A federal judge in Pennsylvania has ruled that the reorganized successor to the former Penn Central Transportation Co. must pay a $15 million judgment 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, 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,” Bartle said in In the Matter of Penn Central Transportation.

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

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

Part of that merger, which formed Penn Central, included a merger protection agreement, referred to as the MPA. That 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 read the MPA as covering 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 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 — it did not include the MPA.

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. “Because the reorganized company that would emerge from bankruptcy would not be in the railroad business, the trustees concluded that it was ‘desirable’ to terminate all obligations under most of the 175,000 existing executory contracts,” Bartle said.

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

“I rather doubt that this proceeding affects any rights under collective bargaining agreements; it can’t,” Fullam said, according to the opinion.

The bankruptcy proceeded under Section 77 of the Bankruptcy Act of 1898, which protected the status of railroad collective bargaining agreements, so nothing in the reorganization plan could “reach or affect the MPA,” Bartle said.

The reorganized company recognized that workers are still entitled to benefits under the MPA, according to the opinion, but it argued that the responsibility to pay the benefits lay with Penn Central.

“The reorganized company maintains that it is a separate entity from Penn Central, that it is not a ‘carrier,’ and that post-consummation it litigated for over 30 years with claimants merely as the representative of the non-existent Penn Central and not as an interested party to which any liability could attach,” Bartle said. He disagreed with that argument.

Bartle cited several U.S. Supreme Court opinions noting that Section 77 proceedings are meant to restructure railroad companies, not dissolve them.

“Penn Central has simply undergone a financial restructuring,” Bartle said. “The reorganized company is, in fact, the very same corporation that the claimants had sued — only reorganized with a new name!”

He concluded that the reorganized company knew this fact, or it wouldn’t have litigated the matter for so many years.

Bartle also noted that, although the Bankruptcy Act of 1898 was repealed in 1978, the provisions of Section 77 remained in force. That section prohibited the change in the wage or working conditions for railroad workers during reorganization. When Congress enacted the modern bankruptcy code, it maintained that sentiment. Bartle quoted from a report by the judiciary committee that said, “The subject of railway labor is too delicate and has too long a history for this code to upset established relationships. The balance has been struck over the years. This provision continues that balance unchanged.”

Penn Central’s bankruptcy proceeded under Section 77 because it was already pending when the new bankruptcy code was passed, according to a footnote in the opinion.

“Although neither the parties nor the court has found any case specifically applying Section 77(n) to merger protection benefits, such benefits are undeniably within the scope of that statutory provision. The MPA ensured that employees’ wages would not fall below a particular level as a result of the merger between the Pennsylvania Railroad Co. and the New York Central Railroad Co. Indeed, the judgment at issue reflects the arbitration panel’s assessment of the diminution in wages the claimants experienced as a result of the merger,” Bartle said.

He ordered the reorganized company to pay the $14.8 million that the arbitration panel awarded to 35 former employees or their estates — most of the workers are dead. Most of the money due, $14.2 million, is interest on the relatively small amount that was initially owed, according to the opinion.

In deciding to allow claimants to collect interest accrued after bankruptcy proceedings, Bartle looked to the U.S. Supreme Court’s 1964 opinion in Bruning v. United States.

“The court finds that the factors that the Supreme Court discussed in Bruning favor allowing the claimants to collect the post-petition, prejudgment interest awarded to them,” Bartle said. “The reorganization in this case was consummated 34 years ago, in 1978. There is simply no basis to conclude that allowing claimants to collect post-petition interest now will ‘inconvenience administration of the bankruptcy estate,’ ‘delay payment from the estate unduly,’ or ‘diminish the estate in favor of high-interest creditors at the expense of other creditors.’”

Michael Cioffi of Blank Rome in Cincinnati, who represented the reorganized company, declined comment on the opinion other than to say that his clients will appeal. “We think it’s incorrect and we intend to appeal to the Third Circuit,” he said.

Carla Tricarichi of Tricarichi & Carnes in Cleveland, who represented the claimants, said, “We’ll be prepared for an appeal if it comes.”

Her late father initiated the case, Tricarichi said, and she’s “very gratified” by Bartle’s opinion.

It’s gratifying “to be able to give some measure of justice to our clients,” Tricarichi said.

Saranac Hale Spencer can be contacted at 215-557-2449 or sspencer@alm.com. Follow her on Twitter @SSpencerTLI.

(Copies of the 46-page opinion in In the Matter of Penn Central Transportation, PICS No. 12-1582, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •