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

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Supreme Court, U.

FILED

OCT 10 1974

In The WICHAEL ROCA, . OT

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 Hanford

Railroad Company, Debtor, Cross-Appellant

vu.

UNITED STATES OF AMERICA, a.

Cross-A ppellees

ON CROSS-APPEAL FROM THE

JUDGMENT OF THE UNITED STATES

DISTRICT COURT FOR THE

EASTERN DISTRICT OF PENNSYLVANIA

REPLY BRIEF OF

CROSS-APPELLANT

Of Counsel: JOSEPH AUERBACH

225 Franklin Street

MORRIS RAKER Boston, Massachusetts

CHARLES W. MORSE, JR. 02110

SULLIVAN & WORCESTER JAMES WM. Moore

225 Franklin Street 54 Meadow Street

Boston, Massachusetts New Haven, Connecticut

02110 06506

Attorneys for Appellant

Richard — Smith, Trustee

of the Property of The New

York, New Haven and Hartford

Railroad Company, Debtor

r sda einen nanedadeneun

PART ONE: ARGUME™T IN REPLY TO

CROSS-APPELLEES:

THE CONSTITUTIONAL ISSUES

RAISED BY THE CROSS-APPEAL ARE

RIPE FOR ADJUDICATION ............

A. The Existence of a Tucker Act

Remedy Not Operate to Make Con-

stitutional Issues Premature Because an

Action for an Inadequately Compensated

Taking Will Lie Only if the RRRA Is

CREE v v.c'c ov ecncatdacsede tues ce

B. The New Haven Trustee Will Not Have a

“Later and Better unity” to Have

an Adjudication of His Claim that the

RRRA's Compulsory Conveyance Provi-

sions Are Unconstitutional .............

THE NEW HAVEN TRUSTEE, AS A SE-

CURED CREDITOR OF PENN CEN-

TRAL, HAS STANDING TO ASSERT

PENN CENTRAL'S RIGHTS UNDER

THE FIFTH AMENDMENT. AS WELL AS

HIS OWN RIGHTS, SINCE DI-

VESTMENT OF HIS LIENS BY §303(b)(2)

OF THE RRRA IS A TAKING OF HIS

PROPERTY WITHOUT JUST COMPEN-

. eee eee

THE RRRA, CONSIDERED AS A RE-

ORGANIZATION STATUTE, IS

INVALID AS A VIOLATION OF THE

FIFTH AuENDMENTS DUE PROCESS

AND TAKINGS CLAUSES ..............

IV. PENN CENTRAL IS ENTITLED TO RE-

CEIVE THE HIGHEST AND BEST USE

VALUE OF ITS PROPERTIES AS A COM-

PLETE TRANSPORTATION SYSTEM IN

MONEY OR ITS PERFECT EQUIV-

ALENT; THE NEW HAVEN TRU 18

ENTITLED TO FORECLOSURE ON HIS

LIENED PROPERTY, OR THE FAIR

VALUE THERREo rk

A. The Railroad Enterprise Which Would

Survive the RRRA, if It Is Not Enjoined,

Will Be in Substance a Public Authority .

Eminent Domain Power, Require Appli-

cation of Principles of Condemnation

Law to Determine Whether Payment of

the “Constitutional Minimum” is Assured

C. Penn Central's Rail Properties Have a

than the “Bare Bones Liquidation Value

Have it Both Ways—Ei the RRRA Is

an Unconstituti to Take Pri-

vate Property Without ising Em-

inent Domain Powers; or the is

Equivalent to Nationalization of Penn

8 ———

. THE LACK OF PRE-CONVEYANCE JU-

DICIAL REVIEW OF THE FAIRN

AND EQUITY OF THE MANDATORY

= ANCES OFFENDS DUE PRO-

PART TWO: LEGAL ANALYSIS OF SPECIAL

COURT'S SEPTEMBER 30, 1974 DECISION,

IN THE MATTER OF PENN CENTRAL

TRANSPORTATION CO. (No. 74-8):

II.

PROCEDURAL STATUS OF SPECIAL

COURT'S DECISION IN RELATION TO

ae APPEALS AND CROSS-

——— ß!k 33

C. Collateral Estoppe l

D. The Requirement of Uniformity ........

E. Fair and i Process — General Con-

: id Equitable

eee ee eee eee eee

F. Erosion of Investors’ Rights

2 . n

Consideration ...........

2 — of a Remedy Under the

Tucker Act

rr Uwe „

—U—Uũ ꝶꝶ * *

TABLE OF CITATIONS

Page

CASES:

Armstrong v. United States, 364 U.S. 40 (1960) . 7,21

ia v. General Motors 169 F. 2d 254

(2d Cir.), cert. denied, 335 U.S. 887 (1948) . 31

Bauman v. Ross, 168 U.S. 548 (1897) ........ 4a

Brooks-Scanlon Co. v. Railroad Commission, 251

N 7 E 37

Bullock v. Railroad Commission of Florida, 254

1K dbeceenseee és 37

Catlin v. United States, 324 U.S. 229 (194. 23-24

Chicago & Southern Airlines v. Waterman SS.

Corp 333 U.S. 103 (1948) ............... 30

Cyd Game ' Omaha Water Co, 218 U.S.

1K464c— e 10

Denver v. Denver. Union Water Co. 246 U.S.

KK AA 16

Des Moines Gas Co. v. City of Des Moines, 238

% ͤ aye 16

E v. United States, 372 F. 2d

152 A & r 42

Federal Power Commission v. Hope Natural Gas

Co, 320 U.S. 591 (198900 41

Group of Institutional Investors v. Chicago, M.

St P. & Pac. R.R., 318 U.S. 523 (194 40

ssn v. Stafford, 360 F.

Sapp. 1087 ( (S. D 5 N . 1973), affd - F. 2d

FF 38

Hayburn Case, 2 U.S. (2 Dall.) 409 (1792) 30

Hurley v. — 285 U.S. 95 (19322 43

In re City of New York (Fifth Avenue Coach

14 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

2 . 13 et passim

In re City of New York (Fifth Avenue Coach

Lines), 22 N.Y. 2d 613, 241 N.E. 2d 717

1 —— 16

In re 1. ion Under the RRRA of 1973,

. 166 J. P. M. I. March 25, 1974)

„5 eae aes a: .

793, 304 F. Su 2 ),

aff'd in part, rev „ sub nom. New Ha-

ven — Cases, U.S. 392 (1970) .

In re Penn Central Transportation Co. (Park **

„ „ 484 F. 2d 323 (3d 1 cert.

nom. Baker v. Morgan G

ER 42 U.S.L.W. 3334 wits

Te Ge ED conned eee

In re Port A Trans-Hudson Corp., 20

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

sub. nom. Port Authority Trans-Hudson

1 1

In the Matter urt, ‘Regional Rail’ Re

onganiat ay ional Rail Re-

et al.

3 r

3 v. United States, 338 U.S. 1

GENEED waccccovsncedeséegeennstesevesees

Larson z. Domestic & Foreign Commerce Corp.

fF fF ey eere

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

Lynch u. United States 292 U.S. 571 (1934)

Malone v. Bowdoin, 369 U.S. 643 (1962)

McGrath v. Kristensen, 340 U.S. 162 (1950) ...

Meas US. 312 ¢ ) i a

National Mutual Ins. Co. v. Tidewater Transfer

Co, 337 U.S. 582 (194ũ 99

New Haven Inclusion Cases, 399 U.S. 392

RRS peer IE

New York, NH. & H. RR. 1st Mortgage 4%

Bondholders’ Committee v. United States, 305

a4. 1049 (S.D.N.Y. 1909), ee rev'd sub

ew Haven Inclusion Cases, 399 U.S.

392 (1970) Klee

Palmer v. Massachusetts, 308 U.S. 79 (19399

4-5, 33

13, 16-17, 19

5 et passim

Page

Railroad Commission v. Eastern Texas R.R., 204

.. wacccccccocesecescscenece 37

Roberts v. City of New York, 295 U.S. 264

eee tees 18

Textile Workers Umon v. Lincoln Mills, 353 U.S.

neee eee e eee 30

United States v. Causby, 328 U.S. 256 (1946) . 43

United States v. Commodities Trading Corp., 339

Cs GS QUOD hac cccctccccccccccccces 16

United States v. King, 395 U.S. 1 (1969) ...... 31, 44, 45

United States v. Klein, 80 U.S. (13 Wall.) 128

.at eee sees ese 31

United States v. Lee, 106 U.S. 196 (1882) ..... 43

United States v. 1000 Acres of Land, More or

Less, in ines Parish, 162 F. Supp.

219 (E.D. La. 1959) cece eens 44

United States v. Sherwood, 312 U.S. 584 (1941) 31, 44, 45

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

„rr 19

Yakus v. United States, 321 U.S. 414 (1944) . 30, 31

You m Sheet S Tube Co., v. Sawyer, 343

Gs BU SOURED wicvccrcenccnvecececocecs 42-43

ADMINISTRATIVE DECISIONS:

Penn Central 1— Sos Company Re-

organization, Report on nization

Plans Finance Bocket No. 30840 (ICC,

— e 37

Pen ma R.R.—M —New York Central

RR. 334 1. C. C. 25 (1969) 35-36

CONSTITUTIONAL PROVISIONS AND STATUTES:

Constitution of the United States:

Anticle I, Sec. 8, Cl. 4 (Bankruptcy Clause) 8, 10, 46

REED GED. 60 vinccccscccseccccvccesguccs

29, 31, 33,

2 et passim

vii

Statutes:

Bankruptcy Act:

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

Judicial Codec, 28 U.S.C.

1491 (Tucker Act)

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National Environmental Policy Act of

1969, 42 U.S.C. §§4321 ef seg. .........

nolo Rail ization Act of 1973,

blic Law 93-239, 87 Stat. 985, 45

U.S.C. §§701 et seq.:

207(b) ů ä

“eee eee 2—·et 3335333333333 *

MISCELLANEOUS:

Hart & Wechsler, The Federal Courts and the

Federal System (2d Ed. 1973) ............

Press Release of USB A, Gis of Puls one

Governmental airs, Options

1—— Industry — "August 22.

—y[— K˖ e K * * * * * * * ee eee

Press Release of USRA, Office of Public and

Governmental Affairs, September 30, 1974

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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

UNITED STATES OF AMERICA, et al.,

Cross-Appellees

ON CROSS-APPEAL FROM THE

JUDGMENT OF THE UNITED STATES

DISTRICT COURT FOR THE

EASTERN DISTRICT OF PENNSYLVANIA

REPLY BRIEF OF

CROSS-APPELLANT

INTRODUCTION

This reply brief is submitted on behalf of Cross-

Appellant, Richard Joyce Smith, Trustee of the Prop-

erty of The New York, New Haven and Hartford Rail-

road Company, Debtor (the “New Haven Trustee” and

“New Haven,” respectively). This brief will address the

contentions made by the United States and the other

governmental parties (herein collectively the “United

States”) in the brief for the Federal Appellees dated

September, 1974, and the separate brief of United

States Railway Association (“USRA”) dated September

26, 1974.

This reply brief is in of two parts. Part One consists

of an argument in reply to points made by the Cross-

Appellees. Part Two is an analysis of the opinion of

the Special Court dated September 30, 1974 holding

that Penn Central is required to reorganize pursuant

to the Regional Rail Reorganization Act of 1973

(“RRRA”).

The Penn Central Trustees intervened in the ac-

tion below as defendants, aligned with the United

States and USRA as supporters of the constitutionality

of the RRRA based on the alleged existence of a

“Tucker Act remedy” under 28 U.S.C. §1491. On this

cross-appeal the Penn Central Trustees, while main-

taining their original position that the RRRA is al-

legedly constitutional because of the putative existence

of a Tucker Act remedy, have parted company with

the United States and USRA and have aligned them-

selves with the New Haven Trustee. The Penn Central

Trustees take the position that the constitutional issue

of whether the RRRA violates the New Haven

Trustee's Fifth Amendment rights is ripe for adju-

dication; and the Penn Central Trustees argue that,

absent a definitive judgment as to a Tucker Act rem-

edy, the RRRA is unconstitutional insofar as it would,

in an eminent domain context, fail to assure that the

Penn Central estate will receive money or its perfect

equivalent in an amount equal to the highest and best

use value of its properties. See Penn Central Trustees’

brief as Appellant in No. 74-165 (at 30-47, as to in-

terim erosion taking; at 48-54, as to ripeness of per-

manent taking issue; at 54-62, as to the failure of the

RRRA to assure just compensation for either interim

erosion takings or the permanent taking; at 63-65, as

to limits upon the defenses that may be deemed open

to the United States in any Tucker Act action; and at

65-67, as to valuation of Conrail securities at actual

fair market value rather than on a capitalization-of-

prospective-earnings valuation).

PART ONE: ARGUMENT IN KEPLY TO

CROSS-APPELLEES

THE CONSTITUTIONAL ISSUES RAISED BY

THE CROSS-APPEAL ARE RIPE FOR

ADJUDICATION

The United States and USRA seek to have the

Court defer consideration of the constitutional issues

presented based on the dual contention that “manifold

uncertainties” attend the operation of the RRRA, and

that “later and better opportunities” are available for

judicial determination of the New Haven Trustee's

claim that the RRRA, on its face, offends his Fifth

Amendment rights. United States’ brief at 16-24.

USRA makes a similar argument, but in addition

claims that the interim erosion taking issue decided by

the court below is not ripe for adjudication. USRA’s

brief at 15-33.

A. The Alleged Existence of a Tucker Act Remedy Does

Not Operate to Make Constitutional Issues Premature

Because an Action for an Inadequately Compensated

Taking Will Lie Only if the RRRA Is Constitutional

A pervasive fallacy in the Federal Appellees’ pre-

maturity contention is the premise that the Tucker

Act, by providing post-conveyance judicial review of

the adequacy of the compensation for a taking by em-

inent domain, will provide an alternative form of judi-

cial review of the same constitutional issues raised

here. This premise is fallacious because, as we have

previously shown (New Haven Trustee's brief as Ap-

pellee at 62-64), the Government’s argument places

the cart before the horse: the Tucker Act claim will be

a valid cause of action only if the RRRA is a con-

stitutionally valid exercise of the sovereign's power of

eminent domain. But that is the very issue which the

United States and USRA claim is premature.

B. The New Haven Trustee Will Not Have a “Later and

Better Opportunity” to Have an Adjudication of His

Claim that the RRRA’s Compulsory Conveyance Provi-

sions Are Unconstitutional

Aside from the Tucker Act remedy argument, the

only basis upon which the United States and USRA

suggest that there will be a “later and better oppor-

tunity” to adjudicate the constitutional issues now

presented is that the New Haven Trustee might apply

to a court convened under 28 U.S.C. §2284 on some

day prior to the 60th day after submission by USRA to

Congress of a final system plan, for an injunction

against certification of such a plan by USRA to the

Special Court pursuant to §209(c) of the RRRA.

But the RRRA itself will frustrate any attempt to

secure subsequent judicial review because the in-

junction action which USRA claims could be brought

at a later date is specifically barred by §209(a), first

sentence, if not granted before the end of the 60th cal-

endar day after submission of a final system plan to

Congress:

“Notwithstanding any other provision of law [a

hrase which presumably includes all of Title 28,

nited States Code}, the final system plan which is

adopted by the Association [USRA] and which be-

comes effective after review by the Congress is not

subject to review by any court except in accordance

with this section.”

It should be noted that, even while arguing that

the present action is premature, the United States and

USRA have carefully refrained from stipulating that

they will not, in a subsequent action before a §2284

court, raise the issue of the allegedly exclusive juris-

diction of the Special Court.

'The issue of exclusive jurisdiction of the Special Court has already

been raised once in Smith v. United States before the Judicial Panel on

(footnote continued on next page)

Thus, the only court with unassailable jurisdiction

to enjoin certification to the Special Court of a final

system plan is the Special Court itself. However, the

Special Court's decision as to any application for an in-

junction is foreordained by its decision dated Sep-

tember 30, 1974 holding that Penn Central is subject

to the RRRA on the basis of there being a Tucker Act

remedy to rectify any failure of the RRRA to compen-

sate Penn Central for its interim erosion and for the

taking of its properties.?

The alleged “later and better opportunity” offered

by the United States for the Court to adjudicate the

constitutional issues now presented does not in fact ex-

ist for precisely the reasons set forth in the New Ha-

ven Trustee’s brief as Cross-Appellant (at 24-31 and

34-35). The Government's prematurity argument, it is

submitted, is not an attempt to assist this Court in de-

(footnote conti md from prior page)

Multi-Distria Litigation, and decided against the United States and

USRA. In re Litigation Under the Regional Rail Reorganization Act of 1973,

Docket No. 166 (J. P. M. I. March 25, 1974). The Panel's Per Cunam de-

ci ion stated: “The Panel has carefully considered the respective con-

tentions of the ies and finds that transfer of these actions under Sec-

tion 209(b) of the Act to the Special Court must be denied.” However, it

can be expected that in response to any future action to enjoin im-

plementation of the RRRA, the United States and USRA will apply to

the Special Court for an injunction ibiting suits in other courts. It is

not that such an injunction, if granted, could be appealed to this

Court.

In the Matter of Penn Central Transportation Co. (Special Coun, Re-

gional Rail Reorganization Act, No. 74-8, et al, Sept. 30, 1974). The Spe-

cial Court has stayed its mandate of reversal of Judge Fullam's Order

No. 1596 (JA 152) pending a decision by this Court on the instant cross-

— the related appeals (Nos. 74-165, 74-166, 74-167 and 74-

168). If the Court does not reach the issue of the unconstitutionality of

the RRRA, and of the existence of a Tucker Act remedy, the Special

Court's decision will stand that the RRRA is constitutional and that a

Tucker Act remedy exists under which the Penn Central Trustees and its

creditors may sue the United States for money damages in the Court of

Claims. See Part Two, infra, for an analysis of the Special Court's

ciding the constitutional issue at a time when more

facts about the final system plan will be known. The

United States would prefer to postpone adjudication

of the constitutionality of the RRRA until Conrail’s

take-over of Penn Central's rail properties is an accom-

plished fact. At that point, the New Haven Trustee

and the New Haven bondholders will be remitted to

the Court of Claims as their only remedy, without

even a decision here that a valid cause of action exists

in the Court of Claims.

THE NEW HAVEN TRUSTEE, AS A SECURED

CREDITOR OF PENN CENTRAL, HAS STAND-

ING TO ASSERT PENN CENTRAL’S RIGHTS

UNDER THE FIFTH AMENDMENT, AS WELL AS

HIS OWN RIGHTS, SINCE DIVESTMENT OF

HIS LIENS BY §303(b)(2) OF THE RRRA IS A

TAKING OF HIS PROPERTY WITHOUT

JUST COMPENSATION

The United States’ brief (at 24-25) challenges the

standing of the New Haven Trustee to seek injunctive

relief. USRA apparentiy concedes the standing issue.“

The United States’ standing argument is without

substance.

First, the New Haven Trustee as a secured creditor

of Penn Central, with a claim of some $124 million,

plus interest, in default for over four years, has an ob-

vious financial stake in a proposal under which a ma-

jor portion of Penn Central's rail assets will be, in

effect, converted into securities of uncertain market

value. The New Haven Trustee claims that it is uncon-

stitutional for Congress to require that Penn Central's

See USRA's brief at 34 n.30.

rail assets be exchanged solely for securities of Conrail

and USRA, without a prior judicial determination that

the securities of Conrail and USRA have a fair market

value equal to the highest and best use value of the

properties conveyed. It is obvious that the New Haven

Trustee has a direct financial stake in Penn Central

sufficient to sustain his standing.

Second, the United States’ argument ignores the

challenge which the New Haven Trustee makes in his

own right, gua secured creditor of Penn Central, that

the divestment of his lien by §303(b)(2) of the RRRA is

unconstitutional on its face.

Section 303(b)(2) provides in pertinent part:

(2) All rail properties conveyed to the Corporation

[Conrail] and the respective profitable rail-

roads . . under this Section shall be conveyed free

and clear of any liens or encumbrances. . . .

The New Haven Trustee's standing as a lien cred-

itor to challenge this portion of the RRRA is clear. Cy.

Armstrong v. United States, 364 U.S. 40 (1960).

THE RRRA, CONSIDERED AS A RE-

ORGANIZATION STATUTE, IS INVALID AS A

VIOLATION OF THE FIFTH AMENDMENT's

DUE PROCESS AND TAKINGS CLAUSES

The United States’ brief (at 26-34) and USRA’s

brief (at 33-50) make an elaborate argument to the ef-

fect that, the Fifth Amendment notwithstanding, Con-

gress has the inherent power under the Bankruptcy

Clause to enact the RRRA.*

The New Haven Trustee does not challenge the

doctrine that Congress has broad authority under Art.

I, §8, Cl. 4 to pass laws on the subject of bankruptcies.

The issue is not whether such power exists, but

whether in the RRRA Congress, in purporting to ex-

ercise it, has transgressed the limits of the Due Process

and Takings clauses of the Fifth Amendment. See

New Haven Trustee's brief as Cross-Appellant (at 37-

51), wherein the legal and factual setting of the RRRA

is analyzed. The RRRA is, as Judge Fullam has recog-

nized, an “amalgam of sale, reorganization and em-

inent domain concepts.” (JA 77; emphasis added). See

New Haven Trustee's brief as Cross-Appellant (at 47-

51).

Indeed, each time the United States and USRA as-

sert that a Tucker Act remedy exists, they implicitly

‘The arguments ignore Fifth Amendment limitations, and assert

only the positive power granted by An. I. §8, Cl. 4, as is evident from

the captions:

“A. The Rail Act Operates As A Reorganization Statute Under

Which Creditors Have No Constitutional Ri To Payment of

Their Claims in Cash.” (United States’ brief at 26).

“A. Congress Has Broad Authority To Provide for the Adjustment

of Credinors’ Claiens in Corporme Reorgnniantions.” (USRA's brief at

35).

recognize that the RRRA is, at least in substantial part,

an eminent domain statute. The Tucker Act remedy

could exist only under the theory of “inverse eminent

domain.” See New Haven Trustee's brief as Appellee

(at 38-64).

The cases cited by the United States and USRA to

uphold the authority of Congress to pass laws provid-

ing for reorganization of financially embarrassed rail-

roads stand only for the proposition that §77 of the

Bankruptcy Act is valid legislation as applied to rail-

roads which are able to reorganize, either on an in-

come basis, or by sale of their properties to a trunk-

line carrier, or conceivably by sale of their properties

to public authorities in negotiated transactions or by

condemnation.

The problem presented by the RRRA as it relates

to Penn Central is that Penn Central cannot be “re-

organized” in the accepted legal definition of that

term. If Penn Central were an ordinary business cor-

poration, and not affected with an overriding public

interest, based on the findings of fact in Opinion and

Order No. 1543 (JA 89-101) there would be no alter-

native to its being adjudicated a bankrupt and its

properties liquidated for the benefit of its creditors

and stockholders. If the overriding public interest does

in fact require a different result, without regard to the

wishes of the present owners of and claimants to Penn

Central's property, then it is reasonably obvious that

the constitutional power which Congress must look to

is the eminent domain power. As Judge Fullam noted

in his opinion below:

~ «fie in purpose of the entire arrangement

{of the would be to insure the —

availability of these rail properties for use in meet-

ing the public need for continued rail service, with-

out regard to the wishes of the present owners of

the properties.” (JA 78).

As the arguments for and against the Tucker Act

remedy attest, the real issue in the New Haven

Trustee's cross-appeal is not whether the RRRA can be

sustained enuely as a Bankruptcy Clause enactment.

The real issue is, given the “amalgam” of eminent do-

main, sale and reorganization concepts which find ex-

pression in the RRRA, can Congress enact a

“chameleon” like statute which is supportable in part

under the Bankruptcy Clause, but when that Clause is

exhausted by Fifth Amendment limitations, can

change color so as to be a putatively valid exercise, in

part, of the eminent domain power.

PENN CENTRAL IS ENTITLED TO RECEIVE

THE HIGHEST AND BEST USE VALUE OF ITS

PROPERTIES AS A COMPLETE TRANS-

PORTATION SYSTEM IN MONEY OR ITS PER-

FECT EQUIVALENT; THE NEW HAVEN

TRUSTEE IS ENTITLED TO FORECLOSURE ON

HIS LIENED PROPERTY, OR THE FAIR VALUE

THEREOF

A. The Railroad Enterprise Which Would Survive the

RRRA, if It Is Not Enjoined, Will Be in Substance a

Public Authority

The United States and USRA seek to negate the

clear implication of §301 of the RRRA that Conrail

will, in substance, be a public authority with a gov-

ernmentally appointed management.

The history of Penn Central's reorganization dur-

ing the past four years strongly suggests that Conrail

will be dependent upon the Government indefinitely

for its capital funds.“ Penn Central could not, even

with the priority accorded to Trustees’ Certificates,

raise capital funds except with government guar-

antees. Amtrak, which was originally in concept sup-

posed to be a private for-profit enterprise, is not pri-

vate and is not profitable; it is, rather, dependent

upon annual congressional budget appropriations both

to finance its capital expenditures and its enormous

operating losses. The losses result in large part from

its payments in excess of $100 million per year to

Penn Central for intercity passenger train service,

without the receipt of which Penn Central's loss would

be much greater.“

In a speech to the Fourth Annual Transportation Forum on Sep-

tember 30, 1974, Arthur D. Lewis, Chairman of USRA, stated:

“First, the task of restructuring the bankrupt railroads into an

economically healthy system is one which will ire substantial fi-

nancial aid. The current state of the Penn Central demonstrates the

dimension of the capital investment required to create an efficent,

economical and dependable physical plant for the railroads of the

ht =.

“Obviously, the problem is immense in scope and complexity.

Central has estimated that restoration of its ' will we.

$3.3 billion, in 1973 prices, spent over the next eight

i $2.0 billion will be internally and

$1.0 billion will have to come from outside sources of

These figures are staggering, especially when viewed in the

iit?

;

»In the calendar year 1973, Amtrak s remuneration to Penn Central

amounted to $131,510,000. Form R-1| Repon, Schedule 600. In spite of

received on account of contract service for Amtrak's account,

Central's — rail ions resulted in a loss (before fixed

charges) of $45,825,000. Form R- I. Schedule 300, Col. (j).

In a Press Release dated August 22, 1974, a copy

of which is reprinted as Appendix B to the September

30, 1974 decision of the Special Court,“ USRA can-

didly acknowledges:

“The level of rehabilitation . . required and the

possible 1 of ‘real’ money [presumably as

contrasted with paper securities] for the assets at

some point in time makes Conrail viability uncertain.

To protect government funding against this risk of

default the law already sets up Presidential ap-

pointments as the majority of the Conrail board for

an unspecified (but lengthy) period of time. The

more federal funding required . the greater the

risk of a permanent federal role.” Slip opinion at B-3

(emphasis added).

B. Since the RRRA is Invalid as Bankruptcy Leg-

islation, the Compulsory Conveyance Provisions, Con-

sidered as an Exercise of Eminent Domain Power, Re-

quire Application of Principles of Condemnation Law to

Determine Whether Payment of the Constitutional Min-

imum” is Assured

USRA argues that establishment of the legal stan-

dard of “constitutional minimum” is one reserved by

Congress exclusively to the Special Count, and that no

prior decision of this Court has any bearing on the is-

sue of the valuation methodology to be employed in

giving body to the skeletal phrase “constitutional min-

imum” employed in the RRRA (USRA's brief at 58-

64). This argument is not addressed to any relevant is-

sue in this cross-appeal. The New Haven Trustee does

not seek an advance declaratory judgment from the

Court that will be binding on the Special Court when,

as and if proceedings mandated by §303(c) of the

"In the Matter of Penn Central Transportation Co. (Special Court, Re-

gional! Rail —— Act. No. 74-8 et al, September 30, 1974), slip

opinion at B1-B3.

RRRA are instituted, which could only be after the

conveyances provided in §303(b). The New Haven

Trustee seeks to enjoin §303(b) from being im-

plemented on the ground that it is unconstitutional in-

sofar as §303(c) does not assure Penn Central or the

New Haven Trustee of the receipt of money for their

respective property interests.

C. Penn Central’s Rail Properties Have a Con-

demnation Value as a Complete Transportation System

Which is Greater than the “Bare Bones Liquidation

Value of its Rail Properties

USRA’s brief (at 64-70) asserts that the precedents

of the Fifth Avenue Bus and Hudson Rapid Tubes cases

do not apply to a federal eminent domain statute.

USRA claims that the United States is subject to a

lesser standard of just compensation than the states

when Congress concludes that a major interstate rail-

road has in the 1970's encountered the same dif-

ficulties which the urban street railways, subway sys-

tems and bus companies encountered in the period of

the 1940's, 1950’s and 19608. % USRA does not spell

out its rationale for contending that a railroad oper-

ating in more than one state has lesser constitutional

rights than a railroad which operates, for example,

solely in the State of New York. To the extent that rel-

evant constitutional decisions of state courts are relied

upon by the New Haven Trustee, those decisions are

based on the Fifth Amendment's just compensation”

clause, and cite precedents of the Court interpreting

n ve City of New York (Fifth Avenue Coach Lines), 18 N.Y. 2d 212,

219 N.E. 2d 410, dismissed sub. nom. Fifth Avenue Coach Lines v. City

of New York, 380 U.S. 778 (1966).

/n re Port Authority Trans-Hudson Corp. 20 N.Y. 2d 457, 231 N. E. 2d

743, cert. denied sub. nom. Port Authority Trans-Hudson Corp. v. Hudson

Rapid Tubes Corp, 390 U.S. 1002 (1968).

The United States’ brief does not address this issue.

the United States Constitution as well as precedents of

the state courts. For example, in the first decision by

the Court of Appeals of New York in the Fifth Avenue

Bus case, it was noted that:

“When private property is taken for public use, our

State and Federal Constitutions alike mandate the

ayment of ‘just compensation’ (N.Y. Const., art. I.,

57 U.S. Const. 5th Amdt.).“ 219 N. E. 2d at 415

(Keating, I., dissenting on other grounds).

The rationale of the majority of the Court of Ap-

peais'' stressed that a regulated public utility, whose

rates were fixed in large part by political expediency

rather than by the value of the service it performs for

the public, is in a peculiarly disadvantageous position

in a period of high inflation:

“The problems raised in this condemnation pro-

ceeding are difficult and to a degree unique. In

this era of spiraling inflation such proceedings will

continually reoccur since it is beyond the resources

of private enterprise to provide mass transportation

at modest rates, dictated by political exigencies and

confiscatory as far as the equity in the business is

concerned.” 219 N. E. 2d at 411.'?

All seven judges of the Court of Appeals of New York approved

the concept that the two bus companies (Fifth Avenue, which operated

in Manhattan, and Surface Transportation, which operated in The

Bronx) were entitled to be paid for their physical assets on the basis of

“reproduction cost new, less depreciation; and all seven judges further

agreed that the bus companies were entitled to an additional amount re-

flecting their going-concern or “assemblage” value as complete trans-

portation systems, in spite of the fact that their operations were sub-

stantially unprofitable. The Court of Appeals, in complete agreement on

the law, split 4-3 as to whether the Appellate Division had correctly ap-

plied the law.

"Cf. USRA brief (at 66) arguing that any valuation of Penn Central

that would allow value to be ascribed to Penn Central Company's stock

interest in Penn Central would amount to “a rich $13.5 billion bonanza

against which valid kruptcy claims may total no more than $2.7

billion.” USRA plainly intends that the RRRA shall not result in any pay-

(footnote continued on following page)

Judge Burke then quoted from the Court’s opinion

in the Monongahela Navigation case,“ indicating that in

his view the words “just compensation” have the same

meaning in the New York State Constitution as in the

United States Constitution.

Judge Burke concluded:

“In the case before us, claimants’ property was a vi-

able operative transit system and was taken as such,

with a clearly expressed intent to so operate it after

the forced transfer of title.... Claimants’ un-

deniably competent and efficient personnel were

taken over by the City along with the claimants’

routes, franchises, operating schedules, accounting

and maintenance records, etc.—all going concern

assets for which claimants must be duly compen-

sated.” 219 N.E. 2d at 415.

The effect of the RRRA in transferring Penn Cen-

tral as a complete transportation system to the

ownership of Conrail is substantially identical.

The New Haven Trustee agrees that “condemnees

may not demand an artificial or inflated value based

on the public need.“ He does not seek a “hold-up”

value, as alleged by USRA (USRA’s brief at 65). How-

ever, as all seven judges of the Court of Appeals rec-

ognized in the Fifth Avenue Bus case, when a public au-

thority takes a privately-owned transportation facility

for continued public use because of the public need

for its service, and the inability of private enterprise to

(footnote continued from pnor page)

ment in respect of Penn Central Company's equity in Penn Central

Transportation Company. It is also significant that USRA excludes ap-

proximately $1 billion of post-reorganization liabilities in comparing the

reproduction-cost-new-less-depreciation value of the assets with the

claims against the estate.

'3 Monongahela Navigation Co. v. United States, 148 U.S. 312 (1893).

Keating. J., dissenting on other grounds in the first Fifth Avenue

Bus decision, 219 N.E. 2d at 415.

operate profitably, the condemnee, while not entitled

to “hold up” the public or to claim an award based on

the amount it would cost the public to construct a new

facility having comparable public service benefits, is

entitled to compensation for “assemblage” value of its

transportation system beyond the “bare bones“ of its

physical assets valued under the reproduction-cost-

new-less-depreciation formula.“

In the Hudson Rapid Tubes case, Judge Keating,

who dissented in the Fifth Avenue Bus case, wrote the

opinion of the court.'® Judge Keating relied on this

Court's holding in United States v. Commodities Trading

Corp. 339 U.S. 121, 123 (1950) that

judge Keating, dissenting on other grounds, observed:

“In addition [to the value of the physical assets], there is real value

attributable to the fact that these tangible assets are not isolated

units. They are fully integrated and operating transit systems, held

together by personnel available and working, franchises, operating

schedules, established routes, accounting and maintenance records

and all of the other elements which spell the difference between

‘bare bones’ and a transportation system in operation. These are but

elements of a ‘going concern’ for which a buyer would willingly

pay... . As elements of a business which have value, it is only proper

that they should be considered of the ‘just compensation’ to

which the condemnees are enti and suv the case law has con-

sistently held.” 219 N.E. 2d at 416.

The cases cited by Judge Keating include the following decisions of

this Court: Kimball Laundry Co. v. United States, 338 U.S. 1 (1949); Des

Moines Gas Co. v. City ire Moines, 238 U.S. 153 (1915); City of Omaha v.

Omaha Water Co. 218 U.S. 180 (1910); Denver v. Denver Union Water Co.,

246 U.S. 178 (1918). Kimball Laundry Co. v. United States, supra, is cited in

USRA’s brief (at 67 n. 77 and 69 n. 83) as contra authority to the New

York State Court decisions; it is not.

'SUSRA's brief at 69 states:

In a forceful dissent, the author of the Fifth Avenue opinion [i.e.

Judge Burke] noted the illogic of basing an award on original cost

when the current market value did not reflect that cost.”

The same Judge Burke, one year later, in his second Fifth Avenue

Bus decision, 22 N.Y. 2d 613, 241 N.E. 2d 717 (1968), stated:

“In the Port Authority case, the ‘willing buyer’ rule was rejected and

the rule set forth in Fifth Avenue reaffirmed.” Id at 720.

(footnote continued on following page)

.. when [the] market value [of a condemnee’s

property] has been too difficult to find, or when its

application would result in manifest injustice to owner or

public, courts have fashioned and applied other

standards.’ 231 N. E. 2d at 738, quoting 339 U.S.

» i23 (emphasis supplied by Judge Keating).

The significance of the Fifth Avenue Bus and

Hudson Rapid Tubes cases to the issues presented by

this cross-appeal is as follows:

1. It cannot be the law that states are forbidden to

take private property for public use without just com-

pensation payable in money, but the federal gov-

ernment is not subject to the same strictures. Any sug-

gestion that the rationale of Fifth Avenue Bus and

Hudson Rapid Tubes is not applicable here because we

are dealing with the Fifth Amendment's “just compen-

sation” clause, and not the State of New York’s “just

compensation” clause, should be rejected. Con-

trariwise, if the compulsory conveyance provision of

the RRRA were held to be a valid device by which the

United States Government could take the properties of

an interstate railroad for public purposes and issue se-

curities of the taking authority as the payment there-

for, then the State of New York could not be pro-

hibited from authorizing, for example, a take-over of a

(footnote continued from prior page)

It is obvious that J Burke's dissent in the Hudson Rapid Tubes

case turned on his very different view of the facts: in his view, the tunnel

railroad constituted a “decrepit, financially hopeless transportation sys-

tem, tailored to the measurements of an ancient. badly mended tun-

nel. 231 N.E. 2d at 742 n. I.

On its facts, Penn Central more closely resembles the y ~ Avenue

Bus situation than it does the Hudson Rapid Tubes situation. n Cen-

tral's present plight is in large measure the result of years of regulatory

constraints, including the necessity to operate money-losing passenger

train and freight services. But for these regulatory constraints, Penn

Central might well be a profitable railroad, just as Fifth Avenue Bus

Company might have been profitable had it been allowed to charge fares

determined solely by business considerations.

railroad such as the Long Island Railroad in exchange

for securities of a state transportation authority. Yet

such a result would be difficult to reconcile with the

decisions interpreting the Fourteenth Amendment.

2. In the valuation of physical properties of a com-

plete transportation system in condemnation, the

whole may well be worth more than the sum of the

parts. Whether the excess value is called “going con-

cern value” or “assemblage” value, it is clearly a value

which must be reflected in a condemnation award.

That value need not be the same as today’s cost in as-

sembling transportation corridors, because today’s as-

semblage cost would represent value to the con-

demnor, not loss to the condemnee.

3. On the other hand, the assemblage value is not

proven to be zero by reason of the unprofitability of

the private transportation system in the regulated en-

vironment in which it was forced to operate. That is

the meaning of Fifth Avenue Bus. The United States

cannot first insist that Penn Central incur large losses

by requiring it to maintain rail passenger operations at

huge deficits, and to service lightly used freight lines;

and then, when it condemns the property for the same

use, declare that the “going concern” value is zero be-

cause “substantial prices are not paid for the privilege

of conducting a business at a loss.

4. The value of the physical properties themselves

will vary depending on whether they are single-use or

multi-use properties and on many other factors. A se-

nes of railroad tunnels which bisect mid-town Man-

hattan and are absolutely essential for through passen-

ger trains from Washington to Boston, as one

Mr. Justice Cardozo in Roberts v. City of New York, 295 U.S. 264, 282

(1935), quoted in USRA's brief at 67.

example, are likely to have a value of a different order

of magnitude than a tunnel of equal length bisecting

mountains in rural Pennsylvania where alternative rail

routings exist. The Hudson Rapid Tubes case does not

stand for the proposition that historical cost less depre-

ciation is the guide; if it did, it would be inconsistent

with both the first and second Fifth Avenue Bus de-

cisions, where the physicial assets were valued at re-

production cost new less depreciation. As the Court

pointed out in New Haven Inclusion Cases, supra, 399

U.S. 392, 482 n. 80 (1970), the decisional principle for

which both Fifth Avenue Bus and Hudson Rapid Tubes

can be cited is that the New York courts “awarded the

owners the value reflecting the highest and best price

for their properties,” which the Court held was “pre-

cisely the treatment accorded the New Haven” in its

sale of rail properties to Penn Central.

The New Haven Trustee and the Penn Central

Trustees are in agreement on the proposition that, in

an eminent domain context, Penn Central is entitled

to the highest and best use value for its properties.

Such value will, in turn, assure secured creditors of

Penn Central that they will receive either payment of

their claim in full, or if the properties securing their

claim have a lesser value, the value of the properties so

determined. Such a result would be in perfect har-

mony with the Court’s decision in Wright v. Union Cen-

tral Life Ins. Co, 311 U.S. 273 (1940), discussed in

USRA’s brief at 44-47. See also United States’ brief at

26 and 32 n. 14.

D. The Governmental Appellees Cannot Have it Both

Ways — Either the RRRA Is an Unconstitutional Attempt

to Take Private Property Without Exercising Eminent

Domain Powers; or the RRRA Is Equivalent to Nation-

alization of Penn Central

USRA mistakenly asserts that the New Haven

Trustee affirmatively advocates nationalization of

Penn Central, and seeks to have the Court exceed its

proper role by advising Congress on “how to amend or

replace” the RRRA. USRA's brief (at 70-72). This is a

distortion of a section of the New Haven Trustee's

brief as Cross Appellant which discusses a public inter-

est solution which might, but only if Congress (not the

Court) concurred, be deemed a navigable route be-

tween the Scylla of a complete cessation of rail oper-

ations in the most heavily industrialized area of the

United States and the Charybdis of a Tucker Act judg-

ment against the United States Treasury amounting to

hundreds of millions or billions of dollars. See New

Haven Trustee's brief as Cross-Appellant (at 88-92).'8

The Federal Appellees should not be permitted to

have it both ways at once—either the RRRA is sus-

tainable as eminent domain legislation, in which case

there is a Tucker Act remedy; or it is not so sus-

tainable, in which case it is unconstitutional.

Io carry the metaphor one step further, it is a well-charted seaway

marked by the nearly universal experience of the industrialized de-

mocracies England. France, Germany, Italy, Switzerland, Japan and

even, to a great extent, Canada—all of whom have nationalized their

more important railroads while allowing peripheral lines to remain pn-

vate. It is not a demonstrable fact that these nations have experienced

“higher costs and inefficiencies that public ownership implies.” USRA's

brief at 71. Moreover, as the New Haven Trustee pointed out (Cross-A p-

pellant's brief at 89 n. 81), if Conrail proves to be profitable, the United

States can turn it back to the private sector; if it turns out to be not prof-

itable, the case law suggests that the economic burdens must be distrib-

uted equitably via taxation.

The New Haven Trustee does not, as USRA asserts

“prefer to have that [a public-interest solution] ac-

complished by nationalization, a process he believes

will constitutionally entitle him to compensation

wholly in cash, and possibly in a much higher

amount than obtainable in reorganization.” USRA's

brief at 71.

The New Haven Trustee's position, so far as here

relevant, is set forth at 88-92 of his brief as Cross-Ap-

pellant, and speaks for itself. Contrary to USRA's

characterization of his argument, the New Haven

Trustee believes that the value of the properties sub-

ject to his liens is in excess of $123,809,404 plus

interest; he believes, based on his knowledge as to the

value of these rail properties, that he will ultimately

receive $123,809,404 plus interest; he cannot, under

any imaginable circumstance, claim more than

$123,809,404 plus interest; and, so long as he retains

his liens and ultimately receives either the right to

foreclose on his properties or the cash equivalent of

his foreclosure right, the New Haven estate will receive

the protection accorded by the Fifth Amendment and

the Court's decision in New Haven Inclusion Cases.

Under the theory of Armstrong v. United States, su-

pra, it is reasonably clear that the United States cannot

expropriate, without payment, the New Haven

Trustee's liens securing his $123,809,404 claim. This

case concerns expropriation, not nationalization. See

§303(b)(2) of the RRRA. USRA asserts that the Court's

role is limited to adjudicating whether the RRRA is

constitutional or not. The New Haven Trustee agrees.

If the Court upholds the Tucker Act argument of the

United States and USRA, however, it is reasonable to

infer from the views of the sponsors of this legislation

in both the House and the Senate that Congress may

well decide io repeal the RRRA. If the Court upholds

the injunction issued below, but does not reach the is-

sue raised by the New Haven Trustees cross-appeal,

Congress will be in the dark as to the limits of its con-

stitutional powers when it comes to amend or repeal

the RRRA. If the Court decides the cross-appeal in fa-

vor of the New Haven Trustee, Congress will be on

notice as to the applicable Fifth Amendment prin-

ciples. That will fulfill the Court's role, and leave the

political decision to Congress and the President.

THE LACK OF PRE-CONVEYANCE JUDICIAL RE-

VIEW OF THE FAIRNESS AND EQUITY OF THE

MANDATORY CONVEYANCES OFFENDS DUE

PROCESS

USRA attempts to justify the RRRA’s failure to af-

ford procedural due process by comparing it to

§77(0).'* However, 577% relates essentially to in-

cidental sales; a sale of the nature that would be in-

volved in the compulsory transfer to Conrail has been

held to be beyond the scope of §77(o).” Further,

9770) provides significant safeguards that are absent

from the RRRA. For example, no transaction of sale

may be effected under §77(0) unless the trustees of

the debtor, who have fiduciary duties to the creditors

and stockholders, affirmatively recommend that it is in

the best interest of the debtor's estate; and even then

any proposed transaction must be approved as 10 its

specific terms by the reorganization court.

be whole of the Rail Ad is very roughly analogous to Section

77(o). . . .” USRA's brief at 41.

% re Penn Central Transportation Co. (Park Avenue Properties), 484 F.

2d 325 (3d Cir.), cert. denied sub nom. Baker v. Morgan Guaranty Trust Co. of

N.Y, 42 US.L.W. 3334 (U.S., Dec. 3, 1973).

More to the point is a significant concession con-

tained in the United States’ brief:

“We concede that in the absence of a Tucker Act

remedy the bankrupt estates would as a group be

constitutionally entitled to a preconveyance judicial

determination of the fairness and equity of the to-

tal amount of the consideration yable under the

final system plan.” United States’ brief at 39.

The New Haven Trustee concurs with that view of

the United States, so far as it goes. Aside from the

RRRA being inadequate from the point of view of

compensation when analyzed as a taking statute, it is

also deficient insofar as §§303(b) and (c) require the

Special Court to order conveyances willy-nilly, before

determining whether the final system plan certified by

USRA is “fair and equitable,” and permit only a sub-

sequent review of the merits or lack thereof of the fi-

nal system plan under the fair and equitable rubric.“

On this issue, Catlin v. United States, 324 U.S. 229

(1945), discussed in the New Haven Trustee's brief as

Before the Special Court, the United States and USRA argued that

Special Court would, under the statutory time-table, have 110 days

‘Congressional approval of the

' ae ope 7 ——

itt

if |

111

Appellee (at 59 n. 50) is in point. Catlin involved an

eminent domain statute under which the United States

took property for military purposes. The statute pro-

vided for title to be vested in the United States in ad-

vance of any judicial determinations as to the legit-

imacy of the taking. The Court construed the statute

to permit post-taking reconveyances of the property,

saying:

“The alternative construction, that title passes irre-

vocably, leaving the owner no opportunity to ques-

tion the taking’s validity or one for which the only rem-

edy would be to accept the compensation which would be

just of the taking were valid, would raise serious question

concern 2 statute's validity.” 324 U.S. at 241 (em-

phasis

The United States argues that under §303(b) of the

RRRA, once conveyances are ordered by the Special

Court (apparently without any pre-conveyance appel-

late review), “reconveyance of all the rail properties

would not be feasible” (United States’ brief at 38 n.

17) even if the Special Court finds in its subsequent

§303(c) proceedings (a) that the final system is not fair

and equitable, and (b) that none of the remedies pro-

vided by the RRRA suffice to cure the lack of fairness

and equity. Such findings, if made by the Special

Court, or if made by this Court on its §303(d) review

of the Special Court’s §303(c) decision, will mean that

an unconstitutional final system plan will have become

final and binding on the parties, who presumably are

then remitted to a possible Tucker Act remedy in the

Court of Claims. And, as previously shown (New Ha-

ven Trustee's brief as Appellee at 67-75), Congress

“Contrary to note 17 of the United States brief, the New Haven

Trustee does not “assume . that reconveyance of all the rail properties

could then act to prevent any Tucker Act remedy, ei-

ther by repealing the sovereign’s consent to suit or by

refusing to appropriate the funds required to enable

the Secretary of the Treasury to satisfy execution upon

any Court of Claims judgment. The above-cited con-

cession by the United States (United States’ brief at 39)

is fatal to its case. The lack of pre-conveyance judicial

review (including appellate review here of any decision

by the Special Court), based on actual knowledge of

the terms of the final system plan, as to the fairness

and equity of the mandatory conveyances as applied to

individual railroads, such as Penn Central, takes prop-

erty without due process of law, irrespective of

whether or not the provisions for compensation in the

form of securities of a public authority are valid.

PART TWO: LEGAL ANALYSIS OF THE SPECIAL

COURT’S SEPTEMBER 30, 1974 DECISION, IN

THE MATTER OF PENN CENTRAL TRANS-

PORTATION CO. (NO. 74-8)

PROCEDURAL STATUS OF SPECIAL COURT'S

DECISION IN RELATION TO THE INSTANT

APPEALS AND CROSS-APPEAL

On September 30, 1974, the Special Court, Re-

gional Rail Reorganization Act (Henry J. Friendly,

Presiding Judge, Carl McGowan and Roszel C. Thom-

sen, Judges) entered a conditional order reversing the

Penn Central Reorganization Court's Order No. 159625

(JA 124-152), as well as that Court’s Secondary Debtor

decision (JA 153-56). The order of reversal was con-

ditioned by a stay pending further order of the Special

Court after a final determination by the Court of this

cross-appeal and the related appeals (Nos. 74-165, 74-

166, 74-167 and 74-168), and the Special Court re-

served jurisdiction to modify its opinion and order in

light of the decision of the Court.

The Special Court refused to give res judicata or

collateral estoppel effect to the prior judgment of the

three-judge district court below in Connecticut General

Ins. Corp. v. United States Railway Ass'n. and related

cases which are the subject of these appeals and cross-

appeal; at the same time, the Special Court has indi-

cated that it will give preclusive effect to the Court's

decision herein:

“We also state, for whatever bearing it may have,

that the last thing we have in mind is to impair in

The ial Court left in effea the Reorganization Court's Order

No. 1543, which no appeals were taken except the New Haven

Trustee's appeal limited to jurisdictional issues. The findings of fact in

support of Order 1543 are accordingly still in effec.

— —

any way the [Supreme] Court's freedom of action

in the Connecticut General appeal.” In the Matter of

Penn Central Transportation Co. Special Court, Re-

ional Rail Reorganization Act, Nos. 74-8 et al.

— 30, 1974, slip opinion by Friendly. J., at

Because of the potential importance of the Special

Court's analysis of the RRRA, and the conflict between

its view of the constitutional safeguards afforded to

claimants to the Penn Central estate by the Fifth

Amendment and that of the Connecticut General court,

the New Haven Trustee has included in this Reply

Brief an analysis of the Special Court's decision, indi-

cating both the areas with which the New Haven

Trustee is in accord and the areas in which the New

Haven Trustee respectfully submits that the Special

Court was in error. In the following discussion, how-

ever, the New Haven Trustee will refrain from any ex-

tensive analysis of the evidenciary conclusions of the

Special Court based on its record, which is not before

the Court at this time and is not relevant to the de-

cision of the constitutional issues presented for de-

cision on the appeals and cross-appeal. Since the Spe-

cial Court has indicated that its decision ultimately will

be guided by the Court’s decision of the instant cross-

appeal and the related appeals, a definitive conclusion

by the Court of the legal issues properly posed by the

summary judgment motions of the plaintiffs below

and here, in the context of the appeals and cross-ap-

peal, is both legally warranted and of extreme im-

portance to the public and private interests involved.

The New Haven Trustee submits that the Court

should hold that the RRRA is unconstitutional, either

by sustaining the judgment of the court below or by

reversing that judgment on the grounds urged by the

New Haven Trustee in this cross-appeal; if the Court

so holds, the Special Court will be required by its own

indication to enter an order affirming the §207(b) or-

der (Order No. 1596) of the Penn Central Re-

organization Court. Thus, the matter will have been

properly and expeditiously decided as requested by all

the parties in the joint motion for expedited

treatment.

The Special Court’s decision did not, of course,

constitute a reversal of the judgment of the three-

judge district court convened under 28 U.S.C. §§2282

and 2284; only this Court has appellate jurisdiction to

hear appeals from a judgment declaring an act of

Congress unconstitutional. While the Special Court's

conclusions as to the existence of a Tucker Act remedy

are in apparent disagreement with the court below, it

is submitted that the Special Court was in error, as

more fully developed in the following analysis of

Judge Friendly’s Opinion. See infra at 47-48 for a dis-

cussion as to the grounds upon which the decision of

the Special Court may properly be remedied by the

Court, and as to the appropriate procedural dis-

positions to be made in this case.

— 2

ANALYSIS OF SPECIAL COURT'S OPINION

The Special Court’s Opinion relating to Penn Cen-

tral consists of an introductory section (at 1-26) plus

eight numbered sections dealing with discrete issues,

each of which is summarized below.

A. Introduction (1-26)

This section contains a general statement of the

case (at 1-10) and summary of the RRRA (at 11-26).

Aside from the point noted below,?“ the summary is

largely accurate.

B. Jurisdiction (26-32)

The Special Court’s Opinion does not, it is submit-

ted, correctly address the Article III issues raised by

the New Haven Trustee. The New Haven Trustee did

not argue that the “case or controversy” was lacking

because of the lack of adversary pleadings (Opinion at

27). The following head note of the New Haven

Trustee’s brief in the Special Court summarized the

argument actually made on this point:

“Even if §207(b) is interpreted not to confer new

jurisdiction upon a §77 court, it requires an Article

II court to exercise legislative and administrative

functions and to issue an advisory opinion.“

The New Haven Trustee cited the following cases

in support of that contention: National Mutual Ins. Co.

See Opinion at 24, n. 20, stating that “it is common knowledge”

that the labor protective conditions in the Penn Central merger were a

cause of the Penn Central debacle. It is unlikely that this was a signifi-

cant cause, particularly as compared with the crew-consist issue, as to

which see n. 21. The RRRA provides no relief from excessive and need-

less costs in the crew-consist area.

Brief of New Haven Trustee, Appellant as to jurisdictional issues,

before the Special Court (No. 74-8), August 2, 1974, at 11.

v. Tidewater Transfer Co, 337 U.S. 582 (1949); Textile

Workers Union v. Lincoln Mills, 353 U.S. 448, 472

(1957) (Frankfurter, J., dissenting, explaining the posi-

tion of a majority of the Justices in the Tidewater Trans-

fer case); Yakus v. United States, 321 U.S. 414, 468

(1944) (Rutledge, J., concurring: “It is one thing for

Congress to withhold jurisdiction. It is entirely another

to confer it and direct that it be exercised in a manner

inconsistent with constitutional requirements, or, what

in some instances may amount to the same thing, with-

out regard to them.”).

The Special Court’s Opinion fails to address the ar-

guments actually made by the New Haven Trustee.

The applicability of the cases cited above are not dis-

cussed at all. Further, the decision of the Special Court

as to the Tucker Act remedy is in fact an advisory

opinion in the sense that it will not be a final judg-

ment unless Congress, upon reviewing the situation,

decides that it is willing to contemplate the entry of a

deficiency judgment against the United States in the

Court of Claims.“ We respectfuliy disagree that

McGrath v. Kristensen, 340 U.S. 162 (1950) is the an-

swer to the New Haven Trustee’s contention that

§207(b) called for an advisory opinion as to a matter

upon which Congress retains the ultimate power of

decision in §208. The New Haven Trustee cited

Hayburn Case, 2 U.S. (2 Dall.) 409 (1792) and more

recent authority, such as Chicago & Southern Airlines v.

Waterman S.S. Corp., 333 U.S. 103 (1948) for the prop-

osition that §207(b) called for a non-judicial decision

as to a matter subject to legislative revision. Indeed,

Congress may act to preclude a Tucker Act judgment of sub-

stantial amount either by vetoing all final system plans submitted to it

under §208(a), or by amending the RRRA to limit expressly the potential

liability of the United States. Neither of these steps would constitute a re-

peal of the Tucker Act; but each would effectively make the United

States immune to suit, or limit the aggregate dollar amount of any li-

ability to which Congress chooses to expose the Treasury.

the indication that the Special Court may not have the

power to bind the Court of Claims (Opinion at 106 n.

109’) as to the existence of any substantive cause of

action, or as to the amount of damages if there be

such a cause of action, makes its entire Tucker Act

remedy discussion (see Sections VII and VIII, at 83-

117) an advisory opinion, contrary to both Article III

limitations and the Court's holdings in United States v.

Sherwood, 312 U.S. 584 (1941) and United States v. King,

395 U.S. 1 (1969).

Finally, the Special Court disposed of Part II of the

New Haven Trustee’s brief on jurisdictional iss uesꝰs on

the ground that it “falls by the wayside” in view of the

pendency of these appeals before the Court. (Judge

Friendly’s Opinion at 31-32). Since the New Haven

Trustee was contending that the RRRA improperly af-

fected the outcome of a case or controversy (his §77(g)

Motion) which was pending at the date of enactment

of the RRRA, a matter which is not now before the

Court, the Special Court erred in dismissing this con-

tention. The New Haven Trustee cited United States v.

Klein, 80 U.S. (13 Wall.) 128 (1871), Battaglia v. General

M..ors Corp., 169 F. 2d 254, 257 (2d Cir.), cert. denied,

335 U.S. 887 (1948), Lockerty v. Phillips, 319 U.S. 182

(1943), and Yakus v. United States, supra, in support of

his position that §207(b) was repugnant to the Con-

stitution insofar as it purported to withdraw the Re-

organization Court’s power to dismiss the re-

Note 109 reads: “We intimate no opinion to what extent, if at all,

the Court of Claims would be bound by our determination as to the

value either of the compensation issuable under the Act or of the assets

conveyed.” See infra at 44-46 for a discussion of this point.

This argument was headnoted:

“§207(b) Confers New Jurisdiction Upon the Reorganization Court

and this Court, and Withdraws Jurisdiction from the Supreme

Court, in a Designed Attempt to Di a Rule of Decision in a

Pending Case, the New Haven Trustees §77(g) Motion.” (at 28).

organization proceedings under §77(g) of the

Bankruptcy Act. The New Haven Trustee further con-

tended that the latent power to dismiss under §77(g) is

the constitutional “safety-valve” under which secured

creditors of Penn Central have been restrained from

exercising their contractual nghts for over four years.

The Opinion addresses none of these contentions; and

yet the Special Court’s order expressly prohibits entry

of an order under §77(g) by any of the reorganization

courts.

C. Collateral Estoppel (32-35)

The Special Court was admittedly faced with a sit-

uation not contemplated by Congress when it estab-

lished the Special Court and required it to render an

appellate decision in a number of distinct cases arising

from appeals of orders of reorganization courts under

§207(b). Prior to the decisions by the respective re-

organization courts, a three-judge federal court with

jurisdiction of the subject matter and the persons of

most of the parties to the Penn Central proceeding

had adjudicated that the RRRA was void in certain re-

spects for repugnance to the Constitution; and that

decision was on appeal and cross-appeal to this Court.

The Penn Central Reorganization Court in its §207(b)

decision, Opinion and Order No. 1596, seems not to

have given the Connecticut General decision binding ef-

fect, but Judge Fullam explained that this was necessi-

tated by the refusal of a majority of the three judges to

reach and decide the issue of the constitutional validity

of the compulsory conveyance provisions (JA 125).*°

Judge Friendly, however, declares that the Special

*®) udge Fullam, concurring below, stated that:

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

case. ... lt is preferable that the deliberate and collegial judgment

of this three-judge court should determine the constitutionality of

the RRRA's conveyancing provisions.” (JA 59).

Court is not bound even by decisions of the duly con-

stituted §2284 court on issues which it did reach —such

as the non-availability of a Tucker Act remedy. The

ground cited is that Congress did not intend that the

Special Court's decision could be governed by a prior

decision of another district court. Yet, it is undisputed

that Congress left 28 U.S.C. §§2282 and 2284 in effea

as to any complaint asserting that an act of Congress is

unconstitutional.*° Moreover, irrespective of Congress’

intent, a duly constituted Article II] court has already

declared that the RRRA is unconstitutional and is not

saved by the alleged existence of a Tucker Act rem-

edy; and that court's decision is reviewable only by this

Court. In upholding a collateral attack upon the prior

holdings of a court with clear jurisdiction of the sub-

ject matter, the Special Court has seemingly assumed

that it has jurisdiction to set aside the judgment of the

§2284 Court. Recognizing that, without more, a non-

appealable decision by the Special Court might itself

be viewed as a final disposition of issues, such as the

constitutionality of the RRRA and the alleged exis-

tence of a Tucker Act remedy, a wholly untenable po-

sition, the Opinion (at 34) declares that “great cases of-

ten demand departures from procedural rules“

otherwise applicable. The Opinion asserts that because

of the alleged non-· revie wability of the Special Court's

decision (based on the last sentence of §207(b), a pro-

vision which the New Haven Trustee contends is itself

void under Article III) its decision should not be per-

mitted to have a preclusive effect on this Court in the

instant cross-appeal and related appeals. By accepted

jurisprudential standards, the Special Court should

*On March 25, 1974, the Judicial Panel on Mulidistrict Litigation

denied the attempt of the governmental parties herein to transfer all

constitutional litigation under the RRRA to the Special Court. /n re Lu-

igation under the Regional Rail Reorganization Act of 1973, Docket No. 166

JF. Mu. L. March 25, 1974). See supra at 4, n. 1.

have deferred to the holding of a fellow district court

of the United States in a case in which, though the de-

cision was under appeal as to its merits, the other

court had clear jurisdiction of the subject matter and

the parties. See Hart & Wechsler, The Federal Courts

and the Federal System (2d Ed. 1973) at 1232-34.°!

See also New Haven Inclusion Cases, supra, 399 U.S. at

419-30.

D. The Requirement of Uniformity (35-37)

In the Connecticut General decision, a majority of

the court (Judges Fullam and Bechtle) held that the

RRRA is invalid insofar as it rests on the Bankruptcy

Clause because it is not, on its face, a uniform law on

the subject of bankruptcies. Judge Aldisert agreed that

the RRRA failed to comply with the uniformity re-

quirement, but reasoned that creditors of Penn Cen-

tral, who are treated alike regardless of where they re-

side, lack standing to raise the constitutional defect of

want of uniformity. The Special Court, having decided

that it was not bound by the Connecticut General de-

cision, adopted the position of the United States and

USRA, that had also been advanced by them below

and rejected without discussion by the §2284 court,

that the RRRA is uniform legislation due to the hap-

penstance that all active railroads in reorganization

were, on January 2, 1974, located in geographical

areas which are within the defined region. It is re-

spectfully submitted that the Special Court's dis-

position of the uniformity issue was in error.

Should it be a postulate of federal judicial administration that

there ought to be no more than one trial of a controversy between the

same parties at the same time in the federal courts, and that accordingly,

when duplicating actions of this kind are instituted, the only problem is

to decide which action sh d be allowed to proceed?” Id at 1232.

E. Fair and Equitable Process—General Con-

siderations (37-41)

The Special Court in this section of its Opinion has

made some general observations“ which are pertinent

only to the inquiry which the Special Court was en-

gaged in: a determination whether the process of the

RRRA will be fair and equitable. The Special Court

correctly pointed out that if the RRRA is uncon-

stitutional as to any non-severable provision, it must be

held not fair and equitable. It is for this reason that

the Special Court’s ultimate judgment cannot stand if

the Court sustains the holding below as to uncom-

pensated interim erosion, or if the Court accepts the

argument of the New Haven Trustee that the com-

pulsory conveyance provisions are unconstitutional.

F. Erosion of Investors’ Rights (41-57)

The Special Court wholly disagreed with the

Connecticut General court’s handling of the interim ero-

sion issue. The Special Court's view of erosion is based

on the authority of Judge Friendly’s 1969 opinion in

the New Haven proceedings,“ which is cited (Opinion

at 44) to sustain the proposition that Penn Central

“The New Haven Trustee must respectfully disagree with one of

the Special Court's observations:

“The idea that billions of dollars of liquidation proceeds of these

bankrupt railroads are lurking just around the Corner is unrealistic

in the last degree.” Opinion at 39.

This statement, carried to its logical conclusion, would mean that Penn

Central will be a “bankrupt bankruptcy,” unable to pay even its priority

administration claims, now in excess of $1 billion. It also casts grave

doubt upon there being any Tucker Act remedy.

In New York, VH. & H RH. First Mortgage 4% Bondholders’ Com mit-

tee v. United States, 305 F. Supp. 1049, 1055-59 (S.D.N.Y. 1969), rev'd sub

nom. New Haven Inclusion Cases, supra, 392 U.S. at 419-30, a three-judge

district court headed by Judge Friendly approved two “discounts” on liq-

uidation value of New Haven's rail assets imposed by the ICC (334

(footnote continued on following page)

could not achieve a termination of operations except

after lengthy proceedings before the ICC. It is submit-

ted that the earlier case is improperly cited, and that

the Court’s opinion in New Haven Inclusion Cases, 399

U.S. at 461, did not affirm the decision of the three-

judge court headed by Judge Friendly. The Court did

not even pass on the merits of Judge Friendly’s earlier

opinion, because it ruled that the three-judge Court

headed by Judge Friendly should have deferred to the

New Haven’s reorganization court (Anderson, J.).“

Part IV of the Opinion is accordingly premised on

the erroneous legal concept that the public interest is

entitled to two “bites of the apple, the first com-

prising the period during which creditors can con-

stitutionally be restrained while efforts to reorganize

the railroad are explored, and the second, a period in

which the ICC and the state regulatory agencies can

process abandonment applications in the usual and

(footnote continued from pmor page)

Had the Court passed on the merits of Judge Friendly's opinion in

305 F. at 1055-59, it would have reversed. This is abundantly clear

from the disening opinion of Jusices Black and Haran, who woul

have reviewed the decisions of both district courts and sustained the dis-

counts imposed by the (CC, thereby affirming Judge Friendly’s opinion

r ne een Ai SP

U.S. at

Jn re New York, VH. & H. RR. supra, 304 F. Supp. at 801, quoted,

with approval, New Haven Inclusion Cases, 399 U.S. at 466.

customary fashion as though no Fifth Amendment

nghts were at stake. It is further submitted that Palmer

v. Massachusetts, 308 U.S. 79, 88 (1939) does not stand

for the proposition for which it is cited in the Opinion

(at 44). Palmer is clearly applicable during the period

prior to a finding that the railroad is not reorganizable

on an income basis within a reasonable time, but its

applicability thereafter is doubtful in the light of New

Haven Inclusion Cases.

Judge Fullam has found Penn Central not to be re-

organizable on an income basis under §77; all parties

to this cross-appeal and the related appeals agree with

that conclusion. Earlier the ICC had found that Penn

Central could be reorganized only with massive gov-

ernment aid. By taking the position that the ICC can

in the public interest subject a railroad in re-

organization to a kind of “one last chance” doctrine (in

Judge Friendly’s words, “a final opportunity to come

up with plans that may prevent serious injury to the

public interest” —Opinion at 44), the Special Court has

undermined the doctrine of the Brooks-Scanion line of

cases. while at the same time giving lip service to its

continued vitality.

Having incorrectiy determined the law applicable

to erosion and the right of creditors to demand a rea-

sonably prompt cessation of deficit rail operations

once it has been determined that the railroad is not re-

organizable, the Opinion then compares the effect of

the RRRA, particularly §304(f), to the prospects “that

would have prevailed in its absence.” (Opinion at 47).

Penn Central Transportation Company Reorganization, Report on Re-

ization Plans, Finance Docket No. 26241 (ICC, September 28,

1973), JD. 54.

* Brooks-Scanlon Co. v. Railroad Commission, 251 U.S. 396 (1920);

Bullock v. Railroad Commission of Florida, 254 U.S. 513 (1921); Railroad

Commission v. Eastern Texas N. R. 264 U.S. 79 (1924).

Assuming that the Fifth Amendment notwithstanding,

Congress and the ICC could subject Penn Central to

the task of proving no adverse environmental impact

as a result of a total cessation of service, see Harlem

Valley Transportation Ass'n. v. Stafford, 360 F. Supp.

1057 (S.D.N.Y. 1973), fd. F. 2d—(2d Cir. 1974),

Judge Friendly concluded that the RRRA by making

the National Environmental Policy Act of 1969

(“NEPA”) inapplicable (RRRA, §601(c)), simply re-

places one burdensome set of regulatory hurdles to

abandonment with another. It is submitted that this

conclusion is incorrect. The Opinion does not deal

with the argument that NEPA itself would be uncon-

stitutional if it prevented, or unduly delayed, a de-

cision permitting cessation of operations to which the

Penn Central creditors would be otherwise entitled by

reason of the Fifth Amendment.

Turning to a factual discussion of the erosion issue,

the Special Court first defines erosion incompletely,**

and then asserts that there is no “convincing evidence”

in the record that erosion is likely in the 620 days

(which has now become 740 days, see USRA’s brief as

Appellee at 3 n. 1) prior to the first date a final system

judge Fnendly’s minimum definition of erosion includes issuance

of trustees’ certificates, deferral of property taxes, accrual of other ad-

aN 0 gages

for payment of operating expenses. Opinion at 51 h of these el-

ements is a consequence of continued net losses from operations; but

such net losses produce other forms of erosion. In any event, the min-

imum definition fails to treat with the following elements of erosion: de-

cline in value of railroad equipment due to retirements in excess of de-

preciation reserves; the excess of deprecation of equipment and of track

and structures, to the extent that it reflects actual wear and tear and ob

solescence, over new investment therein; borrowings otherwise than on

trustees’ certificates from the Government and its agencies to the extent

used to defray operating expenses in excess of revenues from rail oper-

ations; and diversion of non-rail income from real estate and investments

to defray operating expenses.

plan can become effective“ Not only does the Opin-

ion fail to treat with the evidence of erosion in the

record (such evidence consisting primarily of un-

disputed facts that are stipulated in this proceeding),

but it seemingly reverses the trial court’s findings of

fact in Opinion and Order No. 1543 (JA 84-103) with-

out any determination that they are erroneous under

the standard for appellate review and in a situation

where neither the Government nor USRA had ap-

pealed Order No. 1543. Judge Fullam found that

Penn Central will have negative cash available for oper-

ations of $153,700,000 at December 31, 1975, a date

which is within the 740 days allowed for a final system

plan to become effective. Opinion and Order No.

1543, Finding of Fact No. 26 (JA 99-100). Negative

cash of this magnitude necessarily will require the fi-

nancing of cash deficits by borrowings having the pn-

ority of administration claims.

The Opinion as to erosion indicates that the Spe-

cial Court viewed its role under §207(b) of the RRRA

as one calling for a trial de novo, not an appellate pro-

ceeding. It appears that the Special Court considered

that it could reach its own conclusions without regard

to the factual findings of the reorganization courts. In

the erosion discussion, the Opinion places great weight

on the 10% temporary rate increase granted by the

ICC in Ex Parte 305 (see Opinion at 52 and n. 44, 45)

The court below correctly granted summary judgment on the

nd of uncompensated intenm erosion, treating the ion as to

actual Matters and the uncontested findings of fact of Judge Fullam in

Opinion and Order No. 1543 (JA 84-103) as conclusive evidence that

some erosion was likely in the days preceding the effective date of

any final system plan.

cides how much weight it considered iate to give to the re-

i — . — —

respective reorganization courts.

and even concludes, based on the month of July, 1974

(a month following the trial court's decision)“ that

Penn Central’s operations will now be profitable (on

the basis of net railway operating income, not net in-

come after fixed charges). See Opinion at 54 n. 49.

The Special Court, which was plainly given an appel-

late function by §207(b), erred when it applied its own

views to the facts of the case de novo.

G. The Compelled Conveyance and the Adequacy of the

Consideration (57-83)

The New Haven Trustee agrees with the Special

Court's analysis of §§302 and 303 of the RRRA as the

product of congressional reasoning which was too

“simplistic” (Opinion at 61); and with the observation:

“The mere fact, if it be one, that Conrail might

make some profit would not necessarily give its se-

curities a value sufficient to render them fair com-

pensation.” /d. (emphasis in original; footnote

omitted).

Section 207 b) of the RRRA required a decision by the re-

organization courts not later than July l. 1974, and accordingly reliance

upon evidence arising after that date by an appellate court is improper.

On review of the §2284 court's decision, this Court's role is of

course limited to the determination of whether the trial court's judgment

is supported by substantial evidence. As Mr. Justice Stewart observed in

New Haven Inclusion Cases, supra:

“It is not for us to pass upon the myriad factual and issues as

though we were trying the cases de novo. ‘It is not enough to reverse

the Distria Court that we might have appraised the facts somewhat

differently. If there is warrant for the action of the District Coun,

our task on review is at an end.’ 399 U.S. at 435, quoting Group of

Institutional Investors v. Chicago, M., St. P. & Pac. R.R., 318 U.S. 523,

564 (1943).

vit the Special Court's observation (Opinion at 60) that:

“Congress is entitled to insist on the continued operation of rail lines

earning or capable of earning a profit. . .” ( footnote omitted)

(footnote continued on following page)

The New Haven Trustee agrees with the analysis

of the deficiencies of §303(c)(2) of the RRRA (Opinion

at 62-67); that section “fails to supply an adequate tool

with which to cure any deficiency in the con-

sideration.” (Opinion at 67).

Thus, the Special Court found that, absent a

Tucker Act remedy, the process of the RRRA is not

fair and equitable (Opinion at 68-69), since there was

no showing that the combination of Government guar-

anteed obligations, the securities of Conrail and the

“other benefits” would provide just compensation.

(Opinion at 69-83).*

(footnote continued from por page)

means that Congress is entitled to insist on continued operation of a line

or segment of railroad so long as that line or segment makes a positive

rather than negative contribution to net railway operating income, even

if not sufficient to provide any 2 then it is far

too broad and not supported by the Court's modern decisions, such as

Federal Power Commission v. Hope Natural Cas Co., 320 U.S. 591 (1944).

“It is iate to note in passing that che entire discussion of

Conrail vishliay (Opinion st 69-83) ia based on a de nove wial approach,

rather than appellate review of evidence in the record; and this error is

compounded by the use in the Penn Central c of evidence from the

Ann Arbor case which was never subjected «. woss- examination. See

Opinion at 80-81. Considered as a de novo trio e proceedings before

the Special Court were unfair to the Penn Central estate and its creditor

and stockholder daimants, and violated due process of law, because no

unity was afforded to parties who submitted evidence as to Con-

ils non-viable status to introduce evidence or to cross-examine evi-

dence relied upon by the Special Court. Not only was the decision in the

appeal from the Penn Central Reorganization Court decided on the basis

evidence dehors the record in that proceeding, but the Government

SRA in effect disavowed the Ann Arbor evidence on the ground

is not ible at this time to know what form Conrail will take,

requiring all predictions as to its viability to be based on assump-

count bs vesllied. Reo cuneutien of easing» tatters the Soo.

at 85, 88, 91-92. Moreover, the states of Wisconsin and

i which introduced evidence as to Conrail's potential — in

the Ann Arbor ing, where, by , it was not subj to

ü — 41 Galata 1 same evidence in the

Penn Central ings (where it would have been subject to cross-ex-

amination) and did not do so.

H. Availability of a Remedy Under the Tucker Act (83-

102)

The Special Court’s analysis of the Tucker Act

remedy issue is exclusively premised upon the con-

clusion that the jurisdiction of the Court of Claims was

not repealed, expressly or impliedly, by the RRRA.

The New Haven Trustee submits that the judgment

below, that there is no Tucker Act remedy, is sound

whether or not the jurisdiction of the Court of Claims

was repealed.

The Special Court stated that its disagreement with

the Connecticut General court was that the court stated

the wrong issue; according to the Opinion, the issue is

whether Congress expressed an affirmative intent to

withdraw a remedy that would otherwise exist.” Opin-

ion at 85. The Opinion thus fails to differentiate be-

tween (a) affirmative intent to withdraw the consent of

the sovereign to suit and withhold jurisdiction af-

firmatively granted in 28 U.S.C. §1491 to the Court of

Claims, and (b) assuming that the waiver of sovereign

immunity and conferral of jurisdiction are stili in ef-

fect, affirmative intent to preclude any plaintiffs from

being able to prosecute a substantively valid cause of

action in the Court of Claims.”

The Opinion does not discuss any of the cases re-

lied on by the New Haven Trustee in his Tucker Act

remedy analysis save Youngstown Sheet & Tube Co. v.

Sawyer, 343 U.S. 579 (1952), which is dismissed with

the observation:

“The Court of Claims has itself recognized this critical distinction,

pointing out that: it is not every daim involving or invoking the

Constitution, a federal statute or a lation which is cognizable here.”

See Eastport S. S. Corp. v. United States, 372 F. 2d 1002, 1007 (Ct. Cl. 1967),

quoted in New Haven Trustee's brief as Appellee at 38-40.

“The basis of the doubt [as to adequate remedy at

law in the Court of Claims for the seizure of the

steel mills] was that the Executive’s action there was

= authorization in law.” Opinion at 102, n.

The Special Court thus did not address the New

Haven Trustee’s contention that Youngstown has a dif-

ferent meaning which is to be derived from the

Court's citation in Youngstown of Larson v. Domestic &

Foreign Commerce Corp., 337 U.S. 682 (1949).* So far

as the New Haven Trustee can discover, no case has

ever held that an unconstitutional taking has an ade-

quate remedy at law in the Court of Claims, although

there are legions of inverse eminent domain cases

holding that a constitutional taking which is inad-

equately compensated gives rise to a valid cause of ac-

tion under the Tucker Act.

The Opinion correctly discounts the applicability of

Hurley v. Kincaid, supra, to the problem at hand (Opin-

ion at 94-99), but then relies upon another opinion of

Mr. Justice Brandeis, Lynch v. United States, 292 U.S.

571 (1934) (Opinion at 99-102). Lynch involved an un-

usual action by Congress which came very close to re-

pudiation of the public debt, just as the RRRA in-

volves an unprecedented attempt by Congress to

exercise the power to cancel the contractual rights of

mortgage bondholders.*’

“*Youngstown is a case where equitable relief was deemed appropriate

because the mental action complained of was unconstitutional,

thereby qualifying under the test of Larson (as explained in Malone v.

Bowdoin, 369 U.S. 643 (1962)) for the applicability of the doctrine of

United States v. Lee, 106 U.S. 196 (1882). Youngstown, anc) numerous other

cases which relied on the Lee decision, stand in contrast to cases where

pod — coon action alleged to constitute a taking is conceded by the

nee to be constitutional (¢g., Hurley v. Kincaid, 285 U.S. 95

(1932); United States v. Causby, 328 U.S. 256 (1946); and Larson).

he Lynch opinion casts doubt on the availability of a substantive

cause of action in the Court of Claims by its holding that Congress re-

tains the power to withdraw the consent of the sovereign to suit. See 292

U.S. at 581-82.

I. The Adequacy of the Remedy Under the Tucker Act

(102-116)

The Opinion (at 104) cites Bauman v. Ross for the

proposition that Congress is not bound to provide

compensation in money or its perfect equivalent for a

taking under the eminent domain power. It is submit-

ted that Bauman v. Ross holds only that if the con-

demning authority's activity will benefit land of the

condemnee not taken, that benefit may be taken into

account in determining the condemnee’s loss as to the

land which is taken. United States . 1,000 Acres of Land,

More or Less, in Plaquemines Parish, La. stands for the

same proposition. The extravagant dictum contained

in the latter opinion, quoted by the Special Court

(Opinion at 105), cannot be reconciled with recent de-

cisions of the Court.

At most, the cases cited in the Opinion (at 104-105)

stand for the proposition that “other benefits” con-

ferred upon a condemnee by the sovereign may be

taken into account in determining a condemnation

award. It is doubtful that the RRRA confers “other

benefits” upon the holders of railroad mortgages, and

it is likewise doubtful that “other benefits” are con-

ferred upon the Penn Central estate. The privilege to

discontinue common carrier operations. which is a

right conferred by the Fifth Amendment, is not such

an “other benefit.”

The Opinion adverts to the problem posed by the

Sherwood and King cases, supra, barring an effective de-

claratory judgment by the Special Court in its §303(c)

proceedings that could be binding on the Court of

167 U.S. 548 (1897).

#162 F. Supp. 219 K. D. La. 1958).

Claims, but never reveals the Court's judgment on this

issue. Opinion at 106 n. 109. Under Sherwood and

King, the Special Court’s §303(c) judgment as to ihe

existence of a “shortfall” for which a remedy exists in

the Court of Claims will be an advisory opinion bind-

ing on no one. Rather than being an “exercise in li-

teralism” (Opinion at 102 n. 106), the contention that

the Special Court should not have even considered the

Tucker Act remedy was well founded in the doctrine

of sovereign immunity discussed in the Sherwood and

King cases.

The New Haven Trustee agrees that marketable

debt instruments guaranteed as to principal and inter-

est by the United States may be, in fact, the perfect

equivalent of money if they carry a current market

rate of interest. The issue, however, is whether a

“shortfall” remedy in the Court of Claims is adequate

(assuming it exists as a valid cause of action) if it com-

pensates only for the difference between con-

demnation value of the property, on the one hand,

and a theoretical value of Conrail securities plus $500

million of Government guaranteed obligations, on the

other. Conrail’s securities may in fact have a market

value much less than the amount which is determined

to be their “face value” for issuance in a re-

organization. The nub of the controversy here is

whether market value or so-called “intrinsic” value will

govern. If the Court of Claims were to accept the Spe-

cial Court’s “shortfall” rationale, there might, in fact,

be no recovery in the Court of Claims for the differ-

ence between the “intrinsic value” of Conrail’s se-

curities and their actual market value.

“The RRRA is uniquely burdensome in this regard because the se-

curities will be valued by the Special Court many years before they are

likely to achieve the status of a publicly traded security. For example, §77

plan proceedings for Penn Central that will result in distribution of the

condemnation proceeds, might well take the better part of a decade, con-

(footnote continued on following page)

The Opinion advances the proposition that there

can be a statute which, while not valid as a Bankruptcy

Clause enactment alone, is valid as a Bankruptcy

Clause enactment if supplemented by an eminent do-

main power. The same statute is both a re—

organization” and a “taking” at one and the same time,

so that even though it would be invalid solely as a re-

organization or solely as a taking, it is valid as an amal-

gam of the two. (Opinion at 105-108).

The Bankruptcy Clause and the eminent domain

power have never before been considered to com-

plement one another, so that a statute which iails as a

reorganization law because it provides securities of in-

sufficient value, and fails as an eminent domain law

because it pays compensation otherwise than in money

or its perfect equivalent, can be held valid because of a

remedy in the Court of Claims.

(footnote continued from prior page)

sidering the multitude of proofs of claim filed and Penn Central's ex-

traordinarily complex debt and lien structure. And the §77 plan pro-

ceedings cannot even begin until after completion of “horrifyingly” long

valuation proceedings in the Special Court, appellate review by the

Court, and then a lengthy Court of Claims proceeding. Thus, under the

statutory scheme of superimposing the RRRA on §77, a traditionally

lengthy process has become a modern day equivalent of Charles Dickens’

Jarndyce v. Jarndyce, and the “escape valve” based on unreasonable delay

(§77(g)) has been removed. If, as is likely, the 21st century will have been

closely a or even reached, before the Conrail securities will be

available for distribution, it is clear that their fair market value when re-

ceived may be far less than the “intrinsic” value determined by capital-

ization of projected earnings. Even if the Penn Central Trustees could

shorten this process by securing ion Court approval to sell

oe ee Oe ee presumably have to await con-

usion of a Aci deficency judgment proceeding. Unless Conrail

— — 5 —— it is unlikely

as a practical matter that an underwritten public offering of Conrail’s

common stock could take place, particularly in the light of disclosure re-

quirements of the Securities Act of 1933. Accordingly, there may not be

a public market where Conrail’s securities can be traded, and thus no

way to ascertain their fair market value.

CONCLUSION

Based on the foregoing, it is the position of the

New Haven Trustee that:

1. The decision of the court below in Connecticut

General should be affirmed insofar as it relates to the

interim taking;

2. The court was correct in concluding that an ade-

quate Tucker Act remedy is not available to cure the

constitutional defects of the RRRA;

3. The court was correct in concluding that insofar

as the RRRA is a law on the subject of bankruptcies it

is in violation of the constitutional requirement of geo-

graphical uniformity;

4. The decision of the court below should be re-

versed, as requested in this cross-appeal, insofar as it

failed to enjoin implementation of the compulsory

conveyance provisions of the RRRA on the ground

that they effect a taking of private property for public

use without just compensation;>' and

5. In deciding this cross-appeal and the related ap-

peals the Court can properly disregard the Special

Court's §207(b) decision on the ground that the de-

cision below in Connecticut General was binding as to

the constitutional issues decided and that, in other re-

spects, the decision of the Special Court is not relevant

to the issues here before the Court.

The order sought here by the New Haven Trustee

will presumably cause the Special Court to modify its

§207(b) order dated September 30, 1974 so as to af-

firm Order No. 1596 of the Penn Central Re-

organization Court (JA 152), thus precluding appli-

cation of the RRRA to Penn Central.

See New Haven Trustee's brief as Cross-Appellant at 107-09 for

the precise terms of the order requested.

If after hearing argument of the instant appeals

and cross-appeals, the Court were to consider that the

RRRA is facially constitutional as to both its interim

erosion and compulsory conveyance aspects, there

would still remain issues determined by the Special

Court as to the fairness and equity of the process of

the RRRA, which urgently require review because of

their constitutional implications. The record in the

Special Court’s §207(b) proceedings would then be re-

quired in order to adjudicate definitively all aspects of

the case, including the issue of availability of a sub-

stantively adequate Tucker Act remedy, and it would

be proper for the Court to withhold its decision in

these cases pending a decision to review, pursuant to a

writ of certiorari to the Special Court under 28 U.S.C.

§1651, the Special Court’s §207(b) order:“ in such

event, the petition for review of the Special Court’s or-

der could be consolidated with the instant appeals and

cross-appeal for decision on the ments. The Court

would thus be in a position to review the issue of

whether or not the RRRA provides 2 process which is

fair and equitable, an issue which must be reached in

the event that the Court determines that a Tucker Act

action exists, but otherwise need not be decided.

The New Haven Trustee plans to file with the Court, as soon as

ible in the premises, such a petition for a writ of certiorari under 28

S.C. §1651 to review the Special Courts §207(b) order. The petition

will assert that this Court has jurisdiction to issue the writ in aid of its ap-

pellate jurisdiction under §303(d); that there is no other —— provi-

sion whereby the decision of the ial Court can be revi by the

Court; that the last sentence of §207(b) of the RRRA purporting to pre-

clude appellate review of the Special Court's §207(b) decision is void for

repugnance to the Constitution; that §207(b) confers jurisdiction im-

in view of the constraints of Article III of the Constitution; and

that the Special Court's decision on the merits was erroneous, based on

errors of law and errors of fact.

October 10, 1974

Of Counsel:

Monkis RAKER

CHARLES W. MORSE, JR.

SULLIVAN & WORCESTER

225 Franklin Street

Boston, Massachusetts

02110

Respectfully submitted,

JOSEPH AUERBACH

225 Franklin Street

Boston, Massachusetts

02110

JAMES WM. Moore

54 Meadow Street

New Haven, Connecticut

06506

Attorneys for A nt

Richard Joyce Smith, Trustee ~

of the Property The New York,

New P San ap and Hartford Railroad

Company, Debtor

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