Brief for Appellee — Robert W. Blanchette et al., v. Connecticut General Insurance Corp.
Supreme Court brief1974
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Supreme Court of the United
October Term, 1974
No. 74-165
No. 74-167
No. 74-168
SEP 26 1974
UNITED STATES OF AMERICA, et ai.,
Appellants.
v.
CONNECTICUT GENERAL INSURANCE
CORPORATION, et l.
Appellees.
On APPEAL FROM THE UNITED States District Court
FoR THE Eastern District OF PENNSYLVANIA
1035 Land Title Bui
Philadelphia. Pa 19110
Attorneys for Appellees
WiLikie Farr & GALLAGHER
1 Chase Manhattan Plaza
New York, New York 10005
ALAN S. FELLHEIMER
BALLARD, SPAHR, ANDREWS & INGERSOLL
1035 Land Title Building
Philadelphia, Pa. 19110
September 26, 1974
TABLE OF CONTENTS
Statement of the Case
I. Nature of Case and Proceedings Below ....
II. The
III. The |
Argument:
I. The
Rail Act is Unconstitutional in that It
tion of the Penn Central System ......
Penn Central Interim Operations Im-
pose Enormous Losses, Accumulate Pri-
ority Claims and Cause Erosion of the
Value of the Estate ..................
ER S&S wo Ww
41
ii
2. Reasonably Foreseeable Future Fi-
~~ mg Results after December 31,
3. Erosion in the Value of the Estate ..
Compulsory Interim rations are Un-
constitutional in the A of Reason-
able Present Assurance of Reorganiza-
bility under the Act or an Assurance of
Just Compensation ..................
1. The Public Interest in Continued
Service Does Not Justify Mandatory,
Uncompensated Interim Operations
2. The Rail Act Does Not Aff
errr eee eee eee mm h g
(a) Conrail will not be materially
different from Penn Central
(b) Conrail will face the same prob-
lems as Penn Central .........
(e) Conrail has no reasonable pros-
pect of viability ..............
(d) Conrail is an untried concept in
railroad operations ............
(e) The Penn Central Trustees’ via-
PAGE
47
& K 8 8 &
57
II. There is No Adequate Remedy
3. The Act Provides No Assurance of
Payment for the Taking by Interim
reer ee
sa FHA — 8 ‘
is in
medium and amount to assure
fair value for the assets to be
con and still less does it
Pp ide redress for interim ero-
| RR ha) a
(i) Kind and amount of compen-
sation under the Act ......
ii) Inadequacy of compensa-
0 tion on any theory of valua-
KK
(e) The Act fails to provide any
conveyed and compen-
— for interim erosion .....
D. New Haven Inclusion Cases, 399 U.S.
392, Does Not Support the Constitution-
ality of the Rail Act, but Exposes its
Unconstitutionality .................-
able to Appellees under the Tucker Act ..
A. The Statutory Scheme of the Act on Its
Face Purports to be Exclusive and
re ee esd
B. The islative History is Consistent
— K ith the Exclusion of a Remedy
in the Court of Ciaims ..... .
C. In Licht of the History and of
the Rail Act, the Tucker Act *
Cannot Be Adequ ate
PAGE
74
79
III. Injuneti
— on Relief Granted Below was Timely
IV. The Order Entered Below ma be
tained on Other
the District Court . nat by
1 . Use Without Just ——
o the Extent the
ri ant res
ve Ap-
—
102
108
109
v
Table of Authorities
PAGE
Cases :
Almota Farmers Elev. & Wise. Co. v. United
States, 400 U.S. 470 112
Altvater v. Freeman, 319 U.S. 39 83
American Life Ius. Co. v. Stewart, 300 U.S. 203... 101
Armstrong v. United States, 364 U.S. 40. . 27, 48, 110, 112
Atchi T. 4 S. F. Ry. v. Public Util. Comm n,
rr eee. eee eee 27, 49
Bohlcr v. Callaway, 267 U.S. 479 ¶992 101
Brooks-Scanion Co. v. Railroad Comm'n, 251 U.S.
— 27, 47, 50, 51, 52, 73
Bullock v. Railroad Comm u, 254 U.S. 518 50, 51
Central R. R. of NJ. v. M acturers 22
Trust Co., fy 604 (3d Cir. 1970), cert
demied, 306 U.S. % %%/, ůr cece cceneees
Confederated mabe of Ute Indians v. United
States, 117 Ct. Cl. 433 (190))ꝰb!
Consolidated Rock Products Co. v. Du Bois, 312
Dre cee eee eee 52, 74
Continental Ill. Nat'l Bank & Trust Co. v. Chicago,
RI. & P.Ry., 294 UB. 64 51, 52
Davis v. Wakelee, 156 U.S. 6600. 101
v. Carter Oil Co., 174 F.2d 314 (10th Cir.
1949), cert. denied, 338 U.S. 8
Ecker v. Western Pac. N. R., 318 US. 448 52, 74
den Co. v. Zdanok, 370 U.S. 530 ............ 99
pf Insistutional Investors v. Chicago, Ml.,
P. & Pac. N. R., 318 U.S. 52 52, 74
Hanover Nat'l Bank v. Moyses, 186 U.S. 181 .... 32, 113
vi
Cases (Continued) :
— Valley =
Ass'n v. Stafford, 360 F.
1087 ‘SDN NY. 1973 K
e J 1 194 . eee 12
Head Money Cases, 112 U.S. 5860 113, 114
Hurley v. Kincaid, 285 U.S. 9 ................ 100
In re Boston & Maine Corp., 484 F.2d 369 (Ist Cir
Tn ——
on oe Conte SE of N. J 20
1973), cert , 414 2 6
In re Ci of New York (Fifth Avenue
Lines, Inc.), 18 N.Y¥.2d 212, 219 N24 710
(1966), appeal dismissed, 386 U.S. 778 ........ 72
In re New York, N.H. & H.R. R., 289 F. Supp. 451
(D. Conn. 1968) J. choneuiedd dnéedaciee on dec 73
In re New York, N.H. E H. R. R., 304 F. Supp. 793
(D. Conn. 1969), af d in sub nom. New
Haven Inclusion Cases, 399 U.S. 392 .......... 46, 51
In re Penn Central T C.
aw... es
In re Penn Central 7 0
G. 1973) .
e Co., 494 F.2d 270 (3d
(Us Ky’ ior filed, 42 U.S.L.W. 3633
Us &, 1974) 0 (No. 73-1672) (‘Columbus
e 51, 53
In re — Levies Trans-Hudson
2d 457, 931 N. E24 734 (1967) n
LL Ac Amy 72
In re Riker Del. Corp., 385 F.2d 124 (3d Cir. 1967) 52, 53
In re Third Ave. Transit Corp., 198 F.2d 703 (2d
LD 53
5 eee
20... „nee 5 dhe: edie x x. 50
vii
Cases (Continued) :
PAGE
Lockerty v. Phillips, 319 U.S. 1822 108
Lowisville Joint Stock Land Bank v. Radford
7 Sa 24. 48, 74, 110
Miller v. Schoene, 276 U.S. 7ũũ ũm!2123 0-5-5 0005: 49
Nashville, C., & St. L. Ry. v. Walters, 294 U.S. 405 27, 49
New Haven Inclusion Cases, 399 U.S.
— 26, 28, 39, 51 et passim
New York, N.H. 4 H. R.R. First ~ ¢ Bond-
holders’ Comm. v. United States, —
1049 (S. D. N. V. 1969), vacated on other
sub nom. New Haven Inclusion Cases, US.
— rn 39, 51
Olson v. United States, 292 U.S. 24 112
Pennsylvania Coal Co. v. Mahon, 260 U.S. 393.... 50
Sei ewes Eastern Texas R.R., 264 U.S. 2
R. R., 328 82 eee 51, 61
Southern Pacific Co. v. Jensen, 244 U.S. 205 101
Tot v. United States, 319 U.S. 433 117
Union Pac. R. R. v. Board of County Comm rs, 247
US „0 101
United States v. Cors, 337 U.S. 3255 49
United States v. Dickinson, 331 U.S. 745 49
United States v. Gainey, 380 U.S. 33. 117
United States v. Miller, 317 U.S. 3699 112
United States v. Reynolds, 397 US. 14 112
United States v. Romano, 382 U.S. 136 ......... 117
viii ix
Cases (Continued) : PAGE
sacs ConstrruTionaL Provisions anp Statutes (Continued) :
* Lessee v. Dorrance, 2 U.S. (2 Dall.) Regional Rail Reorganization Act of 1973:
P 112 :
Ps ipa Biles, 0 US. O08 ............0..... 117 Z 2 et passim
Tucker Act:
ae Union Central Life Ins, Co., 311 U.S. ; 28 USC. 1 3, 29, 83 et passim
eee e neeéssoure 4
Bonk, 300 US. 440 — So 1 SUSC n 13
7 n 99
oungstown Sheet & Tube Co. v. Sawyer, 343 U.S. i ptem
P 83, 84, 100, 101 ef passim — 50 wee eat tee — = mia —
ConstiTuTIONAL Provisions Ax D Srarurks: S. J. Res. 59-2, 93d Cong., Ist Sess. (1973) 13
U.S. Constitution: Leos tative MaTerRiais:
Art. I, See. 8, Clauses 3 and Ka... 3 H. R. Rep. No. 93-744, 93d Cong., Ist Sess. (1973) 91, 107
( ek i 3, 100 H. R. Rep. No. 93-620, 93d Cong., Ist Sess. (1973) 106, 107
. 3 et passim S. Rep. No. 93-601, 93d Cong., Ist Sess. (1973) 76, 91, 107
Benhruptey Act: 119 Cong. Rec. H11876 et seg. (daily ed. Dec. 20,
Section 77, 11 U.S.C. $205 .............. 4 et passim 1— 92,
Emergency Rail Services Act of 1970: 1 orp ey es Se S 8
b 8 Leere
Judieial Code: 1973) — — ee 36. 94
.. rere 2 Subcommittee Print-H.R. 9142, dated August 2,
. 2 See Cee ——̃ — 90
Ter .... K D
rer a ea . Hearings on S 2188 before the Senate Committee
e 2 on Commerce, 93rd Cong., Ist Sess. (Nov. 15,
28 USC. §§ 2201-02 . 2 1973) ‚G—ũ *r * * 63
28 U.S.C. § 2283 .......... Explanation of Legislation Pe to the Mid-
28 U * a : — —— ore the Sen-
e 2 ate Committee on Commerce, 93d Cong., Ist
R 99 — — 91
Derr en ae 99 Slant aden and” Acronautics es of the Howse
on Interstate and 2
— — (June 14 95, 96, 97
x
PAGE
MIscELLANEOUS :
Annual Report of Penn Central to the ICC for
19GB (Ferm .
Annual Report of Penn Central to the ICC for
Wa hg.. 6
Annual Report of Penn Central for 1973 (Form
1 12——
49 C. F. R. §§ 213 et e . 17
eee. eee dee 23, 83
I 83
5 Collier, Bankruptcy (14th ed. 1974) ........... 78
October Term, 1974
No. 74-165
No. 74-167
No. 74-168
- 0
Unrrep States or Amenica, et al.,
Appellants,
v.
Cownecticut GeneraL Iysurance Corporation, et al.,
Appellees.
Ox AppgaL rrom THE Unrrep Srares District Court ror
TH Eastern District or Pennsy.vania
This brief is filed on behalf of Appellees who are owners
of mortgage bonds of Penn Central Transportation Com-
pany (‘‘Penn Central’’) and of certain lessors of leased
lines of Penn Central (‘‘Lessors’’) secured by mortgages
on rail properties of Penn Central and Lessors, and certain
banks which are corporate trustees or successor corporate
trustees under indentures, mortgages or deeds of trust
under which bonds or other debt securities of Penn Central
or a Lessor were issued or secured.'
* The identity of Appellees and their interests in Penn Central
Opinions Below
The opinions in the District Court, and its order entered
on June 25, 1974, are not yet reported. They are set out in
full in the Joint Appendix at JA 9-83.
Jurisdiction
This case was brought pursuant to 28 U.S.C. §§ 1331(a),
1337, 2201 and 2202, seeking a declaratory judgment that
the Regional Rail Reorganization Act of 1973, Pub. L. No.
93-236, 87 Stat. 985-1023, 45 U.S.C. §§ 701-93 (the Rail
Act“ or Act“), is void for repugnance to the Constitution
of the United States and an injunction against the enforce-
ment, operation and execution of the Act insofar as it was
found to be unconstitutional. Two other actions, Smith v.
United States and Penn Central Co. v. Brinegar, originally
brought in the District of Columbia on substantially the
same grounds, were transferred to the Eastern District of
Pennsylvania. The three actions were consolidated for
disposition before a three-judge Court convened pursuant
to 28 U.S.C. $§ 2282 and 2284.
These appeals have been taken from the order of that
Court granting partial summary judgment to the plaintiffs,
declaring certain portions of the Act to be unconstitutional
and granting certain injunctive relief. The jurisdiction of
this Court has been invoked by Appellants pursuant to
28 U.S.C. §§ 1252 and 1253.
Pursuant to stipulation of all counsel, briefs on the
merits are being filed in advance of the determination of
this Court as to probable jurisdiction, in order to facilitate
an expedited hearing schedule as sought by all parties in a
joint motion previously filed with the Court.
( Continued footnote)
2 r
Constitutional and Statutory Provisions Involved
Article I, Section 8, Clauses 3 and 4, of the United States
Constitution, in pertinent part provide :
The Congress shall have power
To regulate Commerce with foreign Nations and
among the several States . . .;
To establish . . uniform Laws on the subject of
Bankruptcies throughout the United States
Article I, Section 9, Clause 7, provides :
No Money shall be drawn from the Treasury
but in Consequence of Appropriations made by
Law:.
The Fifth Amendment to the United States Constitu-
tion provides in pertinent part:
No person ... shall be . . . deprived of.
property, without due process of law; nor shall
private property be taken for public use, without
just compensation.“
The Rail Act, Pub. L. No. 93-236, 87 Stat. 985, 45 U.S.C.
§§ 701-93, is set forth in full at JA 391-431.
The Tucker Act, as amended, 28 U.S.C. § 1491, provides
in pertinent part:
The Court of Claims shall have jurisdiction to
render judgment upon any claim against the United
States founded either upon the Constitution, or any
Act of Congress, or any regulation of an executive
department, or upon any express or implied con-
tract with the United States, or for liquidated or
unliquidated damages in cases not sounding in
tort....”’
4
Questions Presented
1. Was the Court below correct in concluding that the
Rail Act required the Penn Central estate to continue rail
operations at massive and irreversible losses, without as-
sur ice of adequate compensation, and that the Act in this
tespect was repugnant to the Fifth Amendment to the
United States Constitution?
2. Did the Court below correctly hold that no recourse
pursuant to the Tucker Act exists so as to afford Appellees
an adequate remedy at law for the constitutional deficien-
cies resulting from the operation of the Rail Act?
3. Did the Court below abuse its discretion in issuing
the injunctions contained in its order, or in shaping their
respective terms?
4. Can the result reached by the Court below be sus-
tained on alternative grounds in that:
(a) the Act effects an uncompensated taking of
Appellees’ property ;
(b) the Act constitutes a law on the subject of
bankruptcies which is void because, by its terms,
it is not uniform throughout the United States; or
(e) the procedures mandated by the Act deprive
Appellees of their property without due process of
law!
Statement of the Case
I. Nature of Case and Proceedings Below
During 1974 the financial crisis long impending among
the railroads of the Northeast and Midwest moved swiftly
to a legal climax. In response to the apparent inability
of the seven bankrupt Class I railroads in the region, most
particularly Penn Central, to achieve reorganization under
Section 77 of the Bankruptcy Act, 11 U.S.C. §205 (See-
tion 77°’), Congress passed and the President signed the
Rail Act, effective on January 2, 1974.
The Act immediately encountered broad-based chal-
lenges, posed by the Penn Central Trustees (the ‘‘Trus-
tees’’) and all classes of its security holders, in proceedings
both under and outside the Act.
Proceeding under Section 207(b) of the Act, although
reserving the rights of all parties to object to its terms,
the Penn Central Reorganization Court held, on May 2,
1974, that Penn Central was not capable of being reorgan-
ized on an income basis within a reasonable time (herein-
Court had before it, in addition to the papers originally
filed in the respective plenary actions, a stipulation of
? Reorganization Court Memorandum and Order No. 1543, May
2, 1974 (JA 84 ef seq.).
Pursuant to the Second Sentence of § 207(b) of the Regional Rail
Reorganization Act of 1973, July 2, 1974 (JA 124 ef seq.). An
appeal from that determination has been taken to the Special Court
established pursuant to the Act and is, as of the date of this brief,
sub judice. The Act requires the Special Court to decide als
within 80 days after they were noticed so that the Special
must decide the appeal after this brief is submitted but before this
Court reconvenes. Appelices will, if file a supplemental
|
|
;
facts (JA 203-09) and, by agreement of the parties (JA
197-99), specified portions of the record previously devel-
oped in the Penn Central reorganization proceedings.
The Court below granted plaintiffs’ motions in
denied the eross-motions of the defendants and the inter.
vening defendants, filed its opinions and entered its order
on June 25, 1974. In specified respects, the order declared
the Act unconstitutional and enjoined its effectuation.
Il. The Penn Central Reorganization:
Backdrop for the Rail Act
rr
in the transportation system of
— . sapiens of tho Waited —
route miles of the rail trackage in that region (JA 212-13),
is at the center of the crisis. Reasons for the declining
prospects of rail transportation in the region abound, but
most certainly they include competition from millions of
automobiles and multiple schedules of competitive jet air
service which have blighted the prospects for railroad
passenger transportation while the traditional railroad
In re Central R.R. of N.J., 485 F. 2d 208, 217 (3d Cir. 1
(Aldisert, J., dissenting), cert. denied, 414 U.S. 1131 —
Central and Other — oct Cnmmetee ta
cember 1972 at 220 ef seq. - -
7
which have substantially aided their operations at little
or no user cost.
On June 21, 1970, Penn Central petitioned for reorgan-
ization under Section 77 and shortly thereafter Trustees
duly appointed and confirmed began to oversee its reorgan-
ization.
Penn Central had been in severe financial straits for
several years. During the years ended December 31, 1968
and 1969, it had sustained ordinary income losses of
$41,914,598 and $91,631,726, respectively. After the Trus-
tees took over, the massive losses continued to mount:
ordinary income losses of $179,700,000 were sustained dur-
ing the period from June 21, 1970 to December 31, 1970."
The Trustees quickly determined that the prospects for
improvement in Penn Central's operations, absent change
over which neither they nor the Reorganization Court had
any control, were minimal, and they so reported to the
Court. Prelim. Rep. Concerning Premises for Reorganiza-
tion, Feb. 10, 1971 (J. Doe. No. 1). They specified there
that there could be no hope of profitable operation without
massive increases in freight shipments and revenues and
without fundamental changes in four respects, which came
to be known as the conditions to viability’’: (1) elimina-
tion of passenger service losses; (2) plant rationalization
(primarily through abandonment of excess or uneconomic
lines): (3) more flexible rate and division procedures; and
(4) elimination of excess labor costs. The Trustees con-
5 Penn Central Annual Report on Form A to the Interstate Com-
merce Commission (“ICC”) for the year ended December 31, 1969
(includes operations of The New York, New Haven and Hartford
Railroad Company from date of acquisition, December 31, 1968).
* Finding of Fact No. 4, 120-Day Decision (JA 84, 89-90).
Subsequent citations to such Findings are cited as “FF — See
also Affidavit of Ernest R. Varalli, March 21, 1974 (J. Doc. No. 19)
(hereinafter “Varalli affid.”), Ex. T-1.
cluded their very first report by emphasizing what is still
the heart of the matter:
But the overriding problem of Penn Central
remains—the problem that must be overcome if it
is to stay in the private enterprise system. It is
found in an obligation to perform as a public service
company in certain areas and under certain condi-
tions which simply do not lend themselves to profit-
able operations, no matter whe the operator is,
or how efficient. The only possible remedy here is
for public authority to lend its hand to a speedy
elimination of the conditions which produce the
losses, or respond with adequate compensation if it
insists upon a continuance of the conditions. Id.
at 15.
To date none of the four specified conditions to viability
has been achieved.’ The issues presented by this appeal
relate primarily to the constitutional adequacy of the Rail
Act which, as events unfolded, emerged as the response
of the ‘‘publie authority“.
The financial crisis continued to deepen. In order to
avert an immediate and severe cash shortage, the Trustees
issued $100 million in Trustees’ i for which a
federal guaranty was required.* In return for the guaranty,
the Government received a lien ahead of existing creditors
on substantially all of Penn Central’s properties.“
aa Decision (JA 88). See also 180-Day Decision (JA
Emergency Rail Services Act of 1970, 45 U.S.C. §§ 661 ef seg.
* See Order No. 124 (Doc. No. 704). (References “Doc
No. — are to documents of record in the Penn Central —
uon proceedings. ) $50 million principal amount of the Trustees’
ee
In addition to the infusion of funds from a new para-
mount lien of that magnitude, the Trustees were required
to, and did: (1) apply to rail operations an 3
$155 million from non-recurring cash items (Stip. 0.
11(a), (b),“ JA 206-07; FF 4, JA 89-90 ; baw
Ex. T-1, J. Doe. No. 19); (2) utilize approximately -
million of non-rail income for rail operations (Stip. No.
lite), JA 207);"* and (3) SS
taxes ($241 million *
interest on mortgage and collateral trust debt ($104 —
— — — debt sufßeient
bring the total of all such
Nos. 12, 18, 14, JA 907-48; FF 4, JA 60.90; Vareli old.
Ex. T-1, J. Doe. No. 19). In addition, the Trustees ＋
some $665 million of expenditures 2 4
way. (Affidavit of Clarence E. Jackman, March "ae on
(J. Doc. No. 18) (hereinafter ‘Jackman affid.’’) ;
JA 91-92.)
3
f
5
„If these three changes [plant rationalization,
personnel reduction, passenger service compensa-
ve parties below have agreed that certain facts set out in a
tion dated April 15, 1974 entered in the record below are
deemed to be true. References to “Stip. No. — are to items
that stipulation (JA 203-11).
Certain other efforts of the Trustees to obtain cash from non-
recurring or non-rail sources were unsuccessful. See, e., In re
Penn Central Transp. Co., 484 F.2d 323 (34 Cir. 1973), holding
that major
real estate properties was
appropriate except —
10
tion] were not to be made—or if there were undue
delay in making them—there would not be, in the
judgment of the Trustees, the basis for reorganizing
the Penn Central as a private enterprise. This con-
clusion is based on studies and analyses which show
that maximally effective self-help measures alone—
taken with the most reliable available estimates of
traffic increases in the future—would result in con-
tinued losses during the next four years and would
show only marginal earnings by 1976. That would
be too little and too late—for there would have been
unconscionable and possibly unconstitutional erosion
of the Debtor's estate in the meantime. This judg-
ment could only be invalidated by an unlikely con-
fluence of favorable developments including a spec-
tacular and sustained increase in revenues far beyond
what is here forecast.’’ J. Doc. No. 4 at 2. (Latter
emphasis added.)
The emphasized passage of the report struck for the first
time what was to be the keynote of the reorganization—and
of this litigation—namely the ‘‘unconscionable and uncon-
stitutional’’ results of continuing the railroad's operations
in the face of intractable losses and erosion.
The Trustees’ attempt to effectuate a traditional in-
come-based reorganization of Penn Central through their
own efforts and with the voluntary cooperation of other
parties, including governmental authorities, shippers and
labor, proved unavailing. The Trustees recognized this,
and in their January 1, 1973 Report (J. Doe. No. 8 at 1),
publicly avowed that the railroad was not reorganizable in
a traditional sense, announcing that they ‘‘have concluded
that without government financial assistance for improve-
ment of the railroad, a reorganization of Penn Central can-
not be achieved in 1976, as they had considered possible.
The financial assistance mentioned was to be used to
improve Penn Central's plant and provide more serviceable
—
— —
11
equipment so that projected traffic increases ‘‘upon which
the reorganization depends could be achieved. The Trus-
tees shortly thereafter told the Court that the amount
needed was between $600 million and $800 million. Trustees’
Report, Feb. 1, 1973 (J. Doe. No. 9) at 2. And the Trustees
again drove home the point:
It is clear that the status quo will not permit an
income based reorganization. Indeed, because of
the accumulation of losses and unpaid priority
charges, a continuation of present operations would
do violence to the constitutional prohibition against
the using of private property for a public purpose
without adequate compensation. Id. at 7.
The continued emphasis by the Trustees on the constitu-
tional problems of interim loss operations is noteworthy.
of a hypothetical ‘‘core’’ Penn Central system developed
by Wyer, Dick & Co. (‘‘Wyer, Dick’’) for the Trustees.“
These studies established that even if the most optimistic
be studies were introduced into evidence by the Trustees in
12
predicted » were achieved instantiy, incall
the instant abandonment of 6,000 route miles (30%) of
trackage and the physical elimination of passenger opera-
0 (as distinet f | J, the —
15,000 mile core of the Penn Central system could not
generate income available for fixed charges until 1976.
Nevertheless, in order to mitigate the drain on the
estate, the Trustees filed applications with the ICC to
Stafford, 360 F.Supp. 1057 (S.D.N.Y. 1973), af d, No.
73-2496 (2d Cir., June 18, 1974),"* only some 1,400 miles
of track had been authorized for abandonment.” Since
(“TBS”), consultants Trustees. The projections were criti-
cized as overly optimistic by Mr. Shannon, President of Wyer, Dick
(ICC Ex. 19 at 9-14). The May 1973 projections were, in fact, the
third such forecast made by TBS at the Trustees’ request, and in each
successive forecast the total freight tonnage forecast was revised
downward. Statement of Carl S. Sloane, NC Ex. 17 (J. Doc. No
38) at 10. Mr. Sloane also acknowledged that “external factors
~ —— — —
In the face of the still deepening crisis, and fully aware
Whether the constitutional limit [of interim
erosion) 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
14
The essence of §77 of the Bankruptey Act is
that the legal remedies normally available to credi-
tors may be held in suspension for a reasonable time
in order to permit rehabilitation of the enterprise.
Whenever it appears that there is no genuine like-
lihood of ultimate success, the legal and constitu-
tional justification for restraining creditors from
exercising their normal remedies disappears. .. .
[I]t is apparent that the required profitability can-
not be achieved unless substantial further progress
is made in the immediate future to meet the con-
ditions upon which the projected profitability is
based.
5 *
. On the basis of the record to date, it appears
highly doubtful that the Debtor could properly be
permitted to continue to operate on its present basis
beyond October 1, 1973.“ In re Penn Central Transp.
Co., 355 F.Supp. 1343, 1344-46 (E.D. Pa. 1973).
Again, the emphasis on constitutional problems of con-
tinued operations should be noted.
The Trustees complied with the Court’s directive and
fied a plas of reorganization for Penn Central which,
briefly stuted, contemplated the orderly liquidation of Penn
Central’s rail assets and its reorganization around its other
The wlan was filed with the ICC, as were other
plans proposed by the New Haven Trustee and Penn Cen-
tral Company, and hearings before the ICC (Fin. Dkt. No.
26241), in which all interested parties participated, con-
Nestes.“
** Shortly before the Trustees’ plan was filed, fifteen Lessors
(“Secondary Debtors”) also filed petitions for reorganization under
Section 77 in conjunction with the Penn Central reorganization
proceedines. The Secondary Debtors own, or themselves lease from
others, 9,304 miles (or 46.9% ) of the 19,850 miles of road
operated by Penn Central (JA 105, 212-13). None of the leases
with the Secondary Debtors has been affirmed or rejected (JA 105).
The proposed plan of reorganization also dealt with the
Debtors, since their fate is inextricably intertwined with that of
Penn Central.
——— a —
—— —
15
tinued through the summer of 1973. On October 1, 1973,
the ICC issued its Preliminary Report“, holding, inter
alia, that the Trustees’ plan was not a plan of reorgan-
ization within the meaning of section 77(b) of the Bank-
ruptey Act’’*’ and refusing to certify it or any other
plan of reorganization to the Reorganization Court for
further consideration. The ICC Report also stated that
further hearings would be held in the matter. None was
ever schedule or held.
Following the refusal of the 100 to certify a plan of
reorganization, the New Haven Trustee, on October 9, 1973,
moved before the Reorganization Court for dismissal of
the Penn Central reorganization proceedings under Section
77(g) and institution of an equity receivership as con-
templated by Section 77(i) (J. Doe. No. 13)."*
The Court held a hearing in October 1973 to consider
the implications of ‘he ICC order. At that hearing, the
Under Secretary of Transportation reported to the Court
on the status of the legislative effort (see excerpt at J. Doc.
No. 24) and largely on his representations that adequate
federal assistance was imminent, the Court agreed to bide
its time.” It is fair to conelude that the Reorganization
Court would have reluctantly terminated rail operations
by the end of 1973 had not the Government held out the
promise that help would be forthcoming.
*T ICC Report (J. Doc. No. 54) at 111,
By petition filed in March, 1973 (J. Doc. No. 12), the New
Haven Trustee had sought, inter alia, the fixing of a date for termi-
nation of operations. The petition was never set down for hearing.
'* After the Act was passed, further petitions were filed by the
Institutional Investors Penn Central Group and certain indenture
trustees on March 7, 1974 seeking termination of rail operations
(Doc. No. 7135) and by Penn Central Company on April 4, 1974
seeking termination of rail operations and severance of rail proper-
R
16
During 1973, the financial condition and prospects of
Penn Central continued to worsen: the system lost $189
million from operations in 1973.“ In early 1974 Penn
Central had approximately $10,800,000 of installment pay-
ments due on equipment obligations which it was unable
to meet and, accordingly, applied for an ‘‘emergency’’
grant under Section 213 of the Act (J. Doc. No. 14). How-
ever, the Secretary of Transportation refused to make
an outright grant as apparently called for by the Act but
insisted on acquiring a pro tanto interest in the Trustees’
equity in the equipment involved equivalent to the amount
of the payments made. Notwithstanding outright opposi-
tion to the transaction by some creditor interests and the
position of most others that the transaction was contrary
to the intent of the Act, the Reorganization Court approved
the transaction, stating, “There is no alternative“ (J.
Doc. Nos. 29, 30). Later, on April 30, 1974, the Secretary
authorized and the Reorganization Court approved an
outright grant of an additional $18,000,000 under Section
213 to stave off yet another cash crisis (J. Doc. No. 31).
III. The Impact of Operations During Reorganiza-
tion of the Penn Central Estate
The events described above provide merely a glimpse
of the massive evidence before the Court below document-
ing the inexorable trend in the Penn Central reorganiza-
tion proceedings towards continual and irreversible losses,
the continued dissipation of non-recurring and non-rail
income in non-remunerative rail operations, and the con-
tinued substantial deterioration of plant and equipment.
Some specific facts point up the magnitude of this
financial and physical erosion more graphically:
(1) During the period from June 21, 1970 to December
31, 1973, Penn Central’s operations resulted in losses in
ordinary income, calculated in accordance with ICC regula-
*° FF 1, 4, JA 89-90; Varalli affid., J. Doc. No. 19, Ex. I I.
17
tions, as follows (FF 1, 4, JA 89-90; Varalli affid., J. Doc.
No. 19, Ex. T-1):
June 21, 1970 to December 31, 1970 .... $179,700,000
Year ended December 31, 1971 ........ 284,500,000
Year ended December 31, 1972 ........ 197,900,000
Year ended December 31, 1973 ........ 189,000,000
aa $851,100,000
(2) During that period, non-recurring income approxi-
mating $155,300,000 was expended to sustain operations
(FF 3, 4, JA 89-90; Varalli affid., J. Doc. No. 19, Ex. T- I).
(3) The amount set forth in (2) above does not in-
clude the additional amount of approximately $28,800,000
received under Section 213 of the Act (see FF 4, JA 90).
(4) During that period, $157,000,000 in non-rail in-
come was utilized in operating Penn Central’s rail proper-
ties (Stip. No. 11(e), JA 207, 211).
(5) During that period, unpaid and deferred real estate
taxes, leased line rentals and interest on debt obligations
aggregated approximately $605,900,000 (FF 2, 4, JA 89-90;
Varalli affid., J. Doc. No. 19, Ex. T. I).
(6) Deferral of maintenance of way spread from
branch, side and yard trackage to mainline trackage, and
deterioration of portions of the main line accelerated.
That in turn resulted in, among other things, slow orders
being imposed in 1974 on 8,475 track miles, up from 2,100
track miles in 1970. A total of 6,900 track miles was
classified by the Federal Rail Administration as not being
in adequate condition to meet the minimum standard
for operational track speed of 10 miles per hour (49 C. F. R.
§$§ 213 et seq.). The deterioration of the roadway increased
train time, decreased service capacity and depressed the
system revenues still further (FF 7, 8, 9, 10, JA 91-92;
Jackman affid., J. Doc. No. 18, at 3-4).
18
(7) Even assuming annual expenditures of $225 to $250
million for normalized maintenance of way, an additional
#665 million (in non-inflated dollars) must be expended
to catch up with past deferred maintenance. The amount
of deferred maintenance is so great that it would require
eight years to make up, even if all the money were presently
available (FF 10, JA 91-92; see Jackman affid., J. Doe.
No. 18, at 4).
It cannot be seriously disputed that if Penn Central is
forced to continue operations on the present basis, addi-
tional massive financial losses and deterioration of plant
will result. The Reorganization Court found reasonable—
upon uncontradicted competent expert testimony*'—pro-
jected ordinary income losses for Penn Central in the years
1974-1978 of the following magnitude:
— ree $ (237,700,000)
— (196,300,000 )
BO ee (136,000,000 )
SP + vkbepsscutepdtecstionc (96,000,000 )
Denen (56,200,000)
(FF 12-19, JA 92-95; Affidavit of Carl S. Sloane, March 25,
1974 (J. Doe. No. 16) (hereinafter Sloane affid.’’) at 7-11;
Varalli affid., J. Doe. No. 19, at 4, Ex. T-2).
At
lants in any form attempted to off countervailing evidence
to Penn Central's prospects, and the findings of the Reorganization
as to the reasonably likely losses, accumulation of priority
The foregoing projections are based upon assumed con-
tinued diversion to rail operations of non-rail income. The
magnitude of ordinary income losses reasonably projected
for the same period on a rail-operations-only basis was
found to be as follows:
6 66 „„ „„ 640 $ (236,700,000)
1 (206. 400,000)
1 (153.900, 000)
1 (120,300,000)
9 96968＋3ů—— 4 (82,300,000)
(FF 24, 25, JA 98-99; Varalli affid., J. Doe. No. 19, Ex. T-3).
Neither of these projections reflects the further costs
of eliminating deferred maintenance (FF 27, JA 100).
If, on the one hand, such costs—found by the Reorganiza-
tion Court to be reasonably estimated at $665 million over
eight years (FF 10, JA 91-92, n. 2)—were to be charged
inst operations, the resultant losses would be corre-
spondingly greater. If, on the other hand, the amounts
necessary to cure deferred maintenance are not expended,
the physical plant of Penn Central will continue to deteri-
orate, with a resultant loss of traffic and accelerated de-
cline in revenues. (FF 10, 22, JA 91-92, 97; Sloane affid.,
J. Doe. No. 16, at 11.)
It is also reasonable to expect that in the period 1974-
1978, as much as $310,700,000 in local taxes, $137,100,000
in bond interest and $140,000,000 in leased line rentals will
accrue, but not be paid. (FF 23, JA 98; Guest affid., J.
Doe. No. 20, at 9-10.)
In summary, from the inception of the Penn Central re-
organization proceedings, despite substantial efforts by the
Trustees, a traditional income-based reorganization was
never in the cards. It is, of course, now both conceded
(Stip. Nos. 8, 9, JA 206) and finally found (JA 103) that
such reorganization is not possible. The Trustees realized
early that without substantial achievement of objectives
not within their control or that of the Reorganization Court
— elimination of plant redundancy (primarily through
major line abandonments), elimination of excess labor, full
reimbursement for passenger service and improvement in
rates and divisions—Penn Central’s situation was hope-
less. None of those conditions to viability came close to
fruition. The inevitable result was that the financial
prospects of Penn Central deteriorated calamitously.
IV. Proceedings under the Rail Act
By 1973, six Class I roads in the Northeast and Mid-
west, in addition to Penn Central, were seeking reorganiza-
tion under Section 77.“ And there was an imminent pos-
sibility that Penn Central or one or more of the other bank-
rupt lines might be forced to discontinue operations,
whether by reason of lack of cash, physical deterioration
or an order of a reorganization court to prevent unconsti-
tutiona! erosion. Congress sought a solution to this crisis
through most of 1973. The result is the Rail Act.
Proceeding under that Act, the Reorganization Court
entered its 120-Day Decision on May 2, 1973 with respect
to both Penn Central (JA 84-103) and the Secondary
Debtors (JA 104-20). As to Penn Central, the Court held,
in accordance with the views expressed by virtually every
participant in the hearings, that Penn Central is not re-
organizable on an income basis within a reasonable time
In re Ann Arbor Railroad Company, Bky. No. 4-90833, E.D.
In re Boston & Maine Corporation, Bky. No. 70-250-F, D. Mass.
. 3 Central Railroad Company of New Jersey, No. B401-67,
In re Erie Lackawanna Railway Company, No. 572-27
43 Bky. No. 70-342, E. D.
In re Reading Company, Bky. No. 71-828, E. D. Pa,
21
under Section 77 within the meaning of Section 207(b) of
the Act (JA 84-103). Having so found, the Court con-
sidered it unnecessary to make the public interest determi-
nation contemplated by Section 207 (b).“
Thereafter, the Reorganization Court, having held full
evidentiary hearings, entered its 180-Day Decision finding
that the Act does not provide a process which is fair and
equitable to the estate of Penn Central in the following
respects (JA 149-51):
„1. The Act requires [Penn Central] to continue
to operate the railroad, for its own account, until
such time as the Final System Plan is implemented.
There is no prospect that such operations can be
conducted, except at huge losses. The Act makes no
provision for compensation to the estate or its cred-
itors for the resulting erosion.
2. The Act does not permit judicial determina-
tions with respect to the values of the properties
to be conveyed, or the value and adequacy of the
consideration to be paid for such properties, in ad-
vance of the conveyance, and the subsequent judicial
review of these matters does not affect the finality
of the conveyance.
3. Since USRA, with the approval of Congress,
to determine the nature of the consideration to
is
20 The New Haven Trustee (solely on jurisdictional grounds) and
the Commonwealth of Pennsylvania the 120-Day
to the Special Court, but the appeals were dismissed. Those
grounds. The Court may wish to take notice of the fact
the courts overseeing the reorganizations of the Erie Lackawanna
the a
11710
f
F
i
i
i
11
g *
24
:
17
|
:
be paid for the transferred assets, and judicial
remedies are limited to reallocation of the securi-
ties proposed by USRA and the entry of a deficiency
judgment against Conrail, the Act does not assure
that the [Penn Central] estate will actually receive
the equivalent of the ‘constitutional minimum’ value
of the properties conveyed.
4. It is beyond the power of a reorganization
court, including the Special Court, to order the con-
veyance of properties free and clear of liens in ex-
change for common stock, except perhaps to the
extent that the sale price exceeds the net liquidation
value of the property conveyed. This is particularly
true where there is no guarantee of the value of the
stock or its future earnings.
5. Implementation of the Final System Plan pur-
suant to the Act cannot be regarded as equivalent
to consummation of a plan of reorganization, or a
step in or part of such a plan of reorganization,
because (a) the conveyances would become irrevoc-
able before there would be any opportunity for par-
ticipation by the estate or its creditors in the valua-
tion process, (b) the conveyances would become
irrevocable in advance of any judicial review of fair-
ness, valuations, ete.; (e) the conveyances would be-
come irrevocable before there could be any determi-
nation of the relative rights of creditors and the
value of their security or their treatment in the
reorganization process; the creditors would merely
lose their liens on the properties conveyed.
6. Implementation of the Final System Plan can-
not be legally justified as a sale of property by the
Trustees, or as consummation of a reorganization
pian, for the reasons specified above. To the extent
that the Act represents an exercise of the power of
eminent domain, it is unfair and inequitable, in that
it does not provide for just compensation in cash or
its equivalent, assured in advance of the conveyance.
There is no other basis upon which the constitutional
validity, or the fairness and equity, of implementa-
tion of the Act can be upheld.
7. Under the provisions of the Act, the only
judicial determinations which can have significant
effect in protecting the rights of the railroad estates
and their creditors must be made at a time when
substantially all of the information pertinent to
those judicial decisions is unknown and unknow-
able.“
Summary of Argument
The Court below did not, as Appellants would have
it, launch an indiscriminate and premature attack upon the
Rail Act. Rather, upon a fully developed record.“ the
Court found clear and present harm in the impact of certain
provisions of the Act upon constitutionally protected
interests of the plaintiffs. It used its equitable powers to
tailor an injunctive decree to fit tightly the wrongs which
it found. In this it was neither premature nor extravagant ;
it was correct and prudent. Its order is sustainable not only
upon the grounds which it assigned for its action, but also
upon other grounds which, in the exercise of its judicial
restraint, it declined to reach.
The Court below found Section 304(f) of the Act to be
unconstitutional in that it forced interim rail operations
upon Penn Central until a Final System Plan was adopted.
Since these operations were incontrovertibly at massive
losses, the Court found that they posed a serious likelihood
that the bankrupt estate would be unconstitutionally eroded
before a Final System Plan could be effectuated. Holding
that Section 303 of the Act did not assure compensation
for the losses thus incurred, the Court concluded that the
Appellants attack this conclusion upon the grounds that
(a) the Act in their view does not require such continued
i i = as Congress delays adoption of a
ay ne — — this interval, permissive
abandonments under Section 304(f) could not cure the
effect of massive losses being sustained by the estate, no
would public groups likely acquiesce in any such abandon-
ment program.
Because Section 304(f) in as many words precludes ony
federal court from authorizing abandonment or discon —
uance of service, the Court below properly recognized
it had before it the last clear chance to prevent =
cedures of the Act from exacting an unconstitutional —
of the estate and the claimants entitled to participate
continue at enormous rates, intermi :
not pose a demonstrably immediate threa —
Central estate. Their contention that — nthe Re Rane
The vice of the Act in this respect is that it compels
interim loss operations without providing either assurance
of compensation or a reasonable present assurance of
reorganizability. That this is done for an ostensible
public purpose merely poses the constitutional question;
it does not answer it. The Fifth Amendment presumes
that takings are for a public use. It does not excuse the
payment of just compensation on that account; it com-
mands just compensation on that account.
This Court has always recognized the principle that
when public purposes are to be served, in all fairness and
equity the public rather than private parties should bear
the costs. Armstrong v. United States, 364 U.S. 40, 49;
Louisville Joint Stock Land Bank v. Radford, 295 U.S.
provision of a public good, which is not. Compare Atchison,
T. 4 SF. Ry. v. Public Util. Comm’n, 346 U.S. 346, with
Nashville, C., 4 St. L. Ry. v. Walters, 294 U.S. 405. This
well-settled distinction is basic to the line of cases, epitom-
ized by Brooks-Scanlon Co. v. Railroad Comm n, 251 U.S.
396, which hold it unconstitutional to compel continued
* — — de
justification for indefinite suspension of their rights. See,
o. g., New Haven Inclusion Cases, 399 U.S. at 460-61, 466.
Here, as is apparently conceded (J. Doc. No. 64 at 68-
69), the Rail Act in its terms does not provide adequate
funding to assure just compensation for the interim erosion
392. Although the New Haven eorganization appears
to have been the model for the Rail Act, the latter radically
differs from the former in certain material respects which
highlight the unconstitutional impositions of the Act.
Most notably: The compulsory character of the Act con-
trasts with the voluntary nature of the New Haven in-
clusion. The absence of any judicial supervision of the
procedures of the Act as they lead to inclusion in the Con-
solidated Rail Corporation created by the Act (‘‘Conrail’’)
contrasts with the careful scrutiny accorded the New Haven
reorganization and the terms of its inclusion in Penn
Central. And the assurance enjoyed by the New Haven
investors (woebegone as it turned out to be) that they
would receive an assured per parcel liquidation value for
their properties when those properties were included in
a mammoth railroad with assets of a value twenty times
larger than the value of the conveyed assets, contrasts
starkly with the legitimate pessimism that must be accorded
the prospect that fair value for the conveyed rail proper-
ties can be eked out of a Conrail which amalgamates
portions of the bankrupt railroads themselves.
The deficiencies of compenss tion intrinsic to the Act
are not met by any putative remedy at law under the
Tucker Act.
Analysis of the Rail Act itself and a fair reading
of its legislative history demonstrate that Congress made
explicit provision in the Act (a) for a mechanism of com-
pensation that was to satisfy the ‘‘constitutional minimum’’
to which the estates were entitled (and thus exhaust any
cause of action which could lie in the Court of Claims)
and (b) for a Special Court in which the valuation and
compensation process was exclusively vested.
30
The legislative history and its epilogue show that
Congress affirmatively intended that claimants against
the bankrupt estates not have recourse to the United States
Treasury for redress of any grievances allegedly done
them under the Act. This conclusion is inescapable in the
light of repeated declarations in the conference report,
the reports of Senate and House Committees, and the
statements of the authors and managers of the bill in the
course of debate in both Houses. It is reemphasized further
by the explicit statements of the members of the sponsor-
ing House Committee in oversight hearings conducted
after the Government and USRA had submitted to the
Court below a brief which held out a Tucker Act remedy
as an adequate remedy for any problems of the Act. Lest
any doubt remain about the subject, thirty-seven members
of Congress, ineluding certain sponsors of the Act, have
filed with this Court a brief amicus curiae which concludes
with the categorical observation that if a deficiency judg-
ment against the United States under the Tucker Act
‘tis necessary to make this Act constitutional, the Act
must fall since the legislative history and the language of
the Act are clear that no deficiency judgment against the
U.S. is authorized by the Act.’’ Brief Amicus Curiae at 22.
All of this makes clear that the Tucker Act is not avail-
able to supplement the constitutional deficiencies of the
Rail Act, as a matter of law. Moreover, the uncertainty
created by the explicit declaration of Congress and Con-
gressmen that such recourse would not be tolerated renders
the putative remedy at law inadequate,
The injunetive relief entered below was timely and
proper. It was timely because under the provisions of the
Act imminent constitutional harm threatened plaintiffs
and there was no other appropriate method of redress.
31
The relief was proper because it was tailored to prevent
only those wrongs which were clearly ripe and went only
so far as necessary to prevent their occurrence. The in-
junetive provisions show, when read together, a compell-
ing and proper concern that the Act ousted the federal
courts from their proper functions of preventing and
curing constitutional violations. Section %304(f), which
provides for continued operations ‘‘notwithstanding’’ any
contrary decree of a federal court, was enjoined only
to the extent it purported to authorize disregard of
such decrees. Section 303, which precludes the Special
Court from refusing to transfer rail assets, irrespective
of the inadequacy of compensation for erosion, was en-
joined only insofar as inadequate compensation ensued
from that mechanistic provision. So much of Section
207(b) as required dismissal of the pending Section 77
proceeding—plainly an im terrorem provision to inhibit
the reorganization courts in the 180-day proceedings—was
excised to abate that threat.
Finally, certification of a Final System Plan was en-
joined, not irrationally, as Appellants suggest, but to
preserve the continuing jurisdiction of the federal courts
over the subject matter. By the terms of Section 303(b) (2)
of the Act, upon certification of a Final System Plan,
the procedures thereafter become mandatory, the harm
is inexorable and ‘‘such conveyances [required by the Final
System Plan] shall not be restrained or enjoined by any
court.“ The injunction against certification of a plan
was necessary to prevent ultimate ouster from jurisdic-
tion of the federal courts and to protect the enforceability
of the writs already issued.
None of this was an abuse of discretion; it was, instead,
an extraordinarily astute use of discretion in the face of an
Act posing enormous provocations to the equity jurisdic-
tion of the Court below.
IV.
The restraint exercised by the Court below is further
illustrated by the fact that it refrained from reaching
several issues presented to it for decision and decided cer-
tain of the issues which it did dispose of on narrow rather
than broad grounds. Its order is, therefore, sustainable, not
only on the grounds which it assigned, but upon other
grounds as well.
For example: the Act does effect an uncompensated
taking of Appellees’ property by means of compulsory con-
veyances without the just compensation required for such
a taking. The provisions of the Act which the Court below
enjoined were all integral parts of the uncompensated tak-
ing and the writ entered below is justifiable on that alterna-
tive ground.
Provisions of the Act, most particularly Sections 207
and 303, amend or supersede Section 77 and significantly
affect the rights of creditors in respect of the bankrupt
estate. They are, consequently, laws on the subject of
bankruptcies, but they are in terms applicable only to a
region defined in the Act as embracing seventeen states of
the Northeast and Midwest. They run afoul of the con-
stitutional command that laws on the subject of bankrupt-
cies shall be uniform throughout the United States.
Hanover Nat’! Bank v. Moyses, 186 U.S. 181, 188. The coin-
eidence that the only Class I railroads in reorganization
lie within the region does not justify or permit a departure
from the well-established rule that a bankruptcy law must
in terms be geographically uniform. The provisions en-
joined below are of this character and the writ enjoining
their enforcement may be sustained on this alternative
ground as well.
Finally, the procedures of the Act strip the federal judi-
ciary of its power to exercise an informed discretion over
the fundamental issue of whether the estate and its claim-
ants are receiving fair and equitable treatment. At the
only jurcture under the Act when the reorganization court
is allowed to make a judgment about the fairness of the
process of the Act, it is disabled by the provisions of the
Act from knowing what the outcome of that process can be.
When the Special Court can know what the outcome of the
Final System Plan may be, it is specifically disabled from
doing anything about it. No other court may intervene at
all to protect the estate or its claimants once the Act takes
effect over them. These provisions separately and together
effect a deprivation of the property of Appellees without
the fundamental elements of due process. The operative
provisions of the Act that would lead to this result are also
properly enjoined on that basis.
Appellants attack that determination essentially on the
grounds that: (a) such interim operations are not required ;
(b) the impact of such continuing operations at massive
losses is not erosive of the estate; and (c) even if continued
operations were required under conditions that eroded the
34
estate, such a result is constitutionally permissible because
of the public interest character of the railroad industry.
Appellees urge this Court to reject these contentions.
(1) Appellants’ first argument is based upon a labored
reading of the statute designed to suggest that interim op-
erations of Penn Central’s system may not be required at
all. This argument is at odds with the language, policy and
history of the Act, as well as practical considerations which
this Court should not ignore.
(2) Appellants’ second contention asks this Court to
find that all the parties to the reorganization proceeding,
including the Penn Central Trustees, as well as all the
courts which have examined the condition of the estate in
recent months, are irresponsibly wrong in their uniform
view that the massive losses being sustained by the estate
will continue and will erode someone’s interest in the estate
during the interim period. This argument is based upon
an unjustifiable optimism in the face of an appalling finan-
cial picture, and upon a construct of ‘‘erosion’’ which is
wrong in theory and in fact.
(3) Finally, Appellants’ third contention either requires
a blind deference to Congressional hopes that the Act can
create a possibility of successful reorganization where none
before existed, in the teeth of clear evidence to the con-
trary, or invites this Court to announce an unprecedented
rule that industries affected with a public interest may be
temporarily expropriated without assurance of fair com-
pensation. That argument, however, is unsupported and
unsupportable by evidence in the record or by any prece-
dent or principle of law to which this Court has ever shown
hospitality.
A. The Act Does Mandate Interim Operation of the
Penn Central System.
Section 304(f), which the Court below held required
interim operations, reads in full as follows:
Interim Abandonment.—After the date of enact-
ment of this Act, no railroad in reorganization may
discontinue service or abandon any line of railroad
other than in accordance with the provisions of this
Act, unless it is authorized to do so by the Associa-
tion [USRA] and unless no affected State or local or
regional transportation authority reasonably opposes
such action, notwithstanding 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.“
Appellants’ contention that this language can be read to
permit termination of rail operations is unconvincing and
was properly rejected below.
An ultimate purpose of the Act was to obviate any
threat of termination of operations by any railroad in
reorganization until the essential rail properties could be
identified and transferred to Conrail. In service of this
objective, Section 304(f) specifically provides that after
the date of enactment ‘‘no railroad in reorganization may
discontinue service or abandon any line of railroad other
than in accordance with the provisions of this Act .. .”’
unless authorized to do so by USRA and unless there is no
reasonable objection by affected states, localities or regions.
The other provisions of the Act to which Section 304(f)
refers are those governing abandonment of lines which,
pursuant to a Final System Plan, the prior existence of
which their terms assume, are not to be conveyed to Conrail
or to other railroads. That determination, however, cannot
be made until the Final System Plan emerges many months
from now.
Were not the intention of Congress to preclude abandon-
ments or service discontinuance until implementation of the
Final System Plan—that is, to compel interim operations—
plain enough from the language of Section 304(f), other
Congressional utterances have left the matter well beyond
doubt. Elsewhere in the Act itself, the intention to freeze
operations as they were when the Act became effective
is made equally explicit. Section 213(a), which authorizes
the Secretary of Transportation to make limited payments
to railroads pending the implementation of the Final System
Plan, requires ‘‘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.’’ That provision was in-
voked in connection with the first payment under Section
213 to the Penn Central Trustees, and, over the objection
of creditors, the Trustees entered into an agreement to
maintain such service (J. Doc. No. 14).
Furthermore, the purpose of Section 304(f) was ex-
plicitly adverted to in the course of Senate debate on the
conference bill which became the Rail Act. Under stiff
questioning from Senator Allen, Senator Hartke, its Senate
floor manager, explained :
Mr. Allen. I understand the Senator to say a
moment ago that there would be no abandonment for
18 months.
„Mr. Hartke. No. I said there would be no aban
donment in the region while the final system plan is
being formulated.
„Mr. Allen. In other words, there is a morator-
ium on abandonment for 18 months.
Mr. Hartke. For the region that is correct.
That is absolutely necessary. You cannot let the
lines be abandoned and then try to put them back in
business without a great deal of expense. That is
one of the problems we are faced with. 119 Cong.
Rec, 823783 (daily ed. Dec. 21, 1973) (Emphasis
added).
A more explicit refutation of Appellants’ permissive
reading of the Act would be hard to imagine. That this was
the Congressional purpose, however, could come as no sur-
prise to Appellants since they were forcefully apprised of
that intention by the House manager (and co-author of the
Act) in his letter of April 26, 1974 to the Under Secretary
of Transportation. See Trustees’ Brief, Appendix B, at 7a,
8a. Angered by the prospect that Penn Central might be
encouraged by the Department of Transportation to apply
to USRA for the abandonment of ‘‘hopelessly uneconomic
lines, Congressman Adams remonstrated in part as fol-
lows:
„The purpose of this letter is to emphasize to
you that such an endeavor by DOT and the Trustees
of the Penn Central would be completely contrary to
21
:
11
f
b
|
.
8
=
g
;
3
i
24
Hf
Therefore the Act in terms accurately expresses the
intention of its authors, articulated before its passage
and since, that there are to be no abandonments of even
‘“‘hopelessly uneconomic lines“ during the interim plan-
ning process. That process must last at least 17 months
from the effective date of the Rail Act, and may well
last much longer. Any postponement of the deadlines
set in the Act would necessarily increase the time span
during which interim operations are compelled and erosion
sustained. And, if the Congress reacted unfavorably to
the Final System Plan when first submitted, further delays
of anpredictable duration could eventuate while such objec-
tions are compromised.”
Nor is it persuasive for Appellants to argue that, upon
application to USRA, it may be assumed that authorization
to abandon lines would be forthcoming
Final System Plan; it strains credulity to expect USRA
to authorize abandonment of lines in the absence of a prior
determination that they will be surplus. Secondly, the
right to terminate operations which is at issue here is
system-wide. The Wyer, Dick feasibility studies show that
** It is not entirely speculative to believe that such Congressional
2 — 1 1
rail operation (Rail Act, Section 101(b)(2)), and the provision af
service adequate to meet the needs of the region (Rail Act, Section
101(b)(1)). These competing interests have already emerged as
Erb
sizes — 4 — and the Rail Services —
1
if
5
175
fH
4
Hi
i
|
f
not even the elimination of over 6,000 route-miles of track
combined with other unachievabl optimistic preconditions
sibility there might be for USRA to authorize, with appro-
priate speed, abandonment of a particular segment of
potentially surplus line, there is no practical likelihood
that USRA would authorize the termination of service
on the massive scale necessary to abate unconstitutional
erosion of the Penn Central estate. To do so would be
tantamount to an abandonment by USRA of its expectation
of realizing any plausible Final System Plan.
F
i
f
ments would be inimical
objections, together with those expressly contemplated by
Section 304(f) from state, local and regional transporta-
tion authorities, would inevitably delay and might well
stall altogether any program of abandonmeats, especially
one sufficiently large to make a dent in the operating losses
requests (J. Doc. Nos. 65, 66).
that the Penn
It will not do to argue, as Appellants do,
Central estate would in any event have to undergo time-
consuming abandonment procedures in the absence of the
Inclusion Cases at 459-67.
There exists, then, an explicit statutory command that
interim operations be continued, and the massive losses
that will thereby be sustained cannot be avoided with
appropriate dispatch by recourse to any agency having
authority to excuse the estate from the command of the Act.
To avoid the impact of the plain meaning of Section
304(f), Appellant USRA complains (USRA Brief at 61-66)
that the Court below misread the Act. The section, so goes
the argument, ‘‘could and should have been construed to
confer approval power [with respect to interim abandon-
ments and service discontinuances] only within constitu-
tional limits as the courts may declare them. Id. at 64.
USRA goes on to argue that [a] Reorganization Court
finding it constitutionally necessary to order a discontinu-
ance of service or abandonment of properties would have
as much power both to make this finding and to have the
resulting orders carried out without the injunction issued
by the district court as it has in light of the injunction.’’
Id. at 67-68.
USRA’s argument in this regard flies in the face of the
very language of Section 304(f) forbidding any railroad in
all other federal courts, including, presumably, this Court,
are explicitly ousted of their jurisdiction to order discon-
tinuance or abandonment.” USRA’s argument is tanta-
mount to a contention that the statute can be sustained only
if it means the exact reverse of what it says.“
41
inued loss operations
— tituti nality must be appraised, as it was below,
: ii g
— JA 90.90; Varalli affid., J. Doe. No. 19, * 1.1).
During this period the growth of priority claims kept
pace with the losses : } |
) issued in the
Trustees’ Certificates were ~~
aan of $100 million (FF 3, 4, JA 89-90; Stip.
No. 15, JA 208);
(e) Unpaid leased line rentals accrued i
— of * million (JA 37; FF 2, 4, 4885
* — Doc. No. 19, Ex. T. 1; Stip. No. 13,
These three items bank 83
alone total 8442 — me ruptey priority claims
Of equal importance is the source of funds xpended
and forever lost through their application to deficit rail
operations. In addition to operating funds, other funds
— —— during the period June 21, 1970- December 31
— luded non-recurring income in the amount of $155.3
— ( including the $100 million in proceeds from Trus-
= — and approximately $157 million of in-
—_ rom non-rail operations (JA 36-37; FF 3, 4, JA 89-
; Varalli affid., J. Doe. No. 19, Ex. T-1; Stip. No. 11(a)
(c), JA 206.07, 211). During this period the Trustees also
—— — of cash available by reason of the deferral
= a ion of interest on mortgage and collateral trust
— (FF 2, 4, JA 89-90; Varalli affid., J. Doc. No. 19
Ex. T-1; Stip. No. 14, JA 208). While these amounts are
ineluded in the operating loss figure, they measure the
extent to which the losses were held to even that figure by
draining resou :
— rees from non operating corners of the
2. Reasonably Foreseeable Future Fi :
tnancial
Results after December 31, 1973.
The record here leaves no doubt that simi
‘ similar massive
— — accumulations of prior claims and deferrals
are mandate Tne, Sf Tail operations by Penn Central
, The Reorganization Court found, on undis-
= expert evidence, that it is reasonable to project that
u ng the five-year period ending December 31, 1978:
approximately $722.2 million; 22
(b) Additional accrued but unpaid taxes
amount to approximately $310.7 million ; will
43
(e) Additional deferred leased line rentals will
approximate $140 million; and
(d) Additional unpaid interest will accrue to the
extent of $137.1 million.
(FF 12-20, 23, JA 92-96, 98; Sloane affid., J. Doe.
No. 16, at 7-11; Varalli affid., J. Doc. No. 19, at 4, Ex.
T-2; Guest affid., J. Doe. No, 20, at 9-10.)
On the not necessarily realistic assumption that a Final
System Plan may be implemented toward the end of 1975,
it is instructive that the comparable estimated figures (de-
rived from the same sources) for only the two years 1974
and 1975 are as follows:
(a) Additional ordinary losses will approximate
$434 million;
(b) Additional accrued but unpaid taxes will
amount to approximately $118.2 million ;
(e) Additional deferred leased line rentals will
approximate $55.9 million ; and
(d) Additional unpaid interest will acerue to the
extent of $164.2 million.
(FF 12-20, 23, JA 92-96, 98; Sloane affid., J. Doe.
No. 16, at 7-11; Varalli affid., J. Doe. No. 19, at 4, Ex.
T.2; Guest affid., J. Doc. No. 20, at 9-10.)
Thus, the combination of financial results found to have
oceurred during the reorganization proceedings through
December 31, 1973 with those found to be reasonably ex-
to oceur in the next two years (the earliest point in
time at which the effectuation of a Final System Plan could
reasonably be expected) shows the following :
(a) Ordinary losses—$1.285 billion ;
(v) Accrued but unpaid taxes—$359.2 million ;
44
(c) Deferred leased line rentals—$156.9 million ;
and
(d) Unpaid interest—$268.2 million.
Faced with undisputed evidence of such tremendous
sustained and expected losses and accumulations of prior
claims, the Reorganization Court had no choice but to hold,
as it did, that Penn Central could not be reorganized on an
income basis within a reasonable period of time.
3. Erosion in the Value of the Estate.
The United States alleges that there is no adequate
record evidence of erosion of the value of the estate and
further claims, without citation of authority, that the basis
for evaluating the impact of continuing operations on Penn
Central’s estate is simply a matter of comparing the
amount of accumulated priority claims with the amount
of alleged increases of value of carefully selected assets of
the estate (U.S. Br. at 67-70).
The contention that the record is bare of adequate evi-
dence to show erosion cannot be supported. There was
abundant evidence before the Court below to justify its con-
clusion that the mounting losses charged to the estate
would imminently harm at the very least some of the
claimants who were plaintiffs in the suits before it.
Income losses must have an effect on the value of the
estate; obviously funds have been expended in operations
which otherwise would have defrayed obligations accrued
by the Trustees. The diversion of such funds to operations
in order to cover losses of such magnitude necessarily de-
creases the values in the estate available to satisfy claims of
stockholders and creditors by creating accumulations of
post-bankruptcy priority claims. One index of the effect of
such losses on the value of the estate is the decrease in
stockholders’ equity from approximately $1,500 million at
45
December 31, 1970" to approximately $684 million at De-
cember 31, 1973."
Even this measure of erosion, which 1 a *
in excess of $800 million in the value at g —
not fully reflect two important componen in . —
of the extent of erosion. The first is the og ray ore
of accumulated prior claims, tted by Ng spurt
to be at least $457 million (U.S. Br. at as ante
bankruptcy income losses of $851 million and ‘ —.—
admitted post-bankruptcy prior claims, it is py yee
that there has been no decrease in the value —
available to claimants, as the United States * A
ondly, testing the extent of erosion by the
creases in value of non-depreciable property Eg 4 i
track) by reason of inadequate maintenance. 13
ganization Court has found that, even assuming =
expenditures of $225 to $250 million for normalized ey
tenance of way, an additional $665 3 * oP 2
lars must be expended to remedy past deve 5
; 1 ‘ —
that inflation in the value of assets m
be — 2 “offset the accumulation of —4—
claims“ (USRA Br. at 79), and states that r courts
Form A for 1970 (J. Doc. No. 34 at 201).
82 Form R-1 for 1973 (J. Doc. No. 37 at 11).
of Part D of the
83 A comparison is noteworthy between POuons Noy oF the
Appendix (pp. 67-70) to 0 A-19) attached to the bet
A
8
i
3
>
5
46
have so held, citing only a footnote to In re Boston & Maine
Corp., 484 F. 2d 369 (Ist Cir. 1973). Even that reliance is
misplaced. The cited footnote is merely descriptive of a
particular fact in a particular situation and does not pur-
port to establish a rule of law. The point there at issue
was one of standing to challenge the propriety of continu-
ing the reorganization proceedings where, in that court’s
view, there was ample hope of a successful conclusion.
Moreover, at a time when inflation is so great as to in-
crease asset values to the extent that, as Appellants ap-
pear to claim, huge operating losses and prior claims are
virtually rendered of no effect in calculating the value of
the estate, Appellants’ theory becomes particularly inequi-
table, in that claimants are deprived of their right to with-
draw their capital from an enterprise in which the appre-
ciations caused by an inflationary economy are offset by
massive operating losses, and to reinvest in other enter-
prises reflecting such appreciations in value without off-
setting losses. The right to withdraw capital from such
(Continued footnote)
47
losing investments is, of course, squarely recognized in
Brooks-Scanlon Co. v. Railroad Comm n, 251 U.S. 396. And
this conforms to the purpose of a Section 77 reorganiza-
tion, which is to attempt to develop an enterprise which
has going concern value, not to maintain an irreversibly
losing status quo, offset only by inflationary increases in
asset values.“
The Court below was, therefore, correct in holding
that continued operations under the Act would foreseeably
threaten the Penn Central estate and its stockholder and
creditors. It was neither premature nor unsound in this
conclusion.
The constitutional significance of such compulsory op-
erations turns on the necessity for and availability of
methods of recouping such losses under the Act. To that
we now turn.
C. Compulsory Interim Operations are Unconstitu-
tional in the Absence of Reasonable Present As
surance of Reorganizability under the Act or an
Assurance of Just Compensation.
The Public Interest in Continued Service Does Not
Justify Mandatory, Uncompensated Interim Operations.
Appellants urge this Court to reverse, in part upon the
ground that the public interest requires the Penn Central
estate to bear compulsory, uncompensated erosion because
that risk is attached to investments in the railroad in-
dustry by virtue of its public service character. That
argument extends beyond any limit previously recognized
by this Court the impositions that may be laid upon invest-
*
34 In arguing that the value of the estate has increased since bank.
ruptcy, the United States also argues (U.S. Br. at 68) that since the
48
ors in an industry affected by the public interest and, as
applied in this case, is unsupportable by principle or prece-
dent.
The thesis of the proponents of the Act is that continued
operations and submission to the hazards of ultimate con-
veyance are necessary to achieve the continued rail service
that Congress has declared to be in the public interest (Sec-
tions 101(a), 206(a)). But, as Judge Fullam trenchantly
observed in concurring below, ‘‘the magnitude of the public
interest in continued rail service cannot justify treating
these rail properties as if they were already public prop-
erty’’ (JA 79).
It is a seminal principle of our constitutional structure
that the public should bear the cost of devoting private
property to public uses. That continued interim opera-
tion to the detriment of the estate may be required by the
public interest is the beginning, not the end, of the constitu-
tional inquiry under the Fifth Amendment.
This Court has long recognized the elementary charac-
ter of this principle. It was succinctly framed (per Bran-
deis, J.) in Louisville Joint Stock Land Bank v. Radford,
295 U.S. 555, 602:
„For the Fifth Amendment commands that, how-
ever great the Nation’s need, private property shall
not be thus taken even for a wholly public use with-
out just compensation. If the public interest re-
quires, and permits, the taking of property of indi-
vidual mortgagees in order to relieve the necessities
of individual mortgagors, resort must be had to pro-
ceedings by eminent domain; so that, through taxa-
tion, the burden of the relief afforded in the public
interest may be borne by the public.“
See also Armstrong v. United States, 364 U.S. 40, 49.
49
The invocation of the public interest so freely employed
by Appellants does not have the talismanic force which
they ascribe to it. Conceding that the rail properties of
the estate are being put to public use, there remains the
question of whether they may be put to that use by govern-
mental compulsion at the cost of their private owners.
The principle that private property may not be put
coercively to public use without compensation has devel-
oped a doctrinal refinement as this Court has explored the
frontier between regulation and takings. The cases read
together seem to hold that the Government, in the exercise
of its police power, may diminish or extinguish the value
of property, without compensation, but within quantitative
limits, in order to abate a nuisance which that property
produces. See, e.g., Atchison, T. & S.F. Ry. v. Public Util.
Comm’n, 346 U.S. 346 (railroad properly assessed the costs
of removing hazardous grade crossings which it construct-
ed) ; Miller v. Schoene, 276 U.S. 272 (trees may be destroyed
to prevent spread of disease).
There is no suggestion that the Government has set
about abating a nuisance here; instead it seeks to create
an affirmative public advantage. This Court has consis-
tently recognized that the compulsory commitment of prop-
erty interests for the production of a public good is dif-
ferent from the exaction that may be justified in nuisance
abatement cases, and has held that, when property is put
by force of law to the production of an affirmative public
good, just compensation is required. See, e.g., Nashville, C.,
4 St. L. Ry. v. Walters, 294 U.S. 405 (railroad cannot be
required to bear costs of improving traffic flow on adjacent
highway).
Moreover, the ‘‘principle of fairness’’ expressed in the
Fifth Amendment (United States v. Dickinson, 331 U.S.
745, 748), which forms the basis of its political ethies
(United States v. Cors, 337 U.S. 325, 332), recognizes quan-
titative limits on the exaction that the putative public
50
interest can compel. The question in such cases, so Justice
Holmes put it, ‘‘narrows itself to the magnitude of the
burden imposed.’’ Interstate Consol. St. Ry. v. Massachu-
setts, 207 U.S. 79, 87. See also Pennsylvania Coal Co. v.
Mahon, 260 U.S. 393, 413, 415.
The Act neither attempts to abate a nuisance created
by Penn Central nor does it impose burdens of inconse-
quential magnitude on the estate. On the contrary, it
imposes enormous economic burdens on the estate of Penn
Central and upon Appellees for the purpose of achieving
explicitly defined affirmative public advantages. It is far
outside the ambit of uncompensated regulation tolerated
by the Fifth Amendment.
This principle has been applied specifically to the com-
pulsory continued operation of losing railroads. Brooks-
Scanlon Co. v. Railroad Comm’n, 251 U.S. 396; Bullock v.
Railroad Comm’n, 254 U.S. 513; Railroad Comm 'n v. East-
ern Texas R. R., 264 U.S. 79. These cases all stand for the
proposition that a hopelessly unprofitable railroad enter-
prise cannot be compelled to continue operations in order
to serve an asserted public need, in the absence of compen-
sation, over the objection of its owners and creditors.
Appellants’ view of the Brooks-Scanlon line of cases
appears to be somewhat ambivalent. While admitting,
however grudgingly, that Brooks-Scanlon and its progeny
may still be good law, Appellants nevertheless suggest
that the authoritative force of these cases is dissipated
because their constitutional doctrine was announced in the
context of small railroads, prior to the advent of Section
77. The suggestion is plainly frivolous. In the first place,
as diseussed above, the Brooks-Scanlon cases reflect a
fundamental constitutional principle that confiscation of
private property to service affirmative public needs, with-
out compensation, is unfair. The advent of Section 77 did
not and could not alter that constitutional insight.
51
In the second place, the reorganization court in
New Haven case specifically reviewed the validity of
Brooks-Scaniom line, and, over vigorous objections to
authority lodged by the ICC, held:
„This court, therefore, concludes that Brooks-
Scanlon and subsequent cases, reaffirming the val-
idity of its holding, are still applicable and determi-
native.’’ In re New York, VH. 4 H.R. R., 304 F.
Supp. 793, 804 (D. Conn. 1969).
That opinion of Judge Anderson was reviewed and
quoted extensively with approval by this Court in the
New Haven Inclusion Cases, 399 U.S. 392. See also I
re Penn Central Transp. Co., 494 F.2d 270 (3d Cir.), peti-
tion for cert. filed, 42 U.S.L.W. 3633 (U.S. May 8, 1974)
(No. 73-1672) (‘Columbus Options’’); Ne York, NH.
g H. R. R. First Mtg. 4% Bondholders’ Comm. v. United
States, 305 F.Supp. 1049, 1055 (S.D.N.Y. 1969). The rule
derived from these cases and the fundamental constitu-
its
the line of cases epitomized by Continental IU. Nat’l Bank
€ Trust Co. v. Chicago, RI. & P.Ry., 294 U.S. 648, and
Reconstruction Finance Corp. v. Denver d R. G. W. R. R.,
328 U.S. 495. In the context of this litigation, these lines
of cases converge.
The Brooks-Scanlon cases unequi hold that
carrier cannot be compelled to carry on
% Bullock v. Railroad Comm'n, 254 US. $1
Railroad Comm'n v. Eastern Texas R. R. 264 on wn oe.
loss out of concern for the public interest without just
compensation. Here, that is exactly what the Act compels.
Continental Bank, and other cases like it arising under
Section 77, do, indeed, permit some postponement of a
secured creditor’s remedy of foreclosure of his lien in the
public interest and in the pursuit of a feasible, fair and
equitable reorganization. All of these cases, however,
proceeded upon the explicit assumption that reorganiza-
tion of the railroad in question was demonstrably feasible.
The cases repeatedly assert that the secured creditor,
though required to postpone his remedy, was at least en-
titled to ‘‘full compensatory treatment for the rights
which he enjoyed. See, e.g., Ecker v. Western Pac. N. R.,
318 U.S. 448, 487; Group of Institutional Investors v.
Chicago, Mil., St. P. & Pac. R.R., 318 U.S. 523, 565-66;
Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510,
528-30. The reorganization cases simply do not stand for
2. The Rail Act Does Not Afford Any Reasonable Prospect
of Likely Reorganization for the Penn Central Estate.
Appellants quite clearly have not shown—nor, on the
basis of a scrutiny of the Act in light of the Penn Central
experience, could they possibly have shown—that the Act
furnishes that prospect of feasible reorganizability required
under the cases to warrant continued loss operations of
Penn Central over Appellees’ objections.
On the contrary, a review of the provisions of the Act,
in the context of the record before the Court below, estab-
lishes the futility of pinning the constitutional propriety
of continued operations to the ephemeral prospect of reor-
ganization under the Act. For example:
(a) Conrail will not be materially different from Penn
Central. The addition of the Reading, the Lehigh Valley,
the Central Railroad of New Jersey and the Ann Arbor,
Ir for a judicial finding
of prospective reorganizability require continued absten-
tion on the of the creditors. — notice of the of the
Act, and — ——ů 1 ＋ 2
power of
11
lt
7 21
ct
8
i
ii
aH
0
54
The new Conrail will, in fact, be nothing but the old bank-
rupt Penn Central with inconsequential bankrupt appen-
(b) Conrail will face the same problems as Penn Central.
Since Penn Central can be expected to comprise about
90% of the System, Conrail will be facing, to all intents
and purposes, the same problems that the Penn Central
Trustees have fought over the past four years. If anything,
Conrail’s problems will be exacerbated by the laudable but
expensive public service goals imposed by Section 206(a)
of the Act. The conflict between these goals and economic
considerations is obvious—and well illustrated by the
Evaluation of the DOT Report prepared by RSPO in which
RSPO says that, at its public hearings:
“**Financial viability’ was criticized again and
Moreover, Conrail is not the concept that Congress
originally envisioned because it can no longer include the
Erie Lackawanna or the Boston & Maine. Whatever dim
prospects Conrail might have had with those lines subject
to the Rail Act faded with their withdrawal. The Erie
carries about twice as much tonnage as Reading, Lehigh and
Jersey Central combined, and the inclusion of Erie would
have increased Conrail’s tonnage by more than 15%.“ The
exclusion of Erie not only deprives Conrail of this tonnage,
but leaves Erie in the picture as a competitor battling to
lure away even more business.
Central viability studies were not projections for a con-
ventional railroad. Quite the contrary, the viability studies
projected a new kind of railroad never before tested in
operation. Neither the Penn Central Trustees nor anyone
else could promise that such a railroad would run at all.
As the Trustees told the Reorganization Court in 1972:
„It should be understood that the rail networks
described above are not comparable to any existing
railroad, particularly in the territory served by Penn
Central. The 11,000 mile road to a great degree, and
the 15,000 mile road to a lesser degree, represent a
s Statistics taken from the DOT Report (J. Doc. No. 62) Vol. I
at 7.
0 Trustees’ Report of February 15, 1972 (J. Doc. No. 4), re-
capitulated in their Report of January 1, 1973 (J. Doc. No. 8).
new type of transportation system consisting of
— lines and ae feeder lines. The *
8 requires sca shippers not located in hi
industrialized — to come to the —— —— —
than having railroad come to them. Doe
No. 7, Annex 1 at 1) (J.
It is one thing for the Federal Government to pin its hope
of solving the rail crisis on a new and untried concept of
a bone It is a totally different thing to ask
enn claimants i
why — to accept it as the equivalent
pressures that Congress will be under to the
= system are foreshadowed in the 10 Bralvation of
DOT Report (J. Doc. No. 63) at 9-10:
57
‘Certainly, it was the possibility of rail service
discontinuance and abandonment which raised the
greatest public furor. Witness after witness de-
scribed the adverse economic, social, and environ-
mental impact such actions would have on communi-
ties. It was contended that rail services discontinu-
ance would result in market distortions, economic
depression and social dislocations. Moreover, it was
repeatedly stated that rail discontinuance is incon-
sistent with our national environmental and energy
conservation policies. Decreased rail service would
result in increased truck transport and greater con-
sumption of scarce energy resources, more
and increased pressures on land use for additional
highway construction. Public sentiment was strong
that these factors must be of primary importance in
determining the final rail plan.
More important, the Wyer, Dick studies, completed
after the Trustees first stated their conditions of viability,
show that large-scale abandonment of lines is not the pan-
acea proponents of the Act make it out to be. If, as the
Wyer, Dick studies show, a 15,000 mile Penn Central sys-
tem is not viable, it is hardly likely that a similar Conrail
system (made up primarily of Penn Central lines) could be.
(f) The Penn Central Trustees’ viability condition con-
i will not be satisfied.
Act makes no impact on the Penn Central Trustees’ second
Appellants stress the acknowledged fact that the pro-
vides $250 million for displaced employees, but they ignore
the fact that the Act provides no means to achieve im-
proved productivity by eliminating unnecessary employees.
The Penn Central Trustees’ Report of February 15,
1972 (J. Doe. No. 4) sets a goal of eliminating approxi-
mately 9,800 train and engine service employees. Their
report of July 1, 1972 (J. Doe. No. 6) states that this goal
cannot be achieved except through negotiations with the
affected unions on a national basis. The Act does nothing
to change this situation. Indeed, the DOT Report, after
observing that one of the greatest opportunities for in-
creasing productivity is in finding ways to change inflexible
labor rules to permit better utilization of both labor and
capital,’’—precisely the point of the Trustees’ labor condi-
tion—goes on to acknowledge that the Act ‘‘does not pro-
vide any direct mechanism for making such changes
DOT Report (J. Doc. No. 62) at 8.
(g) The Penn Central Trustees’ viability condition con-
cerning passenger service will not be satisfied. The Act
does not satisfy the Penn Central Trustees’ condition of
viability with respect to passenger service. While the Act
may ultimately provide full compensation for passenger
service, it does not satisfy the fundamental assumption
of the Penn Central viability studies that the core rail
system ‘‘will handle freight only and passenger operations
will not constitute a burden in any way. This assumption
goes beyond the concept that passenger service is self-
sustaining; it assumes, in essence, that the passenger
service does not exist.’’*?
Furthermore, the viability studies’ assumptions would
require the provision of a new freight route from Boston
to Washington so as to permit the exclusive use of the
existing corridor for passenger service. The problems in-
herent in attempting to run slow-moving freight trains
and increasingly high speed Metroliners over the same
tracks are reflected in the RSPO recommendation that
USRA:
“*. . . should consider alternate means of han-
dling freight traffic now moving over the Northeast
Trustees Report of October 1, 1972 (J. Doc. No. 7) Annex
1, III. Exhibit T-7 to Affidavit of Nelson A. Sharfman, dated
March 21, 1974 (J. Doc. No. 17).
passenger corridor between Boston, New York City,
and Washington. The Final System Plan should
inelude and provide for the improvement of routes
which would make it possible to remove as much
freight traffic as possible from the corridor.”’ RSPO
Report (J. Doe. No. 63) at 3.
The Act makes no provision for carrying out this essential
condition.
(h) The Penn Central Trustees’ viability condition
concerning traffic and revenues will not be satisfied. The
final, and perhaps most vital, condition of viability postu-
lated by the Penn Central Trustees is the achievement
of the traffic and revenue potentials forecast by Temple,
Barker & Sloane. (See J. Doc. No. 38; FF 12-22, JA 92-
98.) The basic assumptions of the Temple, Barker &
Sloane studies appear in Attachment 4 to the Trustees
Plan for Reorganization dated April 1, 1972 (J. Doe. No.
5). They include an assumption (sat Penn Central will
have adequate plant and equipment to carry the forecast
tonnage and to maintain service at or above current levels,
and the assumption that there will be increased prod-
uctivity from manpower, equipment and plant. (See also
FF 13, JA 92-93.) The importance of these factors was
recently emphasized by the Executive Vice President of
Temple, Barker & Sloane thus:
„Finally, by way of introduction, it is of critical
importance to note that in our February 1974 fore-
cast, TBS is projecting traffic that is potentially
available to Penn Central. As was the case in our
previous three forecasts, the Trustees requested that
TBS assume in its latest forecast that Penn Central
has sufficient plant, equipment and manpower to
provide the quality of service that shippers can
reasonably expect from railroads; and the present
forecast is predicated on this key assumption. In
the course, however, of developing this latest fore-
cast, evidence was obtained from shippers which
now leads me to state with a reasonable degree of
confidence that the current state of Penn Central’s
plant and equipment will render PC incapable of
fully realizing the potential traffic and revenues
forecast for it.
As noted above, the Act does not provide a mechanism
for increasing manpower productivity to satisfy the
Temple, Barker & Sloane assumptions. Similarly, it does
not provide nearly adequate resources for rehabilitating
and modernizing Penn Central’s equipment and plant, nor
does it provide any funds for Conrail’s working capital.
The Trustees reported as early as February 1, 1973 (J.
Doe. No. 9) that as much as $800 million would be required
for rehabilitation and modernization. That figure has since
been increased by additional deferred maintenance and in-
flation** and would be further increased by the inclusion
of other bankrupt lines in the Conrail system. To meet
this need the new Act provides that only $1 billion of
USRA obligations be issued to Conrail, of which only
$500 million must be allocated to rehabilitation and mod-
ernization. The amount is clearly inadequate for Penn
Central alone upon the facts found by the Reorganization
Court (JA 92). What is worse, however, any funds ad-
vanced under these provisions of the Act will apparently
constitute a first lien on the Conrail properties ranking
prior to the claims of the present Penn Central creditors.
It is important to reiterate that Appellants offered no
evidence below to show that Conrail was likely to be viable,
but rested upon the record submitted to the Court and on
the facial terms of the Act.
** Sloane affid. (J. Doc. No. 16) at 2. See also FF 22, JA 97-98.
Jackman affid. (J. Doc. No. 18); FF 10 and footnote thereto,
JA 91-92.
61
The conclusion is inevitable: immediately before the
Act became law there was concededly no light at the end of
the Penn Central tunnel.“ The Reorganization 2
whose findings on such matters are customarily eee
great weight here,“ made detailed findings which flesh :
out that bare stipulation and concluded that a bay 0
any configuration that could plausibly be designed —
the Penn Central would not have any reasonable prospec
of viability (JA 92-102) in the absence of special roe
meeting the Trustees’ conditions which the Act patently
fails to afford.
introduction of Conrail does not change the situa-
4 .— material way. The addition of a few —
miles of unprofitable track and the adoption of a ——
new name are not enough to alter the outlook for ye y.
On the basis of the Act as it now stands, Conrail $s no
better prospects.
3. The Act Provides No Assurance of Payment
for the Taking by Interim Erosion.
gress could have provided for payment of compen-
wan te interim erosion in at least two ways: it could
have provided direct payments to — — 14 =
terim operations or it could have provi
payment for the rail properties compulsorily conveyed to
Conrail include assured compensation for the imposed
(a) Interim payments provided are inadequate.
The Act does have provisions which were evidently in-
tended to relate to interim operations. However, if in
fact these were intended to provide some degree of compen-
sation for burdens of interim operations, they are wholly
inadequate.
Section 213, the only provision of the Act which pro-
vides funds which may be used for operations during the
planning period, authorizes the Secretary of Transporta-
tion to make payments for certain specific purposes :
(a) Emergency Assistance——The Secretary is
authorized, pending the implementation of the final
system plan, to pay to the trustees of railroads in
reorganization such sums as are necessary for the
continued provision of essential transportation serv-
ices 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 nec-
essary, not to exceed $85,000,000, to remain available
until expended.’’
The $85,000,000 is plainly not enough to effect even a
dent in the massive interim losses anticipated for Penn
Central alone, much less for the other bankrupt lines which
might comprise parts of Conrail. The Government was
well aware that Section 213 money would be of no major
significance. John Barnum, Under Secretary of the De-
partment of Transportation, advised the Senate Commerce
Committee that the $85,000,000 was ‘‘merely the amount
which we thought should be provided in the form of a
grant to the bankrupt railroads so that they would be able
to meet their payrolls Friday and not run out of cash.
And Counsel to the Department of Transportation con-
ceded to the Penn Central Reorganization Court that even
for the purposes intended, the $85,000,000 had been caleu-
lated on faulty premises (J. Doc. No. 25).“
The second provision in the Act relating to interim
payments is Section 215, which provides funds for the
acquisition, maintenance or improvement of rail properties
to be included under the Final System Plan. However,
that section provides that Conrail need not compensate 1
railroad for that portion of the value of rail properties
transferred to it which is attributable to such acquisition,
maintenance or improvement. The section thus does not
so much compensate for interim erosion as it creates a
charge against subsequent compensation. Moreover, the
provision does nothing at all to help with the maintenance
of rail properties which, though required to be kept in
operation under Section 304(f), are not to be included in
the Final System Plan. The section plainly does not con-
stitute any compensation for required interim erosion.
Given the history of Penn Central losses equalling
$851,000,000 for tho poried June 21, 1970 until December
31, 1973 and the findings of the Reorganization Court that
the losses will continue unabated, the Court below had no
choice but to hold that:
„It becomes quickly apparent that the limited
amounts of these funds—available to railroads in
** Hearings on S. 2188 before Senate Commerce Comm. 93d
Cong. Ist Sess. at 65 (Nov. 15, 1973).
64
reorganization in the region—have not been specially
designated to meet challenges of unconstitutional
erosion. (JA 31)
(b) The Act fails to provide compensation which is ade-
quate in medium and amount to assure fair value for the
assets to be conveyed and still less does it provide redress
for interim erosion.““
The Act neither authorizes the Special Court to provide
recompense, nor requires Conrail or USRA to make direct
payment for interim erosion. The burden of such losses
was specifically left with the bankrupt railroads’ estates.
Appellants, however, claim that the Special Court may
somehow fix the compensation to remedy erosion by includ-
ing such amounts in the constitutional minimum“ to be
provided under Section 303. Upon this basis they then
contend that the Court below was premature and improvi-
dent in concerning itself with the adequacy of the com-
pensatory mechanism set out in Section 303 (see, e.g.,
USRA Brief at 71). The problem with this approach, of
course, lies in the fact that reliance on Section 303 requires
rather than excuses a study of the adequacy of its com-
pensatory mechanism. And that study in turn involves a
consideration of the extent to which those procedures pro-
vide adequate assurance of compensation for the conveyed
rail assets and have the clear potential of yielding values
in excess of the amounts required to meet that cost, so
as to defray the burdens o interim erosion. The Special
Court does not have any method by which it can increase
the amount of compensation available under the Act and
the Final System Plan for the rail assets conveyed. If,
as seems inevitable, the value of the compensation real-
izable under the Act turns out to be less than the fair value
of the assets transferred to Conrail, there will obviously
be no way in which the Special Court can also compensate
the estate for two years’ erosion. Yet that is plainly the
prospect, and the Court below properly and necessarily
reached the issue now.
We therefore turn to an examination of the workings
of Section 303 which, Appellees submit, reveals its inade-
quacy both for the purpose it was ostensibly to serve and
the new assignment which Appellants ask this Court to read
into it.
The Act ultimately requires a non-consensual transfer
of title in the rail assets from the estate of Penn Central
with a simultaneous extinction of liens on those assets.
At no point do any of the relevant parties—Trustees, stock-
holder, secured or unsecured creditors, or reorganization
judge—have any option about the disposition of the prop-
erty once the estate has been committed to the process of
the Act. None of these propositions seems to be, nor can
they be, seriously controverted.
Whether this peculiar process results in a condemnation
under the eminent domain power of Congress or an ex-
change of assets under the bankruptcy power may be hard
to discern. In either case, however, it is constitutionally
indispensible that there be in the process of the Act an
assurance that those whose property is transferred by
virtue of its mandatory terms will be justly compensated
for their losses.
Assuming that the Act is not regarded as an exercise
of the power of eminent domain, Section 303 nonetheless
falls far short of meeting the Fifth Amendment requirement
of just compensation. The compensation payable under the
Act is woefully inadequate to equal the constitutional mini-
mum value of the properties to be taken, and the Act
permits Appellees no recourse by which they might re-
cover the amount by which such minimum value exceeds
the amounts payable under the Act. Still less is there any
procedure by which a bill for interim erosion can be added
to the claims against the compensation afforded by the
Act with any hope—let alone assurance—that it could be
paid. In short, the Act would take Appellees’ property in
the interim and ultimately, without assuring them that
just compensation would be paid in all events.
(i) Kind and amount of compensation under the Act.
The Act provides that payment for rail properties conveyed
to Conrail is to consist solely of common stock of Conrail,
other unspecified securities referred to in Section 206(i)
(and, if Congress concurs pursuant to such section, obliga-
tions of USRA not to exceed $500 million, which might be
guaranteed by the United States), and other undefined
‘*benefits’’ accruing to the estate by reason of the transfer.
If the Speciai Court should determine, pursuant to Section
303 (e), that the value of such consideration is less than
the fair value of the properties conveyed, the only remedies
allowed it by the statute are (a) an order reallocating the
securities issued to the various estates; (b) an order
requiring the provision of additional Conrail securities
designated in the Final System Plan; and (c) an order
entering a deficiency judgment against Conrail.
The common stock of Conrail can have value only
insofar as Conrail will be a viable entity generating income
in excess of costs and fixed charges. In light of the dismal
prognosis for the bankrupt lines, parts of which will ulti-
mately comprise Conrail, in light of the failure of the Act
to deal with the problems which beset Penn Central and
given the public service goals which must be served by
Conrail (Section 206), the common stock will have little, if
any, value. But whatever be the ultimate value of the
common stock, there can be no dispute that there presently
Securities of Conrail other than common stock and
USRA obligations could possibly be included in the
package of compensation to go to the estates of the bank-
rupt railroads. However, even if proper under the Act,”
First, if Conrail issued debt secured by liens on all tie
property transferred, the mere existence of these securities
would substantially decrease the intrinsic market value, if
any, of the common stock.“ Second, it must be assumed
that such senior securities would carry with them rights to
interest or dividends in order to be marketable ;** however,
payment of interest or dividends would result in a continual
cash drain on Conrail’s resources, thus further reducing
the value of its common stock. Moreover, there could be
no assurance that payments of interest or dividends could
be made. Third, the existence of secured debt on Conrail’s
properties would render further borrowing by Conrail
difficult and expensive, if possible at all. Last, that USRA
Finally, the Act provides only one remedy—a deficiency
judgment against Conrail—in the event that the Special
Court finds that Conrail’s securities, as authorized by the
Act and designated in the Final System Plan, cannot pro-
itt
ii
i
i
i
|
i
T
t
|
i
2
Li
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i
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i
vide that requisite value. But the deficiency judgment
must necessarily reduce the value of the common stock, the
inadequacy of which requires the entry of the judgment
in the first place. Thus, whether described as ‘‘essentially
cireuitous (JA 77) or as a relatively pointless (JA
137) remedy, the Conrail deficiency judgment cannot cure
the constitutional inadequacy. No party has presented any
analysis which claims significant value for the judgment or
which otherwise supports a contrary conclusion.
(ii) Inadequacy of compensation on any theory of valua-
tion. USRA is (contingent upon subsequent Congressional
ratification) authorized to provide in the Final System
Plan for the issuance of up to $500 million of debt obliga-
tions of USRA, which may be guaranteed by the United
States Government, for use by Conrail in paying for rail
assets. Once it is appreciated that the value of the stock
and other securities of Conrail is not necessarily equal to
the value of the rail assets of Penn Central to be conveyed,
and that the deficiency judgment is essentially circuitous,’’
the only remaining test of the constitutional adequacy of
Section 303 is an assessment as to whether and under what
circumstances this $500 million of theoretically available
debt securities would provide the Penn Central estate
with a total package of securities whose value would equal
the constitutional minimum value of the rail properties
conveyed. Appellees submit that the assessment made by
the Reorganization Court in the 180-Day Decision was cor-
rect: whether the Act be regarded as an eminent domain
statute or as a reorganization statute, its provisions are on
their face incapable of providing compensation equal to the
constitutional minimum value, whatever standard may be
employed to measure that value.
The evidence before the Reorganization Court on valua-
tion of Penn Central’s rail properties consisted primarily
70
of a Day & Zimmermann study filed with the ICC,** which
estimates the value as of December 31, 1970 of the physical
assets of Penn Central and all its leased lines, exclusive
of the Park Avenue properties, and includes, in part, land
not required for rail use and railroad lines which USRA
might determine should be abandoned rather than included
in a Final System Plan. It is, of course, impossible to
show at this time what portion of the assets studied by
Day & Zimmermann would be included in a Final System
Plan. It is reasonable and conservative to project, how-
ever, that in terms of the value of all physical assets of
Peun Central and its leased lines studied by Day & Zim-
mermann, the properties designated in a Final System
Plan would be likely to comprise not less than 50% of the
total value of the physical assets of the Penn Central
System.“
assumed liquidation for non- rail use. In the case of th
latter methodology, a present value of a projected —
of future liquidation proceeds was also calculated. In sum-
71
mary, the results of the Day & Zimmermann study were as
follows:
Total Value of
Wholly-Owned Assets,
Penn Central and
Assumption as to Leased Lines as of
“Highest and Best Use” December 31, 1970
Continued Railroad Use ...........-- $13,858,493,000
Liquidation for Non-Rail Uses:
Estimated Gross Proceeds of Sales
over a Period of Years ........-- $ 3,532,110,000
Present Value of Estimated Net
Proceeds, after deducting interest
factor and all expenses of sale and
of preservation of assets pending
„reer eee eee $ 1.995, 778,000
These valuations provide substantial evidence“ upon
which it may properly be concluded that even if all $500
million of USRA securities available for such use were
committed to the Penn Central estate, it would not consti-
tute payment in full for the value of the Penn Central pro-
perties likely to be included in the Conrail system; but
rather that, as the Reorganization Court held, ‘‘. . there
is every reason to suppose that the included properties
would be worth considerably more than $500 million’’ (JA
137).
72
The conclusion that the Act simply does not provide
enough value of any kind to pay the constitutional minimum
value of the conveyed rail assets alone does not at all
depend upon the valuation standard applied. Both the esti-
mated value for continued rail use ($13.5 billion) and the
estimated liquidation value ($3.5 billion) clearly greatly
exceed the value which could be provided by the Act’s com-
pensation mechanisms."* Even the Day & Zimmermann dis-
counted scrap value approach, an approach which Appellees
contend would be wholly erroneous, produces a value of ap-
proximately $1 billion on the assumption that only 50% in
value of the Penn Central assets would be included in the
Final System Plan.
Finally, mention should be made of a novel theory of
valuation which Appellants pressed below and in the Spe-
cial Court, although it does not yet appear in their briefs
here. That is the proposition, unsupported by any au-
thority, that if going concern value based upon earning
capacity is less than liquidation value, the latter is no meas-
ure of the ‘‘constitutional minimum.“ As the Reorganiza-
tion Court noted in the 180-Day Decision, this theory of
valuation appears in the legislative history to be the basic
rationale of the Rail Act:
The legislative history of the Act suggests that
many responsible public officials may be proceeding
on the assumption that the common stock of Conrail
the Government for continued rail use, the required just compensa-
tion should include an incremental value in recognition of the unique
and, for practical purposes, irreplaceable character of the assets when
taken for continued use. See In re Port Authority Trans-Hudson
Corp., 20 N. V. 2d 457, 231 N.E.2d 734 (1967), cert. denied, 390
U.S. 1002; In re City of New York (Fifth Avenue Coach Lines,
Inc.), 18 N. V. 2d 212, 219 N.E.2d 410 (1966), appeal dismissed,
386 US. noted in
73
i. e., the italized value of its prospective earn-
— — and automatically establishes the
value of the rail assets conveyed to Conrail, even if
those assets had a higher liquidation value, and even
though their value for ‘highest and best use’ might
be much greater. (JA 138)
A pellees contend that this position is wrong as a mat.
ter of law. The New Haven Inclusion Cases plainly held
that the bondholders there were receiving a value reflecting
„the highest and best use of their properties“ (399 US. at
482, n. 80), and described that value as being the equivalent
of ‘‘the right to liquidate and a per-parcel sale that is theirs
by virtue of their mortgage liens“ (399 U.S. at 489-90).
The Court defended this value against a challenge by Penn
Central predicated on the truism that it was paying liquida-
tion value for property which had a lower (or negative)
going concern value, by noting that the bondholders _
to liquidation value derived from their state-created
(399 U.S. at 499).
New Haven Inclusion Cases thus reinforces the propo-
sition that liquidation is the highest and best wse of te
operating property of a hopelessly losing enterprise. i
too stems from the investors’ right to withdraw their
capital from hopelessly non-remunerative use. Brooks-
Scanlon Co. v. Railroad Comm n, 251 U.S. 396. And that
use then determines the value that must be reflected in any
compelled conveyance. yee
Appellants’ intimation below that less will s .
and ee | apparent assumption of Congress in the Act that
the constitutional minimum“ can be less than liquidation
value is simply wrong. Of course, to the extent that Appel-
lants seek to excuse the absence of assured liquidation
values in the Act on this theory, they implicitly acknowledge
5° See also In re New York, N.H. 4 H. R.R., 289 F. Supp.
451, 454-55 (D. Conn. 1968).
74
that no surplus over such liquidation value is provided in
the Act to defray the burden of interim erosion.
(e) The Act fails to provide any procedures which could
assure the requisite fair value for the properties conveyed
and compensation for interim erosion.
This Court has long held that the procedures set out
in Section 77 are constitutional because they provide mech-
anisms by which full compensatory treatment’’ can be
accorded claimants against the estate, in order of their
priority. Consolidated Rock Products Co. v. Du Bois, 312
U.S. 510, 528-30; Group of Institutional Investors v. Chi-
cago, Mil., St. P. & Pac. R. R., 318 U.S. 523. Ecker v.
Western Pac. NR. R., 318 U.S. 448, 565-66, recognized that
such treatment could not be formulistie, but depended
on the existence of procedures which assured that the in-
formed judgment of the ICC and the reorganization court
would be brought to bear on “all relevant factors’’ in
giving prior approval to any exchange of securities re-
quired by a reorganization plan.
The essence of this case law is that creditors are entitled
to procedures which provide reasonable assurance that they
will receive the fair equivalent of their property, in order
of absolute priority, before their property may be taken
from them in bankruptcy. Louisville Joint Stock Land
Bank v. Radford, 295 U.S. 555; Wright v. Vinton Branch
of the Mountain Trust Bank, 300 U.S. 440: Wright v. Union
Central Life Ins. Co., 311 US. 273, 278. The processes of
the Rail Act preclude any such assurance.
In the first place, the Special Court's Section 303 powers
do not assure fair and equitable treatment. Congress
provided in Section 206(d) (1) that the transfers to Conrail
Thall be. . . in exchange for stock and other securities
of [Conrail].’’ Consistent with that intent, the Special
Court, which has the power to determine the fairness of
the exchanges mandated by the Act, but only after they
are consummated, initially decides whether the transfers
75
~ fair and equitable to
— remedy granted to the Special —
care any failure of the exchange to meet the fair ent
equitable standard is: first, to reallocate —
of Conrail, specified in the Final System Plan, which —
been deposited with it prior to the transfer, among t
various railroads ; second, if the lack of fairness and equity
is not thereby cured, to order Conrail to provide addi-
pecial Court shall . enter a judgment against
8 — 303 (e) (2) (C). (Emphasis supplied.)
These procedures fail to assure receipt of the consti-
tutional minimum for the obvious reason that no assurance
whatsoever exists that there are sufficient assets —
to the Special Court pursuant to Section 303 (e) a —_
it to provide a total value in the package of Conrail secant
ties which will equal the value of the rail prope a
Presumably, this is precisely the reason for the i —
in Section 303 (e) (2) (C) of a power to order oy
against Conrail. Thus, while the processes o *
necessarily contemplate a deficiency judgment, there 2
Judge Fullam's concurrence below points out, <4 —
ance that the price fixed by the Special Court can ——
under the statutory scheme (JA 79). The — —
procedures of the Act are inadequate, then,
they are illusory.
i ici * Special Court
Act provides explicitly that the ou
oat within — days after the deposit“ of the securities
76
called for by the Final System Plan order the Trustees
of railroads in reorganization to convey ‘‘forthwith’’ to
Conrail the rail assets specified in the Final System Plan
and shall itself order the conveyance of lessors’ inter-
ests called for by the Final System Plan. In case this
explicit language of Section 303(b) did not carry clearly
enough the intent to defer consideration of compensation
until the conveyances had been irrevocably consummated,
Section 303 (e) further provides that the Special Court
shall decide whether the exchanges are fair and equitable
after the rail properties have been conveyed to [Conrail]
and profitable railroads operating in the region under sub-
section (b) of this section. (Emphasis supplied.)
It is crystal clear from the legislative history that Con-
gress meant exactly what it said. In the Report of the
Senate Committee on Commerce on S. 2767, the Committee
submitted its explanation of Section 303(b) of that bill,
which itself was carried unchanged in this respect directly
into the Act:
“The conveyances are to be free and clear of
liens and encumbrances and may not be judicially
restrained or enjoined. . . Because of the public
interest in permitting the new Corporation [Conrail]
to obtain all the rail properties it will need so that
it may commence operations at the earliest prac-
ticable time, the special court is not given any discre-
tion in making the order requiring conveyance.’’
(Emphasis supplied.)
The Act further underscores the determination to fore-
stall valuation of the assets until after they have been
conveyed by its specific provision that the ‘‘conveyances
shall not be restrained or enjoined by any court.’’ Section
303 (b) (2).
*° S. Rep. No. 93-601, 93d Cong., Ist Sess., Dec. 6, 1973 at 33.
— — —
77
Not only are the procedures of the Act illusory, then;
they are so constructed as to preclude the Special Court or
any other court from interfering with the inexorable convey-
ances that they preseribe.“ No court, therefore, possesses
the power to scrutinize the Final System Plan in advance
of conveyances and to prevent a conveyance which appears
almost certain to be confiscatory. Far from assuring just
compensation for interim erosion as well as the assets
ultimately conveyed, the procedures of the Act go to great
lengths to dissipate the assurances normally afforded by
procedures under Section 77 of the Bankruptey Act.
The procedures under the Act are not analogous to
the Section 77(e) cramdown. The Rail Act procedures
cannot be sustained by analogy to the eramdown“ pro-
vision of Section 77(e) of the Bankruptcy Act. The cram-
down power is set in a context which is wholly absent in
The cramdown is designed to prevent an obstinate class
of claimants from arbitrarily withholding its assent and
between of
fers may be as little as eleven days, it would be impossible for the
Special Court to rest any such decision upon an informed indepen-
78
thereby frustrating a reorganization plan which is fair
and equitable and in the public interest.” However, the
cramdown is permitted only if the court finds, after hear-
ing, that the plan makes adequate provision for fair and
equitable treatment of the interests or claims of those
rejecting it and that such rejection is not reasonably justi-
fied in the light of the respective rights and interests of
those rejecting it and all relevant facts.
The cramdown provision, therefore, grows out of a
combination of consensual arrangement and informed
judicial scrutiny in advance of the consummation of the
reorganization plan. The Rail Act eliminates both of these
underpinnings of the cramdown provision; it neither per-
mits the exercise of enlightened self-interest to protect the
rights of the claimants through the provision of a vote,
nor allows any court the opportunity of informed judicial
supervision of the terms of the exchange in advance of
their occurrence.
There is no precedent for compelling such exchanges
in the absence of both assent and prior judicial determina-
tion that they are fair and equitable.
*2 I¢ is improbable that the cramdown power is intended to be
available where, as here, there is general objection to the plan by
all classes of claimants. As the leading commentator puts it:
79
D. New Haven Inclusion Cases, 399 U.S. 392, Does
Not Support the Constitutionality of the Rail Act,
but Exposes its Unconstitutionality.
Appellants and Amici Curiae all confirm the under-
standing derived from the legislative history that the Act
is consciously based on the New Haven reorganization and
allegedly draws constitutional support from the decisions
handed down in its course. Appellees here defer to the
New Haven Trustee’s review of the relevant history of
that proceeding which, we are informed, he will present
in his Appellee’s brief. In view of the emphasis placed
upon the New Haven precedent, however, Appellees here
do emphasize certain particulars which demonstrate that
the defenders of the Rail Act are misguided in the comfort
they draw from that proceeding:
In New Haven, the rail properties of the debtor were
conveyed to the newly merged Penn Central, a corporate
colossus having assets with a value more than twenty times
the value of the acquired New Haven properties. The size
of Penn Central, the corporate history of its components,
and the economic prospects for the merged company as
developed in the long Penn Central merger proceeding, all
led to a confidence that the underwritten value of the stock
of Penn Central would furnish fair intrinsic value, espe-
cially when taken together with the conditions and protec-
tions ordered in advance by the reorganization court. Even
so, when it became apparent (because of the filing of the
Penn Central reorganization petition) that there was doubt
about the value of the Penn Central stock, this Court re-
manded the matter to the District Court observing that:
The fairness and equity that are the essence
of a §77 proceeding forbid our approval of a pay-
ment for the transferred New Haven properties that
may be worth only a fraction of its purported val-
ne.“ New Haven Inclusion Cases, 399 U.S. 392,
488; and compare generally Jd. at 483-89.
Here, by contrast, there is no pre-existing corporate en-
tity to which the rail properties of Penn Central can be
conveyed; rather, the conveyed assets are the totality of
operating assets of Conrail and the prospective earning
power of Conrail turns entirely on its capacity to wring
a profit from those bankrupt lines. There does not exist
behind the Conrail stock even the measure of assurance,
forlorn as it turned out to be, that underwrote the value of
the Penn Central common stock delivered to the New
Haven. No court under the Act may circumscribe with
conditions the compensation to be afforded the Penn Cen-
tral estate under its terms and no court, not even this one,
has the power to do what this Court did in the New Haven
case, namely, remit the cause for reconsideration in light of
doubt about the intrinsic value of the securities constitut-
ing consideration for the conveyed rail properties.
In New Haven, the light at the end of the tunnel at
all times was thought by all parties involved to be real;
here, excepting only the Government and USRA, all parties
including the Trustees, secured creditors, unsecured
creditors and the stockholder—agree that the hope of re-
organization afforded by the Act upon its own terms is
ephemeral.
Here Appellees and the Trustees, creditors and the stock-
holder have strenuously opposed the indeterminate
In New Haven, the bondholders, motivated by con-
siderations mentioned just above, consented to inclusion
by a substantial majority and then bided their time. Here
the consents of Appellees have not been solicited and the
Act affords them no opportunity to register their vigorous
opposition in any operative way. They have, however,
protested, by every means available, the otherwise inex-
orable processes of the Act, in this action, by a motion
to terminate rail operations and by pressing their
eavil of an obstructionist minority. It is also a far ery
from the position taken by the majority of private inter-
ests in the New Haven case.
In New Haven, the reorganization court had continuous
surveillance of the reorganization effort to be effected by
inclusion in the Penn Central merger so that:
(a) It could and did pass upon the plan of re-
organization and the proposed inclusion; the Re-
organization Court under the Act would have no
such power.
(b) It could and did pass upon, modify, and ulti-
mately determine the value for which the New Haven
assets would be conveyed to the merged Penn Cen-
tral, in which capacity it reviewed the elaborate rec-
ord of two separate ICC valuation proceedings; the
Reorganization Court under the Act would have
no such power.
(e) It could and did pass upon the feasibility and
continued vitality of the inclusion as time passed
from its first proposal to the event of its consumma-
tion; the Reorganization Court under the Act would
have no such power.
(d) It could and did determine that if inclusion
— 1 4 — 1444 (December 31.
), i would have been unreasonably delayed and,
notwithstanding its once bright hope, the New Haven
would be shut down; the Reorganization Court under
the Act would have no such power.
ee
In short, at each step of the way the New Haven court
had decisive control of the estate which was im custodia
legis before it. The Rail Act ousts the Reorganization
Court here of that power, denies the Special Court com-
parable powers and strips Appellees of the protection that
such powers would afford.
It is not irrelevant to note that, despite these significant
differences, including the vastly superior prospect of suc-
cess, the substantial approbation of the private interests,
the serutiny of the ICC and the surveillance of the court,
the New Haven inclusion in Penn Central turned out to
be an unmitigated disaster. If, as Appellees contend, a
reasonably likely prospect of feasible reorganization is re-
quired as the constitutional predicate for continued loss
operations, the New Haven experience, fraught with dis-
tinctions and cataclysmic in result, hardly provides a basis
for optimism here.
* *
The Act, therefore, contains neither an assurance of
just compensation or fair value for rail assets to be con-
veyed, nor the financial components necessary to provide
such assurance, nor mechanisms—judicial or consensual—
to protect the estate from loss of its property in the ab-
sence of such assurance. These shortcomings not only affect
the compensation which may come due for the ultimate con-
veyances but also preclude the prospect of compensation
for interim erosion. They are failures of constitutional
magnitude which the Court below was right to declare as
such and to enjoin.
There is No Adequate
— 222958 Ä
3 Appellants urge this Court to hold that the Tucker
et provides an adequate remedy at law for the per-
ceived constitutional inadequacies of the Rail Act and,
upon that ground, to vacate the injunctions issued below."
The same Appellants have also conceded, how
. ever, that
— — — of a Tucker Act remedy a serious constitu-
i issue i i i i
rr mtr oes indeed exist with regard to the propriety
Preliminarily, Appellees contend that one of the ground
* * *
of decision employed by this Court in Youngstown Sheet
4 Tube Co. v. Sawyer, 343 U.S. 579, to reject precisely
the same contention when urged by the Government there
done them. See Altvater v. Nene
319 U.S. 359; Delaney v. Carter Oil Co, 174 F.2d 314, 317 (10th
ident, which was unauthorized by the Congress, could
— * of a claim under the Tucker Act, the Court
noted that the ‘‘seizure and Ss operation —
these going businesses were bound to result in many presen
and — damages of such nature as to be difficult, if not
incapable, of measurement. Id. at 585. Viewing the case
that way, and in the light of the facts presented below,
enormous difficulties are readily foreseeable in identifying
and measuring the damages that could be inflicted upon
Appellees by the compulsory interim operations mandated
by Section 304(f) and the complicated set of conveyances
ultimately contemplated by Section 303.“
Nor does the fact that in Youngstown the President had
ordered direct Government operation of the stee! mills
materially change the complexity and dimension of these
problems. The compulsory operation, for an indeterminate
period even by existing managements, for a public purpose
and under force of law, generated in Youngstown and would
generate here difficulties of damage assessment of the kind
that, in part, motivated this Court to disregard the Tucker
Act as a plausible remedy in Youngstown.
Moreover, an analysis of the Act and its legislative
history makes clear that, even apart from these practical
considerations, the option of a Tucker Act remedy does not
in fact exist. It is plain from such a review that the Act
creates procedures which: (a) are intended to exhaust the
claims upon which a Tucker Act remedy could hypo-
thetically be sought; (b) are intended to vest in the Special
Court exclusive jurisdiction with respect to compensation
for the amount constitutionally owed the bankrupt estates ;
and (c) accurately reflect the explicit Congressional inten-
tion that claimants against the estates of railroads in
reorganization be denied recourse to the United States
Treasury for any deficiencies in compensation under the
mechanics of the Act.
A. The Statutory Scheme of the Act on Its Face Pur
ports to be Exclusive and Exhaustive.
The provisions of the Act comprise a self-contained
structure for the adoption of the Final System Plan which
determines the properties to be transferred to Conrail and
the manner and measure of payment to be afforded in
exchange. This process by its terms is exclusive, pre-
emptive and exhaustive of any cause of action against the
United States.
The Act clearly sets up a preemptive system of judicial
participation with respect to the Final System Plan. See-
tion 209 mandates the empanelling of the Special Court
and the consolidation before it of ‘‘all judicial proceedings
with respect to the final system plan.“ Section 303(c)
endows the Special Court with the duty to review the
consideration to be received for the properties conveyed
and ultimately the authority to enter a deficiency judgment
against Conrail. The exclusive appeal from the Special
Court’s findings is provided for in Section 303(d).”
Section 303 (d) provides that:
A finding or determination entered pursuant to subsection
Court of the the same manner that an injunction
order may be appealed under section 1253 of title 28, United
States Code: Provided, That such appeal is exclusive
-~
The very nature of the mode of exchange set out in the
Act reinforces the conclusion that Congress legislated what
it believes to be an exclusive method for both measuring
and satisfying Appellees’ rights to just compensation for
their property transferred to Conrail. Congress provided
in Section 206(d)(1) that the transfers to Conrail ‘‘shall
be . . in exchange for stock and other securities of [Con-
rail].“ Consistent with that intent, the Special Court,
which has the power to determine the fairness of the ex-
changes mandated by USRA, decides, after the fact,
whether the transfers to Conrail and the exchange of
securities are in the public interest and are fair and equit-
able to the estate of each railroad. The remedy granted
to the Special Court to cure any failure of the exchange to
meet the fair and equitable standard is: first, to reallocate
among the various railroads those securities of Conrail
which had been deposited with it prior to the transfers;
second, if the lack of fairness and equity is not thereby
cured, to order Conrail to provide additional securities of
Conrail or the limited obligations of USRA, specified in
the Final System Plan, as may be necessary; and finally,
“if the lack of fairness and equity cannot be completely
eured’’ by these first two steps, then the Special Court
Shall. . . enter a judgment against [Conrail]’’ (Section
303(¢)(2)(C)). In Section 303 (e) (3), the Act preseribes
the applicable standard of completeness to be ‘‘the consti-
tutional minimum standard of fairness and equity.“
Congress clearly determined, then, that the deficiency
judgment against Conrail—which, under Section 209, only
the Special Court has subject matter jurisdiction to render
was to be the means by which any shortfall below the
‘‘constitutional minimum“ was to be completely cured.’’
Of course, if the deficiency judgment is intended to be the
complete cure of such a corstitutional deficiency it must by
that fact have been intended to extinguish the claim for
such a shortfall which is said to be available in the Court
of Claims. There simply is no room for inference from the
statutory scheme that any recourse was left to the public
coffers.
Amicus Curiae Brief submitted herein by thirty-
Pm ... members of the House of Representatives eo
e
House side) makes clear, if it was not already —_ <
legislative intent underlying passage of the Act.
Brief states in pertinent part (pp. 17-22):
„The Tucker Act, 28 U.S.C. 1491 (1970), waiver
of the sovereign’s jurisdictional immunity was en-
acted to provide adequate opportunity for expedi-
tious and orderly determination of claims against
the government. The Tucker Act deals with the five
limited areas of liability to which the government
consents. The five areas do not purport to deal with
the upholding of other Acts of Congress. This Court
has never relied upon the presence of the Tucker
Act to uphold the constitutionality of another Act
of Congress. Be
„The logie employed in attempting to argue
the Rail * constitutional because of a potential
Tucker Act remedy is indeed strained. Each and
every act of Congress of a similar nature, irrespec-
tive of the amount of authorization or the process
provided for — OSS a.
ally upheld on the grounds that a future Tucker
remedy might be invoked. — on ys yen
in passing the Tucker Act was not to insure
constitutionality of potential unconstitutional laws
and such a precedent would be very dangerous.
„ there is no question that in considering
process under this Act the 93rd Congress, specifi-
cally the House of Representatives, rejected —
the Federal Courts the key to the Treasury w
would result from an open-ended deficiency judg-
ment against the United States. The legislative
history of this Act is emphatic in restricting the
total amount of funds to be used in carrying out the
reorganization process authorized by the Act.
If this Court should decide at this time that a
mechanism of a deficiency judgment against the
United States under the Tucker Act is necessary to
make this Act constitutional, the the [sic] Act must
fall since the legislative history and the language
of the Act are clear that no deficiency judgment
against the U.S. is authorized by the Act.
As Congress envisioned it, then, only the Special Court is
to review the exchange of securities for rail properties, and
as to its functions its jurisdiction was plainly intended to
be exclusive. No other agency, court or entity, including
the Court of Claims, was given such authority.
As a practical matter (questions of the adequacy of the
consideration apart), it makes some sense to vest the
Special Court with such an exclusive and preclusive role.
That Court, in determining the fairness of the considera-
tion, must allocate the securities of Conrail among the
various estates of the bankrupt railroads. This allocation
obviously can only be made by a court competent tu azcer-
tain the values of all the properties transferred by the
various railroads pursuant to the Final System Plan. It
is impossible to believe that Congress went to such great
pains to create this new tribunal and endow it with the
special and unique function of allocating Conrail securities
among the various railroads, and at the same time con-
templated that the estates of the railroads should undergo
still another, duplicate proceeding in the Court of Claims
to supplement the inadequate consideration awarded by
the Special Court.
As Appellants contend, there is no doubt that Congress
thought that the consideration available under the terms
of the Act would be sufficient to afford a ‘‘constitutional
the Act from its unconstitutionality.
B. The Legislative History is Consistent Only With
the Exclusion of a Remedy in the Court of Claims.
The entire history of the Act is instinct with the Con-
gressional intent not to afford the bankrupt estates or
their creditors recourse to the federal treasury in the
not and do not attribute any such heinous intent to Con-
gress. Appellees merely take the Congress at its word:
if the procedures of the Act are inadequate on their own
of anv federal investment that should be made in the
This intent is evident from a review of the Act as it
went through the drafting process, from the various Com-
mittee reports dealing with it, from the floor debates,
most particularly including the specific explanations of
its managers in both Houses, and finally from the retro-
spective view afforded by oversight hearings and the
Amicus Brief.
To begin with, Congress fashioned the Act in the
model of a Section 77 reorganization for the purpose of
construct is ‘apparent throughout the legislative history.
Congress wanted to cure the Northeast rail crisis ‘‘at the
lowest possible cost to the general taxpayer.’’ Section
101(b)(6). In order to avoid Fifth Amendment claims
roads, the drafters imported language, such as the phrase
fair and equitable, from Section 77, and excised lan-
guage from early drafts of the Act requiring ‘‘mandatory
consolidations of all properties of bankrupt railroads.’
For example, the substitute provision in House Bill 9142
articulates the first goal of the Final System Plan as
follows:
Section 303 (a). The final system plan shall be
formulated in the light of the following goals—(1)
the objective of creating, through a process of re-
organization, a financially self-sustaining rai] service
system. ...’’ (Emphasis supplied.)
Similarly, the final version of the Act which emerged from
the Conference Committee contained fourteen separate
references to the Act as a ‘‘reorganization.’’ The language
of Section 207 and the history underlying the drafting of
it is all to the effect that Congress tried to create in Sec-
Section 303 (a) of the Subcommittee Print H. R. 9142, dated
August 2. 1973 with Changes Proposed by Messrs. Shoup and Adams.
tion 207 a constitutionally adequate procedure comparable
to the Section 77 judicial options.
Congress persistently refused throughout the legislative
process to make the full faith and eredit of the United
States available to guarantee or underwrite Conrail securi-
ties or the deficiency judgment or otherwise to open the
Treasury directly or indirectly. One striking example lies
in the comparison of the report of the Senate Commerce
Committee on S. 2767, the Senate version of the bill —
Rep. No. 93-601, 93d Cong., Ist Sess., Dee. 6, 1973), and
the final conference report on the bill as passed. In the
former, the Senate Commerce Committee, in explaining
Section 206(i), which provided that the Final System
Plan might include terms and conditions for securities
to be issued by what has become Conrail, stated that,
Some form of Federal guarantee of the value of the
Corporation stock may be one such arrangement which
the planners may consider. Id. at 28. The report went
on to note that no such guarantee could become effective
without affirmative joint resolution of Congress. Even
as so limited, however, the Conference Committee ruled
out such a possibility and the eventual bill was explicitly
intended to exclude even the possibility of such a guarantee
of Conrail stock. The conference report specifically states:
“The conferees agreed that the arrangements
recommended by the planners under Section 206(i)
shall not include any form of Federal guarantee
of the value of the Corporation stock.
The conferees thus returned to a position which had been
consistently expressed by prior committee reports. See,
e.g., Explanation of Legislation Pertaining to the Midwest
and Northeast Rail Crisis, Senate Commerce Comm., 93d
Cong., Ist Sess. (Nov. 15, 1973) at 17 where it is observed
% H. R. Rep. No. 93-744, 93d Cong. Ist Sess. 56 (Dec. 20,
1973).
that ‘‘The limitations on the amount of obligations Fannie
Rae [now USRA] is allowed to issue would determine
what the maximum exposure of the Federal Government
would be. (Emphasis added.)
That Congress passed the Act in this form and upon
this understanding is made clearer still by study of the
debates.
The debates in both the House and the Senate are
replete with explanations of the scheme of the Act as pro-
viding non-governmental compensation to the estates of the
bankrupt railroads thus saving the American taxpayers
from paying billions in just compensation to the estates.
Perhaps the most important of these exchanges occurred
during the discussion on the conference report accompany-
ing H.R. 9142 in a colloquy between two of the
on the Part of the House’’ on December 20, 1973:
Mr. Kuykendall. Mr. Speaker, I would like to
ask the gentleman from Washington 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 interpretation of
the guarantees we have to keep that from happen-
ing in the court proceedings?
Mr. Adams. Mr. Speaker, there is a definite
limitation on the total amount that can be authorized
under this 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 Conrail] was to be at the lowest possible limit
to meet the constitutional guarantees.
„Mr. Kuykendall. There is no way the Federal
Court may assess the taxpayers or this Congress
on the judgments of the creditors, is that correct?
„Mr. Adams. The gentleman is correct.
„Mr. Kuykendall. There is no way they can
assess the Congress for the money?
„Mr. Adams. The gentleman is correct.
The Amicus Brief (pp. 21, la-3a) filed by, among others,
those who spoke the words, clearly believes the Court be-
low correctly caught their meaning (JA 49-50). Also illus-
trative is a statement made by the co-drafter of the House
Bill, H.R. 9142, Congressman Adams:
„„ e have done everything possible in the leg-
islative history surrounding this bill to make cer-
tain that no more than the constitutional minimum
for liquidation as defined by the Supreme Court will
be paid by the new corporation for the properties
obtained from the bankrupt estates. In addition, we
have limited the amount of Government loan guar
antees that can be used for acquisition so that tax-
payers are protected both by legislative history
guided by the determination of the Court and by
an absolute limit on the amount of Government
guaranteed loans that can be used.
«|. There is a specific limitation in the final bill
which says no more than 6200 million of Government
loan guarantees can be used for acquisition in any
event, so if the court in 5 to 10 years should come
in with a higher value, the only judgment vould be
j -~noration
11 119 Cong Rec. H11876 (iy ed. Dec. 20, 1973).
72 119 Cong. Rec. H9732, 9742 (daily ed. Nov. 8, 1973).
Congressman Metcalfe, a member of the Transporta-
bill to the House Committee on Interstate and Forei
Commerce, speaking on behalf of the bill, stated that:
. I think that those who look upon this as a
‘billion dollar bonanza’ are using terms which are
misleading to the American people. Title VI of the
bill is concerned with financial arrangements and
obligations of the association. Under this section
the Federal Government will guarantee obligations
of the association up to $1 billion. This will not be
at any cost to the Federal Government. Under this
title the Federal Government is guaranteeing loans,
not granting subsidies.
Moments later, Congressman Shoup, a co-author of
H.R. 9142, observed that the Special Court would have to
the railroads within the private sector. It calls for no
great and continuing influx of Federal funds.
Consistent with the remarks made in the House, when
asked by Senator Beall to describe the total amounts
money involved in the process of the Rail Act, the man-
ager of the Senate bill, Senator Hartke, listed only the
authorization on the face of Act for grants, debt
guarantees and labor protection.“ Indeed, Senator Hartke
went on to express the view that a Court of Claims case
might be created by not passing the Rail Act.“
* 119 Cong Rec. H9741 (daily ed. Nov. 8, 1973).
™ 119 Cong. Rec. H9742 (daily ed. Nov. 8, 1973).
"8 119 Cong. Rec. H9746 (daily ed. Nov. 8, 1973).
7 119 Cong. Rec $23777-78 (daily ed. Dec. 21, 1973).
" 119 Cong. Rec. $23783-84 (daily ed. Dec. 21, 1973).
It is significant that nowhere is there a single comment
either in the House or the Senate evidencing intent to
appropriate additional funds should the Act’s provisions
prove to be insufficient.
After argument below, Oversight Hearings were held
by the Subcommittee on Transportation and Aeronautics
of the House Committee on Interstate and Foreign Com-
merece to inquire into the Tucker Act position argued below
by USRA and the Government, and to make it clearer still
that recourse to the Treasury via the Court of Claims was
not intended by Congress. In these hearings, Congressman
Dingell chastised Appellants for taking the legal position
below that a Tucker Act remedy is available:
„ I believe the actions of the Department of
Transportation and the Department of Justice, as of
this point, are in the gravest error and constitute a
clear misconstruction of the intentions of the
Congress with regard to the Northeast Rail legisla-
tion and constitute what may properly even be
charged as a potential throwaway, or giveaway of
millions or perhaps even billions of dollars of the
taxpayers’ money in the clearest defiance of the ex-
press intent of the Congress as set forth in the re-
ports, the debate and in the clear language of the
legislation, which we are presently scrutinizing in
this gathering here today. (pp. 253-4)
> > >.
wish to reiterate my outrage in the situation
which I see going on before us. I wish to state that,
it is, again, in my view, the clearest and most extra-
ordinary defiance of the clearly expressed intention
of the Congress with the portent of perhaps millions
or perhaps even billions of dollars of taxpayers’
money being dissipated to persons who have no
proper and rightful claim on it, either under the Con-
stitution or the law.
I think, for the Department of Justice, or the
Department of Transportation to engage in the kind
of brief that I have seen here before us today, essen-
tially agreeing with the rape of the public Treasury,
is a seandal of the greatest dimension, and I think it
may necessarily fall upon this committee or one of
our subcommittees to look into and to inquire into
why this kind of extraordinary action has been taken
in terms of a total and clear misconstruction of the
attitude of the Congress and the intention of the
Congress when we passed the legislation. (pp. 254-
55)
Congressman Dingell continued, quoting from a memo-
randum prepared for the Committee by the Library of
Congress :
It should be noted that any claim which is
granted by the court of claims must be paid by ap-
propriated funds of the United States. The testi-
mony sets the potential value of the rail properties
of the Penn Central at as much as $12 billion to $14
billion.’
That is the potential liability of the taxpayers
here. That is, if this matter is not handled with
great care by the Attorney General and the Execu-
tive Departments, ‘the scrap or salvage value alone
is estimated to be at least $2 billion. Such enor-
been
brought to the attention of the Congress at the time
of the passage of the Act, but the statement of the
floor managers of the Act in the
]
4
18
On the same occasion, Congressman Skubitz adopted
and read into the record a portion of the Library of Con-
gress memorandum which, after quoting the Conference
Report passage quoted supra at 91, went on to say (Id. at
284-85) :
It hardly appears reasonable that the Congres-
sional managers of the Act would so explicitly ex-
clude the possibility of a Federal guarantee of the
value of Con-Rail stock if a similar guarantee were
available through the back door by means of the
Tucker Act.
It is a far more reasonable conclusion that the
Congress intended to preclude all Federal guaran-
tees regardless of their source. In short, the credit-
ors may pursue the assets securing their liens insofar
as possible. They cannot, however, assert them on
the Federal Treasury.
In short, the House Committee from which the Rail Act
originally emerged has gone to extraordinary lengths to
repudiate any attribution to Congress of an intention to
leave open any recourse to the Treasury under the Tucker
Act.
Given this clear Congressional] instruction, it is improvi-
dent to assume, as Appellants do, that Congress would
appropriate funds to pay a Tucker Act claim when in the
first instance Congress refused to authorize such funds
after full consideration of the financial aspects of the rail
crisis. The probable result of the operation of the Act,
if allowed to proceed to fruition, is another crisis (and
perhaps another Section 77 proceeding) caused by Con-
rail’s inability to pay the deficiency judgment against it.““
If such a crisis should come to pass, Congress, upon return-
ing to the drawing board, might choose a variety of
remedies—an obvious one being withdrawal of consent to
be sued in the Court of Claims and enactment of yet
another legislative attempt to keep the rails running and
again to ‘‘assure’’ creditors of that constitutional mini-
mum standard of fairness and equity.“ Section 303 (e) (3).
This round would, of course, find Appellees as unsecured
judgment creditors and shareholders, years down the road,
having suffered further erosion of the assets potentially
available to satisfy claims.
One can only assume that Congress will not be any more
willing to compensate Appellees for their losses should the
Court of Claims enter a judgment than it was when it con-
sidered and rejected such compensation in enacting the
Act. Appellants are asking this Court to reach a whoily
speculative conclusion that Congress, rather than choosing
other, less onerous remedies, would drain the Treasury to
pay a judgment of hundreds of millions or billions of dol-
lars which would have been entered in the first instance,
by the terms of its own Act, against a private entity,
Conrail.
Such a judgment is unprecedented in the history of the
Court of Claims“ and even if such a judgment be entered,
Congress could refuse to appropriate the funds to meet such
a judgment.“ Glidden Co. v. Zdanok, 370 U.S. 530, relied
on by Appellant USRA (USRA Br. at 60), does not indicate
a contrary result. Examining whether the Court of Claims
was an Article III court so that its judges could properly
sit on the benches of other federal cov ts, this Court held
that the functions of the Court of Claims were sufficiently
judicial in nature to bring its jurisdiction within Article
III. One aspect which the Court singled out in its opinion
for special treatment was the Court of Claims’ lack of
enforcement power for claims in excess of $100,000. While
the Court noted that Congress had refused to pay a Court
of Claims judgment again:t the United States 15 times
in 70 years, it nevertheless held that the judicial power
of the Court of Claims was not so severely impaired as to
place it outside the ambit of Article III. The holding of
Glidden does not stand for the proposition that the Court
of Claims may enforce its own judgments, or that Congress
„A review of the annual reports of the Clerk of the Court of
Claims indicates that the largest judgment ever rendered by that
Court amounted to $31,761,207.57, exclusive of interest. This
judgment was actually four judgments rendered in consolidated
cases and rendered pursuant to joint motion and stipulation as to
the amount. Confederated Bands of Ute Indians v. United States,
117 Ct. Cl. 433 (1950). Broken down, the judgments were
$24,296,127; $6,037,567.72; $623,686.18; and $803,826.48. The
Deere
1938, 52 Stat. 1209, 75th Cong, 3d Sess., as amended, which gave
the Court of Claims jurisdiction to render judgment against the
United States arising out of, inter alia, the ceding of Indian lands
to the United States pursuant to a federal statute passed in 1880
The Government's liability was established in 100 Ct. Cl. 413
(1943). A related decision as to valuation standards and other
*° 31 U.S.C. §724a; 28 U.S.C. § 2518.
100
may not refuse to appropriate funds to pay a judgment of
that court when it so chooses,"' or that demonstrated Con-
gressional resistance to any such appropriation may not
be considered, in a proper case, on the issue of whether
the Tucker Act remedy is sufficiently certain to be ‘‘ade-
quate.’ 2
Congress having explicitly made the Treasury immune
to recourse under the Act, this Court should not assume
that Congress would turn full circle to afford funds which
it quite consciously refused to provide in the operation of
the Act. The Court below found that the Act was designed
as a self-contained mechanism for the complete effectua-
tion of the Fina] System Plan without resort to the Court
of Claims.
For this court to interpret the Act in a manner
contrary to its explicit terms, contrary to the express
representations of the bill’s managers at the con-
Treasury to presently incalculable, but, in any event,
101
we did this, the judiciary would truly have become
the ‘law-giver’ for substantial federal appropria-
tions ; this in itself would raise serious constitutional
problems.
To accept the government defendants’ conten-
tion 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 interstitially; they
are confined from molar to molecular motions.’
[Southern Pacific Co. v. Jensen, 244 U.S. 205, 221
(Holmes, J., dissenting)]. To 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. (JA 52-53)
In this view, Appellees submit, the District Court was
eminently correct.
Appellees contend, therefore, that the Tucker Act is
clearly unavailable. But even uncertainty about the avail-
ability of the remedy defeats it as ‘‘an adequate remedy
at law. American Life Ins. Co. v. Stewart, 300 U.S. 203,
214-15; Doris v. Wakelee, 156 U.S. 680, 688. See also
Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S. 579, 585;
Bohler v. Callaway, 267 U.S. 479, 488; Union Pac. N. R. v.
Board of County Comm'rs, 247 U.S. 282, 285-86.
It is illusory to expect the Tucker Act to afford final
refuge for Appellees, either under the Act, or under any
rationally foreseeable set of circumstances in which it
might become necessary. Accordingly, there was no ade-
quate remedy available to Appellees to redress the wrongs
threatened by the Act that could have justified the Court
below in withholding injunctive relief.
102
111.
Injunctive Relief Granted Below was Timely and
In addition to their substantive quarrels with the Dis-
triet Court decision below, Appellants challenge the in-
junction iv A on the ground that it was premature and
extravagant in its scope. It was neither.
Appellants’ contention that the injunction was pre-
mature derives almost entirely trom their perception of
the merits of the case. Thus they argue that since no
unconstitutional erosion is visited by the Act upon the
estate of Penn Central, it is untimely to enjoin the pro-
visions of the Act which command its continued opera-
tions (see, eg. USRA Br. at 62-63). Such substantive
contentions have already been addressed.
If the Court below was correct on the merits in per-
ceiving imminert constitutional harm to Appellees, then no
valid separate argument exist. that the Court below should
have postponed granting relief. The argument based on
timeliness, then, rises or falls with the arguments on the
merits and is not truly an independent objection to the
Court's order.
The propriety of the order, both as to timeliness and
scope, is further demonstrated by the fact that, pursuant
to the terms of the Act, the Court below could not have
postponed such relief, eve if it had so desired. Once
the provisions of the Act embrace the estate of a railroa’
in reorganization, a network of provisions in the Act effec-
tively precludes any subsequent judicial intervention to
halt or deflect its inexorable processes. Upon finding those
processes involved a constitutional wrong to Appellees,
there was no later point in the course of the Act at which
the District Court could have afforded the relief it granted
below.
103
Indeed, it is the design and effect of the Rail Act that
the federal judiciary be excluded from any such role, and
the Act in this respect is at least thorough.
The several deeretal paragraphs of the injunction issued
below all reflect sensitivity to the ouster of the federal
courts from subsequent opportunities to grant similar
relief and are thoroughly justifiable as to timeliness and
reach, separately and together, in light of that pervasive
exclusionary effect.
Section 301(f) of the Act, as we have already pointed
out, specifically commands continued operations notwith-
standing any decision of any federal court. That pro-
vision effectively prevents the Reorganization Court, or
any other court, from fixing, at some later date, when the
issue is thought to be more mature, a point of unconsti-
tutional erosion requiring abandonment, cessation or re-
duetion of services. The injunction below merely excises
that prohibition; it enjoins the defendants from taking
any action to enforce the provisions of Section 304(f)
with respect to any abandonment, cessation, or reduction
of service which has been or may hereafter be determined
The problem with the argument put, for example, by
USRA (USRA Br. at 64-68) that the injunction adds noth-
nig to the existing power of reorganization courts to order
such service -eductions is that it disregards the explicit con-
trary language of the statute. The injunction below pre-
serves that option to the reorganization courts where the
Act would foreclose it. Since interim operations have been
compulsory under the Act since January 2, 1974, and since
there were pending before the Penn Central Reorganiza-
tion Court petitions and motions directed to the reduction
or termination of service on constitut
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