In the Matter of The NEW YORK, NEW HAVEN AND HARTFORD RAILROAD COMPANY, Debtor, 4 B.R. 758

TABLE OF CONTENTS Page I.HISTORY OF THE NEW HAVEN REORGANIZATION . 760 II.AMENDED PLAN OF REORGANIZATION OF THE NEW HAVEN .. 767 A. THE REORGANIZED COMPANY . 767 B. CLASSIFICATION OF CLAIMS AND INTERESTS AND TREATMENT PROVIDED . 768 Class A Claims. 768 Class B Claims. 768 Class C and Class F Claims. 768 Class D Claims. 770 Class E Claims. 770 Class I and Class J Claims. 770 III. CLASS G AND CLASS H CLAIMS . 770 A. THE PARTIES’ VALUATION OF THE NEW HAVEN ESTATE . 772 The Trustee’s Methodology. 773 The First Mortgage Bondholders’ Methodology. 785 The Income Bondholders’ Methodology. 789 B.

THE COURT’S RULINGS ON VALUATION . 790 Cash . 791 The Securities. 791 Intangibles. 796 C. THE COURT’S RULINGS ON CLAIMS . 797 D. DISTRIBUTION. 800 IV. RESERVATION OF JURISDICTION . 800 MEMORANDUM OF DECISION ZAMPANO, Senior District Judge. On July 7, 1961, the New York, New Haven & Hartford Railroad Company (“New Haven”) filed a petition for reorganization under

Section 77 of the Bankruptcy Act, 11 U.S.C. § 205, in the United States District Court for the District of Connecticut. At the time the New Haven was a financially derailed and wrecked railroad. For the next 17 years, Chief Judge Robert P. Anderson, later Circuit Judge, painstakingly presided over the reorganization proceedings with extraordinary skill, patience, common sense, and perspicacity. The voluminous record discloses thousands of pages of petitions, briefs, moving papers, exhibits, transcripts of hearings, and other documents.

Judge Anderson’s numerous decisions and orders speak eloquently of his wise and effective judicial performance over the years in salvage efforts of the New Haven, with the result that it now emerges from the ruins with prospects of being a remarkably healthy enterprise of substantial value. By May 1978, Judge Anderson had set in motion the procedural steps necessary to reorganize the New Haven and to terminate finally this complex and difficult case. Unfortunately, he died on May 2, 1978, and the matter was assigned to this Court for resolution. I.

HISTORY OF THE NEW HA VEN REORGANIZATION In 1935 the New Haven first went into reorganization under

Section 77 of the Bankruptcy Act and emerged 12 years later with a capitalization in part of 1) $95,703,-700 principal amount of series A first and refunding mortgage bonds due July 1, 2007, bearing interest at the rate of 4 percent per annum, and 2) $87,881,500 principal amount of general mortgage income series A bonds, due July 1, 2022, bearing contingent interest at the rate of 4% percent per annum. At the time, with some 1,500 miles of line extending from Boston to New York, it was the largest railroad in New England and the sixth largest in the Northeast region.

After a few years of superficial prosperity', the financial condition of the New Haven again deteriorated. By 1961, with current liabilities exceeding current assets by over $36,000,000 and losing cash at the annual rate of $18,000,000, the company filed a petition for reorganization under

Section 77. Judge Anderson approved the petition and three trustees were appointed to administer the rapidly declining railroad. There were three possible courses of action for the parties: 1) seek termination of the operations of the transportation system and liquidation of the assets; 2) sell the bankrupt railroad to other profitable carriers; or 3) merge with a larger successful trunkline railroad. Since it was immediately apparent that no other railroad was interested in . purchasing the debt-ridden New Haven, Judge Anderson gave careful and thoughtful consideration to the remaining options.

Initially it appeared that “the value of the property in the estate of the Debtor as a going concern should exceed by far its value for purposes of liquidation,” and, therefore, he approved continued operations for the public good and in the interests of creditors. Through “life-sustaining transfusions of credit,” the trustees maintained the system’s passenger and freight lines.

Despite spartan economies and a sizeable reduction in the number of employees, staggering losses continued to mount and it soon became obvious that no reorganization plan that contemplated the New Haven as an independent operating business would be feasible. Liquidation was deemed detrimental to the public interest and, therefore, merger with a large, financially healthy railroad seemed to be the most logical and promising means of sustaining the New Haven’s transportation system.

When the Pennsylvania Railroad and the New York Central Railroad applied to the Interstate Commerce Commission for permission to merge on March 9,1962, the New Haven trustees promptly sought inclusion in a merged Penn Central system, both by private negotiations and by a petition to the Commission filed June 26,1962. As noted by Judge Anderson, the “inclusion of the New Haven in the Penn Central merger was the only salvation for the New Haven as an operating railroad.” In re New York, N. H. & H. R. R., 289 F.Supp. 451, 456 (D.Conn.1968).

On April 6, 1966, after more than four years of deficit operations by the New Haven, the Commission approved the Penn Central merger, subject to the condition that the merged railroad would purchase essentially all of the assets of the New Haven. In addition, the Commission directed that a plan for inclusion of the New Haven in the Penn Central system be filed by October 27, 1966, upon such fair and equitable terms and conditions as the Commission might determine, subject to the approval of the reorganization court.

On April 21, 1966, a Purchase Agreement was executed between the New Haven trustees and representatives of the merging railroads by which the Penn Central would acquire the properties of the New Haven for a consideration consisting of cash, Penn Central stocks and bonds, and the assumption of certain of the New Haven’s obligations. In October 1966, the New Haven trustees filed with the Commission a “two-step” plan of reorganization which provided for 1) the New Haven’s assets to be sold to the Penn Central, and 2) thereafter, a determination of fair and equitable terms for the treatment of security holders.

Certain creditor interests litigated the expenditure of the assets of the New Haven to implement the plan and in 1967, the Second Circuit ruled that the merits of the two-step process should be postponed until the Commission certified a plan to the reorganization court. On November 19, 1967, after an independent review, the Commission concluded that $125 million was a fair and equitable price for the sale of the New Haven’s assets under the Purchase Agreement.

This finding was promptly challenged by different classes of the New Haven’s bondholders which on January 23, 1968, commenced a series of actions before a three-judge district court in the Southern District of New York to set aside the Commission’s order. Shortly after the merger of the Pennsylvania and New York Central railroads on February 1,1968, the Commission certified Step I of the reorganization plan for the New Haven- — the sale of the New Haven’s assets to Penn Central — to the reorganization court. The New Haven bondholders, pursuant to

Section 77(

e) of the Bankruptcy Act, responded with objections to the plan and, thus, the identical question concerning the price Penn Central would have to pay the New Haven was the subject of judicial review simultaneously in the reorganization court in this District and the three-judge district court in New York. Subsequently, both courts determined that the Commission had substantially undervalued the New Haven’s assets to be conveyed and remanded the issue to the Commission for further proceedings. New York, N. H. & H. R. R., First Mortgage 4% Bondholders’ Committee v.

United States, 289 F.Supp. 418 (S.D.N.Y.1968); In re New York, N. H. & H. R. R., supra, -289 F.Supp. at 466. On remand, the Commission held further hearings in accordance with the instructions of the two reviewing courts. On December 2, 1968, it reported a revaluation of the New Haven’s assets at $140 million and set January 1, 1969 as the date for the transfer of the New Haven’s assets and operations to Penn Central. Pennsylvania R. R.— Merger — New York Central R. R., 334 I.C.C. 25, 53, 74, 76 (“Fourth Supplemental Report”).

During this period Judge Anderson recognized that the New Haven’s desperate financial problems were causing an irreversible erosion of the estate and that continued expenses would soon reach the point Of being an unconstitutional taking of the New Haven’s assets without just compensation. Accordingly, on December 24, 1968, he filed a memorandum of decision and order approving the transfer of the New Haven’s assets to Penn Central as the “first step” in the New Haven’s plan of reorganization.

He instructed the trustees to carry out the conveyance and receive the consideration fixed by the Commission, subject to a general reservation of jurisdiction to review the plan of reorganization, including objections already filed as to the amount of such consideration. He further reiterated that “unless the transfer of the assets of the New Haven and the operation of the transportation system were taken over by the Penn Central by January 1, 1969, the trains of the New Haven would stop running.” On December 31, 1968, the assets and operations were transferred to the Penn Central.

At the time of the transfer the New Haven received from Penn Central 956,576 shares of Penn Central stock and about $63 million (cash, bonds and assumption and/or forgiveness of indebtedness) with the understanding that the total purchase price Penn Central was to pay remained for future judicial determination. Another round of litigation brought by objecting bondholders before the reorganization court and a three-judge district court in New York followed, wherein post-conveyance judicial review of the adequacy of the compensation was sought.

On May 28,1969, the reorganization court entered its decision on Step I of the plan, In re New York, N. H. & H. R. R., 304 F.Supp. 793 (D.Conn.1969), aff’d in part, vacated in part sab nom., New Haven Inclusion Cases, 399 U.S. 392, 90 S.Ct. 2054, 26 L.Ed.2d 691 (1970), and in a separate opinion, filed July 28,1969, it reviewed Step II of the plan, 304 F.Supp. 1121. The findings and rulings in both decisions were incorporated in a single order, dated July 28, 1969, 304 F.Supp. 1136 (D.Conn.1969), aff’d in part, vacated in part sub nom., New Haven Inclusion Cases, 399 U.S. 392, 90 S.Ct. 2054, 26 L.Ed.2d 691 (1970).

In his Step I Opinion, Judge Anderson determined the Commission had erred in certain respects in its valuation of the New Haven’s assets, and concluded that the price to be paid by Penn Central was approximately $175 million. Moreover, he structured an “underwriting” plan designed to ensure that the New Haven would receive the value of $87.50 per share of Penn Central’s common stock, the intrinsic value ascribed to the shares by the Commission, 304 F.Supp. at 809. In his Step II Opinion, Judge Anderson addressed the distributive elements of the plan of reorganization.

This opinion is, of course, highly significant as precedent because many of the same and/or related issues are now pending before this Court for decision. Appellate review of the plan of reorganization to date, culminating in the New Haven Inclusion Cases, 399 U.S. 392, 90 S.Ct. 2054, 26 L.Ed.2d 691 (1970), primarily concerned Step I of the plan. On June 18, 1969, the three-judge court entered its opinion on the appropriate compensation to be paid by Penn Central to the New Haven.

Although it agreed with Judge Anderson on the need for the “underwriting,” it disagreed with his valuation of the assets by over $28 million, and, in effect, sustained the Commission’s price determinations. The conflicting decisions of the two district courts were then reviewed by the Supreme Court in expedited proceedings.

In the New Haven Inclusion Cases, supra, 399 U.S. 392, 90 S.Ct. 2054, 26 L.Ed.2d 691, the Supreme Court held that the reorganization court, as distinguished from the three-judge court, had primary jurisdiction over the pricing question, and affirmed Judge Anderson’s evaluation of the New Haven’s assets. This, however, did not terminate the issue. Eight days before the Supreme Court’s decision, the Penn Central filed a petition for reorganization under

Section 77 of the Bankruptcy Act in the United States District Court for the Eastern District of Pennsylvania. Recognizing that Penn Central’s bankruptcy would substantially reduce the value of its securities, the Supreme Court decided that a remand for “[fjurther proceedings before the Commission and the appropriate federal courts [was] necessary to determine the form that Penn Central’s consideration to [the] New Haven should properly take and the status of the New Haven estate as a shareholder or creditor of Penn Central.” Id. at 489, 90 S.Ct. at 2108.

On remand, in the light of Penn Central’s bankruptcy and in order fully to compensate and secure the New Haven estate for the balance remaining due, Judge Anderson sought to give the New Haven a secured-creditor status by declaring an equitable lien on all the assets transferred by the New Haven to Penn Central, and imposing a constructive trust on the New Haven’s share of the income from the Grand Central properties. On appeal, the Second Circuit reversed on jurisdictional grounds and remanded the case directly to the Commission.

Later in the Penn Central reorganization proceedings, for the purpose of clarifying the status of the New Haven as a participant in that case, Judge Fullam concluded that the New Haven estate should be treated tentatively as holding “a lien, indeterminate in amount, and indeterminate as to priority, upon all the real property and readily identifiable tangible personal property (exclusive of rolling stock) conveyed to Penn Central.” Thereafter, the reorganization of the New Haven was largely entwined with the complex, unique and lengthy reorganization of the Penn Central.

The New Haven trustee had asserted a secured claim in the total amount of $208.5 million for the unpaid principal and interest, arising from the inclusion in 1968 of the New Haven in the Penn Central merger. The collapse of the mighty Penn Central precipitated a “rail transportation crisis seriously threatening the national welfare.” Regional Rail Reorganization Act Cases, 419 U.S. 102, 108, 95 S.Ct. 335, 341, 42 L.Ed.2d 320 (1974). It soon became evident that a successful reorganization of Penn Central could not be accomplished wholly within the means provided by

Section 77 of the Bankruptcy Act and that congressional intervention was necessary. Congress responded to the crisis with the enactment of the Regional Rail Reorganization Act of 1973 (RRRA), which became law on January 2, 1974. On December 16, 1974, the Supreme Court sustained the Act against constitutional challenge. The purpose and effect of the RRRA have been succinctly stated by Judge Fullam as follows: The broad outline of the RRRA is relatively straightforward.

The bankrupts would operate under the aegis of the Reorganization Courts for a further period, approximately 20 months, during which time the United States Railway Association (USRA), a new corporate entity created under the Act, could complete the task of planning the new rail system or systems, and deciding what portions of the Northeast bankrupts’ rail facilities should be conveyed to Consolidated Rail Corporation (ConRail), the company which was to take over the system which USRA designed.

The statute contemplates a system which, while not profitable immediately, would ultimately be a profitable private sector carrier. In return for the properties conveyed to ConRail, the bankrupts were to receive common stock and other securities of ConRail in amounts commensurate with the value of the properties conveyed. The Act also created the Special Court, a three-judge panel selected by the Judicial Panel on Multidistrict Litigation, to rule on the adequacy of USRA’s valuation of the conveyed property and the value of the stock of ConRail which was given in return.

In re Penn Central Transportation Co., 458 F.Supp. 1234, 1252 (E.D.Pa.1978), aff’d in part, modified and rev’d in part, 596 F.2d 1102; aff’d in part, 596 F.2d 1127; appeal dismissed in part, 596 F.2d 1155 (3 Cir.), cert. denied, 444 U.S. 835, 100 S.Ct. 68, 62 L.Ed.2d 45 (1979). On April 1, 1976, certain of Penn Central’s rail properties were conveyed to Con-Rail.

Litigation, commonly referred to as the “Valuation Case,” followed, with the focus primarily directed to 1) the “net liquidation value” of the Penn Central properties conveyed to ConRail, and 2) the “com-pensable unconstitutional erosion if any,” suffered during the pre-conveyance period. See In re Valuation Proceedings, 439 F.Supp. 1351 (Sp.Ct.R.R.R.A.1977) (Erosion Opinion) and 445 F.Supp. 994 (Sp.Ct.R.R.R. A.1977) (Valuation Opinion). The main purpose of these two opinions rendered by the Special Court is to establish guidelines for the parties and the trial masters on the valuation issues.

The eventual outcome of the Valuation Case may have a direct and significant effect on the payment of the debt securities issued by the reorganized Penn Central. The next sequence of relevant events involved efforts to formulate a fair and equitable plan of reorganization of the Penn Central.

As summarized by Judge Aldi-sert: These efforts were focused on an attempt to construct a plan that would take account of (1) the income-producing continuing businesses owned and managed by Pennco; (2) the cash to be generated through liquidation of non-essential remaining assets (the “asset disposition program”); and (3) the constitutionally assured expectation that a significant award would be made in the Valuation Case, understanding all the while that both the time and the amount of the award were unforeseeable.

The alternative to such a plan, it was believed, would be to embark on decades of litigation, with the concomitant waste of valuable and productive assets and accrual of increasing claims. Any plan, in order to be fair and equitable to the competing claims against the estate, would also have to take into account a basic reality of this reorganization proceeding: that the validity, priority or amount of virtually every claim was under attack in one way or another. In re Penn Central Transportation Co., 596 F.2d 1127, 1136 (3 Cir. 1979).

In the fall of 1975 the Penn Central trustees commenced a series of meetings with creditor interests to work out a consensual plan of reorganization, based necessarily on compromises of the many and varied claims in dispute. The assets remaining after conveyance to ConRail fell into two principal categories: 1) Penn Central’s ongoing, successfully operating, non-railroad business, primarily consolidated in the Pennsylvania Company (“Pennco”); and 2) a variety of real estate holdings and investments.

During the following year, settlement proposals were agreed upon by virtually all of the Penn Central major creditors, including the United States, the so-called “Friday Group” (composed of representatives of a group of insurance companies known as the Institutional Investors Group, the New Haven trustee, and a group of banks represented by Citibank), numerous state and local taxing authorities, active unsecured creditors, Penn Central Company (the sole stockholder of Penn Central), and 15 leased lines also in reorganization known as the “secondary debtors.” On December 17, 1976, the Penn Central trustees filed a plan of reorganization which embodied the agreement reached on December .14, 1976, between the New Haven trustee and the Chairman of the Penn Central trustees.

The settlement proposed in the Penn Central plan treated the unpaid balance of the amount to be paid for the New Haven assets transferred on December 31,1968, as a debt obligation of the reorganized Penn Central to be secured in the amount of $121 million (the unpaid principal amount) and unsecured in the amount of $53 million (a portion of the interest claimed). All securities previously received from Penn Central and then held by the New Haven were to be can-celled.

The total sum of $174 million was in addition to the items of consideration (cash, assumption of liabilities, and cancellation of indebtedness) previously paid or credited under the inclusion agreement and which aggregated approximately $53 million. Inasmuch as all powers and duties of the ICC under

Section 77 of the Bankruptcy Act with respect to the New Haven reorganization terminated as of February 5, 1976, at which time all such powers and duties became vested in the New Haven Reorganization Court by operation of § 618(

b) of the Railroad Revitalization and Regulatory Reform Act of 1976, Pub.L. No. 94-210, 90 Stat. 31, February 5, 1976, the New Haven trustee petitioned the Court on January 7, 1977, for authority to settle the New Haven claim against Penn Central Transportation Company on the terms embodied in the Penn Central reorganization plan.

A hearing on the petition was held on January 19, 1977, and by Order No. 821, dated March 30, 1977, the New Haven trustee was authorized “to take all such action which he considered] necessary or appropriate in support of the proposed settlement and Plan of Reorganization.” After full and lengthy hearings, Judge Fullam approved a plan of reorganization for the Penn Central on March 17, 1978, specifically noting that the New Haven compromise was “fair and reasonable” and “well within the range of reasonably likely litigation possibilities.” In re Penn Central Transportation Co., supra, 458 F.Supp. at 1270.

On May 1,1978, the day before his death, Judge Anderson issued Order No. 850 authorizing the New Haven trustee to vote in favor of the Penn Central Plan. This order constituted the final judicial step regarding approval of Step I of the New Haven plan of reorganization.

The Penn Central Plan was consummated on October 24, 1978, and the New Haven trustee received the cash and securities to which the New Haven estate was entitled: $12.8 million in cash; $28.8 million principal amount of Penn Central Series A Bonds; $7.5 million principal amount of Penn Central Series B Bonds; 1,815,000 shares of Penn Central Series B Preference Stock having a redemption value of $36.3 million; $15.9 million principal amount of Penn Central Certificates of Beneficial Interest (“CBI”) and 1,370,203 shares of Penn Central Common Stock (representing about 6% of the total shares of Common Stock outstanding).

Prior to the receipt of the compensation from the Penn Central, the New Haven trustee had filed Amendment No. 4 to the plan of reorganization of the New Haven (“Amended Plan”) on April 18, 1978, primarily directed toward Step II, which had been held in abeyance pending a determination of New Haven’s interest in the reorganized Penn Central. Hearings on Step II were conducted by this Court commencing on October 12,1978, and continuing through July 12, 1979. Following the submission of briefs, final oral arguments were heard during the week of November 19, 1979. II.

AMENDED PLAN OF REORGANIZATION OF THE NEW HAVEN As noted previously, definitive rulings with respect to the treatment to be accorded security holders under Step II of the plan of reorganization were held in abeyance pending the final determinations of the Step I issues. Those determinations have been made and the consideration due the New Haven from Penn Central has been paid. This Court, therefore, now addresses the distributive elements of the plan, incorporated in the trustee’s Amendment No. 4, filed on April 18, 1978.

This necessarily includes consideration of the distributive elements of the plans submitted by the other parties in this proceeding. In deciding whether the provisions of the Amended Plan are fair and equitable, the Court will discuss seriatim the major features of the plan as set forth by the trustee, together with the objections, if any, of the parties, and rule thereon. A. THE REORGANIZED COMPANY At the present time, the New Haven possesses only cash and Penn Central securities.

The Amended Plan contemplates that the New Haven will be reorganized to carry on business as a closed-end, non-diversified management investment company under the Investment Company Act of 1940, as amended, 15 U.S.C. § 80a-l, et seq., with an authorized equity capitalization consisting of 7,700,000 shares of Class A Common Stock and 20,000,000 shares of New Common Stock of which the maximum number to be issued in consummation of the Amended Plan will be approximately 7,700,-000 and 6,600,000, respectively.

There is no provision for any long-term or short-term debt to be outstanding at the consummation date except for Notes and such debt as may be incurred in consummation of the Plan in accordance with its terms. On the consummation date of the Amended Plan, the assets of the estate will be transferred to the reorganized company which, in turn, will distribute cash and its securities in full satisfaction of all claims allowed against the New Haven estate, in accordance with the provisions of the approved Amended Plan.

The transfer will effect a discharge of all claims against the New Haven, except as otherwise provided in the order confirming the Amended Plan. A reorganized New Haven has obvious merit particularly in view of the substantial tax advantages and growth potential of a new company. The parties to these proceedings recognize that the gains to be derived from a reorganization of the New Haven far exceed the values for distribution under an immediate and straight liquidation and, therefore, have offered no objection to this aspect of the trustee’s Amended Plan.

Under these circumstances, the Court approves the concept that the New Haven should continue as a reorganized company, subject to the changes in the nature of the capital structure required to comply with the Court’s rulings infra. Whether the reorganized company will be formed by the organization of a new corporation, or by suitable changes in the corporate papers of the present New Haven corporation, is left for future determination by this Court. In either event, the Court will appoint the Board of Directors of the reorganized company after considering suggestions from interested persons. B.

CLASSIFICATION OF CLAIMS AND INTERESTS AND TREATMENT PROVIDED Under the Amended Plan, the claims against the New Haven are divided into ten classes: Classes A through E represent post-bankruptcy or administration claims; Classes F through J represent pre-bank-ruptcy claims. Classes G and H are discussed in

part III of this opinion. Class A Claims These claims consist of the costs and expenses incurred and to be incurred in connection with the New Haven reorganization proceedings. They include compensation under

Section 77(c)(2) (compensation for the trustee, his general counsel, and his special counsel), and under

Section 77(c)(12) (compensation for representatives of creditor interests). The reserve of $5 million set aside by the trustee for these claims is adequate for their payment in cash by the reorganized company to the extent not paid by the trustee prior to the consummation date. Class B Claims These claims were the sums due the United States as the holder of Trustees’ Certificates which were extinguished by the payments in full on November 8, 1978 and March 30, 1979, respectively, of $6.25 million unpaid principal and $281,378 unpaid accrued interest.

The provisions of the Amended Plan with respect to Class B claims, therefore should be deleted. Class C and Class F Claims These classes refer to the claims of state and local authorities for taxes and related charges. Class C is applicable to the post-bankruptcy period commencing July 7, 1961; Class F relates to the pre-bankruptcy accumulation of taxes and other charges.

Section V of the Amended Plan states in pertinent part: 5.3 Class C: These claims will be treated as being equal to their principal amount, without penalties or interest, and will be paid in cash on the Consummation Date to the extent of 50% (together with such additional amount, if any, as will facilitate the issuance of Notes in authorized denominations) and by the issuance and delivery of Notes in a principal amount equal to the balance of the claims. 5.6 Class F: These claims (exclusive of penalties or post-bankruptcy interest) including interest accrued for the Pre-Bankruptcy Period will be treated in the same manner as Class C claims.

At the time the Amended Plan was filed, the controversy over the computation and payment of the tax claims loomed as a major source of complex and lengthy litigation. Second only in amount to the total claims of the two system mortgages, the tax claims as listed on the books of the New Haven represented a potential liability of over $13 million due 347 taxing authorities. The major claimants, led by the State of New York, asserted that post-bankruptcy interest should be paid on all tax claims and that tax claims, as “administration claims,” must be paid in full and in cash upon consummation of the plan.

If valid, these contentions would have entitled local taxing authorities from the State of New York alone, with the principal amount of their tax claims at $5 million, to obtain an additional sum of over $8 million in interest. For reasons stated hereinafter, no useful purpose will be served by reviewing the myriad legal arguments advanced by the tax claimants or the responses submitted by the trustee and other parties opposed to the tax claimants’ position.

Events occurring subsequent to April 1978 have rendered these issues academic because no tax claimant now remains that has legal standing to demand more than the principal amount of its claim. Concurring with Judge Anderson’s observation ten years ago that “it may well be to the mutual advantage of [the] tax claimants and the estate to negotiate settlements,” 304 F.Supp. at 1129, and in an effort to narrow the number of litigable issues in these proceedings, this Court determined that as many as possible of the tax claimants' disputes with the New Haven should be settled.

Accordingly, in June 1978, the Court directed that a vigorous program be commenced to reduce the number and dollar amount of the tax claims. From that time on and continuing to date, negotiations with tax claimants, on a case by case basis, have been in progress with extraordinary success. The overwhelming majority of the tax claims and related charges, including those made by the City of New York, State of New York, and the City of Providence, have been resolved by payments ranging from 50% to 100% of their respective principal amounts. No interest or penalty has been allowed or paid on these claims.

Under these circumstances, settlement efforts with the remaining tax claimants should continue up to the consummation date of the plan. Those tax claims which are unresolved on the consummation date will be treated as being equal to their principal amount, without penalties or interest, and will be paid in full in cash on the consummation date. Paragraphs 5.3 and 5.6 of

Section V of the Amended Plan should be amended accordingly. Class D Claims These claims arise from the New Haven’s liability for personal injury and wrongful death cases. Very few are still pending, and the present reserve of $400,000 appears adequate to cover immediate payments in cash of amounts determined by adjudication or settlement up to the consummation date. Any claim that has not been so adjudicated, determined or settled prior to the consummation date will be assumed by the reorganized company and thereafter paid in cash pursuant to an order of this Court when such claim has been adjudicated or determined. Paragraph 5.4 of

Section V of the Amended Plan should be amended to conform to this ruling. Class E Claims These claims are those not already specified in Classes A through D but which are found by the Court to be entitled to be treated as administration claims. The total exposure for Class E claims is approximately $1 million and, therefore, when adjudicated or settled, they should be paid in full in cash. Paragraph 5.5 of

Section V of the Amended Plan should be amended accordingly. Class I and Class J Claims The New Haven estate is so insolvent that the general unsecured claims, designated as Class I, and the stockholders’ interests, designated as Class J, have no equity and these unsecured, pre-reorganization claims take nothing under the Amended Plan. III.

CLASS G AND CLASS H CLAIMS Class G claims are those of the First Mortgage Bondholders, whose bonds were issued under and secured by the lien of the New Haven’s First and Refunding Mortgage, dated July 1, 1947, maturing July 1, 2007, and bearing interest at the rate of 4% per annum. Class H claims are those of the Income Mortgage Bondholders, whose bonds were issued under and secured by the lien of the New Haven’s General Income Mortgage, dated July 1, 1947, maturing July 1, 2022, and bearing interest at the rate of 4V2% per annum.

The First Mortgage Bonds and Income Bonds themselves were originally reorganization securities, issued when the New Haven emerged from an earlier

Section 77 bankruptcy proceeding in 1947. In contrast to liens in connection with specific acquisitions, these bonds are system mortgages, secured by all the New Haven’s assets. It is uncontroverted that the lien of the Income Bonds is in all respects junior to the lien, on the same assets, of the First Mortgage Bonds. Thus, the First Mortgage Bondholders must receive full compensation for the amount allowed of their claim, and thereafter the Income Bondholders receive payment of their claim, but only to the extent that the assets of the New Haven estate exceed the senior claim.

If nothing remains after the payment to the first system bondholders, the second system bondholders take nothing. If there is a surplus of assets, the Income Bondholders participate in the plan of reorganization and are secured in such amount, beyond which they are unsecured and are entitled to no payment.

Under the Amended Plan, the trustee computes the First Mortgage Bondholders’ allowable claim as follows: $76,819,900 as the principal amount due, with accrual of simple interest at the contract rate of 4% per annum until the effective date of the plan, i. e., the date on which the Court enters an order approving a plan of reorganization for the New Haven. This interest now approximates $58,895,251. Thus, the trustee recognizes the total claim in Class G to be about $135.7 million. The claims in Class H are fixed in the Amended Plan in the aggregate amount of $59,877,493, with no further accrual of interest.

In light of his estimated reorganization value for the New Haven of between $120 million and $150 million, and his estimated equity value for the reorganized New Haven of approximately $140 million, the trustee proposes that a fair and equitable distribution of the securities of the reorganized New Haven as between the two system bondholders is as follows: 1) 7,681,990 shares of the preferred convertible Class A Common Stock, representing one share for each $10 of principal, to the holders of First Mortgage Bonds, in satisfaction of the principal amount of their claim. 2) 5,889,525 shares of the New Common Stock representing one share for each $10 of interest, to the holders of First Mortgage Bonds, in satisfaction of the interest accrued to the effective date of the plan, i. e., February 14, 1980. 3) 1,055,110 shares of New Common Stock to holders of Income Bonds, in satisfaction of the allowable portion of their claim for principal and accrued interest to 1960.

In practical effect, assuming full conversion of Class A Common into New Common, the relative distribution of equity in the reorganized company under the Amended Plan is 93.1% to the First Mortgage Bondholders and 6.9% to the Income Bondholders. Both the First Mortgage Bondholders and the Income Bondholders strenuously oppose these features of the Amended Plan, and have submitted their own proposals for the Court’s consideration.

As might be expected, each of their plans — based on divergent factual and legal approaches to the issues concerning the valuation of the assets of the New Haven and the calculation of the allowable portion of their respective claims — differs significantly with respect to the proper distribution of the securities of the reorganized New Haven vis-a-vis the two system mortgages.

In sum, the First Mortgage Bondholders argue that: 1) the net asset value of the New Haven estate is less than $76 million; 2) their total claim, including interest running to the consummation date rather than the effective date of the approved plan of reorganization, is in excess of $130 million; 3) the Court, therefore, must conclude there is no equity whatever for the Income Bondholders; and 4) there should be a single class of equity security in the reorganized New Haven, all of which should be distributed to the holders of the First Mortgage Bonds.

The Income Bondholders, on the other hand, contend that 1) the New Haven’s reorganization value is in the range of $174.5 million to $245.8 million; 2) the allowable claim of the First Mortgage Bondholders for principal and interest should be fixed at $101,154,737; 3) the Income Mortgage Bondholders’ claim aggregates $79,-832,047 of principal and interest; 4) with certain limitations on redemption rights, all the Class A Common Stock (approximately 10.1 million shares of the reorganized New Haven) should issue to the First Mortgage Bondholders, pro rata, on the basis of 100 shares for each $1,000 of principal and 100 shares for each $1,000 of interest, in full satisfaction of their claims; 5) all the New Common Stock (approximately 7.9 million shares) should issue to the Income Mortgage Bondholders, pro rata, on the basis of 100 shares for each $1,000 of principal and 100 shares for each $1,000 of interest; 6) until the conclusion of the Valuation Case, the reorganized New Haven’s holdings of Penn Central’s Common Stock and CBI must be retained; and 7) the reorganized New Haven cannot be voluntarily dissolved or liquidated, except with the prior approval of the holders of at least 60% of the outstanding shares of Class A Common Stock and New Common Stock.

These competing and conflicting proposals advanced by the trustee and the two system bondholders fashion the major legal and factual questions presented for rulings in these proceedings. Under

Section 77(

e) of the Bankruptcy Act, the primary duty of the Court is to approve a legal plan of reorganization of the New Haven which is fair and equitable, and affords due recognition to the rights of each class of creditors. See, e. g., Group of Institutional Investors v. Chicago, M., St. P. & P. R. R., 318 U.S. 523, 539-40, 63 S.Ct. 727, 737-38, 87 L.Ed. 959 (1943) (“Institutional Investors”); Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 114, 60 S.Ct. 1, 6, 84 L.Ed. 110 (1939); In re Penn Central Transportation Co., 596 F.2d 1155, 1164 (3 Cir.), cert. denied, 444 U.S. 835, 100 S.Ct. 68, 62 L.Ed.2d 45 (1979).

An application of those standards in the context of the present proceedings requires the Court to 1) value the New Haven estate; 2) determine the allowable claims against the estate; and 3) establish the treatment to be accorded' these claims under the plan to ensure that creditors will receive full and equitable compensation in exchange for their prior claims. Institutional Investors, supra, 318 U.S. at 566, 63 S.Ct. at 749; Consolidated Rock Products Co. v.

DuBois, 312 U.S. 510, 529-30, 61 S.Ct. 675, 686-87, 85 L.Ed. 982 (1941) (“Consolidated Rock”); In re Penn Central Transportation Co., 596 F.2d 1102, 1110 (3 Cir. 1979); see also Tr. Brief at 22; FB Brief at 13, 26; IB Brief at 14. A. THE PARTIES’ VALUATION OF THE NEW HAVEN ESTATE A valuation of the assets of the New Haven is a necessary prerequisite to the design of a fair and equitable plan of reorganization for the enterprise.

Once that valuation is ascertained, it is then translated into a new set of securities of the reorganized New Haven which, in turn, is distributed to creditors in accordance with the absolute priority rule.

As Collier explains: If the court is to pass upon the proposed distribution of the debtor’s assets, the classes of creditors and stockholders to be granted participation, the allocation of new securities or other compensation, the allocation of voting control, and the like, as well as upon the soundness of the proposed capital structure of the rehabilitated enterprise with regard to its ability to meet future charges and to furnish an adequate return to creditors, the court obviously must have before it a complete and reliable evaluation of the debtor’s assets.

Absent the requisite valuation data, the court is in no position to exercise the informed judgment required of it in assessing the fairness, equity and feasibility of a plan, either upon approval or confirmation thereof. 6A Collier on Bankruptcy, ¶ 11.05 at 184-85 (1977); see also Consolidated Rock, supra, 312 U.S. at 524, 61 S.Ct. at 684 (a determination of the value of the debtor’s assets is required so that criteria will be available to determine an appropriate allocation of new securities between bondholders and stockholders).

The main controversy in this case focuses on the proper methodology to be applied by the Court in valuing the assets of the New Haven, which consist solely of cash and Penn Central securities. The parties urge acceptance of the valuation procedures for the securities which best conform to their views of the applicable law and which, coincidentally, establish the most favorable standing with respect to their own cause. In support of their positions, the parties have submitted considerable evidence by way of affidavits, expert testimony, exhibits, moving papers, and briefs.

Each of the varied and conflicting opinions of the experts was the subject of extensive and, at times, exhaustive cross-examination; hardly a material representation on valuation submitted by one party went unchallenged by another party. The voluminous record in the proceedings speaks eloquently of the tireless efforts of counsel on behalf of their clients. The Trustee’s Methodology The trustee contends that, for reorganization purposes, the Court is required to measure the worth of the New Haven by evaluating its earning power as a going concern.

Under this methodology, the securities held by the New Haven must be appraised by estimating their “intrinsic” or “reorganization” value, rather than by reference to their current market value. He finds support for his position in the rulings of leading cases involving the reorganization of debtors and from his analyses of certain claimed factual circumstances unique to this particular reorganization.

In Consolidated Rock, the Supreme Court stated: “Findings as to the earning capacity of an enterprise are essential to a determination of the feasibility as well as the fairness of a plan of reorganization.” 312 U.S. at 510, 61 S.Ct. at 685. Later in Institutional Investors the Court again emphasized that in a

Section 77 proceeding, earning power was the primary criterion and, therefore, “[t]he basic question in a valuation for reorganization purposes is how much the enterprise in all probability can earn.” 318 U.S. at 540, 541, 63 S.Ct. at 738. Since this determination by nature “requires a prediction as to what will occur in the future, an estimate, as distinguished from mathematical certitude, is all that can be made.” Consolidated Rock, supra, 312 U.S. at 526, 61 S.Ct. at 685, see also Dudley v. Mealey, 147 F.2d 268, 270 (2 Cir.), cert. denied, 325 U.S. 873, 65 S.Ct. 1415, 89 L.Ed. 1991 (1945).

While definitive dollar values on the whole or on specific parts of the debtor’s estate may be neither expected nor required, the reorganization court cannot, of course, resort to guesswork or conjecture. It is incumbent upon the court to exercise a wise informed judgment based on reasonable foreseeable factors to assure that creditors receive “full compensatory treatment.” Protective Committee for Independent Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 452, 88 S.Ct. 1157, 1177, 20 L.Ed.2d 1 (1968) (“TMT Trailer”); Ecker v.

Western Pacific R.R., 318 U.S. 448, 487, 63 S.Ct. 692, 713, 87 L.Ed. 803 (1943). According to the trustee, these legal principles are especially suitable for application to the unusual facts and circumstances in the reorganization sub judice. He argues that the current market value of the Penn Central securities is not a reliable indicator of the worth of the New Haven’s holdings because the investing public’s perception of the true value of the securities has been distorted by various factors.

First, the Penn Central has just recently emerged from a lengthy and complex reorganization and the “stigma of bankruptcy” necessarily results in a serious depression in the market value of its securities. As explained by Mr. William S. Nydorf, one of the trustee’s experts: Any securities newly issued as a consequence of a bankruptcy reorganization are likely to be subject to substantial investor prejudice and must undergo a period of market seasoning before their relative attractiveness as an investing medium can be fully appraised.

This is particularly important in the case of Penn Central, certainly one of the most spectacular and complex bankruptcies in the United States’ financial history. Affidavit of William S. Nydorf With Respect to the Amended Plan of Reorganization for the Debtor at 12 (“Nydorf Affidavit”). Second, the market place is unable to make sound business judgments concerning Penn Central at this time because of the major legal complexities of the Valuation Case.

The Valuation Case is unique and at present has an indeterminable value; therefore, its uncertainty may adversely affect the market values of all the securities of Penn Central which are directly or indirectly tied to the ultimate receipt of the award in that case. Third, the Penn Central securities at this time lack “seasoning” and “stability” because they are generally in the hands of large institutions and have not been sufficiently traded over a long period of time to reflect their true value.

Finally, the trustee contends that the investing public’s lack of knowledge about and confidence in certain features peculiar to Penn Central — the results and timing of the Asset Disposition Program, its unusual capital structure and debt cascades, its new management — make it highly unlikely that the market place has correctly appraised the value of the securities.

Utilizing the intrinsic value concept for the securities held by the New Haven, the trustee concludes that, with the cash on hand, the value of the New Haven estate for reorganization purposes is within a range of $120 million to $150 million, and that the value of the equity of the reorganized New Haven is commensurate with this value.

At the high end, this valuation would provide compensation to the First Mortgage Bondholders to the full extent of their claim, as computed by the trustee, i. e., approximately $135.7 million ($76,819,900 in principal plus $58,895,251 in interest to date), as well as affording a present equity in the estate for the Income Bondholders. In practical effect, the Amended Plan affords the First Mortgage Bondholders 93.1%, and the Income Bondholders 6.9%, of the reorganized New Haven.

This is a significant modification of the treatment accorded the Income Bondholders in the plan of reorganization submitted to Judge Anderson in 1968. In ruling on that plan, Judge Anderson required that the First Mortgage Bondholders’ claim of $101,-154,737 (principal amount of $76,819,900 plus post-bankruptcy interest of $24,334,837 from January 1, 1961 to December 2, 1968, the effective date of the plan) be satisfied by the issuance to them of common stock of the reorganized New Haven.

When taken together with the Penn Central underwriting required by him, this would satisfy the First Mortgage Bondholders’ total claim. The holders of Income Bonds were to receive warrants to buy common stock at a price of $50 per share, which could only be exercised under certain specified conditions.

The more favorable treatment proposed in the Amended Plan for the second level bondholders is due to the trustee’s analyses of the improved financial condition and stability of the New Haven since 1969, and his desire to provide the parties with a basic framework for a “compromise” or “consensual” plan of reorganization.

The main components of the trustee’s valuation are: 1) the cash assets; 2) an estimate of the intrinsic worth of the Penn Central securities held by the New Haven; and 3) a recognition of the real, but presently unquantifiable, values of certain tax attributes and corporate opportunities available to the reorganized New Haven. Cash : At the present time, the cash assets of the New Haven are approximately $36.5 million.

In addition, the trustee treats as the equivalent of cash for valuation purposes his claim in the amount of $2.15 million for reimbursement of fees and costs in the Penn Central reorganization proceedings under

Section 77(c)(12) which is sub judice. Value of the Securities : The trustee did not personally undertake the task of determining the present value of the Penn Central securities owned by the New Haven; rather, he relied on the analysis developed by his expert, Mr. Nydorf. In addition, he retained another expert, Mr. Thomas E. Dewey, Jr., to make an independent valuation in order to obtain a second opinion.

The valuation methodologies of both experts embodied studies of the two separate aspects of the Penn Central enterprise: 1) its ongoing non-railroad businesses, principally consolidated in the Pennsylvania Company (“Pennco”); and 2) its “discontinued businesses” which are involved in the Asset Disposition Program and the Valuation Case. At the time the trustee’s experts prepared their valuations, Pennco’s operating subsidiaries were: (

a) Arvida (100% owned), a developer of residential, resort and other properties in Florida and Georgia; (

b) Buckeye Pipe Line Company (100% owned), a common carrier of petroleum products in Northeastern and Midwestern United States; its sister company, Buckeye Petro Fuels Company, markets fuel oil, gasoline, and propane gas; (

c) Great Southwest (94% owned), an operator of amusement parks and a wax museum; (

d) Edgington Oil Company (80% owned), a petroleum refiner that also manufactures and markets petroleum products; (

e) Clearfield Bituminous Coal Corp. (100% owned), a coal mining company; and (

f) Pennrec (100% owned), an owner of amusement parks. Subsequent to the experts’ calculations on value, Pennco acquired the remaining minority interests in both Edgington Oil Company and Great Southwest, and purchased Williams Energy, a marketer of propane gas in over 25 states. In addition, after the closing arguments in these proceedings, Penn Central merged with another operating company, Marathon Manufacturing Company, which is one of the world’s largest manufacturers of offshore drilling rigs.

In addition to valuing these income producing continuing businesses owned and operated by Pennco, the experts deemed it crucial to their methodologies to consider the cash that would be generated by the Asset Disposition Program (“ADP”) and the anticipated range of awards likely to be received in the Valuation Case. The ADP is a detailed plan pursuant to which most of the assets of Penn Central and its subsidiaries, except Pennco and the Valuation Case, will be liquidated in an orderly and systematic fashion prior to December 31,1987. In re Penn Central Transportation Co., supra, 458 F.Supp. at 1255.

As previously noted, the Valuation Case evolved from the dispute between the parties over the valuation of the Penn Central’s rail assets which were transferred to Conrail in 1976 under the provisions of the RRRA. The novel and complex litigation presently pending before the Special Court, for a determination of the fair, equitable and constitutional terms of exchange, will undoubtedly take years to resolve unless a settlement is negotiated.

For the reasons discussed at length by Judge Fullam, 458 F.Supp. at 1270-76, and the Third Circuit, 596 F.2d at 1164-66, it is clear that the ultimate outcome of the Valuation Case will have a direct and substantial effect upon the Penn Central’s ability to redeem a large number of its debt-type securities (Series B Notes, Series C Notes, Series D Notes, Series B Bonds, Preference Stock, and CBI). Any “spillover” from the award, i. e., the amount of recovery in excess of that required to retire all the Penn Central securities senior to the Common Stock, would presumably enhance the value of the Common Stock.

Any increase in the value of the Common Stock, of course, necessarily depends on the size of the spillover and the timing of its payment. In the instant proceeding, the trustee and the experts recognize that an assessment of the award, or range of awards, must be considered in the valuation of the Penn Central’s securities held by the New Haven, particularly with respect to the 6% block of Common Stock owned by the estate. Mr.

Nydorf valued the New Haven’s securities as of September 30, 1978, the date he assumed would be the effective date of the Amended Plan and the time at which the interest accruing on the First Mortgage Bonds would cease. His evaluation proceeded on three basic premises which he determined to be valid: 1. The projections concerning the amounts and timing of, the sales under the ADP should be accepted; 2.

The appropriate range of values for Penn Central was between $662.3 million (the SEC’s $600 million evaluation of Penn Central as of January 1, 1978, adjusted to reflect retained earnings for the first nine months of 1978) and $1 billion (based on Mr. Dewey’s valuation of Penn Central of $969 million as of December 31, 1978); and , 3. The Valuation Case would produce a recovery of not less than $500 million as of April 1, 1976, plus compound interest at 8% to date of payment. Nydorf Affidavit at 6-9.

He then assigned a value to the Penn Central securities held by the New Haven which would be redeemed by the cash flow of the reorganized Penn Central, namely, all the Series A Bonds and a portion of the Series B Bonds. He assumed that the New Haven would receive $46,069,000 (including the $12,826,000 initial cash payment) in the ten-year period 1978 to 1987, which discounted at appropriate rates, would have a present worth (September 30, 1978) of $41,531,00o.

He also valued the securities held by the New Haven which would not be redeemed by the cash flow of the reorganized Penn Central, namely, the remaining Series B Bonds in the amount of $6,878,000 (including interest), the Series B Preference Stock, and the CBI. All these securities would be retired if the basic award from the Valuation Case was at least $887.4 million (April 1, 1976), for a total recovery of $2.1 billion (December 31, 1987). The New Haven would receive $59,078,000 from this recovery, which discounted, has a present value (September 30, 1978) of $23,981,00o. Thus, as of September 30, 1978, Mr.

Ny-dorf concluded that the value of the securities senior to the Common Stock, together with cash payments received, was $65.5 million. To this, he added a range of values for the New Haven’s interest in the equity of the reorganized Penn Central, i. e., the New Haven’s 6% block of Penn Central Common Stock, based on the range between the values placed on Penn Central by the SEC, as updated, of $662.3 million and by Mr. Dewey of $969 million, rounded off to $1 billion. The value of the 6% block would, therefore, be between $39.7 million and $60 million. The next factor Mr.

Nydorf considered was the enhancement of the Common Stock from any Valuation Case spillover. He opined that the base award would probably be within the range of $1 billion to $2.5 billion. Using increasing discount rates for various segments of the range of assumed awards, he calculated that a base award of $1.4 billion (using Mr. Dewey’s valuation of Penn Central) or a base award of $2.25 billion (using the SEC’s valuation of Penn Central) would be necessary to justify the trustee’s allocations between the two system bondholders as set forth in his Amended Plan.

Because “the Valuation Case awards required to make the allocations [in the trustee’s Amended Plan] fair on a figure basis are well within the range of possible awards,” Mr. Nydorf concluded that the Amended Plan was fair, equitable and feasible. Nydorf Affidavit at 22. Mr. Dewey valued the assets of the New Haven as of December 31, 1978. In doing so, he assumed that the proceeds from the ADP would be realized as projected by the Penn Central trustees, and that the recovery from the Valuation Case would be not less than $500 million, plus compound interest at 8% from April 1, 1976 to date of payment.

He was of the opinion, however, that the two previous studies evaluating the constituent businesses of Penn Central, i. e., the SEC’s and Kuhn Loeb’s reports, were effectively outdated. He, therefore, valued the individual components of the Penn Central’s continuing businesses as of December 31, 1978.

His findings may be summarized as follows: Arvida Corporation $300,000,000 Buckeye Pipe Line Company 160,000,000 Great Southwest Corporation 100,000,000 Edgington Oil Company, Inc. 70,000,000 Clearfield Bituminous Coal Corp. 25,000,000 Pennrec 20,000,000 Tax Loss Carryforwards 1979 through 1982 160,000,000 Corporate Administrative Expenses 1979 through 1982 (20,000,000) Non-Pennco Future Coal Royalties 80,000,000 Subsidized Rail Rentals 26,000,000 Real Estate Unsold at December 31,1987 36,000,000 1983-1987 Tax Deductions 12,000,000 Total $969,000,000 Having determined the worth of the ongoing businesses and other assets of the reorganized Penn Central, Mr.

Dewey then proceeded to value the securities owned by the New Haven. Using a series of ascending discount rates, he projected that present values of the cash flows anticipated to be received upon redemption of the Series A Bonds, Series B Bonds, Series B Preference Stock, and CBI, to be $56.12 million. To this, he added the values represented by the 6% block of Penn Central’s Common Stock of $58.14 million, and the cash on hand of $13.07 million.

After deducting certain claims senior to the bondholders, he concluded that the equity of the New Haven for reorganization purposes was $118.3 million, excluding consideration of any spillover value for the Common Stock from the Valuation Case. Mr. Dewey next considered the extent to which the value of $118.3 million would be increased by Valuation Case base awards between $1 billion and $2.5 billion, a range of recoveries he believed to be reasonably probable.

Based on this analysis he ascertained that a base award of approximately $1.4 billion would be the “breakeven” point for the allocations between the two system bondholders under the Amended Plan. Under these circumstances, he concluded that the Amended Plan was fair, equitable and feasible.

Intangible Values: The third salient element in the trustee’s methodology is a recognition of the real, but presently unquantifiable, values inhering in the New Haven estate because of the tax attributes of the reorganized New Haven, and its other corporate opportunities, which he describes as its attractiveness as a candidate for merger and the “block” value of its Penn Central Common Stock. The trustee is of the opinion that several tax rulings received by the New Haven confer important tax benefits on the estate and its bondholders.

The principal tax benefits derive from the ruling that the New Haven has a high tax basis for its Penn Central securities (other than the CBI). When conveyed to Penn Central in late 1968, the New Haven’s operating assets had a basis for tax purposes of about $300 million.

In private letter rulings issued September 24, 1970, and May 14, 1979, the Internal Revenue Service (IRS) determined that: 1) the transactions of conveyance between the New Haven and the Penn Central in 1968 was a tax-free exchange under § 374 of the Internal Revenue Code; 2) the New Haven did not recognize a tax loss in 1968; and 3) the New Haven’s tax basis in its Penn Central securities will be the same as the basis of the assets conveyed to Penn Central in 1968, reduced by cash and the value of the liabilities assumed, indebtedness cancelled, and other property received.

Under the ruling letters from the IRS, the basis of the property conveyed to Penn Central in 1968, reduced as aforementioned, is to be allocated among the Series A and Series B Bonds, the Preference Stock, and the Common Stock in proportion to the fair market value of each. This allocation results in a tax basis for the Preference Stock well in excess of its liquidation or redemption value and a basis for the Bonds well in excess of their principal amount. Thus, any disposition of the Preference Stock or the Bonds will result in a tax loss.

In addition, the Common Stock has a tax basis substantially higher than its current market value. Under these rulings, the trustee predicts that tax savings are available and may be realized in several ways. For example, because the market value of the Series A and Series B Bonds, Preference Stock, and Common Stock are considerably less than the basis allocated to them, the sales or exchanges of these securities would generate large capital losses. Such transactions could be timed to offset capital gains on other investments or to reduce or eliminate current earnings and profits of the reorganized New Haven.

Elimination of earnings and profits could benefit the equity owners of the reorganized New Haven as well as the company, itself. Under § 301 of the Code, so long as the new company had neither current nor accumulated earnings and profits, distributions to its equity owners would be deemed first to be returns of capital (non-taxable) until the owners have recovered their own respective tax bases, and then as capital gains.

The trustee believes that by careful and appropriate timing of the sales or exchanges of the Penn Central securities, the reorganized New Haven would be able for a considerable time in the future to create ordinary and capital losses sufficient to insure it would have no current earnings, so that the equity owners would be able to utilize the tax benefits. With respect to the Series A and Series B Bonds, the trustee expects the reorganized New Haven would make use of the bonds’ high bases other than by a sale for capital losses.

Redemption of these bonds for less than their bases results in an ordinary loss in the year of redemption. Losses incurred because of redemptions before consummation could be carried forward for the following seven years. Also, under a ruling issued to the Penn Central trustees, holders of Series A and Series B Bonds can amortize anticipated losses resulting from future redemptions over the term of the bonds. Under this ruling, the reorganized New Haven could, in the trustee’s view, expect at least some ordinary loss in each year through 1987, unless all the bonds are redeemed before then.

In addition the trustee is of the opinion that maximization of operating losses could have potential additional benefits. There would exist the possibility of what the trustee terms “merchandising” its losses if certain carefully structured transactions between the reorganized New Haven and a “partner” looking to shelter some of its income were accomplished. Although the trustee considers these tax attributes are valuable assets in the New Haven estate, he does not quantify them.

The trustee further believes that the “block” character of the New Haven’s 6% holding of Common Stock (one of the largest single blocks of voting and equity ownership in the reorganized Penn Central) warrants an additional “plus value” which he does not quantify. Thus, the trustee concludes that a reorganization value for the New Haven is between $120 million and $150 million, based on his appraisals of the cash on hand, the Nydorf valuation of the securities, and a recognition of the real, but unquantifiable, intangible attributes inherent in the New Haven.

The floor estimate of $120 million gives little if any recognition to a spillover value from the Valuation Case; the ceiling figure of $150 million assumes a recovery on the lower end of the scale of possible recoveries insofar as a spillover is concerned. The First Mortgage Bondholders’ Methodology In marked contrast to the trustee’s position, the basic argument of the First Mortgage Bondholders is that fair market value, almost wholly derived from market price, constitutes the primary criterion for determining the reorganization value of the New Haven.

They argue that it is logical and practical for the Court to calculate the net asset value of the New Haven and the reorganized company mathematically by reference to the opinion of investors in the open market because, except for cash, the estate consists solely of marketable securities.

While recognizing the intrinsic value concept in principle, they contend it is inapplicable as employed by the trustee because there is and has been broad, active, and orderly sales of the Penn Central securities over an extended period of time which establishes the market place as the primary and most reliable indicator of value. Reliance is placed on a series of cases which they construe to require the Court to find, as a matter of law, that the present market value of the New Haven securities is the equivalent of their value for reorganization purposes. They cite E. I. duPont de Nemours & Co. v.

Collins, 432 U.S. 46, 97 S.Ct. 2229, 53 L.Ed.2d 100 (1977), in which the Supreme Court referred to the SEC’s expertise in merger cases and sustained the agency’s method of valuing a closed-end investment company by the market price of the underlying securities it owned. Also discussed is Seaboard World Airlines, Inc. v.

Tiger International, Inc., 600 F.2d 355, 361-62 (2 Cir. 1979), wherein the Second Circuit stated that “in a free and actively traded market, absent compelling reasons to believe otherwise, the market price [of stock] is held to take account of asset value as well as the other economic, political, and financial factors that determine ‘value.’ ” Central States Electric Corp. v. Austrian, 183 F.2d 879 (4 Cir. 1950), cert. denied, 340 U.S. 917, 71 S.Ct. 350, 95 L.Ed. 662 (1951), is claimed to be a parallel case. There, in a

Chapter X reorganization of a closed-end investment company, the plan of reorganization provided for the collapse of the “pyramid” of various companies into a single investment company. The stock of the reorganized company was to be issued first to bondholders for their claim, with interest, and then to senior preferred shareholders, with accrued dividends, on the basis of the underlying net asset value of the new investment company as of the effective date of the plan.

The common stockholders, who were eliminated from receiving shares of the reorganized company, challenged the valuation method approved by the reorganization court and the SEC because “the assets of the corporation were not valued at ‘going concern’ value to include such matters as probable enhancement in values of securities held, increase in dividends, investment of amounts now held in cash and government bonds, restoration of ‘leverage’ through the borrowing of money and the earnings of skilled management in the purchase and sale of securities.” Id. at 884.

The Fourth Circuit rejected these contentions, concluding: [W]e agree with it [the SEC] that the proper method of valuing the assets of an investment company such as this is not prospective earnings, as in the case of a manufacturing or railroad corporation, but the presently realizable market value of the securities on hand. Id.-, see also Mills v.

Electric Auto-Lite Co., 552 F.2d 1239, 1247 (7 Cir.), cert. denied, 434 U.S. 922, 98 S.Ct. 398, 54 L.Ed.2d 279 (1977) (“[W]hen market value is available and reliable, other factors should not be utilized in determining whether the terms of [the] merger were fair.”); Amerada Hess Corp. v.

Commissioner, 517 F.2d 75, 84 (3 Cir.), cert. denied, 423 U.S. 1037, 96 S.Ct. 574, 46 L.Ed.2d 412 (1975) (“The better view is that the market does provide the best evidence of the value, notwithstanding a depressed state, or even a large-scale manipulation, of the market as a whole.”); In re Equity Funding Corp. of America, 416 F.Supp. 132, 144 (C.D.Cal.1975) (The market value of assets such as stocks and bonds “is the appropriate measure of their value for reorganization purposes, since the value determined by investors in the market place is the best indicator of the present value of the future earnings of the assets.”).

In support of their position that the average market price is the primary determinant of reorganization value, as a factual matter, the First Mortgage Bondholders rely principally on the testimony of their expert, Mr. Stanley S. Shuman. Based on his study of the market, his research, and his conferences with other experts, he determined that the market generally was stable and orderly, and that for Penn Central securities it was active, free and orderly.

He therefore concluded that the New Haven, which is the holder of only cash and marketable securities and is not an operating company, should be valued by aggregating its cash and the fair market value of its securities. He defined fair market value as “the price at which willing and informed buyers, and willing and informed sellers, acting under no compulsion, will trade.” However, Mr. Shuman did not accept the market prices of the securities at face value.

After an evaluation of the trading prices and the yield of each Penn Central security, he tested the market's conclusions by comparing the yield and quality of each security to comparable securities trading in the open market. The following table summarizes Mr.

Shu-man’s findings concerning the fair market value of the New Haven estate, as of the end of February 1979, net of claims senior to the First Mortgage Bonds: Cash $17,426,677 Penn Central securities: — Series A Bonds 12,377,250 — Series B Bonds 3,532,500 — Series B Preference Stock 9,755,625 — Certificates of Beneficial Interest 2,007,375 — Common Stock 23,978,552 Recovery of New Haven Legal Expenses from Penn Central 2,150,000 Total $71,227,979 His valuation methodology with respect to each of the securities is as follows: Series A Bonds: These Bonds are traded on the New York Stock Exchange.

Prior to December 13, 1978, they traded at a range between 87 and 8OV2. Thereafter, the trading range was between 787/s and 70Vs, with the closing price for February 28, 1979 at 72%. He believed the decline after December 13, 1978 was due to the drawings for redemption of a portion of the Bonds in December 1978. Total volume of sales was $1,281,000 for December 1978, $1,802,000 for January 1979, and $870,000 for February 1979. Based on the foregoing, he concluded that $727% per $1000 Bond was a reasonable market price for the Bonds. Mr.

Shuman then sought to establish comparability by assigning a “rating” for the Series A Bonds. Because neither Standard & Poor’s nor Moody’s had ratings for the Penn Central debt-type securities, Mr. Shuman studied the relevant characteristics of the Bonds and concluded that they would receive a rating no higher than “A” if classified by Moody's. He then examined bonds with comparable ratings to test the market price of the Series A Bonds.

He reviewed the asset coverages, current yields and the yield-to-maturity of comparably rated bonds and found that the yield-to-maturity of the Series A Bonds, on a number of assumptions as to payment, was greater than that of the other bonds reviewed. He attributed this difference to the Series A Bonds’ low asset coverage, the size of senior claims, the lack of current interest payments, and the possibility of an extended maturity.

After making an adjustment to average market price because he believed that newly released material information concerning the Bonds had not been fully digested by investors, he decided that market price could not be accepted as the primary indicator of value at the time he made his valuation. Based on these factors, Mr. Shuman determined that a market price of $750 reflected the fair market value for the Series A Bond and, therefore, the total value for the New Haven’s holdings of these securities was $12,377,250.

Series B Bonds: Trading on a “when-issued” basis for these Bonds commenced on the New York Stock Exchange on November 14, 1978. Through December 20, 1978, they traded in the range of $501/4 to $46’/2. Regular trading of the Bonds began December 22, 1978, at a price of $48V2. Thereafter, until March 1979, the Bonds traded in the range of $48V2 to $45. Daily volume for February 1979 averaged $26,277 principal amount and totalled $473,000 for the month. Establishing comparability in the same fashion as he did for the Series A Bonds, Mr.

Shuman decided the Series B Bonds would be rated no higher than “Ba” by Moody’s, and that a $471 market price valuation per Bond would be proper. The New Haven’s holdings, therefore, amounted to $3,532,500. Series B Preference Stock: During the period November 14,1978 and December 20, 1978, when the Series B Preference Stock was sold on a when-issued basis, it traded in the range of $6% to $5. After regular trading of this Stock began on December 21, 1978, it sold in the range of $6% to $5 through February 1979. An aggregate of 692,800 shares of the Stock was traded in February 1979.

Following the same procedure for determining comparability as he did for the Bonds, Mr. Shuman believed that the Stock would be classified no higher than “B” and probably “Caa.” Based on his analysis he accepted the market price of $5% per share for the Stock as its fair market value. Because the New Haven own 1,815,000 shares of this Stock, the estate’s holdings amounted to $9,755,-625. CBI: These securities are not traded on a national securities exchange; as a result, volume figures are difficult to obtain. However, they are traded over-the-counter and bid prices are available.

The average bid price of the CBI during the month of February 1979 was $12% per $100 face value of a certificate. Mr. Shuman determined that the CBI would be “unrated” or would be classified no higher than “C” by Moody’s and, upon comparison with other similar securities, he concluded that the average market price demonstrated fair market value, and that New Haven’s ownership of $15,900,000 face amount of CBI was worth $2,007,375. Common Stock: The Common Stock traded on a when-issued basis in the over-the-counter market through November 13, 1978, closing at $17%.

During the period November 14, 1978 through December 13, 1978, of when-issued trading on the New York Stock Exchange, it sold in the range of $19V8 to $16V4. After regular trading started on December 14, 1978, it sold in the range of $181/2 to $13% through February 1979. In the latter month, 1,534,300 shares were traded. Based on his studies, Mr.

Shuman determined that the Common Stock should be valued at the market price of $17.50 ■ per share for the following main reasons: 1) The market for the securities was seasoned, broad, free and orderly; 2) The quality and quantity of information was more than adequate for investors to make sound judgments concerning the value of the Common Stock, including appraisals of the range of recoveries in the Valuation Case; 3) The market price reflects investors valuations of the risks and rewards of the ADP and of the Penn Central’s tax attributes; and 4) The hypothetical liquidation value of Penn Central would be $405.1 million resulting in a liquidation value of $17.50 per share of Common Stock.

Thus under Mr. Shuman’s analyses, as of late February 1979, the fair market value of the New Haven’s 1,370,203 shares of Common Stock was $23,978,552. To further sustain the validity of the market value methodology, the First Mortgage Bondholders rely on the testimony of two additional experts, Mr. Martin J. Whitman, a professor at the Yale School of Organization and Management, and Mr. James J. Maguire, a registered specialist at the New York Stock Exchange in the trading of the Common Stock and Preference Stock of the Penn Central.

Both men testified that the market was stable and orderly and that these securities were seasoned. Mr. Whitman further concluded that the market was an appropriate indicator of the values of the Penn Central securities. In their brief, submitted months following Mr.

Shuman’s testimony, the First Mortgage Bondholders “update” their estimate of the net asset value of the New Haven available to satisfy their claim (after payment of senior claims) to reflect the later market prices for the securities during the period July 16,1979 to August 15,1979: Asset Market Value Per Security Total Series A Bonds $80.49/$100 $13,283,265 Series B Bonds $58.34/$100 4,375,500 Preference B Stock $ 5.65/share 10,254,750 CBI $14.96/$100 2,378,640 Common Stock $18.75/share 25,691,306 Cash (as of 6/30/79) 18,825,000 The Net Asset Value Available to Satisfy First Mortgage Bondholders $74,808,461 The Income Bondholders’ Methodology The Income Bondholders and their experts contend, as does the trustee and his experts, that intrinsic value rather than market price is the appropriate measure of value for the securities.

As explained by Mr.

Walter Breslav, Jr., the Income Bondholders’ lead expert, the market prices of the Penn Central securities must be assumed to be substantially below their intrinsic value for the following reasons: 1) the securities of a once-distressed company emerging from a lengthy reorganization are subject to substantial investor prejudice; 2) the market generally undervalues a litigated claim, such as the Valuation Case, as an asset; 3) the abilities of the management of Penn Central are as yet unproven; 4) holders of large numbers of the securities are banks and insurance companies which are under a “pressure” to sell the securities and, therefore cannot be considered to be “voluntary” sellers in the open market; and 5) investors do not possess sufficient knowledge concerning Penn Central’s complex capital structure to appraise accurately the real value of its securities.

Amended Affidavit of Walter Breslav, Jr., dated March 29, 1979 at 5-15. Mr. Breslav agreed with Mr. Dewey’s valuations of the Penn Central securities and found them fair and accurate. He adopted Mr. Dewey’s calculations and, with an adjustment made for the redemption of a portion of the Series A Bonds in 1978, he arrived at a valuation of $97.9 million as his initial determination of the value of the securities. Mr. Dewey’s assessments, however, assumed an $887 million base award in the Valuation Case, which was $113 million less than what Mr. Breslav expected as the minimum recovery. Mr.

Breslav, therefore, concluded that $4.7 million more was available for the Common Stock, and that $102.6 million was the value of the Penn Central securities based on a minimum Valuation Case award of $1 billion. Mr. Breslav used two different approaches in appraising the tax attributes for which he relied in part on the testimony of a tax expert, Mr. Samuel Braunstein. First, Mr. Breslav assumed that the IRS rulings that the transfer of the New Haven’s rail assets to Penn Central in 1968 was nontaxable would be accepted by the man

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