# Reply Brief — Pennsylvania v. United States > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_1138%3A3 ## Record - **Collection:** Supreme Court brief - **Document type:** Reply Brief - **Published:** January 1, 1972 - **Citation:** 409 U.S. 894 ## Text 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385606_1138%3A3. Public record. Not legal advice.