Petition for Writ of Certiorari — Smith v. Baker
Supreme Court brief1972
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MICHAEL RODAK, JR.,CLERK
in The J
Supreme Court of The United States
October Term, 1971
No.
In THE MartTER oF
Tne New Yorx, New Haven anp Hartrorp Raitrvap
Company, Desror
Richard Joyce Smith, Trustee of the Property of The
New York, New Haven and Hartford Railroad Company,
Debtor,
Peririoner
v.
George P. Baker, Richard C. Bond, Jervis Langdon,
Jr. and Willard Wirtz, Trustees of the Property of Penn
Central Transportation Company, Debtor; Manufacturers
Hanover Trust Company, as Mortgage Trustee; and Penn
Central Transportation Company ;
RESPONDENTS
PETITION FOR WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
Of Counset: JAMES WM. Moore
54 Meadow Street
MokRIS RAKER : at
New Haven, Connecticut 06506
Nancy F. Gans
SULLIVAN & WorcestTER JOSEPH AUERBACH
225 Franklin Street 225 Franklin Street
Boston, Massachusetts 02110 Boston, Massachusetts 02110
JOSEPH W. Bisuop, Jr.
54 Meadow Street
New Haven, Connecticut 06506
Dated: April 28, 1972
—————————— ns
Bowne of Boston, Inc.
(i)
Table of Contents
Opinions Below
Jurisdiction
Statutes Involved
Questions Presented .
Statement of the Case
Reasons for Granting the Writ .
:
Only this Court can construe with finality its
Opinion and Judgment in the New Haven In-
clusion Cases, and can set forth its intention
in directing its remand to the New Haven
Reorganization Court. ......
. The New Haven Reorganization Court had
jurisdiction under this Court’s remand to
protect the constitutional rights of the New
Haven creditors, and the equitable lien and
constructive trust were appropriate security
devices for that purpose.
. The Court of Appeals misapplied Warren vy.
Palmer and misconstrued its application to
the respective roles of the reorganization
Courts and the Commission
. The Court of Appeals’ ouster of the New
Haven Reorganization Court from its sub-
stantive jurisdiction is unprecedented and
will unduly prolong the New Haven reorgani-
zation proceedings.
Conclusion
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(ii)
Appendix
Statutes Involved
Section 77(a) of the Bankruptey Act, 11 ULS.C.
205 (a)
Section 77(¢)(6) of the Bankruptey Act, 11
U.S.C, 205(¢) (6)
In the Matter of The New York, New Haven and
Hartford Railroad Company, Debtor, Docket
Nos. 71 - 1903, 71-1929, 71-2024 (2d Cir,
March 17, 1972).
In the Matter of The New York, New Haven and
Hartford Railroad Company, Debtor, 330 F.
Supp. 131 (D. Conn. 1971).
In the Matter of The New York, New Haven and
Hartford Railroad Company, Debtor, 331 F.
Supp. 212 (D. Conn. 1971)
Page
A-]
A-1
A-3
A-61]
(iii)
Table of Citations
Cases:
Baltimore and Ohio R.R. y. United States,
386 U.S. 372 (1967)
Keker v. Western Pacifie R. Corp., 318 U.S,
448 (1943)
In the Matter of The New York, New Haven
and Hartford Railroad Co., Debtor, Dock-
et Nos, 71-1903, 71 — 1929, 71 — 2024, (2d
Cir. March 17, 1972)
In the Matter of The New York, New Haven
and Hartford Railroad Co., Debtor, 331 F.
Supp. 212 (D. Conn. 1971)
Inthe Matter of The New York, New Haven
and Hartford Railroad Co., Debtor, 330 F,
Supp. 131 (D. Conn. 1971)
In the Matter of The New York, New Haven
and Hartford Railroad (o., Debtor, 304 F.
Supp. 451 (1969)
In the Matter of The New York, New Haven
and Hartford Railroad (o., Debtor, 289 F,
Supp. 793 (1968) |
In the Matter of Penn Central Transporta-
tion Company, Debtor, 337 F. Supp. 779
(E.D.Pa. 1972)
New Haven Inclusion Cases, 399 U.S, 399
(1970)
Page
2et passim
2,11, 13, 21
6
2 et passim
Te Pe ee
EER SPAS
wae
tb he nS
ite ito isis i ee es
(iv)
N.Y., N.H. and H.R. Co. Bondholders’ Com-
mittee v. United States, 305 F. Supp. 1049
(S.D.N.Y. 1969)
Penn Central Merger and N & W Inclusion
Cases, 389 U.S, 486 (1968)
Statutes
Bankruptey Act
Section 77, 11 U.S.C. 205
Section 77(a)
Section 77(c) (6)
Interstate Commerce Act
Section 206, 49 U.S.CLA, 206, Historical
Note
Interstate Commerce Commission Reports and
Orders
Boston and Providence Railroad Reorgani-
zation Proceedings, 290 I.C.C. 363 (1954),
327 L.C.C. 10 (1966)
Fourth Supplemental Report and Order,
354 LC.C. 25 (1968)
Lehigh Valley Railroad Company Abandon-
ment between Dushore and Towanda, Pa.,
338 LC.C, 793 (1972)
Page
Set passim
2,
»
19
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in Che
Supreme Court of Che United States
October Term, 1971
: No.
Ix THE Marrer or
THe New York, New Haven anp Harrrorp Ratitroap
Company, Desror
Richard Joyce Smith, Trustee of the Property of The
New York, New Haven and Hartford Railroad Company,
Debtor,
PETITIONER
v.
George P. Baker, Richard (. Bond, Jervis Langdon,
Jr. and Willard Wirtz, Trustees of the Property of Penn
Central Transportation Company, Debtor; Manufacturers
Hanover Trust Company, as Mortgage Trustee; and Penn
Central Transportation Company ;
RESPONDENTS
PETITION FOR WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
OPINIONS BELOW
The United States Court of Appeals for the Second
Cireuit (the ‘‘Court of Appeals’’)' rendered its decision
1 Other frequently used contracted forms of reference herein are:
The New York. New Haven and Hartford Railroad Company, Debtor,
is referred to as “New Haven.”
The Penn Central Transportation Company, Debtor, is referred to as
“Penn Central.”
The United States District Court for the District of Connecticut is
referred to as “New Haven Reorganization Court.”
The United States District Court for the Eastern District of Penn-
sylvania is referred to as “Penn Central Reorganization Court.”
The Interstate Commerce Commission is referred to as Commission.”
i . - ——— a — a © Pe
Te SE SLI ISSO SRE ESS RE RR OF PASSE
DBikeriiawccs DE ERR ORE RR?
2
March 17, 1972. The decision has not yet been reported,
It appears at pages A-5 — A-24 of the Appendix filed here.
with.
The Court of Appeals’ decision reversed the decision
of the New Haven Reorganization Court. In the Matter of
The New York, New Haven and Hartford Railroad Co,, 330
F. Supp. 131, 331 F. Supp. 212 (D. Conn. 1971). The decis.
ion of the New Haven Reorganization Court is reprinted
at pages A-25 — A-60 and the order at pages A-61 — A-65 of
the Appendix.*
JURISDICTION
The Court of Appeals’ decision is dated Mareh 17,
1972. No mandate has been entered because, on April 6,
1972, the Court of Appeals granted the petitioner herein a
30-day stay of its mandate to permit filing of this Petition
for Certiorari prior to the issuance of its mandate,
The jurisdiction of this Court is invoked under 28
U.S.C 1254 (1), 28 U.S.C 2101 (c) and Rule 19 of the Rules
of this Court.
STATUTES INVOLVED
The following United States statutes are involved in
this case and are printed in the Appendix at pages A-1 — A-4:
Section 77(a) of the Bankruptey Act, 11 U.S.C 205(a).
Section 77(c)(6) of the Bankruptey Act, 11 U.S.C
205(¢) (6).
QUESTIONS PRESENTED
1. Where this Court directed the New Haven Reor-
ganization Court to carry out its opinion and judgment in
the New Haven Inclusion Cases, 399 U.S. 392 (1970), and
2The Penn Central Reorganization Court entered a decision and
order, dated December 31, 1971 in related proceedings. In the Matter of
Penn Central Transportation Company, Debtor, 337 F. Supp. 779 (E.D.Pa.
1972). The petitioner herein, and others, filed appeals therefrom to the
United States Court of Appeals for the Third Circuit, where the time for
filing appellants’ briefs has been extended.
3
the opinion and judgment were entered after, and specifi-
cally referred to, the institution of Penn Central's reor-
ganization proceedings under Section 77 of the Bankruptey
Act, and where the New Haven Reorganization Court had
reserved jurisdiction in 1968 to adjudicate matters relating
to the terms of the inclusion in Penn Central of ihe prop-
erties and rights required to be conveyed on December 1,
1968 by New Haven to Penn Central pursuant to orders of
the Commission and the New Haven Reorganization Court,
(a) was the Court of Appeals correet in construing
this Court's remand to the New Haven Reorganiza-
tion Court in the New Haven Inclusion Cases. supra?
(b) was the Court of Appeals correct in holding
that the order of the New Haven Reorganization Court
conflicted with the ‘exclusive jurisdiction’’ of the
Penn Central Reorganization Court and “could...
seriously impair the formulation of a workable plan
for the financial resuscitation of Penn Central by the
Commission and the ability of the Pennsylvania Reor-
ganization Court to administer the entire Pen Central
system,’’ when its only possible effect on the Penn
Central reorganization will be to limit what this Court
had already held constitutionally impermissible, name-
ly the further erosion of the New Haven creditors’
security ?
(c) was the Court of Appeals correct in holding,
under its reading of Warren v. Palmer, 310 U.S. 132
(1940), that the New Haven Reorganization Court had
no jurisdiction pursuant to this Court's remand or its
own prior reservation of jurisdiction to enter orders to
protect the constitutional rights of the New Haven's
creditors, where the Commission lacked jurisdiction to
provide such protection, which this Court had previous-
ly adjudicated?
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(d) was the Court of Appeals correct in holding,
under its reading of Warren vr. Palmer. supra, that the
New Haven Reorganization Court had, in essence, beer
ousted from all jurisdiction over the New Haven reor.
ganization and could neither adjudicate threshold legal
issues for the guidance of the Commission in formulat.
ing a new plan of reorganization for the New Haven,
nor even review the terms of such New Haven plan,
when so formulated under Section 77 of the Bank.
ruptey Act?
2. Where this Court had disaffirmed in its opinion and
judgment only that portion of the New Haven Reorganiza-
tion Court's order which had established an ‘‘underwriting
plan*’ to secure the payment to New Haven from Penny
Central for the properties and rights required to be con-
veyed on December 31, 1968, and such disaffirmance Was
specifically on the sole ground that the Penn Central bank.
ruptey had rendered the underwriting unworkable as a
security measure,
(a) did the New Haven Reorganization Court
have jurisdiction under this Court’s remand to declare
different security measures found necessary to protect
the New Haven’s constitutional right to receive pay-
ment for the properties and rights so conveyed?
(b) if it had such jurisdiction, was the New Haven
Reorganization Court correct in adjudging that an
equitable len and constructive trust arose, as of the
date of conveyance, on (and limited to) the properties
and rights required to be conveyed by New Haven to
Penn Central?
_
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STATEMENT OF THE CASE
The New Haven has been in reorganization under See-
tion 77 of the Bankruptey Act sinee July 7, 1961 in the
New Haven Reorganization Court. Cireuit Judge Robert
P. Anderson, sitting first as Chief Judge of the District
Court for the District of Connecticut and then, after his ap-
pointment to the Court of Appeals, by designation, has ex-
ercised jurisdiction over the New Haven reorganization
since its inception. Three trustees were appointed initially ;
Richard Joyce Smith is the sole remaining trustee.
The Commission, by Report and Order dated Novem-
ber 20, 1968, 354 LC.C. 25, approved a plan of reorganiza-
tion for the New Haven which it certified-to the New Haven
Reorganization Court on December 2, 1968. In its opinion
of March 17, 1972, the Court of Appeals misunderstood the
nature of the proceedings before the New Haven Reorgani-
zation Court, stating: ‘‘ The Commission has never proposed
a reorganization plan for the New Haven itself’? (A-6).
In the New Haven Inclusion Cases, supra, this Court,
however, recognized that the inclusion of the New Haven’s
operations in the proposed Penn Central system was the
Commission’s plan of reorganization for the New Haven,
pointing out that ‘‘the Commission certified the first step
of its plan for the reorganization of the New Haven — the
sale of its assets to Penn Central — to the reorganization
court’? on March 29, 1968, 399 U.S. at 413 (emphasis added).
On August 13, 1968, as this Court further pointed out,
the New Haven Reorganization Court ‘‘independently re-
turned the Commission's plan for further proceedings,”’
399 U.S. at 414 (emphasis added). Thereafter, again as
pointed out by this Court, ‘‘the Commission certified its
revised Plan to... [the New Haven Reorganization Court |
on December 2, 1968,°* 399 U.S. at 416 (emphasis added).
The plan then certified by the Commission provided
for inclusion of the New Haven’s operating assets in Penn
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Central for a consideration to be paid by Penn Central
which the Commission found would equal the estimated
liquidation value of the assets. The Court of Appeals cor-
rectly stated that a Purchase Agreement had previously
been entered into among the New Haven Trustees and rep.
resentatives of the Pennsylvania and New York Central
Railroads subject to the approval of the Commission and
the New Haven Reorganization Court (A-6). It was in.
correct, however, in assuming (as appears to be indicated
in its opinion of March 17, 1972 at A-6) that the New
Haven Reorganization Court at any time approved the
Purchase Agreement as the basis for inelusion of the New
Haven in Penn Central. In fact, Judge Anderson rejected
the terms of the Purchase Agreement, In re New York.
New Haven and Hartford Railroad Co... 289 ¥- Supp.
491 (D. Conn. 1968), after they had been adopted by the
Commission in its first plan of reorganization for the New
Haven, 331 LCL. 643 (1967). As this Court pointed out in
1970 in the New Haren Inclusion Cases. supra, the New
Haven Trustees ‘‘never submitted the |Purehase} Agree-
ment to that Court [the New Haven Reorganization Court |
for its approval."* 309 ULS. at 410, n. 46.
The inelusion was ordered by the Commission to take
place by January 1, 1969, a date which recognized the New
Haven Reorganization Court's earlier finding that con-
tinued erosion of the estate from operational losses after
that date would constitute an unconstitutional publie taking
of the New Haven's property without just compensation.
289 F. Supp. at 459.
The New Haven Reorganization Court set December
11, 1968 as a deadline for the filing of objections to the
Commission's plan, and fixed December 20, 1968 for a hear-
ing with respect to it. New Haven bondholders interests!
* Manufacturers Hanover Trust Company, as trustee under the New
Haven’s First and Refunding Mortgage; the First Mortgage 4% Bond-
holders’ Committee; Oscar Gruss and Son; and Chase Manhattan Bank,
N.A., as trustee under the New Haven’s General Income Mortgage.
7
filed extensive objections to the terms determined by the
Commission. Penn Central contended that the inclusion
should not go forward until the terms of the inelusion had
heen finally determined.‘
The bondholders’ and Penn Central's objections not-
withstanding, the Commission urged that the publie inter-
est required inclusion to be effeeted, with the terms to
be reviewed thereafter. (Hearing before New Haven Re-
organization Court, December 20, 1968, Transeript, p. 50).
By Order No. 559, dated December 24, 1968, the New Haven
Reorganization Court approved the Commission's order
and ordered the New Haven to make the conveyance, and
to accept pro tanto the payment of the consideration pro-
vided in the Commission's Report and Order. The New
Haven Reorganization Court specifically reserved jurisdic-
tion in Order No. 559, as follows:
“It is Ordered, Adjudged and Decreed that the order
of the Commission relating to inclusion of Debtor's
railroad operations in Penn Central Company on or
before January 1, 1969 by conveyance of the Debtor's
assets to Penn Central Company and payment of con-
sideration therefor by Penn Central Company, as
specified in the Plan, subject to the jurisdiction re-
served im this Order, is affirmed and the parties are
directed to implement said inclusion and payment in
compliance with the Commission's order as follows:
. . :
“J. The conveyance of the Debtor's assets by the New
Haven Trustee and the payment of consideration by
Penn Central Company, as provided herein, shall be
without prejudice to the rights of any party to contest
the fairness and adequacy of the consideration and the
4+ At that time, as this Court subsequently noted: “A condition of __.
[the Penn Central] merger was Penn Central’s promise to take in the __.
[New Haven] as an operating entity ... ." New Haren Inclusion Cases,
399 U.S. at 398-399.
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8
other terms of inclusion of the Debtor's operation in
Penn Central Company.
“K. The Court hereby reserves Jurisdiction to ad judi-
cate all objections and claims for equitable treatment
heretofore filed herein except that all objections to the
inclusion of the Debtor’s operations in Penn Central
Company as of December 31, 1968 are hereby overruled
and denied.’* (emphasis added)
Penn Central filed a petition for review of the
Commission’s Order by a statutory three-judge court, and
sought, but was denied, an order from that court staying
the inclusion. Penn Central did not appeal from the three-
judge court order, nor from the New Haven Reorganiza-
tion Court’s Order No, 559.
A description of the background of the inclusion
proceedings, the terms of the inclusion, and the subsequent
judicial proceedings is set forth in the New Haven Inclu-
ston Cases, 399 U.S. at 413-430.
The New Haven’s assets were conveyed to Penn Cen-
tral on December 31, 1968 pursuant to the orders of the
Commission and the New Haven Reorganization Court.
Subsequently, hearings were resumed by the New Haven
Reorganization Court to deal with the issues raised con-
cerning the terms of inelusion. Hearings also commenced
before a three-judge district court in the Southern District
of New York, to which the New Haven bondholder groups
had appealed from the Commission's order,
The New Haven Reorganization Court rejected the
Commission’s valuation findings, ruling the New Haven’s
assets to be worth some $29 million more than that deter-
mined by the Commission. The New Haven Reorganization
Court also met the contentions of the New Haven bond-
holder groups that they were insecure under the inclusion
terms; it did so by formulating and requiring, on its own
initiative and as a condition to Section 77's required finding
9
of fairness and equity, an ‘‘underwriting plan’’ to secure
payment to the New Haven equal to the value of the assets
conveyed to Penn Central. In re New York, New Haven and
Hartford Railroad Co., 304 F. Supp. 793, 809 — 810 (D. Conn.
1969).
In its review, the three-judge court, while finding that
the Commission’s undervaluation was only $990,000, agreed
with and also adopted the New Haven Reorganization
Court’s security device of an underwriting plan to insure
that the New Haven would be fully paid for the assets con-
veyed. N.Y. N.H. & H.R. Co. Bondholders’ Committee v.
United States, 305 F. Supp. 1049 (S.D.N.Y. 1969).
The conflicting decisions of the two district courts were
then reviewed by this Court in expedited proceedings. This
Court held that the New Haven Reorganization Court was
the court of primary jurisdiction, affirming its decision
as to the value of the assets sold to Penn Central ond as
to the constitutional rights of the New Haven creditors to
receive payment which represented the fair equivalent in
value of those assets. However, after argument in this
Court but before its decision, Penn Central itself instituted
reorganization proceedings under Section 77 on June 21,
1970, in the United States District Court for the Eastern
District of Pennsylvania. This Court stated that, were it
not for Penn Central’s bankruptcy, it would have affirmed
the New Haven Reorganization Court’s decision in toto:
‘‘On the basis of the record before the District Court
[the New Haven Reorganization Court] at the time of
5The plan provided that Penn Central would pay part of the con-
sideration in the form of common stock (over 950,000 shares), valued
by the Commission at $87.50 per share. Since the stock had not yet reached
that price on the New York Stock Exchange, the New Haven Reorganiza-
tion Court provided, in essence, in the underwriting plan that if the stock
should not reach that value by February 1, 1978, the New Haven would
be entitled to the difference between $87.50 per share and the value of
the stock at the conclusion of the underwriting period. New Haven Inclu-
sion Cases, 399 U.S. at 486-487.
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its order, we would have no hesitancy in accepting its
findings, conclusions, and proposed underwriting plan
as consistent with the history of the reorganization
proceedings and supported by substantial evidence.”
399 US. at 488 (emphasis added).
However, specifically in the light of the Penn Central's
bankruptey, this Court disaffirmed the underwriting plan,
stating:
‘But we cannot avoid the impact of recent events
in assessing the propriety of the decree that that court
[the New Haven Reorganization Court] has entered.
See United States v. Aluminum Co. of America, 148
F.2d 416, 445. And those events make it possible that
this aspect of the reorganization court’s decree may
be wholly unrealistic.
‘The fairness and equity that are the essence of a
$77 proceeding forbid our approval of a payment for
the transferred New Haven properties that may be
worth only a fraction of its purported value.’’ 399 U.S.
at 488.
‘* Accordingly, we set aside the order of the Connecti-
eut District Court insofar as it determines that an
intrinsic value of $87.50 inheres in the Penn Central
common stock and implements an underwriting plan to
secure payment of that sum.”’ 399 U.S. at 489 (em-
phasis added).
Upon receipt of this Court’s mandate, the New Haven
Reorganization Court, by Order dated August 10, 1970,
directed the New Haven Trustee to file a statement of
position with respect to the provisions that should be in-
cluded in the order of remand to the Commission, and pro-
vided an opportunity for all interested persons thereafter
_
ll
to state their positions in light of that taken by the New
Haven Trustee.* During the course of the ensuing proceed-
ings, the New Haven Trustee took the position, inter alia.
that pending payment for the properties and rights re-
quired by the Commission and The New Haven Reorganiza-
tion Court to be conveyed to Penn Central on December 31,
1968, the order on remand to the Commission should declare
that the property so conveyed was impressed with an equit-
able lien and that the rights in the so-called Grand Central
Terminal Properties and the income therefrom conveyed at
the same time were subject to a constructive trust. The un-
derlying reason for this position was to protect the censti-
tutional rights of the New Haven bondholders found by this
court.
The New Haven Reorganization Court entered its
Memorandum of Decision on June 11, 1971, 330 F. Supp.
131 (A-26-60) and its order on June 22, 1971, 331 F.
Supp. 212 (A-61-65), holding that it had jurisdiction
to adjudicate the issues before it and declaring the exist-
6The New Haven Trustee was required to state his position as to
six designated subjects: (1) Step II of the plan of reorganization for the
New Haven, which deals with the distribution among the New Haven’s
creditors; (2) the extent and nature of the New Haven Reorganization
Court’s directions, if any, to the Commission on the remand; (3) declara-
tion of an equitable lien; (4) payment over to the New Haven Trustee
of proceeds of sales of mortgaged property on deposit with the indenture
trustee under the mortgage securing the Penn Central bonds held by
the New Haven Trustee; (5) declaration of a constructive trust; and
(6) consummation of the plan of reorganization for Boston and Provi-
dence Railroad Corporation. Two of these matters were subsequently
resolved and were not treated with in the June 22, 1971 Order of the New
Haven Reorganization Court. These involved agreements reached between
the New Haven Trustee and the Penn Central Trustees, that were ap-
proved by the respective reorganization courts, so that $18 million on
deposit under the mortgage securing the Penn Central bonds held by the
New Haven Trustee was divided between the two estates; and the accept-
ance by the Penn Central Trustees of responsibility for carrying out the
Plan of reorganization for Boston and Providence Railroad.
a
ence of an equitable lien and constructive trust.’ The
equitable lien was impressed on all the tangible prop-
erty conveyed to Penn Central with the exception of roll-
ing stock and property theretofore sold by Penn Central.
331 F. Supp. at 215 (A-64). The constructive trust applied
to the former right, title and interest of the New Haven in
the **Grand Central Terminal Property,’’ but was limited
4
3 in amount to $28,438,000 plus interest, 331 F. Supp. at 215,
i 216 (A-64-—65), the amount upheld by this Court, in
; affirming the New Haven Reorganization Court, as the value
: of the New Haven’s interest in those properties. 399 U.S.
: at 445-451."
3 i‘ ” tu Sene 21, 1971, upon petition of the Penn Central Trustees, the
. Penn Central Reorganization Court entered an injunction restraining the
bd New Haven Trustee and others from taking any action pursuant to the
Memorandum of Decision or any order entered thereon “to enforce, collect
or cause to be perfected or paid any claim against” Penn Central. The Penn
Central Reorganization Court also asserted jurisdiction to adjudicate the
merits of the equitable lien and constructive trust. The New Haven Trustee
3 and others appealed therefrom to the United States Court of Appeals for
4 the Third Circuit, asserting that the petition of the Penn Central Trustees
constituted an impermissible collateral attack on the June 11, 1971 deci-
sion of the New Haven Reorganization Court. By decision and order dated
December 31, 1971, the Penn Central Reorganization Court extended the
injunction and ruled that, pending final resolution of the New Haven
estate’s entitlement to a security interest in its former property, referring
in passing to the proceedings then pending before the Court of Appeals for
the Second Circuit (to which this petition for certiorari is addressed), the
New Haven Trustee would be deemed to have a tentative lien, “indetermin-
ate in amount, upon al! real property and all readily identifiable personal
property (except rolling stock) conveyed to the Penn Central as of Decem-
id ber 31, 1968, which were siill in possession of the Debtor’s estate on June
4 11, 1971,” In the Matter of Penn Central Transportation Company, Debtor,
337 F. Supp. at 790.
3 The New Haven Trustee has also appealed that decision to the United
States Court of Appeals for the Third Circuit, for the reason, inter alia,
that it is based upon an impermissible collateral attack on the judgment
of the New Haven Reorganization Court; and that the New Haven Reor-
ganization Court’s adjudication of an equitable lien and constructive
% trust was obviously fair and equitable under the circumstances of this
2 case for the reasons stated in Judge Anderson’s opinion.
SIn its Order on Remand, 331 F. Supp. 212 (A-61— 65), the New
Haven Reorganization Court credited against the $174.6 million owed to
the New Haven estate some $41.9 million that had heretofore been paid by
Penn Central in the form of cash, assumption of liabilities, and cancella-
tion of indebtedness, leaving a balance owed the New Haven estate of
$132.7 million. It ruled that the Penn Central stock and bonds that had
been delivered to the New Haven, in accordance with the Commission’s
terms for inclusion, were to be deemed held as security for payment of the
balance.
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The New Haven Reorganization Court understood this
Court’s mandate as requiring its adjudication of threshold
legal issues before remanding the ease to the Commission :
“This court has the exclusive jurisdiction to determine
the effect of the Supreme Court’s mandate in the New
Haven Inclusion Cases, and this court must decide
what is to be done to implement it. The full price re-
quired to be paid for the New Haven’s assets was de-
cided, but the terms of payment were not; and this
court alone must review and determine what means,
pursuant to the Supreme Court’s mandate, are proper.
The LC.C. cannot adjudicate the issues of law now be-
fore this court, for these lie outside its jurisdiction. ...
‘‘So here, the Commission has no jurisdiction to
decide the legal questions of the New Haven’s status,
whether as that of a stockholder or creditor, including
the type of creditor, and the further related question as
to whether or not the New Haven estate has a full
security interest in its former properties for the bal-
ance of the purchase price. These are legal questions
which are for this court in construing the Supreme
Court’s mandate. In the circumstances of this case or-
dinary sense and logic call for a resolution of these
paramount issues before remand of the case to the
1.C.C. in order that it may proceed with prior knowl-
edge of how the legal questions have been adjudicated.
330 F. Supp. at 136-137 (A-28 - 29).
While then adjudicating that an equitable lien and con-
structive trust existed, the New Haven Reorganization
Court did not enter any order which enforced the hen or
trust (providing only that a formal accounting of the in-
come subject to the trust was required), stating:
‘the Penn Central reorganization court will re-
main wholly in control of the effect, if any, of such a
lien on the operations of the railroad and on its reor-
ganization plan formulation.’’ Jd. at 187 (.A-31).
The Penn Central Trustees, Manufacturers Hanover
ust Company, as trustee under the New York Central and
3
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14
Hudson River Railroad Co. Gold Bond Mortgage, and Penny
Central Transportation Company appealed to the Court of
Appeals for the Second Cireuit. The Court of Appeals’
decision reversed the New Haven Reorganization Court on
jurisdictional grounds and directly remanded the case to
the Commission."
The Court of Appeals recognized that the New Haven
Reorganization Court had specifically held that it had juris-
diction to enter its order. The Court of Appeals summarized
four bases upon which it had been contended that jurisdic-
tion could be premised, as follows: ‘‘ First... the ‘exclusive
jurisdiction’ provision of §77 (a) cannot be read literally,
and the... [New Haven Reorganization Court’s] action
comports with the policy underlying that section. Second
... [the New Haven Reorganization Court] had jurisdie-
tion to implement the Supreme Court’s mandate in the
New Haven Inclusion Cases. Third ... [the New Haven
Reorganization Court] reserved jurisdiction, in its order
authorizing the transfer of the New Haven estate’s assets,
over the property so transferred. Finally ... [the New
Haven Reorganization Court] had in personam jurisdic-
tion over the Penn Central trustees and thus had the power
to adjudicate the rights of the parties in property not
located within the court's territorial jurisdiction.’’ (A-11).
The Court of Appeals rejected all four bases of
jurisdiction, wholly relying on its view of the rationale of
Warren v. Palmer, supra.” It did not find that the New
Haven Reorganization Court’s order would, but. only,
despite its clear statement of intent that enfareement of
the security and control over rail operations wduld remain
in the Penn Central Reorganization Court, that’ such order
could;
“Reversed and remanded to the Interstate Commerce Commission"
(A-19).
1” See page 23, infra.
15
at this stage of the Penn Central reorganization
proceedings, seriously impair the formulation of a
workable plan for the financial resuscitation of Penn
Central by the Commission and the ability of the Penn-
sylvania reorganization court to administer the entire
Penn Central system, of which the New Haven line is
but a division ...’* (.A-16).
This finding, even as limited by the Court of Appeals to
an area only of possibility of interference, was without the
support of any evidentiary record. Further, in his coneur-
ring opinion, Judge Mansfield watered down even the possi-
bility of any interference, characterizing the effect of the
security, as follows:
‘Although the creation of a lien and a constructive
trust upon assets of the Penn Central might not have
the immediate effect of disrupting that court’s opera-
tion of the railroad, such action could pose the threat
of doing so.’ "' (A-20) (emphasis added.)
The Court of Appeals held, under Warren v. Palmer,
supra, that the New Haven Reorganization Court had been
ousted from substantially all jurisdiction over the New
Haven reorganization proceedings by the adjudication of
Penn Central’s bankruptey (A-13; A-16). The Court of
Appeals held that a plan of reorganization for the New
Haven should be formulated by the Commission only in con-
junction with a plan of reorganization for Penn Central and,
1) The “threat” of interference referred to by Judge Mansfield could, if
at all, only concern the constructive trust on one half the “excess income”
from the Park Avenue properties, since the order of the New Haven Reor-
ganization Court regarding the equitable lien required no act by the Penn
Central Trustees. It is significant, therefore, that the Penn Central Trustees
have stated subsequently in petitions to the Penn Central Reorganization
Court for approval of the sale of certain of the Park Avenue properties, that
the properties and income from such properties “are not required by the
[Debtor's] Trustees in the operation of the Debtor's railroad or in the con-
duct of the Debtor’s transportation business.” (Penn Central Trustees’ peti-
tions attached to Order No. 605, dated March 13, 1972, of the Penn Central
Reorganization Court.)
Pree eAt ta
want
&
16
in effect, that the Penn Central Reorganization Court alone
had jurisdiction to pass upon the fairness and equity of the
New Haven’s reorganization plan (A-18— 19). It remanded
: ‘*the case to the Interstate Commerce Commission with li-
: rections to consider, in light of the Penn Central reorgani-
zation, the form of consideration the New Haven estate
should receive’’ ™ (A-19),
:
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The Court of Appeals stressed that its reversal of the
New Haven Reorganization Court was limited to its dis.
agreement as to jurisdiction :
‘*We do not imply by this remand that we disagree
either with the fairness of Judge Anderson's order or
with his conclusion that the Supreme Court’s opinion
in New Haven Inclusion Cases requires that the New
Haven estate receive $174.6 million as compensation
for the taking of its property. We hold only that the
Conneeticut reorganization court is not the proper
body to grant whatever protection is required because
it has no jurisdiction ...°’ (A-19).
While thus refraining from an adjudication as to the
merits of the New Haven Reorganization Court’s judgment,
the effect of the jurisdictional holding, nevertheless, is to
deprive the New Haven of the security which was deemed
necessary by the New Haven Reorganization Court to meet
the requirements of the remand by this Court. Thus, the
substantive impact of the Court of Appeals’ decision is to
continue without any protection for an indefinite period the
creditors’ rights which, in the New Haven Inclusion Cases.
supra, this Court held must under the Constitution be ade-
quately safeguarded,
12 Judge Mansfield did not concur in this holding, stating “. .. I do not
agree that the Commission and the Pennsylvania Court have the power
unilaterally and without approval of the Connecticut court to determine
the form of the consideration that is to be paid to the New Haven estate
and its creditors for the assets transferred to the Penn Central.” (A-20)
2 — , CRRA, CROW ROW CBE RV EDR eee el COLON OS,
j *
17
REASONS FOR GRANTING THE WRIT
Summary
This Court should grant certiorari because the central
issues in this case concern the proper construction and
implementation of this Court's mandate in the New Maren
Inclusion Cases, supra, Utterly divergent decisions inter-
preting that mandate have been rendered by the New Hav-
en Reorganization Court and the Court of Appeals. Only
this Court can construe its mandate with finality.
This case also involves important questions of railroad
reorganization law which have not heretofore been consid-
ered and which ought to be decided by this Court. The
issues include matters pertinent to the public interest in
soundly financed railroads and such matters of expressed
national transportation policy as
“... promot[ing]| the public interest in increased sta-
bility of values of railroad securities with resulting
greater confidence therein of investors, ... assurling],
insofar as possible, continuity of sound financial condi-
tion of common carriers [and]... enhane[ing| the
market ability of railroad seeurities ... 7°’ 49 U.S.CLA.
20b, Historical Note.
If the Court of Appeals decision is allowed to stand, the
public interest in carrying out the national transportation
policy will be adversely affected. There are currently six
pending major Section 77 reorganizations™ in the North-
east alone, and the issues raised by the Court of Appeals’
decision have substantial relevance not only to the rights
of holders of railroad securities in these reorganizations,
but are related directly to the future ability of all railroads
economically and efficiently to finance their operations. This
18The New York, New Haven and Hartford Railroad Company, Penn
Central Transportation Company, Boston and Maine Corporation, Central
Railroad Company of New Jersey, Lehigh Valley Railroad Company and
Reading Company.
AhtAS
SOR eicllen. ther Me
Breese oinie rises
1s
(‘ourt should grant certiorari to resolve the conflicts be-
tween the decisions of the Court of Appeals and the deei-
sions of this Court both in the New Haren Inclusion Cases.
supra, and in Warren vr. Palmer, supra, and to serutinize
varefully the ouster of the New Haven Reorganization
Court of substantially all of its reorganization jurisdiction,
including the power to protect the New Haven estate
through the security devices of an equitable lien and con-
structive trust.
In brief, the decision of the Court of Appeals mis.
construes this Court’s mandate; invades the constitution-
al rights of the New Haven creditors; misapplies Warren +.
Palmer, supra; ousts the New Haven Reorganization Court
of substantive jurisdiction over the New Haven reorganiza-
tion; produces an unjust enrichment of other Penn Central
creditors; and leaves the New Haven estate at the merey of
an eroding and wasting Penn Central estate.
1. Only This Court Can Construe With Finality Its
Opinion and Judqment in The New Haren Inclusion
Cases, Supra, and Can Set Forth Its Intention in Di-
recting Its Remand to The New Haven Reorganiza-
tion Court,
This Court rendered its opinion in the New Haren In-
clusion Cases, supra, on June 29, 1970, and remanded the
case to the New Haven Reorganization Court. Penn Central
had gone bankrupt on June 21, 1970. Cognizant of. this
Court's approval in the New Haren Inclusion Cases, supra,
of his role (**The chancellor remains ‘a necessary and in-
portant factor in railroad reorganization,’ *’’ 399 U.S. at
433), Judge Anderson presided over proceedings for some
ten months with respect to what could and should be done
pursuant to the remand and the Penn Central's bankruptey.
Following those proceedings Judge Anderson entered his
opinion and order adjudging an equitable lien and construe-
i9
tive trust on the former New Haven property to protect the
New Haven estate and its creditors, and to prevent Penn
Central’s other creditors from being unjustly enriched.
The Court of Appeals reversed, holding that the New
Haven Reorganization Court had no jurisdiction under the
mandate by reason of the superior jurisdiction of the Penn
Central Reorganization Court, and was powerless to de-
clare the security measures constituted by the equitable
lien and constructive trust. Yet this Court, with full knowl-
edge of and specifie reference to the pendency of the Penn
Ceutral reorganization proceedings, New Haren Inclusion
Cases, supra, 399 U.S. at 399 n., remanded the case to the
New Haven Reorganization Court (and not to the Com-
mission or the Penn Central Reorganization Court). Only
this Court can clarify whether it intended the court to
which it directed its mandate to have jurisdiction limited
solely to a ministerial forwarding of this matter to the
Commission and, thereafter, to be barred from all substan-
tive implementation of the mandate.
The New Haven Reorganization Court considered that
the mandate required it, in remanding the ease to the Com-
mission, to adjudicate pertinent threshold legal issues,
noting that the Commission has itself held that it had no
power to adjudicate legal rights inter partes, Boston and
Providence Railroad Reorganization Proceedings, 290
LCC, 363, 382 (1954); 327 LC.C. 10, 15 (1966)."* It also
considered that it had been directed to formulate an appro-
priate security device to replace the ‘‘underwriting plan”’
which had been rejected by this Court. The ‘underwriting
plan,’’ which had itself been the invention of the New
Haven Reorganization Court in the earlier phase of the pro-
4 See also this Court’s opinion in the New Haven Inclusion Cases on
the extraordinary powers of a Section 77 reorganization court and on the
Commission’s lack of power to decide legal issues. 399 U.S. at 433-434, 442.
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ceeding (and was then accepted by the Commission without
any further administrative findings), was specifically found
by this Court not to provide adequate security for the very
reason that the Penn Central reorganization had been in-
stituted. New Haren Inclusion Cases, 399 U.S. at 48s,
489. Accordingly, only this Court can resolve whether the
New Haven Reorganization Court's formulation of new
security measures, as well as whether the measures which
it formulated, were a proper fulfillment of its responsibili-
ties under this Court's mandate, Section 77, and its own
retained jurisdiction.
2. The New Haren Reorganization Court Had
Jurisdiction Under This Court’s Remand to Protect
The Constitutional Rights of The New Haren Creditors,
and The Equitable Lien and Constructive Trust Were
Appropriate Security Devices for That Purpose.
Constitutional rights of secured ereditors of the New
Haven estate as to the former New Haven property, pre-
viously determined by this Court, may be irreparably im-
paired by any delay in resolution of the issues in the ease at
bar.
There has been a material and continuing erosion of
Penn Central assets during its operation in reorganization.
In the absance of a determination that the New Haven has at
least a security interest (even one, as here, which is wholly
limited in extent to the New Haven’s own former property
for which it has not received the payment found by this
Court to be fair and equitable), the continuing erosion of the
Penn Central estate will necessarily visit a disproportionate
and permanent reduction in the New Haven’s elaim vis-a-vis
other |secured creditors. Recognizing the strictures of
Warren v. Palmer, supra, against interfering with Penn
Central operations, the equitable lien and constructive trust
were among a severely limited group of, if not the only, mea-
21
sures aVailable to the New Haven Reorganization Court to
protect the New Haven creditors’ rights against those of
other creditors of Penn Central seeking the benefit of the
former New Haven assets.
In the New Haren Inclusion Cases, supra, this Court
held (affirming the judgment of the New Haven Reorgani-
zation Court) that the New Haven creditors have suffered
all the losses they were required to suffer in the publie in-
terest and that any further losses would be an uneonstitu-
tional taking of their property without just compensation,
399 U.S. at 466. This Court stated that no further loss by
the New Haven creditors could be sustained under any con-
struction of the Bankruptey Act, Jd. at 467.
Acting pursuant to the mandate, and aware of the
Commission's lack of legal power to declare security inter-
ests in the former New Haven property to protect the credi-
tors’ constitutional rights to be paid therefor, the New
Haven Reorganization Court considered it was required
to formulate new security measures to replace the disaf-
firmed *‘underwriting plan.** In devising the new security
measures, the New Haven Reorganization Court fully ap-
preciated that the security devices would not earry complete
assurance of payment and that the ostensible conflict be-
tween the ‘‘exelusive jurisdiction’’ of the two reorganiza-
tion courts over the same res must be avoided. Thus, it was
careful to find the path which would avoid any actual, or
even any reasonably warranted inference of, interference
with the Penn Central Reorganization Court's control over
Penn Central's operations, pointing out that:
aa
... the Penn Central reorganization court will re-
main wholly in cortrol of the effect, if any, of such a
lien on the operations of the railroad and on its reor-
ganization plan formulation.’* 330 F. Supp. at 137
(A-31).
ELBE ASOLSA SL ARE
22
A significant constitutional question is raised whether
there is an interference as a matter of law with the opera.
tions of Penn Central, as found by the Court of Appeals,
from the provision of the security protection afforded by
the equitable lien and constructive trust. This security pro-
tection will clearly be particularly important during the
time it will take the Commission to formulate a final plan
of reorganization for the New Haven and for that plan to
be approved, confirmed and consummated. The question
whether creditors who have been found to have sustained
the constitutional limits of permissible loss in one rail-
road reorganization are obliged to subject their remaining
assets to the risk of further loss in the reorganization
operations of a second railroad because the public interest
required their rail assets to continue to be operated by the
second railroad, fairly should be resolved as quickly as
possible.
The Court of Appeals’ failure to pass on the substan-
tive issue, and the resulting lack of security for the New
Haven’s constitutional right to receive payment, will re-
sult in a windfall for other Penn Central creditors who will
reap the benefits (even as to proceeds of sale) of the former
New Haven assets, without ever having paid for those
assets. Further, if the New Haven estate is not now protee-
ted by adequate security measures during the time a plan of
reorganization for Penn Central is being formulated and
approved, the New Haven estate might be so eroded zs to
leave nothing for New Haven creditors, except those quali-
fying as administration claimants in the New Haven re-
organization proceedings. It is thus imperative for the pro-
tection of the New Haven bondholders for this Court to
grant certiorari to adjudicate now the merits of the equit-
able lien and constructive trust as security measures in-
plementing this Court’s mandate to protect the New Haven
creditors’ constitutional rights.
23
3. The Court of Appeals Misapplied Warren rv.
Palmer and Miscoustrued its Application to the Respec-
tive Roles of the Reorganization Courts and the Com-
MISSION,
In Warren v. Palmer, supra, this Court held that, where
one reorganization court had authorized the rejection of
a leased line but the debtor was required to continue opera-
tions on that line, the reorganization court charged with
operations could impose a lien on the former leased line to
protect the debtor from operational losses, although the
lessor Was itself 4n reorganization under Section 77. in
another court.
The New Haven Reorganization Court concededly had
jurisdiction over the New Haven properties for the more
than seven years prior to the conveyance of the prop-
erties to Penn Central on December 31, 1968, and clearly
and specifically retained jurisdiction in its order authoriz-
ing the conveyance to adjudicate subsequently matters re-
lating to the purchase price to be paid by Penn Central.
This retained jurisdiction was recognized ‘by this Court
when it sent its mandate to the New Haven Reorganization
Court. The Court of Appeals’ decision, which relies on
Warren v. Palmer, supra, to oust the New Haven Reorgani-
zation Court of its primary jurisdiction over the New Haven
reorganization proceedings, raises questions of far reaching
importance of railroad reorganization law and the relation-
ship between courts having coneurrent jurisdiction over the
same res, Clarification of the scope of application of War-
ren v. Palmer, supra, which, contrary to the view of the
Court of Appeals here, indeed preserved concurrent juris-
diction of two railroad reorganization courts, is desirable.”
15 The concurring opinion, while refusing to go so far as the majority
and which attempted to find, without prescription, some continuing juris-
diction for the New Haven Reorganization Court, actually creates an even
more difficult legal issue. It would relegate to the Commission, in effect,
the power to determine which district court has what jurisdiction in the
subsequent proceedings affectii 5 the New Haven (A-23 — 24).
a
24
In the instant case, the New Haven Reorganization
Court carefully applied Warren vc. Palmer, supra. and pro-
a tected the Penn Central Reorganization Court's control
: over Penn Central operations of the former New Haven
3 properties by specifically providing that the equitable lien
: and constructive trust on such properties could be enforced
only in that court. The disagreement of the Court of Ap-
peals with this reasonable and funetional application of the
decision in Warren vr. Palmer, supra, should be reviewed and
glee adn.
j rejected.
3 The distinctions between the respective functions of
j the Commission and a reorganization court as to the same
; res were set forth by this Court by its opinions in Erker
é vr. Western Pacifie R. Corp.. 318 U.S. 448 (1943), and the
3 New Haren Inclusion Cases, supra. This necessary kind of
3 delineation is presently lacking, however, where the respec-
: tive functions of two reorganization courts are involved.
: The present case squarely raises issues which test the de.
q gree to which Warren v. Palmer, supra, may, if at all, be
. extended. Contrary to the unqualified, simplistic application
; of Warren v. Palmer by the Court of Appeals, the New
4 Haven Reorganization Court's view of Warren cv. Palmer
3 establishes a division of function between the respective re-
4 organization courts on the one hand, and among them and
3 the Commission on the other, which recognizes the public
: interest, and protects the individual constitutional rights of
: New Haven creditors involved.
| “or example, in the instant ease, the division of fune-
; tions among the two courts and the Commission would be
: as follows: The New Haven Reorganization Court should
5 adjudicate, as it already has, matters as to which the Con-
} nussion has no jurisdiction, ice. questions of legal rights
; between parties. In the instant case that adjudication in-
3 volved the determination that the New Haven creditors
: were constitutionally entitled to be equitably secured in
4 their right to payment for the assets taken from them, free
%
from the hen of their mortgages, because of the publie inter-
est in continued rail operation. Based upon that adjudieca-
tion, the Commission, and not the reorganization court,
would then decide the valuation questions, capitalization, if
pertinent, and related matters. After determination by the
Commission in this instance of a plan of reorganization for
the New Haven under Section 77 which fairly and equitably
treated with those questions, it would certify the same to
the New Haven Reorganization Court for the normal course
of review under Section 77.
Since, however, in the instant ease, the plan of reor-
ganization for the New Haven would involve payment by
another railroad also in reorganization under Section 77,
the Penn Central Reorganization Court would in due course
pass upon the treatment of the New Haven estate's claim
(whose ameunt and form would have already been estab-
lished by the Commission and the New Haven Reorganiza-
tion Court) as part of the reorganization plan for Penn
Central certified to it by the Commission. In such latter
review, the New Haven's established claim would be subject
to the impact, as determined by the Commission and the
Penn Central Reorganization Court, of the Penn Central
reorganization plan on claims of the same rank, priority,
and security.
The only qualification on these divisions of functions
would be that, as in Warren v. Palmer, supra, it the New
Haven’s established claims took a form which actually inter-
fered with the operations of Penn Central, the Penn Central
Reorganization Court would have exclusire Jurisdiction,
to determine, the extent of the same, and the protection re-
quired in the public interest against the interference. As
previously indicated, the New Haven Reorganization Court
was wholly sensitive to the exclusive jurisdiction of the Penn
Central Reorganization Court to control both Penn Central
operations and the ultimate treatment in a reorganization
plan for Penn Central of a New Haven claim protected by
ere
Lak ON TABLE
26
a limited equitable lien and constructive trust. While the
Court of Appeals assumed that these security devices ad-
versely affected the operations of Penn Central, there was
no showing that any such impact has occurred or could oc-
eur. And, in fact, none has.
The only certain and intended effect of the judgment
of the New Haven Reorganization Court is that the New
Haven's claim to be paid for the property which it conveyed
to Penn Central pursuant to Commission and court order,
and before final adjudication of the price and terms, would,
as limited to that property, have priority over other non-
administration secured claims and the claims of general
creditors of Penn Central. Where the security provided is
limited wholly to the property and rights conveyed, not only
is the mere existence of such security interest demon-
strably not injurious to the conduet of Penn Central's
operation in reorganization, but it is equitably justified.
Only a person having a claim which arose subsequent to
December 31, 1968 in specific reliance upon the New Haven’s
lack of an equitable security interest in the former New
Haven assets could claim otherwise; but such a contention
could not equitably be sustained in view of the continued
existence, from a date even preceding the conveyance, of
the litigation with respect to the amount and terms of pay-
ment for the property.
Without this Court’s determination of the applicability
to the instant case of Warren v. Palmer, the confusion that
must result as to the future proceedings in the New Haven
reorganization has the seeds of further confusion com-
pounded in other Section 77 proceedings now in process in
——EEEEaEE
27
reorganization courts in the first and third circuits."
4. The Court of Appeals Ouster of The New Haven
Reorganization Court From its Substantive Jurisdic-
tion is Unprecedented; and Will Unduly Prolong The
New Haven Reorganization Proceedings.
The public interest, the interest of investors, and
national transportation policy require that reorganization
plans under Section 77 be formulated and consummated
with the greatest possible speed. At best, much time is con-
sumed. The Court of Appeals cited with approval, however,
the Commission’s stated intention to ‘‘consolidate the Penn
Central reorganization and New Haven inclusion proceed-
ings so as to consider the terms of the New Haven inelusion
‘
as ‘a portion of the reorganization of Penn Central... °°
(A-19), and remanded the case to the Commission for this
purpose. In thus ousting the New Haven Reorganization
Court from jurisdiction over the New Haven reorganization
after more than ten years, and subjecting New Haven credi-
tors to a new reorganization of indefinite but lengthy dura-
ration, the Court of Appeals would protract the New Haven
reorganization proceedings to a seemingly endless pro-
'6The Court of Appeals seeks to avoid jurisdictional conflicts by as-
signing related reorganizations to the same court. However, substantial
and difficult §77(a) jurisdictional problems arise when the same court
supervises two related reorganizations as well as when two different
courts must delineate their respective jurisdictions over the same res. For
example, in the case of the Lehigh Valley Railroad Company, Debtor,
whose separate reorganization proceedings are supervised by the same
court which supervises the Penn Central reorganization, it appears that
Penn Central is not presently being paid regular interline operating
balances by Lehigh Valley (see Lehigh Valley Railroad Company Aban-
donment Between Dushore and Towanda, Pa. 338 I.C.C. 793, 797 (1972).
Thus, creditors of Penn Central, as well as creditors of Lehigh Valley,
have to face the question of the capacity in which the same Section 77 re-
organization court will determine how respective creditors of a bankrupt
parent and its bankrupt subsidiary are to be protected in their respective
operations.
Lenape ctl ow caliiadaeaiiiaataiay |
NYE ES
Cre oho prac iii ues
28
cess." Consolidation of the two proceedings clearly would
eliminate any possibility of a completion of the New Haven
proceedings prior to completion of the Penn Central reor-
ganization and, in fact, may even have the effect of post-
poning a New Haven reorganization under such cireum-
stances until after completion of the Penn Central reorgani-
zation.
The stated objective of the Court of Appeals’ decision
is to vest in another district court the precise issue that
this Court held in an analogous context would be best ad-
judieated in the New Haven Reorganization Court:
‘*We therefore hold that the three-judge court here
should have granted the Government’s motion to the
extent of deferring to the reorganization court in pro-
ceedings ultimately involving only the price to be paid
for the assets of the debtor’s estate."’ New Haven In-
clusion Cases, 399 U.S. at 430.
The New Haven Reorganization Court’s knowledge and
expertise in this matter, which has been pending before it
for more than ten years, are unmatchable in expediting the
termination of the New Haven reorganization proceedings.
It is the only court with a complete record before it of New
Haven participation in proceedings which have been involv-
ed in various appellate aspects in this Court on three prior
oceasions.'* If the New Haven proceedings were to become
'7On April 3, 1972, the Penn Central Trustees reported to the Penn
Central Reorganization Court that they would not file a plan for reor-
ganization of Penn Central prior to April 1973, and that their present
studies are based upon operating conditions estimated to exist in 1976. The
proceedings before the Commission leading to approval and certification of
a plan to the district court under these circumstances and the latter's
subsequent approval and confirmation proceedings may reasonably be
assumed to require many years to complete.
1s New Haven Inclusion Cases, supra; Penn Central Merger and Na&dW
Inclusion Cases, 389 U.S. 486 (1968); Baltimore & Ohio R.R. v. United
States, 386 U.S. 372 (1967).
29
subject t> review in the Penn Central Reorgenizetion Court.
as directed by the Court of Appeals, the evidence o: the
past ten years would be required in large measure again
to he prepared, offered and considered de novo. This pro-
cedure would produce further adverse consequences to the
objective of efficient, economical administration of the bank-
ruptey laws, already sorely tried in a number of. cases,
without any concomitant legal or publie gain. Such a result
in itself warrants the review of, and promulgation of guid-
ing principles by, this Court concerning the questions pre-
sented.
Affirmance of the New Haven Reorganization Court’s
appropriate jurisdiction in the premises as to New Haven
matters other than those affecting the operations of the
Penn Central system would appear to make possible the
formulation and carrying out of a plan of reorganization
for the New Haven which need not wait upon the completion
of the reorganization of Penn Central. To be sure, the
actual receipt by the New Haven of payment for its pro-
perties conveyed to Penn Central could be years in the
future and would, in any event, depend on the treatment for
secured creditors of the New Haven’s ‘ank, priority, and
security, as ultimately approved by the Penn Central Reor-
ganization Court in a plan for Penn Central." However,
once the pending question as to the form and characteris-
ties of the New Haven claim has finally been resolved, e.g.,
whether and how and in what amount the claim is deemed
equitably secured, the final determination by the Commis-
sion of a plan for equitable treatment of the creditors’
claims in the New Haven’s own reorganization and the ap-
proval of such plan by the New Haven Reorganization
Court may be achieved with a minimum of delay.
19 As this Court pointed out at the beginning of its opinion in the
New Haven Inclusion Cases, in noting the institution of the Penn Central’s
reorganization proceedings: “Whether the financial obligations dealt with
in the present opinion may become subject to modification in or because of
those proceedings is a question with which the present opinion in no way
deals,” 399 U.S. at 399 n.
30
CONCLUSION
Kor the foregoing reasons, this Petition for Writ of
Certiorari should be granted in order for this Court to re.
view the jurisdictional judgment of the Court of Appeals
and the substantive merits of the equitable lien and con.
structive trust adjudicated by the New Haven Reorganiza-
tion Court.
Respectfully submitted,
Of Counsel:
Morris RAKER JaAMres Wo. Moore
Nancy F. Gans JosePH AUERBACH
SULLIVAN & WORCESTER
225 Franklin Street
Boston, Massachusetts 02110
Josern W. Bisuopr, Jn.
54 Meadow Street
New Haven, Connecticut, 06506
Dated: April 28, 1972
APPENDIX
A-l
STATUTES INVOLVED
Section 77. Reorganization of Railroads Engaged in
Interstate Commerce, — (a) Any railroad corporation may
file a petition stating that it is insolvent or unable to meet
its debts as they mature and that it desires to effect a plan
of reorganization. The petition shall be filed with the court
in whose territorial jurisdiction the corporation, during the
preceding six months or the greater portion thereof, has
had its principal executive or operating office, and a copy
of the petition shall at the same time be filed with the In-
terstate Commerce Commission (hereinafter called the
“Commission’’), When any railroad, although engaged in
interstate commerce, lies wholly within one State, the pro-
ceedings shall be brought in the United States district court
for the district in which its principal operating office has
been located during the preceding six months or the greater
portion thereof. The petition shall be accompanied by pay-
ment to the clerk of a filing fee of $150. Upon the filing of
such a petition, the judge shall enter an order either ap-
proving it as properly filed under this section, if satisfied
that it complies with this section and has been filed in good
faith, or dismissing it, if he is not so satisfied. If the peti-
tion is so approved, the court in which the order is entered
shall, during the pendency of the proceedings under this
section and for the purposes thereof, have exclusive juris-
diction of the debtor and its property wherever located, and
shall have and may exercise in addition to the powers con-
ferred by this section all the powers, not inconsistent with
this section, which a court of the United States would have
had if it had appointed a receiver in equity of the property
of the debtor for any purpose. Process of the court shall
extend to and be valid when served in any judicial district.
The Supreme Court of the United States shall promulgate
rules relating to the service of process outside of the dis-
trict in which the proceeding is pending, and any other
rules which it may deem advisable in order to aid district
a
A-2
courts and courts of appeal in exercising the jurisdiction
herein conferred upon them. The railroad corporation shall
be referred to in the proceedings as a ‘*debtor."" Any rail.
road corporation the majority of the capital stock of which
having power to vote for the electioon of directors is owned,
either directly or indirectly through an intervening medium,
by any railroad corporation filing a petition as a debtor may
file, with the court in which the other debtor has filed such
a petition, and in the same proceeding, a petition, a copy of
which shall also be filed at the same time with the Com.
mission, stating that it is insolvent or unable to meet its
debts as they mature, and that it desires to effect a reorgan-
ization in connection with, or as a part of the plan of re-
organization of the other debtor; and upon the filing of the
petition, the judge shall enter an order either approving it
as properly filed under this section, if satisfied that it com-
plies with this section and has been filed in good faith, or
dismissing it if not so satisfied, and thereupon the court, if
it approves the petition, shall have the same jurisdiction
with respect to such debtor, its property and its creditors
and stockholders, as the court has with respect to the other
debtor. Creditors of any railroad corporation, having
claims aggregating not less than 5 per centum of all the
indebtedness of the corporation as shown in the latest an-
nual report which it has filed with the Commission at the
time when the petition is filed, may, if the corporation has
not filed a petition under this section, file with the court in
which the corporation might file a petition under this see-
tion, a petition stating that the corporation is insolvent or
unable to meet its debts as they mature and that the eredi-
tors have claims aggregating not less than 5 per centum
of all such indebtedness of the corporation and propose
that it shali effect a reorganization; copies of the petition
shall be filed at the same time with the Commission and
served upon the corporation. The corporation shall, with-
in ten days after such service, answer the petition. If the
Sed
A-3
answer admits the jurisdiction of the court and the ma-
terial allegations of the petition, the judge shall enter an
order approving the petition as properly filed if satisfied
that it complies with this section and has been filed in good
faith, or dismissing it, if not so satisfied. If the answer
denies either the jurisdiction of the court or any material
allegation of the petition, the judge shall summarily deter-
mine the issues presented by the pleadings without the in-
tervention of a jury, and if he finds that the material al-
legations are sustained by the proofs and that the petition
complies with this section and has been filed in good faith,
the judge shall enter an order approving the petition;
otherwise, he shall dismiss the petition. If such a petition
is so approved, the proceedings thereon shall continue with
like effect as if the railroad corporation had itself filed a
petition under this section. If a petition is dismissed, neither
the petition nor the aswer of a debtor constitute an act of
bankruptey or an admission of insolvency or of inability
to meet maturing obligations or be admissible in evidence,
without the debtor’s consent, in any proceedings then or
thereafter pending or commenced under this Act or in any
State or United States court. If, in any case in which the
issues have not already been tried under the provisions of
this subdivision, any of the creditors, prior to the hearing
provided for in paragraph (1) of subsection (c) of this
section, appear and controvert the facts alleged in the peti-
tion, the judge shall determine, as soon as may be, the issues
presented by the pleadings, without the intervention of a
jury, and, unless the material allegations of the petition
are sustained by the proofs, shall dismiss the petition.
Section 77(c) Reorganization of Railroads Engaged
in Interstate Commerce.
(6) If a lease of a line of railroad is rejected, and if
the lessee, with the approval of the judge, shall elect no
longer to operate the leased line, it shall be the duty of the
a
A-4
lessor at the end of a period to be fixed by the judge to begin
the operation of such line, unless the judge, upon the peti-
tion of the lessor, shall decree after hearing that it would
be impracticable and contrary to the public interest for the
lessor to operate the said line, in which event it shall be
the duty of the lessee to continue operation on or for the
account of the lessor until the abandonment of such line is
authorized in accordance with the provisions of section |
of the Interstate Commerce Act as amended, or until sueh
operation pursuant to this paragraph is otherwise lawfully
terminated. During any such operation, the lessor shall be
deemed to be a carrier subject to all applicable provisions of
the Interstate Commerce Act, as amended, and shall be en-
titled to receive just, reasonable, and equitable divisions of
rates, fares, or charges applicable to the transportation of
persons or property over its line or lines of railroad and
the lines of the lessee or other carriers, and the provisions
of section 15(6) of the Interstate Commerce Act, as now or
hereafter amended, shall apply to said divisions whether or
not joint rates covering such transportation have been
established.
A-5
United States Court of Appeals
For the Second Circuit
Nos. 372, 373, 374 — September Term 1971.
(Argued January 3, 1972 Decided March 17, 1972.)
Docket Nos. 71-1903, 71-1929, 71-2024
In the Matter of
THe New York, New Haven anp
Hartrrorp Rarroap Company,
Debtor.
Before:
Luuparp, Hays and Mansrte.p,
Circuit Judges.
Hays, Circuit Judge:
This is an appeal from an order of the United States
District Court for the District of Connecticut declaring an
equitable lien on certain property and imposing a construe-
tive trust on income from certain other property trans-
ferred by the debtor New York, New Haven and Hartford
Railroad (New Haven) to the Penn Central Transporta-
tion Company (Penn Central). We reverse on the ground
that the district court lacked subject matter jurisdiction
under §77(a) of the Bankruptey Act, 11 U.S.C. §205(a)
(1970), to issue the order, since the property affected is
within the exclusive jurisdiction of another district court.
This appeal involves one more stage in the lengthy and
complicated proceedings involving the reorganization of
the New Haven, the merger of the Pennsylvania Railroad
- oe
A-6
and the New York Central Railroad to form the Penn (ep.
tral, the inclusion of the New Haven’s lines in the merged
Penn Central, and Penn Central’s subsequent petition for
reorganization. An outline of the various proceedings from
1961 to 1969 is set forth in New Haven Inclusion Cases. 399
U.S. 392, 399-418 (1970). See also Penn-Central Merger and
N & W Inclusion Cases, 389 U.S. 486 (1968) and Baltimore
€& Ohio R.R. v. United States, 386 U.S. 372 (1967). For pur-
poses of this appeal, a brief outline of the previous proceed.
ings will suffice.
In July, 1961, New Haven filed a petition for reorgan-
ization pursuant to §77 of the Bankruptey Act, 11 U.S.C.
§205 (1970), in the United States District Court for the Dis
trict of Connecticut. The court approved the petition and
appointed trustees. In March, 1962 the Pennsylvania and
New York Central railroads applied to the Interstate Com-
merece Commission for permission to merge. In June, 1962
the New Haven trustees filed with the Commission a petition
for inclusion in the proposed merged railroad. The Com-
mission has never proposed a reorganization plan for the
New Haven itself. In 1966 the Commission approved the
merger of the Pennsylvania and New York Central but re-
quired as a condition of approval of the merger that the
New Haven’s lines be included in the merged railway sys-
tem. The New Haven trustees and representatives of the
Pennsylvania and New York Central railroads thereupon
entered into a Purchase Agreement, subsequently modified,
which provided that all the New Haven assets would be
transferred to Penn Central in return for cash, and stock
and bonds of Penn Central. The New Haven trustees re-
quested the Connecticut reorganization court to permit
them to petition the Commission to require inclusion of the
New Haven’s lines in the merged rail system on the terms
set forth in the Purchase Agreement. The Connecticut
reorganization court granted permission, and in 1967 the
AZ
Commission approved inclusion on the terms provided in
the Purchase Agreement. Subsequent litigation dealt with
the proper value to be assigned to the New Haven proper-
ties. On December 24, 1968, however, because of the pre-
earious financial condition of the New Haven and_ the
imminent termination of its rail service, the Connecticut
reorganization court approved the transfer of New Haven’'s
assets to Penn Central, leaving the exact amount and form
of consideration to be paid by Penn Central to be settled
finally at a later date. Since the Commission conditioned
approval of the merger on inclusion of the New Haven,
Penn Central, as a result of the merger, consented to be
bound by ‘‘whatever terms the [Connecticut] reorganiza-
tion court might [later] confirm...’ New Haven Inclusion
Cases, supra at 428. However the transfer of New Haven’'s
assets Was expressly made ‘‘free and clear of all liens,
charges and encumbrances. ”’
The decision of the Supreme Court in New Haven Inclu-
sion Cases, handed down on June 29, 1970, upheld the de-
termination of the Connecticut reorganization court that
the value of the New Haven property transferred to Penn
Central was approximately $174.6 million. Under the Pur-
chase Agreement, an object of which was to assure that
the New Haven estate would actually receive full compen-
sation, a portion of the consideration was to be paid to
the New Haven estate in the form of Penn Central stock
and bonds. Because of mounting financial pressures, how-
ever, the market value of Penn Central stock declined
drastically from the date of the first negotiations between
New Haven and Penn Central representatives and the final
inclusion of the New Haven in the merger. See In re New
York, N.H. & H. R.R., 304 F. Supp. 793, 808-810 (D. Conn.
1969); New York, NH. & H. R.R. Co. First Mortgage 4%
Bondholders’ Committee v. United States, 305 F. Supp.
1049, 1064-65 (S.D.N.Y. 1969). See also Pennsylvania Rail-
road Co.—Merger—New York Central Railroad Co. (Fifth
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A-8
Supplemental Report), 334 LC.C. 528, 532 (1969). The
Supreme Court, therefore, while agreeing with the Con-
necticut reorganization court’s valuation, remanded the case
for ‘‘|f]urther proceedings before the Commission and the
appropriate federal courts ... to determine the form that
Penn Central’s consideration to New Haven should prop-
erly take ...’’ New Haven Inclusion Cases, supra at 489.
On June 21, eight days before the Supreme Court’s de-
cision was announced, Penn Central filed a petition for re-
organization in the Eastern District of Pennsylvania. The
petition was approved the same day and the district court
issued an order restraining and enjoining all persons ‘‘from
interfering with, seizing, converting, appropriating, attach-
ing, garnisheeing, levying upon, or enforcing liens upon, or
in any manner whatsoever disturbing any portion of the
assets ... properties or premises belonging to, or in the
possession of the Debtor [Penn Central] ... and from com-
mencing or continuing any proceeding against the Debtor"
with certain exceptions not here relevant.
After receiving the mandate of the Supreme Court, the
Connecticut reorganization court did not remand to the
Commission for further proceedings. Instead, it ordered,
on August 10, 1970, that a hearing be held on the question
of whether the court should modify its prior orders with
respect to the New Haven assets previously transferred to
Penn Central. The Penn Central trustees appointed by the
Pennsylvania reorganization court appeared at the hearing,
although they were not parties to the New Haven reor-
ganization. After various proceedings extending over
approximately ten months, the Connecticut reorganization
eourt issued a decision on June 11, 1971. The court first
held, on various grounds, that it had subject matter juris-
diction. Because the decline in the market price of Penn
Central stock and Penn Central’s pending reorganization
had rendered the court’s plan for compensation for the New
A-9
Haven property grossly inequitable, the court declared that,
in order to implement the Supreme Court’s mandate to com-
pensate fully **the New Haven estate for the balance |of
the purchase price] remaining due and to provide reason-
able security for the sum owed,”’
(1) . . . the 956,576 shares of common stock of the
Penn Central Company, the parent company, should be
treated as collateral security, of indeterminate value,
for the balance of the purchase price due by the Penn
Central Trustees; it is wholly unrealistic to treat the
stock otherwise; (2) that an equitable lien must be de-
clared on all of the former assets transferred by the
New Haven to Penn Central, exclusive of (a) rolling
stock and (b) the New Haven’s one-half interest in the
excess income from the Grand Central | Terminal }
properties; and (3) that the Penn Central Trustees
hold the latter item of property subject to a construe-
tive trust in favor of the New Haven estate.”’
The reasoning of the district court was that, as the Supreme
Court had determined that the New Haven estate had the
constitutional right to receive $174.6 million for the assets
transferred to the Penn Central, the New Haven estate
could not be relegated to the position of a general creditor
in the pending Penn Central reorganization.
On June 21, 1971 the Pennsylvania reorganization court
issued an order directing the Penn Central trustees to
appear before the Connecticut reorganization court and to
object to the entry of any order based on that court’s deci-
sion of June 11, on the ground that the Connecticut reor-
ganization court had no jurisdiction to issue an order of
the nature indicated by the decision of June 11. The order
of the Pennsylvania reorganization court enjoined any per-
son ‘‘from taking any action which would enforce, collect
or cause to be perfected or paid any claim against the
Debtor or its estate arising out of the inclusion of the New
DAO MAN Sh Nee TART
2B: TAAL EL,
Been eek erties,
A-10
Haven into the Debtor, other than in these proceedings, or
which would interfere with the primary jurisdiction of this
Court to deal with properties in its possession or under its
control pending further order of this court.’’ In contra-
vention of the constructive trust declared, but not yet or-
dered, by the Connecticut reorganization court, the Penn-
sylvania court directed the Penn Central trustees to use all
the income from the Grand Central Terminal properties
to pay Penn Central’s current expenses. Despite this ac-
tion, the Connecticut reorganization court entered its order
on June 22 and appointed counsel to perfect the interest
of the New Haven estate in the property. An appeal of the
order of the Connecticut district court was thereupon taken
to this court.
I. The Issues
The issue presented by this appeal is whether the Con-
necticut district court had jurisdiction to declare an equit-
able lien on the property transferred by New Haven to
Penn Central and a constructive trust on that portion of the
income from the Grand Central Terminal properties that,
prior to the transfer, New Haven had the right to receive.
Section 77(a) of the Bankruptcy Act, 11 U.S.C. §205(a)
(1970), provides in relevant part;
“‘If the petition [stating that the railroad is insolvent
and wishes to reorganize its capital structure] is so
approved [by a judge of the district court of proper
venue], the court in which the order is entered shall,
during the pendency of the proceedings under the see-
tion and for the purposes thereof, have exclusive juris-
diction of the debtor and its property wherever located.
..’’ (Emphasis added).
In the present case we are faced with conflicting claims
of subject matter jurisdiction over certain property by two
<7 om
eae
A-11
district courts sitting as reorganization courts in proceed-
ings involying two debtor railroads. The property over
which both courts claim jurisdiction is the property former-
ly comprising the assets of the New Haven that the New
Haven was required to transfer to Penn Central before the
receipt of compensation for it. The Counecticut reorganiza-
tion court approved the transfer of all these properties to
Penn Central in return for consideration in an amount and
form to be determined in further proceedings.
The appellants argue that the Connecticut reorganiza-
tion court had no jurisdiction to declare an equitable lien
and a constructive trust on property and income formerly
belonging to the New Haven. They maintain that, since
the property was transferred to Penn Central almost three
years before the issuance of the order that is the subject
of this appeal, the Pennsylvania district court had exclusive
jurisdiction under §77(a) to determine all rights and in-
terests in all of Penn Central's property, including the
former property of the New Haven.
The appellees advance four bases of Jurisdiction upon
which the Connecticut district court could premise its order
of June 22. First, they say, the ‘exclusive jurisdiction "’
provision of §77(a) cannot be read literally, and the district
court’s action comports with the policy underlying that
section. Second, the Connecticut reorganization court had
jurisdiction to implement the Supreme Court’s mandate in
the New Haven Inclusion Cases. Third, the Connecticut
reorganization court reserved Jurisdiction, in its order
authorizing the transfer of the New Haven estate’s assets,
over the property so transferred. Finally, the Connecticut
reorganization court had in personam jurisdiction over the
Penn Central trustees and thus had the power to adjudi-
cate the rights of the parties in property not located within
the court’s territorial jurisdiction.
A-12
Il. Section 77(a) Jurisdiction
The problem here presented concerns the conflict of
jurisdiction between two federal courts each claiming juris-
diction to affect interests in certain property over which,
under a literal reading of §77(a), one federal court has
’°
“exelusive jurisdiction.’* Although conflieting claims of
Jurisdiction under §77(a) are not uncommon, the usual type
of conflict is between a state court and a federal court, in
which the state court's action would in some way interfere
with the federal court's administration or actual reorgani-
zation of the debtor railroad. Seo Gardner vo New Jersey,
329 U.S. 565 (1947); Thompson v. Tevas Mexican Ry., 328
U.S. 184 (1946); Board of Dirs. of St. Francis Levee Dist. y.
Kurn, 98 F.2d 394 (Sth Cir. 1938). Cf. Palmer v. Massachu.
setts, 308 U.S. 79 (1939). Situations involving that type of
conflict involve tactors arising from the federal-state re-
lationship that are not present in the instant ease. See Callu-
way Vv. Benton, 336 U.S. 182 (1949); Meyer v. Fleming, 327
U.S. 161 (1946); Thompson v. Magnolia Petroleum Co., 309
U.S. 478 (1940); In re New York, N.H. & H. R.R., 109 F.2d
136 (2d Cir, 1940). Cf. 28 U.S.C. 61334 (1970).
The Congressional purpose behind the enactment of §77
in general and the ‘‘execlusive jurisdiction’? provision of
§77(a) in particular was to eliminate the need for ancillary
receivership proceedings in federal courts in every state
in which the railroad operated its lines. See Rodgers &
Groom, Reorganization of Railroad Corporations Under
Section 77 of the Bankruptcy Act, 33° Colum.L.Rey. 571
(1983); Craven & Fuller, The 1935 Amendments of the Rail-
road Bankruptcy Law, 49 Harv. L. Rev. 1254 (1936). The
overlapping jurisdiction of numerous courts was not con-
ducive to the speedy and efficient reorganization of a finan-
cially unsound railroad. See Fuller, The Background and
Techniques of Equity and Bavkruptcy Railroad Reorganiza-
tions-—-A Survey, 7 Law & Contemp Probs 377 (1940);
SAPO ADA RINGERS UM LITRE AINE REEL NALA LLEVA ® ALLY RIGO He eileen
A-138
Laughlin, The Evtraterritorial Powers of Receivers, 45
Harv. L. Rev. 429 (1932); Morehouse, Receiverships, 7
Yale L.J. 299 (1898). By eliminating the need for ancillary
receivership proceedings and providing for ‘exclusive
jurisdiction’? in one federal court with nationwide service
of process, see §77(a); Continental Ill. Nat’l Bank & Trust
Co. v. Chicago, RA. d& Pac. Ry., 294 U.S. 648 (1935), Con-
gress intended to vest subject matter jurisdiction over the
debtor railroad and its property in one federal court which
would have adsolute power over that property and over
the administration of the roalroad pending the submission
of a reorganization plan by the Interstate Commerce Com-
mission and approval of such a plan by the court. See Ecker
v. Western Pac. RR., 318 U.S. 448, 466-74 (1948). Cf. Palmer
v. Massachusetts, swpra at 88-89 and n. 15.
The Supreme Court’s decision in Warren v. Palmer,
310 U.S. 182 (1940) is determinative of this case. The
Palmer case involved the conflict between two federal dis-
trict courts sitting as reorganized courts pursuant to §77(a),
with each claiming subject matter jurisdiction over the
same property. The Boston & Providence Railroad leased
one of its lines to the Old Colony Railroad, and Old Colony
then leased the line to the New York, New Haven and Hart-
ford Railroad. The New Haven, experiencing financial diffi-
culties, filed a petition for reorganization which was
approved by the district court for the District of Connecti-
eut. After various proceedings, the court ordered the New
Haven trustees to reject the B & P lease pursuant to
§77(c)(6) and to operate the line for the account of B & P.
Shortly thereafter the B & P filed a petition for reorgani-
zation which was approved by the district court for the Dis-
trict of Massachusetts. As the line operated by the New
Haven trustees for the account of B & P was ineurring
losses, the New Haven trustees requested and the Connecti-
cut district court granted a lien on the B & P property in the
ewer eee
ee ae eT we re ae ee en
2
ae tee | eae tee ee Tae eo
—
amount of the loss, The Supreme Court upheld the jurisdic.
tion of the Connecticut court to declare a lien which would
be binding on the Massachusetts district court. The Supreme
Court said:
A-14
**The property of the Boston and Providence came
into the possession of the trustees of the New Haven
and the Old Colony and remained there during the en-
tire time covered by the claim. These roads were lessees
of the property and debtors under (77 in the Connecti.
eut court. It is immaterial what title the debtors had,
whether a lease or a fee. The physical property covered
by the lease was in the custody of the Connecticut court
by virtue of the provisions of §77(a)....
.-- In view of the public importance of rail service,
we think this subsetion [§77(¢)(6)] represents an in-
tention to give the court charged with operation the
fullest ability to secure the necessities of operation—
an intention to give the operating court power to
promise those having the materials, men and equip-
ment needed for operation a first lien on the road to
secure payment for the operation.”’
310 U.S. at 138-40 (footnotes omitted: emphasis added). See
also Thompson v. Magnolia Petroleum Co.. supra, at 481-82.
The Supreme Court had earlier stated in Ex parte Baldwin,
291 U.S. 610, 615-16 (1934) :
‘* All property in the possession of a bankrupt of which
he claims the ownership passes, upon the filing of a
petition in bankruptey, into the custody of the court
in bankruptey .... The jurisdiction in such cases is
exclusive of the jurisdiction of other courts, although
otherwise the controversy would be cognizable in
them...
_
A-15
... But the exclusive jurisdiction acquired by the
bankruptey court through taking possession of the in-
terurban railway under claim of title, was not limited
to the prevention of interference with the use of the
land .... The jurisdiction extends also to the ad judi-
cation of questions respecting the title.’’
To accept appellees’ argument that the **exclusive
jurisdiction’? provision of §77(a) in this context does not
in fact mean ‘‘exelusive’’
‘“‘would tend greatly to foment conflicts between co-
ordinate courts and compel creditors, in the protection
of their interests, to ride the cireuit, demonstrating
the basis of their positions in successive courts. Surely
such a state of affairs would not constitute the in-
tended improvement over the practice in equity re-
ceiverships, wherein the task of ascertaining charges
and assessing liens had been consolidated . . . in the
court of primary jurisdiction.”’
In re New York, N.H. & H. R.R., 6 F-. Supp. 18, 23 (D.
Conn.), aff'd sub nom. Palmer vy. Warren, 108 F.2d 164
(2d Cir. 1939), aff'd, 310 U.S. 132 (1940), quoted with ap-
proval in New Haven Inclusion Cases, supra, 399 U.S. at
427. See also New England Coal & Coke ( ‘o. v. Rutland
R.R., 143 F.2d 179, 184 (2d Cir. 1944), quoted with approval
in New Haven Inclusion ( 'ases, supra, 399 U.S. at 426. The
position of the commentators is that, in a situation such as
this, ‘‘exelusive jurisdiction”’ is given and should be given
its literal meaning. See Mussman and Riesenfeld, Jurisdic-
tion in Bankruptcy, 13 Law & Contemp. Probs. 88, 97-99
(1948); Rodgers & Groom, supra at 607-08 and n. 207;
Weiner, Reorganization Under Section 77: A Comment, 33
Colum. L. Rev. 834, 846-48 (1933); 5 Collier, Bankruptcy
$77.11 (14th Ed. 1970).
We hold, therefore, that because Penn_ Central had
legal title to and actual possession of the former assets of
Str Rede Beton: hsnek et he
ee
A-16
New Haven when its petition was approved; because Penn
Central was, and the trustees are, using those assets and the
income therefrom to operate its lines and the former lines
of the New Haven; because the order of the Connecticut
district court could, at this stage of the Penn Central re-
organization proceedings, seriously impair the formula-
tion of a workable plan for the financial resuscitation of
Penn Central by the Commission and the ability of the
Pennsylvania reorganization court to administer the entire
Penn Central system, of which the New Haven line is but
a division, see, e.g., §77(0), 11 U.S.C. §205(0) (1970), only
the Pennsylvania reorganization court had subject matter
jurisdiction under §77(a) over the property here in ques-
tion.
Ill. The Supreme Court’s Mandate in the
New Haven Inclusion Cases
Appellees maintain that the Connecticut reorganization
court had jurisdiction to declare the equitable lien and
constructive trust, in order to provide that the New Haven
would receive ‘‘reasonable assurance’’ of full payment for
the assets transferred to Penn Central, under the terms of
the mandate of the Supreme Court in the New Haven In-
clusion Cases.
Penn Central’s petition for reorganization was ap-
poved eight days before the Supreme Court’s decision in
New Haven Inclusion Cases. The Supreme Court said at
the beginning of its opinion:
‘On June 21, 1970, the Penn Central Transportation
Company filed a petition for reorganization . . . in the
United States District Court for the Eastern District
ot Pennsylvania. Whether the financial obligations
dealt with in the present opinion may become subject
to modification in or because of those proceedings is
a question with which the present opinion in no way
deals.**
A-17
New Haven Inclusion Cases, supra at 399 n.+. The Court
set aside the order of the Connecticut district court and
remanded for **[fJurther proceedings before the Commis-
sion and the appropriate federal courts . . . to determine
the form that Penn Central's consideration to New Haven
should properly take and the status of the New Haven
estate as a shareholder or creditor of Penn Central.’ Id.
at 489 (emphasis added).
In view of the language accompanying the remand, we
do not interpret the mandate as conferring jurisdiction on
the Connecticut reorganization court, particularly when as
we have demonstrated, the interpretations of and policy
underlying §77(a) clearly require the opposite result.
IV. Retention of Jurisdiction and
In Personam Jurisdiction
Appellees would have us hold that the Connecticut dis-
trict court, in its order transferring the New Haven’s
assets to Penn Central and ordering inclusion, retained
“jurisdiction to act on any question respecting claims be-
tween the two railroads.’’ However the order cannot be
properly interpreted as either encompassing this type of
equitable action or, indeed, any action based on events
occurring subsequent to the transfer order. See Towers
Hotel Corp. v. Lafayette Nat’l Bank, 148 F.2d 145 (2d Cir.
1945).
Even assuming that the reservation of jurisdiction
could be construed as encompassing the type of action in-
volved here, once the property came within the ‘exclusive
jurisdiction”’ of the Pennsylvania reorganization court by
virtue of that court’s approval of Penn Central’s petition
for reorganization, the policy of §77(a) would prevent ac-
ceptance of appellees’ contention. Due consideration of the
congressional purpose in granting ‘‘exelusive jurisdiction’’
over the debtor’s property to the reorganization court,
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A-18
would preclude permitting another district court to exer-
cise jurisdiction on the ground that such jurisdiction was
reserved in a related proceeding when the effect of the exer-
cise of retained jurisdiction would be to hinder the ability
of the reorganization court to administer the property of
the railroad pending reorganization. Thus, even if. the
Connecticut reorganization court’s order were construed
to include the reservation of jurisdiction to deelare an
equitable lien and a constructive trust, the subsequent ap-
proval of Penn Central's petition by the Pennsylvania re-
organization court served to oust the Connecticut court's
jurisdiction and to vest ‘‘exclusive jurisdiction’ in the
Pennsylvania court.
Appellees’ final contention, that the Connecticut reor-
ganization court had jurisdiction to declare the lien and
constructive trust because it had in personam jurisdiction
over the Penn Central trustees, is without merit. Even if
the Connecticut court had in personam jurisdiction, it
lacked subject matter jurisdiction; the Pennsylvania reor-
ganization court had ‘‘exclusive jurisdiction’’ over the sub-
ject matter—the former property of New Haven— and only
that court was competent to take action with respect to
that property.
V. Remand
This case must be remanded to the Commission so that
a reorganization plan, fair and equitable to all parties, can
be formulated. One of the main reasons for the enactment
of §77 was to establish a reorganization procedure in which
an expert agency would examine the technical and financial
problems of the railroad and propose a reorganization plan
to the reorganization court for approval. As both the
Penn Central and the New Haven are in reorganization, at
least nominally, before courts in different circuits, the
Commission is the common denominator between those
A-19
courts so far as the formulation of a single plan, or two
interrelated plans, is concerned. Whatever protection the
New Haven estate must receive in terms of some senior
position in the Penn Central proceeding must first be pro-
posed by the Commission in the context of a reorganiza-
tion plan for the Penn Central which, it is to be hoped, will
advance the public interest by successfully establishing a
financially viable Penn Central. The Commission has
stated that, if the proceeding is remanded to it, it will con-
solidate the Penn Central reorganization and New Haven
inclusion proceedings so as to consider the terms of. the
New Haven inclusion as ‘‘a portion of the reorganization
of Penn Central . . .’’ This procedure is, we believe, the
proper method by which the interests of all parties—the
New Haven estate, Penn Central and its creditors, and the
public—ean best be advanced.
We do not imply by this remand that we disagree either
with the fairness of Judge Anderson’s order or with his
conclusion that the Supreme Court’s opinion in New Haven
Inclusion Cases requires that the New Haven estate receive
$174.6 million as compensation for the taking of its prop-
erty. We hold only that the Connecticut reorganization
court is not the proper body to grant whatever protection
is required because it has no jurisdiction, and we remand
the case to the Interstate Commerce Commission with di-
rections to consider, in light of the Penn Central reorgani-
zation, the form of consideration the New Haven estate
should receive.
Reversed and remanded to the Interstate Commerce
Commission.
MANSFIELD, Circuit Judge (Coneurring and Dissenting) :
I concur in the majority opinion to the extent that it
remands the case to the Interstate Commerce Commission
with directions, in the light of the Penn Central reorganiza-
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A-20
tion, to consider the form of the consideration which the
New Haven estate is to receive. However, I dissent from
the view that the Connecticut reorganization court lacks
jurisdiction to review the fairness and equity of the econ-
sideration to be paid by the Penn Central to the New Haven
estate. In my view the unusual factual and legal back-
ground of this dispute suggests that the Connecticut and
Pennsylvania reorganization courts have coneurrent jur-
isdiction over the subject matter.
I agree with the majority that once the Penn Central
Railroad was placed in reorganization pursuant to (77
of the Bankruptey Act the Pennsylvania court was vested
by §77(a) with exclusive jurisdiction over its properties,
including those that had been transferred to it by the New
Haven pursuant to the Connecticut court’s authorization.
Thereafter the Connecticut court was barred from taking
any action which might have the effect of interfering with
the Pennsylvania court’s operation of the railroad in re-
organization under its jurisdiction. Although the creation
of a lien and a constructive trust upon assets of the Penn
Central might not have the immediate effect of disrupting
that court’s operation of the railroad, such action could
pose the threat of doing so. For example, if the Pennsyl-
vania court wished to raise money for operation of the
railroad by further mortgaging its properties, it might be
frustrated unless it had the power to disregard or set
aside the lien and trust declared by the Connecticut court.
Although the Connecticut court may not take any ac-
tion which would have the effect of interfering with the
Pennsylvania court’s operation of the railroad, I do not
agree that the Commission and the Pennsylvania court have
the power, unilaterally and without approval of the Con-
necticut court, to determine the form of the consideration
that is to be paid to the New Haven estaté and its creditors
for the assets transferred to the Penn Central. The Connec-
tieut court continues to function as a §77 reorganization
A-21
court and has been vested by the Supreme Court with the
powers of a reviewing court under 65 of the Interstate Com-
merce Act. 399 U.S. at 430. As such it has a vital interest in
the final determination of the terms and conditions of the
New Haven’s inclusion in the Penn Central. Indeed the
Supreme Court, after careful review, accepted the Con-
necticut court’s formulation of those terms. It remanded
only because the ‘‘impact of recent events,’? which I con-
strue to mean the Penn Central’s bankruptey (expressly
referred to by the Court at page 399 n. +), had rendered
unrealistic the provisions for the Penn Central’s under-
writing, at $87.50 per share, of the stock to be transferred
by it to the New Haven pursuant to the plan, thereby de-
priving the New Haven and its creditors of the purchase
price to which they were constitutionally entitled,
The reorganization of the New Haven Railroad and its
merger into the Penn Central will not have been completed
until the fairness and equity of the terms and conditions
of the transfer of its assets to the Penn Central, including
the form of the consideration that is to be received, have
finally been determined. The Connecticut court continues
to have the power and the duty as a reviewing court under
§9 of the Interstate Commerce Act and as a reorganization
court under §77 of the Bankruptey Act, to participate in
that determination. If the New Haven estate had become
in effect a mere subsidiary or ward of the Pennsylvania
court for reorganization purposes, the Supreme Court,
which knew that the Penn Central was in reorganization
and which was aware of the provision of §77(a) giving ‘‘ex-
elusive jurisdiction’’ to a reorgan.zation court over prop-
erties in its possession, see 399 U.S. at 420, would have
held that the form of the consideration to be paid by the
Penn Central must thereafter be determined by the Penn-
Sylvania court as part of the reorganization of the Penn
Central, and it would have directed that upon remand the
Connecticut court must transfer the case to the Commis-
a
A-20
tion, to consider the form of the consideration which the
New Haven estate is to receive. However, I dissent from
the view that the Connecticut reorganization court lacks
jurisdiction to review the fairness and equity of the con-
sideration to be paid by the Penn Central to the New Haven
estate. In my view the unusual factual and legal back-
ground of this dispute suggests that the Connecticut and
Pennsylvania reorganization courts have concurrent jur-
isdiction over the subject matter.
I agree with the majority that once the Penn Central
Railroad was placed in reorganization pursuant to §77
of the Bankruptey Act the Pennsylvania court was vested
by §77(a) with exclusive jurisdiction over its properties,
including those that had been transferred to it by the New
Haven pursuant to the Connecticut court’s authorization.
Thereafter the Connecticut court was barred from taking
any action which might have the effect of interfering with
the Pennsylvania court’s operation of the railroad in re-
3 organization under its jurisdiction. Although the creation
i of a lien and a constructive trust upon assets of the Penn
a Central might not have the immediate effect of disrupting
; that court’s operation of the railroad, such action could
: pose the threat of doing so. For example, if the Pennsyl-
: vania court wished to raise money for operation of the
: railroad by further mortgaging its properties, it might be
: frustrated unless it had the power to disregard or set
| aside the lien and trust declared by the Connecticut court.
Although the Connecticut court may not take any ac-
tion which would have the effect of interfering with the
Pennsylvania court’s operation of the railroad, I do not
agree that the Commission and the Pennsylvania court have
the power, unilaterally and without approval of the Con-
necticut court, to determine the form of the consideration
that is to be paid to the New Haven estate and its creditors
for the assets transferred to the Penn Central. The Connec-
ticut court continues to function as a §77 reorganization
A-21
court and has been vested by the Supreme Court with the
powers of a reviewing court under 45 of the Interstate Com-
merece Act. 399 U.S. at 430. As such it has a vital interest in
the final determination of the terms and conditions of the
New Haven’s inclusion in the Penn Central. Indeed the
Supreme Court, after careful review, accepted the Con-
necticut court’s formulation of those terms. It remanded
only because the “impact of recent events,’’ which I con-
strue to mean the Penn Central’s bankruptey (expressly
referred to by the Court at page 399 n,. +), had rendered
unrealistic the provisions for -the Penn Central’s under-
writing, at $87.50 per share, of the stock to be transferred
by it to the New Haven pursuant to the plan, thereby de-
priving the New Haven and its creditors of the purchase
price to which they were constitutionally entitled.
The reorganization of the New Haven Railroad and its
merger into the Penn Central will not have been completed
until the fairness and equity of the terms and conditions
of the transfer of its assets to the Penn Central, including
the form of the consideration that is to be received, have
finally been determined. The Connecticut court continues
to have the power and the duty asa reviewing court under
$9 of the Interstate Commerce Act and as a reorganization
court under (77 of the Bankruptey Act, to participate in
that determination. If the New Haven estate had become
in effect a mere subsidiary or ward of the Pennsylvania
court for reorganization purposes, the Supreme Court,
which knew that the Penn Central was in reorganization
and which was aware of the provision of §77(a) giving ‘‘ex-
clusive jurisdiction”’ to a reorganization court over prop-
erties in its possession, see 399 U.S. at 420, would have
held that the form of the consideration to be paid by the
Penn Central must thereafter be determined by the Penn-
sylvania court as part of the reorganization of the Penn
Central, and it would have directed that upon remand the
Connecticut court must transfer the case to the Commis-
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sion and the Pennsylvania court. Instead it remanded the
case to the Connecticut court, stating:
‘‘Further proceedings before the Commission and the
appropriate federal courts will be necessary to deter-
mine the form that Penn Central's consideration to
New Haven should properly take and the status of the
New Haven estate as a shareholder or creditor of Penn
Central.’? 899 U.S. at 489.
The Supreme Court’s remand of the case to the Connecti-
cut court without further qualifications, coupled with the
use of the plural term ‘‘courts,’’ confirms the view that the
Connecticut court was not to be stripped of its powers as
a reviewing court.
I further disagree with the majority’s view that War-
ren v. Palmer, 310 U.S 132 (1940), ‘‘is determinative of
this case’’ or that it has the effect of precluding the Con-
necticut court from having a voice in the fairness and
equity of the consideration to be received by the New Haven
and its ereditors from the Penn Central. Although that
decision did involve a question of competing jurisdiction
between two §77 reorganization courts, it turned on a pro-
vision of the Bankruptey Act not applicable here, §77(c)
(6), which specifically requires a reorganization court that
has rejected a leased line to operate it if the lessor is ineap-
able of doing so, in which case continued operation is for
the account of the lessor. The Supreme Court interpreted
that section as giving ‘‘the court charged with operation
the fullest ability to secure the necessities of operation,”
310 U.S. at 140. In short the Supreme Court understand-
ably decided that a reorganization court operating a leased
line must have the power to impose a lien for deficits re-
sulting from its being compelled to operate the line for the
benefit of the lessor. The decision hardly precludes the
existence of concurrent jurisdiction in an appropriate case.
Thus it appears to me that this case, which is sui gen-
eris, involves dual or concurrent jurisdiction with respect to
A-23
the fairness and equity of the consideration to be paid
by the Penn Central in reorganization to the New Haven.
While the Pennsylvania court has exclusive jurisdiction
over the operation of the Penn Central, including the
New Haven Division, the fairness of the consideration to
be paid to the New Haven, including the form of that
consideration and the status of the New Haven as a
creditor in the Penn Central reorganization, as initially
formulated by the Commission as the common denominator,
is subject to approval by both courts.
That there is nothing novel or unusual about the
existence of coneurrent jurisdiction in railroad reorganiza-
tion proceedings is demonstrated by the Supreme Court’s
recognition at an earlier stage in these proceedings that
the Connecticut court, as a §77 reorganization court, and
the three-judge district court sitting in the Southern
District of New York as a reviewing court under §5 of the
Interstate Commerce Act, each had jurisdiction to review
the fairness and reasonableness of the terms for inclusion
of the New Haven in the Penn Central. See 399 U.S. at
419-30. There the Supreme Court concluded, for reasons
set forth in detail, that the three-judge court should have
deferred to the Connecticut court. Although there is al-
ways the danger that exercise of overlapping or coneur-
rent jurisdiction by two courts may lead to conflict or
wasteful duplication of effort, this seems to me to be an
instance where ‘‘two heads are better than one.’? An im-
portant reason for holding that the Connecticut court
should not defer here, which the Supreme Court implicitly
recognized in the New Haven Inclusion Cases, is that over
the years of the New Haven’s reorganization the Con-
necticut court has become intimately familiar with the
complicated factual and legal issues arising out of the New
Haven’s reorganization, thereby gaining a manifest ex-
pertise in the valuation of its assets. While I have no
doubt about the competence of the highly respected Penn-
sylvania court to review the matter, it seems to me that
. ina matter of such importance both courts, working ¢o-
a
sats
PLE CAL AOE EE GN
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AMMERAG ALES
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A-24
operatively and with the aid of the Commisson, can
function effectively to produce a result that will assure
all parties a greater degree of fairness and equity than
might otherwise be realized.
Thus none of the conditions mandating that one court
defer to the other seems to exist here. The issue cannot
be resolved in favor of the Pennsylvania court on the
ground that it first acquired jurisdiction through posses-
sion of the New Haven properties (the basis used by
the Supreme Court in the New Haven Inclusion Cases).
The Connecticut court was the first to aequire possession
as a reorganization court and it continued thereafter in
possession for years, participating in the formulation of
the inelusion terms that were approved by the Supreme
Court. Nor ean it be said that the Connecticut court, by
transferring the New Haven properties to the Penn
Central, implicitly agreed to defer to the Pennsylvania
court. On the contrary, the Connecticut court, in ordering
the transfer of the New Haven property to the Penn
Central, expressly reserved jurisdiction to pass upon the
fairness and adequacy of the consideration and_ the
other terms of inclusion of the New Haven in the Penn
Central. Unlike the circumstances surrounding the con-
current jurisdiction of the Connecticut court and the three-
judge district court in the Southern Distriet of New York,
nothing in the background of the present jurisdictional
overlap suggests that either forum here is better equipped
for the task than the other. Nor is there any reason
to believe that both courts would not cooperate in their
review of the terms formulated by the Commission,
eventually reaching an agreement. If they should disagree,
however, I have no doubt that upon ultimate review of
the Penn Central reorganization plan, including the form
of consideration to be paid to the New Haven estate, the
Supreme Court would appreciate having the recorded
views of the Connecticut court, which has become a re-
spected veteran in this protracted and complicated matter.
LMI RONDE EEE Ce ANAL LOO LED BM
In the Matter of the NEW YORK, NEW HAVEN AND
HARTFORD RAILROAD COMPANY, Debtor.
No. 30226.
Unrrep States District Courr,
D. Conneericurt,
June 11, 1971.
MEMORANDUM OF DECISION ON ISSUE OF KQUIT-
ABLE LIEN AND OTHER MATTERS PRELIMIN-
ARY TO REMAND TO INTERSTATE COMMERCE
COMMISSION
ANDERSON, Cireuit Judge.*
This is an unusual ease, and the features which make
it so stem from the basie cireumstances that the New Haven
Railroad, a deficit operation for several years prior to and
throughout the seven years of operation in reorganization,
was kept going in the public interest; that it was compelled,
again in the public interest, to transfer its properties and
assets to Penn Central Transportation Company (Penn
Central),' receiving in return, at the time, only a smail
* Sitting by designation.
‘As used in this opinion the term “Penn Central” means the Penn
Central Transportation Company, a railroad, which since June 21, 1970,
has been in railroad reorganization in the United States District Court for
the Eastern District of Pennsylvania.
Prior to October 1, 1969, the corporate name of the Debtor was Penn
Central Company. The term “Penn Central Company” presently refers to a
Pennsylvania corporation which holds all of the stock of the operating
railroad which is the Penn Central Transportation Company. While the
New Haven Trustee originally received stock of the railroad Penn Central
Company at the time of the New Haven’s inclusion on December 31, 1968,
the stock which he presently holds is stock of the parent Penn Central
Company that he received in exchange for the stock of the present Debtor,
the Penn Central Transportation Company, pursuant to its plan of cor-
porate reorganization which was approved by its stockholders and made
effective on October 1, 1969,
Hebe
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A-26
fraction of the true and actual value of the New Haven’s
properties and assets while it awaited a value determination
by the Supreme Court; and that the Penn Central itself
went into bankruptey shortly before the Supreme Court's
decision. Although the case is unique, the controlling prin-
ciples are those of simple justice.
Penn Central filed its petition for reorganization in
the Eastern District of Pennsylvania on June 21, 1970,
Right days later, on June 29, 1970 the Supreme Court de
cided the New Haven Inclusion Cases, 399 U.S. 392, 90 S.Ct.
2054, 26 L.Ed?) O91, On July 31, 1970 the Supreme Court's
judgment was filed in the New Haven reorganization
court, which, on August 10, 1970, directed the Trustee of
the New Haven and any other parties desiring to be heard
to file written statements of position, particularly as to six
designated subjects hereinafter referred to as paragraphs
A, B,C, D, E and FY to be considered by the court in con-
nection with the form of order to be issued in carrying out
the terms of the Supreme Court decision.
* Those six subjects are:
A. Whether and, if so, to what extent, this court should modify
its prior orders with respect to Step Il of the plan of reorganization
for the New Haven heretofore approved by the Interstate Commerce
Commission and this court, as a result of said opinion of the Supreme
Court
B. Whether this court should indicate to the Interstate Com
merce Commission specific views or recommendations with respect to
the proceedings to be conducted by the Interstate Commerce Commis-
sion in its further proceedings in the premises, and, if so, what such
views or recommendations should be
C. Whether this court may order an equitable lien on or other
wise subject the assets conveyed to the present Penn Central Trans
portation Company on December 31, 1968 by the then Trustees of the
New Haven to a first security interest in favor of the New Haven and,
if so, whether such an order should be entered and what its terms
should be in conformity with said opinion of the Supreme Court
D. Whether this court may order the trustee of the indenture
securing the Divisional First Mortgage Bonds issued by the present
A-27
Statements of position and briefs were filed by the
principal parties and the case is ready for remand by this
court to the Interstate Commerce Commission (LCC),
Meanwhile many constructive steps have been taken and
much has been accomplished in resolving the problems im-
plicit in these subjects through negotiation by representa-
tives of the Penn Central and New Haven estates, and
through action taken by the Penn Central reorganization
court, over which Judge John P. Fullam presides, Similarly
in the case of the Boston and Providence Railroad Corpor-
ation (B & P), there were the additional collaboration of
the representatives of the B & P estate and the necessary
action by the B & P reorganization court, over which Judge
Francis J. W. Ford presides, Thus as to © F, the B & P
EE ee ee
Penn Central i ransportation Company to the then Trustees of New
Haven, in part consideration for the assets of the New Haven con-
veyed on December 31, 1968, or order the Trustees of Penn Central
Transportation Company, to pay over or cause to be paid over to the
Trustee of the New Haven all proceeds from the sale of mortgaged
property now on deposit with such indenture trustee, all future pro-
ceeds remaining to be paid with respect to sales of mortgaged property
heretofore made, and all proceeds of mortgaged property hereafter
sold, leased or otherwise divested by the Trustees of Penn Central
Transportation Company and, if so, whether such an order should be
entered and what its terms should be in conformity with said opinion
of the Supreme Court.
E. Whether this court may order the Trustees of Penn Central
Transportation Company to pay over to the Trustee of the New Haven,
Periodically as may be determined pending resolution by the Inter-
state Commerce Commission and judicial review of the issues re-
manded by the Supreme Court, of an amount equal to half the excess
income from the Grand Central Terminal properties and, if so,
whether such an order should be entered and what its terms should
be in conformity with said opinion of the Supreme Court
F. Whether this cour: may order the Trustees of Penn Central
Transportation Company and the Trustee of the New Haven to carry
out as soon as possible the plan of reorganization of the Boston and
Providence Railroad Corporation and, if so, whether such an order
should be entered and what its terms should be in conformity with
said opinion of the Supreme Court
A-28
reorganization has been fully consummated, and a railroad
reorganization instituted in 1938 has thereby been con
eluded.
As to © D, again through negotiation and this time with
the approval of the Penn Central reorganization court and
this court, the Penn Central Trustees and the New Haven
Trustee divided equally some $18 million received from the
sale of assets which the New Haven had conveyed to Penn
Central on December 31, 1968. While the subject of future
drawdowns by the New Haven estate of the proceeds from
sales and leases of former New Haven property warrants
continued consideration, the matters within © D may at this
time be dismissed without prejudice. The subjects of para
graphs A, B, C and EF remain for consideration.
Jv RIsDiCTiION
At the threshold, the Trustees of the Penn Central
challenge the jurisdiction of this court to make a deelara
tion as to the foregoing subjeets and the issues they involve.
This court, however, has long had jurisdiction over the
person of Penn Central, both under its present and former
name, as a party to this action. See 399 U.S. at 428, n. 57,
90 S.Ct. 2054. At the time of the conveyance of New Haven's
assets to Penn Central on December 31, 1968 the court ex
pressly reserved jurisdiction over subject matters relating
to the payment of the price, ineluding the form of payment.
The Penn Central has appeared and actively participated
in all of the proceedings before this court concerning the
transfer of assets and payment for them from December
19, 1968 forward, including the period from the time when
Penn Central petitioned in reorganization to the present.
This court has the exclusive jurisdiction to deter-
mine the effect of the Supreme Court's mandate in the
New Haren Inclusion Cases, and this court must decide
what is to be done to implement it. The full price required
A-2s
to be paid for the New Haven’s assets was decided, but
the terms of the payment were not; and this court alone
must review and determine what means, pursuant te the
Supreme Court's mandate, are proper. The LOW. cannot
adjudicate the issues of law now before this court. for these
lie outside its jurisdiction. The Commission itself has <o
held in principle in the Boston & Providence Railroad Re
organization Proceedings, 290 LOC. 363, 382 (19954), 327
LO. 10, 15 (1966), and, again, in the very proceeding
before thix court the Commission stated -
“It ix not within our jurixdiction te fix New Haven’s
legal rights, if any, in the Grand Central Terminal
properties."" Pennsylvania Railroad Company Mer
ger — New York Central Railroad Company, 231 LCC.
643, 680 (1967),
This court, with the aid of a special master appointed by
it, adjudged these rights.
So here, the Commission has no jurisdiction to decide
the legal questions of the New Haven’s status, whether as
that of a stockholder or creditor, including the type of
creditor, and the further related question as to whether or
not the New Haven estate has a full security interest in
its former properties for the balance of the purchase price.
These are legal questions which are for this court's deter
mination in construing the Supreme Court's mandate. In
the circumstances of this ease ordinary sense and logic call
for a resolution of these paramout issues before remand of
the case to the LCL. in order that it may proceed with
prior knowledge of how the legal questions have been ad.
judieated.
The Penn Central Trustees point to §77(a) where it
says the reorganization court *“** * * shall, during the
pendency of the proceedings under this section and for the
purposes thereof, have exclusive jurisdiction of the debtor
Se eae Cer a ae Se Md ee ia es
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A-30
and its property wherever located * * *,"" and argue
that all jurisdiction is in the Penn Central reorganization
court and only that court can impose or deelare a lien or
determine any other questions affecting the New Haven
properties transferred to Penn Central on December 31,
1968. Of course, the language of §77(a) literally gives the
New Haven reorganization court exelusive jurisdiction over
all legal or equitable interests which the New Haven has
in any property, even though it may be in the possession
of the Penn Central. The Penn Central’s Trustees’ argu-
ment ignores the fact that the New Haven reorganization
court not only reserved jurisdiction over the matter of pay-
ment for the assets transferred to Penn Central by the in-
clusion order itself, but it has a mandate from the Supreme
Court to deal further with questions relating to the deter.
mination of the rights and obligations of the parties with
regard to the form of payment for the property of the New
Haven transferred to the Penn Central. It would be odd,
indeed, if by the same decision, this court were barred, for
example, from determining whether or not in the cireum-
stances an equitable lien should be declared which would
relate back to December 31, 1968, the date of the transfer,
beeause meanwhile the transferee, over whom this court
has long had jurisdiction with respect to the terms of the
transfer, filed for S77 reorganization itself in the Eastern
District of Pennsylvania. It should clearly be borne in mind,
however, that this court claims only the power to declare
the existence of an equitable lien on the conveyed property,
including a constructive trust to the extent of the capital-
ized value of one-half of the excess income from the Grand
Central properties, for the balanee due on the purchase
price. With the property in the possession of the Trustees
of the Penn Central and with the duties of operation rest-
ing on that company's Trustees, the New Haven reorgani-
zation court does not under present circumstances assert
the power to enforee such a lien. The declaration of a lien
A-31
will have no adverse impact on the ability of the Penn Cen-
tral to operate as a railroad, and the Penn Central reor-
ganization court will remain wholly in control of the effect,
if any, of such a lien on the operations of the railroad
and on its reorganization plan formulation.
The fact that the adjudication which the court is now
making does not interfere with Penn Central operations or
plan formulation distinguishes this case from Gardner vy.
New Jersey, 3829 U.S 565, 67 S.Ct. 467) 91 L.Bd. 504 (1947),
where New Jersey was attempting to pull out chunks of the
railroad from the reerga ization court's jurisdiction; and
from Warren v. Palmer, 310 U.S. 132, 60 S.Ct, S65, 84 L.Ed.
1118 (1940), where the Supreme Court relied on § 77(e) (6)
and the principle against interference with operations to
sustain the jurisdiction of the New Haven reorganization
court. Warrsn vy. Palmer clearly iNustrates that the “exelu-
sive jurisdiction’’ clause cannot literally be relied on. In
that case the B & P was under the ‘‘exelusive Jurisdiction **
of the reorganization court in Boston. The New Haven and
the Old Colony Railroads were under the ‘‘exelusive jurisdie-
“of the United States Distriet Court at New Haven.
The Old Colony Trustees and the New Haven Trustees re-
jected the B & P lease; the New Haven was ordered to oper-
ate the formerly leased lines for the account of the B &P;
and the question was whether the New Haven reorganiza-
tion court could adjudge a lien for operations on the B & P
property. Here there were two reorganization courts, each
tion’
with **exelusive jurisdiction’’ over the debtor and its prop-
erty wherever located. Reading ¢ 77(a) literally, the B & P
reorganization court in Boston, with ‘exelusive jurisdie-
tion”’ over the B & P, had exclusive Jurisdiction over the
B& P lines because the lease had been rejected and the
B& P was owner. Yet the Supreme Court sustained the
“exclusive jurisdiction’* of the New Haven reorganization
court to declare a lien on the B & P property. The Supreme
es
Aibddide (tte ee athe et,
Th ee eee eee
A-32
Court sustained that exercise of power by reference to
§ 77(e) (6), which deals with the rejection of leases and
operations of leased lines, and emphasized that the juris-
diction of the New Haven reorganization court was being
sustained because the matter dealt with operations.
The B & P affords another illustration of how the stat-
utory provision for ‘‘exelusive jurisdiction’’ aecommo-
dates to practical situations. As pointed out supra, three
reorganization courts, each with ‘‘exelusive jurisdiction”
adjudged matters within its peculiar jurisdiction to effect
the consummation of the B & P reorganization.
©
The ‘‘exelusive jurisdiction’’ clause in § 77(a) was
designed to eliminate the need for ancillary receivership
proceedings; to give one court, the reorganization court,
power to preserve the railroad as a unit and as a going con-
cern, and, with the aid of the LC.C., to approve a plan of re-
organization. Accordingly, suits may be brought against
the reorganization trustees oh claims arising out of rail
operations in any court of competent jurisdiction ; and, even
though the reorganization court has summary jurisdiction,
it must, in an appropriate situation, permit an adjudication
of the matter to be made in another court. Thompson v.
Magnolia Petroleum Company, 309 U.S. 478, 60 S.Ct. 628,
84 L.Ed. 876 (1940).
That the ‘‘exclusive jurisdiction’’ clause must al-
ways be read in light of its background is further made evi-
dent in relation to accounts receivable held by a railroad in
reorganization. Penn Central, for example, has millions of
dollars of accounts receivable. A purely literal reading of
the ‘‘exelusive jurisdiction’’ clause would suggest that such
collection proceedings would have to be conducted before
the reorganization court. However, it is elementary that the
Penn Central reorganization court does not have jurisdic-
tion, over the objection of an account debtor, of proceedings
A-33
to collect these accounts receivable. In re Standard Gas &
Electrie Co., (Hastings v. H. M. Byllesby & Co.) 119 Fv
658 (3 Cir. 1941); 2 Collier on Bankruptey (14th ed.) §
23.05 [4]. Plenary suits for this purpose must be brought in
courts of competent jurisdiction and would not come be-
fore the reorganization court.
That language in this area of bankruptcy cannot be ap-
plied with orthological exactitude is further demonstrated
by 28 U.S.C. § 1334. This section provides;
‘The district courts shall have original jurisdiction,
exclusive of the courts of the States, of all matters and
proceedings in bankruptey.”’
Yet it is accepted practice that hundreds of actions involv-
ing bankruptcy matters ean and are brought in the state
courts. 1 Moore’s Federal Practice (2d ed.) § 0.-60 [8.6].
Indeed, at times, they must be brought in a state court.
Thompson v. Magnolia Petroleum Company, supra.
This Court’s jurisdiction is supported by other
principles, such as the line of cases holding that a court
which has in personam jurisdiction can nevertheless deter-
mine rights with respect to property in the in rem jurisdic-
tion of another court, Barrett v. International Underwrit-
ers, Inc., 346 F.2d 345 (7 Cir. 1965); Dempsey v. Pink, 92
F.2d 572 (2 Cir. 1937), cert. denied 303 US. 648, 58 S.Ct.
745, 82 L.Ed. 1109 (1938); 1A Moore’s Federal Practice
(2d ed.) ¥ 0.222: and also by eases which, while recogniz-
ing that state courts have exclusive jurisdiction over pro-
bate matters, hold that the federal courts nevertheless have
jurisdiction over inter partes suits, otherwise within fed-
eral jurisdiction, that do not usurp jurisdiction of a probate
nature. 1 Moore’s Federal Practice (2d ed.) § 0.60 [1], p.
604.
Moreover, there are compelling practical reasons why
this court should resolve the issues now before it. In addi-
a
A-34
tion to the Supreme Court’s mandate, this court has had
the advantage of a decade of dealing with the complex fac-
tual circumstances which have attended the New Haven’s
reorganization, with the clashing claims made by multiple
contending parties and the continuing duty to protect the
New Haven estate. It is the only district court that has had
to hear and rule upon every aspect of the case from its be-
ginning to the inception of the present issues. For reasons
analogous to those which prompted the Supreme Court to
recognize this reorganization court as having preferred
jurisdiction over the three-judge court in New York to de-
termine the price to be paid for the property transferred
to Penn Central, this court has like jurisdiction to hear and
decide the issues now before it.
OvutTLINe or Events LeEapine to INcLuston Cases
IN SuPREME Court anp CONSTRUCTION OF MANDATE.
RCTs eee
A brief résumé of the pertinent events leading up to
the Supreme Court’s hearing of the New Haven Inclusion
Cases is essential to an understanding of the rationale of
its decision and to a sense of what is called for in imple-
menting it.
After the New Haven had been in reorganization and
had carried on its deficit operation for seven years during
which its assets had been depleted by 60 to 70 million dol-
lars in the public interest, this court decided that it could
not allow the interests of the New Haven bondholders to be
further eroded after the end of 1968 because the constitu-
tional prohibition against the taking of private property
without just compensation forbade it. At the same time the
court continued to be acutely aware of the crucial import-
ance of the railroad to the economy of southern New Eng-
land and the public interest in preserving its operation. Ac-
cordingly, because the Pennsylvania and New York Central
ARES ES GS Ie BEALS PGA, Big EY wane Sa
Pitti einieeiiianienusamasiceasuas
ae
Railroads had voluntarily agreed — in a contract that be-
A-30
came irrevocable upon their merger on February 1, 1968 —
to include the New Haven as a condition of their merger,
the Interstate Commerce Commission and this court
ordered the merged Penn Central physically to take over
the properties and operations of the New Haven by the end
of 1968. The inclusion took place on December 31, 1968. At
the time of the transfer the Penn Central paid, exclusive
of the 956,576 shares of Penn Central stock, about $63 mil-
lion on account of the indebtedness ultimately found due by
the Supreme Court and which, ax a part of its own merger,
Penn Central had agreed to pay. Penn Central and all other
parties knew on December 31, 1968 that the total value of
the consideration Penn Central was to pay remained for fu-
ture determination by the federal courts.
Two federal district courts had been concurrently exer-
cising jurisdiction and were principally concerned with the
issue of fair and equitable price which Penn Central should
pay for the assets of the New Haven. A three-judge district
court for the Southern Distriet of New York, exercising
jurisdiction under § 5 of the Interstate Commerce Act, had
on July 10, 1968 enjoined the order of the LCC. originally
fixing the price to be paid by Penn Central for the New
Haven’s assets at $125,000,000. This reorganization court,
exercising jurisdiction under § 77 of the Bankruptey Act,
on August 13, 1968 similarly rejected that price.* Subse-
quently, the LC.C. in its Fourth Supplemental Report fixed
the purchase cost to Penn Central at $140,600,000, plus $5
million for a share of the New Haven’'s operation losses in
1968, for an aggregate total of $145,600,00. In reviewing
this valuation, this reorganization court held that the LOC,
legally erred as to six items for an undervaluation of $29,-
“As the Supreme Court noted in the New Haven Inclusion Cases, the
three-judge court estimated the $125 million figure was an understatement
on the order of $45 million to $50 million, and the reorganization court,
$33 million to $55 million. 399 U.S. at 414-415, 90 S.Ct. 2054.
RAN,
Or oaths tee we peBinny i
035,899." Accordingly, it fixed the total cost to Penn Central
at $174,635,899. The three-judge district court, on the other
hand, found an undervaluation of only $990,000. Penn Cen-
tral aequiesced in this finding and paid this additional
amount to New Haven.* The price differential between this
reorganization court and the three-judge district court was
in the neighborhood of $28 million.
The other side of the problem was whether the consid-
eration which Penn Central had paid New Haven was equal
to the credit given Penn Central. The real controversy
swirled around the value attributable to the 956,576 shares
of common stock of the Penn Central Company. This re-
organization court, mindful of its duty to see that all are
treated fairly, on its own initiative, formulated underwrit-
ing provisions designed to assure that the New Haven
would obtain a per share value of $87.50; and, as underwrit-
ten, approved the per share value of $87.50. The three-judge
court adopted the same underwriting provisions and_ the
$87.50 figure.
As the cases reached the Supreme Court, Penn Central
non
had been credited in round figures as follows : $33.3 million
‘The reorganization court held that the Commission had legally erred
as to the following items (the first five increased the price, the sixth re-
duced it):
$15,386,000 one year abandonment delay
6,695,000 bulk sale discount
4,439,000 Bronx Yards
1,600,000 improper deduction for tax obligations
2,415,899 excess discount to present value
— 1,500,000 CCBI's
$29,035,899
‘It did this on November 11, 1969. The “mix” of the consideration paid
was:
$370,260 bonds
565,290 stock
54,450 cash
$990,000
for assumption of certain obligations of New Haven, can-
cellation of certificates issued by the Trustees of the New
Haven, and eash payments; approximately $29.6 million for
the $84,025,800 principal amount of 2% Divisional First
Mortgage bonds of Penn Central that liened the former
New Haven rail properties; and $83.7 million, the value
assigned to the common stock.
The Supreme Court (1) held that although the three-
judge court initially had jurisdiction concerning the merger,
it should have stayed its hand in determining the price to be
paid by Penn Central and the value of the consideration
Penn Central had transferred to the New Haven, since this
reorganization court was the preferred court to determine
those matters; (2) affirmed this court in all respects as to
price; and (3) stated that at the time of this court's de-
cision, it had correctly decided as to the Value of the com-
mon stock, in the light of this court’s proposed under-
writing, but that because of recent events, i. e. Penn Cen-
tral’s bankruptey, ‘The reorganization court’s decree may
be wholly unrealistic,’’ as indeed is now is, and that ‘‘a
reassessment of the consideration that Penn Cent ‘al is to
give in exchange for’’ the New Haven's assets is required,
The Supreme Court’s decision Clearly requires a realis-
tic assessment—not a formal one, for if only the latter had
been in the Court’s mind, the Court would have affirmed in
toto. Nothing would have remained to be done except to de-
termine how the additional price should be paid.
It was clearly the intent of this court, the parties, and
the Commission that the New Haven estate would be fully
compensated, The Constitution requires as much. This court
formulated the underwriting provisions for the stock with
the belief that these would make the New Haven whole as
to the value attributed to the stock, but Penn Central's
Lia Getag AOR tia
Bese Sens
bankruptey has made all the provisions concerning the stock
oo
‘*wholly unrealistic.
‘The fairness and equity that are the essence of a °77
proceeding,’’ the Supreme Court) stated, ‘forbid our
approval of a payment for the transferred New Haven
properties that may be worth only a fraction of its pur.
ported value."* 399 U.S, at 488, 90 S.Ct. at 2708,
Continuing, the Court said:
“* * * Tn the circumstances of this case, and for the
reasons we have already set out at length, we agree
with the reorganization court that it would be unfair
and inequitable to allow Penn Central to take the prop-
erties for any lesser sum [liquidation value]. Moreover,
we today require a reassessment of the consideration
that Penn Central is to give in exchange for those
properties. We thereby accord the bondholders the right
to a liquidation and a per-parcel sale that is theirs by
virtue of their mortgage liens. * *°' 399 U.S. at 489-490,
90 S.Ct. at 2108.
And ‘** * * we must also reject any lingering sugges-
tion by Penn Central that the price it must pay for the
New Haven assets is unfair in either a statutory or a
constitutional sense. * *’’ 399 U.S. at 498, 90 S.Ct. at
2110.
Accordingly, the Supreme Court’s mandate obli-
gates the Trustees of Penn Central to see that the New
Haven estate is fully compensated for the remaining balance
due the New Haven in the amount of $132 million plus, with
interest.
®* Cautiously, the Supreme Court said: “may be wholly unrealistic.”
399 U.S. at 488, 90 S.Ct. 2054.
While such cautionary language was proper at a time only 8 days after
Penn Central’s bankruptcy, the intervening year strips away the “may
be” qualification and makes clear that the stock arrangement is ‘wholly
unrealistic.”
A-39
The Supreme Court, at 489, 90 S.Ct, at 2108, stated that
Ye
© * further proceedings before the Commission and
the appropriate federal courts will be necessary to de-
termine the form that Penn Central's consideration te
New Haven should properly take and the status of the
New Haven estate as a shareholder or creditor of Penn
Central."*
It also, at page 3899, 90 S.Ct. at page 2061, noted the petition
of the Penn Central for reorganization under © 77 and
stated:
‘Whether the financial obligations dealt with in the
present opinion may become subject to modifieation in
or because of those proceedings is a question with
which the present opinion in no way deals. **
It ix this court's position that the nature and form
(including whether or not it should be treated as secured)
of the indebtedness of Penn Central to the New Haven for
the assets transferred, long before Penn Central went into
reorganization, and at a time when both the New Haven, as
debtor, and Penn Central were solely under the jurisdiction
of this court, are matters within the exclusive jurisdiction
of this court. Both the New Haven and Penn Central reor-
ganization courts have the duty and jurisdiction to protect
the New Haven’s constitutional right not to have the equity
imposed security of the transferred properties further con-
fiseated in the public interest. The Penn Central reorgani-
zation court has exclusive jurisdiction over any action by
the New Haven Trustee to enforce his equitable lien and
also over the form of the consideration and its time and
manner of payment as they may be affected by a fair and
equitable plan of reorganization of the Penn Central.
This position is consonent with the Supreme Court's
statements above quoted.
oe WN ieee eet ee >
A+
IMPLEMENTATION or THE NUPREME
Cover’s Maxpare.
(Including discussion of © Cy note 2, supra)
In order fully to compensate the New Haven estate
for the balance femaining due and to provide reasonable
security for the sum owed, it is the opinion of this court that
the Supreme Court's mandate must be implemented by pro
viding: (1) that the 956,576 shares of common stock of the
Penn Central Company, the parent Company, should be
treated as collateral security, of indeterminate value, for the
balance of the purchase price due by the Penn Central
Trustees; it ix wholly unrealistic to treat the stock other
wise: (2) that an equitable lien must be declared on all of
the former assets transferred by the New Haven to Penn
Central, exelusive of (a) rolling steck and (b) the New
Haven’s one-half interest in the excess income from the
Girand Central properties; and (3) that the Penn Central
Trustees hold the latter item of property subject to a con-
structive trust in faver of the New Haven estate.
The above mentionad equitable lien ix not a consensual
lien nor is it an involuntary equitable lien arising out of a
judicial proceeding, such as that which emanates from a
creditor's bill to reach and apply equitable assets which are
beyond the grasp of legal process. See Freedman’s Saving-
& Trust Co. v. Earle, 110 U.S. 710, 4. S8.C't. 226, 28 L.Ed. 201
(1884). The lien here invoked ix the kind which the chancel.
lor creates to do equity under the peculiar circumstances of
the case, and, in particular, by the bankruptey chancellor to
implement a just reorganization under { 77 of the Bank-
ruptey Act.
The Trustee's brief sets forth a reasonably good de-
scription of this type of equitable lien as follows:
—
A
“An equitable lien has been defined as a right, not
existing at law, to have specific property applied in
whole or in part to the payment of a particular debt.
Thus, there must be a debt or obligation and a res to
which the debt can attach. The doctrine is a remedy for
a debt, based upon traditional equitable theories of
estoppel and unjust enrichment. An equitable lien may
be imposed where one party, by a course of conduet, has
raised the expectation in the other party that an obli-
gation will be secured, or where one party takes a con-
veyanee or assignment of the property of another and
retains the property without paying for it. Morrison
Flying Service v. Deming National Bank, 404, F.2d 856
(10th Cir, 1968), cert. den. 393 U.S. 1020 [89 S.Ct. G28,
21 L.Ed.2d 565) (1969); Reconstruction Finance Corp.
v. Sun Lumber Company, 126 F.2d 731 (4th Cir. 1942) ;
Westall v. Wood, 212 Mass. 40 [99 NE. 325] (1912)."*
The Tenth Circuit also stated the matter well:
‘An equitable lien is a creature of equity, is based on
the equitable doctrine of un just enrichment, and is the
right to have a fund or specific property applied to the
payment of a particular debt. Such a lien may be de-
clared by a court of equity out of general considerations
of right and justice as applied to the relationship of the
parties."* ( Footnotes omitted.) Caldwell y. Armstrong,
342 F.2d 485, 490 (10 Cir. 1965).
In the first place it was expected and intended by
the parties that full payment would be made to the New
Haven Trustees for the property, assets and rights which
they conveyed to the Penn Central. The LCC. ordered Penn
Central to pay a price less than the fair liquidation value
of the property ; and it was not until June 29, 1970 that the
full purchase price was determined by the Supreme Court's
decision. Meanwhile the Penn Central Transportation Com-
pany went into reorganization. Its Trustees now assert that
the New Haven Trustee has at best no more than a general
claim in bankruptey for the balance of the purchase price.
This ignores the whole history of the New Haven inclusion,
the general terms and framework of which stem from the
coutract of April 21, 1966, made between the New Haven
Trustees and the Pennsylvania and New York Central Rail
roads. 399 U.S. 409-413, 90 S.Ct. 2054. This contemplated a
simultaneous payment of the purchase price at the time of
the transfer of the New Haven’s assets to the merged Penn
Central. As the Supreme Court said, 399 U.S. at 410, nm 45,
90 S.Ct. at 2067 :
**The transfer was to be free and clear of ail hen and
encumbrances, with minor exceptions. The hen= and o»
cumbrances would shift te the proceeds of the sate an
thus remain an obligation of the New Haven e=tat
This concept followed through, to and including the actual
transfer. Except for some high priority claims, the real
parties to whom the proceeds of the sale and transfer belong
are the New Haven bondholders. They had secured claim.
before the transfer of the assets to the Penn Central on
December 31, 1968 and the parties had agreed and intended
that the New Haven bondholders would have a secured claim
after the transfer of assets by having a lien on the proceeds.
The reason the New Haven bondholders do not in law have
such security is beeause the Penn Central Transportation
Company has not paid the full proceeds to which the bond-
holders’ lien ean shift and attach. In equity, therefore, their
lien on the property, which was the subject of the transfer,
did not ‘‘shift to the proceeds of the sale** but remains on
the property transferred.
The Penn Central Trustees argue that any such
claim is foreclosed by the order and deed of transfer which
said the property was conveyed ‘‘free and clear of all liens,
A-43
charges and encumbrances thereon.”’ This covenant, custom.
arily incorporated in the overwhelming majority of trans-
fers in the ownership of the fee of real property and
frequently incorporated in instruments of conveyance at
bankruptey sales, may render a transfer free of such liens
as a consensual lien or a judicial lien arising out of a
creditor's bill, but it does not constitute a waiver of the
chancellor's equitable lien or a bar to his power to create
one. If this customary clause were to constitute a waiver of
the chancellor's equitable lien, the bankruptey chancellor
would be shorn of his power to protect the estate in any sit-
uation Where the covenant or clause ‘‘free and clear’” was
used and there could be no such thing as an equitable lien in
that sense. The clause cannot be used either in law or equity
te msulate a grantee who has failed to pay the purchase
price from having the property subject to an equitable len
m favor of the grantor. The parties were fully cognizant of
the fact that the total purchase price had not been de-
termined, that it would not be fixed for several months, but
that whatever the Supreme Court said it was, the Penn Cen.
tral had a duty to pay it. By the time the price had been
determined Penn Central had maneuvered itself into a finan-
cial debacle and had filed a petition for reorganization under
$77.
The fact that the New Haven was compelled in the
public interest to convey its properties to the Penn Central
without simultaneously receiving the full purchase price
did not constitute a waiver of a lien which at that time could
not be determined. A party ean only waive a known right
and it must do so intentionally. Neither fact existed here.
The right to additional payment of purchase price on which
a matured lien would depend was not then adjudicated. The
New Haven had, at the time of the transfer, an inchoate
lien with which the property was impressed. It could only
become a matured lien through the act or default of the
grantee, itself, the Penn Central. This is accomplished by
FOR ae a ene PER eer eee a wenaneainioll
RED rte
NO) SR
rh Sy
PPtiwreers:sesacs
A-44
failure to pay the price fixed by the Supreme Court. In the
circumstances of the case, this is not the kind of lien re-
ferred to by the ‘*free and clear of all liens * *** clause
in the deed of conveyance which was intended only to cover
liens and encumbrances imposed by aet of the grantor or
third persons and not those caused by the act of the grantee
itself. The matured equitable lien relates back to the date
of the transfer, which was the date the inchoate lien arose
which the act of the Penn Central itself brought to fruition.
Its Trustees take the position that the New Haven
Trustee and the New Haven bondholders, as beneficial own-
ers, have no equitable claim at all; that the New Haven
Trustees made an agreement of sale, got a down payment,
including shares in Penn Central, whieh they said they
wanted, and conveyed the property of the New Haven to
the Penn Central. Though there is still due and unpaid
on the purchase price agreed to be paid over $132,000,000,
the Penn Central Trustes say the New Haven is only a com-
mon creditor, at best, except for the divisional mortgage.
They argue that no security for this purchase price should
be afforded the New Haven estate beeause the old New
Haven assets might have to be expended in the public inter-
est to pay for the Penn Central’s operational losses and
further, if anything were left, the New Haven property
should be used to secure the Penn Central's other creditors,
presumably its other bondholders. For example, Manufae-
turers Hanover Trust Co., Indenture Trustee under N. Y.
Central & Hudson River R. R. Co. Gold Bond Mortgage of
1897, claims that the New Haven property comes within the
provisions of its mortgage. The Penn Central Trustees do
not contradict this.
Thus one sees the New Haven’s properties and
assets, Which on December 31, 1968 furnished some security
for the New Haven bondholders, who had contributed sub-
stantially to their acquisition, transferred to Penn Central,
ina
A-45
which, after paying only a small fraction of the price in
actual money's worth before going into reorganization, now
through its Trustees contemplates using the property to
make up for its own operational losses or to furnish addi-
tional security for its bondholders and other creditors. Cer-
tainly these are circumstances that cry out for equitable
relief.
The Penn Central Trustees are actually seeking an un-
just enrichment. These putative beneficiaries never gave
any consideration for the acquisition of these properties by
the New Haven and they have no equity in them whieh is
the equivalent of or superior to that of the New Haven
bondholders.
Considerable emphasis must be given to the fact that
the issue of an equitable lien in favor of the New Haven
estate on the property transferred to Penn Central on De-
cember 31, 1968, affects only the interests of the two parties,
ie. the New Haven and the Penn Central. Interests of third
parties, innocent or otherwise, are not involved, because no
creditor entered into a credit transaction with the Trustees
of Penn Central in reliance upon Penn Central’s ownership
of the New Haven property unencumbered by an equitable
lien.? While the State of Connecticut appears to make such
a claim, its interest is in seeing that no equitable lien will
impair the agreement between the Connecticut Transporta-
tion Authority and Penn Central Transportation Company,
and it is abundantly clear that the equitable lien claimed by
the New Haven would not do so. As a result of the nego-
tiated settlement between the Trustee of the New Haven
and the Trustees of the Penn Central, relating to the Penn
Central’s acquisition of the B & P and reflected in the
*The declaration of an equitable lien in the present case is not in-
tended to affect, nor should it be construed to affect, former properties of
the New Haven transferred to Penn Central and which were conveyed as
non-operating properties by Penn Central to third persons between Jan-
uary 1, 1969 and the date of the filing of this memorandum of decision.
ew dep ele
» pvaibins inate hie Nita
5 MENA MRAM Sa OTN AE WELD POG Ke ft shit ASME BPR EN OE Ss HE TRICE AO Ni PDN:
ae yee en ae ee
ie at
27
| ee
A-46
petition for and in this court’s order Number 634, dated
February 16, 1971, the declaration by this court of an equit-
able lien on former properties of the New Haven will not
apply to the former properties of the B & P. See also Order
Number 636, dated March 22, 1971.
Although the Penn Central's Trustees strongly imply
the contrary, the deficit ridden New Haven Railroad was
not foisted upon Penn Central; rather the Pennsylvania
and N. Y. Central Railroads voluntarily agreed to purchase
and operate it as a condition to their right to merge. They
knew the New Haven was a deficit operation and had been
for over a decade. They knew the New Haven would con-
tinue to be so, at least for some vears to come. The sugges-
tion that Penn Central's own financial difficulty was
brought on ‘‘to some extent’’ by losses of the New Haven,
coupled with the intimation that this creates a kind of equit-
able claim by Penn Central which off-sets a claim by the
New Haven is untenable.
The condition of the New Haven Railroad was known
to the world. It appears that the true condition of the Penn
Central may not have been. If either party was misled to
its damage in the inelusion transaction, it was not the Penn
Central. It seems likely at present that the true financial
condition and position of the Penn Central at the time of
its acceptance of the transfer of the New Haven’s proper-
ties, was not, and had not been fully disclosed to the Inter-
state Commerce Commission, the federal courts or the
Trustees of the New Haven or its bondholders.
The Trustees of the Penn Central concede in their brief
that if there had been fraud involved on the part of Penn
Central in taking over the New Haven properties, there
would be ground for the imposition of an equitable lien.
Fraud was not alleged in the statements of position now
before this court, and is not being considered as a part of
the record of the case. The court, however, is aware of Con-
A-47
gressional and LC.C. reports and other materials which
suggest that an inquiry may be needed to determine whether
or not the officers and directors of Penn Central on Decem-
ber 31, 1968 knew, in the exercise of their duties, or reason-
ably ought to have known, of facts concerning their com-
pany’s financial condition which were of vital concern to
the New Haven’s Trustees and creditors but not disclosed to
them. The purpose of mentioning this is to make clear that
in ruling on the present issues, this court is in no wise | sie |
adjudicating any question of fraud or reckless Mismanage-
ment which is the funetional equivalent of fraud. It ex-
pressly reserves jurisdiction to hear and decide such ques-
tions as may arise out of any non-disclosure of material
information relating to the transfer of the New Haven’s
properties to Penn Central, and the promise by the latter
to pay for them the price which the Supreme Court de-
termined to be fair
This text is long and has been trimmed here. Open the source document for the complete record.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.