could no longer be continued under these circumstances. Accordingly, on December 24, 1968, Judge Anderson authorized immediate transfer of all New Haven assets to Penn Central, "leaving the exact amount and form of consideration to be paid by Penn Central to be settled finally at a later date." In the Matter of New York, N.H. & H.R.R. Co., 457 F.2d 683, 685 (2d Cir. 1972). Thus, New Haven's only remaining "asset" is its right to receive "fair and equitable" compensation from Penn Central.

The second round of proceedings brought by objecting bondholders in the two district courts was concluded in mid-1969. In May of that year, the Connecticut district court again rejected the Commission's evaluation as too low, finding that a more accurate asset value was approximately $175 million. In the Matter of New York, N.H. & H.R.R. Co., 304 F. Supp. 793 (D.Conn.1969). The three-judge district court, however, approved the Commission's revised evaluation. New York, N.H. & H.R.R. Co., First Mortgage 4% Bondholders' Committee v. United States, 305 F. Supp. 1049 (S.D.N.Y.1969). Since a direct appeal to the Supreme Court of the three-judge court's decision was taken under 28 U.S.C. § 1253, the Supreme Court granted certiorari to the Court of Appeals for the Second Circuit in advance of its judgment on an appeal taken from the decision of the Connecticut district court so that both cases could be heard together. 28 U.S.C. §§ 1254(1), 2101(e).

The Supreme Court's decision, handed down on June 29, 1970, affirmed Judge Anderson's evaluation of the New Haven assets. New Haven Inclusion Cases, supra. Unfortunately, the Court's decision did not terminate the dispute. Only eight days prior to the Supreme Court's decision, the mighty Penn Central filed its petition for reorganization under § 77 of the Bankruptcy Act in the District Court for the Eastern District of Pennsylvania. Since Penn Central securities, which overnight became virtually worthless, were to comprise a significant portion of the payment to the New Haven estate, the Supreme Court remanded the case for "[further] proceedings before the Commission and the appropriate federal courts... to determine the form that Penn Central's consideration to New Haven should properly take and the status of the New Haven estate as a shareholder or creditor of Penn Central." 399 U.S. at 489, 90 S. Ct. at 2108.

Upon remand, Judge Anderson determined that the Penn Central's bankruptcy, and the attendant decline in value of its securities, rendered the earlier plan for compensation to the New Haven estate wholly inadequate. Moreover, the Penn Central's hopeless financial condition indicated that its general creditors would emerge from the Penn Central reorganization proceedings empty-handed. Judge Anderson, therefore, sought to give the New Haven estate secured-creditor status by declaring "an equitable lien... on all of the former assets transferred by the New Haven to Penn Central, exclusive of (a) rolling stock and (b) the New Haven's one-half interest in the excess income from the Grand Central [Terminal] properties" and, as to ...


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