Court Opinion

ID: 8893134
Source: CourtListenerOpinion
Date Created: 2022-11-26 23:30:46.064894+00
Date Added: 2024-06-11T17:07:19.228686
License: Public Domain

ROSENN, Circuit Judge
(concurring) .
I concur with the majority but I believe that two steps in the majority’s analysis require further amplification.
I understand the reasoning of the majority to be as follows. Jersey Central and Third Avenue, which restrict the use of proceeds received from the sale of mortgaged assets, survive the New Haven Inclusion Cases. Because of the prior Government lien in the form of Trustees’ Certificates, Jersey Central and Third Avenue are applicable here even though the secured parties do not have a direct secured interest in the assets being sold. The findings which are required by Jersey Central and Third Avenue were not made, and apparently could not have been made, by the reorganization court. Since Jersey Central and Third Avenue define constitutional standards, marshaling is required in order to avoid an uncompensated taking of the secured parties’ property whenever any proceeds are to be used for operating expenses or additions and better-ments in the absence of the required findings. Furthermore, the Emergency Rail Services Act is consistent with the marshaling rule whenever that rule is constitutionally required.
I. Applicability of Jersey Central and Third Avenue
The Trustees argue that even if Jersey Central and Third Avenue are still good law, the two cases do not apply to the present situation because the assets sold were unmortgaged. The majority holds these cases nevertheless applicable on the theory that the sale of the un-mortgaged assets without providing protection for the secured parties is the equivalent of the issuance of additional Trustees’ Certificates.1 “Looking to fact rather than to form,’’ the majority asserts that since findings would be a *285necessary prerequisite to the issuance of additional Trustees’ Certificates, the same findings should be required here. The majority apparently concludes that Jersey Central or Third Avenue findings must be made before any property subject to the Government lien may be sold and the proceeds used for operating expenses or for additions and betterments.
This “fact” over “form” analysis, however, depends upon the possibility of an eventual “spillover” of the prior Government lien from the unsecured assets to the secured assets in the event that the unsecured assets prove insufficient to satisfy the lien on liquidation. A situation may arise in the future in which sufficient unsecured assets to satisfy the prior Government lien would clearly remain after a proposed sale of unsecured assets had taken place. In such a situation, the existence of the prior Government lien would have no effect upon the secured interests,2 and I believe the proposed sale could then be treated exactly as would a proposed sale of unmort-gaged property in the absence of the Government lien. The secured parties would have only an interest common to all general unsecured creditors in the sale of the unmortgaged asset in question, and would have no special right to require that Jersey Central or Third Avenue findings be made before the un-mortgaged property could be sold. The reorganization court in the instant case, however, made no findings that the remaining unsecured assets were adequate to satisfy the prior Government lien and to protect the secured parties from injury resulting from possible future erosion of unsecured assets.
II. Scope of Jersey Central and Third Avenue
I do not believe that the foregoing analysis conclusively determines that Jersey Central or Third Avenue findings were required in this case, however, as to the use of proceeds from the sale of securities formerly a part of the Contingent Compensation Reserve Fund (Orders 1087 and 1088). The Trustees argue, in effect, that the securities making up the Fund do not constitute the kind of “asset” to which Jersey Central or Third Avenue apply; the Fund was simply a reserve which the company voluntarily set aside to meet future ordinary expenses, namely, the payment of retirement benefits. As such, they contend, it was similar to a bank account.
In fact, this court recently held, in an opinion by Judge Gibbons, that the Contingent Compensation Plan involved here was merely an executory contract calling for the payment of future retirement benefits, and the Fund was held as a part of the company’s general assets subject to whatever use and disposition the company desired. In Re Penn Central Transportation Company, 484 F.2d 1300, company desired. In Re Penn Central 1305 (3d Cir. 1973), cert. den. Green-ough v. Trustees of Penn Central Transportation Co., 415 U.S. 951, 94 S.Ct. 1475, 39 L.Ed.2d 567 (1974).
It is not sufficient to say, as does the majority, that Jersey Central or Third Avenue findings are required merely because the Government lien concededly attaches to the Fund. If that were the only prerequisite to the requirement that findings be made, findings would be required before any property to which the Government lien attached could be used for operating expenses.
In permitting the issuance of the Trustees’ Certificates initially, the reorganization court ordered that the Government lien attach to
all the property, real, personal, and mixed, and the earnings and income thereof, now owned or hereafter ac*286quired by the Trustees as such, said charge and direct first lien to be prior in right to . the liens of each and every mortgage created by [the Penn Central Transportation Company].
In Re Penn Central Transportation Company, E.D.Pa. No. 70-347 (January 13, 1971). This provision appears on its face to cover all assets whatsoever, including bank accounts.3
The majority, as well as the secured parties, would surely not go so far as to contend that just because the Government lien attaches to cash on hand and bank accounts, that such accounts could not be used for operating expenses. Such a holding would of course prevent payment of essential expenses such as wages, salaries, and necessary supplies, and require immediate liquidation of the debtor whenever Jersey Central or Third Avenue findings could not be made.
I raise this point only to point out that an additional distinction must be made between those “assets” transitory in nature which derive from operating revenues and are turned over daily, and those income producing assets in more durable form which tend to be held for long periods of time. Secured parties are not seriously injured by the daily turnover of unmortgaged assets in the first category, even though technically there is less unmortgaged property available to support the Government lien each time money is spent for operating expenses. Only when assets in the durable category are involved might the secured parties have a legitimate interest in preventing use of proceeds for operating expenses or for additions and betterments.4
The real estate properties involved in Orders 1073, 1103, and 1156 are clearly in the second category and thus require findings if, as, and when the reorganization court orders the use of the proceeds for operating expenses or for additions and betterments. I have more difficulty with the securities held in the Contingent Compensation Reserve Fund, however, since the Fund has many of the characteristics of ready cash retained for convenience in the form of securities. On balance, however, I agree with the majority that the securities in question were assets in the second category requiring findings. The Fund was clearly set aside as a reserve for certain specific expenses which would arise in the future, even though the company was not -ultimately obliged to use the Fund for that purpose. I do not desire to penalize the company for its sagacity and vision in voluntarily maintaining such a Fund. It must be recognized, however, that in this case the company desires to use the Fund for a purpose which was far different than the one for which it was maintained and which would exhaust the Fund at a far earlier period in time Moreover, these were not assets used in the day to day operation of the railroad. I believe that at least in this situation the Fund should not be treated as a simple bank account, and that Third Avenue findings are required.

. A numerical example might help to clarify this point. All asset values are in terms of what a sale would ultimately bring on liquidation.
Assume total assets of the debtor are worth 25 hypothetical units, the prior Government lien on all assets is in the amount of 15 units, and the secured parties have mortgages in the amount of 10 units on assets worth 10 units. Fifteen units of un-mortgaged assets therefore remain. On liquidation, the Government will receive its 15 units from the unmortgaged assets, while the secured parties will receive their 10 units from the mortgaged assets.
If the debtor were to sell unmortgaged assets worth 5 units and dissipate the proceeds in operating losses, on liquidation the unmortgaged assets would be worth 10 units while the Government lien would still be in the amount of 15 units. If, instead, the debtor were to borrow 5 units from the Government in exchange for the issuance of additional Trustees’ Certificates in the "same amount, and the proceeds were dissipated in operating losses, on liquidation the unmort-gaged assets would be worth 15 units while the Government lien would be in the amount of 20 units.
In either case, therefore, since the Government lien receives first priority even on the mortgaged- property, the secured parties lose 5 units of their security to the Government and receive only the 5 units remaining after full satisfaction of the Government lien.

. In the numerical example in note 1, supra, if the initial assets were worth at least 30 units, and if 5 units of cash were raised by either method and the proceeds dissipated in losses, then the secured parties will nevertheless receive their full 10 units from the mortgaged assets. Of course, because of the considerable uncertainties inherent in a reorganization procedure, the secured parties could be treated as having the interest of general creditors in the unmortgaged property only if the assets were initially worth considerably more than 30.

. The statutory requirement is that the Trustees’ Certificates be “treated as an expense of administration and receive the highest lien on the railroad’s property and priority in payment under the Bankruptcy Act.” 45 U.S.C. § 662(c).

. The point I make in this section is distinct from the point made in Part I. There, the question was whether the secured parties were to be treated as having an interest of secured or unsecured creditors in the un-mortgaged property being sold, with findings required only in the former case. Here, the question is, even assuming the property in question is to be treated as mortgaged property (i. e., findings are generally required), whether findings are to be required for all expenditures whatsoever. If this is answered in the affirmative, a finding that the secured parties are to have the protection of Jersey Central and Third Avenue is equivalent to a prohibition on the spending of any money at all for operating expenses, and therefore a requirement of immediate liquidation.