Brief for Appellant — U. S. v. Connecticut General Insurance Corporation (Nos. 74-168, 74-165, 74-166, 74-167)
Supreme Court brief1974
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UNrrep ‘States or AMERICA, Er ake, APPELLANTS
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*. ,Com~noticut Genena Insurance Corporation, ®7 At.
} i APPRAL FROM THE UNITED STATES DISTRICT COURT FOR
THE RASTERN PiSTRIOT OF PENNSYLVANIA
| Speman
BRIEF FOR THE APPELLANTS
— SS
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* ROBERT HB. BORK,
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SE encccetenscneccesnncceseddcesececodqnaees
Se tinnncnnneccnnnencagnenedeanoonsit
Constitutional provisions and statutes involved.___._____
Pen cwacedaenesecaseseenesstnecessnnansenéane
PN Gr en cactocecanteaccedcoeectennanees
GEE. cca cccecncccencnescesescscocepgacsacengses
I. Section 304(f) Of The Rail Act Does Not Effect
A Taking Of Appellees’ Property. __....____-
A. Claimants against a bankrupt railroad
may constitutionally be compelled to
bear the burden of continuing its oper-
ations for a reasonable time pending
substantial good faith efforts to restore
it to financial viability. ........_.__.
B. The Rail Act represents a substantial
good faith effort to restore the north-
east rail system to financial viability _-
II. Appellees Will Receive Just Compensation For
ee
A. Compensation is available under Sec-
tion 303 of the Rail Act_........___.
B. Just compensation for any otherwise
uncompensated taking is available ___-
Ill. Section 207(b) Of The Rail Act Is Not Invalid
As A Geographically Nonuniform Law On the
Subject Of Bankruptcies. ._................
IV. There Is No Basis For Enjoining the Association
From Certifying A Final System Plan... ....
CAO ON NK =
18
28
37
38
39
49
55
57
59
Il
The record does not show any substantial likelihood of page
erosion in the Penn Central Estate pending implemen-
tation of the final system plan_._.-.................. 59
A. The record is inadequate____..................- 59
B. Income statement losses overstate erosion... ___ . 63
C. Use of non-recurring cash items and non-rail in-
come exaggerates erosion of the estate... _____ 66
D. There is no evidence of substantial net interim
PE bdo ceccustdinns cttineilbiedee iia 67
E. The value of the estate apparently substantially
exceeds the amount of claims against the estate- 70
F. There is no adequate basis in the record for estimat-
ing prospective erosion if rail operations continue
GP echsnadboncesandinckcenhtaeieds 72
G. Future erosion through 1975 may be worse if the
ee 73
CITATIONS
Cases:
Amell v. United States, 384 U.S. 158... ... ee 14, 40
Armour Packing Co. v. United States, 209 U.S. 56___- 54
Armstrong v. United States, 364 U.S. 40... ..- 41
Brooks-Scanlon Co. v. R.R. Comm., 251 U.S. 396... _- 19
Bullock v. R.R. Comm. of Florida, 254 U.S. 513... - 19
Continental Bank vy. Rock Island Ry., 294 U.S. 648. 13, 20-21
Te = 1 | | Sanya ae ee 54
Ex Parte 305, Interstate Commerce Commission,
EDU HS Sethidintncomnetahen thpanenabive cin 73
Farnsworth v. Montana, 129 U.S. 104_.... 8. 43
Hanover National Bank v. Moyses, 186 U.S. 181____- 50, 53
Harlem Valley Transportation Ass'n. v. Stafford, 360 F.
Supp. 1057, affirmed, C.A. 2, No. 73-2496 (June 18,
EE AE ee a, ee a ee 34
Head Money Cases, 112 U.S. 580.....-- 15, 53
Hele vy. United States, 100 Ct. Cl. 289....... 41
Hurley v. Kincaid, 285 U.S, 95... -- 14, 39, 40, 41,48
In the Matter of the Ann Arbor R. Co., E.D. Mich., No.
74-90833, decided July 1, 1974____....---. 11
In the Matter of the Boston & Maine Corp., D. Mass,
No. 70-250M, Memorandum Opinion, decided
BEY Bp Goins wnccanccccgucsocscesoséuctneéads 10
It
Cases—Continued Page
In the Matier of Central Railroal Company of New
Jersey, D. N.J., Bky. No. 401-67, decided June os,
In the Matter of Erie Lackawanna Railway Co., N.D.
Ohio, No. B72-2838, Order No. 234, decided May 2,
FEO os ce nawecenecgaseenacansceconcesvenssecds 10
In the Matter of Lehigh & Hudson River Railway Co.
$.D. N.Y., Bky. No. 72-419, decided July 1, 1974. 11
In the Matter of Lehigh Valley Railroad Co., E.D. Pa.,
Bky. No. 70-432, Order No. 252, decided July 1,
Sn 0 2 One poqoabessedcccasecosneeenneetecsce 11
In the Matter of Penn Central Transportation Co., B.D.
Pa., Bky. No. 70-347, Order No. 1596, decided
Gy By Cec coweccenoncte ccesenspoconcccence 10-11
In the Matter of Penn Central Tran. portation Co. (See-
ondary Debtors), E.D. Pa., Bky. Nos. 70-347A to
70-3470, Multiple Orders, ‘all decided July 1, 1974_ ll
In the Matter of Penn Central Transportation Co., 355 F.
rr ee 7
In the Matter of the Reading Co., E.D. Pa., Bky. No.
71-828, Order No. 650, decided July 1, 1974______. 11
In re Boston and Maine Corp., 484 F. 2d 369____- 13, 27, 59
In re New Y ork, New Haven and Hartford Rai!road Co.,
No. 30226, Order No. 720, decided February 14,
a EE 52
In re New York, New Haven and Hartford Railroad Co.,
ee re ES Snascensin soccconanceencésaneoees 22
In re New York, New Haven & Hartferd R.R., 304
F, Supp. 1121__--- o eneccccesescesccccsoscocess 65
In re New York, New Haven and Hartford Railroad Co.,
GE hs I Gib cncccccccccccncccanssceseccecs 22, 26
In re New York, New Haven and Hartford Railroad Co.,
GD Hs Ce Givenccccecccescccccceosccanaceses 25
In re Penn Central Transportation Co., Bky. Nos. 70-
347, Memorandum and Order No. 1543 (E.D. Pa.,
BER OD, Fee cocnceccecccaccsascetessessesecse 33
Cases—Continued Page
In re Penn Central Transportation Co., Secondary
Debtors, Bky. Nos. 70-347A through 70-3470,
Memorandum, Corp. Reorg. Rept. (Penn Central),
Document No. 74-68, p. 1011: 5096 (E.D. Pa., May
Oe Ss nanandeenvedacmdentshadbadapebacieten 65
In re Penn Central Transportation Co., Bky. No. 70-
347, Order No. 1344, Corp. Reorg. Rept. (Penn
Central), Document No. 6386, p. 1011: 4793 (E.D.
eR ee 61
In re Penn Central Transportation Co., Bky. No. 70-
347, Memorandum and Order No. 1397, Corp.
Reorg. Rept. (Penn Central), Document No. 6195,
p. 1011 :4772 (E.D. Pa., Aug. 31, 1973)_.-....__.. 61
In re Penn Central Transportation Co., 358 F.
PI TE d, ontidingiiqunsnskenngensawnesece aneune 63, 69
Jacobs v. United States, 290 U.S. 13__.._.__--_____. 41
Knowlton v. Moore, 178 U.S. 41................---- 53
Leiligh Carriage Co. v. Stengel, 95 Fed. 637_....-.-- 53
Louisiana Public Service Comm'n v. Teras & New Or-
GN is Gin, Ge I I cen ecianccececuecu 54
Mabee v. White Plains Publishing Co., 327 U.S. 178__- 54
New Haven Inclusion Cases, 399 U.S. 392... _-- 13, 24, 27, 59
N.Y., NUT. & H. R. Co. Bondholders’ Committee v.
United States, 289 F. Supp. 418_.......-.--.-.-- 25
Fees GU, Sy Ee hc kbd wdacudeccusenncd 53
Palmore v. United States, 411 U.S. 389_.......----_-- 43
Penn Central Merger Cases, 389 U.S. 486.....-.-.__- 13, 23
Penn Central Transportation Co. Reorganization, Corp.
Reorg. Rept. (Penn Central), Document No. 95,
at 1102:86 (ICC Finance Docket No. 26241, Sep-
SE Hk Sea nnciceiebebeetadeteiendednns 59
Pennsylrania v. Wheeling & Belmont Bridge Co., 18
RR a a a eR Se eS 54
Phelps v. United States, 274 U.S. 341__..--...--- 2 2- 40
Phillips v. Commissioner, 283 U.S. 589... .......-.-- 40
Portsmouth Harbor Land & Hotel Co. v. United States,
RT EE ALP SOM Rear Ve a 41
Railroad Comm. v. Eastern Ter. R.R., 264 US. 79___.- - 19
Reconstruction Finance Corp. v. Denver & Rio Grande
presser &. Co., SEB UB, GEG. « ccdcccccuccccececcs 13, 21
Rosenberg v. United States, 346 U.S. 273__-._-...._ 42
Cases—Continued Page
Secretary of Agriculture v. Central Roig Refining Co.,
PE nccdkndinitmn inne Chatecens 54
Shuttle Corp. v. Transit Comm’n., 393 U.S. 186_..----- 42
St. Joe Paper Co. vy. Atlantic Coast Line R.R., 347 U.S.
ES ee ee eee 37
Stellwagen v. Clum, 245 U.S. 605... --..------ sane 53
Tyson & Brother v. Banton, 273 U.S. 418... -. ~~. -- 18
Inited States v. Borden Co., 308 U.S. 188- ~~ -------- 42
United States v. Causby, 328 U.S. 256___...--..----- 41
United States v. Darby, 312 U.S. 100_....---- Ciniaie 29
United States v. Dickinson, 331 U.S. 745---- ~~~. --- 41
United States v. Pfitsch, 256 U.S. 547... -.--------- 41
United States v. Thayer-West Point Hotel Co., 329 U.S.
Pe ictbetdeetenedocucnsensesssiasennaconten 49
United States v. Thirty-Seven Photographs, 402 U.S.
Pdi tite dbibnahnehnncheaetihtnetinaess< 51
Vanston Bondholders Protective Committee v. Green, 329
tt Dh ti ttie a obne natu ehebesethGhemeanhee , 53
West Coast Hotel Co. v. Parrish, 300 U.S. 379_— ~~ ----- 29
Wright v. Vinton Branch of Mountain Trust Bank, 300
Tt Gl kcnentinddcdenetmadcemsednasenananece 53
“earsley v. W. A. Ross Construction Co., 309 U.S. 18_ - 39
Youngstown Sheet & Tube Co. v. Sawyer, 343 US.
Gc tinibddenwtlinenéene6GenKccnuneansunceseees 29
Constitution, statutes and regulations:
United States Constitution:
Article I, Section 8, Clause 3_......-.--.-.----- 2
Article I, Section 8, Clause 4_..---.-.--------- , 50
Article I, Section 9, Clause 6__.......--------- 54
Fifth Amendment__. -- itiniettiaal 3, 18, 21, 24, 28, 46, 49
Air Commerce Act of 1926, 44 Stat. 568___._____--- 41
Bankruptcy Act, 47 Stat. 1474, as added and amended:
“) & § 15 Sere 7, 33, 49
Section 77(a), 11 U.S.C. 205(a).-.......-.-.---- 52
Section 77(c) (6), 11 U.S.C. 205(c) (6)... -.-----
Section 77(o), 11 U.S.C. 205(0)_._......------- 36
Clayton Act, 38 Stat. 730, as amended, 15 U.S.C. 12
42
Constitution—Continued Page
Federal Trade Commission Act, 38 Stat. 717, as
amended, 15 U.S.C. 41, et seqg_..-.........-.-.-.- 42
Foreign Assistance and Related Programs Appropria-
tions Act of 1974, Pub. L. 93-240, 87 Stat. 1057,
pen IIS cE, EN LR pee ae em ee 32
Interstate Commerce Act, 24 Stat. 379, as amended:
Section 1(18), 49 U.S.C. 1(18)_.-__-___________- 16, 33
ee ee pocenbuenoes 36
National Environmental Policy Act of 1969, 83 Stat.
eR ae eee 34, 43
Regional Rail Reorganization Act of 1973, Pub. L. 93-
Pn ee acd ececcacdkeocanece 3,7
OOO Mi iinctentnnst windhnrs otiehéamitemeeas 54
I Wa a i 52
RI eo RR a ey 50
IE EE ED A A eae Le Ss
i RR ER Aa SN Lg IM 43
ET AEE a ee a a A a 8
a ll ES a A a 43
nee dd on he du ocinniumes 50
a 8
i ai LES EAA RI RS ADA Ss
i 51
SE ee ee S
aN in PA RA cat es Re 43
RESP a Se RED ad 8,31
RCE te ES RE ae i 8, 31,48
RRR eat MNS Bw ert 8
ERE an CEE SR Se 2,
3, 10, 11, 12, 15, 16, 43, 49, 50, 51, 52, 53, 55, 56,
57, 63
NS Cd A RR TR ee a 8
RETIN SE Sh Le ae ee 9
Ne EE I Nh a 43
cae Se so Fry 11, 38, 43
RNS TE AO Rare Wiles 2, 3, 13, 55
et SS) a bie 8, 31
| eee ae 8, 31,48
a 31
vil
Constitution—Continued
Regional Rail—Continued Page
eli SRI FA SR lp nA ie A 10, 32
te in 0 ol ania aemenne Ss
| EE A LEA AIO cegercesnoce 8
PL. - cscckdanddbedtiieteenesene 9, 14, 37, 38, 39
Te a ne beeaeinanh 57
PL dc ctematimdpeamdinogee+dhaanmnd 38
an on on cee aleeeienibntibele 43
i A a 3
et Bh 5c cencsresnedadadadecsasies 38
od no cnenckequbenguoncepands 9, 38
nec cccncccedesouses cece’ 44
I Bn nacuschesccnconsaqces 45, 46, 47
0 on ce ctnnininnamatintintheat i)
ne On eek amie eeet 9, 43
sd anuedeonseupann 36
icatebcdcencenssnencseenscesess 36
EE, anicatavetddreastadsabedadénde 36, 43
RE Se A ne 36
PS SL adinicdvatasutbecsoacesedeoune 2,
3, 9, 11, 12, 15, 16, 18, 35, 37, 43, 48, 55, 56, 57
I o> chnenadianunenneladuanieinade 10, 32
EG, a tiawciisaddeeedéneesaseseenece 36
ED. «. ncn cndammenanersmaneaidns 43
inn. tneicongeehebetadeaaedanes 35, 43
ik ce nnnncmonsednehdndivetntndes 35, 43
ee. Ge, Beek Oe WEEE Gh cc cccesonteniecctnnee 43
Second Supplemental Appropriations Act of 1974,
Pei: E.G te Bie cs co ccncecceqcosecscss 32
Sherman Act, 26 Stat. 209, as amended, 15 U.S.C. 1,
0 Se 42
Suits in Admiralty Act, 41 Stat. 525, as amended,
GB Fei. FER IO icocncccsisccccsstinecsncesece 40-41
Tucker Act, 28 U.S.C. 1491............-......---- 6,
14, 15, 37, 39, 40, 41, 42, 43, 46, 47
49 C.F.R. Part 1201, Sections 8-12, 212—220___..._. 64
Miscellaneous:
Cary, Pressure Groups and the Revenue Code: A Requiem
in Honor of the Departing Uniformity of the Taz Laws,
68 Harv. L. Rev. 745 (1955) - .....-...--..------ 53
vill
Miscellaneous—Continued Page
119 Cong. Rec. H876 (daily ed., December 20, 1973) - 47
119 Cong. Ree. H9732 (daily ed., November 8, 1973) _.- 48
119 Cong. Rec. 822483 (daily ed., December 11,
TIE TTS A A IN SPO et nee PP 35
119 Cong. Ree. 823780 (daily ed., December 21,
RO ae eee 45
119 Cong. Rec. 523782 (daily ed., December 21,
EEE Le ee: TE ae 35
119 Cong. Rec. 823782-S23784 (daily ed., December
Re oe ae 46, 47
Department of Transportation, Northeastern Railroad
Problem, a Report to Congress, March 26, 1973____- 33, 34
Department of Transportation, The Penn Central and
Other Railroads, Report to the Senate Committee
TRIES ORS Tek oir teal 28
Department of Transportation, Rail Service in the
Midwest and Northeast Region, February 1, 1974___ 33, 35
H. Rep. No. 93-620, 93d Cong., Ist Sess_....._____. 6,
7, 29, 33, 35, 36, 38
Hearings before the Surface Transportation Subcom-
mittee of the Senate Committee on Commerce, on
S. 1031, Northeastern Railroad Transportation
eS ee ae 29
Hearings before the Subcommittee on Transportation
and Aeronautics of Howse Committee on Interstate
and Foreign Commerce, on H.R. 1416 and H.R.
11825, Transportation: Regulation of International
Air fares, 92d Cong., 2d Sess..__.___.._......___ 34
Tron Age, June 21, 1970_....._______. Sn 60
Kratovel xnd Harrison, Eminent Domain—Policy and
Concept, 42 Calif. L. Rev. 596 (1954)..-.._.______ 18
Penn Central Trustees, Interim Report on Reorganiza-
tion Planning, February 1972....____..__._.__.___. 33
Penn Central Trustees, Interim Report on Reorganiza-
tion Planning, October 1972____.__......._..___. 36
Penn Central Trustees, Interim Report on Reorganiza-
tion Planning, January 1973..._......... 32, 33, 36
Penn Central Trustees, Interim Report on Reorganiza-
tion Planning, April 1974.__......__..........__ 33
In the Supreme Gourt of the Anited States
OctoserR TeRM, 1974
No. 74-168
Unirep Stvates oF AMERICA, ET AL., APPELLANTS
v.
Coxxecticut GENERAL INSURANCE CORPORATION, ET AL.
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR
THE EASTERN DISTRICT OF PENNSYLVANIA
BRIEF FOR THE APPELLANTS
OPINION BELOW
The opinion of the three-judge district court (J.
App. 9-81)" is not yet reported.
JURISDICTION
The order of the three-judge district court (J. App.
82-83) was entered on June 25, 1974. Notices of
appeal to this Court (J. App. 387-390) were filed on
July 22, 1974, and July 24, 1974.° The jurisdictional
1*J. App.” refers to the Joint Appendix lodged in this Court.
?The opinion and order of the three-judge district court
encompassed three separate civil actions (Nos. 74-189, 74-1 107,
and 741149) that had been consolidated for disposition on
cross-motions for summary judgment, and we have filed sep-
arate notices of appeal with respect to each action, However,
we are treating those actions as a single consolidated action for
purposes of our jurisdictional statement and brief on the
merits.
(1)
2
statement was filed on August 23, 1974. The jurisdic-
tion of this Court is invoked under 28 U.S.C. 1252 and
1253."
QUESTIONS PRESENTED
1. Whether Section 304(f) of the Regional Rail
Reorganization Act of 1973, which bars a railroad in
reorganization from discontinuing service or abandon-
ing any line without the consent of the United States
Rail Association, effects a taking of appellees’ prop-
erty in the constitutional sense.
2. Whether the taking, if any, is one for which
there is no provision for just compensation.
3. Whether the provision of Section 207(b) of the
Act that requires the dismissal of certain reorganiza-
tion proceedings is invalid as a geographically non-
uniform law on the subject of bankrupteies.
4. Whether the district court properly enjoined the
Association from certifying a final system plan for
judicial review under Section 209(¢) of the Act.
CONSTITUTIONAL PROVISIONS AND STATUTES INVOLVED
Article I, Section 8, Clauses 3 and 4, in pertinent
part provide:
The Congress shall have power * * *
* 7 * * *
To regulate Commerce with foreign Nations
and among the several States * * *;
To establish * * * uniform Laws on the sub-
ject of Bankruptcies throughout the United
States; * * *,
*In the interest of expeditious consideration of the merits
of this case, we are lodging this brief in advance of the noting
of probable jurisdiction.
Pe i
3
The Fifth Amendment to the Constitution in perti-
nent part provides:
* * * [Nor shall private property be taken
for public use, without just compensation.
Sections 207(b), 209(¢), 303(¢), and 304(f) of the
Regional Rail Reorganization Act of 1973, Pub. L.
93-236, 87 Stat. 985, 998, 1000, 1006-1007, and 1009,
in pertinent part provide: '
Section 207(b). Within 120 day. after the
date of enactment of this Act each United
States district court or other court having
jurisdiction over a railroad in reorganization
shall decide whether the railroad is reorganiz-
able on an income basis within a reasonable
time wv der section 77 of the Bankruptey Act
(11 U.S.C. 205) and that the public interest
would be better served by continuing the pres-
ent reorganization proceedings than by a reor-
ganization under this Act. * * * Beeause of the
strong public interest * * * in the continn-
ance of rail transportation in the region pur-
suant to a system plan devised under the
provisions of this Act each such court shall
order that the reorganization be proceeded with
pursuant to this Act unless it (1) has fom»!
that the railroad is reorganizable on an meome
basis wiiin a reasonable time under section 77
of the Bankruptey Act (11 U.S.C. 205) and
that the public interest would be better served
by such a reorganization than by a reorganiza-
tion under this Act, or (2) finds that this Act
does not provide a process which would be fair
and equitable to the estate of the railroad in
reorganization in which case it shall dismiss
the reorganization proceeding. * * *
*The Rail Act in its entirety is set forth at J. App. 395-451.
4
Section 209(¢). Within 90 days of its effee-
tive date, the Association shall deliver a certi-
fied copy of the final system plan to the special
court and shall certify to the special court—
(1) which rail properties of the respective
railroads in reorganization in the region * * *
are to be transferred to the Corporation, in
accordance with the final system plan;
(2) which rail properties of the respective
railroads in reorganization in the region * * *
are to be conveyed to profitable railroads, in
accordance with the final system plan;
(3) the amount, terms, and value of the
securities of the Corporation (including any
obligations of the Association) to be exchanged
for those rail properties to be transferred to
the Corporation pursuant to the final system
plan * * *; and
(4) that the transfer of rail properties in
exchange for securities of the Corporation
(ineluding any obligations of the Association)
and other benefits is fair and equitable and in
the public interest.
Section 303(¢). (1) After the rail properties
have been conveyed to the Corporation and
profitable railroads operating in the region * * *
the special court, giving due consideration to
the findings contained in the final system plan,
shall decide—
(A) whether the transfers or conveyances—
(i) of rail properties of each railroad in
reorganization * * * to the Corporation in ex-
change for the securities and the other benefits
aceruing to such railroad as a result of such
exchange, as provided in the final system plan
of this Act, and
5
(ii) of rail properties of each railroad in
reorganization * * * to a profitable railroad
operating in the region, in accordance with the
final system plan, are in the public interest and
are fair and equitable to the estate of each
railroad in reorganization in accordance with
the standard of fairness and equity applicable
to the approval of a plan of reorganization or
a step in such a plan under section 77 of the
Bankruptey Act (11 U.S.C. 205), or fair and
equitable to a railroad that is not itself in
reorganization but which is leased, operated, or
controlled by a railroad in reorganization; and
(B) whether the transfers or conveyances
are more fair and equitable than is required as
a constitutional minimum.
(2) If the special court finds that the terms
of one or more exchanges for securities and
other benefits are not fair and equitable to an
estate of a railroad in reorganization * * *
which has transferred rail properties pursuant
to the final system plan, it shall—
(A) enter a judgment reallocating the secu-
rities of the Corporation in a fair and equitable
manner if it has not been fairly allocated
among the railroads transferring rail prop-
erties to the Corporation ; and
(B) if the lack of fairness and equity cannot
he completely cured by a reallocation of the
Corporation’s securities, order the Corporation
to provide for the transfer to the railroad of
other securities of the Corporation or obliga-
tions of the Association as designated in the
final system plan in such nature and amount as
would make the exchange or exchanges fair and
equitable ; and
(C) if the lack of fairness and equity cannot
be completely cured by reallocation of the Cor-
poration’s securities or by providing for the
transfer of other securities of the Corporation
or obligations of the Association as designated
in the final system plan, enter a judgme ut
against the Corporation.
Section 304(f). After the date of enactment
of this Act, no railroad in reorganization may
discontinue service or abandon any line of rail-
road other than in accordance with the provi-
sions of this Act, unless it is authorized to do
so by the Association and unless no affected
State or local regional transportation authority
reasonably opposes such action * * *,
The Tucker Act, 28 U.S.C. 1491, provides in perti-
nent part:
The Court of Claims shall have jurisdiction
to render judgment upon any claim against the
United States founded either upon the Con-
stitution, or any Act of Congress, or any reg-
ulation of an executive department, or upon
any express or implied contract with the United
States, or for liquidated or unliquidated
damages in eases not sounding in tort. * * *
STATEMENT
By 1973, the rail transportation network of the
northeastern section of the United States was in grave
danger of imminent financial collapse. See gencvally
H. Rep. No. 93-620, 93d Cong., Ist Sess, pp. 25-29.
Seven major railroads ° operating principally in sev-
~* The seven railroads are the Penn Central, Reading. Erie
Lackawanna, Central of New Jersey, Lehigh Valley, Boston &
Maine, and Ann Arbor. In addition, a smaller railroad, the
Lehigh & Hudson River, had also entered reorganization.
a
7
enteen northern and eastern States * were attempting
to reorganize under Section 77 of the bankruptcy
Act, 11 U.S.C. 205, and those proceedings were prov-
ing unsuccessful due to the apparently insoluble fi-
nancial difficulties the railroads faced. See, ¢.g., 1”
the Matter of Penn Central Transportation Co., 355
F. Supp. 1343 (E.D. Pa.). There was therefore a
serious possibility that the rail service provided by
some or all of the railroads would be terminated in
order to liquidate the bankrupt estates and satisfy
their obligations to creditors.
Congress recognized that the threatened wholesale
termination of rai! service would do incalculable dam-
age to the nation’s economy. See H. Rep. No. 93-620,
supra, at 28-29. Accordingly, Congress enacted the
Regional Rail Reorganization Act of 1973, Pub. L.
93-236, 87 Stat. 985, as a comprehensive solution to
the impending rail crisis. This case involves the con-
stitutionality of significant portions of that Act.
1. The major features of the Rail Act may be
briefly summarized. The Rail Act establishes a public,
nonprofit corporation, the United States Railway As-
sociation, and directs the Association to formulate a
“final system plan” for the “establishment and main-
tenance of a [financially self-sustaining] rail service
system adequate to meet the rail transportation needs
and service requirements of the [northeast] region.”
~The railroads operate principally in Maine, New Hamp-
shire, Vermont, Massachusetts, Rhode Island, Connecticut, New
York. New Jersey, Pennsylvania, Delaware, Maryland, Vir-
ginia, West Virginia, Ohio, Indiana, Michigan, Iinois, and the
District of Columbia.
8
Section 206(a) of the Rail Act. See, also, Sections 202
and 204. It is anticipated that the final system plan
will provide for the sale of some of the rail properties
of the railroads presently in reorganization to profit-
able railroads, to the National Railroad Passenger
Corporation, and to state and local transportation
authorities. Section 206(¢) and (d). But the Rail
Act contemplates that the centerpiece of the final sVs-
tem plan will be a newly organized for-profit corpora-
tion, the Consolidated Rail Corporation, to which the
Association will issue up to one billion dollars of the
Association’s federally-guaranteed obligations. Sec-
tions 210, 301, and 302.
The final system plan is expected to provide for the
transfer of the bulk of the rail properties of the rail-
roads in reorganization to the Corporation in ex-
change for stock and securities of the Corporation and
up to $500 million of the Association's obligations held
hy the Corporation.’ Sections 206(d) and 210(b). The
Corporation will be required to use at least $500 mil-
lion of the Association's obligations for rehabilitation
and modernization of the transferred rail properties.
Section 210(b).
The final system plan is to be submitted to Congress
within 450 days after the date of enactment of the
Rail Act (January 2, 1974) and will become effective
at the end of 60 session days if not disapproved by
either house. Sections 207 and 208. Within 90 days
thereafter, the plan is to be certified to a special three-
"Subject to congressional approval, the plan may also pro-
vide for additional consideration to the transferor rail ;
estates in the form of federally guaranteed obligations of the
Corporation. Section 206(i). See, also, Sections 206(h) and
210(b).
ae
9
judge court appointed by the judicial panel on multi-
district litigation. Section 209. The special court is to
order the transfer of rail properties from the estates
of the railroads in reorganization to the Corporation
and other transferees designated in the plan and there-
after to determine the fairness and equity of the con-
sideration payable under the plan to the estates of
those railroads. See generally Section 303.
If the special court determines that the considera-
tion payable under the plan exceeds the constitutional
minimum standard of fairness and equity, it must
order the return of any excess. Section 303(¢)(3).
If instead the court finds that the terms of the
exchange are unfair or inequitable to the estate of
any railroad, it must reallocate the total consideration
in a fair and equitable manner, and, if necessary,
order the Corporation to transfer to that estate addi-
tional securities or obligations designated for that
purpose in the final system plan, and, if further
necessary, enter a judgment in the estate’s favor
against the Corporation for the additional amount
needed to render the exchange fair and equitable.
Section 303(¢) (2). The judgment of the special court
is reviewable by this Court. Section 303(d).
In order to ensure that rail service throughout the
northeastern States remain adequate pending the
transfer of properties to the Corporation under the
final system plan, the Act forbids the railroads in
reorganization from discontinuing service or aban-
doning lines without the consent of the Association.
Section 304(f). However, the Secretary of Trans-
portation is authorized to provide emergency assist-
556-931-742
10
ance to the railroads pending implementation of the
final system plan and to pay rail service continuation
subsidies. Sections 213 and 402. The Secretary is
further authorized “to enter into agreements with
railroads in reorganization * * * for the acquisi-
tion, maintenance, or improvement of railroad facili-
ties and equipment necessary to improve property that
will be in the final system plan.” Section 215.
The rail properties of a railroad in reorganization
are subject to transfer under the final system plan
only if the court having jurisdiction over its re-
organization so orders within 180 days after the date
of enactment of the Rail Act. However, Section
207(b) of the Rail Act provides that “[bJlecause of
the strong public interest in the continuance of rail
transportation in the [northeast] region pursuant to
a system plan devised under the provisions of this
Act, each such court shall order that the reorganiza-
tion be proceeded with pursuant to this Act unless it
(1) has found that the railroad is reorganizable on an
income basis within a reasonable time * * * and that
the public interest would be better served by such a
reorganization * * *, [*] or (2) finds that this Act does
not provide a process which would be fair and equit-
able to the estate of the railroad in reorganization in
Which case it shall dismiss the reorganization pro-
ceeding.”’®
*Two courts have now determined that the railroads under
their jurisdiction are reorganizable on an income basis within a
reasonable time. Jn the Matter of Evie Lackawanna Railway
Co., N.D. Ohio, No. B72-2838, Order No, 234, decided May 2,
1974; In the Matter of the Roston & Maine Corp., D. Mass.,
No. 70-250M, memorandum opinion, decided May 2, 1974,
* Three courts have now found that. the Act does not provide
a process that is fair and equitable to the estates of the rail-
roads under their jurisdiction. Zn the Matter of Penn Central
11
2. The present action was brought by the sole share-
holder and major creditors of Penn Central Transpor-
tation Company, one of the railroads in reorganiza-
tion, seeking declaratory and injunctive relief against
enforcement of the Act. See J.S. 9-10, n.4. They con-
tended, inter alia, that the contemplated transfer of
rail properties in exchange for stock and securities of
the Corporation would effect a taking of their prop-
erty for public use without just compensation; that
enforcement of Section 304(f), which bars railroads
from discontinuing service or abandoning lines prior
to the transfer without the consent of the Association,
also would effect such a taking; and that the entire
Act exceeds the power of Congress under the bank-
ruptey clause of the Constitution.
Transportation Co., E.D. Pa., Bky. No. 70-347, Order No. 1596,
decided July 1, 1974; Zn the Matter of Lehigh Valley Railroad
Co. E.D. Pa., Bky. No. 70-432, Order No. 252, decided July 1,
1974; Jn the Matter of Penn Central Transportation Co, (Sec-
ondary Debtors), E.D. Pa., Bky. Nos. 70-347A_ to 70-3470,
multiple orders all decided July 1, 1974; Zn the Matter of Cen-
tral Railroad Company of New Jersey, D. N.J., Bky. No. 401-67,
decided June 28, 1974; Zn the Matter of Lehigh and Hudson
River Railway Co., 8.D. N.Y., Bky. No. 72-419, decided July 1.
1974. Two other courts have refused to find that the process
under the Act is not fair and equitable. Jn the Matter of the
Reading Co., E.D. Pa., Bky. No. 71-828, Order No. 650, decided
July 1, 1974; Zn the Matter of the Ann Arbor R. Co., E.D.
Mich.. No. 74-90833, decided July 1, 1974. These cases are al!
currently on appeal to the special three-judge court established
under Section 209(b). The decision of that court on the question
of the fairness and equity of the process is made nonreviewable
by Section 207(b), which also requires the court to decide the
appeals within 90 days (i.e., by September 29, 1974); however,
the government has urged the special court to stay a mandate
pending disposition of the instant case.
12
/
The three-judge court determined first that the
question whether the final transfer of rail properties
to the Corporation would effect an unconstitutional
taking of appellees’ property was not yet ripe for ad-
judication (J. App. 23-25). The court concluded, how-
ever, that the problem of “interim erosion” of the
bankrupt estates posed by losses resulting from invol-
untary continuation of service or lines was ripe for
adjudication, and the court enjoined the defendants
from acting under Section 304(f) to prohibit any
“reduction of service which has been or may hereafter
be determined by a court of competent jurisdiction to
be necessary [to prevent a taking]” (J. App. 82).”
continued operation of the railroads (J. App. 40-53).
The court further determined that although the Act
in prineipal part is within the general commerce
power of Congress, the provision of Section 207 (b)
that requires dismissal of certain reorganization pro-
ceedings is invalid as a Seographically non-
uniform law on the subject of bankruptcies (J. App.
61-65) ; enforcement of that provision was therefore
enjoined. The court then proceeded, without any
ultimate prospects of achieving sufficient profitability to support
@ valid recapitalization of the enterprise” (J. App. 41, n, 23).
pte ti anes
Rae! me HR 8, hm
he
13
further statement of reasons, to enjoin the Associa-
tion from certifying a final system plan for judicial
review under Section 209(¢) (J. App. 53).
SUMMARY OF ARGUMENT
I
As a matter of law, there will be no interim ero-
sion amounting to a taking under the Rail Act. This
Court has long recognized that the rights of claimants
against the estate of a bankrupt railroad are limited
by and subject to a countervailing public interest in
continued rail service. See Continental Bank v. Rock
Island Ry., 294 U.S. 648. Thus substantial erosion of
the amount available to satisfy prebankruptcy
claimants has been permitted to occur during reor-
ganization proceedings, on the ground that by invest-
ing “in a public utility that * * * owe[s] an obliga-
tion to the public * * * [such claimants] assumed the
risk that in any * * * reorganization the interests of
the publie would be considered as well as theirs.”
Reconstruction Finance Corp. v. Denver & Rio Grande
Western R. Co., 328 U.S. 495, 535-536. Accordingly, it
has become well established that the owners and credi-
tors of a railroad may constitutionally be compelled
to bear the burden of continuing its operations in the
publie interest for a reasonable time pending substan-
tial good faith efforts to restore it to financial
viability. See, e.¢., New Haven Inclusion Cases, 399 U.S.
392, 489-495 ; Penn-Central Merger Cases, 389 U.S. 486,
507-511; In re Boston and Maine Corp., 484 F. 2d 369,
374-375 (C.A. 1).
In this case, appellees may be compelled to bear the
burden of continuing the operations of the Penn Cen-
14
tral pending implementation of the final system plan.
The publie interest in continued operations is substan-
tial. The “interim” during which erosion in the
amount available to satisfy prebankruptey claimants
could occur is expected to he extremely brief by reor-
ganization standards, and the record does not show
that substantia] erosion has or wil] occur. Moreover,
the Rail Act represents a substantial good faith effort
to restore the northeastern rail system to financial
viability. The Rail Act provides financial assistance
that will serve both to soften the impact of any
interim erosion and enhance the probability of sue-
cessful reorganization, and it enables the creation
of a financially self-sustaining core system by permit-
ting the expeditious weeding out of uneconomie lines.
II
sated taking is available under the Tucker Act in the
Court of Cla as.
intention to do so. See, ¢.9., Amell y. United States,
384 U.S. 158; Hurley y. Kincaid, 285 U.S. 95. There
is no such compelling evidence here Although the
Rail Act expressly makes severa] other prior statutes
inapplicable, it contains no reference at all to the
terme OO
—e
15
Tucker Act; and the statutory scheme does not require
denial of Court of Claims jurisdiction. Furthermore,
the legislative history fails to show a congressional
understanding that the traditional Court of Claims
remedy would be unavailable. Accordingly, the court
below should not have enjoined interim takings under
Section 304(f).
Ill
The dismissal provision of Section 207(b) of the
Raii Act is not invalid as a geographically nonuni-
form law on the subject of bankruptcies. That pro-
vision does not, by its terms, discriminate geograph-
ically; this Court would be required to read nonuni-
formity into that provision in order to strike it down.
Moreover, no railroad reorganization proceeding has
been or ever will be either included or excluded from
the reach of the dismissal provision merely on the
basis of geography. Although the only such proceed-
ings pending during the application of Section 207(b)
were located in the northeastern States, that fact does
not invalidate the statute. See, e.g., Head Money
Cases, 112 U.S. 580. Furthermore, Section 207(b)
applies equally to all creditors no matter where they
are located, and that is all the bankruptcy clause re-
quires. See Vanston Bondholders Protective Commit-
tee Vv. Green, 329 U.S. 156, 172 (concurring opinion of
Justice Frankfurter). The court below therefore erred
in enjoining enforcement of the dismissal provision.
IV
The court erred in enjoining certification of the
final system plan even assuming arguendo that Sec-
16
tions 304(f) and 207(b) are constitutionally defective.
-\ny constitutional defects in Sections 304(f) and 207
(b) would not affect the Validity of the certification
process, Moreover, the district court dealt with the
alleged constitutional defects by enjoining enforce-
ment of Section 304(f) and the dismissal provision of
Section 207(b); it was improper for the court addi-
tionally to enjoin certification of the plan.
ARGUMENT
I
SECTION 304(f) OF THE RAIL ACT DOES NOT EFFECT 4
TAKING OF APPELLEES’ PROPERTY
Section 304(f) does not by its terms bar railroads
in reorganization from discontinuing Service or aban-
doning lines. The effect of the provision is rather to
Section 304( f) is analogous to Section 1(18) of the
Interstate Commerce Act, 49 U.S.C. 1(18), which
forbids a railroad from terminating service without
permission from the Interstate Commerce Commis-
Sion.
The district court did not declare Section 304(f)
invalid on its face. The court recognized that Section
3C°(f), like Section 1(18) of the Interstate Com-
merece Act, at least Within limits serves a legitimate
and necessary regulatory purpose. Nor did the court
find that Section 304(f) had yet been applied in such
# manner as to effect a taking, in the constitutional]
sense, of appellees’ property, Any such finding would
of course have been premature; there js nothing in
a ee
17
the record to indicate that any of the railroads in
reorganization has yet requested the Association's
consent to a discontinuance of service or abandonment
of lines on the ground that involuntary continued
loss operations would constitute a taking. Moreover,
the court apparently recognized that involuntary con-
tinued loss operations would not amount to a taking
per se (see J. App. 41, n. 23).
The district court nevertheless enjoined the de-
fendants from prohibiting any “reduction of service
which has been or may hereafter be determined by a
court of competent jurisdiction to be necessary [to
prevent a taking]’’ (J. App. 82). In making that
determination, the court apparently assumed that
claimants against a railroad in reorganization are
constitutionally entitled to the liquidation value of the
estate as of the date of bankruptey (J. App. 41, n.
23); the court apparently concluded that continued
involuntary loss operations threatened to impair the
liquidation value of the estate or to result in such
accumulated administrative claims as to reduce the
amount available to satisfy prebankruptcy claimants
(J. App. 36-40).
The court erred fundamentally in its analysis of the
taking issue. The question whether involuntary con-
tinued loss operations result in a taking cannot be
answered by reference to any bright-line test. The
determination whether a taking has oceurred in the
course of a railroad reorganization requires a com-
plex balancing of the competing public and private
interests. Application of that balancing test to this
ease shows that any involuntary continued loss oper-
18
ations under the Rail Act will not be such as to
amount to a Fifth Amendment taking. There was,
therefore, no basis for enjoining the Association from
exercising in full the discretion granted to it, by
Section 304(f) of the Rail Act, to protect the public
interest by prohibiting discontinuance of needed rail
service.
A. CLAIMANTS AGAINST A BANKRUPT RAILROAD MAY CONSTITUTION-
ALLY BE COMPELLED TO BEAR THE BURDEN OF CONTINUING ITS
OPERATIONS FOR A REASONABLE TIME PENDING SUBSTANTIAL GOOD
YAITH EFPORTS TO RESTORE IT TO FINANCIAL VIABILITY
It has long been understood that there is no talis-
manic guide for applying the Fifth Amendment’s
taking clause. As Justice Holmes once observed, ‘‘the
ccastitutional requirement of compensation when
property is taken cannot be pressed to its gram-
matical extreme; * * * some play must be allowed
to the joints if the machine is to work.” Tyson &
Brother v. Banton, 273 U.S. 418, 445-446 (dissenting
opinion). The careful weighing of social needs agrinst
private interests has played a significant and legiti-
mate role in decisions under the taking clause: “it
is not an overstatement to say that perhaps the prin-
cipal concern of the courts in the law of eminent do-
main is to draw the line equitably between compen-
sable and non-compensable governmental interferences
with property owners, and the process of arriving at
a decision that is fair both to the publie and to private
interests involves a careful weighing and balancing
of these interests.” Kratovil and Harrison, Eminent
Domain—Policy and Concept, 42 Calif. L. Rev. 596,
626 (1954).
19
This balancing process, applied in a long line of
decisions in this and other courts, has established
that the rights of claimants against a bankrupt rail-
road are inherently limited by and subject to the coun-
tervailing public interest in continued rail service, to
the extent that such claimants may constitutionally be
compelled to bear the burden of continuing the rail-
road's operations for a reasonable time pending sub-
stantial good faith efforts to restore the railroad to
financial viability." Although courts, in striking the
final balanee, may consider the possibility that a con-
tinuation of loss operations may result in net redue-
" This proposition is not inconsistent with Brooks-Scan/on
Co. v. RR. Comm. 1 US. 396, Bullock v. R.R. Comm. of
Florida, 254 U.S. 513, and Railroad Comm, v. Eaatern Tex.
RL. 264 US. 79, upon which appellees relied in the court
below. Those cases held that small logging railroads cannot
be compelled to operate indefinitely in the absence of any
“reasonable prospect of profitable operation in the future.”
Bullock v. R.R. Comm, of Florida, supra, 54 U.S. at 520-521.
Those cases were all decided before any method of statutory
reorganization had been made available; the assumption in each
was that further operations could not be made profitable. Those
cases therefore cannot govern a situation where substantial ef-
forts are being made pursuant to statute to restore the rail-
road to profitability; they do not give the owners or creditors
of a railroad an unqualified right to liquidate a railroad for
which there is a nonnegligible chance of being restored to
financially self-sustaining operations. Moreover, the public
interest in a continuation of the rail service provided by those
railroads was insubstantial if not nonexistent; in at least two
of the cases the timber-cutting operations in the area served
by the railroad had been terminated. There was no contention
that the public interest required continued service pending re-
organization; no occasion arose for balancing the public interest
in saving the railroads against the burdens imposed in the
interim on their owners.
20
tion in the amount available to satisfy prebankruptcy
claimants, this Court has never held that factor to
be constitutionally determinative.
In Continental Bank v. Rock Island Ry., 294 US.
648, this Court upheld an order of a reorganization
court barring holders of the debtor railread’s collat-
eral notes from foreclosing on their collateral. The
collateral notes were secured by mortgage bonds, and
foreclosure entailed only a sale of the bonds to the
public, yet the Court barred even this relatively minor
interference with the reorganization process. 294 U.S.
at 678-679. Although the face amount c! the bonds
exceeded that of the notes, there was no assurance
that the noteholders would be satisfied in full. The
Court, apparently recognizing that the reorganization
court’s order might prevent the noteholders from
achieving full satisfaction, conceded that ‘‘[i]t may be
that in an ordinary bankruptcy proceeding the issue
of an injunction in the circumstances here presented
would not be sustained.” 294 U.S. at 676. But,
as the Court had already noted, different considera-
tions apply to railroad reorganization proceedings
since a railroad’s “activities cannot be halted be-
cause its continuous, uninterrupted operation is
necessary in the publie interest * * *.’’ 294 U.S. at
671. The Court therefore concinded that in the cir-
cumstances the creditors’ interest in preserving their
capital investment intact had no constitutional signif-
ieance, 294 U.S. at 676-677. The Court was prepared
to qualify that conclusion only in the event that the
delay prior to formulation and implementation of a
plan of reorganization proved to be unreasonable (294
U.S. at 685) :
21
It is true that no plan has yet been con-
summated ; and, so far as the record shows, none
has been prepared or is in the course of prepa-
ration. If this long delay were without adequate
excuse, the retention of the injunction for the
long period which has intervened since it was
granted could not be justified. But the delay is
obviously due to the many doubts and uncer-
tainties arising from the present litigation.
* * * With those doubts and uncertainties now
removed, the proceeding should go forward to
completion without further delay * * *.
Similar considerations led the Court in Reconstruc-
tion Finance Corp. v. Denver & Rio Grande Western
R. Co., 328 U.S. 495, 535-536, to uphold as fair and
equitable a plan of reorganization that sanctioned the
loss by junior creditors of 90 percent of their invest-
ment during the reorganization proceedings :
* * * [(T)hey invested their capital in a public
utility that does owe an obligation to the public.
* * * [Bly their entry into a railroad enter-
prise, [they] assumed the risk that in any * * *
reorganization the interests of the public would
be considered as well as theirs.
But the scope of the Fifth Amendment taking
clause in railroad reorganization has been most clearly
delineated in a series of decisions involving the New
York, New Haven, and Hartford Railroad. Those de-
cisions unequivocally establish that railroad creditors
may for a reasonable time be forced to bear substan-
tial and uncompensated losses, resulting if. necessary
in a substantial reduction in the amount available to
satisfy prebankruptey claimants, pending reorganiza-
22
tion. Because of the importance of those decisions and
their direct relevance to the facts of this case, we
review them here in some detail.
The New Haven entered reorganization on July 7,
1961. It continued to suffer substantial cash outflows
and operating losses, and by late 1963 “it became ap-
parent that the inclusion of the New Haven in the
Penn-Central merger was the only salvation for the
New Haven as an operating railroad, and at that time
it was thought to be the solution which best served the
interests of the creditors as well as the public inter-
est.” In re New York, New Haven and Hartford Rail-
road Co., 289 F. Supp. 451, 456 (D. Conn.). Accord-
ingly, the New Haven’'s trustees and the two larger
railroads, with the blessing of the reorganization court
and the encouragement of the Interstate Commerce
Commission, ultimately agreed that the New Haven’s
assets would be included in the Penn-Central merger.
However, “because the merger and the reorganization
proceedings stretched out far beyond what was orig-
inally forecast, the ‘interim’ became seven and a half
years; and ‘losses reasonably incident tu working out
the solution most consistent with the public interest’
eroded the debtor’s estate in excess of $60 million.” Jn
re New York, New Haven and Hartford Railroad Co.,
304 F. Supp. 793, 800 (D. Conn.). Since the estate had
no going concern value (In re New York, New Haven
and Hartford Railroad Co., supra, 289 F. Supp. at
455), this erosion directly reduced the amount that
could be made available through liquidation for the
satisfaction of prebankruptcy ciaims.
23
Faced with the prospect of still further erosion re-
sulting from involuntary continued loss operations,
and fearing that losses incurred after the Penn-Cen-
tral merger but prior to inclusion of the New Haven's
assets would be borne by the New Haven estate and its
creditors rather than by the newly merged railroad, a
group of New Haven creditors sought to bar the mer-
ger until simultaneous inclusion could be achieved.
This Court, apparently recognizing that a postpone-
ment of the merger would virtually necessitate a liqui-
dation of the New Haven, and that it was that end
which the creditors in fact sought, rejected their de-
mand (Penn-Central Merger Cases, 389 U.S. 486, 510-
511):
Continuation of the operations of the NH,
which the Commission has found to be essen-
tial, can be assured only upon and after ef-
fectuation of the merger of the Penn-Central.
The bondholders agree that to delay the Penn-
Central merger until all proceedings necessary
to include the NH have taken place may well
mean the end of NH operations. The only
realistic way to avoid this is to permit prompt
consummation of the Penn-Central merger sub-
ject to appropriate conditions respecting the
New Haven which Penn-Central will perforce
accept by its act of merger. While the rights
of the bondholders are entitled to respect, they
do not command Procrustean measures. They
certainly do not dictate that rail operations
vital to the Nation be jettisoned despite the
availability of a feasible alternative. The public
interest is not merely a pawn to be sacrificed
24
for the strategic purposes or protection of
class of security holders whose interests may
may not be served by the destructive move.
The New Haven creditors thereupon petitioned t!
reorganization court to dismiss the proceedings at
order the New Haven’s liquidation, on the ground th
the continuing erosion constituted a taking of the
property under the Fifth Amendment. The predic
ment of the New Haven creditors at that time was f:
more compelling than that of the appellees here. T!
New Haven had been in reorganization for seve
years, suffering continuous losses. The equity and w
secured debt had become worthless. See New Have
Tnclusion Cases, 399 U.S. 392, 490, n. 82. For moi
than four years, it had been clear that the railroa
could not be made viable without external assistane
The only solution, inclusion in the Penn Central, we
still some time away and was outside the control ¢
the reorganization court. Although the exact amour
of consideration to be paid for the New Haven
assets had not been calculated, the upper limit ha
heen fixed by the Interstate Commerce Commissio:
at liquidation value as of December 31, 1966. Sine
that date, additional administrative claims had ac
cumulated, thereby reducing the eventual recover
available to secured creditors.
The reorganization court nevertheless rejected th
petition to dismiss, declaring that ‘‘[t]o jettison every
thing achieved and turn back just as a glimmer o
light begins to show at the end of a long dark tunne
not only carries with it an aura of unreality bui
25
borders on the fantastic.” In re New York, New
Haven and Hartford Railroad Co., 281 F. Supp. 65,
68 (D. Conn.).
In the meantime, the Commission had approved a
proposed purchase agreement for the New Haven
assets. The New Haven creditors attacked the agree-
ment for, inter alia, failing to require the Penn Cen-
tral to compensate the estate for all operating losses
that it had ineurred subsequent to the Penn-Central
merger, on the theory that they were at least entitled
to compensation for post-1966 erosion in their inter-
ests. The three-judge reviewing court also rejected
the creditors’ claims (N.Y., N.A. & H. R. Co. Bond-
holders’ Committee v. United States, 289 F. Supp. 418,
444 (S.D. N.Y.)):
Although we agree that by investing in a rail-
road the bondholders did not surrender their
constitutional right not to he required to operate
the property at a perpetual loss, they did sub-
ject themselves to such losses as are reasonably
incident to working out the solution most con-
sistent with the public interest.
Later in 1968 the reorganization court determined
it would not permit further priority borrowing to
sustain rail operations beyond the end of the year and
that it would entertain a motion to dismiss the pro-
ceedings unless the sale of the assets to the Penn
Central was consummated before then, on the ground
‘‘that the continued erosion of the Debtor’s estate
from operational losses after the end of 1968 will
clearly constitute a taking of the Debtor’s property
and consequently the interests of the bondholders,
556-931-774. —3
26
without just compensation.”” Jn re New York, New
Haven and Hartford Railroad Co., supra., 289 F.
Supp. at 459. But this determination did not rest
upon a simple equation of “taking” with either post-
bankruptcy or post-1967 erosion of the prebankruptey
claimants’ interests. The court recognized that those
interests had in fact heen ‘‘chiseled down day after
day by * * * operating losses.’’ 289 F. Supp. at 457.
The court ruled that the determination of when a
taking oceurs during a railroad reorganization re-
quires a balancing of the interests of prebankruptcy
claimants against the public interest in continued rail
service; it struck that balance in favor of the creditors
only when there was no longer a substantial publie
interest in further delay (289 F. Supp. at 455, 459,
4):
** * TA)s bondholders of a railroad [the
ereditors’] interests are subject to such in-
vasion as may be essential to continue the opera-
tion of the railroad for a reasonable period of
time to provide an opportunity to work out a
permanent plan or means of continuing the
operations, if possible, to the extent that it is
required by the public interest.
* * * * *
The extent to which the * * * [ereditors’]
property rights * * * may properly be invaded
in the public interest to keep railroad opera-
tions going pending a solution of the problem
of reorganization, is hardly a matter which can
be determined with mathematical precision. It
involves a consideration of the amount and
nature of the Railroad’s obligations, the seri-
ousness of adverse consequences to the public
27
if service were terminated, the rate of losses
and the feasibility of possible solutions. * * *
* * & *&
There is presently no reason why the Penn-
Central should not take over the New Haven
at the beginning of 1969.
The sale of the New Haven’s assets to the Penn
Central was thereafter consummated at a price equal
to their liquidation value as of December 31, 1966.
This was not, of course, the measure of the secured
creditors’ recovery. Their claims were subordinate to
the more than $60 million in administrative claims
that had accumulated as a result of deficit operations
during reorganization both before and after Decem-
ber 31, 1966. The secured creditors, therefore, took
the position that under the Fifth Amendment they
were at least entitled to net liquidation value as of
that date, unreduced by later-arising administrative
claims.
This Court considered and rejected that contention
in the New Haven Inclusion Cases, supra. The Court
acknowledged that the secured creditors had suffered
substantial erosion of their security as a result of
continued loss operations but concluded that there was
“no constitutional bar to that result’? (399 U.S. at
491), in view of the substantial public interest that
had been served by maintenance of the New Haven’s
rail services and the fact that the creditors had know-
ingly invested in a regulated utility that owed an
obligation to the public.” See, also, In re Boston ond
Maine Corp., 484 F. 2d 369, 374-375 (C.A. 1).
“? The Court also noted (399 U.S. at 492-493) that the record
did not establish the extent of post-1966 losses and that the
secured creditors first petitioned for dismissal and liquidation
556 -931—74-—_4
28
The court below thus erred in its apparent assump-
tion that a net reduction in the amount available to
satisfy prebankruptcy claimants would of necessity
constitute a Fifth Amendment taking. Before the
court concluded that a taking was imminent or even
possible under the Rail Act, it should have considered
the public interest in continued nonpassenger rail serv-
ice throughout the northeastern United States, the ex-
tremely brief period during which the burdens of
continued loss operations, if any, would fall upon the
railroad creditors, amit the substantial federal assis-
tance that is made available under the Rail Act, and
the fact that the Rail Act permits a profitable re-
structuring of the entire northeast rail system. Con-
sideration of those factors, as we now show, should
have led the court to conclude that no reasonably fore-
seeable losses incurred pending implementation of the
final system plan will constitute a taking under the
Fifth Amendment.
B. THE RAIL ACT REPRESENTS A SUBSTANTIAL GOOD FAITH EFFORT
TO RESTORE THE NORTHEAST RAIL SYSTEM TO FINANCIAL VIA-
BILITY
1. The public interest in continued rail service in
the northeastern States requires little elaboration.”
in April 1967. Those considerations obviously were not the basis
of the Court’s decision, however, for if the constitutional claim
advanced by the secured creditors had been meritorious they
would have been entitled at least to recovery of a portion of
the post-April 1967 losses, and the extent of those losses could
have been determined on remand.
%* The area served by the Penn Central encompasses 55 per-
cent of the nation’s manufacturing plants; that railroad alone
carries 21 percent of all United States freight car loadings and
serves 59 defense facilities. Department of Transportation, The
Penn Central and Other Railroads, Report to the Senate Com-
mittee on Commerce, p. xix (1972). Moreover, termination of
Penn Central operations would cause an immediate drop in
20
In passing the Rail Act, Congress was motivated by
an awareness of the severity of the adverse impact
which liquidation of the railroads now in reorganiza-
tion would have upon the economy and security of
the entire nation (H. Rep. No. 93-620, supra, at 28) :
* * * [T]he public interest would not be
served if these bankrupt carriers were shut
down and sold on the ‘“‘auction block”. The ser-
vices these carriers perform are essential to the
nation, and the blow to the economy if such
services were interrupted only briefly, would
be devastating. This is a matter which affects
not only the economy, but also the defense needs
of the nation. The future of rail transportation
in the Northeast transcends the interests of not
only the investors, the creditors, the managers
and trustees, and the people and the industries
of the Northeast region—it is an American
problem, one affecting all of us.
This congressional evaluation of the public interest
is of course entitled to substantial deference. See, e.9.,
Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S.
579, 609-610 (concurring opinion of Justice Frank-
furter); United States v. Darby, 312 U.S. 100, 115-
117; West Coast Hotel Co. v. Parrish, 300 U.S. 379,
400.
2. But in moving to protect this public interest,
Congress did not place upon the creditors the burden
of lengthy and indefinitely continued loss operations.
Congress instead estabiusned an expedited procedure
GNP of 2.7 percent and increase unemployment by over two
million. Statement of Secretary Brinegar, Hearings before the
Surface Transportation Subcommittee of the Senate Committee
on Commerce, on S. 1031, Northeastern Railroad Transportation
Crisis, 93d Cong., 1st Sess., pt. 2, p. 258.
30
for reorganizing the railroads into a financially self-
sustaining system in less than two years after the date
of enactment (and thus within approximately 13
months after the date of this filing). The “interim”
during which further erosion in the bankrupt estates
may oecur pending reorganization is thereby extremely
brief by reorganization standards. This is not too long
a period to make creditors wait for a reorganization
vitally necessary in the public interest; it may in fact
be a shorter period than would be required for com-
pletion of the complex and time-consuming process of
liquidation.
In view of the brevity of the interim period prior
to reorganization under the Rail Act, any erosion in
the bankrupt estates resulting from further loss op-
erations pending implementation of the final system
plan will be comparatively slight. Indeed, the record
in this ease fails to establish that proceedings under
the Rail Act will impose any economic loss on ap-
pellees. We review that record at length in the Ap-
pendix, tufra,
In brief summary, the losses reported on Penn
Central’s income statements do not reflect actual ero-
sion in the value of the estate (see App., infra, pp.
63-65). The value of the estate appears to have in-
creased since the date of the reorganization petition,
although it cannot be determined from the record
whether this increase fully offsets accumulated ad-
ministrative claims (see App., infra, pp. 67-70). The
current liquidation value of the estate apparently ex-
ceeds the valid claims against it by a minimum of
$1.3 billion, an amount adequate to cushion creditors
31
against even indefinitely continued losses (see App.,
infra, pp. 70-72). Furthermore, it is quite possible that
the estate would at this point suffer greater erosion
from liquidation than from continued operations
pending implementation of the final system plan
(App., infra, p. 73).
3. Moreover, the Rail Act provides substantial
financial assistance that will serve both to soften the
impact on claimants of any interim erosion in the
estates of the debtor railroads and to enhance the
probability ef successful reorganization of those rail-
roads into an econoiuecally viable, financially self-sus-
taining rail system. The Association is authorized
under Section 210 of the Rail Act to issue up to $1.5
billion in federally guaranteed obligations."* Of this
amount, up to $1 billion may be issued to the Corpora-
tion, which will use at least $500 million of that
amount for rehabilitation and modernization of the
rail properties transferred to it from the debtor rail-
roads, Section 210(b).
Because Section 2li(c) permits loans on such
“terms and conditions * * * as the Association deems
appropriate,’’ the Association's loans to the Corpora-
tion may be made on terms considerably more favor-
able than would ordinarily be available commercially.
Thus the Corporation could have available to it at the
outset up to $1 billion in “‘soft financing.’’ In addi-
tion, Section 213 authorizes the Secretary of Trans-
“ The $1.5 billion figure is a rev« lving limitation; additional
obligations may be issued as repayments are made. Section
210(b). Congre-. may by joint resolution approve the issuance
of further obligations above the $1.5 billion ceiling. /bid. See,
also, Section 206(h) and (i).
32
portation to make payments not exceeding $85 million
to the trustees of the debtor railroads to assist them
in meeting emergency needs pending implementation
of the final system plan. Congress has already appro-
priated $74.8 million for that purpose. See Title VII
of the Foreign Assistance and Related Programs
Appropriation Act of 1974, Pub. L. 93-240, 87 Stat.
1057 ; Chapter XT of the Second Supplemental Appro-
priations Act of 1974, Pub. L. 93-305, 88 Stat. 210.
Section 402 of the Rail Act further provides for an
additional $180 million in rail continuation subsidies.
And Section 215 authorizes the Association to issue
up to $150 million in obligations for acquisition,
maintenance or improvement of railroad facilities and
equipment pending implementation of the final sys-
tem plan. j
4. The financial resources provided by the Rail Act
might alone enable the northeastern rail transporta-
tion system to escape from the vicious circle in which
it is now trapped—a circle in which insufficient reve-
nues lead to deterioration of the physical plant,
deteriorating plant to inadequate service, and worsen-
ing service to a further reduction in revenues. See
Penn Central Trustees’ January 1973 Report, p. 2.
But the Rail Act does far more than just provide
desperately needed financial assistance: it provides a
means of systemic restructuring unavailable under
prior law.
The objective of the Rail Act is the fashioning of
a financially sound rail system out of individually
unreorganizable bankrupt railroads. Congress realized
that that objective could not be achieved without an
expeditious means for eliminating duplicative and
unneeded facilities. The Penn Central Trustees,” the
Department of Transportation,” the Penn Central
reorganization court,’ and Congress “ have all recog-
nized that each of the northeastern railroads, and the
Penn Central in particular,” is burdened by excessive
physical plant. Much of this excessive plant represents
“plant redundance’’—the operation of duplicative fa-
cilities by two railroads in an area capable of support-
ing only one. See Department of Transportation, Rail
Service in the Midwest and Northeast Region 3 (Feb-
ruary 1, 1974) (finding that 96% of the 1972 freight
carloads carried by the debtor railroads could have
been accommodated on 76% of their 1972 trackage).
Proceedings under Section 77 of the Bankruptey Act
cannot solve these problems; reorganization courts
conducting such proceedings lack the authority to deal
with excess capacity even of the particular railroad in
reorganization, let alone that of the system as a whole.
See H. Rep. No. 93-620, supra, at 25-29; In re Penn
Central Transportation Company, Bky, No. 70-347,
Mem. and Order No. 1543, p. 5 (E.D. Pa. May 2,
1974).
“Ts See Penn Central Trustees’ February 1972 Report, p. 2;
see also their Reports for January 1973 and April 1974,
See p. 6 of the Department's study on the Northeastern
Railroad Problem, A Report to Congress (submitted March 26,
1973).
" le re Penn Central Transportation Company, Bky. No, 347,
Mem. and Order No, 1543, p. 5 (E.D. Pa., May 2, 1974).
* H. Rep. No, 93-620, supra, at 29.
* By January 1, 1973, the Penn Central Trustees had filed
applications with the Commission for the abandonment of over
3,000 milee of lines. Penn Central Trustees’ January 1973
Report, p. 3.
34
Railroads undergoing reorganization under the
Rankraptcy Act must apply to the Commission for
.whority to abandon uneconomic lines (see Section
1(18) of the Interstate Commerce Act, 49 U.S.C. 1),
and the Commission in turn is required to comply
with time-consuming National Environmental Policy
Act procedures. Harlem Valley Transportation Ass’.
v. Stafford, 360 F. Supp. 1057 (S.D. N.Y.), affirmed,
C.A. 2, No. 73-2496 (June 18, 1974). Although there is
substantial disagreement as to the length of time nor-
mally required for the processing of an abandonment
application by the Commission,” the Department of
Transportation concluded (Northeastern Railroad
Problem, supra, at 22):
Lengthy procedures often prevent or unneces-
sarily hinder a railroad’s efforts to abandon
branch or other lines that can no longer cover
even variable costs. Hearings, briefs, rebuttals,
* Stephen Ailes, President of the Association of American
Railroads, stated in House hearings that “[i]n cases in which
protests are filed and hearings held, the average time from
date of filing to date of final decision is anywhere from 15 to
18 months—despite the fact that only a few miles of track are
usually involved.” Hearings before the Subcommittee on Trans-
portation and Aeronautics of House Committee on Interstate and
Foreign Commerce, on H.R. 1416 and H.R. 11825, Transporta-
tion: Regulation of International Airfares, 92d Cong., 1st Sess.,
pt. 1, p. 357. George M. Stafford, Chairman of the Interstate Com-
merce Commission, replied that “the bottleneck in the elimina-
tion of redundant capacity is the lack of initiative on the part of
railroad management” and that “[i]n the approximately 1,000
abandonment applications received within the past decade,
we were able to dispose of more than 70 percent without oral
hearing and of those approximately two-thirds were approved
within 60 days’ time.” Id. at 261.
35
and other procedures may delay abandonment
for years—all the while forcing the railroad to
provide the service at a loss.
The amount of delay encountered by an abandonment
application will depend in part upon whether the ap-
plication is contested. Contests are most likely where
the application relates to lines carrying substantial
traffic; yet the abandonment of just such lines may be
necessary to restore the northeastern railroads to prof-
itability. See Department of Tranportation, Rail
Service in the Midwest and Northeast Region, supra,
at 8-10.
In considering the Rail Act, Congress emphasized
its concern over the economic burdens that lengthy
abandonment procedures had imposed upon the rail-
roads. See H. Rep. No. 93-620, supra, at 27, 53; see
also 119 Cong. Ree. 822483 (daily ed., December 11,
1973) (Senator Hartke) and 823782 to 823783 (daily
ed., December 21, 1973) (Senator Hartke). Accord-
ingly, Congress made both the Interstate Commerce
Act and the National Environmental Policy Act in-
applicable to abandonments under the Rail Act. Sec-
tion 601(b) and (c¢). Instead, during the interim
period prior to implementation of the final system
plan, the Association is granted authority, in the
absence of a reasonable objection from affected state,
local, or regional transportation authorities, to permit
prompt discontinuancé of service and abandonment
of lines. Section 304(f). And, more significantly, the
service lines not transferred to the Corporation under
the final system plan may be promptly discontinued
and abandoned by the railroads concerned, unless the
service is fully subsidized or the lines are purchased
and operations provided for by the purchaser. Section
304(a), (b), (¢), and (d). No application need be filed
with either the Commission or the Association with
respect to such discontinuances and abandonments.”
Thus, the Rail Act enables the creation of a finan-
cially self-sustaining core system by permitting the
weeding out of uneconomic or otherwise undesirable
lines and the selection of only those lines that will
contribute positively to the economic viability of the
system. This could not have been achieved under prior
law. As indicated above, reorganization courts have
no authority to restructure a debtor's rail operations,
for they are dependent upon the Commission’s author-
ization of piecemeal abandonments. See Section 77 (0) of
the Bankruptey Act. Moreover, restructuring of an
entire system is outside the jurisdiction of a reorga-
nization court and also beyond its capacity, because of
the difficulty of conducting negotiations between
debtor railroads (H. Rep. No. 93-620, supra, at 29),
the need for Commission approval of mergers and con-
solidations (Section 5 of the Interstate Commerce
Act), and antitrust considerations. Even the Com-
mission lacks authority to impose a system-wide plan
"The elimination of employees through discontinuance of
service and abandonment of lines involves substantial employee
protection payments under existing collective bargaining agree-
ments, See, e.g., Penn Central Trustees’ Reports for January
1973 (p. 3) and October 1972 (pp. 3-4). The Rail Act removes
this burden from the debtor railroads by providing indepen-
dently for employee protection; federal funds of up to $250
million are committed under Section 509 to the payment of
such employee protection benefits.
37
upon a reluctant debtor railroad. See St. Joe Paper
Co. v. Atlantic Coast Line R. Coa., 347 U.S. 298, 309, n.
12.
5. The Rail Act—by providing substantial federal
assistance and permitting a profitable restructuring
of the entire northeast rail system—constitutes a
substantial good faith effort to restore the northeast
rail system to financial viability. Accordingly, in view
of the substantial public interest in continued rail
service in the northeast, the extremely brief interim
period required under the Rail Act before the final
system plan is to be implemented, and the absence of
any compelling showing of extreme hardship on the
bankrupt estates, the investors in the debtor railroads
may b> constitutionally compelled to bear the burden
of continuing operations pending implementation of
the plan. The district court therefore erred in bar-
ring the Association from freely exercising its
discretion under Section 304(f) to prevent discontinu-
ance of needed rail services.
II
APPELLEES WILL RECEIVE JUST COMPENSATION FOR ANY
TAKING
Though we believe there is no interim erosion occur-
ring prior to the implementation of the Rail Act that
amounts to a taking, in any event, full and adequate
compensation may be available under Section 303 of
that Act and will certainly be available in the Court of
Claims under the Tucker Act.
38
A. COMPENSATION I8 AVAILABLE UNDER SECTION 303 OF THE
RAIL ACT
The estates of the debtor railroads will receive stock
and securities of the Corporation, and obligations of
the Association, in exchange for the rail properties
transferred to the Corporation under the final system
plan. See Section 303(b). The special court established
under Section 209(b) will then review that exchange
to determine whether its terms are “fair and equitable
to the estate of each railroad in reorganization.’
Section 303(¢)(1). Nothing in the Rail Act bars the
special court from considering interim erosion amount-
ing to a taking in making that determination. Thus
the special court could provide compensation for any
taking resulting from interim erosion by reallocating
the consideration provided in the final system plan,
awarding additional securities of the Corporation or
obligations of the Association, and entering a judg-
ment against the Corporation. See Section 303(¢) (2).
Congress believed that the consideration to be pro-
vided under Section 303 would be constitutionally ade-
quate (H. Rep. No. 93-620, supra, at 54-55) :
The Committee expects that the intrinsie value
of the stock of the new Corporation will be
found to be at least equal to the fair and
equitable value of the rail properties conveyed
in exchange. * * * The Committee is of the
opinion that * * * the provision for deficiency
judgment and payment of obligations of the
Association * * * are more than adequate to
guarantee that the creditors of the bankrupt
railroad will receive all that they may Con-
stitutionally claim.
ee ee ee
Of course, the constitutional adequacy of any com-
pensation ordered by the special court for interim
erosion amounting to a taking would depend in large
part on whether the basic objective of the Rail Act is
achieved—whether, that is, the final system plan suc-
ceeds in establishing a profitable northeastern rail
system. There can of course be no guarantee that that
objective will be achieved, although, as we have shown
(pp. 31-37, supra), the Rail Act appears to provide
considerable promise of success.” But if the consider-
ation ordered by the special court proves to be con-
stitutionally inadequate, a complete remedy, as we
now show, is available under the Tucker Act.
B. JUST COMPENSATION FOR ANY OTHERWISE UNCOMPENSATED TAK-
ING IS AVAILABLE UNDER THE TUCKER ACT
The Tucker Act confers jurisdiction on the Court
of Claims “to render judgment upon any claim
against the United States founded * * * upon the Con-
stitution * * *.” 28 U.S.C. 1491. That Act consents to
suits against the government for damages arising from
otherwise unconstitutional takings. Yearsley v. W. A.
Ross Construction Co., 309 U.S. 18. No provision of
* Apparently because Section 303, standing alone, does not
guarantee the payment of just compensation for any taking re-
sulting from interim erosion, the court below declared it uncon-
stitutional. That holding was erroneous for two separate reasons.
First, since, as we have shown above (pp. 16-37, supra), there
will be no taking from interim erosion, it is not constitutionally
necessary for Section 303 to compensate for such erosion.
Second, since, as we show below (pp. 39-48, infra), appellees
have an adequate remedy at 'aw under the Tucker Act for any
otherwise unconstitutional t king, there is no constitutional
requirement that Section 303 itself guarantee just eompensa-
tion. Hurley v. Kincaid, 285 U.S. 95.
40
the Rail Act by its terms either limits the jurisdiction
of the Court of Claims or bars the estates of the debtor
railroads from suing in that court.
The Tucker Act therefore would appear to provide
an adequate remedy at law for any otherwise uncom-
pensated taking arising under the Rail Act.” The dis-
trict court below concluded, however, on the basis of
its review of the legislative history, that the Rail Act
deprives appellees of any remedy in the Court of
Claims (J. App. 40-53). We disagree that a pro tanto
repeal of the Tucker Act may be inferred from the
Rail Act.
1. This Court historically has been reluctant to
infer that later statutes bar suits under the Tucker
Act. In Amell v. United States, 384 U.S. 158, for
example, this Court declined to infer a withdrawal
of the Court of Claims’ jurisdiction over wage claims
of federal employees working aboard government ves-
sels, even though the subsequently enacted Suits in
*The coneurring judge below questioned whether even a
Tucker Act remedy would be constitutionally adequate, stating
that he found “it difficult to characterize as due process of law
the notion that further interim erosion can be justified because,
if the lengthy and complex procedures of the Act do not produce
a constitutionally permissible result, the parties may then start
over again in the Court of Claims” (J. App. 81). But it has long
been recognized that “[w]here only property rights are involved,
mere postponement of the judicial enquiry is not a denial of
due process * * *.” Phillips v. Commissioner, 283 U.S. 589, 596-
597. Moreover, any such postponement works no economic in-
jury, for interest on just compensation awards runs from the
date of taking. United States v. Thayer-West Point Hotel Co.,
329 U.S. 585; Phelps v. United States, 274 U.S. 341. See, also
Hurley v. Kincaid, 285 U.S. 95. There can be no serious doubt,
therefore, that the Tucker Act remedy is constitutionally ade-
quate.
eae a ae ee See
41
Admiralty Act, 46 U.S.C. 741 et seq., vested in the
district courts exclusive jurisdiction over suits of a
maritime nature; the Court was unwilling to read
into the Suits in Admirality Act a “repeal * * * by
implication” (384 U.S. at 165). See, also, Hele v.
United States, 100 Ct. Cl. 289, 294. Cf. United States
v. Pfitsch, 256 U.S. 547.
Accordingly, it has long been understood that the
mere absence of a specific statutory provision for
compensation does not deprive the Court of Claims
of jurisdiction over just compensation claims, whether
or not the government intended a taking. See Arm-
strong v. United States, 364 U.S. 40; United States
v. Dickinson, 331 U.S. 745; United States v. Causby,
328 U.S. 256; Jacobs v. United States, 290 U.S. 13;
Portsmouth Harbor Land & Hotel Co. v. United
States, 260 U.S. 327. In Causby, for example, this
Court upheld the Court of Claims’ jurisdiction over a
claim that low and frequent flights of military air-
eraft took the property of the owner beneath the
flight path, even though the Air Commerce Act of
1926, 44 Stat. 568, had granted the United States
“eomplete and exclusive national sovereignty in the
air space” over the nation.
Furthermore, this Court has refused to infer a pro
tanto repeal of the Tucker Act even from a statute
expressly exempting the United States from liability.
In Hurley v. Kincaid, 285 U.S. 95, the plaintiff had
sought to enjoin work on a government flood control
project, alleging “‘that the project [would] expose his
property to additional destructive floods” (285 U.S. at
100). Although the pertinent statute stated that “‘[n]o
42
liability of any kind shall attach to or rest upon the
United States for any damage from or by floods”
(285 U.S. at 102, n. 2), the Court held that injunctive
relief was improper because, in the event of a
taking, ‘‘the complainant can recover just compensa-
tion under the Tucker Act in an action at law” (285
U.S. at 104).
It is therefore clear that the mere absence in the
Rail Act of any reference to the availability of a
Tucker Act remedy cannot be read as negating that
remedy. Nor is recourse to the Court of Claims barred
by the fact that the legislative draughtsmen believed
that no taking would occur. The consistent history
of decisional law teaches that Congress may not be
held to have withdrawn the jurisdiction conferred on
the Court of Claims by the Tucker Act without com-
pelling evidence of an explicit intention to do so.
As this Court has often observed, “repeals by im-
plication are not favored[;] * * * [t]he intention
of the legislature to repeal ‘must be clear and mani-
fest.’ ” United States v. Borden Co., 308 U.S. 188, 198.
See also Shuttle Corp. v. Transit Comm’n, 393 U.S.
186, 193; Rosenberg v. United States, 346 U.S. 273,
295. We now show that neither the language of the
Rail Act nor its legislative history reveals a “clear
and manifest’’ intention to repeal pro tanto the Tucker
Act’s grant of jurisdiction to the Court of Claims,
2. In several provisions of the Rail Act, Congress
showed that, when it intended to repeal or limit the
applicability of pre-existing statutes, it explicitly so
stated. For example, the Sherman, Clayton, and Fed-
eral Trade Commission Acts are made “inapplicable
43
with respect to any action taken to formulate or im-
plement the final system plan’’ (Section 601(a)(2));
the Interstate Commerce Act and the Bankruptcy
Act are made “inapplicable to transactions under this
Act to the extent necessary to formulate and imple-
ment the final system plan” (Section 601(b) ; see also
Section 304(¢)); and the National Environmental
Policy Act “shall not apply with respect to any action
taken under authority of this Act before the effective
date of the final system plan’ (Section 601((c)).
Similarly, the requirement in Rev. Stat. 3709, 41
U.S.C, 5, that the government advertise for contract
proposals is made inapplicable to certain government
contracts entered into under the Rail Act. See See-
tions 202(a)(10) and 205 (c)(2). Certain provisions
of the Judicial Code—not including the Tucker Act—
are also overriden. See Sections 206(d)(3), 207(hb),
209 (a) and (b), and 303 (b)(2) and (d). See. also,
Section 304(f).
No provision, however, curtails the jurisdiction of
the Court of Claims under the Tucker Act. “We are
entitled to assume that * * * Congress legislated with
care, and that had Congress intended to [make the
Tucker Act also inapplicable], it would have said so
expressly, and not left the matter to mere implica-
tion.”’ Palmore v. United States, 411 U.S. 389, 395.
As the many explicit limitations on other preexisting
statutes illustrate, an express provision dealing with
the Tucker Act “would have been easy.”’ Farnsworth
v. Montana, 122 U.S. 104, 113. It is therefore unrea-
sonable to infer that Congress intended, by “mere
implication’’, to bar recourse to the traditional Court
44
of Claims remedy in the event that the Rail Act
should cause a taking of property without just com-
pensation,
The court below apparently was persuaded, how-
ever, that the Raii Act established “a preemptive sys-
tem of judicial participation [with] respect to the
final system plan” (J. App. 46), because of the con-
solidation in the special court of “all judicial proceed-
ings with respect to the final system plan’’ (J. App.
47). But the consolidation of such proceedings in the
special court is irrelevant to the question whether a
Court of Claims remedy remains at the close of those
proceedings.”
Consolidation was necessary, among other reasons,
because the function of ‘‘reallocating the securities of
the Corporation in a fair and equitable manner if
[they have] not been fairly allocated among the rail-
roads transferring rail properties to the Corporation
[under the final system plan]’’ (Section 303(¢) (2)
(A)) was one that had to be carried out by a single
tribunal, acting with all the proceedings before it.
More generally, consolidation was necessary to achieve
a coordinated rather than piecemeal review of the
final system plan; Congress’ *‘experience in the envi-
ronmental field indicated what a mess can be made of
the best laid plans by a diversity of legai proceedings
all over the Nation, with different theories canceling
each other out very often, and not resolvable until
~ #4 Indeed, the lower court's exercise of jurisdiction in this case
illustrates that it did not read the Rail Act as barring courts
other than the special court from hearing claims arising out of
enforcement of that Act.
45
you get to the Supreme Court * * *.’’ 119 Cong. Ree.
S 23780 (daily ed., December 21, 1973) (Senator
Javits). The availability of a subsequent Court of
Claims remedy does not interfere with that legislative
purpose.
The court below appeared to be concerned that
Section 303(¢)(2)(C), which empowers the special
court to enter a judgment against the Corporation
if any lack of fairness and equity cannot otherwise
be cured, implies that such a judgment is the exclu-
sive remedy for takings arising under the Rail Act.
That provision may evince a congressional presump-
tion that no taking would arise under the Act, but we
have already shown (pp. 41-42, supra) that the juris-
diction of the Court of Claims over just compensation
claims is not dependent upon a government intent to
commit a taking. Moreover, Section 303(¢)(2)(C)
merely states the limit of the special court’s power to
award fair and equitable consideration to the estates
of the railroads in reorganization. It does not deprive
the Court of Claims of power to determine the con-
stitutional adequacy of that consideration.
The special court may enter a judgment pursuant to
Section 303(¢)(2)(C) equal to the amount by which
the securities, obligations, and other benefits otherwise
received by the debtor railroads fall short of the statu-
tory requirements of fairness and equity. Whether
such a judgment would have any value to the debtor
railroads and, if so, whether that value would be
3 The court below may have assumed that since the debtor
railroads—and ultimately their creditors—would be the share-
holdeis of the Corporation, they would derive no benefit from
556-931--74-—5
sufficient to satisfy the Fifth Amendment, would not
be resolvable in the special court. But those questions
would be appropriate for consideration by the Court
of Claims in a subsequent suit for just compensation.
Thus the logic of the statutory scheme itself sug-
gests, contrary to the holding below, that there was no
congressional intention to divest the Court of Claims
of jurisdiction to hear just compensation suits based
upon alleged takings arising under the Rail Act.
3. The entire legislative history relied upon by the
court below consisted of a single remark made by
Senator Hartke during floor debate and a short col-
loquy between Representatives Kuykendall and Adams
in the House. Neither the remark nor the colloquy
suggests that Congress intended to deprive creditors
of a Tucker Act remedy.
Senator Hartke, in explaining why in his view it
would be necessary to provide the creditors of the
debtor railroads with equity interests in the Corpora-
tion, stated that “[i]f we did nothing while continuing
to mandate rail service, there is the distinct possibility
** * that a number of these people could make a claim
against the Government which could be sustained in
the Court of Claims.” 119 Cong. Rec. S 23783 to S
23784 (daily ed., December 21, 1973). The Senator’s
the entry of judgment under Section 303(c)(2)(C). Such an
assumption would not be entirely correct. Appellees would ob-
viously benefit to the extent that their claims as judgment
creditors had priority over nonshareholder claims, such as those
of the Association (see p. 31. supra). Moreover, appellees’ recovery
on the judgment would probably escape taxation as a return of
capital, whereas other payments by the Corporation to its share-
holders would ordinarily be subject to taxation as dividend pay-
ments,
47
evident concern was with providing sufficient compen-
sation to prevent a Tucker Act claim from being “sus-
tained,” not with denying the remedy. He believed tnat
the Corporation would be profitable (id., at S 23784)
and therefore that the stock interests transferred to
the creditors would be constitutionally adequate. Thus
the Senator’s remark is most reasonably interpreted
as expressing a belief that, although creditors would
he able to assert Tucker Act claims at the close of
proceedings under the Rail Act, such claims would
have no factual basis in view of the consideration to
be provided.
The colloquy between Representatives Kuykendall
and Adams concerned the operation of Section 303(¢)
(2)(C), which permits the special court to enter a
deficiency judgment against the Corporation. Repre-
sentative Kuykendall asked, “‘There is no way the
Federal court may assess the taxpayers or this Con-
gress on the judgments of the creditors; is that cor-
rect?” 119 Cong. Ree. H 11876 (daily ed., Decem-
ber 20, 1973). Representative Adams replied, “The
gentleman is correct.” /bid. The gentleman was cor-
rect. Any deficiency judgment entered by the special
court would be enforceable only against the Cerpora-
tion; the special court is granted no jurisdiction to
enter judgments against the United States. That fact,
of course, does not negate the possibility of a subse-
quent suit in the Court of Claims.
Representative Adams also stated (ibid.):
* * * [T]here is a definite limitation on the
total amount that can be authorized under this
bill. [Congress may by joint resolution approve
48
the issuance of additional federally guaranteed
securities of the Corporation or association,”
but] it was the clear intent of the managers
that any amount other than common stock was
to be at the lowest possible limit to meet the
constitutional guarantees. [Emphasis added. ]
This statement, contrary to the reading of the court
below, indicates an awareness that creditors’ interests
are protected by a constitutional guarantee.” Repre-
sentative Adams apparently assumed that any consti-
tutional deficiency in the consideration ordered by the
special court would be supplied by additional federal
assistance made available by joint resolution of Con-
gress, but nothing he said denies the availability of a
Court of Claims remedy in the event that constitu-
tionally adequate consideration is not otherwise paid.
4. In short, the court below erred in inferring a con-
gressional intent to deprive the Court of Claims of
jurisdiction over just compensation suits arising from
transactions under the Rail Act. Appellees have an
adequate remedy at law for any takings resulting
from enforcement of the Rail Act; they are not en-
titled to injunctive relief. Hurley v. Kincaid, supra.”
2° See Sections 206(i) and 210(b) of the Rail Act.
*? Representative Adams had earlier asserted that “we have
done everything possible * * * to make certain that no more
than the constitutional minimum * * * will be paid by the
new corporation.” 119 Cong. Ree. H 9732 (daily ed., Novem-
ber 8, 1973) (emphasis added).
** But if this Court should conclude, contrary to our submis-
sion, that no Court of Claims remedy would be available, the
injunction against enforcement of Section 304(f) should nev-
ertheless be modified to ensure that the Association would not
be barred from prohibiting discontinuance of service or aban-
donment of lines pending any appeal from an adverse deter-
49
III
SECTION 207(b) OF THE RAIL ACT IS NOT INVALID AS A
GEOGRAPHICALLY NONUNIFORM LAW ON THE SUBJECT
OF BANKRUPTCIES
Section 207(b) of the Rail Act requires “each
United States district court or other court having
jurisdiction over a railroad in reorganization [that]
* * * finds that this Act does not provide a process
which would be fair and equitable to the estate of the
railroad in reorganization * * * [to] dismiss the
reorganization proceeding.” The district court cor-
rectly noted (J. App. 64-65) that that provision de-
prives railroads in reorganization of the opportunity,
afforded under Section 77 of the Bankruntey Act, 11
U.S.C. 205, of undergoing a liquidating reorganiza-
tion.” The court thereupon held it invalid as a geo-
graphically nonuniform law on the subject of bank-
ruptcies.” We disagree.
mination of a reorganization court that continued loss opera-
tions would constitute a taking. The Fifth Amendment should
not prevent orderly prosecution of appeals from such deter-
minations,
* This fact, however, would appear to have little if any in-
trinsic significance. Dismissal of the reorganization proceeding
would mean, as a practical matter, only that liquidation would
be carried out in a federal equity receivership rather than in
the reorganization court. It is unclear what differonce this
would make to either debtor or creditors. Certainly it would
not appear to affect creditors adversely. Indeed, appellee Smith
has already filed a motion to dismiss the Penn Central re-
organization proceeding and to convert that proceeding into a
federal equity receivership. See Document 6351 in those pro-
ceedings; Corp. Reorg. Rept. (Penn Central), p. 1011 4794.
* Judge Aldisert, observing that all creditors of the railroads
in reorganization are treated alike, dissented (J. App. 26-29).
iO
We acknowledge, of course, that Congress, in exer-
cising its power under Article I, Section 8, clause 4
to enact laws on the subject of bankruptcy, is subject
to the requirement that those laws be geographically
uniform. See Hanover National Bank v. Moyses, 186
U.S. 181. But the first thing to note about Section
207(b) is that it does not, by its terms, discriminate
geographically; it applies, without geographic limita-
tion, to “each United States district court or other
court having jurisdiction over a railroad in reorgani-
zation.” The only express limitation is temporal
rather than geographic: since the determination of the
fairness and equity of the process under the Rail Act
must be made within 180 days after the date of en-
actment,” the dismissal provision affects only railroads
on the ground that the uniformity provision of the bankruptcy
clause requires only that bankruptcy laws make no invidious
geographic distinctions among creditors.
" The district court assumed that Section 207(b) applies in a
geographically nonuniform manner presumably because the Rail
Act is concerned with restructuring only the rail system of the
northeastern States; and Section 207(b) does refer at one point
to “the strong public interest in the continuance of rail trans-
portation in the region.” (“Region” is defined as covering seven-
teen States and the District of Columbia; see Section 102(13).)
The failure to limit the application of Section 207(b) to railroads
in reorganization “in the region” may have been cue to a drafting
oversight. The findings required under Section 207(b) are designed
to determine which railroads will be eligible for inclusion in the
final system plan, and the Rail Act contemplates that only “rail
properties of railroads in reorganization in the region” and “rail
properties of profitable railroads operating in the region” are
to be transferred to the Corporation pursuant to the plan, See
Section 206(¢)(1) and (2).
“The determination must be made “| within 60 days after
the submission of the report by the Office, under section 205
51
in reorganization on January 2, 1974 or which entered
reorganization within 180 days thereafter.
The fact that Section 207(b) is facially uniform
in its geographic application is important. This Court
would not only have to depart from the plain mean-
ing of the statutory language in order to strike down
Section 207(b), it would also be required to read into
the statute the very nonuniformity which, appellees
contend, renders the statute unconstitutional. Such a
procedure is wholly contrary to this Court’s normal
practice. This Court often has noted (United States v.
Thirty-Seven Photographs, 402 U.S. 363, 369) :
**[ V7 Jhen the validity of an act of the Congress
is urawn into question, and * * * a serious
doubt of constitutionality is raised, it is a car-
dinal principle that this Court will first ascer-
tain whether a construction of the statute is
fairly possible by which the question may be
avoided.”’ Crowell v. Benson, 285 U.S. 22, 62
(1932). Accord, e.g., Haynes v. United States,
390 U.S. 85, 92 (1968) (dictum) ; Schneider v.
Smith, 390 U.S. 17, 27 (1968); United States
v. Rumely, 345 U.S. 41, 45 (1953) ; Ashwander
v. Tennessee Valley Authority, 297 U.S. 288,
348 (1936) (Brandeis, J., concurring).
Moreover, no legitimate purpose would be served
by construing Section 207(b) as having a narrower
geographic reach than it appears to have on its face.
It is a matter of public record that no railroad re-
organization proceeding, within the meaning of the
Rail Act, was pending outside the northeast region
(d)(1) * * *.” The latter p:ovision requires submission of the
report within 120 days after the date of enactment.
52
during the 180-day period of that statute’s effective-
ness.” The actual geographic reach of Section 207(b)
therefore cannot be affected by this litigation. Es-
pecially in these circumstances, this Court should not
strain to read the statute in a manner that raises con-
stitutional doubts.
But the fact that no railroad reorganization pro-
ceeding was pending outside the northeast region
during the eritical 180-day period has an additional
and greater significance. It means that the statute
has not been and never will e applied in a geograph-
ically nonuniform maniier; no proceeding has been
or ever will be either included or excluded from the
statute’s reach merely upon the basis of geography.
Accordingly, in no meaningful sense may it be said
that Section 207(b) is geographically nonuniform.
It is true that the only proceedings to which Section
207(b) in fact applied were located within the north-
eastern region of the country. But this Cowt long
ago put to rest any notion that constitutional uniform-
ity provisions require statutes to have practical appli-
eation in all sections of the nation. For example, in
** Section 77(a) of the Bankruptcy Act requires any railroad
filing a petition for reorganization to file a copy of its petition
with the Interstate Commerce Commission. The copy is left on
file in the Commission’s Finance Dockets. The Dockets show
that the corporate shells of two railroads—the New Haven and
the Tennessee Central—are still subject to the jurisdiction of
their respective reorganization courts, but each corporation had
sold its rail properties and terminated operations as a common
carrier prior to enactment of the Rail Act. Those corporations
therefore are not “railroads” within the meaning of Section
102(11) of the Rail Act. See /n re New York, New Haven, and
Hartford Railroad Co., No, 30226, Order No. 720, decided Feb-
ruary 14, 1974 (D. Conn.).
53
the Head Money Cases, 112 U.S. 580, 594, the Court
upheld a tax on ship owners that had practical appli-
cation only to the Port of New York, stating:
The tax is uniform when it operates with the
same force and effect in every place where the
subject of it is found. The tax in this case * * *
is uniform and operates precisely alike in every
port of the United States where such pas-
sengers can be landed.
See also Knowlton v. Moore, 178 U.S. 41; Nicol v.
Ames, 173 U.S. 509; Leidigh Carriage Co. v. Stengel,
95 Fed. 637 (C.A. 6). The Rail Act passes constitu-
tional muster under this test: it applies with the same
force and effect wherever railroad reorganizations are
found.”
Moreover, the dismissal provision of Section 207(b)
applies equally to all creditors, no matter where they
are located.” See J. App. 27. That is all the bank-
ruptey clause requires. See Vanston Bondholders
Protective Committee v. Green, 329 U.S. 156, 172
(concurring opinion of Justice Frankfurter).
* The internal revenue laws have long contained provisions
narrowly tailored to tie special circumstances of a single
individual or a small group of taxpayers, and such provisions,
cast in general terms, are tolerated under the constitutional
requirement of geographic uniformity. See generally Cary, Pres-
sure Groups and the Revenue Code: A Requiem in Honor of the
Departing Uniformity of the Tax Laws, 68 Harv. L. Rev. 745
(1955).
“ Congress legislated for the rail transportation crisis wher-
ever it existed, National bankruptcy legislation may constitu-
tionally accommodate itself to local conditions, needs, and
practices. See Wright v. Vinton Branch of Meuntain Trust
Bank, 300 U.S. 440, 4683, n. 7; Stellwagen v. Clum, 245 U.S.
605; Hanover National Bank v. Moyses, supra, 186 U.S. at 190.
* Section 207(b) also applies equally to all debtors; it applies
to all railroads actually in reorganization.
54
Moreover, the Rail Act was enacted as an exercise
not only of the bankruptcy but also of the commerce
power. Congress found and declared that “[t]he public
convenience and necessity require adequate and effi-
cient rail service * * * to meet the needs of com-
merce * * *.’’ Section 101(a)(3). Legislation enacted
under the commerce clause need not apply uniformly
throughout the United States. Secretary of Agricul-
ture v. Central Roig Refining Co., 338 U.S. 604, 616;
Mabee v. White Plains Publishing Co., 327 U.S. 178,
184; Currin v. Wallace, 306 U.S. 1, 14. Furthermore,
Congress may, in the exercise of its commerce power,
enact incidental nonuniformities in areas of the law
otherwise governed by uniformity requirements.
For example, this Court has held that Article I,
Section 9, Clause 6, which bars Congress from giving
“Preference * * * to the Ports of one State over those
of another,” prohibits only legislation that purpose-
fully discriminates against particular ports. Armour
Packing Co. v. United States, 209 U.S. 56. Congress
remains free, therefore, to provide for the construe-
tion of bridges, lighthouses, roads and other improve-
ments even though the effect of such legislation is to
favor one port over another. See Pennsylvania v.
Wheeling & Belmont Bridge Co., 18 How. 421; see also
Louisiana Public Service Comm’n. v. Texas & New
Orleans R.Co., 284 U.S. 125, 131. Accordingly, any
otherwise invalid nonuniformity that the Rail Act
may have temporarily imported into the national
bankruptcy laws should be sustained as a proper
exercise of commerce power.
=
55
IV
THERE IS NO BASIS FOR ENJOINING THE ASSOCIATION FROM
CERTIFYING A FINAL SYSTEM PLAN
The district court found two constitutional defects
in the Rail Act—that Section 304(f) permits takings,
through interim erosion, for which there is no provi-
sion for just compensation, and that Section 207(b)
establishes an invalid geographically nonuniform
bankruptcy rule for the dismissal of railroad reor-
ganization proceedings. On the basis of these determi-
nations, the court (1) enjoined the defendants from
enforeing Section 304(f) in a manner that would re-
quire interim erosion that had been adjudicated by a
court of competent jurisdiction to constitute a taking,
(2) enjoined all parties from enforcing the dismissal
provision of Section 207(b), and (3) enjoined the
Association from certifying a final system plan to the
special court pursuant to Section 209(c).
The district court’s injunctions against enforce-
ment of Section 304(f) and the dismissal provision of
Section 207(b) interfere, in greater and lesser ways,
with the operation of the Rail Act. But the injunction
against certification of a final system plan completely
nullifies the entire statutory scheme. Without certifica-
tion, there can be no transfer of rail properties to the
Corporation; without such a transfer, there can be no
restructuring of the northeastern rail transportation
system under the Rail Act.
We have shown at length above that the district
court erred in finding any constitutional defect in the
Rail Act. There was, therefore, no basis for vhe issu-
ance of any of the injunctions. But even assuming
56
arguendo that the court properly enjoined enforce-
ment of Sections 304(f) and 207(b), there was never-
theless no basis for its injunction against certification
of a final system plan.
The dismissal provision of Section 207(b) operates
long in advance of certification; it applies only to pro-
ceedings in which the reorganization court has de-
termined that the properties of the debtor railroad
subject to its jurisdiction will not be eligible for
transfer to the Corporation under the final system
plan. Thus the validity of the certification process is
wholly unaffected by the validity vel non of the Sec-
tion 207(b) dismissal provision. Moreover, by re-
straining enforcement of the dismissal provision, the
district court cured any constitutional deficiency.
If the district court was correct in reading Sec-
tion 304(f) to permit takings through interim ero-
sion for which there is no provision for just com-
pensation, that constitutional deficiency is fully cured
by allowing the debtor railroads to discontinue service
and abandon lines upon a showing that further loss
operations would cause interim erosion amounting to
a taking. That, of course, is the effect of the district
court’s injunction barring the defendants from en-
forcing Section 304(f) in a manner that would re-
qv're the continuation of interim erosion that is, or
has been, adjudicated to be a taking. Once any un-
constitutional interim erosion is barred by injunction,
no legitimate purpose is served by further barring
certification of the plan. Furthermore, certification
could not add to appellees’ injury in any case. Cer-
tification of a final system plan triggers the transfer
57
of properties pursuant to the plan (see Section 305
(a)), and therefore acts to terminate the interim pe-
riod during which unconstiti.tional erosion allegedly
may occur.
In short, the constitutional deficiencies, if any, in
Sections 304(f) and 207(b) would not, even if un-
cured, afford a basis for enjoining ce:tification of a
plan. Since the district court cured any alleged defi-
ciencies in those provisions, it clearly erred in further
enjoining certification.
CONCLUSICN
For the reasons stated above, the judgment of the
district court should be reversed.
Respectfully submitted.
Rosert H. Bork,
Solicitor General,
Caria A. HIL1s,
Assistant Attorney General,
Keitu A. JONEs,
Assistant to the Solicitor General,
JaMEs F, Davuscu,
Attorney.
Ropney E. Eysrer,
General Counsel,
JEROME E. SHARFMAN,
Attorney,
Department of Transportation.
Aveovwst 1974.
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APPENDIX
THe Recorp Dors Nor SHow Any SvBSTANTIAL
LrKELTHOoD OF ERosION IN THE PENN CENTRAL
Estate PeNDING IMPLEMENTATION OF THE FINAL
System PLaNn
A. THE RECORD IS INADEQUATE
The record in the Penn Centrai reorganization pro-
ceedings is so scanty that the Interstate Commerce
Commission in its Preliminary Report and Order of
September 28, 1973, found it impossible to make any
findine on the nature and extent of alleged erosion of
the estate. See Penn Central Transportation Co, Reor-
ganization, Corp. Reorg. Rept. (Penn Central), Docu-
ment No. 95, at 1102: 86, 109 (ICC Finance Docket
No. 26241, Sept. 28, 1973). (ICC Finance Docket No.
26241 is hereinafter referred to as the “ICC Pro-
ceeding.” ) Those supporting dismissal of the proceed-
ings and liquidation of the estate have the burden of
proving erosion, and they have “made no serious efforts
to marshal and present such information[;] * * *
[t]his information is important, since the greater the
[claimants’] cushion and the slower the rate at which
their security is eroding, the less dire for them the
consequences of delay.”’ In re Boston and Marine
Corp., 484 F. 2d 369, 372-375 (C.A. 1); see also New
Haven Inclusion Cases, 399 U.S. 392, 492-493. They
failed to make this showing to the Commission’s satis-
faction, and little additional evidence has been furn-
ished to the reorganization court. The following are
the primary sources of data in the record:
1. Penn Central’s IOC Railroad Annual Report
Form A (“*Form A’”’) for 1970, 1971, and 1972; and
(59)
PE te ow
60
Penn Central’s ICC Annual Report Form R-1
(“Form R-1”), which replaced Form A, for 1973.
2. For data on the valuation of rail prenerties, the
Day and Zimmerman Report, Appendix 1 to State-
ment of William R. Carlisle, introduced by the Penn
Central Trustees as Ex. 21 in the ICC Proceeding,
Aug. 6, 1973 (‘‘Day and Zimmerman Report’’). This
valaution, however, is only as of Deceneer 31, 1970.
It fails to reflect more than $300 million in additions
and betterments made by the Penn Central Trustees
since bankruptcy. It gives no effect to the substan-
tially increased maintenance-of-way and track-replace-
ment programs carried out by the Trustees since bank-
ruptcy. See Appendix A to Statement of Clarence E.
Jackman, Ex. 18 in the ICC Proceeding, Aug. 6, 1973
(‘Jackman ICC Ex. 18”). It does not show the value
added to the estate by the increase in the price of
serap steel since 1970,” or any other appreciation in
value, such as increases in the value of real estate
devoted to rail operations.
3. For the value of non-rail real estate, Victor
Palmieri & Co. Report, Ex. 25 in the ICC Proceeding
(“Palmieri Report”). The Penn Central Trustees em-
ployed Palmieri & Co. to catalogue, develop, and
* The trade publication “Iron Age” indicates that the market
value of heavy melting scrap iron has dramatically increased
since June 21, 1970:
Marker Prices ror No. 1 Heavy Meurine Scrar ar
Se.ecrep Locations ($/Tow)
on June Prices on July
22, 1970* 15,1975"
I ES ere $43-$44 $137-$138
PEE EE Pera vee ee $42-$453 $129-$130
Ge oneecenceocosenacdnes $43 $44 $118-$120
61
market Penn Central’s non-rail real estate. See In re
Penn Central Transportation Co., Bky. No. 70-347,
Memorandum and Order No. 1397, Corp. Reorg. Rep.
(Penn Central), Document No. 6195, at 1011:4772
(E.D. Pa., Aug. 31, 1973) and Order No. 1344, Corp.
Reorg. Rep. (Penn Central}, Document No. 6386, at
1011: 4793 (E.D. Pa., Oct. 9, 1973).
4. For Penn Central’s various investments, and an
estimate of the erosion of the estate, the affidavit of
John S. Guest in the ICC Proceeding (‘‘CGinest ICC
Ex. 22”)” together with his work papers” and cross-
examination. Guest updated his testimony at the 120-
day hearing on March 25, 1974, by means of an addi-
tional affidavit on which he was cross-examined.
The validity of Guest ICC Ex, 22, and the weight
to be attached to it, are weakened by several factors.
Despite Guest’s obvious qualifications, the time con-
straints under which he prepared his study “ mean
that it is not entitled to the weight of a study pre-
pared over a longer period of time and in greater
depth. For example, Guest was not able to formulate
a method for computing “reasonable use and occu-
pancy payments,” in lieu of leased line rentals, or to
estimate the amount of claims which Penn Central
might have against leased line lessors in the event of
disaffirmance of particular leases for reimbursements
of losses incurred by Penn Central since bank-
ruptey in the operation of the leased lines. Guest ICC
Tr. at 1875-1876. Nor was he able to estimate whether
Statement of John S. Guest, Corp. Reorg. Rept. (Penn
Central), Document No, 22, at 1102 :32.
"Guest ICC Ex. 28, Penn Central Transportation Co.—
Erosion of the Estate and Guest ICC Ex. 24, Summary.
* June-August, 1973. Pre-Hearing Conferencé Transcript,
ICC Finance Docket No, 26241, at 1813 (Aug. 22, 1973) (“Guest
ICC Tr.”). ;
336 931 -74--—6
any issues of the Penn Central’s mortgage and col-
lateral trust bonds were more than fully secured and
therefore entitled to post-bankruptey interest. Guest
1CC Ex. 22, at 7; Guest ICC Tr. at 1877-1878.
Guest was unable to make any more than a rough
estimate of the increase or decline in the value of the
Penn Central’s rail plant and equipment between the
date of bankruptcy and May 31, 1973, based on
changes in book value between December 31, 1969 and
December 31, 1972. He did not determine how much
of this decline in book value was attributable to sales
of land. Although he used increases in book deprecia-
tion to calculate the $68 million decline in the value
of Penn Central’s road property, he was unable to
determine whether any of the increase in deprecia-
tion resulted from replacement of older depreciated
property and additions and betterments. Guest ICC
Tr. at 1901, 2685. Nor could Guest have considered
Jackman’s opinion that a very substantial part of
present deferred maintenance could have been
avoided, if the plant had had normal maintenance
during the period 1957-1969. Jackman ICC Tr. at
1085-1088. Guest did not have available to him Ap-
pendix A to Jackman ICC Ex. 18, showing dra-
matic, post-bankruptcy increases in total main-
tenance-of-way expenses, cross-tie installations, new
rail installation, and expenditures on depreciable
property accounts. Guest ICC Tr. at 1902-1905.
Guest did not include in Guest ICC Ex. 22 some
important information contained in his work papers
(Guest ICC Ex. 23). Guest ICC Tr. at 1845-1849.
Without this information, parts of his statement
could have distorted the true economic picture. He
also modified his own definition of erosion to aecord
with the views of Trustees’ counsel, because he be-
lieved that “‘they knew more about erosion than I
did.”’ Guest ICC Tr. at 1845.
63
Guest’s testimony suffers from the same lack of
detailed preparation which weakened Guest ICC Ex.
22. He continued to include in his calculation of post-
bankruptey taxes substantial amounts (approxi-
mately $45 million) that had in fact accrued prior to
bankruptey. Compare Guest’s testimony in the re-
organization court, Transeript at 11,254—55 (E.D. Pa.,
March 25, 1974) (“Guest 120-day Tr.’’) and before
the Commission, Guest ICC Tr. at 1871-1872, with
the remarks of Paul Duke in the ICC Proceeding,
ICC Tr. at 1497. Moreover, as in Guest ICC Ex. 22,
Guest used income statement loss as a means of de-
fining erosion. This theory is subject to severe criti-
cism, as is shown below.
5. For the value of stock of Pennsylvania Com-
pany, see In re Penn Central Transportation Co.,
358 F. Supp. 154 (E.D. Pa.) (rejecting a proposed
claim settlement involving Pennsylvania Co. Stock).
6. For projections of future erosion, the affidavits
of Ernest Varalli and John Guest, introduced at the
reorganization court’s 120-day hearing under Section
207(b) of the Act (‘‘120-day A f.’’).
B, INCOME STATEMENT LOSSE&S OVERSTATE EROSION
Penn Central sustained ordinary net losses of
approximately $851 million during the period from
June 21, 1970 to December 31, 1973. This figure is
based upon Penn Central financial statements pre-
pared according to ICC accounting rules. It is not,
however, an accurate measure of real erosion. It
includes many items which do not reflect either an
accumulation of administration expenses or an actual
decline in the value of the estate. For example:
64
1. Income statement depreciation—more than $318
million.’ Income statement depreciation is an ac-
counting charge against current income, made _ to
allocate the cost previously incurred in acquiring an
asset. It does not necessarily reflect a real change in
the value of the assets of the estate.”
2. Track replacement—$358 million. Under the
Commission's accounting regulations, Penn Central
is required to list as operating expenses the costs of
replacing rail, ties, ballast and other track material
with new or reusable rail, ties, ballast and other track
material of similar characteristics. See 49 C.F.R.
Part 1201, Sections 8 through 12, and 212 through 220.
These items do not represent the accumulation of
prior administration claims or any decline in the
value of the estate, Indeed, they reflect no injury to
the claimants at all. The replacement of track strue-
ture has the effect of preventing a decline in the
value of the Penn Central rail estate and probabl+
increases its value.
3. Deferred leased line rentals—approximately $101
million. It cannot be determined at this time whether
unpaid leased line rentals are in fact valid adminis-
tration claims against the estate. See Stipulation of
Fact, par. 13 (J. App. 321-322). This is because, in the
* For 1973, $89 million, 1973 Form R-1, at 93, 1.2; for 1972,
$88.7 million, 1972 Form A at 93, 1.2; for 1971, $90.6 million,
1971 Form A at 304, 1.48 and at 306, 1.94; for June 21, 1970—
December 31, 1970 (199 days)—approximately 53% of full
year 1970 ($94.8), as shown on 1970 Form A at 304, 147 and
at 306, 1.94- -$50.6 million.
“Ip his testimony before the Commission, Guest found no
change in the value of the plant and equipment of Penn Central
Curing the period June 21, 1970 to May 31, 1973, despite the
accumulation of income statement depreciation during that
period. Guest ICC Tr. 1861-1862, 1959; see also Guest ICC Ex.
22, at 5.
65
event of disaffirmance, losses incurred by the Penn
Central in operating the leased lines during bank-
ruptey can be offset against claims by the lessors for
unpaid rentals. See Section 77(c)(6) of the Bank-
ruptey Act, 11 U.S.C. 205(c) (6); In re Penn Central
Transportation Co., Secondary Debtors, Bky. Nos, 70-
347A through 70-3470, Memorandum, Corp. Reorg.
Rept. (Penn Central), Document No. 74-68, at 1011:
5096 (E.D. Pa., May 2, 1974).
4. Deferred bond interest—approzimately $104 mil-
lion. Here again it cannot be determined yet which
issues of bonds are fully secured and thus entitled to
post-bankruptey interest. See Stipulation of Facts
par. 14 (J. App. 322). Generally, post-bankruptcy in-
terest is payable as an administration expense only to
the extent that it is actually secured. See Im re New
Vork, New Haven & Hartford Railroad Co., 304 F.
Sepp. 1121 (D. Conn.). Moreover, if the deferred bond
interest ix payable, it obviously benefits rather than
harms any bondholders entitled to the interest.
5. Post-bankruptcy interest on unsecured or tnade-
quately-secured pre-bankruptcy debt—approzimately
$146.3 million. See 1973 Form R-1, at 5la-5le. As
noted above, post-bankruptey interest is generally pay-
able only if it is secured. Post-bankruptey interest on
unsecured obligations does not reduce the size of the
estate or the amount available for payment to credi-
tors.
In summary, then, the income statement may over-
state the real economic consequences of continuing
operations by as much as $1,027 million:
Milliona
Income statement depreciation_. ..........-.---------------------- $318
Track replacement .............-.-----.--------------------0-0--- 358
Leased line rentals deferred__.............----------------------- w1
a 104
Posthankruptey interest on prebankruptcy unsecured or inadequately
Oe 146
66
C. USE OF NON-RECURRING CASH ITEMS AND NON-RAIL IN-
COME EXAGGERATES EROSION OF THE ESTATE
From June 21, 1970 to December 31, 1973, the Penn
Central Trustees expended approximately $137.5 mil-
lion of non-recurring cash items, including $100 mil-
lion in drawdowns of guaranteed trustees certificates ;
they expended $2.1 million in proceeds from sales of
mortgaged properties; they expended $15.7 million in
proceeds from the *‘Agnes” flood loan; and they ex-
pended approximately $157 million in income derived
from so-called non-rail properties. See J. App. 36-37
n. 17, Appellees contended in the court below that these
items constitute erosion of the estate.
The expenditure of non-recurring cash proceeds
and non-rail income does not per se reduce the size of
the estate. The record indicates that during the post-
bankruptcy period at least $206.5 million was invested
in reducing outstanding equipment debt, thus increas-
ing the estate’s equity in readily salable railroad
equipment.” During this same period, more than
$137.9 million was invested in additions and better-
ments to mortgaged and unmortgaged transportation
** See Guest Ex. 24, which shows that equipment debt out-
standing was reduced from $542 million at June 30, 1970, to
$364 million as of May 31, 1973. Penn Central Forms A and
R-1 for 1970-1973 show the following payments of equipment
obligations :
1973—$51.7 million (Form R-1, at 51E-P).
1972—-$59.7 million (Form A at 50-51H).
1971—$60.2 million (Form A at 236-237H).
1970—$34.9 million (53% of full year; Form A at 237
A-L).
67
property.“ Thus non-recurring cash proceeds and non-
rail income was not used nerely to subsidize loss oper-
ations but rather was converted into valuable rail
properties that maintain or enhance the value of the
estate. The $310 million in non-rail income and non-
recurring cash items characterized as erosion by the
creditors is more than offset by the $344 million in
additions and betterments and equipment investments
that confer positive bencfits on the estate.
D. THERE IS NO EVIDENCE OF SUBSTANTIAL NET INTERIM
EROSION
Although the record is inadequate as a basis for
accurate assessment of the impact of continued oper-
ations on Penn Central, a tentative summary is pos-
sible.
Prior administration claims of $457 million have
accumulated (as of December 31, 1973):
a. trustees certificates-—-$100 million
b. accrued post-hbankruptcy state and local
taxes—$195 million *
' ¢. increase in current liabilities—$162 mil-
ion “*
As we now dicuss, however, the effect of these ac-
cumulated claims may be offset entirely or in large
part by increases in the value of the assets of the
estate:
a. Plant and equipment—#85 million to $360
million.
** Additions and betterments to transportation property:
1973—825.7 million (Form R-1, at 30-31).
1972—$20.8 million (Form A at 30-31).
1971—850.6 million (Form A at 220-221).
1970—$33.5 million (53° of full year; Form A at 221).
* See Stipulation of Facts, par. 12 (J. App. 321).
«Compare Guest ICC Ex. 24, at 6, for June 21, 1970 (S301
million) with 1973 Form R-1, at 11, 1.59 ($463 million).
68
b. Investments—$53 million to $100 million.“
¢. Other balance sheet assets, offset by de-
clines in current assets, adjusted for account-
ing adjustments and declines in injury and loss
and damage reserves—$80 million.
ad. Other assets (mainly capital and other re-
serve funds )—850 million.
Increases in the Value of the Plant Equipment—ss85
million to 8360 million
An evaluation appraisal is the best way of measur-
ing any increases in the value > Penn Central’s plant
and equipment, and no suffici-atly recent appraisal is
currently available for the purpose. Estimates based
upon changes in net book values are unsatisfactory,
especially in a period of rapid inflation. Nevertheless,
it is significant that net book value in freight equip-
ment and road properties has increased by $89 million
over the period of reorganization. See Guest [CC Ex.
24, at 916." But substantial additions to the road
properties were not reflected in the balance sheets. As
indicated above (p. 64, supra), the Penn Central
Trustees expended approximately $358 million for
track replacement during the period 1970-1973. This
expenditure was charged to operating expenses, even
though the replacement of old track with new track,
old ties with new ties, ete., must have substantially
increased the value of the estate.
* This estimate does not include any increase in the value of
Tenn Central's non-rail real estate or its holdings in Manor
Real Estate, which owns substantial coal-producing properties.
* Passenger cars carried at $70 million on Penn Central's
books were sold to the National Railway Passenger Corporation
at a substantial book loss in 1971.
69
Increases in the Value of Investments—$53 million to
$100 million “
The only investment whose value is fairly capable
of estimation—Penn Central’s holdings in the Penn-
sylvania Company—has increased in value since the
filing of the reorganization petition. Guest testified
that if the Trustees had determined at the date of fil-
ing to sell the Penneo stock, he, as a financial adviser,
having made the kind of study which he deemed ap-
propriate, would have advised a potential buyer that
the value of Pennco was in the neighborhood of $150
million. Guest ICC Tr. at 1951-1954. By his own esti-
mate, the sale value of the Penneo stock has increased
to at least $203 million. Guest ICC Ex. 22. And the
reorganization court recognized an outside value of
$250 million. See 358 F. Supp. at 154.
Other Balance Sheet Assets with Appropriate Off-
set—S80 million
From a comparison of Penn Central’s Form R-1
for December 31, 1973, with Guest ICC Ex. 24, at 6,
16-17, for June 21, 1970, it appears that “other as-
sets’’*° increased by $48 million (from $37.7 million
to $85.7 million); liability reserves for injury and
freight loss and damage decreased hy $9.5 million
(from $85.1 million to $75.6 million) ;" book value of
current assets decreased by $21.3 million (from $483.8
million to $462.5 million), but a positive adjustment
of $43 million resulted in a net increase of $22 mil-
Guest ICC Ex. 22 asserts a decline in the value of Penn
Central's investments of $120 million, resulting principally from
reduced valuations of Manor Real Estate Co. and Pittsburgh &
Lake Erie R.R. Co. The government was not permitted to cross-
examine with respect to those valuations.
°° 1973 Form R-1, at 10, 1.42.
" Account 774, 77 4, 5 and 6, 1973 Form R-1, at 57. A decrease
in liability is of course equivalent to an increase in assets.
70
lion in current assets.” These items therefore show a
net asset value increase of approximately $80 million.
Other Assets—$50 million
On Guest TCC ix. 24, at 3, Guest shows that capital
and other reserve funds in the hands of Penn Central
have increased by approximately $50 million since the
date of bankruptey.
F. THE VALUE OF THE ESTATE APPARENTLY meapentes ‘vjeuanl
EXCEEDS THE AMOUNT OF CLAIMS AGAINST THE,STATE
Evidence in the record indicates the following val-
ues for assets of the Penn Central estate:
1, Rail assets, less equipment, as of Decem-
ber 31, 1970, as shown in the Day & Zimmerman
physical asset valuation study—$1.456 billion net
liquidation value or $2.857 billion gross liquida-
tion value.”
* Guest characterized part of the decline in current assets
as being an accounting adjustment not reflecting “an actual de-
terioration of PCT.C’s financial condition.” Guest ICC Ex. 23,
at 7.
°* These valuations include assets leased to Penn Central. Most.
of the “leased |: ~ xanies” are controlled by the Penn Cen-
tral Transportat ay. The book value of Penn Central's
investments in its . line and affiliated companies is sub-
stantial. See 1973 Form R-1, pp. 20-23. The leased line com-
panies own substantial amounts of railroad operating assets,
and approximately $600 million in non-rail real estate. 1CC
Ex. 25, Not to take account of Penn Central's investment in its
leased line and affiliated companies would be to undervalue the
Penn Central estate substantially. On the other hand, no summary
of claims against the leased line companies in reorganization is in-
cluded in the record. These claims may be substantial. To com-
pensate for that fact, we have omitted (albeit somewhat ar-
bitrarily) from the value of the Penn Central estate al! of the
non-rail real estate owned by the leased line companies. See
note 4, infra.
71
2. Penn Central’s equity in freight equip-
ment, adjusted for inflationary factors, as
shown by Guest ICC Ex. 24, at 10, as of
May 31, 1973—$805 million.
3. Penn Central’s adjusted book value for
passenger cars as of May 31, 1973, as shown on
Guest ICC Ex. 24, at 11—$10.4 million.
4. Current assets, less materials and supplies,
as shown on the balance sheet as of Decem-
ber 31, 1973 (Form R-1)—$389.3 million.
5. Special funds as shown on the December
31, 1973 balance sheet (Form R-1)—$78.0
million.
6. Other assets and deferred charges as
shown on the December 31, 1973 balance sheet
(Form R-1)—$124.9 million.
7. Wholly-owned non-rail real estate, as
shown in the Paimieri Report, ICC Ex. 25—
$400 million.”
8. The Pennco stock, as valued by the reorga-
nization court, 358 F. Supp. 154—$250 million.
9. Other investments, as valued by Kuhn,
Loeb & Co. (Guest TCC Ex. 22)—from $297.2
million to $413.1 million.
10. Book value of capital expenditure for
additions and bhetterments in 1970-1973, as
shown on the Forms A and R-1 for those
years—$138 million.
Accordingly, the net value of the estate may be as
high as $3.97 billion, $5.50 billion or higher.
The claims against the estate are reflected on the
balance sheet (1973 Form R-1) and the Trustees’
report on proofs of claim, Attachment 5 to the April 1,
“ This figure does not include the value of the interest of
Penn Central's leased lines in real estate, which the Palmieri
Co. reported as adding an additional $600 million of value.
72
1972 plan for reorganization. The Trustees’ report
estimates the total amount of valid pre-bank-ruptey
claims at $1.583 billion. The balance sheet shows cur-
rent liabilities of $463 million, and liabilities for
personal injury, freight loss and damage of $75.7
million. 1973 Form R-1, at 57, 11.4, 5 and 6. (Liabil-
ity on equipment obligations is not included here
because the equipment was valued above on a net
equity basis.) The estate is also liable for $100 mil-
lion in trustees certificates, $195 million in post-
bankruptcy taxes, $45 million in prebankiruptey
taxes, a maximum of $104 million in accrued bond
interest, and, to the extent not offset by the Penn
Central Trustees’ claims, $101 million in deferred
leased line payments. Valid prebankruptey andi post-
bankruptcy claims, including deferred bond imterest
and deferred leased line rents, therefore apparently
total no more than $2.67 billion.
Fr. THERE IS NO ADEQUATE BASIS IN THE RECORD FOR
ESTIMATING PROSPECTIVE EROSION IF RAIL OPERATIONS
CONTINUE THROUGH 1975
The evidence in the record for projected erosion
through 1975 consists mainly of the affidaviits of
Ernest Varalli and John Guest. They project am addi-
tional $118 million in taxes and a maximum of $110
million in additional deferred leased line rentalls and
bond interest (Varalli Aff. T+, T-5). That projection
is unhelpful; it bears no relation either to the eco-
nomic realities of this case or to the question whether
creditors would be harmed by continued operations.
The bulk of the liquidation value of the Penn Central
estate as shown on the Day & Zimmerman appraisal
consists of real estate, and inflation in land walues
may offset any operating losses and increase the
realizable value of the estate.
Moreover, any forecast of prospective erosion
through 1975 must take into account the 10 percent
73
rate increase, granted by the Interstate Commerce
Commission on June 4, 1974, in Ex Parte 305. This
rate increase should raise freight operating revenue
by over $80 million during the last six months of 1974
alone (Varalli 120-day Tr. 12490-12491).
G. FUTURE EROSION THROUGH 1975 MAY BE WORSE IF THE
RAILROAD IS LIQUIDATED
To gauge accurately any injury to the creditors by
virtue of the continuation of rail operations pending
the implementation of the final system plan, one must
consider what the erosion would be if rail operations
were in fact terminated and the liquidation process
begun. The little evidence available suggests that
greater erosion would result from liquidation than
from continued operations.
In the ICC proceedings, the Penn Central Trustees
proposed a cessation of rail operations to begin on
October 31, 1973, to be followed by a nine-month
holding period in which the Trustees would attempt
to sell off portions of the railroad for continued rail
use, and failing that, to be followed by a liquidation.
A 13-month cash forecast on these conditions was pre-
pared for the Trustees by Ernest Varalli and sub-
mitted to the Commission as Ex. 7 to Mr. Varalli’s
affidavit (Varalli ICC Ex. 16). That forecast shows,
directly or by inference, that during that 13-month
period real estate taxes, leased line rentals, and post-
hankruptey interest would continue to accrue; in the
absence of payments on equipment loans, equipment
might be repossessed and sold in foreclosure sales,
with a possible loss of part of the debtor’ equity; and
employee severance pay and other claims would be
referred to the reorganization court for settlement.
While the amount of these items is not presently cal-
culable, they are likely to be susbtantial.
US GOVERNMENT PRINTING OFFICE [974
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