thority, owed taxes by bankrupt railroads, to acquire title to certain propertiesthose remaining with the trustees but not those scheduled or already a part of the ConRail System.

Under my bill, a municipality could get title to this non-transportation property and offset the taxes owed by the carrier against the purchase price. Today, most municipalities do not have the cash or the borrowing resources to purchase such needed properties. They also have great difficulty in negotiating with the trustees for such property.

My bill would permit a municipality to set what it considers a fair price for the property in question. The special bankruptcy court would then determine if the price were adequate under the Fifth and Fourteenth Amendments and would make any necessary adjustments. Under this procedure, municipalities could use such property for parks, industrial development or other public benefit projects.

I believe this bill provides equitable relief to the municipalities which have borne a large share of the burden of the railroad bankruptcy but are least able to bear the resultant loss of income.

In Buffalo, the railroads own more than 11 per cent of all real property in the city. Of the city's vacant land, 25 per cent is under the control of the trustees or of ConRail.

My proposal would allow municipalities to continue with planned land development projects that have been in limbo because of the bankruptcy, the quasigovernmental take-over, the resultant confusion and-under all these circumstances the legal advice to "go slow."

A recent incident involving the City of Buffalo illustrates the problems municipalities have in dealing with the trustees.

For a dollar a year, the City of Buffalo has been leasing a 6.6 acre of Penn Central land for use as a school playground. This lease has been running for more than 30 years, during which time the city has absorbed the real estate taxes as part of the original agreement.

Last March, the trustees informed the city that Buffalo had breached its contract by not paying the amount of the taxes to the railroad in cash during this period. The trustees made it known that they would drop the court action concerning this landlocked property if Buffalo agreed to purchase this 6.6 acres for $135,000 cash and pay the back taxes to the railroad. As an alternative, the trustees suggested a continuation of the lease with $8000 annual rent plus taxes, apparently to be paid to the railroad in cash.

However, the trustees would not agree to then pay the taxes with that money. Needless to say, Buffalo does not have $135,000, nor does the Emerson Little League which uses the park.

Under my bill, the city would offer a fair price for such non-transportation property. The taxes owed by the railroad would be reduced by that amount. I believe that secured creditors are treated fairly under this procedure, since municipalities already have priority over these creditors and the estate is diminished only by the amount owed the municipalities.

Needless to say, the Penn Central does not want the tax offset. It wants cash. Beyond their duty to the estate and the creditors, the trustees are trying to get the highest price possible for each property as potential evidence in their suit alleging that the United States underpaid them for the ConRail property. This is the situation confronting Buffalo in its efforts to acquire various parcels of land. We have become, in effect, a small pawn in a lawsuit which will determine if the trustees will get $700 million or $7 billion for the properties of the bankrupt estates.

In opposition to my proposal, it has been argued that giving such land acquisition authority to the municipalities would be giving them a special, super priority. However, the opposite is now true. Other administrative expense creditors have been paid regularly in cash. Simultaneously, the municipalities receive nothing and, therefore, are being treated currently as a sub-priority within a class, contrary to the normal bankruptcy law.

My proposal would provide a statutory remedy to give some relief to our municipalities and right this imbalance. Equity, I believe, dictates that the municipalities be given the authority proposed in my bill. Buffalo is literally crisscrossed with rail property. The trustees talk in terms of 10 and 20 years before disposing of all the property in the estate. Such a timetable will only compound the burden being shouldered by the municipalities. I thank you very much for your consideration of this proposal.

94TH CONGRESS 1ST SESSION

H. R. 10388

IN THE HOUSE OF REPRESENTATIVES

OCTOBER 28, 1975

Mr. NOWAK introduced the following bill; which was referred to the Committee on the Judiciary

A BILL

To amend the Bankruptcy Act to provide emergency relief under certain circumstances to political subdivisions who are creditors of railroads.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 3 That the Bankruptcy Act (11 U.S.C.) is amended by in4 serting immediately after section 77 the following new sec5 tion:

"SPECIAL RULE IN CERTAIN CASES RELATING TO

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"SEC. 78. TAXING AUTHORITIES ELIGIBLE FOR SPE

RAILROADS OWING CERTAIN TAXES

9 CIAL RELIEF.—Any authority of a State Government or of 10 a political subdivisions of a State which has the authority

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under law to collect taxes imposed with respect to owner

2 ship of real estate is eligible for relief under this section if

"(1) railroad owes to such authority any tax im

4 posed with respect to ownership of real estate; and

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"(2) the railroad is the subject of any action or proceeding for relief under this Act.

"b. NATURE OF RELIEF.-Any taxing authority eligible 8 under the provisions of subsection a. may seize real estate 9 of a value it determines is reasonably equivalent to the 10 amount of past due taxes with respect to which the lien re11 ferred to in subsection a. has attached, whether or not such 12 lien attached to the real estate to be seized, if the real 13 estate

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"(1) is located within the jurisdiction of the taxing authority;

"(2) is owned by the railroad referred to in sub

section a.;

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(3) does not include any property in current use for railroad operations or within 20 feet of property in

such use, as determined by the chief executive of the

21 State or other territory in which the property is located,

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or as determined by an appropriate planning organization having planning jurisdiction over the location, but if there is a metropolitan planning organization designated under section 104 (f) (3) of title 23 of the United

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States Code and having planning jurisdiction over the location, then the determination shall be made by such metropolitan planning organization; and

"(4) does not include any rail property which is transferred or conveyed to the Consolidated Rail Corp

ration or to a profitable railroad under the final system

plan pursuant to the Regional Rail Reorganization Act

of 1973.

"c. FINAL ADJUSTMENT BY COURT.-The bank10 ruptcy court in which the action or proceeding referred to 11 in subsection a. takes place may make such orders as are 12 necessary, after determining the amounts due in any final 13 distribution to creditors of the railroad which is the subject 14 of that action or proceeding, to pay to the taxing authority 15 any amount due to it in such distribution in excess of the 16 value at the time of seizure of the real estate seized by the 17 taxing authority under this section, or to require the taxing 18 authority to pay to the court for disposition in accordance. 19 with this Act any amount which is the excess of the value at 20 the time of seizure of the real estate seized under this sec

21 tion over the amount due to such authority in such distribu

22 tion.".

TESTIMONY OF HON. HENRY J. NOWAK, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW YORK

Mr. NOWAK. Thank you very much, Mr. Chairman, my personal "thank you" for allowing me to testify before the committee as it studies the railroad reorganization section of H.R. 31 and H.R. 32. I would like to speak on the problems caused by certain precedents, now affecting the largest railroad reorganization in our history.

The law of railroad bankruptcy is unique because Congress has recognized the priority of continuing our Nation's railroad system over the immediate payment and satisfaction of creditors.

Congress has demonstrated its concern through comprehensive, multibillion-dollar legislation that has been enacted to deal with the multiple railroad bankruptcies that threatened to disrupt the Nation's transportation network. However, with the continuance of essential rail service, it is now appropriate to consider the problems that the railroads' fiscal difficulties have caused local governments.

One month after the Penn Central Transportation Co. petitioned for reorganization under section 77, the trustees were granted a Federal court order directing the nonpayment of municipal and State taxes due or accruing in the future-Order No. 70.

Local and State governments could petition for relief from this order if they depended upon revenue from Penn Central for at least 15 percent of their budgets, could not maintain their budgets by obtaining additional revenue from alternate sources, and would have to curtail vital public services should such revenue be deferred.

Although no city has been able to meet the court's stringent criteria. for relief, nevertheless, there has been great hardship imposed on local taxing authorities.

When our Nation first began to tax its citizens, the Federal Government relied on the property tax. Finding it unworkable, the Federal Government encouraged the several States to use property as a basis for taxation. The States having as much success as the Federal Government, turned over such taxation to the localities.

The localities, unfortunately, have no one to turn to.

Today, the Nation's municipalities are collectively holding a tax bill in excess of $370 million from the bankrupt carriers for postpetition taxes. In my congressional district, the city of Buffalo alone is owed more than $5 million.

Under bankruptcy law, postpetition taxes are treated as administrative expenses, which are due priority equal to other expenses of the administration of the bankrupt estate.

However, under Order 70, other administrative expense creditors are fully satisfied, while tax creditors must bear the risk of default without consent. The court, in its order, said that the taxing bodies will be paid the same pro rata share as other administrative expense creditors, so there would be no discrimination.

However, those creditors-such as laborers and suppliers-were paid 100 percent in cash. If there is not going to be enough cash to satisfy the taxing bodies, they will receive ConRail securities of questionable value.

And the legal fiction that ConRail securities are equal to cash is going to be very hard for the municipalities to swallow. For example,