# Brief for Appellee — Robert W. Blanchette et al., v. Connecticut General Insurance Corp. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_0165%3A04 ## Record - **Collection:** Supreme Court brief - **Document type:** Brief for Appellee - **Published:** January 1, 1974 - **Citation:** 419 U.S. 102 ## Text 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 th i if | li 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 val [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_0165%3A04. Public record. Not legal advice.