Brief for Appellant — U.S. v. Connecticut General Insurance Corp. (No. 74-168)

Supreme Court brief1974

Ask Donna

What actually matters in this document.

Text

Supreme Goat, 0. &

FILED

i] AUG 29 197%

No. 74-168

= Se

Ju the Supreme Gourt of the United States

Ooroner Term, 1974

Unrrep States or AMERICA, ET AL.. APPELLANTS

Connecticut General [Nsvurance CorPORATION, ET AL.

ON APPRAL FROM THE UNITED STATES DISTRICT COURT FOR

THE RASTERN DISTRICT OF PENNSYLVANIA

BRIEF FOR THE APPELLANTS

ROBERT H. BORK.

Solicitor General

CARLA A. HILIS,

Aasiatant Aftorney General

KEITH A. JONES,

4asiatant to the Selicitor General

JAMES F. DAUSCH,

Attorney.

Department of Juatice.

Washington, D.C. 20580

RODNEY E. EYSTER.

General Counsel,

JEROME EB GHARFMAN,

Attorney,

Department of Transportation

Washington, D.C. 20590

INDEX

{ Ipinion bye low

Jurisdiction

Quest

(on

bons presented

;

itutional provisions and statutes involved

rv of Argument

|. Section 304(f) Of The Rail Act Does Not Effect

A Taking Of App llees’ Property

\. 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 Aet represefits a substantial

good faith effort to restore the north-

east rail system to financial viabilit,

| Anpelles Will Receive Just Compensation For

An) Taking

\. Compensation it available under Se

tion 303 of the Rail Act

B. Just compensation for any otherwis«

Mcom pen ated 1 “king i- avatiable

Section 207(b) Of The Rail Act Is Not Invalid

As A Geographi y Nenuniform Law On the

Subject Of Bankruptei

}

} Phere |. No Basis For Enjoming t hee A ~-Ociatlbon

From Certifying A Final Svstem Plan

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

(. 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 mterim

erosion 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 prosper tive erosion if rail operations continue

through 1975 72

G. Future erosion through 1975 may be worse if the

railroad is liquidated 73

CITATIONS

(Cases

Amell vy. United States, 384 U.S. 158 : 14.40

Armour Packing Co. v. United States, 209 U.S. 56 54

Armstrong v l'nited States, 364 U.S. 40 41

Brooks-Scanlon Co. v. R.R. Comm., 251 U.S. 396 19

Bullock v. RR. Comm. of Florida, 254 U.S. 513. 19

Continental Bank ». Rock Island Ry., 294 U.S. 648_ 13, 20-21

Currin v. Wallace, 306 U.S. 1 54

Ex Parte 305, Interstate Commerce Commission,

June 5, 1974 73

Farnsworth v. Montana, 129 U.S. 104 43

Hanover National Bank vy. 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,

1974) : 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

May 2, 1974 ad _

Ill

Cases—Continued Page

In the Matter of Central Railroal Company of New

Jersey, D. N.J., Bky. No. 401-67, decided June 28,

1974 1]

In the Matter of Erie Lackawanna Railway Co.. N.D.

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

1974 -_ 10

In the Matter of La high & Hudson River Railway (o.,

$.D. N.Y., Bky. No. 72-419, decided July 1, 1974 11

In the Matter of Le high Valle y Railroad Co., E.D. Pa.,

Bky. No. 70-432, Order No, 252, decided July 1,

1974 1]

In the Matter of Penn Central Transportation Co., E.D.

Pa.. Bkyv. No. 70-347, Order No. 1596, decided

July 1, 1974 10-11

In 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 i]

In the Matter of Penn Central Trans portation ('o., 355 F

Supp. 1343 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 Railroad Co..,

No. 30226, Order No. 720, decided February 14,

1974 (D. Conn.) 52

In re New York, New Haven and Hartford Railroad Co..,

304 F. Supp. 793 99

In re New York, New Haven & Hartford R.R., 304

F. Supp. 1121 65

In re New York, New Haven and Hartford Railroad Co..,

289 F. Supp. 451 22, 26

In re New York, New Haven and Hartford Railroad Co.,

281 F. Supp. 65__-. 25

In re Penn Central Transportation Co., Bky. Nos. 70

347, Memorandum and Order No. 1543 (E.D. Pa.,

May 2, 1974) : 33

C‘ases—C ‘ontinued

In ve 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

2, 1974 .

In re Pa (Central Transportation c.. Bky. No. 70

47, Order No. 1344, Corp. Reorg. Rept. (Penn

Central), Document No. 6386, p. 1011: 4793 (E.D

Pa., Oct. 9, 1973

/ ¢ Penn Central Trans portat m Co., Bky. No. 70

17, Memorandum and Order No. 1397. Corp

Reorg. Rept. (Penn Centr 1), Document No. 6195,

p. 1011 :4772 (E.D. Pa., Aug. 31, 1973)-

In é Penn ('entral Transp wlatior Co., 358 F

Sup. 154 —

Jacobs v. United States. 290 U.S. 138

ly lton v. Moore, 178 U.S. 41

Levwligh Carriage Co. v. Stengel, 95 Fed. 637

/ sana Public Service Comm'n v. Texas & New Or-

leans R. Co., 284 US. 125

VMabee v. White Plains Publ shing Co., 327 U.S. 178

Vew Haven Inclusion Cases, 399 U.S. 392 13, 24,

VLY.. NL. & H. R. Co. Bondholders’ Committe: \

{ 1 Stat 2890 F Supp. 418

Vicol v. Ames, 173 U.S. 509

Palmore v. United States, 411 U.S. 389

P Central Merger Cases, 389 U.S. 486

/? Central Transportation Co Reorganization, Corp

KR v Rept Penn Central), Document No. 95.

at 1102:86 (ICC Finance Docket No. "26241. sep-

ber 28, 197

Pennsylvania v. Wheeling & Belmont Bridge Co.. 18

If 12]

Phelps v. United States, 274 U.S. 341

Phillips v. Commissioner 283 U.S. 589

Portsmouth Harbor Land & Hotel Co. v. United States.

ies

260 US. 327

Railroad Comm. v. Eastern Ter. RP, 264 U.S. 79

Reconstruction Finance Corp. v. Denver & Rio Grande

Western R. Co... 328 US. 495

Rosenberg v. United States, 346 U.S. 273 Pea

Page

Cases—Continued Page

Secretary of Agriculture v. Central Rog Refine q Co

338 U.S. 604 54

Shuttle Corp. v. Transit Comm’ n., 893 U.S. 186 4?

St. Joe Paper Co. v. Atlantic Coast Line RR, SAT US.

298 : 37

Stellwagen v. Clam, 245 U.S. 605 53

Tyson & Brother v. Banton, 273 U.S. 418 1S

United States v. Borden Co., 308 U.S. 188 42

United States v. Cauaby, 328 U.S. 256 4)

United States v. Darby, 312 U.S. 100 29

United States v. Dickinson, 331 U.S. 745 4)

United States v. Pfitech, 256 US. 547 4

United States v. Thayer-West Point Hotel Co., 329 Us

5S5 40

United States v. Thirty-Seven Photographs, 402 U.S

$63 51

Vanston Bondholders Protective Committee v. Green, 329

US. 156 15, 53

West Coast Hotel Co. v. Parrish, 300 U.S. 379 20

Wright v. Vinton Branch of Mountain Trust Bank, 300

U.S. 440 53

Vearsley v. W.A. Ross Construction Co., 309 U.S. 18 +

Youngstown Sheet & Tube Co. v. Sawyer, 345 US

579 29

Constitution, statutes and regulations

United States Constitution

Article 1, Section 8, Clause 3 2

Article 1, Section 8, Clause 4 2, 50

Article 1, Section 9, Clause 6 54

Fifth Amendment 3, 18, 21, 24, 28, 46, 49

Air Commerce Act of 1926, 44 Stat. 568 1

Bankruptcy Act, 47 Stat. 1474,as added and amended

Section 77, 11 U.S.C. 205 7, 33, 49

Section 77(a), 11 U.S.C. 205 (a) 52

Section 77(c)(6), 11 U.S.C. 205(©)(6)

Section 77(o0), 11 U.S.C. 205(0) sO

Clayton Act, 38 Stat. 730, as amended, 15 U.S.C. 12

et seq... - 42

Constitution—Continued Page

Federal Trade Commission Act, 38 Stat. 717. as

amended, 15 U.S.C. 41, ef seq 4?

Foreign Assistance and Related Programs Appropria-

tions Act of 1974, Pub. L. 93-240, 87 Stat. 1057

Title VII s2

Interstate Commerce Act, 24 Stat. 379, as amended

Section 1(18), 49 U.S.C. 1(18 16, 33

Section 5.49 U.S.C. 5 6

National Environmental Poliey Act of 1969, 83 Stat

852, 42 U.S.C. 4321, ef seq 4, 45

Regional Rail Reorganization Act of 1973, Pub. L. 92

26, S7 Stat. OSS. ef seq 7)

Section 101(a)(3 54

Section 102(11 52

Section 102(15 ~_ 50

section 202 S

Section 202(a)(10 45

Section 204 Ss

section 205(c)(2 45

section 205(d)(1) 50)

Section 206(a Ss

Section 206(c) Ss

section 206(¢)(1) o1

Section 206(d) s

section 206(d) (3) 43

section 206(h) 8,51

Section 206(i) S,51,48S

Section 207 s

Section 207 (b) 2

4, 10, 11, 12, 15, 16, 43, 49, 50, 51, 52. 53. 55. 56

57, 63

Section 208 S

Section 209 9

Section 209(a) 4%

Section 209(b) 11, 38, 43

section 209(c) . 2, 3, 13, 55

Section 210 : 8, 31

Section 210(b)__. ? 8, 31,48

Section 211(c)_.__- - 3

Section 213____. — 10, 31

Vil

Constitution—Continued

Regional Rail—Continued Page

section 215 10, 52

section 301 Ss

section 302 S

Section 303 9, 14, 37, 38, 59

section 303 (a) 57

Section 303(b) JS

Section 303 (b)(2) 43

Section 303(c) »

Section 303(¢)(1) - 3S

Section 303(¢)(2) 9.38

Section 303(c¢)(2)(A) 44

Section 303(¢)(2)(C) 45, 46, 47

Section 303(c¢) (3) i)

Section 303 (d) 9, 43

Section 304(a) 36

Section 304(b)__. 36

Section 304(c) “9 36, 43

Section 304(d) 36

Section 304(f) 2,

3, 9, 11, 12, 15, 16, 18, 35, 37, 43, 48, 55, 56, 57

Section 402 10, 32

Section 509 36

Section 601(a) (2) : 43

Section 601(b) — 35, 43

Section 601(c) ' 35, 43

Rev. Stat. 3709, 41 U.S.C. 5 os 43

Second Supplemental Appropriations Act of 1974,

Pub. L. 93-305, 88 Stat. 210 , 32

Sherman Act, 26 Stat. 209, as amended, 15 U.S.C. 1,

et seq _ . — : . 42

Suits in Admiralty Act, 41 Stat. 525, as amended,

46 U.S.C. 741, et seq eral iia _...... 40-41

Tucker Act, 28 U.S.C. 1491. nee ull 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) 2 53

VIII

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. Ree. 522483 (daily ed., December 11,

1973) . 35

119 Cong. Ree. 523780 (daily ed., December 21,

1973) 45

119 Cong Rec. S23782 (daily ed., Docember 21,

1973) 35

119 Cong. Ree. 5323782-S23784 (daily ed., December

21, 1973) — 46,47

Department of Transportation, Northeastern Railroad

Problem, a Re port to Congress, March 26, 1973 33, 34

Department of Transportation, The Penn Central and

Other Railroads, Report to the Senate Committee

on Commerce (1972) 28

Department of Transportation, Rail Service in th:

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

5. 1031, Northeastern Railroad Transportation

Crisis, 93d Cong., Ist Sess 29

Hearings before the Subcommittee on Transportation

and Aeronautics of House 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

Iron Age, June 21, 1970 60

Kratovel and Harrison, Eminent Domain Policy and

Concept, 42 Calif. L. Rev. 596 (1954) IS

Penn Central Trustees, Jnterim Report on Reorgan 2a-

tion Planning, February 1972___. 33

Penn Central Trustees, Interim Re port on Reorganiza-

tion Planning, October 1972 36

Penn Central Trustees, Interim [Re port on Reorganiza-

tion Planning, January 1973 32, 33, 36

Penn Central Trustees, Interim Re port on Reorganiza-

tion Planning, April 1974- ahaaintinte , 33

Yn the Supreme Court of the United States

Ocroner Term, 1974

No. 74-168

Uxrrep SvTaTes OF AMERICA, ET AL., APPELLANTS

Coxxecticut GENERAL INSURANCE CORPORATION, ET AL.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR

THE EASTERN DISTRICT OF PENNSYLVANTA

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

'“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, 74-1107,

and 74-1149) 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. Towever,

we are treating those actions as a single consolidated action for

purposes of our jurisdictional statement and brief on the

merits.

)

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 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. in pertinent

part provide;

The Congress shall have power * * *

* > * * *

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.

The Fifth Amendment to the Constitution in pert:

nent part provides:

* * * (Nor shall private property bh taken

for public use, without just compensation.

Sections 207(b), 209(¢), 303(¢), and 304(f) of the

Regional Rail Reorganization Act of 1975, Pub. L.

93-236, 87 Stat. 985, 998, 1000, 1006-1007, and 100%,

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 ts reorganiz

able on an income basis within a reasonable

time under section 77 of the Bankruptcy Act

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

would be better served by continuing the pres

ent reorganization proceedings than by a reor

ganization wnder this Act. * * * |

strong public interest * * *

ance of rail transportation in the region pul

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 foun

that the railroad is reorganizable on an tneon

hasis within 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 he fair

and equitable to the estate of the railroad in

reorganization in which case it shall dismiss

the reorganization proceeding. * * *

leeanse of the

in the eontinn

‘The Rail Act in its entirety is set forth at J. App. 595-451.

Section 209(¢). Within 90 days of its effec

tive date, the Association shall deliver a certi

fied copy of the final sVstem 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

(including 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 heen 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

(1) of rail properties of each railroad in

to the Corporation in ex-

reorganization * * *

change for the securities and the other benefits

accruing to such railroad as a result of such

exchange, as provided in the final system plan

of this Aet, and

(ii) of rail properties of each railread im

reorganization 7°97 @& @ 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 im

reorganization but which is leased, operated, or

controlled by a railread 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

(©) 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 judgment

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

te render judgment upon any claim against the

United States founded either upon the Con-

stitution, or any Aet of Congress, or any reg-

ulation of an executive department, or upon

any express or unphed contract with the United

States, or for liquidated or unliquidated

damages in cases not sounding m test. ~ ° *

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.. 1st Sess.. pp. 25-29.

Seven major railroads * operating principally in sey-

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

Iehigh & Hudson River, had also entered reorganization.

‘

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, ¢.9., In

the Matter of Penn Central Transportation Uo., 395

F. Supp. 1343 (E.D. Pa.). There was therefore a

serious possibility that the rail service provided by

come 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 rail service would do inealeulable 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, Transylvania, Delaware, Maryland, Vir-

ginia, West Virginia, Ohio, Indiana, Michigan, Illinois, and the

District of Columbia.

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

by 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 railroads’

estates in the form of federally guaranteed obligations of the

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

210(b).

judge court appointed by the judicial panel on multi-

district litieation. 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(¢) (5).

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-

556-031 74 2

eee

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 <Aet. However, Section

207(b) of the Rail Act provides that “[blecause 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

hot provide a process which would be fair and equit-

able to the estate of the railroad in reorganization in

tn)

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 Feri Lackawanna Railway

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

1974; In the Matter of the Boston & Maine Corp., 1D. Mass.

No. 70-250M, memorandum opinion, decided May 2, 1974.

* Three courts have now found that the Act does not provide

& process that is fair and equitable to the estates of the rail-

roads under their jurisdiction. Jn the Matter of Penn Central

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.@. 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. TO-MT, 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. (See-

ondary Debtors), E.D. Pa. Bky. Nos. 70-47A_ to TOUMTY,

multiple orders all decided July 1, 1974; /n the Matter of Cen

tral Railroad Company of New Jersey, D. N.J., Bky. No, 401-67,

decided June 28, 1974; In the Matter of Le high and Hudson

River Railay Co. SD. 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, /n the Matter of the

Reading Co., ¥..D. Pa., Bky. No. 71-888, Order No. 650, decided

July 1, 1974; Jn the Matter of the Ann Arbor R. Co., ED.

Mich.. No. 74-90833, decided July 1, 1974. These cases are all

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 its mandate

pending disposition of the instant case.

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 vet 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) te prohibit any

“reduction of service Which has been or mav hereafter

le determined by a court of competent jurisdiction to

be necessary [to prevent a taking]” (J. App. 82).""

The court based that ruling upon a determination that

the Act impliedly amends the Tucker Act so as to har

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

im 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 “s a geographically non-

uniform law on the subject of bankrupteies (J. App.

61-65) ; enforcement of that provision was therefore

enjoined. The court then proceeded, without any

The court did not determine whether in fact any such

taking had yet occurred, It indicated, however, that a deter

mination of that kind would require consideration of “both

* * * the amount of erosion of the Debtor's estate Which can

be permitted to occur before umpairing liquidation value, and

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

ultimate prospects of achieving sufficient Profitability to support

& valid recapitalization of the enterprise” (J, App. 41, n. 23).

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

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 vy. 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 publie utility that owel[s] an obliga-

* * @ |

tion to the public such claimants | assumed the

risk that in any * * * reorganization the interests of

the public would be considered as well as theirs.”

Reconstruction Finance Corp. v. Denver & Rio Grande

Western R. Co., 328 US, 495, 535-536. Accordingly, it

has become well established that the owners and ecredi-

tors of a railroad may constitutionally be compelled

to bear the burden of continuing its operations in the

public interest for a reasonable time pending substan-

tial good faith efforts to restore it to financial

viability. See, ¢.¢., New Haven Inclusion Cases, 399 U.S.

392, 489-495 ; Penn-Central Merger Cases, 389 U.S. 486,

\OT-511; In re Boston and Maine Corp., 484 F. 2d 369,

374-375 (CLA. 1).

In this case, appellees may be compelled to bear the

burden of continuing the operations of the Penn Cen-

tral pending implementation of the final system plan.

The public interest in continued operations is substan-

tal. The “interim” during which erosion in the

wunount available te satisfy prebankruptey claimants

could oeeur is expected to be extremely brief by reor-

sanization standards. and the record does hot show

that substantia] erosion has or will occur, Moreover,

the Rail Aet represents a substantia] good faith effort

fo 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 financials self-sustaining core system by permit-

ting the expeditions weeding out of uneconomic lines,

But assuming argquendo that any interim erosion

under the Rail Act could amount to a taking, there js

“ample provision for just compensation, The special

court may award such compensation under Section

303, Just ¢ mpensation for any otherwise uncompen-

sated taking is available under the Tueker Act in the

Court of Claims.

Congress may not be held to have withdrawn the

Jurisdiction conferr ¢ on the Court of Claims by the

Tueker Act without compelling evidence of an explicit

intention to do 80. See, ¢.9., Amell Vv. United States,

4 US. 158: Hurk 4 V. Kincaid, 285 U.S. 95. There

is ho such compelling evidence here, Although the

Rail Act expressly makes several] other prior statutes

inapphieable, it contains no reference at all te, the

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

Rail 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

hasis 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 imvalidate the statute. See, ¢.g., Head Moncey

Cases, 112 U.S. 580. Furthermore, Section 207(b)

applies equally to all creditors no matter where thev

are located, and that is all the bankruptey clause re

quires, See Vanston Bondholders Protective Commit

tee V. Green, 329 U.S. 156, 172 (concurring opinion ol

Justice Frankfurter). The court below therefore erred

in enjoining enforcement of the dismissal provision.

The court erred in enjoining certification of the

final system plan even assuming arguendo that See-

————SSSaS—_aee

tions 304(f) and 207(b) are constitutionally defective.

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 enjoining enforce-

ment of Section 304(f) and the dismissal] Provision of

Section 207(b) ; it Was improper for the court addi-

Honally to enjoin certification of the plan,

ARGUMENT

SECTION 804; ¢) 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

make the consent of the Association a condition of

such discontinuance or abandonment, Tp this respect,

Section 304(f ) is analogous te Section 1(18 ) of the

Interstate Commerce Act, 49 U.S.C, 1(18), whieh

forbids a railroad from terminating service without

permission from the Interstate Commerce Commis-

SlOn,

The district court did not declare Section 304/f)

invalid on its face. The court recognized that Section

SO4(T), 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

a manner as te effect a taking, in the constitutional

sense, of appellees’ property, Any such finding would

of course have been premature; there jg nothing in

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 servic

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 bankruptcy (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 prebankruptey 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

case shows that any involuntary continued loss oper-

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,

\. CLAIMANTS AGAINST A BANKRUPT RAILROAD MAY CONSTITUTION

\LLY BE COMPELLED TO BEAR THE BURDEN OF CONTINUING ITS

OPERATIONS FOR A REASONABLE TIME PENDING SUBSTANTIAL GOOD

FAITH 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

constitutional 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 against

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 public 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).

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 balance, may consider the possibility that a con-

tinuation of loss operations may result in net reduc-

This proposition is not inconsistent with Brooks-Scan/on

Co. v. RR. Comm., 21 US. 396, Bullock v. RR. Comm, of

Florida, 254 U.S. 513, and Railroad Comm. v. Eastern Tex.

RR.. 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.”

Rullock v. RR. Comm. of Florida. supra, 254 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.

tion in the amount available to satisfy prebankruptey

claimants, this Court has never held that factor to

be constitutionally determinative.

In Continental Bank vy. Rock Island Ry., 294 US.

648, this Court upheld an order of a reorganization

court barring holders of the debtor railroad’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

pubhe, yet the Court barred even this relatively minor

interference with the reorganization process. 294 U.S.

at 678-679. Although the face amount of 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 notecholders from

achieving full satisfaction, conceded that ‘*[i]t may be

that in an ordinary bankruptcy proceeding the issue

of an injunction in the cireumstances 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 public interest * * *.”’ 294 U.S. at

671. The Court therefore concluded that in the cir-

cumstances the creditors’ interest in preserving their

capital investment intact had no constitutional signif-

icance, 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

US. at 685) :

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.

* * * [B]y 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 foreed to bear substan-

tial and uncompensated losses, resulting if necessary

in a substantial reduction in the amount available to

satisfy prebankruptcy claimants, pending reorganiza-

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

vears; and ‘losses reasonably incident to 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 (Jn 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 prebankruptey claims.

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.

dll):

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 righis

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 tu be sacrificed

for the strategic purposes or protection «

class of security holders whose interests may

may not be served by the destructive move,

The New Haven creditors thereupon petitioned

reorganization court to dismiss the proceedings i

order the New Haven’s liquidation, on the ground t

the continuing erosion constituted a taking of th

property under the Fifth Amendment. The predi

ment of the New Haven creditors at that time was

more compelling than that of the appellees here. 1

New Haven had been in reorganization for sev

years, suffering continuous losses. The equity and |

secured debt had become worthless. See New Hai

Tuclusion Cases, 399 U.S. 392, 490. n. 82. For me

than four years, it had been clear that the railro

could not be made viable without external assistan

The only solution, inclusion in the Penn Central, w

still some time away and was outside the control

the reorganization court. Although the exact amou

of consideration to be paid for the New Have

assets had not been caleulated, the upper limit h

been fixed by the Interstate Commerce Commissi

at liquidation value as of December 31, 1966, Sin

that date, additional administrative claims had a

cumulated, thereby reducing the eventual recove

available to secured ereditors.

The reorganization court nevertheless rejected t)

petition to dismiss, declaring that ** [t]o jettison ever

thing achieved and turn back just as a elimmer |

light begins to show at the end of a long dark tunn

not only carries with it an aura of unreality bi

a horders on the fantastic.” In re New York, New

rr Haven and Hartford Railroad Co,, 281 F. Supp. 65,

G8 (1D. Conn.).

a In the meantime, the Commission had approved a

idl proposed purchase agreement for the New Haven

ut assets. The New Haven creditors attacked the agree-

ir ment for, inter alia, failing to require the Penn Cen-

am tral to compensate the estate for all operating losses

ir that it had incurred subsequent to the Penn-Central

o merger, on the theory that they were at least entitled

n to compensation for post-1966 erosion in their inter-

- ests. The three-judge reviewing court also rejected

os the creditors’ claims (N.Y., N.A. & H.R. Co. Bond-

d 144 (S.D. N.Y.)):

Although we agree that by investing in a rail-

. road the bondholders did not surrender their

constitutional right not to be required to operate

t 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,

\6-031- 74 —3

Without just compensation.” ln ve New York, New

Haven and Hartford Railroad Co., supra., 29 F.

Supp. at 459 But this determination did not rest

upon a simple equation of “taking” with either post-

hankruptey or post-1967 erosion of the prebankruptey

Claimants’ interests. The court recognized that those

interests had in fact been “chiseled down day after

dav by * operating losses.”’ 289 F. Supp. at 457.

The court ruled that the determination of when a

taking occurs during a railroad reorganization re-

quires a balancing of the interests of prebankruptes

claimants against the public interest in continued rail

service: it struck that balance in faver of the creditors

only when there was no longer a substantial pubhe

interest in further delay (289 F. Supp. at 455, 459,

+):

—_ [A}s hondholders 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 ts

required by the publie interest.

rhe extent to which the * * * fereditors: |

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 publie

if service were termi ofed, the rate of losses

and the feasibility of possible solutions. * * *

sf x fF FT

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 hatidation 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, Jn re Boston and

Maine Corp., 484 F. 2d 369, 374-375 (C.A. 1).

“"? The Court also noted (599 U.S. at 494-493) 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—7T4-——4

—————————————————e———ee

The court below thus erred in its apparent assump-

tion that a net reduction in the amount available to

satisfy prebankruptey 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, gaat 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.

BR. THE RAIL ACT REPRESENTS A SUBSTANTIAL GOOD FAITH EFrorTr

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, 7he

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

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, ¢ oo

Youngstown Sheet & Tube Co. v. Sawyer, 343 US.

579, 609-610 (concurring opinion of Justiee 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 publie interest,

Congress did not place upon the creditors the burden

of lengthy and indefinitely continued loss operations.

Congress instead established 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., Ist Sess., pt. 2, p. 258.

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 occur 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 publie 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, infra.

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.

63-5). The value of the estate appears to have in-

creased since the date of the reorganization petition,

although it cannot be determined from the reeord

whether this increase fully offsets accumulated ad-

ministrative claims (see App., tnfra, 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

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 of successful reorganization of those rail-

roads into an economically 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 rehalnilitation and modernization of the

rail properties transferred to it from the debtor rail-

roads, Section 210(b).

Because Section 211(¢) 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 <ecretary of Trans-

“ The $1.5 billion figure is a revolving limitation; additional

obligations may be issued as repayments are made. Section

210(b). Congress may by joint resolution approve the issuance

of further obligations above the $1.5 billion ceiling. /bid. See,

also, Section 206(h) and (i).

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 XI 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

heen accommodated on 76% of their 1972 trackage).

Proceedings under Section 77 of the Bankruptcy 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).

“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,

"| la re Penn Central Transportation Company, Bky. No. 347,

Mem. and Order No, 1543, p. 5 (E.D. Pa., May 2, 1974).

* HL. Rep. No. 93-620, supra, at 2.

* By January 1, 1973, the Penn Central Trustees had filed

applications with the Commission for the abandonment of over

3,000 miles of lines. Penn Central Trustees’ January 1973

Report, p. 3.

Railroads undergoing reorganization under the

Bankruptcy Act must apply to the Commission for

authority 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'n.

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, rephed that “the bottleneck in the elimina-

tion of redundant capacity is the lack of initiative on the part of

ijn the approximately 1,000

railroad management” and that “

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.

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 S23782 to 823783 (daily

ed., December 21, 1973) (Senator Hartke). Accord-

ingly, Congress made both the Interstate Commerce

Act and the National Environmental Poliey Act in-

applicable to abandonments under the Rail Act. See-

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 discontinuance 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), (e), 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 abandoninents. See Section 77(0) of

the Bankruptey Act. Moreover, vestructuring 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.

upon a reluctant debtor railroad. See St. Joe Paper

Co. v. Atlantic Coast Line R. Co., 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 be constitutionally co npelled 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 diseontinu-

ance of needed rail services.

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 wander the Tucker Act.

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.

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 Aet.

B. JUST COMPENSATION POR ANY OTHERWISE CU NCOMPENSATED TAR-

ING 18 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. Years/ey v. W. A.

Ross Construction Co., 309 US. 18. No provision of

* Apparently because Section 503, standing alone, does not

guarantee the payment of just compensation for any taking re-

sulting from interim erosion, the court below declared it unecon-

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. 30-48, /vfra), appellees

have an adequate remedy at law under the Tucker Act for any

otherwise unconstitutional taking, there is no constitutional

requirement that Section 303 itself guarantee just compensa-

tion. Turley v. Aine aid, 235 U.S. 95.

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 Tueker Act therefore would appear to provide

an adequate remedy at law for any otherwise uneom-

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 im

“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 becanse.

if the kh ngthy and complex procedures of the Act do not produce

a constitutionally permissible result, the parties may then start

over again im the Court of Claims” (J (pp. 81). But it has long

heen recognized that “[w|here only property rights are involved,

mere postponement of the judicial enquiry is not a denial of

due process * * *.” Phillipa v. Commissioner, 223 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. /'nited States v. Thayer-Weat Point Hotel Co..

$29 U.S. 585; Phelps v. United States, 274 U.S. 341. See. also

Hurley v. Kincaid, 235 U.S. %%. There can be no serious doubt,

therefore, that the Tucker Act remedy is constitutionally ade-

quate

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. Pftsch, 256 U.S. 547.

Accordingly, it has long been understood that the

mere absence of a specifie 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 Vv. United States, 304 U.S. 40; United States

v. Dickinson, 331 U.S. 745; United States v. Caushy,

328 U.S. 256: Jacobs v. United States, 290 U.S. 13;

Portsmouth Harbor Land & Hotel Co. vy. 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 Conumerce Act of

1926. 44 Stat. 568, had granted the United States

“couplete and exelusive national sovereignty im 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 jo

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

US. 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

hy the fact that the legislative draughtsmen believed

that no taking would oceur. 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 mtention

of the legislature to repeal ‘must be clear and mani-

fest." L'nited 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

ee see

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 Bankruptey

Act are made “inapplicable to transactions under this

Act to the extent necessary to formulate and imple-

ment the final system plan” (Section 6O1(b); see also

Section 304(¢)); and the National Environmental

Poliey Act “shall not apply with respeet to any action

taken under authority of this Act before the effective

date of the final system plan’ (Section 601((«)).

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 (¢)(2). Certain provisions

of the Judicial Code—not including the Tucker Act

are alse overriden. See Sections 206(d)(3). 207(b).

209 (a) and (bh), and 308 (b)(2) and (d). See also,

Section SOA).

No provision, however, curtails the jurisdiction of

the Court of Claims under the Tucker Aet. “We are

entitied to assume that * * * Congress legislated with

care, and that had Congress intended to [make the

Tucker Act also inapplicable], it would have said se

expressly, and not left the matter to mere implica

thon.’ Palmore v. United States, 411 US. 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, 129 U.S. 104, 113. It is therefore unrea

sonable to infer that Congress intended, by “mere

inplieation’’, to bar recourse to the traditional Court

—————eE———EEEOE

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 Rail 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 proeceed-

ings with respect to the final system plan”’ (J. App.

17). 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,

heeause the funetion of *“reallocating the securities of

the Corporation in a fair and equitable manner if

[they have] not been fairly alloeated among the rail-

roads transferring rail properties to the Corporation

funder the final system plan|"’ (Seetion 308(¢)(2)

(A)) was one that had to be earried ont 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 hy a diversity of legal proceedings

all over the Nation, with different theories canceling

each other out very often, and not resolvable until

* Indeed, the lower court’s exercise of jurisdiction in this case

iilustrates that it did not read the Rail Act as barring courts

other than the special court from hearing claims arising out of

enforcement of (hat Act.

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 3038(¢)(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 <Aet.

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 308(¢)(2)(C)

merely states the limit of the special court's power to

award fair and equitable consideration to the estates

of the railroads m 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

‘ailroads ” and, if so, whether that value would be

The court below may have assumed that since the debtor

oads—and ultimately their creditors——would be the share-

iders of the Corporation, they would derive no benefit from

6 031 74

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 dehate and a short col

loguy 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 explaiming why im his view it

would be necessary to provide the ereditors of the

debtor railroads with equity interests in the Corpora-

tion, stated that “[1])f we did nothing while continuing

to mandate rail service, there is the distinet 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. Ree. S 23783 to S

23784 (daily ed., December 21, 1973). The Senator's

the entry of judgment under Section 308(¢)(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. «pra). 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

thents,

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 that

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 7” 119 Cone. Ree. H 11876 (daily ed., Decem

ber 20, 1973). Representative Adams replied, “The

gentleman is correct.” /biid. The gentleman was cor

rect. Any deficiency judgment entered by the special

court would be enforceable only against the Corpora

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 (tbid.):

* * * [There ts a definite limitation on the

total amount that can be authorized under this

lull, [Congress may by jot resolution approve

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-

cress, but nothing he said denies the availalnlity 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.”

See Sections Wht) and 210(b) of the Rail Act.

Representative Adams had earlier asserted that “we hav

done everything possible * * * to make certain that no more

than the conatitutional minimum * * * will be paid by the

new corporation.” 119 Cong. Ree. I 9732 (daily ed.. Novem

ber 8, 1975) (emphasis aided ).

But if this Court should conclude, contrary to our submis

sion, that no Court of Claims remedy would be available, thu

injunction against enforcement of Section 304(f) should nes

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 cetet

lif

SECTION 207(b) OF THE RAIL ACT IS NOT INVALID AS A

GROGRAPHICALLY 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 Bankruptey 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

net prevent orderly prosecution of appeals from such deter-

minations

This fact, however, would appear to have littl if any im

trinsic significance. Dismissal of the reorganization proceeding

would mean, as a practical matter, only that liquidation would

be carnmed out in a federal equity receivership rather than in

the reorganization court. It is unclear what difference 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 diemiss the Penn Central re

organization proceeding and to convert that proceeding into a

federal equity recervership. See Document 6351 in those pro

ceedings: Corp Reorg . Rept (Penn Central). p. 1O1lL 474

* Judge Aldisert, observing that all creditors of the railroads

in reorganization are treated alike, dissented (.J. App. 26-29).

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 thine 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 reorgant-

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 prov ision affects only railroads

on the ground that the uniformity provision of the bankruptey

clause requires only that bankruptey laws make no invidious

ve mrra pli distinctions among creditors.

Phe district court assumed that Section 207(b) applies in a

geographically nonuniform manner presumably because the Rail

\ct is concerned with restructuring only the rail system of the

northeastern States: and Section 2Z07(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 Dustrict of Columbia: see Section 102(15).)

Phe failure to lumit the application of Section 207(b) to railroads

in reorganization “in the region” mav have been due 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 pian. See

Section 2ZU6(¢)(1) and (2)

The «determination must be mack “Iwiithin 60 lays after

the submission of the report by the Office, under section 205

cere eeresemmeneiinms mien

in reorganization on January 2, 1974 or which entered

reorganization within 180 days th reafter.

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, enders 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) :

**[W |hen the validity of an act of the Congress

is drawn into question, and * * *

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 vy. United States,

390 US. 85, 92 (1968) (dictum); Schneider v.

Smith, 390 U.S. 17, 27 (1968): United States

Vv. Rumely, 345 U.S. 41, 45 (1953); Ashwander

v. Tennessee Valley Authority, 297 U.S. 288,

348 (1936) (Brandeis, J., concurring).

a serious

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 provision requires submission of the

report within 120 days after the date of enactment.

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 pot

strain to read the statute in a manner that raiees eon-

stitutional doubts.

But the fact that no railroad reorganization pro-

ceeding was pending outside the northeast region

during the critical 180-day period has an additional

and greater significance. It means that the statute

has not been and never will be applied in a geograph-

ically nonuniform manner; 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 faet applied were located within the north-

eastern region of the country. But this Court long

ago put to rest any notion that constitutiona: 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.).

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,

45 Fed. 637 (C.A. 6). The Rail Act passes constitu-

tional muster under this test: it applies with the same

foree 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 the special circumstances of a single

f taxpavers, and such provisions,

uvlividual or a small group o

cast in general terms. are tolerated under the constitutional

requirement of geographic uniformity. See generally Cary, /res-

sure Cs rou ps and the Lee venue ¢ ode : A lieque mon llonor of the

Th proevting / niformity of the T aa Lawes. is Harv. ie Rev. 745

(1945).

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 Mountain Truat

Bank, 300 US. 440. 463. n. 7; Steldwwagen v. Clam, 245 US.

605: Hlanoerer National Bank v. Moyse s, supra, 1S6 LuS. at 190.

Section 20T(b) also applies equally to all debtors; it applies

to all railroads actually in reorganization.

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-

eent rail service to meet the needs of com

* eer

merce Section 101(a)(3). Legislation enacted

under the commerce clause need not apply uniformly

throughout the United States. Secretary of Agricul

fure V. Central Row Refining Co., 338 US. G04, 616:

Mabee v. White Plains Publishing C'o., 327 US. 178,

184; Currin Vv. 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 PUT pose-

fully discriminates against particular ports. Armour

Packing Co. v. United Stat s, 209 ULS. 56. Congress

remains free, therefore, to provide for the constrne

tion of bridges, lighthouses, roads and other improve

ments even though the effect of such legislation is to

faver one port over another. See Pennsylvania vy.

Wheeling & Belmont Bridge Co., 18 How. 421: see also

Loumsane Public Service Comm'n. v. Teras & New

Orleans RC o., 234 USS. 125, 131. Accordingly, any

otherwise invalid nonuniformity that the Rail Act

may have temporarily imported into the national

hankruptey laws should be sustained as a proper

exercise of commerce power.

THERE IS NO BASIS POR EXNJOINING 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

hankruptey rule for the dismissal of railroad reor

ganization proceedings. On the basis of these deternu

nations, the court (1) enjoined the defendants from

enforcing 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 (5) enjoined the

Association from certifying a final system plan to the

special court pursuant to Section 209(¢).

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 injunetion

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, tere can be no

restructuring of the northeastern rail transportation

system under the Rail Act.

We have shown at length above that the district

eourt erred in finding any constitutional defect in the

Rail Act. There was, therefore, no basis for the issu-

ance of any of the injunctions. But even assuming

arquendo 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 jursdiction will not be eligihle for

transfer to the Corporation under the final system

plan. Thus the validity of the certification process is

whelly unaffected by the validity vel non of the See

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 Nee-

thon 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

bv allowing the debtor railroads to discontinue serviec

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

quire the continuation of interim erosion that is, or

has heen, adjudicated to be a taking. Once any un-

constitutional interim erosion ts barred by injunetion,

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

of properties pursuant to the plan (see Section 305

(a)), and therefore acts to terminate the intermn jm

riod during which unconstitutional erosion allewed|)

nay occur,

In short, the constitutional deficiencies, if any, in

Sections 3O4(f) and 2O07(b) would not. even i” un

cured, afford a basis for enjoming certification of a

plan. Since the district court eured any alleged defi

Mencies in those PPrOVISLOTIS, if clearly erred in furthes

enjoiming certification.

CONCLUSION

For the reasons stated above, the Judgment of the

district court should be reversed.

Respectfully submitted,

Rorert H. Dork,

Solteitor General,

Canta A. Hints,

Assistant Attorney General,

Kerru A. Jones,

Assistant to the Solicitor General,

James F. Datscn,

Altorney.

Ropxey EF. Eysrer,

(general Counsel,

Jerome kK. SHARFMAN,

Attorne i,

De partment of Transportation.

Avovst 1974.

APPENDIX

THe Recorp Dorms Nor Seow ANY SwUBSTANTIAI

LIKELIHOOD or Erosion «iN THE PeNN CENTRAI

Estate Pennine IMPLEMENTATION OF THE Final

System Pan

4. THE RECORD IS INADEQUATI

The record in the Penn Central reorganization pro-

ceedings is so seanty that the Interstate Commerce

Commission in its Prelimmary Report and Order of

September 28, 1973, found it impossible to make any

finding on the nature and extent of alleged erosion of

the estate. See Penn Central Transportation Co. Reo

ganization, Corp. Reorg. Rept. (Penn Central), Doeu

ment No. 95, at 1102: 86, 109 (ICC Finance Docket

No. 26241, Se pot. 28, 1973). (ICC Finance Docket No.

“6241 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 mformation[;] * * *

[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 ol delay " Jn re Boston and Marin

Corp., 434 FPF. 2d 369, 372-375 (C.A. 1); see also New

Haven Inclusion Cases, 399 U.S. 392, 492-493. Ther

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 nr

the prinars sourees of data 1M) the record

1. Penn Central’s LOCC Railroad Annual Report

Form A (**Form A”) for 1970, 1971, and 1972: and

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 properties, 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 December 31, 1970.

It fails to reflect more than $300 million in additions

and betterments made by the Penn Central Trustees

since hankruptey. It gives no effect to the substan

tially inereased maintenance-of wal and track replace

ment programs carried out by the Trustees since bank

ruptey. See Appendix A to Statement of Clarence E.

Jackman, Ex. 18 in the ICC Proceedine. Ane. 6. 1972

(‘Jackman ICC Ex. 18”). It does not show the value

added to the estate by the imerease in the price of

serap steel since 1970," or any other appreciation im

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

ploved Palmieri & Co. to catalogue. develop, and

The trade publication “Iron Age” indicates that the market

value of heavy melting s rap iron has dramatically increased

since June 21, 1970

Marker Prices ror No. 1 Heavy Meuri~we Serap wo

Sececren Loc virions (8/Tow)

Prices on June Price a on

” e768 © 5.197

Chicago 843-844 $137-8138

Pittsburgh . ‘ $42-$4;} $1.-9- 8130

Philadelphia — $43 844 SiiS- S120

* Iron Age. June 25. 1970. at 94

* Irom Age, July 22, 1974, at 64.

market Penn Central's non-rail real estate. See Jn re

Penn Central Transportation Co., Bky. No. 70-347,

Memorandum and Order No. 1397, Corp. Reorg. Rep.

(Penn Central), Document No. 6195, at LOLL:4T72

(ED. Pa. Aug. 31, 1973) and Order No. 1344, Corp.

Reorg. Rep. (Penn Central), Document No. 6386, at

1011: 4793 (ELD. 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 ("Guest ICC

Ex. 22”) together with his work papers” and cross

examination. Guest updated his testimony at the 120-

day hearing on Marna 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 oecn-

pancy payments,” im leu 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 [OC

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 110222

‘Cinest 1(C Ex. 23. Penn f entral T rans portation f'a

Erosion of the Eatate and Guest ICC Ex. 24, Summary

* June-August, 1973. Pre-Hearing Conference Transcript.

ICC Fimanece Docket Ne. 26241. at ISIS (Ame. 22. 1975) ("Crest

oC Tr").

any issues of the Penn Central’s mortgage and eol-

lateral trust bonds were more than fully seeured and

therefore entitled to post-bankrupteyv interest. Guest

ICC Ex. 22, at 7: Guest [CC Tr. at 1877-1878.

(inest was unable to make any more than a rough

estimate of the merease or decline in the value of the

Penn Central's rail plant and equipment between the

date of hankruptey and May 31, 1973, hased 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 caleulate 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 vers substantial part of

present deferred mamtenance could have been

avoided, if the plant had had normal maintenance

during the penod 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-hankruptey inereases in total main-

Lenance-of-way expenses, cross-tie installations, new

rail installation, and expenditures on depreciable

property accounts. Guest [CC Tr. at 1902-1905.

Cinest did not include in Guest ICC Ex. 22 some

lriportant information contained in his work papers

Ginest ICC Ex. 23). Guest ICC Tr. at 1845-1849.

Without this information, parts of his statement

could have distorted the true economic picture. He

ilso modified his own definition of erosion to accord

with the views of ‘| rustees’ eounsel, hecause he he-

heved that “thes knew more about erosion than

al} j Cine | Cc Tr. at TS45.

Guest's testimony suffers from the same lack of

detailed preparation which weakened Guest ICC kx.

22. He continued to include in his calculation of post

hankruptey taxes substantial amounts (approxt-

mately $45 million) that had im fact accrued prior to

hankruptey. Compare Guest's testimony in the re-

organization court, Transeript at 11,254-55 (ED. Pa.,

March 25, 1974) (“Guest 120-day Tr.”’) and before

the Commission, Guest LCC 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,

Giuest used income statement loss as a means of de-

fining erosion. This theory is subject to severe criti-

¢isti, as 18s shown below.

5. For the value of stock of Pennsylvamia Com-

pany, see In ve Penn Central Transportation Co.,

358 F. Supp. 14 (ELD. 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

%0T7T(b) of the Act (**120-day Aff.”*).

BRB. INCOME STATEMENT LOSSES 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 ts

hased upon Penn Central financial statements pre

pared according to ICC accounting rules. It ts not,

however, an aceurate 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 :

l. Jucome statement de preciation—more than 8318

million.” Ineome statement depreciation is an ae

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 replacernent—8358 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 th

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 probabls

increases its value.

3. Deferred leased line rentals approximately 8101

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 beeause, in the

For 1973. S80 lhon. 1973 Form R-1. at 93. 12: for 1972.

SS8.; million. 1972 Form A at 93. 1.2: for 1971. $00.6 million.

1971 For \ at OM. 148 and at 306, 1.94: for June 21. 1970 —

December 31, 1970 (199 days)—approximately 53% of full

vear 1070) (S048) is shown on 1970 Form A at 304. 1 7 and

at G5. 1.04 me i ben

In his testimony before the Commission. Guest fouml no

change n the valine of the prianet ar equipment of Penn Central

lene r the penod June 21. 1970 to May 31. 1973. ce spite the

” , lation of noon tatement lepreciation durng that

per od. Guest 10 Pr. 1861-1862, 1959: see also Guest 1C(C Fx

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(¢) (6); In re Penn Central

Transportation Co., Secondary Debtors, Bky. Nos. 70-

347A through 70-3470, Memorandum, Corp. Reorg.

Rept. (Penn Central), Doeument No. 74-68, at 1011:

9096 (F.1D. Pa., May 2, 1974).

4. Deferred bond interest—approximately $104 mil-

lion. Here again it cannot be determined yet which

isstics Of bonds are fully secured and thus entitled to

post-hankruptey 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 In re New

York, New Haven & Hartford Railroad Co., 304 F.

Supp. 1121 | 1). Conn.). Moreover, if the deferred bond

interest is payable, it obviously benefits rather than

harms anv bondholders entitled to the interest.

5. Post-bankruptecy interest on unsecured or inade-

quately-secured pre-bankruptey debt—approrimately

$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-hankruptey interest on

unsecured obligations does not reduce the size of the

estate or the amount available for payment to cred

tors,

In summary, then, the Income statement may over

state the real economic consequences of contimuine

operations by as much as $1,027 million:

Income statement depreciation R415

Track replacement

Lease! line rentals deferred 11

Deferred bond interest 14

Posthankruptey interest on prebankruptey unsecured or inadequately

secured cdetyt 146

Total 1,027

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-

bankruptey period at least $206.5 million was invested

in reducing outstanding equipment debt, thus inereas-

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 842 million at June 30, 1970, to

S364 million as of May 31, 1973. Penn Central Forms A and

R-1 for 1970-1973 show the following payments of equipment

obligations :

1973-—851.7 million (Form R-1, at 51E-P),

1972—859.7 million (Form A at 50-51H).

1971—860.2 million (Form A at 236-237H).

1970—334.9 million (530 of full year; Form A at 237

A-L).

property.” Thus non-recurring cash proceeds and non-

rail income was not used merely 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 bettermenats and equipment investments

that confer positive benefits 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

bh, acerued post-bankruptey state and local

taxes—$195 million “

«. increase in current liabilities—-$162 mil-

lion “

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—820.8 million (Form A at 30-31).

1971—850.6 million (Form A at 220-221).

19T0—833.5 million (536 of full year; Form A at 221).

** See Stipulation of Facts, par. 12 (J. App. 32!).

* Compare Guest ICC Ex. 24, at 6, for June 21, 1970 (S301

million) with 1973 Form R-1, at 11, 1.59 ($468 million).

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.

d. Other assets (mainly capital and other re-

serve funds )—850 million,

Ineveases in the Value of the Plant Equipment—ss5

million to 8360 million

An evaluation appraisal is the best way of measur-

ing any increases in the value of Penn Central’s plant

and equipment, and no sufficiently 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 LCC Ex.

24, at 9-16." 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

erpenditure 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

Penn 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.

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 buver 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 by $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,

lion in current assets.” These items therefore show a

het asset value increase of approximately $80 million.

Other Assets—850 million

On Guest ICC Ex. 24, at 3, Guest shows that capital

and other reserve funds in the hands of Penn Central

have increased by approximately $50 million sinee the

date of bankruptey.

bE. THE VALUER OF THE ESTATE APPARENTLY muuenten ‘eqpenes

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-

her 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 PCTC's financial condition.” Guest ICC Ex, 23,

at 7.

These valuations include assets leased to Penn Central. Most

of the “leased line companies” are controlled by the Penn Cea-

tral Transportation Company. The book value of Penn Central's

investments in its leased line and affiliated companies is sub-

stantial, See 1973 Form R-1, pp. 20-23. The leased line com-

janies own substantial amounts of railroad operating assets,

and approximately $600 million in non-rail real estate. 10C

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 all of the

non-rail real estate owned by the leased line companies. See

note 4, snfra.

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—4#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-

her 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 Palmieri Report, [CC Ex. 25—

$400 million.”

8 The Penneo stock, as valued by the reorga-

nization court, 358 F. Supp. 154—#250 million.

9, Other investments, as valued by Kuhn,

Loeh & Co. (Guest ICC Ex. 22)—from $297.2

million to $413.1 million.

10. Book value of capital expenditure for

additions and betterments 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 te 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.

1972 plan for reorganization. The Trustees’ report

estimates the total amount of valid pre-bankruptey

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 ineluded 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-

hankruptey taxes, $45 million in prebankruptey

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 and post-

hbankruptey claims, ineluding deferred bond interest

and deferred leased line rents, therefore apparently

total no more than €2.67 billion.

r. THERE IS NO ADEQUATE BASIS IN THE RECORD POR

ESTIMATING PROSPECTIVE EROSION IF RAIL OPERATIONS

CONTINUE THROUGH 1975

The evidence in the record for projected erosion

through 1975 consists mainly of the affidavits of

Ernest Varalli and John Guest. They project an addi-

tional $118 million in taxes and a maximum of $110

million in additional deferred leased line rentals and

bond interest (Varalli Aff. T-4, 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 values

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

rate inerease, granted by the Interstate Commerce

Commission on June 4, 1974, in Ex Parte 305, This

rate inerease 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

hegun. The little evidence available suggests that

vreater 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 net presently cal-

culable, they are likely to be susbtantial.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.