Full opinion text
OPINION AND ORDER NO. 1189 FULLAM, District Judge. The Debtor owns 100% of the common stock of the Pennsylvania Company, which is essentially a holding company for a variety of corporate enterprises, principally in non-railroad fields. In early 1969, and for some time previously, the Debtor was indebted to a group of banks in the sum of $100 million, represented by short-term unsecured notes. In April of 1969, the line of credit was increased to $300 million, and the Debt- or pledged its Pennco stock as security. Some 53 banks throughout the country were parties to or ultimately participated in the loan transaction. Through a series of petitions (Documents Nos. 3960, 4077, 4624, 5010, and 5042) the Trustees seek approval of a settlement agreement, pursuant to which the claims of 49 of these 53 banks would be discharged, in exchange for transfer to these banks of 95%% of the common stock of Pennco. The proposed settlement appears to have the express or tacit approval, not only of the settling banks and the Trustees, but also of the Institutional Investors group, and certain indenture trustees. The United States government and the Interstate Commerce Commission both oppose consummation of the settlement agreement at the present time, although for different reasons. The bondholders represented by the “special representatives” (substitute fiduciaries appointed for purposes of this case with respect to certain bond issues in which the settling banks are named as indenture trustees, and therefore have a conflict of interest), the New Haven trustee, the Penn Central Company (parent of the Debtor), and the preferred shareholders of the Pennsylvania Company all actively oppose the proposed settlement. At least partial opposition has also been expressed on behalf of the Detroit Bank, one of the original participants in the loan transaction, which has not accepted the proposed settlement agreement. All facets of the proposed settlement have been fully explored through discovery, and extensive hearings have been held in this Court. Upon consideration of the entire record, I now enter the following FINDINGS OF FACT 1. Pursuant to credit and pledge agreements entered into in the spring of 1969, by the Debtor and 48 banks acting through the First National City Bank of New York as the agent bank, the banks made available to the Debtor a $300 million revolving line of credit to be secured by the Debtor’s common stock interest in Pennco. Appropriate promissory notes were executed to reflect the principal and interest attributable to each drawdown. 2. Five additional banks acquired participation under the credit and pledge agreements. 3. By June 21, 1970, the full credit line had been utilized, and in accordance with the pledge agreement, the agent held the Debtor’s stock certificate for Pennco’s common stock accompanied by a stock assignment executed in blank. Paragraph 6 of the pledge agreement authorized the agent, upon default on the notes, to sell the Pennco stock to satisfy the obligations reflected by the promissory notes. 4. The Trustees have made no payments on the promissory notes. Accrued interest on the respective promissory notes to June 21,1970 was $4,495,653, and simple interest since June 21, 1970 to October 31, 1972, is approximately $42.5 million. 5. The agent has declared the notes in default and accelerated the entire principal. By the general injunctive provisions of Order No. 1, the agent is enjoined from exercising its rights under the pledge agreement. However, Order No. 10 precludes the Debtor from causing Pennco to declare and pay dividends to the Debtor and, in addition, grants the agent certain rights to information concerning Pennco’s operations. 6. Pennco is a Delaware corporation formed in 1870 by the Debtor’s corporate predecessors to operate certain leased lines west of Pittsburgh, Pennsylvania. At the present time, Pennco is primarily a holding company for both rail and non-rail assets. 7. Pennco’s outstanding common stock of 4,985,000 shares is owned by the Debtor subject to the pledge agreement mentioned in Findings 1 and 3. 8. Pennco’s 206,440 preferred shares are publicly held and traded on the New York Stock Exchange. The preferred shares have the following rights: (a) Annual cumulative dividends of $4.625 per share. (b) A liquidation preference of $100 per share prior to any payout to common stockholders. (c) An option to convert the Pennco preferred shares into common stock of the Norfolk & Western Railway Company (“N&W”). 9. Pennco has escrowed 158,248 shares of N&W stock to satisfy the conversion option of the Pennco preferred. As of January 1, 1972, five quarterly preferred dividends had been missed, amounting to a total cumulative arrearage in excess of $1.35 million. On January 15, 1972, preferred dividend, payments were resumed. 10. Pennco’s principal assets are described briefly below. Non-Rail Assets (a) Arvida Corporation is a Delaware corporation conducting a land bank and development enterprise in Florida. It owns $24.3 million in interest-bearing mortgages and contract notes, 30,000 acres of raw land in Florida, and the Boca Raton Hotel complex. 58.4% of Arvida’s common stock is owned by Pennco. The remainder of the stock is publicly held and traded over-the-counter. (b) Buckeye Pipeline Company, an Ohio corporation, is wholly owned by Pennco and is engaged in the operation of oil and petroleum product pipeline systems in nine eastern and mid-western states. The stock of Buckeye is pledged to secure a $35 million loan to Pennco. (c) Clearfield Bituminous Coal Corporation (“Clearfield”), a Pennsylvania corporation, is wholly owned by Pennco. Essentially, it is a passive enterprise managing mineral rights in coal-rich lands and debt and equity securities of other corporations, including railroad companies related to the Debtor. (d) Great Southwest Corporation (“GSC”), a Texas corporation, conducts business on its own account and through certain subsidiaries and partnerships. Its main capital ventures are amusement parks, real estate holdings, including an industrial park, and the manufacturing of mobile homes. Exclusive of Penneo’s ownership of 81% of the common and 82% of the preferred stock (90% of the voting stock), GSC stock is traded over-the-counter. (e) Fifteen percent of the common stock and $32.9 million in convertible debentures of the N&W, a major rail carrier in the east. Ninety-eight percent of Pennco’s N&W stock is pledged to secure various Pennco obligations. The ICC has ordered divestiture of the N&W holdings by 1979. (f) Six percent of the common stock of Madison Square Garden in unregistered form. ' (g) Sixty percent of the outstanding preferred stock of Strick, Incorporated, and warrants to purchase 27% of Strick’s common. (h) A subordinated note, due in 1978, in the amount of $2,661,000, plus accrued interest of $612,500 as of March 31,1972, of Transport Pool Corporation, which leases trailers and is an affiliate of Strick. (i) Sixteen percent of the outstanding common stock of Pullman Company. (j) Two-thirds of the common stock of Penn Towers, Inc., the owner of an apartment building in Philadelphia. (k) Seven percent of the 4y2% preferred stock of the Wabash Railroad. Assets Related to Debtor’s Rail Operations (l) 245,329 shares of the 245,333 outstanding shares of the Detroit, Toledo & Ironton Railroad Company. (m) Fifty percent of the common stock of the Toledo, Peoria & Western Railroad Company. (n) Fifty percent of the common stock of the Montour Railroad Company. (0) Seventy-four percent of the common stock of the Connecting Railway Company. (p) Thirty-five percent of the common stock of the Philadelphia, Baltimore & Washington Railroad Company (the Debtor owns the remaining common stock). (q) Twenty-eight percent of the common stock of West Jersey & Seashore Railroad Company (the Debtor owns 57% of the common stock of WJS). (r) Through Pennco’s wholly-owned subsidiary Clearfield, 40% of the common stock of the Cambria & Indiana Railroad Company, 30% of the common stock and 2% of the preferred stock of the Fort Wayne & Jackson Railroad Company and slightly less than 1% of the stock of the Mahoning Coal Railroad Company (a majority of the outstanding stock of which is owned by the Debtor). (s) In addition to the above stock interests in railroad companies, Pennco has debt obligation of railroads as follows: (1) A $20,305,000 principal amount open account indebtedness plus interest against American Contract Company; (ii) A substantial number of bonds of the Lehigh Valley Railroad Company in unpaid principal amount of $3,166,000; (iii) A $2,225,000 principal amount open account indebtedness plus accrued interest against the Detroit, Toledo & Ironton Railroad Company. Obligations of the Debtor or its Subsidiaries to Pennco (t) A $49 million principal amount 914% promissory note of the Debtor to Pennco. (u) A $33,176,893 principal amount open account indebtedness owed by PB&W to Pennco. (v) General mortgage bonds of the Pennsylvania Railroad Company in principal amount of $11,637,000. (w) $3,194,000 in principal amount of 5% general mortgage bonds, Series D, due August 1, 1975, of the Pittsburgh, Cincinnati, Chicago & St. Louis Railroad Company. 11. Upon ratification of their appointments by the Interstate Commerce Commission on July 28, 1970, the Trustees were required to direct immediate attention to the financial condition of Pennco and its subsidiaries. In particular, GSC was in need of a substantial cash infusion within the near future. Moreover, effort was expended to secure new management personnel for Pennco and its subsidiaries to replace the Debt- or’s personnel that had provided the major management component for Pennco and its subsidiaries prior to the filing of the reorganization petition. 12. The Trustees have succeeded, in large measure, in eliminating or at least reducing the intensity of the financial and management problems of Pennco and its subsidiaries. 13. Within the first few months of their appointment, the Trustees determined that as a general policy it would be in the best interest of the estate to divest nonrailroad assets, if appropriate terms and methods were available. 14. Within this early period the Trustees’ financial advisor, Mr. John Guest of Kuhn, Loeb & Co., proceeding on the premise that the value of Pennco was less than the $300 million debt which the Pennco stock secured, undertook to explore the possibility of the sale or transfer of the Debtor’s Pennco stock to the lending banks. In March of 1971, a formal meeting was held between the agent bank and the Trustees. As a result of this meeting, a negotiating team was appointed by the Trusteees. Prior to the March meeting and thereafter, the Trustees were advised by their financial ad-visor and staff that the value of Pennco, and therefore the Pennco stock, was substantially less than the $300 million debt owed to the lending banks. 15. A number of studies compiled by the staff of Pennco, its subsidiaries, or retained advisors, were in existence during the period mentioned in Finding 14. These studies were relevant on the question of the value of Pennco. These reports were not specifically relied upon by the Trustees in formulating their decision to enter into negotiations with the lending banks. 16. On May 25, 1971, a summary of points of agreement was executed (Document No. 1590) by almost all of the banks and the Trustees subject to the necessity of drafting a more formal agreement satisfactory to the parties and the eventual approval of this Court. A formal agreement was executed on March 14, 1972. Since that time amendments to the original agreement have been executed. It is this agreemnt, as amended, which the Trustees seek authority to implement. 17. Prior to execution of the settlement agreement, the Trustees authorized Kuhn, Loeb & Company to perform a formal appraisal study of Pennco to determine the value of the Pennco Stock. The final written report was rendered on July 17, 1972. 18. Kuhn, Loeb’s appraisal of Pennco is summarized below: Investments in companies other than PCTC and its leased lines $360,764,000 Investments in PCTC and its leased lines 28,292,000 Pennco assets other than investments 756,000 Total assets and investments $389,813,000 Less: Pennco liabilities and preferred stock 166,688,000 Net value of Pennco stock $223,125,000 Mr. Guest of Kuhn, Loeb made adjustments to the appraised value of certain assets in an affidavit dated November 3, 1973; however, the aggregate appraised value of Pennco was described as not appreciably more than $223,125,000. 19. Pennco rail assets as defined in the settlement agreement were valued at $68,936,000 and included in the total appraised value of $223,125,000 (Findings 10W-(s)). 20. During the preparation of the Kuhn, Loeb Report (“KLR”), additional information and data was generated by Pennco, its subsidiaries, and its retained advisors. This information was not necessarily reflected in the Kuhn, Loeb Report. Further information became available subsequent to Kuhn, Loeb’s rendering of its final report. 21. The settlement agreement was executed by 49 of the 53 lending banks. Three of the non-signatories to the settlement agreement executed an amendment to the credit and pledge agreements which purports to alter the general security interest of the non-settling banks in all the Pennco stock to a security interest in 4% % of the Pennco stock. The National City Bank of Detroit has not executed the settlement agreement or the modification to the credit and pledge agreements. 22. The settlement agreement, if consummated, would result in the restructuring of the legal rights of the settling banks in the Debtor’s estate. In addition, specific obligations would be assumed by the Trustees and the settling banks to cause Pennco to execute certain transactions. 23. The rights of the Trustees and settling banks under the settlement agreement are summarized below: (a) The Trustees will transfer to the settling banks or their nominee ownership of 95%% of the Pennco stock. (b) Cancellation by the settling banks of their claims arising under the credit and pledge agreements in the amount of $287 million plus all interest claims. (c) The settling banks agree to make available $150 million in equipment financing within three years, of which $80 million is available to rebuild old equipment. (d) The settling banks agree not to dispose of their Pennco stock (except if required by law) within five years of the closing date to any entity other than the banks’ parent or a subsidiary of the parent. If such a transfer takes place, it must be subject to the terms of the settlement agreement excluding the obligation to make equipment financing available. The settling banks would remain obligated to provide the equipment financing. (e) The settling banks agree to share equally with the Debtor’s estate any increment in the value of Pennco within 10 years of closing in excess of $287 million. All distributions and dividends from Pennco to the banks, and the appraised value of Pennco on the tenth anniversary of the closing date shall be considered in determining whether the $287 million figure is exceeded. Although this provision is denominated as the “equity split,” the sharing arrangement does not give rise to any joint venture or partnership relationship between the Debtor and the settling banks. 24. Obligations of the Trustees with respect to Pennco: (a) Cause Clearfield to transfer to Pennco its stock interest in the Cambria & Indiana Railroad Company, Fort Wayne & Jackson Railroad Company, and the Mahoning Coal Railroad Company. (b) Cause the formation of a Delaware corporation to be known as “Penn-rail” with the common stock to be owned by the Trustees and with nine series of preferred stock authorized. (c) Cause Pennco to transfer to Penn-rail the stock interests mentioned in sub-paragraph (a) of this Finding and the Pennco stock interests set out in Finding 10(l)-(g), in exchange for one series of Pennrail preferred for each of the nine stock interests in railroad property transferred to Pennrail by Pennco. (d) Cause Pennco to subject the Penn-co rail assets and Pennrail preferred stock to liens in favor of the Secretary of Transportation in an amount not to exceed $13.01 million as partial security for payment of the $100 million in trustees’ certificates issued pursuant to Order No. 124. Said lien is subordinate to existing liens on Pennco’s assets and the rights of the Pennco preferred stock. 25. Obligations of the settling banks with respect to Pennco: (a) Cause Pennco to transfer the Pennrail preferred stock at any time to Pennrail for $50 million in cash or securities, including reorganization securities. (b) Upon redemption of one or more of the series of Pennrail preferred stock aggregating a redemption price of $50 million, the banks will cause Pennco to transfer the remaining preferred stock of Pennrail to the Trustees for no additional consideration. (c) Cause Pennco to transfer to Penn-rail the preferred stock of Pennrail if at any time during the 10-year period the Trustees shall be entitled to payment pursuant to the so-called equity split provision. In the event the total distributions and appraised value of Pennco at the end of the 10-year period do not equal $287 million, the Trustees shall cause Pennrail to transfer assets of Pennrail to the banks in such amount not to exceed $50 million that is necessary to make up any deficiency, provided that in the event Pennco sells certain assets denominated as “special assets” (See Findings (t)-(w)) and sustains a capital loss, the tax savings generated and used by Pennco shall reduce the maximum amount of the Pennrail assets due the banks in like amount. In the event Pennrail assets are transferred to Penn-co to make up any. deficiency, (1) the Trustees have an option to reacquire said assets with cash, property, or securities (including reorganization securities) in value equal to the value of the asset reacquired; (2) the settling banks agree to execute the necessary documents and instruments to permit the Trustees to exercise management control over any of the railroad companies mentioned in Finding 10(i)-(r), if such control were vitiated by Pennrail’s transfer of the stock underlying the Pennrail preferred to Pennco, and the railroad company is necessary for the operation of the Debt- or’s system. (d) Transfer upon request of the Trustees the $33,173,893 debt owed by the PB-W to Pennco for cash or senior debt reorganization securities in like amount. (e) Will not cause Pennco to declare or pay any dividend or distribution to the banks for five years from the closing date. 26. Finding 10(a) sets out the main assets of Arvida. The KLR determined Arvida’s asset value to be $98.4 million. The average market price of Arvida stock during the first six months of 1972 was $13.85 per share, or a total value of Arvida of $83.7 million. Similarly, the closing bid price of Arvida stock on June 30, 1972 and November 3, 1972, results in market values of $74.1 million and $68.7 million, respectively. Since the asset value was calculated on the highest and best use of Arvida’s raw land, KLR concluded that the asset value was too high, but it also determined that the market price of Arvida stock was somewhat low. The report adopts a composite valuation of $87.5 million. The Debtor’s stock interest of 58.4%- was determined to be worth $51.1 million. 27. In calculating Arvida’s debt, KLR made no discount adjustment based upon the relatively low rates payable on Arvida’s major debt obligations. 28. Excluding Arvida’s Boca Raton Hotel complex, the thrust of Arvida’s operation has been land acquisitions for resale in large tracts. Arvida has recently determined to reorient its corporate activities to development of a significant portion of its inventory of raw land. 29. Land investment is a speculative and high risk venture. Land development, while potentially very profitable, brings increased risks by injecting entirely new marketing and production problems which to some extent are not within the control of management. From the point of view of undertaking land development objectives, the quality and location of Arvida’s land inventory provides a strong base, as does Arvida’s reputation for quality and fair dealing. 30. By moving into land development, Arvida must now consider potential outright sales from the competitive impact that such sales might have on Arvida’s projected development undertakings. 31. Absent the change in Arvida’s corporate objectives, Arvida could probably generate future cash needs itself. Land development objectives require additional financing. It is possible that Arvida will need Pennco support to secure the necessary additional capital. 32. Increased citizen and local governmental resistance to land development poses the potential of delays and even the halting of development of particular tracts within Arvida’s inventory. 33. Pennco has strengthened Arvida’s management; however, additional qualified personnel appear to be necessary to staff the company for its move into the land development field. 34. Arvida’s dividend policy has been to forsake dividends in favor of reinvestment of earnings in the enterprise. 35. Because Arvida’s earnings in the past have been a direct result of the number of large tract sales consummated, its earnings record has fluctuated greatly: the first nine months of 1972 — pretax $4,946,000 posttax $2,470,000; 1971— pretax $3.3 million, posttax $1.825 million; 1970 — pretax $0.2 million, posttax $0.1 million; 1969 — pretax $2.3 million, posttax $1.3 million. 36. A five-year business plan has recently been developed by Arvida’s management. The function of the plan was to state tentative operational objectives. Intensified development activity is reflected in the business plan by the rising numbers of units to be sold in future years. A chart from Arvida’s five-year plan has been omitted to protect confidentiality. 37. Acquisition of 1,306,733 shares of Arvida by Pennco would increase Penn-co’s interest to 80%. As an 80%-owned company of Pennco, Arvida could file a consolidated tax return with the Debtor’s affiliated group, and thereby take advantage of the debtor’s capital losses to shelter Arvida earnings. 38. It is estimated that if Pennco increased its ownership of Arvida to 80%, the value of Pennco’s investment in Arvida would increase by about $50 million. It is estimated that acquisition of this, large block of Arvida stock would cost at least $20 million (net $30 million). 39. Finding 10(b) describes the general business operations of Buckeye. The KLR values Buckeye at $80 million based on a 13.8 multiple of 1971 pro forma after-tax earnings of $5.79 million. The rather low earnings multiple is a consequence of Buckeye’s low compound revenue growth rate during the last 10 years of 4.7% and a 5.7% compound revenue growth rate for 1966 through 1971. The average growth rate for earnings during the last 10-year period was 3%%. 40. The KLR evaluation resulted from a restatement of Buckeye’s financial results in the last decade as a separate taxpayer (i. e., not part of the Debt- or’s affiliated group filing a consolidated return) and contemplates similar tax status in the future. Assuming Buckeye’s income was offset by losses of the Debtor, the present value of the estimated tax savings through 1981 with a 7.5% discount rate is approximately $45 million. 41. Buckeye’s 10-year forecast projects average pretax income in the $13 to $15 million range. 42. Assuming Buckeye is a separate tax entity in the future and its earnings forecast levels are accurate, Buckeye will be able to finance $97 million of capital expenditures, pay $6 million per annum to Pennco in dividends, and retire $57 million in debt during the next 10 years. 43. Buckeye is a well-established high-quality pipeline company competing in a unique environment in the sense that its customers frequently own their own pipeline ventures. 44. Buckeye’s pricing and marketing policies have been relatively conservative. Pennco has recently replaced many top and middle management personnel in order to create a more aggressive and growth-oriented management philosophy. 45. Finding 10(d) describes the general business activities of Great Southwest Corporation (“GSC”). The KLR as supplemented, values GSC at $18.4 million. On that basis, Pennco’s 82% ownership of GSC’s preferred stock is worth $13.9 million. In addition, a $12.2 million debt obligation of GSC to Pennco is valued at its face amount. 46. GSC reported earnings of $28 million in 1968, $34 million in 1969, and a loss of $147 million in 1970. Pursuant to a consent decree entered into between Pennco, GSC, and the Securities Exchange Commission, certain transactions involving the syndication of Six Flags over Texas and Six Flags over Georgia which were originally treated as sales transactions and so reflected in the 1968 and 1969 earnings reports were recast as joint ventures with the entities previously treated as buyers. As a result, GSC’s earnings were reduced by $14 million and $20 million in 1968 and 1969, respectively. The 1970 results were restated to decrease GSC’s loss by $3.7 million. 47. The SEC mandated restatement resulted in a negative net worth of GSC of $20.8 million as of December 31, 1971. 48. Although Pennco has not formally restated its consolidated reports for the years 1968 through 1970, it is estimated that Pennco’s pre-tax earnings would be reduced by $25 to $30 million in 1968, up to $35 million in 1969, and Penneo’s 1970 loss would be reduced by $7 million. 49. Valuation of GSC on a going concern basis is difficult in light of the above earnings results, the recent elimination of substantial portions of the real estate holdings of GSC’s California subsidiary, GSCD.C-Western Region, and GSC’s reordering of its corporate objectives from real estate development to concentration on its amusement park and mobile home operations. In general, KLR’s appraisal method was to value the real estate holdings at market value and to value operating entities by an earnings multiple or going concern basis. 50. Up until mid-1972, GSC’s ability to meet its debt as it came due was in serious doubt. During 1971, GSC was able to reduce its $287 million debt to $186 million. In March of 1972, an agreement was reached with a GSC creditor group under which new repayment schedules were established for $132 million of debt. Shortly thereafter, a refinancing of $34 million in debt of the recreation group was arranged. 51. New management has been selected to run GSC. Additional management personnel experienced in GSC’s areas of activity are necessary. 52. GSC has extricated itself from the acute problems encountered in 1970 and 1971. Management forecast pre-tax earnings of $2.3 million in 1972 growing to approximately $15 million in 1977, with annual average earnings for the 1973-77 period of approximately $9 or $10 million. 53. A cash balance of $6.7 million is forecast for 1977. 54. During the 1972-77 period, GSC’s debt will be reduced from $186 million to $81.5 million. Failure to meet revenue or earnings forecasts during the 1972-77 period by a few percentage points could result in GSC’s being unable to meet its debt obligations during a given financial period. 55. GSC’s business activities are conducted in three principal areas: The recreation group consisting of Six Flags over Texas, Georgia, and Mid-America Japanese Village and Deer Park in Buena Park, California; and the Movieland Wax Museum; Richardson Homes Corporation, a manufacturer of mobile home units; and GSC Development of Texas and GSC Development of California. 56. The recreation group properties are high-quality ventures that have been soundly operated and properly maintained. Competition is increasing within the amusement park industry. Aggressive marketing, additional capital investment, and the maintaining of the public’s high opinion of the recreational group properties are necessary in order to maintain or increase the annual attendance levels at the respective properties. 57. The recreation group’s 1972 revenues of approximately $50 million put GSC second only to Walt Disney Enterprises in the amusement park industry. 58. In evaluating the recreation group properties the KLR treated the properties as if they were owned outright by GSC. Six Flags over Texas and Georgia are not owned outright by GSC. 59. A GSC forecast projects pre-tax profits for the recreational group as follows: 1972 — $9.9 million; 1973 — $10.8 million; 1974 — $16.8 million; 1975— $16.9 million; 1976 — $19.7 million; 1977 — $19.7 million. 60. Richardson Homes Corporation’s 1971 production of 9,000 units places it in the top 15 companies in the mobile home industry. Recent competitive pressures have necessitated the marketing of additional models of Richardson Homes Corporation’s product. Competition in the industry is intensifying. Recent trends indicate that large output companies are beginning to make it difficult for companies of Richardson’s size to continue to hold or increase their market shares. Substantial capital investment to support internal growth, or acquisition of another mobile home company, may be advisable in the near future. A GSC forecast projects pre-tax profits for Richardson Homes Corporation as follows: 1972 — $2.9 million; 1973 — $2.8 million; 1974 — $3.3 million; 1975 — $3.8 million; 1976 — $4.3 million; 1977 — $4.8 million. 1972 results appear to be below the forecasted level. 61. Market prices for mobile home companies have decreased dramatically within recent months. 62. Sale of Richardson to .a third party is complicated by its low book value of $6 million as compared with a $30 million appraised value on an earnings multiplier basis. The $24 million differential would probably have to be amortized as good will in future years. 63. GSC is a defendant in a number of pending lawsuits seeking recovery from it of substantial damages for alleged violations of the federal securities laws and other claims. The amounts claimed in these lawsuits against GSC exceed GSC’s total assets. The existence of these suits reduces significantly what an investor might be willing to pay for GSC. For a number of these lawsuits GSC has established a reserve of approximately $7 million on its books. GSC’s management has determined that for the remaining lawsuits it is unable to determine its likely exposure and has been unable to establish a suitable reserve. A $20 million reduction in GSC’s appraised value was made in the KLR to reflect the effect of the pending litigation. 64. Pennco owns 245,329 shares of the 245,333 outstanding shares of the Detroit, Toledo & Ironton Railroad Company, a railroad operating between Detroit, Michigan and Ironton, Ohio. The Ann Arbor Railroad Company, a wholly-owned subsidiary of DT&I (99.94% of the outstanding stock), operates a 293-mile railroad from Toledo, Ohio to Frankfurt, Michigan. DT&I Enterprises is a real estate subsidiary of DT&I owning 30 parcels of land along the railroad’s right-of-way suitable for industrial development. DTI Enterprises also owns 60% of the stock of two railroad equipment leasing companies originally formed to lease equipment to the Pennsylvania Railroad. 65. Based primarily upon an earnings multiple of approximately nine times 1971 actual earnings of $2,467,000, as adjusted to $1,937,000 to reflect DT&I’s filing of a corporate return without the benefit of Pennco’s tax losses, the KLR valued DT&I at $18.4 million, or $75 per share. 66. A $2,225,000 — 6% 90-day demand note of DT&I which is technically in default but upon which DT&I has made interest payments is valued by the KLR at a 7% yield basis to be worth $1,929,000. 67. The 1972 forecast for DT&I’s earnings is $2 million. 68. Although DTI Enterprises’ real estate holdings are carried at a book value of $3.9 million and management estimates a maximum market value of $5.5 million, these assets were not specifically reflected in KLR’s valuation of DT&I. Rather, the earnings multiple was derived from market prices of other railroad companies which also hold substantial real estate suitable for industrial development along their rights-of-way. Moreover, since DTI Enterprises did not declare a dividend in 1971, DTI Enterprises’ value as a going concern to DT&I is reflected in the KLR only by its choice of an earnings multiple. 69. The Montour Railroad Co. is a terminal and switching company operating 47 miles of road in the coal area surrounding Pittsburgh, Pennsylvania. Montour originates coal shipments and interchanges with the P&LE, B&O, and the Debtor. Its real estate subsidiary leases coal rights. Royalty revenues will be approximately $500,000 per annum beginning in 1976. The Youngstown & Southern Railway Company is a wholly-owned subsidiary of Montour operating 50 miles of connecting road in Ohio. KLR values Montour at $4.06 million, with Pennco’s 50% interest valued at $2.03' million. 70. The Toledo, Peoria & Western Railway Co. is 50%-owned by Pennco. It operates 240 miles of road outside Chicago and serves as a western connection for the Debtor. KLR applied an earnings multiple of eight to estimated annual earning power of $67,000 to arrive at a value of $5.36 million. Penn-co’s interest is therefore $2.68 million. 71. Cambria & Indiana Railway Co. is 40%-owned by Pennco’s wholly-owned subsidiary, Clearfield Bituminous Coal Corp. C&I operates 38 miles of road in the coal region north of Johnstown, Pennsylvania, originating coal and interchanging it with the Debtor. KLR values C&I at 10 times projected earnings of $800,000 per annum, or $8 million. Clearfield’s interest is valued at $3.2 million. 72. Clearfield also owns 30.5% of the common and 2.1% of the preferred stock of the Fort Wayne & Jackson Railway Company which leases its 97-mile single-track road to the Debtor. No rentals have been paid since June 21, 1970, and the Trustees have recommended disaffirmance. KLR ascribes no value to the Fort Wayne & Jackson common stock and a value of $1,000 to its preferred stock holdings. 73. 138 shares, or 0.5% of the outstanding common stock of Mahoning Coal Railroad Company is owned by Clearfield. Mahoning leases its line to the Debtor. No rental has been paid Mahoning since June 21, 1970, and the Trustees have recommended disaffirmance. Although the stock was carried at a book value of $89,950 by Clearfield, KLR values Clearfield’s interest at $23,-000. 74. The West Jersey Seashore Railroad Co. is a non-operating company that leases its 197 miles of track to the Pennsylvania & Reading Seashore Line for an annual rental of $702,000. The Debtor and the Reading Railroad own 66%% and 33%%, respectively, of the Pennsylvania & Reading Seashore Line, and have guaranteed the Pennsylvania & Reading Seashore Line’s rental obligation. The Pennsylvania & Reading Seashore Line is not profitable, but apparently indirect benefits to the Debtor and the Reading have resulted in the continuation of rental payments to the West Jersey. A multiple of eight was utilized in the KLR to arrive at a value of $5,-561,500 for the West Jersey. In addition, the present value of projected real estate sales was set at $341,000. A total value of $5,902,700 was ascribed to the West Jersey, and Pennco’s 28% interest was assigned a value of $1,660,000. 75. The Philadelphia, Baltimore & Washington Railroad Company’s property is leased to the Debtor and serves as the Debtor’s main line between Philadelphia and Washington. PB&W also owns various pieces of railroad throughout the Debtor’s system that are also leased to the Debtor. Pennco’s 34% interest in the PB&W is valued in the KLR at $12,-477,000. The so-called “15,000-mile core” would include almost all of PB&W’s property. No rentals have been paid PB&W since June 21, 1970. Extrapolating the KLR value to a per-mile basis results in a $57,000 per-mile value ascribed to PB&W’s road. 76. Connecting Railroad Company consists of relatively short sections of road around Philadelphia and Detroit, and between Cincinnati and Dayton, Ohio. In addition, Connecting owns the Little Miami Railroad Co. which operates between Cincinnati and Columbia, Ohio, and the Pittsburgh, Youngstown & Ashtabula Railroad which extends from New Brighton, Pennsylvania to Ashtabula, Ohio. These lines are leased to the Debtor, and substantial portions of the total trackage are included in the projected “11,000 and 15,-000-mile cores.” Pennco’s ownership of 73.81% of the Connecting common was valued at $4,669,000 by the KLR report. On a per-mile basis the KLR report would result in a derivative value of $77,000 per mile. Discussion The Pennco Settlement Agreement The settling banks have claims against the Debtor’s estate in the total face amount of $287 million (plus pre-bankruptcy interest in the amount of $4.5 million), secured by a pledge of 95%% of the common stock of Pennco. (The validity of this pledge is challenged in related proceedings, referred to herein as “the Robinson Petition.” For purposes of the present discussion, the validity of the pledge will be assumed.) The Trustees are apprehensive that the banks’ claim may be entitled to post-petition interest; simple interest at 6% from the date of bankruptcy to June 21, 1973, would total approximately $55 million. The banks may further contend that, if the settlement agreement is not approved, they have the right to foreclose their pledge on the Pennco stock. And finally, if the settlement agreement is not approved, and if Pennco should decline in value from its worth on June 21, 1970, it is possible that the banks will assert an administration claim against the Trustees for the decrease. To summarize, if all of the banks’ possible contentions set forth above are valid, failure to approve the settlement agreement would leave the Trustees faced with accumulating interest claims which already total nearly $55 million, the possibility that they will be held accountable for any decline in the value of Pennco, and the threat of foreclosure of the pledge, and possible further deficiency claims arising thereafter. The Trustees seek to avoid litigation of these issues, by carrying out the proposed settlement. According to the Kuhn, Loeb report, the stock pledged to the settling banks is worth only $213.5 million. By transferring this stock to the banks pursuant to the settlement agreement, the Trustees would obtain the following benefits for the Debtor’s estate: cancellation of the entire $287 million debt ($291.5 million including pre-bankruptcy interest); release of all claims for post-petition interest; avoidance of all risk of decrease in the value of Pennco; retention of operating control over the rail assets of Pennco plus an oportunity to acquire ownership of these rail assets on favorable terms; reasonable assurance that the banks will cause Pennco to be managed and operated in a way calculated to increase its value; reasonable assurance that, if the value of Pennco exceeds $287 million at the expiration of 10 years from the settlement date, the Debtor’s estate will receive one-half of the increase; a three-year commitment by the banks to provide equipment financing up to- $150 million (not more than $125 million outstanding at any one time), including $80 million available for financing rebuilt equipment. Certain features of the proposed settlement agreement require some elaboration: 1. The Pennco rail assets. These are divided into equity interests (Finding No. 10(1) to (r)) and debt interests (Finding No. 10(s)) in rail enterprises owned by Pennco. The settlement agreement is designed to insure that the banks get the economic benefit of these assets as part of the consideration for releasing their claims, but that the Trustees retain operating control, and have the right to get these assets back (without additional cost if the other assets of Pennco become worth $287 million within 10 years, and in any event for $50 million, payable in cash or in reorganization securities at face value). Bifurcation of operating control from economic benefit would be achieved through creation of a new enterprise, “Pennrail,” to which nine blocks of equity securities representing ownership of various rail assets would be transferred by Pennco, in exchange for nine series of preferred income stock. The Trustees would exercise voting control of Penn-rail to the extent necessary to control rail operations. 2. Special Assets. These are debt obligations which the Debtor or its affiliated companies owe to Pennco or its affiliated companies. They include $5.3 million in mortgage obligations of leased lines, $12.9 million in mortgage obligations of the Debtor or guaranteed by the Debtor, $54.1 million of unsecured obligations of the Debtor, and $33.1 million unsecured obligations of PB&W. The total face amount of these obligations is $106,507,999. As noted elsewhere in this Opinion, they are valued in the Kuhn, Loeb report at approximately $10.3 million. As to all of these special assets, the Trustees have the right of first refusal in the event of a sale by the banks. Apparently, payment in cash would be required. If any of these debt obligations is sold at a loss, reducing Pennco’s tax liability, the reduction is to be credited toward reacquisition of the rail assets. In addition to the first refusal rights just mentioned, in the case of the $33 million unsecured obligation of PB&W, the Trustees have the option at any time to purchase this obligation, at its then value, by payment either in cash or in senior debt reorganization securities at face value. 3. The “Lock-Up” and “Equity Split” Provisions. The banks would be precluded from receiving any dividends or other distributions from Pennco for five years. The banks would also be precluded from selling any of their Pennco stock during that period. Thereafter, until the expiration of 10 years, the banks would be free to dispose of all or part of their stock, and to receive dividends and other distributions from Pennco. At the expiration of 10 years, the banks’ remaining holdings in Pennco (if any) would be valued. If the total of all dividends and distributions received by the banks plus the then value of their holdings in Penn-co should exceed $287 million, one-half of the excess would be paid to the Debt- or’» estate, whereupon all rights of the Debtor’s estate would terminate. The agreement does not confer upon the Trustees any right to challenge any actions which the banks might take in dealing with their Pennco holdings or with Pennco’s assets. The agreement proceeds on the theory that Pennco should be completely divorced from the reorganization proceeding in order to facilitate development of its full potential; and that the banks should be free to exercise their own best judgment in the matter. By precluding the banks from liquidating their investment for at least five years, the parties apparently contemplate that, in their own self-interest, the banks would be encouraged to work toward the enhancement of Pennco values. While the banks would be free to sell their Pennco stock at any time after the expiration of five years, it seems probable that Penneo’s growth potential during the second five years would be reflected in the sale price. Hence, it is probable that, if Pennco flourishes so that its value at the end of 10 years would be greatly in excess of $287 million, the Debtor’s estate would reap some of the benefits, either because the banks, in their own self-interest, retained their investment for 10 years, or because the potential for growth during that relatively short five-year period would be reflected favorably in the price for which the Pennco stock would be sold during the second five years. On the other hand, however, if Penneo’s potential for growth is not manifested during the first five years, the banks could liquidate their investment and the Trustees would receive nothing. There is no particular unfairness in this feature, since such an eventuality would presumably demonstrate that the Pennco stock surrendered by the Trustees was actually worth less than the banks’ claims against it. The fact that the banks would own the enterprise outright after 10 years would seem to provide some incentive for retention beyond that period, unless there are significant negative developments in the interim. Obviously, it is not possible to predict what course the banks would choose to pursue. Changes in federal or state regulations might affect such decisions. 4. Equipment Financing. It is difficult to assess the full significance of this feature of the agreement. In the absence of government guarantees, the Trustees have had difficulty in financing equipment acquisitions, except under lease arrangements which are quite costly. It has been virtually impossible to finance the rebuilding of existing equipment, a process which can produce significant economies. Under the terms of the proposed settlement agreement, the banks would be required, during the next three years, to make substantial equipment financing available, at an interest rate of 2%, to 3 percent above the base rate charged by the agent bank to substantial and responsible borrowers. This composite rate would be variable, since the actual interest charge per quarter would be determined by the base rate applicable in that quarter. However, the commitment does not run in favor of the Trustees, but in favor of third party borrowers. Presumably, the lease between the Trustees and the financing entity would reflect a somewhat higher rate, to cover the intermediary’s costs. Initially, it was the position of the Trustees that this equipment financing, while desirable to have on a stand-by basis, might not be utilized, and was therefore not a particularly important feature of the settlement agreement. In the later hearings, this position changed, and it is now the view of the Trustees that it would be extremely desirable to have the benefit of the proposed equipment financing. Apparently, this is particularly true with respect to the $70 million available for rebuilding of existing equipment. I have no doubt that this feature of the agreement would confer a significant benefit to the Debtor’s estate. The importance of this benefit would seem to depend in large measure upon whether or not the required legislative and regulatory actions will be taken, so as to make possible the survival of the Debt- or’s railroad. See Order No. 1137. There is every reason to suppose that the government and the ICC are fully aware of the present obstacles to successful reorganization. Both oppose the settlement agreement. As noted above, apart from the question of equipment financing and the equity split provisions, a principal advantage to the Debtor’s estate, at least in theory, would be the relinquishment by the banks of all claims for post-petition interest. It would seem that the importance of this claim will vary depending upon whether or not the pledged stock generates income, and whether or not the value of the stock exceeds the amount of the banks’ claims. The general rule in Chapter X and § 77 reorganizations seems to be that post-petition interest is not allowed. Sexton v. Dreyfus, 219 U.S. 339, 31 S.Ct. 256, 55 L.Ed. 244 (1911); New York v. Saber, 336 U.S. 328, 69 S.Ct. 554, 93 L.Ed. 710 (1949). However, exceptions to this rule are recognized (1) when the instruments creating the security interests provide that the security applies to income as well as the asset in question, and the asset does generate income; and (2) when the value of the security exceeds the principal amount of the claim. Ticonic National Bank v. Sprague, 303 U.S. 406, 58 S.Ct. 612, 82 L.Ed. 926 (1938). However, these exceptions are not rigid doctrinal categories. A reorganization court must consider the issue of post-petition interest not in the abstract, but in light of the nature of each claim, and in application of basic principles of fairness and equity. Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 67 S.Ct. 237, 91 L.Ed. 162 (1946). Claims for post-petition interest must be viewed in the context of the treatment accorded various parties secured by the same assets or assets; parties secured by different assets; and the treatment of secured parties in comparison with all other claimants and equity interests. The absolute priority rule of Northern Pacific Railroad Co. v. Boyd, 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931 (1913) and its progeny bears on this problem. To date, no one has attempted to create a procedural context in which the question of post-petition interest on the banks’ claims can be squarely decided. About all that can be said at this point is that the banks’ claim to post-petition interest is not clearly frivolous. The same observation applies to the contention that the banks might be entitled to assert administration claims in the event of a decrease in the value of Pennco, or at least would be entitled to be regarded as secured creditors to the extent of such decrease. See In re New York, New Haven & Hartford Railroad Co., 147 F.2d 40 (2d Cir. 1945). The principal benefits to be derived by the banks from the consummation of the settlement agreement would seem to be these: (1) Elimination of involvement in and uncertainty concerning the future course of this reorganization; (2) assurance that, at least for the most part, their claims will not be paid off in reorganization securities (i. e., their investment will no longer be dependent to any substantial extent upon the future fortunes of the railroad business); (3) control and effective ownership of a highly volatile conglomerate with seemingly excellent potential for growth; and (4) an opportunity to foster the enhancement of the value of their investment, through prudent management, insulated from any stigma of bankrupty. Valwation When the petition was filed, the Trustees also filed, and made available to the parties, a formal appraisal report prepared by Kuhn, Loeb & Company, in which the Pennco common stock was valued at $223,125,000 (Finding No. 19) (this report will hereinafter be referred to as KLR). There is, of course, no established market price for the Pennco stock, all of which is owned by the Debtor. It was therefore necessary to apply various appraisal techniques in order to determine the price which a willing buyer would probably pay for the stock. Kuhn, Loeb determined that the highest value would be achieved by selling the constituent parts of Pennco to buyers in the same or related fields as the company in question, rather than by attempting simply to apply an earnings multiple to Pennco’s average earnings in recent years. The latter approach was rejected because of the erratic earnings history of Pennco in recent years, and because it was felt that hypothesizing a sale of all of the Pennco stock to one buyer or syndicate would not produce as high a price as the aggregate of the prices of constitutent companies. All parties appear to be in accord with the basic methodology adopted by Kuhn, Loeb. Understandably, no other complete appraisal has been submitted by any of the parties. However, all of the supporting data were made available to the parties in the discovery process, and various parties do take issue with the judgments expressed in the KLR. These differences of opinion result in substantially different views as to the actual value of the Pennco stock. The principal disagreement with the KLR is expressed in the Nydorf report, introduced by the New Haven trustee and relied upon by the government and the special representatives. Instead of attempting to determine the value of the Pennco stock in terms of the price that a third party buyer would be willing to pay for it, Mr. Nydorf attempted to determine the value of the Pennco stock to the Debtor’s estate, if it were retained by the Trustees. The chief distinction between the two approaches stems from their differing treatment of tax shelters. Since KLR assumes sales to third parties who would not be able to take advantage of the Debtor’s operating loss carry-forwards, historic and projected earnings of the various companies were restated to reflect independent taxpayer status. Thus, the KLR capitalizes pro forma after-tax earnings of the constituent companies. Nydorf, on the other hand, assumes retention of the Pennco stock by the Debtor’s estate, and thus the continued availability of accumulated operating losses to shelter the income of the Pennco constituent companies. Generally speaking, this means that Nydorf capitalizes earnings at a level approximately 45 to 50 percent greater than that assumed by KLR. The Nydorf report takes a given tax liability shown on the restated earnings computation, treats the liability as cash available to the company, projects the tax liability for a period in the future, and then reduces the total tax saving to present worth by application of a discount favor. The present worth value of the future tax savings is then added to the appraised value ascribed to the company in the KLR. Another difference between the two approaches is that KLR recomputed depredation allowances in some instances to reflect a higher depreciation, on the assumption that that is what a third party purchaser would do. Nydorf, on the other hand, assumed that existing depreciation policies would continue to be followed. The effect of Nydorf’s “retained value” hypothesis is to increase the appraised value of Pennco by $163.5 to $177.7 million. Of this amount, $141 to $155.2 million is attributable to the present worth of tax shelters; $15 million arises from a downward adjustment in the depreciation allowances recomputed by KLR for Six Flags over Mid-America (reduced to present worth); and about $7.2 million results from certain additional value ascribed to DT & I Railway Company. The tax shelter figure is broken down as follows: Arvida, $30 million; Buckeye, $45 million; DT & I, $3.188 million; and Great Southwest, $62.8 to $77 million. The Nydorf figures for Arvida are subject to a further qualification. Penn-co does not own or control 80% of that subsidiary; hence, tax shelters generated by railroad losses are not available. The Nydorf report is based on the assumption that enough additional Arvida stock would be acquired to reach the 80% level. This would cost approximately $20 million, assumed to be available either in cash or through borrowings. The Trustees contend that the disadvantages of committing cash or credit to the acquisition of additional Arvida stock outweigh the theoretical tax shelter advantages. In addition to the tax shelter adjustment made in the case of the DT & I Railway Company, the Nydorf report adds a further figure of $7.2 million to reflect additional values of its real estate subsidiary, DTI Enterprises. In valuing DT & I, the KLR applied an earnings multiple to DT & I’s 1971 earnings. The multiple was derived from comparison with other similar railroads with substantial real estate holdings. Thus, the Trustees argue that the KLR fully recognizes the valuable real estate holdings of DT & I, and that Mr. Nydorf’s approach represents double valuation. Stated otherwise, the contention is that, using the Nydorf approach, the earnings multiple would have to be adjusted downward. The Nydorf supporters counter this argument by pointing out that in the year 1971, selected by the KLR as the basis for its valuation, the earnings flowing upstream from the real estate subsidiary to the DT & I Railway ($27,000) were unusually low. The contrast between the KLR approach and the approach adopted in the Nydorf report points up a fundamental issue, namely, whether we are concerned with what Pennco is worth on the open market, or with what Pennco is worth to the Debtor’s estate. In a straight bankruptcy, the relevant consideration presumably would be the price which Pennco could be sold for; that is, whether there is any “equity” over and above the banks’ claims, and whether the Trustees should “disclaim”. In a railroad reorganization context, however, the potential value of Pennco to the reorganized company must also be considered. In short, both the KLR figures and the Nydorf figures are relevant for present purposes. However, the Nydorf figures cannot be accepted literally. It cannot be assumed that the savings available to the Pennco subsidiaries by reason of tax shelters would necessarily flow to Penn-co, nor can it be assumed that whatever benefits do flow upstream to Pennco would be distributed dollar-for-dollar to the Debtor. Thus, while it seems clear that, by reason of the tax shelter feature, Pennco should be worth more to the Debtor than to a third party purchaser, the Nydorf attempt to quantify this difference cannot be regarded as entirely successful. There was other evidence on the valuation questions. Mr. Robert S. Rubin of Lehman Brothers, the outside financial advisor to Pennco, testified on behalf of the Trustees that in his opinion, the maximum value could be attained by sale of Pennco’s assets. He valued the non-rail assets of Pennco at $184.5 million, and accepted a figure of $50 million for Pennco’s rail assets. Thus, his total price of $234.5 million was $12.375 million, or .6%, higher than the KLR figure. Opponents of the proposed settlement point out that Mr. Rubin assigned higher values to certain of Pennco’s assets than did the KLR, and lower values to other assets. If the Rubin figures and the KLR figures were combined, and the higher value used in each case, the total value of Pennco would be $257.125 million. Obviously, the validity of this approach is highly questionable. Moreover, Mr. Rubin did not engage in exhaustive examination of the underlying financial data and other material used by Kuhn, Loeb; his figures must be regarded as more or less in the “ball park” category. A report prepared by McKinsey & Company must also be mentioned. In the latter part of 1970, when the Trustees secured outside directors for Pennco, the new members of the Board retained McKinsey & Company to make a quick study and report of the holdings of Pennco and possible methods of divestiture. After studying Pennco for only 3% weeks, McKinsey & Company reported in general terms that if Pennco’s assets were disposed of within a period of six months, Pennco would receive anywhere from $28 million to $170 million after its debts were paid; and that if a “managed divestment program” were undertaken over a course of two or three years, the return would be somewhere between $169 million and $320 million after Pennco’s debts were paid. The report did not purport to include accurate valuations of the assets; values were stated as “order of magnitude” figures. In view of the wide ranges in these figures, the McKinsey report is not particularly helpful in the present controversy. It is to be noted that the McKinsey figures are not inconsistent with any of the estimates presented by the parties in this proceeding. Further complications arise in connection with determining the amount of Pennco’s indebtedness to be deducted from the asset values in arriving at the value of the Pennco stock, and in connection with the proper values to be assigned to certain “special assets” of Pennco, consisting of claims against the Debtor’s estate or the Debtor’s subsidiaries. In the KLR, the McKinsey report, and the analysis of Mr. Rubin, the debt obligations of Pennco and its subsidiaries have been taken approximately at face value, as were the liquidation preference rights of the Pennco preferred stock. In light of the distant maturities of some of the Pennco debt, and the low interest rates in some instances, the Pennco debt obl