Appendix — Robert W. Blanchette et al., v. Connecticut General Insurance Corp.
Supreme Court brief1974
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JOINT APPENDIX
Nos. 74-165 w
74-166 In THE
_Pupreme Court of the Hutte States
74-16 Octoser Term, 1974
74-168
UNITED STATES OF AMERICA, ET AL., APPELLANTS,
V.
CONNECTICUT GENERAL INSURANCE CORPORATION, ET AL., APPELLEES.
UNITED STATES RAILWAY ASSOCIATION, APPELLANT,
V.
CONNECTICUT GENERAL INSURANCE CORPORATION, ET AL., APPELLEES.
ROBERT W. BLANCHETTE, RICHARD C BOND AND JOHN H. McARTHUR,
AS TRUSTEES OF THE PROPERTY OF PENN CENTRAL
TRANSPORTATION COMPANY , DEBTOR, APPELLANTS,
V.
CONNECTICUT GENERAL INSURANCE CORPORATION, ET AL., APPELLEES.
RICHARD JOYCE SMITH, AS TRUSTEE OF THE NEW YORK, NEW HAVEN
AND HARTFORD RAILWAY COMPANY, DEBTOR, APPELLANT,
v.
Ur STATES OF AMERICA, ET AL., APPELLEES.
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
POR THE EASTERN D&STRICT OF PENNSYLVANIA
(i)
TABLE OF CONTENTS
Stipulation as to the Record and Joint Appendix
Opinions below (with orders).
a. Opinions of 3-judge court, dated June 25, 1974.
b. Opinion of Judge Fullam in Penn Central
120-day proceeding, dated May 2, 1974
c. Opinion of Judge Fullam in secondary debtors
120-day proceedings, dated May 2, 1974
d. Opinion of Judge Fullam in Penn Central
180-day proceeding, dated July 2, 1974
e Opinion of Judge Fullam in secondary debtors
180-day proceeding, dated July 2, 1974
Papers in Connecticut General, et al. v.
USRA, et A. Docket No. 74-189:
a. Docket entries
d. Complaint, dated January 25, 1974 .
c. Order adding parties — dated
February 4, 1974 1
d. Answer of defendants, dated March 4, 1974 .
e. Motion of Penn Central Trustees for leave
to intervene, dated April 3, 1974 .
f. Answer of Penn Central Trustees, dated
April 3, 1974. f
183
157
161
176
178
191
192
(ii)
g. Order granting the Trustees leave
to intervene, dated April 19, 1974
h. Stipulation as to the record, dated
April 15, 1974 a
i. Affidavit of Louis A. Craco, dated April 16,
1974, together with attachments
j. Plaintiffs’ motion for summary —
dated April 16, 1974 . :
k. Intervenors’ motion for summary —
dated April 16, 1974 . ‘
1. Defendants’ motion for summary —
dated May 24, 1974
m. Affidavit of John W. Ingram, dated
May 23, 1974 (as amended)
Papers in Smith v. United States, et al.,
Docket No. 74-1107:
a. Docket entries
d. Complaint, dated January 25, 1974 .
c. Answer of all defendants, dated
March 11, 1974
d. Motion of Penn Central Trustees for leave
to intervene, dated April 3, 1974.
e. Answer of Penn Central Trustees,
dated April 3, 1974
f. Order granting Penn Central Trustees leave
to intervene, dated May 3, 1974 .
197
221
224
226
316
(iii)
g. Stipulation of plaintiff and defendants
as to factual matters, dated April 1974 .
h. Caption of stipulation as to record,
noting that it is identical to item 3h
i. Caption of affidavit of John W. Ingram,
dated May 23, 1974 (as amended), noting
that it is identical with item 3m .
j. Motion by plaintiff to strike affidavit
of John W. Ingram, dated June 3, 1974
k. Plaintiff's motion for summary —
dated April 29, 1974 . ;
I. Intervenors’ motion for summary 2
dated May 10, 1974
m. Defendants’ motion for summary —
dated May 24, 1974 ,
n. Caption of Jerome E. Sharfman, dated
May 10, 1974, together with Exhibit A
thereof, noting that it is not printed but
appears in the Joint W Sub-
mission as Item 60 ; 5 0 0
Papers in Penn Central Co. v. Brinegar, et al.,
Docket No. 74-1149:
a. Docket entries
b. Complaint, dated January 1974
c. Answer of all defendants, dated
March 6, 1974
325
325
326
328
331
332
336
337
341
350
(iv)
d. Motion of Penn Central Trustees for leave
to intervene, dated April 3, 1974 .
e. Answer of Penn Central Trustees, dated
April 3, 1974.
f. Caption of affidavit of John W. Ingram,
dated May 23, 1974 (as amended), noting
that it is identical with item 3m . ;
g. Order granting Penn Central Trustees leave
to intervene, dated May 16, 1974
h. Plaintiff's motion for summary 3
dated May 22, 1974
i. Intervenors’ motion for summary —
dated May 20, 1974 8 ;
j. Defendants’ motion for summary —
dated May 31, 1974 :
k. Caption of stipulation as to the record, 2
that it is identical to item 3h . , ee
1. Stipulation of plaintiff and defendants
as to factual matters, dated June 4, 1974 .
m. Supplementary Joint Documentary Submission
of plaintiff, defendants and intervening defend-
ants, together with Exhibits A and B, dated
May 31, 1974 ene
All notices of appeal .
The text of the * Rail . Act
of 1973 N
1
358
359
365
367
369
. 370
376
384
391
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
CONNECTICUT GENERAL INSURANCE
CORPORATION, er ai.,
)
)
Plaintiffs, ) Civil Action
v. ) No. 74-189
)
UNITED STATES RAILWAY ASSN.., )
et al., Defendants. )
RICHARD JOYCE SMITH, Trustee )
of The New York, New Haven and )
Hartford Railroad Company, )
Plaintiff, ) Civil Action
v. ) No. 74-1107
)
UNITED STATES OF AMERICA, et A. )
Defendants. )
PENN CENTRAL COMPANY,
Plaintiff, Civil Action
v. No. 74-1149
CLAUDE S. BRINEGAR, et .
Defendants.
ee ee —— —
STIPULATION AS TO
RECORD AND JOINT APPENDIX
The parties to the above captioned cases stipulate as
follows:
2
I
Contents of Joint Appendix
The Joint Appendix printed for the use of the Court
and all parties will contain:
This stipulation
Opinions below (orders included):
l.
2.
b.
Opinions of 3-judge court, dated June 25, 1974
Opinion of Judge Fullam in Penn Central 120-
day proceeding, dated May 2, 1974
Opinion of Judge Fullam in secondary debtors
120-day proceedings, dated May 2, 1974
Opinion of Judge Fullam in Penn Central 180-
day proceeding, dated July 2, 1974
Opinion of Judge Fullam in secondary debtors
180-day proceeding, dated July 2, 1974
Papers in Connecticut General, et al v. USRA, et
al., Docket No. 74-189:
a.
b.
C.
Docket entries
Complaint, dated January 25, 1974
Order adding parties plaintiff, dated February
4, 1974
Answer of defendants, dated March 4, 1974
Motion of George P. Baker, Robert W. Blanchette
and Richard C. Bond, as Trustees of the Property
of Penn Central Transportation Company, Debtor,
for leave to intervene, dated April 3, 1974
3
f. Answer of Penn Central Trustees, dated April
3, 1974
g. Order granting the Trustees leave to intervene,
dated April 19, 1974
h. Stipulation as to the record, dated April 15,
1974
i. Affidavit of Louis A. Craco, dated April 16,
1974, together with stipulation of facts at-
tached thereto and dated April 15, 1974 (in-
cluding Exhibits A and B thereto), affidavit
of C. C. Shannon (Exhibit C to Craco affi-
davit), and letter of Claude S. Brinegar (Ex-
hibit E to Craco affidavit)
j. Haintiffs motion for summary judgment, dated
April 16, 1974
k. Intervenors’ motion for summary judgment,
dated April 16, 1974
I. Defendants’ motion for summary judgment,
dated May 24, 1974
m. Affidavit of John W. Ingram, dated May 23,
1974 (as amended by affidavit of May 30,
1974)
Papers in Smith v. United States, et al., Docket
No. 74-1107:
a. Docket entries
b. Complaint, dated January 25, 1974
c. Answer of all defendants, dated March 11, 1974
4
. Motion of George P. Baker, Robert W. Blanchette
and Richard C. Bond, as Trustees of the Property
of Penn Central Transportation Company , Debtor,
for leave to intervene, dated April 3, 1974
. Answer of Penn Central Trustees, dated April
3, 1974
Order granting Penn Central Trustees leave to
intervene, dated May 3, 1974
Stipulation of plaintiff and defendants as to fac-
tual matters, dated April 1974
. Caption of stipulation as to record, noting that
it is identical to item 3h
Caption of affidavit of John W. Ingram, dated
May 23, 1974 (as amended), noting that it is
identical with item 3m
Motion by plaintiff to strike affidavit of John
W. Ingram, dated June 3, 1974
. Plaintiffs motion for summary judgment, dated
April 29, 1974
Intervenors’ motion for summary judgment,
dated May 10, 1974
. Defendants’ motion for summary judgment,
dated May 24, 1974
. Caption of affidavit of Jerome E. Sharfman,
dated May 10, 1974, together with Exhibit A
thereof, noting that it is not printed but ap-
pears in the Joint Documentary Submission as
Item 60
5
Papers in Penn Central Co. v. Brinegar, et al.
Docket No. 74-1149:
a.
b.
C.
Docket entries
Complaint, dated January 1974
Answer of all defendants, dated March 6, 1974
Motion of George P. Baker, Robert W. Blanchette
and Richard C. Bond, as Trustees of the Property
of Penn Central Transportation Company, Debtor,
for leave to intervene, dated April 3, 1974
Answer of Penn Central Trustees, dated April
3, 1974
Caption of affidavit of John W. Ingram, dated
May 23, 1974 (as amended), noting that it is
identical with item 3m
Order granting Penn Central Trustees leave to
intervene, dated May 16, 1974
Plaintiff's motion for summary judgment, dated
May 22, 1974
Intervenors’ motion for summary judgment,
dated May 20, 1974
Defendants’ motion for summary judgment,
dated May 31, 1974
Caption of stipulation as to the record, noting
that it is identical to item 3h
Stipulation of plaintiff and defendants as to
factual matters, dated June 4, 1974
6
m. Supplementary joint documentary submission of
plaintiff, defendants and intervening defendants,
together with Exhibits A and B, dated May 31,
1974
All notices of appeal
The text of the Regional Rail Reorganization Act
of 1973
Material From the Record to Be Lodged
With the Clerk in Ten Copies
All items in joint documentary submission (items
1 through 61 inclusive), except items 32, 33, 59
and 61, which are printed in Joint Appendix
Report of Secretary of Transportation, dated Feb-
ruary |, 1974, pursuant to Section 204
Report of Rail Services Planning Office (ICC),
dated May 2, 1974, pursuant to Section 205(d)(1)
Transcript of record of 120-day hearing in Penn
Central Transportation Company case, pp. 11,106-
11,270
Transcript of hearing before 3-judge court on mo-
tions for summary judgment
List of applications for abandonment filed by Penn
Central Transportation Company with the United
States Railway Association
7
Response by United States Railway Association
to abandonment applications.
/s/ Louis A. Craco
Attorney for plaintiffs in
Connecticut General, et al. v. USRA,
Docket No. 74-189
/s/ Joseph Auerbach
Attorney for Richard C. Smith,
plaintiff in Docket No. 74-1107
David Beger
David Berger, Attorney for
plaintiff Penn Central Company
in Docket No. 74-1149
L. William R. Perlik
Attorney for defendant
United States Railway Association
. James F. Dausch
Attorney for defendants Brinegar,
Stafford, Schultz, Interstate Com-
merce Commission and United States
of America
/ Charles A. Horsky
Attorney for intervening defendants
Dated: July 31, 1974
Opinions
of
United States District Court
for the
Eastern District of Pennsylvania
And Related Opinions
by the
Penn Central Reorganization Court
9
UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
[Caption omitted in printing]
Before: ALDISERT, Circuit Judge, and FULLAM and
BECHTLE, District Judges.
OPINION OF THE COURT
ALDISERT, Circuit Judge.
These cases present the question whether an injunction
should issue restraining the enforcement of certain provi-
sions of the Regional Rail Reorganization Act of 1973,
Public Law 93-236, 45 U.S.C. 43-744, because of con-
stitutional infirmities. Three-judge courts have been con-
vened pursuant to 28 U.S.C. 2282. 2284, and the mat-
ters are consolidated for disposition on cross-motions for
summary judgment. The Connecticut General plaintiffs
are owners f mortgage bonds and are corporate trustees
or successor corporate trustees under indentures, mort-
gages and deeds of trust of the Penn Central Transporta-
tion Company and certain of its lease lines which together
comprise the “Penn Central System. Plaintiff, Richard
mme following plaintiffs own the approximate principal amounts
of mortgage bonds of Penn Central and of certain Lessors secured
by mortgages on rail properties and other properties of Penn Cen-
tral and certain Lessors set forth opposite their respective names:
a. Connecticut General Insurance
Corporation n 8 31,025,000
b. Connecticut Mutual Life
Insurance Company. ..... . 9,985,000
(Cont'd)
10
Joyce Smith, Trustee of the property of The New York,
New Haven and Hartford Railroad Company, Debtor, is
the registered holder of divisional mortgage bonds of Penn
Central Transportation Company.? These bonds are se-
cured by a divisional mortgage comprising a first lien at-
taching certain real property, railroad tracks and improve-
ments of the Penn Central Transportation Company.
Plaintiff, Penn Central Company, is the owner of 100%
of the stock in and is a creditor of the Penn Central
Transportation Company, Debtor.
The defendants are the United States Railway Associa-
tion, a corporate entity established under Section 201 of
the Act, 45 U.S.C. Vi; the Secretary of Transportation;
the Chairman of the Interstate Commerce Commission;
the Secretary of the Treasury; and the United States of
America. Penn Central Trustees, Intervening Defendants,
are presently operating the Penn Central Railroad under
Section 77 of the Bankruptcy Act, II U.S.C. 205, in
this court at Bankruptcy No. 70-347.
(Footnote | cont'd)
c. The Equitable Life Assurance Society
of the United States . . . $147,509,000
d. Metropolitan Life Insurance
„
e. The Prudential Insurance Company
MGM «cc ee ee ss
2 Plaintiff, Richard Joyce Smith, Trustee of the property of The
New York, New Haven and Hartford Railroad Company, Debtor in
reorganization under Section 77 of the Bankruptcy Act (“New
Haven Trustee” and “New Haven respectively) is the registered
holder of $34,025,800 principal amount of 5% Divisional Mortgage
Bonds (“Bonds”) of Penn Central Transportation Company, Debtor.
While plaintiffs challenge the constitutionality of the
1973 Act with a galaxy of arguments, their central con-
tentions may be summarily outlined:
1. The 1973 Act ultimately requires a permanent
taking of their property for which they are entitled to
be paid in cash instead of stocks and other securities;
that the conveyance procedures offend procedural due
process; and that a deficiency judgment against Conrail
provides no assurance that just compensation would be
paid.
2. The 1973 Act violates the geographical uniform-
ity requirement of Article I, Section 8, Clause 4 of the
United States Constitution.
3. The 1973 Act effects an interim taking of their
property by requiring continued rail operation pending
implementation of the Final System Plan.
I.
Before consideration of these contentions, a short sum-
mary of the Act is necessary. The judicial panel on multi-
district litigation described it as “an heroic attempt by
Congress to solve a complex and deeply rooted problem.
Eight major railroads in the Northeast and Midwest are
undergoing reorganization pursuant to Section 77 of the
Bankruptcy Act. Of these eight, seven are the only Class
I railroads, those with $5 million or more of annual rev-
enue, in the United States in reorganization. “Reasons
cited for this [Northeast railroad] crisis were competition
from 90 million automobiles and multiple schedules of
competitive jet air service which directly competed with
passenger transportation. The decline of railroad freight
business also diminished the passenger carrying capabilities
12
of the railroads. Traditional railroad freight business was
lost to inland water way operations, pipelines and trucks.
Moreover, government policy tended ‘to favor non-rail
transportation and perpetuate a regulatory climate that
[was] hostile to experimentation.” Water, air and high-
way transportation were successfully aided through public
investment, at little or no user cost while railroads had
to make such investments on their own.”
Congress first responded to the rail crisis with the Emer-
gency Rail Services Act of 1970, 45 U.S.C. 8661, ef seg.
authorizing the Secretary of Transportation to guarantee
up to one hundred twenty-five million dollars in certifi-
cates issued by trustees of railroads in reorganization un-
der Section 77. However, detailed treatment of the rail-
roads’ particular difficulties did not emerge until the enact-
ment of the 1973 Act. As stated in the defendants’ brief:
The 1973 Act represents Congress’ comprehen-
sive response to the long-range problems of
railroads that own or operate most of the
trackage in the Northeast and Midwest, and
which therefore constitute a vital segment of
the U.S. railroad system and an important
segment of the U.S. economy.
The Act requires the United States Rail-
way Association . to design a | Final System]
Plan for reorganized rail services in the Re-
gion . and provides, among other things,
3 In re Central Railroad Company of New Jersey, 485 F. 2d 208,
217 (Aldisert, J., dissenting) (footnotes omitted), citing, inter alia,
Staff Report, “The Penn Central and Other Railroads,” Senate Com-
mittee on Commerce, December, 1972, at 220-222.
13
that a new private railroad, the Consolidated
Rail Corporation (“Conrail”) shall acquire,
own and operate rail properties pursuant to
the Final System Plan.
(Brief, 10-11)
Congress also provided in the 1973 Act
several kinds of financial assistance, new in
form and substantial in amount, each in-
tended to assist in creating and implement-
ing the overall plan for rail transportation
service in the Region and the Conrail por-
tion of that plan in particular. Four of
these additional resources deserve special
mention. (i) Substantial obligational author-
ity is conferred on USRA. To carry out its
purposes under the Act (principally to plan
the new rail system and to provide part of
the consideration for rail properties acquired
by Conrail under the Act), USRA is author-
ized to issue $1.5 billion in securities to be
guaranteed by the Secretary of Transporta-
tion. Section 210. Of this sum, not more
than $1 billion may be issued to Conrail, of
which not less than half must be used by
Conrail for rail rehabilitation and modern-
ization. Section 210(b). Additional amounts
may be issued if approved by joint resolu-
tion of Congress. /d (ii) The Secretary of
Transportation, with USRA’s approval, is au-
thorized to enter into agreement for the ac-
quisition, maintenance or improvement of
property that will be in the Final System
Han; for this purpose, the Act provides ob-
ligational authority of $150 million. Section
14 15
215. (iii) To meet emergency needs pending Central reorganization court has already determined that
implementation of the Final System Plan, the Penn Central is not reorganizable “on an income basis
Secretary of Transportation is further author- within a reasonable time under Section 77 of the Bank-
ized to make payments not exceeding $85 ruptcy Act.” The next step under the Act is the “180-
million to the trustees of railroads in reorgan- day determination by that court as to whether “such
ization. Section 213. (iv) Finally, the Secre- railroad shall be reorganized by means of transferring
tary of Transportation and the Association some of its rail properties to the Corporation“ This
may provide subsidies for continuing non- hearing was held on June 10, 1974, but no findings have
economic service and loans for the acquisition yet been made.
and modernization of rail properties. Sec-
tions 402 and 403. (Footnote 4 cont'd)
reorganized by means of transferring some of its rail
(Brief, 12-13). properties to the Corporation pursuant to the provi-
f Act. Because of t blic inter-
Section 207(b)* of the Act sets forth the procedure by — tps Don of — *
which a railroad becomes subject to the transfer provisions region pursuant to a system plan devised under the
contained in the Final System Plan. The Section 77 Penn provisions of this Act, each such court shall order
that the reorganization be proceeded with pursuant
to this Act unless it (1) has found that the railroad
4 SEC. 207 is reorganizable on an income basis within a reason-
— able time under section 77 of the Bankruptcy Act
(11 U.S.C. 205) and that the public interest would
(b) APPROVAL. — Within 120 days after the be better served by such a reorganization than by a
date of enactment of this Act each United States dis- reorganization under this Act, or (2) finds that this
trict court or other court having jurisdiction over a Act does not provide a process which would be fair
railroad in reorganization shall decide whether the and equitable to the estate of the railroad in reor-
railroad is reorganizable on an income basis within ganization in which case it shall dismiss the reorgan-
a reasonable time under section 77 of the Bankruptcy
ization proceeding. If a court does not enter an
Act (11 U.S.C. 205) and that the public interest would
order or make a finding as required by this subsec-
be better served by continuing the present reorganiza- tion, the reorganization shall be proceeded with pur-
tion proceedings than by a reorganization under this suant to this Act. An appeal from an order made
Act. Within 60 days after the submission of the re- under this section may be made only to the special
port by the Office, under section 20%d\1) of this court. Appeal to the special court shall be taken
title, on the Secretary's report on rail services in the within 10 days following entry of an order pursuant
region, each United States district court or other court to this subsection, and the special court shall com-
having jurisdiction over a railroad in reorganization plete its review and ren det its decision within 80 days
shall decide whether or not such railroad shall be after such appeal is taken. There shall be no review
(Cont'd) of the decision of the special court.
16
Within 420 days after January 2, 1974, a Final System
Han must be prepared by the executive committee of the
Association and submitted for approval by its Board of
Directors. Section 207(c). Yet final review of the Plan
remains with Congress. Section 208(a). A Special Court
has been created to “exercise the powers of a district judge
in any judicial district with respect to such proceedings
and such powers shall include those of a reorganization
court. The Special Court shall have the power to order
the conveyance of rail properties of railroads, leased, op-
erated, or controlled by a railroad in reorganization in the
region.” Section 209%b).5
The Association is required to deliver a copy of the
Final System Plan to the Special Court. Section 209(c).®
Thereafter, the Special Court shall order the trustees to
> Members of the Special Court selected by the judicial panel on
multi-district litigation, as provided by Section 20%b), are Circuit
Judges Henry J. Friendly and Carl McGowan, and District Ju dge
Rosel C. Thomsen.
6
SEC. 209
(c) Delivery of Plan to Special Court. — Within
90 days after its effective date, the Association shall
deliver a certified copy of the final system plan to
the special court and shall certify to the special court
(1) which rail properties of the respective rail-
roads in reorganization in the region and of any
railroad leased, operated, or controlled by such
railroads in reorganization are to be transferred
to the Corporation, in accordance with the final
system plan;
(Cont'd)
17
convey to Conrail “forthwith . all right, title and m-
terest in the rail properties. Section 303(b).’
(Footnote 6 cont'd)
(2) which rail properties of the respective rail-
roads in reorganization in the region or railroads
leased, operated, or controlled by such railroads
in reorganization are to be conveyed to profitable
railroads, in accordance with the final system plan;
(3) the amount, terms, and value of the securi-
ties 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 as indi-
cated in paragraph (1) of this subsection; and
(4) that the transfer of rail properties in ex-
change for securities of the Corporation (includ-
ing any obligations of the Association) and other
benefits is fair and equitable and in the public
interest.
7 SEC. 303 (a) Deposit With Court.
Within 10 days after delivery of a certified copy
of a final system plan pursuant to section 20%c)
of this Act
(1) the Corporation, in exchange for the rail
properties of the railroads in reorganization in
the region and of railroads leased, operated, or
controlled by railroads in reorganization in the
region to be transferred to the Corporation,
shall deposit with the special court all of the
stock and other securities of the Corporation
and obligations of the Association designated
in the final system plan to be exchanged for
such rail properties,
(2) each profitable railroad operating in the
region purchasing rail properties from a railroad
in reorganization in the region, or from a rail-
(Cont'd)
After the conveyance, the Special Court reviews the terms
of the exchange as set forth in the Final System Plan. In
(Footnote 7 cont'd)
road leased, operated, or controlled by a tail.
road in reorganization in the region, as provided
in the final system plan shall deposit with the
special court the compensation to be paid for
such rail properties.
(b) Conveyance of Rail Properties. (1) The
special court shall, within 10 days after deposit un-
der subsection (a) of this section of the securities
of the Corporation, obligations of the Association,
and compensation from the profitable railroads op-
erating in the region, order the trustee or trustees
of each railroad in reorganization in the region to
convey forthwith to the Corporation and the respec-
tive profitable railroads operating in the region, all
right, title, and interest in the rail properties of
such railroad in reorganization and shall itself or-
der the conveyance of all right, title, and interest
in the rail properties of any railroad leased, oper-
ated, or controlled by such railroad in reorganiza-
tion that are to be conveyed to them under the
final system plan as certified to such court under
section 20%(d) of this Act.
(2) All rail properties conveyed to the Corpo-
ration and the respective profitable railroads operat-
ing in the region under this section shall be conveyed
free and clear of any liens or encumbrances, but
subject to such leases and agreements as shall have
previously burdened such properties or bound the
owner or operator thereof in pursuance of an ar-
rangement with any State, or local or regional trans-
portation authority under which financial support
from such State, or local or regional transportation
authority was being provided at the time of enact-
ment of this Act for the continuance of rail passen-
19
remedying any inadequacy of consideration which it finds,
that court is permitted to reallocate Conrail’s securities
(Footnote 7 cont'd)
ger service or any lien or encumbrance of no greater
than 5 years, duration which is necessary for the
contractual performance by any person of duties
related to public health or sanitation. Such con-
veyances shall not be restrained or enjoined by any
court.
(3) Notwithstanding anything to the contrary
contained in this Act, if railroad rolling stock is in-
cluded in the rail properties to be conveyed, such
conveyance may only be effected if the profitable
railroad operating in the region or the Corporation
to whom the conveyance is made assumes all of
the obligations under any conditional sale agree-
ment, equipment trust agreement, or lease in re-
spect to such rolling stock and such conveyance is
made subject thereto; and the provisions of this Act
shall not affect the title and interests of any lessor,
equipment trust trustee, or conditional sale vendee
or assignee under such conditional sae agreement,
equipment trust agreement or lessee under section
77(j) of the Bankruptcy Act (11 USC. 2050).
(4) Notwithstanding anything to the contrary
contained in this Act, if a railroad in reorganization
has leased rail properties from a lessor that is
neither a railroad nor controlled by or affiliated
with a railroad, and such lease has been approved
by the lessee railroad’s reorganization court prior
to the date of enactment of this Act, conveyance
of such lease may only be effected if the Corpora-
tion or the profitable railroad to whom the convey-
ance is made assumes all of the terms and condi-
tions specified in the lease, including the obligation
to pay the specified rent to the non-railroad les-
sor.
(Cont'd)
20 21
among the various bankrupt estates, to order the provi-
sion by Conrail of further securities of Conrail or obli-
gations of the Association as designated in the Final
System Plan and, ultimately, to enter a deficiency judg-
(Footnote 7 cont'd) (Footnote 7 cont'd)
(c) Findings and Distribution. — (1) After
the rail properties have been conveyed to the
Corporation and profitable railroads operating in
the region under subsection (b) of this section,
the special court, giving due consideration to the
findings contained in the final system plan, shall
decide
(A) Whether the transfers or conveyances —
(i) of rail properties of each railroad
in reorganization, or of each railroad
leased, operated, or controlled by a rail-
road in reorganization, to the Corpora-
tion in exchange for the securities and
other benefits accruing to such railroad
as a result of such exchange, as provided
in the final system plan and this Act,
and
(ii) of rail properties of each railroad
in reorganization, or of each railroad
leased, operated, or controlled by a rail-
road in reorganization, to a profitable
railroad operating in the region, in ac-
cordance with the final system plan.
are in the public interest and are fair and equi-
table to the estate of each railroad in reor-
ganization in accordance with the standard
of fairness and equity applicable to the ap-
proval of a plan of reorganization or a step
in such a plan under section 77 of the Bank-
tuptcy Act (11 USC. 205), or fair and equi-
table to a railroad that is not itself in reor-
ganization but which is leased, operated, or
controlled by a railroad in reorganization; and
(Cont'd)
(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, or to a railroad leased,
operated, or controlled by a railroad in reorganiza-
tion, which has transferred rail properties pursuant
to the final system plan, it shall —
(A) enter a judgment reallocating the securi-
ties of the Corporation in a fair and equitable
manner if it has not been fairly allocated among
the railroads transferring rail properties to the
Corporation; and
(B) if the lack of fairness and equity cannot
be completely cured by a reallocation of the
Corporation's securities, order the Corporation
to provide for the transfer to the railroad of
other securities of the Corporation or obliga-
tions of the Association as designated in the
final system plan in such nature and amount
as would make the exchange or exchanges fair
and equitable; and
(C) if the lack of fairness and equity cannot
be completely cured by reallocation of the Cor-
poration's securities or by providing for the trans-
fer of other securities of the Corporation or ob-
ligations of the Association as designated in the
final system plan, enter a judgment against the
Corporation.
(3) If the special court finds that the terms of
one or more conveyances of rail properties to a prof-
(Cont'd)
ie)
--
ment against Conrail should these steps prove insufficient
to pay the estates their “constitutional minimum.”
(Footnote ~ cont d)
itable railroad operating in the region in accordance
with the final system plan are not fair and equitable,
it shal! enter a judgment against such profitable rail-
road. if the special court finds that the terms of one
or more conveyances or exchanges for securities or
other benefits are fairer and more equitable than is
required as a constitutiona) minimum. then 11 shall
order the return of any excess secunties. obligations.
or compensanon to the Corporation or a profitable
railroad so as not to exceed the constitutional mini-
mum standard of fairness and equity.
(4) Upon making the findings referred to in this
subsec uon. the special court shal] order distribution
of the securities. obligations. and compensation de-
posited with it under subsection (b) of this section
to the trustee or trustees of each railroad in reorgan-
ization in the region who conveyed right, tide, and
interest in rail properties to the Corporation and the
respective profitable railroads under such subsection.
(d) Appeal. — A finding or determination en-
tered pursuant to subsection (c) of this section may
be appealed directly to the Supreme Court of the
United States in the same manner that an injunction
order may be appealed under section 1253 of ttle
28. United States Code: Provided, That such ap-
peal is exclusive and shal) be filed in the Supreme
Court not more than 5 days after such finding or
determination is entered by the special court. The
Supreme Court shal) dismiss any such appeal within
7 days after the entry of such an appeal if it deter-
munes that such an appeal would not be in the in-
terest of an expeditious conclusion of the proceed-
ings and shal) grant the highest pnonty to the de-
terminauion of any such appeals which 11 determines
not to dismiss
We first dispose of plaintiffs’ threshold contention that
the possible future conveyance of rail properties to Con-
rail in consideration for Conrail stock and securities con-
stitutes a Fifth Amendment taking without payment of
just compensation. Plaintiffs argue that the provision
for compensation for the conveyance of Penn Central
assets renders the Act unconstitutional on its face because
the compensation provided in the Act is not payable in
money or other legal tender, because the purported safety
valve in a deficiency judgment against Conrail provides no
assurance that just compensation will be paid, and because
these procedures offend procedural due process.
We do not meet these Fifth Amendment questions be-
cause we are persuaded that these issues are premature.
“Courts do not review issues, especially constitutional is-
sues, until they have to. Joint Anti-Fascist Refugee Com-
mittee v. McGrath, 341 U.S. 123, 154-55 (1951) (Frank-
furter, J., concurring). It has been said that a number of
jurisprudential rules underlie this general principle. The
doctrines of “standing”, “ripeness”, “finality” and “moot-
ness all serve “the primary conception that federal judi-
cial power is to be exercised to strike down legislation
only at the instance of one who is himself immedi-
ately harmed, or immediately threatened with harm, by
the challenged action.” Poe v Ullman, 367 U.S. 497,
503-04 (1961). We believe that the present circumstances
do not present a nipe controversy because the basis of
8 in addition to the mandatory conveyance provision of the Act,
Congress provided that the conveyances be made “free and clear of
any liens and encumbrances” subject to limited exceptions. Section
303 bY 2).
24
plaintiffs’ complaint depends on the “concurrence of f.
contingent events too speculative to warrant anticipa-
tory judicial determinations.” Eccles v. Peoples Bank, 333
U.S. 426, 432 (1948).
Before the plaintiffs may be harmed by the mandatory
conveyances, certain contingencies must occur. First, the
Penn Central reorganization court must decide “whether
or not such railroad shall be reorganized by transferring
some of its rail properties to the Corporation pursuant to
the provisions of this Act.” Section 207(b). Although
the court conducted a hearing on June 10, 1974, no find-
ings have been made. Second, the board of directors of
the Association must deliver the Final System Plan adopted
by the Association to both Houses of Congress and to the
Committee on Interstate and Foreign Commerce of the
House of Representatives and the Committee on Commerce
of the Senate for approval. Section 208(a).? Third, after
Congressional approval, the conveyances take place only at
the direction of the Special Court within ten days after de-
posit of the consideration by Conrail. Section 303(b).
SEC. 208(a) GENERAL. — The Board of
Directors of the Association shall deliver the final
system plan adopted by the Association to both
Houses of Congress and to the Committee on In-
terstate and Foreign Commerce of the House of
Representatives and the Committee on Commerce
of the Senate. The final system plan shall be
deemed approved at the end of the first period
of 60 caiendar days of continuous session of Con-
gress after such date of transmittal unless either
the House of Representatives or the Senate passes
a resolution during such period stating that it does
not favor the final system plan.
25
Thus, before plaintiffs can be exposed to the alleged
harm, there must be a judicial determination by a Section
77 reorganization court followed first by Congressional ac-
tion, and finally judicial action by the Special Court.
Faced with this triple contingency, the plaintiffs cannot
be said to have been exposed to harm. Until these con-
tingencies occur, only an abstract issue appears; and ab-
stract issues do not invoke the jurisdiction of the courts.”
McCahill v. Borough of Fox Chapel, 438 F.2d 213, 215
(3d Cir. 1971). “As is well known, the federal courts es-
tablished pursuant to Article III] of the Constitution do
not render advisory opinions. United Public Workers of
America v. Mitchell, 330 U.S. 75, 89 (1947) (footnote
omitted).
We are persuaded that the teachings of Communist Party
of United States v. Subversive Activities Control Board,
367 U.S. 1 (1961), and Albertson v. Subversive Activities
Control Board, 382 U.S. 70 (1965), control the issues
dealing with the ultimate conveyance of railroad proper-
ties. In Communist Party the Court ruled that the mere
possibility of Section 7(h) of the Subversive Activities
Control Act and a regulation issued thereunder affecting
the officers of the Party was not sufficient to present a
live controversy. “The duties imposed by those provisions
will not arise until and unless the Party fails to register.
At this time their appearance is wholly contingent and
conjectural.” 367 U.S. at 106. However, when the Party
members subsequently appealed from an order directing
them to register under the Act, the Court ruled in Albert-
son that the claims were ripe for adjudication. Accord-
ingly, we conclude that plaintiffs’ contention that the con-
veyance of the rail properties offends the due process clause
is not ripe for adjudication.
26
Article I, Section 8, Clause 4 requires uniform Laws
on the subject of Bankruptcies throughout the United
States.” Plaintiffs contend that because the Act must be
geographically uniform in application, Hanover National
Bank v. Moyses, 186 U.S. 181 (1902), it is facially un-
constitutional because it provides that only rail properties
of railroads in reorganization in the “Region” may be de-
signated for transfer to Conrail. Section 206(c)(d). By
definition the Region is limited to seventeen northeastern
and midwestern states, the District of Columbia, and cer-
tain portions of contiguous states. 0
The defendants’ answer to these arguments is that, inso-
far as the Act is an exercise of the bankruptcy process, it
is uniform: all Class I railroads in reorganization are in
10 The Act is entitled “Regional Rail Reorganization Act of 1973.”
Section 101(b) states:
(b) PURPOSES. — It is therefore declared to
be the purpose of Congress in this Act to provide
for —
(1) the identification of a rail service system
in the midwest and northeast region which is ade-
quate to meet the needs and service requirements
of this region and of the national rail transporta-
tion system
Section 10A 13) declares that “ ‘Region’ means the States of Maine,
New Hampshire, Vermont, Massachusetts, Connecticut, Rhode Island,
New York, New Jersey, Pennsylvania, Delaware, Maryland, Virginia,
West Virginia, Ohio, Indiana, Michigan, and Illinois; the District of
Columbia; and those portions of contiguous States in which are lo-
cated rail properties owned or operated by railroads doing business
primarily in the aforementioned jurisdictions (as determined by the
Commission by order
27
fact located within the defined Region, and there is no
discriminatory treatment of creditors within or without
the Region. Alternatively, defendants contend that the
Region was defined for purposes of statutory provisions
based on Congress’ power under the commerce clause, which
is not subject to requirement of uniformity.
The court is divided on this issue. Judges Fullam and
Bechtle are of the view that certain provisions of §207(b)
(see ante page 10, n. 4) offend the constitutional require-
ment of uniformity. These provisions mandate disrnissal
of the Section 77 proceeding if the procedures of the Act
are rejected. Their analysis and conclusions are set forth
in Part II of Judge Fullam’s separate opinion.
For my part, without reaching defendants’ alternate con-
tention that the Act finds constitutional support under the
commerce clause, | am persuaded that, in the context of
the circumstances of this case, the Act does not offend
Article I, Section 8, Clause 4.
Hanover Bank instructs that Itlhe laws passed on the
subject [of bankruptcies] must, however, be uniform
throughout the United States, but that uniformity is geo-
graphic and not personal. 186 U.S. at 188. We
believe that the Founding Fathers’ requirement of uni-
formity was mandated to prevent Congressional geograph-
ical discrimination of creditors or debtors. But the 1973
Act is geographically uniform with respect to creditors’
claims. No provision of the Act restricts the right of any
creditor wheresoever located to obtain relief because of
regionalism. If there is a facial geographic restriction, it
would apply to regional or non-regional debtor railroads
only. However, that is not this case. We are not con-
fronted with a proper case or controversy involving a
constitutional challenge to the Act brought by a debtor
28
railroad inside or outside the Region. The challenge is
brought by creditors within the Region whose claims are
treated alike. Accordingly, instructed by the rule of
United States v. Raines, 362 U.S. 17, 21 (1960) that “one
to whom application of a statute is constitutional will not
be heard to attack the statute on the ground that impliedly
it might also be taken as applying to other persons or
other situations in which its application might be uncon-
stitutional”,'' | do not reach the question of whether the
11 The very foundation of the power of the federal
courts to declare Acts of Congress unconstitutional
lies in the power and duty of those courts to de-
cide cases and controversies properly before them.
This was made patent in the first case here exer-
cising that power the gravest and most delicate
duty that this Court is called on to perform.”
Marbury v. Madison, | Cranch 137, 177-180. This
Court, as is the case with all federal courts, “has
no jurisdiction to pronounce any statute, either of
a State or of the United States, void, because irre-
concilable with the Constitution, except as it is
called upon to adjudge the legal rights of litigants
in actual controversies. In the exercise of that ju-
risdiction, it is bound by two rules, to which it has
rigidly adhered, one, never to anticipate a question
of constitutional law in advance of the necessity of
deciding it; the other never to formulate a rule of
constitutional law broader than is required by the
precise facts to which it is to be applied.” Liver-
pool, New York & Philadelphia & S. Co. v. Commis-
sioners of Emigration, 113 US. 33, 39. Kindred to
these rules is the rule that one to whom application
of a statute is constitutional will not be heard to at-
tack the statute on the ground that impliedly it might
also be taken as applying to other persons or other
situations in which its application might be unconsti-
tutional. United States „ Wurzbach, 280 US. 396
Heald v. District of Columbia, 259 US. 114, 123;
(Cont'd)
29
Act may not survive a constitutional attack brought by a
debtor railroad located outside the Region. Thus, | would
hold that as to plaintiff-creditors, the Act does not offend
the uniformity requirements of Article I, Section 8, Clause
4.
(Footnote 11 cont'd)
Yazoo & Mississippi Valley R. Co. v. Jackson Vine-
gar Co., 226 US. 217; Collins „ Texas, 223 US.
288, 295-296; New York ex rel. Hatch v. Reardon,
204 U.S. 152, 160-161. J Voeller v. Neilston Ware-
house Co., 311 US. 531, 537; Carmichael v. South-
em Coal & Coke Co., 301 US. 495, 513, Virginian
R. Co. v. System Federation, 300 US. 515, 558;
Blackmer v. United States, 284 US. 421, 442; Rob
erts & Schaefer Co. v. Emmerson, 27\ US. 50. .
55, Jeffrey Mfg. Co. v. Blagg, 235 US. 571. 576;
Tyler v. Judges of the Court of Registration, \79 US.
405; Ashwander v. TVA, 297 US. 288, 247-348
(concurring opinion). In Barrows v. Jackson, 346
US. 249, this Court developed various reasons for
this rule. Very significant is the incontrovertible
proposition that it “would indeed be undesirable for
this Court to consider every conceivable situation
which might possibly arise in the application of com-
plex and comprehensive legislation.” /d at 256.
The delicate power of pronouncing an Act of Con-
gress unconstitutional is not to be exercised with
reference to hypothetical cases thus imagined. The
Court further pointed to the fact that a limiting
construction could be given to the statute by the
court responsible for its construction if an applica-
tion of doubtful constitutionality were in fact con-
cretely presented. We might add that application
of this rule frees the Court not only from unnec-
essary pronouncement on constitutional issues, but
also from premature interpretations of statutes in
areas where their constitutions application might
be cloudy.
362 US. at 20-22 (footnote omitted).
30
IV.
Finally plaintiffs contend that the Act effects a taking
of their property by compelling operation of Penn Central's
rail properties at an irreversible loss during the period be-
fore adoption of the Final System Han. 12 They urge that
“the Act is unconstitutional in that I) it denies them their
present right to terminate their investment in a hopelessly
losing railroad; and 2) it provides no assurance that plain-
tiffs will in all events be paid just compensation on account
of such forced continued operations. 13
12 Section 304(f) of the Act provides for interim abandonment
if certain conditions are met:
After the date of enactment of this Act, no rail-
road in reorganization may discontinue service or
abandon any line of railroad other than in accord-
ance with the provisions of this Act, unless it is
authorized to do so by the Association and unless
no affected State or local or regional transporta-
tion authority reasonably opposes such action, not-
withstanding any provision of any other Federal
law, the constitution or law of any State, or decision
or order of, or the pendency of any proceeding before
any Federal or State court, agency, or authority.
At oral argument the Penn Central Trustees represented that
requests for abandonment were filed with the office of the Associ-
ation, but as of June 3, 1974 — over five months after the effec-
tive date of the Act — the office of the Association was not yet
fully functioning.
'3 Connecticut General Plaintiffs’ Brief, 30. The Penn Central
Company contends that an unconstitutional taking of the Penn Central
railroad’s property occurred on January 2, 1974; that the compul-
sory continuation of operations during the interim period without
payment of just compensation abridges the Fifth Amendment; and
that since the debtor estate is being continually depleted, plaintiff,
as an unsecured creditor, is presently being injured. Penn Central
Company's Memorandum in Support of its Motion for Summary
Judgment, 10-14.
31
That Congress expected losses during implementation of
the Final System Plan is evidenced by Section 213 which
provides that the Secretary of Transportation may make
payments for certain specific interim losses:
(a) Emergency Assistance. — The Sec-
retary is authorized, pending the implementa-
tion of the final system plan, to pay to the
trustees of railroads in reorganization such
sums as are necessary for the continued pro-
vision of essential transportation services by
such railroads. Such payments shall be made
by the Secretary upon such reasonable terms
and conditions as the Secretary establishes,
except that recipients must agree to maintain
and provide service at a level no less than
that in effect on the date of enactment of
this Act.
(b) Authorization for Appropriations. —
There are authorized to be appropriated to
the Secretary for carrying out this section
such sums as are necessary, not to exceed
$85,000,000, to remain available until ex-
pended. '4
It becomes quickly apparent that the limited amounts
of these funds — available to railroads in reorganization
in the region — have not been specially designated to
meet challenges of unconstitutional erosion. Moreover,
the full statutory authorization has not been appropri-
ated nor is there total agreement between the Secretary
14 Significantly there is no explicit reference to the Court of
Claims.
32 33
of Transportation and the trustees and creditors as to the million, which required approval by the Section 77 reorgan-
nature of the payments to be made under Section 213 and ization court. In approving the trustees’ petition the court
those to be made under Section 215."5 Congress has only observed:
appropriated $35 million of the $85 million authorized.
By February 19, 1974, a tentative, partial solution was
reached between the trustees and the Secretary as to $10.8
15 SEC. 215. Prior to the date upon which rail
properties are conveyed to the Corporation under
this Act, the Secretary, with the approval of the
Association, is authorized to enter into agreements
with railroads in reorganization in the region (or
railroads leased, operated, or controlled by rail-
roads in reorganization) for the acquisition, main-
tenance, or improvement of railroad facilities and
equipment necessary to improve property that will
be in the final system plan. Agreements entered
into pursuant to this section shall specifically iden-
tify the type and quality of improvements to be
made pursuant to such agreements. Notwithstand-
ing section 210(b) of this title, the Association shall
issue obligations under section 210(a) of this title
in an amount sufficient to finance such agreements
and shall require the Corporation to assume any
such obligations. However, the Association may
not issue obligations under this section in an ag-
gregate amount in excess of $150,000,000. The
Secretary may not enter into any agreements un-
der this section until he issues regulations setting
forth procedures and guidelines for the administra-
tion of this section. The Corporation shall not be
required under title Ili of this Act to compensate
any railroad in reorganization for that portion of
the value of rail properties transferred to it under
this Act which is attributable to the acquisition,
maintenance, or improvement of such properties
under this section.
Section 215 of the Act authorizes the advance
of up to $150 million for the purpose of in-
terim acquisition, maintenance and improve-
ment of rail assets which would eventually be
conveyed to the new operating corporation
contemplated by the statute, as part of the
final system plan (increases in value resulting
from such expenditures are not to be re-
flected in the consideration to be paid for
such transfers, and the obligation to repay
is to be assumed by the new corporation).
The Secretary has thus far declined to
approve any grants under $213, and is not
yet in a position to implement 8215. To
meet the present emergency, the Secretary
is apparently willing to use 213 funds, but
not on a grant basis. The proposal contem-
plates that, instead of providing funds to the
Trustees to meet operating expenses, the Sec-
retary will, in effect, transfer funds equal to
certain current installments due on equip-
ment, and in return acquire a pro tanto in-
terest in the Trustees’ equity in that equip-
ment. Meanwhile, it is contemplated that
the parties will attempt to determine the
extent to which 215 funds can appropri-
ately be made available to relieve future cash
shortages.
34
A hearing on the Trustees’ petition was
held on February 26, 1974. The creditor in-
terests all expressed, in varying degrees, their
conviction that the proposed financing was
contrary to the intent of the Regional Rail
Reorganization Act of 1973, and also would
violate the constitutional rights of the credi-
tors. The New Haven Trustee flatly opposes
the transaction. Substantially all of the other
creditor interests, and the Trustees, expressed
their willingness to have the Court approve the
transaction, so long as it was clearly under-
stood that this would not create a precedent
for similar approvals in the future, and that all
parties expressly reserved their rights to press
all constitutional and legal arguments at the
forthcoming hearings on the issues involved in
$207 of the Reorganization Act and in all
other proceedings involving their rights under,
and the constitutionality of, the statute.
As all parties recognize, unless these funds
are provided immediately, the Trustees will be
forced to default in the payments due on equip-
ment in which they have an equity in excess of
$70 million. Section 77(j) of the Bankruptcy
Act severely restricts the power of a reorgani-
zation court to preclude equipment creditors
from exercising the rights granted under the fi-
nancing documents. No other source of cash
to meet these installments l. as been suggested
(and it is difficult to imagine any alternative
source which would not involve repayment,
35
and thus the same constitutional issues as in
the present proceeding).'®
16 In re Penn Central Transportation Co., Debtor, Memorandum in
Support of Order No. 1480 (March |, 1974) (pp. 1-3).
Immediately after the enactment of the 1973 Act, the Trustees
applied to the Secretary of Transportation for a grant under Section
213, to meet a projected cash shortfall of approximately $12 million
anticipated to occur by March |, 1974. There were three difficulties:
(1) the grants were supposed to be made pursuant to regulations pre-
scribed by the Secretary, and the Secretary had not yet prescribed
any regulations; (2) The Act requires, as a condition of any such
grant, that the recipient agree to maintain rail service at the level of
January 2, 1974, and there were problems of interpretation on that,
as well as questions about whether the Trustees could make any such
commitment in good faith, or without violating the constitutional
rights of creditors; and (3) It was the firm position of the Secreiary
of Transportation that the preferred vehicle for interim financing,
would be loans for capital improvements under Section 215, rather
than grants under Section 213.
There were, however, many problems standing in the way of
use of any Section 215 money. (These funds, to be used for capi-
tal improvements and acquisitions, are in effect loans made to Con-
rail, in advance of its coming into existence.) In addition to the
fact that such capital improvements were to be limited to the rail
properties which would be designated in the Final System Plan, and
which were therefore not presently identifiable, there would be no
money available under Section 215 until United States Railway As-
sociation had been formed and could issue government-guaranteed
debt securities.
By February 19, 1974, a proposal for a patchwork solution had
been worked out between the Trustees and the Department of Trans-
portation. The DOT would put up $10.8 million, by directly meeting
certain installment payments due on equipment, and would be subro-
gated, pro tanto, to the Trustees’ equity in that equipment. In ef-
fect, the Trustees would sell a part of their equity in certain rail
equipment to the Department of Transportation, but with the right
(Cont'd)
36
A.
Our first responsibility is to determine whether the in-
terim erosion issue is presently ripe for adjudication. The
predicate of this issue is that, absent permissive interim
abandonment, the Act mandates continued operations of
Penn Central until the Final System Plan is adopted. Plain-
tiffs contend that a compulsory interim operation for a vir-
tually indefinite length of time at large operating losses
continues to erode the Penn Central estate so as to con-
stitute a condemnation of the assets without fair and just
compensation. To decide whether this contention presents
a ripe, and therefore justiciable, issue requires an overview
of the Penn Central operations. A statement of opera-
tional losses being sustained by Penn Central, while under
Section 77 reorganization, is revealed in the stipulations
filed by the parties. During the period that began June
21, 1970, until December 31, 1973, Penn Central sus-
tained ordinary net losses in an amount which approxi-
mates $851,000,000.00."7
(Footnote 16 cont'd)
to redeem it by paying back the money without interest. A hearing
was held on this proposal on February 26, 1974, and the Section 77
reorganization court approved it, over the objections of various credi-
tors, by Order No. 1480. In a Supplemental Memorandum and Order
(No. 1509) the court denied a motion for reconsideration. The orders
are now under appeal.
Thus, of the $35 million thus far appropriated under Section 213
of the Act, $10.8 million has been expended to purchase a part of
Penn Central's equity in some of its equipment.
7 During this same period, the Penn Central trustees expended in
operating rail properties approximately $137,500,000 of non-recurring
cash items as follows:
Trustees’ Certificate Drawdowns $ 100,000,000
Tenants Tax Escrow Account 3,100,000
Proceeds from New Haven Property
Sale 9,100,000
(Cont'd)
37
It is also stipulated that for the two months ended Feb-
ruary 28, 1974, Penn Central had a deficit in net railway
operating income, a deficit in total income, a deficit in
income available for fixed charges and deficit net income,
as those items are determined in accordance with account-
ing regulations of the Interstate Commeice Commission.
As previously stated, the Penn Central reorganization court
has ruled that the railroad is not “reorganizable on an in-
come basis within a reasonable time under section 77 of
the Bankruptcy Act.”
(Footnote 17 cont'd)
Sale of Freight Cars to PALE 7,300,000
MB IA. Settlement 9,100,000
Proceeds from sale of stock of
Madison Square Garden Corp. 2,400,000
Proceeds from sale of securities
held in Contingent Compensation
Fund 6,500,000
TOTAL $137,500,000
They expended $2,100,000 in proceeds from sale of mortgaged
properties in connection with the Selkirk Yard improvement and
$15,700,000 in proceeds from the “Agnes” Flood Loan.
They expended in operating rail properties approximately
$157,000,000 in income derived from Penn Central's non-rail prop-
erties .
They deferred payment of approximately $241 000,000 in state
and local taxes, of which some $44 million to $48 million is alloca-
ble to the pre-reorganization period. These taxes ($241 000,000) are
included in the ordinary net losses.
They deferred payment of approximately $101 ,000,000 in rentals
on leased line properties. The deferred leased line rentals are included
in the ordinary net losses.
38
The book value — and we emphasize that this is not a
market value or liquidated value — of total assets is re-
corded as $4,419,917,759 as of December 31, 1971."8
The trustees report that as of December 31, 1971, 26,254
claimants filed Proofs of Claim, claiming a gross amount
of 83.348.620, 840“ Fifty-one secured creditors filed
timely proofs of claim in the amount of $1,062,734,988.
Ten indenture trustees filed claims in the amount of
$963,135,138. Thirty-five individual bondholders claimed
$81,911,646. Six claimants filed claims arising from con-
ditional purchases of equipment and property in the amount
of $17,688,204. An accountants’ report indicates that on
June 21, 1970, the long-term debt in respect of mortgage
bonds and collateral trust bonds, exclusive of railroad
equipment obligations, was $687,692,000.% This, of
course, is only a partial listing of the claims." A single
18 Annual Report to ICC, 1971, p. 8.
19 Trustees’ Plan for Reorganization, April 1, 1972, Attachment
5, pp. 6-7 (Doc. No. 3033). The trustees estimate an aggregate lia-
bility of $1,583,076,820 from the filed claims.
20 Ibid, at 14-15.
21 In addition to the filed claims there is the matter of priority
claims incurred against the estate during the Section 77 reorganization
proceedings:
E. Growth in priority claims against
the estate.
Deprived of an adequate cash flow, the Penn
Central estate has accumulated substantial priority
claims ahead of all pre-bankruptcy interests. Con-
servatively estimated, these priority claims already
aggregate at least $300 million. On a status quo
(Cont'd)
39
unsecured creditor in these proceedings, the Penn Central
Company, claims an approximate amount of $41,800,000.
The Court of Appeals for the Third Circuit suggests:
“If, as some of the reports filed by the trustees suggest,
it is already clear that such a reorganization is not feasi-
ble, l then this reorganization is already at the point
where the erosion of the estate in deficit operations must
cease and a liquidation alternative must be considered if
II See, eg. Trustees’ Interim Report of Febru-
ary |, 1973; Memorandum accompanying July 2,
1973 Plan of Reorganization of the Penn Central
Transportation Company and Other Railroad Cor-
porations (June 29, 1973)."22
(Footnote 21 cont'd)
assumption, another $100 million would be added
in 1973. As a result, the value of the estate has
already been substantially eroded and the Trustees
are presently unable to prevent continuing erosion.
In addition to these items, there is a priority charge
of some $200 million a year for interest and amor-
tization of equipment debt and equipment lease ren-
tals which must continue to be serviced out of future
cash resources whether or not such charges are earned.
There is, simply, not enough cash to cope with
continuing claims and to embark upon the capital
improvement programs which would permit a con-
tinuation of service improvements. Not only is the
ability to preserve earning power jeopardized, but
Penn Central's essential public services cannot be
sustained on this basis.
*_* © * 2
Trustees Interim Report of January |, 1973, p. 4 (Doc. No. 4911).
22 In the Matter of Penn Central Transportation Co., Debtor,
(Columbus Option Cases), 494 F.2d 270, 283 (3d Cir. 1974).
40
the secured creditors or other interested parties insist upon
such consideration.”
Over a year ago the Section 77 reorganization Court
warned: “1. Erosion. While the precise calculations have
not been fully developed, the record justifies the conclusion
that post-reorganization deferrals and unpaid administration
claims have already eroded the Debtor’s estate to the ex-
tent of about $500 million. Whether the constitutional
limit has been exceeded depends primarily upon how the
remaining assets are to be valued; and this in turn may
well depend upon how those assets are to be used at the
conclusion of this reorganization. Under any view of the
matter, it seems clear that the point of unconstitutional-
ity is fast approaching, if it has not already arrived... .
On the basis of the record to date, it appears highly doubt-
ful that the Debtor could properly be permitted to continue
to operate on its present basis beyond October 1, 1973.”
In re Penn Central Transportation Company, 355 F. Supp.
1343, 1344, 1346 (E.D. Pa. 1973).
Cognizant of massive operational losses of $851,000,000
during the present reorganization proceedings, and cogni-
zant also that unsecured creditor as well as secured cred-
itor interests are squarely before this court, we are per-
suaded that a significant possibility exists that a point of
erosion either has been or may soon be reached so that
it can be said that plaintiffs’ contention of interim uncon-
stitutional taking by continued loss operations is ripe for
adjudication. Having determined that there is a contro-
versy ripe for adjudication, we now examine the merits
of plaintiffs’ contention.
The defendants acknowledge that if a point is reached
where continued loss operations during the interim amount
41
to an unconstitutional taking,” the Act does not explicitly
provide for the payment of just compensation. They in-
sist, however, that plaintiffs have an implied remedy at law
— a suit in the Court of Claims under the Tucker Act, 28
U.S.C. 81491, for just compensation from the United States.
The Tucker Act confers jurisdiction on the Court of Claims:
to render judgment upon any claim against
the United States founded either upon the
Constituticn, or any Act of Congress, or any
regulation or an executive department, or
upon any express or implied contract with
the United States, or for liquidated or un-
liquidated damages in cases not sounding in
tort.
23 [T}here are limits beyond which . . . [the] public
interest cannot be served without violating the con-
stitutional prohibition against appropriation of pri-
vate property for public use without just compen-
sation. New Haven Inclusion Cases, 399 U.S. 392,
90 S. Ct. 2054, 26 L.Ed.2d 691 (1971); cf Brooks-
Scanlon Co. v. Railroad Commission of Louisiana,
251 US. 396, 40 S. Ct. 183, 64 L.Ed. 323 (1920).
These limitations are measured both in terms of the
amount of erosion of the Debtor's estate which can
be permitted to occur before impairing liquidation
value, and in terms of the length of time that is
reasonable for assessing the ultimate prospects of
achieving sufficient profitability to support a valid
recapitalization of the enterprise.
In Re Penn Central Transportation Company, 347 F. Supp. 1346,
1366 (E.D. Pa. 1972).
24 The district courts have concurrent jurisdiction of claims not
exceeding $10,000. 28 U.S.C. $1346.
42
The applicability of the Tucker Act is vital to the de-
fendants’ position. At oral argument counsel conceded
that if a point was reached at which continued manda-
tory operations created losses of such an amount as to
constitute a Fifth Amendment taking, the operators would
then be entitled to just compensation, and that without
an implied Court of Claims remedy, the 1973 Act would
be unconstitutional as to these plaintiffs.*
25
JUDGE ALDISERT: All right now, Mr. Cutler,
assuming an unconstitutional taking by means of con-
tinued interim operation, without a Tucker Act rem-
edy, would the 1973 Act be unconstitutional?
MR. CUTLER: You are saying assuming that
a point might be reached before the consummation
of the new plan in which the constitutionally permis-
sible point of erosion had been reached, before that
could be carried out?
JUDGE ALDISERT: Yes, sir.
MR. CUTLER: And that a Tucker Act rem-
edy was not available?
JUDGE ALDISERT: Yes.
MR. CUTLER: | think | would answer that,
Judge Aldisert, by saying under those circumstances,
Congress would then have decreed a taking by the
provision of this Act for which it had removed any
adequate remedy at law by way of the Tucker Act
suit. In that case, the Act as a whole would prob-
ably be unconstitutional. We would agree with that.
We think it would be possible at that point
though to save most of the Act by construing |
think it is 303 where the court is required to trans-
fer the properties before it has passed on the value
of what is to be given in exchange, by construing
that as unconstitutional, that particular provision,
(Cont'd)
43
The defendants concede that the United States, as sov-
ereign, may not be sued without its consent. [Il he
terms of its consent to be sued in any court define that
(Footnote 25 cont'd)
and saving the rest of the statute under the severa-
bility clause, which would have the result that the
court could delay the transfer until after it had
passed on the values, and as to erosion, if the in-
terim or the final point, the limit of constitution-
ally permissible erosion, had been reached before
the plan was consummated, then | suppose Judge
Fullam, as the reorganization judge, and the other
judges wou'd be free, since the compulsory trans-
fer would have been struck down as unconstitu-
tional, to terminate the proceedings, if they thought
that was appropriate
R. 68-69.
Penn Central Trustees have expressed a similar position:
B. Interim Erosion. Moreover, there is the
further objection to the Act already referred to -
the lack of any assurance that the estate will be
compensated for erosion during the many months
which must elapse before Penn Central's rail prop
erties are conveyed. Financial erosion — the accu-
mulation of real estate taxes, interest on secured
debt, leased line rentals and a variety of adminis-
trative expenses — continues to accumulate at the
expense of the owners. Physical erosion, as noted
above, is likewise continuing, as the rail properties
of the debtor continus to suffer from inadequate
maintenance.
The Trustees have been advised that a Tucker
Act remedy may be available to them to recover
these erosion losses. The Trustees will attempt to
secure a Supreme Court ruling that, if a constitu-
tionally impermissible level of erosion was reached
(Cont'd)
44
court's jurisdiction to entertain the suit.” United States v.
Sherwood, 312 U.S. 584, 586 (1941). Consent to be sued
must be established in an act of Congress, and such an act,
“since it is a relinquishment of a sovereign immunity, must
be strictly interpreted.” bid, at 590; see, United States
„ King, 395 U.S. 1, 4 (1969). Specifically defendants
urge that a statutory grant of consent to a suit against the
United States for any unconstitutional taking by reason of
interim losses is conferred on the Court of Claims by im-
plication because the Regional Rail Reorganization Act of
1973 shows no affirmative Congressional intent to deprive
(Footnote 25 cont'd)
by January 2, 1974, the date the Act became law,
a taking of Penn Central's rail properties occurred
at least by that date, and that a Tucker Act remedy
exists for erosion occurnng thereafter. Section 304
(f) of the Act provides that “after the date of en-
actment of this Act, no railroad in reorganization
may discontinue service or abandon any line of rail-
road other than in accordance with the provisions of
this Act. While the planning agency, the
United States Railway Association, may authorize a
service to be discontinued or a line to be abandoned
(unless local authonties reasonably object), this man-
date by Congress has the effect of requiring Penn
Central to continue operations — notwithstanding
the losses it will incur — until a final system plan
is implemented. Again, however, the Trustees are
advised that unless and until the Supreme Court has
ruled that the United States can be required to re-
imburse the Penn Central estate for its interim
losses, they cannot as fiduciaries rely exclusively on
a Court of Claims recovery.
Trustees’ April 3, 1974 Report on Reorganization Planning, pp. 5.
6 (Doc. No. 7304).
45
that court of its Tucker Act jurisdiction in cases where
claims for unconstitutional takings are made.
The plaintiffs counter with a reference to the legislative
history to demonstrate that there was a specific intention
to limit the obligations of the United States to the express
provisions and explicit limitations contained in the Act.
Thus the issue is joined, and the solution turns on the vex-
ing problem of statutory construction.
We cannot demean the importance of proper statutory
construction in the precise matter at hand. On proper
statutory construction stands or falls the constitutionality
of important provisions of the statutory schema. The de-
fendants, joined by the intervening Penn Central trustees,
mount a formidable argument, reminding us that when
“the validity of an act of the Congress is drawn in ques-
tion, and . a a serious doubt of constitutionality is raised,
it is a cardinal principle that . . [courts] will first ascer-
tain whether a construction of the statute is fairly possi-
ble by which the question may be avoided.” United States
v. Thirty-Seven Photographs, 402 "U.S. 363, 369 (1971),
citing Crowell u Benson, 285 U.S. 22 (1932) (emphasis
supplied). See also, American Communications Assn, C0
„ Douds, 339 U.S. 382, 407 (1950); United States Con-
gress of Industrial Organizations, 335 U.S. 106, 120-2!
(1948). The Penn Central trustees emphasize that “the
Act contains no fewer than thirteen provisions repealing
or making inapplicable the provisions of various laws or
excluding the jurisdiction of federal courts on various sub-
jects. Since none of these thirteen provisions excludes a
Tucker Act remedy — although, as plaintiffs themselves
argue, Congress was intensely aware of the possibility of
such a remedy — Congress must be deemed to have de-
liberately rejected the readily available option of including
* 47
such an exclusionary provision in the Act. 209 mandates the empaneling of the Special Court and the
consolidation before it of ‘all judicial proceedings with re-
On their part the plaintiffs also tum to the text of the spect to the final system plan’. Section 303(c) endows the
Act, describing it as “a preemptive system of judicial par-
ticipation [with] respect to the final system plan. Section
(Footnote 26 cont'd)
atempts to exclude a Tucker Act remedy for just
compensation for the properties so taken.
26 Penn Central Trustees’ Brief in Opposition to Plaintiffs’ Mo-
tion for Summary Judgment, p. 6.
The thirteen repealing or jurisdiction-excluding
provisions in the Act are found in Sections 202(a),
20HcK 2), 206(dK3), 207(b), 20%a), 2OAb), 303(b)
(2), 303d), 304(c), 304(f), 601(aK 2), 601(b) and
601(c).
Sections 202(a\ 10) and 20%cX 2) exempt United
States Railway Association (USRA) and the Rail
Services Planning Office, respectively, from the pro-
visions of Section 3709 of the Revised Statutes, 41
US.C., Section 5. Section 206(d\3) provides that
certain determinations by USRA aad the ICC shall
not be reviewable in any court. Section 207(b) pro-
vides that appeals from orders made under that sub-
section may be taken only to the Special Court,
whose decisions are not subject to further review.
Section 207(b) also in effect repeals part of the ju-
risdiction created by Section 77 of the Bankruptcy
Act by requiring dismissal of Section 77 proceed-
ings in certain circumstances.
Section 20%a) provides that the final system
plan shall become effective after review by Congress
“notwithstanding any other provision of law” and is
“not subject to review by any court except in accord-
ance with this section.” Here Congress provides that
no court may review the contents of the final system
plan — the document which establishes what railroad
properties shal] be taken and that the plan is to
become effective notwithstanding any other provi-
sions of law. Obviously nothing here purports or
(Cont'd)
Section 20%b) authorizes the Judicial Panel on
Multi-District Litigation to create a Special Court and
to consolidate therein all judicial proceedings with re-
spect to the final system plan, and to issue rules for
the conduct of the Panel's functions. The section
goes on to provide that “no determination by the
panel [on Multi-District Litigation] under this sub-
section may be reviewed in any court.” Here again
Congress demonstrated that it well knew how to ex-
clude jurisdiction of federal courts when it wished
to do so.
Section 303(b\ 2) provides that mandatory
conveyances ordered pursuant to the Act by the
Special Court “shall not be restrained or enjoined
by any court.” Section 303(d) provides that, af-
ter the Special Court enters its orders with respect
to compensation which are authorized by prior
subsections of Section 303, an appeal may be
taken to the Supreme Court and “that such ap-
peal is exclusive.” This makes a single appeal to
the Supreme Court the only means by which in-
terested parties may question whether the Special
Court has properly performed the functions as-
signed to it by Section 303. Since those func-
tions do not include consideration of any ques-
tion whether the compulsory conveyance pursuant
to the Act constitutes a taking of property or
the amount of just compensation due therefor,
section 303(d) in no way attempts to exclude a
Tucker Act remedy for such a taking. To the
contrary, Section 30d) yet again demonstrates
(Cont'd)
48
Special Court with the duty to review the consideration to
be received for the properties conveyed and ultimately the
(Footnote 26 cont'd)
that Congress was fully aware of the necessity
of excluding various types of jurisdiction and
did so expressly when it wished to do so.
Section 304(c) provides that railroad aban-
donments permitted under the section may be
made “notwithstanding any provision of the In-
terstate Commerce Act or of other laws. Sec-
tion 304(f) provides that the inhibition on interim
abandonments imposed by that subsection prevails
“notwithstanding any provision of any other Fed-
eral law, the constitution or law of any State, or
decision or order of, or the pendency of any pro-
ceeding before any Federal or State court, agency,
or authority.”
Section 601(aX2) provides that “the anti-
trust laws are inapplicable with respect to any
action taken to formulate or implement the final
system plan where such action was in compliance
with the requirements of such plan.” Section
601(b) similarly makes inapplicable the provisions
of the Interstate Commerce Act “whenever a pro-
vision of any such act is inconsistent with this
Act.” And Section 601(c) provides that certain
provisions of the National Environmental Policy
Act of 1969 “shall not apply with respect to any
action taken under authority of this Act before
the effective date of the final system plan.” These
provisions are contained in Title VI of the Act,
in a subtitle headed “Relationship to Other Laws.”
If Congress had wished also to exclude the appli-
cation of the Tucker Act, it obviously would have
added such an exclusion to the very explicit pro-
vision of Section 601 excluding the applicability
of various other laws.”
lbid., at 6-9 (footnote omitted).
49
authority under Section 303(cM2C) to enter a deficiency
judgment against Conrail. The exclusive appeal from the
Special Court's findings is provided in Section 303(d).”?’
The legislative history reveals that Senator Vance Hartke,
who would later be one of the Managers of the bill on the
part of the Senate, observed that if Congress did not act
by providing the creditors with stock in Conrail, “there is
the distinct possibility . that a number of these people
could make a claim against the Government which could
be sustained in the Court of Claims.
Especially significant in the legislative history of the Act
are the remarks recorded during the discussion on the con-
ference report accompanying H.R. 9142 in a colloquy be-
tween two of the “Managers on the Part of the House
Mr. Dan] Kuykendall “Mr. Speaker,
I would like to ask the gentleman from Wash-
ington one point, and that is the matter of
the deficiency judgment. There was a lot of
colloquy in the original debate which expressed
fears that the Federal Court had the key to
the Treasury.
“Will the gentleman give us his interpreta-
tion of the guarantees we have to keep that
from happening in the court proceedings?”
Mr. [Brock] Adams. “Mr. Speaker,
there is a definite limitation on the total
amount that can be authorized under this
27 Connecticut General's Brief, 59-60.
28 119 Cong. Rec. S. 23783-84 (1973).
50 51
bill. Any amounts that go beyond that, or
the shifting of the way in which it is spent,
is to be approved by an Act of Congress,
to be signed by the President... . [I]t
was the clear intent of the managers that
any amount other than common stock [of
Section 210 describes the maximum obligational authority
of the Association, and the authorization for appropriation
is limited to “such amounts as are necessary to discharge
the obligations of the United States arising under this sec-
tion.” (Emphasis supplied.) Judicial review is delineated
with specificity in Sections 20%a) and 303 with no men-
Conrail] was to be at the lowest possible tion of the Court of Claims.
limit to meet the constitutional guarantees.”
*- * * (Footnote 30 cont'd)
Mr. Kuykendall. “There is no way the for purposes of preparing the reports and exer-
Federal Court may assess the taxpayers or
this Congress on the judgments of the credi-
tors, is that correct?”
cising other functions to be performed by him
under this Act such sums as are necessary not
to exceed $12,500,000, to remain available un-
til expended.
‘Mr. Adams. “The gentleman is cor- (b) OFFICE. — There are authorized to
rect. be appropriated to the Commission for the use
, of the Office in carrying out its functions un-
Mr. Kuykendall. “There is no way der this Act such sums as are necessary, not to
they can assess the Congress for the money?” exceed $5,000,000, to remain available until ex-
pended. The budget for the Office shall be sub-
= Adams. “The gentleman is cor- mitted by the Commission directly to the Con-
rect. gress and shall not be subject to review of any
kind by any other agency or official of the
United States. Moneys appropriated for the Of-
fice shall not be withheld by any agency or of-
ficial of the United States or used by the Com-
mission for any purpose other than the use of
the Office. No part of any other moneys ap-
propriated to the Commission shall be withheld
by any other agency or official of the United
States to offset any moneys appropriated pursu-
We are persuaded that the legislative history supports the
conclusion that Congress intended that financial obligations
be limited to the express terms of the Act. Article I, Sec-
tion 9, Clause 7 provides that no money shall be drawn
from the Treasury of the United States except in conse-
quence of an appropriation made by law. Section 213(bd),
supra, and Section 214™ entitled “Authorization for Ap-
propriations place an express ceiling on expenditures. ant to this subsection.
29 (c) ASSOCIATION. — There are author-
119 Cong. Rec. H. 11876 (1973). ized to be appropriated to the Association for
30 purposes of carrying out its administrative ex-
penses under this Act such sums as are neces-
sary, not to exceed $26,000,000, to remain
(Cont'd) available until expended.
SEC. 2144a) SECRETARY. — There are
authorized to be appropriated to the Secretary
52
We were taught by Justice Frankfurter that the trouble-
some phase of [statutory] construction is the determina-
tion of the extent to which extraneous documentation and
external circumstances may be allowed to infiltrate the text
on the theory that they were part of it, written in ink dis-
cernible to the judicial eye. John Chipman Gray often
quoted a sermon by Bishop Hoadley that “|w]|hoever hath
an absolute authority to interpret any written or spoken
laws, it is he who is truly the law-giver to all intents and
purposes, and not the person who first wrote or spoke
them.
For this court to interpret the Act in a manner contrary
to its explicit terms, contrary to the express representations
of the dill's managers at the conference committee discus-
sions, and to construe this Act in a manner which will ex-
pose the United States Treasury to presently incalculable,
but, in any event, substantially formidable claims would
be a flagrant violation of the separation of powers doc-
trine. If we did this, the judiciary would truly have be-
come the “‘law-giver” for substantial federal appropriations,
this in itself would raise serious constitutional problems.
3! Frankfurter, Some Reflections on the Reading of Statutes, 47
COLUM. L. REV. 527, 529 (1947).
Justice Frankfurter also reminded us that “Mr. Justice Holmes
reached meaning easily, as was true of most of his results, with em-
phasis on the language in the totality of the enactment and the felt
reasonableness of the chosen construction. He had a lively aware-
ness that a statute was expressive of purpose and policy, but in his
reading of it he tended to hug the shores of the statute itself, with-
out much reinforcement from without,” supra, at 532.
32 Gray, NATURE AND SOURCES OF THE LAW, 102, 125,
172 d Ed 1921).
53
To accept the government defendants’ contention would
require judicial legislation on a grand, if not arrogant, scale.
Justice Holmes told us “I recognize without hesitation that
judges do and must legislate, but they can do so only in-
terstitially; they are confined from molar to molecular mo-
tions Jo read a Tucker Act remedy into the Act would
be a movement of the mass and not simply the particles.
We simply lack such power.
Vv
Accordingly, we hold that Section 304(f), in requiring
mandatory interim operations without providing a legal
remedy to furnish fair and just compensation for an ero-
sion of property beyond constitutional limits, offends the
Fifth Amendment; that Section 303, the only provision
of the Act pertaining to valuation of the railroad estate,
in failing to provide a remedy for any unconstitutional
erosion caused by mandatory interim operations under
Section 304(f), is also defective; that because the effect
of Section 207(b) precludes a form of liquidation under
Section 77 of the Bankruptcy Act, it is constitutionally
defective as set forth in Part II of the separate opinion
of Judge Fullam; and that because of these conclusions
the United States Railway Association must be enjoined
from certifying a Final System Plan to the Special Court
pursuant to Section 209%c).
33 Southern Pacific Co. „ Jensen, 244 US. 20S. 221 (1917)
(Holmes, J., dissenting).
54
An appropriate decree will issue (1) enjoining the United
States Railway Association, the Secretary of Transportation,
the Chairman of the Interstate Commerce Commission, and
the Secretary of the Treasury from enforcing the Regional
Rail Reorganizational Act of 1973 in a manner inconsistent
with this holding and (2) declaring as null and void desig-
nated sections of the Act.
/s/ Ruggero J. Aldisert
Ruggero J. Aldisert
United States Circuit Judge
55
a
FULLAM, J.
In view of the number and complexity of the issues
which have been presented in this case, it should occa-
sion little surprise that there is a lack of total agreement
among judges on all issues. With respect to the issues
actually decided by the majority, | am in general agree-
ment, although to some extent for slightly different rea-
sons. But the majority fails to reach a number of issu*s
which I feel must be faced, not only because they are
indeed ripe for decision, but because the principal con-
clusion expressed by the majority — that the Regional
Rail Reorganization Act of 19731 is unconstitutional be-
cause it fails to provide compensation for interim erosion
during the planning period necessarily depends upon
an evaluation of the nature and validity of the Act’s pro-
visions concerning mandatory conveyance of rail proper-
ties to Conrail. In short, | believe the majority has at-
tempted to isolate an issue which cannot be isolated.
I. Prematurity
Plaintiffs challenge the facial constitutionality of the
Act on a variety of grounds, not all of which are neces-
sarily ripe for decision. In considering which issues must
be faced at this time, it is important to keep in mind the
distinctions between concepts of standing, ripeness, and
the need for injunctive relief.
Unquestionably, one or more of the parties to these
lawsuits have standing to raise every issue which has been
presented. That is, the statute affects these parties in
! The Regional Rail Reorganization Act of 1973 is referred to
in this Opinion as the Act, the RRRA, or the statute.
56
particular, as distinguished from the public at large, in
substantial ways. They thus meet the tests of Associa-
tion of Data Processing Service Organizations, Inc. v. Camp,
397 U.S. 150 (1970), and Flast v. Cohen, 392 U.S. 83
(1968).
The question of whether all of the constitutional issues
are ripe for decision requires us to analyze the inevitabil-
ity of the alleged unconstitutional impact, whereas the
immediacy of the alleged threat bears upon the propriety
of injunctive relief.
By July 1, 1974, each of the reorganization courts will
have made, or failed to make, findings pursuant to 2070)
of the Act. Under the statute, the effect of these find-
ings or non-findings (as affirmed or reversed by the Spe-
cial Court within 80 days thereafter) will be either that
the statutory processes will inexorably apply to these es-
tates, or that the 8 77 proceedings will be dismissed. The
plaintiffs assert that the §207(b) proceedings themselves
are unconstitutional on due process grounds. Surely this
challenge is now ripe for decision; indeed, the defendants
do not contend otherwise.
As set forth in Judge Aldisert’s scholarly opinion, the
existence and inevitability of staggering losses from con-
tinuing rail operations pose an immediate threat to the
constitutional rights of the owners and creditors of the
bankrupt estates. Plaintiffs contend that the effect of
$8304(f) and 303 of the Act is to mandate continued loss
operations for an indefinite period without hope of re-
imbursement, in derogation of both the taking and due
process clauses of the Fifth Amendment. Since the ma-
jority has concluded that the ultimate conveyance issues
are not now ripe for decision, the fact §304(f) has been in
force since January 2, 1974, and continues to require in-
57
terim operations and losses, undoubtedly makes the in-
terim erosion challenge ripe for decision.
Plaintiffs challenge the entire Act as a violation of
the uniformity requirement of the bankruptcy clause,
Article I. Section 8, Clause 4 of the Constitution. Again.
this issue is undeniably ripe for decision.
Finally, plaintiffs pose a series of challenges to the sta-
tutory provisions which contemplate the mandatory trans-
fers of rail assets to Conrail or to existing solvent car-
riers, at prices to be determined by the Special Court af-
ter the event, and to be paid in the form of a to-be-de-
termined mixture of Conrail securities, undefined “other
benefits,” and possibly a limited amount of guaranteed
obligations of USRA. Whether some or all of these “ultr
mate conveyance issues are now ripe for decision is a
more difficult question. Judge Aldisert views the posst-
bility that a conveyance may never take place because
of action taken by the reorganization court under $207
(b, the Congress, and the Special Court, as rendering in-
appropriate consideration of any of the ultimate convey-
ance issues. For me, the decision of this issue ts not so
simple.
No one doubts, and in fact the parties have stipulated,
that Penn Central rail properties will be included in the
Final System Plan. Equally certain is the fact that USRA
will deliver to Congress a Final System Plan which is to
become effective 60 sessiondays thereafter. In order to
prevent the Plan from taking effect, one House of Con-
gress must act affirmatively by passage of a resolution ex-
pressing disapproval of the Plan, §208(a). Section 208(b) makes
it the continuing duty of USRA to present final system plans
to the Congress until one becomes effective. | cannot
equate Congress’ reservation of the right to veto the first
Final System Plan, or even the second or third, to a sit-
58
uation in which Congressional action is necessary as a pre-
condition to a Final System Plan becoming effective. |
believe this Court must assume that the Act means what
it says, and that the expressed intent of Congress would
be carried out.
Once a Final System Plan is effective, ie. when the
60-day Congressional action period exp... the Special
Court is required under §303(b) to order conveyance of
the property. There remains no discretionary role to be
played by the Special Court, or any other court, at that
point. Therefore, it is clear that if the reorganization
court does not make $207(b) findings that remove the
railroad from the RRRA, conveyances are certain, save
only amendment or repeal of the RRRA. Of course, the
possibility of future legislative and executive action is al-
ways present during the judicial evaluation of the con-
stitutionality of a statute, and does not render such ad-
The last potential exit would be a finding by the te-
organization court that the RRRA “does not provide a
process which would be fair and equitable to the estate
of the railroad in reorganization,” $207(b). In this event.
there would be no conveyance under the Act. In my
view, this possibility does not raise an issue of ripeness,
but rather, a question more akin to abstention.
Under $207(b), the reorganization court will have to
consider at least some of the cluster of discrete issues
concerning the ultimate conveyance provisions of the Aci,
including some of the constitutional issues raised by these
cases. This is so because the reorganization court must
consider the RRRA in ts entirety in order to ascertain
whether the process is fair and equitable to the estates.
Moreover, it is highly improbable that a reorganization
court could successfully reject the statute as unfair or in-
59
equitable under $207(b) for reasons of less than constitu-
tional magnitude. Indeed. the government's position at
the June 10 hearing in the reorganization court was that
nothing short of unconstitutionality would justify rejec-
tion of the Act under $207(b). Thus, the issue is essen-
tially whether it is preferable for the three-judge court
to rule on the constitutional issues surrounding the con-
veyance provisions, either directly or in conjunction with
plaintiffs’ due process attack on $207(b), before the re-
organization courts act under $207(b).
The policies embodied in 28 U.S.C. $2282 appear ap-
plicable in this case. Enforcement of major federal legis-
lation is sought to be enjoined. As a practical matter, a
decision by the reorganization court under §207(b) that a
constitutional infirmity requires the Act to be found not
fair and equitable would be equivalent, for ali practical
purposes, to an injunction that might issue as a result of
this three-judge court litigation: and a contrary decision
would be equivalent to denial of an injunction. It is pref-
erable that the deliberate and collegial judgment of this
three-judge court should determine the constitutionality
of the RRRA’s conveyancing provisions. It is significant
that the government has not contended that the §207(b)
hearings operate to render any of the constitutional claims
premature.
This is not to say that with respect to many of key
consti‘utional claims the government's contention that
there is not an adequate factual record for constitutional
adjudication is not sound. Rather, the point is that the
government's contentions in this regard should be consid-
ered by the Court at this time.
Another aspect of the RRRA’s impact that warrants
consideration, is the relationship of the availability of the
60
RRRA's processes to the pending petitions to terminate
rail services and to dismiss the Penn Central's § 77 pro-
ceeding. Obviously, the RRRA is an important factor
to be weighed by the reorganization court in assessing
validity of the petitioners’ contentions that operations can
no longer be constitutionally required. This consequence
in and of itself would seem to justify present considera-
tion by this Court of the constitutional issues deferred
by the majority.
Irrespective of the validity of the foregoing observations,
| am satisfied that, in the final analysis, many of the con-
stitutional issues concerning the mandatory conveyance
features of the Act are necessarily ripe for decision at
this time because of their relationship to the issues of in-
terim erosion. While it is not necessary to determine
whether or not the contemplated transfers would amount
to takings in the constitutional sense, requiring advance
assurance of payment in cash or equivalent, | am per-
suaded that the constitutional validity of uncompensated
interim erosion cannot be properly decided except in the
light of the constitutionality of the ultimate result which
implementation of the Act would produce.
Stated otherwise, the fact that the statute does not pro-
vide compensation for interim erosion as such would not
necessarily render the statute unconstitutional if there is
reasonable present assurance that the end result of the
Statutory process would be the receipt of consideration
for the assets and other benefits in amounts equaling at
least liquidation value plus interim erosion.”
2 Counsel for the government pressed the point that under the
conveyance provisions the Special Court could include in its valua-
tion of Penn Central's property an amount sufficient to compen-
sate the estate for unconstitutional interim erosion. Record 98-99.
61
ll. Uniformity
The Act in its entirety is challenged as violative of the
uniformity requirement of Article |, Section 8, Clause 4
of the Constitution. With one minor exception discussed
below, | believe that the Act can (and therefore must)
be construed in such a way as to render it constitutional.
But | reach this result by a somewhat different route
than does Judge Aldisert.
Professor Warren tells us:
any N tional law which deals with
inability to pay debts and which is uni-
form throughout the country is a law ‘on
the subject of bankruptcy, Charles War-
ren: Bankruptcy in United States History
(Harv.U.Press 1935), at p. 8.
For more than half a century, attempts to achieve na-
tional bankruptcy legislation were severely hampered by
the widely held belief that the Constitution required that
bankruptcy litigation must be uniform in its application
to all classes (ibid. p. 61). However, the Supreme Court
eventually decided that the requirement was geographical.
Hanover Netional Bank v. Moyses, 186 U.S. 181, 190.
It has been stated that the uniformity requirement
is wholly satisfied when existing ob-
ligations of a debtor are treated alike by
the bankruptcy administration throughout
the country, regardless of the state in
which the bankruptcy court sits.” Vans-
ton Bondholders Protective Committee v.
Green, et al, 329 U.S. 156, 172 (Frank-
furter, J., concurring).
62
Taken literally, that statement would seem to vindicate
the statute here involved, since this Act unquestionably
permits all claims against the affected bankrupt railroads
to be treated alike, irrespective of the situs of particu-
lar creditors or particular courts. But bankruptcy legis-
lation affects debtors as well as creditors, and it seems
doubtful that the qu, ed language was intended to sug-
gest that different treatment based upon the geographi-
cal location of the debtor would be permissible under
the uniformity clause.
The fact is, the Supreme Court has never had occasion
to consider a statute which was not geographically uni-
form. The few reported decisions have all dealt with
variations in state laws respecting property rights (eg
exemption), or the application of nationwide standards
to particular factual situations determined by courts. See
Wright v. Vinton Branch of the Mountain Trust Bank of
Roanoke, 300 U.S. 440 (1937).
While Congress’ power to classify debtors is not open
to question at this late date, see In re Baltimore & Ohio
RR. Co, 29 F.Supp. 608 (D. Md. 1939), cert. denied
309 U.S. 654 (1940); In re Chicago, Rock Island & Paci-
fic K, 72 F.2d 443, 450 (7th Cir. 1934), aff'd 294 US.
648 (1935), that power may not be exercised on the basis
of geography.
I cannot accept the notion that only those debtors not
affected by the statute can have standing to challenge the
lack of geographical uniformity. In my view, every rail-
road subject to the statute has standing to make that chal-
lenge, and so do creditors of such railroads. The Penn
Central interests are not complaining that the Act is val-
idly applied to others and not to Penn Central; the con-
tention is that an invalid, non-uniform statute is being
applied to Penn Central.
63
Neither do | accept the government defendants’ argu-
ment that the statute is in fact uniform because all Class
| railroads now in reorganization are located in the region
defined in the statute. The statute is not limited to Class
I railroads, and it is not, apparently, limited to railroads
which were in reorganization on the effective date of the
Act.“
But | do find it possible to uphold the statute as an
exercise of Congress’ powers under the commerce clause.
The essential features of an exercise of the bankruptcy
power are that it deals with adjustment of the respective
right: of embarrassed debtors and their creditors, and that
impairment of the obligation of contracts is permissible.
Continental Illinois Bank & Trust Co. v. Chicago, Rock
Island & Pacific Ry. Co., 294 U.S. 648 (1935), Hanover
National Bank v. Moyses, supra. Stated otherwise, recourse
to the bankruptcy clause to justify Congressional action
is necessary only if that action impairs the obligation of
contracts.
For the most part, the statute under discussion adds
nothing, in that respect, to the powers already granted
to reorganization courts under the geographically uniform
and admittedly valid provisions of 877 of the Bankruptcy
Act. To some extent, those powers are transferred to the
Special Court, but this is surely permissible under Arti-
cle Il] of the Constitution. The ultimate dispositions of
the respective rights of debtors and creditors are to be
made under $77. Authority to order conveyances free
3 By implication, it appears that the statute could not affect
a railroad unless it was in reorganization on January 2, 1974, or
entered reorganization within 180 days thereafter. Whether there
are any railroads in the latter category does not appear.
64
and clear of liens, and to “cram down” a plan of reor-
ganization, already exists under $77, and is not newly
created or added by the 1973 Act.“
Therefore, in my view, since the principal provisions
of the 1973 Act which depend upon the bankruptcy
power for their validity are merely repetitive of similar
provisions in existing, valid, laws, the statute as a whole
does not violate Article |, Section 8, Clause 4 of the Con-
stitution.
There is, however, one provision of the Act which is
clearly an exercise of Congressional power derived solely
from the bankruptcy clause, and which cannot be found
in existing, uniform, legislation. I refer to the provisions
of §207(b) which mandate dismissal of the §77 proceed-
ing if the procedures of the Act are rejected. At first
blush, this might seem relatively innocuous: Since the
particular debtors have been found to be incapable of re-
organizing “on an income basis under §77, dismissal of
the §77 proceeding might be thought to follow as a mat-
ter of course.
But a §77 proceeding may properly lead to results other
than a normal income-based reorganization of a railroad
as a railroad. The New Haven Inclusion case, 399 U.S.
392 (1970), stands as a prime example of a type of reor-
ganization designed to produce permanent withdrawal of
the debtor from common carrier operations. There, the
4 As discussed in Part IV. infra, the RRRA does sharply alter
these existing bankruptcy powers have traditionally been exercised.
Although the question is a close one, | have concluded that these
departures are not necessarily a sufficient basis for invalidating the
entire Act on uniformicy grounds.
65
rail assets were disposed of, with a view toward reorganiz-
ing the enterprise as an investment holding company.
The plan of reorganization was approved by the ICC, the
reorganization court, and the Supreme Court.
It thus appears that $77 can be used to produce a form
of liquidation, at least where the plan contemplates that
the bulk of the rail properties will continue to be oper-
ated as a railroad by someone. The provisions of $207
(b) of the Act seem to preclude that kind of recourse to
$77. Since this partial repeal of $77 of the Bankruptcy
Act applies only to debtors in the geographical region
specified in the statute, and since that feature of the Act
is plainly a law “on the subject of bankruptcy.” | am
forced to conclude that the Act is, in that one respect,
violative of Article I. Section 8, Clause 4 of the Consti-
tution. Indeed, it seems probable that that same portion
of $207(b) is vulnerable on due process and equal protec-
tion grounds, and perhaps on the ground of separation of
powers as well.
III. Underlying Principles and Background
In order to evaluate the constitutional permuissibility of
interim erosion in light of the constitutional adequacy of
the end result, it is helpful to review briefly the legal
theories underlying the reorganization provisions of the
Bankruptcy Act, and their application to the Penn Cen-
tral proceedings apart from, and in relation to, the RRRA
itself.
A.
Reorganization of financially embarrassed debtors pur-
suant to a plan that is feasible, fair and equitable is bene-
ficial to both public and private interests. Underlying the
66
reorganization process is the simple economic fact that
the intangible values inherent in a going concern will be
lost if individual creditors are completely free to exercise
their rights to foreclose on the physical assets of the en-
terprise.
“One of the purposes of §77B was to avoid
the consequences to the debtor and credi-
tors of foreclosure, liquidation and forced
sales with their deflationary effects.” Case
Los Angeles Lumber Products, 308 US.
106, 124 (1939) (Douglas, J.)°
See also R C. Denver 4 Rio Grande Western RR (o.
328 U.S. 495, 508 (1945). If the reduction in values as-
sociated with forced sales can be avoided, and going con-
cern values wholly or partially preserved, many junior in-
terests which would have been wiped out by liquidation
(junior secured, unsecured and equity interests) may par-
ticipate in the plan. See generally, Blum, The Law and
Language of Corporate Reorganization, 17 Univ. of Chi-
cago L.R. 565 (1950). The medium of exchange is, of
course, new corporate securities of the surviving entity.
Allocation of the new securities poses both practical
and theoretical problems. The theoretical difficulty in-
volves the method of recognizing the respective priorities
of the various claimants. Section 77(e)(1) is the pertinent
Statutory provision:
5 $77B was a general corporate reorganization statute enacted in
1934, one year after $77, but superseded in 1938 by Chapter X of
the Chandler Act.
67
“The judge shall approve the plan if satis-
fied that: (1) It complies with the provisions
of subsection (b) of this section [77], is fair
and equitable, affords due recognition to the
rights of each class of creditors and stockhold-
ers, does not discriminate unfairly in favor of
any class of creditors or stockholders, and will
conform to the requirements of the law of the
land regarding the participation of the various
classes of creditors and stockholders.”
As Mr. Justice Douglas observed, in Case Los Angeles
Lumber Products, supra:
“The words ‘fair and equitable’. are words
of art which prior to the advent of §77B had
acquired a fixed meaning through judicial in-
terpretation in the field of equity receivership
reorganization.” 30é U.S. at 115.
The substance of the fair and equitable test is derived
from Northern Pacific Ry. Bord. 228 U.S. 482 (1913),
in which the Supreme Court established what has become
known as the absolute priority rule. Simply put, the ab-
solute priority rule requires that “once a hierarchy of in-
terest is established, each class must receive 100% satisfac-
tion before the next lower class may participate at all.”
Friendly & Tondel, The Relative Treatment of Securities
in Railroad Reorganizations under 477, 7 Law & Contem-
porary Problems 420, 423 (1940). Yet, claims may be
satisfied in whole or in part by securities of a character
inferior to those originally owned by the claimant, so long
as junior claimants are not permitted to participate unless
and until the senior claimants receive under the plan the
equitable equivalent to their entire panoply of rights un-
der their original debt instruments. Consolidated Rock
68
Products v. DuBois, 312 U.S. 510 (1941); Ecker v. West-
ern Pacific RR Corp., 318 U.S. 448 (1943); Group of
Institutional Investors v. Chicago, Minneapolis, St. Paul &
Pacific RR Co., 318 U.S. 523 (1943).
Basic to the application of the absolute priority rule is
the valuation of the enterprise and the determination of
value of the security underlying purportedly secured claims.
Both e) and the Supreme Court's pronouncements in
the Consolidated Rock Products, Ecker, and Institutional
Investors cases require that earning power or income-
generating capacity of the debtor be the measure of a
railroad’s value. Once the earning power has been estab-
lished, the aggregate capitalization of the new capital struc-
ture is derived from the earning power. Although 877
does not contain an explicit requirement that the reorgan-
ization plan be feasible (in the sense that the new capi-
tal structure is such that a viable entity will survive the
reorganization process), the Interstate Commerce Coniinis-
sion’s duty under $77(d) to formulate a plan that is in
the public interest has been read to include this require-
ment. Group of Institutional Investors v. Chicago, Min-
neapolis, St Paul & Pacific RR Co, 318 U.S. 523, 544-
45 (1943).
Congress has invested the judiciary with powerful tools
for the effectuation of 877 reorganizations. Preservation
of the status quo can be insured by the prudent exercise
of the stay provisions of §77(j). Trustees’ certificates hav-
ing priority over secured debt may be issued pursuant to
$77(c3) to obtain interim working capital. Executory
contracts may be rejected by the trustee or in the plan
of reorganization $77(b). Rail and non-rail properties may
be sold free and clear of liens under §77(0) (subject to
the limitation imposed in this Circuit by /n re Penn Central
69
Transportation Co., 458 F.2d 1030 (3d Cir. 1973)). Under
certain circumstances, funds held subject to the liens of mort-
gage indentures may be used for working capital or addi-
tions and betterments to the plant, Central RR of New
Jersey v. Manufacturers Hanover Trust Co., 421 F.2d 604
(3d Cir. 1970); In re Third Avenue Transit Co., 198 F.2d
703 (2d Cir. 1952). And notwithsta ding lack of majority
support, an approved plan may be confirmed under the
cram-down provision of e), RTC. Denver & Rio
Grande Western R.R. Co., 328 U.S. 495 (1946). More-
over, the expertise of the Interstate Commerce Commis-
sion is made an integral part of a 877 reorganization proc-
ess by the assignment to the Commission of the task of
formulating the plan, ascertaining the values of railroad
property, and evaluating the public interest aspects of the
proposed uses of a 877 debtor’s transportation property.
The reorganization process fosters the public interest as
well as the private interests of owners and creditors. The
economic inefficiency of dismantiing a potentially produc-
tive enterprise is avoided, and investor confidence is re-
stored. Moreover, §77 is designed to promote the public
interest in preservation of a sound rail transportation sys-
tem. Continental Illinois Bank & Trust Co. v. Chicago,
Rock Island & Pacific Ry. Co., 294 U.S. 648, 676 (1935).
The Regional Rail Reorganization Act of 1973 repre-
sents the Congressional response to the unfortunate fact
that the processes and concepts of 877 outlined above
proved inadequate to deal with the current plight of rail-
roads in the Northeast. Section 77 is adequate only when
a railroad’s revenues are, or can reasonably be predicted
to be, in excess of operating expenses.
70
Historically, railroad reorganizations have been precipi-
tated by the circumstances that fixed charges were unreal-
istically high in relation to long-term earning capacity.
The solution was to scale down and stretch out the debt
structure so that fixed charges could be met from net op-
erating revenues without exhausting those revenues.
Penn Central and most of the other bankrupt northeast-
ern carriers do not generate net operating revenues, but in-
cur large operating deficits. They cannot achieve reorgani-
zation on an income basis under 77.
As a matter of simple maximization of values, if there
is no “going concern” value in the usual sense, there is no
justification for continuing a reorganization proceeding,®
© ‘The significant advantage of $77 over the equity receivership is
the substitution of the Interstate Commerce Commission's valuation
procedures for the foreciosure sale of the equity receivership as the
mechanism for determining who has an interest in the debtor's estate
See generally S. EC, Report on the Study and Investigation of the
Work, Activities, Personnel and Functions of Protective and Reor-
ganization Committees, Part VIII (1940). But clearly, the Ne)
procedires are assumed to result in a valuation in excess of that
which would be obtained by the foreclosure sale. As Mr. Justice
Douglas observed in R.F.C. v. Denver & Rio Grande Western R N Co.,
328 US. 495, 509 (1946):
“Liquidation in depression periods meant that large
portions of debts, as well as stock interests in the
properties, would be irretrievably lost to the hold-
ers, while reorganization on a capitalization that
estimated what normal income would support
meant the salvage of sound values. We see no
more constitutional impediment to the elimination
of claims against railroad debtors by the Interstate
Commerce Commission's determination of values,
(Cont'd)
71
unless either or both of the following conditions are estab-
lished: (1!) a reasonable prospect that, because of stream-
lining, consolidations, and other changes in circumstances,
earning power and profitability can be restored; or (2) a
reasonable prospect that the public need for preserving
the debtor's railroad is such that it will be appropriated
for public use, and that the values inherent in its assem-
blage as an operating railroad will be recognized and paid
for. Cf Port Authority Trans. Hudson Corp. v. Hudson
Rapid Tubes, 20 N.Y. 2d 457, 231 N.E. 734, cert de-
nied 309 U.S. 1002 (1967).
If Penn Central were not a railroad and were being re-
organized under Chapter X. presumably a liquidating plan
of reorganization would be pursued, 6A Collier € 10.02,
at pp. 421-23, or the proceeding would be converted to
a straight bankruptcy proceeding or dismissed under $236
of the Act. But railroad corporations are not eligible for
relief under the straight bankruptcy provisions. Section
77(g) does permit dismissal of the case, but the implica-
tions of such a dismissal are not clear. Presumably, such
a dismissal would be immediately followed. by an equity
receivership and the relatively cumbersome and unsatisfac-
tory liquidation measures available in such a proceeding.
As discussed in Part II of this Opinion, a plan of reor-
ganization providing for the partial or total liquidation of
a $77 debtor's rail assets might well be accomplished un-
der 477. The language of eb) provides that:
(Footnote 6 cont'd)
with judicial review as to the sufficiency of the
evidence and compliance with statutory standards.
than we do to their elimination by an accepted
bid in a depression market.”
72
Ine plan may provide for] the sale of all
or any part of the property of the debtor
either subject to or free from any lien at
not less than the fair upset price.”
The New Haven plan can be characterized as a liquidat-
ing type of reorganization plan. However, in its October
1973 report to the Penn Central reorganization court (Doc-
ument No. 6336), the ICC expressed the view that such a
liquidation could not be regarded as a plan of reorganiza-
tion under 477, apparently on the basis of a perceived dif-
ference in the degree of assurance of continued operation
of the railroad by someone.
It is against this background, and in light of the accrued
and continuing post-reorganization losses summarized in
Judge Aldisert’s Opinion, that the provisions of the Act
are to be considered.
IV Analysis of the Pertinent Provisions
of the Statute
It is desirable at the outset to attempt to characterize
the Act in terms of some familiar legal model or category.
To the extent that the statute can thus be labeled, „ as
4 reorganization statute of as an eminent domain statute,
the constitutional implications emerge with reasonable clar-
ity. Unfortunately, the Act does not fit comfortably into
any familiar category.
From the terminology employed in the statute, and much
of the legislative history, it would appear that a reorganiza-
tion-type statute was intended. But on the basis of its to-
tal impact, such a characterization is somewhat misleading.
Perhaps the best description of the essential character of
the statute appears in $207(b):
73
“Each United States district court or other
court having jurisdiction over a railroad in
reorganization shall decide whether or not
such railroad shall be reorganized by means
of transferring some of its rail properties
to the Corporation pursuant to the provi-
sions of this Act.”
It bears emphasis that the Act does not affect the reo
ganization process of ) directly. Upon completion of
all of the procedures contemplated by the Act, it will
still be necessary for the parties to the Penn Central pro-
ceeding to complete the process of adjustment of credi-
tors claims, and of proposing, processing and consummat-
ing a plan of reorganization that is fair and equitable in
accordance with the requirements of $77. What the Act
does is provide a mechanism for consummating, insofar as
the Debtor's rail assets are concerned, what would be in
effect a liquidating reorganization plan, if the properties
are transferred to Conrail (and perhaps other solvent rail-
roads) pursuant to the Final System Plan. In connection
with such a partial liquidation scheme, the §77 role of
the Interstate Commerce Commission is largely eliminated,
as is participation and voting by creditors. Essentially,
the Act provides a buyer for some or all of the Debtor's
rail properties, an expedited mechanism for terminating
rail services over the balance of the Debtor's properties,
and expedited proced res for achieving the transfer and
sale.
Thus, the Act «an be viewed as a reorganization stat-
ute in the sense that it provides for disposal of some or
all of the Debtor's rail properties in a manner analogous
to dispositions authorized by §77(0) of the Bankruptcy
Act during the course of a reorganization and outside a
74
reorganization plan, or pursuant to §77(b)5) of the Bank-
ruptcy Act as part of a reorganization plan. The obvious
difference, however, is that under o) a sale must be
found to be “in the interest of the debtor's estate and of
ultimate reorganization” and the price must be adequate,
and under §77(b)(5) the sale price must be at least equal
to a fair upset price established by the reorganization court.
It is noteworthy that, in the New Haven Inclusion case,
supra, the reorganization court viewed the conveyance of
the New Haven’'s properties to Penn Central as having been
made pursuant to Webs) Although the full price was
not to be finally ascertained until after the conveyance,
a minimum price had been established before the convey-
ance, and the parties were all willing to leave the final
price open for further litigation.
The New Haven Inclusion case is particularly instructive
in another respect: There, a substantial part of the pur-
chase price was to be paid in the form of Penn Central
stock. In order to insure that the New Haven interests
would receive the actual value of the assets conveyed,
Judge Anderson imposed an underwriting provision which
in effect required a guarantee that the stock wowld regain
its previous market value of $87.50 per sha at sorre
time during a ten-year period following the ya ce.’
The Supreme Court expressly approved that feature of
the transaction, as of the date of the district court's de-
cision, but since Penn Central had entered reorganization
shortly before the Supreme Court decided the case, the
Court remanded for further proceedings, stating:
in re New York, New Haven & Hartford R KR Co., 314 F. Supp.
793, 808 (D. Conn. 1969).
75
“The fairness and equity that are the essence
of a 977 proceeding forbid our approval of
a payment for the transferred New Haven
properties that may be worth only a frac-
tion of its purported value... 399 US.
at 488-89.
The decision of the Supreme Court can be fairly read to
mean that, if shares of stock are to constitute part of the
consideration for a sale under §77(b)(5), the issuer must
in some manner underwrite the value of the stock.
It is apparent that the approach represented by the Act
is quite different from what has heretofore been consid-
ered as within the ambit of §77(0) or §77(bx 5S). The
transfer transaction is initiated by Congress and is to be
implemented through USRA and Conrail. The value of
Conrail stock is to be determined after the conveyance,
and the railroad must accept the risks of fluctuations in
market price (assuming that the stock is marketable at
all).
At first blush, there is some similarity between the ap-
proach of the Act, and the treatment accorded claimants
in the $77 proceeding under a plan of reorganization. Pur-
suant to such a plan of reorganization, secured and unse-
cured creditors, as well as stockholders, may be required
to relinquish their property rights in exchange for securi-
ties of inferior character. Such exchanges are, of course,
subject to the absolute priority rule and the standards of
§77(e) concerning valuation. Claims which cannot be sat-
isfied within the framework of the new capital structure
are discharged.
But again, this is only a surface similarity. The Act
does not operate at the claimant-debtor level, but involves
76
the debtor and Conrail. The Conrail securities are to be
issued to the debtor, not to its creditors. The valuation
of the creditors’ security and their treatment under the
plan would not be contemporaneous, or, perhaps, even re-
lated. While an eventual reorganization plan for the rail-
road might provide for a direct pass-through of Conrail
securities to the creditors whose claims were secured by
properties taken by Conrail, that would not be a neces-
sary result. Moreover, the voting rights of Conrail stock-
holders would be so limited that they would have no voice
in management of the enterprise, §$301(d), and, apparently,
the stock would be ineligible for listing on the major ex-
changes Thus, it is clear that the Act does not fit com-
fortably within any existing procedure or mechanism under
the Bankruptcy Act.
Finally, it is of course clear that the approach of the
Act does not fit an eminent domain model. It does not
in REC e & Rio Grande Westem & K Ch, supra,
the Supreme Court affirmed the district court's confirmation and
cram down of a plan on a group of junior secured creditors. In
reviewing the dissenter’s contention that the orginal valuation by
the Interstate Commerce Commission was too low and that, in any
event, subsequent events demonstrated the valuation was too low,
the Court stated that “the unlimited dividends that might be earned
and paid on the common stock in ‘lush years,’ 328 US. at 518,
and the large amount of cash on hand were “part of the compen-
sation to senior claimants for their loss of position,” 328 US. $22.
Moreover, the bondholders obtained some control of the corpora-
tion by receiving common stock. While the earnings at the time
of the challenge to the plan were substantially in excess of that
envisioned by the Interstate Commerce Commission, the Court ap-
proved the capital structure based on the earning power, in part,
on the theory that the loss of the senior claimants’ secured posi-
tion justified receipt of stock which had the possibility of paying
substantial dividends.
77
provide for payment in cash, payment is not assured in
advance of the conveyance, and there is a limit upon the
amount of the consideration.
There are, however, at least partial resemblances to a
condemnation approach. The conveyances are not volun-
tary, on the part of either the purchaser or the seller.
Conrail, although purportedly a private corporation, has
no choice in the matter. The only element of choice,
insofar as the railroad is concerned, is the limited choice
afforded in connection with the $207(b) findings, and
these are choices of the courts, not of the railroad or its
creditors. From the standpoint of the seller-railroad, there
is no assurance that the price will ever actually be realized.
If the value of Conrail’s stock, plus whatever portion of
the $500 million in USRA bonds are included in the con-
sideration mix, is less than the constitutional minimum“
value to which the railroad is entitled, the Special Court
can enter a deficiency judgment against Conrail. But it
seems rather obvious that if the value of Conrail’s stock
is inadequate, a judgment against that same equity would
add nothing, and would be essentially circuitous.
From the standpoint of Conrail, on the other hand, the
fact that the price may be fixed at a level greater than
the value produced by capitalizing the projected earnings
of the new venture® is a significant departure from the
normal concept of a private sale. For a private purchaser
would not ordinarily be expected to pay more for a busi-
ness enterprise than its capitalized earnings.
To summarize, the RRRA represents an amalgam of
sale, reorganization, and eminent domain concepts. Im-
plementation of the Final System Plan would produce
9 See note 6, supra.
-
78
transactions akin to sales under V) or §77(b)(5) of the
Bankruptcy Act, but without the safeguards of participa-
tion by the parties or advance judicial scrutiny; sales in
which the price would be paid in a form somewhat like
that encountered in a plan of reorganization. The transac-
tions would somewhat resembie a reorganization in which
the “cram down” decision is made by Congress, or at least
virtually compelled by Congress, in advance of formulation
of the plan. And the plain purpose of the entire arrange-
ment would be to insure the continued availability of these
rail properties for use in meeting the public need for con-
tinued rail service, without regard to the wishes of the
present owners of the properties.
The novelty of the statutory approach does not, of
course, establish its unconstitutionality. In dealing with
problems of this importance and complexity, it is under-
standable that Congress should attempt to apply whatever
legal concepts might prove useful. But merely because it
can be constitutionally permissible under some circum-
stances to compel creditors in a reorganization pian to be
satisfied with stock in the new enterprise, it does not fol-
low that that result is always permissible. Presumably,
the Fifth Amendment is equally applicable to bankrupts
and non-bankrupts. Thus, if the compulsory character
and public purpose of the Act compel the conclusion that
the Act constitutes an exercise of the eminent domain
power, albeit a slightly indirect one, the use of stock as
the compensation medium is extremely suspect. See,
Nicholas, Eminent Domain 48.2 (3d rev. ed. 1970) and
cases cited therein. Similarly, at least until now, a deci-
sion that a stock distribution was fair and equitable has
always required contemporaneous comparisons between
the value of the creditors’ and stockholders’ claims and
the value of the stock, a weighing of entrepreneurial risks
79
against the prospects for growth. And merely because it
is constitutionally permissible for a reorganization court
to authorize sales of assets free and clear of liens, it does
not follow that such sales may be approved without knowledge
of the purchase price, and without a simultaneous transfer
of existing liens to proceeds having value equivalent to the
assets conveyed. And, of course, the magnitude of the
public interest in continued rail service cannot justify treat-
ing these rail properties as if they were already public
property.
It is apparent that the determination by the Special
Court as to what constitutes the constitutional minimum“
price for the transferred properties is crucial to the imple-
mentation of the statute. That issue, as such, is not be-
fore this Court and | intimate no view on the merits. But
it is important to note that, no matter how that issue may
ultimately be resolved by the Special Court, the present,
immediate, constitutional obstacle would remain. There
is no assurance that the price fixed by the Special Court
can be paid, uncer the statutory scheme.
Under any view of the Act, there is at least a distinct
possibility that application of the deficiency judgment me-
chanism will be required; and, as set forth above, that is
an obviously inadequate remedy. It must be assumed that
USRA will strive diligently to comply with the Congres-
sional directive to design both aà financially self-sustaining
rail service system™ and a “rail service system adequate to
meet the rail transportation needs and service requirements
of the region.” At present, no one knows whether these
somewhat inconsistent goals can be achieved. Congress it-
self has recognized the uncertainty, by retaining the right
to review the plan before it becomes effective. And
of course, even if the Final Plan is designed to show
profitability on the basis of pro forma projections, there
can be no assurance that actual results will live up to the
forecasts.
The point is, not that these uncertainties can or should
be eliminated, but that all risks — of the possibility of de-
signing a profitable system, of ultimate profitability, and
of interim losses while the hypotheses are explored — are
imposed upon the debtors and their creditors, who are to
be irretrievably committed to the project in advance, no
matter how it works out.
As discussed in Part | of this Opinion, I agree with the
majority that we need not reach all of the constitutional
implications of the transfer provisions of the RRRA. Spe-
cifically, we need not now determine whether or not those
transfer provisions amount to an exercise of the power of
eminent domain. But it is impossible to avoid the conclu-
sion that, before the burden of further interim erosion can
constitutionally be imposed upon the railroad and its cred-
itors, there must be greater assurance of a constitutionally
acceptable end result than is provided by this statute.
V. The Tucker Act Remedy
For the reasons so well stated in the majority Opinion,
agree that Congress did not intend to provide for any
compensation to the railroads or their creditors for in-
terim erosion other than that specified in the Act. Whether
this would necessarily preclude a later resort to the Court
of Claims on a constitutional theory | deem it unnecessary
to decide. I note, however, that the argument of the gov-
ernment defendants in support of such a potential remedy
seems to amount to an assertion that governmental immu-
nity is itself constitutionally suspect.
For present purposes, it suffices to state that the avail-
ability of a Tucker Act remedy is not now sufficiently
assured to justify denial of relief in the present litigation.
Moreover, the adequacy of any such putative remedy, if
it exists, seems highly questionable. I find it difficult to
characterize as due process of law the notion that further
interim erosion can be justified because, if the lengthy
and complex procedures of the Act do not produce a
constitutionally permissible result, the parties may then
start over again in the Court of Claims. The rights of
the secured creditors of the New Haven, for example,
have already been held in suspension for more than ten
years.
I concur in the result reached by the majority. I am
authorized to state that Judge Bechtle joins in Part II of
the foregoing Opinion.
John P. Fullam
82
ORDER
AND NOW, this 25th day of June, 1974, for the rea-
sons set forth in the foregoing opinions, it is ORDERED:
1. That the defendant, United States Railway Associ-
ation, is enjoined from certifying a Final System Plan to
the Special Court pursuant to Section 20%c) of the Re-
gional Rail Reorganization Act of 1973.
2. That the defendants are enjoined from taking any
action to enforce the provisions of Section 304(f) of the
Regional Rail Reorganization Act of 1973, with respect
to any abandonment, cessation, or reduction of service
which has been or may hereafter be determined by a
court of competent jurisdiction to be necessary for the
preservation of rights guaranteed by the United States
Constitution.
3. That all parties are enjoined from enforcing, or tak-
ing any action to implement, so much of Section 207(b)
of the Regional Rail Reorganization Act of 1973 as pur-
ports to require dismissal of pending proceedings for re-
organization under Section 77 of the Bankruptcy Act.
4. That a declaratory judgment be entered, declaring:
a. That Section 303 of the Regional Rail Reorgan-
ization Act of 1973 is null and void as contravening the
Fifth Amendment of the United States Constitution inso-
far as it fails to provide compensation for interim erosion
pending final implementation of the Final System Plan
pursuant to the statute.
b. That Section 304(f) of the Regional Rail Reor-
ganization Act of 1973 is null and void as violative of the
Fifth Amendment of the United States Constitution, to the
83
extent that it would require continued operation of rail
services at a loss in violation of the constitutional rights
of the owne:s and creditors of a railroad.
c. That so much of Section 207(b) of the Regional
Rail Reorganization Act of 1973 as requires reorganization
courts to dismiss pending proceedings under Section 77
of the Bankruptcy Act under the circumstances set forth
in said Section 207(b) is null and void, as violative of
Article I. Section 8, Clause 4 of the Constitution of the
United States.
5. That the respective motions of the plaintiffs for
partial summary judgment are granted in part, as set forth
above, and in all other respects are denied.
6. That the defendants’ motions for summary judgment
are denied.
/s/ Ruggero J. Aldisert
Ruggero J. Aldisert
/s/ John P. Fullam
John P. Fullam
/s/ Louis C. Bechtle, J.
Louis C. Bechtle, J.
a4
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
[caption omitted in printing]
MEMORANDUM AND ORDER NO. 1543,
and FINDINGS PURSUANT TO THE FIRST
SENTENCE OF §207(b) of the Regional Rail
Reorganization Act of 1973
FULLAM, J. May 2, 1974
Section 207(b) of the Regional Rail Reorganization Act
of 1973 (hereinafter the Act), provides:
“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
is reorganizable on an income basis within a rea-
sonable time under $77 of the Bankruptcy Act
(11 U.S.C. $205) and that the public interest
would be better served by continuing the pres-
ent reorganization proceedings than by a reor-
ganization under this Act
The Debtor is a “railroad in reorganization” as defined in
the Act. The statute became effective January 2, 1974,
which means that the decision as to reorganizability is to
be made not later than May 2, 1974.
By Order No. 1426, this Court directed that a hearing
be held on March 25, 1974, in relation to the decision
required by the quoted language of the statute, and in-
vited all interested parties, at stated times in advance of
the hearing, to specify and brief the legal and factual
issues they deemed relevant to the required determination.
85
In response to this invitation, a wide range of questions
have been briefed and presented, but in view of the fact-
ual record developed at the hearing, not all of these is-
sues need now be discussed.
. Jurisdictional and Other Preliminary Issues
It is necessary to note at the outset that the constitu-
tionality of the Act is being challenged on a variety of
grounds in other litigation now pending in this District
and elsewhere! Many of the same constitutional issues
have been raised in the present proceeding. For the most
part, they will not now be considered. Apart from the
question of whether this Court should attempt to avoid
deciding the constitutional issues, in deference to the three-
judge proceedings, it would seem that these issues can and
should be deferred for consideration in connection with
the findings contemplated by the second clause of $207
(b) (the so-called “180-day findings)
The only constitutional issues which must be faced now
are those expressing a challenge to the jurisdiction of this
Court to make the findings required by $207(b).
The findings contemplated by the first sentence of $207
(bi the so-called “120-day” findings, embrace two areas
! The two cases originally filed in this District are Connecticut
General Insurance Corp., et al. v. United States Railway Association,
et al, Civil Action No. 74-189, and Manufacturers Hanover Trust
Co. v. United States Railway Association, et al., Civil Action No.
74-332. In both cases, a three-judge court (of which che writer is
one member) has been convened, pursuant to 28 USC. 12284. Docu-
ments filed of record in those cases suggest that similar cases pend-
ing in other districts are being transferred to this District pursuant
to 28 USC. $1404.
86
of inquiry: (1) whether the Debtor “is reorganizable on
an income basis within a reasonable time under 77
and (2) Whether] the public interest would be better
served by continuing the present proceedings than by re-
organization under this Act... he New Haven Trus-
tee contends that this Court lacks power to make findings
on either subject because there is no “case or controversy”
before the Court; and further argues that making findings
with regard to “the public interest is not a judicial func
tion and cannot be delegated to a court, at least in the
absence of adequately defined standards.
A. “Case or Controversy”
I have concluded that a finding on the issue of reor-
ganizability may properly be made by an Article III court.
The reorganization proceeding itself is the “case or con-
troversy which justifies judicial action. While there might
perhaps be some question as to the validity of legislative
intrusion into specific pending litigation by fixing dead-
lines for decision of particular issues (a question which
has not been raised in the present proceeding, and as to
which I intimate no view), it is entirely clear that a court
may properly comply with such deadlines; its preexisting
jurisdiction weuld not be impaired.
It is true that the Act does not prescribe procedural
machinery for making the required findings in an adver-
sary setting: there is no petitioner or respondent; indeed,
the Act does not even mandate a hearing. But there is
no requirement that the norms of procedural due process
must be disregarded, and they have not been. All par-
ties have been afforded ample opportunity to be heard.
It is also true that the statute provides little or no guid-
ance on the question of the proper allocation of the bur-
87
den of proof; but that shortcoming is not, in my view,
jurisdictional.
In short, there appears to be no valid reason for reach-
ing any conclusion other than the obvious one, namely,
that a reorganization court does have jurisdiction to make
findings concerning reorganizability of the Debtor.
B. Public Interest
The principal thrust of the New Haven Trustees juris-
dictional argument is that a determination as to whether
the public interest would be better served by continuing
the §77 proceeding or by proceeding pursuant to the 1973
Act is essentially legislative in character, and cannot be
delegated to an Article III court. The government and
other parties counter with the argument that the Act
self adequately discloses what Congress intended to de-
fine as the public interest, and that all that is required
is performance of the normal judicial function of fact-
finding.
Unless there is a finding that the Debtor is reorganizable
under §77, there is no necessity for making a public in-
terest comparison under §207(b). Since | have reached
the conclusion that the Debtor is not reorganizable, there
is no present necessity for resolving the second phase of
the jurisdictional argument.
Il. Definition of “Reorganizable on an Income
Basis Within a Reasonable Time under §77 of
the Bankruptcy Act“
The parties are not in complete agreement as to whether
the standards for determining reorganizability under the
Act are different from, or identical to, the standards of
$77. More importantly, there is lack of agreement as to
what constitutes a valid plan of reorganization under $77.
For example, the New Haven Inclusion Cases, 399 U.S.
392 (1970) recegmzed as valid a plan of reorganization
in which the Debtor would first dispose of its rail opera-
tions and then reorganize as a holding company. But
when the Penn Central Trustees filed a somewhat simi-
lar plan, the ICC purported to hold that it would not
constitute a plan of reorganization under $77. While this
ruling does not, of course, represent the final word on
the subject, it serves to point up the potential for con-
flicting views.
1 find it unnecessary to resolve this doctrinal dispute
at the present time. For it is at least clear that in adopt-
ing the 1973 Act, Congress was attempting to deal only
with the rail assets of railroads in reorganization, and that,
for purposes of §207(b) only a reorganization of those
rail assets, pursuant to a plan involving continuation of
rail service by the Debtor, would pass muster.
Moreover, | am persuaded that reorganizability must
be determined on the assumption that the existing regu-
latory and operational setting will continue. From the
very inception of these proceedings, it has been reason-
ably clear that, if certain conditions could be altered, the
Debtor could be made viable. The needed changes eli-
mination of plant redundancy, reductions in crew con-
sists, full reimbursement for passenger service, improve-
ment in rates and divisions, and, more recently, substan-
tial governmental financial assistance are not within the
control of the Trustees or this Court, and have not been
realized.
The issue, then, is whether there is now any reason-
able prospect that continuation of the Debtor's rail
89
operations under existing constraints will produce enough
net income, soon enough, to support adequately a realis-
tic re-capitalization of the enterprise. Applying the fami-
liar figure of speech, we are concerned with the existence
and relative intensity of the light at the end of the tun-
nel, and also with the length of the tunnel and the fur-
ther burdens involved in traversing it.
in. Findings of Fact
1. During the period from the filing of the Debtor's
reorganization petition on June 21, 1970, to December
31, 1973, the Debtor's operations have produced losses
in ordinary income, calculated in accordance with ICC
regulations (49 CFR Part 1201, 501-51) totalling $851.1
million.
2. The Debtor has been able to continue operations
during this period only by deferring payments of virtually
all real estate taxes, rentals of leased lines, and interest
(including mortgage and collateral trust bonds) other than
equipment obligations.
3. Non-recurring income aggregating $155.3 million
from trustees certificates, sales of real property and equip-
ment, sales of securities, and drawdowns from escrowed
funds, have been utilized to sustain operations.
4. The charts below show the ordinary losses, defer-
rals, and applications of non-recurring income on an an-
nual basis and the detail relating to non-recurring income.
90
Sum of Financial Results
($ in millions)
Deferred Taxes Non
Leased Line Recurring
Ordinary Rents and Sources
Income (Loss) interest Oblig* of Cash
June 21 to Dec. 31, 1970 179.7) $142.8
Year 1971 (284.5) 163.9 $96.6
Year 1972 (197.9) 156.1 25.0
Year 1973 dss 143.1 337.
Total June 21, 1970 to oe
December 31, 1973 $(851.1) $605.9 $155.3
*Interest on all debt obligation, secured and unsecured, u included in these figures.
**Does not include approximately $10.7 covered in Order No. 1480 dated
March |, 1974, regarding D.O.T. and certain equipment obligations.
Detail of Non-Recurring Sources of Cash
Sources 1971 1972 1973
Trustees Certificates Drawdown $75.0 $25.0
Tenants Tax Escrow Account 3.1
Proceeds from New Haven Property Sale 91
Sale of Freight Cars to PALE 7.3
Mortgage Trustees Drawdown Selkirk Improvement 2.1
M.B TA. Settlement $9.1
Proceeds from Madison Square Garden 24
Proceeds from Sale of Contingent Compensation 6.5
und
“Agnes” Flood Loan * 15.7
Total $96.6 $25.0 $33.7
5. The aggregate annual expenditures, including all road
depreciation accounts, for maintenance of way and struc-
tures by the New Haven, New York Central, and Penn-
sylvania Railroads from 1957 to 1968 and the Debtor's
expenditures since the merger, are reflected below:
9
1957 222475 1966 - $179.73
1958 - 17647 1967 - 178.54
1959 - 176.55 1968 - 190.66
1960 - 17643 1969 19032
1961 - 163.14 1970 - 22382
1962 - 17147 1971 - 256.46
1963 - 168.34 1972 - 24451
1964 - 171.21 1973 - 2559
1965 - 17247
6. The cost of labor and material utilized in maintenance
of way and structures has risen 113% from 1957 to 1973.
7. Expenditures for maintenance of way and structures
from 1958 until the merger, and to a lesser extent since the
merger, were inadequate to maintain the plant at the level
necessary to accommodate traffic.
8. The initial impact of deferral of maintenance of way
expenditures was on branch, side, and yard trackage. By the
mid-60's, the deferral of maintenance began to have an im-
pact on main line trackage, and since that time the deteriora-
tion of portions of the main line has accelerated. Foregoing
preventive maintenance has created a situation in which sig-
nificant refurbishing and replacement of materials is now
necessary
9. In 1970, slow orders had been imposed on 2,100 track
miles. By 1974, slow orders had been imposed on 8,475
track miles. 6,900 track miles within the system are not in
adequate condition to meet the minimum standard imposed
by the Federal Rail Administration for operational train
speeds of 10 miles per hour. 49 CFR 213 ef seq.
10. Assuming normalized maintenance of way expendi-
tures of at least $225 to $250 million per annum, an addi-
92
tional $665 million in present dollars must be expended in
an eight-year period to remedy past deferrals.
11. Poor condition of the roadway increases train time,
and thereby decreases the service capacity and revenue of
the system.
12. In order to provide an estimate of the future finan-
cial results of the Debtor's operations, the Trustees traffic
consultants, Temple, Barker & Sloan, developed a forecast
of traffic and revenue for 1974 through 1978 (the forecast
period ).
13. The main assumptions underlying the forecast are as
follows:
a. Using 1958 as the base year, the national economy will
have an average real rate of growth of 4% per annum during
the forecast period.
b. Rail traffic growth in the eastern district will be less
than the national rail traffic growth rate. The difference be-
tween the eastern district and the national growth rate will
be less than in previous years.
c. The Debtor’s rail service will be adequate during the
forecast period to meet the reasonable expectations of its
shippers.
d. The “energy crisis” will improve the competitive posi-
tion of railroads versus other transportation modes, and im-
2 This figure is derived from Mr. Jackman’s affidavit (Docu-
ment No. 7243) in which he estimated an 1|1,000-route mile sys-
tem would require $451 million ($41,000 per route mile) and the
15,000-route mile system would require $567 million ($37,466 per
route mile) to cure past deferrals. A per-route mile cost of $35,000
is applied to an assumed 19,000-route mile system to generate the
estimate of $665 million to cure deferred maintenance throughout
the system.
93
prove the Debtor’s total tonnage carried and commodity mix.
e. Governmental environmental regulations will be altered
to permit utilities and industry to increase their use of coal.
f. Coal traffic will increase 31% from 1973 to 1978, with
coal traffic in 1978 comprising 31% of the Debtor's traf-
fic as compared to 28% of the Debtor's traffic in 1973.
g. Higher fuel costs after 1974 will be covered by im-
mediate rate surcharges or increases; or, stated another
way, the 1975-78 figures show no incremental cost for
fuel and no additional revenue from rate increases to
cover that cost.
h. Rate increases adequate to cover increased unit
costs (increased costs less saving from higher productiv-
ity) will be effective on July | of the year succeeding
the cost increases.
14. The 1973 estimated actual tonnage for the Debtor
was 276.9 million tons. A tonnage increase of 3.68% per
year over the 1973 estimated actual tonnage is predicted
as follows:
(millions of tons)
1974 - 282.1
1975 - 293.8
1976 — 305.3
1977 - 316.0
1978 : 327.9
15. In accord with the method set out below, the
traffic forecast was utilted to generate a net revenue fore-
cast in current dollars.
a. Unit revenues derived from a model based on 1972
data with certain adjustments to reflect 1973 data were
94
applied to the projected tonnage in each commodity cate-
gory to generate estimated gross revenue in 1972 dollars.
b. Gross revenue was adjusted to a net revenue figure
by application of a .047 factor to reflect revenues received
for services rendered by others.
c. Net revenues in 1972 dollars were then converted
into current dollars for the forecast period by determin-
ing the increase cost due to inflation as offset by product-
ivity increases. Revenue was then adjusted in accord with
the rate increases assumptions indicated in Finding | 3(h).
d. No reduction in tonnage was made to reflect pos-
sible shipper reaction to rate increases.
16. Revenue in current dollars is forecasted to be:
(in millions)
1974 - 1,879.2
1975 - 2,069.4
1976 : 2,258.2
1977 - 2,435.5
1978 - 2,637.3
17. Fifty-five percent of the increased revenue is at-
tributable to rate increases and 45% to increased traffic,
changes in commodity mix, and changes in unit revenue.
18. Below s the forecasted income statement for the
Debtor premised on the traffic and revenue forecast with
certain assumptions for cost increases.
95
(dollars in millions)
1974 1975 1976 1977 1978
Operating Revenues
Freight $1,879.2 $2,069.3 $2,258.2 $2,435.5 $2,637.3
All other 2393 339 3220 3400 3600
Total 2,168.5 2,373.2 2,580.2 2,775.5 2,997.3
Operating (Costs 2,309.7 24916 26516 2815.7 3,001.7
Net Rwy. Oper. Inc. (141.2) (1184) (714) (402 (44)
Other Income 62.2 4.2 82.0 BBS 90.4
Misc Deductions 21.2 20.2 20.2 20.2 20.2
Inc. Avail for Fx.Chgs (100.2) (644) (9.6) 28.1 65.8
Fixed Charges 1375 319 1264 1241 122.0
Ordinary Income $ (237.7) $ (196.3) $ (136.0)$ (96.0)$ (56.2)
Average Numberof 79,325 79,325 79.325 79,325 79,325
Employees
Tons handled (Mil) (282.1 2938 305.3 3160 327.9
Operating Ratio(%) 82.99 81.16 7949 7851 77.45
19. The ordinary income loss for 1976, 77 and 78 as
shown in Finding 18 is overstated because the revenue pro-
jections therein utilized did not reflect rate increases to
cover increased fuel cost in 1977-78, whereas the operat-
ing cost projections do contain increased fuel costs. The
substantial increment in the “Other Income” account
shown in Finding 8 is attributable to yearly increases in
the proceeds of property sales ($6.7 million in 1974 com-
pared with $30 million in 1978).
20. The chart below shows the projected cash posi-
tion resulting from operations consistent with the income
statement shown in Finding 18.
96 97
Source and Application of Funds : 21. The cash forecast for 1974 is as follows:
(dollars in millions) ;
(dollars in millions)
Source 1974 1975 i976 1977 1978
Ordinary income (Los) $(237.7) $(196.3) $(136.0) $ (96.0) $( 56.2) ——
8 Balance Available
Adjustments to Earnings: —
Taxes-Accrued 585 605 625 644 668 for Operations”
Paid (4) (4) (4) (4) (4)
Interest Accrued 108.3 102.8 97.4 95.1 93.0 March 1974 $ (8.8)
Paid (23.0) (23.9) (184) (160 (14.1) April (4.7)
L.L.Rts.-Accrued 29.0 289 28.9 289 289 May (2.0)
Paid (1.0) (1.0) ao a0 0) June 49
Depreciation 85.1 83.3 81.3 793 77.4 jul 3 4
Other (12. ) (20.0) _ (26.1) _ (30.7) _ 30.7) - y —
Total Adjustments 244.5 230.2 2242 2195 219.9 — * (19.4)
October (22.8)
Cash from Operations 68 339 88.2 123.5 163.7 — (258)
Other Sources. December (17.0)
Proceeds from Sale of
Salvage 15.1 16.2 1733 18.5 19.8 NOTE: |. Assumes SEPTA payments in April, August and Decem-
Total Sources 21.9 50% 105.5 1420 183.5 ber of $4 million each.
2. Assumes increase AMTRAK reimbursement of $1 .3 mil-
Application lion per month commencing May 1974.
Capital Program Equip. $0 117 12.4 13.2 14.0 , —
-Road 20 30% 319 338 3855 > = — — — Ae 22
Debt Retirement 39.1 423 874 35.0 336 equipment obligations assumed by the D.O.T.
Amtrak 60 — — — = 4. Does not include effect of recent FRA. order regarding
Total Application 70.1 84.0 131.7 82.0 83.5 maintenance standards.
Ges Came acs 2 ow oe 22. The revenue forecast and projections derived therefrom
Beginning Cash 40.2 (80) (41.9) (681) (1) are overstated because of the assumption that the Debtor will
Ending Cash (8.0) (41.9) (68.1) 6.0 919
be able to provide adequate service to its shippers. Findings
—— oe ee ee 8-13 indicate that the physical condition of the system is not
such that the service level will meet the reasonable expecta-
tions of shippers. It is estimated that the inability to provide
service levels satisfactory to shippers will cause a shortfall in
Ending Cash Avail for Oper. $ (17.0) $(514) $ (78.1) $ (186) $ 809
3 By affidavit dated April 26, 1974 (Document No. 7446), the cash
balances through August were revised as follows: April - $( 17.6); May -
$(14.2), June $(5.6); July $(15.9); and August $(38.9).
98
the revenue forecast of 2 to 3% per annum or $25 to $50 mil-
lion per year.
23. During the 1974-78 period, $310.7 million in local
taxes, $137.1 million in bond interest, and $140 million in
leased line rents will accrue, but not be paid.
24. In order to depict the financial results of the Debtor's
rail operations only, the income statement shown in Finding
18 was adjusted as follows:
a. Non-rail income, including accruals of tax allocation
payments due from related companies, is extracted from the
statement.
b. Due to the lack of definitive information, an arbitrary
allocation of 50% of the leased line rents and interest obliga-
tions (components of fixed charges) have been extracted from
the statement.
c. Tax accruals have been adjusted according to a prelimi-
nary analysis developed by the Trustees’ staff of the tax con-
sequences of severance of rail and non-rail operations.
d. The rail operation is presumed to carry the full cost of
overhead.
25. Set out below is the forecasted income statement based
on the procedure set out in Finding 24 for the Debtor's rail
operations only.
99
1974 ies meien 1978
Operating Revenues
Freight $1,879.2 $2,069.3 $2,258.2 $2.435.5 $2,637.35
All Other 289.3 303.9 322.0 40.0 1400
Total 2,168.5 2,373.2 2,580.2 2,775.5 2,997.3
Operating ( osts 2,314.3 2496.1 2656.1 2820.1 3,006.0
Net Rwy. Oper. Inc. (145.8) (122.9 (75.9) (446) ( 87)
Other Income 54 5.6 54 54 5.4
Misc. Deductions 13.0 109 10.9 10.9 10.9
Inc. Avail for Px. Chgs. (153.2) (128.2) (1.2 (499 (140)
bined Charges 83.5 78.2 72.7 70.4 68.3
Ordinary Income $ (236.7) $ (206.4) $ (153.9) $ (120.3) $( 82.)
Average Number
of Employees 79,325 79,325 79,325 79,325 79,325
Tons Handled (Millions) 282.1 293.8 305.3 316.0 327.9
Operating Ratio (Percent) 82.9 81.16 79.49 #7851 77.45
26. The chart below shows the projected cash position
resulting from rail only operations consistent with the in-
come statement shown in Finding 18.
Source and Application of Funds
(dollars in millions)
SOURCE 1974 1975 1976 1977 1978
Ordinary Income (Loss) $ (236.7) $ (206.4) $ (153.9) $(120.3) $ (82.3)
Adjustments to Earnings
Taxes-Accrued $1.7 $34 $5.6 74 59.7
Pad (4) 4 (4) (4) (4)
Interest-Accrue¢ 68.9 634 $8.2 $5.9 53.8
Paid Qn») 239 «84s (6.1) (141)
L.L.Rts.-Acerued 14.5 14.5 14.5 14.5 14.5
Pad (1.0) ao) (1.0) (1.0) 10
Depreciation 83.7 81.9 79.9 7.99 76.0
Other (2) 2 = 2 2
Total Adjustments 193.2 _ 188.3 188.4 188.2 188.5
C
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