Reply Brief — Smith v. Baker

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October Term, 1971

SUPREME COURT, U.

Ly THE MarrTer oF

Tur New York, New Haven anp Hartrorp RaAILRoap

Company, Desror

Ricuarp Joyce Smiru, Trustee or THE Property oF THE

New York, New Haven anp Hartrorp Rartroap

Company, Desror,

PETITIONER

Vv.

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

REPLY BRIEF IN SUPPORT OF CERTIORARI

Of Counsel:

Morris RAKER

Nancy F, Gans

Epwarp WOLL, Jr.

SULLIVAN & WoRCESTER

225 Franklin Street

Boston, Massachusetts 02110

Dated: June 7, 1972

James WM. Moore

54 Meadow Street

New Haven, Connecticut 06506

JosEPH AUERBACH

225 Franklin Street

Boston, Massachusett. ©2110

Po for Petitioner,

Richard Joyce Smith

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TABLE OF CITATIONS

Page

Cases:

Chicot County Drainage District v. Baxter State Bank,

PM eerie enter Wet he ae 3

Durfee v. Duke, 875 US.106..00 3

New Haven Inclusion Cases, 399 U.8.392... 2, 5, 6, 7, 8, 9

, Penn Central and N&W Inclusion Cases, 389 U.S. 486 2

) Stoll v. Gottlieb, 305 US.165..0. 3

Treimes v. Sunshine Mining Co.,308U.S.66...... 3

Warren v. Palmer, 310 U.8.182.....00000 1, 3,4

Statutes:

Barkruptey Act

Section 77 (11 U.S.C. §205) 20.00 2, 3, 4, 9

Interstate Commere: Act

section 5 (49 US.C. 45)... 3

Miscellaneous:

Rule 19, Rules, Supreme Court of the United States _. 2

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in The

Supreme Court of The United States

October Term, 1971

No. 71-14-01

Ty tHE Marrer or

Te New Yorx, New Haven anp Hartrorp Rattroap

Company, Desror

Ricuarp Joyce Smiru, Truster or THE Property or THE

New York, New Haven ann Harrrorp Rartroap

Company, Destor,

PETITIONER

y

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 ;

ReEsponpents

REPLY BRIEF IN SUPPORT OF CERTIORARI

I. The Decision Below Presents Important Legal Questions

That Should Now Be Settled By This Court.

The decision below is novel and unprecedented in that

it strips the New Haven Reorganization Court of its re-

organization jurisdiction and, also, of its power to protect

the constitutional rights of the New Haven bondholders

from further erosion in the Penn Central reorganization ;

misconstrues Warren y. Palmer, 310 U.S. 132; and, is gen-

erally significant in attempting to delineate the coordinate

jurisdiction of two reorganization courts, each having ‘‘ex-

elusive jurisdiction,"

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Only this Court can construe its mandate with finality,

It should do so now in order to protect the New Haven cred-

itors, and to expedite the reorganization process.

In opposing certiorari, the Penn Central Trustees and

Manufacturers Hanover Trust Company mainly argue the

merits of the Court of Appeals’ decision that the New

Haven Reorganization Court lacked jurisdiction to enter its

order of remand. Their briefs are tellingly limited in meet-

ing the grounds stated in the Petition why, pursuant to Rule

19 of this Court, certiorari should be granted.

Who eek al ew Pet bee

Respondents’ only arguments which fairly pertain

to the Rule 19 standards are that: the factual issues, but not

the legal issues, are unique; no question of general im-

portance under the bankruptcy laws is raised; and it is

premature to consider the substantive issues.

1. That the facts are unique may readily be agreed;

but they are all established of record. As to the issues of

law, it must fairly be agreed that they are novel and of

broad significance. Further, the nature of the questions

and their litigation history categorically establish that

only this Court may resolve them. Specifically, and apart

from questions of general significance, the issues involved

require an interpretation of this Court’s own remand to

one of two district courts, each of which has claimed ex-

clusive jurisdiction under §77 of the Bankruptcy Act to

decide the issues at bar.

The New Haven Reorganization Court’s claim to juris-

diction is based upon the specifies of this Court’s remand

in the New Haven Inclusion Cases, 399 U.S. 392, and its

own reservation of jurisdiction entered at a time when

both the Interstate Commerce Commission (the ‘‘Conmis-

sion’’) and the New Haven Reorganization Court consid-

ered that the public interest required a conveyance of the

New Haven’s assets before the intertwined terms of con-

sideration and payment could be finally fixed. That re-

servation of jurisdiction was itself based upon the findings

of this Court in the Penn Central and N&W Inclusion

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Cases, 389 U.S. 486, that Penn Central was unconditionally

bound to meet terms of payment for the New Haven’s as-

sets ultimately determined by the Commission ané the New

Haven Reorganization Court as being fair and equitable un-

der $77 (and §5 of the Interstate Commerce Act),

On the other hand, and based upon precisely the same

opinion and remand of this Court, the Penn Central Re-

organization Court claimed ‘exclusive jurisdiction” pur-

suant to §77 over the same former New Haven assets, and

construed the remand to the New Haven Reorganization

Court .ctually as ousting the New Haven Reorganization

Court from all jurisdiction. (See appendix to brief of Penn

Central Trustees.) The Court of Appeals for the Second

Cireuit reached the same result but on an entirely different |

theoretical basis. It considered that Warren v. Palmer, |

supra, wholly ousted the New Haven Reorganization Court |

from jurisdiction under (77 and vested it solely in the Penn

Central Reorganization Court, notwithstanding the duties

of the New Haven Reorganization Court under §77 to make

specific findings regarding approval (or rejection) of a re-

organization plan, to confirm a plan, to consider so-called

“eram-down’’ provisions in the event of adverse votes, and

to oversee the steps leading to consummation of the plan. At

the same time, however, the Court of Appeals made it clear

that it did not disagree with the equitable protection

deemed necessary by the New Haven Reorganization Court

in its limited exercise of jurisdiction.

The Penn Central Reorganization Court, in asserting

its jurisdiction, unequivocally entertained and sanctioned

a collateral attack by the Penn Central Trustees on the

judgment of the New Haven Reorganization Court in direct

conflict with, and disregard of, the specific holdings of this

Court in such cases as Durfee v. Duke, 375 US. 106; Chicot

County Drainage District v. Baxter State Bank, 308 U.S.

371; Treinies v. Sunshine Mining Co., 308 U.S. 66; and Stoll

v. Gottlieb, 305 U.S. 165.

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f

These sweeping issues stem from the unique fact that

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the New Haven creditors were compelled to stand by, be-

cause of public interest considerations, while the property

that comprised their entire security was ordered to be con-

veyed to Penn Central. It may be granted that it was reason-

able at that time for the Commission and the Courts to

assume that the transaction would be carried out on a bas's

approved after full judicial consideration. However, at the

time when Penn Central became bankrupt, the transaction

had not been completed. It is in the executory nature of the

transaction that the basie and troublesome questions of

jurisdiction of two federal district courts under §77 have

their genesis.

Thus, both the underlying questions of fact and law are

unique, and the questions of law raised by the decision of

the Court of Appeals here sought to be reviewed are pre-

cisely defined, novel, and of current and substantial im-

portance, as hereinafter discussed.

2. With respect to the general importance of the ques-

tions involved in the Petition, the significance of the pend-

ing number of reorganizations under (77 of the Bankruptcy

Act cannot be disparaged, as suggested by the Penn Central

Trustees, in weighing the importance of a resolution of the

jurisdictional meaning of Warren v. Palmer, supra. Not only

must jurisdictional boundaries and the New Haven’s rights

be resolved as set forth in the Petition, but questions of

‘‘exelusive jurisdiction’’ also exist in other pending re-

organizations under (77; for instance, in the reorganization

of Lehigh Valley Railroad Company, a subsidiary of Penn

Central. In that case, questions of ‘‘exclusive jurisdiction”

already exist for the respective creditors of Lehigh Valley

and Penn Central where the same district court (in fact,

the same judge) has ‘‘exclusive jurisdiction’’ over con-

flicting claims in the two reorganizations.

3. Respondents’ contentions that a present review of

the issues would be premature, at worst, endorse a philoso-

phy of adjudication by postponement, and at best, have only

circumstantial relation to a determination whether the Peti-

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tion should be grated. The hard facts are that there is now

outstanding a judgment of the New Haven Reorganization

Court which held not only that it had jurisdiction, but that

equity required the New Haven creditors to be secured

by an equitable lien and constructive trust for the pay-

ment found by this Court in the New Haven Inclusion

Cases, supra. Whether the Penn Central Reorganization

Court would ever reach the same result, or whether the

New Haven Trustee would have an opportunity at some

undefined future occasion to claim such protection, has no

bearing on determination of the Petition. The constitutional

significance to the New Haven creditors now to be made

secure in their right to payment, no matter what form the

payment may eventually take as a consequence of a Penn

Central reorganization plan approved by the Penn Central

Reorganization Court, may not fairly be gainsaid. It is no

answer to the New Haven creditors that the Petition should

be denied because, although the Penn Central Reorganiza-

tion Court sanctioned a collateral attack on the judgment

of the New Haven Reorganization Court, it voluntarily pro-

vided the New Haven Trustee with “‘a lien, indeterminate

in amount and indeterminate as to priority’? (Penn Cen-

tral Trustees’ brief, 21a), pending some future determi-

nation.

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4. As note? above, respondents’ briefs deal princi-

pally with the merits of the decision of the Court of Ap-

peals. In that context certain of the arguments particularly

require factual clarification.

At page 15 of the Penn Central Trustees’ brief, it is

stated that no one appealed the order of the New Haven

Reorganization Court whieh provided for conveyance of

the New Haven’s assets to Penn Central ‘“*free and clear

of all liens, charges and encumbrances.’ In fact, that pro-

vision was conditioned upon specific exceptions, including

reservation of the right of New Haven creditors to litigate

the terms and of the court to adjudicate the issues so

raised. Of primary significance is that the quoted language

Was necessarily required to be contained in the order Se)

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that the specific terms of the plan of reorganization which

the Commission had certified to the New Haven Reorgani-

zation Court could be executed without any hiatus in the

transportation services provided to the publie by the New

Haven. Without such provision there could have been no

conveyance pursuant to the plan by January 1, 1969, when

the New Haven’s operations were scheduled to cease. The

reason why the New Haven interests did not appeal from

that order was that the specifie conditions expressly pro-

vided by the New Haven Reorganization Court, with the

concurrence of the Commission, were that the ‘‘free and

clear’’ conveyance was ‘‘without prejudice to the right of

any party to contest the fairness and adequacy of the con-

sideration and the other terms of the inclusion.’’ (Order

No. 559, December 24, 1968; Manufacturers’ brief, 7A). As

pointed out by the New Haven Reorganization Court, fur-

thermore, the form of the conveyance did not ‘‘constitute a

waiver of the chancellor’s equitable lien or a bar to his

power to create one’’ (New Haven Trustee’s Petition, (+45).

At page 16 of the Penn Central Trustees’ brief, it is

stated that the decision of the Court of Appeals ‘‘is in

accord with the only previous decision by this Court deal-

ing with a conflict between the respective jurisdictions of

two Section 77 reorganization courts,’’ citing Warren r.

Palmer, supra. The decision of the Penn Central Reorgani-

zation Court, attached to the Penn Central Trustees’ brief,

and cited by them as a principal basis for denial of cer-

tiorari stated, however: ‘‘Since the case [Warren vr.

Palmer] involved largely post-bankruptey issues, and liens

which were necessary for the continued operation of rail

service, the decision is not directly apposite’? (Penn Cen-

tral Trustees’ brief, 14a).

At pages 17-18 of the Penn Central Trustees’ brief, it

is claimed that this Court remanded the New Haven In-

clusion Cases ‘‘to the Commission and the appropriate

federal courts.’’ This characterization is a travesty of the

actual order of this Court, dated June 29, 1970, filed in the

United States District Court for the District of Connecti-

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eut on July 31, 1970, in which it was stated: ‘‘These causes

be and they hereby are remanded to the United States Dis-

triet Court for the District of Connecticut for further pro-

ceedings in conformity with the opinion of this Court.’’

At page 19 of the Penn Central Trustees’ brief, it is

stated ‘‘in fact, however, the New Haven Reorganization

Court reserved jurisdiction only to pass upon objections to

the amount and the form of consideration which had been

previously filed with the court.’’ As previously noted, how-

ever, the New Haven Reorganization Court provided, as a

basie condition of its order, that the conveyance and the

payment of consideration were to be without prejudice to

the right of any party not only to contest the fairness and

adequacy of the consideration, but also ‘‘the other terms of

the inclusion of the Debtor’s operations in Penn Central

Company’’ (Manufacturers’ brief, 6A).

II. Counter-Statement of Pertinent Facts.

The facts of this case are not disputable. Petitioner

believes, however that the factual summary contained in the

Penn Central Trustees’ brief is inaccurate in a number of

instances of significance to the Court’s consideration of the

Petition; and, accordingly, brings the following to the

Court’s attention.

Purchase agreement was never approved by New Haven

Reorganization Court.

1. At pages 3-4 of the Penn Central Trustees’ brief,

in the diseussion of the effect of the purchase agreement

among the Pennsylvania Railroad, the New York Central

Railroad and the New Haven Trustees, no reference is

made to the fact of record (previously recognized by this

Court, 399 U.S. at 410, n. 46) that the New Haven Reor-

ganization Court never approved the purchase agreement.

Further, although the purchase agreement had been ap-

proved by the Commission, that approval was specifically

conditioned upon an approval by the New Haven Reorgani-

zation Court (327 LC.C. 475, 553 (1966) ).

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“Free and clear’’ transfer was subject to reserved juris.

diction.

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2. At page 5 of the Penn Central Trustees’ brief, the

order of the New Haven Reorganization Court approving

the transfer to Penn Central ‘‘free and clear’’ is noted

simply to have been with certain unspecified exceptions,

In fact, the New Haven Reorganization Court made the

entire transfer subject to the condition that the ‘*convey-

ance of the Debtor’s assets by the New Haven Trustees

and the payment of consideration by Penn Central Com-

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

right of any party to contest the fairness and adequacy of

the consideration and the other terms of the inclusion”

({J, Manufacturers’ brief, 6A). In addition, the New Haven

Reorganization Court also reserved jurisdiction to adjudi-

cate all objections and claims theretofore filed, except those

going to the fact of inclusion itself ({K, Manufacturers’

brief, 6A).

Furthermore, it is relevant to these facts that, al-

though it was unconditionally bound to include the New

Haven’s properties, Penn Central sought a stay of such

order from a three-judge district court, notwithstanding

that it provided for a ‘‘free and clear transfer,’’ specifically

on the basis that the matters covered by the reservations

of jurisdiction should be resolved before Penn Central

should be required to carry it out.

Increase in purchase price was due to Com mission’s under-

valuation of assets.

3. At page 5 of the Penn Central Trustees’ brief, it

is stated that the New Haven Reorganization Court in-

creased the consideration which ‘Penn Central was to pay

for assuming the New Haven’s deficit operations.’’ There

was, in fact, no payment of any kind for New Haven’s

operations (399 U.S. at 482); the $29 million increase in

purchase price ordered by the New Haven Reorganization

Court related to the Commission’s undervaluation of the

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assets Which Penn Central received at liquidation value,

discounted for the costs of a liquidation. As this Court

pointed out in the New Haven Inclusion Cases, **we thereby

accord the bondholders the right to a liquidation and a per

parcel sale that is theirs by virtue of their mortgage liens”’

(399 U.S. at 489-490).

Underwriting plan was to assure full payment of purchase

price.

+. At page 5 of the Penn Central Trustees’ brief, it

is stated that the New Haven Reorganization Court ‘‘de-

vised a so-called ‘underwriting plan’ to cushion the New

Haven estate against a decline in the value of Penn Cen-

tral common stock below $87.50 per share.’’ The stock has

never reached that price. As put by this Court, in analyzing

the underwriting plan (399 U.S. at 487, 488): ‘‘In sum, the

reorganization court devised a plan that added to its as-

sessment of present worth both a reasonable assurance of

realization of such worth and the opportunity of additional

gain.’’

This Court was referring to Penn Central’s bankruptcy

in recognizing the impact of recent events upon the un-

completed purchase transaction.

). At page 7 of the Penn Central Trustees’ brief, it

is implied that, when this Court referred in its opinion to

“the impact of recent events,’’ it intended to refer to the

reduction in the market price of Penn Central common

stock on the New York Stock Exchange between J anuary

2, 1969 and May 30, 1970. The finding of the New Haven

Reorganization Court was that this Court was referring to

the filing by Penn Central of a petition for reorganization

under $77 which oeeurred only eight days prior to the en-

try of this Court’s opinion, and which was specifically re-

ferred to at the outset of the Court’s opinion.

New Haven Reorganization Court considered Penn Cen-

tral bonds and stock in relation to payment of purchase.

price.

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6. At page 9 ({2) of the Penn Central Trustees’ brief,

the New Haven Reorganization Court’s Order of Remand

is summarized as having given no credit whatever for the

Penn Central bonds and stock received by the New Haven

Trustee. In facet, the New Haven Reorganization Court

provided that such bonds and stock would be held as secu-

rity ‘‘and to the extent such security is liquidated or is re-

tained under a plan of reorganization, Penn Central shall

be credited with the fair value thereof’? (New Haven

Trustee’s Petition, A64). Furthermore, the New Haven Re-

organization Court provided that the purchase price due

the New Haven would be reduced by all interest and divi-

dends received by the New Haven on such bonds and stock

(Ibid.).

New Haven Reorganization Court did not attempt to set

aside purchase and sale of assets.

7. At page 9 ({3) of the Penn Central Trustees’ brief,

it is stated that the New Haven Reorganization Court ‘‘pur-

ported to set aside the purchase and sale of the New Haven

assets.’’ There is no such indication anywhere in the Memo-

randum of Decision or the Order of the New Haven Re-

organization Court (New Haven Trustee’s Petition, \25-

A65), and no such inference may fairly be drawn.

‘Related proceedings in the Philadelphia Court” consti-

tuted an improper collateral attack.

8. At page 10 of th» Penn Central Trustees’ brief,

reference is made to ‘‘related proceedings in the Phila-

delphia Court.’’ No mention is made that such proceedings

were instituted by petition of the Penn Central Trustees on

June 17, 1971 (the Memorandum of Decision of the New

Haven Reorganization Court having been entered on June

11, 1971) collaterally attacking the decision of the New

Haven Reorganization Court.

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CONCLUSION

Petitioner submits that, for the reasons stated in his

Petition, the Petition for Writ of Certiorari should be

granted.

Respectfully submitted,

Of Counsel:

Morris Raker e Es Wo. Mya Ps

POREPH Shakin: i G

Nancy F. Gans

Epwarp WOLL, Jr.

A4ttorney for Petitioner,

Sutzavan & Woncmaren Richard Joyce Smith

225 Franklin Street

Boston, Massachusetts 02110

Dated: June 7, 1972

ees,