Opposition — Sutherland Marine Co. v. Penn Central Transportation Co.

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IN THE

Supreme Court of the Unit

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} SEP 14 1978

EE tty

No. 78-255

IN THE MATTER OF

PENN CENTRAL TRANSPORTATION COMPANY,

Debtor

SUTHERLAND MARINE COMPANY,

Petitioner

v.

TRUSTEES OF THE PROPERTY OF PENN CENTRAL

TRANSPORTATION COMPANY

and

TRUSTEE OF THE PROPERTY OF THE PITTSBURGH,

YOUNGSTOWN & ASHTABULA RAILWAY COMPANY,

Respondents

BRIEF FOR RESPONDENTS IN OPPOSITION

Mark WILtcox, Jr. Cart Hetmerac, Jr.

Herpert G. SCHICK EUGENE E. ANDERSON, Jr.

HersuRN, Ross, WILLcox 3100 IVB Building

& PUTNAM 1700 Market Street

2010 Two Penn Center Plaza Philadelphia, Pa. 19103

Philadelphia, Pa. 19102 Attorneys for Trustees of

Attorneys for Trustee of Penn Central Transportation

The Pittsburgh, Youngstown Company, Debior

& Ashtabula Railway

Company, Secondary Debtor

International Printing Co., 711 So. 50th St., Phila., Pa. 19143 — Tel. (215) 727-8711

Se

INDEX TO BRIEF

Page

QUESTIONS PRESENTED ....-.- 0 es sceseeeeseeeseesreeeeeees 1

GrATEMENT OF THE CAGE occ cc ccccccccccsccsccccvcevesess 2

REASONS FOR DENYING THE WRIT .........sccesccccccseeee 5

I. The Petition Does Not Satisfy the Requirements of

Rule 19 of the Rules of the Supreme Court of the

Catied Giet0S cccivcccavesvevsdsccsrssesciesanes 5

II. Whether an Oral Hearing Should Be Held on a

Petition for Approval of the Sale of Assets Rests

Within the Discretion of the Reorganization Court 5

III. The Terms of Sutherland’s Offer Permitted the Trus-

tees to Accept Other Offers ...........:eeeeeeeees 8

IV. The Trustees Were Under a Duty to Accept the Best

Offer Attainable for Submission to the Court ...... 9

CONRATION ccc ccdteccccsccnesseserscareensetsscvsieenes 10

Coreseremars OF BRINE boc cc ccc cccctececserecencasseses ll

TABLE OF CONTENTS

Cases Page

Biossom v. Railroad Co., 70 U.S. 196 (1865) ............... 8

Connecticut Gen. Ins. Corp. v. United States Ry. Ass'n., 383

F. Supp. 510 (E.D. Pa.) (concurring opinion) (consti-

tutionality of Regional Rail Reorganization Act of 1973),

rev'd sub nom. Regional Rail Reorganization Act Cases,

YL ee ene ret nns Eas 6

Continental Bank v. Rock Island Ry., 294 U.S. 648 (1935) . 6

DeMet v. Harralson, 399 F.2d 35 (5th Cir. 1968) .......... 6

In re Marathon Foundry & Machine Co., 239 F.2d 122 (7th

Cir. 1956), cert. denied, 353 U.S. 912 (1957) .......... 9

In re Stanley Engineering Corp., 164 F.2d 316 (3d Cir. 1947),

cert. denied, 332 U.S. 847 (1948) ...............00ee. 9,10

Kimmel v. Crocker, 72 F.2d 599 (10th Cir. 1934) .......... 10

Mathews v. Eldridge, 424 U.S. 319 (1976) ................ 6

Sigma Chi Fraternity v. Regents of the University of

Colorado, 258 F. Supp. 515 (D. Colo. 1966) ........... 6

Smith v. Save-Rite Drug Stores, 178 F.2d 507 (10th Cir.

MOUED Sos nskckcsndarebakdceuedssavdeek en eaeneeee y)

J. J. Sugarman Co. v. Davis, 203 F.2d 931 (10th Cir. 1953) r)

Rules

Rules of Bankruptcy Procedure, R. 8-510(a)(b) ........... 6

Rules of the Supreme Court of the United States, R. 19 ..... 5

Statutes

Bankruptcy Act:

Se cckrcdcecackeausasdsneudecusnrel 6

Section 77(0), 11 U.S.C. § 206(0) .......cccccccsccees 4,5

Miscellaneous

Agreement:

RED 6:4 660 adv dd Adkeeneaaenneemobe ese 2, 8,9

QUESTIONS PRESENTED

1. Ina railroad reorganization, is an oral hearing nec-

essary to dispose of a petition for the sale of assets where

the issue is narrow, the relevant facts are set forth in writ-

ten submissions to the Reorganization Court and no rele-

vant material facts are disputed?

2. Was the Reorganization Court correct in approv-

ing a sale to the high bidder under a sealed bid procedure

whereby two prospective purchasers—after one of them

had made a formal offer for the property—were given an

equal opportunity to bid and both were advised that the

high bid received by a specified date would be recom-

mended to the Trustees for acceptance?

2 Statement of the Case

STATEMENT OF THE CASE

During the period 1974-76, the Trustees of Penn Cen-

tral Transportation Company (Penn Central) negotiated

with two parties for the sale of 78 acres of riverfront land

in Ashtabula, Ohio. The property is owned by The Pitts-

burgh, Youngstown & Ashtabula Railroad Company, a

leased line which is included in the Penn Central reorgani-

zation as a secondary debtor. The first party to approach

the agent of the Trustees was the Ashtabula Yacht Club

(Yacht Club), which in 1974 indicated an interest in pur-

chasing the 10.6 acres which it leases. Upon being ad-

vised that the tract would not be subdivided for sale, the

Yacht Club persuaded Kister Construction Company

(Kister ) to join it in negotiating for purchase of the entire

tract. Meanwhile, in 1975, Sutherland Marine Company

(Sutherland ), petitioner herein, expressed a desire to pur-

chase the 5.5 acres leased to it. Upon being advised that

only the entire tract would be sold and that other parties

were interested in buying the property, Sutherland sub-

mitted a written offer on July 8, 1976, to buy the property

for $454,000. The appraised value of the property was

$354,740.

It is clear from the language of the instrument signed

by Sutherland that the Trustees were not bound either to

accept the offer (although higher than the appraisal) or

to submit it to the Reorganization Court for approval.

Section 8.2 of the instrument reads as follows:

“8.2 Binding Offer. In consideration of the pay-

ment by Seller to Buyer of Ten Dollars ($10.00) and

for other valuable consideration, receipt of which

is hereby acknowledged by Buyer, Buyer agrees that

its execution of this agreement and the delivery of

same to Seller constitutes a binding and irrevocable

Statement of the Case 3

offer by Buyer to purchase the Land on the terms and

conditions herein contained and that, except as other-

wise expressly provided herein, such offer shall re-

main binding on Buyer and subject to acceptance by

Seller until one hundred twenty (120) days after

Buyers Delivery Date [August 31, 1976], or until

Buyer notifies Seller that such offer has been revoked,

whichever occurs later. Buyer understands and agrees

further that, notwithstanding any action or perform-

ance heretofore or hereafter taken or rendered by

Seller or any agent or employee of Seller arising out

of or in connection with this agreement, Seller shall

not be deemed to have accepted such offer, nor shall

Seller have any liability whatsoever to Buyer with re-

spect to the Land or arising hereunder, unless or until

Seller executes this agreement and delivers the same

to Buyer. Buyer understands further: that Seller will

not execute or deliver this agreement unless the Court

has issued an order, which Seller deems to have be-

come final, approving the transactions contemplated

by this agreement .. .”

Since there were two parties desiring to purchase the

same property, the agent of the Trustees notified both

parties that sealed bids for the property would be accepted

until 12:00 noon on August 31, 1976. The Yacht Club and

Kister were furnished the same form of agreement as that

signed by Sutherland, and the parties were advised that the

following procedure would govern in the opening of the

bids: the Yacht Club-Kister joint bid would be opened

first, and, if it were found to be lower than Sutherland’s

original offer, Sutherland’s bid would remain sealed and

its original offer would be recommended for acceptance

by the Trustees; if the Yacht Club-Kister bid were higher

than Sutherland’s original offer, Sutherland’s bid would be

4 Statement of the Case

opened and the higher of the two bids would be recom-

mended for acceptance. Sutherland stood on its original

offer of $454,000. Yacht Club-Kister submitted a bid of

$465,500. The agent of the Trustees recommended that the

Yacht Club-Kister bid be accepted, and so advised both

bidders.

The Trustees accepted the high bid and petitioned the

Reorganization Court under Section 77(0) of the Bank-

ruptecy Act, 11 U.S.C. § 205(0), for approval of the sale.

The Reorganization Court authorized the sale on the basis

of the pleadings’ without issuing an opinion. Sutherland

appealed to the United States Court of Appeals for the

Third Circuit, which dispensed with oral argument and

unanimously affirmed the Reorganization Court’s order.

Sutherland then filed a petition for rehearing in banc,

which was denied. After securing a stay of the mandate

of the United States Court of Appeals, Sutherland has filed

a petition for a writ of certiorari urging this Court to re-

view the decisions of the courts below.

1. The circumstances of the sale, including the sealed bid pro-

cedure, were fully explained in the Trustees’ petition for approval

of the sale. Sutherland filed an answer contending that there should

have been no bidding and that its offer should have been submitted

to the Reorganization Court regardless of pending negotiations

with Yacht Club-Kister. The Trustees then called the Court’s

attention to an earlier sale where similar objections to the use of

the sealed bid procedure had been raised and where the Court had

issued an opinion approving the sealed bid procedure and over-

ruling the objections. This opinion is set forth on pages 7-9 of

Sutherland’s petition.

Reasons for Denying the Writ 5

REASONS FOR DENYING THE WRIT

I. The Petition Does Not Satisfy the Requirements of Rule

19 of the Rules of the Supreme Court of the United

States

It is beyond question that the petition does not meet

the considerations of Rule 19 of the Rules of the Supreme

Court of the United States. Sutherland agrees that this is

so. Petition at 6. Not only does the case lack the spe-

cific grounds for review mentioned in the rule, there are

clearly no “special and important reasons” of any kind

which would justify invoking the certiorari jurisdiction.

The basis urged for granting the writ is to instruct

“the lower court to hold the hearing originally requested

by Petitioner and to make a proper record”. Petition at

6. The reason advanced for the need for a hearing is to

protect the integrity of judicial sales to ensure that the

bankrupt estate realizes the maximum from the sale of its

assets. Petition at 4,5. While the Trustees believe that

this objective is sound, they are unable to understand in

what respect the procedure followed by the Reorganiza-

tion Court resulted in the impairment of the integrity of

judicial sales or how the Penn Central estate was preju-

diced by the approval of a higher bid than Sutherland had

made for the property.

II. Whether an Oral Hearing Should Be Held on a Petition

for Approval of the Sale of Assets Rests Within the

Discretion of the Reorganization Court

The proceedings under Section 77(0) of the Bank-

ruptcy Act, 11 U.S.C. § 205(0), are in equity and sum-

mary in nature. There is no requirement in Section '77(0)

that petitions to the Reorganization Court for approval of

the sale of property be considered after an oral hearing.

6 Reasons for Denying the Writ

Whether an oral hearing should be held is a matter left to

the discretion of the Reorganization Court. See Continen-

tal Bank v. Rock Island Ry., 294 U.S. 648, 682 (1935);

DeMet v. Harralson, 399 F.2d 35, 39 (5th Cir. 1968); See

also Sigma Chi Fraternity v. Regents of the University of

Colorado, 258 F. Supp. 515, 526-27 (D. Colo. 1966). Cf.

Rules of Bankruptcy Procedure, R. 8-510(a)(b). “Due

process is flexible and calls for such procedural protections

as the particular situation demands.” Mathews v. Eldridge,

424 U.S. 319, 334 (1976).

Disposing of petitions for approval of the sale of

assets without an oral hearing is appropriate in large re-

organizations and particularly so in the case of the Penn

Central reorganization, certainly one of the largest, if not

the largest, in the history of reorganizations under the

Bankruptcy Act, 11 U.S.C. §§ 1-775. Over the period of

eight years in which Penn Central has been in reorgani-

zation, the Reorganization Court has been required to con-

sider several hundred petitions for the approval of the sale

of assets and a very large number of other petitions for

approval of the establishment of proofs of claim procedure,

approval of compensation to consultants and attorneys,

and for a host of other activities growing out of the func-

tioning of the Penn Central estate. In addition to the very

large volume of petitions requiring judicial consideration

and approval, the Court has been required to rule upon

novel legal questions of the greatest importance, including

the Trustees’ Plan of Reorganization.” To enable the

Court to handle this enormous work load superimposed

upon its regular duties, there has been developed a no-oral-

hearing procedure which permits the Court to decide many

2. See, e.g., Connecticut Gen. Ins. Corp. v. United States Ry.

Ass’n., 383 F. Supp. 510 (E.D. Pa.) (concurring opinion) (consti-

tutionality of Regional Rail Reorganization Act of 1973), reu'd sub

nom. Regional Rail Reorganization Act Cases, 419 U.S. 102 (1974).

Reasons for Denying the Writ 7

matters upon petitions, affidavits, proposed forms of orders

and responses thereto.

This procedure gives the objectors the right to ask for

an oral hearing, however, and to present reasons why such

a hearing should be held. If the Reorganization Court

determines that an insufficient basis for an oral hearing has

been presented, the decision is made upon the written sub-

missions. Where the Court decides that an oral hearing is

warranted, it is held, but in such instances the regular

course has been to require the testimony to be submitted in

the form of affidavits subject to cross-examination. This

procedure parallels that used by the administrative agen-

cies and is both expeditious and relatively inexpensive. It

has been used for the majority of the petitions for ap-

proval of the sale of assets, where the issue is generally a

narrow one—whether the price offered is in the best inter-

ests of the estate—and where the proceeding is essentially

administrative in nature. In no instance has the United

States Court of Appeals for the Third Circuit or this Court

held that this procedure is inadequate to satisfy the re-

quirements of procedural due process of law.

To grant Sutherland’s request that the case be re-

manded to the Reorganization Court for an oral hearing,

this Court would have to find either that the sealed bid

procedure denies fundamental fairness or that the present

application of that procedure violated due process. In the

earlier opinion, set out in full in the petition at 7-9, the

Reorganization Court, after oral hearing, determined that

the sealed bid procedure was proper even if the amount of

the original offer became known to other bidders.’ In this

case, Sutherland has not asserted any relevant material

facts which are disputed and which require an oral hearing

to determine.

3. This ruling seems clearly correct since such a disclosure

would amount to no more than the Trustees’ establishing an upset

price before the bidding began.

8 Reasons for Denying the Writ

A requirement that the Reorganization Court hold an

oral hearing upon the request of a low bidder for property

being sold would be totally unmindful of judicial economy

and in many instances would result in delays which could

frustrate a sale to the higher bidder to the disadvantage

of the estate.

III. The Terms of Sutherland’s Offer Permitted the Trus-

tees to Accept Other Offers

From the provisions of Section 8.2 of the form of

agreement signed by Sutherland, it is clear that the terms

of Sutherland’s offer did not bind the Trustees to accept

that offer (regardless of the fact that it was substantially

more than the appraised value of the property) but per-

mitted the Trustees to seek other offers and to accept the

highest offer received. The offer was made irrevocable for

120 days to enable the Trustees to evaluate the offer in

light of all relevant circumstances and to seek firm offers

from others who had expressed an interest in the property.‘

The distinction between this case and those cited by

Sutherland is that the cited cases involved offers which the

trustee had accepted and submitted to the court for con-

firmation. In those cases it was held that the court abused

its discretion in approving a later—though slightly higher

—offer than the one accepted by the trustee. Here, Suth-

erland’s offer was never accepted by the Trustees or sub-

mitted to the Court. Where a bid has not been accepted,

the bidder cannot be heard to complain that the sale was

subsequently abandoned, Blossom v. Railroad Co., 70 U.S.

196 (1865), or that a resale was ordered with an oppor-

4. In the parlance of the securities markets, the Trustees

bought a “put” on the property exercisable within 120 days; in

other words, the Trustees at any time within 120 days could re-

quire Sutherland to buy the property for $454,000. They were not,

however, bound to sell the property to Sutherland for that price—

or any price.

Reasons for Denying the Writ 9

tunity for the original bidder or bidders to participate.

J. J. Sugarman Co. v. Davis, 203 F.2d 931 (10th Cir. 1953).

IV. The Trustees Were Under a Duty to Accept the Best

Offer Attainable for Submission to the Court

It is not possible to read In re Stanley Engineering

Corp., 164 F.2d 316 (3d Cir. 1947), cert. denied, 332 U.S.

847 (1948), or any of the other cases cited by Sutherland

as condemning the Trustees’ action in eliciting bids from

would-be purchasers, because one of them had made a

formal offer for the property. Indeed, far from diminish-

ing confidence in judicial sales and reducing the amounts

to be received therefrom, such competition tends to de-

velop the highest attainable values for the debtor’s assets.

In Stanley Engineering there was spirited competitive bid-

ding. In Smith v. Save-Rite Drug Stores, 178 F.2d 507

(10th Cir. 1949), the sealed bid procedure was utilized

and seven bids were received. In re Marathon Foundry &

Machine Co., 239 F.2d 122 (7th Cir. 1956), cert. denied,

353 U.S. 912 (1957), involved the sale of the debtor’s

stock ownership in another corporation. The sale attracted

several bids, the highest of which was submitted to the

court and ultimately confirmed.

Sutherland’s purported concern for the welfare of the

Penn Central estate because of the alleged unfairness of

asking for sealed bids in this case is unfounded. Bidders

at judicial sales and offerors at private sales acquire no

rights—and here Sutherland had no reason to suppose that

it acquired any rights (see Section 8.2)—until their bid

or offer has been accepted.”

5. In connection with the effect of the sealed bid procedure

upon the estate, it should be noted that the Penn Central reorgani-

zation is rapidly drawing to a close; the Court has fixed October

24, 1978, as the date for consummation of the reorganization. In re

Penn Central Transp. Co., No. 70-347, Consummation Order and

Final Decree at 9 (E.D. Pa. Aug. 17, 1978).

10 Conclusion

In affirming the Reorganization Court’s approval of

the sale to Yacht Club-Kister, the Third Circuit has not de-

parted from the principles laid down in Stanley Engineer-

ing, which holds it to be an abuse of discretion for a court

to fail to confirm a sale to the high bidder at a judicial

sale for the reason that a somewhat higher bid is made at

the confirmation hearing. Here, the Reorganization Court

did confirm a sale to the high bidder at a judicial sale con-

ducted under a sealed bid procedure, and the Third Cir-

cuit properly affirmed that action. It would be a clear

abuse of discretion for the trustee to accept, and the court

to approve, the lesser of two such bids. Kimmel v. Crocker,

72 F.2d 599 (10th Cir. 1934).

CONCLUSION

For the foregoing reasons, the petition for a writ of

certiorari should be denied.

Respectfully submitted,

Mark WILLCox, JR. Carut HELMETAG, JR.

HERBERT G. SCHICK EUGENE E. ANDERSON, JR.

HeEppurn, Ross, WiLLcox 3100 IVB Building

& PUTNAM 1700 Market Street

2010 Two Penn Center Philadelphia, Pa. 19103

Plaza Attorneys for Trustees of

Philadelphia, Pa. 19102 Penn Central Transportation

Attorneys for Trustee of Company, Debtor

The Pittsburgh, Youngs-

town & Ashtabula Railway

Company, Secondary

Debtor

Dated: September 13, 1978

Certificate of Service ll

CERTIFICATE OF SERVICE

I hereby certify that I have this day caused the fore-

going Brief for Respondents in Opposition, Trustees of

the property of Penn Central Transportation Company,

Debtor, and Trustee of the property of The Pittsburgh,

Youngstown & Ashtabula Railway Company, Secondary

Debtor, to be mailed, by first class mail, postage prepaid,

to the following:

JoserH S. Gix, Esq.

100 East Broad Street

Columbus, Ohio 43215

Dated at Philadelphia, Pennsylvania, this 13th day

of September, 1978.

Cart HELMETAG, JR.