Petition for Writ of Certiorari — Crismon v. United States

FAY 25 197

IN THE

Supreme Court of the United St MICHAEL RODAK, JR.,

October Term, 1971

No.

In the Matter of

THE NEW YORK, NEW HAVEN anp HARTFORD

RAILROAD COMPANY,

Debtor.

THE NEW YORK, NEW HAVEN & HARTFORD RAIL-

ROAD COMPANY FIRST MORTGAGE 4% BONDHOLD-

ERS COMMITTEE,

Petiiioner,

against

GEORGE P. BAKER, RICHARD C. BOND, JERVIS LANG-

DON, JR. and WILLARD WIRTZ, Trustees of the Property

of Penn Central Transportation Company, Debtor; MANU-

FACTURERS HANOVER TRUST COMPANY, as Mortgage

Trustee; and PENN CENTRAL TRANSPORTATION

COMPANY,

Respondents.

nn —________)

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

LesTer C. MIGDAL,

LAWRENCE W. POoLLack,

Attorneys for Petitioner

598 Madison Avenue,

New York, New York 10022

Of Counsel :

MicpaL, Low, TENNEY & GLAss

598 Madison Avenue

New York, New York 10022

May 23, 1972.

TABLE OF CONTENTS

PAGE

Opinion Below ........+sseeeeeeeeeeeer ee reeceees 1

EO, 5 oc cause 006d40s¥s veee shen sede cees 3

Questions Presented .......--++2+eeeereeeeereetees 3

Statutes Involved ..........ceeceee cece eee creeeeees 4

Statement of the Case .........6. eee e eee eee reece 4

Reasons for Granting the Writ .........---++++++ 16

1. The Court of Appeals erred in concluding that

the New Haven Reorganization Court was

ousted from its jurisdiction to take additional

steps necessary to preserve the constitution-

ality of orders previously issued .........-. 18

2. The Court of Appeals erred in disregarding

Penn Central’s obligations under Section 5 of

the Interstate Commerce Act and Condition 8

to the Penn Central merger .......---+-+-+-+- 22

aetlmbem, . 4. cs cccoccccecsvessedsessccesscencene ys)

TABLE OF AUTHORITIES

Cases:

In re New York, New Haven & Hartford Railroad

Co., 378 F. 2d 635 (2d Cir. 1967) ...-----+++++> 18

In re-New York, New Haven & Hartford Railroad

Co., 281 F. Supp. 65 (D. Conn. 1968) ....------- 8

In re New York, New Haven & Hartford Railroad

Co., 289 F. Supp. 451 (D. Conn. 1968) ....-- 5, 7, 9, 19

TABLE OF CONTENTS

PAGE

In re New York, New Haven & Hartford Railroad

Co., 304 F. Supp. 793 (D. Conn. 1969) ......... ll

In re New York, New Haven & Hartford Railroad

Co., 304 F. Supp. 1136 (D. Conn. 1969) ........ ll

In the Matter of Penn Central Transportation Com-

pany, 455 F.2d 811 (3rd Cir. 1972)...:........ 16

New Haven Inclusion Cases, 399 U.S. 392 (1970) ...4, 5, 11,

12, 13, 14, 16, 17, 18, 20, 23, 24

New Haven Passenger Discontinuance Case, 327 i.C.C.

USL (1966) 2... ce reccececcvcsceccsscescooens 5

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

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

SD Sk RE wk HAR adele Cécrwaweccediee 9

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

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

Se I 6a peck ae e 8h ont ek cee cee 11

Penn-Central Merger Cases, 389 U.S. 486 (1968) ..8, 16,18

Pennsylvania R.R.-N.Y. Central R.R.-Merger, 327

L.C.C. 475 (1966) (Penn-Central Merger Ap-

proval Report) ..........:eeeeee reece eee ees 5, 6, 19

Pennsylvania R.R.-N.Y. Central R.R.-Merger, Second

Supplemental Report, 331 1.C.C. 643 (1967) (In-

PI IEE 5-0 da S44 A506 745 cave ben ded cdass 5,7

Pennsylvania R.R.-N.Y. Central R.R.-Merger, Fourth

Supplemental Report, 334 I.C.C. 25 (1968) (Re-

SE SD 5 oasis was ecco eis cess en ¥en toens 9, 10, 17

Pennsylvania R.R.-N.Y. Central R.R.-Merger, Fifth

Supplemental Report, 344 1.C.C. 528 (1969) ....

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

ww

TABLE OF CONTENTS iii

Statutes: PAGE

Bankruptcy Act

mection 77 (11 UGC. $ B05) ....0. cic ccccess passim

ME Soothes ak, de bawh cue Kee 4, 15, 21

Interstate Commerce Act

Section 5 (49 U.S.C. $5) ........... 4, 16, 18, 22, 23, 24

Section 5(2)(d) ........... Lense tancweweee 4,5, 15, 16

PE isageeeehesn haba wanvunccueus 4, 25

IN THE

Supreme Court of the United States

October Term, 1971

No.

In the Matter of

Tue New York, New Haven and Hartrorp

Rariroap Company,

Debtor.

. Tae New York, New Haven & Hartrorp Rarroap

Company First Mortcacr 4% BonpHoupers Committe,

Petitioner,

against

Georczk P. Baker, Ricwarp C. Bonn, Jervis Lanapon, Jr.

and Witiarp Wirtz, Trustees of the Property of Penn

Central Transportation Company, Debtor; Manvurac-

TuRERS Hanover Trust Company, as Mortgage Trustee;

and Penn Centra TRANSPORTATION CoMPANY,

Respondents.

-

bs

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Opinions Below

The decision of the United States Court of Appeals fer

he Second Cireuit (the ‘‘Court of Appeals’’) was issued

a

ela

on March 17, 1972. The decision has not yet been officially

reported. On April 28, 1972, Richard Joyce Smith, Trustee

of the property of the New York, New Haven and Hart-

ford Railroad Company (the ‘‘New Haven Trustee’’)*

filed his petition for writ of certiorari with Appendix,

seeking review of the Court of Appeals’ decision (No

71-1401). The decision of the Court of App2als appears

at pages A-5-A-24 of the Appendix attached to the New

Haven Trustee’s petition. In the interest of preserving

the assets of the New Haven estate and avoiding dupli-

cation, no appendix has been attached to this Petition and

references are made to the Appendix filed by the New

Haven Trustee.

The Court of Appeals’ decision reversed the decision

of the New Haven Reorganization Court. That Court’s

decision is reported as In re New York, New Haven é

Hartford Railroad Co., 330 F. Supp. 131 (D. Conn. 1971)

and reprinted at pages A-25-A-60 of the Appendix. The

New Haven Reorganization Court’s order of remand is

reported as In re New York, New Haven & Hartford Rail-

-oad Co., 331 F. Supp. 212 (D. Conn. 1971) and reprinted

at pages A-61-A-65 of the Appendix.

* Other frequently used contracted forms of reference herein are:

The New York, New Haven and Hartford Railroad Com-

pany, Debtor, is referred to as “New Haven”.

Petitioner, The New York, New Haven and Hartford Rail-

road Company First Mortgage 4% Bondholders Committee, is

referred to as “Bondholders Committee”.

The Penn Central Transportation Company, Debtor, is re-

ferred to as “Penn Central”.

The United States District Court for the District of Con-

necticut is referred to as “New Haven Reorganization Court”.

The United States District Court for the Eastern District of

Pennsylvania is referred to as “Penn Central Reorganization

Court”.

The Interstate Commerce Commission is referred to as “Com-

mission”.

|

Jurisdiction

The Court of Appeals’ decision is dated March 17, 1972.

No mandate has been entered because, on April 6, 1972,

the Court of Appeals granted the New Haven Trustee a

thirty-day stay to permit his filing of a petition for a writ

of certiorari prior to the issuance of a mandate.

The jurisdiction of this Court is invoked under 28 U.S.C.

§1254(1). ,;

Questions Presented

1. Where the New Haven Reorganization Court had,

in the public interest, ordered the transfer of the New

Haven assets to Penn Central prior to its passing upon

the fairness and equity of the terms of inclusion pro-

pounded by the Commission and reserved jurisdiction to

determine the fairness and equity of the terms, and there-

after rejected the terms and fixed new terms which were

in turn in part rejected and in part affirmed by this Court,

did the filing by Penn Central of a petition for reorgani-

zation before this Couré’s decision oust the New Haven

Reorganization Court of its reserved jurisdiction to com-

plete the trausaction and preserve the constitutionality

of the orders previously issued?

2. Where Penn and Central had accepted as a condition

te their merger the specific jurisdiction of the New Haven

Reorganization Court to pass upon the fairness and equity

of terms of inclusion for the New Haven, and where the

New Haven Reorganization Court then directed the trans-

fer of the New Haven assets subject to its later examina-

tion of the terms of inclusion, was the Court of Appeals

correct in holding that, where Penn Central thus acquired

possession of the New Haven’s property, Penn Central’s

fling of a petition for reorganization under §77 of the

—

4

Bankruptcy Act voided Penn Central’s submission to the

New Haven Reorganization Court and ousted the court of

jurisdiction to determine the fairness and equity of the

inclusion terms?

3. Where this Court in New Haven Inclusion Cases,

supra, rejected as unrealistic an underwriting provision

which, though designed to assure payment to the New

Haven of the value of the assets it had already transferred

to Penn Central, provided merely an unsecured promise to

pay, and remanded to the New Haven Reorganization

Court for further proceeding in accordance with its

opinion, did the New Haven Reorganization Court’s de-

termination that an equitable lien and constructive trust

in favor of the New Haven applied to those assets con-

form to the mandate of this Court and the requirements

of fairness and equity?

Statutes Involved

The statutes involved in this case are: Section 77(a) of

the Bankruptcy Act, 11 U.S.C. § 205(a), reprinted at pages

A-1-A-3 of the New Haven Trustee’s Appendix and Inter-

state Commerce Act 4$§ 5(2)(d) and 5(11), 49 U.S.C.

§§ 5(2)(d) and 5(11).

Statement of the Case

The New Haven has been in reorganization under Sec-

tion 77 of the Bankruptcy Act in the New Haven Reorgani-

zation Court since July 7, 1961. The Bondholders Com-

mittee has been authorized to represent holders of the New

Haven’s First and Refunding Mortgage Bonds since Feb

ruary 5, 1962. As of December 31, 1968, the claim of

the holders of the First Mortgage Bonds totalled

$101,659,900.00.

LL

—

5

On March 9, 1962, the Pennsylvania Railroad Company

and the New York Central Railroad Company jointly filed

their application with the Commission for authority to

merge under Section 5 of the Interstate Commerce Act.

The New Haven Trustees, on June 26, 1962, opposed the

Penn Central merger unless the New Haven was included

jn the transaction under Section 5(2)(d) of the Interstate

Commerce Act. On March 29, 1965, the Hearing Ex-

aminer’s report in the Penn Central merger case was

issued. It provided for operation by Penn Central of only

the New Haven’s freight service. Since the New Haven

Trustees had presented no evidence on the question of fair

and equitable terms, none were recommended. Only then,

on March 31, 1965, did the New Haven Trustees reveal that

they had previously negotiated and signed a secret agree-

ment for the sale of the New Haven assets to Penn Central

and the consideration to be received. The formal agree-

ment was executed on April 21, 1966, but the New Haven

Trustees never sought and never received authorization

to sign the agreement. The Commission adopted the agree-

ment. Second Supplemental Report, 331 1.C.C. 643 (1967)

(Inclusion Report). The Bondholders Committee and

other creditors objected and the New Haven Reorganization

Court rejected the terms. Jn re New York, New Haven

¢ Hartford Railroad Co., 289 F. Supp. 451 (D. Conn.

1968).*

The Commission, with knowledge of the proposed agree-

ment, simultaneously decided the New Haven Passenger

Discontinuance Case, 327 I1.C.C. 151 (1966) and the Penn-

Central Merger Approval Report, 327 I1.C.C. 475 (1966).

The Commission denied discontinuance of the New Haven

* The Court of Appeals incorrectly assumed that the New Haven

Reorganization Court approved the Trustees’ agreement as the basis

for inclusion of the New Haven in Penn Central (A-6). The in-

choate nature of the unauthorized and unapproved agreement was

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

at 410 fn. 46.

a a

6

passenger service, imposing on the New Haven the erosion

of its estate in the public interest, on the basis of its merger

decision which required Penn Central to ‘‘include’’ the

New Haven as a merger condition.

The Commission fixed the following conditions:

“8. The Pennsylvania New York Central Trans-

portation Company shall be required to include in the

transaction all the New York, New Haven and Hart-

ford Railroad Company—the inclusion of passenger

operations being subject to the findings and deter-

minations of the Commission as set forth in Finance

Docket No. 23831 issued simultaneously with this re-

port—upon such fair and equitable terms as the

parties may agree subject to the approval of the Bank-

ruptey Court and the Commission. Within 6 months

after the date this report is served, the parties shall

file with the Commission for its approval, a plan for

such inclusion. In the event the parties are unable to

reach an agreement (and subject to approval by the

Bankruptcy Court) such inclusion shall be upon such

fair and equitable terms and conditions as the Com-

mission may impose. * * * Jurisdiction is hereby re-

served for such purposes. Consummation, of the merger

by applicants shall indicate their full and complete

assent to these requirements.’’ Penn-Central Merger

Approval Report, 327 1.C.C. at 553 (emphasis added)

**16. Consummation of the transaction approved

herein shall constitute on the part of The Pennsyl-

vania Railroad Company and the New York Central

Railroad Company, their successors and assigns,

acquiescence in and assent to the conditions stated in

this appendix and in the attached report.’’ Penn

Central Merger Approval Report, 327 L.C.C. at 555.

While the proceedings for the determination of fair and

equitable terms for the New Haven’s inclusion were pend-

_—

7

ing before the Commission, the Bondholders Committee

requested this Court to enjoin consummation of the Penn

Central merger unless and until inclusion could be con-

eurrently accomplished.

After the filing by the Bondholders Committee of its

jurisdictional statement, but prior to argument before

this Court, the Commission issued its Inclusion Report, 331

LC.C. 643 (1967) and furnished copies to this Court. Dur-

ing the argument before this Court, Penn Central and the

Commission urged that Penn Central be permitted to

consummate the merger even though the terms of inclusion

had not yet been subjected to review by the New Haven

Reorganization Court because Condition 8 to the Penn

Central merger and the Commission’s retention of juris-

diction afforded the New Haven bondholders ful! protec-

tion for their claims and constitutional rights.* The Bond-

holders Committee argued that its full rights should not

be left to future orders of the Commission but were forced

to acknowledge that a delay in the consummation of the

Penn Central merger might well cause a termination of

New Haven railroad service. This Court rejected the in-

junction application on the ground that since Penn and

Central by their merger submitted themselves absolutely

to the reserved jurisdiction of the Commission, which, in

turn, was required to provide fair and equitable terms for

the bondholders, subject to the approval of the New Haven

Reorganization Court, the bondholders could not be injured

if the merger proceeded in advance of inclusion. Under

these circumstances, this Court held that the public inter-

est in continued railroad service should be protected. This

Court said:

**Continuation of the operations of the NH, which the

Commission has found to be essential, can be assured

only upon and after effectuation of the merger of

*The undertaking of counsel for Penn Central to this Court

during the oral argument is quoted in Jn re New York, New Haven

& Hartford Railroad Co., 289 F. Supp. 451, 460 (D. Conn. 1968).

—y

8

Penn-Central. The bondholders agree that to delay

the Penn-Ceniral merger until all proceedings neces-

sary to include the NH have taken place may well mean

the end of NH operations. The only realistic way to

avoid this is to permit prompt consummation of the

Penn-Central merger subject to appropriate conditions

respecting the New Haven which Penn-Central will

perforce accept by its act of merger. ...

While we reject the appeal of the NH bondholders,

acceptance or rejection of the terms and conditions on

behalf of the NH remains to be determined. The bond-

holders’ objections may be registered and adjudicated

in the reorganization court or upon judicial review as

provided by law. Furthermore, as noted above, the

Commission has retained jurisdiction to make further

appropriate orders, if necessary, and has provided

both that inclusion of NH in Penn-Central and the

making of the loan arrangement on such terms as are

prescribed by the Commission are conditions of ap-

proval of the merger.’’ Penn-Central Merger Cases,

389 U.S. 486, 510-11 (1968) (emphasis added)

This Court’s decision made it clear that the New Haven

bondholders were thereafter precluded from seeking in-

terim remedies which might result in the termination of

New Haven operations, which were deemed essential in

the public interest. This Court decided that the absolute

submission of Penn Central to Condition 8 and the ap-

proval of the New Haven Reorganization Court would pro-

vide full protection for the New Haven bondholders’ right

to full payment for the assets transferred to Penn Central.*

* Earlier, in April, 1967, the Bondholders Committee sought the

termination of the reorganization proceedings to permit liquidation

of the New Haven assets. The Supreme Court opinion permitting

consummation of the merger was issued on January 15, 1968. Penn

and Central merged on February 1, 1968. On February 13, 1968,

the New Haven Reorganization Court dismissed the petition seeking

termination of the reorganization proceedings on the ground that the

bondholders would be fully protected. Jn re New York, N.H. &

H.R.R., 281 F. Supp. 65 (D. Conn. 1968).

>-

9

Judicial review of the Inclusion Report and orders then

proceeded in both a Statutory three-judge District Court

for the Southern District of New York and the New Haven

Reorganization Court. Both Courts found that the Com-

mission had committed numerous errors and both remanded

the proceedings to the Commission.*

In remanding the Inclusion Report to the Commission

for the correction of its many errors, the New Haven Re-

organization Court also held that the continuation of the

New Haven’s deficit railroad operations after December

31, 1968 would unconstitutionally deprive the New Haven

bondholders of their property and declared that the public

interest had been served to the full extent permitted by

the Constitution. On the remand, the Bondholders Com-

mittee objected to a transfer of the New Haven assets free

and clear of the first mortgage lien without absolute assur-

ance of the payment of liquidation value which it contended

was required by the Constitution. The Commission issued

its Fourth Supplemental Report, 334 I.C.C. 25 (Remand

Report) on November 25, 1968.** To the bondholders’ ob-

jection to the transfer of assets without payment the Com-

mission replied

“We disagree with the position of those creditor in-

terests which argue that the reorganization court can-

not require the creditors to surrender their liens unless

they are assured of receiving liquidation value .. .

of the NH assets...

* 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 re New York, N.H. & H.R.R. Co., 289 F. Supp. 451 (D. Conn.

1968).

** The Commission increased the price by approximately $20

million to $145.6 million which the Bondholders Committee and

other creditors contended was inadequate. The Bondholders Com-

mittee also contended that the consideration was overvalued.

ee 7

owe —

10

The NH creditors are guaranteed just and reason-

able compensation and other terms for their interests

in the NH, whenever distribution of the compensation

shall occur, whether at the time of or after the prop-

erties pass to Penn Central. Since Penn Central must

include the NH and must pay a price just and reason-

able to all concerned, the creditors lose nothing, vis-a-

vis Penn Central, by having their liens transferred

from the NH properties to the consideration which

Penn Central will eventually have to pay.” (334 LC.C.

74-75) (emphasis added)

Penn Central opposed the inclusion of the New Haven

until the payment terms had been subjected to the final

judicial review. The Commission rejected Penn Central’s

position, stating “the continuation of NH service without

interruption is a public interest matter of paramount im-

portance’’ (334 L.C.C. at 76). The Commission refused

to delay inclusion “even in view of the high probability

that litigation will continue beyond that date [January 1,

1969] over the price and other terms of the inclusion”

(Id.). It considered that its orders ‘‘adequately preserve

their [the parties] rights pending final adjudication of

appeals taken or to be taken from our order under section

Fass

The Remand Report was forwarded to the New Haven

Reorganization Court and the three-judge Statutory Court

for review. The New Haven Reorganization Court held

a hearing on December 20, 1968 for the sole purpose of

reviewing the provision of the Commission’s order which

required a transfer of the New Haven assets by December

31, 1968 before the terms had been subjected to final re-

view. By its Order No. 559 dated December 24, 1968, the |

New Haven Reorganization Court approved the provision,

directed the conveyance of the New Haven assets, and

reserved jurisdiction to consider and determine questions

related to the terms of the transaction.

_—

11

Judicial review of the Commission’s Remand Report fol-

lowed in the New Haven Reorganization Court and in the

three-judge Statutory District Court. The decisions of the

two Courts conflicted.*

On review of the Remand Report, the New Haven Re-

organization Court found that the Commission still under-

stated and improperly discounted liquidation value of the

New Haven assets to the extent of approximately $30 mil-

lion and that there was no adequate assurance that the

New Haven would actually receive the full value of the

property transferred. To insure full payment, the New

Haven Reorganization Court imposed upon Penn Central

a form of guarantee or “underwriting”. In re New York,

New Haven and Hartford R.R. Co., 304 F. Supp. 793 (D.

Conn. 1969). The “underwriting plan” was adopted by

the three-judge Statutory District Court, New York, N.H.

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

United States, 305 F. Supp. 1049 (S.D.N.Y. 1969) and by

the Commission. Fifth Supplemental Report, 334 I.C.C.

528 (1969). The Bondholders Committee and other cred-

itors appealed to this Court. Among other grounds cited

fer appeal was the attribution of certain values to Penn

Central shares and the inadequacy of the underwriting

plan to assure payment of the constitutional minimum to

which the bondholders were entitled.

The matters were then reviewed in expedited proceed-

ings by this Court. New Haven Inclusion Cases, 399 U.S.

392 (1970).

On June 21, 1970, while the matter was awaiting deci-

sion by this Court, Penn Central filed a petition under

Section 77 of the Bankruptcy Act. On June 21, 1970 also,

the Penn Central Reorganization Court issued its Order

* New York, N.H. & H.R.R. First Mortgage 4% Bondholders

4

Committee v. United States, 305 F. Supp. 1049 (S.D.N.Y. 1969) ;

In re New York, New Haven and Hartford R.R. Co., 304 F. Supp.

793 (D. Conn. 1969).

| _

12

No. 1 containing the usual blanket injunction against the

continuation of proceedings. Nevertheless, on June 29,

1970, this Court issued its decision remanding the matter

to the New Haven Reorganization Court for further pro-

ceedings in accordance with its opinion, while taking cog-

nizance of the intervening Penn Central petition for re-

organization. New Haven Inclusion Cases, supra, at 399,

fn.

This Court held:

‘‘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 sellout 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

Central to take the properties for any lesser sum.

Moreover, we today require a reassessment of the con-

sideration that Penn Central is to give in exchange

for those properties. We thereby accord the bond-

holders the right to a liquidation and a per-parcel

sale that is theirs by virtue of their mortgage liens.

..”? (399 U.S. at 489-90)

‘‘There is no longer room for dispute that the bond-

holders will receive the highest and best price for the

assets of the debtor as of December 31, 1966.’’ (399

US. at 492)

‘‘On the other hand, we must also reject any linger-

ing suggestion by Penn Central that the price it must

pay for the New Haven assets is unfair in either a

statutory or a constitutional sense.’’ (399 U.S. at 493)

>

13

Having found that the New Haven bondholders must

receive the ‘‘highest and best price for the assets of the

debtor as of December 31, 1966’’ and having confirmed the

New Haven Reorganization Court’s determination that

the value of those assets was $174,635,899, this Court re-

jected the New Haven Reorganization Court’s ‘‘under-

writing plan’’ as ‘‘wholly unrealistic’’ because it did not

assure that the New Haven bondholders would finally re-

ceive that amount under the underwriting plan in view of

Penn Central’s petition for reorganization. This Court

declared in plain language:

‘‘The fairness and equity that are the essence of a

§77 proceeding forbid our approval of a payment for

the transferred New Haven properties that may be

worth only a fraction of its purported value.’’ (399

U.S. at 488).

It remanded the matter to the New Haven Reorganiza-

tion Court for further proceedings in accordance with its

opinion, thereby requiring the New Haven Reorganization

Court and the Commission to formulate terms that would

make impossible the ‘‘payment for the transferred New

Haven properties that may be worth only a fraction of its

purported value.”? —

After receiving the mandate from this Court, the New

Haven Reorganization Court directed that statements of

position be filed by the New Haven Trustee and other in-

terested parties with respect to specified issues to be in-

cluded in an order of remand to the Commission. The

Penn Central Trustees then procured an order from the

Penn Central Reorganization Court directing them to ap-

pear specially and object to the remand proceeding being

conducted by the New Haven Reorganization Court. They

then appeared specially in the proceedings but neverthe-

less proceeded to brief and argue the issues on the merits.

14

The New Haven Reorganization Court entered its Mem-

orandum of Decision on June 11, 1971 (A-26-A-60) and its

order on June 22, 1971 (A-61-A-65), holding that it had

jurisdiction to adjudicate the issues before it and declar-

ing the existence of an equitable lien upon the former New

Haven assets and a constructive trust upon the excess in-

come from the Grand Central Terminal Properties.* The

New Haven Reorganization Court stated:

‘“‘This court has the exclusive jurisdiction to deter-

mine the effect of the Supreme Court’s mandate in

the New Haven Inclusion Cases, and this court must

decide what is to be done to implement it. The full

price required to be paid for the New Haven’s assets

was decided, but the terms of payment were not; and

this court alone must review and determine what

means, pursuant to the Supreme Court’s mandate,

are proper. The I.C.C, cannot adjudicate the issues |

of law now before this court, for these lie outside its

jurisdiction. ...

‘‘So here, the Commission has no jurisdiction to

decide the legal questions of the New Haven’s status,

whether as that of a stockholder or creditor, including

the type of creditor, and the further related question

as to whether or not the New Haven estate has a full

security interest in its former properties for the bal-

ance of the purchase price. These are legal questions

which are for this court in construing the Supreme

Court’s mandate. In the circumstances of this case

' ordinary sense and logic call for a resolution of these

paramount issues before remand of the case to the

I.C.C. in order that it may proceed with prior know]l-

edge of how the legal questions have been adjudi-

cated.’’ 330 F. Supp. at 136-137 (A-28-A-29).

* See New Haven Inclusion Cases, supra, at 445-451.

15

The Penn Central Trustees, Manufacturers Hanover

Trust Company, as trustee under the New York Central

and Hudson River Railroad Co. Gold Bond Mortgage (a

creditor of Penn Central), and Penn Central Transporta-

tion Company appealed to the Court of Appeals for the

Second Circuit. The Commission participated in the pro-

ceedings before the New Haven Reorganization Court

and submitted a statement of position, but did not appeal.

The Court of Appeals reversed on the ground that the

New Haven Reorganization Court ‘‘lacked subject matter

jurisdiction under 4 77(a) of the Bankruptcy Act, 11 U.S.C.

§ 205(a) (1970), to issue the order, since the property

affected is within the exclusive jurisdiction of another

district court’? (A-5) and directly remanded the case to

the Commission.

The Court of Appeals expliciily held that the New Haven

Reorganization Court’s jurisdiction to implement the man-

date of this Court, its reserved jurisdiction under the order

authorizing the transfer of the New Haven assets in ad-

vance of the final determination of terms of inclusion, and

its in personam jurisdiction over the Penn Central Trus-

tees, must all fall to the literal ‘‘exclusive jurisdiction’’

language of 477(a), supported by the majority’s inter-

pretation* of Warren v. Palmer 310 U.S. 132 (1940). In

addition, since the majority appears to oust the New Haven

Reorganization Court from having any future voice in

connection with the determination of the fairness and

equity of the still open terms of inclusion (A-16, A-18),

the Court of Appeals has held without comment that Con-

ditions 8 and 16 to the Penn Central merger, designating

the New Haven Reorganization Court as the court having

jurisdiction over approval of the terms of inclusion under

Section 5(2)(d) of the Interstate Commerce Act, must be

* Judge Mansfield concurred in the remand to the Commission

but dissented from the majority’s interpretation of Warren v. Palmer,

supra (A-22).

mene TREE DOSE NOTRE SERENE NTI LEN NS ST PRET DEN

ea a

16

deemed abrogated, thereby dismissing the emphasis this

Court placed upon Conditions 8 and 16 in Penn Central

Merger Cases, supra, and New Haven Inclusion Cases,

supra.* There is no authority, and the Court of Appeals

cited none, for the proposition that conditions imposed

under Section 5(2)(d) of the Interstate Commerce Act are

rendered inapplicable by the filing of a petition for re-

organization.

The Court of Appeals concluded:

‘‘We do not imply by this remand that we disagree

either with the fairness of Judge Anderson’s order

or with his conclusion that the Supreme Court’s opin-

ion in New Haven Inclusion Cases requires that the

New Haven estate receive $174.6 million as compensa-

tion for the taking of its property. We hold only that

the Connecticut reorganization court is not the proper

body to grant whatever protection is required be-

cause it has no jurisdiction, and we remand the case

to the Interstate Commerce Commission with direc-

tions to consider, in light of the Penn Central reor-

ganization, the form of consideration the New Haven

estate should receive.’’ (A-19)

Reasons for Granting the Writ

Summary

On December 31, 1968, the New Haven assets were trans-

ferred ‘‘free and clear’’ of the liens of the First Mort-

gage Bondholders in advance of final determination of the

terms of inclusion and delivery of the full compensation

* The harshness of the ‘‘ouster” of the New Haven Reorganiza-

tion Court is emphasized by the fact that the Bondholders Commit-

tee has been held to have no standing in the Penn Central reorgani-

zation proceedings. Jn the Matter of Penn Central Transportation

Company, 455 F.2d 811 (3rd Cir. 1972). A petition for a writ of

certiorari has been filed with this Court (No. 71-1384).

a

to which the bondholders’ lien could then attach. This

extraordinary procedure was imposed because the public

interest was said to require uninterrupted New Haven rail-

road service. The removal of the bondholders’ property

without immediate just compensation was stated to be con-

sistent with the Constitution because the bondholders’

constitutional rights were completely protected by the re-

tained jurisdiction of the Commission and the New Haven

Reorganization Court. The Commission had previously

‘“‘guaranteed just and reasonable compensation’’ to the

bondholders and considered that its reserved jurisdiction

and that of the New Haven Reorganization Court fully

preserved the bondholders’ rights ‘‘peading final adjudi-

cation of appeals taken or to be taken from our order

under section 5’’. Remand Report, 334 I.C.C. at 74-76. In

ordering the transfer of the assets, the New Haven Reor-

ganization Court reserved jurisdiction over ‘‘the fairness

and adequacy of the consideration and the other terms of

inclusion’? (Order No. 559 dated December 24, 1968).

Among the ‘‘terms of inclusion’’ fixed by the New Haven

Reorganization Court was an ‘‘underwriting plan’’ de-

vised by the New Haven Reorganization Court to assure

that the New Haven bondholders received the full com-

pensation due to them. Upon appeals to this Court, the

terms of inclusion and purchase price were approved, but

this Court, in light of Penn Central’s petition for reorgani-

zation, found the ‘‘underwriting plan’’ to be ‘‘wholly un-

realistic’? and ordered ‘‘a reassessment of the considera-

tion’’* so that the bondholders would actually receive the

full compensation due to them. See New Haven Inclusion

Cases, supra, at 489-90, 492.

The Court of Appeals’ holding ousts the New Haven

Reorganization Court from its jurisdiction to take the

steps necessary to preserve the constitutionality of the

17

* The bulk of the consideration was then contemplated to consist

of securities of Penn Central of questionable value.

ee MD ema rad eh unad inate cue SED

ns ae

18

extraordinary orders it has already issued in an extreme

effort to serve the public interest. This Court’s decision

in Penn Central Merger Cases supra, foreshadowed the

transfer of the assets out from under the bondholders’

liens in the public interest. Only this Court can interpret

its mandate in New Haven Inclusion Cases, swpra, to pre-

serve the jurisdiction necessary to assure protection of

the constitutional rights of the bondholders.

The Court of Appeals erred in ousting the New Haven

Reorganization Court of jurisdiction upsetting completely

the procedure previously established by this Court and

the Commission.* The error seriously endangers the con-

stitutional rights of the bondholders and even their right

to be heard in defense of their own interests. Important

questions involving constitutional law, Section 77 of the

Bankruptcy Act, Section 5 of the Interstate Commerce Act

and the construction of this Court’s mandate are pre-

sented.

1. The Court of Appeals erred in concluding that the New

Haven Reorganization Court was ousted from its juris-

diction to take additional steps necessary to preserve

the constitutionality of orders previously issued.

From the beginning of these proceedings it was recog-

nized that the merger of Penn and Central, the terms for

the inclusion of the New Haven, and even the New Hav-

en’s reorganization, would have to proceed step by step.

It was recognized that, while ordinarily it is preferable

for the merger conditions to spell out precisely all of the

obligations to be assumed by the merger partners, this

could not be accomplished expeditiously in the instant

proceedings. Penn-Central Merger Cases, supra. Even

the New Haven Reorganization was divided into a unique

‘‘two-step’’ plan** and finally, even the ‘‘first step’’ of the

* Even the Penn Central Trustees had not presumed to ask the

Court of Appeals for such relief. In consequence, the question was

never briefed or argued to the Court of Appeals.

** See New Haven Inclusion Cases, supra, at 413-14 fn. 47; In re

New York, N.H. & H.R. Co., 378 F. 2d 635 (2d Cir. 1967).

—

19

New Haven reorganization plan was subdivided so that

the public interest could be served.

Thus, Penn and Central were authorized by the Com-

mission to merge in advance of the formulation of inclu-

sion terms. Penn-Central Merger Approval Case, 327

L.C.C. 475 (1966). Thereafter, the Commission and the

New Haven Reorganization Court deemed it necessary to

require the New Haven to transfer its property in advance

of an adjudication of the amount Penn Central would

have to pay for the New Haven assets and the terms of

payment. When Penn Central desired to merge, it stated

its complete willingness to risk whatever future terms

were finally imposed subject to the approval of the New

Haven Reorganization Court. See In re New York, N.H.

é H.R. Co., 289 F. Supp. 451, 460 (D. Conn. 1968).

In ordering the transfer of the New Haven property to

Penn Central in advance of satisfying itself that it could

approve the Commission’s terms of inclusion, the New

Haven Reorganization Court recognized that it was dis-

posing of the property of creditors over their objections

to the terms of inclusion and in advance of their vote on

a plan of reorganization. The New Haven Reorganiza-

tion Court insulated this extraordinary step against the

charge of impropriety by a broad reservation of jurisdic-

tion. This broad reservation was required because the

court found that the public interest required that con-

tinued rail service be furnished while the constitutional

rights of the bondholders forbade the New Haven from

continuing to furnish it. The rights of the bondholders

could not be determined or satisfied before railroad serv-

ice would terminate. To protect against the possibility

that the bondholders would be unfairly or unconstitution-

ally treated, broad jurisdiction was reserved and a trans-

fer of the New Haven operations to Penn Central was

imposed.

The New Haven Reorganization Court then determined

the inclusion terms, both as to the amount and as to Penn

20

Central’s unsecured promise to assume payment of that

amount (the ‘‘underwriting plan’’). The decision of this

Court in New Haven Inclusion Cases, supra, confirmed

the jurisdiction of the New Haven Reorganization Court

to fix terms of inclusion in the posture of this case, but held

those fixed inadequate for failing to assure that the bond-

holders would finally receive the value of the property taken

from them. This Court stated:

‘*. . . 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 [liqui-

dation value].’’ (399 U.S. at 489)

‘‘The fairness and equity that are the essence of a

§77 proceeding forbid our approval of a payment

for the transferred New Haven properties that may

be worth only a fraction of its purported value.”’

(399 U.S. at 488)

When this Court’s mandate was issued to the New Haven

Reorganization Court, the duty devolved upon that court

to define the law of the case in respect of inclusion terms

to the Commission, so that the Commission’s further pro-

ceedings on remand would not require the determination

of questions of law. Even more importantly, the remand

required the correction of the defect this Court had found

in the underwriting plan created by the New Haven Re-

‘organization Court. The order reversed by the Court of

Appeals provides one formula for the correction, by the

Court that made it, of the error adjudged by this Court.*

* Future events may yet demonstrate that even the security inter-

est declared in the order reversed by the Court of Appeals is inade-

quate to protect the constitutional rights of the bondholders and their

rights under § 77, just as the underwriting plan proved inadequate

in the light of future events. The Bondholders Committee does not

intend by its support of the order of the New Haven Reorganization

Court to waive its right to appropriate inclusion terms should future

events prove further protection is required.

_——_

21

The Court of Appeals brushed aside all the history of

this case and all the careful and important reservations

of jurisdiction, in favor of a literal reading of the ‘‘ex-

elusive jurisdiction’’ phrase of 4{77(a) and an expansive

interpretation of the case of Warren v. Palmer, supra.

As to the reservation of jurisdiction contained in the

order of the New Haven Reorganization Court, the Court

of Appeals simply concluded that ‘‘the subsequent ap-

proval of Penn Central’s petition by the Pennsylvania

reorganization court served to oust the Connecticut

court’s jurisdiction and to vest ‘exclusive jurisdiction’ in

the Pennsylvania court’’ (A-18). There is no authority

for the holding of the Court of Appeals and none was

cited by the Court of Appeals. The only attempt at jus-

tification for the holding is contained in the completely

unsupported statement that ‘‘. . . the effect of the exer-

cise of retained jurisdiction would be to hinder the ability

of the reorganization court to administer the property of

the railroad pending reorganization’’ (A-18). A declara-

tion of legal rights, if correct, does not ‘‘hinder the ability

of the reorganization court to administer the property’’.

A reorganization court should not be deemed to be above

the law with respect to property in the possession of the

debtor’s trustees. That court should be subservient to,

and need only follow, the law that has been established

and administer the estate within the framework of the

applicable law.

The Court of Appeals held that this Court’s decision

in Warren v. Palmer, swpra, ‘‘is determinative of this

ease’ (A-13), But that case bears no resemblance to the

instant situation, where Penn Central came into possession

of the New Haven assets because of a compelled transfer

in the public interest. That transfer in the first instance

was justifiable only because jurisdiction had been reserved

to fix appropriate terms. The decision of the Court of Ap-

peals that the New Haven Reorganization Court has been

ousted of jurisdiction to preserve the constitutionality

22

of its earlier orders should be reviewed by this Court and

rejected.

The Court of Appeals’ ouster of the New Haven Reor-

garization Court, if upheld, would have the effect of de-

priving that Court of passing upon the propriety of the

first step of the plan of reorganization for the New Haven

in violation of the statutory scheme of 477 of the Bank-

ruptey Act. It would require this Court to pass upon the

propriety of the first step of a New Haven plan of reor-

ganization without the benefit of the opinion of the New

Haven Reorganization Court. It would deprive the credi-

tors of the New Haven of the right to be heard in the

forum in which their standing is assured. It would assign

the determination of the propriety of the first step of the

New Haven plan of reorganization to a reorganization

court which is not familiar with the New Haven history,

which has for-its primary function the protection of the

publi¢ interest in a reorganization of Penn Central and

which has already questioned the standing of the New

Haven creditars to be heard before it. These questions are

of such far reathing magnitude and require such novel in-

terpretations concerning the staiutory scheme in reorgani-

zation proceedings that this Court should grant review.

2. The Court of Appeals erred in disregarding Penn Cen-

tral’s obligations under Section 5 of the Interstate Com-

merce Act and Condition 8 to the Penn Central merger.

In New Haven Inclusion Cases, swpra, this Court de-

scribed its earlier role as follows:

*‘On January 15, 1968, this Court had upheld the valid-

ity of the Penn Central merger under 45 of the Inter-

state Commerce Act, conditioned on the inclusion of

New Haven on terms subject to objections to be ‘reg-

istered and adjudicated in the bankruptcy court or

upon judicial review as provided by law.’ Penn Cen-

tral Merger Cases, 389 U.S. at 511. We had permit-

ted a postponement of the inclusion of New Haven

on.

—

23

on the basis of Penn Central’s acceptance of the in-

clusion requirement, id., at 509, and because by its

act of merger Penn Central would ‘perforce accept

... appropriate conditions respecting the New Haven.

..’? Id., at 510.

‘“‘Two weeks later Penn Central merged. At that

point the lack of jurisdictional ‘completeness’ in the

reorganization court, to which we have earlier re-

ferred, was cured, for there now remained no ques-

tion of Penn Central’s obligation to take over the

assets of the New Haven. With Penn Central having

given its irrevocable consent to the inclusion of New

Haven by its act of merger, it was evident that what-

ever terms the reorganization court might confirm,

subject to review or appeal to the Court of Appeals

followed by certiorari here, would bind Penn Central

by virtue of its merger commitment.’’ (399 U.S. at

427-28) (emphasis added).

In spite of the determination by this Court that by its

merger subject to Condition 8, Penn Central had given

its irrevocable consent to ‘‘whatever terms the reorgani-

zation court might confirm’’, the Court of Appeals has now

determined that the jurisdictional aspects of Condition 8

have been terminated by the filing of a petition for reor-

ganization by Penn Central. The Court of Appeals cited

no case or statutory authority for the proposition that the

filing of a petition under $77 is sufficient to free Penn

Central of merger conditions fixed in combined $5 and

§77 proceedings. Indeed, the Court of Appeals managed

to write its opinion without any discussion of Condition 8.

Pursuant to the jurisdiction mandated by Condition 8

and §77, the New Haven Reorganization Court fixed an

‘‘underwriting plan’’ designed to assure payment to the

New Haven. In the light of Penn Central’s reorganiza-

tion proceedings, this Court struck down the underwriting

plan because the general creditor status provided by that

24

plan ‘‘may be worth only a fraction of its purported

value” and would not satisfy the requirements of {77

(399 U.S. at 488). On remand, the New Haven Reorganiza-

tion Court fixed a term of inclusion which provides that

the New Haven is a secured rather than a general creditor

of Penn Central. There is no doubt that the declaration

of such a term of inclusion was within the jurisdiction of

the New Haven Reorganization Court and the Commission

. prior to the filing of Penn Central’s petition for reorganiza-

tion.* But because this Court recognized the underwriting

plan to be unrealistic the Court of Appeals has now per-

mitted Penn Central to avoid the entire statutory scheme

of § 5 of the Interstate Commerce Act and §77 and its ob-

ligations under Condition 8. The Court of Appeals has

deprived the New Haven Reorganization Court of the op-

portunity to discharge its obligations to the New Haven

bondholders arising from the transfer of the New Haven’s

property free of the bondholders’ liens to Penn Central in

advance of final terms, all on the theory that Penn Cen-

tral’s petition for reorganization insulated the Penn

Central estate from all further proceedings in any court

but that on which Penn Central by its petition claims to

have conferred jurisdiction.

The postponement of the inclusion of the New Haven

in Penn Central and the postponement of the fixing of final

terms of inclusion was permitted by this Court and by the

New Haven Reorganization Court only because it was

-recognized that the consummation of the merger consti-

tuted such a binding submission to the jurisdiction of the

Commission and the New Haven Reorganization Court that

there was no danger that terms of inclusion fair and

equitable to the New Haven approved by the New Haven

* The Penn Central Trustees recognized that it was within the

Commission’s jurisdiction to make such a declaration on remand.

They argued only that it was premature for the New Haven Reor-

ganization Court to declare that such a term was mandated by con-

siderations of fairness and equity and this Court’s decision.

—_

25

Reorganization Court would not finally be carried out.

When the Commission granted Penn and Central the right

to merge, it automatically granted to them the benefits of

§5(11) of the Interstate Commerce Act which relieved

them of all ‘‘restraints, limitations, and prohibitions of

law, Federal, State, or municipal, insofar as may be neces-

sary to enable them to carry into effect the transaction so

approved or provided for in accordance with the terms and

conditions, if any, imposed by the Commission .. .’’ This

broad immunity may be conferred by the Commission only

because it imposes conditions which assure continued con-

trol over the immunized merger partners. The decision of

the Court of Appeals, ruling Penn Central free to abrogate

Condition 8 while retaining the benefits of the merger,

should be reviewed by this Court.

CONCLUSION

For the reasons above stated, this Petition for a writ

of certiorari should be granted.

Respectfully submitted,

Lester C. Miepau

Lawrence W. Potiack

Attorneys for Petitioner

598 Madison Avenue

New York, New York 10022

Of Counsel:

MicpaL, Low, Tenney & Grass

May 23, 1972.