Petition — City of Cambridge v. Meserve

33-1412

CASE NUMBER

The Supreme Court of the———

United States

OCTOBER, 1983 term

CITY OF CAMBRIDGE, MASSACHUSETTS,

Petitioner

v.

ROBERT W. MESERVE and BENJAMIN H. LACY,

Reorganization Trustees of the Boston

and Maine Corporation,

Respondents

On Writ of Certiorari to the United States

Court of Appeals for the First Circuit

PETITION FOR CERTIORARI

MATTHEW BROWN

BROWN, RUDNICK, FREED & GESMER

ONE FEDERAL STREET

BOSTON, MASSACHUSETTS 02110

(617) 542-3000

ATTORNEY FOR APPELLANT

QUESTION PRESENTED

Where a railroad in reorganization pays no real estate taxes to a munic-

tlie detten atl year administreti ‘od. is the ‘cipal

entitled to receive interest on these postpetition taxes under Nicholas v.

United States , 384 U.S. 678 (1966) upon the consummation of a plan of

reorganization which provides for the payment of interest on the claims

of lower priority creditors?

PARTIES

The City of Cambridge, Massachusetts (the **City’’) is a political sub-

division of the Commonwealth of Massachusetts.

Robert W. Meserve and Benjamin H. Lacy, are the trustees (**Trust-

ees"’) of the Boston and Maine Corporation (the ‘‘B&M""), a railroad

which was the subject of reorganization proceedings under Section 77 of

the Bankruptcy Act, 11 U.S.C. §205 (1977) (repealed), from March 12,

1970 through June 28, 1983.

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(i)

TABLE OF AUTHORITIES

Cases

In re Boston and Maine Corp.,

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City of New York v. Saper,

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Consolidated Rock Products Co. v. DuBois

312 U.S. $10 (1941) .......0..... allah piace céndbenbeeeilibhees senshinds 9

MacGregor v. Johnson-Cowdin-Emmerich, Inc. ,

ak ica iicnddnctlbisacussecsevcescecseusdinems 5

In re New York, New Haven and Hartford Railroad Co. ,

304 F. Sapp. 1121 (D. Comm. 1969) ..........ccccrcccccccssccseccccceees 7,8

In re New York, Ontario & Western Railway Company,

I dni 5i conscoscvecseecoctcovssedessnbebe 5

Nicholas v. United States of America,

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In re Penn Central Transportation Co. ,

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In re Penn Central Transportation Co. ,

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People of the State of Michigan v. Michigan Trust Company,

isan en talib delisiisvebends cetokeerenaseussapecbebe 5

Sexton v. Dreyfus,

SS ESE OT A ae Re PU eM 5

Southern Railway Co. v. United States,

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(iii)

Statutes Page

Bankruptcy Act Section 24a, 11 U.S.C. §47a (1977)

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Bankruptcy Act Section 64a(1), 11 U.S.C. §104,

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Bankruptcy Act Section 77, 11 U.S.C. §205 (1977)

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Treatises

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(iv)

STATEMENT OF JURISDICTION

The City seeks review of a judgment entered by the First Circuit Court

of Appeals, in a divided decision, affirming an order of the United States

District Court for the District of Massachusetts approving the Amended

Plan of Reorganization (the ‘*Plan’’) of the Trustees of the B&M. The

effect of the judgment and order was to deny interest to the City on its

prepetition and postpetition tax claims. Review is sought solely on the

question of whether interest is payable on postpetition taxes.

The first circuit issued its judgment on September 30, 1983; a petition

for rehearing was denied on November 17, 1983. This Court has juris-

diction to review this judgment by writ of certiorari pursuant to 28 U.S.C.

§1254(a).

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STATUTES AND ORDINANCES

Bankruptcy Act Section 64a(1),

11 U.S.C. §104 (1977) (repealed)

(text set forth in appendix at 99)

Massachusetts General Laws c. 59, §57

(text set forth in appendix at 98)

STATEMENT OF THE CASE

This case arises out of the railroad reorganization proceedings involv-

ing the Boston and Maine Corporation (the *“B&M’’). These proceed-

ings were initiated on March 12, 1970 when an involuntary petition for

reorganization was filed against the B&M under Section 77 of the Bank-

ruptcy Act, 11 U.S.C. §205 (1977) (repealed). The B&M remained in

reorganization for almost thirteen years until the Trustees’ Amended Plan

of Reorganization (the ‘‘Plan’’) was consummated on June 28, 1983.

Pursuant to the Plan, the B&M was sold to a private investor for $24.5

million dollars on that date. The Trustees are now in the process of dis-

tributing to creditors the proceeds of that sale as well as about $48 million

remaining from an earlier sale of commuter rail properties to the Mas-

sachusetts Bay Transportation Authority.

During this thirteen- year reorganization period (and for several years

before), the B&M regularly paid no real estate taxes to the City of Cam-

bridge, Massachusetts (the ‘‘City’’) or to other municipalities. Even

though it received no tax revenue from the B&M, the City continued to

supply the B&M with police and fire protection and other essential

municipal services throughout the reorganization.

At the Trustees’ request, the temporary deferral of the payment of real

estate taxes was formally authorized by the reorganization court in an

order entered on September 19, 1978. The basis for this order was that

the B&M had insufficient funds both to pay current taxes and to pay other

ordinary operating expenses. At various times after this order was

entered, the City believing that the relative financial condition of the B&M

and itself had changed, requested that the reorganization court modify

its order to require the Trustees to pay future taxes as they accrued or to

pay some or all of the back taxes. However, each such request was

rejected.

As of June 28, 1983, the date the Plan was consummated, the B&M

owed the City $3,894,980.89 in taxes which had been assessed during

the reorganization period. In addition, the B&M owed the City about

$361,344.23 for unpaid taxes assessed prior to the filing of the petition.

Statutory interest in the amount of approximately $2,459,197 had

accrued on the principal amount of postpetition taxes owed to the City.

In addition, about $381,948 in interest had accrued on the principal

amount of the City’s prepetition taxes in the period from the filing of the

petition to August 5, 1982.' Under Massachusetts law, the City’s claim

for outstanding taxes and interest thereon is secured by validly perfected

first liens on the subject parcels.

The Plan calls for the City to receive the full principal amount of its

prepetition and postpetition tax claims. However, except for the interest

which had accrued on prepetition taxes as of the petition date (March 12,

1970) the City is to receive no interest on either its pre or postpetition tax

claims. The Plan does provide for certain secured creditors, whose liens

are of lower priority than the City’s, to receive the full amount of interest

which accrued during the reorganization period on their claims.

The Plan was approved by the Interstate Commerce Commission on

April 26, 1982. The reorganization court conducted hearings on approval

of the Plan in August, 1982. At the hearings, the City objected to the Plan

because of the failure to provide for interest on either its prepetition or

postpetition tax claims. Notwithstanding the City’s objections, the Plan

was approved by the reorganization court in an order dated December

30, 1982.

The City appealed the reorganization court's order approving the Plan

to the First Circuit Court of Appeals which had jurisdiction over the case

pursuant to Section 24a of the Bankruptcy Act, 11 U.S.C. §47a (1977)

(repealed), and 28 U.S.C. §1291. In a divided decision entered on Sep-

tember 30, 1983, the first circuit entered a judgment affirming the reor-

ganization court's order, the effect of which was to deny interest to the

City on its prepetition and postpetition tax claims. The City then sought

a rehearing solely on the issue of whether the court of appeals misappre-

hended the law in denying postpetition interest on its postpetition tax

claims. The petition for rehearing was denied on November 17, 1983.

After the first circuit issued its judgment, the Trustees voluntarily paid

the City the full principal amount of the prepetition and postpetifion taxes

owed by the B&M. It is anticipated that the interest which had accrued

on the prepetition taxes as of the petition date will be paid shortly. No

payment has been made on account of postpetition interest on either pre-

' Under Massachusetts General Laws c.59, §57, taxes assessed for fiscal years com-

mencing before July 1, 1977 bear interest at a per annum rate of eight percent. That

Tate was increased to ten percent per annum for taxes assessed during the period between

July 1, 1977 and June 30, 1979 by Mass. St. 1976, c.250, §1, and to fourteen percent

per annum for taxes assessed after July 1, 1979 by Mass. St. 1979, c.503, §1.

Trustees shall hold in escrow an amount sufficient to pay the full ammount

of interest the City alleges is owed on its tax claims pending final reso-

lution of its appeal.

ARGUMENT

The City respectfully requests that this court grant certiorari solely on

the issue of whether postpetition interest is payable on its postpetition tax

claims. The court of appeals’ decision denying the City interest on its

postpetition tax claims conflicts with the holding of this Court in Nicholas

v. United States, 384 U.S. 678 (1966).

For almost thirteen years during the reorganization proceedings, the

City furnished essential municipal services to the B&M without receiv-

ing any tax revenue in return. Such taxes are an expense of administration

like “*heat, light and current upkeep” and generally must be paid on a

current basis. MacGregor v. Johnson-Cowdin-Emmerich, Inc. , 39 F.2d

574, 576 (2nd Cir. 1930); See, People of the State of Michigan v. Mich-

igan Trust Company, 286 U.S. 333, 344 (1932); In re Boston and Maine

Corp. , 693 F. 2d 4, 5, (ist Cir. 1982); Southern Railway Co. v. United

States, 306 F. 2d 119, 126 (Sth Cir. 1962). Expenses of administration

are accorded first priority under Bankruptcy Act Section 64a, 11 U.S.C.

§104 (1977) (repealed). While this Court has not yet ruled on the issue,

the lower courts have held that the provisions of Section 64 apply in rail-

road reorganizations. Jn re New York, Ontario & Western Railway Com-

pany, 25 F. Supp. 709 (S.D.N.Y. 1937); See, 5 Collier, *‘On Bank-

ruptcy”’ 477.21 (14th ed.).

The general rule is that interest on a debtor's prepetition claims is not

computed beyond the date that a petition in bankruptcy is filed. Sexton v.

Dreyfus, 219 U.S. 339 (1911); City of New York v. Saper, 336 U.S. 328,

332 (1949) (taxes). This rule does not apply to claims which arise during

the reorganization proceeding itself. In Nicholas v. United States, 384

U.S. 678 (1966), this Court held that interest is payable on taxes assessed

during the reorganization and that the obligation to pay interest on such

taxes continues until the case is converted from a reorganization to a liq-

during the reorganization are administrative expenses that ought to be

paid on a current basis, but must bear interest if their payment is delayed

or deferred.

Nicholas involved a claim by the Internal Revenue Service for interest

on payroll taxes which had not been paid during the reorganization. Noth-

ing in the Nicholas opinion, however, suggests that its holding rests on

the particular facts or equities of that case or that its holding is limited to

Chapter XI cases. The Court reviewed prior case law, involving both

liquidation and reorganization proceedings and gleaned from those cases

the general principle that interest is payable on taxes incurred during any

period of bankruptcy administration until the debtor enters a new stage

of bankruptcy administration beyond that in which the underlying tax

obligation is incurred. Applying this principle, interest is payable on pre-

petition taxes until a reorganization or liquidation petition is filed. Sim-

ilarly, interest is payable on taxes incurred during a reorganization pro-

ceeding until the case is converted to a liquidation proceeding.

The Court noted that allowance of interest on debts incurred during the

reorganization (including taxes) ‘‘promotes the availability of capital to

a debtor in possession and enhances the likelihood of achieving the goal

of the proceeding, the ultimate rehabilitation of the debtor.”’ /d. at p.687.

The suspension of interest once the reorganization case has been con-

verted to a liquidation case is grounded in the administrative convenience

of not continually having to redetermine interest rates, and a concern

“that creditors should not be disadvantaged vis a vis one another by legal

delays solely attributable to the time consuming procedures inherent in

the administration of the bankruptcy laws.”’ /d. , at p.683. Put more con-

cretely, the Court was concerned that two creditors who might extend

credit at different interest rates during the reorganization period should

not be treated differently where payment is delayed not in furtherance of

any rehabilitative purpose, but solely due to procedural delays inherent

in the liquidation process.

The court of appeals majority attempts to distinguish Nicholas, on the

ground that it involved a Chapter XI proceeding, not a railroad reorga-

nization. The majority argues that Nicholas is not relevant because the

failure of the B&M to pay postpetition taxes during the thirteen year reor-

ganization period was due to the entry of an order by the reorganization

court in 1978 authorizing the railroad to defer payment of taxes.

As the dissent correctly points out, this case is governed by former

Section 77 of the Bankruptcy Act, which provides that ‘‘the rights and

liabilities of creditors, and of all persons with respect to the debtor and

its property, shall be the same as if a voluntary petition for adjudication

had been filed and the decree of adjudication had been entered on the day

when the debtor's petition was filed."” 11 U.S.C. §205(1) (1977)

(repealed). Nowhere in Section 77 are the courts given the power to impair

the rights of governmental bodies in the recovery of tax claims against a

railroad in reorganization. The clear language of the Supreme Court in

Nicholas , 384 U.S. at 691 , states that “‘the strong policy of Section 64a(1)

of the Bankruptcy Act . . . establishes a sharply defined priority that

places all expenses of administration on a parity, including claims for

taxes.’’ Absent clear statutory support, there is no basis in law or equity

for treating tax claims which are deferred during a railroad reorganiza-

tion differently from other administrative claims.

The majority suggests that the reorganization court’s power to defer

the payment of taxes when necessary to sustain the railroads’ continued

operation, See, In re Penn Central Transportation Co. , 458 F.2d 1030

(3rd Cir. 1972), somehow encompasses the power to deny interest on

such taxes when they are ultimately paid. Indeed, logic would seem to

dictate quite the opposite result. Deferral of the taxes has resulted in

harsher treatment for the City than that accorded other administrative

creditors who have been paid currently. The payment of interest is nec-

essary, therefore, to accord it similar treatment and to make it whole.

As Chief Judge Levin H. Campbell noted in his dissenting opinion in

this case:

**Basically, I find it hard to locate the source of the district court's

power, after having forced a deferral of Cambridge's taxes, to

deprive it of all interest on what was, in effect, a forced loan. I con-

cede that there is now ample authority permitting railroad reorga-

nization courts to cause the deferral of municipal taxes. There is no

clear authority, however, empowering the denial of all postpetition

interest on postpetition tax claims. Indeed, the Supreme Court has _

held in a related context that ‘[s]ince the taxes in question were”

incurred during the Chapter XI arrangement proceeding itself, the

United States was entitled to interest on those taxes for the duration

of that period.’ Nicholas v. United States, 384 U.S. 678, 689

(1966)."’ (Appendix, at page 21)

The only authority cited by the majority for the proposition that denial

of interest is appropriate is In re New York, New Haven and Hartford

Railroad Co. , 304 F. Supp. 1121 (D. Conn. 1969). As the dissent points

out, however, the New Haven case is entirely distinguishable from this

case. The New Haven case involved the liquidation of a hopelessly insol-

vent railroad, whose condition was analogized to that of a ‘‘trainwreck."’

There, the railroad had been sustained ‘‘at the expense of the bondhold-

ers."’ Jd. at 1134. All creditors had been disadvantaged by the public

although ‘‘interest on unpaid post reorganization state and local tax

claims, both secured and unsecured, would normally be paid’’ under the

circumstances, *‘all considerations compelled the disallowance of inter-

est on the tax claims.”’ /d. Since all creditors of the New Haven were being

awarded reduced recoveries, the taxing authorities were merely being

required to share the burden.

In the present case, the City has been singled out to bear a dispropor-

tionate share of the cost of the reorganization. Other administrative cred-

itors have been paid on a current basis. First mortgagees and income

bondholders are to receive the full amount of interest on their claims. In

comparison, the City has been forced to provide the B&M with what the

dissent correctly terms ‘‘an interest-free loan."’ It should also be noted

that the precedential value of New Haven is diminished by the fact that

no tax claimant contested the proposed treatment of its claim under

the plan.

The court of appeals majority also attempts to distinguish the Nicholas

case by asserting that the nonpayment of interest during the B&M reor-

ganization was mandated not by a decision of the Trustees, but by the

“‘law’s delay,’ a phrase used by the Nicholas Court. To a certain extent,

any postponement in the payment of a claim during a bankruptcy pro-

ceeding is caused by the law’s delay. This is true not only with regard to

prepetition claims, but also with regard to administrative claims the pay-

ment of which may be delayed pending the consummation of a plan of

reorganization. The Nicholas Court acknowledged that the amount of

interest that accumulates on an administrative claim depends ‘‘upon the

duration of a proceeding that takes place under the direction and authority

of the bankruptcy court.’’ /d. at 684. But, ‘‘meaningful legal delays”

occur only when an enterprise enters the period of bankruptcy adminis-

tration beyond that in which the debt was incurred. The entry into the next

stage marks the beginning of the type of wholly unanticipated delays dur-

ing which the further accumulation of interest would produce an unfair

disadvantage to certain creditors. /d. at 685.

The B&M reorganization case was commenced in 1970. No real estate

taxes were paid to the City until the proceedings were concluded about

thirteen years later. Not until 1978, did the Trustees apply to the court for

an order authorizing deferral of the taxes. The reorganization court's

order only ratified a unilateral decision previously made by the Trustees.

Whether under Chapter XI, Chapter X or Section 77, the decision to

defer payment of taxes is made in the first instance by the reorganizing

debtor or trustee, presumably in the interest of fostering a reorganization,

and it is difficult to see how the entry of an order ratifying this decision

changes the voluntary character of the decision.

The majority suggests that the special nature of railroad reorganization

proceedings makes the decision to defer payment one imposed by law,

because railroads in reorganization often must operate at a loss in the

*“public interest.’ That supposes that other types of reorganization pro-

ceedings do not involve operating losses, or are not affected by the public

interest, a supposition unsupported in the record, and contradicted by

experience. Many Chapter XI debtors continue in operation for a period

of time despite incurring operating losses. If, for example, an important

defense contractor or a major automaker were to file a petition for reor-

ganization under Chapter XI, they would likely continue operating even

if they were to incur losses.

In the end, the majority's decision misapprehends the clear mandate of

Nicholas which was concerned with equal treatment of creditors who

extend credit at the same stage of bankruptcy proceedings. The clear

import of that case was that all administrative creditors, including taxing

authorities, should be treated alike. Nicholas dic aot turn on the volun-

tariness of decisions made by debtors, or their trusies (whether ratified

by court decree or not), during any period of bankrupicy administration.

The majority also asserts that the equities of this case favor non-

payment of interest to the City. It is concerned that if interest is paid to

the City, unsecured prepetition creditors may receive their ten percent

(10%) dividend by way of certificates of contingent interest instead of

cash. The touchstone of bankruptcy administration has always been

equality of treatment among creditors who are similarly situated, not a

balancing of equities as between classes of creditors of different priori-

ties. This is required by the absolute priority rule. See, Consolidated Rock

Products Co. v. DuBois, 312 U.S. 510(1941). Before weighing the bal-

ance of equities between the City and the unsecured creditors, the court

of appeals was required to ensure that the City was being treated fairly

in comparison to other administrative creditors.

The City’s postpetition tax claims are first priority expenses of admin-

istration as well as first priority liens on the property they affect. Unlike

other ordinary operating expenses incurred during the reorganization

period, payment of the taxes was deferred for thirteen years without com-

pensation to the City for the delay in payment. (While payment of the

taxes was deferred, interim fee allowances were granted to the Trustees

and certain attorneys.)

To deny the City interest on these deferred taxes is to require the City

unfairly to underwrite the reorganization, at the expense of the essential

public interest it represents, a result against which the reorganization court

in the Penn Central case expressly warned. In re Penn Central, 325 F.

Supp. 294, 300.(D.Ct.Pa. 1970). The unfairness of this result is accen-

tuated by measuring the treatment of the City’s first priority claims against

the treatment afforded the first mortgagees and income bondholders,

whose claims, even the majority concedes, ‘‘arise only after the payment

from gross earnings for all necessary operating and managing expenses,

proper equipment, and useful improvements.’’ The claims of both the

first mortgagees and the income bondholders are being paid in full,

including the total amount of interest which has accrued on their claims.

The City submits that the court of appeals decision comports neither

with applicable precedent of this Court nor with equity. Since the court

of appeals judgment conflicts with a decision of this Court and is of excep-

tional importance, the City respectfully requests that this Court grant

certiorari over this matter.

Respectfully submitted,

Matthew Brown

Brown, Rudnick, Freed & Gesmer

One Federal Street ‘

Boston, Massachusetts 02110

(617) 542-3000

Dated: February 13, 1984

10

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a APPENDIX ;

Table of Contents

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United States Court of Appeals

For the First Circuit

CITY OF CAMBRIDG

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

{Hon. Frank J. Murray, U.S. District Judge)

Before

Campbell, Chief Judge,

Bownes, Circuit Judge,

and Torruella,* District Judge.

Joseph F. Ryan, with whom John F. Collins, Hirsh Freed, Robert

E. Brooks, Steven B. Levine, and Brown, Rudnick, Freed & Gesmer

were on brief, for City of Cambridge.

Robert M. Gargill, with whom John N. Garner, Choate, Hall &

Stewart, Charles W. Mulcahy, Jr., and Mahoney, Hawkes & Golding

were on brief, for Reorganization Trustees of Boston and Maine Cor-

poration.

September 30, 1983

*Of the District of Puerto Rico, sitting by designation.

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BOWNES, Circuit Judge. This is another, and perhaps the last, in a

long line of decisions involving the reorganization of the Boston and

Maine Railroad (B&M). Appellant, the City of Cambridge, appeals from

an order of the district court sitting as a Reorganization Court. That order

approved the final plan of reorganization for the B&M. Cambridge's

objections stem from the treatment afforded its claims for taxes under the

plan. Some background is necessary.

On March 12, 1970, an involuntary petition for reorganization was

filed against the B&M under section 77 of the Bankruptcy Act, 11 U.S.C.

§205 (1977). For some time before this date and throughout the reorga-

nization period—March 12, 1970 through June 28, 1982—B&M did not

pay taxes owed to Cambridge on a current basis. B&M's failure to pay

the taxes due during the reorganization period was the result of an order

of the district court on September 19, 1978, which authorized the Trust-

ees ‘to defer the payment of taxes heretofore or hereafter assessed on or

in connection with property of or in the possession of the Debtor or the

Cambridge’s claims for taxes are substantial. It is owed approximately

$434,000 in taxes accruing prior to the filing of the reorganization peti-

tion (prepetition taxes), which includes prepetition interest, and approx-

imately $4,026,000 in taxes accruing during the reorganization period

(postpetition taxes). The reorganization plan provides for cash payment

in full for these claims. It does not, however, provide for postpetition

interest on the taxes owed. This interest amounts to approximately

$375,000 on the prepetition taxes and approximately $1,868,000 on the

postpetition taxes. It is the plan's failure to provide for postpetition inter-

est payments to which Cambridge objects.

In assessing the district court's affirmance of the plan's disallowance

of interest it must be remembered that the district court, in passing on the

allowance of claims, sits as a court of equity. Pepper v. Litton, 308 U.S.

295, 307 (1939); see Sampsell v. Imperial Paper & Color Corp. , 313

U.S. 215, 219 (1941). We have previously articulated the standard of

review:

“It is not for us to pass upon the myriad factual and legal issues as

though we were trying the cases de novo. ‘It is not enough to reverse

the District Court that we might have appraised the facts somewhat

differently. If there is warrant for the action of the District Court,

our task for review is at an end.’ ’’ Group of Institutional Investors

v. Chicago, M., St. P.&P.R. Co., 318 U.S. 523, 564.

14

Boston and Maine Corp. v. First National Bank of Boston, 618 F.2d 137,

141 (ist cir. 1980) (quoting New Haven Inclusion Cases, 399 U.S. 392,

435 (1970)). The district court’s decision would, of course, not be war-

ranted if it were the result of an error of law or based on factual findings

that were clearly erroneous.

I. INTEREST ON PREPETITION TAXES

Cambridge, inits appeal, asserts th. ° the district court erred in holding

that its prepetition secured tax lien is not entitled to payment of postpe-

tition interest from the assets of B&M. For the reasons set forth below,

we agree with the district court.

It is a well-established principle that in bankruptcy and other insol-

vency proceedings interest upon claims ceases to accrue at the initiation

of the proceedings. Nicholas v. United States, 384 U.S. 678, 682 (1966);

City of New York v. Saper, 336 U.S. 328, 332 (1949); Vanston Bond-

holders Protective Committee v. Green, 329 U.S. 156, 162 (1946); Sex-

ton v. Dreyfus, 219 U.S. 339 (1911); Thomas v. Western Car Co., 149

U.S. 95, 116-17 (1893); Debentureholders Protective Committee of

Continental Investment Corp. v. Continental Investment Corp. , 679 F.2d

264, 268-69 (Ist Cir.), cert. denied, 103 S. Ct. 192 (1982). As the

Supreme Court has explained:

Exaction of interest, where the power of a debtor to pay even his

contractual obligations is suspended by law, has been prohibited

because it was considered in the nature of a penalty imposed because

of delay in prompt payment—a delay necessitated by law if the courts

are properly to preserve and protect the estate for the benefit of all

interests involved . . . . ““The delay in distribution is the act of the

law; itis anecessary incident to the settlement of the estate.’’ Thomas

v. Western Car Co., 149 U.S. 95, 116-117. Cf. American Iron Co.

v. Seaboard Air Line, 233 U.S. 261. Courts have felt that it would

be inequitable for anyone to gain an advantage or suffer a loss because

of such delay. Sexton v. Dreyfus, 219 U.S. 339, 346. Accrual of

simple interest on unsecured claims in bankruptcy was prohibited

in order that the administrative inconvenience of continuous recom-

putation of interest causing recomputation of claims could be

avoided. Moreover, different creditors whose claims bore diverse

interest rates or were paid by the bankruptcy court on different dates

would suffer neither gain nor loss caused solely by delay.

Vanston Bondholders Protective Committee v. Green, 329 U.S. at 163-

64 (footnote omitted).

15

Historically governmental entities’ claims for past due taxes received

special treatment, accruing postpetition interest until the date of pay-

ment. See City of New York v. Saper, 336 U.S. 328, 333. In Saper, how-

ever, the Supreme Court held that the general prohibition against the pay-

ment of postpetition interest embraced tax liens in bankruptcy cases. Id.

at 338. Saper’s ban on postpetition interest for tax claims has been

extended to Chapter X reorganizations, United States v. Edens, 189 F.2d

876, 877 (4thCir. 1951), aff'dper curiam, 342 U.S. 912 (1952); Chapter

XI arrangements, Massachusetts v. Thompson, 190 F.2d 10, 10-11 (ist

Cir. 1951), cert. denied, 342 U.S. (1952); United States v. General Engi-

neering and Manufacturing Co., 188 F.2d 80, 81-83 (8th Cir. 1951),

aff'd per curiam, 342 U.S. 912 (1952): direct actions against a debtor

after the confirmation of an arrangement, National Foundry Co. v.

Director of Internal Revenue, 229 F.2d 149, 150-51 (2d Cir. 1956); and

Section 77 railroad reorganizations, Jn re Penn Central Transportation

Co., 358 F. Supp. 154, 170 (E.D. Penn. 1973); In re New York, New

Haven and Hartford Railroad Co., 304 F. Supp. 1121, 1129-32 (D.

Conn. 1969).

Despite the general prohibition on the payment ef postpetition interest,

three exceptions have been developed by the federal courts. Interest may

accrue: (1) where the bankrupt ultimately proves to be solvent; (2) where

securities, held by the creditor produce income after the filing of the peti-

tion; and (3) where the amount of the secured creditor’s security is suf-

ficient to satisfy both the principal and interest due on the secured claim.

In re Walsh Construction, Inc. , 669 F.2d 1325. 1330 (9th Cir. 1982); In

re Kerber Packing Co., 276 F.2d 245, 246-47 (7th Cir. 1960); United

States v. Bass, 271 F.2d 129, 130 (9th Cir. 1959); In re Macomb Trailer

Coach, Inc., 200 F.2d 611, 613 (6th Cir.), cert. denied, 345 U.S. 958

(1953); see also Debentureholders Protective Committee of Continental

Investment Corp. v. Continental Investment Corp. , 679 F.2d at 269 (dis-

cussing first exception); United States v. Kalishman, 346 F.2d 514,517-

18 (8th Cir. 1965) (discussing first and second exceptions), cert. denied,

384 U.S. 1003 (1966); United States v. Harrington, 269 F.2d 719, 720

(4th Cir. 1959) (same); Castaner v. Mora, 234 F.2d 710, 712 (ist Cir.

1956) (discussing third exception); Kagan v. Industrial Washington

Machine Corp. , 182 F.2d 139, 146 (1st Cir. 1950) (same); Oppenheimer

v. Oldham, 178 F.2d 386, 388-89 (Sth Cir. 1949) (same).

These exceptions are not rigid doctrinal categories. Rather, they are

flexible guidelines which have been developed by the courts in the exer-

cise of their equitable powers in insolvency proceedings. The reorgani-

16

zation court must consider whether to grant postpetition interest, not as

an abstract matter, but in light of the nature of each claim and the equities

of the case before it. Jn re Penn Central Transportation Co. , 358 F. Supp.

at 170; In re Leeds Homes, Inc. ,222 F. Supp. 20, 33 (E.D. Terin. 1963),

aff'd 332 F.2d 646 (6th Cir.), cert. denied, 379 U.S. 836 (1964); see also

In re Magnus Harmonica Corp. , 262 F.2d 515, 518 (3d cir. 1959). At

all times the reorganization court must be guided by the basic equitable

principle announced in Vanston:

It is manifest that the touchstone of each decision on allowance of

interest in bankruptcy, receivership and reorganization has been a

balance of equities between creditor and creditor or between cred-

itors and the debtor.

Vanston Bondholders Protective Committee v. Green, 329 U.S. at 165

(citation omitted).

Cambridge contends that, having perfected its tax lien prior to the fil-

ing of the petition, it became a secured creditor in the amount of its liened

claims and enjoys the same status as all other secured creditors. As such

a creditor, Cambridge alleges that it falls within the ambit of the third

exception and is thus entitled to postpetition interest. We disagree.

Those cases in which courts have applied the third exception, permit-

ting postpetition interest to accrue, have generally involved mortgages,

trust deeds ; pledges or conditional sales contracts. In all of these circum-

stances, the creditor's security interest arises from a voluntarily executed

agreement between the debtor and the creditor. The two parties have bar-

gained with reference to a specific security with the expectation that the

creditor may sell this security and realize the entire amount of the out-

standing obligation, including interest accrued to the date of payment. in

re Kerber Packing Co., 276 F.2d at 247; United States v. Harrington,

269 F.2d at 723-24. To deny such a creditor postpetition interest, when

the amount of the security is sufficient to cover both the principal and

interest due, would undermine the faith of lenders in the efficacy of credit

arrangements. Such a loss of confidence could result in a curtailing of the

free flow of capital in our economy. Note, The Federal Tax Lien in Bank-

ruptcy: Enforceability of Liened Claims for Penalties and Post-Petition

Interest, 44 Minn. L. Rev. 1149, 1156 (1960). Thus, granting postpe-

tition interest to mortgages and other holders of contractual liens satisfies

the expectations of the parties and strikes an equitable balance between

the creditors and the debtors.

The Supreme Court has never ruled on the applicability of the third

17

exception, granting postpetition interest when there is sufficient secured

collateral , to tax liens. We agree with those federal courts of appeals which

have held that the third exception does not embrace tax liens. Jn re Kerber

Packing Co., 276 F.2d at 247-48; United States v. Mighell, 273 F.2d

682, 684 (10th Cir. 1959); United States v. Bass, 271 F.2d at 131; United

States v. Harrington, 269 F.2d at 723-24. A meaningful distinction can

be drawn between contractual liens, such as a mortgage or deed of trust,

and statutory liens, such as Cambridge’s perfected tax lien. A statutory

lien depends for its existence solely on a legislative act creating the lien

in specified circumstances. No bargaining takes place between the debtor-

taxpayer and the taxing entity which is granted a lien; the lien cannot be

classified as voluntary. '

Further, the payment of the interest, which is secured by the lien, is not

contemplated by the parties at the beginning of each tax year. Rather, the

imposition of interest on unpaid taxes is more in the nature of an enforce-

ment device assuring the collection of delinquent taxes. In the Context of

an insolvency proceeding, to grant the taxing entity postpetition interest

on its tax lien would impose the *‘enforcement device’’ not on the insoi-

vent debtor, but on those lower priority creditors whose claims will go

unpaid. Such creditors are but innocent bystanders; they could have done

nothing to effect the prompt payment of taxes and avoid the imposition

of postpetition interest. To penalize these creditors for the bankrupt's ina-

bility to pay its taxes on time violates all notions of equity. /n re Cameron,

166 F. Supp. 400, 407 (S.D. Cal. 1958) (quoting Jn re Burch, 89 F. Supp.

249, 254 (D. Kan. 1949)), aff'd sub nom. United States v. Bass, 271 F.2d

129 (9th Cir. 1959). As one federal court has explained:

The allowance of interest [on tax claims] to the date of payment,

an accumulation caused solely because of delays necessitated by the

successful efforts of the Trustee to protect and increase the estate,

seems to me to be entirely inequitable, and to result in an unbalance

of equities between the several creditors rather than a ‘balance of

equities’’ which the Supreme Court says is the touchstone of cach

decision.

' Some courts have further distinguished statutory tax liens from contractual liens on the

basis that tax liens are general, applying to all of the debtor's propertv, whereas con-

tractual liens are specific, attaching only to one asset. In re Kerber Packing Co. , 276

F.2d at 247; United States v. Bass, 27\ F.2d at 131-32. This reasoning is inapplicable

here, since Cambridge's lien attaches only to those parcels of real estate subject to

Cambridge's property taxes.

In re Union Fabrics, Inc. , 73 F. Supp. 685, 688 (S.D.N.Y. 1947), aff'd

sub nom., Carter v. United States, 168 F.2d 272 (2d Cir. 1948), aff'd

sub nom. City of New York v. Saper, 336 U.S. 328 (1949).

Cambridge points to only two cases in which postpetition interest has

been granted to a governmental entity on its liened tax claims. /n re Par-

chem, 166 F. Supp. 724, 730(D. Minn. 1958); Jn re Ross Nursing Home,

2 Bankr. 496, 499-500 (Bankr. E.D.N.Y. 1980). We note that both cases

were decided by inferior federal courts—a district court in Parchem, and

a bankruptcy court in Ross Nursing Home. We feel that both cases were

wrongly decided and choose to follow the beter authority of the four

circuit courts of appeals which have found the third exception inapplica-

ble to liened tax claims.”

In light of Saper and the uniform rule in the Circuit Courts of Appeals,

we think it appropriate to limit the granting of postpetition interest to

those exceptional situations involving creditors deemed to have bar-

gained for specific collateral to secure both the principal obligation and

interest. Further, we perceive no need, on the facts of this case, to extend

the third exception to cover Carnbridge’s perfected tax liens. ‘‘Collection

of the public revenue is a favored object, but we think today it is no more

favored than that of protecting remaining creditors from the law's delay

to the extent of denying post-bankruptcy interest on tax claims, liened or

not.”’ United States v. Bass, 27\ F.2d at 132.

In light of the above discussion, we find that the district court acted

well within its discretion in disallowing Cambridge's claim for postpe-

tition interest on its prepetition tax claims.

> Cambridge also maintains that its claim for postpetition interest falls within the second

exception, which grants postpetition interest to a secured creditor who holds securities

that it is entitled to interest on those property taxes which are attributable to property

rented by the B& M toa third party. The lease between the B&M and its tenant specifies

that a portion of the rent is attributable to taxes. Despite this lease provision— which

we view only as a collection mechanism—we find the second exception inapplicable.

This exception arises only where securities, held by the creditor, produce income.

19

II. INTEREST ON POSTPETITION TAXES

During a period of reorganization a debtor is required to pay taxes on

a current basis; they are an expense of administration. See In re Boston

and Maine Corp. , 693 F.2d 4, 5 (1st Cir. 1982); Southern Railway Co.

v. United States, 306 F.2d 119, 126 (Sth Cir. 1962). In a railroad reor-

ganization, however, the district court is afforded a measure of discretion

in determining when taxes are to be paid. See In re Boston and Maine

Corp. , 693 F.2d at 5; In re Penn Central Transportation Co. , 452 F.2d

1107, 1108-09 (3d Cir. 1971), cert. denied, 406 U.S. 944 (1972). The

court’s ability to defer taxes is a reflection of the special nature of a rail-

road reorganization. Of paramount concern is the public interest in con-

tinued operation of the railroad. In fact, liquidation is not available to a

railroad. See Continental Illinois National Bank & Trust Co. v. Chicago,

Rock Island & Pacific Ry. Co., 294 U.S. 648, 671-72 (1935). **A rail-

road debtor simply must continue to operate, without regard to the inter-

ests or desires of its creditors, at least until such time as the constitutional

rights of secured creditors under the Brooks-Scanion line of cases are

Clearly in jeopardy.” Jn re Penn Central Transportation Co. , 458 F. Supp.

1234, 1277 (E.D. Pa. 1978), aff'd, 596 F.2d 1102 (3d Cir. 1979). In

order to facilitate the continued operation of the railroad the district court

has the authority to defer payment of taxes.

In the instant case the district court deferred payment of all postpetition

taxes pending reorganization. Under the proposed plan, Cambridge will

recover the principal amount of these taxes, but not interest thereon.

Cambridge mounts several challenges to the plan’s failure to award it

postpetition interest, none of which we find persuasive.

Cambridge first asserts that Nicholas v. United States, 384 U.S. 678,

makes mandatory the payment of interest on debts arising during the pen-

dency of a reorganization. It claims that the district court erred as a matter

of law in approving a plan that did not provide for interest to it. We need

not determine whether Nicholas announced a rule of law or whether, as

the Trustees argue, a bankruptcy court still retains a measure of discre-

tion and may deny interest on administration claims when the ‘‘balance

of equities’’ counsels against such payment. The holding of Nicholas is

not applicable in this case.

Nicholas followed a line of cases in which the Supreme Court discussed

the allowability of claims for interest accruing during a bankruptcy pro-

ceeding. As discussed above, Sexton v. Dreyfus, 219 U.S. 339, estab-

lished the general rule: interest on a debtor's obligations is not computed

beyond the date that a petition in bankruptcy is filed. Jd. at 344. Vanston

20

followed thirty-five years later, reaffirming the holding of Sexton and

reminding *‘that the touchstone of each decision on allowance of interest

in bankruptcy, receivership and reorganization has been a balance of eq-

uities between creditor and creditor or between creditors and the debtor.”

Vanston, 329 U.S. at 165. Then, in City of New York v. Saper, 336 U.S.

328, the Court made clear that the general principle that interest stops

accruing as of the date of filing of a petition in bankruptcy is applicable

to tax claims. /d. at 330.

Nicholas involved a claim for federal taxes incurred during a reorga-

nization. The Court went a step further than the earlier cases by distin-

guishing among the various stages of a bankruptcy proceeding. The Court

reaffirmed the justification for the general rule that interest stops as of the

date of filing of a petition in bankruptcy.

. . Sexton and Saper reflect the broad equitable principle that

creditors should not be disadvantaged vis-a-vis one another by legal

delays attributable solely to the time-consuming procedures inher-

ent in the administration of the bankruptcy laws. In the context of

interest-bearing debts, the equitable principle enunciated in Sexton

and Saper rests at bottom on an awareness of the inequity that would

result if, through the continuing accumulation of interest in the course

of subsequent bankruptcy proceedings, obligations bearing rela-

tively high rates of interest were permitted to absorb the assets of a

bankrupt estate whose funds were already inadequate to pay the

principal of the debts owed by the estate.

Nicholas, 384 U.S. at 683-84 (footnotes omitted).

The Court noted a fundamental difference between debts incurred

before the filing of a petition and those incurred during the reorganization

itself.

To be sure, the amount of interest that accumulates on a debt

incurred during a Chapter XI arrangement depends upon the dura-

tion of a proceeding that takes place under the direction and authority

of the bankruptcy court. But interest claimed on such a debt does nc‘

arise through a ‘‘delay”’ of the law in any meaningful sense. The

underlying obligation of the debtor in possession is incurred as part

of a judicial process of rehabilitation of the debtor that the proce-

dures of Chapter XI are designed to facilitate.

Id. at 684-85 (citations omitted).

Thus, the Nicholas Court recognized that debts incurred during the

reorganization itself are administration expenses that ought to be paid on

a current basis and must bear interest if any creditor is to remain willing

to do business with a debtor in reorganization. See id. at 687. Failure to

pay administration expenses during the reorganization period is the result

of the debtor’s own choice and not, as is true of debts incurred prior to

reorganization, mandated both by law and an order of the court super-

vising the reorganization. Thus, the accumulation of interest on admin-

istration expenses incurred during reorganization cannot be attributed to

the law's delay.

It is clear that the B& M's failure to pay taxes during the reorganization

period was the result of the distri¢t.court’s order deferring payment. The

railroad was unabie to meet all of its current operating expenses, and this

order was made to foster the purpose of the reorganization, ensuring the

continued operation of the railroad in the public interest. The accumu-

lation of interest was directly attributable to the law's delay, and there-

fore, the reasoning of Nicholas is not applicable to the circumstances of

In an ordinary reorganization a debtor that is unable to meet current

operating expenses will be forced into liquidation. See In re Penn Central

Transportation Co. , 458 F.Supp. at 1277. But since the court supervising

a railroad reorganization is responsible for fostering the public interest

in reviving an ailing railroad, it can delay payment of current taxes when

such action is necessary to sustain the railroad’s continued operation. See

Continental Illinois National Bank & Trust Co. v. Chicago, Rock Island

& Pacific Ry. Co., 294 U.S. at 676 (‘*[A] proceeding under §77 is not an

ordinary proceeding in bankruptcy. It is a special proceeding which seeks

only to bring about a reorganization, if a satisfactory plan to that end can

be devised.’’) In cases like Nicholas, no public interest is served in allow-

ing a debtor to postpone payment of taxes. In the case of railroads, delay

in payment reflects a public policy in favor of revival of the railroad. It

would be unjust to allow interest to accumulate on court-postponed reor-

ganization debts at the expense of other creditors.

We find support for our conclusion in Jn re New York, New Haven and

Hartford Railroad Co. , 304 F. Supp. 1121. In that case state and local

taxing authorities sought interest on postpetition taxes, payment of which

had been postponed by court order. Judge Anderson of the Second Cir-

cuit, sitting by designation, held that Nicholas did not compel allowance

of interest.

[Nicholas ’] holding that taxes incurred during a Chapter XI pro-

in payment was brought about as a result of the debtor's own request

that it be given a chance to rehabilitate itself and not because of the

*‘law’s delay.’’ In the case of the New Haven there was never any

thought of its rehabilitating itself because it was, at the time of the

petition and had been for several years prior thereto, hopelessly

insolvent. The sole purpose of pursuing a §77 reorganization under

the court’s order, was to seek a means of keeping the New Haven in

operation in the public interest. The delay was imposed upon the

debtor’s estate in this fashion and for this purpose. The ordered accu-

mulation of accrued but unpaid taxes, as well as the interest on them,

was not directed by the court as a matter of administrative conve-

nience but as a matter of necessity. Nicholas gives recognition to and

reaffirms the principle that the bankrupt estate should not be dis-

advantaged by means of the *‘law’s delay.”’

Id. at 1134.

Cambridge seeks to distinguish the New Haven case on the grounds

that the New Haven was hopelessly insolvent—‘‘a total trainwreck’’—

whereas the B&M is in better financial shape. This is, to state a familiar

adage, a distinction without a difference. The important factor for the

court in New Haven was that the delay in payment of taxes was imposed

by the court to foster the public interest in continued operation of the rail-

road. This is precisely the justification for the delay in the B&M’s pay-

ment of taxes.

Cambridge further argues that the equitable justification for disallow-

ing interest—prejudice to other creditors because of the law’s delay—is

absent from this case. Cambridge claims that even if interest is paid in

full on its tax claims, the B&M will still have sufficient cash to meet all

of its obligations under the reorganization plan. The district court found

that payment of interest to Cambridge would diminish the distribu-

tive shares of general unsecured creditors; this finding is not clearly

erroneous.

Under the plan, general creditors’ claims are allowed at ten percent of

their amount. But if there is no cash left after payment of higher priority

claims, these creditors will receive Certificates of Contingent Interest

(CCIs), whici: will expire in five years from the date of consummation.

Cambridge conceded at ora! argument that if B&M were presently to pay

interest on the tax claims, general creditors will receive CCIs but nocash.

The argument that general creditors will not be prejudiced since they will

get all that they are entitled to under the plan is really one of semantics.

23

YY Owe pane ee

7 ‘

Be Aa" any

True, the issuance of CCIs will, under the reorganization plan, satisfy in

full the claims of the general creditors. It cannot be seriously contended,

however, that general creditors will not be prejudiced if there is sufficient

cash to pay their claims, but the cash is diverted to satisfy claims for

interest on tax debts.

The parties’ dispute over the amount of cash available to pay off claims

allowed under the plan revolves, for the most part, around the future prof-

itability of investment of funds in the segregated account for settlement

of claims. The district court suggested that if after all claims are settled

there is sufficient cash to pay Cambridge's claim for interest it might

weigh the equities differently. The plan provides that the district court

will retain jurisdiction during implementation of the plan. That court is

the proper one in which to raise arguments about the B& M's future ability

to pay interest.

Cambridge raises three other objections to the plan, which we dispose

of summarily. First, it claims that failure to award postpetition interest

On postpetition taxes, an administrative expense, will subordinate its

claim to those of other administrative creditors. The rule that all creditors

within the same priority must be treated alike does not require that they

all receive satisfaction of their claims at the same time. See In re Penn

Central Transportation Co. , 452 F.2d at 1108. Requiring simultaneous

participation ‘“would unduly impair the flexibility so essential to a reor-

ganization proceeding.’’ /d. Furthermore, there is nothing in the record

before us that indicates that all other administrative creditors have been

paid in a timely manner, or that administrative debts that were postponed

ultimately received interest.

Cambridge next asserts that the plan is unfair because it provides for

interest payments to First Mortgages and Income Bondholders, whose

claims are of a lower priority than the postpetition tax claims. This attack

is based on two theories: first, that it violates the rule of Fosdick v. Schall,

99 U.S. 235 (1879), and second, that it violates the absolute priority rule.

We see no merit to either theory.

Fosdick established the rule that administrative or current debts of a

railroad must be settled before any other creditor is entitled to satisfaction

of its claims. See id. at 252. ‘*Fosdick’s principle . . . is one of mortgage

law: that the mortgagee’s interest attaches to net income, which arises

only after the payment from gross earnings for all necessary operating

...."” In re Boston and Maine Corp., 634 F.2d 1359, 1368 (ist Cir.

1980), cert. denied, 450 U.S. 982 (1981); see also Southern Railway Co.

24

“—_: =— “—” va —, we |

v. United States , 306 F.2d at 126. The absolute priority rule establishes

a similar proposition. Under that rule, a reorganization plan may not pro-

vide for the payment of lower priority claims before higher priority claims

are fully satisfied. See Consolidated Rock Products Co. v. DuBois, 312

U.S. 510, 520-21, 527 (1941); Case v. Los Angeles, 308 U.S. 106, 116

(1939); Northern Pacific Railway Co. \. Boyd, 228 U.S. 482, 504(1913).

Cambridge contends that the plan’s awarding interest to lower priority

claims of secured creditors while denying interest on its first priority

administrative tax claims is an unlawful subordination of its claims. We

disagree. Fosdick and the absolute priority rule say nothing about allow-

ance of claims; they speak only to the order of payment to be accorded

claims that the court allows under the plan. See New York v. Feinberg,

204 F.2d 502, 502-03 (2d Cir. 1953); In re New York, New Haven and

Hartford Railroad Co. , 4 Bankr. 758, 799 (D. Conn. 1980). Since we

affirm the district court's decision that Cambridge has no legal or equi-

table right to interest on its postpetition taxes, it has no allowable claim

for interest that is even potentia.iy in danger of subordination under the

above principles.

The district court's order approving the plan of reorganization is

affirmed.

CAMPBELL, Chief Judge (Concurring in part and dissenting in part).

I agree with Part I of the court's opinion denying postpetition interest on

prepetition taxes, since that holding appears toconform with the case law.

The court's denial of postpetition interest on postpetition taxes, however,

lacks adequate support.

Basically, I find it hard to locate the source of the district court's power,

after having forced a deferral of Cambridge's taxes, to deprive it of all

interest on what was, in effect, a forced loan. I concede that there is now

ample authority permitting railroad reorganization courts to cause the

deferral of municipal taxes. There is no clear authority, however,

empowering the denial of all postpetition interest on postpetition tax

claims. Indeed, the Supreme Court has held in a related context that

“*[s]ince the taxes in question were incurred during the Chapter XI

arrangement proceeding itself, the United States was entitled to interest

on those taxes for the duration of that period.’ Nicholas v. United States,

384 U.S. 678, 689 (1966).

The case falls under the former section 77 governing railroad reorga-

nizations. That section provided that ‘the rights and liabilities of credi-

tors, and of all persons with respect to the debtor and its property, shall

be the same as if a voluntary petition for adjudication had been filed and

a decree of adjudication had been entered on the day when the debtor's

petition was filed.’’ 11 U.S.C. §205(1) (repealed). Nowhere in section

77 are the courts given the power to impair the rights of governmental

bodies in the recovery of tax claims against a railroad in reorganization.

Indeed , the clear language of the Supreme Court in Nicholas, 384 U.S.

at 691, states that ‘‘the strong policy of section 64a(1) of the Bankruptcy

Act. . . establishes a sharply defined priority that places all expenses of

administration on a party, including claims for taxes.’’' Although Nicho-

las applied to a Chapter XI proceeding, the principle of equal treatment

of tax claims with other debts’ seems to be applicable to railroad reor-

ganizations given the absence of any contrary statutory provision.

' While the Supreme Court has not decided the issue, the lower courts have held the

provisions of section 64 apply in railroad reorganizations. In re New York, O.4&W. Ry

Co. , 25 F. Supp. 709 (S.D.N.Y. 1937); 5 Collier on Bankruptcy 477.21 (14th ed.).

* During the first half of this century prepetition tax claims were awarded postpetition

interest, thus enjoying a favored status vis-a-vis other prepetition claims. This pref-

erence was abolished in New York v. Saper, 336 U.S. 328, 337 (1949), in which the

Court held that *“Congress assimilated taxes to other debts for all purposes, including

denial of post-bankruptcy intcrest [on prepetition debt)."*

26

This court states that *‘since the court supervising a railroad reorga-

nization is responsible for fostering the public interest in reviving an ail-

ing railroad, it can delay payment of current taxes. . . ."’ This, as Ihave

said, is a well-established principle in railroad reorganizations, but the

further point that it “*would be unjust to allow interest to accumulate on

court-postponed reorganization debts at the expense of other creditors,"

does not necessarily follow. The delay of the trustees in paying taxes dis-

advantaged the city, since payment of other administration debts was

apparently not delayed. Thus the equities regarding the payment of inter-

est appear to favor the city because denial of interest only exacerbates the

imposition on the city, especially with respect to other claimants for

administrative expenses.

The argument that the usual failure to timely pay taxes is due to “‘the

debtor's own choice’’ while in this case it is due to the “‘law’s delay”’ is

not convincing. In Nicholas the Court stated,

To be sure, the amount of interest that accumulates on a debt

incurred during a Chapter XI] arrangement depends on the duration

of a proceeding that takes place under the direction and authority of

the bankruptcy court. . . . But interest claimed on such a debt does

not arise through a ‘‘delay”’ of the law in any meaningful sense. The

underlying obligation of the debtor in possession is incurred as part

of a judicial process of rehabilitation of the debtor that the proce-

dures of Chapter XI are designed to facilitate.

384 U.S. at 684-85 (emphasis added). The *‘law’s delay”’ in the words

of the Court are ‘‘legal delays attributable solely to the time-consuming

procedures inherent in administration of the bankruptcy laws."’ /d. at 683

(emphasis added). In Vanston Bondholders Protective Commitiee v.

Green, 329 U.S. 156, 163 (1946), the Court stated **[e]xaction of inter-

est, where the power of a debtor to pay even his contractual obligations

is suspended by law, has been prohibited . . . ."’ In this case the railroad

trustees requested the court to authorize deferred payment of taxes. This

was the ‘‘trustees’ choice,"’ but the deferral was approved by the court

as part of the attempted rehabilitation of the railroad. See Commeni,

Bankruptcy—The Penn Central Reorganization—A Reorganization

Court Has the Power to Defer Municipal and State Taxes, 26 Rutgers L.

Rev. 664, 679 (1973) (railroad reorganization court should award inter-

est on deferred postpetition taxes at the *‘rate of interest the financial mar-

ket would have demanded for bearing the risk this deferment entailed"’).

27

The court cites /n re New York, New Haven and Hartford Railroad Co. ,

304 F. Supp. 1121 (D. Conn. 1969), in support of the denial of postpe-

tition interest on postpetition taxes. In that case, the ‘hopelessly insol-

vent”’ railroad was being operated in the public interest’ and ‘‘was for the

most part sustained at the expense of the bondholders."’ /d. at 1134. The

court noted that ‘‘interest on unpaid post-reorganization state and local

tax -iaims, both secured and unsecured, would normally be paid,’ but

held that ‘‘all considerations compel the disallowance of interest on their

claims."’ /d. The fact situation in New Haven is thus very different from

the present case: in New Haven, all creditors were disadvantaged by the

public policy of reorganizing the railroad, whereas in our case the City

of Cambridge has taken the greatest loss (e.g., the First Mortgage and

Income Bondholders received interest on their claims). The strong equi-

table concerns present in New Haven are absent from this case.‘

In re Penn Central, 452 F.2d 1107 (3d Cir. 1971), cert. denied, 406

U.S. 944 (1972), supports the proposition that payment of postpetition

tax claims can be enjoined to avoid defeating a railroad reorganization.

The court held that “the only viable recourse was to postpone such pay-

ment for a reasonable time, taking into consideration the competing pub-

lic interests inherent in reorganizing the railroad and in maintaining the

revenues of the various taxing entities affected by the injunction."’ Jd. °*

1109. The court only approved the injunction because (1) the record

showed that the assets of the company would be sufficient to meet rea-

sonably foreseeable first priority claims, and (2) the district court was

aware of its duty to terminate the injunction at the earliest possible date.

The court recognized the need to balance the public policies of saving

railroads and of maintaining tax revenues. As the district court in Penn

Central said, **[i}t would be inequitable to require these taxing entities to

underwrite the reorganization of the debtor, at the expense of the essential

public interests they represent.’’ Jn re Penn Central, 325 F. Supp. 294,

300 (E.D. Pa. 1970).

> Although there is a public interest in operating a bankrupt railroad, under section 77

if the operation of the railroad endangered the constitutional rights of creditors, **the

Only action open to the court [was] to dismiss the petition, which would in all likelihood

be followed by a State court receivership with all its attendant disadvantages.'’ His-

torical Note to 11 U.S.C. §1174.

* The precedential value of New Haven is diminished by the facts that the plan provisions

relating to taxes were uncontested and the court's decision was not appealed.

28

Thus while the power of a court to delay payment of taxes in railroad

reorganizations cannot be denied, it is more questionable whether reve-

nue interests of a municipality can be impaired to the degree of forcing a

municipality to make an interest-free loan. If, as in New Haven, all cred-

itors are awarded reduced recoveries, then the equitable powers of the

court similarly extend to requiring taxing entities to share the burden.

Postpetition tax claims are claims of administration, however, and I won-

der if such first priority claims can be denied interest absent very special

circumstances of a type which do not appear to be present here.

UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

In the Matter of

BOSTON AND MAINE CORPORATION, No. 70-250-M

Debtor

OPINION

MURRAY, Senior District Judge

The Trustees of the Debtor in reorganization, the Boston and Maine

Corporation (“‘B&M’’), filed with the Interstate Commerce Commis-

sion (“‘Commission’’) in December 1975 their plan of reorganization,

and subsequently amended the plan on December 29, 1980, againon July

15, 1981 and finally on March 3, 1982. The Commission on April 23,

1982 approved the plan as finally amended (the ‘‘Amended Plan’’) find-

ing that “‘the Amended Plan, which provides for the conservative capi-

talization of B&M on essentially an all equity basis and provides for con-

tinuation of the existing service on a vital link of the New England Rail

System, satisfies all relevant statutory criteria and is in the public inter-

est.’ (1.C.C. Decision at 25).' The Commission certified the Amended

Pian to this court on June 28, 1782.’

Viewed broadly, the goal of the Trustees under the Amended Plan is a

Boston and Maine Corporation reorganized and continuing as an oper-

ating railroad with a revised capitalization on a substantially all equity

basis, with all of the outstanding new Common Stock issued to Guilford

Transportation Industries, Inc. (‘‘Guilford"’) (thus vesting in Guilford

control of the reorganized corporation), in the expectation that B&M thus

reorganized will be a financially viable operating railroad capable of pro-

Transportation Authority (*‘MBTA"’), and freight service over existing

rail lines (including many of the lines presently utilized for commuter rail

service).

Since 1970 B&M has been in this court in reorganization proceedings

under Section 77, and before referring to the significant features of the

Amended Plan and the issues involved in the question of its approval, it

is well to begin with a brief history of the proceedings.

On March 12, 1970 several bondholders (herein the **Group of Insti-

tutional Bondholders”’)’ filed in this court a petition for reorganization

of B&M under the provisions of Section 77. For many years prior to 1970

B&M had been in poor financial health, having suffered uninterrupted

deficits in net income, debts arising from unpaid property taxes and

unpaid interest on its bonds, and a decline in traffic and earnings resulting

from a twelve-year period of inadequate capital expenditures.‘ It was

upon the failure of B&M to pay the interest due on the First Mortgage

bonds as of February of 1970 that these reorganization proceedings were

instituted. Charles W. Bartlett, Esquire, Paul Cherington, and Robert W.

Meserve, Esquire, were appointed by the court to serve as Trustees’ of

the Debtor's property.

The debts owed by B&M and the claims against it on March 12, 1970,

the date of bankruptcy, were as follows:°

Secured claims

Bondholders and Creditors holding Securities $ 81,779,442.30

Real Estate and Other Tax Claims 7,621,704.10

Unsecured claims

Personal Injury and Property Damage | 896,355.06

Interline Per Diem Claims ~-11,284,587.23

Interline Freight/Overcharge Claims 567,763.86

Shippers and Consignees Freight Claims 2,972,492.00

Shippers and Consignees Overcharge Claims 173,657.50

Private Car Hire 503,653.43

Materials, Supplies, and Services Rendered 8 600,327.98

Total $115,399,983.46

Within the first year following the filing of the bondholders’ petition,

separate plans of reorganization were filed with the Commission by the

petitioning bondholders and by the directors of B&M. Both plans sought

inclusion of B&M in the Norfolk & Western Ry. system and failing that,

abandonment and liquidation of the properties of B&M. The Trustees of

the Debtor also petitioned the Commission for inclusion of B&M in the

Norfolk & Western Ry. system. In addition, the petitioning bondholders,

gravely concerned that the railroad might not be financially able to con-

tinue operations, applied to the Commission for abandonment of the entire

B&M rail lines. By mid-1971, however, it appeared there was no immi-

31

nent likelihood of interruption of B&M’s rail service for lack of operating

funds, and on September 29, 1971 the Commission rejected the pending

plans of reorganization, and denied the Trustees’ petition for inclusion

of the Debtor in the Norfolk & Western Ry. system and the bondholders’

application for abandonment.

In December of 1971 the Trustees filed an ‘‘interim or contingency"

plan of reorganization which, along with alternative plans of reorgani-

zation filed by Amoskeag Company and by the Group of Institutional

Bondholders, became the subject of extensive hearings before an Admin-

strative Law Judge in 1972. The Commission adopted the report of the

Administrative Law Judge, filedon February 13, 1973, that the Trustees’

plan was basically sound and the proposals valid, but that additional

measures were required to provide for a modified capital structure,

reduction of taxes and an adequate cash flow before B&M could satisfy

its creditors and become a profitable railroad operation. The interim plan

was approved as modified by the discussion and conclusions in the report

of the Administrative Law Judge, and the Trustees were directed by the

Commission to file adefinitive plan on or before June 30, 1974. The plans

of Amoskeag Company and the Group of Institutional Bondholders were

rejected.

The plan of reorganization next proposed by the Trustees was the 1975

Plan, filed with the court on December 12, 1975,’ which contemplated

reorganization of B&M in two steps. A definitive First Step, which the

Commission and the court approved in 1976, provided for the sale by

B&M to MBTA for $39.5 million in cash of the commuter rail lines

radiating northerly and westerly from the North Station in Boston, and

certain other properties. The conveyance by the Trustees of the rail lines

to MBTA was subject to the reservation in perpetuity of an easement by

the Trustees to operate freight service over the lines. It was further pro-

vided under the First Step that the Trustees would continue to operate the

commuter rail service, under an operating agreement with MBTA, over

the rail lines conveyed. 7 ne Second Step comprised measures to be taken

to satisfy claims of cred ‘tors against the Debtor's estate and to recapitalize

B&M.

The commute; rail lines (and other properties) were conveyed to MBTA

on December 26, 1976 free and clear of all claims, except the reserved

easement. On January 1, 1977 the operating agreement became opera-

tive. During 1977 the court approved a second operating agreement

between B&M and MBTA covering commuter rail service over addi-

tional commuter rail lines extending southerly and southwesterly from

32

the South Station in Boston, which service had previously been provided

by Consolidated Rail Corporation (“‘ConRail’’). Under this agreement

B&M, in the latter part of 1977, undertook operations of the commuter

rail service from the South Station.

The Trustees were not at this point in a position to carry out the Second

Step of the 1975 Plan because of the heavy operating loss sustained in

1976. Believing that existing conditions offered dim prospects for pre-

cise implementation of the Second Step, the Trustees petitioned the court

for authority to use the major share of the proceeds of the sale to MBTA

to finance an interim tender offer to redeem the Debtor's First Mortgage

bonds at a discount. In 1979 the Trustees were authorized to use $33.06

million (of the $39.5 million proceeds of the sale to MBTA) to acquire

(at the discounted price of $800 per bond) the First Mortgage bonds of

B&M and accrued unpaid interest thereon. The tender offer resulted in

the acquisition and retirement of $36,992,000 principal amount of the

bonds, thus reducing the amount of principal indebtedness of the bonds

outstanding to $9,944 ,976 and increasing the Debtor's net worth.

A significant move directed toward ultimate reorganization was initi-

ated by the Trustees in 1978 when they sought and were granted autho-

rization to enter into a financing agreement with Federal Railroad

Administration (**FRA*’) for rehabilitation of B&M’s main line between

Ayer, Massachusetts and Mechanicville, New York. Under the agree-

ment dated September 29, 1978, FRA loaned the Trustees $26.0 million

in cash in exchange for Trustees’ certificates of indebtedness in the face

amount of the loan. The rehabilitation was completed in 1981, resulted

in a major rebuilding of B&M's heaviest density line and upgraded the

line, in large part, to Class IV standard.

The amendment to the 1975 Plan that was filed with the court on

December 31, 1980 was transmitted to the Commission which estab-

lished a schedule of proceedings for consideration of the Plan as most

recently amended. Before any consideration was given io the Plan under

the schedule, the Trustees had concluded certain negotiations with Tim-

othy Mellon of Guilford, Connecticut, which resulted in the execution of

a ‘‘Letter of Intent’’ on April 15, 1981 concerning the acquisition of B&M

by Guilford Transportation Industries, Inc.* On July 15, 1981 the Letter

of Intent was superseded by an Acquisition Agreement entered into by

the parties. It is sufficient to note here, in concluding this brief history of

the reorganization proceedings, that the Acquisition Agreement -ontem-

plates that Guilford will become owner of all of the outstanding new

Common Stock and assume control of the reorganized B&M.

33

Il

Soon after reorganization proceedings were commenced, the Trustees

began an abandonment study of lines that were unprofitable in operation.

A number of branch lines were operating at very low traffic density at

out-of-pocket loss. Some of the branches had been receiving little or no

maintenance and if continued in operation B&M would have had to restore

the lines to normal maintenance condition at heavy expense. The Trustees

sought and were given authority to abandon freight service over approx-

imately 280 miles of lines. Approximately 65 additional miles of lines

are, or may become, the subject of further abandonment petitions.

Presently, B&M operates oyer approximately 1416 miles of owned or

leased track in the states of Massachusetts, Maine, New Hampshire, Ver-

mont, Connecticut and New York. B&M is primarily a carrier of freight,

but, as noted above, it also operates commuter rail service from Boston's

North and South Stations for the account of MBTA.

B&M’s main line runs east/west from Rotterdam Junction, New York

through Mechanicville, New York to Ayer, Massachusetts, a distance of

165 miles. At Mechanicville there is an interchange with the Delaware

and Hudson Railroad (“*‘D&H"’), and at Rotterdam Junction B&M inter-

changes traffic with ConRail. That portion of the main line between

Fitchburg and Greenfield, Massachusetts, approximately 56 miles, is

leased by B&M from the Vermont and Massachusetts Railroad under a

999-year lease. As already mentioned, this east/west main line is main-

tained at Class IV standard.

B&M operates over the 118-mile line between Ayer and South Port-

land, Maine, where it interchanges traffic with the Maine Central Rail-

road through the Portland Terminal Company. The 13-mile portion of

this line between Willows and North Chelmsford, Massachusetts, is

leased by B&M from Stony Brook Railroad Company (in which B&M

owns a controlling , 60% interest) under a lease that expires in 1989. This

line is maintained at Class III standard.

The Connecticut River Line of B&M lies between Springfield, Mas-

sachusetts and Wells River, Vermont, a distance of 164 miles, and is

maintained at Class III standard. This line makes a junction with B&M’s

east/west main line at East Deerfield, Massachusetts. The line continues

northerly from the junction through Greenfield, Massachusetts to Bel-

lows Falls, Vermont, where it connects with the Central Vermont Rail-

road (a subsidiary of the Canadian National Railroad), and continues still

northerly to White River Junction, Vermont, thence to Wells River, Ver-

mont and Whitefield, New Hampshire, and ultimately to Berlin and

Groveton, New Hampshire, where the line connects with the Canadian

National Railroad (*‘CN’’). The Central Vermont Railroad (*“CV*’) owns

approximately 14 miles of the Connecticut River Line between White

River Junction and Windsor, Vermont, and | | miles between Brattleboro

and East Northfield, Vermont, and CV has granted trackage rights to

B&M over these portions of the line. At White River Junction there is a

traffic interchange with CV; at Woodsville, Vermont, near Wells River,

there is a traffic interchange with CN; and at Whitefield, a connection

with the Maine Central Railroad. Using B&M crews, Amtrak operates

one ‘*Montrealer’’ passenger train per day in each direction over the Con-

necticut River Line.

B&M operates its New Hampshire Line approximately 45 miles from

North Chelmsford, Massachusetts to Concord, New Hampshire, and

serves the principal New Hampshire cities of Concord, Manchester and

Nashua. This line is maintained at Class III standard.

In addition, B&M operates several light density freight lines. The most

significant of these may be described as follows:

(a) The Groveton and Berlin Branch connecting the James River Cor-

poration plant in Berlin and the Groveton Paper Company plant in Grove-

ton to the Connecticut River Line at Wells River. (The Berlin Mills Rail-

way, a short line, operates the Berlin Yard for B&M.)

(b) The Conway Branch running north from the Ayer/Portland line at

Rollingsford, New Hampshire to Ossipee, New Hampshire.

(c) The Ashuelot Line connecting Keene, New Hampshire with the

Connecticut River Line at Brattleboro. (The Green Mountain Rail-

road, a short line, operates the Keene Yard for B&M.)

The commuter rail service, which B&M operates for the account of

MBTA from Boston’s North and South Stations, is a very important pas-

senger service. MBTA owns or leases the equipment used in the com-

muter service, and B&M supplies all of the operating and supporting

personnel. Operations under the agreement with MBTA for commutei

rail service represent almost one-third of B&M'’s activity as measured by

the operating expenses.

In December of 1981 , the court by Order No. 629 authorized the Trust-

ees to purchase from ConRail certain railroad lines, rights and properties

located in Connecticut and western Massachusetts and assume the freight

service obligations of ConRail appertaining thereto. The Trustees also

35

obtained trackage, operating and reciprocal switching rights over

approximately 93 miles of track, and trackage rights over approximately

3.1 miles of track, in Massachusetts and Connecticut, in order to facilitate

operations over the railroad lines acquired from ConRail.’

Il

The First Step of the Trustees’ 1975 Plan had been fully achieved when

the July 15, 1981 amendment, which reflected Guilford’s proposal to

acquire control of B&M, was filed with the Commission and the court.

In the July 15, 1981 amendment the Trustees proposed measures by

which they expected both to satisfy claims of creditors and to revise the

capitalization of B&M. The Trustees submitted to the Commission their

so-called ‘‘Amended Plan’’, incorporating the amendment of July 15,

1981; and subsequently the Trustees submitted an additional amendment

which they filed with the Commission on March 3, 1982. The Commis-

sion approved the final version of the plan with all amendments thereto.

A

The Amended Plan provides for a revision of the capitalization of B&M

by cancelling the presently outstanding preferred and common stock, and

by authorizing the creation of new capital stock as follows:

(a) 3,000,000 shares of new Common Stock of the par value of $1 per

share, and

(b) 2560 Redeemable Preference Shares, Series A, and 40 Redeem-

able Preference Shares, Series B, of the par value of $10,000 per

share.

The Plan calls for issuance to Guilford of all of the outstanding new Com-

mon Stock, that is, a total of 2,425,000 shares, in consideration of Guil-

ford’s payment of $24,250,000 in cash to the reorganized B&M. Thus

the Plan does not call for issuance at this time of the full number of shares

of new Common Stock authorized. The Plan also provides for issuance

of all 2600 Redeemable Preference Shares to the United States Govern-

ment in exchange for the Trustees’ certificates of indebtedness of $26.0

million, issued in 1978 for the loan made by FRA to the Trustees. No

dividends or payments of principal will be due on the Redeemable Pref-

erence Shares prior to 1989. It is provided under section 3.1(1) of the

Plan that the holders of the new Common Stock, in the event of liquidation

or winding-up of the reorganized B&M, shall be entitled to receive $10

36 -

per share out of the assets available for distribution to stockholders before

any distribution is made to holders of Redeemable Preference Shares.

The holders of the Redeemable Preference Shares would then be entitled

to receive the par value of their shares before further distribution would

be made to holders of the new Common Stock."

Preference Shares Series A will issue in an amount equivalent to loans

made by FRA for the elimination of deferred maintenance of B&M’s

main line, and the annual dividend payable, commencing in 1989, on

such shares will be at the rate of 4.2 percent per annum on the outstanding

par value of such shares. Preference Shares Series B will issue in an

amount equivalent to loans made by FRA for work deemed by FRA not

to constitute deferred maintenance, and the annual dividend payable,

commencing in 1989, on such shares will be at the rate of 8.89 percent

per annum on the outstanding par value of such shares. Series A shares

will receive annual *‘level service’’ payments of $750 (the dividend plus

the mandatory redemption installment) per share commencing in 1989

and payable to 2008, when the shares will be fully paid out. The annual

“‘level service’’ payments from 1989 to 2008 on Series B shares will be

at the rate of $2547.22 per share.

B

The reorganized B&M will be authorized under the Amended Plan to

issue Certificates of Contingent Interest (CCIs) in four series, designated

in order of priority Series, A, B, C and D.

Series A CCIs may be issued in the aggregate face amount by which

the amount of cash available may be found insufficient on the Consum-

mation Date to fully satisfy the claims of the holders of the Income Bonds.

Series B CCIs may issue in the aggregate amount equal to the face value

of all claims of the United States arising under Title 31 U.S.C. §191.""

Series C CCIs may issue in the aggregate face amount equal to all tax

claims, which have not been waived and which are not secured by valid

liens of federal, state and local taxing authorities, that are found to be

based on valid assessments and to have become legally due and owing

within three years preceding March 12, 1970, or otherwise entitled to

Series D CCIs may issue in the aggregate face amount equal to ten

percent of the total principal amount of liquidated and allowed claims of

general unsecured creditors.

The holders of the CCIs will be entitled to receive payment of the face

37

amount, without interest, of the CCIs only from the cash in the Segregated

Account”? that is in excess of the amounts needed for payment of senior

claims. CCIs will be payable in order of priority among the four series,

and pro rata within each series, in whole or in part, from time to time

when it is determined by the Trustees that excess cash is available. To the

extent that CCIs have not been paid in full within five years after the date

of consummation of the Plan, such CCIs will be cancelled automatically

and the holders thereof will have no further claims against the reorga-

nized B&M for the unpaid balance of such CCIs.

ts

The claims against the Debtor's estate that have been acknowledged

by the Trustees are as follows:

(a) Administration claims $ 3,000,000

(b) Lien-tax claims 8,600,000

(c) Claims of Six Months creditors [11 U.S.C.

§205(b)] 3,000,000

(d) First Mortgage bonds, principal and

accrued interest 17,655,000

(e) Income bonds, principal and accrued interest 37,276,000

(f) Claims of the United States under 31 U.S.C.

§191, and State of New Hampshire

Public Utilities Tax 40,000

(g) Claims of general unsecured creditors 15,050,000

(h) 5% Preferred Stock ( shares) _

(i) Common Stock ( shares) mm

$84,621,000

The Trustees had on deposit in their Restricted Funds Account (Account

No. 716) as of June 30, 1982 the sum of $47,970,771. The funds in this

account are comprised mostly of the proceeds of sales of property of the

Debtor. subject to the liens of the First Mortgage bonds and Income bonds,

and the interest accrued from investment of the proceeds. The

$47,970,771 was exclusive of the Debtor's current cash and cash equiv-

alents in Accounts No. 701 and No. 702, and the special deposits in

Account No. 703."

Under the Plan, $5,250,000 of the cash in Accounts No. 701 and No.

702 on the Consummation Date will be paid over to the reorganized B&M.

To the extent that the cash in those two accounts is less than $5,250,000

the deficiency shall be paid from the Segregated Account to the reorga-

38

nized B&M before any cash is distributed to creditors.

Assuming consummation of the Plan had occurred on June 30, 1982,

the Trustees would have distributed the available cash consisting of the

$47,970.771 in Account No. 716 and the $24,250,000 to be paid by

Guilford for the new Common Stock, a total of $72,220,771 .'° This sum

would have been adequate to pay the amounts allotted to the classes of

claims listed above, except for the following: (g) the general unsecured

claims; and (h) and (i), any amount on the presently outstanding preferred

and common stock.

The Plan provides that the claims of the general unsecured creditors

will be satisfied by the issuance of Series D CCIs in the aggregate face

amount equal to ten percent of the total liquidated and allowed claims.

There are no provisions in the Plan for payment of any cash, or issuance

of any options or warrants to acquire securities of the reorganized B&M,

to the holders of presently outstanding preferred and common stock.

Instead, the Trustees request in section 3.10 that the Commission find

and the court affirm that such stock has no value.

The cash of the Debtor available for distribution to the creditors will

be paid in the order of priority set out in section 3.3(2) of the Plan—the

order set forth in the above listing. In section 3.9 of the Plan it is provided

that any cash remaining in the Segregated Account after making the cash

payments to claimants as required by section 3.3 shall be paid over to the

reorganized B&M as additional working capital.

D

The Trustees, in section 4. 1 of the Plan, expressly affirm the leases (as

of March 12, 1970) of the properties of The Northern Railroad, the Stony

Branch Railroad, and the Vermont and Massachusetts Railroad, includ-

ing the amendments in each lease. A schedule of the executory contracts

that will be assumed by the reorganized B&M has been filed with the

court as provided in section 4.2. Other executory contracts, which the

Trustees have rejected as of March 12, 1970, as provided in section 4.3,

are identified in an Exhibit filed with the court.

As of the Consummation Date all of the property remaining in the

Debtor's estate will, as provided in section 4.5 of the Plan, be transferred

and conveyed to the reorganized B&M free and clear of all claims or

creditors and stockholders of the Debtor.

39

IV

Pursuant to Section 77(e) the court by order entered July 7, 1982 (A)

fixed the time within which (1) objections to the Amended Plan certified

by the Commission, (2) claims for equitable treatment, and (3) statements

of position, might be filed with the court; (B) established August I 1 , 1982

as the date of hearing of the objections and claims; and (C) provided for

the giving of due notice of the hearing by the Trustees to creditors, stock-

holders and all other parties in interest. Notice of entry of the July 7 order

was given by the Trustees in accordance with the directions of the court

contained therein. Objections to the Amended Plan were filed pursuant

to the order, and there were also filed claims for equitable treatment and

statements of position. Among the responses filed was the motion of

Canadian Pacific Ltd. (‘“CP”’) requesting that the court defer decision

on the question of approval of the Amended Plan until such time as the

Court of Appeals for the District of Columbia Circuit decided certain

petitions for review of the Commission's decision approving the Trustees’

Amended Plan (the plan presently before the court in this proceeding).

The hearing was held August 11 and 12, 1982, pursuant to the order

entered July 7, at which all parties in interest were afforded opportunity

to be heard in support of and opposition to the objections and claims for

equitable treatment, and in support of and opposition to the motion of CP.

The parties who appeared and argued to the court on the objections, claims

or the motion of CP are identified in the margin. '° The hearing was closed

after the conclusion of the oral arguments and after the court fixed August

23, 1982 as the time within which a party in :nicrest might file a memo-

randum on the issues raised before the court duirng the hearings.

On August 26, 1982 the court, on its own initiative, entered an order

giving notice of the reopening of the hearing, and scheduling a further

hearing t be held September 16, 1982 for the limited purposeof receiv-

ing evidence of ‘‘the approximate amounts to be paid by the Debtor [or

by any corporation or corporations acquiring the Debtor’s assets] for

expenses and fees incident to the reorganization” in accordance with the

provisions of Section 77(e)(2). Notice of entry of the August 26 order

was given by the Trustees to all persons who rendered services and

incurred expenses incident to the reorganization, in accordance with the

directions of the court set out in the order. The order provided that any

tothe reorganization might, in lieu of presenting oral evidence at the hear-

ing, file with the court a statement of the services rendered, or to be ren-

40

dered, and the expenses incurred, substantially in the manner and form

of the statement required by Bankruptcy Rule 8-212(a). The persons who

appeared and addressed the court in response to the matters contained in

the order or who filed statements with the court are identified in the

margin.”

Thus the record of the proceedings on the question of approval of the

Amended Plan demonstrates that all parties in interest have had an oppor-

tunity to be heard, and that all classes of creditors and stockholders have

had an opportunity to present their claims and argue the same to the Com-

mission and to the court.

Section 77(d) provides that if the Commission approves a plan, it shall

certify to the court the plan ‘‘together with a transcript of the proceedings

before it and a copy of the report and order approving the plan’’. In the

Commission's decision in this case, the Commission noted that it had

consolidated for concurrent disposition the Amended Plan and Guilford’s

application (filed October 28, 1981) for authority to control B&M, the

Commission stating it did so ‘*[i}n view of the interrelationship between

the control application and the. . . Amended Plan’’. (1.C.C. Decision at

5). The record and transcript certified to the court comprise the complete

record and transcript of the consolidated proceedings before the Com-

mission on the Amended Plan and the control application. The record

contains written verified statements of witnesses on direct evidence on

the Plan and control application, and on ‘‘responsive applications’’ filed

by other parties, and testimony developed under cross-examination of

witnesses at public hearings before an Administrative Law Judge. The

testimony of some witnesses in the record relates only to the control appli-

cation, and the testimony of other witnesses relates to both the Amended

Plan and the control application. The consolidated record was not sepa-

rated as between the Plan and the control application. While recognizing

that “‘an integral relationship exists between [Guilford’s] control of B&M

and that carrier's reorganization”’ ,'* the Commission made clear the basis

of its decision to approve the Plan, as follows:

We are approving the Amended Plan of Reorganization because ii

satisfies the requirements of section 77(b) and (e) of the former

Bankruptcy Act and is compatible with the public interest. The

Trustees have established the viability of a reorganized B&M on the

basis of its realistic earning potential.

(1.C.C. Decision at 4).

41

Vv

Section 77 contemplates that **(t}he judicial functions of the [reorga-

nization} court and the administrative functions of the Commission [will]

work cooperatively in reorganizations’. (Footnote omitted). Warren v.

Palmer, 310 U.S. 132, 138 (1940). Upon certification of the plan by the

Commission, Section 77(e) in part provides that the judge, after hearing,

shall ‘approve the plan if satisfied that . . . [i]t complies with the provi-

sions of subsection (b) of this section, is fair and equitable, affords due

recognition to the rights of each class of creditors and stockholders, does

not discriminate unfairly in favor of any class of creditors or stockhold-

ers, and will conform to the requirements of the law of the land regarding

the participation of the various classes of creditors and stockholders. . .”’.

In reviewing the plan, ‘*[t]he power of the court does not extend to par-

ticipation in all responsibilities of the Commission. Valuation is « func-

tion limited to the Commission, without the necessity of approval by the

court . . . . The function of valuation thus left to the Commission is the

determination of the worth of the property valued, whether stated in dol-

lars, in securities or otherwise”. Ecker v. Western Pacific R. Corp. , 318

U.S. 448, 472 (1943). While it is clear that the statutory scheme vests in

the Commission (and not in the court) the determination of value of the

property on which the plan of reorganization depends, it remains for the

reorganization court to ascertain, within the statutory scheme, whether

the Commission's determination is supported by material evidence and

is in accordance with legal standards. /d. at 477. So long as the record

demonstrates both (1) the requisite support fui the Commission's find-

ings of fact and conclusion on valuation and (2) the application of correct

principles by the Commission in reaching its findings and conclusion, it

is not the function of the court to reexamine those findings or that con-

clusion.

The statutory provisions for valuation of a railroad in reorganization

are set forth in Section 77(e) (44):

If it shall be necessary to determine the value of any property for

any purpose under this section, the Commission shall determine such

value and certify the same to the court in its report on the plan. The

value of any property used in railroad operation shall be determined

on a basis which will give due consideration to the earning power of

the property, past, present, and prospective, and all other relevant

facts. In determining such value only effect shall be given to

the present cost of reproduction new depreciation and orig-

42

inal cost of the property, and the actual investment therein, as may

be required under the law of the land, in light of its earning power

and all other relevant facts.

Under the Amended Plan, the value of the reorganized B&M consists

in the expectation of income from its use of productive property. In such

case the earning power of the property is the primary factor in determin-

ing the value of the enterprise as an operating railroad. Group of Insti-

tutional Investors v. Chicago, Milwaukee, St. Paul & Pacific Railroad

Co. , 318 U.S. 523, 539-40 (1943); Ecker v. Western Pacific R. Corp.,

supra at 507. **The extent and method of inquiry necessary for a valua-

tion based on earning capacity are necessarily dependent on the facts of

each case.’ Consolidated Rock Co. v. Du Bois, 312 U.S. 510,527 (1941).

A

The Commission's determination of the value of the reorganized B&M

is about $24,250,000. (1.C.C. Decision at 24). See Ecker v. Western

Pacific R. Corp. , supra at 481, 483. The Commission had before it evi-

dence pertaining to past operating revenues and income, the system's

physical restructuring and condition, improvements at the management

level, and forecasts to 1985 of tonnage, revenues, expenditures, and

income. Overall there was adequate evidence of relevant future earning

power of the reorganized B&M, and, in addition, there were opinions of

value of the reorganized B&M given by witnesses called by the Trustees.

The Commission found that the Trustees have established the requisite

viability of the reorganized B&M on the basis of its realistic earning

potential, id. at 19, having found that the record establishes that the reor-

ganized B&M will produce sufficient earnings to justify approval of the

Amended Plan."

The Amended Plan calls for a pro forma capitalization of the reorga-

nized B&M totalling $60,525,000, as of January |, 1982, comprised of

total debt of $10,275,000 and total shareholder's equity of $50,250,000.

The debt portion consisted of equipment obligations in the amount

of $1,106,000, and capital leases of $9,169,000. Shareholder’s equity

included the $26 million of Redeemable Preference Shares, and

$2,425,000 allocated to 2,425,000 shares of new Common Stock (of $1

par value per share) and $21 ,825,000 to paid-in capital.

The pro forma capitalization reflects the elimination of the Debtor's

mortgage debt and the conversion of the Trustees’ Certificates, previ-

ously delivered to FRA, to the subordinated Redeemable Preference

43

Shares, and demonstrates that upon consummation of the Amended Plan

the reorganized B&M will commence business with an unusually low

amount of funded debt.

In computing the annual fixed charges of the reorganized B&M, the

Commission used the $1 1.1 million estimate of Mr. Guest for equipment

obligations, ‘rather than the $10,275 ,000 figure originally presented by

the Trustees"’, (1.C.C. Decision at 20, n. 14), and added to that estimate

Guilford’s loan of $1.5 million to the Trustees for acquisition and reha-

bilitation of ConRail lines in Massachusetts and Connecticut. Thus the

total funded debt used in this computation would amount to $12.6 mil-

lion. The evidence justified the Commission's use of the increased amount

of funded debt, which use was viewed by the Commission as constituting

a ‘‘conservative approach’’. Nevertheless, the substantial reduction

overall in funded debt that would be effected by consummation of the

Amended Plan would result in a decrease of annual fixed charges from

approximately $3.07 million in 1981 to no more than $1.3 million after

reorganization. The Commission's finding that the Amended Plan ade-

quately provides for coverage of the annual fixed charges of the reorga-

nized B&M by the probable earnings available for the payment thereof

is supported by material evidence and comports with correct principles.

The Commission's judgment that B&M'’s value for purpose of reor-

ganization is about $24,250,000 likewise is supported by material evi-

dence and accords with legal standards. Thus Guilford’s cash purchase

of the total common equity of the enterprise for $24,250,000 represents

an amount which is equivalent to the valuation found by the Commission.

Ecker v. Western Pacific R. Corp., supra at 483 (‘*[{T]}he determination

by the Commission of the aggregate amount of securities which may be

issued against the system is in substance a finding of total value for reor-

ganization purposes.’’). It is clear from the record that B&M'’s value for

purpose of reorganization would not support a capitalization which would

justify issuance of securities in addition to the new Common Stock pur-

chase by Guilford. The court concludes upon all the evidence that the

amount to be paid by Guilford is a fair price for the total issue of 2,425,000

shares of new Common Stock.

The Commission concluded that the provisions of the Amended Plan

for distribution of (1) the total of the cash in the Trustees’ Restricted Funds

Account plus $24,250,000 of cash to be paid by Guilford for the new

Common Stock, and (2) the CCIs, as required, to various classes of cred-

itors, are in accordance with the rule of absolute priority. North Pacific

Ry. Co. v. Boyd, 228 U.S. 482 (1913), and Case v. Los Angeles Lumber

Ad

Products Company, 308 U.S. 106 (1939). Classification of creditors and

the order of their priorities were established by orders of the court, entered

March 19, 1979 (Order No. 398) and April 19, 1982 (Order No. 637).

Order No. 637 provided for a separate classification of general unsecured

creditors, and defined their qualifications for membership in the class

(“‘six months’’ claimants). The Order provided that the priority of the

class shall be immediately junior to administration claims and secured

tax claims, but senior to all other claims, including those of bondholders.

Order No. 637 was entered after the Trustees had filed their plan, and

amendments, containing the description of ‘‘six months’’ claims in sec-

tion 1.19. To the extent that any inconsistency exists between the provi-

sions of section 1.19 and Order No. 637, the court will modify the

Amended Plan to conform with Order No. 637 *‘in order to carry out the

plan effectively’’. (I.C.C. Decision at 60). The Court agrees with the

Commission that the distribution of the cash and CCIs under the provi-

sions of the Amended Plan accords with the rule of absolute priority.

In accordance with the request contained in section 3.10 of the

Amended Pian, the Commission found that there is no value in the equity

of the presently outstanding common and preferred stock of the Debtor.

This conclusion follows from (a) the Commission's determination of the

value of the reorganized B&M at about $24 250,000, and (b) the fact that

the proposed distribution under the Amended Plan of cash and CCIs will

be insufficient to satisfy in full the claims of all creditors. Among others,

the general unsecured creditors of the Debtor to the full extent of their

debts are entitled to priority over the rights of stockholders in the property

of the Debtor. Kansas City Terminal Ry. Co. v. Central Union Trust Co. ,

271 U.S. 445, 455 (1926). Furthermore, the Commission determined

that the value of the B&M for purpose of reorganization does not justify

the issuance of options or warrants to creditors or stockholders to receive,

or subscribe for, the new Common Stock of the reorganized B&M. The

court is satisfied from the record that the foregoing finding and conclu-

sions of the Commission are supported by material evidence and are in

Under Section 77(d) the Commission is charged with the primary

responsibility of determining whether the Amended Plan is compatible

with the public interest. Ecker v. Western Pacific R. Corp. , supra at 473.

In 1967 (almost three years before the petition for reorganization was

filed) the Commission recognized the importance of B&M, as a railroad

system, ‘‘to New England and the national rail system.’’ The Commis-

sion has reiterated that recognition in its decision in these proceedings,”

45

thus emphasizing the regional and national importance of the B&M sys-

tem. Moreover, the Commission has expressly found that the Amended

Plan is compatible with the public interest.

In the proceedings before the Commission, all of the states in which

the Debtor operates (except Vermont, which took no position on the

Amended Plan) gave their support to the Plan. In its consideration of the

record before it, the Commission found that the reorganized B&M will

not be a new system, *‘having only a speculative prospect for continued

life’’ (I.C.C. Decision at 20, n. 13), but, rather, that Guilford ‘*has evinced

an unequivocal commitment to operate B&M for a long term’’. /d. at 19.

The Commission noted that “‘B&M’s affiliation with MEC and [Guil-

ford]—which is an integral part of the reorganization—should entail sub-

stantial positive benefits for the reorganized entity’’ (id. at21), and stated

that the reorganized B&M ‘will remain the same railroad presently being

operated, with additional traffic and competitive opportunities arising

from affiliation with MEC and its recent acquisition of Conrail [sic] prop-

erties”’. Id. at 20, n.13.

Thus after reviewing the Commission's findings on (1) the viability of

the reorganized B&M, (2) the amount and character of its conservative

capitalization, and (3) the reorganized railroads ability to make appro-

priate use of B&M’s existing facilities and plant to meet the need of the

public for an efficient and economical continuing transportation system

serving New England and the national rail system, the court agrees that

all such findings are adequately supported by the record, are in accord

with legal standards and justify the conclusion of the Commission that

the Amended Plan is compatible with the public interest.

The findings and conclusions of the Commission demonstrate that,

pursuant to Section 77(b)(5), the Amended Plan contains adequate means

for its execution. The Amended Plan provides for the transfer of control

of the productive operating properties, and other properties, retained by

the Debtor, free and clear of all claims of stockholders and, except for

$12.6 million of debt, free and clear of all claims of creditors. This trans-

yb agner is under the Amended Plan, will be effected by cancelling

esently outstanding preferred and common stock of the Debtor, pur-

canseaneaienentiecmmetatetectanntenmantie,

and by the issuance to Guilford for cash, the total authorized outstanding

2,425,000 shares of new Common Stock of the reorganized B&M. The

Amended Plan also provides for the affirmation of the Debtor's leases of

the properties of The Northern Railroad, the Stony Brook Railroad, and

the Vermont and Massachusetts Railroad, operated in the Debtor's sys-

46

tem, and the assumption by the reorganized B&M of certain executory

contracts. The Amended Plan further provides for the rejection of other

executory contracts, and leases.

As further means for its execution, the Amended Plan contains pro-

visions for the distribution of cash and certificates of contingent interest,

in accordance with the rule of absolute priority, for the satisfaction of

claims of secured and unsecured creditors; and provisions for the satis-

faction or elimination of existing liens, or other security, and for the cur-

ing of defaults. The Amended Plan also provides (a) for the conversion

of Trustees’ Certificates into Redeemable Preference Shares, (b) for the

transfer of cash from the Segregated Account, in the approximate amount

of $6 million, to the reorganized B&M to be used for working capital,

and (c) for the discharge of the Debtor from all debts and liabilities to its

creditors and stockholders.

The record supports the conclusion of the Commission that the

Amended Plan provides adequate means and resources for achieving

reorganization of B&M, ona conservatively capitalized basis, as a finan-

cially viable operating railroad.

The motion of Canadian Pacific Ltd. requesting the court to defer deci-

sion on the question of approval of the Amended Plan, certified to the

court here by the Commission, until such time as the Court of Appeals

for the District of Columbia Circuit has reached a decision on certain

petitions for review of the Commission's decision approving the Amended

Plan, was denied by Order of the court on November 3, 1982. The Mem-

orandum of the court stating the reasons for the denial was filed with the

Order.

Section 77(e) provides that submission of a plan to stockholders is not

necessary if their claims have been found worthless by the Commission,

“‘and the judge shall have affirmed the finding’’. As reported in its deci-

sion, the Commission found that the equity of the presently outstanding

preferfed and common stock of the Debtor has no value. In Ecker, the

Supreme Court made clear that the requirement of the distict court's affir-

mation of the Commission's action eliminating claimants having no equity

in the debtor's properties “‘points to a wider scope of review than an

inquiry as to whether statutory standards for valuation have been fol-

lowed"’. 318 U.S. at478. Nevertheless, the wider scope of review ‘‘does

not require an independent appraisal [by the court] of the valuation’ found

47

by the Commission and that **[t]he court properly affirms the Commis-

sion, when it finds no legal objection to the Commission's use of its own

valuation to determine whether particular claimants are entitled to par-

ticipate in the reorganization”’. /d. at 479.

The court has found that B&M's value for purpose of reorganization

is supported by material evidence and accords with legal standards, and

the court has not been made aware of any reason why that finding should

be reviewed. In view of the fact that Guilford will pay in cash an amount

at least equal to the value of the reorganized B&M for all the authorized

outstanding new Common Stock, issuance of additional new Common

Stock to the present stockholders in satisfaction of their claims would not

be justified. Furthermore, there is no requirement, constitutional or stat-

utory, that stockholders are entitled to ‘‘immediately valueless"’ options

or warrants to receive, or subscribe for, securities of a reorganized rail-

road. Ecker v. Western Pacific R. Corp. , supra at 476. Moreover, as the

court has found, the Amended Plan provides for distribution of the value

of B&M'’s assets for purpose of reorganization in accordance with the

rule of absolute priority. Thus the court affirms the finding of the Com-

mission that the equity of the present stockholders has no value.

VI

The opposition to the Amended Plan before the court comes from the

following: Providence and Worcester Railroad (‘‘P&W"’), CP, group of

state and local taxing authorities, a group of Six Months Creditors, the

State of New York,” the Maine-New Hampshire Interstate Bridge

Authority,” and two stockholders. The Commission reported in its deci-

sion that the principal opposition to the Plan before the Commission came

from P&W and CP, that no shareholders nor unsecured creditors

appeared to oppose the Plan, and that the other creditors—secured cred-

itors and the holders of priority ‘six months claims'—appear satisfied

with the plan and do not oppose it’’. (1.C.C, Decision at 17). The court

has considered all objections and claims presented by those who appeared

at the hearing, and by those who submitted objections and claims but did

not otherwise seek to be heard.

A

P&W, after the August | 1-12, 1982 hearing, filed a brief with the court

in which it persists in opposing the Plan. The grounds of opposition are

that the Commission disregarded the standard concerning cost of capital

stated in Chicago, Milwaukee, St. Paul Pacific Railroad Company, Reor-

ganization, 363 1.C.C. 17 (1980) (‘Milwaukee Road" ); that the Trust-

ees’ forecasts of future earnings are grossly overstated; that the reorga-

nized B&M has no prospect of covering its fixed charges; that the

Amended Plan does not allow for sufficient working capital; and that

approval of the Amended Plan by the Commission violated the provision

of the Constitution concerning uniform laws on the subject of bankruptcy.

Article I, Section 8 (in the fourth clause) of the United States Constitu-

tion. All except the last argument were presented to the Commission

which addressed and rejected them.

P&W is notacreditor of B&M, and appears to claim standing to oppose

the Amended Plan on the subtle ground that it (P&W) possibly might

become a creditor of a reorganized B&M. On the record before the court,

the nature of such possibility is not only incalculable, but is too uncertain,

indefinite and remote to qualify P&W as a party in interest, within the

meaning of Section 77(e), entitled to file objections to the Plan certified

by the Commission.

Assuming, arguendo, that the objections are properly here, neverthe-

less they must be found lacking in merit. The main thrusts of the objec-

tions are that (1) the Trustees’ forecasts are qverstated, and (2) even if

they are not overstated , the Amended Plan of reorganization is not viable.

The Trustees’ expert witness, Isabel H. Benham, concluded that the

going concern value of the reorganized B&M is $24,158,000 based on

(1) capitalization at 12 percent of the 1982-1985 average of the Trustees’

forecasts of net revenues from railroad operations, plus (2) capitalization

of income derived from other than rail operations, and (3) additions of

asset Values not presently producing earnings, with (4) deductions from

the total of the foregoing of debt and other ongoing liabilities of the reor-

ganized railroad. (Benham's Verified Statement, Appendix C). Miss

Benham explained the earning power component” of her valuation of

B&M, which she characterized as ‘‘an insolvent carrier’’ in bankruptcy,

in her testimony before the Administrative Law Judge. John Guest,

financial advisor to Guilford, testified to valuation of the reorganized

B&M in the range of $15-18 million. (Com. Ex. C-62)." Thomas

Dewey, Jr., witness for P& W, testified that he had no opinion of value of

the reorganized B&M. (Com. Tr. 774).

Miss Benham's opinion of value was challenged by Dewey as a “‘gross

overstatement"’ because her capitalization of earnings was based on the

Trustees’ forecast, which he thought was ‘‘spectacularly at variance with

49

the history in this case’’. (Com. Tr. 774). (Dewey agreed that he had

made nw independent analysis of the forecasts.) The record contains evi-

dence that the information which provided the basis of the Trustees’ fore-

casts was obtained by B& M's Marketing and Sales Department directly

from B&M's rail customers. The forecasts focused on six major com-

modity groups that have been, and are expected to be, the backbone of

B&M's freight business, and the probable market opportunities and traffic

levels through 1985. Miss Benham made a detailed analysis of the pro-

jections and their bases, as shown in Appendix D of her Verified State-

ment. Her view of the commodity mix overall is that it was ‘‘lackluster’’,

but she concluded that ‘‘every effort has been made to make the projec-

tions as conservative as possible’’. She was of the opinion that the pro-

jections for 1982 may not be reached, “‘but we would expect 1985 ton-

nage results to be fairly close to the targets with the possibility of revenues

substantially exceeding the forecasts’. (Appendix D at 7). She affirmed

this belief later in testimony that ‘‘in the five year period [the tonnage

forecasts] will come out probably exactly where they say they are,”’ and

noted that B&M's downturn in 1981 car loadings was no different than

that of the industry as a whole. She stated that B&M's tonnage and rev-

enues are projected to grow at a compound annual rate of | .5 percent and

1.2 percent, respectively, while operating expenses are estimated to

increase at the rate of 0.6 percent, compounded annually. She found the

Trustees’ estimated cash flows adequate to cover annual debt maturities

and capital expenditures, and she observed that ‘‘a high level of cash

inflows over cash outflows are [sic] more indicative of . . . viability and

financial strength than reported earnings or other yardsticks. . ."’. (Ben-

ham's Verified Statement at 13). According to Miss Benham, although

coverage of fixed charges is ‘‘more than adequate’ , the margin of safety

ratio for such charges is slim, suggesting ‘‘that revenues . . . may be

inadequate in relation to the cost of handling the traffic’. /d. at 16-17.

It was her view that ‘‘if the earnings and cash projections . . . should not

be realized . . ., the conservative capitalization of the reorganized com-

pany suggests that external funding of capital requirements would be pos-

sible without jeopardizing the ICC fixed charge coverage yardstick of

3.5x"’. She concluded that:

the Trustees’ projections are conservative and that, if revenue fore-

casts turn out to be too optimistic, there is room in the expense

accounts to compensate for any revenue decline because of the major

rehabilitation programs projected to be charged to those accounts.

Most important, the cash flow projections indicate that adequate debt

protection exists and that sufficient sums will be generated internally

to meet capital requirements over the first four years after consum-

mation of the Plan.

Id. at 16-17.

John Guest gave testimony in support of the Amended Plan and the

viability of B&M and Maine Central Railroad (‘“‘MEC*’) as components

of Guilford’s system. He contrasted B&M's ten years of deficits during

1970-1979 with the recent benefits to B&M brought about by the Trust-

ees in management, advantageous commuter service contracts, rehabil-

itation of the main line, and relief from burdensome work rules in labor

relations; and he noted that, absent the coal strike and expenditures for

excessive maintenance, B&M would have reported net revenue from

railway operations (‘‘NRRO"’) of approximately $1.0 million in 1981.

He observed that under the Amended Plan B&M will emerge from bank-

ruptcy with a $12.6 million debt, ‘an unusually low amount of funded

debt"’ , and that his pro forma statements of income and cash flow, based

on alternative assumptions of (a) NRRO at $2.5 million a year and (b)

NRRO at $4.7 million a year (reflecting B&M’s share of benefits from

Guilford’s common control of B&M and MEC), indicate that under nor-

mal economic conditions B&M should enjoy positive net income, and

demonstrate both a satisfactory fixed charge coverage ratio and a high

ratio of gross cash flow to total debt. He noted that in assessing viability

of an enterprise it is necessary to consider both good years and bad years,

and that ‘‘unusual adverse events such as the impact of a coal strike may

appropriately be excluded ..."’. Turning to the feasibility of the

Amended Plan, Guest concluded that the effect of the recession on B& M's

recovery progress did not appear to daunt Mr. Mellon, who ‘‘testified

. . . that Guilford viewed B&M as a long range investment and [that he]

continued to support the Trustees’ plan, including the payment of

$24,250,000 for the entire [issued] common stock of the reorganized

railroad’’. (Guest's Verified Statement at 9).

Material evidence was presented to the Commission concerning the

value of the reorganized B&M. It is true that in 1981 and 1982 earnings

of the Debtor fell short of earnings predicted tur those years by the Trust-

ees, but, as the Commission found, the shortfall resulted in large part

from unusual adverse conditions arising out of the continuing economic

recession coupled with a coal strike and expenditures for excessive main-

tenance. There was adequate evidence to support these findings, and the

51

weight to be accorded to the conditions referred to, and the conclusions

reached, by the Commission are not subject to reexamination here.

Moreover, there was additional evidence of factors relevant to future

earning power of the reorganized B&M in the record before the Com-

mission; thus the Commission was noi bound to agree with P& W's argu-

ment that the Trustees’ forecasts for 1982 through 1985 like a “‘house of

cards must now come tumbling down’’. Nor was the Commission bound

to accept P& W’s estimate of the yield from B&M'’s contract with MBTA,

or the adverse impact on B&M’s revenues which P&W assumed would

result from the Norfolk and Western-Southern (*‘NS’’) consolidation.

The thrust of these arguments is not that the record was lacking in evidence

to support the Commission's findings and conclusions; rather, it is that

the Commission should have found facts as P&W preferred them to be.

It was for the Commission in the exercise of its fact-finding function,

in considering evidence which arguably might have tended toward alter-

native conclusions, to determine future earning capacity of the reorga-

nized B&M, its coverage of fixed charges, and the question of adequacy

of its working capital. The findings and conclusions reached by the Com-

mission lie within the limits of the evidence in the record, and the court,

in reviewing the Commission's findings and conclusions, can see no

reason to interfere with the discretion confided to the Commission to

Jetermine whether the evidence before it affords a reliable basis for its

conclusions.

P&W contends further in its brief filed here that under the test stated

in the Commission's decision in Milwaukee Road the reorganized B&M

will not achieve, under the Trustees’ forecasts, a rate of return equivalent

to the railroad industry's cost of capital. P&W argues that such rate of

return is a condition of approval of the Amended Plan.

In addressing this argument, the Commission stated:

The Trustees have established requisite viability of the reorga-

nized B&M on the basis of its realistic earning potential. Milwaukee

Road did not establish an absolute requirement that a reorganized

railroad achieve a rate of return on total capitalization greater than

the railroad industry cost of capital. Indeed, in Milwaukee Road we

expressly refused ‘‘to develop a rate of return which would signify

viability . . . [ellipsis in text} since the rate could vary depending on

the capital sources available to the system, the risk of the proposal,

and the magnitude of public involvement.”’ Jd. at 48. We focused on

the ‘‘hurdle”’ rate that would induce an investor to make the ‘‘new

52

investment”’ in a *‘newly reorganized railroad.”’ /d. at 49. And we

noted that one of the principal reasons for ensuring that a reorga-

nized carrier can achieve an adequate rate of return is that in the

absence of such a return, it ‘‘would have great difficulty attracting

outside capital, and would have a strong disincentive from rein-

vesting its own funds in the system."’ /d. at 45.

In this case the ultimate test of viability established in Milwaukee

Road has already been met. In contrast to the involuntary investment

in a reorganized railroad which shareholders of its non-railroad

holding company were required to make under both of the Milwau-

kee Railroad reorganization plans, here an outside source of private

capital—[Guilford]—has agreed to invest $24.25 million to acquire

the reorganized railroad. P&W and CP argue, in essence, that we

should not permit this investment because it might not prove prof-

itable for [Guilford]. We believe that a clear indication of profita-

bility and of long term viability is the willingness of private investors

to place their funds at risk in an enterprise. Approval of the Amended

Plan is wholly consistent with Milwaukee Road. [Footnote omitted].

(1.C.C. Decision at 19-20).

A detailed narrative of the extensive rehabilitation of track and equip-

ment problems of Milwaukee Road, and its traffic and financial hurdles,

which required the attention of the Commission and results in the rejec-

tion by a unanimous Commission of two plans of reorganization and a

plan of liquidation, is set forth in the 53-page decision in 363 1.C.C. 17

(1980). The court has examined all phases of that decision carefully, par-

ticularly the discussion of conditions establishing viability; it will serve

no useful purpose here to enter upon a detailed dissertation on Milwaukee

Road.” Milwaukee Road and B&M, as candidates for Commission

approval of reorganization under Section 77, have little, if anything in

common as to their overall problems, and their respective proposals for

providing means for the continued operation of manifestly disparate rail-

road systems. The Commission itself recognized important distinctions

between the plan of reorganization in Milwaukee Road and that in B&M.

B&M Trustees’ Amended Plan, could and did conclude that: **[a]pproval

of the [B&M] Amended Plan is wholly consistent with Milwaukee

Road’’. Jd. at 20. The court finds no basis for disagreement with that

conclusion.

P& W's objection predicated on Milwaukee Road and Railway Labor

53

Executives’ Assn. v. Gibbons, 102 S. Ct. 1169, rehearing denied, \02

S.Ct. 1997 (1982) (*‘RLEA"’), isentirely without merit. In the first place,

the Commission's decision approving the Amended Plan proposed for

B&M is not shown to be inconsistent, either in principle or in respect to

any material fact, with the Commission's decision in Milwaukee Road.

Moreover, no question as to the uniformity requirement of Article I, Sec-

tion 8 (in the fourth clause) of the United States Constitution” arises when

the Commission's decisions in Milwaukee Road and B&M are com-

pared. Neither the uniformity clause of the Constitution nor the decision

in RLEA constrains the Commission in the exercise of its statutory func-

tion when resolving the question whether a plan of reorganization should

be approved.

After reviewing the objections of P&W, which, as above noted, the

court assumed for the sake of argument were properly here, the court

concludes that the objections should be and are hereby overruled and

denied.

B

Various state and local taxing authorities object that the Amended Plan

makes no allowance for payment of interest on unpaid tax-lien claims up

to the date of payment.

Claims for unpaid taxes constituting liens against the property of the

Debtor, accrued before the petition for reorganization was filed, amount

to approximately $640,000. The Amended Pian provides for payment in

cash in the full amount of the principal of these claims, and the Trustees

concede that interest thereon which accrued to the time of filing the peti-

tion on March 12, 1970 is payable on the claims. The plan will be mod-

ified to provide for such payment of interest. The objections of taxing

will be discussed hereafter.

Claims for unpaid taxes likewise constituting liens, accrued during

reorganization (March 12, 1970 through June 30, 1982), amount to $7.6

million. The Amended Plan provides for payment in cash in the full

amount of these claims due and owing as of the date of consummation.

The Trustees contend that no interest should be paid on these tax claims.

est on unpaid taxes was not raised before the Commission; the question

was raised before the court by nume rous taxing authorities. At the court's

suggestion the Trustees filed a petit ion seeking a determination as to the

54

liability of the Debtor’s estate for payment of interest on tax claims, and,

after notice to all parties in interest, the court heard the petition on August

5, 1982. A motion was allowed by the court that the proceedings on the

petition be incorporated in the record of the hearing on the question of

approval of the Amended Plan.

The evidence in the record establishes that during the period of reor-

ganization sufficient cash has not been available to pay current taxes and

all necessary current operating expenses indispensable to continued rail

operation. Generally, postpetition local taxes are regarded as part of the

cost of doing business in reorganization, but circumstances may arise

when deferment by the court of tax payments is authorized. See In re Penn

Central Transportation Co. , 325 F. Supp. 294(E.D. Pa. 1970), affirmed,

452 F.2d 1107 (3rd Cir. 1971). In determining what allocation should be

made of cash in the Debtor's estate, when the amount of such cash proves

insufficient to meet all current obligations, paramount consideration must

be given to the public interest in the continued operation of the railroad

system in the cities and towns it serves. Here, payment of the taxes accrued

during the reorganization was deferred by order of the court, to keep the

railroad in operation, and the delay in making prompt payment of the tax

obligations must be viewed as ‘‘a delay necessitated by law if the courts

are properly to preserve and protect the estate for the benefit of all inter-

ests involved. . ."’. Vanston Bondholders Protective Com. v. Green, 329

U.S. 156, 163 (1946).

It has been a long-standing rule in bankruptcy par equity receiverships

that accumulation of interest upon claims against the debtor stops when

the petition is filed with the court. Nicholas v. United States, 384 U.S.

678 (1966); City of New York v. Saper, 336 U.S. 328 (1949); Vanston

Bondholders Protective Com. v. Green, supra; Sexton v. Dreyfus, 219

U.S. 339 (1911); Thomas v. Western Car Company, 149 U.S. 95 (1893).

See United States v. Harrington, 269 F.2d 719 (4th Cir. 1959). In City of

New York v. Saper, supra, the rule was made applicable to the accumu-

lation of interest on tax obligations. See Nicholas v. United States, supra

at 662 & n.10. The reasons advanced for the rule are that the time the

petition is filed ‘*fixed the moment when the affairs of the bankrupt are

supposed to be wound up”, Sexton v. Dreyfus, supra at 344, and that

“creditors should not be disadvantaged vis-a-vis one another by legal

delays attributable solely to the time-consuming procedures inherent in

the administration of the laws" [footnote omitted]. Nicholas

v. United States, supra at 683.

The City of Cambridge (Cambridge) has the largest claim for unpaid

postpetition tax liens (an amount now probably in excess of $3.5 million),

and Cambridge contends that the Debtor will have sufficient resources

**to pay all creditors in cash when the plan is confirmed, even if interest

[probably in excess of $1.9 million in statutory interest] is allowed on

[Cambridge's] tax claims’. In light of the record in these proceedings on

the question of approval of the Amended Plan, the court is not persuaded

that Cambridge's vision of the future—full payment in cash to all credi-

tors—is likely to be fulfilled. However, if it should come to pass, after all

claims have been paid in full in cash, that there remains in the hands of

the Debtor a surplus over and above what is required for the execution of

the Amended Plan, then, in the view of the court, equitable considera-

tions might permit payment of postpetition interest on such unpaid tax-

lien claims of state and local taxing authorities. Vanston Bondholders

Protective Com. v. Green, supra at 164.

Cambridge further contends that it is entitled to receive interest on its

postpetition secured tax claims before interest is allowed to the holders

of the First Mortgage bonds and the Income bonds. To support its con-

tention, Cambridge asserts that it relies upon the absolute priority rule of

North Pacific Ry. Co. v. Boyd, supra, and Case v. Los Angeles Lumber

Products Company, supra. Cambridge argues that by allowing interest

to the bondholders, whose claims are at a lower priority, while denying

allowance of interest on postpetition secured tax claims, the Amended

Plan violates the absolute priority rule. The court disagrees.

Even though the Amended Plan provides for allowance of interest

according to the terms of the bonds secured by the First Mortgage Inden-

ture and the General Income Mortgage Indenture,” while it makes no

allowance of interest on postpetition secured tax claims, the Plan is not

objectionable. Jn re New York, New Haven and Hartford Railroad Co. ,

304 F. Supp. 1121, 1133-34 (1969). See United States v. Harrington,

supra at 724, and State of New York v. Feinberg, 204 F.2d 502, 503 (2d

Cir. 1953). In Harrington, supra, the court succinctly stated the rationale

for the distinction drawn between mortgagees and secured tax claims in

the allowance of postpetition interest: ‘“The justification for this allow-

ance to mortgagees, etc., would seem to be that when the creditor

extended credit, he relied upon the particular security given as collateral

to secure both the principal of the debt and interest until payment and, if

the collateral is sufficient to pay him, the contract between the parties

Ought not be abrogated by bankruptcy. This rationale has no application

to tax liens.”’ dd. at 724. There is nothing in Fosdick v. Schall, 99'U.S.

235 (1879), or Jn re Boston and Maine Corporation, 634 F.2d 1359 (\st.

Cir. 1980), cert. denied, 450 U.S. 982 (1981), or Southern Railway

Company v. United States, 306 F.2d 119 (Sth Cir. 1962), relied upon by

Cambridge. inconsistent with denying interest on secured tax claims

while allowing payment of interest according to the terms of the mortgage

bonds. The court finds that the Amended Plan does not violate the abso-

lute priority rule in denying allowance of interest on postpetition secured

tax claims.

Vanston counseled that *‘the touchstone of each decision on allowance

of interest in . . . reorganization has been a balance of equities between

creditor and creditor or between creditors and the debtor.’’ 329 U.S. at

165. Should postpetition interest be allowed on either prepetition or post-

petition secured tax claims here, until payment of the principal, the delay

in making prompt payment of the taxes—a delay necessitated by law to

keep the railroad running—would diminish the distributive shares of gen-

eral creditors through no fault of theirs, and would have the effect of

penalizing them. Under such circumstances, allowance of postpetition

interest claimed by the taxing authorities here would not be in accord with

equitable principles. Vanston, supra at 163-65; United States v. Har-

rington, supra at 721-24.

While postpetition secured taxes are part of the cost of doing business

during the reorganization, and, accordingly, are entitled to the same

priority as administration expenses, such taxes do not enjoy a higher rank

over other administration expenses. Presumptively, 2ll administration

creditors should be treated alike. In any event, the fact that postpetition

secured tax claimants are entitled to the priority of administration cred-

itors, does not entitle them to allowance of interest until paid.

The provisions of the Amended Plan are not objectionable for failure

to make allowance for payment of postpetition interest, to date of pay-

ment, on either prepetition taxes or postpetition taxes. In re New York,

New Haven and Hartford Railroad Co. , supra at 1134; In re Penn Cen-

tral Transportation Co. , supra at 298ff.

The Town of Madbury, New Hampshire (*‘Madbury"’) filed an objec-

tion to the Amended Plan for failure of the Plan to make allowance of

postpetition interest to date of payment of its tax-lien claim. Madbury

points to the undisputed facts, apparently distinctive to its claim, that the

real estate that secured its tax lien was sold in 1974 for a price well above

the assessed value, and that since 1974 the Debtor has had the benefit of

the substantial interest income on these proceeds. On the basis of these

facts, Madbury argues that the court should exercise its equitable discre-

57

tion to allow Madbury’s interest claim, even if the court does not allow

the outstanding postpetition interest claims of other taxing authorities.

The City of Keene, New Hampshire (*‘Keene’’) filed objection to the

Amended Plan for failure of the Plan to allow interest on its tax claim.

Keene also calls attention to circumstances, which it asserts are peculiar

to its claim, that warrant exercise of the equitable discretion of the court

to allow postpetition interest on Keene's unpaid taxes. Keene asserts that

although the Debtor has owned real estate in Keene, some of which was

used in the ordinary business of the railroad and some of which was not,

during the reorganization period, Keene has received “‘nothing but

decreasing railroad service’’ from the Debtor. Therefore, Keene argues,

the court should view the distinctive equities in Keene's claim as weighing

in the balance in Keene's favor.

After a careful review of the undisputed facts, and the assertions and

arguments advanced by Madbury and Keene, respectively, the court finds

that the delay in making prompt payment of their tax claims was “‘neces-

sitated by law’’ to keep the railroad running. While the circumstances

and details of Madbury’s and Keene's claims distinguish their claims

somewhat from the interest claims of others, nevertheless, in the ‘*bal-

ance of equities between creditor and creditor’’ it would not be equitable

for either Madbury or Keene to gain an advantage over others because of

the act of the law in the delay in distribution of the assets of the Debtor's

estate to all entitled to them under the Amended Plan.

After review of the objections filed by the taxing authorities, the court

concludes that the Amended Plan providing (1) payment in cash in the

full amount of prepetition secured taxes, and interest thereon from the

date of default until March 12, 1970, at the rate of interest payable during

the period of default, (2) payment in cash in the full amount of postpetition

taxes, and (3) no payment of postpetition interest to date of payment of

the tax on either prepetition taxes or postpetition taxes, is not objection-

able. The court concludes further that the objections should be and are

hereby overruled and denied.

Cc

Certain holders of unsecured claims, who assert entitlement to priority

under the Six Months rule, have objected to the Amended Pian for its

failure to provide for allowance of interest on their prepetition claims.

The group of claimants raising the objection inchades the Chessie sys-

tem,” CP, Penn Central, and the Committee on Interline Railroads. In

seeking allowance of interest, these claimants rely on Order No. 637 of

the court and on the decision in /n re Boston and Maine Corporation,

Debtor, supra. Furthermore, the claimants argue that standards of fair-

ness and equity require that the Amended Plan provide for allowance of

imerest on their claims.

As mentioned above at 26, Order No. 637 established a separate clas-

sification of general unsecured creditors. Pursuant to Section 77(b) [11

U.S.C. §205(b)}” of the Bankruptcy Act, and in accordance with the

principles in /n re Boston and Maine Corporation, Debtor, supra, Order

No. 637 provides as follows:

The holders of general unsecured claims against the Debtor, timely

filed and duly proved in this matter and allowed by the court, where

each claim meets these requirements: (a) it was incurred within six

months before the filing of the petition for reorganization on March

12, 1970, (b) it was for an expense necessarily incurred for the pur-

chase of goods or services used in the current operations of the rail-

road, and (c) the goods or services were delivered on credit in the

expectation they would be paid for out of current operating revenues

of the railroad and not in reliance on the railroad's general credit.

Payment of claims of this class shall be on the same basis and from

the same operating income as administration claims of operating

expense creditors.

As appears above at 16, the principal amount of each allowed Six Months

claim will be paid in full in cash on the Consummation Date.

It is clear that neither Order No. 637 nor the decision of the First Circuit

in Boston and Maine, supra, supports the interest claims. The question

of entitlement to interest was not considered by the Court of Appeals, nor

was it considered by this court. Allowance of interest does not necessarily

accrue to unsecured claims that qualify for the Sixth Months priority. The

general rule against accumulation of interest upon claims against the

debtor after the filing of the petition is applicable to Six Months claims,

and no showing has been made that these claims fall within any of the

exceptions to the rule. The court concludes that as general unsecured

creditors, the holders of Six Months claims arc not entitled to postpetition

interest.

The Six Months claimants also assert entitlement to interest that accrued

on these underlying claims before the petition was filed on March }2,

1970. In Debentureholders, Etc. v. Continential Inv, Corp. , 679 F.2d

264, 268 (ist Cir. 1982), cert. denied, 103 S. Ct. 165 (1983), the court

59

pointed out that *‘[p]re-petition interest is governed by state law, absent

an overruling federal law’’. Cf Vanston Bondholders Protective Com.

v. Green, supra at 161-70. The applicable law in Massachusetts was

summarized in Debentureholders, supra:

State law may allow pre-petition interest either because the parties

have so contracted or because under state rules governing contracts

a person who breaks a contract for a liquidated sum must pay as part

of the damages interest from the date of the breach. [Citations omit-

ted.]

679 F.2d at 268. None of the Six Months creditors claiming prepetition

interest here has presented evidence, or has argued, that the claim for

interest arises out of the terms of a contract providing for payment of

interest. Nor has there been any showing made of a basis in ‘‘overruling

federal law’’ that would support allowance of prepetition interest claims.

The court is not persuaded that considerations of fairness and equity

support the allowance of interest on these claims. ** A reorganization court

must consider the issue of postpetition interest not in the abstract, but in

light of the nature of each claim, and in application of basic principles of

fairness and equity.’’ Jn re Penn Central Transportation Company, 358

F. Supp. 154, 170 (E.D. Pa. 1973). It must not be overlooked here that

under the Amended Plan each Six Months creditor will receive in cash

the full amount of principal of his allowed prepetition unsecured claim

while all other general unsecured creditors will receive only Series D

CCls equal to ten pecent of their respective liquidated and allowed claims.

Moreover, under the Amended Plan these Series LD CCIs will be redeemed

in cash only if and when cash is determined to be available in accordance

with section 3. 1(2) of the Plan, as amended. To allow interest on the claims

of the Six Months creditors until payment of the principal would be to

penalize other creditors because of a delay necessitated by law. Cf, United

States v. Harrington, supra at 723, and Vanston Bondholders Protective

Com. v. Green, supra at 163. The allowance of interest under such cir-

cumstances would not be in accord with equitable principles.

The court concludes that the objections of the Six Months creditors to

the Amended Plan for failure to provide allowance of postpetition interest

on the allowed claims should be and are hereby overruled and denied.

D

__ Written objections to the Amended Plan were filed by two stockhold-

ers—one holding shares of the presently outstanding common stock; the

60

other holding shares of both outstanding preferred and outstanding com-

mon stock—who seek equitable treatment for failure of the Plan to make

provision for a distribution to them of part of the Debtor's assets. As

explained earlier in this opinion, the Commission found that the equity

in the shares of the preferred and common stock has no value, and the

court has affirmed that finding. As a general proposition, a plan of reor-

ganization cannot provide for a stockholder’s participation in the reor-

ganization unless the pian provides full compensation to unsecured cred-

itors for their rights discharged pursuant to the plan. Although the result

is unfortunate, the couct must reaffirm here the Commission's finding in

view of the value of the Debtor's property for purpose of reorganization

and the application of the absolute priority rule. The court concludes that

the objections of the two stockholders should be and are hereby overruled

and denied.

vil

Under the Commission's order approving the Amended Plan and cer-

tifying it to the court, it is stated that ‘*[t}he construction of the Amended

Plan by the court, whether before or after the submission of it to creditors,

is final and conclusive. The court shall have the power to cure any defect,

supply any omission, or reconcile any inconsistency in such manner and

to such extent as may be necessary or expedient in order to carry oui the

plan effectively.’’ (1.C.C. Decision at 60). For the purpose of clarifying

and making effective the provisions of the Amended Plan, the following

modifications of the Amended Plan, which will not require its reference

to the Commission, should be made:

A. The sentence in section 4.3 of the Amended Plan (‘‘Rejection of

. . . Executory Contracts’’) shall be modified by striking out the

period at the end of the sentence, and by substituting therefor a

comma, and by adding to the sentence the following: ‘‘and the

Trustees shall give notice to each party to acontract to be rejected

of such rejection by mailing notice of such action pursuant to the

order of the court.’’

B. The sentence in section 3.11 of the Amended Plan (‘‘Issuance

of New Common Stock"’) shall be modified to read as follows:

**As of the Consummation Date, the First Mortgage Bonds and

the Income Bonds registered in the name of Guilford pursuant

to sections 3.4 and 3.5 above shall be transferred to the Trustees,

and the bonds shall thereupon be cancelled hy the Trustees, and

61

the reorganized Company shall issue to Guilford, and Guilford

shall become the sole owner of 2,425,000 shares of Common

Stock, which shares shall constitute all of the outstanding Com-

mon Stock of the Reorganized Company."

C. The part of the sentence in section 3.3(1) (‘‘Segregated

Account’’), commencing in subsection (ii), shall be modified by

adding at the end of subsection (ii) the following: ‘such amount

of cash or cash equivalents of the Debtor in Account No. 703

(‘‘Special Deposits’*), as of the Consummation Date, as repre-

sents the proceeds of the Reading Line Interest Settlement, and"’

D. The last sentence in section 2.2 of the Amended Plan, com-

mencing ‘‘Effective as of the Consummation Date’’, shall be

modified to read as fellows: ‘Effective as of the Consummation

Date, the reorganized Company shall thereupon and thereafter

be responsible for all Administration Claims, if any, which are

not satisfied in full prior to the Consummation Date, and the

Trustees shall have no further responsibility relating to the

Debtor or to the conduct of its affairs; provided, however, that

the Trustees shall continue to serve as such for the limited pur-

poses of administering and making payments from the Segre-

gated Account, as provided in Article III below, and imple-

menting the New Plan, as provided in section 4.4 below; and

provided further that any compensation payable to the Trustees

for such services after the Consummation Date shall be in such

amounts as the Reorganization Court may approve as being

appropriate and shall be paid solely from the Segregated

The court determines that it is necessary to clarify the provisions of

section 4.3, relating to the rejection of executory contracts, because the

section, as it read before the modification, appeared to authorize rejec-

tion of executory contracts without notice of such rejection to the other

contracting party. The modification makes it clear that such notice is

required by the Amended Plan.

The principal purpose for modifying section 3.1 1 of the Amended Plan

is to provide for cancellation of the First Mortgage Bonds and the Income

Bonds after payment to the bondholders has been effected pursuant to

sections 3.4, 3.5 and 3.7 of the Amended Plan. Although section 4.5 of

the Amended Plan is entitled ‘‘Cancellation of Securities, Etc."’ , no pro-

vision is made therein, or elsewhere in the Amended Plan, for cancella-

62

tion of either the First Mortgage Bonds or the Income Bonds. It is clear

that the Amended Plan considered as a whole contemplates that the First

Mortgage Bonds and the Income Bonds shall be paid in full on the Con-

summation Date, and that the Debtor's liability thereon shall be dis-

charged. Explicit provisions requiring cancellation of the bonds by the

Trustees on the Consummation Date will confirm that construction of the

Plan.

On October 13, 1982 the court determined that the $2.0 million paid

by MBTA to the Trustees in settlement of the Debtor's claim for interest

on an arbitration award in favor of the Debtor, arising out of the Reading

Line Taking, socalled, were not restricted funds in the hands of the Trust-

ees. It was the court's opinion that those ‘*funds and all increments thereto

should be held by the Trustees pending further action on the Amended

Plan"’. The foregoing rulings appear in the court's Memorandum filed

October 13. The modification of section 3.3(1) makes clear that the pro-

ceeds of the Reading Line Interest Settlement should no longer be held

by the Trustees as restricted funds, but should be held for deposit in the

Segregated Account.

The court determines that it is necessary to clarify the provisions of

section 2.2, by striking certain language therefrom, in order to avoid

possible conflict with sections 4.4 (‘Implementation of New Plan*’) and

4.6 (‘‘Reservation of Jurisdiction’) concerning the powers, duties and

immunities of the Trustees on the Consummation Date and thereafter. In

the court's opinion, such powers, duties and immunities of the Trustees

will be more appropriately defined and described in the Consummation

Order.

Upon full consideration of the record of proceedings before the Com-

mission on the Amended Plan, including the verified statements of wit-

nesses, the transcripts of testimony, and the proceedings before the court,

the court is satisfied that the relevant findings and conclusions of the

Commission on the Amended Plan as certified to the court, are ade-

quately supported by material evidence and agree with legal standards.

Further, the court is satisfied that the Amended Plan, as modified

(a) complies with the provisions of Section 77(b), and (ce) as

amended, of the Bankruptcy Act [11 U.S.C. §205(b) and (e)];

(b) is fair and equitable and affords due recognition to the rights of

each class of creditors and stockholders;

(c) does not discriminate unfairly in favor of any class of creditors

or stockholders, and will conform to the requirements of the law

63

. i

of the land regarding the participation of the various classes of

creditors and stockholders;

(d) makes adequate provision for payment of all costs of adminis-

tration and all other allowances made or to be made by the court;

(e) makes adequate provision for payment of expenses and allow-

ances incident to the reorganization, including compensation and

reimbursement of expenses, within such maximum limits as are

fixed by the Commission to be subject to the approval of the court,

as provided in Section 77(c)(12) [11 U.S.C. §205(c)(12)} (the

amount reserved in the Amended Plan for all such purposes is

in excess of the total amount of claims for payment which can

reasonably be anticipated);

(f) is feasible, and is compatible with the public interest.

To summarize briefly, the court concludes that all of the statutory pre-

requisites to approval have been met, and that the Amended Plan, as mod-

ified for the purpose of clarifying and making effective its provisions,

will be approved. Furthermore, all objections to the Amended Plan are

hereby overruled, and all fees and expenses within such maximum limits

as are fixed by the Commission subject to the approval of the court will

be ordered paid.

Vill

The B&M was a comparatively small railroad when the petition for

reorganization was filed. At that time the railroad was badly run down

and in need of substantial capital investment and improvement. From the

inception of reorganization the Trustees have made good progress in cut-

ting costs, restoring the level of service on the railroad, retaining the con-

fidence of its customers, and progress toward reorganization. The Trust-

ees, their counsel, B& M management and employees, all have devoted

many years of hard work to the struggle to achieve reorganization, and

much credit is due to them for bending their efforts and skills toward

reaching that goal. Much credit is also due to other parties, with vital

interests in the Debtor's estate, for their patient cooperati.n during the

reorganization process. The B& M still is a comparatively small railroad,

but manifestly a much healthier one.

Accordingly, in consideration of the foregoing, itis hereby ORDERED:

(1) The Amended Plan as modified is hereby Approved.

(2) The final date for mailing written acceptances or rejections of

the Amended Plan is March 30, 1983.

(3) Voting on the Amended Plan shall be governed by the provisions

of the Voting Procedure on Plan of Reorganization, Order No.

(4) A certified copy of this opinion and order shall be sent to the

Pend $F

February 23, 1983

Senior District Judge

FOOTNOTES

. Bostonand Maine Corporation— Amended Plan of Reorganization, 1.C.C. Finance

Docket No. 26115 (Sub-No. 12), and Guilford Transportation Industries, Inc. —

Control—Boston and Maine Corporation, 1.C.C. Finance Docket No. 29720 (Sub-

No. 1), Decided Apr. 23, 1982 (“*I.C.C. Decision"’).

. Section 77(e) of the former Bankruptcy Act [11 U.S.C. §250(e)] in the sixth sen-

tence provides that:

If the judge shall approve the plan, he shall file an opinion, stating his conclu-

sions and the reasons therefor, and enter an order to that effect, and shall send

a certified copy of such opinion and order to the Commission.

. The Equitable Life Assurance Society of the United States, Metropolitan Life Insur-

ance Company, Connecticut Mutual Life Insurance Company, and the Northwest-

ern Mutual Life Insurance Company, holders of First Mortgage bonds of B&M in

the aggregate principal amount of $14,198,000, or about 30 percent of such bonds

. Boston and Maine Reorganization, 1.C .C. Finance Docket No. 26115, Report and

Order Recommended by Victor A. von Rinteln, Adm. Law Judge, Feb. 2, 1973, at

25.

. The assignment of this reorganization case in the first instance was drawn by the late

District Court Judge Francis J.W. Ford, who appointed the three Trustees. Mr.

Cherington resigned as Trustee as of December 21, 1971, and Mr. Bartlett resigned

as of January 9, 1973. Upon reassignment, the case was drawn by the author of this

opinion on November 9, 1973.

. See n.4, supra at 35.

. Before this plan was filed in 1975, the court was required, within | 20 days following

January 2, 1974, to determine under the general provisions of Section 207(b) of the

Regional Rail Reorganization Act of 1973, Pub. L. No. 93-236, 87 Stat. 985,

whether B&M should continue under the reorganization provisions of Section 77 of

the former Bankruptcy Act (i 1 U.S.C. §205) or be subject to reorganization under

the Regional Rail Reorganization Act. This court held on May 2, 1974 that the public

interest would be better served by continuing B& M under the present reorganization

proceedings. in re Boston and Maine Corporation, 378 F. Supp. 68 (D. Mass. 1974).

. Guilford Transportation Industries, Inc. was organized as a corporation under the

laws of Delaware in 1981. Timothy Mellon is the owner of all or substantially all of

the common stock of Guilford, which is owner and holder of all of the outstanding

stock of Maine Central Railroad Company (*‘MEC"*) and in control of MEC. Guil-

ford recently has acquired conditionally all of the oustanding common stock of Del-

aware & Hudson Railroad (‘‘D&H*"). Guilford is a holding company with substan-

tial investments in railroad properties which it controls and proposes to manage.

. Order No. 629 specifically authorized the Trustees to purchase certain lines,

amounting to approximately 164.5 miles of track, which serve the following towns

and cities (a) in Massachusetts: Pittsfield, North Adams, North Adams Junction,

Highland Junction, and Torrington. One such line, that between Water-

bury and Torrington, was, however, subsequently conveyed to the State of Con-

necticut. Order No. 629 also authorized the Trustees to obtain trackage and/or oper-

10.

12.

ating and reciprocal switching rights over certain lines and ina rail yard which serve

or are located in the following towns and cities (a) in Massachusetts: North Adams

Junction, Pittsfield, and Springfield; and (b) in Connecticut: Hazardville, Bloom-

field, Griffins, New Haven, Waterbury, Derby, Wethersfield, Rocky Hill, and

Hartford. The expansion of operations contemplated in Order No. 629 afforded

B&M opportunities, inter alia, to develop connections and cooperation with the

Long Island Rail Road. Nevertheless, it is important to note, in this regard, that the

Commission, in reaching its decision to approve the Trustees’ Amended Plan, did

not, when calculating revenues of B&M, ‘‘include income associated with these

acquisitions ”* of lines in Massachusetts and Connecticut. See I.C.C. Decision at 22,

n.d.

Additional designations, p

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