Opposition Brief — Consolidated Rail Corp. v. Erie Lackawanna, Inc., 107 S. Ct. 2463 (1987) (No. 86-1612)

No. 86-1612

~Hecsw ee

IN THE

Supreme Court, US.

FILED

May 6 1987

* POSEPH F. SPANIOL,

Supreme Court of the United

October Term, 1986

CONSOLIDATED RAIL CORPORATION,

Petitioner,

ws

ERIE LACKAWANNA INC.,,

JOHN HENNING, and VICTOR LaSCALA,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SIXTH CIRCUIT

BRIEF IN OPPOSITION TO PETITION FOR WRIT

OF CERTIORARI

HARRY G. SILLECK, JR.

HOWARD W. GOLDSTEIN*

JAMES NISS

JAMES B. BLANEY

MUDGE ROSE GUTHRIE ALEXANDER

& FERDON

180 Maiden Lane

New York, New York 10038

(212) 510-7000

Counsel for Respondent

Erie Lackawanna Inc.

* Counsel of Record

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COUNTER-STATEMENT OF

THE QUESTION PRESENTED

Whether the district court properly barred claims

first asserted after the termination of a former railroad’s bank-

rupitcy proceeding, in respect of which Congress in the Rail

Act had granted the court broad discretion to liquidate the

assets remaining to the bankrupt railroad after the mandatory

conveyance of its rail assets to Conrail, where the district court

effected the bankrupt’s liquidation and the distribution of its

remaining assets to allowed creditors, at 52¢ per dollar of their

allowed claims, through the vehicle of a liquidating

corporation?

TABLE OF CONTENTS

Page

COUNTER-STATEMENT OF THE QUESTION

PTO spsinbstitiniacgbadiainleicieaincdeuiiadiianammniieds i

Ce Se PI > piidesinsalarssaenieeithicnassssneiitinommna ill

COUNTER-STATEMENT OF THE CASE) ............0.:ccc000 2

A. TRE scenester 3

BT ee icaitdinedintpctectcienineeees 7

REASONS FOR DENYING THE PETITION ................... 9

A. The Sixth Circuit Correctly Interpreted

Ce FUE FE section 10

B. The Decision Below Does Not Conflict

with Decisions of the Eighth and Ninth

COPE — ccerxinnssentiandcadesenapanaadeeiebaeaaleaicantedinnaienees 15

C. The “Absolute Priority Rule” Has

Nothing to Do with This Case ............ceeeeeeeeees 18

CRPPUGARTNEEES §—-_snsacssundieninonscnbicicaranaeaalnaadiammnmmmaiaeiae 19

APPENDIX

Order No. 1152 —- Instructions With Respect

To Investment Of The Valuation Case

TIE | sncciinecesniisnasnanipiiiadiaan niall oe A-224

Petition Of The Debtor’s Trustees and

Reorganization Managers For Approval Of

Documents Implementing Plan Of

Reorganization [Excerpted] .....cccsccccsscsccossscsecssceee A-232

Erie Lackawanna Inc. — Financial Report

December 1962 FERCOQORE] oncccccccsssssnssocesnscsasnscoase A-234

=—ji—

TABLE OF AUTHORITIES

CASES:

Bankers Life & Casualty Co. v. Kirtley, 334 F.2d

cs susieniinsbensinsnsndieasaaerivnreoasse

In re Pigott, 684 F.2d 239 (3d Cir. 1982)...

In re Sullivan, 36 Bankr. 771 (Bankr. E.D.N.Y.

I acadlaipieidosiabhnansusooes

In re Weis Securities, 411 F. Supp. 194 (S.D.N.Y.

1975), affd per curiam, 538 F.2d 317 (2d Cir.

a serials dahiabissncignsssbbbacentieensensies

Kelce v. U.S. Financial Inc., 648 F.2d 515 (9th Cir.

1980), cert. denied, 451 U.S. 970 (1981)...............

Northern Pacific R.R. v. Boyd, 228 U.S. 482 (1913)

Schweitzer v. Consolidated Rail Corp., 758 F.2d 936

(3d Cir.), cert. denied, 106 S. Ct. 183 (1985)......

Tarbell v. Crex Carpet Co., 90 F.2d 683 (8th Cir.

is cc ac isleatncemistaseannadwinnavensahesdsnons

—ill-

Page

15,16

1]

1]

1]

1]

STATUTES: Page

Bankruptcy Act of 1898, 30 Stat. 544, as amended

By ee ts 2 oe | eee een aoere 11, 18

Drag CE TE tae OF FID acanciiindeniciccaniisninsen Passim

Regional Rail Reorganization Act of 1973, as

amended, 45 U.S.C. §§ 701-797

§ 601(b)(4), 45 U.S.C. § 791(b)(4) oe. a,

15

SD PR, SS EEA. BF icicicenicicccicnssinscncens 13

Bankruptcy Procedure Rule 8—404(b) (superseded) 7

-jv—

No. 86-1612

IN THE

Supreme Court of the United States

OCTOBER TERM, 1986

CONSOLIDATED RAIL CORPORATION,

Petitioner,

V.

ERIE LACKAWANNA INC.,

JOHN HENNING, and VICTOR LASCALA,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES

COURT OF APPEALS FOR THE SIXTH CIRCUIT

BRIEF IN OPPOSITION TO PETITION FOR

WRIT OF CERTIORARI

Respondent Erie Lackawanna Inc. (‘‘Erie’’)'

respectfully submits this brief in opposition to the petition for

1. Pursuant to Rule 28.1 of the Court, Erie provides the following

listing: (1) parent companies: none; (2) subsidiaries (other than wholly-

owned subsidiaries): Niagara Junction Railway Co. (minority interest).

writ of certiorari (“Pet.”) of Consolidated Rail Corporation

(“Conrail”).

COUNTER-STATEMENT OF

THE CASE

This case turns on the application of two virtually

obsolete statutes — the Regional Rail Reorganization Act of

1973 (the “Rail Act”) and Section 77 of the now repealed

Bankruptcy Act of 1898? — to the unique facts of one

former railroad’s bankruptcy proceeding under those statutes.

The judgment which petitioner asks the Court to revisit was

reached unanimously by all four judges who considered the

merits of the question.’ Not a single judge of the Sixth Circuit

requested a vote on Conrail’s petition for rehearing en banc

(A-39).

Petitioner’s Statement of the Case suggests that the

court of appeals established a major precedent for pending and

future reorganization proceedings. Yet a balanced summary

of the proceedings shows that the opinion below can have no

such impact. Notwithstanding petitioner’s extravagant asser-

tion that the court of appeals fashioned a means by which cor-

porations can misuse generally applicable federal bankruptcy

Statutes, it is clear that the decision below was based on provi-

sions of the Rail Act and Section 77 which do not apply to

reorganizations in general and which have no further applica-

bility even to railroad reorganizations. The only interest at

stake on this petition for writ of certiorari is Conrail’s claim to

2. The Bankruptcy Act of 1898 was superseded on October 1, 1979

by the Bankruptcy Reform Act of 1978.

3. The order of the district court affirmed below had been entered by

the Hon. Robert B. Krupansky, United States Circuit Judge for the Sixth

Circuit, sitting by designation on the district court, where he had presided

over the bankruptcy proceeding as a district judge beginning in 1972. Judge

Krupansky’s order was affirmed by a unanimous panel of the court of

appeals.

indemnity from the former creditors of the defunct Erie

Lackawanna Railway Company and their assignees — a claim

that was correctly resolved against petitioner after full and fair

hearings in the two lower courts.

A. Background

In 1972, the Erie Lackawanna Railway Company

(hereinafter referred to as “the Debtor” to distinguish it from

respondent Erie) filed for relief under Section 77 of the

Bankruptcy Act of 1898, a special railroad reorganization stat-

ute (formerly codified at 11 U.S.C. § 205) which, for reasons

of national transportation policy, did not provide for liquida-

tion of a debtor even if the debtor lacked sufficient earning

power to continue its rail business as a reorganized carrier

(A-6, A-9). Most of the railroads in the northeastern United

States were in similar straits, and Congress recognized that the

mechanism of Section 77 could not cope with so massive a

problem. It therefore enacted the Regional Rail

Reorganization Act of 1973 (“the Rail Act’), 45 U.S.C. §§

701-797. The Rail Act created Conrail, required the bankrupt

northeastern railroads to transfer their rai] businesses to

Conrail, and thereby effected a reorganization of those busi-

nesses entirely outside the framework of the Bankruptcy Act

(A-2, A-9).

The mandatory conveyance of rail assets to Conrail

which occurred on March 31, 1976 left the bankrupt railroad

companies with the right to compensation from the United

States for the property taken by Conrail, with miscellaneous

assets, and with massive debts. Their estates were still in the

custody of various district courts because of the pending

Section 77 proceedings, and Section 601(b)(4) of the Rail

Act (45 U.S.C. § 791(b)(4)) directed each court

to reorganize or liquidate such railroad in reor-

ganization pursuant to Section 77 on such terms

as the court deems just and reasonable, or

pursuant to any other provisions of the

ane

—————_

Bankruptcy Act, if the court finds that such

action would be in the best interests of such

estate.

The Rail Act thus explicitly empowered the district court to

order liquidation of a debtor under Section 77, even though

that Section did not contemplate liquidation and provided no

rules or procedures for liquidation. In view of this statutory

void, Congress vested broad discretion in the district court to

liquidate the remaining assets of the former railroads “‘on such

terms as the court deems just and reasonable.”

In the instant case, the Debtor’s liabilities far

exceeded its assets, even after it had received more than $300

million (including interest) in compensation from the United

States for the assets conveyed to Conrail, and the Debtor had

retained no income—producing assets around which to mold an

operating company.‘ Consequently, in 1982 the district court

found the Debtor’s stock to be worthless (A-—48, A-51). It

ordered that the sole stockholder receive nothing, that the cash

assets be used to satisfy claims of secured and other priority

creditors, and that the then remaining non-cash assets be liq-

uidated over a six-year period for distribution of the proceeds

(together with any remaining cash) to general creditors. Such

distribution was effected by the issuance of the stock of what

Judge Krupansky called the “liquidating corporation,” i.e.,

respondent Erie, provided for in what was denominated as the

Debtor’s plan of reorganization (the “Plan”) (A—40). All pro-

ceeds realized from the liquidation and other cash earned from

investment thereof were ordered to be placed in a Master

4. Petitioner incorrectly states that “[t)he Reorganized Company

has exploited the value of the [Debtor's] net operating loss carry

forwards. . . .” (Pet. at 13). On the contrary, the Debtor’s losses referred

to by petitioner were insufficient to offset the taxable interest income

received by the Debtor prior te consummation of the plan for the assets con-

veyed to Conrail (A-90 to A-91).

Trust to assure payment of the priority claims (A-62 to

A-63).°

Upon consummation of the Plan on November 30,

1982, the district court entered a Final Decree barring after—

asserted claims. The decree permanently enjoined all persons

from instituting any lawsuit against the liquidating corporation

“based upon any right, claim or interest of any kind or nature

whatsoever . . . against the Debtor... .“ (A-129).

Contrary to petitioner’s insinuations that Erie is an

ongoing, profitable business (e.g., Pet. at 11), Erie’s sole

authorized activity is the disposition of the remaining assets for

the benefit of general creditors and their assignees, the invest-

ment of the Master Trust moneys pending distribution, and the

settlement of tax liabilities and other claims asserted before

consummation of the Plan but not then resolved (A-48 to

A-49). In other words, petitioner seeks to enforce indemnity

claims first asserted after the bar date, November 30, 1982,

against assets already allocated by the court to carry out the

satisfaction of allowed creditor claims at a loss.®

Under the broad discretion conferred upon the dis-

trict court by the Rail Act, Judge Krupansky after

March 1976 might have converted the Section 77 proceeding

into a statutory liquidation under the Bankruptcy. Act. But the

5. Under the terms of the Master Trust, the investment of all Master

Trust moneys is restricted to risk-free or low-risk securities, and, except for

the payment of priority claims and taxes and for working capital required to

effect the liquidation, no assets may be withdrawn prior to the payment of

all priority claims without approval of the district court (A-62 to A-63;

A-224 to A-228; A-232 to A-233).

6. The circumstances of the Debtor in this case, therefore, differed

substantially from those (for example) of the Reading Company and the

Central Railroad of New Jersey — the ex-railroads involved in Schweitzer

v. Consolidated Rail Corp., 758 F.2d 936 (3d Cir.), cert. denied, 106

S. Ct. 183 (1985). Neither of the reorganization plans of those railroads

was a liquidating plan.

mechanism he chose instead — a liquidating corporation

combined with a Master Trust — had compelling administra-

tive advantages. Statutory liquidation would have subjected to

the district court’s supervision the sale of hundreds of pieces of

remaining property, primarily unimproved real estate. This

cumbersome procedure would have increased the administra-

tive cost of liquidation and burdened the district court for no

good reason, since the court’s role as referee among the con-

flicting interests was no longer needed: the stockholder’s inter-

est had been completely extinguished, priority claims had all

been provided for with cash pursuant to the liquidating plan,

and the remaining creditors had agreed to be treated as a

single class for pro rata distribution of the deficient residue.’

Another disadvantage of straight bankruptcy was the burden

upon trade creditors who had no markziable securities evidenc-

ing their claims and would have to wait many years for pro

rata distribution.

Both these problems were solved by the court’s use of

a liquidating corporation. This vehicle eliminated the need for

court orders to authorize sales of remaining assets and permit-

ted issuance of marketable securities — the new Erie capital

stock — to unsecured creditors. The new capital stock was

issued at the rate of one share per $100 of allowed claim. Its

book value, however, was only $52 per share, and its market

value upon issuance was substantially below book value (A-3,

A-67, A-234).

The Plan approved by the district court mandated the

sale of a// the Debtor’s assets and mandated the transfer of the

proceeds of sale to the Master Trust for the benefit of allowed

7. The liquidating plan of reorganization made possible the approval

under Section 77(¢) (A-199 to A-200) of a large number of compromises of

position among the various types of creditors as to priorities and amounts of

valid claim without the necessity of either obtaining 100% approval by such

creditors or litigating the issues to the bitter end that “straight liquidation”

would have entailed.

priority creditors. As required by former Bankruptcy

Rule 8-404(b), the Plan provided a five-year waiting period

during which creditors were permitted to exchange debt certif-

icates and executed satisfactions of claims for the considera-

tion provided in the Plan. Approximately one year thereafter,

dissolution of the liquidating corporation is required pursuant

to both the Plan and Erie’s charter, which state that Erie is “to

be completely liquidated.” The only way that dissolution can

be avoided is by a charter amendment approved, after all

claims have been paid or provided for, by a vote of not less

than 75% of all stock outstanding, coupled with an appraisal

right and payout to any dissenting shareholder who demands it

(A-68 to A-69).°

B. The Proceedings Below

Two years after the Final Decree, several former

employees of the Debtor brought suit against petitioner

Conrail and in some cases against Conrail and the liquidating

corporation, respondent- Erie, for alleged personal injuries.

Petitioner Conrail brought suit against Erie claiming indem-

nity for Conrail’s liability on such personal injury claims. For

the purpose of this case, it was assumed that these injuries did

not become manifest until after consummation of the Plan, but

were caused (at least in part) by on-the-job exposure to asbes-

tos or other pathogens before 1976, while the Debtor was an

operating railroad.’

8. Early in 1984, the Erie Board of Directors resolved to seek a vote

extending Erie’s life after final determination of Erie’s tax liabilities and

assuming no intervening material adverse events. This resolution was

rescinded in May 1986 for reasons unrelated to this case.

9. One of the indemnity claims does not involve personal injury but

Conrail’s liability to the State of New York for a petroleum leak on property

conveyed to Conrail by the Debtor. Moreover, in at least one of the personal

injury cases involving a third—party claim by Conrail against Erie, Conrail

was sued prior to the consummation date but did not commence its

third—party claim until after that date.

ss.

EE

In response to these claims, the liquidating corpora-

tion applied to Judge Krupansky for an order declaring that

such suits were barred by the injunctive provisions of the Final

Decree and for an injunction requiring their dismissal. Judge

Krupansky granted the relief requested, holding, inter alia,

that the Debtor-tortfeasor no longer exists and that the liqui-

dating corporation is not the Debtor’s successor — indeed, is

not an ongoing business at all, but merely a vehicle for liquida-

tion (A-10, A-32).”

Conrail and two personal injury plaintiffs, respon-

dents Henning and LaScala, appealed to the Sixth Circuit. On

that appeal, a unanimous panel of the Sixth Circuit affirmed

Judge Krupansky’s order. It held that the liquidating nature

of the Debtor’s bankruptcy proceeding was dispositive and that

the Rail Act gave the district court sufficient flexibility to bar

after-asserted claims in a Rail Act-—Section 77

reorganization—liquidation to the same extent as such claims

would be barred in statutory liquidation (A-—7 and n. 4).

Since not even non-discharged claims can be enforced in

“straight bankruptcy” so as to diminish the pro rata share in

the estate of creditors whose claims — like those of the credi-

tors who became the shareholders in the liquidating

corporation — were filed before the bar date and allowed by

the court, the court of appeals did not reach the question of

discharge vel non presented in Schweitzer v. Consolidated

Rail Corp., 758 F.2d 936 (3d Cir.), cert. denied, 106 S.Ct. 183

(1985) (A-2 n. 1). Conrail’s petition for rehearing en banc

was denied.

10. Judge Krupansky also went on to analyze at length — and

reject — the petitioner's argument below that its claims were not discharged

for the reasons stated by the Third Circuit in Schweitzer. Judge Krupansky

declined to follow Schweitzer.

REASONS FOR DENYING

THE PETITION

In order to conjure up an issue worthy of certiorari,

petitioner first distorts the record of the Debtor’s bankruptcy

proceeding and the opinion of the court of appeals and then

asserts that the Sixth Circuit has devised a new form of reor-

ganization that is both unauthorized by federal bankruptcy

Statutes and in conflict with decisions in other circuits.

Nothing could be further from the truth. The judge who pre-

sided for ten years over the Debtor’s Rail Act-Section 77 pro-

ceeding understood the liquidating nature of that proceeding.

Based on that understanding, he explicitly found that respon-

dent Erie is not an ongoing business and is not the Debtor’s

successor. In holding that petitioner cannot pursue its: claims

against respondent Erie as if it were the Debtor’s successor,

the court of appeals did not “concoct” anything “retroactively”

(Pet. at 7). Rather, it correctly applied the Rai] Act and

Section 77 to the facts found by the district court and fully

supported by the record.

The Rail Act was enacted to supplement Section 77

of the Bankruptcy Act and to establish a special fonm of reor-

ganization of the railroad businesses of only a designated

handful of bankrupt railroads at a particular time (1973) and

place (the northeastern United States). Section 77 has no pro-

spective applicability, and the Rail Act’s narrow objective has

now been accomplished. This case is doubtless one of the last

that will arise under any provision of those acts, and the opin-

ion of the court of appeals is of no significance for bankruptcy

proceedings in general.

Moreover, the decision below does not conflict with

the decisions of the Eighth and Ninth Circuits cited by peti-

tioner; nor can it so conflict in view of the fact that neither of

those cases was governed by the statutes whose construction

controls here. Nor is the “absolute priority rule” in any way

implicated in the dispute between Conrail and Erie. All that is

at stake on the petition is whether it was “‘just and reasonable”

sien

for Conrail to be barred from diluting the already deficient

distribution to allowed creditors of the defunct Erie

Lackawanna Railway Company by enforcing new indemnity

claims against a fund previously allocated by the district

court. The courts below have resolved this dispute between

Conrail and Erie; since nothing more is at stake, the petition

should be denied.

A. The Sixth Circuit Correctly Interpreted

the Rail Act

y After ten years of bankruptcy proceedings, the dis-

trict court determined that allowed claims against the defunct

Erie railroad far exceeded its assets; that the shareholder’s

equity was worthless and would be wiped out; that all business

operations of the Debtor had permanently ceased; and that the

Debtor’s property should be liquidated for the satisfaction of

priority claims and distribution of the residue to allowed gen-

eral creditors at 52¢ per dollar of allowed claim.

' This case arises solely because of the administrative

mechanism ¢hosen by the district court to carry out these

determinations. Petitioner acknowledged below and acknowl-

edges here (Pet. at 10) that the court had the power under the

Rail Act to accomplish the result it deemed “just and

reasonable”’ by explicitly converting the Section 77 proceeding

into a statutory liquidation.’ If it had done so, there is no

question that petitioner’s claims would be barred (see opinion

at A-5, A-7). The rule in statutory liquidation is that only

claims filed prior to the bar date can participate in pro rata

distribution of the bankrupt’s estate; claims “not filed within

the [prescribed] time” may be paid only out of the surplus —

11. Unlike Chapter X, relied on by petitioner, Section 77 itself did

not permit such conversion; the court’s power to convert is derived solely

from the broad discretion granted by Section 601(b)(4) of the Rail Act, as

petitioner acknowledges.

=

ne

if any — remaining after “all claims which have been duly

allowed have been paid in full.” Bankruptcy Act § 57n,

former 11 U.S.C. § 93(n). The bar date in statutory liquida-

tion is absolute, and no justification or excuse permits a late

claim to dilute the discounted pro rata share of allowed

creditors. See, e.g., In re Pigott, 684 F.2d 239, 245 (3d

Cir. 1982); Tarbell v. Crex Carpet Co., 90 F.2d 683 (8th

Cir. 1937); In re Sullivan, 36 Bankr. 771

(Bankr. E.D.N.Y. 1984); In re Weis Securities, Inc., 411

F. Supp. 194 (S.D.N.Y. 1975), affd per curiam, 538 F.2d

317 (2d Cir. 1976).”

Here, there was no surplus; the Debtor’s estate was

insufficient to satisfy the timely filed creditor claims in their

allowed amount. The absence of any surplus over such

creditors’ claims was so clear in the Debtor’s case that the

Debtor’s sole shareholder never sought at any time during the

entire proceeding to participate in the estate. General credi-

tors received value of only 52¢ per dollar of the allowed

amount of their claims, and thus there was nothing left for

post-consummation claims.”

12. Conrail is thus mistaken when, citing provisions of Section 77, it

says that the former employees here involved would have had priority in a

“true liquidation” over the claims of the unsecured creditors (Pet. at 13). If

the proceeding had been converted to a statutory liquidation, Section 57n of

the Bankruptcy Act would have governed. If Judge Krupansky had con-

verted Erie’s proceedings to a straight liquidation following the conveyance

of the rail business of Erie in 1976, the bar dates provided in Section 57n

would have expired far earlier than the bar date of November 30, 1982

established in the court’s decree.

13. Much of the increase in book value of the stock of Erie since con-

summation of the Plan in 1982, to which Conrail refers (Pet. at 13), is due

to the interest income earned since 1982 on the moneys in the Master Trust

ultimately distributable to the Debtor's general creditors (now the Erie

stockholders). The general creditors have not yet received any cash on

account of the stock issued under the Plan.

=e

a

Petitioner’s argument amounts to a claim that Judge

Krupansky erred in barring its claims because the mechanism

he had chosen for liquidation was a “liquidating corporation”

created by a plan adopted under Section 77 rather than a stat-

utory trustee. To bolster this argument, petitioner inaccu-

rately states that the Rail Act limited the district court to only

two choices: “to reorganize under Section 77 or to liquidate

pursuant to some other section of the Bankruptcy Act”

(Pet. at 10). However, the Rail Act did not put the district

court in the strait jacket suggested by petitioners. Rather, it

explicitly authorized the district court, as one of its options, to

liquidate under Section 77. Recognizing that Section 77 did

not itself provide a mechanism for liquidating a railroad, it

then granted the court the discretion to “liquidate such rail-

road in reorganization pursuant to Section 77 on such terms as

the court deems just and reasonable ... .”

To further bolster its argument, petitioner asserts

that the courts below allowed the Debtor to “enjoy the

benefits” of reorganization, “‘continue in operation in

perpetuity,” reap “equity-type rewards [without] equity—type

risks,’ operate “as a profitable corporation,” and “sail unen-

cumbered into the twenty-first century.” (Pet. at 7, 11, 13).

On the contrary, the courts below premised their decisions on

the fact that the Debtor’s equity and business had ceased to

exist altogether, and that respondent is nothing more than a

vehicle for liquidating the business property and holding the

proceeds in banks or low-risk debt instruments until they are

distributed to the allowed creditors and their assignees, where-

upon Erie will be “completely liquidated” as required by the

Plan.“

14. Petitioner seeks to avoid the uniqueness of these facts by mis-

leadingly suggesting that the Special Court established under the Rail Act

has recently found “that the Reorganized Company was in the same position

as several other former railroads that had conveyed rail assets to Conrail and

reorganized as non-railroads.” (Pet. at 11-12, n. 3). However, the Special

ott.

While petitioner relies heavily on the provision of the

Plan which allows the liquidating corporation to continue in

existence (after all prior claims have been provided for) upon a

vote of at least 75% of the shares outstanding, the court of

appeals correctly noted (A-7 to A-8) that the unlikely event of

such a supermajority vote does not change the economic reality

that the Debtor’s business has completely ceased to exist.

After completion of disposition of all the property, the

Debtor’s assets will have been reduced entirely to cash, which

75% of its former general creditors might theoretically pool

and reinvest in a new and entirely unrelated common enter-

prise within the corporate shell of respondent.’* Any future

decision of Erie’s creditor-stockholders to continue to pool

their distributive shares would not alter the fact that, under

the circumstances of this case, the distribution to those credi-

tors constituted a liquidation of the Debtor which insulated the

distributees and their assignees from post—liquidation claims

based on pre-1976 operations of the Debtor. As the court of

appeals correctly stated, “‘[i]f a straight liquidation was

ordered, nothing would prohibit the unsecured creditors from

embarking on a new business enterprise with the funds they

received, without the worry of a lawsuit.” (A-7).

The form of liquidation chosen by the district court

was not crafted to enable Erie to “sail into the twenty-first

century” while “operating a profitable corporation.” Its sole

Court opinion cited by petitioners had nothing to do with Section 601(b)(4)

of the Rail Act. Rather, the Special Court merely held that Section 709(b)

of the Rail Act neither provided an explicit basis for recovery against

Conrail by former employees of the bankrupt railroads nor insulated Conrail

from liability under tort law theories of successor liability. In reaching that

conclusion, the Special Court merely noted that, like the other railroads

before the court, the Debtor’s Section 77 proceeding had been terminated.

15. That such a vote would be equivalent to a voluntary new invest-

ment of cash by each ex—creditor is made clear by the absolute right of any

shareholder dissenting from the vote to withdraw his share of the cash (A-68

to A-69).

=

purpose was the efficient administration of the estate and the

maximization of net proceeds available for distribution to

creditors. Statutory liquidation would have required wasteful

and cumbersome court proceedings to approve the sale of the

Debtor’s miscellaneous pieces of property, and would have

deprived those trade creditors who needed ready cash of an

efficient market in which to sell assignments of their interest in

the liquidation.”*

Petitioner’s contention (Pet. at 13-14) that on the

basis of the decision below “any corporation in bankruptcy”

will be encouraged to structure its reorganization to include a

“liquidation option” and thus cut-off post-consummation

claims is ridiculous. The Rail Act does not apply to “any cor-

poration in bankruptcy” and does not even apply to future rail-

road reorganizations. Moreover, the decision of the court of

appeals below was not based on any “liquidation option;” on

the contrary, it was based on the mandated cessation of the

Debtor’s business and the requirements of the Plan that a//

assets be liquidated and reduced to cash and that all proceeds

of the liquidation be placed in trust subject to severe

restrictions. What corporation able to effect a true reorganiza-

tion of any part of its business would ever prefer such a sui-

cidal procedure? Given that in the great majority of corporate

reorganizations there are assets sufficient to permit participa-

tion by the stockholders in the reorganized business, the

possible use of this case, where no surplus for stockholders

16. Petitioner argued below that its claims were enforceable against

Erie because the liquidating corporation was established -by charter amend-

ment rather than dissolution and reincorporation. This argument that the

district court was required to follow a particular form in order to achieve the

result it “deemed just and reasonable” is inconsistent with the Rail Act and

was properly rejected below. Reincorporation would have required the bur-

densome and expensive conveyancing and recording in the name of the new

corporation of hundreds of parcels of real property located in several states,

even though the liquidating corporation was to sell the real estate as soon as

practicable after consummation.

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a NT em

existed, as a “persuasive precedent”’ in barring post-

consummation claims in other corporate bankruptcy proceed-

ings, even by analogy, is highly remote indeed.

Compelling considerations of administrative effi-

ciency led the district court to conclude that a hybrid form of

liquidation was “in the best interests of such estate.” The court

of appeals correctly held that Section 601(b)(4) of the Rail

Act gave the district court sufficient flexibility to do so (A-7

and n. 4). As the court of appeals held, the district court’s

orders making provision for priority creditors to be paid in

cash and directing the distribution to the general creditors of

Erie’s stock constituted the liquidation of the Debtor under a

plan with terms which were “just and reasonable.” For the

foregoing reasons, the writ of certiorari should be denied.

B. The Decision Below Does Not Conflict

with Decisions of the Eighth and Ninth

Circuits

Petitioner asserts that the opinion of the court of

appeals is in direct conflict with the decisions of the Eighth

and Ninth Circuits in Bankers Life & Casualty Co. v. Kirtley,

338 F.2d 1006 (8th Cir. 1964) and Kelce v. U.S. Financial

Inc., 648 F.2d 515 (9th Cir. 1980), cert denied, 451 U.S. 970

(1981). However, the facts of those cases do not remotely

resemble the facts below, and the holdings of the Eighth and

Ninth Circuits do not in any way address the issue before the

court of appeals below. The opinion of the court of appeals, a

correct application of the Rail Act to unique facts, simply does

not conflict with the decision of any other federal court.

In Bankers Life & Casualty Co. v. Kirtley, a

Chapter X proceeding, the district court had ordered equita-

ble subordination of the interest of two controlling stockholders

to that of the debtor’s public stockholders. The controlling

stockholders appealed, claiming that the district court lacked

the power of equitable subordination because the

reorganization plan called not for rehabilitation but for

liquidation of the debior’s assets. Arguing that liquidation is

not concerned with equities among stockholders after the

rights of creditors.are satisfied, the controlling stockholders

claimed it was reversible error for the district court to exercise

equitable powers expressly granted by Chapter X in a

Chapter X proceeding which contemplated liquidation. The

Eighth Circuit rejected this argument and affirmed. It noted

that Chapter X rules specifically permitted the sale of all of

the debtor’s assets (i.e., a liquidation) and modification of the

rights of stockholders. The court held that it was not error for

the district court to apply these specific Chapter X rules in a

Chapter X proceeding.”

In Kelce v. U.S. Financial Inc., a defrauded share-

holder sought reversal of an order subordinating his fraud

claim to those of general creditors. The Ninth Circuit

affirmed, holding that it would violate the absolute priority

rule to allow a stockholder to share in the debtor’s estate on

equal footing with unsatisfied creditors. Citing Bankers Life,

the Ninth Circuit in dictum in a footnote rejected the

appellant’s attempt to distinguish the rationale given by com-

mentators for subordinating a shareholder’s fraud claim to

claims of creditors. Appellant had urged that the

commentators’ arguments did not apply to a Chapter X reor-

ganization in which liquidation was the ultimate goal, and the

Ninth Circuit disagreed.

Even the most cursory analysis makes clear that the

opinion of the court of appeals below does not conflict in any

way, let alone directly, with these decisions. Both Bankers

Life and Kelce involved the formulation of reorganization

plans and questions with regard to the application of Chapter

17. In holding that it was not error for the district court to apply

Chapter X rules in a Chapter X proceeding, the court in Bankers Life did

not address whether it would have been improper for the district court to

fashion a plan utilizing other bankruptcy rules.

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X rules to claims asserted during the course of Chapter X

reorganization proceedings. Neither case involved the Rail

Act’s broad grant of discretion to the district court to liquidate

the debtor “pursuant to Section 77 on such terms as the court

deems just and reasonable.” More importantly, those cases are

concerned only with rules on issues concerning priority of

claims that apply in formulating a plan; neither case addressed

the issue here involved, i.e., whether claims filed after consum-

mation of a liquidating plan are barred as against creditors by

reason of the liquidating nature of the plan.

Petitioner also asserts that the court of appeals below

completely misread the effect of the liquidation of a corporate

debtor and ignored “fundamental bankruptcy law” in barring

petitioner’s claims (Pet. at 12). This argument is astonishing

given petitioner’s concession below that claims filed after the

bar date in a straight bankruptcy liquidation could not be

enforced against the interest of allowed creditors. The fact

cited by petitioner that “liquidation would not have discharged

{the claimants’] claims” (Pet. at 12) simply is irrelevant and

was properly not addressed by the court of appeals. Not even

non—discharged late claims can be enforced in straight bank-

ruptcy so as to diminish the pro rata share in the estate of

creditors whose claims were filed before the bar date and

allowed by the court. A non-discharged claim which is filed

after the bar date can be satisfied only out of the surplus, if

any, available for the stockholders. Here, there was no

surplus.

In citing to Kelce, petitioner underscores the impor-

tance to bankruptcy proceedings of fulfilling just expectations

(Pet. at 10). Here, the just expectations of participants in the

Debtor’s bankruptcy proceeding would be thwarted if

petitioner’s position prevailed. Contrary to the assertions of

petitioner, the Debtor’s creditors did not bargain for equity—

type rewards in exchange for equity-type risks (Pet. at 11).

As the court of appeals correctly recognized (A-6 to A-7), it

is factually incorrect to speak of the creditors as accepting the

=,

|

risk of Erie’s “‘business.”’ Erie has no business; the Plan

extinguished all equity interest in the Debtor and provided that

the only activities of Erie would be those required for its

liquidation. In such circumstances, permitting petitioners now

to enforce their claims would improperly dilute the allowed

claims of the Debtor’s creditors and would frustrate the

creditors’ legitimate expectations that the compromises made

in the liquidation plan would be accorded finality.

C. The “Absolute Priority Rule” Has

Nothing to Do with This Case

Petitioner argues that the decision of the court of

appeals “conflicts with both the congressionally mandated

claim priority scheme and the absolute priority rule pro-

nounced by this Court.” (Pet. at 14). For two reasons this

argument does not warrant review by this Court.

First, while personal injury claims of a railroad

debtor’s employees were entitled to priority under Section 77,

petitioner is not a former employee of the Debtor and is not

asserting a personal injury claim. Rather, petitioner Conrail is

a billion-dollar public company asserting an indemnification

cla’ 1 against the liquidating corporation while at the same

time denying its liability to the Debtor’s former employees.

Most of the individual former employees of the Debtor whose

claims were the subject of the proceedings below did not

appeal the district court’s decision barring their claims as

against Erie, and the two individuals who pursued their

appeals in the Sixth Circuit, respondents Henning and

LaScala, have not petitioned for certiorari.

Second, the decision below clearly does not violate

either the Section 77 priority granted employee personal

injury claims or the absolute priority rule. As petitioner con-

ceded below, claims filed after the bar date in a straight bank-

ruptcy liquidation could not be enforced against the interests

of allowed creditors. See Section 57n of the Bankruptcy Act

of 1898. Even as to priority claims, there comes a cut-off time

~]8-

where the assets of a liquidating, insolvent corporate debtor

are allocated among qualifying creditors then present, where-

upon the Debtor becomes a “judgment proof” empty shell.

Nothing in Northern Pacific R.R. v. Boyd, 228

U.S. 482 (1913) and its progeny is to the contrary. While

Boyd recognized the right of a creditor who did not participate

in a reorganization to subject the interests of a Debtor’s old

stockholders to his claim, Boyd specifically recognized that

“{i]f [the stockholders’} interest is valueless, [the creditor] gets

nothing.” 228 U.S. at 508. Here, the district court found in

1982 that the Debtor’s stock was worthless. The court, there-

fore, properly barred petitioner’s post-consummation claims.

CONCLUSION

For the foregoing reasons, the petition for writ of cer-

tiorari should be denied.

Dated: May 6, 1987

Respectfully submitted,

Harry G. Silleck, Jr.

Howard W. Goldstein*

James Niss

James B. Blaney

MUDGE ROSE GUTHRIE

ALEXANDER & FERDON

180 Maiden Lane

New York, New York 10038

(212) 510-7000

Counsel for Respondent

Erie Lackawanna Inc.

* Counsel of Record

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