Brief for Appellant — RICHARD JOYCE SMITH, etc. v. U.S. (Nos. 74-166, 74-165, 74-167, 74-168)

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3n The —=

Supreme Court of the United sttre™: '*

OCTOBER TERM, 197

. AUG 28 1974

No. 74—166

REGIONAL RAIL REORGANIZA TEESE BE

RICHARD JOYCE SMITH, Trustee of the Property

The New York, New Haven and Hanford

Railroad Company, Debtor, Cross-Appellant

‘

UNITED STATES OF AMERICA, ef al.,

Cross-Appellees

ON CROSS-APPEALS FROM THE

JUDGMENT OF THE UNITED STATES

DISTRICT COURT FOR THE

LASTERN DISTRICT OF PENNSYLVANIA

BRIEF OF

CROSS-APPELLANT

OSEPH AUFRBACH

Of Counsel: J 225 Franklin Street

Bosto , Me sachusetts

MORRIS RAKER 02110 aie

CHARLES W. Mors, JR.

JAMES WM. Moore

SULLIVAN & WORCESTER $4 Bleadne Sire

225 Franklin Street Ne iu Haven Connection

Boston. Massachusetts 06506

O27110

Atiorneys for Appellant

Richard Joyce Smith, Trustee

of the Property of The New

York, New Haven and Hartford

Railroad Company, Debtor

TABLE OF CONTENTS

Tele GE GAMER 2c cccccvesessccccscccssenes

PPPTTTTTT TTI TITLE

Cophetbas Badew nnn scccccsccccccesscccscess

DME ccvcccnceccscccccveccesccececesees

Questions Presented a a ak

Constitutional Provisions and Statutes Involved in

This Cross-Appeal ...........-.222eeeeeeees

Senswmment of the Case ......ccccscccccccscvcces

Summary of Argument ...............005-005:

Argument:

1. THE COURT BELOW ERRED IN NOT

DECIDING WHETHER THE COM-

PULSORY CONVEYANCES MANDATED

BY THE RRRA VIOLATE THE FIFTH

AMENDMENT RIGHTS OF THE NEW

PEAVEN TRUE cc cccsccccccsccssvcss

Il. THE COMPULSORY CONVEYANCE

PROVISIONS OF THE RRRA VIOLATE

THE NEW HAVEN TRUSTEE’S FIFTH

AMENDMENT RIGHTS ................

A. Legal and Factual Setting of the RRRA .

B. The Compulsory Conveyance Provisions

of the RRRA Involve an Intentional Tak-

ing, Not Compensated by Money or its

Perfect Equivalent, of the ey of

Penn Central in Violation of the Fifth

Amendment Rights of its Creditors and

SURED a ccccccccccsscecssQeceses

C. The Fifth Amendment Requires that a

Railroad in Reorganization, Which Is Un-

able to Earn Net Railway Operating In-

come and Whose Properties Are Required

to Be Continued in Perpetual Public Ser-

vice, Be Paid Not Less than the “Highest

and Best Use” Value of its Rail Properties

D. The RRRA Is Constitutionally Defective

in Requiring Payment for Rail Assets in

the Form of Securities of Conrail Without

Any Provision for a Guarantee that the

Value of Such Securities Will Be the Per-

fect Monetary Equivalent of the “Highest

and Best Use” Value of the Rail Assets ..

Pag:

E. A Requirement that Rail Properties of

Penn Central Be Exchanged for Securities

of Conrail Is a Denial of Constitutional

Rights to Dismissal of the Reo ization

Proceedings and Termination of Loss Op-

GEE Se 6ocves ves inerusswksendesenne 84

". Adjudication that the Compulsory Con-

veyance Provisions of the Present RRRA

Are Unconstitutional Can and Should Re-

sult in a Congressional Enactment

Amending the RRRA to Authorize Pay-

ment as Required by the Fifth Amend-

ment for Penn Central's Rail Properties . 88

Ill. THE PROCEDURES OF THE RRRA OF-

FEND PROCEDURAL, DUE PROCESS BY

MANDATING CONVEYANCE OF RAIL

ASSETS PRIOR TO JUDICIAL REVIEW

OF THE ADEQUACY OF THE CON-

SIDERATION PAID WHERE THERE IS

NO POSSIBILITY THAT A COURT MAY

SET ASIDE THE CONVEYANCES ....... 93

IV. TO THE EXTENT THAT THE RRRA

AMENDS THE SUBSTANTIVE AND

PROCEDURAL PROVISIONS OF §77 OF

THE BANKRUPTCY ACT, THE RRRA IS

A “LAW ON THE SUBJECT OF BANK-

RUPTCIES” AND IS VOID FOR WANT

OF GEOGRAPHICAL UNIFORMITY .... 99

A. The RRRA Is an Invalid Non-Uniform

Statute as yy my to Penn Central, and

Creditors of Penn Central Have Standin

to Challenge the Lack of Geographica

SET “OG0SAveldecceciesessanacecs 99

B. The Court Below Was im Error in Con-

cluding that the RRRA’s Defect as Non-

Uniform Legislation on the Subject of

Bankruptcies Taints Only the Provision

Requiring Mandatory Dismissal of §77

MMP SoS edevccvcccscccecsessose 103

SIE Who. ba Gat oukh Hane deeccune wkeva ce oak 107

ED Sas WN obs cubdkse sedepiesuchiestiouess A-l

TABLE OF CITATIONS

Cases:

Almota Farmers Elevator & Warehouse Co. v.

United States, 409 U.S. 470 (1973) ........

Ashwander v. Tennessee Valley Authority, 297

UB. SOB (ICSE) 2... ccccccccccccccccceses

Association of Data Processing Service Or-

een Inc. v. Camp, 397 U.S. 150

DOIG) ..ncncccccccccccccsesesevcccceces

Baltimore & Ohio R.R. v. United States, 298 U.S.

SOD (IGBEP. ..ccccccccccccccccccccsesess

Baltimore & Ohio R.R. v. United States, 386 U.S.

STB (OGRA) on ccccccccccccccccccscccceces

Brooks-Scanlon Co. v. Railroad Commission, 251

Te YY Ferrer rrr.

Bullock v. Florida ex rei. Railroad Commission,

BB4 UG, SED GIGBSD ccccccccccescccccces

Case v. Los A s Lumber Products Co., 308

We f £=x%»°» error rr

Central R.R. of New {oe v. Manufacturers

Hanover Trust Co., 421 F. 2d 604 (3d Cir.),

cert. denied, 398 U.S. 949 (1970) ..........

Communist Party of the United States v. Sub-

oy Activities Control Board, 367 U.S. |

D vccecededeccnccecdocesesoccecoese

Consolidated Rock Products Co. v. Du Bois, 312

U.S. SIO (IDGE) 2... cccccccccceccccees

Continental Ili. Nat. Bank v. Chicago, RI. & Pac.

Ry., 294 U.S. 648 (1985) ..... 6... cece eu

Data Processing Service v. Camp, 397 U.S. 150

CIGTED oc cccccccccccvccceseccccceceeesees

Eccles v. Peoples Bank, 333 U.S. 426 (1948) ...

Ecker v. Western Pacific R.R. Corp., 318 US.

GED TN Necinies indaseaeaniiaenna

Epperson v. Arkansas, 393 U.S. 97 (1968) .....

Federal Power Commission v. Hope Natural Gas

Co., 320 U.S. 591 (1944) oo. cece

Flast v. Cohen, 392 U.S. 83 (1968) ...........

Group of Institutional Investors v. Chicago, M.,

SLP., & P. R.R., 318 U.S. 523 (1943) ......

Hanover National Bank v. Moyses, 186 U.S. 181

GEE Sndeeredecoeedasdevcncceccecceccs

In re City of New York (Fifth Avenue Coach

Lines), 18 N.Y. 2d 212, 219 N.EB. 2d 410,

appeal dismissed sub. nom. Fifth Avenue Coach

Lines v. City of New York, 386 U.S. 778

GHEE Scnseccescccssescesccussccccosecs

In re New York, NH. & H. R.R., 289 F. Supp.

40 GD. Comm. BGG... ccccccccccccees

In re New York, NH. & H. R.R., 304 F. Su

793 (D.Conn. 1969), aff'd in part, rev’

. New Haven Inclusion Cases, 399 US.

92 I te Oe i

In re New York, NH. & H. RR. Co., 330 F.

Su 131, 150 331 F. 212 (D. Conn.

), rev'd, 457 F. 2d (2d Cir.), cert.

demed, 409 U.S. 890 (1972). .............

In re New York, N.H. & H. R.R., 378 F. 2d 635

GED. GHEE ne vececccccessctocesececss

In re New York, Ontario & Western Ry., 171 F.

Supp. 634 (S.D.NY. — Tn aiethihbeeede

In 124 approving 8100 Co. (Order a

124 100 million of Trustees’ Certi

Peo5 F’ Supp. 302 (E.D. Pa. 1971) .

In re Penn Central T Co. (Order No.

546, Providing for a Lien Pending

Adjudication of New Haven Trustee's Pr

Claim), 337 F” supp. wou Pa. 1972 y

In re Penn Central Tra Co. (Order No.

602), 340 F. Supp. 851 CD. Pa. 1972) im-

— In re Penn Central Transportation

o. (rer Orders Nos. 192 and 193), 454

Pe PD GED cacccccdccccecccecs

In re Penn Central Tra Co. (Order No.

1137), 355 F. Supp. 343 (ED. Pa. 1973) .

In Cn Penn p nme 7 (Columbus

a ar ea

$633 18ra) prin on fro No! 1672

7,71

45, 84

In re Penn Central Tra ion Co. (Opinion

& Order No. 1507 re Pha ja Commuter

Service) (E.D. Pa. March 18, 1974) ........

In re Penn ood ™

in Support 0. seb ¢ af l

Findings s2071b) (E.D. 2B Day

In re Penn Central ry my Co. (Mem-

orandum in Support & Order No.

1596 Pursuant to to Second Sentence of

§207(b) nization

Act of 19 IED. july. 2, SE alckese

In re Penn Central viewer 7 ar Co. et al.

(Memorandum in Su wh f aay ndings and Or-

ders Pursuant to the Clause of §207(b)

of the ~~ +” Rail R mization Act

1933 im Sec v Pracecdange)

(E.D. Pa. July 2, 1974) ... 0.0.66 c cee

In ve Port A ity Trans-Hudson Corp., 20

N.Y. 2d 457, 231 N.E. 2d 743, cert. demed

sub. nom. Port Authority Trans-Hudson Corp.

a Rapid Tubes Corp., 390 U.S. 1

i rrrrrrrrrr rr

In re 620 Church Street Bldg. Corp., 299 U.S. 24

GIGS co cccccdccccccccccesescoesesccses

In re Third Avenue Transit Corp., 198 F. 2d 703

le Pree

Investment Co. Institute v. Camp, 401 U.S. 617

(BGT) nccccccccccneccccccccccccccencces

Joint Anti-Fascist R Committee v. McGrath,

341 US. 123 (1951) . 2... cece enue

Juilliard v. Greenman, 110 U.S. 421 (1884) ...

Knox v. Lee, 79 U.S. (12 Wall.) 457 (1871) ....

Lockerty v. Phillips, 319 U.S. 182 (1943) ......

Louisville Joint Stock Land Bank v. Radford, 295

I ac cmnctetaainad

Marbury « Madison, 5 US. ( Cranch) 137

al Diba ecednddhnedapededinethnsgueres

erty Navigation Co. v. United States,

148 U.S. 312 Gl 7 pdt aid oteeeaiee ee

18 et passim

74, 75, 84

56, 57, 58

New Haven Inclusion Cases, 399 U.S. 392

St acodscedeebésteeetsscbestecesvesss

QUEENS cccvesccccccstescescsoesooscceses

alee ge Ry. v. Boyd, 228 US. 482

GEE cvctonecewevecensencneneessesedes

Penn Central Merger Cases, 389 U.S. 486 (1968)

Poe v. Uliman, 367 U.S. 497 (1961) ..........

Railroad Commission v. Eastern Texas Railroad,

ff § Reese Sue

Railroad Transfer Service, Inc. v. Chicago, 386

ae GES GEES cccrtcovesiccccceseveces

Reconstruction Finance v. Denver & R.G.W.

R.R., 328 U.S. 495 (1

SET cist tiadicbadcadieeeldsact aia

United States v. Miller, 317 U.S. 369 (1943) ...

United States v. Raines, 362 U.S. 17 (1960) ....

United States v. Reynolds, 397 U.S. 14 (1970) ..

Vanhorne’s Lessee v. Dorrance, 2 Dali. 304 (Cir-

cuit Court Pa. 1795)

Vanston Bondholders Protective Committee v.

Green, 329 U.S. 156 (1946) ..............

Wright v. Umon Central Life Ins. Co., 311 U.S.

PEED cocncenccesccesessosscoececcs

v. Vinton Branch Mountain Trust Bank,

ee ED eccendnencindeseddes

Yakus v. United States, 321 U.S. 414 (1944) ...

Administrative Decisions:

New York, Ontario and Wesiern Railroad Re-

organization, 295 1.C.C. 346 (1956) .......

Penn Central Transportation Company Re-

organization, Report on Reorganization

Finance ket No. 41 (Sep-

tember 28, 1973) .... 2.6... 6. cece eee nees

Constitutional Provisions and Statutes:

Constitution of the United States:

Article I, Sec. 8, Cl. 3 (Commerce Clause) .

Article I, Sec. 8, Cl. 4 (Bankruptcy Clause)

Anticle I, Sec. 9, CL. 7 2... 6 occ cece

DA TED cddedcccsacocccccecccescesees

EEE cccccccececocecocccecvcecoses

Statutes:

Bankruptcy Act:

Section 24, 11 U.S.C. §47 .............

Section 77, 11 U.S.C. §205 ............

Pree

ee ee

)

X, 11 U.S.C. §§501-676 (suc-

clase BD GIVE cc cccccccccccccees

Emergency Price Control Act of 1942, 56

Stat. 23, 50 U.S.C. App. §§901 ef seg. ...

E Rail Services Act of 1970, §3,

45 Use. MED pccnvcesssovceeoscetes

Frazier-Lemke Act, 48 Stat. 1289;

Amended Frazier-Lemke Act, 49 Stat.

ll sich deenedkakeusesseesedsensetes

Interstate Commerce Act, 49 U.S.C. §§1 ef

seq:

BD cccccccccsccssccsoececcccees

BEEIEED occccccccccovcccccccosccees

2 ef passim

47, 104, 105,

106

vill

Judicial Code, 28 U.S.C.

5... RPTITUTITULLLELELE TLL

Saneay caer Ae, ren §§151 et seq. .

ae = yr nization Act of 1973,

Law 93-239, oer Stat. 985, 45

U.S.C. §§701 et seq.:

a eee

“ee eee eee eee eee eee eee

Senate Joint Resolution No. 59, Public Law

93-5, 87 Stat. 5 (February 9, 1973) .....

Trading With the Enemy Act, 50 U.S.C.

App. §§1 ef seg. 6.66. c cece cece eeee

Page

17, 35, 98

4 et passim

18 et passim

12 et :

48, 102

99, 100

21, 44, 60

In The

Supreme Court of the Anited States

OCTOBER TERM, 1974

No. 74—166

REGIONAL RAIL REORGANIZATION CASES

RICHARD JOYCE SMITH, Trustee of the Property

The New York, New Haven and Hartford

Railroad Company, Debtor, Cross-Appellant

VU.

UNITED STATES OF AMERICA, et al.,

Cross-Appellees

ON CROSS-APPEALS FROM THE

JUDGMENT OF THE UNITED STATES

DISTRICT COURT FOR THE

EASTERN DISTRICT OF PENNSYLVANIA

BRIEF OF

CROSS-APPELLANT

INTRODUCTION

This bref is submitted on behalf of cross-appellant,

Richard Joyce Smith, Trustee of the Property of The

New York, New Haven and Hartford Railroad Com-

pany, Debtor (the “New Haven Trustee” and “New

Haven,” respectively). Since July, 1961, the New Ha-

ven has been in reorganization under §77 of the Bank-

ruptcy Act, 11 U.S.C. §205; however, since December

31, 1968 New Haven’s former railroad has been oper-

ated by Penn Central Transportation Company (“Penn

Central”), pursuant to the inclusion approved by this

Court in’ Penn Central Merger Cases, 389 U.S. 486

(1968) and New Haven Inclusion Cases, 399 U.S. 399

(1970). On June 21, 1970 Penn Central filed a petition

seeking reorganization under §77. The New Haven

Trustee is presently owed $123,809,404 by Penn Cen-

tral, exclusive of interest, out of a total purchase price,

approved in New Haven Inclusion Cases, of

$174,635,899, and his standing in this case is predi-

cated upon that unpaid claim. The New Haven

Trustee, together with certain other plaintiffs (whose

actions were consolidated for oral argument and dis-

position), prevailed in the court below as to certain of

the constitutional contentions presented for decision;

however the court below failed to reach other, even

more basic, constitutional issues. As a result, although

an appellee as to the appeals taken by the defendants

below, the New Haven Trustee is a cross-appellant as

to so much of the order below as ‘enied in part his

claim for relief.

OPINIONS BELOW

The opinions and order of the district court have

not yet been reported; they are reproduced in the

Joint Appendix of the Appellants and Appellees, pp.

9-83 (hereinafter cited as “JA"). The instant case,

Smith v. United States (E.D. Pa. Civil Action No. 74-

1107) was consolidated for oral argument and dis-

position below with two related cases, Connecticut Gen-

eral Ins. Corp. v. United States Ry. Ass'n (E.D. Pa. Civil

Action No. 74-189) and Penn Central Co. v. Brinegar

(E.D. Pa. Civil Action No. 74-1149).

JURISDICTION

Jurisdiction in this Court is based on 28 U.S.C.

§1252. On August 23, 1974, the New Haven Trustee

filed a Jurisdictional Statement relating specifically to

the jurisdiction of this Court to hear this cross-appeal.

By stipulation of counsel for the New Haven Trustee

as cross-appellant and all other appellants and appel-

lees, this Brief is being filed in advance of the de-

termination of the Court as to probable jurisdiction in

order to facilitate an expedited briefing and hearing

schedule as sought by all the parties.

QUESTIONS PRESENTED

1. Was the court below in error in refusing to adju-

dicate whether or not the compulsory conveyance pro-

visions of the Regional Rail Reorganization Act, 45

U.S.C. §§701 et seq. (“RRRA”), are void on their face as

repugnant to the constitutional rights of the New Ha-

ven Trustee and other claimants to the Penn Central

estate?

2. Did the New Haven Trustee have standing to

assert that the enforcement of the compulsory con-

veyance provisions of the RRRA, if not enjoined,

would cause irreparable injury to the New Haven

estate?

3. Where a railroad in reorganization under §77 of

the Bankruptcy Act is unable to achieve an earnings-

based reorganization by reason of large deficits in net

railway operating income and the lack of any prospect

of earnings, can Congress by enactment of new leg-

islation deprive claimants to the railroad’s estate of

their right to insist upon termination of rail operations

and the sale of rail properties subject to their mort-

gage liens for their “highest and best use” value?

4. Considered as an exercise of Congress’ Com-

merce Clause and eminent domain powers, do the

compulsory conveyance provisions of the RRRA in-

volve an intentional uncompensated taking, or a tak-

ing not compensated in money or its perfect equiv-

alent, of the property of Penn Central, and of

claimants to its estate, in violation of the Fifth Amend-

ment to the Constitution?

5. Considered as an exercise of Congress’ Bank-

ruptcy Clause powers, do the compulsory conveyance

provisions of the RRRA offend substantive due pro-

cess rights of claimants to the Penn Central estate by

divesting such claimants’ liens on valuable rail trans-

portation properties in exchange for common stock

and other securities of uncertain value of a gov-

ernmentally-controlled corporation and an illusory de-

ficiency judgment against such corporation?

6. Do the compulsory provisions of §303(b)(1) and

(2) of the RRRA, requiring conveyance of rail proper-

ties and divestment of the liens of claimants to the

Penn Central estate, in advance of judicial de-

terminations as to “highest and best use” value of such

properties and the equitable equivalent value of the se-

curities and common stock to be exchanged therefor,

offend the procedural due process rights of claimants

to the Penn Central estate?

7. Are the compulsory conveyance provisions of

§§206, 207, 208, 209, 303 and 304 of the RRRA void

as a law, purportedly on the subject of bankruptcies,

which is not uniform geographically throughout the

United States?

CONSTITUTIONAL PROVISIONS

AND STATUTES

INVOLVED IN THIS CROSS-APPEAL

The constitutional provisions and statutes involved

in this cross-appeal include:!

Constitution of the United States:

Article I, Section 8, Clauses 3 and 4

Article I, Section 9, Clause 7

Fifth Amendment

Statutes of the United States:

Regional Rail Reorganization Act, Public Law

93-236, 45 U.S.C. §§701 et seg. (JA 391)

Section 77 of the Bankruptcy Act, 11 U.S.C.

§205

STATEMENT OF THE CASE

Penn Central is the successor to The Pennsylvania

Railroad Company and The New York Central Rail-

road Company, whose merger was finally approved by

this Court in Penn Central Merger Cases, supra.2 As one

of the conditions of the merger, the Pennsylvania and

New York Central Railroads agreed to purchase the

assets of the New Haven, which had been in re-

organization under §77 of the Bankruptcy Act since

1961 (United States District Court for the District of

Connecticut, No. 30226). Penn and Central effected

their merger on February |, 1968; and New Haven’'s

'The text of the Regional Rail Reorganization Act of 1973 is printed

in full at JA 391 et seq. The text of pertinent provisions of the United

States Constitution and of Section 77 of the Bankruptcy Act is printed in

the Appendix hereto at A-1 et seq.

*See also Baltimore & Ohio R.R. v. United States, 386 U.S. 372 (1967),

refusing to approve the initial decision of the Interstate Commerce Com-

mission (“ICC”) until it afforded adequate protection to certain eastern

railroads not to be included in the merger.

en er Prin BS . 4

“ . ont Y - vy

whey? Se yh Aaa ,

St nt F

railroad assets were conveyed to Penn Central on De-

cember 31, 1968, by Richard Joyce Smith, Trustee of

the New Haven (together with his then co-Trustee),

subject to later judicial review of adequacy of the pur-

chase price ordered by the ICC.

On June 21, 1970, Penn Central filed for re-

organization under §77 of the Bankruptcy Act (United

States District Court for the Eastern District of Penn-

sylvania, Bky. No. 70-347). Eight days later, this Court

indicated approval of the terms fixed by the New Ha-

ven Reorganization Court (under §77(e) proceedings

on New Haven’s plan of reorganization) for sale of

New Haven’s assets to Penn Central, but reversed and

remanded for further proceedings to consider the ef-

fect of Penn Central's bankruptcy on the value of the

Penn Central's payment, particularly its common

stock, included in the consideration. New Haven In-

clusion Cases, supra.

The early stages of the Penn Central §77 pro-

ceedings were devoted to an effort by the Penn Cen-

tral Trustees to identify the problems which had to be

overcome in order to achieve an earnings-based re-

organization as contemplated by §77. The initial cash

crisis was temporarily alleviated by orders of the

United States District Court for the Eastern District of

Pennsylvania, Judge John P. Fullam (“Penn Central

Reorganization Court”) permitting deferrals of interest

on debt (other than equipment debt), and most leased

line rentals and real estate taxes.’ In addition, acting

*Through December 31, 1973, the following amounts had been de-

ferred: interest, $104 million; leased line rentals, $101 million: taxes,

$241 million. Stipulation as to Factual Matters (printed at JA 317-24;

hereinafter ated as “Stip. Fact”), #912, 13, 14. The total of such deferrals

was $446 million as of December 31, 1973, and represents a priority ad-

ministration claim. This total does not include $57 million of interest on

$300 million of notes secured by pledge of Penn Central's stock interest

in Pennsylvania Co., a non-rail subsidiary. If the interest on the notes se-

cured by the Pennsylvania Co. stock is included, deferrals amounted to

$503 million as of December 31, 1973.

pursuant to §77(c)(3), the Penn Central Re-

organization Court approved $100 million of Trustees’

Certificates,* which in order to be marketable required

the guarantee of the United States authorized by §3 of

the Emergency Rail Services Act of 1970, 45 U.S.C.

§662.

A series of Penn Central Trustees’ Reports dated

February 10, 1971, March 22, 1971, September 17,

1971, February 15, 1972, April 1, 1972, July 1, 1972,

October 1, 1972, January |, 1973, February |, 1973,

and April 3, 1974° disclose the history of the Trustees’

efforts to achieve a private income-based re-

organization of Penn Central. The Trustees began by

asserting that Penn Central could be reorganized if

certain conditions, not within their control, were met.°

Subsequent reports spelled out a lack of success in im-

plementing these conditions. Finally, i their January

1, 1973 and February |, 1973 Repors, the Trustees

acknowledged that reorganization would not be pos-

sible without a government grant (not merely financial

assistance by way of loans or guarantee of borrowings)

on the order of $600 million to $800 million.

There followed an attempt by the Trustees to im-

plement certain crew-consist changes (which had been

the subject of exhaustive, but unproductive, pro-

ceedings under the Railway Labor Act), that resulted

*In re Penn Central Transportation Co. (Order No. 124), 325 F. Supp.

302 (E.D. Pa. 1971).

‘These Trustees’ Reports are reproduced as Documents | through

10 in the Joint Documentary Submission in the court below, ten copies of

which have been filed with the Clerk of this Court.

®The New Haven Trustee on March 10, 1972 advised the Penn Cen-

tral Reorganization Court that in his opinion the Penn Central Trustees’

predictions as to reorganizability of Penn Central on an income basis

were unduly optimistic. See Doc. No. 11 in the Joint Documentary

Submission.

in a strike on February 8, 1973. Congress responded

by enacting Senate Joint Resolution No. 59, which im-

posed a 90-day moratonum on both the work-rule

changes and the strike.’

Shortly thereafter, acting sua sponte, the Penn Cen-

tral Reorganization Court entered an opinion and or-

der regarding the status of reorganization efforts. /n re

Penn Central Transportation Co, 355 F. Supp. 1343

(E.D. Pa. 1973). Judge Fullam concluded as follows:

“Whether the constitutional limit [of erosion] has

been exceeded depends primarily upon how the re-

maining assets are to be vehnatk and this in turn

may well depend upon how those assets are to be

used at the conclusion of this reorganization. Un-

der any view of the matter, if seems clear that the

point of unconstitutionality is fast approaching, if it has

not already arnved.

“The essence of §77 of the Bankruptcy Act is that

the legal remedies normally available to creditors

may be held in suspension for a reasonable time in

o to permit rehabilitation of the enterprise.

Whenever it appears that there is no genuine like-

lihood of ultimate success, the legal and constitutional

Justification for restraining creditors from exercising their

normal remedies disappears.

“It has been a t that the particular prob-

lems of Pena Cole quest be ‘eungiaaly di-

vorced from problems of national transportation

icy. Railroads are, after all, a regulated industry.

woe cody me onmy, Sy be the notion that a

regulated industry can ome bankrupt, the

Trustees’ efforts to rehabilitate the Debtor are cir-

cumscnibed by existing statutes and regulations. To

the extent that these statutes and lations . . .

preclude the exercise of self-help in achieving prof-

"Public Law 93-5, 87 Stat. 5 (February 9, 1973). F. ing that

tutte by Cangrens, che Trusses anver agele amampeed tv tnphtwens the

~ 2a

itability, the legislative and executive branches of

vernment must be looked to for solutions, if so-

utions are to be forthcoming.

“The legal and constitutional nghts of the parties

to this reorganization should be evaluated in the

light of whatever changes Congress sees fit to

enact.

“By the same token, however, this Court cannot ig-

nore the realities of the Debtor's situation. On the

basis of the record to date, it appears highly doubtful

that the Debtor could properly be permuted to continue to

operate on its present basis October 1, 1973.” Id.

at 1344-46 (emphasis )8

There then followed proceedings before the ICC in

August, 1973 upon proposed plans of reorganization

of Penn Central filed by the New Haven Trustee and

subsequently by the Penn Central Trustees and Penn

Central Company. The ICC’s Report dated September

28, 1973 rejected on various grounds all plans submit-

ted for the reorganization of Penn Central,’ and de-

clined to certify to the Reorganization Court any plan

of reorganization under §77(d), essentially adopting

the position urged by the United States that re-

organization of Penn Central had to await a “solution”

for the Northeast that would, in turn, require Con-

gressional action.

"By the time this appeal has been heard, Penn Central will have

eS ee

the date of “highly doubtful” consti#tutionality.

*The ICC's Repon dated September 28, 1973 is Doc. No. 54 in the

Joimt Documentary Submission. Extracts from the testimony in the KCC

proceedings are set forth in Docs. Nos. 38-53 in the Joint Documentary

Submission.

See infra, Part L-A, for a detailed discussion of the submited

to the ICC under §77(d) and its Report dated September 28, 1973.

Peele, bt

Lee

7. -

te Se

On October 9, 1973, the New Haven Trustee filed

a Motion to dismiss Penn Central's §77 proceedings

pursuant to §77(g), alleging that the point of uncon-

stitutional erosion of the Penn Central estate had com-

menced not later than January |, 1973.'°

On january 2, 1974, the RRRA was signed into law

by the President.''

On January 25, 1974, the New Haven Trustee filed

a complaint asserting that the RRRA was uncon-

stitutional on its face and as applied to Penn Central,

naming as defendants the United States, United States

Railway Association (“USRA”) created pursuant to

§201 of the RRRA, and Secretary of Transportation

Brinegar (herein referred to collectively as the “Gov-

ernmental Defendants”). The action was filed in the

United States District Coun for the District of Col-

umbia. On che same day, other creditors of Penn Cen-

tral filed a similar complaint in the United S.ates Dis-

tnct Court for the Eastern District of Pennsylvania

(Connecticut General v. USRA, Civil Action No. 74-189).

In order to achieve a single expedited proceeding, the

New Haven Trustee consented to a motion of the

United States and other Governmental Defendants to

transfer Smith v. United States, et al. to the Eastern Dis-

trict of Pennsylvania pursuant to 28 U.S.C. §1404(a).

A third case, Penn Central Co. v. Brinegar, was also

transferred, under §1404(a), from the District of

Columbia.

petition seeking an ity receivership have not been decided. No hear-

ing was held on the §77(g) Motion until May 6, 1974. A previously filed

pectin of che New Haven Tunes, soshing intr alia, the Uning of 2 dase

termination of operations (Doc. No. 12 in the Joint

Submission), filed on March 16, 1973, was never set down for hearing.

Public aw 93-236, codified as 45 U.S.C. §§701 et seg. Section refer-

ences to the RRRA are to the Section numbers in Law 93-236,

Pursuant to 28 U.S.C. §§2282 and 2284, a three-

judge district court, consisting of Circuit Judge Rug-

gero J. Aldisert and District Judges john P. Fullam

and Louis C. Bechtle, was constituted to hear all the

cases concerning the constitutionality of the RRRA.

The Penn Central Trustees, who :m-tervened as de-

fendants, answered that the RRRA w~ ‘onstitutional

by virtue of the alleged existence « “Tucker Act

remedy” under 28 U.S.C. §1491 to “u rite” any

constitutional deficiency in the RRRA.

After joinder of issue, the New Haven Trustee on

April 29, 1974 filed a motion for summary judgment

as to certain of the legal issues raised by his Com-

plaint.'? The Governmental Defendants and the Penn

Central Trustees each then filed counter-motions for

summary judgment. The factual record was then com-

pleted by a Stipulation as to the Record in the Penn

Central Reorganization Proceedings, a Stipulation as

to Factual Matters, a Joint Documentary Submission,

and affidavits of two government witnesses.'* Smith v.

United States was then consolidated for purposes of

oral argument and disposition on the merits with the

Connecticut General and Penn Central Company cases, in

which motions for summary judgment had also been

filed.

The issue before the court below was whether an

injunction should issue restraining the enforcement of

'?The New Haven Trustee’s Memorandum of Points and Authontes

in Support of Motion for Summary Judgment (filed May 2, 1974, E. D.

Pa. C. A. No. 74-1107, Doc. No. 4; see JA 258) at pp.1-8 lists the issues

included in his motion for summary judgment.

'3As noted above, ten copies of the Joint Documentary Submission

have been filed with the Clerk of this Court. One of the government's af-

fidavits is Doc. No. 61 in the Joint Documentary Submission; the other ts

reprinted at JA 226-55. The Stipulation as to Factual Matters is pointed

at JA 317-24. The Stipulation as to the Record is identical to that set

forth at JA 197-99.

various sections of the RRRA on grounds of re-

pugnance to the Constitution. The court below

granted, in part, the motion of the New Haven

Trustee for summary judgment, and issued an order

dated June 25, 1974 (“Order”: JA 82-83) which en-

joined defendant USRA from certifying a final system

plan to the Special Court pursuant to §209(c) of the

RRRA, and enjoined all defendants from taking any

action to enforce the provisions of §304(f) of the

RRRA with respect to any abandonment, cessation or

reduction of railroad service determined by a court of

competent jurisdiction to be necessary for the pres-

ervation of nights guaranteed by the Constitution (Or-

der, 991, 2: JA 82). In addition, the court below en-

joined all parties “from enforcing, or taking any action

to implement, so much of Section 207(b) of the RRRA

as purports to require dismissal of pending pro-

ceedings for reorganization [of Penn Central] under

Section 77 of the Bankruptcy Act” (Order, 93; JA

82).'* Finally, the court below entered a declaratory

judgment that §303 of the RRRA is null and void in-

sofar as it fails to provide compensation for interim

erosion pending final implementation of the final sys-

tem plan contemplated by the RRRA and that §304(f)

of the RRRA is null and void as violative of the Fifth

Amendment to the Constitution insofar as it would re-

quire continued operation of rail services at a loss in

violation of the constitutional nghts of the owners and

creditors of Penn Central (Order, 4a, 4b; JA 82-83).

The court below also declared a portion of the third

sentence of §207(b) of the RRRA to be null and void

as violative of Article I, Section 8, Clause 4 of the Con-

stitution in that the RRRA is not uniform geographi-

'*This portion of the Order was entered sua sponte as none of the

plaintiffs sought this relief.

cally throughout the United States and, to the extent

that the RRRA amends §77 of the Bankruptcy Act, it

is a law on the subject of bankruptcies within the

meaning of Article I, Section 8, Clause 4 (Order, 4c;

JA 83).

The court below was not unanimous in every re-

spect. Circuit Judge Aldisert, who wrote the Opinion

of the Court, was joined by District Judge Bechtle in

disposing of “plaintiffs’ threshold contention that the

ssible future conveyance of rail properties to Conrail

{Consolidated Rail Corporation] in consideration for

Conrail stock and securities constitutes a Fifth Amend-

ment taking without payment of just compensation”

(Opinion of the Court; JA 23) by concluding that “we

do not meet these Fifth Amendment questions be-

cause we are persuaded that these issues are pre-

mature” (Opinion of the Court; JA 23). Judge Fullam

concurred in the result, but took the view that certain

of the constitutional issues presented were ripe for ad-

judication and should not have been deferred (Con-

curring Opinion of Fullam, J., Part I; JA 55-60). The

New Haven Trustee as cross-appellant asserts that the

court below was in error in finding that it was pre-

mature to judge the facial constitutionality of the com-

pulsory conveyance provisions of the RRRA.

The court below was also in disagreement as to

whether the RRRA was, to the extent it represents a

“law on the subject of bankruptcies,” void for want of

geographical uniformity under Article I, Section 6,

Clause 4 of the Constitution. Judges Fullam and

Bechtle so held, but concluded that the only provision

in the RRRA that could not be rationalized as being

based on Commerce Clause powers was the provision

requiring mandatory dismissal of §77 proceedings, '°

MSRRRA, §207(b), third sentence, clause (2).

which they held to be void for lack of geographical

uniformity (Concurring Opinion of Fullam, J., Part II;

JA 64-65). Judge Aldisert dissented from this con-

clusion on the ground that the RRRA is uniform in its

application to creditors, and that creditor parties lack

standing to assert the constitutional defect of the

RRRA’s non-applicability to a debtor railroad located

outside the region (JA 26-29). The New Haven

Trustee, by this appeal, asserts that the RRRA is void

for want of geographical uniformity in a number of

respects, including (but not limited to) clause (2) of the

third sentence of §207(b), and that, for the reasons set

forth in Part II of Judge Fullam’s concurring opinion

(for the majority of the court), the New Haven

Trustee has standing to assert this constitutional

defect.

The United States and the other Governmental De-

fendants, and the Penn Central Trustees as inter-

vening defendants, each filed appeals to this Coun

from the Order pursuant to 28 U.S.C. §§1252 and

1253 (docketed as No. 74-167, United States Ry. Ass'n v.

Connecticut General Ins. Corp., et al.; No. 74-168, United

States, et al. v. Connecticut General Ins, ( -orp., et al. and

No. 74-165, Blanchette, et al. v. Connecticut General Ins.

Corp., et al.). The New Haven Trustee filed a cross-ap-

peal to this Court (28 U.S.C. §1252) from so much of

the Order as denied, in pan, his motion for surnmary

judgment (docketed as No. 74-166, Smith v. United

States, et al.). :

et «

SUMMARY OF ARGUMENT

This cross-appeal challenges the constitutional va-

lidity of the compulsory conveyance provisions of the

RRRA, an issue which the majority of the court below

refused to reach on grounds of alleged prematunity.

The RRRA was declared unconstitutional in part by

the court below, and the court below enjoined certifi-

cation of any “final system plan” by USRA to the Spe-

cial Court. This judgment, however, was based solely

on the constitutional defect thar the RRRA requires

Penn Central to sustain enormous operating deficits,

and consequent erosion of the estate available to sat-

isfy Penn Central claimants, during the period January

1. 1974 to the date when the compulsory conveyances

mandated by the RRRA may occur. The RRRA was

held unconstitutienal in thai it failed to make provi-

sion for payment to the estate of just compensation in

respect of these operating deficits and consequent ero-

sion. While the decision below is of some help in pre-

venting an unconstitutional taking from being im-

plemented, the issues which the court below found to

be ripe for adjudication represent, in effect, but the

tip of the iceberg. The issues as to the constitutional

defects, both facial and as applied to Penn Central, of

the compulsory conveyance provisions of the RRRA

are inherently important issues which require con-

current resolution.

The RRRA was enacted by Congress on January 2,

1974 to deal with the unfortunate fact that the Penn

Central System'® and certain smaller railroads in the

The Penn Central System comprises railroad properties of Penn

Central Transportation Company, the Principal Debtor, 15 leased lines

of Penn Central which have filed for reorganization under §77 as “Sec-

ondary Debtors,” and numerous other railroads controlled by Penn Cen-

tral (Penn Central's Form R-1 Report for 1973 (Doc. No. 37 in Jount Dox-

footnote continued neu Pave

Northeast-Midwest region'’ are unable to generate op-

erating revenues in excess of operating expenses, and

hence are unable to achieve any net earnings before

fixed charges.

The Penn Central system, for example, has in-

curred deficits of $851,000,000 from the date of its fil-

ing (June 21, 1970) through December 31, 1973 (Stip.

Fact, §10) and an additional deficit of $103,579,392

during the year 1974 through June 30 (Trustees’ Re-

port dated August 5, 1974, Doc. No. 7970). Thus the

total deficit of the Penn Central System during four

years of operations under §77 is $954,000,000.

The basic scheme of the RRRA is to require that all

reorganization courts having jurisdiction over railroads

in reorganization in the Northeast/Midwest Region is-

sue findings and orders (RRRA, §207(b)) as to

whether or not such railroad shall be “reorganized” by

means of conveyance, free of ali existing mortgage

(footnote continued from prior page)

umentary Submission) lists 44 transportation companies, including the

15 Secondary Debtors, which are directly controlled by Penn Central and

more which are indirectly controlled). The 15 Secondary Debtors own

(or lease from other railroads) 9,304 route miles of track (46.9% of the

19,853 route miles included in the System). The RRRA subjects the rail

properties of all these subsidiary and leased line coripanies to the com-

pulsory conveyance provisions of the Act. See §102(10): “ ‘rail properties’

means assets or rights owned, leased or otherwise controlled by a rail-

road. . . .” This Section contains an exception for non-leased, controlled,

but less than wholly-owned subsidiaries, which are Class I railroads,

thereby excluding from the RRRA the Pittsburgh & Lake Erie Railroad,

a 92.6% owned subsidiary of Penn Central.

'"There are seven Class | railroad systems operating in the North-

east/Midwest region of the United States now in reorganization pro-

ceedings pursuant to §77 of the Bankruptcy Act: Penn Central, Reading,

Central of New Jersey, Lehigh Valley and Ann Arbor (each of which has

been found to be non-reorganizable on an income basis under §77); and

Erie Lackawanna and Boston & Maine (each of which has been found re-

organizable on an income basis under §77 and hence excluded from the

RRRA). There is one Class II railroad (defined as a railroad with oper-

ating revenues of less than $5 million) in reorganization, the Lehigh &

Hudson River.

liens (§303(b)(2)), of ns “designated” rail properties

(§206(c)) to Consolidated Rail Corporation (“Conrail”),

a nominally private for-profit corporation incor-

porated under state law (§301(a)) which, however, 1s

controlled by the United States Government through

the device of a statutory provision (§301(d)) which

mandates that 8 of the 15 directors of Conrail be gov-

ernment officials or persons appointed by the Presi-

dent with the advice and consent of the Senate. The

“designation” is to be done by a final system plan pre-

pared by USRA, a governmental agency specially cre-

ated for this purpose (§201), with the assistance of the

Rail Services Planning Office of the ICC (§205) pur-

suant to statutory goals (§206(a)), factors (§206(b)),

and provisions (§§206(c), (d), (e), (f), (g), (h), and (i).

The final system plan is to be adopted within 420 days

of enactment (§207(c)), and submitted to Congress for

its approval, which will be deemed given if neither

house passes a resolution vetoing the plan during a

60-day period (§208(a)). In the event of a Con-

gressional veto, it is USRA’s duty to prepare and sub-

mit to Congress a revised final system plan (§208(b)),

although there is no time limit for it to do so. When,

as and if a final system plan becomes “effective” by

surviving the Congressional veto under §208(a), it is to

be delivered to the Special Court, Regional Rail Re-

organization Act (§209%c)), and copies filed with each

reorganization court (§209(d)). Within 10 days after

certification of the final system plan by USRA to the

Special Court, Conrail must deposit with the Special

Court the stock and other securities of Conrail and

any obligations of USRA designated in the final sys-

tem plan (§303(a)(1)). Within 10 days of such deposit,

the Special Court must order the trustees of the rail-

roads (whose courts entered §207(b) orders subjecting

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them to the RRRA) to convey forthwith to Conrail!*

the rail properties designated in the final system plan.

Only after the conveyances are made and are irre-

vocable is there any judicial review (§§303(c) and

303(d)) of the final system plan to assure that it com-

ports with the standards of “fairness and equity” de-

veloped judicially during the era of equity re-

ceiverships and given statutory sanction by §77.

The foregoing statutory scheme of the RRRA is re-

ferred to in this Brief as the “compulsory conveyance

provisions of the RRRA.” This cross-appeal asserts

that the compulsory conveyance provisions of the

RRRA are void for repugnance to the Constitution of

the United States. This was an issue which the Court

below declined to reach on the grounds that the issue

was “premature” and not “ripe” for decision. It is also

an issue, however, which the Penn Central Re-

organization Court was required to reach in its §207(b)

“180-day” decision; that Court decided in favor of the

New Haven Trustee's position, holding squarely that

the RRRA could not be sustained either under the

Bankruptcy Clause powers or the Commerce Clause

(eminent domain) powers of Congress, and that the

RRRA violated the Fifth Amendment nights of se-

cured creditor and stockholder claimants to the Penn

Central estate. In re Penn Central Tranportation Co.

(Memorandum in Support of Findings and Order No. 1596

Pursuant to the Second Sentence of §207(b) of the Regional

Rail Reorganization Act of 1973), (EO. Pa. July 2, 1974)

(JA 124-51).'° That decision has been appealed by the

'*Conveyances may also be directed by USRA to be made to “profit-

able” railroads Operating in the region. A “profitable railroad” means a

railroad which is not in reorganization (§102(9)), which in turn is limited

to railroads subject to the RRRA (§102(12)). Thus the Erie Lackawanna

and Boston & Maine, each in §77 reorganization, are “profitable rail-

roads” as defined.

'*Hereinafter cited as “Opinion in Support of Order No. 1596.”

United States, USRA and the ICC to the Special Court

(where it is docketed as No. 74-8), whose decision

thereon will be known before this appeal is heard;

however, by reason of the seventh sentence of §207(b),

no appeal from the Special Court's decision wi't lie to

any Court of Appeals, and hence this Court's scatutory

certiorari jurisdiction under 28 U.S.C. §1254 can not be

invoked to review the Special Court's decision.*°

In the Argument section of this Brief, the New Ha-

ven Trustee analyzes why the court below was in error

in finding the constitutional issue as to compulsory

conveyances under the RRRA “premature” and not

“ripe” for adjudication. The basic error was the court's

failure to acknowledge the features of the RRRA

which will preclude effective judicial review of the

same constitutional issues at a later time, namely

§209(a) and the last sentence of §303(b)(2). The court

below also mis-applied the pnor decisions of this

Court dealing with when constitutional issues can be

avoided by reason of the speculative character of the

alleged injury. The New Haven Trustee points out

how the RRRA, if the Government Defendants are not

enjoined from enforcing it, threatens to destroy the

collectibility of the sum of $123,809,404 plus interest

owed to him by Penn Central under this Court’s de-

cision in New Haven Inclusion Cases, supra, and thereby

subject the New Haven bondholders (for whom he ts a

fiduciary) to further diminution in the assets of the

New Haven estate available to support their claims to

the equivalent of a per-parcel liquidation sale of New

However, if a party aggrieved by the Special Court's §207(b) de-

cision files a petition for certioran to this Court under 28 U.S.C. §1651 al-

leging that the decision gives effect to an unconstitutional enactment of

Congress, and that the seventh sentence of §207(b) is itself uncon-

stitutional, this Court may have power to issue a wnt “necessary OF ap-

propriate in aid of [its] jurisdiction” directly to the Special Court. 28

U.S.C. §1651. Cf. In re 620 Church Street Bldg. Corp., 299 U.S. 24 (1936)

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Haven’s rail assets as of December 31, 1966. New Ha-

ven Inclusion Cases, supra at 489-90.

In Section II of the Argument, the New Haven

Trustee describes the manner in which the compulsory

conveyance provisions of the RRRA violate his Fifth

Amendment rights. The legal and factual setting of

the RRRA is described, including an historical review

of the development of the law in the field of equity re-

ceiverships, §77B, Chapter X and §77 of the Bank-

ruptcy Act, from Northern Pacific Ry. v. Boyd, 228 U.S.

482 (1913) through the latest definitive decision of this

Court, New Haven Inclusion Cases, supra. The factual

setting includes the treatment of the New Haven

Trustee's Plan dated June 27, 1973 for reorganization

of Penn Central, an admittedly novel but nevertheless

serious attempt by private interests to propose a set-

tlement with the representatives of the public interest

which was designed to permit private claimants to re-

ceive fair and equitable value of their claims while al-

lowing public-interest claimants to receive securities

and common stock of a “core system” made up of

Penn Central rail properties comprising 11,000 route

miles of mainline and principal feeder lines to be op-

erated as a freight-only railroad divested of re-

portation and Justice .(whose cooperation was es-

sential), and then by the ICC by its Report of Sep-

tember 28, 1973 (refusing to certify any plan for Penn

Central), casts a long shadow on the Government's

principal contention in support of the constituuonality

of the RRRA: that Conrail’s operations can be made

viable through reduced trackage and divestment of re-

sponsibility for passenger train operation. :

The New Haven Trustee then analyzes the com-

pulsory conveyance provisions of the RRRA in terms

of the nature and amount of securities of Conrail and

obligations of USRA which can be included in a final

system plan, the limited ability of the Special Court to

order additional amounts of the same types of se-

curities provided for in the plan, and its authority to

issue a deficiency judgment against Conrail, a provi-

sion aptly described below as “essentially circuitous.”

These features of the statute are then compared to the

decisions of this Court in cases where private property

is taken for a public use under authority of an act of

Congress, which set forth the principle that just com-

pensation means an amount of money or its perfect

equivalent equal to the “highest and best use” value of

the properties taken for public purposes. The dubious

constitutionality of Conrail’s acquiring the Boston—

Washington corridor properties free of lien in ex-

change for securities, and then selling the corridor

properties to Amtrak for $500 million as contem plated

by §206(c)(1)(C) and §601(d) of the RRRA, is ana-

lyzed, and a decision of Judge Fullam, in the §207(b)

proceedings of the Secondary Debtors, holding this

feature of the RRRA unconstitutional, is noted (JA

153-56).

The brief then discusses the Government's prin-

cipal rationale in support of the constitutionality of the

compulsory conveyance provisions of the RRRA. The

Government contends that if Congress and the gev-

ernmental agencies can design a Conrail with some

limited prospect of earnings, the capitalized value of

those prospective earnings automatically fixes the

value of all rail properties to be conveyed to Conrail,

and that, based on New Haven Inclusion Cases, supra,

there is no constitutional necessity for the value of the

securities issued in a reorganization to be equal to the

“highest and best use” value of the railroad property

conveyed in exchange for such securities. The Gov-

ernment further contends that even if the fair capital-

ized value of the reasonably projected net earnings of

a reorganized company would be substantially less

than the liquidation value of the debtor railroad’s rail

properties, creditor and stockholder claimants must

ernment’s principal thesis and, in fact, squarely recog-

nize that the claimants to a railroad estate have a right

to realize value not less than the “highest and best use”

The brief then discusses the nature of Conrail as a

governmentally created and controlled entity, and the

distinctions which set the RRRA apart from all prior

laws on the subject of bankruptcy. With specific refer-

ence to the provisions of §301(d) of the RRRA, the

New Haven Trustee points out that Conrail will, for

Bt Conrail’s viability and Profitability, and therefore the

alk value of its stock. Accordingly, viewed solely as an ex-

an ercise of the Bankruptcy Clause power, it is contended

‘ that the compulsory conveyance Provisions ef the

‘

service once it has become clear that there is no rea-

The New Haven Trustee then analyzes the manner

in which public interest goals of the RRRA could be

implemented by an amendment to the statute which

would cure its constitutional defects. lt is suggested

that the basic defects of the Act could be cured by

having USRA initially subscribe to the capital stock of

Conrail and thereby assume the burden of en-

trepreneunal nsk with respect to the proposition that

Conrail’s operations can be so structured as to make

Conrail a profitable carrier.

In Section IIIl, the New Haven Trustee turns to a

discussion of how the procedures of the RRRA offend

procedural due process by mandating conveyance of

rail assets pnor to judicial review of the adequacy of

the consideration, particularly when there is no pos-

sibility that a court may subsequently set aside the con-

veyances upon a finding that just compensation has

not been paid.

Section IV of the Argument discusses the con-

tention that the compulsory conveyance provisions of

the RRRA, as an amendment of §77 of the Bank-

ruptcy Act, constitute legislation “on the subject of

bankruptcy” which is void on grounds of lack of geo-

graphical uniformity required by Article I, Section 8,

Clause 4 of the Constitution. It is asserted that the

court below was correct in holding that claimants to

the Penn Central estate have standing to challenge the

RRRA on grounds of lack of geographical uniformity,

but erred in limiting the impact of its holding to a sin-

gle provision of the RRRA requinng mandatory dis

missal of §77 proceedings upon a finding that the

Act’s processes are not “fair and equitable.” The

court's conclusion that the RRRA adds nothing to the

powers of reorganization courts under §77 to impair

the obligations of contracts of secured creditors of a

railroad is asserted to be in error based on a com-

parison of the operative provisions of the RRRA and

their asserted counterparts found in §77.

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ARGUMENT

THE COURT BELOW ERRED IN NOT

DECIDING WHETHER

THE COMPULSORY CONVEYANCES

MANDATED BY THE RRRA VIOLATE

THE FIFTH AMENDMENT RIGHTS OF THE

NEW HAVEN TRUSTEE

In his summary judgment motion, the New Haven

Trustee sought a permanent injunction against the en-

forcement of so much of the RRRA as would con-

stitute an unconstitutional taking of Penn Central's rail

properties and his morgage and other lien interests

therein.?! This issue was characterized by the New Ha-

ven Trustee in his Memorandum of Points and Au-

thorities in Support of Motion for Summary Judgment

(filed May 2, 1974, E.D. Pa. C.A. No. 74-1107, doc.

no. 4; see JA 258) as follows:

Act [i.e., the RRRA] hereinafter enumerated con.

stitute a taking by force of law for a public use of

the property of Penn Central, a railroad in re-

organization owning rail properties within the

based on his equitable lien, temporarily protected by Order No

546 of the Penn Central Reorganization Coun (Stip. Fact $3), to secure

the total portion ($123,809,404, as of December 31, 1973 plus

clusion Cases, supra. In terms of standing, the New Haven Trustee must

his chamed to have the rights of a secured creditor to the fallen of

his claim, based on the “underwriting” imposed by the New Haven Re-

956,000 shang pt 28 '0 the value of $87.50 per share relative re nn

956,000 shares of Penn Central Company common stock which he holds

pending adjudication of the New Haven's plan of reorganization, based

on this Court's remand, 399 U.S. at 488-89.

meaning of the 1973 Act, and operating under

lease rail properties of railroads ‘leased, operated

or controlled’ by Penn Central within the meaning

of the 1973 Act

‘(b) upon the date when certain rail properties of

Penn Central and the several Lessors (the ‘Designa-

ted Properties’) will be ordered under the 1973 Act

to be conveyed pursuant to §303(b) of the Act to

Conrail and other transferees referred to in

§§206(c), 206(d) and 303(b) of the 1973 Act, as a

law providing for a taking for a public use of (i) the

right, title and interest of Penn Central as owner in

fee or as to a leasehold estate of said Designated

Properties; and (ii) of the right, title and interest of

Plaintiff as owner of Bonds secured by the Di-

visional Mortgage, which lien will be divested by

operation of §303(b) of the 1973 Act insofar as it

attaches to Designated Properties.” (/d. at 4).

A majonty of the Court below (Judges Aldisert and

Bechtle) never reached the merits of this contention

hecause of the belief, which it is submitted was er-

roneous, that this issue was “premature.” It is of

course true that:

“Courts do not review issues, especially con-

stitutional issues, until they have to.” Joint Anti-Fas-

cist Refugee Committee v. McGrath, 341 U.S. 123,

154-55 (1951) (Frankfurter, J., concurring).

But that assumes that the issues so deferred can later

be reviewed. The New Haven Trustee asserts by this

cross-appeal that there may not be a later time at

which a court can effectively protect the New Haven

Trustee against the threatened unconstitutional taking

of his property. If a later opportunity for judicial in-

tervention to prevent an unconstitutional taking will

never effectively exist, then the constitutional issue

presented here must fall in the “have to” review area

where courts should be available to pass on claims of

constitutional right to judicial process, and to provide

such process if the claim is sustained.

Judges Aldisert and Bechtle failed to give appro-

priate significance to the provisions of the RRRA

whereby, with the exception of a pre-final system plan

civil action attacking the RRRA as violative of the Con-

stitution, under 28 U.S.C. §§1331, 2282 and 29284,

Congress has created in the RRRA an exclusive self-

contained system of judicial review even more pre-

clusionary than that contained in the Emergency Price

Control Act of 1942, which this Court sustained in

Lockerty v. Phillips, 319 U.S. 189 (1943) and Yakus v.

United States, 321 U.S. 414 (1944).22

Under the second sentence of §207(b) of the

RRRA, a decision by the Special Court that Penn Cen-

tral must reorganize by conveying its rail properties to

Conrail has the following effects which preclude later

judicial review:

(a) It is a final, non-appealable order, which is pur-

portedly not reviewable in this Court (§207(b), last

sentence);

(b) It has an arguable res judicata effect on any sub-

sequent contentions that the compulsory conveyance

provisions of the RRRA ($§206(c), 206(d), 207(c), 208,

209%(c) and (d), and 303(b)) are unconstitutional, since

the §207(b) judgment would necessarily have been that

the “process” of the RRRA is “fair and equitable”

(§207(b), third sentence);

in the Supreme Court. §207(b), last sentence, purports to exclude this

Court from reviewing the Special Court's §207(b) decision by with-

drawing the jurisdiction of the Courts of Appeal, whose judgments are

reviewable by writ of certiorari under 28 U.S.C. §1254. But see 28 U.S.C.

§1651 and Jn re 620 Church Street Bldg. Corp., supra.

USRA certifying to Congress and then to the Special

Court the final system plan would be governed by

§209(a) of the RRRA which provides that:

“Notwithstanding any other provision of law, the

final system plan . . . is not subject to review by any

court except in accordance with this section.” (Em-

phasis added).

(d) The implementation of the §207(b) finding by

USRA certifying to the Special Court the final system

plan and the Special Court's ordering the conveyances

therein set forth would be governed by $303(b)(2), last

sentence, of the RRRA, which provides that:

“Such conveyances [i.e., the conveyances pursuant

to §303(b)(1) which Judge Aldisert’s opinion as-

sumes could be enjoined in a subsequent civil ac-

tion under 28 U.S.C. §1331 on constitutional

grounds] shall not be restrained or enjoined by any

court.” (Emphasis added).”*

Judges Aldisert and Bechtle erred in their ap-

proach to the prei*a.urity issue because they failed to

observe the conseq.eaces of a §207(b) decision in the

light of the prohibitions against subsequent judicial ac-

tion provided in §§209(a) and 303(b)(1).

The foregoing is consistent with Judge Fullam’s

concurring opinion below**:

*3Judge Aldisert's opinion below does not treat with the problem cre-

ated by §20%a) and §303(b)(2).

*Although Judge Fullam clearly concurred in the judgment, he

parted company with Judge Aldisert on the “prematurity” issue, and his

opinion should be read as a dissent as to that issue, particularly since the

order in which he concurred enjoins USRA from certifying a final sys-

tem plan to the Special Court under §209%(c) of the RRRA.

“. . . the majority fails to reach a number of issues

which I feel must be faced, not only because they

are indeed ripe for decision, but because the prin-

cipal conclusion expressed by the majority —that

the Regional Rail Reorganization Act of 1973 is un-

constitutional because it fails to provide compen-

sation for interim erosion during the planning pe-

riod —necessarily depends upon an evaluation of

the nature and validity of the Act's provisions con-

cerning mandatory conveyance of rail properties to

Conrail. In short, I believe the +e ge has at-

tempted to isolate an issue which cannot be

isolated.

“In considering which issues must be faced at this

time, it is important to keep in mind the dis-

tinctions between concepts o standing, ripeness,

and the need for injunctive relief.

“Unquestionably, one or more of the parties to

these law-suits have standing to raise every issue

which has been presented. That is, the statute af-

fects these parties in particular, as distinguished

from the public at large, in substantial ways. They

thus meet the tests Association of Data Processin

Service Organizations, Inc. v. Camp, 397 U.S. 15

(1970), and Flast v. Cohen, 392 U.S. 83 (1968).

“The question of whether all of the constitutional

issues are ripe for decision requires us to analyze

the inevitability of the alleged unconstitutional im-

po. whereas the immediacy of the alleged threat

ars upon the propriety of injunctive relief.

a fuly 1, 1974, each of the reorganization courts

will have made, or failed to make, findings pur-

suant to §207(b) of the Act. Under the statute, the

effect of these findings or non-findings (as af-

firmed or reversed by the Special Court within 80

days thereafter) will be either that the statutory

processes will inexorably apply to these estates, or

——

that the §77 proceedings will be dismissed. The

plaintiffs assert that the §207(b) proceedings them-

selves are unconstitutional on due process grounds. Surely

this challenge is now ripe for decision; indeed, the de-

fendants do not contend otherwise.”

“Plaintiffs challenge the entire Act as a violation of

the uniformity requirement of the bankruptcy clause,

Article I, Section 8, Clause 4 of the Constitution.

Again, this issue is undeniably ripe for decision.

“Finally, plaintiffs pose a series of challenges to the

statutory provisions which contemplate the man-

datory transfers of rail assets to Conrail or to exist-

ing solvent carriers, at prices to be determined by

the Special Court after the event, and to be paid in

the form of a to-be-determined mixture of Conrail

securities, undefined ‘other benefits’, and possibly a

limited amount of guaranteed obligations of

USRA. Whether some or all of these ‘ulumate con-

veyance’ issues are now npe for decision is a more

difficult question.

“No one doubts, and in fact the parties have stipu-

lated, that Penn Central rail properties will be in-

cluded in the Final System Plan. Equally certain is

the fact that USRA will deliver to Congress a Final

System Plan which is to become effective 60 ses-

sion-days thereafter. In order to prevent the Plan

from taking effect, one House of Congress must

act affirmatively by passage of a sation ex-

ry disapproval of the Plan, §208(a). Section

08(b) makes it the continuing duty of USRA to

resent final system plans to the Congress until one

ecomes effective. I cannot equate Congress’ reser-

vation of the right to veto the first Final System

Plan, or even the second or third, to a situation in

which Congressional action is necessary as a pre-

condition to a Final System Plan becoming effec-

tive. I believe this Court must assume that the Act

means what it says, and that the expressed intent of

Congress would be carried out.

“Once a Final System Plan is effective, ie, when

the 60-day Congressional action period expires, the

Special Court is required under §303(b) to order

conveyance of the property, there remains no dis-

cretionary role to be played by the Special Court, or any

other court, at that point. Therefore, it is clear that if

the reorganization court does not make §207(b) find-

ings that remove the railroad from the RRRA, con-

veyances are certain, save only amendment or repeal

of the RRRA. Of course, the possibility of future

legislative and executive action is always present

during the judicial evaluation of the con-

stitutionality of a statute, and does not render such

adjudication premature.

“The last potential exit would be a finding by the

reorganization court that the RRRA ‘does not pro-

vide a process which would be fair and equitable to

the estate of the railroad in reorganization,’

§207(b). In my view, this possibility does not raise

an issue of ripeness, but rather, a question more

akin to abstention.

* . *

“. . . it is highly improbable that a reorganization

court could successfully a the statute as unfair

or inequitable under §207(b) for reasons of less

than constitutional magnitude. Indeed, the gov-

ernment’s position at the June 10 hearing in the re-

organization court was that nothing short of uncon-

ae would justify rejection of the Act

under §207(b). Thus, the issue is essentially

whether it is preferable for the three-judge court to

rule on the constitutional issues surrounding the

conveyance provisions, either directly or in con-

junction with plaintiffs’ due process attack on

de before the reorganization courts act under

“The policies embodied in 28 U.S.C. §2282 appear

applicable in this case. Enforcement of major fed-

eral legislation is sought to be enjoined, As a prac-

tical matter, a decision by the reorganization court

under §207(b) that a constitutional infirmity re-

quires the Act to be found not fair and equitable

would be equivalent, for all practical purposes, to

an injunction that might issue as a result of this

three-judge court litigation; and a contrary decision

would be equivalent to denial of an injunction.

> * .

“| am satisfied that, in the final analysis, many

of the constitutional issues concerning the man-

datory conveyance features of the Act are neces-

sarily ripe for decision at this time because of their

relationship to the issues of interim erosion. While

it is not necessary to determine whether or not the

contemplated transfers would amount to takings in

the constitutional sense, requiring advance as-

surance of payment in cash or equivalent, | am

persuaded that the constitutional validity of un-

compensated interim erosion cannot be properly

decided except in the light of the constitutionality

of the ultimate result which implementation of the

Act would produce.” (JA 55-60; emphasis added).

Judge Fullam has thus, it ts submitted, correctly

shown why it is not premature now to judge the con-

stitutionality of the compulsory conveyance provisions

of the RRRA, or to reach the issues as to denial of

procedural due process by §207(b) and related provi-

sions of the RRRA. The cases cited in Judge Aldisert’s

opinion on the prematunity issue are, on the other

hand, inapposite for a number of reasons relating to

the structure of the RRRA’s provisions relative to judi-

cial process.

Judge Aldisert treated the claim that the com-

pulsory conveyance provisions of the RRRA will, if not

enjoined, constitute an inadequately compensated tak-

ing of plaintiff's property as being analogous to cases

seeking an injunction to restrain threatened en-

forcement of criminal statutes, invoking the following

cases: Poe v. Ullman, 367 U.S. 497 (1961); Eccles v. Peo-

ples Bank, 333 U.S. 426 (1948); United Public Workers v.

Mitchell, 330 U.S. 75 (1947); and Communist Party of the

United States v. Subversive Activities Control Board, 367

U.S. 1 (1961). In each of the foregoing cases the plain-

tiffs attempted, by pre-enforcement suits challenging

the constitutionality of the relevant statute, to restrain

the enforcement of the statute as applied to them. In

each instance, the Court was compelled to gauge the

immediacy of the threat of enforcessent and held that

none of the fact situations evidenced the clear, present

threat of injury necessary to sustain a justiciable

controversy.

In Poe v. Uliman, supra, for example, plaintiffs were

two marnied persons, and their doctor, who sought a

declaratory judgment as to the unconstitutionality of a

Connecticut statute prohibiting the use of con-

traceptive devices or the giving of medical advice

about them. The Connecticut courts upheld the stat-

ute, even as applied to married couples. After plenary

consideration in this Court, the appeal was dismissed,

with the Justices voting 5-4 and without an opinion of

the Court. Justice Frankfurter (joined by Chief Justice

Warren and Justices Clark and Whittaker) thought the

case fell within the rules of judicial self-restraint sum-

marized in Mr. Justice Brandeis’ concurrence in

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

346 (1936). Justice Brennan concurred in the result on

the practical ground that:

“The true controversy in this case is over the open-

ing of birth-control clinics on a large scale; it is that

which the State has prevented in the past, not the

use of contraceptives by isolated and individual

marned couples. It will be time enough to decide

the constitutional questions urged upon us when, if

ever, that real controversy flares up again.” 367

U.S. at 509.

Cases such as Poe v. Ullman must, however, be com-

pared with the cases such as Epperson v. Arkansas, 393

U.S. 97 (1968), where plaintiffs sought an injunction

and declaratory judgment that a 1928 | .w prohibiting

the teaching of evolution was unconstitutional. The

Court disposed of any “justiciability” problems as

follows:

“There is no record of any prosecutions in Ar-

kansas under its statute. It is possible that the stat-

ute is presently more of a cunosity than a vital fact

of life in [Arkansas, Mississippi and Tennessee].

Nevertheless, the present case was brought, the ap-

peal as of right is properly here, and it is our duty

to decide the issues presented.” /d. at 101-02.

In Roe v. Wade, 410 U.S. 113 (1973), plaintiff “Jane

Roe” was an unmarried woman who was pregnant at

the inception of litigation and who

“sought a declaratory judgment that the Texas

criminal abortion statutes were unconstitutional on

their face, and an injunction restraining the de-

fendant from enforcing the statutes.” /d. at 120.

This Court found the case of “Jane Roe” presented

a justiciable controversy npe for determination, but

that the case of “John and Mary Doe,” a married,

childless couple, was of a

“. | . speculative character. Their alleged injury

rests on possible future contraceptive failure, pos-

sible future pregnancy, possible future un-

preparedness for parenthood, and possible future

impairment of health. Any one or more of these

several possibilities may or may not take place, and

all may not combine. . . .But we are not prepared

to say that the bare allegation of so indirect an in-

jury ts sufficient to present an actual case or con-

troversy. [Citations omitted] The Does’ claim falls

far short of those resolved otherwise in the cases

the Does urge upon us, namely /nvestment Co. In-

stitute v. Camp, 401 U.S. 617 (1971); Data Processing

Service v. Camp, 397 U.S. 150 (1970); and Epperson

v. Arkansas, 393 U.S. 97 (1968).” Id. at 128.

In the instant case, the New Haven Trustee's

standing and the immediacy of the threatened harm

clearly favor justiciability of his claim that the RRRA is

unconstitutional under the reasoning of Epperson v. Ar-

kansas and Roe v. Wade, which cases are not cited in

Judge Aldisert’s opinion.®> See also Steffel v. Thompson,

42 U.S.L.W. 4357 (U.S., March 19, 1974).

The New Haven Trustee is owed $123,809,404,

plus interest, by Penn Central; the entire debt is se-

cured by a claimed (but unadjudicated) equitable lien

deriving from this Court’s remand, in New Haven In-

clusion Cases, supra, and $34,025,800 is secured by a

first mortgage on the former rail properties com-

prising the largest portion of the assets conveyed by

New Haven to Penn Central on December 31, 1968.26

The defendant USRA, if not enjoined, presently in-

tends, and thus can be expected, to prepare a final sys-

tem plan under §206 designating a significant portion,

if not all, of these same rail properties for conveyance

Jud Fullam, dissenting as to prematurity, cited two of the recent

cases on the related issues of standing and justiciability, namely Data Pro-

cessing Service v. Camp, supra, and Flast v. Cohen, supra.

The United States and the other governmental defendants have

conceded for the purpose of this litigation that “It is likely that some of

the rail properties of Penn Central subject to the Divisional Mortgage

and the indeterminate lien . . . will be designated pursuant to each sub-

section of §206(c)(1) [of the RRRA] for transfer, or conveyance pur-

suant to §206(d) of the Act in any final system plan made effective under

the Act.” Stip. Fact 4.

to Conrail; Congress intends, and thus can be ex-

pected, to approve a final system plan prepared by

USRA under §208; the plan so approved is intended,

and thus can be expected, to be certified by defendant

USRA to the Special Court, under §209%c); Conrail

can be expected to deposit the securities provided for

in the plan under §303(a); the Special Court can be

expected within 10 days of the §303(a) deposit to obey

the directive contained in §303(b)(1) to order the Penn

Central Trustees to convey forthwith the properties

designated in the plan to Conrail; and the Penn Cen-

tral Trustees can be expected to comply with the Spe-

cial Court’s order. Therefore, if these provisions of the

RRRA are not enjoined, the New Haven Trustee's

lien, securing $123,809,404, plus interest, can be ex-

pected to be divested as provided in §303(b)(2). Ob-

viously, once his lien is divested, the New Haven

Trustee is faced with the clear and present danger that

in a subsequent §77 plan Penn Central would not have

assets sufficient to pay the New Haven Trustee's claim,

which will rank junior to administration expenses and

Trustees’ Certificates which now aggregate close to $1

billion.

In weighing ripeness considerations, the court be-

low should have been guided by this Court's pro-

nouncement in Railroad Transfer Service, Ine

Chicago,”” 386 U.S. 351, 357 (1967), that

“It is difficult to imagine a controversy more actual,

alive, and ripe than this one. It has lasted for more

than a decade.”

27The case involved a Chicago ordinance which purported to require

a local inter-terminal carrier to demonstrate annually to the City of

Chicago its ability to satisfy the public convenience and necessity, before

the City would grant it a license to do business. The issue was whether

this ordinance placed an undue burden on interstate commerce anu in

fringed upon an area preempted by the Interstate Commerce Act. The

Court reached the merits of this issue over the City's objections that the

issue was premature

With all due respect, Smith v. United States may well

pose the one case which is even more ripe than

Railroad Transfer Service, since the New Haven Bond-

holders, who initially had mortgage liens on certain of

the rail properties involved in this case, have had their

nght to foreclose, and to realize payment of their

claim, postponed since 1961. The end of the litigation

to assure the New Haven Bondholders payment on

their claims, if not hastened by this Court, may well be

deferred into the 1980's. Surely, the ultimate impact

on the New Haven estate of a §303(b) conveyance or-

der is sufficiently likely and clearly foreseeable that its

constitutionality should be adjudicated now. See Joint

Anti-Fascist Refugee Committee v. McGrath, supra, 341

U.S. at 156.

THE COMPULSORY CONVEYANCE

PROVISIONS OF THE RRRA VIOLATE

THE NEW HAVEN TRUSTEE'’S

FIFTH AMENDMENT RIGHTS

A. Legal and Factual Setting of the RRRA

As was noted in Judge Fullam’s concurnng opinion

below, in approaching the question of the con-

stitutionality of the compulsory conveyance provisions

of the RRRA, it is necessary first to review the “legal

theories underlying the reorganization provisions of

the Bankruptcy Act, and their application to the Penn

Central proceedings apart from, and in relation to, the

RRRA itself.”*

The early cases of corporate reorganization under

equity receiverships involved a decision by senior cred-

itor and equity groups that their respective financial

interests would be better served by having a new com-

pany with scaled-down capitalization assume the busi-

ness of the financially embarrassed debtor and thereby

maintain the values of a going business. The devices

chosen evolved out of the procedures of equity: in-

stead of separate bills of forec losure by each secured

creditor group, the court was asked to enter what

amounted to a consent decree of foreclosure unde

which a newly formed company purchased the assets

of the debtor in exchange for the securities comprising

a portion of the new capital structure. Since the con-

sent of the stockholders of the debtor was considered

essential to a consent decree, in an equity receivership

plan the new company might exchange a portion of its

capital stock for the entire capital stock of the old com-

*%Concurring Opinion of Fullam, J. (JA 65); Judge Fullam’s analysis

is directed pnmarily to the constituuiona! limits upon imposing urther

uncompensated rail deficits on the estate of a railroad in reorganization

pany.*® Decisions of this Court, cited in the note, held

that these arrangements were subject to judicial scru-

tiny at the insistance of any non-consenting creditor

who claimed that he should be entitled to full recog-

nition in the plan if junior creditors or stockholders

were to be allowed to participate at all.

The amendments of the Bankruptcy Act dealing

with corporate reorganizations (§77B and Chapter X)

and railroad reorganizations (§77, enacted in 1933 and

amended in 1935) enacted in the 1930's must be read

in the light of practices developed in the field of eq-

uity receiverships. Terms such as “fair and equitable”

and “conform to the requirements of the law of the

land regarding the participation of the various classes

of creditors and stockholders” appearing in §77(e) of

the Bankruptcy Act were phrases of art which re-

See, eg., Northern Pacific Ry. v. Boyd, 228 U.S. 482 (1913, and ear-

lier cases therein cited. The device of the consent decree was held not to

foreclose a non-consenting creditor of the old company whose claim was

reduced to judgment many years later from daiming, even in the ab-

sence of fraud, that he was entitled to have his claim paid since valuable

consideration was paid to stockholders of the old company. See also Case

v. Los Angeles Lumber Products Co., 308 U.S. 106 (1939), in which a con-

sent arrangement involving participation by stockholders of the old com-

pany was denied judicial a under §77B of the Bankruptcy Act.

This case was followed by Consolidated Rock Products Co. v. Du Bois, 312

U.S. 510 (1941), also under §77B, in which the “absolute rule of priority”

doctrine was held not satisfied in the absence of detailed valuation find-

ings as to the capitalized value of the entire enterprise and the ability of

the i company to meet the interest and dividend requirements

of the new securities. The consent arrangements in the equity re-

ceivership and §77B cases involved intri ¢ packages of corporate se-

flected the accumulated judicial expenence of dealing

with equity receiverships.*°

Section 77, the Bankruptcy Act provision which has

governed railroad reorganization from 1933 until the

enactment of the RRRA, while departing in many re-

spects from equity receivership and §77B re-

organizations, nevertheless involved judicial scrutiny as

to whether the standards of the Boyd, Case and

Consolidated Rock decisions, supra note 29, were met.

Section 77(e) required that before a plan of re-

organization could be carried out the judge must find

that the plan, certified to the court under §77(d) by

the ICC, was “fair and equitable.” Under §77, the ICC

and the court could determine that the stockholders of

the railroad, or any class of creditors, had no equity

and could properly be awarded nothing in the plan.

See Ecker v. Western Pacific R.R. Corp., 318 U.S. 448

(1943); Group of Institutional Investors v. Chicago, M., St.

P. & P. RR, 318 U.S. 523 (1943). The 1935 amend-

ments to §77 included a “cram-down” exception to the

voting requirement that the plan be approved by at

least two-thirds in interest of each class entitled to par-

ticipate in the plan. The cram-down exception, which

essentially completed a statutory scheme which has re-

mained intact until the RRRA, permitted the judge to

override the objections of a dissenting class of cred-

itors provided he determined that the plan provided

fair and equitable treatment for the interests of those

rejecting it and found that “such rejection is not rea-

sonably justified.” See Reconstruction Finance Corp. v.

Denver & R.G.W. R.R., 328 U.S. 495 (1946).

The words ‘fair and equitable’ . . . are words of art which prior to

the advent of §77B (the predecessor of Chapter X] had acquired a fixed

meaning through judicial interpretations in the field of equity re-

ceivership reorganizations.” Case v. Los Angeles Lumber Products Co., supra,

308 U.S. at 115.

Lae 5

Until the reorganization proceeding of the New

Haven Railroad which commenced in 1961, prior rail-

road reorganization cases under equity receiverships

and §77 had generally involved debtor corporations

which were viable businesses but were financially em-

barrassed in the sense that their operations could not

support their existing capital structures. As Judge

Fullam noted in his concurring opinion,

“Both §77(e) and the Supreme Court's pro-

nouncements in Consolidated Rock Products, Ecker

and /nstitutional Investors cases require that earnin

wer or income-generatin capacity of the debtor

the measure of a railroad’s value.” (JA 68)

Except for the happenstance of the Penn Central

merger, hereinafter discussed, the New Haven’s re-

organization might well have gone the way of the New

York, Ontario & Western Railroad, which ended in a

liquidating equity receivership,*! since the ICC and the

Court each found that the New Haven had no pos-

sibility of achieving profitable status, or even net in-

come before fixed charges:

“The concept of ‘going concern value’ is fictional as

applied to the New Haven because it ignores the

Railroad's long and continuous history of deficit

operations.” In re New York, N.H. & H. R.R., 289 F.

Supp. 451, 455 (D. Conn. 1968).

In the case of the New Haven’s §77 proceedings, a

totally fortuitous event emerged to make possible a re-

organization plan under §77, rather than dismissal of

reorganization proceedings and a liquidating equity re-

ceivership: two major, profitable trunk-line carriers,

"See New York, Ontario & Western Reorganization, 295 1.C.C. 346

(1956), in which the railroad was declared unreorganizable by the ICC,

leading to a dismissal and liquidation of the enterprise. See also /n re

New York, Ontario & Western Ry., 171 F. Supp. 634, 635, 647 (S.D.N.Y.

1958).

one operating in the New Haven’s territory, the New

York Central Railroad, and the other a connecting car-

rier with the New Haven, the Pennsylvania Railroad,

petitioned the ICC for authority to merge, thereby

opening up the possibility of an inclusion petition by

the New Haven Trustee pursuant to §5(2)(d) of the

Interstate Commerce Act. What then followed is

known to this Court and need not bear repetition. See

Penn Central Merger Cases, supra; New Haven Inclusion

Cases, supra”

In relation to an assessment of the RRRA, the most

important aspect of the New Haven experience is that

the Trustees of the New Haven perceived that the

merger of the Pennsylvania and New York Central

Railroads offered the possibility of a solution which

recognized both the compelling public interest in

maintaining rail transportation in Southern New En-

gland and the satisfaction, through securities of a

(then perceived to be) profitable trunk line railroad

system, of the private interest in realizing the equitable

equivalent of the highest and best use value of the

New Haven’s rail properties. There was thus a

voluntary decision and recommendation by the Trust-

ees of the New Haven to pursue inclusion in the pro-

posed merged Penn Central, and to seek to sell the

New Haven’s rail assets to the merged Penn Central,

subject to administrative and judicial determinations as

One aspect of the New Haven situation which does deserve re-

petition is the fact that the rights of the New Haven bondholders have

now been held in suspension under §77 since July, 1961, and no im-

mediate relief is in sight. As Judge Fullam commented in his opinion

below:

“I find it difficult to characterize as due process of law the notion

that further interim erosion can be justified because, if the lengthy

and complex procedures of the Act do not permit a constitutionally

permissible result, the parties may then start over again in the Court

of Claims. The rights of the secured creditor, of the New Haven, for

example, have already been held in suspension for more than ten

years.” (JA 81).

to the equivalence of value of the assets and the con-

‘va sideration (in the context of a §77 plan of re-

) organization), as being in the financial self-interest of

tag the claimants to the New Haven estate, as well as in

a8 the public interest. The New Haven Bondholders’ rep

are resentatives initially acquiesced in the concept of in-

ee clusion, although reserving their nights with respect to

ee the adequacy of the consideration. The Bondholders

originally opposed consummation of inclusion prior to

a final decision as to the consideration (leading to the

“Procrustean measures” language by Mr. Justice Fortas

in Penn Central Merger Cases, 389 U.S. at 510-1 1), but

ps later consented to the conveyance of New Haven's as-

Ge sets and divestment of their liens on the basis of as-

- surance of subsequent judicial review as to the ade-

| quacy of the consideration. Thus, New Haven Inclusion

Cases arose in a procedural context totally at variance

with the factual setting of the present case.

In the case of Penn Central's reorganization, there

was no possibility of a solution involving voluntary ac-

quisition of the rail assets by another carrier or carti-

ers, since no carrier could afford to assume Penn Cen-

tral’s deficits in net railway operating income

amounting to some $90 million annually. This, how-

- i

a “core system” of 11,000 miles, and to approve and

certify pursuant to §77(d) a plan under which the rail

properties of Penn Central required for the 11,000-

mile system would be transferred to a new cor-

poration, “Core Railroad;” the Boston-Washington

passenger corridor would be operated on the basis of a

governmental subsidy providing for a return on in-

vestment by a new corporation, “Northeast Railroad,”

which would lease trackage rights for which it would

pay Core Railroad a fair rental based on the value of

the property fairly allocable to passenger operations;

non-rail and surplus rail assets would be segregated;

and an investment company called Penn Central En-

terprises (all of the securities of which would be issued

to private creditor and stockholder claimants of Penn

Central, in the order of the priority of their claims)

would be created to hold all of the non-rail assets of

Penn Central, plus all of the stock of Northeast Rail-

road, a portion of the stock of the Core Railroad and

all the stock of a liquidating subsidiary to which non-

essential rail properties would be conveyed. The New

Haven Trustee's Plan required the United States and

other public interest claimants, including labor

claimants, to accept senior debt securities, junior se-

curities and common stock of Core Railroad in ex-

change for all of their claims. The Plan was not ap-

proved by the ICC, which held hearings in August

1973 on the New Haven Trustee's Plan and two other

proposed plans for reorganization submitted to it pur-

suant to §77(d).3 The United States Departments of

The other plans included a plan filed by the Penn Central Trustees

which called for cessation of operation and sale of all rail properties to

others, hopefully to public authorities and other railroads interested in

operating the properties; and a plan filed by Penn Central Company

which contemplated an action against the United States in the Court of

Claims under 28 U.S.C. §1491 (“Tucker Act”). The ICC held that the

Trustees’ proposed plan was not a “plan” within the meaning of §77(d).

The ICC rejected the plan filed by Penn Central Company.

Transportation and Justice opposed the New Haven

Trustee's Plan. In a report dated September 28, 1973,

the ICC rejected the New Haven Trustee’s Plan on a

number of grounds, but principally that the Core Rail-

road would not be economically viable.*

The efforts represented by the New Haven

Trustee's Plan, the opposition to it of the government

and its rejection by the ICC, are significant to the de-

cision here. The refusal of the ICC, after objection by

the government, to approve a plan calling for an

11,000 mile streamlined “core” freight-only railroad,

made up of principal main line and high density

feeder routes, as proposed by the New Haven Trustee,

must fairly be deemed to cast a long shadow on the

underlying theory of the RRRA, which is based on the

assumption that Conrail, a freight-only railroad*> made

up of the essential or “core” lines of Penn Central and

a few other relatively small bankrupt carriers, could be

designed so as to be economically viable.

In any event, the New Haven Trustee treated the

ICC’s rejection of his Plan as dispositive of any private

attempt to arrange an accommodation with the public

sector. The Plan provided that, if it were not promptly

accepted by the ICC, the United States, organized la-

bor and the States (in respect of tax claims), whose vol-

untary consent thereto was a necessary precondition,

the New Haven Trustee would move promptly under

§77(g) for dismissal of the §77 proceedings, and, un-

der §77(i), for an equity receivership calling for the

_**As noted above, the ICC's September 28, 1973 Report is Doc. No.

54 in the Joint Documentary Submission. The New Haven Trustee's Plan

ak ee See O-8h, the ICC's conclusions are set forth at pp. 59-77

and in App. DD.

“The RRRA contemplates that Conrail will sell or lease the Wash-

ington-Boston passenger corridor to National Railroad Passenger Cor-

poration (Amtrak). See §§206(c) (1) (C) and 601 (d) of the RRRA.

prompt liquidation of Penn Central's rail properties.*®

The New Haven Trustee accordingly on October 9,

1973 filed his §77(g) Motion to dismiss Penn Central's

§77 proceedings.*’

Congress was aware of the pendency of the §77(g)

motion while it was considering the RRRA, as evi-

denced by the legislative history.** Apparently with the

intention of mooting the §77(g) motion, Congress then

amended pending bills so as to expand the definition

of “railroad in reorganization” (RRRA, §102(12)) to in-

clude railroads in equity receiverships.*® Congress also

6A liquidation equity receivership would not, of course, be incon-

sistent with a series of sales of rail properties for continued railroad use

(at the “highest and best use value”) to public authorities (federal and

state) and other railroads (such as the major trunk line carriers in the

West and South, as well as the Northeast, which carry substantial Penn

Central originated and terminated traffic).

"Doc. No. 13 in the Joint Documentary Submission. The Penn Cen-

tral Reorganization Court at first did not hold any heanng on the §77(g)

Motion on the ground that it was waiting for a legislative solution. See /n

re Penn Central Transportation Company (Columbus Option Appeals), 494 F.

9d 270 (3d Cir. 1974), petition for cert. filed, 42 U.S.L.W. 3633 (May 8,

1974). On May 6, 1974, a hearing was held on the §77(g) Motion, but no

decision has been forthcoming. Judge Fullam has stated that he de-

liberately deferred action on the §77(g) Motion of the New Haven

Trustee: “By a series of actions and inactions which need not be detailed

here, this Court held all such proposals in abeyance pending action by

Congress on the RRRA.” Opinion in Support of Order No. 1596, supra (JA

131). On August 8, 1974, by Order No. 1648, Judge Fullam ordered the

Penn Central Trustees to file a report on September 3, 1974, and called

a hearing on September 17, 1974, with respect to the desirability of se-

questration of non-rail income for the purpose of paying taxes and other

administration expenses now being deferred, and again specifically de-

ferred any adjudication of the §77(g) Motion pending said hearing.

See, e.g, 119 Cong. Rec. H. 9767 (daily ed. Nov. 8, 1973; remarks

of Rep. Shoup, co-sponsor of the Shoup-Adams bill which eventually be-

came the House version of the RRRA); 119 Cong. Rec. H. 9731 (daily

ed. Nov. 8, 1973; remarks of Rep. Adams relative to the Shoup-Adams

bill).

Compare §103(11) in “Working Paper No. |, Rail Services Act of

1973,” dated Nov. 11, 1973: “(11) ‘Railroad in reorganization’ means a

railroad which is a debtor in a reorganization proceeding under section

77 of the Bankruptcy Act (11 U.S.C. 205),” with §103(12) in S. 2767, re-

ported to the Senate on Dec. 3, 1973, in which the following sentence

first appears: “A ‘bankruptcy proceeding’ includes a proceeding pur-

suant to section 77 of the Bankruptcy Aa (11 U.S.C. 205) or an equity

receivership or equivalent proceeding.”

designed §207(b) in such a way that one of the pos-

sible factual foundations for the granting of the §77(g)

Motion, that an income-based reorganization was not

possible, would itself trigger compulsory conveyances

(RRRA, §207(b), first sentence) rather than a dismissal

of the proceedings under §77(g).

Subsequently, the Institutional Investors Penn Cen-

tral Group and substantially all indenture trustees of

Penn Central System bonds petitioned for a prompt

termination of rail operations. This petition was prem-

ised on a view that termination of rail operations and

sale of rail properties could be achieved even if §77

proceedings continued. A petition was also filed by

Penn Central Company, the holding company owning

all of Penn Central's stock, for a segregation of non-

rail properties from rail properties and cessation of rail

operations.” These petitions, together with the New

Haven Trustee’s §77(g) Motion, establish the unanim-

ity of substantially all creditor and stockholder parties

in the position that deficit rail operations of Penn Cen-

tral are constitutionally required to terminate.

The relationship between the RRRA and the pend-

ing motions to dismiss Penn Central’s §77 proceedings

and terminate rail operations is clearly stated by Judge

Fullam in his opinion below:

“Another aspect of the RRRA’s impact that war-

rants consideration, is the relationship of the avail-

ability of the RRRA’s processes to the pending peti-

tions to terminate rail services and to dismiss Penn

Central's §77 proceeding. Obviously, the RRRA is an

important factor to be weighed by the reorganization court

in assessing [the] validity of the petitioners’ contentions

“The petitions to terminate rail operations were heard by the Re-

organization Court on May 6, 1974, together with the hearing on the

New Haven Trustee's §77(g) Motion, and remain undecided. As noted

above, a hearing has been scheduled for September 17, 1974 with re-

spect to the desirability of sequestering non-rail income for the purpose

of paying administrative expenses, and Order No. 1648 calling such

hearing has specifically deferred adjudication of these petitions and the

§77(g) Motion.

that operations can no longer be constitutionally re-

quired.” (JA 59-60; emphasis added).

Given the history of Penn Central's hopelessly un-

profitable rail operations and chronic cash crises re-

sulting from deficit operations, *' and the utter futility

of the private efforts to reorganize Penn Central in the

face of opposition of the government and the ICC, it

became obvious that if any solution contemplating on-

going operation of the Penn Central System were to be

forthcoming, it would have to be a solution created by

Congress.

The congressional solution has been aptly de-

scribed by Judge Fullam as follows:

“To summarize, the RRRA represents an amalgam

of sale, reorganization, and eminent domain con-

cepts. Implementation of the Final System Plan

would produce transactions akin to sales under

§77(o) or §77(b) (5) of the Bankruptcy Act, but with-

out the safeguards of participation by the parties or ad-

vance judicial scrutiny; sales in which the price would

be paid in a form somewhat like that encountered

in a plan of ———— The transactions would

somewhat resemble a reorganization in which the

‘cram down’ decision is made by Congress, or at

least virtually compelled by ange wg in advance of

formulation of the rs And the plain purpose of the

entire arrangement would be to insure the con-

tinued availability of these rail properties for use in

meeting the public need for continued rail service,

without regard to the wishes of the present owners of the

*1As is indicated by Stip. Fac $11, in order to continue its oper-

ations, it was necessary for Penn Central not only to defer all real estate

taxes, leased line rentals and interest payments, but also to utilize ex-

traordinary sources of cash to the extent of $157 million. This amount is

exclusive of $28.8 million made available in 1974 to Penn Central by the

United States Department of Transportation under §213 of the RRRA;

of this amount, $10.8 million was made available in the form of a pur-

chase by the United States of a participation in certain equipment obliga-

tions of Penn Central. See Order No. 1480 and Memorandum in Sup-

port thereof (Docs. Nos. 29 and 30 in the Joint Documentary

Submission). Appeals from Order No. 1480 are pending in the Third

Circuit.

operties.” (Fullam, J., concurring; JA 77-78; em-

cae added).

In the RRRA, Congress set forth what it was will-

ing to do, by way of amending §77 and authorizing

and committing monies of the United States* by way

of a solution, and equally importantly, what it was not

willing to do. Specifically, Congress indicated that it

was not willing (except possibly to the extent of $500

million of government-guaranteed bonds of USRA) to

permit the estates of Penn Central and other bankrupt

carriers subject to the RRRA to be paid the “highest

and best use” value of the designated rail properties in

any form save that of common stock and possibly

more senior securities of Conrail. While the RRRA

employs words of “reorganization” and utilizes phrases

of art in the law of reorganization, such as “fair and

equitable,” it does not in fact contemplate re-

organization in the accepted legal definition of that

word. If “reorganization” in the conventional sense

were possible, there would have been no need for the

RRRA.

As Judge Fullam noted in his concurring opinion

below:

“The Regional Rail Reorganization Act of 1973

represents the Congressional response to the un-

fortunate fact that the processes and concepts of

“A total of $2.165 billion is authorized by Con in the RRRA in

the form of loans, guarantees and grants: $250 million for labor protec-

tion (Title V); $180 million for local rail continuation subsidies (Title

Hdd se gped million for obligations of USRA §210(b); $150 million for

Or acquisition, maintenance or improvements of property (§215);

and $85 million for to railroads in reorganization ($213), To date,

a total of $28.8 million has been made avai to Penn Central, of

which $10.8 million was in the form of a purchase of outstanding equip-

ment obligations (see Order No. 1480 and Memorandum in Support

thereof, Docs. Nos. 29 and 30 in the Joint Documentary Submission) and

$18 million was in the form of a grant (see Order No. 1542 and Mem-

orandum in Support thereof, Doc. No. 31 in the Joint Documentary

Submission).

“a

§77 outlined above proved inadequate to deal with

the current plight of railroads in the Northeast.

Section 77 is adequate only when a railroad’s reve-

nues are, or can reasonably be predicted to be, in

excess of operation expenses.

. > >

“Penn Central and most of the other bankrupt

northeastern carriers do not generate net operating

revenues, but incur large operating deficits. They

cannot achieve reorganization on an income basis

under §77.” (JA 69-70).

The Congressional response, as reflected in the

RRRA, is to mandate that all railroads in re-

organization in the Northeast which cannot reorganize

on an income basis (RRRA, §207(b)) convey their des-

ignated rail properties (§206(c)) to Conrail, a cor-

poration controlled by United States government ap-

pointed officials (§301(d)), in exchange for: (1) stock

and other securities of Conrail (§206(d)), including ob-

ligations of USRA (if affirmatively approved by a joint

resolution of Congress —§206(i)—which in any event

are limited to $500 million principal amount (§210(b));

and (2) the undefined “other benefits” accruing to

such railroad by reason of such transfer (§206(d)).

Once a railroad’s reorganization court concludes that

the railroad should be reorganized by means of con-

veyance of its rail properties to Conrail (§207(b)), there

is no further judicial review provided until after the

conveyances of property (§303(b)(1)) and the con-

current divestment of creditors’ liens (§303(b)(2)) have

been completed. The only “out” from the compulsion

of the statute which a reorganization court could ex-

ercise if an income-based reorganization is not pos-

sible,*? is a finding that “this Act does not provide a

‘The reorganization courts supervising the Ere-Lackawanna and

Boston & Maine reorganizations found that income-based re-

organizations were possible, and thus avoided the compulsion of the

RRRA.

process which is fair and equitable to the estate of the

railroad in reorganization. . .” (§207(b), third sentence,

clause (2)). This finding inherently requires a de-

termination whether or not the processes of the RRRA

would be unconstitutional as applied to the railroad.

In the case of Penn Central, the finding has been

made that the RRRA does not provide a process which

would be fair and equitable to the estate. Opinion in

Support of Order No. 1596, supra (JA 124-52). The issue

raised by this cross-appeal, asserting that the com-

pulsory conveyance provisions of the RRRA violate the

New Haven Trustee's constitutional rights, is es-

sentially the same issue which has thus already been

decided by the Penn Central Reorganization Court in

favor of the New Haven Trustee. The Reorganization

Court's decision, however, is subject to review by the

Special Court (created pursuant to §209(b) of the

RRRA).* The Special Court's decision is required by

the terms of the sixth sentence of §207(b) to be ren-

dered no later than September 30, 1974. Thus, as of

the date of this Brief, it is not known whether the Spe-

cial Court will decide (a) to sustain a plea of res judi-

cata, based on the order of the court below in

Connecticut General that the RRRA is unconstitutional

in failing to provide just compensation in respect of

erosion, (b) to affirm Order No. 1596 on the merits,

“The Special Court is a three-judge district court consisting of Cir-

cuit Judges me Og Friendly (presiding) and Carl McGowan and Dis-

trict Judge Roszel C. Thomsen. t has before it appeals on the merits of

Order No. 1596 (docketed as No. 74-8) by the United States, USRA and

Trustee limited to his jurisdictional contention that the junsdiction con-

ferred by §207(b) is void under Article II] and under Article I, Sec. 8.,

Cl. 4 of the Constitution. The Penn Central Trustees, although partially

aligned with the United States and USRA as to the “Tucker Act remedy”

argument, are appellees in support of Order No. 1596 on the merits, as

are all of the plaintiffs in Connecticut General and the related cases, Smith

v. United States and Penn Central Co. v. Brinegar.

the decision below, (d) to decline to reach the merits

by finding that jurisdiction is improperly conferred by

§207(b), or (e) to defer decision pending a decision by

this Court of the appeals and cross-appeals from

Connecticut General and related cases. The Special

Court’s decision will presumably have been made pnor

to the argument of this case. Whatever the Special

Court’s decision, appeals from its decision are pur-

portedly excluded by the seventh sentence of

§207(b).*

With this background, we turn to an analysis of

why the Congressional “solution” requiring Penn Cen-

tral. which is unable to reorganize in the conventional

manner, to convey its rail assets to Conrail in exchange

for stock and securities of Conrail and USRA, 1s neces-

sarily a violation of the Fifth Amendment rights of se-

cured creditors and other daimants to the Penn Cen-

tral estate.

**Junsdictional appeals by the New Haven Trustee from orders Nos

1543 and 1596 (120-day and 180-day orders under §207(b)) have been

filed under §24 of the Bankruptcy Act with the Court of Appeals for the

Third Circuit (Nos. 74-1501 and 74-1649). The former appeal was ar-

gued on July 18, 1974 and the Third Circuit panel reserved decision

pending a decision by this Court in this case. The New Haven Trustee

has acknowledged to the Court of Appeals that a favorable decision of

his cross-appeal ere would moot his jurisdictional appeals from the

§207(b) orders and thereby avoid the necessity of decisions as to whether

or not §207(b) is void under Article III of the Constitution and the doc-

trine of separation of powers.

B. The Compulsory Conveyance Provisions of the RRRA

Involve an Intentional Taking, Not Compensated by

Money or its Perfect Equivalent, of the Property of Penn

Central in Violation of the Fifth Amendment Rights of

its Creditors and Stockholders

The New Haven Trustee submits, for the reasons

set forth below, that the compulsory conveyance provi-

sions of the RRRA (§§206(c), (d), (f), (h) and (i)), 207,

208, 209%c) and (d) and 303(b) and (c), hereinafter col-

lectively referred to as the “compulsory conveyance

provisions,” are constitutionally void on their face and

as applied to Penn Central.

The RRRA authorizes for issuance to the estates of

bankrupt railroads, which are subject to the com-

pulsory conveyance provisions of the RRRA, only

common stock of Conrail, other unspecified securities

of Conrail which may be issued subject to the lim-

itations set forth in §206(i), plus (if Congress concurs

by joint resolution pursuant to §206(i)) not in excess of

$500 million of obligations of USRA which might be

guaranteed by the United States.** If the securities of

Conrail plus any obligations of USRA authorized by

Congress should be determined in the §303(c) pro-

ceedings to have less value than the “highest and best

“The $500 million limitation is derived from §210(b), fixing the

maximum obligational authority at $1,500 million of USRA securities, of

which $1,000 million may be issued to Conrail. Of the latter amount, not

less than $500 million is available solely for rehabilitation and mod-

ernization of rail properties. Under §206(i), the final system plan may in-

clude terms and conditions for any securities to be issued by Conrail in

exchange for rail properties which in the } of USRA will min-

imize any actual or potential debt burden on Conrail, and any securities

of Conrail which purport to obligate USRA shall not become effective

without approval by joint i i

States guaranteed debt securities is unauthorized. While Congress could

amend the $500 million limitation of §210(b) by a joint resolution, the

constitutionality of the RRRA cannot be made to on conjecture

as to future actions which Congress may or may not b

= ei i

BPR nev

use” value of the designated rail properties conveyed,

the only remedies allowed for by the statute are the

possibility of the Special Court's ordering additional

amounts of the same types of securities of Conrail

specified in the final system plan(§303(c)(2)(B)), plus

entering the §303(c)(2)(C) deficiency judgment against

Conrail.

Judge Fullam aptly described the deficiency judg-

ment provision of §303(c)(2)(C) in his opinion below as

“essentially circuitous.” (JA 77). If the Conrail com-

mon stock and securities are insufficient, a deficiency

judgment against the property having insufficient

value to support the securities representing the prop-

erty wil’ yroduce no possible satisfaction of the judg-

ment. Moreover, even if the judgment were satisfied,

Conrail’s assets would be depleted by the same

amount, thereby reducing the value of the common

stock, creating a need for a further deficiency judg-

ment. In his Opinion in Support of Order No. 1596, supra,

Judge Fullam described the deficiency judgment as a

“relatively pointless” remedy.(JA 137).

Neither the Penn Central Trustees, as intervening

defendants below, nor the Governmental Defendants

have presented any analysis of the RRRA which sup-

ports any contrary conclusion. The Trustees argued

below that the compulsory conveyance provisions of

the RRRA are unfair and inequitable to the Penn Cen-

tral estate unless this Court definitively adjudicates that

there is a Tucker Act remedy under 28 U.S.C. §1491

to take care of any “short fall” between the con-

sideration provided by the RRRA and the con-

stitutional minimum which would prove to be due un-

der the Takings Clause of the Fifth Amendment.”

"The Governmental Defendant's brief below was “in partial op-

position to intervening defendants motion for summary judgment” (Doc.

(footnote continued on next page)

The Governmental Defendants likewise relied be-

low upon the “Tucker Act remedy,” but with a some-

what different emphasis. The Governmental De-

fendants argued tha if USRA were able to design a

final system plan under which Conrail could be shown

to have the potential to earn net income before fixed

charges, then the capitalized value of the prospective

net earnings (i.e, the value of Conrail common stock

and its other securities for purposes of reorganization)

would automatically fix the value of the rail properties con-

veyed to Conrail. However, recognizing that the value

thus determined for rail properties of the bankrupt

carriers might be far less than the liquidation value of

those properties if sold for their highest and best use,

the Governmental Defendants argued below that any

constitutional “short fall” could be remedied by a suit

in the Court of Claims against the United States.

The Court below unanimously rejected the

“Tucker Act remedy” arguments of both the Penn

Central Trustees and the Governmental Defendants.

The New Haven Trustee asserts that this disposition

was correct, and the point will be fully briefed in his

Brief herein as an Appellee. In the instant Brief the

New Haven Trustee will assume that the Court below

was correct without argument of the question, and

that no “Tucker Act remedy” exists for any failure of

the stock and other securities of Conrail (including up

to $500 million of obligations of USRA if subsequently

authorized by Congress under §206(i)) to equal the

“highest and best use” value of the Penn Central rail

assets designated in a final system plan for conveyance

to Conrail.

(footnote continued from prior page)

Sa a Pahang 107, May 4 Bawe oe the United

judgment that a “Tucker Act remedy" cents wile St the come Uae an

serting the affirmative defense of an “adequate remedy at law.”

ae |

In his motion for summary judgment below, the

New Haven Trustee alleged that the RRRA constitutes

a taking by force of law for a public use of the prop-

erty of Penn Central of two types: (a) during the pe-

riod from enactment of the RRRA through the date of

conveyances under §303(b), as a law requiring that pri-

vate property be devoted to public use without the

owner being afforded a reasonable expectation of

profit or return on his investrent;** and (b) upon the

happening of the §303(b) conveyances, as a law pro-

viding for the taking for public use of (i) the right, title

and interest of Penn Central as owner in fee or as to a

leasehold estate of the designated rail properties, and

(ii) the right, title and interest c’ the New Haven

Trustee as mortgagee and lienholder. The first type of

taking was enjoined by the Court’s order below. The

instant cross-appeal deals with the failure of the Court

below to enjoin the second type of taking.

There is no dispute that, once a §207(b) order com-

pelling Penn Central to convey its property were to be

entered by the Special Court,*® the RRRA would, by

force of law, inexorably require conveyance of desig-

nated rail properties of Penn Central to Conrail in ex-

change for the consideration of the types specified in

the RRRA. There is also no dispute that the con-

sideration specified in the RRRA does not include

money.

**The Court below granted this portion of the New Haven Trustee's

motion for summary judgment.

As is sought by the United States, USRA, the ICC and the other

governmental parties who have filed a joint brief dated August 5, 1974

seeking to reverse Judge Fullam’s Order No. 1596 (Special Coun, Re-

gional Rail Reorganization Act, No. 74-8). As noted above, the Penn

Central Trustees, although they argue for a “Tucker Act remedy” to save

the RRRA, are aligned with the creditors and stockholders of Penn Cen-

tral as appellees in support of Order No. 1596 rejecting the RRRA as not

being “fair and equitable” to Penn Cerral.

The New Haven Trustee submits that, once a tak-

ing of private property is established to have taken

place under an Act of Congress, or to be the inevitable

consequence of the implementation of such an Act,

the implementing legislation must provide for pay-

ment to the owners of that property of the “full mon-

etary equivalent of the property taken.” Almota Farmers

Elevator S Warehouse Co. v. United States, 409 U.S. 470,

473 (1973).5° See United States v. Reynolds, 397 U.S. 14,

16 (1970). In United States v. Miller, 317 U.S. 369, 373

(1943), this Court held:

“The Fifth Amendment of the Constitution pro-

vides that private property shall not be taken for

public use without just compensation. Such com-

pensation means the full and perfect equivalent in

money of the property taken. The owner is to be

ut in as = pecuniarily as he would

ave occupied if his property had not been taken.”

(Footnotes omitted).

See also Monongahela Navigation Co. v. United States,

148 U.S. 312, 326 (1893), where it was stated that:

“The noun ‘compensation’ [as used in the phrase

‘just compensation’ in the Fifth Amendment],

standing by itself, carries the idea of an equivalent.

. . And this is made emphatic by the adjective

‘just.’ There can, in view of the combination of

those two words, be no doubt that the compen-

sation must be a full and perfect equivalent for the

property taken. . . . This excludes the taking into

account as an element in the compensation of any

The full quotation is as follows:

“The Fiith Amendment provides that private property shall not be

taken for public use without ‘just compensation.’ ‘And ‘just compen-

sation’ means the full monetary equivalent of the property taken.

The owner is to be put in the same position monetarily as he would

have occupied if his property had not been taken’ United States v.

Reynolds, 397 U.S. 14, 16 (footnotes omitted). See also United States v

Miller, 317 U.S. 369, 373.”

supposed benefit that the owner may receive in

common with all from the public uses to which his

private property is appropriated, and leaves it to

stand as a declaration that no private property shall

be appropriated to public uses unless a full and ex-

act equivalent for it be returned to the owner.”*

The only question which remains, assuming that

the “full monetary equivalent” test must be met, is

whether the Congress is free to legislate, in connection

with a taking, that something other than money shall

be the equivalent of money. In other words, can Con-

gress declare, for example, that the stock of Conrail is

to be the legal equivalent of money and, if it does,

what is the constitutional effect of that legislative dec-

laration? The question was squarely presented in the

Monongahela Navigation case, supra, and was squarely

answered as follows:

“By this legislation Congress seems to have as-

sumed the right to determine what shall be the

measure of compensation. But this is a judicial, and

not 4 legislative question. The legislature may de-

termine what private property is needed for public

purposes —that is a question of a political and leg-

islative character; but when the taking has been or-

dered, then the question of compensation is judi-

cial. It does not rest with the public taking the

property, through Congress or the legislature, its

representative, to say what compensation shall be

aid, or even what shall be the rule of compensation.

he Constitution has declared that just compen-

sation shall be paid, and the ascertainment of that

‘'This holding was cited with approval by this Court in 1970 in

United States v. Reynolds, supra, and the Reynolds decision was in turn cited

with approval by the Court in 1973 in Almota Farmers Elevator & Ware-

house Co. v. Umted States, supra. Thus there can be no doubt that the

Monongahela Navigation decision in 1892 remains the current and author-

itative holding of this Court on the issue.

is a judicial inquiry.” 148 U.S. at 327 (emphasis

added).*?

In the compulsory conveyance provisions of the

RRRA (particularly §§206(d), 303(b) and 303(c)), Con-

gress has specifically legislated the nature and rule of

the compensation to be provided to railroads in re-

organization for the compulsory “transfers or con-

veyances” of their property. By providing as a limit on,

and a test of, “just compensation,” that the Special

Court shall decide “fairness and equity” on the basis of

solely (i) stock and possibly other securities of Conrail,

(ii) obligations of USRA not exceeding $500 million

principal amount, and (iii) “other [undefined] bene-

fits,” Congress is in contravention of the clear holding

of the Monongahela Navigation case.

There is, in fact, but one medium of exchange

which is the “perfect equivalent of the property

taken,” namely money prescribed by Congress as legal

tender for the payment of all debts, public and pn-

vate. While it has the power to declare what “money”

is, and what shall be legal tender for payment of pri-

vate and public debts, and even to override incon-

sistent provisions in private contracts,5* Congress has

no power tc declare that something which is not

money is, as a matter of law, the perfect equivalent of

money. As the Monongahela Navigation, Miller, Reynolds

and Almota cases make plain, the law on this subject

has not changed since 1795 when it was stated:

**See Baltimore & Ohio R.R. v. United States, 298 U.S. 349,364(1936):

“Congress has no power to make final determination of just compen-

sation or to prescribe what constitutes due process of law for its ascer-

tainment.” (Footnote omitted). The Court cited with approval the por-

uon of the Monongchela Navigation opinion quoted in the text.

As to the er of Congress to make Treasury notes legal tender,

see Knox v. Lee, 79 L > (12 Wall.) 457 (1871) ; Juilliard v. Greenman, 110

U.S. 421 (1884). As to the power of Congress to invahdate gold clauses

in private contracts, see Norman v. Baltimore & Ohio R.R., 294 U.S. 240

(1935); and see other “Gold Clause Cases” decided the same day.

“No just compensation can be made except in

money. Money is a common standard, by com-

parison with which the value of any thing may be

ascertained. It is not only a sign which represents

the respective value of commodities, but it is an

universal medium, easily portable, liable to little

variation, and readily exchanged for any kind of

property. Compensation is a recompense in value,

a quid pro quo, and must be in money. True it is,

that land or any thing else may be a compensation,

but then it must be at the election of the party; it

cannot be forced upon him. His consent will le-

galize the act, and make it valid; nothing short of it

will have the effect.” Vanhorne’s Lessee v. Dorrance, 2

Dall. 304, 313 (Circuit Court Pa. 1795).

These legal precedents establish that the RRRA is

unconstitutional on its face and as applied to Penn

Central, when considered as an exercise of Congress’

Commerce Clause/eminent domain powers, and re-

sults in a permanent taking of the property of Penn

Central and the New Haven Trustee without payment

of just compensation in legal tender, in violation of the

Fifth Amendment. As an emineni domain statute, not

even the existence of a “Tucker Act remedy” under 28

U.S.C. §1491 to cover a “short fall” between the con-

sideration provided by the Act and the “highest and

best use” value of Penn Central's rail properties would

suffice to render the statute constitutional, since

claimants of Penn Central are entitled to full payment

in money or its perfect equivalent. Almota Farmers El-

evator & Warehouse Co. v. United States, supra, and other

cases cited above. Whether or not the stock or other

securities of Conrail have demonstrable value, such se-

curities are plainly not money or its perfect equivalent.

In its Opinion in Support of §207(b) 180-Day Findings

in the Secondary Debtor Proceedings (E.D. Pa. July 2,

1974) (JA 153-56), the Penn Central Reorganization

Court held unconstitutional the provisions of

§§206(a)(3) and 601(d) of the RRRA, which require

rail properties in the Boston-Washington passenger

corridor to be sold or leased by Conrail to National

Railroad Passenger Corporation (Amtrak), following

the §303(b)(1) conveyances and the §303(b)(2) di-

vestments of liens. The basis of this holding was that

the RRRA, at least in this area, clearly involves an ex-

ercise of eminent domain powers without provision for

payment of just compensation in money. Judge

Fullam observed:

“A further problem . . . arises in connection with

the provisions of the Act dealing with the so-called

“northeast corridor” from Boston to Washington.

Virtually all of this property is owned by the Sec-

ondary Debtors** and leased to Penn Central... .

The Government, in the present rope has

taken the position that Conrail wili be able to raise

$500 million in cash by acquiring the northeast cor-

ridor properties and then selling them to Amtrak

pursuant to §601(d) of this Act. While the public

purpose of these provisions of the statute is quite

Clear, the constitutionality of that approach seems par-

ticularly dubious. Certainly, if Congress were to give

Amtrak the power of eminent domain, Amtrak

could ap acquire the corridor properties. But

I find it difficult to accept the theory that it is con-

stitutionally permissible for the government to

— = result by means of the ogee without

providing esent owners of the property with cash or

its equivalent (JA 155; emphasis added).

ee eee

C. The Fifth Amendment Requires that a Railroad in

Reorganization, Which Is Unable to Earn Net Railway

Operating Income and Whose Properties Are Required

to Be Continued in Perpetual Public Service, Be Paid

Not Less than the “Highest and Best Use” Value of its

Rail Properties

Aside from Tucker Act remedy considerations,*°

the gist of the contentions of the United States and

USRA that the processes of the RRRA do not involve

an unconstitutional taking of property rests on an as-

sumption as to a valuation theory which appears to be

a complete misreading of the holding of New Haven

Inclusion Cases, supra. The point was specifically ad-

dressed in a colloquy between counsel representing the

United States and USRA and Judge Fullam at the

“180-day” hearing on June 10, 1974:

THE COURT: “Perhaps it is the lateness of the

hour, but it would seem to me one of the factors

the Court would certainly have to consider in de-

ciding whether this Act provides a fair and equita-

ble process would be what the probable outcome or

what the possible outcome would be at the valu-

ation stage.

MR. CUTLER: “My difficulty with that is there are

so many imponderables involved on both sides of

that valuation equation.

“To begin with, if a profitable railroad can be cre-

ated, then it may be the only value that these es-

tates are entitled to is the capitalized earning power

of the profitable railroad. They may not be entitled

to liquidation value. So you may not have to add in

any other benefits at that point.

55As noted above, the unavailability of a “Tucker Act remedy” is not

argued in this Brief but will be discussed fully in the New Haven

Trustee's Brief as Appellee.

“That is a point the Supreme Court expressly re-

served in the New Haven case. It is one Jud An-

derson never reached himself when he said that he

thought the night thing was liquidation value, not

because it is constitutionally required. So that is an

open issue.

THE COURT: “Of course, it has always been as-

sumed up until this point that going concern value

was greater than liquidation value, hasn’t it? Hasn't

that usually been the assumption?

MR. CUTLER: “The point was in the earlier re-

organization cases that may very well be true, the

early going concern value cases, but the precise

int was reserved, as I said, by the Supreme Court

in the New Haven case. So there is an open issue.

“If a profitable railroad can be created, even if it is

a billion-dollar railroad, let's say its value capital-

ized is a billion dollars, and the liquidation value

were theoretically more, that doesn’t automatically

demonstrate that the consideration to be paid is

less than a constitutional minimum. That is an

open point.

“As to liquidation itself, there are many open

points, as you know. There are discounts to be ap-

plied. There are the problems of succeeding in

abandonments, all of the different things that the

Supreme Court considered in the New Haven

case.” (Transcript of June 10, 1974 hearing, E.D.

Pa. No. 70-347, on the 180-da eo pursuant

to §207(b) of the RRRA, at pp. to, 610-12).

In his Opinion in Support of Order No. 1596, supra,

Judge Fullam noted that this theory of valuation ap-

pears in the legislative history to be the basic rationale

of the RRRA.

“The legislative history of the Act suggests that

many responsible public officials may be pro-

ceeding on the assumption that the Common Stock

of Conrail (i.e., the capitalized value of its >

tive earnings) necessarily and automatically estab-

lishes the value of the rail assets conveyed to Con-

rail, even if those assets had a higher liquidation

value, and even though their value er ‘highest and

best use’ ~~ be much greater.” (Opinion in Sup-

port of Order No. 1596, supra; JA 138).

The Government argues in effect that the value of

Penn Central's rail assets can, for Fifth Amendment

purposes, be valued solely by reference to the value of

the securities issued by a buyer of the properties in a

context where the properties are the only asset of the

buyer. The argument is thus both circular and ques-

tion begging where the issue is whether the seller could

realize greater value by a sale of its properties for non-

rail use, or by condemnation of its properties by a

public authority for continued rail use, or a com-

bination of both. The New Haven Trustee submits

that the Government's circular reasoning does not in

any event withstand close analysis of the holding of

this Court in New Haven Inclusion Cases, supra.

Mr. Justice Stewart's opinion (399 U.S. at 481-82)

discussed the contention of the New Haven Bond-

holders “that Penn Central should pay an added

amount [in addition to per-parcel sale liquidation

value] to reflect the ‘going-concern’ value of the New

Haven.” This particular contention was rejected by the

Court, not because it was reserving any issue, but be-

cause it considered that such payment would give the

New Haven Bondholders “the best of both worlds” (/d.

at 482), a result which the Court found would be “un-

fair” and “inequitable” to Penn Central (/d.). Of par-

ticular significance to the instant case is that the Court

distinguished the Fifth Avenue Bus and Hudson Rapid

Tubes cases, cited in 399 U.S. at 482, note 80, on the

56In re City of New York (Fifth Avenue Coach Lines), 18 N.Y. 2d 212,

219 N.E. 2d 410, appeal dismissed sub nom. Fifth Avenue Coach Lines v. City

of New York, 386 U.S. 778 (1966); In re Port Authority Trans-Hudson Corp.

90 N.Y. 2d 457, 231 N.E. 2d 734, cert. denied sub nom. Port Authority

Trans-Hudson Corp. v. Hudson Rapid Tubes Corp. 390 US. 1002 (1967).

ground that:

“In neither of these cases did the New York courts

require the taking authorities to pay both an oper-

ating and a liquidating value. Rather, they awarded

the owners the value reflecting the highest and best

use for their properties — precisely the treatment ac-

corded the New Haven here.” (Emphasis in

original).

The New Haven Trustee submits that the findings

made by Congress in the RRRA, §101(a), constitute a

recognition that the railroad properties of Penn Cen-

tral are, in the words of one of the Government briefs

below, an “irreplaceable national asset.” As such, the

highest and best use value of at least Penn Central's

principal rail properties is presumptively for continued

railroad use by one or more public authorities. The

New Haven Trustee submits that, prior to the valu-

ation hearings by the Special Court (RRRA, §303(c)) at

which a definitive theory of valuation of Penn Cen-

tral’s rail properties can be decided upon, the facial

constitutionality of the RRRA must be adjudged in the

light of the constitutional requirement that valuation

of a debtor railroad’s rail properties be based on

“highest and best value” in the words of Mr. Justice

Stewart, and not on an automatic application of a pre-

determined valuation technique.

On the New Haven’s facts, both Judge Anderson

and this Court found that liquidation value was

greater than going concern value.’ In both the Fifth

Avenue Bus and Hudson Rapid Tubes cases, the trans-

portation entities were in a hopeless loss situation, and

yet they were “irreplaceable” local assets which the

public authorities would not tolerate being abandoned

and sold piece-meal. The New Haven Trustee submits

that Penn Central's case is analogous to Fifth Avenue

"In re New York, New Haven & Hartford R.R., 289 F. Supp. 451, 454-

55 (D. Conn. 1968); New Haven Inclusion Cases, supra, 399 U . at 481-82.

Bus and Hudson Rapid Tubes, and §101(a) of the RRRA

confirms this to be so. In Fifth Avenue Bus and Hudson

Rapid Tubes, the amount awarded to the owners of the

transportation facility was somewhere between scrap

value (argued for by the taking authority) and re-

production cost new, less depreciation (argued for by

the owners of the property). This mid-point repre-

sented application of the valuation principle of “high-

est and best use” to the facts of those cases.

All the New Haven Inclusion Cases decide is that

where, under the peculiar facts of that case, value

based on “highest and best use” was equal only to liq-

uidating value for non-rail use, the Court would not

compel payment of a greater amount. The Court's

opinion does not stand for the proposition that going

concern value, when less than liquidation value, could be

judicially approved as meeting the test of “highest and

best use.”

It is in light of the discussion at 399 U.S. at 481-82

that one must read the following single sentence of the

Court's opinion (399 U.S. at 490) upon which Gov-

ernment counsel presumably relied in his oral argu-

ment (see Transcript of June 10, 1974 hearing at p.

12, 637):

“Nor is it necessary to consider the bondholders’

claim that anything less than full liquidation value

would amount to an uncompensated taking mi vio-

lation of the Fifth Amendment.”

This sentence is immediately preceded by the fol-

lowing passage which, it is submitted, is totally incon-

sistent with the Governmental Defendants’ reliance on

that sentence for its “reservation of issue” position:

“The purchase price that the Commission and the

reorganization court have required Penn Central to

pay to the New Haven estate is based upon the liq-

uidation value of the seller's assets, appraised as of

December 31, 1966. That price hypothesizes a

shutdown of New Haven, followed by a sell-off of

its assets af their highest and best value. (n the circum-

stances of this case, and for the reasons we have al-

ready set out at length, we — with the re-

organization court that it would be unfair and

inequitable to allow Penn Central to take the prop-

erties for any lesser sum. Moreover, we today re-

uire a reassessment of the consideration that Penn

Central is to give in exchange for those properties.

We thereby accord the holders the right to a

liquidation and a per-parcel sale that is theirs by

virtue of their mort liens. The Bankruptcy Act

does not require that they be given more.” 399 U.S.

at 489-90 (emphasis added).

The portion of Judge Anderson's August 13, 1968

opinion presumably relied upon by the Governmental

Defendants is the following two sentences:

“It is the opinion of the court that the Penn-Cen-

tral should pay to the Trustees of the New Haven

at least the fquidation value of the New Haven as

of December 31, 1966. This is so not because the

Constitution necessarily requires it but because that

standard, under the arcumstances of this case, is

fair both to the creditors and to the Penn-Central.”

289 F. Supp. at 454.

It is submitted that neither Mr. Justice Stewart nor

Judge Anderson was reserving the issue as to whether

the New Haven Trustees could, consistent with the

Fifth Amendment, have been paid /ess than liquidation

value. Rather, each court was limiting its respective

opinion to the facts of the New Haven situation. Each

court concluded that the “highest and best use” value

of the New Haven’s rail assets was to be measured by a

hypothetical liquidation and per-parcel sale for non-

rail use. Judge Anderson (289 F. Supp. at 454) refers

to the “constitutional minimum of value” as to which

the creditors were “entitled,” and that those “rights of

;

creditors cannot be arbitrarily sacrificed or restricted

_..” It is wholly inconsistent with Judge Anderson's

“constitutional minimum” language to read into his

opinion an intent to reserve the issue that creditors of

a railroad in reorganization might be entitled to less

than liquidation value and a per-parcel sale in a Sit-

uation where “going concern value” was less than liq-

uidation value. This is particularly true since Judge

Anderson specifically rejected the “going-concern

value” arguments of the New Haven Bondholders

because:

“The concept of ‘going concern value’ is fictional as

applied to the New Haven because it ignores the

Railroad’s long and continuous history of deficit

operations.” 289 F. Supp. at 455.*°

In the case of the Penn Central System, it is now res

judicata that its railroad properties are not re-

organizabie on an income basis (Order No. 1543 (JA

103); the governmental parties to this case have not

appealed this order). Penn Central's rail properties

thus have no “going-concern value.” Penn Central is in

the same position now that New Haven was in the

1960's. The Government's “capitalized earning power”

argument amounts to this: if there had been no Penn-

Central merger to serve as the medium by which rail

service in the New Haven’s territory could have been

maintained consistent with the protection of creditor

rights which is mandated by the Fifth Amendment, it

would have been open to Congress to enact a law un-

der which the New Haven Trustees would have been

See New Haven Inclusion Cases, supra, 399 U.S. at 436:

“In approving the negotiators’ approach to the price question, the

Commission observed that asset value rather than earning power was

the primary determinant because ‘New Haven had long been dry of

earning power.’ 331 1.C.C., at 657. ‘It there is one thing on this

record that is clear and undeniable,’ the Commission concluded, ‘it is

that New] Hfaven] has neither earning power nor the prospect of

earning power.’ /d. at 687.”

compelled to convey to a nominally private (but gov-

ernmentally controlled) rail corporation a designated

portion of New Haven’s rail properties in exchange

for common stock and possibly other securities of this

new entity, all without benefit of any “underwniting”

to assure that the value of this package of securities

was equal to $174,635,899, the amount finally ap-

proved as the “highest and best use” value of New Ha-

ven’s assets. Moreover, the Government argues that

the capitalized value of the earings predicted to be

earned by the buyer of the designated rail properties

determines their value to the seller even though such

properties might have a higher value to the seller if

sold for non-rail use or if condemned by one or more

public authorities. Such an argument confuses the “ap-

ples” of the theory of capitalized value in an earnings-

based reorganization with the “oranges” of the basic

rationale of bankruptcy law, that a debtor’s property

be applied for the benefit of claimants to its estate in

the order of the priority of their claims. This repre-

sents a sharp departure from any prior decision of this

Court, including most particularly the New Haven In-

clusion Cases, upon which the Government seeks to rely

for its theory of valuation.

D. The RRRA Is Constitutionally Defective in Requiring

Payment for Rail Assets in the Form of Securities of

Conrail Without Any Provision for a Guarantee that the

Value of Such Securities Will Be the Perfect Monetary

Equivalent of the “Highest and Best Use” Value of the

Rail Assets

This section of the Brief analyzes the nature of

Conrail as a governmentally created and controlled en-

tity, the facts in the record as to the value of the rail

properties comprising Penn Central's System under

the “highest and best use” standard of the New Haven

Inclusion Cases, and the reasons why securities and

common stock of Conrail, plus an amount of gov-

ernmentally guaranteed debt instruments not ex-

ceeding $500 million, could not be viewed as the per-

fect equivalent of the “highest and best use” value of

the portion of Penn Centr: ; rail assets to be designa-

ted for conveyance to Conrail under the RRRA.

Although the compulsory features of the RRRA are

sufficient, by themselves, to distinguish the RRRA

from any prior law “on the subject of bankruptcy”

heretofore enacted,°? it is the governmental control of

Conrail which most clearly marks the RRRA as an ex-

ercise of the Commerce Clause/eminent domain pow-

ers of Congress. Compulsory conveyance of properties

to a governmentally created and controlled cor-

Jt is true, of course, that the “cram-down” feature of §77(e), up-

held in the Denver & Rio Grande case, supra, represents an element of ju-

dicial compulsion; however, the court in §77(e) is required to find that a

plan ejected by a class of creditors “makes adequate provision for fair

and equitable treatment for the interests and claims of those rejecting it”

and “such rejection is not reasonably justified in the light of the re-

spective rights and interests of those rejecting it . . . .” In the RRRA, by

contrast, there is no voting by creditor or stockholder claimants to the

railroad’s estate, nor any judicial proceedings to determine that their re-

jection of Congress’ plan “is not reasonably justified” in the light of their

nights and interests.

poration is not a feature of any prior “law on the sub-

ject of bankruptcies.” The New Haven Trustee has no

quarrel with the Congressional decision to place con-

trol of Conrail in the hands of the United States and

its agencies in view of the extensive governmental fi-

nancial commitment to Conrail. But Conrail will neces-

sarily be as much a creature of Congress’ will as are

Federal Deposit Insurance Corporation, Securities In-

vestors Protection Corporation, and National Railroad

Passenger Corporation. These are “nominally” private

corporations which, however, serve primarily non-pri-

vate purposes. Conrail is simply not fairly char-

acteristic of “private enterprise.” It is “government en-

terprise” in its creation, financing and control.

The “government enterprise” nature of Conrail

may be judged by the following legislative history:

MR. KUYKENDALL: “Mr. Speaker, is it not true,

I will ask the gentleman from Washington (Mr. Ad-

ams) that the creditors are of course given protec-

tion, and that the Board of Directors, under the

control of Government officials, is the owner of the

entire block of 100 million shares, whatever it is?”

MR. ADAMS: “The gentleman is correct. It is con-

trolled by the United States, so long as the Secre-

tary determines that there is an amount of obliga-

tion funds which the United States might, in any

way ever, have anything to do with.

“During that period of time, it is controlled by a

board of directors which consists of Government

officials.” 119 Cong. Rec. H 11876 (daily ed. De-

cember 20, 1973).

The provisions vesting control of Conrail in the

United States Government are set forth in §301(d) of

the RRRA: so long as 50% or more of Conrail’s in-

debtedness constitute debts owed to, or guaranteed, by

USRA or the United States, eight of the fifteen direc-

ee nn

tors of Conrail will be government officials or persons

appointed by the President with the advice and con-

sent of the Senate.” Thus, the owners of 100% of the

common stock of Conrail will be effectively without

voice, having at best 7 of 15 votes on the Board of Di-

rectors. Since management decisions will be vested in

the Board of Directors by whatever state law Conrail ts

incorporated under (§301(b)), the owners of the stock

of Conrail can expect that Conrail will be managed in

the public interest whenever the public interest con-

flicts with the private interests of the stoc kholders.

When the RRRA is viewed solely as a “law on the

subject of bankruptcy,” the following factual dis-

tinctions set it apart from any prior exercise of the

Bankruptcy Clause power: (1) the RRRA provides for

a type of “reorganization” which does not depend on

private claimants to the estate seeking the “re-

organization” or voting upon it; (2) the “re-

organization” is required to be implemented over the

unanimous dissent (as exemplified by the present

three constitutional complaints before the Court) of

the private creditor and stoc kholder claimants; (3) the

“reorganization” dogs not by its terms insure that pn-

vate secured claimants will receive the equitable equiv-

alent of a hypothetical foreclosure of their liens, mea-

sured by the “highest and best use” value of the

properties subject to such liens;*' and (4) the RRRA

*'The United States and USRA have for the first time comended be

fore the Special Court that

“USRA and this (the Special] Court on review under Section 30K%c),

(footnote continued on next page)

provides that private claimants, in exchange for their

legal liens upon tangible physical property, will receive

common stock and other securities of a government-

controlled, nominally privately incorporated, cor-

poration. The common stock of Conrail has been

stripped of all the normal attributes of ownership of

stock in a private enterprise. Thus the Penn Central

claimants, as potential owners of the vast majority of

the shares of common stock of Conrail to be issued,

would not have control of the Board of Directors of

Conrail, or the right to select its executive officers, or

the right to discharge management for incompetence

or poor economic performance, or the right to declare

dividends when deemed appropriate, or the right to

pass on the terms of any debt, or the right to avoid po-

litical appointments to a Board whose decisions would

entail financial gind fiduciary responsibilities, or the

right to sell their stock on the New York Stock Ex-

change or possibly other national securities ex-

changes,” or the right to be assured that they could

(footnote continued from prior page)

are empowered to provide for the issuance of such Conrail debt se-

curities as they deem necessary or appropriate — including bonds se-

cured by liens on specific properties identical in all security respects

to the liens that attach.” Brief of United States, ef al, dated

August 5, 1974 ( i rt No. 74-8).

While this argument might have some persuasive force if USRA were

required by the RRRA to issue fixed income mortgage bonds secured by

first mortgage liens to the extent of the “highest and best use” value of

the rail ies ject to existi mortgage liens divested under

§303(b)(1), this is mot the case. If USRA designs the final system plan

without fixed income mortgage bonds (or if Congress rejects such a pro-

| when the plan is submitted to it under §208), the Special Court will

unable to remedy the deficiency under §303(c)(2)(B) because that sec-

tion is expressly limited to “securities of the Corporation. . .as designated

in the final system plan.”

“The provision that a majority of the directors of Conrail be elected

by the Government, leaving only a minority to be elected by the holders

of 100% of the common stock, would the New York Stock Ex-

change “Policy as to Non-Voting Stock” (New York Stock Exchange,

pees Manual, §A-15); see also the rule as to “Unusual Voting Provi-

sell their stock to the United States or one of its agen-

cies at the price at which it was valued when it was re-

quired to be accepted as “payment” of their claims se-

cured by liens on Penn Central's rail properties.”

In terms of Congressional intent, it is reasonably

clear from the legislative history that Congress was

motivated almost entirely by a view of the Constitution

which proceeds from the premise, in Senator Hartke’s

words, that the common stock of Conrail can be

“crammed down” on the creditors, and that “judges

have ruled that this is fair.” 119 Cong. Rec. S 23783-4

(daily ed. December 21, 1973; remarks during debate

on Conference Report accompanying H.R. 9142).

This view seems to stem from a mis-reading of New

“Compare the “underwriting” of the Penn Central Common Stock

required by the New Haven Reorganization Court, /n re New York, NH

& H. R.R, 904 F. Supp. 793 (D. Conn, 1969), aff'd in part, rev'd in part,

New Haven Inclusion Cases, supra. it is of course highly significant that a

majority of this Court in 1970 believed that Judge Anderson's “under-

writing” concept was a sound and necessary provision to assure the New

Haven estate's daimants that they would in fact receive the equitable

equivalent of the “highest and bes value” of New Haven’s rail proper-

ties, and found it necessary to remand the case because the Court per-

ceived that the underwriting might well have become unrealistic by vir-

tue of Penn Central's subsequent §77 petition. If the RRRA were to be

sustained in this Court, the 1970 decision of this Court remanding the

underwriting plan because of its insufficiency would be largely mooted

since the New Haven's First Mortgage Bondholders would ultimately re-

ceive, at best, nor-underwritten stock and securities of Conrail, in ex-

change for which Conrail would receive the bulk of the New Haven's as-

sets valued at $175 million in 1966 for which payment remains to be

made

“The entire quotation is as follows

“We are providing that the creditors of this corporation would be re-

quired to take common stock in the new quas-government operation. In

other words, they are exchanging their present security interest in

the rail properties for common stock in the new corporation

“The railroad properties then become the properties of the new cor-

poration free and clear of lens and encumbrances. In other words,

the assets are being transferred and the rights are being changed

The nonrailroad property will remain in the bankruptcy court to be

(footnote continned on ned page)

Haven Inclusion Cases, supra, and Penn Central Merger

Cases, supra, since there is no other authority to sup-

port it. The Congressional theory underlying Senator

Hartke’s thesis must be based on the Bankruptcy

Clause, since there are no cases which could be read to

stand for the proposition that, for example, Congress

could flood a farmer's land as a result of construction

of a hydroelectric dam, and require him to accept

stock of TVA instead of money for his property.

As a “law on the subject of bankruptcy,” however,

**= RRRA is void as a violation of substantive due pro-

cess. It is a deprivation of property without due pro-

cess for Congress to divest a creditor of his contractual

lien created under state law, and give him in exchange

a piece of paper stripped of the normal attributes of

an investment security, no matter what aspects of pro-

cedural due process are accorded.

The leading cases in which this Court explored the

outer limits of Congress’ power to pass laws for the re-

lief of debtors from the claims of their secured cred-

itors are the Rock Island® case, and the Radford and the

two Wright cases under the Frazier-Lemke Act and

the amended Frazier-Lemke Act. In the Rock Island

case, the Court upheld an injunction against fore-

(footnote continued from pror page)

deak with by them. One can talk about what is svailable if the rail-

road is liqui and put through the wringer, but even then the

chances of these creditors getting their money is relatively slim, and

this country cannot afford cessation of rail service while the railroads are

put through the . So what, in effect, is called thr *

theory forces them to accept this kind of settlement and judges have

ruled that this is fair.” (Remarks of Senator Hartke; 119 Cong. Rec.

S$ 23783-4 (daily ed. December 21, 1973); emphasis added).

“Continental Tl. Nat. Bank 9 Trust Co. v. Chicago, RI. @ Pac. Ry., 294

U.S. 648 (1935). /

“Louisville Joint Stock Land Bank v. 295 U.S. 555 (1935),

wae v. Vinton Branch Mountain Trust Bank, U.S. 440 (1937); Wright

v. Union Central Life Ins. Co, 311 U.S. 273 (1940).

closure of a pledge in a §77 case against the con-

tention that it represented an impairment of contract

in contravention of the Fifth Amendment. The Court

reasoned that “the injunction here goes no further

than to delay the enforcement of the contract.” 294

U.S. at 681. In Radford and the two Wright cases, there

was no question of a governmental “taking;” the bene-

ficiary of both Frazier-Lemke Acts was the debtor-

farmer, and there was neither a government con-

trolled entity involved nor any “public purpose” other

than relief of poverty. The rationale of these four

cases is that the Bankruptcy Clause and the Fifth

Amendment can together support a law which effects

a brief moratorium on foreclosure of a pledge or a mort-

gage lien, coupled with an option in the mortgagor at

the end of the period to purchase the mortgagee’s in

terest for cash equal to the appraised value of the prop-

erty. This result, it is submitted, is not different from

the hypothetical liquidation per-parcel sale value of

the New Haven Inclusion Cases. By implication in all

four cases (and express holding in Radford), a Bank-

ruptcy Clause enactment (not supported by any pos-

sible exercise of eminent domain powers), which de-

prives a pledgee or mortgagee to a greater extent

(such as, for example, divesting his lien and paying

him less than appraised value, or not paying him in

cash at all but giving him an unsecured or junior obli-

gation of the debtor which is not the equitable equiv-

alent of his secured claim), is a violation of the Due

Process clause of the Fifth Amendment.

Thus, §303(b)(2) of the RRRA, by which mortgage

liens of creditors are divested prior to any judicial de-

termination that the consideration received by the

bankrupt debtor upon conveyance of the property is

the “fair and equitable” equivalent of the properties

valued at their “highest and best use” value, is de-

ficient as Bankruptcy Clause legislation on due process

grounds. This is a defect apparent on the face of the

RRRA unless it can be reasonably determined that the

“highest and best use” value of the designated portion

of Penn Central's rail assets will be $500 million or

less, that being the amount of obligations of USRA

contingently” authorized to be included in a final sys-

tem plan as payment to all estates of railroads in re-

organization which convey rail assets under §303(b).

Once it is determined that the stock and other se-

curities of Conrail are not necessarily equal to the

“highest and best use” value of the rail assets of Penn

Central which would be required to be conveyed un-

der a final system plan, and that the §303(c)(2)(C) de-

ficiency judgment is “essentially circuitous,” all that re-

mains to test the facial constitutionality of the

compulsory conveyance provisions of the RRRA is to

assess whether and under what circumstances this

$500 million of theoretically available debt securities

(which might or might not carry the full faith and

credit of the United States) would tend to provide the

Penn Central estate with a total package of securities

which could be said to be the “fair and equitable

equivalent” of its rail properties.

"Under RRRA, §206(i), any provision in the final system plan which

purports to create a direct ae of USRA is subject to affirmative

approval by a joint resolution of the Congress. As noted above, the $500

million limitation is derived from §210(b). There is no assurance that this

$500 million of USRA obligations would carry the guarantee of the

United States. Section 210(c) of the RRRA sienery Me

“The Secretary [of Transportation] shall guarantee the payment of

principal and interest on all obligations issued by the Asssociation in

acco with this Act and which the Association requests be guar-

anteed.” (Emphasis added).

“Even if the full $500 million of government guaranteed USRA ob-

ligations is made available in the final system plan, Penn Central's estate

would at best receive only a pro-rata portion since the estates of four

other Class | railroads and one Class II railroad would be entitled to pro-

rata participation.

To date no definitive valuation findings relating to

the rail assets of Penn Central have been made by ei-

ther the ICC (whose jurisdiction in this area is ex-

clusive under §77(e)) or by the Penn Central Re-

organization Court, nor have any hearings been held

at which valuation evidence could be administratively

or judicially tested. The lack of definitive valuation

proceedings, such as those reviewed by this Court in

New Haven Inclusion Cases, is a consequence of the ICC

having failed to formulate any plan of reorganization,

and its rejection for various reasons of those plans sub-

mitted to it. No valuation hearings have been held by

the Penn Central Reorganization Court because it has

had no plan certified to it by the ICC. Unless the

RRRA is held to be unconstitutional, valuation hear-

ings will never be held until after the irrevocable con-

veyance of Penn Central's rail properties, free of lien,

to Conrail.”

The evidence before the Reorganization Court on

valuation of Penn Central's rail properties consisted

primarily of a Day & Zimmermann study which had

originally been placed in the Penn Central Re-

organization Library established pursuant to Order

No. 1179 and was subsequently, in a revised form,

filed with the ICC.”! The Day & Zimmermann study

“ICC Report dated September 28, 1973, supra, Doc. No. 54 in the

Joint Documentary Subraission.

"The failure of the RRRA to provide for a definitive hearing on val-

uation evidence in connection with fair and equitable findings is indi-

cative of the statute's shortcomings under the due process clause of the

Fifth Amendment.

"Day & Zimmermann, Inc., “The PCTC Physical Asset Valuation

Study,” April, 1973; Doc. No. 58 in the Joint Documentary Submission;

Revised Study, May, 1973, Appendix | to Exhibit T-21 (witness: Carlisle)

in ICC Finance Docket No. 26241, /n re Reorganization Proceedings of Penn

Central Transportation Co.; Doc. No. 40 in the Joint Documentary Sub-

mission. The ization Library was established pursuant to peti-

tions filed by the Haven Trustee (see petition dated March 16,

1973; Doc. No. 12 in the Joint Documentary Submission), and Morgan

Guaranty Trust Co.

estimates the value as of December 31, 1970 of the

physica! assets of Penn Central and ali its leased lines

(exclusive of commercial properties owned by Penn

Central and its leased lines in the area of Grand Cen-

tral Terminal, New York City, referred to as “Park Av-

enue Properties”). The Day & Zimmermann study in-

cludes, in part, land not required for rail use, and lines

of railroad which USRA might determine should be

abandoned rather than included in a final system plan.

It is impossible to know at this time what proportion

of the Penn Central rail assets studied by Day & Zim-

mermann would be included in a final system plan.

See Stip. Fact, $74, 5, 6. It is reasonable and conser-

vative to project, however, in terms of the value of all

physical assets of Penn Central and its leased lines

studied by Day & Zimmermann, that the Penn Central

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.”

"For example, the New Haven Trustee's Plan dated June 27, 1973

for reorganization of Penn Central, submitted to and rejected

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