Petition — Wilmington Trust Co. v. Penn Central Transportation Co.

armen —--

7 $unreme Court, U. S | ;

FILED \

MAY 25 {979

Supreme Court of the Uribe States |

as

October Term, 1978.

No. @e-1767

WILMINGTON TRUST COMPANY,

as Successor Indenture Trustee,

Petitioner,

v.

PENN CENTRAL TRANSPORTATION COMPANY,

as Debtor,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT.

RicHarp G. EL.iort, JR.,

MIcHAEL A. MEEHAN,

RicHarps, LAYTON & FINGER,

4072 DuPont Building,

P. O. Box 551,

Wilmington, Delaware. 19899

Attorneys for Wilmington

Trust Company:

Dated: May 25, 1979

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

TABLE OF CONTENTS.

ONE UE WE Gad ecccccapiscncnerveasacnseceees

Pe NT Gl UD UII ov ec cw ecscscccaenecss

B. The Plan of Reorganization ..................005:

C. The Reorganization Court Opinions ...............

D. The Court of Appeals Opinions ..................

REASONS FOR GRANTING THE WRIT .............00 cee eeeees

l. The Supreme Court Should Assert Its Supervisory

Powers When the Court of Appeals Committed an

Obvious and Injurious Error in Denying WTC’s

Initial Petition for Rehearing on the Ground That

WTC Failed to Assert a Claim to Certain Assets

When WTC Explicitly Asserted Such Claim in Each

of Its Briefs Filed With the Court of Appeals ......

2. The Treatment Afforded by the Plan of Reorganiza-

tion to the MCC Indenture Bondholders Could Not

Be Found to Be Fair and Equitable When All of the

Collateral Securing That Creditor’s Claim Was Not

Considered by Either the Reorganization Court or

Re: A

3. The MCC Indenture Bondholders Have Not Received

| Fair and Equitable Treatment Under the Plan of

| Reorganization When Neither the Reorganization

Court Nor the Court of Appeals Conducted an In-

formed Evaluation of the Reasonable Range of Liti-

EY EE aso vita p¥ wh doa we dee ssececeen

Ne ee eu dda as boa abadee ees

a)

A

@

co on Gk F&F ODO OO WD W

14

TABLE OF CONTENTS (Continued).

APPENDIX: Page

Opinion of the United States Court of Appeals for the

Third Circuit in Nos. 78-1698, et al. .............. Al

Judgment of the United States Court of Appeals for the

Third Circuit in Nos. 78-1698, et al. .............. A62

Opinion of the United States Court of Appeals for the

Third Circuit in Nos. 78-1692, et al. ............8. A65

Judgment of the United States Court of Appeals for the

Third Circuit in Nos. 78-1692, et al. .............. A116

Opinion of the United States Court of Appeals for the

Third Circuit in Nos. 78-1697, et al. .............. Al1IS

Judgment of the United States Court of Appeals for the

Third Circuit in Nos. 78-1697, et al. .............. A122

Opinion on Rehearing of the United States Court of

Appeals for the Third Circuit in Nos. 78-1703, et al. . A124

Judgment on Rehearing of the United States Court of

Appeals for the Third Circuit in Nos. 78-1699, et al. . A127

Judgment on Rehearing of the United States Court of

Appeals for the Third Circuit in Nos. 78-2311, et al. . A129

Opinion of the United States District Court for the

Eastern District of Pennsylvania ‘Dated March 9,

SOCK es . BOE a er da ewcedee titcavkcers’s A130

Opinion of the United States District Court for the

Eastern District of Pennsylvania Dated August 17,

PT Se a I IO 0 ras Sad bss ecaes bunts mee A357

Order of the United States Court of Appeals for the

Third Circuit in Mise. Nos. 78-8104, et al. ........ A394

Petition for Rehearing of Wilmington Trust Company in

Py OG ER ok c iN ac a eu awk tae eke bok A413

TABLE OF AUTHORITIES.

Cases: _ Page

Case v. Los Angeles Lumber Products Co., 308 U.S. 106

(1939), reh. den., 308 U.S. 637 (1939) ............... 16, 17

Consolidated Rock Products Co. v. DuBois, 312 U.S. 510

LOY Sick deck hoctkass stains ptenkelsssckuncea 15, 16, 17

Ecker v. Western Pacific R.R., 318 U.S. 448 (1943) ..... 15, 16, 17

In re Equity Funding Corp., 416 F. Supp. 132 (C.D. Cal.

So . ) Se ee ee Sp ee rr ber pe oot 15

Gibson v. Lockheed Aircraft Service, Inc., 350 U.S. 356

CORR) incexiavitainnnc nat pienvean aves way ueewebss 13

Group of Institutional Investors v. Chicago, Milwaukee, St.

Paul and Pacific R. Co., 318 U.S. 523 (1943) .......... 17

‘ Kaiser Steel Corp. v. Ranch Co., 391 U.S. 593 (1968) ....... 13

Kansas City Terminal Ry. Co. v. Central Union Trust Co.,

Sp ee ke Ree re ee pr rres Une 16

Letulle v. Scofield, 308 U.S. 415 (1940) ..............005. 14

Marine Harbor Properties, Inc. v. Manufacturers Trust Co.,

SEE EK TO CRED hs ab Kier oO EWA heC ON ne terse s 17

Northern Pacific Ry. Co. v. Boyd, 228 U.S. 482 (1912) ...... 16

In re Penn Central Transportation Co., 354 F. Supp. 717

(E.D. Pa. 1972), affd 484 F.2d 323 (3d Cir.), cert.

Gendad, GUA: UB. WORD CSD. 66.000 ces ccnceccceyess 6, 10, 11

In re Penn Central Transportation Co., 458 F. Supp. 1234

CUE De BOVG) 0.05 Pena iek saves saeebeciaececnenies 7

Protective Committee for Independent Stockholders of T.M.T.

Trailer-Ferry, Inc. v. Anderson, 390 U.S. 414 (1968)

14, 15, 18, 20

Reconstruction Finance Corp. v. Denver & Rio Grande

Western R. Co., 328 U.S. 495 (1946) ..............08. 17

Washington v. United States, 357 U.S. 348 (1958) ......... 14

TABLE OF AUTHORITIES (Continued).

Statutes: Page

Title 11, United States Code [Bankruptcy Act]:

RR aor eee toes ee 4

A I av aie bc exes ek oc cbews ciacl cake 2

ae BN aca u od Wawa eee RU aren vB ek 4

11 U.S.C. § 205(e) [Bankruptcy Act §77(e)] ......... 3, 16

Title 28, United States Code:

SU: EEE Fa cious cy ca Wak c vow coho e ok nce 2

Miscellaneous:

nappmnne Coommt Teas TOCA ID) wok sci dk ccc kas inode. 9, 18

IN THE

Supreme Court of the United States

OcToBER TERM, 1978.

No.

WILMINGTON TRUST COMPANY,

as Successor Indenture Trustee,

Petitioner,

v.

PENN CENTRAL TRANSPORTATION COMPANY,

as Debtor,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT.

The Petitioner, Wilmington Trust Company, as suc-

cessor indenture trustee under the New York Central and

Hudson River Railroad Company, Michigan Central Col-

lateral Indenture dated April 13, 1898 (“WTC”), respect-

fully prays that a Writ of Certiorari (“Writ”) issue to re-

view the judgments and opinions of the United States

Court of Appeals for the Third Circuit entered in this

proceeding.

be Petition for a Writ of Certiorari

OPINIONS BELOW.

The opinions rendered by the Court of Appeals in

this case (the “Wilmington Opinion”), and in the com-

panion cases (the “Irving Opinion” and the “Bankers

Opinion’ ) are not yet reported and appear in the Appendix

hereto (App. A1-A61; A65-A115; A118-A121). The opinion

rendered by the Court of Appeals in connection with

WTC's initial petition for rehearing, not yet reported, and

the order denying WTC’s second petition for rehearing

appear in the Appendix hereto (App. Al24-A126; A129).

The opinions rendered by the United States District Court

for the Eastern District of Pennsylvania (the “Reorganiza-

tion Court”) are reported at 458 F. Supp. 1234 (the

“Approval Opinion”) and 458 F. Supp. 1364 (the “Con-

firmation Opinion”), respectively, and appear in the

Appendix hereto (App. A130-A356; A357-A393 ).

JURISDICTION.

The judgment of the Court of Appeals for the Third

Circuit was entered on January 11, 1979 (App. A62-A64).

A timely petition for rehearing, or, in the alternative, re-

hearing en banc was denied on February 26, 1979 (App.

A127-A128). A second timely petition for rehearing was

denied on March 22, 1979 (App. A129). This petition

for certiorari was filed within 90 days of the date on which

the Court of Appeals denied WTC’s first petition for re-

hearing. This Court’s jurisdiction is invoked under 28

U.S.C. § 1254(1) and 11 U.S.C. § 47(c).

Petition for a Writ of Certiorari 3

QUESTIONS PRESENTED.

1. Whether the Supreme Court should assert its

supervisory powers when the Court of Appeals committed

an obvious and injurious error in denying WTC’s initial

petition for rehearing on the ground that WTC failed to

assert a claim to certain assets when WTC explicitly as-

serted such claim in each of its briefs filed with the Court

of Appeals.

2. Whether the treatment afforded by a plan of re-

organization to a secured creditor could be found to be

fair and equitable when all of the collateral_securing that

creditor's claim was not considered by either the Reorgan-

ization Court or the Court of Appeals.

3. Whether a secured creditor received fair and eq-

uitable treatment under a plan of reorganization when

neither the Reorganization Court nor the Court of Appeals

conducted an informed evaluation of the reasonable range

of litigation possibilities.

STATUTORY PROVISIONS INVOLVED.

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

§ 205(e), provides in pertinent part that a plan of re-

organization may not be approved unless the court finds

that it is:

“fair and equitable, affords due recognition to the

rights of each class of creditors and stockholders, does

not discriminate unfairly in favor of any class of

creditors or stockholders, and will conform to the

requirements of the law of the land regarding the

participation of the various classes of creditors and

stockholders... .”

4 Petition for a Writ of Certiorari

STATEMENT OF THE CASE.

This proceeding commenced on June 21, 1970, when

Penn Central Transportation Company (the “Debtor” or

“PCTC”) filed a petition with the Reorganization Court

seeking relief under the provisions of the Bankruptcy Act,

11 U.S.C. § 1 et seq. Jurisdiction of the Reorganization

Court was invoked pursuant to §77 of the Bankruptcy

Act, 11 U.S.C. § 205.

A. History of This Indenture.

WTC is successor trustee under the New York Central

and Hudson River Railroad Company (“New York C. &

H.R.R.”), Michigan Central Collateral Indenture dated

April 13, 1898 (“MCC Indenture” or the “Indenture” ).

Bonds were issued under the MCC Indenture for the pur-

pose of financing the acquisition by Debtor’s predecessor

of the stock of the Michigan Central Railroad Company

(“Michigan Central”). The trustee under the Indenture

received 168,143 shares of Michigan Central stock for the

bonds issued under and secured by the Indenture.

As further security for the payment of principal and

interest, the MCC Indenture, along with the Lake Shore

Collateral Indenture (“Lake Shore Indenture”), was se-

cured by a lien on certain property located in mid-town

Manhattan (the “Park Avenue Properties”), which lien is

senior to the lien of the bonds issued under the New York

C. & H.R.R. Consolidation mortgage (Mortgage 014)

(“Consolidation Mortgage”). The liens of this Indenture,

the Lake Shore Indenture and the Consolidation Mortgage

on the Park Avenue Properties are junior to the lien of the

New York C. & H.R.R. Gold Bond mortgage (Mortgage

013) (“Gold Bond Mortgage”). The most junior mortgage

in this mortgage chain, referred to as the “013-015 Chain”,

is the New York C. & H.R.R. R.&I. mortgage (Mortgage

015) (“New York Central R&I Mortgage” ).

Petition for a Writ of Certiorari 5

Thus, the Indenture is secured as follows:

1. By a first lien on 168,143 shares of Michigan Cen-

tral stock, which the Reorganization Court and the

Debtor’s trustees value at $25,195,000 (App. A47; A235-

A236).

2. By a second lien on the Park Avenue Properties

which includes:

(a) Specific Park Avenue Properties which, be-

fore satisfaction of the Gold Bond Mortgage ($97

million), the Reorganization Court found to have a

value of $236 million (App. A235-A236);

(b) Certain property subject to the Harlem

Lease which has a value of $48.2 million. Though

subject to the lien of the MCC Indenture, this prop-

erty was incorrectly allocated to the New York Cen-

tral R&I Mortgage (App. A270); and

(c) Rentals received in respect of the Park

Avenue Properties during the pendency of the reor-

ganization which have a value of $76 million, net of

taxes. Though subject to the lien of the MCC

Indenture, this property has been incorrectly allo-

cated to the New York Central R&I Mortgage (App.

A112-A113).

The claim of this Indenture to the Harlem Lease

properties and the Park Avenue rentals was raised as

early as February 23, 1972. As to the Park Avenue rent-

als, WTC’s predecessor indenture trustee moved before

the Reorganization Court for an order sequestering the

rentals from the Park Avenue Properties (Ct. App. Vol. II,

A-1, A-11'). The motion was denied by the Reorganiza-

1. Reference to the appendices filed with the Third Circuit,

which are part of the certified record filed with this Court, will be

made thusly: “Ct. App. Vol. —, A-—”.

6 Petition for a Writ of Certiorari

tion Court on the ground that the rentals from the Park

Avenue Properties were needed by the PCTC trustees

in connection with their efforts to effect a successful re-

organization. In re Penn Central Transportation Co.,

354 F. Supp. 717, 746-47 (E.D. Pa. 1972), affd, 484 F.2d

323 (3d Cir.), cert. denied, 414 U.S. 1079 (1973).

B. The Plan of Reorganization.

Prior to the consummation of Debtor's plan of reor-

ganization (“the Plan”), the claim of the bondholders un-

der the MCC Indeniure for principal and interest to

December 31, 1977 was $21,856,000 (App. A229). Under

the Plan, all Debtor’s 28 secured creditors holding mort-

gages or collateral trusts are treated as a single class. All

28 Class J creditors are assumed to be fully secured, either

by retained assets or conveyed assets,” and receive a dis-

tribution in respect of their claim of 10% cash, 30% General

Mortgage Bonds, 30% Preference Stock and 30% New

Common Stock (App. A227). }

As initially proposed, the Plan made but a single

distinction as among the 28 Class J creditors. Thus, the

Plan originally recognized the relatively stronger position

of creditors fully or partially secured by retained assets of

the Debtor through its formula for distribution of General

Mortgage Bonds. The bonds were divided into Series A

and B. Within the 30% of the total distribution repre-

sented by the General Mortgage Bonds, each secured

creditor was awarded Series A Bonds in proportion to the

degree that its claim was secured by Debtor’s retained as-

sets. The remainder of the 30% was satisfied with Series.

B Bonds. For example, a claim of $1,000 which is 70%

secured by retained assets would receive $210 in Series A

2. On April 1, 1976, a significant portion of Debtor’s rail prop-

erty was transferred to ConRail. The value of the property so con-

veyed is presently unknown and is to be determined in what has

been referred to in this proceeding as the “Valuation Case”.

Petition for a Writ of Certiorari 7

Bonds and $90 in Series B Bonds. If such claim were

fully secured by retained assets, it would receive $300 in

Series A Bonds and if it had no retained asset security,

it would receive $300 in Series B Bonds (A227-A228).

Series A Bonds are to be redeemed out of the pro-

ceeds of the sale of the marketable assets retained by the

Debtor prior to the Series B Bonds. Series B Bonds look

to the proceeds of the Valuation Case for payment, in re-

spect of which their claim is junior to an estimated $1.278

billion of government, state and local tax claims. Series

B Bonds not redeemed in the Valuation Case will convert

into common stock of the reorganized company (App.

ATA).

C. The Reorganization Court Opinions.

The Reorganization Court approved the Plan but al-

tered its treatment of Class J creditors by creating a class

of so-called “super-secured creditors” consisting of the

Mohawk & Malone Mortgage (275% retained asset cov-

erage), the Gold Bond Mortgage (243% retained asset

coverage ), the New York Central 6% Bonds af 1990 (113%

to 119% retained asset coverage) and the Penn Central

6%% Bonds of 1993 (123% to 138% retained asset cover-

age). Those claimants were deemed entitled to receive

a distribution of Series A Preference Stock which has

rights of redemption, pari passu, which rights take preced-

ence over the redemption rights of other preference

stock. See, In re Penn Central Transportation Co., 458

F. Supp. 1234, 1291, 1302 (E.D. Pa. 1978) (App. A234-

A235; A257-A258 ).

Though the Reorganization Court recognized that the

MCC Indenture had first lien retained asset coverage of

115% based on its lien on the Michigan Central stock (App.

A236), the Indenture was not included as a member of

this judicially created class. In addition, the Reorganiza-

8 Petition for a Writ of Certiorari

tion Court did not give the Indenture any credit for its

second lien on the Park Avenue Properties, which the

Court valued at $236 million. This value did not include

certain of the Harlem Lease properties or the Park Avenue

rentals (App. A270; A273-A277). The Court allocated

the entire $236 million to the Gold Bond Mortgage, thus

finding it to be 243% retained asset secured (App. A236).

D. The Court of Appeals Opinions.

The Court of Appeals directed that another change

be made in connection with the Plan’s treatment of Class

J creditors. It concluded that the Mohawk & Malone

Mortgage was entitled to a distribution of 10% cash and

90% Series A Bonds (App. A104). In addition, it reversed

the Reorganization Court’s rejection of the New York

Central R&I Mortgage claim for recognition of its security

interest in the Park Avenue rentals. The Court of Appeals

remanded the issue to the Reorganization Court for a

determination of the value of the rentals and whether that

value would increase the retained assets securing the New

York Central R&I Indenture (App. A112-A113), thus

increasing the portion of Series A General Mortgage Bonds

to be distributed under that Indenture.

As the Reorganization Court had done, the Court of

Appeals’ consideration of the fairness of the Plan as to

the MCC Indenture was based on the Reorganization

Court’s finding that the Park Avenue Properties were

worth only $236 million; a consideration which did not

include certain of the Harlem Lease properties and the

Park Avenue rentals (App. A47-A48; A55-A56).

Petition for a Writ of Certiorari 9

REASONS FOR GRANTING THE WRIT.

I. The Supreme Court Should Assert Its Supervisory

Powers When the Court of Appeals Committed an

Obvious and ‘yj: cious Error in Denying WTC’s

Initial Petition :or Rehearing on the Ground That

WTC Failed to Assert a Claim to Certain Assets

When WTC Explicitly Asserted Such Claim in Each

of Its Briefs Filed With the Court of Appeals.

The Court of Appeals committed an obvious and in-

jurious error which demands that this Court assert its

“power of supervision” under Rule 19(1)(b) when the

Court of Appeals denied WTC’s initial petition for rehear-

ing on the grounds it did not assert a claim to the Park

Avenue rentals.

In its order of May 19, 1978, the Court of Appeals

urged the numerous appellants to avoid duplication

of argument and materials in their respective briefs to the

extent possible (App. A397). In compliance with that

direction, the trustee for the New York Central R&I Mort-

gage carried the laboring oar on the issue of the rentals

received on the Park Avenue Properties and the Consoli-

dation Mortgage carried the laboring oar on the Harlem

Lease properties. WTC, while raising those issues in its

briefs,* carried the laboring oar in respect of other issues.

In the Irving Opinion, the Court of Appeals held that

the Reorganization Court had erroneously rejected the

claim of the New York Central R&I Mortgage for recog-

nition of its security in the net rentals from the Park

3. Opening Brief at 7, 21, 23, 27; Reply Brief at 10,12. WTC’s

Opening Brief and Reply Brief, each of which was filed with the

Court of Appeals, have been certified in connection with this Peti-

tion as part of the entire record below. Because the appendix filed

in connection with this Petition is already voluminous, WTC has, in

the interest of economy, chosen not to reproduce its briefs below as

part of the appendix.

10 Petition for a Writ of Certiorari

Avenue Properties (App. Al12-Al113). However, in the

Wilmington Opinion, the Court of Appeals failed to in-

clude and consider WTC’s claim to the Park Avenue

rentals in its determination of the Plan’s fairness.

Although WTC brought this error to the attention of

the Court of Appeals in its initial petition for rehearing,

the Court of Appeals declined to grant relief to WTC. In

so doing, the Court of Appeals initially stated that WTC

had made no objection in its briefs or at oral argument

to the diversion of the Park Avenue rentals (App. A125).

That statement is simply erroneous. WTC specifically

objected to the diversion of the Park Avenue rentals both

in its Opening and Reply Briefs filed with the Court of

Appeals. In its Opening Brief, WTC stated:

“Unlike other ‘super-secured’ creditors the MCC In-

denture looks to the extremely valuable Park Avenue

Properties, the income of which has been financing

PCTC’s reorganization proceeding for the past seven

years, and substantially all of the stock of the Michi-

gan Central, one of PCTC’s largest and most valuable

leased lines.” (Opening Brief at 7).

This objection was reasserted by WTC in its Reply Brief:

“The Park Avenue properties are unique; for, as this

Court has noted, the properties are an essential in-

gredient to any reorganization of the Debtor. In re

Penn Central Transportation Co., 484 F.2d 323, 334

(3d Cir.), cert. denied, 414 U.S. 1079 (1973). It is

difficult to imagine how long this proceeding would

have lasted if it had not been for the use of the Park

Avenue rentals which exceeded $76,000,000, net of

taxes. The MCC Indenture should not be penalized

by subjecting this unique asset to the payment of

administrative claims because it has, in effect, sup-

ported this reorganization.” (Reply Brief at 10).

Petition for a Writ of Certiorari ll

As its second, and only other ground for denying

WTC’s petition for reargument, the Court of Appeais

stated that WTC did not rely upon the availability of the

Park Avenue rentals in its liquidation analysis (App.

A125).

That statement is also erroneous. WTC specifically

set forth the Park Avenue rentals in its liquidation analysis

presented to the Court of Appeals. WTC argued that if

the Park Avenue rentals had been included, the collateral

securing the Gold Bond Mortgage would be increased and

the increase would then pass down to the MCC Indenture,

making the MCC Indenture even more secured in a

liquidation:

“If the value of the collateral securing the Gold Bond

mortgage is increased by the addition of the Harlem

Lease ($48.2 million) or increased to take into ac-

count the rental payments received by the estate on

the Park Avenue properties ($76 million), the excess

over 200% which passes down to the MCC Indenture

is further increased, thereby making the MCC In-

denture even more secure.” (Reply Brief at 12).

Not only is the error of the foregoing rulings apparent,

but the result is in direct conflict with the prior opinion of

the Court of Appeals rendered at an earlier stage of this

proceeding. In In re Penn Central Transportation Co.,

484 F.2d 323 (3d Cir.), cert. den., 414 U.S. 1079 (1973),

the Court found that the New York Central R&I Mortgage

was the most junior within the 013-015 Chain, 484 F.2d

at 330, and that the rentals on the Park Avenue Properties

were among the collateral securing the 013-015 Chain,

subject to the priorities within that chain. 484 F.2d at

337.4

4. The Opinion of the Court of Appeals also ignores that

Court’s prior order to the parties to avoid duplication of argument

in briefing. (See, App. A397).

12 Petition for a Writ of Certiorari

Though it is not possible to speculate why the Court

of Appeals did what it did, it should be noted that the

Lake Shore Indenture trustee also moved for rehearing.

In its petition, the Lake Shore Indenture trustee acknowl-

edged that it had not raised the subject of the Park

Avenue rentals in its briefing before the Court of Appeals.

Evidentally, the Court of Appeals seized upon this admis-

sion as the basis for its opinion.

The injury caused thereby is equally apparent. For

example, implicit in the Court of Appeal’s analysis of the

fairness of the Plan as to the MCC Indenture is the con-

clusion that the Reorganization Court’s value of $236 mil-

lion for the Park Avenue Properties would be sufficient to

satisfy the $97 million Gold Bond Mortgage, under worst

case assumptions, leaving nothing for the MCC Indenture.

With the addition of the Park Avenue rentals, approxi-

mately $60 million would pass through to the second tier

claimants (See, App. A112, n.14). Since the MCC Inden-

ture shares a second lien with the Lake Shore Indenture,

it would, for analytical purposes, be entitled to 50%

of the value, or a total of approximately $30 million.

When added with the Michigan Central stock, the MCC

Indenture would have a claim to $55.2 million in assets,

and thus would be 253% secured—well above the per-

centage for super-secured status set by the Reorganization

Court.

The effect of an increase in collateral securing the

Gold Bond Mortgage was conceded by counsel for the

Debtor's trustees at argument before the Court of Ap-

peals. He acknowledged that an increase in the value of

the Park Avenue Properties of only $48.2 million (refer-

ring to the Harlem Lease properties) would be sufficient

to give the MCC Indenture super-secured status (tran-

Petition for a Writ of Certiorari 13

script of argument before the United States Court of Ap-

peals, October 16, 1978, at 1-151).

At a minimum, the effect of super-secured status is to

substitute Series A Preference Stock for Series B Preterence

Stock. As the Court recognized in the Irving Opinion, the

value of the “preference afforded by classification in Series

A is substantial” (App. A78).

Under Rule 19(1)(b) of this Court, a writ of cer-

tiorari may be granted where a decision of a court of

appeals “has so far departed from the accepted and usual

course of judicial proceedings .. . as to call for an exercise

of this Court’s power of supervision.” This Court has exer-

cised its discretion under Rule 19 in order to correct plain

and obvious error below even though the substantive legal

question at issue was not of the type usually considered by

this Court.

Thus, in Gidson v. Lockheed Aircraft Service, Inc.,

350 U.S. 356 (1956), the Court, in a per curiam opinion,

reversed a decision of the court of appeals relating to

the correctness of a charge made by the district court to

the jury. Although the substantive legal issue in Gibson

was not particularly significant, the Court noted that its

consideration of that case was based upon its supervisory

power over lower federal courts. In a concurring opinion,

Mr. Justice Frankfurter agreed that the issuance of a writ

of certiorari was proper since the rulings below were “so

obviously and injuriously erroneous ‘as to call for an exer-

cise of this court’s power of supervision.” 350 U.S. at

358. In Kaiser Steel Corp. v. Ranch Co., 391 U.S. 593

(1968), the Court issued a writ of certiorari and, at the

same time, reversed the decision below on the ground that

the refusal of the lower court to stay its hand pending

decision by a state court on issues relating to the matter

constituted an abuse of “sound judicial administration”.

14 Petition for a Writ of Certiorari

=

391 U.S. at 594. See, Washington v. United States, 357

U.S. 348 (1958) [per curiam, issuing writ and reversing

court of appeals on issue relating to sufficiency of evi-

dence]; Cf. Letulle v. Scofield, 308 U.S. 415 (1940) [writ

issued where petitioner asserted that the court of ap-

peals decided the case on issues not raised or argued

below].

WTC submits that the Third Circuit’s per curiam

opinion denying WTC’s initial petition for rehearing, is,

to use Mr. Justice Frankfurter’s phrase, so obviously and

injuriously erroneous as to call for the exercise of this

Court’s power of supervision. Furthermore, the issuance

of a Writ and the ultimate reversal of the Court of Ap-

peals will not impose any additional burden on either the

Reorganization Court or upon counsel since this issue is

already before the Reorganization Court, insofar as it re-

lates to the New York Central R&I Mortgage and the

Debtor has represented that it has sufficient securities to

satisfy the relief sought by WTC.

WTC respectfully submits that the error of the Court

of Appeals presents this Court with one of the admittedly

few cases that called for the issuance of a Writ in the exer-

cise of this Court’s supervisory power over inferior federal

courts.

II. The Treatment Afforded by the Plan of Reorganization

to the MCC Indenture Bondholders Could Not Be

Found to Be Fair and Equitable When All of the

Collateral Securing That Creditor’s Claim Was Not

Considered by Either the Reorganization Court or the

Court of Appeals.

The Supreme Court last considered plans of reorgani-

zation in 1968. Protective Committee for Independent

Stockholders of TMT Trailer-Ferry, Inc. v. Anderson, 390

Petition for a Writ of Certiorari 15

U.S. 414 (1968). Since that date there have been numer-

ous complex reorganizations all raising substantial ques-

tions as to the applicability of priority rules under the

Bankruptcy Act. See e.g., In re Equity Funding Corp.,

416 F. Supp. 132 (C.D. Cal. 1975). There has been a

growing tendency, as evidenced by Debtor's Plan, to lump

secured creditors in a single class, to minimize collateral

value and ignore lien priority, all under the pretext of

complexity.

In the Wilmington Opinion, the Court of Appeals

valued the Park Avenue Properties at $236 million, with-

out considering the MCC Indenture’s claim to the rentals

as recognized in the Irving Opinion and without consider-

ing or much less discussing the Harlem Lease properties.

By not considering all the collateral securing the MCC

Indenture, the Court of Appeals could not determine

whether the Plan’s distribution to the MCC Indenture

bondholders was fair and equitable as mandated by this

Court in Consolidated Rock Products Co. v. DuBois, 312

U.S. 510, 526-27 (1941).

The Court of Appeals in the Wilmington Opinion then

erroneously held that under Ecker v. Western Pacific R.

Corp., 318 U.S. 448, 482-83 (1943), it was not required to

conduct an evaluation of the collateral securing the MCC

Indenture, as that was a matter to be determined under

the circumstances of each case (App. A54). The Court

concluded that it would be “impossible” to place a value

on the rights surrendered by MCC Indenture bond-

holders, given the complexity of the Plan, the unpredict-

able prior claims, and the benefits to be derived by imple-

menting some plan now (App. A54). In so holding,

the Court of Appeals in the Wilmington Opinion dis-

regards its own decision in the Irving Opinion where the

Court does place values on the rights surrendered by

Class J creditors (compare, A95-A102), and ignores the

16 Petition for a Writ of Certiorari

requirements of this Court’s decisions in Consolidated

Rock and Ecker.

Having abdicated its obligation to value all the col- |

lateral securing the MCC Indenture, the Court of Appeals,

as the Reorganization Court before it, refused to apply

equitable principles of marshalling and concluded that col-

lateral would be allocated only to senior creditors, not-

withstanding the existence of a possible surplus following

satisfaction of that creditor’s claim (App. A48-A49; A55-

A56). Thus, the Court of Appeals considered only the

value of the Michigan Central stock (App. A48). Not

considered, over the objection of WTC, was any excess

value, such as the Park Avenue rentals or the Harlem Lease

properties, that would flow to the MCC Indenture after

satisfaction of the Gold Bond Mortgage. By refusing to

consider this collateral, the Court of Appeals has, in effect,

ruled that a valuable third mortgage is worth the same as

a worthless second mortgage—nothing.

As a result, the Plan, as approved by the Reorganiza-

tion Court and the Court of Appeals, does not recognize

the priorities among the differently secured Class J cred-

itors. For example, the MCC Indenture, which is secured

by a first lien on Michigan Central stock and has a lien

prior to the lien of the Consolidation Mortgage on the

Park Avenue Properties, receives the same treatment under

the Plan accorded the Consolidated Mortgage. For that

reason, the Plan does not “conform to the requirements of

the law of the land regarding the participation of the

various classes of creditors,” Bankruptcy Act § 77(e), and

this Court has never affirmed the approval or confirmation

of a plan that failed to recognize the priorities of existing

classes of creditors. _ See, Northern Pacific Ry. Co. v.

Boyd, 228 U.S. 482 (1913); Kansas City Terminal Ry. Co.

v. Central Union Trust Co., 271 U.S. 445 (1926); Case v.

Los Angeles Lumber Products Co., 308 U.S. 106 (1939),

Petition for a Writ of Certiorari 17

reh. den., 308 U.S. 637 (1939); Consolidated Rock

Products Co. v. DuBois, supra; Marine Harbor Properties,

Inc. v. Manufacturers Trust Co., 317 U.S. 78 (1942); Ecker

v. Western Pacific R. Corp., supra; Group of Institutional

Investors v. Chicago, Milwaukee, St. Paul and Pacific R.

Co., 318 U.S. 523 (1943); Reconstruction Finance Corp. v.

Denver & Rio Grande Western R. Co., 328 U.S. 495

(1946).

In formulating a plan, priority treatment accorded

a particular debt must be based upon the security pledged

to that particular debt and “[t]he important element [in a

plan] is the allocation of the securities so as to preserve to

creditors the advantages of their respective priorities.”

Ecker, 318 U.S. at 483. Full recognition must be given to

the relative advantages which certain secured creditors

have by reason of their higher priority and by reason of

the value of the collateral securing their claim. If the

value of the collateral differs, then there are different

priorities and different priorities of treatment as between

creditors must be accorded.

In that context, valuation of the collateral securing

this Indenture is crucial because it is only after such valua-

tion occurs that any determination can be made as to

whether or not the Plan preserves to creditors the ad-

vantage of their respective priority. It is precisely that

evaluation which the Court of Appeals dispensed with, not-

withstanding the prior decisions of this Court.*

If the Court of Appeals in the Wilmington Opinion

had followed Consolidated Rock and Ecker, and had con-

sidered all the assets securing the MCC Indenture, and

had marshalled those assets not needed to satisfy the Gold

Bond Mortgage to the MCC Indenture, the Court would

5. The Court of Appeals would appear to have recognized this

infirmity because it recognized that the Plan’s distribution takes no

account of the amount of strength of the underlying security (App.

A48).

18 Petition for a Writ of Certiorari

have found that the MCC Indenture was as secure as the

Mohawk & Malone Mortgage, and thus entitled to a dis-

tribution of 10% cash and 90% Series A Bonds, or at a min-

imum entitled to Series A Preference Stock.

III. The MCC Indenture Bondholders Have Not Received

Fair and Equitable Treatment Under the Plan of

Reorganization Because Neither the Reorganization

Court Nor the Court of Appeals Conducted an In-

formed Evaluation of the Reasonable Range of Liti-

gation Possibilities.

The second test which must be applied is whether the

Plan’s compromises are fair. As this Court stated in TMT

Trailer:

“There can be no informed and independent judg-

ment as to whether a proposed compromise is fair

and equitable until the bankruptcy judge has ap-

prised himself of all facts necessary for an intelligent

and objective opinion of the probabilities of ultimate

success should the claim be litigated. Further, the

judge should form an educated estimate of the com-

plexity, expense and likely duration of such litiga-

tion, the possible difficulties of collecting on any

judgment which might be obtained, and all other

factors relevant to a full and fair assessment of the

wisdom of the proposed compromise. Basic to this

process in every instance, of course, is the need to

compare the terms of the compromise with the likely

rewards of litigation.” 390 U.S. at 424-25.

In the Irving Opinion, the Court of Appeals recog-

nized its duty under TMT Trailer and after reviewing all

of the facts and conducting a “worst case” analysis, con-

cluded that as to the Irving Trust Company Indentures,

the Plan’s distribution represented a “fair and equitable

Petition for a Writ of Certiorari 19

compromise of the-litigation possibilities.” (App. A101-

A103). In that regard, the Court of Appeals held that in

a worst case liquidation analysis, the nine classes of prior

administrative and priority claims would prime all but 41%

of Debtor’s encumbered assets at the close of a liquidation.

Vhe Court then noted that the New York Central 6% Bonds

were roughly 100% secured and that the value of the dis-

tribution to that super-secured creditor was approximately

60% of its total claim. Since, on a worst case analysis, the

collateral securing these bonds might be reduced to only

41% of the claim, the Court found the distribution under

the Plan which amounted to approximately 60% of the

claim was within the range of litigation possibilities

(App. A102).

Significantly, the Court of Appeals failed to perform

the foregoing analysis, or anything approaching that, in

the Wilmington Opinion. Specifically, the Court:

(1) found that it was impossible to value the

collateral securing the MCC Indenture. See Reason

II, supra.

(2) refused to form “an opinion of the proba-

bilities of ultimate success should the claim be liti-

gated” as required by TMT Trailer stating that “with

nine classes of prior claimants . . ., there is no way

to establish relative priorities of secured creditors

without litigation of every potential claim.” (App.

A55).

(3) failed to conduct a “worst case” liquidation

analysis of the Gold Bond Mortgage to see if in fact,

“there would be no excess assets to secure the claim

of the holder of a second lien’—the MCC Indenture

(App. A56).

If the Court of Appeals had performed a similar

analysis in the Wilmington Opinion and had included a

20 Petition for a Writ of Certiorari

value of only $60 million for the Park Avenue rentals, it

would have found that this Indenture would be over

100% secured after payment of all administrative and prior-

ity claims under the Court of Appeals own worst case

analysis ° (compare, App. A102).

Carrying the Court’s analysis in the Irving Opinion

one step further, the Court of Appeals would have con-

cluded that the Plan’s distribution to the MCC Indenture

bondholders of between 45 and 50% of their claim (App.

A255) when their claim would survive a worst case liqui-

dation does not fall within the range of litigation possibili-

ties and that additional compensation is mandated.

Thus, in the Wilmington Opinion, the Court of Ap-

peals completely failed to conduct the analysis required

by TMT Trailer—a failure which, in itself, is a sufficient

departure from prior decisions of this Court to justify the

issuance of a Writ.

CONCLUSION.

For the foregoing reasons, a Writ should issue to re-

view the judgment and opinions of the Third Circuit.

Respectfully submitted,

RicHarp G. ELLIOTT, JR.,

MICHAEL A. MEEHAN,

RIcHARDsS, LAYTON & FINGER,

4072 DuPont Building,

P.O. Box 551,

Wilmington, Delaware 19899

Attorneys for Wilmington

Trust Company.

Dated: May 25, 1979

6. If the Harlem Lease properties in dispute were included, the

percentage would be well in excess of 100%.