In re Penn Central Transportation Co.

Citations: 944 F. Supp. 2d 363; 2012 WL 3704804; 2012 U.S. Dist. LEXIS 122290Docket: No. 70-347

Court: District Court, E.D. Pennsylvania; August 28, 2012; Federal District Court

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On June 21, 1970, Judge C. William Kraft, Jr. signed a petition from the Penn Central Transportation Company (PCTC) for reorganization under § 77 of the Bankruptcy Act. The case was overseen by Judge John P. Fullam for over 40 years until his retirement in 2011, after which it was assigned to the current judge. The reorganized entity is now known as The Penn Central Corporation (PCC). PCC is seeking summary judgment regarding its liability to 32 former PCTC employees or their estates (the "Claimants") for a judgment of $14,761,238 awarded by the U.S. District Court for the Northern District of Ohio, confirming an arbitration award related to a 1964 collective bargaining agreement. The Claimants have filed a cross-motion for summary judgment to enforce this judgment against PCC.

Summary judgment is deemed appropriate when there is no genuine dispute over material facts, allowing the movant to claim judgment as a matter of law. A dispute is considered genuine if a reasonable jury could rule for the non-moving party. The court will favor the non-moving party in evaluating facts and must rely only on admissible evidence. 

There are no genuine disputes regarding material facts. In 1962, the Pennsylvania Railroad Company and the New York Central Railroad Company agreed to merge, as required by the Interstate Commerce Act. To protect employees during this merger, the two railroads and the Brotherhood of Railroad Trainmen signed a Merger Protection Agreement (MPA) on November 16, 1964, effective January 1, 1964. The MPA stipulates that upon the merger's consummation, all employees of both railroads willing to accept employment would be retained, ensuring no employee would suffer a detriment in employment conditions or benefits.

Disputes regarding the interpretation or application of the MPA can be referred to an arbitration committee, with arbitrators appointed by each party and a neutral arbitrator selected by the others. The majority decision or the neutral arbitrator's decision is final and binding. Following the merger of the railroads forming PCTC on February 1, 1968, PCTC furloughed 29 employees from its subsidiary, CUTC, without providing MPA benefits, citing the MPA's lack of provisions for CUTC employees. In 1969, 17 of these furloughed employees filed a lawsuit for MPA benefits. Concurrently, PCTC abolished positions of six former New York Central Railroad employees, who also filed separate lawsuits for MPA benefits. PCTC filed for reorganization under the Bankruptcy Act on June 21, 1970, after incurring over $87.7 million in MPA benefits from February 1968 to September 1970. In 1973, a stipulation allowed the Knapik lawsuit to be reinstated but restricted judgment enforcement. In 1974, the ICC ruled that PCTC subsidiary employees were entitled to MPA benefits, leading to an additional lawsuit from 16 former CUTC employees seeking unpaid MPA benefits.

In 1975, the court approved a stipulation regarding the Sophner lawsuit that mirrored a prior stipulation related to the Knapik lawsuit, allowing the case to proceed in the Northern District of Ohio while imposing a restriction that any future judgment could only be enforced with the court's authorization. Concurrently, Congress enacted the Regional Rail Reorganization Act of 1973 (RRR Act) to mitigate disruptions in rail service due to multiple railroads, including PCTC, entering reorganization. The RRR Act established the Consolidated Rail Corporation (Conrail) and mandated that trustees of reorganizing railroads sell their assets to Conrail or other viable railroads, while also requiring Conrail to employ the affected railroad's employees and assume certain collective bargaining agreements.

Effective April 1, 1976, PCTC’s employees transitioned to Conrail. Following this, Congress added § 211(h) to the RRR Act, which allowed Conrail to borrow funds from the United States Railway Association to cover specific payables, with PCTC's estate obligated to recognize these funds as current administrative costs. Consequently, the government incurred substantial claims against PCTC, characterized by significant size and statutory priority. In September 1977, the PCTC Trustees submitted a report concerning executory contracts from PCTC’s pre-petition operations. This report referenced sections of the proposed PCTC reorganization plan outlining the assumption and treatment of executory contracts, specifying that contracts not assumed would be rejected as of the petition filing date, while rejections related to contracts assumed by Conrail would only pertain to PCTC’s remaining obligations.

The Trustees aimed to affirm specific executory contracts listed in Exhibit I of their report, excluding the MPA. Initially, they reviewed all contracts to identify those beneficial for the reorganized company’s operations as a railroad post-bankruptcy. However, due to significant asset transfers under the RRR Act, the Trustees determined that the reorganized company would not operate as a railroad, leading to the decision to terminate obligations under most of the 175,000 executory contracts. Following notification to affected parties, a court hearing was held on November 4, 1977, where Hewlett Skidmore, a PCTC employee, contended that the court lacked authority under § 77(n) to limit his rights under a collective bargaining agreement. Judge Fullam concurred, asserting that the proceedings would not affect such claims. The Trustees’ report on executory contracts was later integrated into the Amended Plan of Reorganization, which the court approved on March 17, 1978, and confirmed on August 17, 1978. The Plan established a 'Reorganized Company' as the entity retaining the debtor’s assets and outlined the liabilities and claims to be addressed. It allowed certain creditors to recover accrued interest on their claims and specified the treatment of executory contracts: those listed in the Trustees' report would be assumed, while others would be rejected as of the petition filing date, with exceptions for contracts assumed by Conrail under the RRR Act.

Section 7 of the Plan details the 'Reservation of Claims,' stipulating that any claims against the Debtor or Trustees not resolved before the Consummation Date will be treated as valid if adjudicated afterward, allowing them to participate in the Plan as if they were settled prior. The Reorganized Company is responsible for defending and settling these claims, with obligations from such actions being its responsibility. The Reorganized Company can employ legal experts for these matters. 

On August 17, 1978, the court confirmed the Plan and issued a 'Consummation Order' (Order No. 3708), mandating that PCTC close its books by 11:59 p.m. on October 24, 1978, with PCC opening its books immediately after. The Consummation Order discharges the Debtors and Trustees from all claims as of the Consummation Date, regardless of their status in the proceedings. 

The ongoing operations of the Reorganized Company included maintaining insurance programs for certain retired employees and fulfilling obligations under a Contingent Compensation Plan. The order also required PCC to replace PCTC Trustees in ongoing litigation at its expense. Furthermore, Section 7.02 of the Consummation Order prohibits claims against the Reorganized Company that arise from rights against the Debtors, except those obligations outlined in the Plan and the Order itself.

All individuals are permanently prohibited from initiating or continuing any legal actions against the Reorganized Company, its successors, or assets, regarding any claims related to the Debtors or their Trustees, with exceptions for obligations specified in the Plans or this Order. The court’s jurisdiction over reorganization proceedings will end on the consummation date, but it retains authority to resolve specific future issues, including proof of claims against the Debtors and enforcement of injunctive provisions. 

The Claimants' lawsuits against PCTC have spanned nearly forty years, beginning in the late 1960s. In a ruling on November 29, 1979, the Northern District of Ohio mandated that the Reorganized Company compel arbitration for the Knapik litigation as per the 1964 Merger Protective Agreement (MPA), extending this requirement to three other lawsuits. The court ruled that arbitration was necessary despite the union being the MPA's signatory rather than the Claimants. Subsequently, on June 18, 1980, the Reorganized Company entered into an arbitration agreement with the Claimants, designating the Claimants as 'Employees' and itself as 'Employer,' with the agreement linked to disputes regarding the MPA and related actions pending in court.

The arbitration agreement established the selection process for an arbitration panel to determine the Claimants' entitlement to benefits under the Merger Protective Agreement (MPA) of 1964. Awards from this arbitration would be final and binding, with the employer required to comply by a specified date if the employees prevailed. Between 1980 and 2005, two arbitrations occurred regarding the Claimants' lawsuits; the first was vacated by the district court, while the second ruled that none of the 17 Knapik plaintiffs were eligible for MPA benefits, a decision later reversed by the STB for ten Claimants. In 2005, the Northern District of Ohio ordered further arbitration on the Claimants’ eligibility, which commenced in mid-2006. In November 2007, the Reorganized Company sought to halt the arbitration, claiming the Claimants were improperly pursuing benefits from them rather than PCTC, contravening prior court stipulations. The court denied this emergency petition, emphasizing that any resulting judgment required future court authorization. Days before the arbitration hearing in December 2007, the Reorganized Company filed another petition to prevent the Claimants from seeking attorneys’ fees or pre-judgment interest, which was also denied. Judge Fullam allowed all relevant claims to be presented to the arbitrators. The arbitration panel majority found the Reorganized Company estopped from denying its role in the arbitration due to its prior involvement. On July 20, 2009, the Claimants were awarded $13,453,504, which included $564,820 in MPA benefits and $12,888,684 in pre-judgment interest. The Claimants moved to confirm this award in the Northern District of Ohio, prompting the Reorganized Company to file a third emergency petition to enjoin this action, which was denied. The court indicated it would later determine the potential liability of the Reorganized Company and the applicability of its Consummation Order regarding pre-judgment interest.

In September 2009, the Reorganized Company sought court jurisdiction to avoid liability for an arbitration award, with Judge Fullam indicating he would only address this matter after the litigation in the Northern District of Ohio concluded. Subsequently, the arbitration panel’s award was affirmed with minor modifications in January 2011. The Reorganized Company did not appeal this decision or oppose its confirmation by the Northern District of Ohio, which then issued a judgment for the Claimants, including pre-judgment interest up to March 31, 2011. At that time, only 5 out of 32 Claimants were alive. The Reorganized Company later petitioned the court to determine its liability under this judgment. On March 29, 2011, the court asserted its jurisdiction to evaluate three key issues: (a) potential liability of the Reorganized Company regarding the arbitration award, (b) whether bankruptcy law prohibits pre-judgment interest against the Debtor, Penn Central Transportation Company, and (c) the enforceability of the arbitration award against the Debtor. Following a brief discovery period, the Reorganized Company filed for summary judgment, while the Claimants requested additional discovery, which the court denied. The Claimants then filed an omnibus cross-motion for summary judgment. The Reorganized Company's position is that the Plan and Consummation Order eliminate its liability for benefits under the MPA, asserting that the Claimants can only seek recovery from PCTC, which it claims ceased to exist at the consummation date. The Reorganized Company also contends that the Bankruptcy Act of 1898 restricts its liability to only the principal amount owed. In contrast, the Claimants argue that the Bankruptcy Act prevents any modification of the arbitration award.

Claimants assert that judicial estoppel bars the Reorganized Company from contesting its liability for an arbitration award due to its longstanding conduct throughout nearly 30 years of litigation. They seek court confirmation of the full judgment amount, including prejudgment interest, awarded by the Northern District of Ohio. The court maintains jurisdiction to enforce the reorganization plan and related orders, including the Consummation Order, as authorized by § 77(a) of the Bankruptcy Act of 1898, which granted federal courts broad powers in railroad reorganizations. This section confirms exclusive jurisdiction over the debtor and its property during the proceedings and extends beyond the final decree, as stated in § 77(f). The Consummation Order reserves jurisdiction to address any necessary actions to implement the order and prevent interference. Additionally, stipulations allowing the Claimants’ lawsuits in the Northern District of Ohio indicate that no judgments entered can be enforced without the court's authorization. The jurisdictional provisions and explicit reservations affirm the court's authority to evaluate the Reorganized Company's potential liability for the judgment in light of bankruptcy law, the Plan, and relevant orders. The court will first assess whether the Reorganized Company must pay a judgment for merger protection benefits awarded to former PCTC employees under the pre-petition collective bargaining agreement, known as the MPA, signed in 1964. The MPA guarantees that employees of the involved carriers will not be deprived of employment or placed in a worse position regarding various employment aspects.

Appendix E of the MPA establishes employee benefits by comparing each employee's average monthly earnings from the year prior to May 16, 1964, with their current wages during the month of claiming MPA benefits. Railroad workers’ collective bargaining agreements are granted heightened protection during bankruptcy proceedings. Under the Bankruptcy Act of 1898, specifically § 77, courts were prohibited from altering railroads' obligations regarding employee wages and working conditions, unless done in accordance with the Railway Labor Act. This provision was carried into the modern Bankruptcy Code in 1978 under 11 U.S.C. § 1167, which maintained the historical balance regarding railway labor relations. Although no case directly addresses the application of § 77(n) to merger protection benefits, these benefits are included within its scope. The MPA was designed to prevent wage reductions for employees due to the merger of the Pennsylvania Railroad and the New York Central Railroad. The arbitration panel's judgment addressed the wage reductions experienced by the Claimants from this merger. Courts have interpreted "rates of pay, rules, and working conditions" under the Railway Labor Act to encompass issues like seniority and severance pay. Judge Fullam, during a 1977 hearing, affirmed that the MPA would protect workers' rights, despite the trustees’ intention to disaffirm other executory contracts. It is acknowledged that during the reorganization, PCTC’s obligations under the MPA remained unchanged, with employees receiving both wages and MPA benefits. At the time of the reorganization petition, PCTC employed 92,000 workers, highlighting the special status of railroad collective bargaining agreements as protected under the relevant statutes.

Neither the Plan nor the Consummation Order explicitly mentioned the Merger Protection Agreement (MPA). The Reorganized Company acknowledges that the Claimants are entitled to merger protection benefits under the MPA but contends that the obligation to pay these benefits rested solely with PCTC, which it claims ceased to exist after the consummation date of October 24, 1978. The Reorganized Company asserts it is distinct from PCTC and not a "carrier," arguing that its over 30 years of litigation with the Claimants was merely as a representative of the nonexistent PCTC. However, this argument is misaligned with the Supreme Court's interpretation of a reorganization under Section 77 of the Bankruptcy Act of 1898, which aims to preserve the operational entity of the debtor railroad rather than liquidate it. An Amended Plan of Reorganization was approved, defining the Reorganized Company as the current Penn Central Transportation Company, which retained all assets and liabilities from PCTC. The corporate identity remained intact, merely undergoing a financial restructuring, which was consistent with the purpose of Section 77. At the consummation of the Plan, the Penn Central Corporation retained the corporate existence of the previously named Penn Central Transportation Company, indicating that PCTC did not dissolve but was reorganized. The Reorganized Company’s references to itself as the “successor” to PCTC do not imply a separate entity; it continued as the reorganized PCTC. Thus, PCTC did not cease to exist on the specified date.

The discharge and injunction provisions in the Plan and Consummation Order do not exempt the Reorganized Company from the obligation to pay MPA benefits to Claimants. Section 3.06 of the Consummation Order discharges the Reorganized Company from liabilities of PCTC not covered by the Plan, while Section 7.02 enjoins claims against the Reorganized Company based on rights against the Debtors, except for obligations specified in the Plan and Order. However, the court lacks authority to alter PCTC employees' wages or working conditions, meaning the MPA is unaffected by these provisions. The Reorganized Company acknowledged that these provisions did not shield it from MPA responsibilities, as evidenced by its decision to enter into arbitration in 1980 and its prolonged litigation efforts.

Even if the Reorganized Company were to claim it is not liable for MPA benefits due to the Plan and Consummation Order, it is estopped from denying liability based on its actions and representations during litigation and arbitration in the Northern District of Ohio. In September 1979, the Penn Central Company sought to compel arbitration under the MPA, which the court approved in November. In June 1980, Claimants entered into an arbitration agreement with Penn Central Corporation, designating it as the Employer. This agreement established that any arbitral award would be binding on the Employer. Throughout the arbitration process, Penn Central Corporation identified itself as the Employer and carrier, with no mention of PCTC acting on its behalf. Prior to 2007, the Reorganized Company did not assert that it was litigating in a representative capacity, and key documents from the arbitration and subsequent communications support its position as the direct employer.

Prior to 2007, the Reorganized Company did not assert that Claimants could only recover MPA benefits from a defunct PCTC and not from itself. For decades, the Reorganized Company acted as if it had a direct stake in the litigation involving Claimants, which contradicts its later claims that it was relieved of liability for MPA benefits or merely represented PCTC. The delay of over 25 years in asserting such a defense raises questions about the Reorganized Company’s true beliefs regarding its liability. The Consummation Order's section 6.04, stating that the Reorganized Company would be substituted as a party at its own cost, does not imply a representative capacity as claimed by the Reorganized Company. Furthermore, the language in 6.04 did not obligate the Reorganized Company to continue litigation if PCTC was defunct and lacked funds. The doctrine of judicial estoppel is applicable here, which prevents parties from taking inconsistent positions in different court proceedings. The three factors for judicial estoppel include: 1) the assertion of a position irreconcilably inconsistent with a previous one, 2) a change in position made in bad faith, and 3) the need for estoppel to protect the court's integrity. The Court of Appeals case, Air Line Pilots Ass’n v. Continental Airlines, is cited as precedent, where a party was barred from changing its position on arbitration after consistently asserting it was bound by arbitration agreements.

Judicial estoppel is deemed the sole appropriate remedy due to the Reorganized Company’s inconsistent positions over 25 years. Initially, in 1980, the Reorganized Company agreed to an arbitration clause stating awards would be final and binding. It later represented itself as a party in litigation against Claimants until it changed its stance in 2007 without a reasonable explanation for the significant delay. This shift creates an unfair advantage against the Claimants, indicating a lack of good faith. The obligation of PCTC to pay Claimants under the MPA was not altered or discharged during the reorganization and thus transferred to the Reorganized Company, which is simply a renamed PCTC and not a distinct entity. Even if PCTC’s liability were discharged, the Reorganized Company is estopped from denying responsibility due to its conduct over the litigation period.

Regarding the judgment from the Northern District of Ohio, which includes $14,196,418 in prejudgment interest, the Reorganized Company argues it is not liable for this interest under the Bankruptcy Act of 1898. Historically, courts have not required post-petition interest payments to creditors under this act, as explained by the Supreme Court. This rule arises from the need for equitable distribution of insufficient assets in insolvency cases, preventing unequal treatment among creditors with varying interest rates during the delay in distribution.

Delay caused by legal processes should not lead to advantages or disadvantages for any party. In cases where funds are insufficient to cover claims of equal standing, distribution is based solely on the principal amount owed. The Supreme Court has established that the prohibition of post-petition interest is a matter of liquidation practice rather than substantive law. In American Iron & Steel Mfg. Co. v. Seaboard Air Line Ry., the Court indicated that interest could accrue during a receivership, and if the estate's assets were sufficient to cover all claims, both interest and principal should be paid. Even post-adjudication, creditors may be entitled to post-petition interest if assets allow for it. The Supreme Court has not cited any provision of the Bankruptcy Act of 1898 that prohibits post-petition interest. 

In Bruning v. United States, the Court ruled that the government could collect post-petition interest on non-dischargeable, pre-petition tax debts. It noted that such payments would not disrupt the bankruptcy estate's administration or unfairly favor creditors with higher interest claims. The Court found these considerations applicable to the current case, where the reorganization was completed 34 years ago, concluding that allowing claimants to collect post-petition interest would not disrupt estate administration. The Reorganized Company argued that allowing this interest would be unfair to other claimants, but this was countered by the fact that other employees received ongoing benefits during bankruptcy and no evidence was presented of other creditors with non-dischargeable claims who did not receive post-petition interest.

Many creditors of PCTC, including unsecured ones, received post-petition interest according to the Plan. Class E and Class I claims, encompassing state, local, property, and corporate taxes, had estimated interest calculated up to December 31, 1977. General unsecured creditors with Class M pre-bankruptcy claims were also awarded interest based on contractual agreements for payment. Exhibit 4 of the Plan estimated this interest at $136.9 million. The significant interest payments to PCTC creditors, including those with implied contractual rights, indicate no unfairness to other creditors at this stage.

The Reorganized Company contended that prejudgment interest is unavailable to Claimants since their judgment falls under Class D claims, payable only as such under the Plan. This was refuted, as Class D claims pertain to specific government claims related to operating expenses financed with government loans. The Reorganized Company's argument that it only paid principal amounts of Class D claims through Series B Notes was dismissed, as the Claimants' judgment did not stem from such loans but from unpaid amounts owed by the Reorganized Company for decades.

The court deemed it inequitable for the Reorganized Company not to pay interest to the living Claimant railroad workers and the estates of deceased workers, who have awaited recovery for over 35 years. Consequently, the Reorganized Company, previously known as The Penn Central Corporation and now American Premier Underwriters, Inc., is liable for the Claimants' judgment, including prejudgment interest. The Claimants' motion for summary judgment was granted, while the Reorganized Company's motion was denied. Additionally, it was noted that ten of the Knapik plaintiffs were recalled to work during 1968-1969 and continued employment with PCTC until retirement or death.

Ten plaintiffs are part of 32 Claimants currently before the court, while seven others did not respond to recall notices from PCTC. An earlier arbitration regarding the Knapik case determined that employees, including lead plaintiff Michael Knapik, were ineligible for MPA benefits, a ruling later affirmed by the STB and the Sixth Circuit Court of Appeals. The Bankruptcy Act of 1898, 11 U.S.C. 205, originally governed railroad bankruptcy proceedings until the Bankruptcy Reform Act of 1978 established new rules under Sub-chapter IV of Chapter 11 of the Bankruptcy Code, 11 U.S.C. 1161-74. Cases pending when the new code took effect on October 1, 1979, remain subject to the 1898 Act. Certain Bankruptcy Code provisions applied to 77 reorganization proceedings if no reorganization plan was filed before November 6, 1978. In this case, the reorganization plan was filed and confirmed before that date. There is no specific court order permitting the continuation of the Watjen and Bundy actions against PCTC, but a 2011 judgment suggests those cases proceeded and reached a conclusion. The Knapik suit had a directed verdict for PCTC on claims unrelated to MPA benefits, with Judge Lambros noting that the cases had been streamlined to focus on one key issue. All 17 plaintiffs in the Knapik lawsuit are part of the arbitration agreement, signed by Michael R. Kube as the Employee Member of the Committee.

An arbitration agreement mandates the formation of a committee comprising two members—one appointed by employees and one by the employer—along with a neutral member selected by mutual agreement or appointed by the National Mediation Board if consensus fails. Disputes regarding the "interpretation or application" of the MPA are subject to arbitration under section 1(e) of the MPA, with the opinion of U.S. District Judge Thomas Lambros from November 29, 1979, dictating the resolution of framing issues. On May 3, 1990, during the second arbitration, the defendant's counsel identified himself as representing Penn Central Corporation. Following the ICC Termination Act of 1995, the STB now reviews arbitration decisions related to benefits under collective bargaining agreements that include employee protective agreements, exercising jurisdiction over causation, benefit calculations, and factual disputes only for egregious errors. The STB ruled that seven Knapik plaintiffs were ineligible for MPA benefits, a decision upheld by the Sixth Circuit Court of Appeals, with a subsequent certiorari petition to the Supreme Court denied. Initially, four lawsuits were to be arbitrated separately, but a March 2007 order consolidated them. Congress enacted 11 U.S.C. 1113 in 1984, allowing trustees to invalidate collective bargaining agreements, although this does not apply to agreements under the Railway Labor Act. The court has previously interpreted terms by referencing similar federal laws, such as the Federal Employers Liability Act. The ICC determined that employees of PCTC subsidiaries were entitled to MPA benefits prior to the trustees' report on executory contracts. The Reorganized Company (formerly PCC) became American Premier Underwriters, Inc. in 1994, and the transcript from the May 1990 arbitration is noted as incomplete, with no additional relevant documents suggested by the Reorganized Company. Claims from Classes E and I were compensated in cash and notes with interest, while Class M claims were settled with stock and certificates payable from the proceeds of the Valuation Case, with interest accruing on certain notes from their issue date.