T-2285-71
In re Penn Central Transportation Company
(Debtor)
and
Robert W. Blanchette, Richard C. Bond and John
H. McArthur, Trustees of the Property of Penn
Central Transportation Company
and
In re Canada Southern Railway Company
(Creditor)
and
In re The Penn Central Corporation (Applicant)
Trial Division, Addy J.—Toronto, June 24 and 25;
Ottawa, December 12, 1980.
Railways — Contract — Application for order vacating
previous order of this Court — Applicant seeking to secure
payment to itself of funds in escrow in Canadian bank —
Counter-application by Canada Southern requiring the Court
to substitute applicant for trustees of Penn Central — Previ
ous order granting appointment of receiver pending liquidation
of Canada Southern's claims by Ontario Court — Reorgani
zation Court (U.S.) authorizing escrow of funds in Canada —
Whether any possible execution of Ontario Court's judgment
against applicant can be transferred to the Reorganization
Court.
The applicant seeks an order discharging the trustees of Penn
Central Transportation Company (PCTC), terminating the
scheme of arrangement and vacating a previous order of this
Court so as to permit it to secure payment to itself of funds
held in escrow in a Canadian bank. Canada Southern Railway
(CSR), a Canadian creditor, opposes the application and asks
the Court to substitute the applicant for the trustees. The order
rendered granted CSR's application requiring the appointment
of a receiver and the retention by him of the proceeds of the
sale by PCTC of its shares in the Toronto, Hamilton and
Buffalo Railway Co. (TH&B) pending liquidation of CSR's
claims by an Ontario Court. Pursuant to the order, the trustees
were granted authority from the Reorganization Court (U.S.)
to escrow the funds in Canada. In substance, applicant is
requesting that any possible execution of the Ontario Court's
judgment against it be transferred to the Reorganization Court.
Held, the application and the counter-application are dis
missed. The reorganization of the railroad by the U.S. Court
does not have an extraterritorial effect which would prevent
execution against property in Canada on behalf of Canadian
creditors nor indeed by its terms does it purport to have any
such effect. Clearly, the order rendered is to ensure that the
funds be kept in Canada pending disposition of proceedings
such as those instituted by CSR. There is no basis upon which
the applicant, as successor to the rights and obligations of the
trustees, can now ask to be relieved of the undertaking with
respect to the escrowed funds. To grant the relief would in
effect be to overturn that order: this the Court has no jurisdic
tion to do. As to the counter-application, it is denied on the
ground that the applicant refuses to accept the trust. This
Court, if it had power to do so, would never attempt to impose
a future trust on an unwilling trustee a fortiori one residing in a
foreign jurisdiction.
APPLICATION.
COUNSEL:
Duncan Finlayson, Q.C. and Gerald C. Holl-
yer, Q.C. for applicant.
J. E. Sexton, Q.C. and J. Steiner for creditor.
SOLICITORS:
Kingsmill, Jennings, Toronto, for applicant.
Osler, Hoskin & Harcourt, Toronto, for
creditor.
The following are the reasons for order ren
dered in English by
ADDY J.: The applicant, The Penn Central Cor
poration, as successor to Penn Central Transporta
tion Company, debtor, seeks an order of this
Court:
1. discharging or confirming the discharge of
Messrs. Blanchette, Bond and McArthur as
trustees of the property of Penn Central Trans
portation Company, debtor, in Canada, pursu
ant to my order herein approving and confirm
ing the scheme of arrangement, dated
September 27, 1974; and
2. terminating the scheme of arrangement con
firmed by the said order; and
3. vacating or, alternatively, amending the order
of my brother Cattanach J., dated April 14,
1977, so as to permit the applicant as successor
to the said debtor and its trustees to secure
payment to itself of the funds described in the
said order of Mr. Justice Cattanach to permit
the applicant to withdraw the said funds from
the escrowed account in the bank where they are
now deposited; and, permitting the bank, where
the said moneys are now on deposit, to release
the said funds now in escrow to the applicant
herein.
Canada Southern Railway Company opposes
the application and at the same time applies for an
order substituting The Penn Central Corporation
for the three above-mentioned trustees of Penn
Central Transportation Company.
The facts forming the background and the basis
for the main application, although largely undis
puted, are by no means simple. An attempt will be
made to summarize the salient ones.
The following abbreviations will be used to
describe certain companies and entities:
Canada Southern Railway Company CSR
(opposing the main application and the appli
cant in the counter-application.)
Penn Central Transportation Company PCTC
The Penn Central Corporation Penn Central
(the successor corporation to PCTC and the
applicant in the main application.)
Robert W. Blanchette, Trustees
Richard C. Bond and of PCTC
John H. McArthur,
trustees of the property of Penn Central
Transportation Company
Consolidated Rail Corporation Conrail
(a new railway corporation of the U.S. Gov
ernment to whom PCTC and several U.S.
bankrupt railway companies were obliged by
U.S. Congress to convey their railroad
assets.)
Michigan Central Railroad Company MCR
(Lessee under 999-year lease of CSR rail
properties and lessor of these properties under
sublease of 99 years to New York Central
Railway.)
New York Central Railway NYC
(Lessee under 99-year sublease from MCR of
CSR rail properties.)
Toronto, Hamilton and Buffalo Railway TH&B
Company
Canadian Pacific Ltd. CP
(Purchaser of shares of TH&B from PCTC
Trustees and MCR.)
CSR was incorporated in or about 1868 and, by
special Act of the Parliament of Canada in 1874,
was continued as a federal undertaking. It owned,
and operated for a short time, a piece of track
running from Windsor to the City of Welland with
branch lines running from Welland to Niagara
Falls and Fort Erie. In 1903, CSR leased its rail
properties to MCR for a term of 999 years, which
lease was approved by statute of the Parliament of
Canada. MCR in turn sublet its leasehold interest
in the CSR rail properties to NYC for a term of
99 years in 1930. In 1968, NYC and the Pennsyl-
vania Railroad merged and continued operations
together as Penn Central Transportation Company
(PCTC). Prior to April 1, 1976, CSR had been
controlled through stock ownership by MCR,
PCTC and its predecessors and then the trustees.
MCR was itself controlled by PCTC and its
predecessors.
On June 21, 1970, PCTC filed a petition in the
District Court of the United States of America for
the Eastern District of Pennsylvania (hereinafter
called the "Reorganization Court") for an order
authorizing its reorganization as a railroad under
the provisions of section 77 of the Bankruptcy Act
of the United States of America. The order grant
ing the petition was made the same day and later
on July 22, 1970, certain trustees were appointed
as trustees of the property of PCTC for the pur
pose of carrying out such reorganization. The trus
tees, named in the style of cause in this applica
tion, Messrs. Blanchette, Bond and McArthur,
were the trustees in office at the time the scheme
of arrangement herein was promulgated and
remained so until their apparent discharge from
office on October 24, 1978 by the Reorganization
Court. In May 1973, MCR, an almost wholly-
owned subsidiary of PCTC, filed a petition for
reorganization under the United States Bankrupt
cy Act and Douglas Campbell was appointed by
the Reorganization Court as trustee of its prop
erty. No scheme of arrangement in Canada was
filed on behalf of MCR with the Federal Court of
Canada.
The trustees of PCTC instituted proceedings in
Canada under sections 95 to 99 of the Railway
Act' and sections 26 to 28 of the Exchequer Court
Act 2 complementary to the proceedings before the
Reorganization Court in the United States so that
the railway business of PCTC in Canada would
continue and provision be made for disposition of
certain creditors' claims. Among those creditors
described as likely to assert claims under the
scheme of arrangement are the lessors under leases
of Canadian railway property. PCTC had
incurred, prior to June 22, 1970, obligations to
certain Canadian creditors as a result of that
Company's Canadian railway operations and cer
tain other obligations contracted and payable by
the Company, in Canada, consisting among other
things of obligations under leases of Canadian
railway property.
The evidence establishes that rent was paid to
CSR under the lease throughout the period of
reorganization under the Bankruptcy Act in the
United States. Payments due from the trustees of
PCTC to CSR pursuant to covenants in the lease
were never in arrears and were always paid.
Pursuant to the scheme of arrangement
approved by my order of September 27, 1974, a
report was filed with this Court, dated May 27,
1975. All claims presented and entitled to be paid
under the scheme of arrangement have apparently
been satisfied in full. A number of lawsuits, which
had been instituted against PCTC in Montreal and
which were defended, were eventually compro
mised and settled by reason of the scheme of
arrangement.
On April 1, 1976, the trustees of PCTC ceased
to operate a railway both in Canada and the
United States. Pursuant to the Regional Rail
Reorganization Act, an Act of the United States
Congress, virtually all of their rail and rail related
assets were conveyed to Conrail, including, inter
alia, the trustees' leasehold interest in CSR and
their shares in CSR.
The trustees of PCTC, the trustee of MCR
together with CSR owned, at one time, a substan
tial majority of the shares of the TH&B which
were not included in the conveyance to Conrail. In
May 1976, PCTC and MCR trustees agreed to sell
' R.S.C. 1970, c. R-2.
2 R.S.C. 1970, c. E-11.
their TH&B shares to CP. CSR agreed separately
for the sale of its shares to CP. Both agreements
had a closing date on or before November 1, 1976.
Prior to closing CSR made application to the
Federal Court of Canada for the appointment of a
receiver and an injunction and other relief in con
nection with the proceeds of the sale of the TH&B
stock by PCTC and MCR trustees. A series of
orders of this Court including an order of my
brother Walsh J. of November 17, 1976 and an
order of my brother Cattanach J. of April 14, 1977
resulted in the amount of $2,776,184 from the
proceeds being deposited in escrow with the Bank
of Montreal.
CSR asserted substantial claims against MCR,
PCTC, their respective trustees and Penn Central.
These claims pertain to the manner in which MCR
and PCTC dealt with the rail properties of CSR
and other related matters. The claims were first
formally asserted in 1976 in a demand for arbitra
tion and, subsequently, in an action in the
Supreme Court of Ontario commenced by CSR
against MCR and Penn Central on June 1, 1979.
In the interim there have been a large number of
related proceedings.
Meanwhile, a new plan of reorganization in the
Reorganization Court in the United States for the
bankrupt PCTC was proposed and finally
approved by a consummation order and final
decree of the Reorganization Court bearing date
August 17, 1978 (hereinafter called the "consum-
mation order").
The plan of reorganization contemplated that
the creditors, other claimants and stockholders of
PCTC and certain leased lines would compromise
their claims in light of the uncertainties of the
future in order to obtain recoveries promptly and
in order to avoid the expense and delays of pro
longed and complex litigation. The debtor com
pany, PCTC, would continue as a reorganized
company called The Penn Central Corporation
("Penn Central") under the plan, and provisions
were made for payment and settlement of claims
of different classes. An order from the Reorgani-
zation Court was subsequently obtained which
stated that Messrs. Blanchette, Bond and McAr-
thur were discharged as trustees. The management
of the reorganized company Penn Central was
given to new officers and directors of that
Company.
The former trustees of PCTC were authorized
and directed to execute and deliver to PCTC deeds
transferring all of the assets and property of the
trustees of PCTC of every kind and nature,
according to the consummation order; pursuant to
these transfers such assets and properties became
the absolute property of Penn Central on the con
summation date which was October 24, 1978.
Effective the same date, all funds held by the
former PCTC trustees in that capacity pursuant to
the orders of the Reorganization Court by an
escrow agent or fiduciary, were to vest absolutely
and without restriction in Penn Central and be
paid thereafter by such escrow agent or fiduciary
to or upon the order of Penn Central, such pay
ments to be a good and sufficient discharge to any
such escrow agent or fiduciary.
Section 3.10 of the said consummation order
reads as follows:
As of the Consummation Date, the PCTC Trustees ... shall be
discharged and relieved of any further duties and responsibili
ties in respect of the administration of the property or the
conduct of the business and affairs transferred to the reorgan
ized company ... on the Consummation Date. Thereupon the
Trustees shall no longer have any power and authority or duties
and responsibilities to take any action on behalf of or in respect
to the reorganized company ....
The scheme of reorganization and my order of
September 27, 1974, both contain the following
provision:
8. The parties hereto acknowledge and declare that these
presents are and shall be entered into or given solely and
exclusively for the continued operation of its railway business in
Canada by the Trustees of its Property, and for no other
purpose whatsoever. These presents and the Scheme of
Arrangement shall continue in force until one of the following
events shall have occurred; (a) the proceedings before the
Reorganization Court to reorganize the Company shall have
been discharged, or (b) the Trustees and their successors in
office shall have been discharged from office; or (c) the Federal
Court of Canada shall have ordered that this Scheme not be
confirmed, be disallowed, be replaced or be declared in default;
provided that non-confirmation or disallowance of this Scheme
of Arrangement shall not operate to divest the Trustees of the
property of the Company in Canada.
It appears that the Reorganization Court has
acted in accordance with the view that CSR's
claims are to be determined in Canada and satis
fied here out of the Canadian assets of Penn
Central. In August 1978, it approved CSR's
request that the consummation order be amended
to provide that the injunction provision of that
order not be applicable to proceedings in Canada
pertaining to the claims of CSR against Penn
Central and MCR.
The order of my brother Walsh J., dated
November 17, 1976, to which I have referred
previously, required the appointment of a receiver
and the retention by him of the TH&B proceeds
until any one of the three following events should
occur:
(a) the entry of an order in the Reorganization
Court permitting the trustees of Penn Central to
escrow the TH&B proceeds in Canada and an
undertaking by them to that effect;
(b) the provision by the trustees of security in
the amount of the TH&B proceeds "to cover
claims in Canada against the said funds in the
event that they should decide to remove the said
funds from Canada"; or
(c) the establishment of the claims of CSR or
any other Canadian creditor against the TH&B
proceeds, whether by arbitration, judgment of a
court of competent jurisdiction, or settlement,
and payment of the claim or claims so estab
lished out of the TH&B proceeds.
It seems clear from the above as well as from
the reasons for judgment of Walsh J. [[1977] 2
F.C. 624] that the purpose of the order was to
preserve assets in Canada in the amount of the
TH&B proceeds pending liquidation of the claims
of CSR and other Canadian creditors and satisfac
tion of same out of such assets. Alternatives (b)
and (c) have not occurred.
The trustees sought authority from the Reor
ganization Court to escrow the TH&B proceeds in
Canada in compliance with the above-mentioned
alternative (a) and also authority to enter into "a
Canadian disposition of the Canada Southern
Claims." This was granted by that Court in March
1977.
The order of my brother Cattanach J. was obvi
ously given to implement the order of my brother
Walsh J. He also ordered both parties to proceed
with due diligence to adjudicate CSR's claims.
There is no evidence that this has not been done. If
the escrow were removed and the monies returned
to the U.S.A., the very purpose of the escrow
would be defeated. There is no basis upon which
Penn Central, as successor to the rights and obli
gations of the trustees, or otherwise, can now ask
to be relieved of the undertaking with respect to
the escrowed funds. To grant the relief as request
ed would in effect be to overturn that order and I
certainly have no jurisdiction to do so.
The applicant also contends that the CSR
claims arising out of the lease would not fall under
the scheme of arrangement. This is now a settled
matter between the parties as my brother Walsh J.
found that they did, as evidenced in his reasons for
the order. He felt that it was necessary for him to
so find in order to grant the application. His order
was rendered three years ago and no appeal has
been launched against this finding. I certainly
would have no jurisdiction to reverse this finding
even if I felt inclined to do so.
The applicant argues that this Court has no
jurisdiction to continue the escrow since Penn Cen
tral is now solvent and the creditors in the United
States are now being paid in full. I do not accept
this contention since the United States creditors
are not receiving cash in satisfaction of their
claims but are obliged by the Reorganization
Court to accept securities in lieu of payment in
specie. A debtor, unable to satisfy his creditors in
cash is not solvent. If Penn Central were solvent, it
would matter little whether the claims were satis
fied in cash in Canada or in the United States and
the applicant would not be so anxious to remove
the funds from Canada. The applicant contends,
strangely enough, that it would be unfair for CSR
to be paid through Canadian assets rather than
going to the United States. There could be no
unfairness to American creditors if CSR were to
be paid in cash in either event. A request that CSR
be obliged to "share" with other creditors in the
U.S. Court is in itself an admission of insolvency.
Again, on this question of solvency, one Roger
Frish, on behalf of CSR, swore an affidavit that,
according to a memorandum of the trustees of the
16th of March 1978, the settlement of CSR's
claims would fall under class "M" claims and, as
such, could be satisfied by the "issuance of certifi
cates of beneficial interest in a principal amount
equal to 30% of the claims ...." He also, at pages
26 and 27 of his affidavit, deposes as to other
facts, including the market value of stock issued in
satisfaction of class "M" claims, which would
establish that CSR would probably never be paid
in full even if it did accept the stocks and securities
which it would apparently be obliged to accept in
satisfaction of its claims. Mr. Frish was never
cross-examined on these assertions which bear
directly and conclusively on the solvency of the
applicant.
Counsel for the applicant argues on the one
hand that the proceedings before the Reorganiza
tion Court have been discharged and at the same
time argues that CSR may subsequently present
any judgment which it may recover in Canada, to
the Reorganization Court in the U.S.A. for pay
ment or satisfaction as that Court may order. The
two arguments appear to be contradictory and
mutually exclusive.
The applicant also requires release of the escrow
on the basis of the following terms in paragraph 8
of my order of September 27, 1974, namely:
... these presents are and shall be entered into or given solely
and exclusively for the continued operation of its railway
business in Canada by the Trustees of its Property, and for no
other purpose whatsoever.
The purpose of the order in so far as the parties
are concerned was "solely and exclusively for the
continued operation of the Railway" but in so far
as the creditors are concerned the purpose was
obviously to protect them and provide an amount
sufficient to satisfy their claims.
According to CSR's statement of claim in the
Ontario action, many of its claims arose prior to
the 22nd of June 1970, and my order specifically
provided that the trustees were obliged to "pay in
full the valid claims of the Company's creditors in
Canada arising prior to the 22nd of June, 1970
from the operation of the Company's railway busi
ness in Canada ...." The order also provided that
sufficient additional time be allowed to permit any
unliquidated claims to be liquidated. This is pre
cisely the intended result of the Ontario action.
The claims are those of a creditor in Canada
arising prior to that date under leases of Canadian
railway property as well as obligations to pay
Canadian taxes.
It has also been argued that Penn Central is not
privy to the lease. That company and its predeces
sors, on the other hand, have been enjoying full use
of the leasehold assets covered by the lease since
the 1930's and it would appear that there would be
a legal responsibility resting on it for all payments
and other obligations under the lease which it
would at law be deemed to have assumed. In any
event, this is one of the questions to be determined
at trial when the evidence is heard before the
Supreme Court of Ontario.
Although conceding that the Supreme Court of
Ontario has jurisdiction to try CSR's claims, the
applicant is requesting in substance that any possi
ble execution of its judgment against the applicant
be removed and transferred to the Reorganization
Court in the United States. CSR's claim is a claim
by a Canadian company taken in Canada and
arising out of a contract affecting assets in
Canada, yet, the Federal Court of Canada is being
requested to transfer to a United States Court
control over the effective disposition of monies
which are presently available here and which have
been made available here for the express purpose
of satisfying Canadian claims of Canadian
creditors.
The reorganization of the railroad by the U.S.A.
Court does not have an extraterritorial effect
which would prevent execution against property in
Canada on behalf of Canadian creditors nor
indeed by its terms does it purport to have any
such effect. Clearly the purpose of Mr. Justice
Walsh's order is to ensure that the funds be kept in
Canada pending disposition of proceedings such as
those which CSR has instituted against the trus
tees of PCTC and the trustee of MCR.
For the above reasons the application of Penn
Central is refused.
As to the counter-application of CSR to have
the Court substitute Penn Central for the trustees
of PCTC, altogether apart from the question of
jurisdiction of this Court based on the issue as to
whether Penn Central is now truly a railway com
pany, and also apart from the fact that, in the
absence of special provisions in a statute or in a
trust instrument, courts do not appoint trustees as
opposed to receivers, CSR's application is denied
on the grounds that Penn Central refuses to accept
the trust. This Court, if it had power to do so,
would never attempt to impose a future trust on an
unwilling trustee a fortiori one residing in a for
eign jurisdiction. My decision on this application
was pronounced orally at the end of the hearing.
It might well be that Penn Central, because of
its actions, has now constituted itself either a
trustee de son tort or a constructive trustee, but
that question is not before this Court.
ORDER
For the above reasons, THIS COURT DOTH
ORDER THAT both applications be and the same
are hereby dismissed with costs.
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