# Petition for Writ of Certiorari — Smith v. Baker > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_1115%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1972 - **Citation:** 409 U.S. 890 ## Text FILE COPY 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 18 20 o- oat Ei ™* & 2 3 B ® § ¥ 4 of a a Bowes BR A es SS BNC Hy (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 a 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? = | $ i ? Pe $ R } & 5 q 4 done Agha arene Nef As re SON Me Biurwav.. FOP aw da Bre abiidets a 4 (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? _ ”o 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 a de eet in LF int HE tte nated, OS alba iG ing We epitala BE! las ahs Birr ict, sine) satan. tetue east a 6 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. Se eee | wha 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. oe ee eee ye Rn, ee ae . Pia ban PUR AS CER Hee PRS Pe UAL INS TANS Rt te Se Oe bP ih 4 Me a 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. ARIST Oy Waa ea Cae a "ed a Pies Poa Nae aniienaieiiiil 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 | + 2 a o % 3 Biaiienn aaa 0; 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), : } “ q “2 3 x 8 » R * 4 : 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. SR WAI A ode NE DRS Li Lo OS effect AMM tld te Nae OR ARIS 5 TBM, VaR +046 iit IP Ae OER AR ate hob 5 = 4 4 3 & ‘4 3 | g ; : 2 ; ; 20 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 Tae Ts on ag CS 4 akin Mes hatte! il iy MOREA RT REAM RUC AI RO ied Bi RG a GS BLK Lc BER BS Tp LA FETS Wires REMY MS REDE WATE hate 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 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 and equitable insofar as such questions concern the interests of the bankrupt New Haven Railroad. It must be remembered that the early time of the trans- fer of properties and assets of the New Haven on December 31, 1968 in advance of a final judicial determination of the actual price to be paid and on payment by the Penn Cen- tral of only a small fraction of what that price was ultimate- ly held to be, was not sought by any of the parties. Rather it was imposed by ruling of the I.C.C. and the order of this court. At that time it was opposed by Penn Central in an effort to compel the approval, in substance, of the LC.C.’s findings and conclusions relative to price as a condi- tion precedent to its taking over the New Haven; and the New Haven First Mortgage Bondholders were calling for liquidation. The Trustes of the New Haven simply followed the directions of this court. The transfer was not effected in the interest of or for the benefit of the New Haven’s cred- itors. It was done simply and solely in the public interest to keep the trains of the New Haven running. The New Haven Railroad faced a grave emergency. It had suffered Cube Aoi hah a i shia — A-48 and was continuing to suffer staggering losses so that its operations could not be continued beyond 1968, The price issue could not possibly, short of stipulation, be finally ad- judicated until after 1968, and immediate inclusion in spite of no final price determination was the only solution. There remain for discussion the assertions by the Penn Central Trustees and the LC.C. that the public interest re. quires that the New Haven properties conveyed to Penn Central be held free of any lien and available to be en cumbered by, or expended for losses incurred in the deticit operation of keeping the Penn Central trains going iii the public interest. The Penn Central Trustees argue as follows: “The equities favoring the Penn Central's unencum- bered ownership of the former New Haven assets, on the other hand, are overwhelming. First, as the Com- mission and courts have recognized, ‘the first policy to be served in reorganization proceedings is **continued operation of the property * *."?* Fourth Supple- mental Report and Order, 334 LC.C, 25, 61 (1968). Transfer of the New Haven Assets was designed to further this interest : ‘A total abandonment of the NH would be incon- sistent with the public interest * * * Operation by Penn Central, on the other hand, provides a feasi- ble and achievable alternative. Yet, in order for Penn-Central to effectively rescue the NH opera- tions, it must be free to conduct them according to the dictates of good and efficient management as an integrated part of its own system, This it cannot do if it must take the NH properties without the power of disposition over them and subject to th creditors’ liens.’ 344 LC.C. at 75 (Emphasis added.) A-49 The central reason for ordering inclusion of the New Haven assets on December 31, 1968, ‘free and clear of all liens and encumbrances,’ was to facilitate the main tenance of the railroad as an operating entity in the public interest." In the New Haven Inclusion Cases. however, the Su. preme Court said; After 35 years of § 77, as amended, it is unnecessary to recanvass the two basic objectives of the statute —the conservation of the debtor's assets for the benefit of creditors and the preservation of an on-going railroad in the public interest."" 399 U.S. at 431, 90 S.Ct. at 207%, It is quite clear that a bankrupt railroad's estate (which is to say the owners of rail securities) must sustain the burden of losses incurred in a deficit operation for a reasonable period following the petition in hbankruptey and before abandonment to enable governmental officials and those who represent the public to take steps to preserve railroad transportation service if they are satistied it is in the pub- lic interest to do so. In the New Haren Inclusion Cases, 399 US. at 491, 90 S.Ct. at 2109, the court said: ‘The rights of the bondholders are not absolute. As we have had oceasion to say before, security holders ‘cannot be called upon to sacrifice their property so that a depression-proof railroad system might be created. But they invested their capital in a public utility that does owe an-obligation to the public. *** [B]y their entry into a railroad enterprise, [they] assumed the risk that in any depression or any reorganization the interests of the public would be considered as well as theirs.’ Reconstruction Finance Corp. v. Denver & R. G. W. R. Co., 328 U.S. 495, 535-536, 66 S.Ct. 1282, 90 L.Ed. 1400."" A-d0 But the public interest cannot demand the erosion of the bankrupt’s assets to the point of confiscating practically the entire estate, At some point the extent and degree of taking runs into the constitutional prohibition in the Fifth Amend- ment the taking of private property for public use without just compensation. The time needed to afford the public a fair opportunity to take the necessary action to provide for the continuance of rail service rests in the sound diseretion of the reorganization court, The estate of the New Haven Railroad lost between 60 and 70 million dollars in maintain: ing its deficit operation up to January 1, 1969. This court held that any further erosion of the estate of the New Haven in the public interest would be an unconstitutional taking of private property without just compensation and this was affirmed by the Supreme Court. 399 U.S. at 466, 90 S.Ct, 2054. The Commission, however, had taken a view which appeared to arrogate to itself almost absolute authority over the extent to which a debtor railroad’s estate could be consumed in compelling it to continue a deficit of operation. In its Fourth Supplemental Report, 344 LC.C. 25 at 05-56, the LC.C. in discussing Railroad Commission of Texas v. Eastern Texas RR., 264 U.S. 79, 44 S.Ct. 247, 68 L.Ed. 569 (1924), held that ‘* * * * if at any time it develops with reasonable certainty that future operation must be at a loss, the company may discontinue operation and get what it can out of the property by dismantling the road. To com- pel it to go on at a loss or to give up the salvage value would be to take its property without just compensation which is a part of due process of law.”’ The Commission went on to mention that the Kastern Texas case cited Brooks-Seanlon Co. v. Railroad Commis- sion of Louisiana, 251 U.S. 396, 40 S.Ct. 183, 64 L.Ed. 323 (1920), which had held that a railroad may abandon even a branch line that loses money and cited in support of this, A-51 Munn vy, Illinois, 94 U.S. 113, 126, 24 L.Ed. 77 (1876). It then stated that the Mann and Scanlon cases had been overruled sub silentio by Colorado v. United States, 271 U.S. 153, 166, 168, 46 S.Ct. 452, 70 L.Ed. 878 (1926), whieh preserved ‘the Commission's role in weighing the advantages and disad vantages of abandonment of branch lines.”’ Through further discussion in the report and in its briefs and oral arguments the Commission seemed to have adopted a general doctrine that it had the power to compell the continued deficit opera tions, regardless of devastating losses, provided, it could find it was in the public interest to do so, Pursuant to this theory it decided that, despite the New Haven estate's losses of 60 to 70 million by December 31, 1968, it could withhold the right to abandon for another year and thereby saddle the New Haven with at least another $15 million in losses, The Supreme Court rejected the Commission's Claims, 399 U.S. 457-467, 90 S.C't. 2054. In spite of this the Commission now objects to the imposition of an equitable lien on the former New Haven properties to secure the payment for those very some [sic] properties, on the ground that it might interfere with the further consumption of those assets if it became necessary to dispose of them in the course of continuing Penn Central's deficit operation in the public interest, In oral argument on its statement of position concern- ing the declaration of an equitable lien the Commission said: “* ** the committee in its reply brief would apparent- ly read that lien to mean that New Haven would be en- titled to satisfaction of New Haven's claims against Penn Central in the form of a receipt of the proceeds from the sale of the former New Haven assets and Mr. Auerbach has essentially repeated that message this morning, But those proceeds may indeed be needed for opera- tions of Penn Central.’ Tr. pp. 58-59, aS A-d2 And this in spite of the fact that in its Fourth Supplement al Report, 344 1.C.C. 75, the Commission said: ; The NH ereditors are guaranteed just and reasonable compensation and other terms for their interests in the NH, whenever distribution of the compensation shall occur, Whether at the time of or after the properties pass to Penn Central, Since Penn Central must include the NH and must pay a price just and reasonable to all concerned, the creditors lose nothing, vis-a-vis Penn Central, by having their liens transferred from the Nil properties to the consideration whieh Penn Central will eventually have to pay.’ (Emphasis supplied.) ligt? his — * . eee we EDL POLI LAR RIE LIME LAO But guaranteed by what! ¥ By mid-night December 31, 1968 the publie interest had extracted the last penny which it could constituti mally take } from the property and assets of the bankrupt New Haven : estate, The Supreme Court had so decided. It sail, 399 U.S, ; at 466, 90 S.Ct. at 2096 : B. i “We think the reorganization court was entirely correct i in concluding that: 4 ‘The poliey of imposing an interim burden of losses, through its deficit operation, on a railroad in reorganization is to afford a reasonable oppor- tunity to the responsible agencies to errange the continuation of the railroad’s operation, but the law does not require the furnishing of two or three or four opportunities. The duty was more than amply fulfilled by the New Haven. The public interest has had one huge bite of the apple; it is not entitled to another.’ 304 F.Supp. 793, at 801." It also approved this court's finding *** * * * that the Con- tinued erosion of the Debtor's estate from operational losses OR rN aS BER ep bY TEAR ME CLE A-53 after the end of 1968 will Clearly constitute a taking of the Debtor's property and consequently the interests of the houdholders, without just compensation. It is therefore eon. stitutionaliy impermissible, and obviously no reorganization plan which calls for such a taking can be approved,’ 289 P.Supp. 401, at 459.7 399 TLS. at 491, 90 S.Ct. at 2109, The constitutionally forbidden erosion whieh could not be imposed directly cannot now be accomplished indirectly by preventing and Withholding the declaration of an equitable lien. Sueh a lien is required to protect. the already adjudicated constitutional rights of the New Haven estate, It muet be reiterated that. the conveyance of the transportation plant of the New Haven Railroad to the Penn Central in advance of the determination of the price to be paid for it, was made solely for and on behalf of the public interest, but there is a constitutional bar which prevents the public interest from extracting anything further out of the assets of the New Haven. The only other party affected is the Penn Central, and certainly it has no right in law or equity to take the Valuable properties and assets of the New Haven estate for a small fraction of their fair value. There are sufficient: bases discussed earlier in’ this opinion to warrant the declaration of an equitable lien on the transferred property in favor of the New Haven estate. Bui even if those grounds did not exist, the present cireum- stances in which the Penn Central seeks to prevent. the granting of any security for the $132,000,000, rightfully owed, and from the beginning agreed by the contracting parties to be a liened claim in favor of the New Haven bond. holders and also seeks to appropriate and use the properties to cover its own deficit operations or to secure its own eredi- tors, reenforeed by the position of the LC.C. that the former New Haven properties and assets must be left uneneum- bered so that they may be available for further erosion hy supporting a continuing deficit operation in the publie in- eee Iie echect ite sae Sia yb bi kt a oa ci CF ERS eA A-54 terest, all point to the absolute necessity for imposing an equitable lien on the properties and assets to protect and preserve the rights and interest declared by the Supreme Court to belong to the New Haven estate and to prevent their being dissipated away by persons who are not entitled to them. As stated at the outset, the faets and cireun- stances of this case are entirely unique. The reports show no case even roughly comparable. Equity did not cease to function on the date of the last decision which imposed an equitable lien on property. If ever an equitable remedy was ‘alled for, it is here in this case. It is the only means by which the rights of the New Haven creditors can be pro- tected. The Penn Central asserts that only two of the four States, In which the New Haven Railroad ran, recognize the doctrine of equitable lien. But that is not so. The doctrine is recognized in all four of the States,* and when remedial justice requires, the equity court will impose an equitable lien on personal property as well as on real estate, Porter vy. Searle, 228 F.2d 748 (10 Cir. 1955); Caldwell v. Armstrong, supra, and it is the opinion of this court that the courts of *~New York and Rhode Island have long recognized the doctrine of equitable liens. Birnbaum y. Rollerama, Inc., 232 N.Y.S. 2d 188 (Sup.Ct. 1962); Zeiser v. Cohn, 207 N.Y. 407, 101 N.E. 184 (1913); Passarelli y. Passarelli, 94 R.I. 157, 179 A.2d 330 (1962). While Massachusetts did not recognize the doctrine prior to 1912, Ahrend v. Odiorne, 118 Mass. 261 (1875), it has given effect to equitable liens since that date. Beacon Trust Company v. Dolan, 27 F.2d 247 (1 Cir. 1928); Westall v. Wood, 212 Mass. 540, 98 N.E. 325 (1912). In Connecticut, the courts have indicated a readi- ness to apply equitable liens in an appropriate case. Gruss vy. Miskinis, 130 Conn. 367, 34 A.2d 600 (1943); see also Hall v. Hall, 50 Conn. 104 (1882); Chapman v. Beardsley, 31 Corn. 115 (1862). If the lien law to be applied here were limited to that of only one of the four states, presumably it would be that of New York. See Section 29 of the Agreement, dated April 21, 1966, between The Pennsylvania Rail- road Company, The New York Central Railroad Company, and the Trust- ees of the New Haven. And New York law unequivocally supports the equitable lien as a “recognized agency of remedial justice.” Zeiser v. Cohn, supra. — A-55 last resort of all of the States, if they had this case before them, would hold it to be one in which the doctrine of equitable lien could be considered and applied. But irrespective of state law the federal inter- est in bankruptey and reorganization is paramount, and where circumstances warrant, as in the ease at bar, a federal court would be justified in declaring an equitable lien to accomplish a just reorganization. See Hurley v. Atchison, T. & S. FL Railway Co., 213 U.S. 126, S.Ct. 466, 523 L.Ed. 729 (1909). ‘This is consistent with many rulings where the bank. ruptey court, applying equitable principles, did not feel con- strained by state law. Thus while state laws normally de- termine property rights and interests, they will not be allowed to subvert the general policies of the Bankruptey Act, and a bankruptey court may, When necessary, de- termine property interests, irrespective of state law, to im- plement those policies.” For example, equitable principles governing bankruptey distribution require the bankruptey court to allow a claim of interest on interest. Vanston Bond- holders Protective Committee y. Green, 329 U.S. 156, 67 S.C't. 237, 91 L.Ed. 162 (1946). And the principles of equitable subordination are not controlled by state law. Prudence Realization Corp. vy. Geist, 316 U.S. 89, 62 S.Ct. 978, 86 L.Ed. 1293 (1942) ; Pepper v. Litton, 308 U.S. 295, 60'S. Ct. 238, 84 L.Ed. 281 (1939); Taylor v. Standard Gas & Electric Co., 306 U.S. 307, 59 S.Ct. 543, 83 L. Ed. 669 (1939). In Prudence Realization Corp. v. Geist the Court said, 316 U.S. at 95, 62 S.Ct. at 982: “Board of Trade of City of Chicago v. Johnson, 264 U.S. 1, 44 S.Ct. 232, 68 L.Ed. 533 (1924), held that a bankrupt’s seat on the Board of Trade constituted a property interest under the Bankruptey Act which passed to the trustee, although under state law there Was no property interest reachable by creditors: Lines y. Frederick, 400 U.S. 18, 91 S.Ct. 113, 27 L.Ed.2d 124 (1970), held that accrued vacation pay of a bankrupt wage earner was not property which passed to his trustee because of the policy of the Bankruptcy Act in relation to wage earners. A-56 ** Nothing deeided in Erie R. Co. v. ‘Tompkins [304 U.S. 64, O8 S.Ct. 817, 82 L. Kd. 1188] requires a court of bank. ruptey to apply * * * a local rule governing the liquida- tion of insolvent estates. * * * The court of bankruptey is a court of equity ~“ * and it is for that court — not without appropriate regard for rights acquired under rules of state law — to define and apply federal law in determining the extent to which the inequitable conduct of a claimant in aequiring or asserting his claim in bankruptey requires its subordination to other claims which, in other respects, are of the same elass."* ConsTRUCTIVE TRUST ON GRAND CenTRAL TERMINAL PROPERTIES (ineluding discussion of {| K, note 2, supra) All of the reasons supporting an equitable lien, dis. cussed above, support an adjudication that the property interest in the Grand Central Terminal properties, which the New Haven transferred to Penn Central, is subject to a con- struction trust in the New Haven's favor. Originally, this reorganization court, with the aid of a special master, undertook its own resolution of the legal question as to whether the New Haven had a property imter- est in the terminal properties that would survive a cessation of rail operations by the New Haven, and the court con- cluded that the New Haven did have such an interest which should be measured by the capitalization of one-half of the excess income remaining after satisfaction of the terminal expenses. Thereafter the Commission fixed this value at $28,438,000 and both this court and the Supreme Court approved. This court now concludes that a constructive trust in the foregoing amount should attach to all of the terminal prop- erties as of December 31, 1968; and, additionally, as to the A-57 actual monies received by Penn Central, on or after July 1, 1971, from those properties, one-half of the exeess income is impressed with a trust in favor of the New Haven estate. Subjecting the properties to a constructive trust as of December 31, 1968 is fair to both the New Haven and Penn Central. It protects the New Haven estate's interest from being subjected to mortgage and other creditor interests of Penn Central whose equities are junior to those of the New Haven, Since the properties involved are Non-operating properties, the revesting in the New Haven of Its trans ferred title and rights does not affect: Penn Central's rail operations, and the revesting protects the New Haven against conveyances of and encumbrances upon those inter- ests without the New Haven being paid the value of its in- terest, which, incidentally, is roughly equivalent to the over- all increase in price which this court adjudged and the Supreme Court affirmed. After stating that “fairness and equity’? forbid approval of only a fractional payment of New Haven’s value, the Supreme Court added: “And the same considerations of fairness and equity prevent imposing on Penn Central the burden of immediate payment in full eee? 399 US. at 488, 90 S.C't. at 2108, In testing the order for a declaration of a constructive trust by these criteria the court has given weight to these considerations: (a) if sales or other similar dispositions of Grand Central properties are made, an appropriate liquida- tion of the New Haven’s interest under the constructive trust is not burdensome upon Penn Cent ‘al; (b) immediate payment will be required only out of ineome currently realized from non-rail operations, whieh will be relatively small in amount when compared to the total amount due by Penn Central, ie. $132 million; (¢) the date of July 1, 1971 comes a year after Penn Central went into bankruptey and after the Supreme Court enunciated this balance of fairneys approach; ane (d) the payment is necessary to preserve the a % 2 a J : 8 Be 3 3 3 4 hie AA A-DS New Haven reorganization. The New Haven's assets consist of approximately $14 million in cash or cash equivalents, and its clann against Penn Central. Following cessation of divi- dend and interest payments by Penn Central, the income of the New Haven estate became essentially limited to the earn. ings of the cash equivalents — treasury bills, certificates of deposit, and the like. On the other hand, the estate has approximately $52 million of administrative claims which include $7 million or more of tort claims, mostly FELA ‘vases, $12.5 million due the United States on defaulted trus- tees" certificates, and $17 million of real estate taxes in addi- tion to pre-bankruptey liened real estate taxes. Shortly after Penn Central's bankruptey, necessity required this court, on July 6, 1970, to order the general suspension of payment of claims, although the needs of many creditors — both taxing authorities and injured persons — were great, and the ap- peals of the seriously injured employees and passengers on humane grounds have been very compelling. Recently, be- ‘ause of these considerations, the court has modified its suspension order to permit the resumption of small quar- terly payments on the liquidated tort claims. Funds must be husbanded to keep the Trustee’s small staff intact, and to press and safeguard the New Haven’s one main asset — the amount justly due to it by the Penn Central. After balancing the equities, this court believes that equity and good con. science require that beginning on July 1, 1971, one-half of the excess income from the Grand Central properties be im- pressed with a constructive trust. This does not prejudice Penn Central, for it is not entitled to operate on other people's money. Moreover, the Penn Central reorganization court has declared that the Penn Central is not insoivent. INTEREST So that the New Haven estate is fully compen- sated for the balance of over $132 million due it, the estate is entitled to interest from December 31, 1968 at the ap- A-99 propriate legal rate, with appropriate credits given Penn Central for dividends and interest paid by it and for any payments made on prineipal, such as the one-half of the proceeds from the sales of former New Haven real estate in the approximate amount of $9 million. REMAND (including discussion of § A and 4 B, note 2, supra.) The New Haven’s plan. of reorganization should he remanded to the Interstate Commerce Commission sub- ject to the legal rulings made in this opinion and also to certain legal rulings in this court's Memorandum of Deci- sion on Distributive or Step I] Portion of Fourth Supple- mental Report and Order of Interstate Commerce Com. mission rendered on July 28, 1969, 304 F.Supp. 1121. Among other things these concern the acerual of interest and penalties on tax claims, the need to satisfy counsel fees and trustees’ certifieates in eash, and the provision that any claim covered by the Pl [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_1115%3A1. Public record. Not legal advice.