Reply Brief — Pennsylvania v. United States

IN THE

October Term, 1971

No. 71-1596

COMMONWEALTH OF PENNSYLVANIA, e al.,

Petitioners,

against

UNITED STATES OF AMERICA, et al.,

Respondents.

REPLY BRIEF OF RESPONDENT 34%

MORTGAGE BONDHOLDERS’

PROTECTIVE COMMITTEE

Jacos I. GoopsTEIN

Frep H. Krones

BengaMin Wm. MEHLMAN

Attorneys for Respondent 344%

Mortgage Bondholders’

Protective Committee

21 East 40th Street

New York, New York 10016

(212) 685-4822

Supreme Court of the Wnited States’ “*

_

TABLE OF CONTENTS

PAGE

I TINIE ecdchinsorsarpnowivsntnirininienidigunieitincsasincivtin 1

ESA ec Rept eae One WEN en eee Tren ON TENT 2

Argument

I. The reorganization court has the power to

order, as it did in Order No. 445, suspension

of the Debtor’s Pennsylvania lines on April 1,

1972 and cessation of all its operations if the

Trustee’s application to the Interstate Com-

merce Commission to abandon should be denied

in whole or in any respect which the court finds

is not in the best interest of the Debtor’s estate 3

II. An appeal from an order of the Interstate Com-

merce Commission authorizing the Debtor to

abandon portions of its lines must be made to

the reorganization court ........................ccsccscsessee 6

ETRE A OR Ni Re PEN Le EE 12

TABLE OF AUTHORITIES

Cases:

New Haven Inclusion Cases, 399 US 392, 26 LEd 691,

| tS” Rr ENE AP OL alee teen 4,5, 7,10

New York, N.H. & H.R. Co., In re, 289 F. Supp. 451;

a li cede 10

” " Statutes:

Bankruptcy Act:

Sec. 77(a), 11 USC See. 205(a) oo... 6

Sec. 77(0), 11 USC See. 205(0) 00... ee 6

—

IN THE

Supreme Court of the United States

October Term, 1971

No. 71-1596

—_—_—_—E— ae

CoMMONWEALTH OF PENNSYLVANIA, et al.,

Petitioners,

against

Unitep States or America, et al.,

Respondents.

REPLY BRIEF OF RESPONDENT 344%

MORTGAGE BONDHOLDERS’

PROTECTIVE COMMITTEE

Questions Presented

1. Whether the reorganization court has the power to

authorize a shutdown of the Debtor’s lines, or all of its

lines, without authorization of the Interstate Commerce

Comm?sion.

2. Whether an order of the Interstate Commerce Com-

mission authorizing the Debtor to abandon portions of its

lines must be appealed to a three-judge court or must it be

made to the reorganization court.

Statement

The Respondent 314% Mortgage Bondholders’ Protec-

tive Committee was authorized by the Interstate Commerce

Commission, by order dated September 13, 1968 in Finance

Docket No. 24535, to solicit and represent holders of the

Debtor’s 314% Mortgage Bonds.

The reorganization court. permitted this Respondent to

intervene in this proceeding by order dated and entered

October 1, 1969. That order was affirmed by the Court of

Appeals for the Third Circuit by order dated July 17, 1970.

An application to reverse the order of that court was made

to this Honorable Court which denied certiorari on March

1, 1971.

This Respondent, through counsel, has taken part in all

proceedings in this matter in the reorganization court, the

Court of Appeals, this Honorable Court and before the

Interstate Commerce Commission. It represents a substan-

tial amount of the outstanding bonds.

We believe that the briefs of the Trustee and other

Respondents will set forth the relevant facts, so that it

will not be necessary for us to burden this Court with

repetitious statements.

We also have been advised that the briefs of the Trustee

and other Respondents will cite the relevant legal decisions

and authorities so that it will not be necessary to set forth

an extended discussion of the applicable law herein.

—

3

This Respondent respectfully submits that the reorgan-

ization court below acted properly and with full authority

in making the orders involved in this petition, namely

Order No. 445 and Order No. 451 and that they were prop-

erly affirmed by the Court of Appeals for the Third Circuit.

The affirmance should stand and the petition for the writ

of certiorari should be denied.

ARGUMENT

I

The reorganization court has the power to order, as

it did in Order No. 445, suspension of the Debtor’s

Pennsylvania lines on April 1, 1972 and cessation of

all its operations if the Trustee’s application to the

Interstate Commerce Commission to abandon should

be denied in whole or in any respect which the court

finds is not in the best interest of the Debtor’s estate.

The Debtor has lost and is continuing to lose substantial

sums of money annually. These losses amount to millions

of dollars each year. As a result of its familiarity with

the Debtor’s operations and after taking testimony as to

its losses, the reorganization court was convinced that the

Debtor could not continue in business unless its operations

in the Commonwealth of Pennsylvania were eliminated.

Early in 1971 the reorganization court authorized the

Trustee to apply to the Interstate Commerce Commission

for leave to abandon the Debtor’s Pennsylvania lines.

Because of the Debtor’s continued losses, and in the

reorganization court’s opinion of the disastrous effect of

4

the losses of the Pennsylvania lines on the Debtor’s entire

system, the court decided that it was necessary to suspend

all operations in Pennsylvania on April 1, 1972 and it issued

Order No. 445. We respectfully submit that the reorgan-

ization court has that power and that it properly made

that order.

This Honorable Court has set forth the underlying prin-

ciples governing railroad reorganizations in New Haven

Inclusion Cases, 399 US 392, 26 LEd 2d 691, 90 SCt. 2054

(1970), in which Mr. Justice Stewart’s opinion stated (p.

431):

‘**After 35 years of §77, as amended, it is unneces-

sary to recanvass the two basic objectives of the statute

—the conservation of the debtor’s assets for the benefit

of creditors and the preservation of an on going rail-

road in the public interest. See generally 5 Collier,

supra 977.02, at 469-470. Central to the statutory

objective that the reorganized company should, if at

all possible, emerge as a ‘living, not a dying * * *

enterprise’, Van Schaick v. McCarthy, 116 F 2d 987,

993, is the understanding that ‘a railroad [is] not like

an ordinary insolvent estate.’ Palmer v. Massachu-

setts, 308 US at 86, 84 L Ed at 99. (Footnote omit-

ted). ® © @»

The reorganization court found, in issuing Order No. 445

that the suspension of Debtor’s operations in the Common-

wealth of Pennsylvania would permit the continuation of

part of Debtor’s railroad which will serve a tremendous

number of industries and will preserve the Debtor’s assets.

The reorganization court therefore exercised the power and

jurisdiction given to it by the Bankruptcy Act.

—

There are many authorities which may be cited in other

briefs herein to sustain the power and jurisdiction of a

reorganization court to order a suspension or shutdown

of a railroad’s operations. Such shutdowns are justified

not only by the physical condition of the railroad, but also

by the lack of finances necessary to operate the road.

5

As this Honorable Court pointed out in the New Haven

Inclusion Cases (supra), at 415, Judge Anderson (the re-

organization judge in those cases) ruled that because of

the New Haven’s dwindling cash reserves, unless the Inter-

state Commerce Commission ordered inclusion of the New

Haven into the Penn Central by January 1, 1969, he would

entertain a motion to dismiss the reorganization proceed-

ing, resulting in termination of all the New Haven’s train

service.

We respectfuly submit that there is no reason why the

reorganization court in this proceeding was not also justi-

fied in shutting down all of the Debtor’s operations in the

face of continued drastic losses.

It should also be noted, in balancing the equities of the

situation, that the petitioner, Commonwealth of Pennsyl-

vania, has not offered, at any time, any plan or suggestion

whereby the Debtor’s lines in Pennsylvania could continue

to be operated without continued, substantial losses, nor has

it offered any financial subsidy which would enable the

Debtor to continue the operation of those lines. The re-

organization court and the Court of Appeals undoubtedly

considered the equities as well as the legal factors involved.

We submit, therefore, that the affirmance by the Court

of Appeals of the reorganization court’s Order No. 445

should stand, and that a writ of certiorari should not issue.

An appeal from an order of the Interstate Com-

merce Commission authorizing the Debtor to abandon

portions of its lines must be made to the reorganization

court.

We respectfully submit that any appeal from an order

of the Interstate Commerce Commission authorizing the

Debtor to abandon portions of its lines must be made to

the reorganization court.

Section 77(a) of the Bankruptcy Act (11 USC, Sec.

205(a)) states, in part:

‘‘(a) Any railroad corporation may file a petition

stating that it is insolvent or unable to meet its debts

as they mature and that it desires to effect a plan of

reorganization. * * * If the petition is so approved, the

court in which the order is entered shall, during the

pendency of the proceedings under this section and for

the purposes thereof, have exc-usive jurisdiction of the

debtor and its property wherever located, and shall

have and may exercise in addition to the powers con-

ferred by this section all the powers, not inconsistent

with this section, which a court of the United States

would have had if it had appointed a receiver in equity

of the property of the debtor for any purpose. Process

of the court shall extend to and be valid when served

in any judicial district. * * *.”

Section 77(0) of the Bankruptcy Act (11 USC Sec.

205(0)) states in part:

‘<(o9) The trustee or trustees, from time to time,

shall determine what lines or portions of lines of rail-

road and what other property of the debtor, if any,

ce eaaeaamcaaa aaa

7

should be abandoned or sold during the pendency of

the proceedings in the interest of the debtor’s estate

and of ultimate reorganization but without unduly or

adversely affecting the public interest, and shall pre-

sent to the judge petitions, in which other parties in

interest may join, for authority to abandon or sell any

such property ; and upon order of the judge made after

a hearing pursuant to such reasonable notice by publi-

cation or otherwise as the judge may direct to parties

in interest, authorizing any such abandonment or sale,

but only with the approval and authorization of the

Commission when required by the Interstate Commerce

Act as amended February 28, 1920, or as it may be

hereafter amended, the trustee or trustees shall take

all steps and carry out all proceedings necessary for

the consummation of any such abandonment or sale in

accordance with the order of the judge. Any such

order of the judge shall be a final order for purposes

of appeal. The judge may order and decree any sale

of property, whether or not incident to an abandon-

ment, under this subsection at public or private sale

and subject to or free from liens. * * *”’,

We respectfully submit that these provisions confer

authority upon the reorganization court to review orders of

abandonment issued by the Interstate Commerce Commis-

sion.

The opinion of Mr. Justice Stewart of this Honorable

Court in New Haven Inclusion Cases (supra), states ample

authority for asserting the authority of the reorganization

court in this regard. The ultimate question there was the

price to be paid by Penn Central for the assets of the New

Haven. The Interstate Commerce Commission’s order fix-

ing that price was remanded by the reorganization court

for further proceedings, ruling that, because of the con-

on

tinuing drain on the New Haven’s dwindling cash reserves,

unless the Commission ordered inclusion by January 1,

1969, the Court would entertain a motion to dismiss the

reorganization proceeding resulting in termination of all

the New Haven’s train service.

The Commission certified a revised plan which again

was rejected by the reorganization court. An appeal was

taken to a three-judge court, which denied the bondholders’

application for injunctive relief. Mr. Justice Stewart said

(p. 419):

««*** From the outset all the parties in the three-

judge court recognized that the pricing questions pre-

sented in the litigation there were also destined to come

before the reorganization court under $77 of the Bank-

ruptey Act. * * *”’,

and in commenting on the three-judge court’s ruling, he

said (p. 420):

‘‘In this ruling, the three-judge court was correct.

The jurisdiction of the reorganization court was not

open to question. Upon its approval of the New

Haven’s petition for reorganization in 1961, that court

had acquired ‘exclusive jurisdiction of the debtor and

its property wherever located * * *.’ Id. §77(a) 11

USC §205(a) * * *’’. (Citing cases in footnote 52).

There are a number of other statements in Mr. Justice

Stewart’s opinion which underscore the reorganization

court’s jurisdiction. On page 421, he stated:

««* © * Together the [reorganization] court and the

Commission ‘unquestionably’ had ‘full and complete

power not only over the debtor and its property, but

also, as a corollary, over any rights that [might] be

—

9

asserted against it.’ Callaway v Benton, 336 US 132,

147, 93 L Ed 553, 564, 69 S Ct 435. One such power

was precisely that which the Commission was about to

propose that the reorganization court exercise—the

power to confirm a plan of reorganization providing

for ‘the sale of all * * * of the property of the debtor

** *’ Bankruptcy Act, §77(b)(5), 11 USC §205(b) (5).

To that end the Commission was required to certify

its proposal to the court as a prerequisite to judicial

approval. §77(d), 11 USC §205(d). Injunctive inter-

vention by the three-judge court would thus have dis-

rupted an essential statutory phase of the New Haven

reorganization. ’’

Interference by a three-judge court, as requested by

the appellants would similarly disrupt this proceeding, par-

ticularly since the Commission has issued an order to aban-

don the Debtor’s Pennsylvania lines.

It is argued that the three-judge court should review

the Commission’s order of abandonment. However, Mr.

Justice Stewart’s opinion disposed of that argument.

Referring to situations where a three-judge court has been

asked to consider the same pricing questions as the re-

organization court, he said (p. 426):

We recognize that that principle has com-

monly applied in cases where both courts assert in rem

jurisdiction over the property in dispute, and that here

the three-judge court’s jurisdiction was in personam

in character. But the conflict was nonetheless one

‘between two coordinate courts of concurrent, over-

lapping jurisdiction, neither belonging to a class which

by paramount law is categorically given a jurisdiction

over the particular subject matter paramount to the

jurisdiction of the other.’ In re New York, N.H. &

H.R. Co., 26 F Supp 18, 24, aff’d sub nom Palmer v.

10

Warren, supra. And given that conflict the three-

judge court could have followed the settled proposition

that ‘[t]he court which first acquired jurisdiction

through possession of the property is vested, while it

holds possession, with the power to hear and determine

all controversies relating thereto.’ Lion Bonding &

Surety Co. v Karatz, 262 US 77, 89, 67 L Ed 871, 880,

43 S Ct 480.

Surely a vesting of primary jurisdiction in the

reorganization court comports with the basie purpose

of §77. ee 877

This Honorable Court has recognized and affirmed the

power of the reorganization court to order a debtor railroad

to cease all operations and liquidate if the court finds that

further operations of the debtor solely for the public inter-

est would violate the Fifth Amendment as an unconstitu-

tional taking of the debtor’s property. New Haven Inclu-

sion Cases (supra).

As we have pointed out above, Judge Anderson, sitting

as reorganization court for the New Haven Railroad under

§77 (In re New York, N.H. & H. R. Co., 289 F Supp 451;

D. Conn. 1968) ordered that the inclusion of the New Haven

in the Penn Central system take place no later than January

1, 1969, or he would permit no further financing of the rail-

road’s deficit operations at the expense of the New Haven

estate, and, as a result the line would shut down.

In recognizing Judge Anderson’s power to do so, Mr.

Justice Stewart’s opinion stated (pp. 490-491) :

“A §77 reorganization court may not, of course,

disregard a claim that injurious consequences will re-

sult to a secured creditor from the suspension of the

right to enforce his lien against the property of a

—_

11

debtor. That claim, however, ‘presents a question ad-

dressed not to the power of the court but to its discre-

tion—a matter not subject to the interference of an

appellate court unless such discretion be improvidently

exercised.’ Continental Illinois National Bank & Trust

Co. v. Chicago, R.I. & P.R. Co. 294 US 648, 677, 79 L

Ed 1110, 1129, 55 S Ct 595. Here the reorganization

court recognized its duties under the Bankruptcy Act

and the Constitution. * * *.”’

This Honorable Court thus affirmed the power of the reor-

ganization court to order a shutdown of a debtor’s entire

operation. In affirming that power, the opinion quoted

Judge Anderson’s ruling with approval in which he stated

(p. 491):

‘¢*TIn view of the history of this deficit operation

from the time of the filing of the petition under §77 and

even before, the size of the losses, the long period of

time necessarily involved in seeking to work out a solu-

tion, short of liquidation, through inclusion in the Penn-

Central, the present condition of the Railroad and the

rate of loss and out-flow of cash in the recent past and

in the foreseeable future, this court finds that the con-

tinued erosion of the Debtor’s estate from operational

losses after the end of 1968 will clearly constitute a

taking of the Debtor’s property and consequently the

interests of the bondholders, without just compensa-

tion. It is therefore constitutionally impermissible, and

obviously no reorganization plan which calls for such

a taking can be approved.’ 289 F Supp, at 459.”’

Judge Anderson had the power to shut down the New

Haven because of its condition and doubt of its future con-

tinuance. Judge Augelli, the reorganization judge in this

proceeding, who has knowledge of the facts concerning this

Debtor’s condition and of its bleak prospects, certainly has

12

the power to order a partial shutdown of its operations, and

the paramount power to review an order of the Interstate

Commerce Commission which authorized abandonment of

some of the Debtor’s lines.

Conclusion

For the foregoing reasons, the petition for a writ of

certiorari to review the judgments and opinions of the

Court of Appeals for the Third Circuit should be de-

nied.

Respectfully submitted,

Jacos I. GoopsTEIN

Frep H. Krones

BenzamMin Wm. Meuiman

Attorneys for Respondent 3%4%

Mortgage Bondholders’

Protective Committee

_ a

ETO a ee SLE LIPO E A LE SIO IS ER