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September 5, 1986

ALAN C. RIEVMAN, WALTER PISTNER, LIV ANSPACH, IRWIN E. GARFIELD, as Trustee for B.G. ENTERPRISES, INC., Defined Benefit Pension Plan and Trust Dated 12/1/76, GESEG, INC., and J. ALLAN MACTIER, Plaintiffs,

The opinion of the court was delivered by: CARTER

CARTER, District Judge

Over a year ago, in an opinion with which familiarity is assumed, this court entered a preliminary injunction against a proposed plan to substitute the collateral that secured $117,700,000 worth of bonds. Rievman v. Burlington Northern Railroad Co., 618 F. Supp. 592 (S.D.N.Y. 1985) (Carter, J.). The case is now before the court on the motion of the plaintiff class to enter a permanent injunction, and the cross-motions of defendants Burlington Northern Railroad Co. ("Burlington") and Citibank, N.A. ("Citibank") to grant them summary judgment and dismiss the case as moot.


 The facts of this case are both interesting and complex enough to bear the limited repetition required by these motions. The Northern Pacific Railway Company ("Northern Pacific"), merged into Burlington in 1970, issued two series of bonds in 1896. One series, issued pursuant to a mortgage and paying four percent interest, will mature on January 1, 1997 ("Prior Lien Bonds"). The second series, issued pursuant to a second mortgage on the same properties and paying three percent interest, will mature on January 1, 2047 ("General Lien Bonds"). Both series are secured by two types of collateral: railroad properties that Northern Pacific owned as of November 10, 1896; and "Resource Properties," or property interests granted to Northern Pacific's predecessor in interest by Congress. The Resource Properties -- comprised of mineral rights as well as lands held in fee simple -- have become far more valuable than the bonds that they secure. Par value for the outstanding bonds is $117,700,000. The Resource Properties may be worth billions. Approximately 1,900,000 acres of land in fee simple and 2,400,000 acres of mineral rights remain subject to the bonds' mortgage liens.

 Neither series of bonds may be called by the issuer prior to maturity. Proceeds from the sale of any of the Resource Properties must be deposited with the bonds' trustees. *fn1" Burlington may withdraw excess collateral only to the extent expended in improvements to the railroad lines formerly operated by Northern Pacific, labelled "additions and betterments" ("A's and B's"). Burlington thus has only a limited financial incentive to sell or develop the Resource Properties.

 Speculation that Burlington would be forced to pay a premium -- called "hold-up" value -- to the bondholders in order to disencumber the Resource Properties has driven up the bonds' market value. The record shows that on April 19, 1985, the Prior Lien Bonds traded on the New York Stock Exchange ("NYSE") at three percent above their value as debt obligations; on the same day, the General Lien Bonds traded at 66 percent above that value.

 Northern Pacific's first recorded attempt to release the Resource Properties from the mortgage liens took place in 1959. Plaintiffs' Exhibits 28 and 29. *fn2" That aborted effort did not survive the trustees' vigorous opposition. Id. In 1973, Burlington sought the advice of two law firms regarding modification of the mortgages; both concluded that the mortgages barred all means of substituting collateral. Plaintiffs' Exhibit 63.

 The third attempt to release the Resource Properties from the mortgage liens brought Burlington to this court. On April 19, 1985, Burlington signed two agreements ("Letter Agreements") with the trustees. The Letter Agreements imposed several conditions on the trustees' release of the mortgage liens. The first was the provision of substitute collateral in the form of a portfolio of United States Securities placed in irrevocable trusts. Burlington had already purchased such a portfolio. These trusts would have allowed Burlington to pay all bond obligations, both principal and interest, as they became due. They would absolutely guarantee Burlington's obligations to pay the bondholders; they would also nullify the bonds' hold-up value, because Burlington would have achieved its goal of releasing the Resource Properties from the liens.

 The second condition was intended to protect the bondholders against the anticipated decline in the bonds' market value upon the publication of the substitution plan. It consisted of a tender offer for the bonds at a price slightly higher than their market value immediately prior to the announcement of the Letter Agreements. The remaining provisions of the Letter Agreements dealt with the bonds' rating, the accounting treatment of the transaction, and indemnification of the trustees.

 Plaintiffs opposed the transactions proposed in the Letter Agreements. Their complaint, filed on May 15, 1985, sought both declaratory and injunctive relief. On June 14, 1986, they moved for a preliminary injunction against implementation of the Letter Agreements, release of the Resource Properties and the tender offer. On June 21, 1986 (one day before the transactions contemplated in the letter agreement were to be consummated), that motion was granted and the case was certified as a class action. In granting the preliminary injunction, we applied the governing standard of Jackson Dairy, Inc. v. H. P. Hood & Sons, Inc., 596 F.2d 70 (2d Cir. 1979), which requires a showing of: (1) irreparable harm; and (2) either (a) likelihood of success on the merits or (b) a serious question going to the merits and the balance of hardships in movant's favor. First, we held that the bondholders would suffer irreparable harm from the implementation of the Letter Agreements because it would be difficult, if not impossible, to ascertain money damages from the loss of the hold-up premium. Rievman, 618 F. Supp. at 597. *fn3" Next, we held that the plaintiff class had shown a likelihood of success on the merits. Relying on Colorado & Southern Railway Co. v. Blair, 214 N.Y. 497, 108 N.E. 840 (1915), we held that it was likely, though not certain, that the bondholders would be able to show that the defendants could not substitute their collateral without their consent. We interpreted Colorado & Southern Railway to lay

 down a per se rule: because of the 'vast sums invested in railroad bonds; and the need to insure investor confidence, railroad mortgage trustees may not 'sell, change, or in any manner compromise the security except as authorized in express terms or by necessary implication' -- even where the sale or change would not harm the bondholders' interests.

 Rievman, 618 F. Supp. at 601, citing Colorado & Southern Railway, 214 N.Y. at 511.

 Finally, we held that even if the bondholders had not proven their likelihood of success on the merits, at the very least they had shown that there were serious questions going to the merits and that the balance of hardships tipped decidedly in their favor. 618 F. Supp. at 601. The potential harm to Burlington from the injunction was de minimis. The bondholders' apparent right to bargain for the release of the property, on the other hand, would be "irretrievably lost" in the absence of injunctive relief. Id. at 602. Accordingly, the court issued a preliminary injunction barring Burlington and the trustees from "(a) implementing the Letter Agreements dated April 19, 1985; (b) releasing any or all of the Resource Properties; and (c) proceeding with the tender offer commenced by [Burlington] to purchase any and all outstanding bonds." Id. at 603.

Ā Burlington abandoned the proposed defeasance plan after issuance of the injunction on June 21. Negotiations with the bondholders are in stalemate. Lowey Reply Affidavit, Exhibit 3 (Interview with R. Bressler, January 4, 1986). Burlington sold off the portfolio of United States Securities that was to have provided the ...

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