Jurisdictional Statement — U.S. v. Connecticut General Insurance Corp. (No. 74-168)

Sepreme Cosrt, U. S.

FILED

AUG 23 1974

MICHAEL BOOAK JA_Ci ERK

-

No. 74-168

Yn the Supreme Gourt of the Waited States

Octoser Team, 1974

Unrrep States oy AMERICA, ET AL., APPELLANTS

v.

Conwneoticct Genera. Insuraxce CorRPORATION, BT AL.

ON APPEAL FROM THE UNITED &TATERS DISTRICT COURT FOR

THE BASTERN DISTRICT OF PENNSYLVANIA

JURISDICTIONAL STATEMENT

ROBERT H. BORK,

Solicitor General

CARLA A. HILIS

Aasistant Attorney General,

KEITH A. JONES,

Assistant ( § he Solicitor Generel.

JAMES F. DAUSCH.,

Attorney.

Department of Justice,

Washington, D.C. 20680.

INDEX

§

Opinion below

Jurisdiction _ --

Questions presented _ _ _ -

Constitutional provisions and statutes inv olved...

Statement

The questions are substantial.

Conclusion. ---.-...- -. :

-nNO ee wn =

CITATIONS

Cases:

Ann Arbor Railroad Co., In the Matter of,

E. D. Mich., No. 74-90833, decided July 1,

1974

Boston & Maine Corp., In the Matter of,

D. Mass., No. 70-250M, memorandum

opinion, decided May 2, 1974

Central Railroad Company of New Jersey,

In the Matter of, D. N.J., Bky. No. 701-67,

decided Jume 28, 1974__........_.

Continental Bank vy. Chicago, Rock Island

& Pacific Ry., 294 U.S. 648 ane

Erie Lackawanna Railway Co., Jn the Matter

of, N.D. Ohio, No. B72-2838, Order No.

234, decided May 2, 1974__.___-

Hurley v. Kincaid, 285 U.S. 95... __. ,

Lehigh and Hudson River Railway Co., In

the Matter of, 8S.D. N.Y., Bky. No. 72-419,

decided July 1, 1974

(I)

Il

Cases—Continued

Lehigh Valley Railroad Co., In the Matter of,

E.D. Pa., Bky. No. 70-432, Order No. 252,

ee ee

New Haven Inclusion Cases, 399 U.S. 392___-

Penn Central Transportation Co., In the Matter

of, 355 F. Supp. 1348. .................

Penn Central Transportation Co., In the Matter

of, E.D. Pa., Bky. No. 70-347, Order No.

159¢ decided Bar 0, Gi es cccssssttlinnst

Penn Central Transportation Co., (Secondary

Debtors), In the Matter of, E.D. Pa., Bky.

Nos. 70-347A to 70-3470, multiple orders,

all decided July 1, 1974..............--.--

Reading Co., In the Matter of, E.D. Pa., Bky.

No. 71-828, Order No. 650, decided July 1,

Qe ae

Reconstruction Finance Corp. v. Denver & Rio

Grande Western R. Co., 328 U.S. 495__ .

Constitution and statutes:

United States Constitution:

Bankruptcy Act, section 77, 11 U.S.C. 205__.

Regional Rail Reorganization Act of 1973,

Pub. L.. 93-236, 87 Stat. 985............-

ERE LO ELIA ES

Section 206(i)

Rene orn hw we

13

It

Constitution and statutes—Continued —

Section 207(b) . 2, 3, 8, 9, 11, 12, 13, 14

Section 208 beitides 7

Section 209 7

Section 209(b) Q

Section 209(c) 2, 3, 11

Section 210

Section 210(b)-.

Section 213

Section 215

Section 301

Section 302

Section 303

Section 303(a)

Section 303(c)(2)

Section 303(c)(3)

Section 303(d) gu gimmie

Section 304(f)......... 2,3, 4,8, 10, 11, 12,1

Section 402

Miscellaneous:

H. Rep. No. 93-620, 93d Cong., Ist sess____ 4,5

9 i ee ee ee ee Se

Gn the Supreme Gourt of the United States

OcTrosen Term, 1974

No.

Unrrep STATES OF AMERICA, ET Al... APPELLANTS

-

Connecticut GENERAL INSURANCE CORPORATION, ET AL.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR

THE EASTERN DISTRICT OF PENNSYLVANIA

JURISDICTIONAL STATEMENT

OPINION BELOW

The opinion of the three-judge district court (J.

App. 9-81)’ is not vet reported.

JURISDICTION

The order of the three-judge district court (J. App.

82-83) was entered on June 25, 1974. Notices of ap-

peal to this Court (J. App. 387-390) were filed on

July 22, 1974, and July 24, 1974.’ The jurisdiction of

this Court is conferred by 28 U.S.C. 1252 and 1253.

‘J. App.” refers to the Joint Appendix lodged in this Court.

* The opinion and order of the three-judge district court en

compassed three separate civil actions (Nos. 74-189, 74-1107,

and 74-1149) that had been consolidated for disposition on

cross-motions for summary judgment, and we have filed sepa

rate 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.

2

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 aban-

doning any line without the consent of the United

States Railway Association, effects a taking of ap-

pellees’ property 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 bankruptcies.

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, of the United

States Constitution in pertinent part provide :

The Congress shall have Power * * *

To regulate Commerce with foreign

Nations, and among the several States

2 os

To establish ~ * * uniform Laws on the

subject of Bankruptcies throughout the

United States; * * *.

The Fifth Amendment to the Constitution in per-

tinent part provides:

* * * (N jor shall private property be taken for

public use, without just compensation.

3

Sections 207(b), 209(¢), and 304(f) of the Regional

Rail ieorganization Act of 1973, Pub. L. 93-236, 87

Stat. 985, 998, 1000, 1009, in pertinent part provide :’

Section 207(b). Within 120 days 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 ; seorganiza-

ble on an income basis within a reasonable time

under section 77 of the Bankruptcy Act (11

U.S.C. 205) and that the public interest would

be better served by continuing the present re-

organization proceedings than by a reorganiza-

tion under this Act. * * * Because of the

strong public interest in the continuance of rail

transportation in the region pursuant to a sys-

tem plan devised under the provisions of this

Act, each such court shall order that the re-

organization 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 under section 77 of the Bank-

ruptey Act (11 U.S.C. 205) and that the public

interest would be better served by such a

reorganization than by a reorganization 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 re-

organization in which case it shal] dismiss the

reorganization proceeding. * * *

Section 209(¢). Within 90 days after its effee-

tive date, the Association shall deliver a certi-

fied copy of the final system plan to the special

‘The Act in its entirety is set forth at J. App. 393-431.

4

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 (ineluding 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 ex-

change for securities of the Corporation (in-

cluding any obligations of the Association) and

other benefits is fair and equitable and in the

public interest.

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 aecordance with the provi-

sions of this Act, unless it is authorized to do so

by the Association and unless no affected State

or local or regional transportation authority rea-

sonably opposes such action * * *,.

STATEMENT

By 1973, the rail transportation network of the

northeastern section of the United States was in grave

danger of imminent financial collapse. See generally

H. Rep. No. 93-620, 93d Cong., Ist Sess., pp. 25-29.

5

Seven major railroads‘ operating principally im

seventeen northern and eastern States *° were attempt-

ing 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 finan-

cial diffieulties the railroads faced. See, ¢.¢., In 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 obli-

gations to creditors.

Congress recognized that the threatened wholesale

termination of rail service would do incalculable dam-

age to the nation’s economy. See H. Rep. No. 93-620,

supra, pp. 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 constitu-

tionality of significant portions of that Act.

1. The major features of the Act may be briefly

summarized. The Act establishes a public, nonprofit

corporation, the United States Railway Association,

‘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.

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, Illinois, and

the District of Columbia.

6

and directs the Association to formulate a “final sys-

tem plan” for the “establishment and maintenance of

a [financially self-sustaining] rail service system ade-

quate to meet the rail transportation needs and serv

ice requirements of the [northeast] region.” Section

206(a) of the Act. See, also, Sections 202 and 204. It

is aiticipated that the final system plan will provide

for the sale of some of the rail properties of the

railroads presently in reorganization to profitable rail-

roads, to the National Railroad Passenger Corporation,

and to state and local transportation authorities. Sec-

tion 206 (¢) and (d). But the Act contemplates that

the centerpiece of the final system plan will be a newly

organized for-profit corporation, the Consolidated Rail

Corporation, to which the Association will issue up te

one billion dollars of the Association’s federally-guar

anteed obligations. Sections 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 te the Corporation in ex-

change for stock and securities of the Corporation

and up to $500 million of the Association’s obligations

held by the Corporation.® Sections 206(d) and 210(b).

The Corporation will be required to use at least $500

million of the Association’s obligations for rehabilita-

tion and modernization of the transferred rail prop-

erties. Section 210(b).

“Subject to congressional approval, the plan may also pro

vide for additional compensation to the transferor railroads’

estates in the form of federally guaranteed obligations of the

Corporation, Section 206(1). See, also, Sections 206(h) and 210

Corporation. Section 206(1). See, also, Sections 206(h) and

210(b).

7

The final system plan is to be submitted to Congress

within 450 days after the date of enactment of the Act

(January 2, 1974) and will become effective at the end

of 60 session days if not disapproved by either house.

Sections 207 and °° . Within 90 days thereafter, the

plan is to be ce:tifed to a special three-judge court

appointed by the judicial panel on multi-district liti-

gation. 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 com-

| pensation payable under the plan to the estates of

those railroads, See generally Section 303.

If the special court determines that the consideration

payable under the plan exceeds the constitutional mini-

mum standard of fairness and equity, it must order the

return of any excess. Section 303(c) (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 equita-

ble manner, and, if necessary, order the Corporation

to transfer to that estate additional securities or obli-

gations designated for that purpose in the final system

plan, and, if further necessary, enter a judgment im

the estate’s favor against the Corporation for the addi-

tional 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 remains adequate pending the

8

transfer of properties to the Corporation under the

final system plan, the Act forbids the railroads in re-

organization from discontinuing service or abandoning

lines without the consent of the Association. Section

304(f). However, the Secretary of Transportation is

authorized to provide emergency assistance to the rail-

roads pending implementation of the final system plan

and to pay rail service continuation subsidies. See-

tions 213 and 402. The Secretary is further authorized

“to enter into agreements with railroads in reorga-

nization * * * for the acquisition, maintenance, or

improvement of railroad facilities and equipment

necessary to improve property that will be in the final

system plan.” Seetion 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 reorganization

so orders. However, Section 207(b) of the Act provides

that “[b]ecause of the strong public interest in the con-

tinnance of rail transportation in the [northeast]

region pursuant to a system plan devised under the pro-

visions of this Act, each such court shall order that the

reorganization be proceeded with pursuant to this Act

unless it (1) has found that the railroad is reorganiz-

able on an ineome basis within a reasonable time * * *

and that the public interest would be better served by

such a reorganization * * *,['] or (2) finds that this

Act

‘Two courts have now determined that the railroads under

their jurisdiction are reorganizable on an income basis within

a reasonable time. /n the Matter of Erie Lackawanna Railway

Co., N.D. Ohio, No. B72-2838, Order No. 234, decided May 2,

1974; In the Matter of Boston & Maine Corp., D. Mass., No. 70-

250M, memorandum opinion, decided May 2, 1974.

9

does not provide a process which would be fair and

equitable to the estate of the railroad in reorganiza-

tion in which case it shall dismiss the reorganization

proceeding.”’ *

2. The present action was brought by the sole share-

holder and major creditors of Penn Central Trans-

portation Company, one of the railroads in reorganiza-

tion, seeking declaratory and injunctive relief against

enforcement of the Act.” They contended, inter alia,

* 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. /n the Matter of Penn Central

Transportation Co. E.D. Pa. Bky. No. 70-347, Order No.

1596, decided July 1, 1974; /n the Matter of Penn Central

Transportation Co. (Secondary Debtors), ED. Pa. Bky. Nos.

7O-347A to 70-3470, multiple orders all decided July 1, 1974:

/n the Matter of Lehigh Valley Railroad Co.. ED). Pa., Bky.

No. 70-432, Order No, 252, decided July 1, 1974: /n the Mat-

ter of Central Railroad Company of New Jersey, DN...

Bky. No. 401-67, decided June 28, 1974; /n the Matter of

Lehigh and Hudson River Railway Co., 3.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.

In the Matter of Reading Co. ED. Pa. Bhy. No. 71-828,

Order No. 650, decided July 1, 1974; Ju the Matter of Ann

Arber Railroad Co., E.D. Mich., No. 74-00833, decided July 1,

1974. These cases are all currently on appeal to the special

three-judge court established under Section 209(b). The deci-

sion 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

(ic., by September 29, 1974); however, the government has

urged the special court to stay its mandate pending disposition

of the instant case,

*As we have indicated (note 2, supra), there were in fact

three separate actions before in the district court. The plaintiffs,

in No, 74-189, were Connecticut General Insurance Corporation,

Connecticut Mutual Life Insurance Company, The Equitable

10

that the contemplated transfer of rail properties in

exchange for stock and securities of the Corporation

would effect a taking of their property for public use

without just compensation; that enforcement of Sec-

tion 304(f), which bars railroads from discontinuing

service or abandoning lines prior to the transfer with-

out the consent of the Association, would also effect

such a taking; and that the entire Act exceeds the

power of Congress under the bankruptcy clause of the

Constitution.

Life Assurance Society of the United States, Metropolitan Life

Insurance Company, and The Prudential Insurance Company

of America, and, in their capacities as trustees, The Bank of

New York, Bankers Trust Company, The Fidelity Bank, The

First Pennsylvania Banking and Trust Company, Girard Trust

Bank, National Commercial Bank and Trust Company, United

States Trust Company of New York, American National Bank

& Trust Co. of Chicago, Mellon Bank N.A.. Wilmington Trust

Company, and Irving Trust Company. The plaintiff in No.

74-1107 was Richard Joyce Smith, Trustee of the New York.

New Haven and Hartford Railroad Company. The plaintiff

in No, 74-1149 was Penn Central Company. Claude S. Brinegar.

Secretary of Transportation, the United States of America, and

the United States Rail Association were named as defendants

im all three actions. George M. Stafford, Chairman of the

Interstate Commerce Commission, and George P. Schultz, Sec-

retary of Treasury, were additionally named as defendants in

Nos. 74-189 and 74-1149. The Interstate Commerce Commis-

sion was named as a further defendant in No. 74-1189. George

P. Baker, Robert W. Blanchette, and Richard (. Bond, Trustees

of the property of Penn Central Transportation Company. in-

tervened as defendants in all three actions. This jurisdictional

statement is filed on behalf of the United States of America:

Claude S. Brinegar, Secretary of Transportation; George M.

Stafford, Chairman of the Interstate Commerce Commission :

William E. Simon, Secretary of Treasury; and the Interstate

Commerce Commission.

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

adjudication (J. App. 23-25). The court concluded,

however, that the problem of ‘interim erosion” of the

bankrupt estates posed by losses resulting from in-

voluntary continuation of service or lines was ripe for

adjudication, and the court enjoined the defendants

from acting under Section 304(f) to prohibit any “re-

duction in 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). The

court based that ruling upon a determimation that

the Act impliedly amends the Tucker Act so as to

bar suits for damages for any takings resulting from

the continued operation of the railroads (J. App.

40-53).

The court further determined that although the

Act in principal 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 geographically nonuniform

law on the subject of bankruptcies (J. App. 61-65) ;

enforcement of that provision was therefore enjoined.

The court then proceeded, without any further state-

ment of reasons, to enjoin the Association from cer-

tifying a final system plan for judicial review under

Section 209(¢) (J. App. 53).

The court did not determine whether in fact any such tak-

ing had yet occurred. It indicated, however, that a determina-

12

THE QUESTIONS ARE SUBSTANTIAL

The importance of this case requires little diseus-

sion. Certification of a final system plan to the special

reviewing court is a critical and necessary step in the

procedure established by Congress for the financial

restructuring of the rail transportation network of the

northeastern States. Enforcement of the final system

plan by the special court is the linchpin of the statu-

tory scheme; if no plan is certified to the court, the

entire scheme collapses. Thus br barring the Associa-

tion from certifying a plan to the special court, the

court below has completely nullified the congressional

solution to the transportation crisis presently facing

the nation.

The district court erred in enjoining certification of

a plan. The court based that injunction solely upon

its determinations that Section 304(f) permits tak-

ings, through interim erosion, for which there may be

no just compensation and that Section 207(b) estab-

lishes a geographically nonuniform rule for the

dismissal of railroad reorganization proceedings.

Those determinations were in error.

Interim erosion pending implementation of the final

system plan will not amount to a taking in the con-

stitutional sense. Appellees, by investing “their capi-

tion of that kind would require consideration of “both * * *

the amount of erosion of the Debtor's estate which can be

permitied to occur before impairing liquidation value, and

** * the length of time that is reasonable for assessing the

ultimate prospects of achieving sufficient profitability to sup-

port a valid recapitalization of the enterprise” (J. App. 41,

n. 23).

13

tal in a public utility that does owe an obligation to

the public” (Reconstruction Finance Corp. v. Denver

& Rio Grande Western R. Co., 328 U.S. 495, 535),

subjected themselves to the burden of continuing rail

operations for a reasonable time while good faith ef-

forts are being made to restore the northeast rail sys-

tem to financial viability. See New Haven Inclusion

Cases, 399 U.S. 392; Continental Bank v. Chicago,

Rock Island & Pacific Ry., 294 U.S. 648. The Act

represents such an effort.

But even if interim erosion pending the plan’s im-

plementation could in some instances be said to con-

stitute a taking, there is ample provision for payment

of just compensation. The ownership and creditor

interests in the Corporation, and the obligations of the

Association, received in exchange by the estates of the

transferor railroads should constitute adequate and

full consideration. But if that consideration proves to

be constitutionally inadequate, a complete remedy is

nevertheless available under the Tucker Act. Cf. Hur-

ley v. Kincaid, 285 U.S. 95.

The provision in Section 207(b) requiring the dis-

missal of certain railroad reorganization proceedings

is not a geographically nonuniform law on the sub-

ject of bankruptcies. That provision both by its terms

and in faet applied to every railroad reorganization

proceeding pending at the time of or within 180 days

after enactment of the Act. It has no application to

future railroad reorganizations and therefore will

never be applied in a geographically discriminatory

manner.

But the court erred in enjoining certification of

14

the final system plan even assuming arguendo that

Sections 304(f) and 207(b) are constitutionally de-

fective. Certification triggers the transfer of proper-

ties pursuant to the plan. See Section 303(a). Cer-

tification thus terminates any interim erosion that

might otherwise result from enforcement of Section

304(f); and the dismissal provision of Section 207(b)

applies only to proceedings in which the reorganiza-

tion court has determined that the properties of the

debtor railroad will not be eligible for transfer under

the plan. Thus any 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 en-

joining enforcement of Section 304(f) and the dis-

missal provision of Section 207(b); it was improper

for the court additionally to enjoin certification of

the plan.

CONCLUSION

For the foregoing reasons, probable jurisdiction

should be noted.

Respectfully submitted.

Rosert H. Bork,

Solicitor General.

Caria A. Hiss,

Assistant Attorney General.

Keitu A. JONES,

Assistant to the Solicitor General.

Rosert H. Kopp,

Davip J. ANDERSON,

James F. Dauscu,

Attorneys.

Avoust 1974.

US GOVERNMENT PRINTING OFFICE tOTSe