Opposition Brief — Smith v. Baker

Nos. 71-14-01 and 71-145

IN THE

Supreme Court of the Unitet

Ocroser TEM, 1971

IN THE MATTER OF THE NEW YORK, NEW HAVEN

AND HARTFORD RAILROAD COMPANY, Debtor

Bicmarp Joyce Smiru, Trustee of the Property of the New

York, New Haven and Hartford Railroad Company,

Debtor, ae Petitioner in No. 71-14-01

and °

_ Lawrence W. Iannortt, Successor Trustee Under the First

i and Refunding 4% Mortgage Bonds, Dated as of July

1, 1947, of the New York, New Haven and Hartford

Railroad Company, Debtor, Petitioner in No. 71-14-51

4 v.

| Gzoxcr P. Baxer, Ricuarp C. Bonp, Jervis Lanapon, Jr.

4 and Wuiarp Wirtz, Trustees of the Property of Penn

Central Transportation Company, Debtor; Manvrac-

TruRERS Hanover Trust Company, as Mortgage

Trustee; and Penn Centrat Transportation Com-

pany, Respondents

H ON PETITIONS FOR A WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

| BRIEF FOR GEORGE P. BAKER, RICHARD C. BOND,

_ JERVIS LANGDON, JR. and WILLARD WIRTZ. TRUS-

TEES OF THE PROPERTY OF PENN CENTRAL TRANS-

PORTATION COMPANY, DEBTOR, IN OPPOSITION

CHARLES A. HORSKY

HUGH B. COX

BRICE M. CLAGETT

if Counsel : Covineron & BURLING

| EDWIN K. TAYLOR Sixteenth awe N.W.

| Senior Corporate C ia ashington, D. C. 20006

» Penn Central Transportation Company Special Counsel for the Trustees

} 1138 Six Penn Center. Plaza

© Philadelphia, Pennsylvania 19104

HN F. DEPODESTA

_ Reorganization Attoriey

» 1808 Bix Penn Center Plaza

>) Philadelphia, Pennsylvania 19104

TABLE OF CONTENTS

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——

ii Table of Contents Continued

Page

In re New York, N.H. & H. R.R., — F.2d — (2d Cir.

i Os ace aakentbucaseees es

Isaac v. Hobbs Tie & Timber Co., 282 U.S. 734 ..-..-.. 20

New Haven Inclusion Cases, 399 U.S. 392 ....-- 3, 7-8, 18,

et passim

New York, N.H. & H. R.R. First Mortgage 47% Bond-

holders’ Committee v. United States, 289 F. Supp.

418 (S.D.N.Y. 1968) ......--..- ee eee eee teen

New York, N.H. & H. R.R. First Mortgage 4% Bond-

holders’ Committee v. United States, 305 F. Supp.

1049 (S.D.N.Y. org REPRE oe pe eee Se 6

Thompson v. Terminal

Cir, 1989) .......ccececce eee eens ence eseesess

Warren v. Palmer, 310 U.S. 182 ......---++++++> 16, 18, 19

SraTuTEs:

Bankruptcy Act, 11 U.S.C. §§ 1 et seq. ....----- 2 et passim

InTEeRsTaTE CoMMERCE COMMISSION :

Second Supplemental Report, 331 1.0.C. 643 (1967) .. 4

Fourth Supplemental Report, 334 1.C.C. 25 (1968) ... 4,5

Fifth Supplemental Report, 334 1.C.C. 528 (1969) .... 6n.

MISCELLANEOUS:

Collier on Bankruptcy, Vol. 2, par. 23.03 ......-.++++: 17

Collier on Bankruptcy, Vol. 2, par. 23.04 ........++++ 17, 20

Collier on Bankruptcy, Vol. 5, par. 77.14 ......---+-- 18n.

_—

IN THE

Supreme Court of the United States

Ocroser Term, 1971

Nos. 71-1401 and 71-14-51

IN THE MATTER OF THE NEW YORK, NEW HAVEN

AND HARTFORD RAILROAD COMPANY, Debtor

Ricuarp Joyce Sairu, Trustee of the Property of the New

York, New Haven and Hartford Railroad Company,

Dedtor, Petitioner in No. 71-14-01

and

Lawrence W. Iannorrt, Successor Trustee Under the First

and Refunding 4% Mortgage Bonds, Dated as of J uly

1, 1947, of the New York, New Haven and Hartford

Railroad Company, Debtor, Petitioner in No. 71-14-51

Vv.

Georce P. Baker, Ricwarp C. Bonn, Jervis Lanapon, JR.

and Wittarp Wirtz, Trustees of the Property of Penn

Central Transportation Company, Debtor; Manurac-

TuRERS Hanover Trust Company, as Mortgage

Trustee; and Penn CrentraL Transportation Com-

pany, Respondents

ON PETITIONS FOR A WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

BRIEF FOR GEORGE P, BAKER, RICHARD C. BOND,

JERVIS LANGDON, JR. and WILLARD WIRTZ, TRUS-

TEES OF THE PROPERTY OF PENN CENTRAL TRANS-

PORTATION COMPANY, DEBTOR, IN OPPOSITION

OPINIONS BELOW

The memorandum of decision of the District Court

for the District of Connecticut dated June 11, 1971 is

reported at 330 F. Supp. 131, and its order of June 22,

1971 is reported at 331 F. Supp. 212. They are re-

printed in the Appendix to the petition in No. 71-14-01

2

at pages A25-A60 and A61-A65° respectively. The

opinion in the United States Court of Appeals for

the Second Circuit dated March 17, 1972 is not yet

reported. It is reprinted in the Appendix to the

petition in No. 71-14-01 at pages A5-A24.

JURISDICTION

The opinion of the United States Court of Appeals

for the Second Circuit was filed on March 17, 1972.

The petition for a writ of certiorari in No. 71-14-01

was filed on April 28, 1972, and the petition in No.

71-14-51 on May 5, 1972. The jurisdiction of this

Court is sought to be invoked under 28 U.S.C.

§§ 1254(1) and 2101(c).

QUESTION PRESENTED

In December 1968 the District Court for the District

of Connecticut—the New Haven Reorganization Court

—ordered the New Haven properties transferred to

Penn Central free and clear of all liens and encum-

brances. In June 1970 the properties came into the

possession of, and are now being operated by, the Dis-

trict Court for the Eastern District of Pennsvlvania—

the Penn Central Reorganization Court. Did the court

below properly conclude that the New Haven Reorgani-

zation Court had no jurisdiction, in June 1971, to im-

pose an equitable lien and constructive trust on the

former New Haven properties?

STATUTES INVOLVED

The relevant sections of the Bankruptcy Act (11

U.S. §§ 1 et seq.) are set out in the Appendix to the

petition in No. 71-14-01.

3

STATEMENT

This case is the latest in the continuing contro-

versies arising out of the bankruptcy of the New

Haven. The earlier history is described in the opinion

of this Court in New Haven Inclusion Cases, 399 U.S.

392. The facts now relevant can be briefly summarized

as follows:

In 1962 the Pennsylvania Railroad (Penn) and the

New York Central (Central) sought authority from

the Interstate Commerce Commission (Commission)

tomerge. The Trustees’ of the New York, New Haven

and Hartford Railroad Co. (New Haven), then and

now in proceedings for reorganization before the

United States District Court for the District of Con-

necticut (New Haven Court) intervened in the merger

proceeding and petitioned for inclusion of the New

Haven in the proposed Penn Central. Penn and Cen-

tral resisted the inclusion, but in order to obtain

Commission approval of the merger, Penn and Central

executed a purchase agreement with the New Haven

Trustees. That agreement, as later amended, provided

for the acquisition by the proposed Penn Central of

the New Haven’s rail operations and properties. The

agreed price for these assets was 950,000 shares of

Penn Central common stock, $23 million in Divisional

First Mortgage Bonds secured by the New Haven

properties, $8 million in cash and the assumption of

certain specified New Haven liabilities.’ In its Second

1 The sole remaining New Haven Trustee is a petitioner herein.

2 A New Haven Trustee later testified: ‘‘One of the principles

for which we negotiated at considerable length was that the bulk

of the consideration should be in the form of common stock .. .

which would permit the claimants to the New Haven’s Estate to

participate in the benefits of the [Penn Central] merger.’’ See

New Haven Inclusion Cases, 399 U.S. at pp. 483-484.

7

4

Supplemental Report, 331 I.C.C. 643 (1967), the Com-

mission approved the Purchase Agreement as the basis

for inclusion. The Commission recognized that the

New Haven properties had ‘‘neither earning power

nor the prospect of earning power’’ (331 L.C.C. at p.

687), but held that as a condition to their merger Penn

and Central could and shouid be required to pay a

price determined as though the New Haven were being

liquidated. It found that that price was $125 million,

and that the consideration to be given by Penn Central

was worth that amount.

Review of this action of the Commission was sought

by creditors of the New Haven in both the New Haven

Court and a statutory three-judge district court.

These courts found that the Commission had under-

stated the New Haven’s liquidation value and over-

stated the value of the consideration to be paid by

Penn Central. In re New York, N. H. & H. R.R., 289

F. Supp. 451 (D. Conn. 1968) ; New York, N. H. & H.

R.R. First Mortgage 4% Bondholders’ Committee v.

United States, 289 F. Supp. 418 (S.D.N.Y. 1968). In

its opinion the New Haven Court also threatened, be-

cause of substantial continuing losses by the New

Haven, to shut down all operations on the New Haven

on January 1, 1969, if they had not by that date been

taken over by Penn Central.

On remand from the two courts the Commission, in

its Fourth Supplemental Report, 334 I.C.C. 25 (1968),

increased the consideration to be paid by Penn Central

to $145.6 million. It also ordered Penn Central to take

over the New Haven’s assets by the end of 1968 and

concurrently to pay this increased purchase price,

whether or not final judicial review of the financial

terms had occurred.

~

0

Thereafter, on December 24, 1968, the New Haven

Court entered an order approving the transfer of the

New Haven’s assets to Penn Central. That transfer

was, with certain specified exceptions not here relevant,

to be

“fa binding transfer to the Penn Central Company

free and clear of all liens, charges and encum-

brances....”’

This was in conformity with Section XII of the New

Haven’s Plan of Reorganization, as adopted by the

Commission (334 I.0.C. at 119):

“The property dealt with by the plan, when

transferred and conveyed to Penn Central... ,

shall be free and clear of all claims of the debtor, its

creditors and stockholders and all other persons,

unless otherwise specifically provided in the...

present report....’’

Inclusion occurred at midnight, December 31, 1968.

The consideration prescribed by the Commission was

concurrently paid in full by Penn Central. Neither

the New Haven Trustees nor any New Haven creditor

sought review of the transfer orders.

With inclusion and payment effected, New Haven

creditors sought to require an additional payment by

Penn Central, seeking review of the Commission’s

orders in both the New Haven Court and the statutory

district court in New York. The New. Haven court

increased by $29,035,899 the consideration Penn Cen-

tral was to pay for assuming the New Haven’s deficit

operations, and in addition devised a so-called ‘‘un-

derwriting plan’’ to cushion the New Haven estate

against a decline in the value cf Penn Central common

stock below $87.50 per share. In re New York, N.H. &

6

H. R.R., 304 F. Supp. 1136 (1969). The statutory dis-

trict court, on the other hand, affirmed, with minor

modifications, the price fixed by the Commission, and

accepted the underwriting plan." New York, N.H. &

H. R.R. First Mortgage 4% Bondholders Committee

v. United States, 305 F. Supp. 1049 (8.D.N.Y. 1969).

Both decisions were before this Court, and had been

argued and were under consideration, when on June

21, 1970 Penn Central filed its petition under Section

77 of the Bankruptcy Act (11 U.S.C. § 205) in the

United States District Court for the Eastern District

of Pennsylvania (Philadelphia Court). The Phila-

delphia Court, by its Order No. 1, approved the peti-

tion on the same day as properly filed. It thus ob-

tained, under Section 77(a), ‘‘exclusive jurisdiction

of the debtor and its property wherever located.’’ Its

Order No. 1 also included the following provision:

**9. All persons and all firms and corporations,

whatsoever and wheresoever situated, located or

domiciled, hereby are restrained and enjoined

from interfering with, seizing, converting, appro-

priating, attaching, garnisheeing, levying upon, or

enforcing liens upon, or in any manner whatso-

ever disturbing any portion of the assets, goods,

money, deposit balances, credits, choses in action,

interests, railroads, properties or premises belong-

ing to, or in the possession of the Debtor as owner,

lessee or otherwise, or from taking possession of

or from entering upon, or in any way interfering

with the same, or any part thereof, or from inter-

fering in any manner with the operation of said

properties or premises or the carrying

on of its business by the Debtor under the order

*The underwriting plan, which imposed a personal, unsecured

contingent obligation on Penn Central, was accepted by the Com-

mission in its Fifth Supplemental Report, 334 I.C.C. 528 (1969).

7

of this Court and from commencing or continuing

any proceeding against the Debtor, whether for

obtaining or for the enforcement of any judgment

or decree or for any other purpose, ... .””

Eight days later, on June 29, 1970, this Court handed

down its decision, 399 U.S. 392. The Court affirmed

the decision of the New Haven Court that the con-

sideration should be increased by $29,035,899. It also,

in view of ‘‘the impact of recent events,”’* set aside

the order of the New Haven Court insofar as it had

been determined that the Penn Central stock which

the New Haven had received from Penn Central had

an intrinsic value of $87.50 per share, and had formu-

lated the underwriting plan. It remanded the cause

for further consideration by ‘“‘the Commission and the

appropriate federal courts’’ of issues involving “the

form that Penn Central’s consideration to New Haven

should properly take and the status of the New Haven

estate as a shareholder or creditor of Penn Central.”

399 U.S. at p. 489.

The only reference in the Court’s opinion to the

Penn Central bankruptcy appears in an unnumbered

first footnote, which notes the filing of the petition

under Section 77 eight days before, and states- (399

U.S. at 399) :

“Whether the financial obligations dealt with in

the present opinion may become subject to modi-

fication in or because of those proceedings is a

*The underwriting plan was based on an ‘‘intrinsie value”’ of

871% for Penn Central stock. On January 2, 1969, immediately

following inclusion, the price on the New York Stock Exchange

closed at 64. On March 30, 1970, the date of oral argument in

this Court, the price closed at 23%. On April 30 it was 18; on

May 30 it was 1254.

8

stion with which the present opinion in no way

On August 10, 1970, the New Haven Court, instead

of remanding the cause to the Commission, entered

an order directing all parties to file statements of posi-

tion on certain specified issues as to which, the court

indicated, it might give directions to the Commission

in its remand order. Among those issues were:

1. Whether the New Haven Court had jurisdic-

tion to impose an equitable lien on the former

New Haven assets, and, if so, whether the court

should impose it.

2. Whether the court could, and should, order

payment to the New Haven Trustee of proceeds

of future sales of former New Haven properties

covered by the Divisional First Mortgage.

3. Whether the court could, and should, order

the Penn Central Trustees to pay to the New

Haven Trustee one-half of the ‘‘excess income”’

from the so-called Grand Central Terminal prop-

erties.°

The Penn Central Trustees, while not parties to the

New Haven reorganization proceedings (Penn Central

5In the New Haven inclusion proceedings it was determined

that the New Haven was entitled to a share of the ‘‘excess in-

come”’ from the Grand Central Terminal properties (the office

building and hotel income less Grand Central Terminal expenses).

That entitlement was conveyed to the Penn Central as part of the

New Haven inclusion on December 31, 1968. The New Haven’s

interest was found by the Commission to have a capitalized value

of $28,438,000; its decision was affirmed by the New Haven Court

and by this Court. As a result, $28,438,000 was included in the

price paid by Penn Central for the New Haven estate on Decem-

ber 31, 1968.

9

itself was), appeared before the New Haven court and

urged that the New Haven Court was without jurisdic-

tion to enter the orders it proposed, and in any event

should not do so." However, on June 11, 1971, the New

Haven Court filed its Memorandum of Opinion and

announced it would settle its order on June 22, 1971.

On that day, pursuant to an order of the Philadelphia

Court issued the previous day, as more fully explained

below, the Penn Central Trustees again appeared and

challenged the jurisdiction of the court and the merits

of its proposed order. Nonetheless, the New Haven

Court entered its “‘Order of Remand,” in which—

1. It purported to determine the amount of New

Haven’s claim against the Penn Central estate by

determining the number and amount of proper

offsets against the total purchase price which had

been determined by this Court in the New Haven

Inclusion Cases.

2. It purported to determine that interest was

due on the “‘unpaid balance’ from December 31,

1968, and the rate to be applied. The “unpaid

balance” recognized no credit whatever for the

bonds and stock paid to the New Haven Trustee

on December 31, 1968.

3. It purported to set aside the purchase and

sale of the New Haven assets by stating that the

bonds and stock paid to the New Haven Trustee

*In their first appearance in the New Haven court, the Penn

Central Trustees’ counsel moved that the Trustees’ participation

“shall be without prejudice to their right to take such action as

they may deem appropriate in the [Philadelph‘a court] or any

other court in respect of the exercise of jurisdiction by this court

over such Trustees or the debtor [Penn Central] or the property

of the debtor.”’ The motion was never ruled on.

——

10

on December 31, 1968 should be deemed only

“security”? for the purchase price.

4. It purported to declare that ‘‘all the tangible

property”’ conveyed by the New Haven to Penn

Central on December 31, 1968 (except rolling

stock and property already sold by Penn Central)

is ‘‘subject to an equitable lien as of December 31,

1968,”’ to secure the total purchase price.

5. It purported to declare that “‘all the right,

title and interest’’ of the New Haven in the Grand

Central Terminal properties “‘shall be held in

trust’? by Penn Central or its Trustees for the

benefit of the New Haven until the New Haven

shall have received $28,438,000.

6. It purported to order that beginning on

July 1, 1971, one-half of the excess income from

the Grand Central Terminal properties shall ‘‘ac-

erue to the account of the Trustee for the New

Haven estate.”’

7. And it remanded the proceedings to the Com-

mission “or further proceedings in accordance

with its opinion and order and the opinion of this

Court.

On the same day, the New Haven Court appointed

special counsel to take steps to ‘‘preserve”’ the equit-

able lien and constructive trust. On August 23, 1971

the court approved a petition for compensation to that

counsel for such services, including the recording of

the lien and trust in various jurisdictions.

Meanwhile, there were related proceedings in the

Philadelphia Court. As already noted, on June 21,

1971, that court (1) ordered the Penn Central Trustees

11

to appear on the following day in the New Haven

Court and object to the entry of any order beyond the

jurisdiction of the New Haven Court or which would

interfere with the reorganization of Penn Central; (2)

enjoined any action to enforce or collect any claim

against Penn Central arising out of the New Haven

inclusion other than in the Philadelphia Court, or any

action that would interfere with the jurisdiction of

that court to deal with properties in its possession;

(3) directed the Penn Central Trustees to continue to

devote all income from the Grand Central Terminal

properties to defray current Penn Central expenses;

and directed the Penn Central Trustees not to pay any

money, from any source, to the New Haven Trustee.

In the same order, the Philadelphia Court noticed a

hearing ‘‘at which . . . this court will consider whether

it should adjudicate, and may adjudicate, the rights of

the Trustees in the properties conveyed” by the New

Haven, ‘‘and will determine whether or not to continue

the foregoing relief, and to consider such other and

further relief as may be required to preserve and

effectuate the jurisdiction of this Court.’’ Following

that hearing, in which counsel for the New Haven

Trustee participated, on December 31, 1971 the court

filed an extensive opinion. In the Matter of Penn Cen-

tral Transportation Company, Dedtor, 337 F. Supp.

779.

After a review of the opinion of this Court in the

New Haven Inclusion Cases, the Philadelphia Court

concluded that this Court had not suggested that the

Philadelphia Court refrain from carrying out its fune-

tions under Section 77, which included the responsi-

7 For the convenience of the Court, the opinion and order of the

Philadelphia Court are reproduced in the Appendix to this brief.

ton at a

12

bility of determining the amount of an unsatisfied

debt, deciding whether it is secured or unsecured, and

classifying the various claimants for purposes of a

reorganization plan. Moreover, it concluded that since

the New Haven assets had been conveyed to Penn

Central free and clear of liens, and were in the owner-

ship and possession of Penn Central on the date of

bankruptcy, the filing of Penn Central’s Section 77

petition ‘vested exclusive jurisdiction over those assets

in this [Philadelphia] court, and made it jurisdic-

tionally impossible for any other court to impose liens

upon them, except with the approval of this court.”’

Noting that the New Haven Trustee had filed in

May 1971 in the Penn Central proceedings a proof of

claim for the same amount which it asserted to be due

in the proceedings before the New Haven Court, and

that the deadline for filing objections had not yet been

fixed and many parties potentially affected by the New

Haven claim had no notice or opportunity to object, the

court stated its belief that it would invade the ‘‘abso-

lute constitutional right’’ of the other creditors were

the court now to adjudicate the New Haven claims.

Its order, in consequence, provides that the restraints

which it had imposed by its order of June 21, 1971,

supra, be continued; that the ultimate disposition of

fhe New Haven claim be deferred to the regular pro-

gram for handling claims; but in order to avoid any

prejudice to the New Haven pending final decision—

“That, without prejudice to the ultimate reso-

lutior of the merits of the claims asserted, the

Trustee of the New York, New Haven & Hartford

Railroad shall, unless and until otherwise ordered

by this Court or an appellate court of competent

jurisdiction, be deemed to have a lien, indetermi-

nate in amount, and indeterminate as to priority,

13

upon all of the real property and readily identi-

fiable tangible personal property (exclusive of

rolling stock) conveyed to Penn Central by the

said New Haven Trustee as of December 31, 1968,

and remaining in possession of the Trustees

of the Debtor as of June 11, 1971.” .

The order of the Philadelphia Court has been appealed

by various New Haven interests to the Court of Ap-

peals for the Third Circuit.’

The court below, on March 17, 1972, reversed the

order of the New Haven Court on the ground that it

lacked jurisdiction, and remanded the cause to the

Commission for further proceedings. Each of the

bases of jurisdiction urged to support the order of the

New Haven Court was discussed and rejected. Judge

Mansfield concurred in the conclusions that the New

Haven Court lacked jurisdiction and that the cause

should be remanded to the Commission, but dissented

from what he assumed to be the position of the ma-

jority that ultimate review of the Commission’s action

would be the sole responsibility of the Philadelphia

Court.

ARGUMENT

This case raises no question that deserves review by

this Court at this time. It presents the single issue

whether the New Haven Reorganization Court had

SIn the matter of Penn Central Transportation Company,

Debtor, Nos. 72-1172 through 72-1180. An earlier appeal by the

New Haven interests from the order of the Philadelphia Court

of June 21, 1971, was dismissed without prejudice and the parties

remanded to the Philadelphia Court. In the Matter of Penn Cen-

tral Transportation Company, Debtor, 454 F.2d 210 (8rd Cir.

Jan. 3, 1972).

14

jurisdiction to encumber property which it disposed

of several years before and which is now in the posses-

sion of and being administered by the Penn Central

Reorganization Court. This issue turns on particular

facts which are unique, as petitioner in No. 71-14-51

admits (Petition, p. 12). The case therefore raises no

question of general importance in the administration

of the bankruptcy laws; petitioners refer to a number

of railroads now in bankruptcy but they do not and

cannot suggest that the issue they seek to present here

has arisen, or is likely to arise, in any of those

proceedings.

Furthermore, petitioners seek review at a point in

time when the problem of the status of the New

Haven’s claim in the Penn Central bankruptcy remains

in an inchoate state. Neither the Commission nor any

court has determined as of what date or on what basis

the assets delivered by Penn Central to the New Haven

are to be valued. Accordingly, the amount of any un-

paid claim that the New Haven may have against Penn

Central is still indefinite. Neither the Commission nor

any court has determined the form of the considera-

tion that the New Haven is entitled to receive for

any unpaid portion of its claim against the Penn Cen-

tral estate. The Commission has not yet had an oppor-

tunity to carry forward its sensible suggestion to con-

solidate the Penn Central and the New Haven proceed-

ings so that it may determine in a single and compre-

hensive setting what will be fair and equitable to the

creditors of both estates. The Penn Central Reorgani-

zation Court has in large measure now given the New

Haven Trustee the protection he sought from the New

Haven Court by providing that the New Haven has a

lien, indeterminate in amount and indeterminate as to

15

priority, pending a final resolution of the problems

arising in the two bankruptcies. In these circum-

stances petitioners’ assertion that there is a threat of

immediate injury to constitutional rights is without

foundation. This Court’s review of petitioners’ con-

stitutional and other arguments should be deferred

until they can be considered in a more specific and im-

mediate context.

In any event, the issue raised by the petitions was

correctly decided below.

I

We are aware of no instance in which a Section 77

court, or indeed any bankruptcy court, has sought to

assert a jurisdiction comparable to that claimed by the

New Haven Court in this instance. That court, in

December 1968, approved the sale to Penn Central of

the property here sought to be encumbered, expressly

providing that the sale was to be “‘a binding trans-

fer... free and clear of all liens, charges and encum-

brances.’’ No one appealed from that order. On June

21, 1970, when the Philadelphia Court approved Penn

Central’s petition for reorganization under Section 77 ;

the property became a part of the property now owned

by, operated by and in the possession of the Penn Cen-

tral Trustees. The court below unanimously and cor-

rectly concluded that by the specific terms of Section

77(a) the Philadelphia Court obtained “exclusive

jurisdiction of the debtor and its property wherever

located,’’ and that in those circumstances the New

Haven Court was without jurisdiction to encumber

assets over which the Philadelphia Court had exclusive

jurisdiction.

16

It

The decision is in accord with the only previous deci-

sion by this Court dealing with a conflict between the

respective jurisdictions of two Section 77 reorganiza-

tion courts. In Warren v. Palmer, 310 U.S. 132, the

New Haven, which was then in an earlier Section 77

reorganization in the District of Connecticut, had

leased railroad lines from the Boston & Providence

Railroad. The leases were rejected by the New Haven

Trustee pursuant to Section 77(¢) (6), but operations

were continued by the New Haven for the account

of the lessor. The Boston & Providence later filed its

petition for reorganization under Section 77 in the

District of Massachusetts. When the Connecticut Sec-

tion 77 court declared that the losses of the Boston &

Providence were a first lien on its property, the Boston

& Providence appealed, arguing that, as lessor, it

owned the property and hence the Massachusetts court

had exclusive jurisdiction to declare any lien thereon.

In deciding that the Connecticut court had exclusive

jurisdiction, this Court emphasized the public impor-

tance of rail service and the fact that the physical pos-

session of fhe Boston & Providence property was in

that court. It construed Section 77 as intended (310

U.S. at p. 140) to—

‘‘give the court charged with operation the fullest

ability to secure the necessities of operation—an

intention to give the operating court power to

promise those having the materials, men and equip-

ment needed for the operation a first lien on the

road to secure payment for the operation.”’

(Italics supplied.)

There, when possession and operation were in the Con-

necticut court, the fact that legal title was in the

17

Massachusetts court was not enough to support its

jurisdiction. Here, possession, operation and title all

are in the Philadelphia Court. The New Haven Court,

once also charged with operating a railroad, no longer

has that position; it now sits merely as a court of

liquidation, administering the consideration received

for the New Haven assets. In contrast the Phila-

delphia Court bears the responsibility for maintaining

the operations of and supervising the efforts to reor-

ganize one of the largest and most important rail

systems in the United States, a responsibility that re-

quires the court to deal with a multiplicity of problems

whose complexity and difficulty need no elaboration.

For all these reasons, this ease is Warren v. Palmer a

fortiori. See also Gardner v. New Jersey, 329 U.S.

565; Callaway v. Benton, 336 U.S. 132; Thompson v.

Terminal Shares, Inc., 104 F.2d 1 (8th Cir. 1939);

Collier on Bankruptcy, Vol. 2, pars. 23.03, 23.04.

As the court below observed (Pet. in No. 71-14-01,

App. p. A16), recognition of the New Haven Court’s

assertion of jurisdiction

“eould, at this stage of the Penn Centra] reor-

ganization proceedings, seriously impair the for-

mulation of a workable plan for the financial

resuscitation of Penn Ceniral by the Commission

and the ability of the Pennsylvania reorganization

court to administer the entire Penn Central sys-

en

ITI

The argument by petitioners that the jurisdiction

claimed by the New Haven Court was in some way

conferred by the mandate of this Court in the New

Haven Inclusion Cases, supra, is without substance.

The remand, ‘‘to the Commission and the appropriate

“a

federal courts,” was ‘‘to determine the form that Penn

Central’s consideration to New Haven should properly

take and the status of the New Haven estate as a

shareholder or creditor of Penn Central.’ 399 U.S.

at p. 489. This conferred no power to the New Haven

Court to create or declare retroactive security interests

in property no longer in its possession. As noted

above, the first footnote in this Court’s opinion in the

New Haven Inclusion Cases expressly states that its

opinion ‘‘in no way deals’’ with the effect of the Penn

Central bankruptcy on the litigation. 399 U.S. at 399,

note. Indeed, in the light of Section 77(a) and the

decision in Warren v. Palmer, only the most explicit

language could warrant a conclusion that this Court

intended to compromise the powers, duties and respon-

sibilities of the Philadelphia Court. The remand ‘‘to

the Commission” ordered by the court below fully

earries out this Court’s remand ‘‘to the Commission

and the appropriate federal courts.’”

IV

The other contentions urged in support of jurisdic-

tion in the New Haven Court are equally without sub-

stance. That the Penn Central Trustees had appeared

_ before the New Haven Court to protest its action could

not, as the court below held, cure the lack of subject-

matter jurisdiction; petitioners do not now argue to

the contrary.

18

® Although the court below did not have to reach the point, the

decision by the New Haven Court directing the decisions to be

reached by the Interstate Commerce Commission improperly in-

vaded the Commission’s jurisdiction as well as that of the Phila-

delphia Court. See Ecker v. Western Pac. R.R., 318 U.S. 448,

474; Chicago, R.I. & P. Ry. v. Fleming, 157 F.2d 241, 244 (7th

Cir, 1946), cert. denied, 329 U.S. 780; Collier on Bankruptcy, Vol.

5, par. 77.14, p. 539.

—_

19

Nor is there merit in the argument that the New

Haven Court retained jurisdiction over properties

which it transferred by sale ‘“‘free and clear of all

liens, charges and encumbrances”’ and over which the

Philadelphia Court now has exclusive jurisdiction. As

the court below pointed out (Pet. in No. 71-14-01, App.

p. A17), even had it done so, the reservation could not

prevail, under Section 77(a) and the decision in

Warren v. Palmer, supra, to permit an interference

with the responsibilities of the Philadelphia Court.

In fact, however, the New Haven Court reserved juris-

diction only to pass upon objections to the amount

and the form of consideration which had been previ-

ously filed with the court—a recognition that the trans-

fer of the assets did not preclude the continuance of

the controversy as to the price to be paid by Penn Cen-

tral which was finally settled by this Court in the New

Haven Inclusion Cases.”

Vv

A final comment is appropriate on petitioners’ con-

tention that the decision below deprives the New Haven

estate of essential protection. As already noted, the

New Haven Trustee has submitted the New Haven

10Qn March 31-April 2, 1969, the New Haven Court held hear-

ings called ‘‘hearing and argument on all remaining objections to

the plan of reorganization and claims for equitable treatment.’’ At

the outset the court noted that, since ample notice had been given

requiring the filing of such objections and claims. any further

filings were barred (Tr., March 31, 1969, p. 16). The hearings

centered around claims that the price to the Penn Central should

be increased, but no equitable lien or constructive trust, or any

similar security interest, was claimed. It was more than a year

after the New Haven Court had ordered the transfer of the New

Haven properties to Penn Central before any such claim was

made.

20

claim, including the claim to an equitable lien and a

constructive trust, to the jurisdiction of the Philadel-

phia Court. That court, to ensure against prejudice to

the New Haven claim, has taken the unusual step of

according the New Haven interim protection pending

a final hearing by providing that the New Haven has a

lien on all its former real property and readily identi-

fiable personal property, indeterminate in amount and

indeterminate as to priority, pending final decision on

its claim. That final decision is unquestionably the

responsibility of the Philadelphia Court under Section

77({e)(7). Isaac v. Hobbs Tie & Timber Co., 282 U.S.

734; Ez parte Baldwin, 291 U.S. 610; Collier on Bank-

ruptcy, Vol. 2, par. 23.04. That court has evidenced

its intention to exercise its jurisdiction in that respect,

with due regard to the rights of all other Penn Central

ereditors. Moreover, the New Haven has a legal lien

on all former New Haven real property given to secure

the Divisional First Mortgage and bonds of Penn Cen-

tral which it holds. Finally, with respect to the only

property not covered by the legal lien of the mortgage

or the interim lien declared by the Philadelphia

Court—a share of the ‘‘excess income”’ from the Grand

Central Terminal properties (see 399 U.S. at 438-

451)—the decision by the Philadelphia Court refusing

to recognize the New Haven claim to a constructive

trust thereto is now before the Court of Appeals for

the Third Circuit (p. 13, n.), and is appropriately to

be resolved in that litigation.

21

CONCLUSION

The petition for a writ of certiorari should be

denied.

Respectfully submitted,

CHARLES A. Horsky

Hveu B. Cox

Brice M. CiaGcettr

- Covington & Burling

888 Sixteenth Street, N.W.

Washington, D. C. 20006

Special Counsel for the Trustees

Of Counsel:

Epwin K. Tayor

Senior Corporate Counsel

Penn Central Transportation Company

1138 Six Penn Center Plaza

Philadelphia, Pennsylvania 19104

JoHN F. DePopesta

Reorganization Attorney

1808 Six Penn Center Plaza

Philadelphia, Pennsylvania 19104

la

IN THE UNITED STATES DISTRICT COURT FOR THE

EASTERN DISTRICT OF PENNSYLVANIA

In the Matter of In Proceedings for the

Penn CentTraL TRANSPORTATION Reorganization of a

Company, Railroad

Debtor No. 70-347

[In re: Claim of Richard J oyce Smith,

Trustee of the N.Y., N.H. & H. Railroad]

Opinion

Order No. 546

Fuuuam, J. December 31, 1971

The Trustees have petitioned for determination of the

issues raised by the proof of claim filed by the reorganiza-

tion Trustee of the New York, New Haven and Hartford

Railroad Company (hereinafter “New Haven Trustee”),

and certain related applications by the Trustees for interim

relief. The claim in question is an outgrowth of the litiga-

tion which culminated in the decision of the Supreme Court

in the New Haven Inclusion Cases, 399 U.S. 392 (1970).

The New Haven Trustee asserts that these issues have

already been decided by the United States District Court

for the District of Connecticut, which has jurisdiction over

the New Haven reorganization.

L Background

On March 6, 1962, the Pennsylvania Railroad Company

and the New York Central Railroad Company made ap-

plication to the Interstate Commerce Commission under

Section 5(b) of the Interstate Commerce Act (49 U.S.C.

§5(b)(1), for approval of a proposed merger of the two

railroads into what ultimately became the Penn Central

Transportation Company, the Debtor herein. 7

‘

.

2a

On June 26, 1962, the New Haven, then in reorganization

for the second time in less than 20 years, sought inclusion

in the merger. Eventually, over the objections of the merger

proponents, the Commission, by its order of April 6, 1966,

made its approval of the merger conditional upon inclu-

sion of the New Haven, on terms to be negotiated by the

parties, subject to the approval of the LC.C. and the New

Haven reorganization court. 327 ICC 475, 553. It was

recognized that any attempt to recapitalize the New Haven

and include it as an operating company would be point-

less in view of its hopelessly deteriorating financial con-

dition. Accordingly, the outright sale of the New Haven’s

assets was the method of inclusion selected. This transac-

tion was to constitute the first step of a two-step reorgani-

zation plan for the New Haven. New Haven Inclusion

Cases, 399 U.S. 392, 410 at n. 45 (1970).

The New Haven Trustee and the merger proponents

originally agreed that a fair purchase price for the New

Haven assets would be $125,000,000. The Commission also

approved this price,’ which was to be paid by a “package”

consisting of $8,000,000 in cash, $23,000,000 in (divisional)

first mortgage bonds, the assumption of certain New Haven

liabilities, closing adjustments, and the issuance of shares

of common stock in the new corporation. The parties, and

the Commission, valued the common stock at $87.50 per

share; thus the stock constituted the major part of the

consideration flowing to the New Haven estate. It is con-

ceeded that this feature of the transaction was eagerly

sought by the New Haven estate.

While the transaction as thus formulated was designed to

produce the equivalent of $125,000,000 for the New Haven

estate, the Commission further found that it would cost

Penn Central the equivalent of $157,000,000, largely because

of the interim and continuing losses of the New Haven

2331 ICC 627, 692.

ee

3a

which the Penn Central would be required to assume. Thus,

Penn Central would pay $157,000,000 in exchange for assets

having only negative earning power. But, apparently con-

vinced that the merger would “save” upwards of $80,000,000

per year, the Commission concluded that the inclusion of

the New Haven on the above terms “would be both ‘just and

reasonable’ as a condition of the merger under $5... and

‘fair and equitable’ as part of a plan of reorganization

under §77....” New Haven Inclusion Cases, 399 U.S. 392,

413 (1970).

At this point, procedural complications developed. The

1.C.C. order was subject to dual review: in the Connecticut

District Court, and in a three-judge statutory court in the

Southern District of New York. The former had jurisdic-

tion over the reorganization of the New Haven, the latter

over the merger (and the related inclusion) under §5 of the

Interstate Commerce Act. Appeals were taken to both

courts, by New Haven creditor groups asserting that the

price was too low, and by various parties opposed to the

merger, the New Haven inclusion, or both.

The Connecticut Court concluded that the New Haven

assets were worta between $33,000,000 and $55,000,000 more

than the agreed price, In re New York, N.H. d H.R.R., 289

F.Supp. 451, 465 (D.C. Conn. 1968), while the merger court

concluded that the deficiency was in the range of $45,000,000

to $50,000,000. N.Y., N.H. & H.R.R., First Mtg. 4% Bond-

holders’ Committee v. United States, 289 F.Supp. 418, 440

(S.D.N.Y. 1968).

On remand, again in a combined proceeding involving

both the merger and the reorganization, the I.C.C. increased

the price by some $37,700,000, but allowed certain further

deductions totaling $22,100,000, thus producing a net price

increase of $15,600,000. The total price set by the Commis-

sion was approximately $145,600,000. The increase was to

be paid by issuing $7.4 million more of divisional mortgage

bonds, and by assuming certain additional liabilities.

rh —

4a

By this time, the New Haven was in such desperate

straits that cessation of rail services appeared imminent.

Accordingly, the I.C.C. concluded that the assets should be

immediately transferred to Penn Central, and Penn Central

should be required to take over the New Haven’s opera-

tions, without awaiting final judicial review of the price.

This was accomplished, pursuant to the I.C.C. opinion and

an order of the New Haven reorganization court, as of

December 31, 1968, by an outright conveyance to Penn Cen-

tral “free and clear of liens.” The price set by the I.C.C. was

paid, subject to adjustment on appeal.

On the second round of appeals, the merger court gen-

erally upheld the I.C.C., but made some adjustments which

increased the price by about $990,000. N.Y., N.H. é@ H.R.R.,

First Mtg. 4% Bondholders’ Committee v. United States,

305 F. Supp. 1049 (S.D.N.Y. 1969). This, too, was paid.

However, the reorganization court increased the price by

some $29,000,000. In re N.Y., N.H. & H.R.R., 304 F.Supp.

793 and 304 F.Supp. 1136 (D. Conn. 1969).

When the merger was originally consummated in 1966,

the median price of Penn Central stock was $87.50. By the

time of the conveyance of the New Haven assets on Decem-

ber 31, 1968, the price had declined to an average of about

$69.50 per share, see: New Haven Inclusion Cases, 399 U.S.

at 485, but all concerned apparently felt that the long-range

benefits of the merger would improve the market. Accord-

ingly, in authorizing the New Haven Trustee to accept

950,000 shares of Penn Central stock as representing pay-

ment of $83,125,000 of the purchase price, the Connecticut |

court imposed on Penn Central an underwriting plan which |

in effect required Penn Central to guarantee that the stock |

would again reach $87.50 per share by February 1, 1978;

otherwise, Penn Central would pay the New Haven Trustee

the difference in cash. See 304 F.Supp. at 808-810.

Appeals from the orders of both courts were pending

before the Supreme Court when the Penn Central went into

———

5a .

bankruptcy. Eight days later, on June 29, 1970, the Su-

preme Court decided the pending appeals. New Haven In-

clusion Cases, 399 U.S. 392 (1970). The Court (a) affirmed

the New Haven reorganization court’s determination that

the correct price for the New Haven assets was $174,000,-

000; (b) vacated that part of the reorganization court’s

judgment which set up the underwriting plan; and (c) di-

rected the merger court to abstain “pending the further

proceedings before the I.C.C. and the reviewing courts

under Section 77 of the Bankruptcy Act.”

As can be seen from the foregoing recital, there were

two separate issues involved throughout these proceed-

ings: the value of the New Haven assets, and the value

of the consideration to be furnished by Penn Central. When

the L.C.C. and the lower courts considered the case, the

value of the assets was decreasing, even negative; whereas

the value of the consideration was thought to be likely to

increase. By discarding going-concern, or income-producing,

approaches, and choosing a liquidation hypothesis, the re-

organization court established a floor under the declining

asset value. And its underwriting provision was designed

to insure that the consideration value would correspond to

the price thus fixed.

By the time the Supreme Court decided the case, it was

apparent that the underwriting scheme was no longer

feasible.

IL. The Issues

Before attempting to discuss the precise extent of this

Court’s jurisdiction and the desirability vel non of its exer-

cise, it may be helpful to review the issues which, in con-

sequence of the Supreme Court’s decision, remain open for

further consideration. Unfortunately,- even this subject is

not free from doubt.

It is clear that the value of the New Haven assets which

were conveyed to Penn Central as of December 31, 1968,

oo

has been finally and unalterably fixed at $174,000,000. If

the “package” of consideration previously furnished by

Penn Central were to be valued as of the time of payment

and treated as an accomplished fact, then the only remain-

ing issue would be the form of payment of the $28,000,000

balance. But the Court has expressly stated that, in the

light of intervening events, the underwriting scheme which

was designed to produce a value of $87.50 per share of

the common stock “may be wholly unrealistic.” From this

it can be argued, either that the Court intended that only

the underwriting scheme should be reconsidered, or that

the true value of the “package” as of December 31, 1968,

should be reappraised in the light of subsequent events, or

that the entire “package” should be reevaluated as of

present day values. There is language in the Court’s opinion

which can be construed as lending support to each of these

possible constructions.

The Court stated, 399 U.S. 392, at p. 489:

“Accordingly, we set aside the order of the Connecticut

District Court insofar as it determines that an intrinsic

value of $87.50 imheres in the Penn Central common

stock and implements an underwriting plam to secure

payment of that sum. *urther proceedings before the

Commission and the appropriate federal courts will

be necessary to determine the form that Penn Central’s

consideration to New Haven should properly take and

the status of the New Haven estate as a shareholder

or creditor of Penn Central.” [emphasis added]

However, immediately preceding this language, the Court

stated (pp. 488-89) :

“The fairness and equity that are the essence of a

Section 77 proceeding forbid our approval of a pay-

ment for the transferred New Haven properties that

may be worth only a fraction of its purported value.

And the same considerations of fairness and equity

prevent imposing on Penn Central the burden of im-

mediate payment in full, particularly when it is re-

7a

membered that the New Haven bondholders have never

objected to the receipt of Penn Central stock in

exchange for the New Haven assets.”

Elsewhere (at pp. 489-90), in discussing the constitutional

rights of the bondholders, the Court stated:

“. .. The purchase price that the Commission and the

reorganization court have required Penn Central to

pay to the New Haven estate is based upon the liqui-

dation value of the seller’s assets, appraised as of

December 31, 1966. That price hypothesizes a shut-

down of New Haven followed by a sell-off of its assets

at their highest and best value. In the circumstances of

this case, and for the reasons we have already set out

at length, we agree with the reorganization court that

it would be unfair and inequitable to allow Penn Cen-

tral to take the properties for any lesser sum. More-

over, we today require a reassessment of the considera-

tion that Penn Central is to give in exchange for those

properties. We thereby accord the bondholders the

right to a liquidation and a per parcel sale that is

theirs by virtue of their mortgage lien. .. .” [emphasis

added ]

And finally, there is at least surface inconsistency between

the Court’s language at page 488:

“.. . But we cannot avoid the impact of recent events

in assessing the propriety of the decree that [the

reorganization] court has entered... .”

and the express disclaimer set forth in a prefatory foot-

note in which, after noting the commencement of Penn

Central’s reorganization proceeding, the Court stated:

“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.”

In view of the fact that the opinion was filed shortly

after Penn Central’s bankruptcy, and that the implications

of the bankruptcy had not been briefed or argued, it may

8a

well be that the “recent events” mentioned in the text

referred to the pre-bankruptcy decline in Penn Central’s

fortunes, and not to the bankruptcy itself. Another pos-

sible way to reconcile these two comments might be to

construe the Supreme Court’s mandate as directing that

the underwriting scheme, or the valuation of the entire

package of consideration, must be reconsidered by reason

of the intervening bankruptcy, but without any attempt

on the part of the Court to suggest what effect, if any,

the intervening bankruptcy should have on the result. Or,

the Court may merely have wished to make clear that,

whatever the outcome of its mandated reevaluation, vari-

ous parties in interest in the Penn Central reorganization

proceeding would still be able to challenge it in this reor-

ganization proceeding.

To summarize, the issues which remained to be decided

after the Court’s action include at least (1) the method of

payment of the $28,000,000 increase; (2) the underwriting

scheme, or a substitute therefore; (3) whether the stock

transaction can or should be rescinded, or recast; (4)

whether the New Haven estate can or should be accorded

the status of a secured creditor with respect to some or

all of the further consideration to be furnished; and (5)

the treatment to be accorded whatever claims emerge from

decision of the foregoing issues, in the Penn Central bank-

ruptcy proceeding.

Il. Post-Bankruptcy Events

Since the opinion of the Supreme Court was handed

down, the litigation has followed a potentially awkward

course both in this court and in the Connecticut court,

generating the specific controversies which this court is

now asked to consider. In this court, the New Haven

Trustee, in May of 1971, filed a proof of claim, as a secured

creditor, in the sum of $132,000,000. This amount was

arrived at by deducting from the $174,000,000 total pur-

chase price approved by the Supreme Court the various

——

9a

cash payments which have been made, the face value of

the mortgage bonds which have been issned, and certain

obligations assumed by Penn Central. Thus, the New Haven

proof of claim asserts that the New Haven is a secured

creditor for the full balance of the purchase price, plus

interest thereon, without any adjustment for the 950,000

shares of Penn Central stock.

The Connecticut court filed an opinion and on June 11,

1971, entered an order,’ which, in remanding the case to

the Interstate Commerce Commission, imposed an “equita-

ble lien” in favor of the New Haven, upon all of the former

New Haven assets conveyed to Penn Central (except

rolling stock) for the full balance of the purchase price

(z.e., $174,000,000, less cash payments on account, obliga-

tions assumed, and mortgage bonds issued); declared the

existence of a “constructive trust” in one-half of the in-

come from the Grand Central Terminal properties in New

York, in the sum of $28,000,000; concluded that the 950,000

shares of Penn Central stock which were part of the

original purchase price paid in 1968 should now be re-

garded as being held merely as security for the payment

of the full balance; and directed the Interstate Commerce

Commission to implement these provisions in carrying out

its mandate. The Connecticut court also, acting on its own

motion, designated a named attorney as the representative

of the court to take immediate steps to record the “equita-

ble lien” wherever necessary under state law, in the four

states in which the former New Haven assets were thought

to be located. An appeal from these orders is now pending

before the Court of Appeals for the Second Circuit.

The Trustees of the Debtor sought interim relief in this

Court from certain aspects of the Connecticut court’s order.

By Order No. 296, this request was granted in part, in

an order directed only to the litigants, and those in privity

* See: In re N.Y., N.H. & H.R.R., 330 F.Supp. 131; 331 F.Supp.

212 (D. Conn., 1971).

a

10a

with them, and designed only to preserve the status quo

pending ultimate resolution of these issues, by prohibiting

any attempts to exact payment. An appeai from this order

is now pending before the Court of Appeals for the Third

Circuit.

At the same time, the Trustees filed the present applica-

tion, seeking an immediate determination by this court

of the merits of the New Haven Trustee’s proof of claim.

At the hearing on this application, the New Haven Trustee

relied solely upon the opinion and order of the Connecticut

court in support of its proof of claim. (Tr. 2730.)

It would be naive to ignore the potential for unseemly

conflict between courts of coordinate jurisdiction which

inhere in these circumstances and events. On the other

hand, however, care must be taken not to exaggerate or

unduly emphasize such potential conflict. Where related

controversies, or different aspects of the same controversy,

are properly presented to two courts for decision, it is

sometimes necessary for both courts to express their views.

Cf. Dellinger v. Mitchell, 442 F.2d 782, 787-88 (D.C. Cir.

1971). The applications now pending in this court cannot

be simply ignored, and they cannot be disposed of without

considering the jurisdictional and other issues presented.

The unique and complex relationshio between the two

reorganization proceedings, in my judgment, makes it

necessary for both courts to decide their respective por-

tions of the issues presented, in the interests of expediting

final and conclusive resolution of all of the issues involved

in the entire litigation. Every reasonable effort should be

made, of course, to minimize differences.

TV. Jurisdiction

As noted above, the Supreme Court held that “further

proceedings before the Commission and the appropriate

federal courts will be necessary to determine the form that

Penn Central’s consideration to New Haven should properly

take and the status of the New Haven estate as a share-

lla

holder or creditor of Penn Central.” From the use of the

plural (“courts”), and the fact that the Supreme Court di-

rected the merger court to abstain, it can be argued that the

opinion contemplated that this court would be involved in

the ultimate determination of some or all of the issues re-

maining open. Nevertheless, it must be recognized that the

litigation in which the opinion was rendered did not origi-

nate in this court, and that the Supreme Court’s mandate

was directed to the Conneeticut court. In view of the lan-

guage quoted above, and the disclaimer in the prefatory

footnote at the beginning of the Supreme Court’s opinion,

this much at least is certain: the Supreme Court has not

suggested that this court should refrain from carrying out

its functions under the reorganization statute.

In the ordinary course of reorganization, this court, pur-

suant to Section 77(c)(7) of the Bankruptey Act, is re-

quired to determine the amount of an unliquidated debt,

decide whether the claim is secured or unsecured, and

classify the various claimants “according to the nature of

their respective claims and interests” for purposes of the

reorganization plan. 5 Collier on Bankruptcy, §§77.20,

77.21; 6A Collier on Bankruptcy, §9.02. In carrying out

these functions, this court would be bound by principles of

res judicata and full faith and credit. To the extent that the

judgment of the Connecticut court became final, either

before bankruptcy or by virtue of the Supreme Court’s

affirmance shortly after bankruptcy, no question arises. But

to the extent that additional obligations are sought to be

imposed, or additional liens created, after Penn Central’s

bankruptcy, without the consent or approval of this Court,

very serious jurisdictional questions appear. The Trustees

have never been made parties to the proceedings in the

Connecticut District Court, nor has anyone sought leave of

this court to proceed against them in that regard.

Perhaps this is but another way of pointing out that,

since the New Haven assets were conveyed to Penn Central

free and clear of all liens, including all claims of the New

12a

Haven estate, on December 31, 1968, and since they re-

mained in the ownership and possession of Penn Central

on the date of bankruptcy, the filing of Penn Central’s re-

organization petition vested exclusive jurisdiction over

these assets in this court, and made it jurisdictionally im-

possible for any other court to impose liens upon them,

except with the approval of this court.

Counsel for the New Haven Trustee suggested at oral

argument that one solution to this impasse would be for this

court now to authorize and direct the Trustees to subject

themselves to the jurisdiction of the New Haven court, and

thereafter for this court to abstain until final appellate

determination in the Second Circuit proceedings. While the

thought of allowing the cup thus to pass has considerable

appeal, this approach contains its own grave difficulties. In

the first place, by the time this suggestion was made, the

proceedings in the Connecticut District Court had, to all

practical intents and purposes, already terminated.’

Whether something could have been, or could now be, done

to overcome this difficulty need not now be considered. For

the due process rights of the Penn Central creditors present

a more serious problem.

It is no answer to state that the Trustees act as repre-

sentatives of the creditors of Penn Central. In a sense this

is true, inasmuch as the Trustees do have the obligation to

preserve the Debtor’s estate for the benefit of all concerned.

But the Trustees cannot adequately represent one or more

- groups of creditors in disputes involving relative priorities

of claims.

To the extent that the New Haven Trustee seeks a post-

bankruptcy adjudication which would transform its $83.1

million stock transaction into a secured claim, create a

further secured claim in the sum of $28,000,000, plus inter-

* The Trustees did appear in some limited fashion in the Connec-

tieut proceeding. The extent of this participation and the pro-

eedural adequacy of the proceedings are among the issues now

Cireuit.

pending on appeal in the Second

13a

est on the aggregate sum, and establish some further type

of security (“constructive trust”) in certain current income

of the Debtor, I am convinced that the various creditor

interests of Penn Central have an absolute constitutional

right to be heard before final decision.* I am also satisfied

that the only forum in which these interests now can (or,

conveniently, ever could) be heard is in the context of the

Penn Central reorganization.

Any railroad reorganization proceeding is a complex

form of litigation, and has many aspects. The New Haven

reorganization is no exception. For present purposes, the

Connecticut proceedings can be seen as involving the form-

ulation and implementation of a plan of reorganization of

the New Haven, a mandate from the Supreme Court, and

litigation which was pending on the date of Penn Central’s

bankruptcy, in which claims are being asserted against

Penn Central. This court has no direct concern with the

first two of these three aspects, and should clearly refrain

from taking any action which might infringe upon the jur-

isdiction of the Connecticut court. However, insofar as new

or additional claims are being asserted therein against the

Debtor’s estate, I am required to decide whether the asser-

tion of these claims in that forum should be permitted to

continue, in view of the Penn Central bankruptcy and the

stay of suits provisions of Order Nc. 1 herein.

As between the New Haven Trustee and the Debtor, these

claims, notwithstanding their unusual ramifications, are

*New or additional credit aggregating hundreds of millions of

dollars was extended to Penn Central between December 31, 1968,

and the date of bankruptey. Additional obligations, both secured

and unsecured, were incurred. These creditors may be able to estab-

lish that they relied in part upon the “free and clear” (former)

New Haven assets, and that actual or constructive notice that the

full purchase price was not finally settled would not constitute

notice of a potential retroactive lien, especially with regard to

payments already made. At least, their opportunity to attempt such

proof cannot be foreclosed.

l4a

essentially pre-bankruptcy claims, contractual in nature.

They were submitted to the jurisdiction of this court when

the New Haven Trustee filed his proof of claim in these pro-

ceedings, an event which occurred before the Connecticut

court’s adjudication.

The leading case involving the jurisdictional interplay

between two railroad reorganization courts is Warren v.

Palmer, 310 U.S. 132 (1940). The Court held that the re-

organization court which had jurisdiction over the debtor

in possession of leased lines could impose liens on the

leased property for operating expenses, notwithstanding

the fact that the lessor was also in reorganization in an-

other court. Since the case involved largely post-bankruptcy

issues, and liens which were necessary for the continued

operation of rail service, the decision is not directly appo-

site. However, to the extent that it does bear on the present

situation, it lends support to the position of the Penn-Cen-

tral Trustees in this case.

Whether the present issue be regarded as a question of

the exercise of this Court’s discretion as to whether or not

to stay pending litigation in another jurisdiction, or, in-

dependently of the “stay of suits” question, the determina-

tion as to which of two reorganization courts is the pre-

ferable forum, I am constrained to reach the somewhat

uncomfortable conclusion that the ultimate decision de-

pends to a large extent upon the result which has been or

may be reached in the other jurisdiction. The usual stand-

ards to be applied in this situation—impact on the formula-

tion of a reorganization plan and the continuance of rail

service, cf. Warren v. Palmer, supra; Gardner v. New Jer-

sey, 329 U.S. 565 (1947), and impact on this court’s interim

administration of the reorganization proceeding, see Con-

gress of Railway Unions, et al. Appeal, —— F.24 —— (3d

Cir., July 16, 1971) —must be assessed in light of the actual

or threatened outcome of the pending litigation.

If the Connecticut court had simply remanded the matter

to the Interstate Commerce Commission, the “form” of

l5a

Penn Central’s consideration and the “status” of the New

Haven would presumably be determined by the Commission

simultaneously in both the New Haven reorganization pro-

ceeding (including the remnants of the merger case) and in

the Penn Central reorganization proceeding. It is reason-

able to assume that these initial determinations would have

been internally consistent. Review would then be available,

in the Connecticut court in the New Haven proceeding, and

in this court in the Penn Central proceeding. If the two

courts then viewed the issues differently, there might be

separate appeals in the two proceedings, the parties might

agree upon a single appeal, or one court might defer to the

other. Since the decision of each court would have had its

genesis in a proceeding in which all concerned were heard,

some form of unification of the appeal process would prob-

ably be feasible. Moreover, there is every reason to suppose

that the Commission, which is, after all, primarily responsi-

ble for the formulation of reorganization plans, see Group

of Institutional Investors v. Chicago, Minneapolis, St. Paul

and P.R. Company, 318 U.S. 523, 544 (1943); Reconstruc-

tion Finance Corporation v. Denver and Rio Grande and

Western Railroad Company, 328 U.S. 495, 530 (1946), might

be expected to resolve these issues in a manner which would

withstand attack in both courts. As matters now stand, how-

ever (depending in part upon the outcome of the pending

appeal in the Second Circuit), it is difficult to see how the

Commission, confronted with the order of the Connecticut

court, could properly perform its function in either pro-

ceeding.

I hasten to emphasize that the Connecticut court has

made it clear that it does not view its order as in any way

controlling the ultimate disposition of the New Haven

Trustee’s claim in the reorganization plan of the Penn Cen-

tral. However, this assurance can be, and is widely inter-

preted by Penn Central creditor groups as being, limited

to the notion that the New Haven Trustee’s ultimate parti-

cipation in a reorganized Penn Central would be deter-

16a

mined in the Penn Central reorganization proceeding. The

recalculated amount of the New Haven Trustee’s claims,

and their character as secured or unsecured, are a different

matter; yet these are the critical determinations insofar as

Penn Central’s other creditors are concerned.

While the existence of a declared lien would ordinarily

have little adverse effect upon the interim conduct of the

reorganization process, if it were subject to reonsideration

in the ultimate reorganization plan, the fact remains that in

this case, unless the declared lien is to be simply disre-

garded, difficult and burdensome accounting procedures

might be required. To the extent that the lien purportedly

attaches to all of the former New Haven assets (except roll-

ing stock), whether real or personal, thus apparently even

including office furniture and supplies, the interference with

the orderly process of the reorganization and the opera-

tions of the Debtor in the interim is potentially quite sub-

stantial. Further, obvious difficulties arise with respect to

that part of the Connecticut court’s order which imposes a

‘‘constructive trust’’ upon substantial amounts of income

now available to the Trustees for operating expenses.

For all of these reasons—the seeming incompleteness of

the Connecticut court’s jurisdiction, the exclusive jurisdic-

tion of this court over the assets in the possession of the

Debtor, and the probable impact upon the reorganization

proceedings and the ultimate reorganization plan for Penn

Central—if the issues were being presented to this court for

completely independent decision, I should be inclined to

stay the prosecution of these claims by the New Haven

Trustee in other forums. But the Connecticut court’s deter-

mination of its own jurisdiction is entitled to great weight.

Considerations of comity, and due deference to the views

of an eminent jurist of exceptional experience in these mat-

ters, alike dictate that every effort be made here to avoid

reaching a result which might further complicate matters,

or seem to interfere unduly in the other related proceeding.

—

17a

When the case was before the Supreme Court, the basic

issues were whether the inclusion terms were “just and rea-

sonable” under $5 and “fair and equitable” under §77. The

Court held that, inasmuch as Penn Central had agreed to

the inclusion, the issue was essentially the same under both

statutes, and involved the valuation of the New Haven as-

sets, a task peculiarly within the jurisdiction of the New

Haven reorganization. I shall assume that the §5 criterion

is no longer open for consideration. But in the present pos-

ture of the case, determining what is “fair and equitable”

from the standpoint of the New Haven reorganization, or

eve. from the joint standpoint of the New Haven reorgani-

zation and a solvent Penn Central in private management,

is not necessarily the same as determining what is “fair and

equitable” in the total context of both reorganizations.

In short, the result of the ultimate decision of the sub-

stantive issues raised here must appear to the Connecticut

court to be consistent with a “fair and equitable” plan for

the New Haven, and must also appear to this court to be

consistent with a “fair and equitable” plan for the Penn

Central. Neither court can delegate this decision to the

other, nor would abstention be permissible.

Accordingly, it seems appropriate to view the Connecti-

cut court’s order of June 11, 1971, as essentially constitut-

ing a declaration of what would be consistent with a fair

and equitable plan for the New Haven reorganization. But

it does not, and in my view cannot, constitute a binding

determination of what would be consistent with a “fair and

equitable” reorganization of Penn Central.

Determining the components which will go to make up

the present liquidated amount of the New Haven claims is

one thing; deciding whether the various components are all

entitled to the same priority is quite another.

In my judgment, the only conclusion which need now be

expressed is that, whatever may be the situation as between

the New Haven Trustee and the stockholders of the Debtor,

ET SE

SIE Seen SE ee =

18a

I do not consider that any issues of relative priority, or of

amount (except for the additional $28,000,000), have been

determined with finality insofar as other creditors of Penn

Central are concerned.

V. The Merits

As stated at the outset, the Trustees are pressing for

an immediate ruling on the proof of claim filed in these

proceedings by the New Haven Trustee. They have pre-

sented extensive argument to the effect that the lien is

without legal or equitable basis, is contrary to the law of

all of the states in which the property is located, and is

otherwise invalid. No doubt the decision of the Second

Cireuit in the pending appeal will be instructive, or even

dispositive, as to many of these issues.

As I view the matter, however, the merits of this claim

cannot properly be determined on the present record, in

any event. The present posture of the proof of claims

program is such that, although the deadline for filing

proofs of claim has passed, and the claims which have been

filed are being classified arid processed, complete lists of

the claims have not yet been made a matter of record;

and the deadline for filing objections to claims has not yet

been fixed. While various creditor interests did get notice

of the hearing on the present petition, and some creditor

groups have expressed their views on the merits of the

New Haven claim, many parties potentially affected thereby

have had neither notice nor opportunity to express their

views. I refer specifically to the unsecured creditors, who

seemingly would be most directly affected by the outcome.

Moreover, as a practical matter, if a plan for Penn Cen-

tral can be devised which makes adequate provision for

all creditors, whether secured or not, the New Haven

Trustee’s claims will diminish in poignancy. And the under-

lying constitutional issues can be more clearly perceived

and dealt with after the various valuation studies now in

progress are completed.

—

19a

| It is a reasonable supposition that the principal objec-

tives of the current efforts by the New Haven Trustee

are (a) to insure that he will have standing to object to

the sale or other disposition of any substantial portion

| of the former New Haven assets, or the proceeds of such

| gales; (b) to provide protection in the event the Penn

Central reorganization proceeding is dismissed; and (c)

to insure preferred status in the event Penn Central’s

reorganization plan does not contain adequate provisions

for unsecured claims. As set forth earlier, I am satisfied

that none of these matters can be finally determined except

in these proceedings, after all parties in interest have had

an opportunity to be heard. However, I see no reason why

| reasonably adequate interim protection should not be af-

forded the claims of the New Haven Trustee.

Accordingly, I have concluded that, pending final deter-

mination of all of the issues involved in the appropriate

forum or forums, and unless and until otherwise ordered by

this court or by an appellate court of competent jurisdic-

tion, the New Haven Trustee shall be deemed to have a

tentative lien, indeterminate in amount, upon all real prop-

erty all readily identifiable personal property (except

rolling stock) formerly owned by the New Haven estate

and conveyed to the Penn Central as of December 31, 1968,

which were still in possession of the Debtor’s estate on

June 11, 1971. The provisions of Orders Nos. 78 and 192

shall be applicable. This, of course, does not constitute the

expression of any view as to the merits of the claim or the

asserted lien. The restraints imposed by Order No. 296

will remain in effect.

In order to promote the orderly and expeditious resolu-

tion of all of the issues surrounding the New Haven’s

claims, this court will, on application, at such time as the

remand of the inclusion litigation to the I.C.C. becomes

effective, certify to thé Commission, for its recommenda-

tions and report, any appropriate question relating to the

One See

eee SBMA aia ital

20a

valuation and proper treatment of the claims of the New

Haven Trustee, including, by way of illustration: (1) The

value of the various items of consideration transferred by

Penn Central, on the respective dates of transfer, if no

value is attributed to Penn Central’s obligations under the

underwriting agreement; (2) The value of Penn Central’s

obligations under the underwriting agreement, reappraised

_ in the light of subsequent events; (3) The separate com-

ponents of a presently fair and equitable consideration

package, and the values of each.

In all other respects, disposition of the issues committed

to this court must await the normal processing of the New

Haven Trustee’s proof of claim.

21a

Order No. 546

AND NOW, this 31st day of December, 1971, it is

ORDERED :

1. That, without prejudice to the ultimate resolution

of the merits of the claims asserted, the Trustee of the

New York, New Haven & Harford Railroad shall, unless

and until otherwise ordered by this Court or an appellate

court of competent jurisdiction, be deemed to have a lien,

indeterminate in amount,’and indeterminate as to priority,

upon all of the real property and readily identifiable tangi-

ble personal property (exclusive of rolling stock) conveyed

to Penn Central by the said New Haven Trustee as of

December 31, 1968, and remaining in possession of the

Trustees of the Debtor as of June 11, 1{'71.

2. That the provisions of Orders Nos. 78 and 192 shall

be fully applicable to transactions respecting said assets.

3. That the restraints imposed by Order No. 296 shall

remain in effect until further order of this Court.

4. That this court will entertain applications for refer-

ence of appropriate issues to the Interstate Commerce

Commission in accordance with the views expressed in the

foregoing Opinion.

5. That the ultimate disposition of the claims asserted

by the New Haven Trustee is deferred pending completion

of the program for handling proofs of claim in these pro-

ceedings, and the receipt and consideration of objections

in accordance with such program.

/s/ Joun P. Futtam

J.