Brief for Respondent — Smith v. Baker

a= —

IN THE

Supreme Court, U.

Supreme Court of the United States! | © 1

October Term, 1971 MAY 31 1972

No. 71-1401 MICHAEL RORAN, JRO

In the Matter of The New York, New Haven and

Hartford Railroad Company, Debtor

Richard Joyce Smith, Trustee of the Property of The New

York, New Haven and Hartford Railroad Company, Debtor,

Petitioner,

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.

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the Second Circuit

BRIEF OF RESPONDENT MANUFACTURERS

HANOVER TRUST COMPANY, AS

MORTGAGE TRUSTEE

Epwarp Roserrs, III,

Attorney for Respondent

Manufacturers Hanover Trust Com pany,

as Mortgage Trustee

350 Park Avenue

New York, New York 10022

Of Counsel:

Frank H. Hetss

Rosert L. CrawFrorp

Kettey Dayz Warren CLARK

Carr & Exuis

_ Dated: May 26, 1972

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TABLE OF CONTENTS

PAGE

Preliminary Statement ae 1

Questions Presented sasiinaliaes 2

Statement of Facts 3

The Rights of Manufacturers Hanover, as Trus-

tee of the 1897 Mortgage 5

The New Haven Reorganization Court’s Order

on Remand 6

Reasons for Denying the Writ 8

The Court of Appeals Correctly Applied Relevant

Decisions of This Court Relating to a Re-

organization Court's Exclusive Jurisdiction

Under Section 77(a) s

1. Finality icing

2. The Constitutional Rights of the New

Haven Creditors 11

3. Warren v. Palmer 13

4. The Equities 14

Conclusion CALNE E523 A 17

Appendix

Order 559 of the New Haven Reorganization Court

Directing Inclusion of Debtor in Penn Central

Company 1A

TABLE OF AUTHORITIES

PAGi

Cases:

In the Matter of The New York, New Haven and Hart-

ford Railroad Co., Debtor, Docket Nos. 71-1902,

71-1929, 71-2024 (2d Cir. Mareh 17, 1972) 7.9, 10,1:

In the Matter of The New York, New Haven and Hart-

ford Railroad Co., Debtor, 331 F. Supp. 212 (1D.

Conn. 1971) 6,

In the Matter of The New York, New Haven and Hart-

ford Railroad Co., Debtor, 330 F. Supp. 131 (1).

Conn. 1971) 3,

In the Matter of The New York, New Haven and Hart-

ford Railroad Co., Debtor, 289 F. Supp. 793 (1D.

Conn. 1968)

New Haven Inclusion Cases, 399 U.S. 392 (1970) 3, 4,6

9, 10,1

Warren v. Palmer, 310 U.S. 132 (1940) 9,1

Statutes:

Bankruptey Act, Section 77(a) 2 ef passiv

In the Matter of The New York, New Haven and

Hartford Railroad Company, Debtor

Richard Joyce Smith, Trustee of the Property of The New

York, New Haven and Hartford Railroad Company, Debtor,

Petitioner,

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.

On Petition for a Writ of Certiorari to the United Siates

Court of Appeals for the Second Circuit

nN Jie en

BRIEF OF RESPONDENT MANUFACTURERS

HANOVER TRUST COMPANY, AS

MORTGAGE TRUSTEE

Preliminary Statement

Respondent Manufacturers Hanover Trust Company

(“Manufacturers Hanover’’), as Trustee under The New

2

York Central and Hudson River Railroad Company (the

‘*Central’’) Three and One-Half Percent Gold Bond Mort.

gage, dated June 1, 1897 (the ‘£1897 Mortgage’’), by its

attorneys, respectfully submits this brief in response both

to the above-captioned Petition and to No. 71-1451, the

similar Petition, dated May 6, 1972, of Lawrence W. Ian.

notti, Successor Trustee under the First and Refunding

4% Mortgage Bonds, dated as of July 1, 1947, of The New

York, New Haven and Ilartford Railroad Company,

Debtor."

Questions Presented

The principal question raised by these petitions is

whether the Court of Appeals correctly held that the New

Haven Reorganization Court had no jurisdiction to declare

an equitable lien on, and a constructive trust on the income

from, various former properties of the New Haven because

those properties, which the Penn Central Trustees had

legal title to and actual possession of, were under the ex-

elusive jurisdiction of the Penn Central Reorganization

Court under Section 77(a) of the Bankruptey Act, 11 U.S.C.

1. For convenience we have used the same shortened reference

forms as those used in the New Haven Trustee’s Petition:

“New Haven”—The New York, New Haven and Hartford Rai-

road Company, Debtor.

“Penn Central”—Penn Central Transportation Company, Debtor

“New Haven Reorganization Court’—the United States Distric:

Court for the District of Connecticut.

“Penn Central Reorganization Court’—the United States Di-

trict Court for the Eastern District of Pennsylvania.

“Court of Appeals”—the United States Court of Appeals for th:

Second Circuit.

“Commission” —the Interstate Commerce Commission.

3

j205(a)? A secondary question raised by the petitions

is whether the admittedly important federal question of

Section 77(a) jurisdiction has not already been settled

by previous decisions cf this Court, which were correctly

applied by the Court of Appeals in the decision, review

of which the New Haven Trustee and Mr. lannotti now

seek ?

Statement of Facts

This Court last considered the problems arising out of

the various proceedings involving the reorganization of

the New Haven, the merger of the Pennsylvania Railroad

Company and the Central, and the sale of the New Haven’s

properties to the newly formed Penn Central in the New

Haven Inclusion Cases, 399 U.S. 392 (1970). Briefly what

had transpired prior to that decision was the following:

July 7, 1961—New Haven enters reorganization under

Section 77.

April 6, 1966—Commission approves Penn Central

merger subject to the inclusion of the New Haven.

November 19, 1967—Commission prescribes terms for

the New Haven’s inclusion setting the considera-

tion to be paid by Penn Central at $125 million.

February 1, 1968—Penn Central merger effected.

November 25, 1968—Commission revises the terms for

the New Haven’s inclusion it prescribed November

19, 1967, increasing the consideration to be paid

by Penn Central to $145.6 million.

December 24, 1968—New Haven Reorganization Court

orders the transfer of the New Haven’s assets to

Penn Central by January 1, 1969.

Pe ee ee a aia lt.

4

May 28, 1969—New Haven Reorganization Court jp.

creases the consideration to be paid by Penn Cep-

tral to $174.6 million.

June 21, 1970—Penn Central enters reorganization m-

der Section 77.

June 29, 1970—New Haven Inclusion Cases, supra,

decided.

In the New Haven Inclusion Cases, supra, this Court

affirmed the decision of the New Haven Reorganization

Court setting the consideration to be paid by Penn Central

for the New Haven assets at $174.6 million. But, because

the major part of that consideration was to be paid in Pem

Central stock which in the spring of 1970 was not selling

at the $87.50 intrinsic value set by the New Haven Re-

organization Court, this Court remanded the case for

‘further proceedings before the Commission and the

appropriate federal courts * * * to determine the form

that Penn Central’s consideration to New Haven should

properly take * * *."’ New Haven Inclusion Cases,

Supra at 489.

Instead of simply remanding the proceedings to the

Commission in accordance with this Court’s direction, the

New Haven Reorganization Court, on August 10), 1970.

ordered that the Trustee of the New Haven and ail other

interested parties file ‘‘statements of positieu’’ on certain

specified issues, as to which, the Court indicated, it might

give directions to the Commission in its remand order.

Two of the issues listed in the New Haven Reorganization

Court’s August 10, 1970 Order—whether it could an

should declare an equitable lien on the New Haven assets

transferred to Penn Central on December 31, 1968 and

COPY BOUND CLC

5

whether it could and should order the Penn Central

Trustees to pay the New Haven Trustee half the excess

income from the so-called Grand Central Terminal prop-

erties*—vitally affected the rights of Manufacturers Han-

over, as Trustee of the 1897 Mortgage.

The Rights of Manufacturers Hanover,

as Trustee of the 1897 Mortgage

In its Statement of Position, filed in response to the

New Haven Reorganization Court’s August 10, 1970 Order,

Manufacturers Hanover, in addition to challenging the

Court’s power to declare equitable liens on or otherwise

affect the property of Penn Central within the exclusive

jurisdiction of the Penn Central Reorganization Court,

advised the New Haven Reorganization Court of the fol-

lowing.

On June 1, 1897, the Central had mortgaged ail its

properties to a predecessor of Manufacturers Hanover, as

Trustee, to secure an issue of bonds. Included in the trust

estate mortgaged by the Central were the Grand Central

Terminal properties. There were presently outstanding

under the 1897 Mortgage approximately $80,000,000 in

bonds, all in default as a result of the Penn Central bank-

muptey. Any rights the New Haven had had in the Grand

Central Terminal properties arose from a 1907 agreement

tetween the Central and the New Haven for the develop-

2. (A. 26-27). References preceded by the letter “A” are to the

pages of the Appendix annexed to the New Haven Trustee’s Petition

and NOT the Appendix to this brief.

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ment of the Grand Central Terminal area.* Regardless of

what rights, if any, the New Haven retained in the Grand

Central Terminal properties following the transfer of those

properties to Penn Central on December 31, 1968, those

rights were clearly subordinate to the recorded lien of

Manufacturers Hanover, as Trustee of the 1897 Mortgage.

Consequently, even if the New Haven Reorganization Court

were to conclude that it did have subject matter jurisdiction

to declare an equitable lien and to order the Penn Central

Trustees to pay half of the excess income from the Grand

Central Terminal properties to the New Haven, it could

not do so without totally abrogating the rights held by

Manufacturers Hanover as Trustee for the holders of the

bonds issued under the 1897 Mortgage.

a th AIA NR ec le Sas sk

NS ale Bs COA thle Ni

The New Haven Reorganization

Court’s Order on Remand

On June 22, 1971, nearly a year after this Court had

remanded the Vew Haven Inclusion Cases, supra, ‘‘for fur

ther proceedings before the Commission,’’ the New Haver

Reorganization Court in its Order of Remand‘ declared an

equitable lien encumbering virtually all the assets which

the New Haven had conveyed to Penn Central on December

3. This was the conclusion of the Special Master appointed by

the New Haven Reorganization Court to make a legal appraisal of

the interests and rights of the New Haven in the Grand Central Ter-

minal properties. The Special Master’s report was adopted by the

New Haven Reorganization Court and that portion of its decision

affirmed by this Court. Jn re New York, New Haven and Hartford

Railroad Co., 289 F. Supp. 451, 463 (1968), aff'd in part sub nom,

New Haven Inclusion Cases, supra at 438-451.

4. In the Matter of The New York, New Haven and Hartfori

Railroad Co., Debtor, 331 F. Supp. 212 (D. Conn. 1971) (A. 61 ¢t

seq.).

COPY BOUND CLO

7

, 1968." In addition, the Order of Remand directed the

Penn Central Trustees (i) to hold in trust for the benefit

f the New Haven all the right, title and interest in the

rand Central Terminal properties which the New Haven

ad transferred to Penn Central on December 31, 1968 and

ii) commencing on July 1, 1971, to accrue to the account

f the New Haven one-half the excess income from the

trand Central Terminal properties.®

Nn ATA ii cb SOS ith Die,

The New Haven Reorganization Court’s Order of Re-

mand completely ignored the rights in the Grand Central

erminal properties held by Manufacturers Hanover, as

rustee of the 1897 Mortgage, although curiously enough

he Court in its accompanying Memorandum of Decision?

ommented on those rights: ‘‘* * * Manufacturers Hanover

rust Co., Indenture Trustee under N.Y. Central & Hudson

R.R.Co. Gold Bond Mortgage of 1897, claims that the New

Haven property comes within the provisions of its mort-

age. The Penn Central Trustees do not contradict this.’

eS he a eA Oe hl Me Ui Say

The New Haven Reorganization Court’s Order of Re-

mand was appealed to, and reversed by, the Court of Ap-

peals on March 17, 1972 on the ground that ‘‘the district

ourt lacked subject matter jurisdiction under §77(a) of

he Bankruptcy Act, 11 U.S.C. §205(a) (1970), to issue the

brder, since the property affected is within the exclusive

urisdiction of another district court.’”

5. 331 F. Supp. at 215 (A. 64).

6. 331 F. Supp. at 215-216 (A. 64-65).

7. In the Matter of The New York, New Haven and Hartford

ailroad Co., Debtor, 330 F. Supp. 131 (D. Conn. 1971) (A. 25 et

eq.)

8. 330 F. Supp. at 144 (A. 44).

9. In the Matter of The New York, New Haven and Hartford

katlroad Co., Debtor, F. 2d (2d Cir. March 17, 1972) (A.

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Reasons for Denying the Writ

The Court of Appeals Correctly Applied Relevant

Decisions of This Court Relating to a Reorganization

Court’s Exclusive Jurisdiction Under Section 77(a).

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 insol-

vent 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

this section and for the purposes thereof, have exclu-

sive jurisdiction of the debtor and its property wher-

ever located * * *”? (Emphasis added).

When the New Haven Reorganization Court in its Order

of Remand imposed an equitable lien on the former New

Haven assets conveyed to Penn Central on December 31,

1968 and ordered the Penn Central Trustees to hold Penn

Central’s Grand Central Terminal properties in trust for

the benefit of the New Haven, it was circumventing the

unambiguous language of Section 77(a) which granted

the Penn Central Reorganization Court exclusive jurisdic-

tion over the property of Penn Central.

The Court of Appeals could have simply relied on See-

tion 77(a) when it reversed the New Haven Reorganization

Court’s Order of Remand. Instead, however, the Court

of Appeals, in a detailed and well-reasoned opinion, re-

viewed each of the arguments made by the appellants and

the appellees on the jurisdictional issue, cited and dis-

cussed the relevant decisions of this Court, and then con-

COPY BOUND CLOS

; id )

cluded that under Section 77(a) and the decisions of this

Court interpreting Section 77(a) ‘** * * only the Pennsyl-

) vania [i.e., the Penn Central] reorganization court had

jurisdiction under §77(a) over the property here in ques-

tion 9910

The New Haven Trustee lists four reasons why this

Court should review the Court of Appeals decision: (i)

only this Court can construe its remand decision in the

New Haven Inclusion Cases, supra, with finality; (ii) the

New Haven Reorganization Court had jurisdiction to pro-

tect the constitutional rights of the New Haven creditors;

(ili) the Court of Appeals misapplied Warren v. Palmer ;"

and finally (iv) an argument based on the equities. None

of these reasons warrant the grant of certiorari.

1. Finality

The New Haven Trustee argues that this Court is the

only Court which can construe its remand decision in the

New Haven Inclusion Cases, supra, with finality. Clearly,

that is so. It is, however, hardly a reason for this Court

to issue a writ of certiorari. The relevant question here

is whether the Court of Appeals correctly interpreted the

New Haven Inclusion Cases, supra. A comparison of

both opinions shows that it did.

In the New Haven Inclusion Cases, supra, this Court

remanded the case for ‘‘[f]urther proceedings before the

Commission and the appropriate federal courts * * * to

10. —— F. 2d at —— (A. 16).

11. 310 U.S. 132 (1940).

LOSE IN CENTER

12. 399 U.S. at 489.

determine the form that Penn Central’s consideration to

New Haven should properly take * * *.’"" The Court of

Appeals decision reversing the New Haven Reorganization

Court’s Order of Remand provides:

10

‘‘This case must be remanded to the Commission

so that a reorganization plan, fair and equitable to

all parties, can be formulated. One of the main rea-

sons for the enactment of §77 was to establish a re.

organization procedure in which an expert agency

would examine the technical and financial problems

of the railroad and propose a reorganization plan to

the reorganization court for approval. As both the

Penn Central and the New Haven are in reorganiza-

tion, at least nominally, before courts in different

circuits, the Commission is the common denominator

between those courts so far as the formulation of a

single plan, or two interrelated plans, is concerned,

Whatever protection the New Haven estate must re-

ceive in terms of some senior position in the Penn

Central proceeding must first be proposed by the

Commission in the context of a reorganization plan

for the Penn Central which, it is to be hoped, will

advance the public interest by successfully establishing

a financially viable Penn Central. The Commission

has stated that, if the proceeding is remanded to it,

it will consolidate the Penn Central reorganization

and New Haven inclusion proceedings so as to con-

sider the terms of the New Haven inclusion as ‘a por-

tion of the reorganization of Penn Central * * *’ This

procedure is, we believe, the proper method by which

the interests of all parties—the New Haven estate,

Penn Central and its ereditors, and the public—can

best be advanced.’’

13, —— F. 2d at — (A. 18-19),

COPY BOUND CLO

y Clearly it is the Court of Appeals decision remanding

the case directly to the Commission, and not the New Haven

1 Reorganization Court’s Order of Remand, which correctly

carries out the mandate in the New Haven Inclusion Cases,

, supra.

11

2. The Constitutional Rights of

the New Haven Creditors

The New Haven Trustee argues that the New Haven

Inclusion Cases, supra, held that ‘‘the New Haven creditors

have suffered all the losses they were required to suffer

in the public interest and that any further losses would be

an unconstitutional taking of their property without just

compensation * * *.’* He also states that the equitable

lien and constructive trust were appropriate security de-

vices to prevent further losses and an unconstitutional

taking.

The argument is fallacious in two respects. First, the

losses referred to in the New Haven Inclusion Cases were

losses suffered by the New Haven estate because of its

unprofitable operation of the New Haven as a railroad in

the public interest. That operation ceased on December

31, 1968, when the New Haven transferred its railroad to

Penn Central. Thereafter it was and still is Penn Central

and its creditors who are suffering the losses incurred in

the operation of the former New Haven rail assets,

Ss lm UNS Si i Fee

Secondly, the equitable lien and the constructive trust

are not appropriate security devices since ms violate not

only Section 77(a), but also the New Haven Reorganization

Court’s own order of December 24, 1968 approving the

14. New Haven Trustee's Petition, p. 21.

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12

transfer of the New Haven assets to Penn Central. There

the New Haven Reorganization Court ordered “‘a binding

transfer’ of the New Haven assets to Penn Central “free

and clear of all liens, charges and encumbrances thereon.’™

The order provided that the various liens, charges and

encumbrances to which the transferred assets had been

subject prior to conveyance **shall attach and be recognized

as continuing liens, charges and encumbrances upon the

assets hereafter held by the New Haven Trustees,”’ which

included the consideration paid by Penn Central."

The equitable lien and the constructive trust, interfering

as they do with the assets transferred from the New Haven

to Penn Central, violate the New Haven Reorganization

Court's own order approving the transfer ‘‘free and clear

of all liens, charges and encumbrances.”’

15. Paragraphs J and K of Order No. 559, which we have printed

in its entirety as an appendix to this brief, were quoted at pp. 7-8 of

the New Haven Trustee's Petition. Paragraph H of Order No. 559

provides :

“The convevance of the Debtor's assets to Penn Central Com-

pany pursuant to the [lan shall be @ finding transfer to Penn

Central Company free and clear of all liens, charges and encum-

brances thercon except as specitied im Section 3.2 of the Purchase

Agreement as moditie!d with regafd te the Harlem River Division

mortgage and bends and approvdll in the Ilan; the liens, charges

and encumbrances to which the Belbtor's asscts are subject prior

toy the conveyance of such assetgishall attach and be recognized

as continuing hems, charges 4: munbrances upon the assets

hereafter held bw the New Haven Trustees, including all assets

on deposit in the registry ot thas Court, all as provided in the

Plan” (Enyphasts added)

16. Paragraph L of Order No. 55% set forth in the Appendix

me

j

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I

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3. Warren v. Palmer

The Court of Appeals held that Warren y. Palmer,

supra, was determinative," concluding that the New Haven

Reorganization Court's Order on Remand “‘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 reorganization court

to administer the entire Penn Central system, of which the

New Haven line is but a division * * *,°"*

13

The New Haven Trustee argues that there was no show-

ing that any such impact had occurred.” Reference to the

New Haven Reorganization Court's Order on Remand re-

futes this contention. The operative provisions of the

Order of Remand do not merely declare the equitable lien,

they also direct the Penn Central Trustees to hold the

Grand Central Terminal properties in trust for the benefit

of the New Haven and to accrue for the account of the

New Haven one-half the excess income from those prop-

erties.

This is precisely the sort of interference with the oper-

ations of a railroad in reorganization to which Warren vy.

Palmer applies. The existence of the Order on Remand,

we submit, constitutes impermissible encroachment on the

Penn Central Reorganization Court's Section 77(a) juris-

diction.

Nor does the statement of the New Haven Reorganiza-

tion Court in its Memorandum of Decision that ‘** * * this

17, —— F. 2d at —— (A. 13).

18 —— F. 2d at —~— (A. 16).

19. New Haven Trustee's Petition, p. 26.

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14

court claims only the power to declare the existence of an

equitable lien on the conveyed property, including a con-

structive trust to the extent of the capitalized value of one-

half of the excess income from the Grand Central properties

* ** [T]he New Haven reorganization court does not

under the present circumstances assert the power to en-

force such a lien.””” As United States courts are not nor-

mally given to knowingly making unenforceable declara-

tions, one can question this distinction which the New Haven

Reorganization Court makes between its power to declare

and its power to eeforce. Such questioning is not neces-

sary however—it is the Order of Remand with its clear-cut

directions to the Penn Central Trustees which restricts

their management of Penn Central, and it is the Order of

Remand which the Court of Appeals reversed.

4. The Equities

Throughout his Petition the New Haven Trustee has

sought to create the impression that the Penn Central's

other creditors are being unjustly enriched at the expense

of the New Haven and that the New Haven Reorganization

Court is the only tribunal which can effectively protect

the New Haven’s right. A return to reality seems justified.

a Nate Ra eet ee Eee hee aPC Lee a ec ee

After the December 31, 1968 transfer of the rail assets

of the New Haven to Penn Central, the New Haven estate’:

principal assets were securities—bonds, stock and Pem

Central’s promise to underwrite the value of the stock—

of Penn Central. As long as Penn Central remained sol-

vent, the New Haven Trustee had the right, as a Pem

Central security holder, to require Penn Central to live

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20. 330 F. Supp. at 137 (A. 30).

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15

up to the terms of those securities. He could enforce that

right in the New Haven Reorganization Court or any other

court where Penn Central could be served.

On June 21, 1970, when the Penn Central entered re-

organization in the Penn Central Reorganization Court,

that Court and that Court alone acquired jurisdiction over

the assets of Penn Central. All claims on those assets had

to be made before the Penn Central Reorganization Court

so that it could apportion equitably the limited assets of

the Penn Central estate among the various claimants to

those assets.

No greater demonstration can be made of the soundness

of Section 77(a) in bestowing upon a reorganization court

exclusive jurisdiction over the property of a debtor in

reorganization than the example of the encroachment on

the Penn Central Reorganization Court’s exclusive juris-

diction by the New Haven Reorganization Court in its

Order of Remand.

Notwithstanding that the New Haven Reorganization

Court was sitting as a court of equity, it ignored considera-

tion of the relative merits of the claims of all creditors of

Penn Central. Instead, it considered only the merits of

the unsecured claim of the New Haven Trustee which the

New Haven Reorganization Court, by its Order of Remand,

elevated to secured status.

It is not surprising that most creditors of Penn Central

did not appear in New Haven and did not attempt to justify

the merits of their claims against Penn Central before the

New Haven Reorganization Court. They undoubtedly as-

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sumed that their claims would eventually be weighed by

the Penn Central Reorganization Court. It is surprising

that the New Haven Reorganization Court chose to ignore

this vast body of claimants, many of whom may be entitled

to the same solicitous consideration which the New Haven

Reorganization Court reserved for the New Haven Trustee.

As Manufacturers Hanover informed the New Haven

Reorganization Court in its Statement of Position, the

Grand Central Terminal properties are pledged to it, as

Trustee under the 1897 Mortgage. Any order of the New

Haven Reorganization Court diverting the excess income

of the Grand Central Terminal properties to the New Haven

Trustee would violate the rights of 1897 Mortgage bond-

holders who are entitled to the full security of the pledge

of the Grand Central Terminal properties. Whatever may

have been the rights of the New Haven Trustee in the Grand

Central Terminal properties vis-a-vis the rights of Pen

Central as successor to the Central, those rights are clearly

subordinate to the rights of Manufacturers Hanover, as

Trustee of the 1897 Mortgage, to the full security of the

pledge of the Grand Central Terminal properties.

There was not in the record before the New Haven

Reorganization Court one shred of evidence which even

suggests that the rights of the New Haven Trustee to the

Grand Central Terminal properties are superior to the

rights of the 1897 Mortgage Trustee. There is nothing in

the record before this Court to suggest that the New Haven

Reorganization Court, which has ignored the claims of

Manufacturers Hanover, as Trustee for the holders of bonds

secured by the 1897 Mortgage, and which has apparently

been unconcerned over the plight of any other Penn Central

eS

COPY BOUND CLOS!

17

ereditor except the New Haven Trustee, is better equipped

than the Penn Central Reorganization Court to dispense

equitably the limited assets of Penn Central to those cred-

itors entitled to them. Section 77(a), the decisions inter-

preting Section 77(a), and common sense all compel the

conclusion that the Penn Central Reorganization Court is

the only tribunal which, in the first instance, has or should

have the power over the assets of Penn Central.

Conclusion

Petitioners have not shown any reasons for grant-

ing the writ; certiorari should be denied.

Respectfully submitted,

Epwarp Roserts, III,

Attorney for Respondent

Manufacturers Hanover Trust Company,

as Mortgage Trustee

390 Park Avenue

New York, New York 10022

Of Counsel:

Frank H. Hetss

Rosert L. Crawrorp

Kevtey Drye Warren CLARK

Carr & Eis

Dated: May 26, 1972

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APPENDIX

CORY ROLIND CI a

1A

: Order No. 559

IN THE

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF CONNECTICUT

In Proceedings for the Reorganization of a Railroad

lo the Matter of

THE NEW YORK, NEW HAVEN AND No. 30226

HARTFORD RAILROAD COMPANY,

Debtor.

ORDER DIRECTING INCLUSION OF DEBTOR IN PENN

CENTRAL COMPANY —

The Interstate Commerce Commission (the Commission)

having certified to this Court, on December 2, 1968, a Plan of

Reorganization for the Debtor (the Plan), as embodied in its

reports and orders of November 16, 1967 and March 1, 1968

which have been modified in accordance with its report and order

of November 25. 1968; together with exhibits and a transcript

of the proceedings before the Commission; this Court having,

by Order of December 3, 1968, directed the filing of objections

and claims for equitable treatment on or before December 16,

1968, and scheduled hearings on the Plan commencing December

20,-1968; notice ci said Order of December 3, 1968 and of the

hearings thereon having been duly given in accordance with said

\ Order; all parties in interest having been given due opportunity

to file their objections in writing to said Plan and their claims

(7383)

I QMOGE IAI CEAITES BP

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2A

7384

for equitable treatment; the Court having, at the Rearing on

December 20, 1968, limited said hearing to the issue of the

inclusion of the 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 reserved in this Order; all

parties in interest having been heard or given opportunity to be

heard on said issue; and this Court having filed its opinion in

the premises,

THE COURT FINDS AS FOLLOWS:

1. Due and lawful notice to all persons and parties has been

given in strict compliance with the Order of ‘this Court oi

December 3, 1968 prescribing the manner of notice.

2. Subject to the jurisdiction reserved herein, the inclusion

of the Debtor’s operations in Penn Central Company as oi

December 31, 1968 in accordance with the Plan is fair ani

equitable, and otherwise fully complies with the requirements

of Section 77 of the Bankruptcy Act, including subsections (b)

and (e) thereof.

3. The Debtor is insolvent within the meaning of Section

77(e) of the Bankruptey Act, and the equity of the holders oi

the Debtor’s preferred and common stock and certificates ¢

beneficial interest has no value.

4. Inclusion of the Debtor's operations in Penn Centr

Conipany as of December 31, 1968 by conveyance of the Debtors

assets and payment of the consideration specified in the Plan

subject to the jurisdiction reserved herein, will not adverse

and materially affect any class of stockholders or of creditor

of the Debtor's estate, except that under Section 77(e) of th

Bankruptcy Act, the interest of the United States of Americ

is dcemed to be affected.

§. The United States of America has consented to the ore’

of the Interstate Commerce Cominission insofar as it relates t

the conveyance of the Debtor's assets to Penn Central Company

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3A

7386

.

¢

New Haven Trustees, and the New Haven Trustees are author-

ized to receive, on the closing date provided in the Plan, to wit,

} December 31, 1968, the following consideration :

(1) 950,000 shares of Penn Central Company stock (plus

such additional shares as may be necessary by the

anti-dilution provisions approved by the Commission) ;

(2) $33,600,000 principal amount of Penn Central Com-

pany bonds;

(3) $8,000,000 in cash (less any amount representing

accrued vacation pay which the New Haven Trustees

and Penn Central Company agree is to be assumed by

Penn Central Company) ; and

Penn Central Company is further directed on December 31,

1968 to assume obligation and liability in respect of :

(a) the Debtor's equipment obligations ;

(b) the Debtor's Harlem River Division mortgage and

bonds;

(c) the mortgage, bonds and certificates of contingent

beneficial interest when issued pursuant to the Plan

of Reorganization of the Boston and Providence

Railroad Corporation (B&P) ;

(d) the payment for publicly held shares of the Boston

and Providence Railroad Corporation upon consum-

mation of the Plan of Reorganization of the B&P:

and

(e) such other obligations and liabilities of the Debtor

or of the New Haven Trustees, all as are provided

in the reports and orders of the Commission referred

to herein; and

Penn Central Company is further directed, on December a4,

1968, to cancel and surrender to the New Haven Trustees all

Certificates of the New Haven Trustees held by said Company to

evidence loans tu the New Haven Trustees.

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C. The New Haven Trustees and Penn Central Company are

hereby authorized and directed to perform all obligations to

be performed by them pursuant to the provisions of the Plan

relating to the inclusion of the Debtor and of the operations

of the B&P in Penn Central Company, including the making

of adjustments on May 31, 1969, the post-closing adjustment

date under the Plan, in such amounts as may be payable by the

New Haven Trustees and Penn Central Company, respectively,

on said date pursuant to Section 7 of the Agreement between the

New Haven Trustees and the Pennsylvania Railroad Company

and the New York Central Railroad Company, dated April 21,

1966, as amended (the Purchase Agreement).

} D. The New Haven Trustees are authorized and directed

i to turn over to Penn Central Company on December 31, 1968

i the operations of the B&P and all rights of the Debtor wit

; respect to such operations, and Penn Central Company

P directed to operate the B&P, subject to the reserved jurisdiction

} of the Commission and of this Court, pending consummation 6!

;

the Plan of Reorganization of the B&P, the payment by Pen

y held shares of the B&P, th

1387

~—

: Central Company for the publicl

5 conveyance of the assets of the B&P to Penn Central Compan

, and the assumption by Penn Central Company of the obligation

under the mortgage bonds and certificates of contingent benehc:

interest to be issued pursuant to the Plan of Reorganization of th:

\ B&P, Penn Central Company to succeed to the rights of the Ne

2 . .

i Haven upon consummation of said Plan.

=

4 E. The Clerk of this Court is directed forthwith to turn ov

: to the New Haven Trustees for delivery to Penn Central Cor

: pany on the closing date the following assets held in the regisit

4 of this Court: ‘ 1

& P j

j (1) 5% Note of Railway Express Ageney, Incorporat.

5 in the principal amount of $1,272,284.02;

(2) $1,068,000 principal amount of The Provide

Terminal Company 44% First Mortgage Bonds:

Bae BEA Se

COPY BOUND CLOSs

alae " 8e

; 7388

(3) 9,551 shares of stock of Providence and Worcester

Railroad Company ;

(4) 1,071 shares of stock of Norwich and Worcester

Railroad Company ;

(5) 3,364 shares of stock of Fruit Growers Express Com-

pany;

(6) 15,000 shares of stock of The New York Connecting

Rail Road Company ;

(7) 7 shares of stock of The Boston Terminal Corpora-

tion; and

ed (8) 15,000 shares of stock of New England Transporta-

y tion Company and 656 demand note of said Company

in the principal amount of $738,000.

F. The Trustees under the indentures of the Debtor’s First

and Refunding Mortgage and of the Debtor's General Income

Mortgage are hereby directed to turn over and release forthwith

tothe New Haven Trustees for delivery to Penn Central Company

on the closing date all securities held in pledge pursuant to said

indentures including the following :

(1) 25,877 shares of stock of The Pullman Company ;

(2) 400 shares of stock of South Manchester Railroad

Company ; and

(3) Voting trust certificate substituted for 91,344 shares

of stock uf Railway Express Agency, Incorporated,

pursuant to Order No. 510 herein.

1 G. All. persons, firms and corporations whatsoever, and

Wheresoever situated, located or domiciled are directed to turn

over forthwith to the New Haven Trustees for delivery to Penn

Central ( empany on the closing date any and all of the Debtor's

ap ets held by them, in pledge or otherwise, which are to be

fonveved to Penn Central Company pursuant to the Plan.

H. The conveyance of the Debtor's assets to Penn Central

™pany pursuant to the Plan shall he a hinding transfer to

C0

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Pd a A ti

or OS

TéBren,

Dati ricvisiovaue,

GA

7389

Penn Central Company free and clear of all liens, charges and

encumbrances thereon except as specified in Section 3.2 of the

Purchase Agreement as modified with regard to the Harlem

River Division mortgage and bonds and approved in the Plan;

the liens, charges and encumbrances to which the Debtor's

assets are subject prior to the conveyance of such assets shall

attach and be recognized as continuing liens, charges and en-

cumbrances upon the assets hereafter held by the New Haven

Trustees, including all assets on deposit in the registry of this

Court, all as provided in the Plan.

I. Upon inclusion of the Debtor in Penn Central Company,

the New Haven Trustees shall be relieved of the duty to operate

and manage the railroad and common carrier properties of the

Debtor, including those railroad and common carrier properties

operated by the Trustees under lease or other arrangement; and

in all other respects, the Trustees shall have all of the authority

hitherto granted them in these proceedings.

J. The conveyance of the Debtor's assets by the New Haven

Trustees and the payment of consideration by Penn Central

Company, as provided herein, shall be without prejudice to the

right of any party to contest the fairness and adequacy of th:

consideration and the other terms of the inclusion of the Debtor’

operation in Penn Central Company.

K. The Court hereby reserves jurisdiction to adjudicate @

operations and claims for equitable treatment heretofore file

herein except that all objections to the inclusion of the Debtor:

operations in Pern Central Company as of December 31, 1%

are hereby overruled and denicd.

L. Upon receipt of the consideration to be paid from Per

Central Company, the Trustees shall forthwith deposit in th

registry of this Court the stock and bonds of Penn Cent:

Company received by them, pending further order of this Ce

upon notice to all parties, provided, however, that, until fe:

order of the Court, the New Haven Trustees shall be entitle

to receive directly payments ci interest and dividends on S-

securities.

LrODY ROININ CT

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7390

M. The Clerk of this Court is hereby directed to transmit a

certified copy of this Decree and of the Opinion of the Court

} hereon dated December 24th, 1968 to the Interstate Commerce

Commission.

Enter: ;

Rosert P. ANDERSON

United States Circuit J udge,

) sitting by designation.

Dated : December 24th, 1968.

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