Successor to bankrupt railroad firm ordered to pay $15 million judgement

Reorganized company must honor Penn Central Transportation’s obligations

A federal judge in Pennsylvania has ruled that the reorganized successor to the former Penn Central Transportation Co. must pay a $15 million judgment made against the original railroad company, which filed for bankruptcy in 1970.

In a case stemming from the merger and subsequent bankruptcy of the rail company that has dragged on for decades, U.S. District Judge Harvey Bartle III of the Eastern District of Pennsylvania invoked “judicial estoppel” — or a contradiction of settled fact — citing the discordant posture of the reorganized company that recently began arguing it wasn’t liable for Penn Central’s debts.

“The position the reorganized company first asserted in 2007 is irreconcilably inconsistent with its position through the preceding 25 years of litigation ... The reorganized company has not proffered any reasonable explanation for the decades-long delay that preceded its about-face,” Judge Bartle said in the Penn Central Transportation matter.

“The reorganized company is estopped from denying its liability to claimants in light of its conduct during nearly 30 years of hard-fought litigation,” he wrote.

Beginning with the merger of the Pennsylvania Railroad Co. and the New York Central Railroad Co. in 1968, Judge Bartle described the history leading to his ruling.

Part of that merger, which formed Penn Central, included a merger protection agreement. The agreement essentially required Penn Central to retain all of the employees from both companies at their current salaries and referred all disputes to an arbitration committee.

Twenty days after the merger became final, Penn Central furloughed employees in Cleveland who worked for a subsidiary, according to the opinion. It didn’t pay those workers because it didn’t believe the merger protection agreement covered employees of subsidiaries.

Soon after, in 1970, the newly formed company filed for bankruptcy and, after Congress compelled railroads undergoing reorganization to sell their assets to Conrail in its 1973 Regional Rail Reorganization (RRR) Act, the company that emerged from the reorganization in 1978 was no longer in the railroad business. Initially, it was called Penn Central Corp., but changed its name in 1994 to American Premier Underwriters.

As part of its plan for reorganization, Penn Central trustees submitted a report in 1977 listing the unfulfilled contracts it would assume after reorganization — and it did not include the merger agreement contract.

The trustees at the time noted, “‘The situation has now radically changed’ because most assets, including track, stock and other equipment, were transferred to other entities pursuant to the RRR Act, according to the opinion.

During a hearing on that report, the judge who oversaw the litigation until his retirement last year, John P. Fullam, agreed with a plaintiff who contended that the court had no authority to limit his rights under the merger agreement.

The reorganized company said that workers are still entitled to benefits under the merger agreement, but argued that the responsibility to pay the benefits lay with Penn Central.

Judge Bartle disagreed, citing several U.S. Supreme Court opinions noting that such proceedings are meant to restructure railroad companies, not dissolve them.

He ordered the reorganized company to pay the $14.8 million that an arbitration panel awarded to 35 former employees, or to their estates, since most of the workers are dead.

Michael Cioffi of Blank Rome in Cincinnati, who represented the reorganized company, said that his clients will appeal.