Appendix — Central Jersey Industries, Inc. v. Unites States Railway Ass'n
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IN THE :
e A ANDER lL STEVAS |
Supreme Court of the Hnited States. |
OCTOBER TERM, 1984 ——
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IN THE MATTER OF THE VALUATION PROCEEDINGS
UNDER §§ 303(C) AND 306 OF THE REGIONAL
RAIL REORGANIZATION ACT OF 1973
CENTRAL JERSEY INDUSTRIES, INC.,
a corporation of the State of New Jersey, et al.,
Appellants,
v.
THE UNITED STATES RAILWAY ASSOCIATION AND
THE UNITED STATES OF AMERICA, et al.,
Appellees.
APPENDIX
TO
JURISDICTIONAL STATEMENT
VOLUME I
Pages CA-1 to CA-524
STANLEY WEISS
744 Broad Street
Newark, New Jersey 07102
(201) 622-7711
Counsel for Appellants
Central Jersey Industries, Inc.
and Certain Affiliates
Of Counsel:
CARPENTER, BENNETT & MORRISSEY
DEAN R. MAY
ALEXANDER COHEN
Special Counsel
September 21, 1984
2 '
TABLE OF CONTENTS
APPENDIX A
Memorandum and Order Directing Preliminary Proceed-
ings for the Determination of General Principles under
§§ 303 and 306 of the Act, June 16, 1976 ......... ee.
APPENDIX B
Opinion with Respect to Issues Set For Briefing and Argu-
ment as Subjects (1) and (2) of Schedule Attached to
Memorandum and Order of June 16, 1976, October 18,
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APPENDIX C
Decision of the Special Court on Compensable Unconstitu-
tional Erosion, (CUE Opinion), April 19, 1977 ............
APPENDIX D
Order on Motions for Reconsideration of CUE Opinion,
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APPENDIX E
Decision of the Special Court on Constitutional Minimum
Values, (CMV Opinion), October 12, 1977 wu... ee
APPENDIX F
Order Postponing Effectiveness of Order of Denial of July 5,
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APPENDIX G
Order on Motions for Reconsideration of CMV Opinion,
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APPENDIX H
Opinion with Respect to Valuation for Rail Use, (Rail Use
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APPENDIX |
Opinion on Petitions for Reconsideration of Rail Use Opin-
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APPENDIX J
Opinion on Valuation of the Central Railroad of New Jersey
and the Lehigh & New England Railway for Nonrail Use,
Pee SPINE, RINE Bids OUI sasesivccisnresescisoesssentsnenntennes
PAGE
CA-1
CA-30
CA-77
CA-156
CA-160
CA-260
CA-262
CA-266
CA-660
APPENDIX K
Opinion on Petitions for Reconsideration of CNJ Opinion,
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APPENDIX L
Order Making Certain Findings and Determinations Pursu-
ant to § 306(c)(4) of the Regional Rail Reorganization
Act OF 1973, Deana BD, CHD cceintcsanscseseenssincsncnnncinivenes
APPENDIX M
Memorandum Accompanying Judgment Under
§ 306(c)(4) of the Rail Act on Valuation of the Central
Railroad of New Jersey and the Lehigh & New England
Railway for Nonrail Use, December 5, 1983 .........0......
APPENDIX N
CNJ Opinion on Interest and Severance Damage, (Sever-
ance/Delay Damage Opinion) June 15, 1984 .........
APPENDIX O
Final Judgment of the Special Court Regional Rail Reor-
nmiees Ant 00 FST | cccicccmiadsceisaaninnen
APPENDIX P
Notices of Appeal to the Supreme Court of the United
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APPENDIX Q
Pertinent Provisions of the Regional Rail Reorganization
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APPENDIX R
Order of the Supreme Court, August 2, 1984.00...
APPENDIX S
Second and Sixth Pretrial Orders of the Special Court ....
APPENDIX T
Opinions of CNJ Reorganization Court with Respect to
Discontinuance Of Operations .............c:cesseeereeeeeeeneeeeeees
CA-792
CA-803
CA-807
CA-815
CA-863
CA-870
This Appendix is submitted by the Appellants, which consist of
Central Jersey Industries, Inc. and its subsidiaries, The Central
Railroad of Pennsylvania, the Communipaw Central Land Com-
pany, the Dover and Rockaway Railroad Co., the Mt. Hope
Mineral Railroad Co., the Wharton and Northern Railroad
Company and the Bayshore Connecting Railroad. There are no
other subsidiaries or affilia.es of any of the Appellants except for
certain wholly owned subsidiaries of Central Jersey Industries,
Inc.
APPENDIX A
CA-1
Appendix A
SPECIAL COURT
REGIONAL RAIL REORGANIZATION ACT OF 1976
Special Court—Misc. No. 76-1
Filed June 16, 1976, James F. Davey, Clerk
>
IN THE MATTER OF THE VALUATION PROCEEDINGS
UNDER §§ 303(C) AND 306 OF THE REGIONAL RAIL
REORGANIZATION ACT’
>
MEMORANDUM AND ORDER DIRECTING PRELIMI-
NARY PROCEEDINGS FOR THE DETERMINATION
OF GENERAL PRINCIPLES UNDER §§ 303 AND 306
OF THE ACT
I. HISTORICAL BACKGROUND AND GENERAL
CONSIDERATIONS.
In this Court’s opinion of September 30, 1974, 384 F. Supp.
895 at 926 n.53, we said that, as we then envisioned, our initial
task after the conveyances provided in § 303 of the Act, “would
be, after suitable briefing and argument, to set the principles for
valuing the properties conveyed.” These principles would then be
applied to specific properties by a number of special masters, |
whose decisions we would review. It would have been premature
to attempt to analyze just what issues would benefit from such
advance determination, and we likewise did not address ourselves
to such questions as whether an initial setting of guidelines would
require discovery or the taking of evidence.
The extensive amendments made in Title VI of the Railroad
Revitalization and Regulatory Reform Act of 1976 have consid-
erably augmented the difficulties of what already was probably
the most gigantic task ever confided to a court. The added
CA-2
Appendix A
problems arise in considerable part from the Amendments’ crea-
tion of a new form of security which is to comprise a part of the
consideration payable to railroads that have transferred property
to ConRail, namely, “certificates of value” (CV’s), § 306, which
are to be redeemed by USRA not later than December 31, 1987,
§ 306(c)(1); the CV’s are guaranteed by the Secretary of Trans-
portation, constitute general obligations of the United States, and
carry the pledge of its full faith and credit, § 306(a). A separate
series of CV’s is to be issued to each transferor, § 306(b). Criti-
cal to ascertainment of the redemption price is our determination,
§ 306(c)(4), of the “base value” (BV) of each series. This is
computed by determining the “net liquidation value” (NLV), to
which the transferor may be entitled by virtue of transfer of
property to ConRail, subtracting the value of other benefits pro-
vided under the Act (VOB), adding compensable unconstitu-
tional erosion (CUE), and finally adding interest compounded
annually at the rate of 8% per annum; to get the BV of each
certificate, the figure just obtained is divided by the number of
certificates in the series. The formula, omitting the interest item
and the final division, thus is:
BV = NLV — VOB + CUE
A principal problem is that this new concept was superimposed on
the concepts of “public interest,” “fair and equitable,” and “con-
stitutional minimum” in § 303(c) without any clear indication in
the statute itself, as distinguished from the legislative history,
what Congress considered was the relationship of the securities
issuable to the transferors’ as prescribed by § 306 and the stan-
dards laid down in § 303.°
The added complexities created by the 1976 Amendments
seemed to us to heighten the necessity for this Court to make as
many determinations of law as possible, at least in a preliminary
fashion, before putting the special masters to work. Putting
aside for the moment the secondary debtors of Penn Central
CA-3
Appendix A
(PC) and the non-bankrupt lessors, we have seven primary debt-
ors, and it is apparent that more than one special master will be
required in the case of Penn Central (PC) and perhaps in that of
the Erie-Lackawanna (EL) if undue delay is to be avoided;‘
realistically therefore when we speak of special masters, we are
thinking in terms of at least ten.
Because of such considerations the Court, on March 9, 1976,
sent a letter to all members of the Acting Liaison Committee
which the Court had appointed, outlining the Court’s tentative
views of what legal issues required decision and raising a number
of procedural questions. This led in turn to the Court’s order of
April 26, 1976, prescribing a procedure whereby all parties were
invited to file statements commenting on the issues and the struc-
ture of this proceeding, with an opportunity to file answers
responding to the statements of others. The order also set forth a
procedure whereby persons not named as parties might apply for
leave to intervene. The Court has now reviewed these statements
and answers, many of which have been exceedingly helpful.
While substantially all the comments recognize the existence of
some questions which the Court may now determine after appro-
priate briefing and argument, most take a rather parsimonious
view on this score. Although professing to recognize the neces-
sity of providing the special masters with guidelines, many of the
proposals seem to be that the special masters shall take evidence
on whatever theory passing the lowest threshold of rationality
may be offered to them.°
We think this would produce utter chaos. If a transferor or
security holder® is allowed to offer evidence based on a certain
theory of value, the Government parties’ could not afford simply
to argue that the theory was wrong; they would be obliged to
cross-examine and offer rebuttal on the detailed application of the
theory since for aught that would appear we might adopt it.
Similarly the special masters would be obliged to make factual
findings with respect to all theories even though we were to relieve
CA-4
Appendix A
them of the task (which we would reserve for ourselves) of choos-
ing among them.
While we respect the zeal displayed by the parties, there are
other considerations that must be borne in mind. The PC has
already been in reorganization for six years, the CNJ still longer,
and the New Haven since 1961. It has now become apparent
that a good many months will elapse before the special masters
can profitably be put to work in any event. It is impossible to
predict how long their labors will take under the best of circum-
stances, and if we had not already determined the proper princi-
ples we would be at the mercy of the slowest, since otherwise our
determination in the earlier cases would govern the later ones
without having afforded the parties in such cases a hearing.
After the masters’ reports will come our own consideration and
decision on a mammoth record, and appeal to the Supreme Court,
and possibly proceedings in the Court of Claims. Until all these
steps, save perhaps the last, have been completed, the reorganiza-
tion courts will be unable to make meaningful progress with their
individual plans and the expensive administration of these estates,
some of which are understood to be on the verge of actual insol-
vency, must continue. Indeed we have considerable doubt
whether, under the procedures proposed by some parties, the
CV’s could be valued by December 31, 1987, their redemption
date. The legal and other expenses of the litigation in this Court
will be tremendous in any event and would become even more
Staggering and a legitimate subject for public concern if the
litigation were protracted beyond the necessities of the case.
Given all this and the fact that no procedure can produce a
mathematically perfect result, it behooves all concerned with this
proceeding to cooperate in devising procedures that will shorten
the interval before final decision to the the full extent compatible
with essential fairness. We believe it is possible to devise proce-
dures that will enable us to decide a large number of basic ques-
tions before the special masters go to work, although there are
other matters on which there is no need for an early decision. In
eee eee
CA-5
Appendix A
saying this we are conscious of the risk that by making some
preliminary rulings we may be courting reversal by the Supreme
Court and the need of starting all over again; we simply think the
danger of this to be less serious than the consequences of letting
the special masters proceed as some of the parties have proposed,
see fn. 5. Indeed, as this Memorandum progresses, the need for
our making a considerable number of preliminary rulings will
become even more evident.
We add one final prefatory note. The complexity of this case,
as revealed by the statements submitted to us, has convinced us
that the many preliminary issues that must be considered are best
addressed in several separate units. What follows is a delineation
of these units, with instructions to the parties and intervenors as
to how they should proceed as to each. For the convenience of
the parties we annex a schedule of the dates ‘ixed for various steps
in these preliminary proceedings.
Il. QUESTIONS WHICH THE COURT CAN NOW
DECIDE WITHOUT PRESENTATION OF FAC-
TUAL MATERIAL.
There appears to be almost complete agreement that the Court
may now decide, without taking any evidence, what we character-
ized in our March 9, 1976 letter as the “first set” of § 303 issues;
indeed, there appears to be a fair amount of agreement how we
should decide them. Accordingly we shall set these and some
other matters for briefing and argument in accordance with the
schedule outlined below:
Initial briefs - August 23, 1976
Answering briefs - September 21, 1976
Time requests for oral argument shall be filed with the answering
briefs. In this and all other cases dealt with in this Memorandum
and Order, the parties shall arrange for joint briefing and argu-
ment to the maximum extent possible and shall keep the length of
CA-6
Appendix A
briefs to the minimum. After studying the briefs and time
requests, the Court — perhaps after a pre-argument conference
— will advise the parties of the time, place and organization of
the argument.
In light of the statements, we deem it desirable to sharpen the
issues as follows:*
(1) “Public interest.” The first question raised in our
March 9 letter concerned the nature of our responsibility under
§ 303(c)(1)(A) to determine whether the transfers and convey-
ances “are in the public interest .. . ,” especially in view of the
description of judicial review in the second sentence of § 209(a)
and the statement on p. 137 of the Conference Report of January
23, 1976. Several parties suggest that we need only determine
that Congress had a rational basis for enacting the Rail Act and
make no suggestion that it did not. If that is right, this issue can
be regarded as substantially out of the case. However, two other
views emerge from some of the statements.
One of these is that the “public interest” test requires us to pass
on the viability of ConRail. At the moment we do not under-
stand why we need to do this, just how we should go about it, or
what we could do if we decided in the negative since a major
reconveyance does not appear to be feasible. If any parties
espouse this view, they should develop it in briefs.
The other such view is that although the “public interest” test
may have little or no significance for the main body of the convey-
ances, it may require us to pass on the inclusion of certain periph-
eral properties or to decide whether, if the Act be regarded as a
condemnation statute, certain properties were taken for some-
thing other than a public use.’ It is hard to consider the question
in vacuo. Any transferor or security holder allowed to intervene
who asserts this position shall include in its brief illustrative state-
ments of the properties in respect of which sum a claim is made
and the supporting reasons; the answer of the Government parties
need meet such claims only with respect to legal issues since
CA-7
Appendix A
evidence would have to be taken if the Court were to decide there
is need to pursue the matter further. In other words, what the
Court needs is factual material sufficient to enable it to decide
whether, if any such claims are made, they have sufficient legal
merit to require further development of the facts.
(2) Fairand equitable. The second question propounded in
the March 9 letter concerned the construction of the “fair and
equitable” language in § 303(c)(1), especially in view of the
facts (a) that if the consideration is “fairer and more equitable
than is required as_ constitutional minimum,” § 303(c)(3)
requires us to eliminate the excess, and (b) that if the considera-
tion were less than the constitutional minimum, it would not be
fair and equitable.
Almost all, perhaps all, the statements seem to agree that the
fair and equitable language serves no significant function in the
determination of the value of any particular property, although
several parties (including the Government parties) have sug-
gested that this language may have a bearing on the allocation of
ConRail’s Series 3 Preferred and common stock. There is no
need to rule on the latter suggestion now, since it will not be a
matter for immediate consideration by the masters. Accordingly
the Court will consider the “fair and equitable” issue to have been
removed from the process of valuing the properties of individual
estates or other transferors unless this is raised in the briefs to be
filed as above indicated; any person taking such a position shall
state with precision and not merely in conclusory terms how the
“fair and equitable” test differs from the constitutional minimum
test with respect to valuation in the context of the Act as it now
stands.
The March 9 letter also raised the question whether the Court
was bound to ascertain by what amount the consideration was less
than fair and equitable and, by the same token, less than the
constitutional minimum, even though the Court might have no
effective way of remedying the defect. Further consideration had
CA-8
Appendix A
led us to an affirmative answer even before receipt of the state-
ments; several of these suggest this and none opposes. Accord-
ingly there is no need to brief this issue.
We pass now to certain other questions of law which we believe
the Court may now be able to decide, without taking evidence.
These should be briefed and argued in accordance with the sched-
ule set out on page [CA-S5].
(3) Reorganization vs. eminent domain statute. Although
not raised in the March 9 letter, a question lurking in the case is
whether the standard of valuation”® should be different if the Act
be regarded as a reorganization statute, as an eminent domain
statute or as both. At the moment the Court does not perceive
that it should be. Any parties taking a different view should
include arguments on the score in their briefs. Some parties also
intimate that there may be different procedural requirements if
the Act is regarded as an exercise of eminent domain; any party
taking this view should brief it.
(4) Reckless or deliberate disregard. We include this item
in the list, although it may not fit the caption. In the last para-
graph of the March 9 letter, we stated we would “like to be
promptly advised whether USRA, the United States, ConRail, or
any other party represented on LC (Liaison Committee) takes
the position that the last sentence of § 209 (e)(1) has any
application in proceedings under § 303(c)(1)(A) and (B) or
306 (c)(4)” since, if they did, the Court would desire to receive
briefs and hear argument on the statutory and constitutional
questions that would be raised. USRA has advised the Court —
that it does not take that position. Unless any party advances, |
that position in its opening briefs, see p. [CA-5], the Court will
consider that the taking of such a position with respect to pro-
ceedings under the cited sections is foreclosed.
CA-9
Appendix A
(5) Method of handling the valuation of property not owned
by a primary debtor. The discussions of valuation in the state-
ments of the primary debtors and their security holders seem to
assume, without detailed discussion, that the properties are first
to be valued for each estate and that the total will then be distrib-
uted, in some way not clearly defined, as between the constituent
transferors. This is an almost necessary consequence of the view,
espoused by several primary debtors and their security holders,
that the transferred property is to be valued as a going concern,
and also conforms to what we understand to be the general prac-
tice in condemnation proceedings. The FSP, Vol. I, pp. 126, 145,
shows separate values for each of the subsidiary debtors of Penn
Central, and Appendix A to the Master Liquidation Plan and
Summary of Valuation Reports dated March 1, 1976 gives a more
detailed breakdown. The statements filed by the lessors seem to
assume that they will receive the full value of their properties,
without regard to the interest of the lessees; we have not been
informed of the position of the latter. It may be that we have
here a whole new set of issues which have thus far received
relatively little thought.
The Court confesses it is somewhat baffled by the problem
which bears, among other things, on the number and the duties of
the masters to be appointed, and would welcome detailed propos-
als and briefing, even though it may be premature to attempt a
definitive decision at this time. All parties desiring to express
views on how this problem should be handled shall file briefs not
later than August 23, 1976, answering briefs not later than Sep-
tember 21, 1976, and time requests for oral argument along with
the answering briefs. The Court will then determine what fur-
ther proceedings shall be had.
Ill. “Net LIQUIDATION VALUE.”
It is clear that, under § 306(c)(4), the Court is bound to
determine the net liquidation value to which the transferors are
CA-10
Appendix A
entitled by virtue of transfers of rail properties to ConRail under
§ 303(b)(1) as a step in determining the BV of the CV’s,
whether the value of the securities (including the CV’s) issuable
to the transferors is the same as or more or less than the Constitu-
tional Minimum Value (CMV). The statements, however,
reveal serious differences of opinion how this task should be
performed.
A.
USRA’s approach is summarized in FSP, Vol. I, pp. 124-26,
and is stated in considerable detail in an Appendix, Vol. I, pp.
141-55. The essence of USRA‘s method is captured in the fol-
lowing paragraplis on p. 125:
To resolve these and other issues, USRA postulated a
“master liquidation plan” describing in detail an orderly
process for the disposition of each estate’s assets. The key
assumption of the plan is that the estates would be
required to sell substantial assets for continued rail use but
that the prices for such sales would be regulated and fixed
at the pricing levels which would obtain if all rail opera-
tions over the lines of the bankrupts actually ceased and as
if the assets of the railroads in reorganization actually
were dismantled and disposed of for other uses. USRA
assumed further that because of the valid requirements of
common carrier regulations, the estates would operate
under subsidies, if need be, and maintain their rail opera-
tions until 1979, at which time the orderly liquidation
would begin. This subsidy period is also consistent with
the self-interest of the estates in maintaining healthy price
levels for their assets. USRA’s plan also makes the
favorable assumption that orderly cessation actually
occurs and, therefore, prices are not adversely affected by
the economic dislocations which would result if the actual
service termination were abrupt and not orderly. The
CA-11
Appendix A-_
master liquidation plan also recognizes the physical
requirement for preparing assets for sale and their effect
on the timing of asset disposition.
In essence, then, the liquidation plan postulated by
USRA is for an orderly transfer of the transportation
| services provided by the estates to other railroads with the
prices of such transfers computed as if the estates had
actually been allowed to exercise their asserted right to
liquidate by selling all of their assets for nonrail uses. The
pricing under the assumption of total liquidation is based
| on supply and demand conditions which such a time-
phased liquidation of rail assets into nonrail uses would
produce. The pace of asset disposition is tied to the time
required to accomplish a transition to alternate modes and
to prepare assets for sale.
as itis at Do te
We have no doubt that this is one theory of determining net
liquidation value that must be considered. However, as indicated
in the March 9 letter, even if USRA’s general theory were to be
accepted, its calculations depend on a considerable number of
assumptions which are open to contest.
We cite as examples, but without limitation, “[a]ssessments of
the time and cost of preparing the assets for sale, and the expected
time required to dispose of such assets once prepared for sale in
light of supply and demand conditions” (p. 125); “[t]he overall
economic environment within which these activities would occur”
(p. 125); the method for arriving at the discount factors stated at
p. 126; the details of the calculations as to when all necessary
authority to sell rail properties would be obtained, pp. 145-46
(including the question whether, if certain transferors would have
been obliged to shut down for lack of funds, any such authority
would have had to be obtained); what was done in regard to
properties that may be “rail properties” within the Act but are not
in the sense that authority to sell would have to be obtained; and
the assumptions with respect to the determination of the value of
am se
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oot 1 Ct
CA-12
Appendix A
rolling stock (pp. 146-48), facilities (pp. 148-49) and real estate
(pp. 149-51).
In order to avoid wildly conflicting approaches by the masters
appointed to deal with particular transferors, it seems essential
that the Court, perhaps with the assistance of one or more Special
Masters, should pass on the general validity of these assumptions,
even though we recognize that any decision on this would simply
establish something like a presumption which could be challenged
by any transferor, e.g., by showing that it could have obtained
authority to abandon at a date earlier than that hypothesized by
USRA (or would not have required such authority because of
lack of funds or for other reasons) or that it was a peculiarly
favorable position to sell rail ties. The transferors insist that
before anything can be done in the way of briefing, there must be
extensive discovery of the details of USRA assumptions and the
basis for them.
While we agree that some discovery is needed before there can
be any effective briefing, we believe this should be in two stages.
The first stage would be devoted to general questions such as
those we have outlined. The second stage, which could go on
while we were considering these general issues, would relate to
more specific matters, e.g., the correctness of the count of rolling .
stock, track, etc., or the validity of the choices of other real estate :
sales selected to determine market value.
USRA has now taken an important first step by serving on the
parties copies of its Master Liquidation Plan and of five valuation
reports. While we do not anticipate that these will satisfy trans-
ferors even with respect to first stage discovery, this submission
should suffice to enable them to formulate requests, which can 7
then form the subject of consideration by the Acting Liaison
Committee, substantially as proposed in the June 7, 1976
response of the Government parties, pp. 13-15. We direct the
parties and the Acting Liaison Committee to proceed along these
lines with respect to what we have characterized as first stage
discovery of NLV methodology used by USRA and by any of the
aN eT
Seek he IC A OO A aN ne a OH
CA-13
Appendix A
transferors and the Acting Liaison Committee to report to us no
later than August 23, 1976.
We now turn to another and more basic matter. The chief
quarrel on the part of the transferors and security holders with
USRA’s general approach to the determination of NLV, summa-
rized in the paragraph quoted from FSP. Vol. I, p. 125, as distin-
guished from the subsidiary assumptions leading to the final
figures, and also as distinguished from the question whether
CMV is higher than the value of the securities issuable to the
transferors, relates to the second sentence. Many of the state-
ments claim that, at least for certain properties, the maximum
liquidation price would be attained by selling them for railroad
use.”
We do not understand that the statements of the Government
parties altogether dispute this, see pp. 12-17 of the opening state-
ment and pp. 9-12 of the responsive statement. After outlining a
formidable series of hurdles that, in their view, a transferor would
have to overcome before he could establish that sale to another
railroad would yield more than sales for non-rail use, and urging
that on this account, “the Court should presume that no hypothet-
ical combination of dispositions would have produced a value
higher than that attainable in a disposition of all of the trans-
ferred properties for nonrail use,” they concede that “[t] his pre-
sumption could be overcome by a showing by a transferor that...
it could and would legally and feasibly have disposed of some or
all of its properties, for rail use, at a value determined other than
by reference tc the value attainable in a liquidation for nonrail
use,” (p. Fr).
The Government parties argue that before any transferor can
be allowed even to attempt this showing, there must be a prelimi-
nary proceeding in which, as we understand it, all transferors
CA-14
Appendix A
seeking to make the attempt must develop a consistent “alterna-
tive scenario” and the Court is to pass upon its feasibility, consid-
ered as a whole. While the presentation of such a plan would
greatly facilitate our consideration, the Government parties have
not indicated how we could compel this. At the moment we are
not persuaded that the procedure proposed by the Government
parties is necessary or even feasible. The subject can be more
intelligently considered when we know what transferors intend to
show more advantageous dispositions for rail use and with respect
to what properties.
Before we request transferors to advance their proposals, there
seems to be a point of law the decision of which will importantly
affect the proceedings. Several transferors appear to include in
their claim that NLV should take account of higher prices obtain-
able for rail than non-rail use not only sales of certain properties
to solvent railroads (or other private groups if any such were
possible purchasers) but also sales of other properties to public
bodies vested with the power of condemnation. At the moment
we do not understand why in the absence of competing private
purchasers, such public bodies could be expected to pay more
than the NLV for nonrail use.’* We think this question can be
usefully briefed, argued and decided along with those enumerated
in Part II, Items (1), (2) and (3). The question is this:
Assuming that in determining “net liquidation value” as
used in § 306(c)(4) the Court should take account of a
higher price obtainable for certain properties on a sale for
rail use rather than, as USRA proposed, “at the pricing
levels which would obtain if all rail operations over the
lines of the bankrupts actually ceased and as if the assets
of the railroads in reorganization actually were disman-
tled and disposed of for other uses” (FSP, Vol. I, p. 125),
should the Court do this when the proposed sale is to a
public body vested with the power of eminent domain, in
CA-15
Appendix A
the absence of proof of a private purchaser ready and
willing to make the purchase?
:
)
)
: Once the Court answers this question, the next step would be to
| require the transferors to enumerate the possible transfers they
| _ desire to have considered. It may be that, as suggested by the PC
| Trustees (p. 23), the transferors will require the aid of discovery
| to assist them in doing this; the Government parties say that on
. this and other subjects discovery should be reciprocal. USRA
could expedite matters if it would promptly make available to
; transferors any information which it has in regard to the interest
(or lack of it) displayed by private parties in acquiring parts of
the properties conveyed to ConRail, including the history of the
aborted negotiations with the Chessie and the Southern; the
. transferors should similarly make available to the Government
parties facts as to efforts made by them to effect such sales. The
. mechanics for this should be discussed in the Acting Liaison
. Committee and included in the report directed above. When the
transferors have formulated their proposals, it may well be desir-
able to utilize the two-phase process suggested by the PC Trustees
— a first phase in which the Court, perhaps aided by a Special
Master, would determine the feasibility of the proposed transfers,
and a second phase ascertaining the prices that would have been
obtainable.
A number of the transferors have advanced theories for deter-
mining NLV that seem to have nothing to do with “liquidation,”
particularly in the light of the discussicn at p. 199 of the Confer-
| ence Report. As at present advised, we believe that the place for
/ these theories is in the consideration of the constitutional mini-
| mum, which we will discuss in Part V of this Memorandum. The
) briefing and argument of the validity of these theories which is
there directed can include the point raised in the two preceding
sentences.
at re a Ce nn ENS 8
CA-16
Appendix A
IV. OTHER PROBLEMS IN ARRIVING AT THE BASE VALUE
OF THE CERTIFICATES OF VALUE.
Since the discussion in Part III has taken us a considerable
distance into the problems of § 306(c) (4), it will be convenient to
complete our discussion of that section before returning to
§ 303(c)(1).
We think it would be desirable to separate the determination of
BV into its three component parts, NLV, VOB, and CUE. We
take it that Appendix A to the Master Liquidation Plan and
Summary of Valuation Reports dated March 1, 1976 broadly
reflects the position of the Government parties as to NLV. Any
further revisions to take account of additional designations, prop-
erty sales, and the changed conveyance date should be made
promptly.
USRA has outlined its theories as to the determination of VOB
in FSP, Vol. I, pp. 128-34. However, the FSP says that it had
been “impossible within the statutory deadlines to arrive at any
final quantification as to all categories of ‘other benefits’ ”; that
the figures given are at least in part “estimates and approxima-
tions”; and that USRA’s “analysis will continue as regards both
the quantification of established categories and the possible iden-
tification and quantification of additional categories.” Most of
the transferors claim that there are no, or few, “other benefits”;
they also say that the failure of FSP to trace how the general
principles stated on pp. 128-33 were translated into the figures in
Tables 2 and 3 makes it impossible for them to voice their objec-
tions intelligently.
We think there is merit in the latter point, at least to the extent
that the argument would be more meaningful if more details were
known. We therefore direct USRA to prepare and file a more
detailed explanation and calculation of VOB, taking such account
as it thinks warranted of the criticisms in the statements. The
objective would be to provide a statement in sufficient detail that
we could rule on the issues of principle (i.e, whether a particular
CA-17
Appendix A
category did or did not constitute a benefit) on the basis of
USRA’s statement and opposing affidavits going into principle
rather than detail and thereby eliminate, as to categories we
might rule out, the need for further discovery or factual presenta-
tion. USRA is directed to file such a statement not later than
December 1, 1976. Again we urge USRA to be as forthcoming
as feasible in its statement; the more that is voluntarily disclosed,
within the realm of reason, the better are the chances for our
being able to issue instructions to the masters without unneces-
sary advance discovery and taking of evidence. We also take note
: of the contention of some transferors that the benefits, in whole or
in certain categories, are negative, and the legal problem arising
therefrom. We believe that, at the appropriate time, this also can
be handled by briefs supplemented with illustrative factual mate-
rial — not in the sense of determining precise figures but in that of
deciding whether the contention that “negative benefits” should
be added rather than subtracted, or the more modest proposal
that a “negative benefit” in one category is to be offset against
positive benefits in others, are legally sustainable.
Turning to CUE, it now appears to us that there are three sets
of legal issues which can be determined without awaiting the
completion of detailed studies on the subject; indeed a relatively
early resolution of these issues is essential in order to enable us to
direct what studies should be prepared, since USRA contends
that there has been no CUE.
Two of these issues concern the period of erosion claims. The
statement of the Government parties takes the position, p. 28
n.19, that there can be no valid erosion claim for any period prior
to enactment of the Rail Act — a position finding at least some
support in our earlier opinion, 384 F. Supp. at 925. The transfer-
ors disagree. Secondly, some transferors take the position that
there can be valid erosion claims for periods after the March 31,
1976 conveyance with respect to property not conveyed. The
Government parties presumably disagree. The third concerns
Sh ete ate ee
Oe
CA-18
Appendix A
the nature of the items qualifying as erosion claims. The state-
ment of the PC Trustees (pp. 11-12) helpfully subdivides erosion
into “financial erosion” and “physical erosion.” The former
would include the four items mentioned in our earlier opinion,
384 F. Supp. at 923, and possibly others of similar nature. Physi-
cal erosion is the deterioration of plant which may result in a
lower NLV for the properties conveyed and lower realizable va!-
ues for those not conveyed. We think the two issues of dates and
the issue of the nature of the items qualifying for treatment as
CUE can be resolved, or at least narrowed, as a matter of princi-
ple on the basis of factual submissions without the taking of
detailed evidence since we would not anticipate serious conflict on
the facts. We direct that all persons making claims of CUE shall
file not later than October 13, 1976 detailed statements with
supporting briefs which shall include the following:
(1) The date when they contend that valid erosion claims
began. These should be supported by inclusion of
petitions, reports and orders in the various reorganiza-
tion courts and financial data that are claimed to be
relevant.
contend that er@sion continued. The statements
should give somejidea of the nature and amount of any
such post-conveyance erosion claims and shall present
the legal theory contended to support them.
(2) Any date later of March 31, 1976 to which they
(3) The categories (and some approximation of the
amounts) of erosion claims.
The Government parties shall answer not later than November
15, 1976, and the claimants may reply not later than December 7,
1976. The Court will then set a date for argument.”
?
CA-19
Appendix A
V. CONSTITUTIONAL MINIMUM VALUE.
While, as mentioned in Part III of this Memorandum, Con-
gress was of the opinion, Conference Report p. 199, that by
providing for CV’s it had assured the transferors of the constitu-
tional minimum, that opinion is, of course, not conclusive. As
also mentioned in Part III, we are presently of the view, while this
is subject to change after brief and argument, that when Congress
spoke of liquidation, it meant liquidation, although liquidation is
not necessarily sale exclusively for nonrail use. Unless further
briefing and argument should alter the view stated in the preced-
ing sentence, we would consider, as previously indicated, that
many of the contentions with respect to an expansive notion of
NLYV should rather be regarded as contentions that even an appli-
cation of NLV taking full account of possible dispositions for rai!
use may not produce values equal to the constitutional minimum.
It would seem that if a railroad (or a seginent which would
have been allowed to operate pruned of unprofitable extensions)
has capitalized earning power in excess of NLV, even in the
“world” where most of the rail service provided by the bankrupt
estates has ceased, the Constitution would require payment on
that basis. If the Government parties contest this proposition, or
desire to frame conditions about it which they believe we should
impose as guidelines to the masters, they should include a discus-
: sion of this in their opening briefs.’
Apart from this the statements and answers can be said gener-
ally to reveal the clash manifested by the majority and dissenting
opinions in Jn the Matter of the Port Authority Trans-Hudson
Corp., 20 N.Y.2d 457, 231 N.E.2d 734 (1967). Putting the
matter in another way, they raise the issue whether and, if so, how
far the Supreme Court would consider that the situations here
presented require a departure from the standard that in condem-
nation “the question is what has the owner lost, not what has the
taker gained,” Boston Chamber of Commerce v. City of Boston,
217 U.S. 189, 195 (1910), and subsequent decisions. We see no
‘
a aT
CA-20
Appendix A
reason why we cannot formulate at least a general position on this
subject without requiring the special masters to take detailed
evidence on some or all of the many theories of valuation that
would run afoul of the quoted standard if this is applicable. In
saying this we do not mean to limit the parties to ordinary legal
briefs. If any party believes it would be helpful to accompany its
brief by affidavits or offers of proof, it may do so; the Court will
consider these not as proof of the facts stated but for the light they
shed on the legal issues. Such a course will meet the Supreme
Court’s comments in Regional Rail Reorganization Act Cases,
419 U.S. 102, 146 (1974), without requiring the vast expenditure
of time and money that would follow from our leaving the issue of
the constitutional minimum wholly at large until the masters have
reported.
That issue, as we now see it, is whether the Constitution
requires any valuation in excess of NLV properly defined, and as
then used in § 306, plus any higher valuation of a railroad or
segment derivable under the second paragraph of this Part V.
Illustrative of the theories of valuation that would seem to fall if
that question were to be answered in the negative are those pro-
pounded as theories of NLV in the statements of the Trustees of
the Lehigh Valley, pp. 11, et seq.,’° of the Erie Lackawanna, pp.
11, et seq.,’* and of the Penn Central Trustees, pp. 9-11; those
propounded as theories of the constitutional minimum in the
statements of the Penn Central Lienholders, pp. 9, et seq.,’’ and
the Committee of Secured Rail Creditors in the Penn Central
Transportation Company Reorganization Proceedings; the
“true economic value” theory gf the Penn Central Company; and
the theory of the New Haven'Trustee.'* We emphasize that by
mentioning the contentions of these parties as illustrations we are
not relieving others who contend for a value higher than that
ios in the first sentence of this paragraph.”
There are three subsidiary issues that appear to require special
briefing:
CA-21
Appendix A
The first is this: Assuming that our answer to the question put
above were to be generally in the negative, are there specific
properties as to which valuation on the basis of NLV or a higher
value based on capitalized earnings would be so manifestly unfair,
because both factors work out at or near zero, that a higher value
must be found and, if so, on what basis? This is essentially the
question put by Judge Keating with respect to the Hudson River
tunnel properties in Jn the Matter of the Port Authority Trans-
Hudson Corp., supra. 20 N.Y.2d at 470, 231 N.E.2d at 739-40.
While long tunnels of this sort are the paradigm, the transferors
are invited to suggest other categories.
A second question, raised by the statement of the New Haven
Trustee, is whether there is any requirement that the properties
conveyed by the New Haven to PC should be valued on any
higher basis than other properties.
A third issue, raised explicitly by the Lehigh Valley Trustee
(pp. 23-24) but potentially of broad application, is whether the
Constitution requires that compensation be given for any diminu-
tion in value of the assets severed and then left with the transfer-
ors, on a theory of inverse condemnation or otherwise. Here
again, we would expect those propounding this point to give suffi-
cient examples to enable the Court to understand the nature of
the claimed diminution, not necessarily in dollar amounts but by
categories.
We recognize the possibility that, after the briefing and argu-
ment here directed, we may decide that some of the issues pro-
pounded in this Part V are not ripe for decision, or may determine
to afford the Special Masters greater leeway (possibly in the form
of permitting requests for further instructions) than we now con-
template. Nothing will have been lost, however, since the issues
set forth in this Part V will have to be briefed and argued at some
time in any event, and the benefit attainable from our ruling in
1977 rather than many years later, after prodigious efforts before
and by the special masters, which may be unnecessary, is so
tremendous.
CA-22
Appendix A
Recognizing that the issues raised in this Part V are of great
consequence and that factual materials may need to be assem-
bled, we shall allow considerably more time for the filing of
papers. We set the following schedules:
Presentation of proponents - January 6, 1977
Presentation of Government parties - February 20, 1977
Replies of proponents - March 18, 1977
We shall defer fixing a date for argument until the papers have
been filed.
VI. PETITIONS FOR LEAVE TO INTERVENE.
In view of the large number of parties entitled to participate in
these proceedings as a right, the Court cannot be as liberal in
granting interventions as it might like to be. Indeed in some ways
the intervention of creditor and stockholder interests may be
counterproductive; insofar as they merely repeat arguments
already ably made by transferors, they diminish the force of the
latter. Paraphrasing Mr. Justice Stewart’s well-known remark
in New York Times Co. v. United States, 403 U.S. 713, 729
(1971), when everyone is heard, no one is heard. We are also
mindful of the considerations concerning expense mentioned in
Part I of this Memorandum. Weare therefore granting interven-
tion in these proceedings for the establishment of general princi-
ples to intervenors who have dernonstrated a legal interest in the
outcome and have taken or propose to take positions different
from that taken by the transferors. What interventions shall be
granted in proceedings relating to the application of the general
principles to specific properties can be determined later.
Applying this criterion we grant intervention in the proceedings
provided for in this Memorandum and Order to the [ollowing:
Institutional Investors Penn Central Group and certain
Penn Central Indenture Trustees.
CA-23
Appendix A
The First National Bank of Chicago as Trustee under
First Mortgage Indenture of the Chicago River and
Indiana Railroad Company, for the limited purpose of
presenting arguments pertaining specifically to the C.R.
& I.
Provident National Bank and A. Wakelee Swartz, Jr., as
Indenture Trustees for Pennsylvania Tunnel and Termi-
nal Railroad Company, and the Bank of New Jersey, as
Indenture Trustee for New York Connecting Railroad
Co., for the limited purpose of presenting arguments
pertaining specifically to the named railroads.
Citibank, N.A., as Agent for the Committee of Secured
Bank Creditors in the Penn Central Transportation
Company Reorganization Proceedings, for the limited
purpose of presenting in proceedings under Part V of
this Memorandum and Order the theory of valuation
discussed in its petition and accompanying statement.
Richard Joyce Smith, Trustee of the Property of the New
York, New Haven & Hartford R.R. Co., for the limited
purpose of presenting contentions pertaining specifi-
cally to properties transferred by the New Haven estate
to Penn Central.
Penn Central Company, for the limited purpose of
presenting in proceedings under Part V of this Memo-
randum and Order the issues outlined in its petition and
accompanying statement.
The following applications are denied for lack of a sufficiently
specific showing of inadequacy of representation by other parties
in the proceedings provided for in this Memorandum and Order
and, in some instances, for failure to file a statement of conten-
tions as required by this Court’s order of April 26, 1976:
i |
CA-24
Appendix A
Joint Application of Morgan Guaranty Trust Company of
New York and eight other indenture trustees of Erie
Lackawanna Railway Company Joint Application of
Girard Trust Bank and four other indenture trustees of
Lehigh Valley Railway Company.
Petition of John W. Sullivan, John D. Mabie, and Thomas
A. Reynolds, Jr., minority stockholders of Reading
Company.
Petition of Minority Stockholders of Mahoning Coal Rail-
road Co.
Petitions for leave to intervene have been filed on behalf of five
governmental bodies listed in the margin.” As to almost all of
the questions set forth in this memorandum, we fail to see that
these bodies have an interest justifying even permissive interven-
tion; the only exception would be if a contention were to be made
that some of the transfers were not in the public interest, see Part
“TIT (1). These petitions are denied without prejudice to applica-
tions for limited intervention in the event indicated.
This constitutes an order; the parties shall proceed in accord-
ance herewith.
HENRY J. FRIENDLY
Henry J. Friendly
Presiding Judge
ROSZEL C. THOMSEN
Roszel C. Thomsen
Judge /
June 16, 1976
CA-25
Appendix A
FOOTNOTES
1. The Court has adopted a new caption and docket number for
general matters relating to the valuation proceedings under §§ 303(c)
and 306. All papers subsequently filed in general proceedings dealing
with valuation shall bear this caption and docket number. The Court
will enter an order transferring from Docket Misc. No. 75-3 matters
relating to these general valuation proceedings and also breaking Misc.
No. 75-3 into various categories.
; 2. Weuse the term “securities” to include other forms of considera-
tion moving to a transferor.
3. The problems would have been less under the bill as passed by the
Senate which used the phrase “constitutional minimum” instead of
NLV.
4. The valuation of the New Haven took four years even though
there was general agreement that the property should be valued primar-
ily on a scrap value basis.
5. Thus the statement on behalf of Reading Company and its
wholly-owned subsidiaries says (p. 13):
Therefore, the only proper instructions that this Court can give
the Special Masters is to hear all evidence pertaining to value
each party desires to introduce and to structure the appropriate
theory of valuation at the end of the proceeding.
6. We use this term to include indenture trustees.
7. For present purposes, we include ConRail along with the United
States and USRA in the term “Government parties.”
8. It should be clearly understood that any expressions in this Mem-
orandum and Order which relate to the merits or to procedures not
herein prescribed wot ee solely to assist,in structuring these pro-
ceedings and do not indicate a prejudgment.
9. Here, as elsewhere in this Memorandum, we will take it for
granted that parties who wish to establish that a question that has been
raised has constitutional as well as statutory dimensions will develop the
point in their briefs.
10. We use this phrase so as to exclude for present purposes the
question whether to the extent that the statute is an eminent domain
EST
CA-26
Appendix A
statute, as the non-bankrupt transferors claim it necessarily is as to
them, and as some other parties claim as well, the Constitution requires
that the consideration be paid in cash.
11. This contention is to be distinguished from the argument that
for certain segments the “highest and best use” would be retention by
the transferor for railroad purposes. This sounds rather on the claim
that CMV may exceed the value of the securities issuable to the trans-
ferors, although a determination of capitalized earnings would have
evidentiary value for both.
12. Except, of course, in a situation similar to that envisioned in
fn. 5.
13. The Trustee of the Ann Arbor has raised an issue of law peculiar
to it. Since this estate has conveyed no property to ConRail, it will not
obtain CV’s. The Trustee wishes us to decide whether we have power to
enter a deficiency judgment for CUE under § 303(c)(3) and direct
payment by the United States under § 303(c)(5). If we should decide
in the negative, the Trustee would like to proceed directly in the Court of
Claims. We think it preferable to defer decision on this at least until we
have passed on the general questions with respect to erosion outlined
above.
14. In our 1974 opinion, 384 F.Supp. at 923 n.51, we took note of a
theory which we thought to be then suggested by the Government
parties, namely, that the constitutional minimum might be less than
liquidation value in the case of a railroad (or perhaps a segment) with
earnings which were sufficient that it could not obtain permission to
abandon but whose capitalized value was less than liquidation value.
The Government parties do not now seem to urge this except for making
the point that if ConRail has sufficiently large earnings, there may be no
need for determining net liquidation value. If the Government parties
wish to preserve the contention averted to in the cited footnote, they
should also include an argument on this in their opening briefs.
15. Real estate at fair market value plus an assemblage factor:
Improvements at the higher of a scrap value or going concern value:
> Going concern value measured by a combination of:
Capitalized prospective earnings
\
CA-27
Appendix A
Public usefulness (the price of reconstruction or of a substitute
facility)
RCNLD in appropriate instances
Value in place (i.e., scrap value with no subtraction for
dismantling).
16. Capitalized earning power as basis for sale to another railroad:
Gross liquidation value (i.e., no cost for dismantling) as basis for
sale to another railroad;
“Special Value” to a public body (e.g., a state) calculated by some
combination of:
Depreciated value of track
Market value of land, plus assemblage factor
Gross liquidation value
Value of a developed operating organization
Value of not having to develop more costly alternatives
RCNLD of special facilities;
“Residual Value”—i.e., value as an integrated network.
17. Value properties as an assembled unit (i.e., apparently as a
“going concern”) by an appropriate combination of:
Land at fair market value plus assemblage;
Track at depreciated value;
Related facilities at cost pius appreciation;
Intangibles at cost of production less obsolescence;
For special facilities, RCNLD;
Value to public in terms of costs of alternatives.
18. “[W]hat it would have cost an acquiring entity on April 1, 1976
to buy, in an arm’s length transaction, the conveyed real estate and to
then build an integrated rail system .. . on that real estate... (p. 4)”
CA-28
Appendix A
19. Presumption of reconstruction cost new less depreciation unless
the Government parties rebut this.
20. We have not mentionea the contentions of the Government par-
ties as to “ConRail use value” since we do not understand their precise
relevance. If the Government parties wish these to be considered as
part of the proceedings here contemplated, they should make a further
submission on the subject not later than August 15, 1976.
21. The Commonwealth of Pennsylvania, the State of Delaware, the
Department of Transportation of the State of New York, the Maryland
Department of Transportation and the city of Philadelphia.
CA-29
Appendix A
Schedule
Subject
(1) “Public interest”; “fair and equitable”; reorganization vs. emi-
nent domain statutes, reckless or deliberate disregard clause,
§ 209(a)(1)—see Part II, Items (1), (2), (3) and (4); relevance of
possibility of sale for rail use to public bodies having power of condem-
nation, see Part Ili.
Opening briefs—August 23
Answering briefs—September 21
(2) Method of handling the valuation of properties not owned by
primary debtors, see Part II, Item (3).
Opening briefs—August 23
Answering briefs—September 21
(3) Report by Acting Liaison Committee with respect to first stage
discovery on NLV methodology and on efforts by USRA and transferors
to effect sales for rail use to private parties.
August 23
(4) Date on which USRA shall file detailed statement of value of
other benefits.
December |
(5) Filing by transferors of statements and briefs with respect to
uncompensated unconstitutional erosion: October 13
Response by Government parties: November 15
Replies: December 7
(6) Briefs (accompanied by affidavits or offers of proof) on constitu-
tional minimum.
Opening briefs—January 6
Answering briefs—February 20
Reply briefs—March 18 :
APPENDIX B
CA-30
Appendix B
SPECIAL COURT
REGIONAL RAIL REORGANIZATION ACT OF 1973
Special Court—Misc. No. 76-1
Filed October 18, 1976, James F. Davey, Cierk
_ >
IN THE MATTER OF THE VALUATION PROCEEDINGS
UNDER §§ 303(C) AND 306 OF THE REGIONAL RAIL
REORGANIZATION ACT.
~~
Before FRIENDLY, Presiding Judge, and WisDOM and
THOMSEN, Judges.
Opinion with Respect to Issues Set for Briefing and
Argument as Subjects (1) and (2) of Schedule
Attached to Memorandum and Order of
June 16, 1976
FRIENDLY, Presiding Judge:
In our Memorandum and Order of June 16, 1976 (hereafter
“June 16 Memorandum”), a copy of which is appended to this
opinion as an addendum, issued after we had received-statements
of position from the parties and answers thereto, we sought to
identify certain issues of principle early determination of which
by this Court would enable us to frame appropriate instructions to
the special masters who will take detailed evidence. Opening
briefs on various subjects were due by August 23, with answering
briefs to be filed on September 21. Oral argument was heard on
September 27. In this opinion we deal with most of these sub-
jects, although, as anticipated in the June 16 Memorandum, we
find that an attempt at resolution of some would be premature.
CA-31
Appendix B
I. “PUBLIC INTEREST”
Section 303(c)({1)(A) of the Rail Act directs that after the
transfers and conveyances of the properties designated in the
FSP, this Court “giving due consideration to the findings con-
tained in the final system plan” shall determine, among other
things, whether such transfers or conveyances “are in the public
interest”. We raised the question what our responsibilities in
making that determination could be since a number of provisions
of the Act and materials in the legislative history indicated that
we were not to pass generally on the merits of the FSP from a
transportation standpoint,’ a task performed initially by USRA
and later in some degree by Congress itself, and also because any
large scale reconveyance would be impracticable.
Most of the parties, evidently sharing our inability to discern
what Congress expected of us, have advanced no suggestions on
this. The E-L Trustees suggest that the “public interest” clause
might require us to consider the viability of ConRail at the time
when it becomes necessary to distribute the Series B Preferred
Stock and the common stock, whose fair market value is deduct-
ible from the base value of the certificates of value, § 306(c).”
We are not greatly impressed by the argument but we need not
deal with it at this time since the date of the distribution unhap-
pily is far in the future.
The Trustees of the Reading suggest that the “public interest”
requirement compels us to pass on contentions that the designa-
tions of certain property do not meet that criterion. They cite as
examples the designation of Reading’s 3,000 shares (all the capi-
tal stock) of the Washington & Franklin Railway Company,
which is leased to the Western Maryland Railroad Company, a
Chessie System subsidiary, under a 995-year lease running from
July 1, 1901, and Reading’s 500 shares of stock in the Trailer
Train Company. The First National Bank of Chicago, as Trus-
tee under the First Mortgage Indenture of The Chicago River and
Indiana Railroad Company, raises a somewhat similar question
enews
CA-32
Appendix B
with respect to the Ashland Avenue year in Chicago.’ Finally,
the North Pennsylvania Railroad Company, the Delaware and
Bound Brook Railroad Company, the Philadelphia, Germantown
and Norristown Railroad Company, and the Plymouth Railroad
Company, question whether two properties—one belonging to the
Bound Brook and allegedly without rail use, and the other consist-
ing of various overhead utility wire rental agreements—were
properly designated.
Although we are cognizant of the arguments, based particu-
larly on the final sentence of § 208(d)(2), on § 208(d)(3)(C),
and on the final sentence of § 209(e)(1), that may be made
against such review, we are not disposed to rule out the latter
without further briefing. Contentions that particular transfers
were not “in the public interest” raise some of the same questions
as contentions, raised at an earlier stage of the proceedings before
us, that certain designations were not of “rail properties” as
defined in § 102(12). It is highly desirable that if any transfers
or conveyances are to be annulled as not in the public interest or
as unauthorized, this should be determined before time and effort
are expended in valuing them. We therefore direct that any
claims that transfers or conveyances were not in the public inter-
est or were unauthorized be filed, in the form of complaints in
separately numbered actions, not later than December 1, 1976,
and order that any claims not so filed will be deemed to have been
waived. Notice of this direction will be promptly mailed by the
Court’s executive attorney to counsel for all transferors who
appeared in the transfer proceedings, Misc. No. 75-3. We, of
course, encourage the parties to endeavor promptly to settle any
disputes of this sort; an appendix to the answering brief of the
Government parties indicates that such efforts are in progress
with respect to several of the properties we have mentioned.
Save to the extent here indicated, we shall instruct the special
masters not to give further consideration to the “public interest”
criterion of § 303(c)(1)(A) insofar as it relates to setting a
CA-33
Appendix B
standard of valuation unless a party makes a specific and sup-
ported request to that end, showing that a different result would
ensue from application of the criterion, in which event the master
shall seek this Court’s further instructions.
Il. “FAIR AND EQUITABLE”
Section 303(c)(1)(A) also requires us to make a finding,
subsequent to the transfers and conveyances, that these
are fair and equitable to the estate of each railroad in
reorganization in accordance with the standard of fairness
and equity applicable to the approval of a plan of reorgani-
zation or a step in such a plan under section 77 of the
Bankruptcy Act (11 U.S.C. 205), or fair and equitable to
a railroad that is not itself in reorganization but which is
leased, operated, or controlled by a railroad in reorganiza-
sss
In the June 16 Memorandum we expressed doubt whether these
words, generally used in corporate reorganization law to deal with
the distribution of the securities of a reorganized company among
various Classes of creditors and stockholders, had any practical
application to the valuation of the properties “in view of the facts
(a) that if the consideration is ‘fairer and more equitable than is
required as a constitutional minimum,’ § 303(c)(3) requires us
to eliminate the excess, and (b) that if the consideration were less
than the constitutional minimum, it would not be fair and
equitable.”
Here again most of the parties share our inability to discern
why, under the terms of the Rail Act, the requirement that we
find that the consideration is more than, less than, or equal to the
“constitutional minimum” does not drain the “fair and equitable”
language of all meaning as regards the adequacy of the total
consideration to be received by each transferor.! Accordingly we
propose to instruct the special masters that in valuating the
CA-34
Appendix B
properties they need not address themselves to the fair and equi-
table standard as distinguished from the constitutional minimum
in the absence of a specific and supported claim that a different
result would ensue from application of such a standard, in which
event the master shall seek this Court’s further instructions.
Ill. REORGANIZATION VS. EMINENT DOMAIN STATUTE
In the June 16 Memorandum we requested the parties to brief
the question “whether the standard of valuation should be differ-
ent if the Act be regarded as a reorganization statute, as an
eminent domain statute or as both.” (P. 9, footnote omitted).
The question how far the Rail Act is a “reorganization statute”
and how far it is an exercise of eminent domain was considered by
this Court in Jn the Matter of Penn Central Transportation Com-
pany, 384 F. Supp. 895, 926-38, 948-52 (1974) (sometimes here-
after “our 1974 decision”), and, more importantly, by the
Supreme Court in Regional Rail Reorganization Act Cases, 419
U.S. 102, 148-55 (1974).
In light of the briefs and argument, we now have some doubt
whether the question we put in our June 16 Memorandum was
precisely the right one. Perhaps the question could be more
accurately stated as being whether the Act involves a taking and,
if so, whether the “constitutional minimum” required both by the
terms of the Act and by the Fifth Amendment differs if the Act
should be regarded as a reorganization statute enacted under the
bankruptcy power or as a statute enacted under the commerce
power or as both.
The transferors and creditor and stockholder interests argue
that the Rail Act is a taking within such cases as United States v.
Causby, 328 U.S. 256 (1946), and Armstrong v. United States,
364 U.S. 40 (1960), and that the constitutional minimum must,
therefore, be a figure established in light of the body of case law
relating to eminent domain, of which they regard the decision in
In the Matter of the Port Authority Trans-hudson Corp., 20
CA-35
Appendix B
N.Y.2d 457, 231 N.E.2d 734 (1967), cert. denied, 390 U.S. 1002
(1968), as a significant example. They would dispose of the
Supreme Court’s indication, 419 U.S. at 155, that the only taking
is of the “shortfall” between the constitutional minimum and the
value of the compensation provided under the Act on the basis
that this formulation requires judicial determination of what con-
stitutes a constitutional minimum and that the process of deter-
mining the amount of any “shortfall” thus is no different than if
the entire property were taken. In other words, they regard the
Count’s emphasis on the Act’s being a valid exercise of the bank-
ruptcy power and thus a reorganization statute, 419 U.S. at 153,
as being a basis for upholding the validity of the Act without the
Court’s being obliged to decide whether compensation other than
money may be adequate under what is solely a condemnation
statute, see 419 U.S. at 149-55, rather than as implying that the
constitutional minimum would be different than if the Rail Act
had been enacted solely under the commerce power.
The Government parties point to other arguments which look
the other way. They cite this court’s statement, 384 F. Supp. at
927, that Congress did not have to choose between “the Scylla of
outright condemnation and subsequent nationalization and the
Charybdis of a collapse of rail transportation in the most heavily
industrialized section of the country”; they argue from this that
we did not believe that the Rail Act constituted “outright con-
demnation.” They refer also to the Supreme Court’s statement,
419 U.S. at 152-53, where in answer to a contention that the Rail
Act’s provisions “for a compelled conveyance and for the continu-
ation of rail services pending formulation of the Final System
Plan constitute the Act a condemnation statute”, the Court found
“no significance in these features of the Act” since “Congress, in
enacting those provisions, clearly intended to legislate pursuant to
the bankruptcy power”, and followed this up with a reference to
RFC v. Denver & R.G.W.R. Co., 328 U.S. 495 (1946), “where
the Court sustained the ‘cram down’ provision of § 77 authorizing
a reorganization court to confirm a plan despite its rejection by
CA-36
Appendix B
creditors.” Stressing the creditors’ and stockholders’ continued
ownership in the assets conveyed to ConRail by virtue of the
distribution of the Series B Preferred and common stock to the
transferors, the Government parties argue that if Congress had
simply authorized or directed a reorganization court to carve out
the most productive elements of a bankrupt railroad and transfer
them to a new corporation in exchange for its securities, this
would have come within traditional reorganization concepts and
that no different result is required because the Rail Act dealt with
the assets of a number of primary and secondary bankrupts and
even of non-bankrupts whose properties were leased or controlled
by bankrupts. See in this connection the discussion at 384 F.
Supp. at 951-52. The upshot of the contention of the Govern-
ment parties is that the constitutional minimum for the properties
transferred should be determined solely by reference to the value
of realistic choices of which the Rail Act deprived the transferors,
rather than under principles of condemnation law if the latter
should in fact be different, which they deny.
In light of our conclusion that determination both of net liqui-
dation value and of the constitutional minimum requires consid-
eration of evidence showing significant likelihood of sales for rail
use, it is difficult at this point to appraise exactly how much may
ride upon the difference between these views. It is clear, how-
ever, that the amount may be substantial. In the light of the
extensive and helpful briefing and argument, it now appears to us
that a decision as between the respective positions at this time
might significantly impinge upon our determination of constitu-
tional minimum value discussed in Part V of our June 16 Memo-
randum which we set for more detailed briefing in early 1977.
Accordingly, we conclude that it is not desirable at this time to
answer the question put in Part II(3) of our June 16 Memoran-
dum, as put or as here recast, and that we should defer decision
until we have received the briefs therein specified and heard
further argument.
CA-37
Appendix B
IV. SALES TO PUBLIC BODIES FOR. RAIL
USE—AND HEREIN OF “NET LIQUIDATION VALUE.”
On p. 16 of the June 16 Memorandum we posed the following
question:
Assuming that in determining “net liquidation value” as
used in § 306(c)(4) the Court should take account of a
higher price obtainable for certain properties on a sale for
rai! use rather than, as USRA proposed, “at the pricing
levels which would obtain if all rail operations over the
lines of the bankrupts actually ceased and as if the assets
of the railroads in reorganization actually were disman-
tled and disposed of for other uses” (FSP, Vol. I, p. 125),
should the Court do this when the proposed sale is to a
public body vested with the power of eminent domain, in
the absence of proof of a private purchaser ready and
willing to make the purchase?
For the reasons indicated below, the submissions convince us that
the transferors should be left free to develop the significant likeli-
hood of such sales and the prices expectable therefrom, following
the procedures outlined on pages 16 and 17 of our June 16
Memorandum.
The Government parties argue strenuously for a negative
answer to the question posed. They rely heavily on the point that
sale to a public body even for rail use would constitute an aban-
donment requiring a certificate from the Interstate Commerce
Commission under § 1(18) of the Interstate Commerce Act; that
§ 1(20) authorizes the Commission to “attach to the issuance of
the certificate such terms and conditions as in its judgment the
public convenience and necessity may require”; and that the
Commission frequently includes as a condition a “salvage value
clause.” This typically reads:
[T]he applicant [shall] sell the branch or any part
therecf, to any person or persons offering . . . to purchase
CA-38
Appendix B
the same for continued operation at a price not less than
the net salvage value thereof.
Texas & N.O. R.R. Abandonment, 282 1.C.C 1,13 (1951). See
also Jamestown, W. & N. R.R. Abandonment, 217 1.C.C. 739,
740 (1937); more recent cases cited in New haven Inclusion
Cases, 399 U.S. 332, 472 n.74 (1970); C. Cherington, The Regu-
lation of Railroad Abandonments 172 n.42 (1948). The Gov-
ernment argues that, having fair assurance that the Commission
would include such a clause, no rational purchaser, public or
otherwise, would pay more than salvage value unless required to
do so by the threat of a higher competitive bid.
Although we do not preclude the Government parties from
further argument on this point, we are not much persuaded. The
purpose of such clauses is, as stated in Tennessee Central Ry.
Abandonment, 333 1.C.C. 443, 455 (1968), to insure that an
applicant for abandonment “give first consideration to any offer
for acquisition which contemplates continued operations over all
or substantially all of its line railroad.” The Commission’s speci-
fication of salvage value has occurred in contexts in which the
Owner was proposing to scrap the branch and had no better alter-
native in view. It is the continued operation, not preventing an
owner from securing an optimum price, which is the Commis-
sion’s prime objective. As the Commission stated in Washington
and Old Dominion Railroad Abandonment, 331 1.C.C. 587,599-
600 (1968), review action dismissed without need to discuss the
point, Washingion and Old Dominion Users Ass'n -v. United
States, 287 F. Supp. 528 (E.D. Va. 1968),
Ordinarily the prescription of a price in the terms “not
less than net salvage value” sets only the bidding minimum
and guarantees that the abandoning railroad will not have
to take less in a sale of the line intact for future operations
than it could obtain by disposal otherwise. What price is
CA-39
Appendix B
actually paid depends, in most instances, upon circum-
stances, peculiar to each case—though not less than net
salvage value. It might be the highest price bid above
scrap value; or a price stated by the carrier as satisfactory
to it; or some amount above a stated salvage value: or a
price negotiated at arms length by the abandoning line
and the acquirer.
Although this was said in a case where the proposed disposition at
a figure higher than salvage value was for highway rather than
railroad use, the Commission has also refused to use the salvage
Clause as a means for limiting the amount which a railroad seller
may obtain from a railroad purchaser. Chicago, M., St.P. & P.
R.R. Abandonment, 347 1.C.C 1, 2 (1973). The Commission
there said it was of the view:
that in prior proceedings involving conditions such as that
herein, the Commission has not undertaken to set the
maximum price for the sale of such trackage [see, Wash-
ington & Old Dominion R. Abandonment—Virginia, 331
I1.C.C. 587, 599 (1968)]; that it has been recognized,
among other things, that to do so would be an unwar-
ranted interference with the contractual rights of the par-
ties; that setting a maximum price based solely on the net
salvage value of the line might ignore other factors, such
as the value of the right-of-way, having a reasonable bear-
ing on a fair price for requiring continued operations of the
line in the interest of the public; that in establishing the
standard of net salvage value as a minimum, reasonable
price, the Commission has been cognizant that a railroad
should be able to recover at least this much of its capital
investment in its line in exchange of foregoing the opportu-
nity of selling the trackage for other than transportation
purposes or for possible usage of the trackage in other
parts of its system... .
ess nhl etnias Sitti
CA-40
Appendix B
The Government parties have pointed us to no case where the
Commission insisted on sale at salvage value where a purchaser
for continued use, even in the absence of competition, was willing
to pay more, and we are by no means certain that the Commission
lawfully could attach a salvage clause in such a situation, even if,
as apparently is not the case, its policy were todoso. Insofar asa
statement in New York, N.H. & H. R.R. Bondholders’ Commit-
tee v. United States, 289 F. Supp. 418, 435 (S.D.N.Y. 1968),
may indicate that the Commission could and would require a sale
at salvage value where a public body would be compelled to pay
more under a state condemnation statute, this was said in a case
where there was no proof of interest by the public body in a
consensual sale at a price above salvage value and without the
court’s having had the benefit of citation to the Commission
decisions in the Old Dominion and Milwaukee cases, the latter of
which had not yet been rendered.
Furthermore, it is not certain that all abandonments will nave
to await action by the Commission. In this Court’s 1974 opinion,
384 F. Supp. at 919 n.31, we stated our assumption that abandon-
ment procedures might have to be pretermitted if a reorganiza-
tion trustee ran out of cash after exhausting all reasonable efforts
to raise it. The answering brief of the CNJ Trustee (p. 11 n. 9)
considers this to be only one instance of a general principle that a
certificate of abandonment is not required when cessation of oper-
ations is compelled by circumstances beyond the railroad’s con-
trol. See also reply brief of Penn Central Lienholders, p. 26.
Since this question is also important on the issue of the timing of
sales for scrap, we prefer not now to decide how far our assump-
tion or the broader argument noted is sound; it suffices that the
points are sufficiently arguable that we would not wish to decide
them against the transferors at this time.
Finally, transferors and creditor interests have cited examples
in which public bodies vested with the power of eminent domain
have paid more than scrap value for railroad properties desired
for continued use even in the absence of competition and have
CA-41
Appendix B
given reasons why this behavior would not be irrational even if the
arguments of the Government parties with respect to salvage
clauses were sounder than we now think them to be. Among
these are the desire for a speedy settlement to prevent further
decreases or deterioration of service; the possibility that a certifi-
cate of abandonment might not be required; the desire to acquire
not simply physical assets but an operating organization; fear that
a reorganization court might not approve a sale at salvage value;
and the fact that state condemnation statutes might require pay-
ment of more than scrap value so that a settlement may be
cheaper as well as swifter than condemnation proceedings. For
all these reasons we think that transferors and creditors should be
free to develop realistic possibilities of sales of particular lies to
public bodies at higher than scrap value even in the absence of
proof of competition; the Government parties will, of course,
be free to counter any such proof with any relevant evidence.”
The Court calls attention to the procedure for handling the sub-
ject of sales for railroad use generally which is outlined on pages
16 and 17 of the June 16 Memorandum and urges that this
process be expedited.
V. NETLIQUIDATION VALUE VERSUS CONSTITU-
TIONAL MINIMUM
On p. 17 of the June 16 Memorandum we stated:
A number of the transferors have advanced theories for
determining NLV that seem to have nothing to do with
“liquidation,” particularly in the light of the discussion at
p. 199 of the Conference Report. As at present advised,
we believe that the place for these theories is in the consid-
eration of the constitutional minimum, which we will dis-
cuss in Part V of this Memorandum. The briefing and
argument of the validity of these theories which is there
directed can include the point raised in the two preceding
sentences.
H
CA-42
Appendix B
Despite this, the brief of the New Haven Trustee® contains an
extensive argument that NLV should be read as the equivalent of
CMV. Although we shall abide by our commitment not to
decide this issue until the briefing and argument of subject (6),
we think that since the issue has been ventilated, it would assist
the parties if we stated why, whatever the desiderata might be, we
are unconvinced at the moment that a determination of net liqui-
dation value embraces all the elements that may be called for in
determining the constitutional minimum.
The Rail Act as adopted on January 2, 1974, 87 Stat. 985, did
not require a determination of net liquidation value. Neither did
the Senate version of the 1976 Act, S. 2718, 94th Cong., Ist Sess.
The provision in the Senate bill for determining the base value of
the certificates of value was that this “shall be the value obtained
by taking the constitutional minimum value, if any (as deter-
mined pursuant to section 303(c)(1) of this title),” plus and
minus certain items.
In passing the bill in this form the Senate overrode an objection
from the Secretary of Transportation reading as follows:
The base value of certificates of value should not be estab-
lished at whatever figure the Special Court designates as
the constitutional minimum. Such a provision will seem
to signal a congressional repudiation of both USRA’s net
liquidation value theory and Congress’ own intention in
the Regional Rail Act to provide for a reorganization, not
a condemnation, of the bankrupt railroads.
S. Rep. No. 499, 94th Cong., Ist Sess. 315-16 (1975). The
House Committee, however, substituted the words “the net liqui-
dation value, as determined by the special court” for the Senate’s
“constitutional minimum.” H.R. 10979. The Report of the
House Committee on Interstate and Foreign Commerce, H.R.
Rep. No. 725, 94th Cong., Ist Sess. 121 (1975), accurately
described the House version but did not explain the reason for the
CA-43
Appendix B
change from the Senate’s. It did contain a letter from the Secre-
tary of Transportation commending “the improvements the Com-
mittee made to the provisions on certificates of value” and
indicating that if these were to be changed on the floor, “the bill
would not be acceptable to the Administration”. Jd. at 282.
Faced with this, the Conference Committee adop‘ed the House
version, with no explanation other than that
The role of the certificates of value is to assure that these
private interests will fare no worse than under the liquida-
tion alternative.
H.R. Rep. No. 781, 94th Cong., 2d Sess. 199 (1976).
We may agree with the New Haven Trustee that it is hard to
see how the change demanded by the Secretary of Transportation
benefits the Government in the long run. If the certificates of
value, determined on the basis of net liquidation value, plus and
minus the other elements requiring consideration, are less than
the constitutional minimum, a figure which this Court, subject to
review by the Supreme Court, was necessarily left free to deter-
mine, the balance would be awarded—not indeed by action of this
Court but as a result of further expensive and time-consuming
proceedings in the Court of Claims. But quite obviously the
Secretary thought he might be accomplishing a change in the
standard for determining the base value of the certificates of
value, and left Congress no feasible alternative save to go along.
This history itself seems to preclude our reading the two terms to
mean the same thing, even though the differences may not be so
great as the Secretary thought. The term “liquidation” normally
implies a sale, although not necessarily a sale for scrap value; the
constitutional minimum may well be more—a point we reserve
for decision after further briefing.’ If this analysis is in error, the
parties should clearly point out why.
5
’
:
/
‘
:
:
1
CA-44
Appendix B
VI. PROCEDURE FOR VALUATION OF PROPERTY OF
SECONDARY DEBTORS AND NON-BANKRUPT
TRANSFERORS.
There appears to be general agreement that, whatever this
Court’s ultimate responsibilities may be, the proceedings before
the special masters should not concern themselves with the
respective interests of lessor and lessee in an award for the same
property. We endorse that conclusion and think it is premature
to consider how that issue should ultimately be handled.
With a few exceptions the parties seem also to agree that since
it will be desirable (although not necessarily sufficient) to value
the system of each primary debtor as a whole and since it may be
that many elements of VOB (value of other benefits) and CUE
(compensable unconstitutional erosion) can be determined only
on a system-wide basis, we should appoint special masters with
reference to the estates of the primary debtors (doubtless several
in the case of the Penn Central) rather than designate separate
special masters for each transferor (or group of transferors). We
agree with that position. The contrary argument of a few rather
small transferors, based largely on the supposed speed with which
their problems could be solved, ignores the interdependence of all
transferors created by § 303(c)(2) and the undesirability that
initial determination by this Court and review by the Supreme
Court should take place in what may be a wholly atypical case.
However, there is a difference of opinion whether each special
master should content himself with a finding with respect to the
system or conduct the hearing so as to enable him to make addi-
tional findings with respect to each transferor.
There would seem to be no doubt that under §§ 303(c)(1)(A)
and 306(c)(4) findings as to each transferor will ultimately be
required. The question therefore is one of relative conven-
ience—will it be simpler and fairer to have the special masters
arrive at figures for each system, which presumably we will
review, and then start over again with respect to each transferor
CA-45
Appendix B
within the system, or to conduct the hearings in the estate of each
primary debtor with a view to making the separate findings con-
cerning various transferors that will ultimately be needed. We
think the latter.’ Certainly a transferor must be permitted at
some time to present a theory (within the parameters established
by this Court) resulting in a higher valuation for its property than
would result from allocation of a system value; we would think
this could better be done in the same proceeding in which the
primary debtor is presenting its theory, particularly since a higher
value for the property of one transferor might reduce the value of
the properties of others. Generally time will be saved if the
parties address themselves to the question of relative shares at a
date when the necessary figures are more likely to be available
rather than postpone the problem to a distant future when records
and knowledgeable witnesses may have disappeared. ‘ On the
other hand, we shall expect the various transferors to live up to
their promises of cooperation with the primary debtors and the
masters in an effort to minimize time and expense.
CA-46
Appendix B
Finally, referzing to Part II1(4) of the June 16 Memorandum,
we note that no party has taken the position that the last sentence
of §209(e)(1)—the “reckless or deliberate disregard”
clause—applies to valuation proceedings under
§§ 303(c)(1)(A) and (B) or 306(c)(4). Accordingly the
Court will consider the taking of any such position to be
foreclosed.
HENRY J. FRIENDLY
Henry J. Friendly
Presiding Judge
JOHN MINOR WISDOM
John Minor Wisdom
Judge
ROSZEL C. THOMSEN
Roszel C. Thomsen
Judge
October 18, 1976
CA-47
. Appendix B
FOOTNOTES
1. See Regional Rail Reorganization Act of 1973, as amended,
§ 209(a) second sentence; Report of the Committee of Conference of S.
2718, H.R. Rep. No. 781, 94th Cong., 2d Sess. 187-88 (1976).
2. A similar suggestion is made by the Trustee of the Central
Railroad Company of New Jersey, and by the Intervening Penn Central
Lienholders. Cf. opening brief of the Trustee of the Lehigh Valley
Railroad Company; brief of the Trustee of the ee and Hudson
River Railway Company.
3. The FSP, Vol. I, p. 262, limited the designation to the portion of
the yard “needed to sustain ConRail operations.” The Bank contends
that the portion ordered to be conveyed was in excess of this.
4. As noted in the June 16 Memorandum (p. 8), the Government
parties suggest that fairness and equity might eniitle transferors of
particularly strategic properties to larger allocations of ConRail Series
B Preferred and common stock, which would give them a larger share in
the envisioned future prosperity of ConRail. This issue is a long way off
and we need not consider it now.
5. The Government will doubtless claim that a state would not be
interested in making the substantial payments required for taking over
main line (as distinguished from commuting) operations without assur-
ance that other states would take similar action to the extent required to
constitute a viable system. The transferors thus might be well advised
in their own interests to develop an “alternative scenario” (or a number
of such scenarios) of the sort discussed in the statement of contentions of
the Government parties (see June 6 Memorandum p. 15).
6. This brief disregards the limitation imposed by us on granting
intervention to the New Haven Trustee, namely, that this was “for the
limited purpose of presenting contentions pertaining specifically to
properties transferred by the New Haven estate to Penn Central.” June
16 Memorandum p. 26. Our object in allowing intervention by the New
Haven Trustee was to permit him to present contentions arising out of
the inclusion of the New Haven in the Penn Central, such as, to take one
example, a claim that the New Haven’s properties having once been
valued should not be revalued except to take account of subsequent
dispositions and the fact that certain properties were not transferred to
CA-48
Appendix B
ConRail. It was not and is not our intention to allow the New Haven
Trustee to intervene to present positions with respect to valuation issues
where the New Haven’s interest as a creditor of Penn Central is ade-
quately represented by the Penn Central Trustees.
7. The strongest case would be where a piece of railroad which the
Interstate Commerce Commission would allow to be operated shorn of
unprofitable track would earn an income whose capitalized value would
exceed net liquidation value.
8. There are some instances in which a line is leased or controlled
by more than one primary debtor; in these cases the parties have reached
or are in the course of reaching agreement as to the estate in which the
valuation is to occur.
cia i
CA-49
Appendix B
Addendum
SPECIAL COURT
REGIONAL RAIL REORGANIZATION ACT OF 1973
Special Court—Misc. No. 76-1
>
IN THE MATTER OF THE VALUATION PROCEEDINGS
UNDER §§ 303(C) AND 306 OF THE REGIONAL RAIL
REORGANIZATION ACT!
_
MEMORANDUM AND ORDER DIRECTING PRELIMI-
NARY PROCEEDINGS FOR THE DETERMINATION
OF GENERAL PRINCIPLES UNDER §§ 303 AND 306
OF THE ACT
Il. HISTORICAL BACKGROUND AND GENERAL
CONSIDERATIONS.
In this Court’s opinion of September 30, 1974, 384 F. Supp.
895 at 926 n.53, we said that, as we then envisioned, our initial
task after the conveyances provided in § 303 of the Act, “would
be, after suitable briefing and argument, to set the principles for
valuing the properties conveyed.” These principles would then be
applied to specific properties by a number of special masters,
whose decisions we would review. It would have been premature
to attempt to analyze just what issues would benefit from such
advance determination, and we likewise did not address ourselves
to such questions as whether an initial setting of guidelines would
require discovery or the taking of evidence.
The extensive amendments made in Title VI of the Railroad
Revitalization and Regulatory Reform Act of 1976 have consid-
erably augmented the difficulties of what already was probably
the most gigantic task ever confided to a court. The added
problems arise in considerably part from the Amendments’ crea-
tion of a new form of security which is to comprise a part of the
ek Wee ect
CA-50
Appendix B
consideration payable to railroads that have transferred property
to ConRail, namely, “certificates of value” (CV’s), § 306, which
are to be redeemed by USRA not later than December 31, 1987,
§ 306(c)(1); the CV’s are guaranteed by the Secretary of Trans-
portation, constitute general obligations of the United States, and
carry of pledge of its full faith and credit, § 306(a). A separate
series of CV’s is to be issued to each transferor, § 306(b). Criti-
cal to ascertainment of the redemption price is our determination,
§ 306(c) (4), of the “base value” (BV) of ach series. This is
computed by determining the “net liquidation value” (NLV), to
which the transferor may be entitled by virtue of transfer of
property to ConRail, subtracting the value of other benefits pro-
vided under the Act (VOB), adding compensable unconstitu-
tional erosion (CUE), and finally adding interest compounded
annually at the rate of 8% per annum; to get the BV of each
certificate, the figure just obtained is divided by the number of
certificates in the series. The formula, omitting the interest item
and the final division, thus is:
BV = NLV — VOB + CUE
A principal problem is that this new concept was superimposed on
the concepts of “public interest,” “fair and equitable,” and “con-
stitutional minimum” in § 303(c) without any clear indication in
the statute itself, as distinguished from the legislative history,
what Congress considered was the relationship of the securities
issuable to the transferors’ as prescribed by § 306 and the stan-
dards laid down in § 303.°
The added complexities created by the 1976 Amendments
seemed to us to heighten the necessity for this Court to make as
many determinations of law as possible, at least in a preliminary
fashion, before putting the special masters to work. Putting
aside for the moment the secondary debtors of Penn Central
(PC) and the non-bankrupt lessors, we have seven primary debt-
ors, and it is apparent that more than one special master will be
required in the case of Penn Central (PC) and perhaps in that of
CA-51
Appendix B
the Erie-Lackawanna (EL) if undue delay is to be avoided;'
realistically therefore when we speak of special masters, we are
thinking in terms of at least ten.
Because of such considerations the Court, on March 9, 1976,
sent a letter to all members of the Acting Liaison Committee
which the Court had appointed, outlining the Court’s tentative
views of what legal issues required decision and raising a number
of procedural questions. This led in turn to the Court’s order of
April 26, 1976, prescribing a procedure whereby all parties were
invited to file statements commenting on the issues and the struc-
ture of this proceeding, with an opportunity to file answers
responding to the statements of others. The order also set forth a
procedure whereby persons not named as parties might apply for
leave to intervene. The Court has now reviewed these statements
and answers, many of which have been exceedingly helpful.
While substantially all the comments recognize the existence of
some questions which the Court may now determine after appro-
priate briefing and argument, most take a rather parsimonious
view on this score. Although professing to recognize the neces-
sity of providing the special masters with guidelines, many of the
proposals seem to be that the special masters shall take evidence
on whatever theory passing the lowest threshold of rationality
may be offered to them.’
We think this would produce utter chaos. If a transferor or
security holder® is allowed to offer evidence based on a certain
theory of value, the Government parties’ could not afford simply
to argue that the theory was wrong; they would be obliged to
cross-examine and offer rebuttal on the detailed application of the
theory since for aught that would appear we might adopt it.
Similarly the special masters would be obliged to make factual
findings with respect to all theories even though we were to relieve
them of the task (which we would reserve for ourselves) of choos-
ing among them.
While we respect the zeal displayed by the parties, there are
other considerations that must be borne in mind. The PC has
CA-52
Appendix B
already been in reorganization for six years, the CNJ still longer,
and the New Haven since 1961. It has now become apparent
that a good many months will elapse before the special masters
can profitably be put to work in any event. It is impossible to
predict how long their labors will take under the best of circum-
stances, and if we had not already determined the proper princi-
ples we would be at the mercy of the slowest, since otherwise our
determination in the earlier cases would govern the ijater ones
without having afforded the parties in such cases a hearing.
After the masters’ reports will come our own consideration and
decision on a mammoth record, and appeal to the Supreme Court,
and possibly proceedings in the Court of Claims. Until all these
steps, save perhaps the last, have been completed, the reorganiza-
tion courts will be unable to make meaningful progress with their
individual plans and the expensive administration of these estates,
some of which are understood to be on the verge of actual insol-
vency, must continue. Indeed we have considerable doubt
whether, under the procedures proposed by some parties, the
CV’s could be valued by December 31, 1987, their redemption
date. The legal and other expenses of the litigation in this Court
will be tremendous in any event and would become even more
staggering and a legitimate subject for public concern if the
litigation were protracted beyond the necessities of the case.
Given all this and the fact that no procedure can produce a
mathematically perfect result, it behooves all concerned with this
proceeding to cooperate in devising procedures that will shorten
the interval before final decision to the the full extent compatible
with essential fairness. We believe it is possible to devise proce-
dures that will enable us to decide a large number of basic ques-
tions before the special masters go to work, although there are
other matters on which there is no need for an early decision. In
saying this we are conscious of the risk that by making some
preliminary rulings we may be courting reversal by the Supreme
Court and the need of starting all over again; we simply think the
danger of this to be less serious than the consequences of letting
CA-53
Appendix B
the special masters proceed as some of the parties have proposed,
see fn. 5. Indeed, as this Memorandum progresses, the need for
our making a considerable number of preliminary rulings will
become even more evident.
We add one final prefatory note. The complexity of this case,
as revealed by the statements submitted to us, has convinced us
that the many preliminary issues that must be considered are best
addressed in several separate units. What follows is a delineation
of these units, with instructions to the parties and intervenors as
to how they should proceed as to each. For the convenience of
the parties we annex a schedule of the dates fixed for various steps
in these preliminary proceedings.
I]. QUESTIONS WHICH THE COURT CAN NOW DECIDE
WITHOUT PRESENTATION OF FACTUAL MATERIAL.
There appears to be almost complete agreement that the Court
may now decide, without taking any evidence, what we character-
ized in our March 9, 1976 letter as the “first set” of § 303 issues;
indeed, there appears to be a fair amount of agreement how we
should decide them. Accordingly we shall set these and some
other matters for briefing and argument in accordance with the
schedule outlined below:
Initial briefs - August 23, 1976
Answering briefs - September 21, 1976
Time requests for oral argument shall be filed with the answering
briefs. In this and all other cases dealt with in this Memorandum
and Order, the parties shall arrange for joint briefing and argu-
ment to the maximum extent possible and shall keep the length of
briefs to the minimum. After studying the briefs and the time
requests, the Court — perhaps after a pre-argument conference
— will advise the parties of the time, place and organization of
the argument.
CA-54
Appendix B
In light of the statements, we deem it desirable to sharpen the
issues as follows:
(1) “Public interest.” The first question raised in our
March 9 letter concerned the nature of our responsibility under
§ 303(c)(1)(A) to determine whether the transfers and convey-
ances “are in the public interest . . . ,” especially in view of the
description of judicial review in the second sentence of § 209(a)
and the statement on p. 187 of the Conference Report of January
23, 1976. Several parties suggest that we need only determine
that Congress had a rational basis for enacting the Rail Act and
make no suggestion that it did not. If that is right, this issue can
be regarded as substantially out of the case. However, two other
views emerge from some of the statements.
One of these is that the “public interest” test requires us to pass
on the viability of ConRail. At the moment we do not under-
stand why we need to do this, just how we should go about it, or
what we could do if we decided in the negative since a major
reconveyance does not appear to be feasible. If any parties
espouse this view, they should develop it in briefs.
The other such view is that although the “public interest” test
may have little or no significance for the main body of the convey-
ances, it may require us to pass on the inclusion of certain periph-
eral properties or to decide whether, if the Act be regarded as a
condemnation statute, certain properties were taken for some-
thing other than a public use.’ It is hard to consider the question
in vacuo. Any transferor or security holder allowed to intervene
who asserts this position shall include in its brief illustrative state-
ments of the properties in respect of which such a claim is made
and the supporting reasons; the answer of the Government parties
need meet such claims only with respect to legal issues since
evidence would have to be taken if the Court were to decide there
is need to pursue the matter further. In other words, what the
Court needs is factual material sufficient to enable it to decide
CA-55
Appendix B
whether, if any such claims are made, they have sufficient legal
merit to require further development of the facts.
(2) Fairand equitable. The second question propounded in
the March 9 letter concerned the construction of the “fair and
equitable” language in § 303(c)(1), especially in view of the
facts (a) that if the consideration is “fairer and more equitable
than is required as a constitutional minimum,” § 303(c)(3)
requires us to eliminate the excess, and (b) that if the considera-
tion were less than the constitutional minimum, it would not be
fair and equitable.
Almost all, perhaps all, the statements seem to agree that the
fair and equitable language serves no significant function in the
determination of the value of any particular property, although
several parties (including the Government parties) have sug-
gested that this language may have a bearing on the allocation of
ConRail’s Series B Preferred and common stock. There is no
need to rule on the latter suggestion now, since it will not be a
matter for immediate consideration by the masters. Accordingly
the Court will consider the “fair and equitable” issue to have been
removed from the process of valuing the properties of individual
estates or other transferors unless this is raised in the briefs to be
filed as above indicated; any person taking such a position shall
state with precision and not merely in conclusory terms how the
“fair and equitable” test differs from the constitutional minimum
test with respect to valuation in the context of the Act as it now
stands.
The March 9 letter also raised the question whether the Court
was bound to ascertain by what amount the consideration was less
than fair and equitable and, by the same token, less than the
constitutional minimum, even though the Court might have no
effective way of remedying the defect. Further consideration had
led us to an affirmative answer even before receipt of the state-
ments; several of these suggest this and none opposes. Accord-
ingly there is no need to brief this issue.
CA-56
Appendix B
We pass now to certain other questions of law which we believe
the Court may now be able to decide, without taking evidence.
These should be briefed and argued in accordance with the sched-
ule set out on [CA-53].
(3) Reorganization vs. eminent domain statute. Although
not raised in the March 9 letter, a question lurking in the case is
whether the standard of valuation” should be different if the Act
be regarded as a reorganization statute, as an eminent domain
statute or as both. At the moment the Court does not perceive
that it should be. Any parties taking a different view should
include arguments on that score in their briefs. Some parties also
intimate that there may be different procedural requirements if
the Act is regarded as an exercise of eminent domain; any party
taking this view should brief it.
(4) Reckless or deliberate disregard. We include this item
in the list, although it may not fit the caption. In the last para-
graph of the March 9 letter, we stated we would “like to be
promptly advised whether USRA, the United States, ConRail, or
any other party represented on LC (Liaison Committee) takes
the position that the last sentence of § 209 (e)(1) has any appli-
cation in proceedings under § 303(c)(1)(A) and (B) or 396
(c)(4)” since, if they did, the Court would desire to receive briefs
and hear argument on the statutory and constitutional questions
that would be raised. USRA has advised the Court that it does
not take that position. Unless any party advances that position in
its opening briefs, see [CA-53], the Court will consider that the
taking of such a position with respect to proceedings under the
cited sections is foreclosed.
(5) Method of handling the valuation of property not owned
by a primary debtor. The discussions of valuation in the state-
ments of the primary debtors and their security holders seem to
assume, without detailed discussion, that the properties are first
aE A
CA-57
Appendix B
to be vaJued for each estate and that the total will then be distrib-
uted, iri some way not clearly defined, as between the constituent
transferors. This is an almost necessary consequence of the view,
espoused by several primary debtors and their security holders,
that the transferred property is to be valued as a going concern,
and also conforms to what we understand to be the general prac-
tice in condemnation proceedings. The FSP, Vol. I, pp. 126, 145,
shows separate values for each of the subsidiary debtors of Penn
Central, and Appendix A to the Master Liquidation Plan and
Summary of Valuation Reports dated March 1, 1976 gives a more
detailed breakdown. The statements filed by the lessors seem to
assume that they will receive the full value of their properties,
without regard to the interest of the lessees; we have not been
informed of the position of the latter. It may be that we have
here a whole new set of issues which have thus far received
relatively little thought.
The Court confesses it is somewhzt baffled by the problem
which bears, among other things, on the number and the duties of
the masters to be appointed, and would welcome detailed propos-
als and briefing, even though it may be premature to attempt a
definitive decision at this time. All parties desiring to express
views on how this problem should be handled shall file briefs not
later than August 23, 1976, answering briefs not later than Sep-
tember 21, 1976, and time requests for oral argument along with
the answering briefs. The Court will then determine what fur-
ther proceedings shall be had.
III. “NET LIQUIDATION VALUE.”
It is clear that, under § 306(c)(4), the Court is bound to
determine the net liquidation value to which the transferors are
entitled by virtue of transfers of rail properties to ConRail under
§ 303(b)(1) as a step in determining the BV of the CV’s,
whether the value of the securities (including the CV’s) issuable
CA-58
Appendix B
to the transferors is the same as or more or less than the Constitu-
tional Minimum Value (CMV). The statements, however,
reveal serious differences of opinion how this task should be
performed.
A.
USRA’s approach is summarized in FSP, Vol. I, pp. 124-26,
and is stated in considerable detail in an Appendix, Vol. I, pp.
141-55. The essence of USRA’s method is captured in the fol-
lowing paragraphs on p. 125:
To resolve these and other issues, USRA postulated a
“master liquidation plan” describing in detail an orderly
process for the disposition of each estate’s assets. The key
assumption of the plan is that the estates would be
required to sell substantial assets for continued rail use but
that the prices for such sales would be regulated and fixed
at the pricing levels which would obtain if all rail opera-
tions over the lines of the bankrupts actually ceased and as
if the assets of the railroads in reorganization actually
were dismantled and disposed of for other uses. USRA
assumed further that because of the valid requirements of
common carrier regulations, the estates would operate
under subsidies, if need be, and maintain their rail opera-
tions until 1979, at which time the orderly liquidation
would begin. This subsidy period is also consistent with
the self-interest of the estates in maintaining healthy price
levels for their assets. USRA’s plan also makes the
favorable assumption that orderly cessation actually
occurs and, therefore, prices are not adversely affected by
the economic dislocations which would result if the actual
service termination were abrupt and not orderly. The
master liquidation plan also recognizes the physical
requirement for preparing assets for sale and their effect
on the timing of asset disposition.
CA-59
Appendix B
In essence, then, the liquidation plan postulated by
USRA is for an orderly transfer of the transportation
services provided by the estates to other railroads with the
prices of such transfers computed as if the estates had
actually been allowed to exercise their asserted right to
liquidate by selling all of their assets for nonrail uses. The
pricing under the assumption of total liquidation is based
on supply and demand conditions which such a time-
phased liquidation of rail assets into nonrail uses would
produce. The pace of such asset disposition is tied to the
time required to accomplish a transition to alternate
modes and to prepare assets for sale.
We have no doubt that this is one theory of determining net
liquidation value that must be considered. However, as indicated
in the March 9 letter, even if USRA’s general theory were to be
accepted, its calculations depend on a considerable number of
assumptions which are open to contest.
We cite as examples, but without limitation, “[a]ssessments of
the time and cost of preparing the assets for sale, and the expected
time required to dispose of such assets once prepared for sale in
light of supply and demand conditions” (p. 125); “[t]he overall
economic environment within which these activities would occur”
(p. 125); the method for arriving at the discount factors stated at
p. 126; the details of the calculations as to when all necessary
authority to sell rail properties would be obtained, pp. 145-46
(including the question whether, if certain transferors would have
been obliged to shut down for lack of funds, any such authority
would have had to be obtained); what was done in regard to
properties that may be “rail properties” within the Act but are not
in the sense that authority to sell would have to be obtained; and
the assumptions with respect to the determination of the value of
rolling stock (pp. 146-48), facilities (pp. 148-49) and real estate
(pp. 149-51).
CA-60
Appendix B
In order to avoid wildly conflicting approaches by the masters
appointed to deal with particular transferors, it seems essential
that the Court, perhaps with the assistance of one or more Special
Masters, should pass on the general validity of these assumptions,
even though we recognize that any decision on this would simply
establish something like a presumption which could be challenged
by any transferor, e.g., by showing that it could have obtained
authority to abandon at a date earlier than that hypothesized by
USRA (or would not have required such authority because of
lack of funds or for other reasons) or that it was in a peculiarly
favorable position to sell rail ties. The transferors insist that
before anything can be done in the way of briefing, there must be
extensive discovery of the details of USRA assumptions and the
basis for them.
While we agree that some discovery is needed before there can
be any effective briefing, we believe this should be in two stages.
The first stage would be devoted to general questions such as
those we have outlined. The second stage, which could go on
while we were considering these general issues, would relate to
more specific matters, e.g., the correctness of the count of rolling
stock, track, etc., or the validity of the choices of other real estate
sales selected to determine market value.
USRA has now taken an important first step by serving on the
parties copies of its Master Liquidation Plan and of five valuation
reports. While we do not anticipate that these will satisfy trans-
ferors even with respect to first stage discovery, this submission
should suffice to enable them to formulate requests, which can
then form the subject of consideration by the Acting Liaison
Committee, substantially as proposed in the June 7, 1976
response of the Government parties, pp. 13-15. We direct the
parties and the Acting Liaison Committee to proceed along these
lines with respect to what we have characterized as first stage
discovery of NLV methodology used by USRA and by any of the
transferors and the Acting Liaison Committee to report to us no
later than August 23, 1976.
CA-61
Appendix B
B
We now turn to another and more basic matter. The chief
quarrel on the part of the transferors and security holders with
USRA’s general approach to the determination of NLV, summa-
rized in the paragraph quoted from FSP. Vol. I, p. 125, as distin-
guished from the subsidiary assumptions leading to the final
figures, and also as distinguished from the question whether
CMV is higher than the value of the securities issuable to the
transferors, relates to the second sentence. Many of the state-
ments claim that, at least for certain properties, the maximum
liquidation price would be attained by selling them for railroad
use.”
We do not understand that the statements of the Government
parties altogether dispute this, see pp. 12-17 of the opening state-
ment and pp. 9-12 of the responsive statement. After outlining a
formidable series of hurdles that, in their view, a transferor would
have to overcome before he could establish that sale to another
railroad would yield more than sales for non-rail use, and urging
that on this account, “the Court should presume that no hypothet-
ical combination of dispositions would have produced a value
higher than that attainable in a disposition of all of the trans-
ferred properties for nonrail use,” they concede that “[t] his pre-
sumption could be overcome by a showing by a transferor that...
it could and would legally and feasibly have disposed of some or
all of its properties, for rail use, at a value determined other than
by reference to the value attainable in a liquidation for nonrail
use,” (p. 17).
The Government parties argue that before any transferor can
be allowed even to attempt this showing, there must be a prelimi-
nary proceeding in which, as we understand it, all transferors
seeking to make the attempt must develop a consistent “alterna-
tive scenario” and the Court is to pass upon its feasibility, consid-
ered as a whole. While the presentation of such a plan would
greatly facilitate our consideration, the Government parties have
CA-62
Appendix B
not indicated how we could compel this. At the moment we are
not persuaded that the procedure proposed by the Government
parties is necessary or even feasible. The subject can be more
intelligently considered when we know what transferors intend to
show more advantageous dispositions for rail use and with respect
to what properties.
Before we request transferors to advance their proposals, there
seems to be a point of law the decision of which will importantly
affect the proceedings. Several transferors appear to include in
their claim that NLV should take account of higher prices obtain-
able for rail than non-rail use not only sales of certain properties
to solvent railroads (or other private groups if any such were
possible purchasers) but alse sales of other properties to public
bodies vested with the power of condemnation. At the moment
we do not‘inderstand why in the absence of competing private
purchasers, such public bodies could be expected to pay more
than the NLV for nonrail use.’ We think this question can be
usefully briefed, argued and decided along with those enumerated
in Part II, Items (1), (2) and (3). The question is this:
Assuming that in determining “net liquidation value” as
used in § 306(c)(4) the Court should take account of a
higher price obtainable for certain properties on a sale for
rail use rather than, as USRA proposed, “at the pricing
levels which would obtain if all rail operations over the
lines of the bankrupts actually ceased and:as if the assets
of the railroads in reorganization actually were disman-
tled and disposed of for other uses” (FSP, Vol. 1, p. 125),
should the Court do this when the proposed sale is to a
public body vested with the power of eminent domain, in
the absence of proof of a private purchaser ready and
willing to make the purchase?
Once the Court answers this question, the next step would be to
require the transferors to enumerate the possible transfers they
CA-63
Appendix B
desire to have considered. It may be that, as suggested by the PC
Trustees (p. 23), the transferors will require the aid of discovery
to assist them in doing this; the Government parties say that on
this and other subjects discovery should be reciprocal. USRA
could expedite matters if it would promptly make available to
transferors any information which it has in regard to the interest
(or lack of it) displayed by private parties in acquiring parts of
the properties conveyed to ConRail, including the history of the
aborted negotiations with the Chessie and the Southern; the
transferors should similarly make available to the Government
parties facts as to efforts made by them to effect such sales. The
mechanics for this should be discussed in the Acting Liaison
Committee and included in the report directed above. When the
transferors have formulated their proposals, it may well be desir-
able to utilize the two-phase process suggested by the PC Trustees
— a first phase in which the Court, perhaps aided by a Special
Master, would determine the feasibility of the proposed transfers,
and a second phase ascertaining the prices that would have been
obtainable.
A number of the transferors have advanced theories for deter-
mining NLV that seem to have nothing to do with “liquidation,”
‘particularly in the light of the discussion at p. 199 of the Confer-
ence Report. As at present advised, we believe that the place for
these theories is in the consideration of the constitutional mini-
mum, which we will discuss in Part V of this Memorandum. The
briefing and argument of the validity of these theories which is
there directed can include the point raised in the two preceding
sentences.
IV. OTHER PROBLEMS IN ARRIVING AT THE BASE
VALUE OF THE CERTIFICATES OF VALUE.
Since the discussion in Part III has taken us a considerable
distance into the problems of § 306(c) (4), it will be convenient to
CA-64
Appendix B
complete our discussion of that section before returning to
§ 303(c)(1).
We think it would be desirable to separate the determination of
BV into its three component parts, NLV, VOB, and CUE. We
take it that Appendix A to the Master Liquidation Plan and
Summary of Valuation Reports dated March 1, 1976 broadly
reflects the position of the Government parties as to NLV. Any
further revisions to take account of additional designations, prop-
erty sales, and the changed conveyance date should be made
promptly.
USRA has outlined its theories as to the determination of VOB
in FSP, Vol. I, pp. 128-34. However, the FSP says that it had
been “impossible within the statutory deadlines to arrive at any
final quantification as to all categories of ‘other benefits’”; that
the figures given are at least in part “estimates and approxima-
tions”; and that USRA’s “analysis will continue as regards both
the quantification of established categories and the possible iden-
tification and quantification of additional categories.” Most of
the transferors claim that there are no, or few, “other benefits”;
they also say that the failure of FSP to trace how the general
principles stated on pp. 128-33 were translated into the figures in
Tables 2 and 3 makes it impossible for them to voice their objec-
tions intelligently.
‘We think there is merit in the latter point, at least to the extent
that the argument would be more meaningful if more details were
known. We therefore direct USRA to prepare and file a more
detailed explanation and calculation of VOB, taking such account
as it thinks warranted of the criticisms in the statemenis. The
objective would be to provide a statement in sufficient detail that
we could rule on the issues of principle (i.e., whether a particular
category did or did not constitute a benefit) on the basis of
USRA’s statement and opposing affidavits going into principle
rather than detail and thereby eliminate, as to categories we
might rule out, the need for further discovery or factual presenta-
tion. USRA is directed to file such a statement not later than
CA-65
Appendix B
December 1, 1976. Again we urge USRA to be as forthcoming
as feasible in its statement; the more that is voluntarily disclosed,
within the realm of reason, the better are the chances for our
being able to issue instructions to the masters without unneces-
sary advances discovery and taking of evidence. We also take
note of the contention of some transferors that the benefits, in
whole or in certain categories, are negative, and the legal problem
arising therefrom. We believe that, at the appropriate time, this
also can be handled by briefs supplemented with illustrative fac-
tual material — not in the sense of determining precise figures but
in that of deciding whether the contention that “negative bene-
fits” should be added rather than subtracted, or the more modest
proposal that a “negative benefit” in one category is to be offset
against positive benefits in others, are legally sustainable.
Turning to CUE, it now appears to us that there are three sets
of legal issues which can be determined without awaiting the
completion of detailed studies on the subject; indeed a relatively
early resolution of these issues is essential in order to enable us to
direct what studies should be prepared, since USRA contends
that there has been no CUE.
Two of these issues concern the period of erosion claims. The
statement of the Government parties takes the position, p. 28
n.19, that there can be no valid erosion claim for any period prior
to enactment of the Rail Act — a position finding at least some
support in our earlier opinion, 384 F. Supp. at 925. The transfer-
ors disagree. Secondly, some transferors take the position that
there can be valid erosion claims for periods after the March 31,
1976 conveyance with respect to property not conveyed. The
Government parties presumably disagree. The third concerns
the nature of the items qualifying as erosion claims. The state-
ment of the PC Trustees (pp. 11-12) helpfully subdivides erosion
into “financial erosion” and “physical erosion.” The former
would include the four items mentioned in our earlier opinion,
384 F. Supp. at 923, and possibly others of similar nature. Physi-
cal erosion is the deterioration of plant which may result in a
CA-66
Appendix B
lower NLV for the properties conveyed and lower realizable val-
ues for those not conveyed. We think the two issues of dates and
the issue of the nature of the items qualifying for treatment as
CUE can be resolved, or at least narrowed, as a matter of princi-
ple on the basis of factual submissions without the taking of
detailed evidence since we would not anticipate serious conflict on
the facts. We direct that all persons making claims of CUE shall
file not late than October 18, 1976 detailed statements with sup-
porting briefs which shall include the following:
(1) The date when they contend that valid erosion claims
began. These should be supported by inclusion of
petitions, reports and orders in the various reorganiza-
tion courts and financial data that are claimed to be
relevant.
(2) Any date later than March 31, 1976 to which they
contend that erosion continued. The statements
should give some idea of the nature and amount of any
such post-conveyance erosion claims and shall present
the legal theory contended to support them.
(3) The categories (and some approximation of the
amounts) of erosion claims.
The Government parties shall answer not later than November
15, 1976, and the claimants may reply not later than December 7,
1976. The Court will then set a date for argument.”
V. CONSTITUTIONAL MINIMUM VALUE.
While, as mentioned in Part III of this Memorandum, Con-
gress was of the opinion, Conference Report p. 199, that by
providing for CV’s it had assured the transferors of the constitu-
tional minimum, that opinion is, of course, not conclusive. As
also mentioned in Part III, we are presently of the view, while this
is subject to change after brief and argument, that when Congress
CA-67
Appendix B
spoke of liquidation, it meant liquidation, although liquidation is
not necessarily sale exclusively for nonrail use. Unless further
briefing and argument should alter the view stated in the preced-
ing sentence, we would consider, as previously indicated, that
many of the contentions with respect to an expansive notion of
NLV should rather be regarded as contentions that even an appli-
cation of NLV taking full account of possible dispositions for rail
use may not produce values equal to the constitutional minimum.
It would seem that if a railroad (or a segment which would
have been allowed to operate pruned of unprofitable extensions)
has capitalized earning power in excess of NLV, even in the
“world” where most of the rail service provided by the bankrupt
estates has ceased, the Constitution would require payment on
that basis. If the Government parties contest this proposition, or
desire to frame conditions about it which they believe we should
impose as guidelines to the masters, they should include a discus-
sion of this in their opening briefs."
Apart from this the statements and answers can be said gener-
ally to reveal the clash manifested by the majority and dissenting
opinions in Jn the Matter of the Port Authority Trans-Hudson
Corp., 20 N.Y.2d 457, 231 N.E.2d 734 (1967). Putting the
matter in another way, they raise the issue whether and, if so, how
far the Supreme Court would consider that the situations here
presented require a departure from the standard that in condem-
nation “the question is what has the owner lost, not what has the
taker gained,” Boston Chamber of Commerce v. City of Boston,
217 U.S. 189, 195 (1910), and subsequent decisions. We see no
reason why we cannot formulate at least a general position on this
subject without requiring the special masters to take detailed
evidence on some or all of the many theories of valuation that
would run afoul of the quoted standard if this is applicable. In
saying this we do not mean to limit the parties to ordinary legal
briefs. If any party believes it would be helpful to accompany its
brief by affidavits or offers of proof, it may do so; the Court will
consider these not as proof of the facts stated but for the light they
CA-68
Appendix B
shed on the legal issues. Such a course will meet the Supreme
Court’s comments in Regional Rai! Reorganization Act Cases,
419 U.S. 102,146 (1974), without requiring the vast expenditure
of time and money that would follow from our leaving the issue of |
the constitutional minimum wholly at large until the masters have
reported. |
That issue, as we now see it, is whether the Constitution |
requires any valuation in excess of NLV properly defined, and as !
then used in § 306, plus any higher valuation of a railroad or |
segment derivable under the second paragraph of this Part V.
Illustrative of the theories of valuation that would seem to fall if
that question were to be answered in the negative are those pro-
pounded as theories of NLV in the statements of the Trustees of
the Lehigh Valley, pp. 11, et seq.,’° of the Erie Lackawanna, pp.
11, et seq.,"° and of the Penn Central Trustees, pp. 9-11; those
propounded as theories of the constitutional minimum in the
statements of the Penn Central Lienholders, pp. 9, et seq.,'’ and
the Committee of Secured Rail Creditors in the Penn Central
Transportation Company Reorganization Proceedings; the
“true economic value” theory of the Penn Central Company; and
the theory of the New Haven Trustee.’* We emphasize that by
mentioning the contentions of these parties as illustrations we are
not relieving others who contend for a value higher than that
formulated in the first sentence of this paragraph.”
There are three subsidiary issues that appear to require special
briefing:
The first is this: Assuming that our answer to the question put |
above were to be generally in the negative, are there specific |
properties as to which valuation on the basis of NLV or a higher |
value based on capitalized earnings would be so manifestly unfair,
because both factors work out at or near zero, that a higher value
must be found and, if so, on what basis? This is essentially the
question put by Judge Keating with respect to the Hudson River
tunnel properties in Jn the Matter of the Port Authority Trans-
Hudson Corp., supra, 20 N.Y.2d at 470, 231 N.E.2d at 739-40.
rent
CA-69
Appendix B
While long tunnels of this sort are the paradigm, the transferors
are invited to suggest other categories.
A second question, raised by the statement of the New Haven
Trustee, is whether there is any requirement that the properties
conveyed by the New Haven to PC should be valued on any
higher basis than other properties.
A third issue, raised explicitly by the Lehigh Valley Trustee
(pp. 23-24) out potentially of broad application, is whether the
Constitution requires that compensation be given for any diminu-
tion in value of the assets severed and then left with the transfer-
ors, on a theory of inverse condemnation or otherwise. Here
again, we would expect those propounding this point to give suffi-
cient examples to enable the Court to understand the nature of
the claimed diminution, not necessarily in dollar amounts but by
categories.
We recognize the possibility that, after the briefing and argu-
ment here directed, we may decide that some of the issues pro-
pounded in this Part-V are not ripe for decision, or may determine
to afford the Special Masters greater leeway (possibly in the form
of permitting requests for further instructions) than we now con-
template. Nothing will have been lost, however, since the issues
set forth in this Pari V will have to be briefed and argued at some
time in any event, and the benefit attainable from our ruling in
1977 rather than many years later, after prodigious efforts before
and by the special masters, which may be unnecessary, is so
tremendous.
Recognizing that the issues raised in this Part V are of great
consequence and that factual materials may need to be assem-
bled, we shall allow considerably more time for the filing of
papers. We set the following schedules:
Presentation of proponents - January 6, 1977
Presentation of Government parties - February 20, 1977
Replies of proponents - March 18, 1977
CA-70
Appendix B
We shall defer fixing a date for argument until the papers have
been filed.
VI. PETITIONS FOR LEAVE TO iNTERVENE.
In view of the large number of parties entitled to participate in
these proceedings as a right, the Court cannot be as liberal in
granting interventions as it might like to be. Indeed in some ways
the intervention of creditor and stockholder interests may be
counterproductive; insofar as they merely repeat arguments
already ably made by transferors, they diminish the force of the
latter. Paraphrasing Mr. Justice Stewart’s well-known remark
in New York Times Co. v. United States, 403 U.S. 713, 729
(1971), when everyone is heard, no one is heard. We are also
mindful of the considerations concerning expense mentioned in
Part I of this Memorandum. Weare therefore granting interven-
tion in these proceedings for the establishment of general princi-
ples to intervenors who have demonstrated a legal interest in the
outcome and have taken or propose to take positions different
from that taken by the transferors. When interventions shall be
granted in proceedings relating to the application of the general
principles to specific properties can be determined later.
Applying this criterion, we grant intervention in the proceed-
ings provided for in this Memorandum and Order to the
following:
Institutional Investors Penn Central Group and certain
Penn Central Indenture Trustees.
The First National Bank of Chicago as Trustee under
First Mortgage Indenture of the Chicago River and
Indiana Railroad Company, for the limited purpose of
presenting arguments pertaining specifically to the
oe ES
Provident National Bank and A. Wakelee Swartz, Jr., as
Indenture Trustees for Pennsylvania Tunnel and Termi-
nal Railroad Company, and the Bank of New Jersey, as
CA-7]1
Appendix B
Indenture Trustee for New York Connecting Railroad
Co., for the limited purpose of presenting arguments
pertaining specifically to the named railroads.
Citibank, N.A., as Agent for the Committee of Secured
Bank Creditors in the Penn Central Transportation
Company Reorganization Proceedings, for the limited
purpose of presenting in proceedings under Part V of
this Memorandum and Order the theory of valuation
discussed in its petition and accompanying statement.
Richard Joyce Smith, Trustee of the Property of the New
5 York, New Haven & Hartford R.R. Co., for the limited
purpose of presenting contentions pertaining specifi-
cally to properties transferred by the New Haven estate
to Penn Central.
Penn Central Company, for the limited purpose of
presenting in proceedings under Part V or this Memo-
randum and Order the issues outlined in its petition and
accompanying statement.
The following applications are denied for lack of a sufficiently
specific showing of inadequacy of representation by other parties
in the proceedings provided for in this Memorandum and Order
and, in some instances, for failure to file a statement of conten-
tions as required by this Court’s order of April 26, 1976:
Joint Application of Morgan Guaranty Trust Company of
New York and eight other indenture trustees of Erie
Lackawanna Railway Company
Joint Application of Girard Trust Bank and four other
indenture trustees of Lehigh Valley Railway Company.
Petition of John W. Sullivan, John D. Mabie, and Thomas
A. Reynolds, Jr., minority stockholders of Reading
Company.
CA-72
Appendix B
Petition of Minority Stockholders of Mahoning Coal Rail-
road Co.
Petitions for leave to intervene have been filed on behalf of five
governmental bodies listed in the margin.*' As to almost all of
the questions set forth in this memorandum, we fail to see that
these bodies have an interest justifying even permissive interven-
tion; the only exception would be if a contention were to be made
that some of the transfers were not in the public interest, see Part
II (1). These petitions are denied without prejudice to applica-
tions for limited intervention in the event indicated.
This constitutes an order; the parties shall proceed in accord-
ance herewith.
HENRY J. FRIENDLY
Henry J. Friendly
Presiding Judge
ROSZEL C. THOMSEN
Roszel C. Thomsen
Judge /
June 16, 1976
CA-73
Appendix B
FOOTNOTES
1. The Court has adopted a new caption and docket number for
general matters relating to the valuation proceedings under §§ 303(c)
and 306. All papers subsequently filed in general proceedings dealing
with valuation shall bear this caption and docket number. The Court
will enter an order transferring from Docket Misc. No. 75-3 matters
relating to these general valuation proceedings and also breaking Misc.
No. 75-3 into various categories.
2. Weuse the term “securities” to include other forms of considera-
tion moving to a transferor.
3. The problems would have been less under the bill as passed by the
Senate which used the phrase “constitutional minimum” instead of
NLV.
4. The valuation of the New Haven took four years even though
there was general agreement that the property should be valued primar-
ily on a scrap value basis.
5. Thus the statement on behalf of Reading Company and its
wholly-owned subsidiaries says (p. 13):
Therefore, the only proper instructions that this Court can give
the Special Masters is to hear all evidence pertaining to value
each party desires to introduce and to structure the appropriate
theory of valuation at the end of the proceeding.
6. We use this term to include indenture trustees.
7. For present purposes, we include ConRail along with the United
States and USRA in the term “Government parties.”
8. It should be clearly understood that any expressions in this Mem-
orandum and Order which relate to the merits or to procedures not
herein prescribed are designed solely to assist in structuring these pro-
ceedings and do not indicate a prejudgment.
9. Here, as elsewhere in this Memorandum, we will take it for
granted that parties who wish to establish that a question that has been
raised has constitutional as well as statutory dimensions will develop the
point in their briefs.
10. We use this phrase so as to exclude for present purposes the
question whether to the extent that the statute is an eminent domain
statute, as the non-bankrupt transferors claim is necessarily is as to
CA-74
Appendix B
them, and as some other parties claim as well, the Constitution requires
that the consideration be paid in cash.
11. This contention is to be distinguished from the argument that
for certain segments the “highest and best use” would be retention by
the transferor for railroad purposes. This sounds rather on the claim
that CMV may exceed the value of the securities issuable to the trans-
ferors, although a determination of capitalized earnings would have
evidentiary value for both.
12. Except, of course, in a situation similar to that envisioned in
fn. 11.
13. The Trustee of the Ann Arbor has raised an issue of law peculiar
to it. Since this estate has conveyed no property to ConRail, it will not
obtain CV’s. The Trustee wishes us to decide whether we have power to
enter a deficiency judgment for CUE under § 303(c)(3) and direct
payment by the United States under § 303(c)(5). If we should decide
in the negative, the Trustee would like to proceed directly in the Court of
Claims. We think it preferable to defer decision ou this at least until we
have passed on the general questions with respect to erosion outlined
above.
14. In our 1974 opinion, 384 F.Supp. at 928 n.61, we took note of a
theory which we thought to be then suggested by the Government
parties, namely, that the constitutional minimum might be less than
liquidation value in the case of a railroad (or perhaps a segment) with
earnings which were sufficient that it could not obtain permission to
abandon but whose capitalized value was less than liquidation value.
The Government parties do not now seem to urge this except for making
the point that if ConRail has sufficiently large earnings, there may be no
need for determining net liquidation value. If the Government parties
wish to preserve the contention adverted to in the cited footnote, they
should also include an argument on this in their opening briefs.
15. Real estate at fair market value plus an assemblage factor:
improvements at the higher of a scrap value or going concern value:
Going concern value measured by a combination of:
Capitalized prospective earnings
Public usefulness (the price of reconstruction or of a substitute
facility)
CA-75
Appendix B
RCNLD in appropriate instances
Value in place (i.e., scrap value with no subtraction for
dismantling).
16. Capitalized earning power as basis for sale to another railroad;
Gross liquidation value (i.e., no cost for dismantling) as basis for
sale to another railroad;
“Special Value” to a public body (e.g., a state) calculated by some
combination of:
Depreciated value of track
Market value of land, plus assemblage factor
Gross liquidation value
Value of a developed operating organization
Value of not having to develop more costly alternatives
I.CNLD of special facilities;
“Residual Value”—i.e., value as an integrated network.
17. Value properties as an assembled unit (i.e., apparently as a
“going concern”) by an appropriate combination of:
Land at fair market value plus assemblage;
Track at depreciated value;
Related facilities at cost plus appreciation;
Intangibles at cost of production less obsolescence;
For special facilities, RCNLD;
Value to public in terms of costs of alternatives.
18. “[W]hat it would have cost an acquiring entity on April 1, 1976
to buy, in an arm’s length transaction, the conveyed real estate and to
then build an integrated rail system... on that real estate... . (p. 4)”
19. Presumption of reconstruction cost new less depreciation unless
the Government parties rebut this.
20. We have not mentioned the contentions of the Government par-
ties as to “ConRail use value” since we do not understand their precise
relevance. If the Government parties wish these to be considered as
part of the proceedings here contemplated, they should make a further
submission on the subject not later than August 15, 1976.
21. The Commonwealth of Pennsylvania, the State of Delaware, the
Department of Transportation of the State of New York, the Maryland
Department of Transportation and the City of Philadelphia.
CA-76
Appendix B
Schedule
Subject
(1) “Public interest”; “fair and equitable”; reorganization vs.
eminent domain statutes, reckless or deliberate disregard clause,
§ 209(a)(1)—see Part II, Items (1), (2), (3) and (4); rele-
vance of possibility of sale for rail use to public bodies having
power of condemnation, see Part III.
Opening briefs—August 23
Answering briefs—September 21
(2) Method of handling the valuation of properties not owned
by primary debtors, see Part II, Item (5).
Opening briefs—August 23
Answering briefs—September 21
(3) Report by Acting Liaison Committee with respect to first
stage discovery on NLV methodology and on efforts by USRA
and transferors to effect sales for rail use to private parties.
August 23
(4) Date on which USRA shall file detailed statement of value
of other benefits.
December |
(5) Filing by transferors of statements and briefs with respect
to uncompensated unconstitutional erosion: October 18
Response by Government parties: November 15
Replies: December 7
(6) Briefs (accompanied by affidavits or offers of proof) on
constitutional minimum.
Opening briefs—January 6
Answering briefs—February 20
Reply briefs—March 18
APPENDIX C
CA-77
Appendix C
SPECIAL COURT
REGIONAL RAIL REORGANIZATION ACT OF 1973
Filed April 19, 1977, James F. Davey, Clerk
Special Court—Misc. No. 76-1
>
IN THE MATTER OF THE VALUATION PROCEED-
INGS
UNDER §§ 303(C) AND 306 OF THE
REGIONAL RAIL REORGANIZATION ACT.
-.
Before FRIENDLY, Presiding Judge, and WISDOM and
THOMSEN, Judges.
David B. Isbell, Esq., Washington, D.C. (Edwin M.
Zimmerman, Esq., Jeffrey S. Berlin, Esq., Jeffrey
G. Huvelle, Esq., and Covington & Burling,
Esqs., Washington, D.C.; John B. Rossi, Esq.,
Philadelphia, Pa., of Counsel), for Penn Central
Trustees and Certain Affiliated Transferors.
David C. Toomey, Esq., Philadelphia, Pa. (Jared I.
Roberts, Esq., and Duane, Morris & Heckscher,
Esqs., Philadelphia, Pa., of Counsel), for Trustee
of the Lehigh Valley Railroad Company.
Harry G. Silleck, Jr., Esq., New York, N.Y. (John
L. Altieri, Jr., Esq., and Mudge Rose Guthrie &
Alexander, Esqs., New York, N.Y., of Counsel),
for Trustees of Erie Lackawanna Railway Com-
pany, and Certain Affiliated Non-Bankrupts.
Stanley Weiss, Esq., Newark, N.J. (M. Elaine
Jacoby, Esq., Dean R. May, Esq., and Carpenter,
Bennett & Morrissey, Esqs., Newark, N.J., of
CA-78
Appendix C
Counsel), for Trustee of the Central Railroad
Company of New Jersey.
Louis A. Craco, Esq., New York, N.Y. (Walter H.
Brown, Jr., Esq., Thomas L. Bryan, Esq., Michael
B. Targoff, Esq., Rebecca T. Halbrook, Esq.,
Richard L. Posen, Esq., and Willkie Farr & Gal-
lagher, New York, N.Y.; Frederic L. Ballard, Sr.,
Esq., and Ballard, Spahr, Andrews & Ingersoll,
Esqs., Philadelphia, Pa., of Counsel), for Inter-
vening Penn Central Lienholders.
Joseph Auerbach, Esq., Boston, Mass. (Morris
Raker, Esq., Thomas Wardell, Esq., Thomas D.
Halket, Esq., Harvey E. Bines, Esq., and Sullivan
& Worcester, Esqs., Boston, Mass.; James Wm.
Moore, Esq., New Haven, Conn. of Counsel), for
Trustee of The New York, New Haven and Hart-
ford Railroad Company.
Howard H. Lewis, Esq., James A. Sox, Esq., and
Obermayer, Rebmann, Maxwell & Hippel, Esqs.,
Philadelphia, Pa.; Lockwood W. Fogg, Jr., Esq.,
Plymouth Meeting, Pa., for Trustees of the Read-
ing Company and for its Wholly-Owned
Subsidiaries.
Timothy V. Smith, Esq., New York, N.Y., for Trus-
tee of The Lehigh and Hudson River Railway
Company.
Joseph J. Connolly, Esq., and Goodman & Ewing,
Esqs., Philadelphia, Pa.; Herbert G. Schick, Esq.,
and Hepburn, Ross, Willcox & Putnam, Esgqs.,
Philadelphia, Pa.; Jerome K. Walsh, Esq., and
Walsh & Frisch, Esqs., New York, N.Y., for Sec-
ondary Debtors of The Penn Central Transporta-
tion Company.
CA-79
Appendix C
Charles I. Thompson, Jr., Esq., Philadelphia, Pa.,
for The North Pennsylvania Railroad Company,
ihe Delaware and Bound Brook Railroad Com-
pany, and Philadelphia, Germantown and Norris-
town Railroad Company.
Perrin C. Hamilton, Esq., and Hamilton,
Darmopray & Malloy, Esqs., Philadelphia, Pa.,
for the East Pennsylvania Railroad Company.
Alan C. Kauffman, Esq., and Obermayer, Reb-
mann, Maxwell & Hippel, Esqs., Philadelphia,
Pa., for the Peoria and Eastern Railway
Company.
Joseph S. Radom, Esq., and Thomas B. Radom,
Esq., for Trustee of the Ann Arbor Railroad
Company.
George F. Galland, Esq., Robert W. Ginnane, Esq.,
and Galland, Kharasch, Calkins & Brown, Esqs.,
Washington, D.C., for Norwich & Worcester
Railroad Company.
William T. Lake, Esq., and Louis R. Cohen, Esq.,
Washington, D.C. (Lloyd ’N. Cutler, Esq., Wil-
liam R. Perlik, Esq., David R. Johnson, Esq., and
Wilmer Cutler & Pickering, Esqs., Washington,
D.C.; Kevin P. Charles, Esq., Robert H. Kapp,
Esq., Howard R. Moskof, Esq., George W. Mayo,
Jr., Esq., and Hogan & Hartson, Esqs., Washing-
ton, D.C.; Cary W. Dickieson, General Counsel,
Stephen C. Rogers, Deputy General Counsel, and
Jordon Jay Hillman, Special Counsel, United
States Railway Association, Washington, D.C., of
Counsel), for United States Railway Association.
/
?
CA-80
Appendix C
Paul M. Tschirhart, Esq., Deparztment of Justice,
Washington, D.C. (Rex E. Lee, Assistant Attor-
ney General, and John H. Broadley, Esq., Dept. of
Justice, Washington, D.C.; Donald T. Bliss, Dep-
uty General Counsei, Alexander P. Humphrey,
Esq., and Justine Fischer, Esq., U.S. Dept. of
Transportation, Washingion, D.C. of Counsel),
for United States of America.
CA-81
Appendix C
FRIENDLY, Presiding Judge:
I. INTRODUCTION
e Scction 303(c)(1)(A) and (2) of the Regional Rail Reorgan-
ization Act of 1973 as amended (the Rail Act) directs this court
to determine whether the transfers and conveyances which took
place on April 1, 1976, were for a consideration more or less than
the constitutional minimum! “taking into consideration compen-
sable unconstitutional erosion, if any, which the special court
finds to have occurred in the estate of each such railroad, during
the bankruptcy proceeding with respect to such railroad”.? Sec-
tion 306(c)(4) provides that one item to be included in the base
value of each series of certificates of value (CV’s) authorized by
§ 306 shall be “such amount, if any, as the special court may
determine shall be required after taking into consideration com-
pensable unconstitutional erosion, if any, in the estate of a rail-
road in reorganization, or of a railroad leased, operated, or
controlled by such a railroad, which the special court finds to have
occurred during any bankruptcy proceeding with respect to such
railroad”. These provisions appeared for the first time in the
amendments made by the Railroad Revitalization and Regula-
tory Reform Act of 1976 (RRRRA), evidently in response to
indications in our opinion of September 30, 1974 (180-Day
Appeals), 384 F. Supp. 895, 918-26, and the Supreme Court’s
opinion in Regional Rail Reorganization Act Cases, 419 US.
102, 122-25 (1974), that the process provided by the Rail Act
might involve what the Supreme Court called an “erosion taking”
of property of the transferors for which the Fifth Amendment
would require just compensation. Because of the limited powers
accorded us by the original Rail Act with respect to securities
issuable to the transferors, those opinions envisicned that the task
of determining the existence and amount of such erosion would
devolve primarily upon the Court of Claims under the Tucker
Act, 28 U.S.C. § 1491; the effect of the 1976 amendments was to
CA-82
Appendix C
transfer that task, or at least the bulk of it, to this court.‘. The
claims are large; and approximation of the claim of the Penn
Central Trustees for pre-conveyance erosion runs to nearly $900
million.
In our Memorandum and Order of June 16, 1976, Directing
Preliminary Proceedings for the Determination of General Prin-
ciples under §§ 303 and 306 of the Act (June 16 Memorandum),
we identified “three sets of legal issues” with respect to compensa-
ble unconstitutional erosion (CUE) which we thought could be
presently “determined without awaiting the completion of
detailed studies on the subject”. 425 F. Supp 276, 284-85.
These were:
(1) The date when the transferors contend that valid
erosion claims began;
(2) Any date later than March 31, 1976 to which the
transferors contend that erosion continued:
(3) the categories (and some approximation of the
amounts) of erosion claims’.
Consideration of the briefs and arguments has led us to con-
clude that it would be best to defer decision on the item of post-
conveyance erosion claims, identified above as (2). These claims
fall into three categories— interest on loans made pursuant to
§ 211(h); alleged inadequacy of rentals for property subject to
rail service continuation payments under § 304(c)(2);' and ero-
sion with respect to properties designated as “suitable for use for
other public purposes” and required to be temporarily retained
under § 304(b)(2). The nature of these claims is altogether
different from pre-conveyance CUE claims; their amount, if any,
is not now determinable; decision with respect to some (notably
the second) may be dependent on later decisions in the valuation
phase of the case; and failure to pass upon them at this time will
CA-83
Appendix C
not delay the progress of these proceedings.* Both the Govern-
ment parties and those transferors who spoke on the matter indi-
cated a willingness to have us postpone consideration of these
issues. We shall thus defer decision on them, with the proviso
that at any time this court may, or any party may request us to,
restore all or some of these questions to the active list, with proper
notice and such further opportunity, if any, for additional briefing
and argument as we may think appropriate.
We shall therefore deal in this opinion only with pre-convey-
ance CUE claims. As was suggested at the argument, we shall
treat the brief of the Government parties as a motion for sum-
mary judgment that, subject to certain reservations hereafter
noted, there are no valid claims. Further we shall deal in this
opinion only with the issue of when, if ever, such claims began to
accrue.
The organization of the balance of this opinion shall be as
follows: In Section II, after a brief statement of the general nature
of the claims, we shall set forth the history giving rise to the claim
of the Penn Central Trustees. This will be followed by Section
III in which we shall analyze the authorities. In Section 1V we
shall state our general conclusions in regard to the accrual of pre-
conveyance CUE and apply these to the Penn Central. A further
Section V shall deal with the claims of other bankrupt estates for
pre-conveyance CUE, and in a final Section VI we shall make
some concluding remarks.
Il. THE NATURE OF THE CLAIMS AND THE His-
TORY GIVING RISE TO THE CLAIM OF THE
PENN CENTRAL TRUSTEES
The term “compensable unconstitutional erosion” is a new-
comer to the legal lexicon.
As recognized in our previous opinions, June 16 Memorandum,
425 F. Supp. at 284-85; see Jn re Penn Central Transportation
Company, 384 F. Supp. 895, 923 (1974), “erosion” of estates
such as those of the railroads here before us falls into two major
CA-84
Appendix C
categories. Financial erosion arises from the creation of claims
such as administration expenses, trustees’ certificates, and taxes
which have priority over the claims of pre-bankruptcy creditors,
and use for operations of cash or property held as security for
liens. Physical erosion consists of the depletion of property
through such means as loss of nonescrowed cash and deterioration
of physical plant, which result in the property having a lesser
value at the end of the period than at the beginning.’
Erosion as such has no constitutional implications; it is suffered
in some forms by many losing businesses outside bankruptcy as
well as within it and by commercial or manufacturing enterprises
as well as by public utilities. Unconstitutional erosion arises only
when a losing business has been required to continue to operate
against its will for more than a reasonable period.
It is not clear just what Congress considered it was adding by
the adjective “compensable”. Perhaps it was of the view that
even unconstitutional erosion was not always compensable, but if
so, it did not state what the critical factors were deemed to be. In
the preceding paragraph we deliberately used the passive voice
“has been required” and did not elaborate on the meaning of the
verb “require”. By adding the word “compensable” Congress
may have meant to emphasize the importance of two elements
that are implicit in the concept of “unconstitutional” erosion
itself, namely, that the claimant should have made m
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