# Opposition — Wilmington Trust Co. v. Penn Central Transportation Co.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition
- **Published:** January 1, 1979
- **Citation:** 444 U.S. 834

## Text

Supreme Court, U.
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8 JUN 26 1979
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No. 78- 1767

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MICHAEL ROD! K JR. , CLERK

IN THE
Supreme Court of the United States

OcTroRBeR TeERM, 1978

WILMINGTON Trust COMPANY,
as sueceessor indenture trustee,
Petitioner,

".

CENTRAL TRANSPORTATION COMPANY,

PENN
Debtor,

Respondent.

On Petition for a Writ of Certiorari to the United States
Court of Appeals for the Third Circuit

BRIEF IN OPPOSITION FOR
PENN CENTRAL TRANSPORTATION COMPANY,
Debtor

CHARLES A. Horsky

W. Crossy Roper, Jr.
888 - 16th Street, N.W.
Washington, D.C. 20006

JAMES E. Howarp
1700 Market Street
Philadelphia, Pa.

19103

Of Counsel:

Covinaton & BURLING
888 - 16th Street, N.W.
Washington, D.C. 20006

June 1979

Oe et ee ste tO

TABLE OF CONTENTS

Page
FVATEMENT 6. occhccecnaad.e deb ews 40 dha Yes RE 1
Tus Pian oF REORGANISATION. oo o2.cccsusveetesnens 2
THe Decision Betow ON REHEARING .........000000- 9
Reasons FoR DENYING THE WRIT .......eccecccscees 10
COMCLUMON cic cvcncceesecbenndeensesuseesuceewes 16

TABLE OF AUTHORITIES

CASES:

In re Penn Central Transportation Company (Park
Avenue Properties), 484 F.2d (3d Cir.), certiorari

denied, 414. U3. 1070 CASTS) 2. cd cc cdseeceveuss 7
New Haven Inclusion Cases, 399 U.S. 392 ........... 4
STATUTES:

Regional Rail Reorganization Act of 1973 (45 U.S.C.
G5 TOL 68 206.) ci csc cciicuscusnscesiasveeeseehaee 2

IN THE

Supreme Court of the United States

Octoser TerM, 1978

No. 78-1767

Witminoaton Trust CoMPANY,
as successor indenture trustee,
Petitioner,
Vv.

PENN CENTRAL TRANSPORTATION COMPANY,
Debtor,
Respondent.

On Petition for « Writ of Certiorari to the United States
Court of Appeals for the Third Circuit

BRIEF IN OPPOSITION FOR
PENN CENTRAL TRANSPORTATION COMPANY,
Debtor

STATEMENT

On October 24, 1978 the reorganization of Penn Cen-
tral Transportation Company, Debtor, and fifteen sec-
ondary debtors, was consummated, thus bringing to an
end perhaps the largest and almost certainly the most
complex reorganization ever addressed under Section
77 of the Bankruptcy Act. The class of secured credi-
tors, which includes the bondholders for whom peti-

2

tioner purports to speak, approved the treatment ac-
corded them under the Plan by an overwhelming ma-
jority vote (99.4 percent). The bondholders for whom
petitioner is trustee themselves accepted the provisions
of the plan by a vote of 98.1 pereent. Notwithstanding
that vote, petitioner has pressed an appeal and two
petitions for rehearing to the court below, and failing
there has filed its petition in this Court. The petition
does not seck to upset the consummation of the reorga-
nization plan; rather, it seeks a more favorable treat-
ment for the particular group of bondholders repre-
sented by petitioner—at the expense, of urse, of other
claimants.

THE PLAN OF REORGANIZATION

To put the position of petitioner into context re-
quires some explanation of the Plan of Reorganization.
The characteristics of the Plan are set out in the long

and careful opinion of the Reorganization Court

(A130-A357),! and in a somewhat more abbreviated
form in the opinion of Judge Aldisert in the court be-
low (A8-A32).

The objective of the Plan, now accomplished, was to
resolve the obstacles presented by an enormously com-
plex set of conflicting and interrelated claims, and the
overriding uncertainty as to the value of the Debtors’
major asset—the unknown and unknowable amount to
be realized in the litigation to determine the value of
the rail assets conveyed to Consolidated Rail Corpora-
tion (Conrail) and others on April 1, 1976, pursuant to
the Regional Rail Reorganization Act of 1973 (45
U.S.C. §§ 701 et seq.) (RRR Act).

References throughout are to the Appendix to the Petition for
Certiorari.

3

The Trustees might, of course, have attempted to
delay any reorganization until the valuation case had
been finally decided—1987 is the target date set in the
RRR Act. Or, alternatively, because of the unfairness
to claimants of such a delay, they might have opted for
liquidation—a course that would have precipitated the
massive and time consuming litigation of all the econ-
flicting claims, with the probable end result that even
those claimants whose litigation was ultimately suc-
cessful would not benefit (see A180-A181). The Trus-
tees rejected both of those solutions, and, by compro-
mise resolution of the multitude of conflicting claims,
achieved a successful Plan.

The Plan rests on several basic premises. It assumes
that the estate is solvent. It bases the on-going opera-
tions of the reorganized company—The Penn Central
Corporation—on a wholly-owned subsidiary of the
Debtor—The Pennsylvania Company—which owns suc-
cessful non-rail assets and earnings potential. Other
assets are to be sold. The proceeds of those sales—
Asset Disposition Proeeeds, or ADP— together with
the recovery in the valuation case, are used to satisfy
claimants.

The compromises of the varied issues legitimately in
dispute were, of necessity, also essential to the Plan.
The first, and basic, one was with the United States,
which had guaranteed $100 million of Trustees’ Certifi-
cates ($50 million were in default), and which, pursu-
ant to Seetion 211(h) of the RRR Act, had in effect
loaned the estate hundreds of millions more. Under the
compromise, the defaulted Trustees’ Certificates were
paid in cash, but the United States agreed to accept for
its claims B Notes, some of which are to be paid over

4

the next several years, but most of which are deferred
to the conclusion of the valuation case.

The second, and equally significant, compromise, was
with the state and local taxing authorities, whose
claims aggregated hundreds of millions of dollars.
They agreed to accept 44 percent in cash and notes
maturing in two years, and for the balance of their
claims notes with maturities related to the target date
for conclusion of the valuation case.

In addition, the Plan rests on settlement of potential
litigation with the trustee of the New Haven, a major
ereditor (see New Haven Inclusion Cases, 399 U.S.
392) ; with a group of banks holding in pledge all of
the stock of The Pennsylvania Company; with the so-
ealled ‘‘Friday Group,” representing a large portion
of the secured debt; with the active unsecured credi-
tors; with the sole stockholder of the Debtor, The
Penn Central Company; and with the trustees and se-
curity holders of the 15 controlled leased lines also in
reorganization as Secondary Debtors.

One of the most difficult problems, and for purposes
of the present petition the most relevant, was the treat-
ment of the complex collection of mortgages, with over-
lapping and various ranks of liens, vis-a-vis one an-
other. The Trustees reached the conclusion that it was
reasonable to treat each of the parent-company mort-
gages as fully secured, and to treat them as a single
class and to accord each a distribution under the Plan
of 10 percent of their claim in cash on consummation,
new General Mortgage Bonds in principal amount
equal to 30 percent of the claim, new Preference Stock
with a redemption value equal to 30 percent of their
claim, and new Common Stock. Approximately 55 per-

eR RT Lc Io

4)

cent of the new Common Stock has been distributed

proportionately to secured creditors pursuant to the
Plan.

As already noted, a basic premise of the Plan was
that, by reason of the anticipated recovery in the val-
uation case, the Debtor was solvent and all debt was
fully secured. It was recognized, however, that security
consisting of retained assets could be realized on more
quickly than the recovery on property conveyed to Con-
rail, which would have to await the conclusion of the
valuation case. This compromise treatment, therefore,
contained in addition a recognition of the fact—albeit a
fortuitous one—that some mortgages were secured pri-
marily by property still owned by Penn Central, and
some primarily by property transferred to and owned ©
by Conrail. The variations in these circumstances were
endless. However, in recognition of the fact that the
various mortgages differed in the extent to which their
underlying security had been transferred to Conrail,
the General Mortgage Bonds, which each secured claim-
ant received for 30 percent of his claim, were divided
into two series. Series A Bonds were issued in pro-
portion to the extent the relevant mortgage was secured
by assets that had not been so transferred, and Series
B Bonds for the balance. The Plan requires that A
Bonds be redeemed ahead of B Bonds from the pro-
ceeds of the continuing sale of the assets of the estate
other than The Pennsylvania Company, and that B
Bonds be redeemed ahead of A Bonds from the pro-
ceeds of the valuation case.

In appreving the Plan, the Reorganization Court
made one further adjustment in the interrelationship
of the secured creditors. Many of them, including the

6

present petitioner, urged that any mortgage secured
by retained assets in excess of 100 percent of its claim
should be given some preference as ‘‘super-secured.”’
The court dealt at length with the contention in its
opinion (A234-A258)—considering, inter alia, alter-
nate distribution schemes; the argument, which he
found unsupported, that funds which should go to pay
the alleged super-secured would be used to pay mort-
gages less well secured; and whether, were there a li-
quidation rather than a plan, the alleged super-secured
would or could expert such favorable decisions on their
efforts to avoid the consequence of the huge priority
claims of the United States and state taxing authori-
ties, as to ensure them a recovery greater than the Plan
provided. The court concluded (A257) that in general
those mortgage trustees claiming super-secured status
received appropriate allocation under the Plan. He
further concluded, however, that four mortgages were
secured by first liens on retained assets of an amount
and quality which rendered them relatively immune
from major erosion by administration claims and pos-
sible litigation of disputed issues. Two of those mort-
gages had retained asset coverage of 275 and 243 per-
cent, respectively, and two had retained asset coverage
well in excess of 100 percent and were additionally
benefited by being secured by an asset less vulnerable
to administration claims (A257). For these four mort-
gages the court directed that, in the 30 percent Prefer-
ence Stock component of the distribution to them, they
be accorded Preference Stock which would have a pri-
ority in redemption (Series A), before any other Pref-
erence Stock was redeemed (A258). Petitioner’s claim
to super-secured treatment was rejected.

7

On appeal to the court below by those claiming su-
per-secured treatment, including petitioner, the analy-
sis and disposition of the issue by the Reorganization
Court was affirmed. The court below, however, took
cognizance of the fact that one small mortgage of the
four mortgages to which the Reorganization Court had
accorded Series A Preference Stock (the Mohawk &
Malone) was so super-secured—not only did it have
retained assets equal to 275 percent of its $1.967 mil-
lion claim, but its retained assets consisted of $4.535
million in cash and another $0.85 million in other re-
tained assets—that it should receive, in lieu of Prefer-
ence and Common Stock, all A Bonds (A104).

The other change by the court below concerned a dif-
ferent dispute—what could be properly included in the
‘‘retained assets’’ category for the purpose of caleulat-
ing the A Bond-B Bond allocation to a particular
mortgage. The issue was raised by the trustee for the
New York Central and Hudson River Railway Com-
pany Refunding and Improvement Mortgage (R&I).
The trustee of that mortgage, the Bank of New York,
had urged, unsuccessfully in the Reorganization Court,
that in determining the allocation of A Bonds to that
mortgage the Plan should have included as ‘‘retained”’
property the amounts of rents collected from certain
New York Park Avenue properties securing that mort-
gage, which, with the approval of the Reorganization
Court (In re Penn Central Transportation Company
(Park Avenue Properties), 484 F.2d (3d Cir.), certio-
rari denied, 414 U.S. 1079 (1973)), were used by the
Trustees in the operation of the railroad, and amounts
which were not paid by the Trustees, again with the
approval of the courts below, in respect of dividends on
pledged stock. The court below recognized that such

8

amounts and the cash otherwise available for the divi-
dends had already been expended, but held that such
sums, less any amount that was reinvested in the prop-
erties, and less the costs properly associated with the
collection of the rentals (A112-A113) should be deemed
to be ‘‘retained’’ assets for the purpose of determining
the amount of A Bonds to be issued to the holders of
R&I bonds. The determination of the net amount, if
any, was remanded to the Reorganization Court. The
Reorganization Court has not yet determined what that
net amount, if any, is.

The relevance of this potential modification of the
amount of ‘‘retained’’ assets securing the R&I bonds
to the present contention of petitioner requires an ex-
planation of the complex matrix of mortgage liens on
the former New York Central and Hudson River Rail-
road Company (NYC) Properties, of which petitioner’s
mortgage—the New York Central and Hudson River
Railroad Company Michigan Central Collateral Inden-
ture (MC Collateral)—and the R&I mortgage are a
part. Three mortgages and two collateral trust inden-
tures together comprise four different levels of liens.
At the top is the New York Central and Hudson River
Railroad Company Gold Bond, one of the mortgages
held to be super-secured. Next are the Lake Shore Col-
lateral Bonds issued under the Lake Shore Collateral
Indenture and the bonds represented by petitioner, the
Michigan Central Collateral Indenture. Third is the
New York Centre! and Hudson River Consolidation
Mortgage, which secures the Lake Shore Collateral and
the Michigan Central Collateral bonds, as well as
Series A and Series C bonds. The third mortgage, and
the fourth level of lien, is the R&I mortgage. All of
these mortgages were liens on the Park Avenue prop-

9

erties owned in fee by the Debtor, on the Debtor’s lease-
hold interest in the Park Avenue properties owned by
the New York and Harlem Railroad, and in addition
were a lien on a substantial part of what was the New
York Central railroad system. The Lake Shore stock
originally pledged for the Lake Shore Collateral Bonds
was extinguished by merger of the Lake Shore into
NYC. The Michigan Central Collateral Bonds retained
a first lien on 168,143 shares of Michigan Central stock
owned by the Debtor. The R&I had a second lien on
this stock and a first lien on an additional 17,848 shares
of Michigan Central stock and on approximately 95
percent of the stock of the New York and Harlem.

| In determining the extent to which the several bond
issues in the 013-015 mortgage chain were secured by
retained assets for purposes of allocating Series A
Bonds, the Reorganization Plan and the Reorganiza-
tion Court followed conventional marshalling princi-
ples. Asset values in excess of those required to pro-
vide for a senior claim were marshalled down to the
lien next in line, and any surplus after satisfaction of
that lien was in turn marshalled down to the next level.

THE DECISION BELOW ON REHEARING

Following the decision of the court below, peti-
tioner and the trustee for the Lake Shore Collateral
bonds each filed petitions for rehearing and rehearing
en bane. The petitiors asserted that the decision that
the “‘retained’’ assets of the R&I mortgage should be
deemed to include the Park Avenue rents (the petition
asserted by $60 million, although the net amount is still
undetermined) should result in an increase in the value
of the ‘‘retained’’ assets subject to their senior mort-
gages on the same properties, and that therefore they

10

were entitled to ‘‘super-secured’’ status or better. The
petition was denied in a brief opinion (A124-A126), on
the ground that the claims were made for the first time
in the petitions for rehearing (A127-A128). A second
petition for rehearing filed by petitioner, asserting that
the court was in error in denying the first petition for
rehearing on the ground that the claims had not been
made earlier, was denied without opinion (A129).

REASONS FOR DENYING THE WRIT
I

Petitioner does not deny that, if the court below was
correct in concluding that the contentions made in its
petitior for rehearing had not been raised earlier, that
is an end to the matter. The trustee of the Lake Shore
Collateral bonds (the Manufacturers National Bank
of Detroit, which stands pari passu with petitioner in-
sofar as its relationship to the R&I mortgage is con-
cerned, conceded that it had not raised the issue pre-
sented in the petition for rehearing prior to its rehear-
ing petition (Pet. p. 12). Petitioner’s attempt to show
that it had done so is without substance, and certainly
does not rise to the level calling for the extraordinary
assertion of this Court’s power of supervision over the
Courts of Appeal pursuant to Rule 19(1)(b).

Petitioner relies in support of its contention that it
objected to the diversion of the Park Avenue rentals
on three brief excerpts culled from a 61-page brief and
a 35-page reply brief. The sole excerpt from its brief,
which is taken from the Statement of the case, not
from the argument, simply asserts that the Park Ave-
nue properties are valuable. The longer excerpt from
the reply brief argues a wholly different point—that

1]

the Park Avenue properties should be immune, in a
liquidation, from administration claims. The shorter
reply brief excerpt criticizes the Trustees’ analysis of
values on a hypothetical basis, and certainly does not
articulate an argument for increasing the amount
credited to its underlying security by the net amount
of the Park Avenue rentals. Even these isolated ex-
cerpts in almost 100 pages of briefs, while they refer
to the rentals from the Park Avenue properties, do
not in any way argue that the proper definition of
‘‘retained’’ properties should include the net amount of
such rentals—the argument which was successfully as-
serted in the court below, and had been asserted in the
Reorganization Court, by the t: .stee of the R&I mort-
gage in relation to the allocation of A Bonds. Indeed,
in response to the argument by the trustee of the R&I
mortgage, the Penn Central Trustees’ brief to the court
below noted, in a footnote on page 74:

“Although they hold prior liens, neither the trus-
tees nor any bondholders under the Gold Bonds
and the Consolidated Mortgage make a claim to
the rental income from the Park Avenue proper-
ties as a retained asset.”

The Consolidated Mortgage, as stated above (p. 8),
secures petitioner’s bond issue. Petitioner later filed a
35-page reply brief, which was described (p. 1) as a
“reply specifically to the brief of the Trustees [of
Penn Central],’’ and did not challenge the statement
in the footnote.

Petitioner makes much of its argument that the
court below urged parties to avoid duplicate argu-
ments, and that the ‘‘laboring oar on the rentals’’ was
carried by the trustee for the R&I mortgage and for the
Harlem dividends by the trustee for the Consolidated

12

Mortgage (Pet. p. 9). Yet, as the Court of Appeals
noted (A125), neither the excerpts quoted in the peti-
tion, nor any other portion of the brief or reply brief
filed by petitioner in the court below contains any
cross-reference to such arguments made by other
parties, nor any suggestion that such arguments of
others were being adopted by reference, although peti-
tioner expressly adopted by reference an argument of
the Detroit Bank on a wholly different issue (Reply
Brief, p. 27).

What seems apparent is that petitioner, following
the initial decision of the court below, recognized that
the decision might provide a new opportunity to se-
cure, as it now asks (Pet. p. 18) treatment as ‘‘super-
secured,”’ and that its general references to the rentals
and dividends in the course of arguing the benefit to
the estate from the use of Park Avenue rentals, or
challenging the marshalling of assets which was ap-
proved by both courts below in determining super-se-
cured status, might supply a basis for its contention.
Those general references, however, never came close
to specifying the contention that petitioner advanced
in its petition for rehearing.

The court below, as its several opinions reveal, was
thoroughly familiar with both the record and the va-
rieties of arguments that were advanced. Its conclu-
sion that petitioner’s new argument came too late was
correct.

I

In any event, the claim for preferred teatment of
the MC Collateral bondholders asserted in petitioner’s
request for rehearing is without merit.

ei ee eee ee eee

Po

pat PE

13

As noted above, the analysis of the security under-
lying each mortgage was not made to determine
whether the mortgage was fully seeured—that was as-
sumed—but solely for the limited purpose of deter-
mining the A Bond-B Bond allocation of the General
Mortgage Bond component of the securities distributed
to secured creditors. In making this analysis the Trus-
tees, the Securities and Exchange Commission (which
was asked by the Reorganization Court to review the
Plan) and the Reorganization Court itself considered
all retained assets, allocated them under established
principles of marshalling, and made the allocations ac-
cordingly. The MC Collateral Bonds were, on that anal-
ysis, fully secured by retained assets, and hence re-
eeived A Bonds exclusively. The decision of the court
below to give the R&I Mortgage credit for the net of
Park Avenue rentals and Harlem dividends, thereby
increasing the proportion of A Bonds which the R&I
bondholders received, thus could have no effect on the
A Bond alloeation to bonds represented by petitioner.

The issue which petitioner sought, for the first time
in its petition for rehearing, to raise by reason of this
change in the R&I Bond component is quite different
—whether the MC Collateral Bonds should be included
in the ‘‘super-secured’’ category. Only four bond is-
sues met the standards established by the Reorganiza-
tion Court and approved by the court below for that
limited category: either first liens on retained assets
valued at substantially more than twice the debt se-
cured, or first liens on marketable securities—stock
of the Pittsburgh & Lake Erie Railroad Company, a
profitable railroad not part of the Debtor’s system—
with a market value in excess of the debt secured.
Recognition of the former rested on the ample margin

14

of safety afforded by the excess value against poten-
tial erosion by administrative claims in a liquidation
context. Recognition of the latter rested on the rela-
tively lower exposure of the Pittsburgh & Lake Erie
stock to such claims. The court below found the stand-
ards sound (A55-A56; A76-A77).

Nothing in the decision of the court below permits
the MC Collateral Bonds to qualify under those stand-
ards. Unlike the Pittsburgh & Lake Erie stock, the
Michigan Central Railroad stock on which they had
their only first lien was an interest in a railroad which
is an integral part of the Penn Central system and
which was a Secondary Debtor, and can lay no claim
to relatively low exposure to administration claims in
a hypothetical liquidation. Indeed, the value of $25,195,-
000 attributed to the stock for Plan purposes is subject
not only to erosion by administration claims, but also,
in a hypothetical liquidation, to a priority claim of
approximately $100 million (A261) by the Penn Cen-
tral Trustees against the Michigan Central—a claim
compromised out under the Plan—which would reduce
to zero value the only property on which the MC Col-
lateral Bonds had a first lien.

Moreover, petitioner conveniently ignores that part
of the opinion of the court below which adversely af-
fects the value of its collateral. Its petition (p. 5) as-
cribes a value of $48.2 million to ‘‘certain property
subject to the Harlem lease.’’ The decision below has
a substantial impact on that figure, which was hotly
disputed in the Reorganization Court. The correct
amount depends on an allocation of values between the
leasehold interest of the lessee and the fee interest of
the lessor. The Reorganization Court found it unneces-
sary to resolve this issue in the context of General

TTC TREE

15

Mortgage Bond allocation, since what was added to the
security for senior liens would simply fiow down to the
R&I mortgage as the more junior lien (see A270-
A-271). However, the Court of Appeals holding that
the R&I trustee, as pledgee of the Harlem stock, is en-
titled to credit for $7.1 million of dividend rentals ac-
crued during the seven and one-half years of reorga-
nization, almost $950,000 a year, indicates a reduction
in value of the leasehold not only by the $7.1 million
credit but by the present value of the additional rental
payments during the term of the lease. Possible addi-
tional reductions are noted in the Reorganization
Court’s opinion (A272).

Essentially, petitioner seeks to meld two entirely
separate concepts used by the courts below—one deal-
ing with the proper allocation of A Bonds, and*the
other with super-secured status. That the court below
gave credit in allocating A Bonds to an intangible—
Park Avenue rentals which had long since been used
in the continuing operation of the estate—by deeming
them to be a ‘‘retained asset’’ had no relevance to a
wholly separate matter—whether a bond issue was
super-secured. The two concepts had different stand-
ards and different purposes. They do not meld.

16

CONCLUSION

The issues raised by the petition for certiorari are
unique to the Penn Central Plan of Reorganization,
which itself is unique in the annals of now-repealed
Section 77 of the Bankruptey Act (P.L. 95-598, Nov.
6, 1978) and cannot on any basis be considered as of
general importance. The court below correctly declined
to consider what it found to be a new issue raised by
petitioner for the first time on rehearing, and in any
event the issue lacked merit. The petition for certiorari
should be denied.

Respectfully submitted,

CuarLes A. Horsky

W. Crossy Roper, JR.
888 - 16th Street, N.W.
Washington, D.C. 20006

JAMES E. Howarp
1700 Market Street
Philadelphia, Pa. 19103
Of Counsel:

Covincton & BurLING
888 - 16th Street, N.W.
Washington, D.C. 20006

June 1979

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385006_0238%3A3. Public record. Not legal advice.