Petition for Writ of Certiorari — Smith v. Baker
Supreme Court brief1972
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Supreme Court of the United States
October Term, 1972
No. 72-356
In THE MatrTeR OF
Penn Central Transportation Company, Destor
Richard Joyce Smith, Trustee of the Property of
The New York, New Haven and Hartford Railroad
Company, Debtor,
PETITIONER
v.
George P. Baker, Richard C. Bond, Jervis Langdon, Jr.
and Willard Wirtz, Trustees of the Property of
Penn Central Transportation Company, Debtor;
Bankers Trust Company as Mortgage Trustee;
and Morgan Guaranty Trust Company of New York
as Mortgage Trustee;
RESPONDENTS
Petition FoR Wait oF CERTIORARI
BerorE JUDGMENT TO THE UNITED
States Court or APPEALS FOR
Tse Tump Crecurr
225 Franklin Street
Boston, Massachusetts 02110 JoserH AUERBACH
225 Franklin Street
Boston, Massachusetts 02110
Dated: August 30, 1972
Bowne of Boston, Inc.
(i)
TABLE OF CONTENTS
STATUTES INVOLVED
QUESTIONS PRESENTED
STATEMENT OF THE CASE
REASONS FOR GRANTING THE WRIT
I. The Issues Raised By The Two Petitions Should Be
. The Judgment of The Penn Central Reorganization
Court Sustained a Collateral Attack In Disregard of
All Pertinent Decisions Of This Court
. The New Haven Reorganization Court Should Be
Sustained On The Merits As Having Correctly Con-
strued The Intention Of This Court In The New
Haven Inclusion Cases
CONCLUSION
(ii)
TABLE OF CITATIONS
American Surety Co. v. Baldwin, 287 U.S. 156 (1932) ....... 5
Angel v. Bullington, 330 U.S. 183 (1947) ..........eeeeeees TH
Baldwin v. Iowa State Traveling Men's Assoc., 283 U.S. 522
EEE Snieekivesbintsa0elsenonrd i ecessexeathunionens 4
Blonder-Tongue Laboratories v. University of Illinois Foun-
SA, Se Ts NO CED ho coc cncdendascscendcctwnkaa Lb
Chicot County Drainage District v. Baxter State Bank, 308
Ee CEE Sdn nckbcssewas assed ccktansdccanmmesans 15
Davie o. Davie, 305 US. 32 (1038) .....cccccccccccccccces 14
Durfee v. Duke, 375 U.S. 106 (1963) ............eceeeeeees 15
Faust v. Munson Steamship Lines, 299 U.S. 77 (1936) ...... 15
Heiser o. Woodruff, 327 U.S. 726 (1946) .........ecceeeeee 15
In re New York, New Haven and Hartford R.R. Co., 331 F.
De Te CER GRR. BOGE 0.0.00 os cscnntsccscsnnineccasa 25
In re New York, New Haven, and Hartford R.R. Co., 330 F.
ee BRD Ce GI, BPE 6 ones dn cnnnedes dceiccavescas 2, 5,6
In re Penn Central Transportation Co., 337 F. Supp. 779 (E.D.
eR NER Ree rina MO ci 2,9
Katchen v. Landy, 382 U.S. 323 (1966) ........... cece eeees 15
Morris v. Jones, 329 U.S. 545 (1947) ...... cc cccccccccccees 15
New Haven Inclusion Cases, 399 U.S. 392 (1970) ...... 4 et passim
Stoll v. Gottlieb, 305 U.S. 165 (1938) ...........eceeeeceees
(it
Texas v. Donoghue, 302 U.S. 284 (1937) .....ceeeeeseeeeee
Thompson v. Magnolia Petroleum Co., 309 U.S. 478 (1940) ..
Union Joint Stock Land Bank of Detroit v. Byerly, 310 U.S. 1
(IMD) seeccscceecccccceceseeseeesssssesseeeseseeeees
United States v. Throckmorton, 98 U.S. 61 (1878) ......+-.-
United States v. United Mine Workers of America, 330 US.
Q5B (1947) ...cscecceccecscescecscsvscseceeesceeones
Williams v. Armroyd, 11 U.S. (7 Cranch) 423 (1813) ....-..
15
15
15
14
15
14
in The
Supreme Court of the United States
October Term, 1972
No.
In THE MarTTER OF
Pexn CenTraL TRansPortaTion CoMPANY, DzsTor
Richard Joyce Smith, Trustee of the Property of
The New York, New Haven and Hartford Railroad
Company, Debtor,
PETITIONER
Vv.
George P. Baker, Richard C. Bond, J ervis Langdon, Jr.
and Willard Wirtz, Trustees of the Property of
Penn Central Transportation Company, Debtor;
Bankers Trust Company as Mortgage Trustee;
and Morgan Guaranty Trust Company of New York
as Mortgage Trustee;
ResPoNDENTS
Petition ror Writ or CERTIORARI
Berore JupcMEnT TO THE UNITED
Srates Court or APPEALS FOR
Tae Txump Crrovuit
OPINIONS BELOW
The United States District Court for the Eastern District
of Pennsylvania (the ‘‘Penn Central Reorganization Court’’)
entered its Order No. 296 on June 21, 1971 which is set forth
2
in the Appendix to this petition at B15-B17,’ and its opinion
and Order No. 546(B70-B91) on December 31, 1971, as amend.
ed by Order No. 552 (B96), In re Penn Central Transportation
Co., 337 F. Supp. 779 (E.D.Pa. 1972). Those orders were there.
after supplemented by the Penn Central Reorganization Court
by Order No. 565 (B102).
In the related proceedings in the United States Court of
Appeals for the Second Circuit (the subject of the Second
Circuit Petition), the decision was rendered March 17, 1979
(A5-A24).
The Second Circuit’s decision reversed the decision of the
United States District Court for the District of Connecticut
(the ‘‘New Haven Reorganization Court’’), in In re The New
York, New Haven and Hartford Railroad Company, 330 F.
Supp. 131, (D. Conn. 1971), enforced by 331 F. Supp. 212 (D,
Conn. 1971). The decision of the New Haven Reorganization
Court is set forth at A25-A60 and its order at A61-A65.
JURISDICTION
The orders of the Penn Central Reorganization Court
were entered on June 21, 1971, December 31, 1971, January 7,
1972 and January 25, 1972. The petitioner filed a timely notice
of appeal from those orders to the Court of Appeals for the
Third Circuit (the ‘‘Third Circuit’’) where the appeals were
timely docketed. Petitioner’s brief was filed June 8, 1972, ap-
pellees’ briefs were filed August 10, 1972 and petitioner’s
reply brief was filed August 24, 1972. There has been no argu-
1 The petitioner herein is also the petitioner in Supreme Court Docket No.
71-14-01, dated April 28, 1972, seeking a writ of certiorari to the United States
Court of Appeals for the Second Circuit (such petition being hereinafter referred
to as the “Second Circuit Petition”).
The two petitions involve companion cases, and the appendix to that petition
is incorporated by reference for purposes ot the Court’s consideration of this peti-
tion. Page references herein to the appendix to the Second Circuit Petition (which
is physically bound therewith) are prefaced with the letter “A” while page refer-
ences to the additional appendix which accompanies the instant petition are
prefaced by the letter “B”.
3
ment and the case has not been decided by the Third Circuit.
The jurisdiction of this Court is invoked under 28 U.S.C.
¢1254(1), 98 U.S.C. §2101(e) and Rule 19 of the rules of this
Court.
STATUTES INVOLVED
The following United States statutes are involved in this
case and are set forth at Al1-A4:
Section 77(a) of the Bankruptcy Act, 11 U.S.C. 205(a).
Section 77(c)(6) of the Bankruptcy Act, 11 U.S.C. 205
(c)(6)-
QUESTIONS PRESENTED
1. Should this Court now grant certiorari before judg-
ment to the Third Circuit in order to consider this case con-
currently with the companion Second Circuit Petition where
the decision on the merits of the two cases involves substan-
tially identical issues and could materially expedite consum-
mation of reorganization plans under Section 77 of the Bank-
ruptey Act for both the New Haven and the Penn Central
railroads?
9. Where the New Haven Reorganization Court entered
a judgment, acting pursuant to a mandate of this Court and a
specific prior reservation of jurisdiction in proceedings under
§77 of the Bankruptcy Act which is the subject of the Second
Circuit Petition, was that judgment res judicata so that the
orders of the Penn Central Reorganization Court, to which
this petition for certiorari is addressed, improperly sanc-
tioned a collateral attack upon that judgment?
3. Was the Penn Central Reorganization Court correct, if
it properly reached the merits of the matters adjudged by
the New Haven Reorganization Court, in rejecting the equit-
able lien and constructive trust imposed by the New Haven
Reorganization Court to secure the New Haven’s right to the
payment for such property which was fixed by this Court in
the New Haven Inclusion Cases?
“=
required inclusion of the New. Haven Railroad into the
merged Penn Central system as a condition of the
of the merger under the Interstate Commerce Act. The history
of the proceedings and the litigation is set forth in the
Second Cireuit Petition. In order to avoid duplication to the
greatest possible degree, reference is hereby made to the
Second Circuit Petition for its statement of the case for facts
underlying the present case.
To summarize the background briefly, and to add the
facts of the proceedings in the Third Circuit which are only
touched upon in the Second Circuit Petition, the New Haven
Reorganization Court, after receiving this Court’s mandate
in the New Faven Inclusion Cases, directed the New Haven
Trustee, by order dated August 10, 1970, to file a statement
of position with respect to the provisions that should be in-
cluded in the order of remand to the Interstate Commerce
Commission (the ‘‘Commission’’), and provided an oppor-
tunity for all interested persons thereafter to state their
positions in light of that taken by the New Haven Trustee.
During the course of those proceedings the New Haven
Trustee took the position, inter alia, that, in order to secure
the New Haven’s rights to payment therefor, the order on re-
mand to the Commission should declare that the property re-
quired to be conveyed by the New Haven to Penn Central on
December 31, 1968 by the orders of the Commission and the
New Haven Reorganization Court was impressed with an
equitable lien, and that the New Haven’s right to income
from the so-called Grand Central Terminal Properties should
be protected by a constructive trust. After entry of the August
10, 1970 order, the Penn Central Trustees specifically sought
suthorization from the Penn Central Re«rganization Court,
with notice to all parties to that proceeding, to employ counsel
to appear for them in the remand proceedings before the New
Haven Reorganization Court (B2) and were so authorized
by the Penn Central Reorganization Court (B1). The Penn
Central Trustees then appeared before the New Haven Reor-
ganization Court in the remand proceedings, challenged the
_ court's jurisdiction and contested the merits of the issues.
After briefing and argument of the issues before the New
Haven Reorganization Court, but prior to the issuance of that
court’s decision, the New Haven Trustee was required pur-
suant to Order No. 164 of the Penn Central Reorganization
Court to file the New Haven’s proof of claim in the Penn
Central reorganization proceedings by June 1, 1971. Under
this compulsion, the New Haven Trustee filed a proof of claim
asserting, on the basis of the opinion of this Court in the
New Haven Inclusion Cases, that the New Haven claim was
secured by an equitable lien and constructive trust. This
position was consistent with that taken by the New Haven
Trustee earlier in the remand proceedings before the New
Haven Reorganization Court.
The New Haven Reorganization Court entered its memo-
randum of decision on June 11, 1971, In re New York, New
Haven and Hartford Railroad, 330 F. Supp. 131 (A25-60), and
its order on June 22, 1971, In re New York, New Haven and
Hartford Railroad, 331 F. Supp. 212 (A61-65). The court
held that it had jurisdiction to adjudicate the issues before
it. It declared an equitable lien to secure the New Haven on
all the tangible property which had been conveyed by the
New Haven to Penn Central, excluding rolling stock and all
former New Haven property theretofore sold by Penn Cen-
**. .. the Penn Central Reorganization Court
wholly in control of the effect, if any, of such a lien on
operations of the railroad and on its reorganization plan
is
el
The Penn Central Reorganization Court ordered a hear-
ing to be held on June 21, 1971 (B5). Prior to that hearing,
the New Haven Trustee moved to dismiss the Penn Central
Trustees’ petition on the ground, among others, that it failed
to state a claim upon which relief could be granted (B13).
At the hearing before the Penn Central Reorganization
Court, no evidence of any nature was offered by the Penn Cen-
tral Trustees in support of the injunctive relief sought. The
New Haven Trustee objected to the grant of any relief sought
7
ip the Penn Central Trustees’ petition on the ground, among
others, that it constituted an unwarranted collateral attack on
the proceedings in the New Haven Reorganization Court
(B14).
After adjournment of the hearing, the Penn Central Re-
organization Court that same day entered Order No. 296
which contained the following injunction:
any claim against the Debtor or its estate
arising out of the inclusion of the New Haven into the
Debtor, other than in these proceedings, or which would
and, on its own motion, entered Order No. 647, dated the same
day, appointing counsel to implement its Order of Remand.
On July 1, 1971, the New Haven Trustee filed an answer
in the Penn Central Reorganization Court to the June 17
petition of the Penn Central Trustees, pleading the res judi-
cata effect of the judgment of the New Haven Reorganization
Court (B45), and filed a notice of appeal from Order No.
296 to the United States Court of Appeals for thé Thing
Circuit. At the same time, the New Haven Trustee filed
motion with the Penn Central Reorganization Court for « stay
of Order No. 296, pending appeal to the Third Circuit (B47.
B49). On July 2, 1971, the Penn Central Reorganization Court
denied the application for a stay (B 50-B54), as did the Third
Circuit on July 14, 1971 (B59). Ke |
Thereafter, on July 26, 1971, as fixed in Order No, 296,
a hearing was held before the Penn Central Reorganization
Court. The New Haven Trustee formally introduced in
evidence authenticated copies of the Memorandum of Ded-
sion, dated June 11, 1971 and the Order of Remand, dated
petition of the Penn Central Trustees-were res judicata. Apart
from documentary matters received in evidence, the
at that time was, in effect, an argument on the legal issues
raised by Order No. 296. The Penn Central Reorganization
Court specifically ruled that counsel should address them.
selves both to procedural matters and the merits of the issues
involved (B61). At the conclusion of that hearing, the Penn
Central Reorganization Court took the matter under advise-
ment, but ordered that the injunction granted in Order No.
296 be extended until further order of the court.
The Penn Central Trustees then filed a motion in the
Third Circuit to dismiss the appeal from Order No. 296, which
was denied by the Third Circuit on September 13, 1971. After
briefing of that appeal, counsel for the New Haven Trustee
and the Penn Central Trustees, at the direction of the Third
Circuit, attended a pre-argument conference on October 21,
1971 (B62). Thereafter, a conference was held by all parties
to the appellate proceedings with the Penn Central Reorganis-
ation Court on November 1, 1971 (B65). That court advised
the parties, by letter dated November 3, 1971, that it con-
sidered itself not to have jurisdiction to modify Order No.
996 so long as an appeal therefrom was pending in the Third
Gireuit (B65-B66).
By reason of the then pending appeal by the Penn Central
in the Second Circuit whose decision is now the
subject of the Second Circuit Petition, the parties then joined
in requesting the Third Circuit to defer oral argument on the
appeals from Order No. 296 (B67).
tinued in effect (B90).
On January 3, 1972, apparently without knowledge of the
entry of Order No. 546, the Third Circuit dismissed the ap-
peals from Order No. 296 without prejudice and with a sug-
gestion relating to the injunctive portion thereof (B92-B95).
On January 14, 1972, the New Haven Trustee moved the Penn
Central Reorganization Court to vacate Order No. 296 (B97-
B99), which motion was denied by Order No. 565 ‘*without
prejudice to the right of the movant to seek modification of
Order No. 296, Order No. 546 or both pursuant to the opinion
of the Court of Appeals for the Third Circuit filed January
3, 1972”’ (B102).
The New Haven Trustee then appealed from Order No.
296 (supplemented by Order No. 565), from Order No. 546
(as amended by Order No. 552 and supplemented by Order No.
565) and from Orders Nos. 296 and 546 (as amended by Order
No. 552 and supplemented by Order No. 565). Those appeals,
together with those taken by certain New Haven bondholder
interests, were consolidated for briefing and argument. As of
the date of this petition, briefing of the appeals has been com-
10
pleted but no argument has yt been scheduled andthe Mh
Circuit has not rendered a decision. aqity
[REASONS FOR GRANTING THE WRIT
Stripped of detail, the orders of the Penn Central Re
organization Court, which are on appeal to the Third Cireuit
and to which this petition for certiorari is addressed, cop.
stitute:
1. Unwarranted re-litigation of both jurisdictional and
substantive issues that are the subject of petitioner’s
pending Second Circuit Petition ;
2. An impermissible collateral attack upon the proceed-
ings of and adjudication by the New Haven Reorgani-
zation Court in carrying out this Court’s mandate in
the New Haven Inclusion Cases; and
3. An erroneous adjudication on the merits that disre-
gards and differs from that of the New Haven Reor-
ganization Court and fails to protect the constitutional
rights of the New Haven bondholders as adjudged by
this Court in the New Haven Inclusion Cases.
The Court should grant this petition for certiorari in con-
junction with the Second Circuit Petition, and determine the
merits. This is the only court that can decide these matters
with finality, an adjudication which would greatly assist in
expediting the reorganization proceedings of both the New
Haven and the Penn Central.
L THE ISSUES RAISED BY THE TWO PETITIONS SHOULD
BE DETERMINED CONCURRENTLY
This petition is a companion to the Second Circuit Peti-
tion. The central issues in each petition involve the respective
‘*exelusive’’ jurisdictions of two district courts under Section
77 of the Bankruptcy Act, and the meaning of this Court's
il
opinion in the New Haven Inclusion Cases as to the treatment
sonstitutionally required to be accorded persons affected by
‘sterests of investors in railroad securities at a time when the
number of reorganizations under Section 77 continues to
mount? Both petitions arise from the need of the New Haven
and Penn Central reorganization proceedings to rely on 8
definitive exposition by this Court of its intention in the New
Haven Incluston Cases, rather than on continued speculation
of counsel, the Commission and the respective reorganization
courts as to the intent of this Court in those Cases.
The basic question to be determined by the two cases is
identical, involving the protection to be granted to the New
Haven estate for the rights found by this Court in the New
Haven Inclusion Cases to payment for the properties con-
veyed to Penn Central. The question of the effect of that
protection in the ultimate plan of reorganization of Penn
Central as a matter of the rights of creditors vis-a-vis one
another was not intended to be, and was not, determined in
either case. (A30). This petition, in addition, concerns an
issue not in the Second Circuit Petition but a direct outgrowth
of the same facts and issues, namely, the res judicata effect to
be accorded the judgment of the New Haven Reorganization
Court.
If the Court should grant the Second Circuit Petition
and not grant this petition, the merits involved might not be
reached for many years. As a result, the issues, other than
that of jurisdiction, might be deferred for a period so long
as to deprive parties of rights which the Court’s decision in
the New Haven Inclusion Cases was clearly intended to
guarantee. Because of the identity of the issues, to await the
normally desirable consideration and judgment of the Third
2 There are seven major northeastern railroads now in reorganization: Penn
Central, New Haven, Boston & Maine, Erie Lackawanna, Lehigh Valley, Reading
and Central of New Jersey.
12
Cireuit would not, in this instance, be in the ite
judicial economy, speed or efficiency, whether of the ‘Third
Circuit or of this Court. Further, if only the Second Cirenit
Petition is granted, the possibility exists that the Third Gir.
cuit could rénder'a decision in this case which would be con:
trary to the result reached by this Court in the Second Cirenit
case.* Such an outcome would only create more confusion and —
uncertainty in a situation which is already extremely
and almost certainly necessitate still another petition to this
Court by some party.
If neither petition should be granted, the New wie
reorganization proceedings would be relegated indefinitely to
its present limbo. Since the Penn Central Reorganization
Court would under such circumstances have exclusive juris-
diction as to substantive New Haven reorganization matters
(A 18), and since that court deferred, in the decision which
18 now sought to be reviewed by this petition, any final
resolution of the merits of the New Haven’s claims deter.
mined by this Court in the New Haven Inclusion Cases (B88-
B90), the New Haven reorganization proceedings could not
foresee any ultimate termination.
If, however, both petitions should be granted, this Court
could resolve the respective jurisdictions of the two district
courts and, however so determined, lay finally to rest the
controversies which have arisen as to the intention of this
Court in the New Haven Inclusion Cases. This alone would
permit acceleration of the reorganization process for the New
Haven under Section 77 which has now taken more than eleven
years.
The decisions below in the instant case clearly constitute
a departure from the accepted and usual course of judicial
* This petitioner and others moved in the Third Circuit for leave, in effect,
to postpone proceedings until after this Court had finally determined the Second
Circuit Petition. The motion was denied May 1, 1972.
13
proceedings, and from prior decisions of this Court, within
the concept of Rule 19 of this Court, and clearly raise the
need for this Court to clarify its intention in the New Haven
Inclusion Cases. Under these circumstances, and given the
siternative consequences for the New Haven creditors whose
to foreclose their mortgage liens were so long frus-
trated, the Court should grant both petitions and adjudicate
the merits of the substantive controversy.
{. THE JUDGMENT OF THE PENN CENTRAL REORGANIZA-
TION COURT SUSTAINED A COLLATERAL ATTACK
IN DISREGARD OF ALL PERTINENT
DECISIONS OF THIS COURT
Following remand by this Court in the New Haven Inclu-
sion Cases to the New Haven Reorganization Court, the latter
court held hearings as to what it should do to implement this
Court’s mandate and its own reserved jurisdiction in framing
its order of remand to the Commission.
Penn Central had long been a party to the New Haven
reorganization proceedings and, was, of course, a party to the
New Haven Inclusion Cases that were remanded to the New
Haven Reorganization Court. The Penn Central Trustees
were, and are, in privity with Penn Central and bound by this
Court’s decision in the New Haven Inclusion Cases. In addi-
tion, the Penn Central Trustees, through counsel appointed
specifically for the purpose by the Penn Central Reorganiza-
tion Court, fully participated in the New Haven proceedings
on the framing of the remand order (A28, B82).
The Penn Central Trustees raised, briefed and argued
the issue of jurisdiction as well as the substantive issues re-
garding the declaration of an equitable lien and constructive
trust (A28). The New Haven Reorganization Court specifi-
cally ruled on and rejected the Penn Central Trustees’ juris-
dictional defense, and expressly held that it had jurisdiction to
adjudicate the issues before it (A28-A34). It then went on to
14
declare an equitable lien and constructive trust, limited solely
to the property compelled to be conveyed by the New Haven,
as protection for its right of payment for the same property
(A64-A65). 1 Aeegs
The Penn Central Reorganization Court, in entering the
orders appealed from by this petitioner, disregarded. the
pleaded judgment of the New Haven Reorganization Court,
asserted exclusive jurisdiction in the same premises and ad.
dressed itself to the merits of the very controversy which had
been litigated before, and adjudged by, the New Haven Re
organization Court (B70-B91). In determining its jurisdic.
tional basis to do so, however, the Penn Central Reorganiza-
tion Court failed to discuss a single decision of this Court
dealing with res judicata and collateral attack (B70-B91),
This Court has always condemned the evil of collateral
attack. It has been the unqualified doctrine of this Court that
a judgment need not be free from error to be valid and bind-
ing. Williams v. Armroyd, 11 U.S. (7 Cranch) 423, 432, 433
(1813). If, whenever a judgment were called in question, a
court in such proceeding could review the matter previously
adjudged to determine whether there had been error, a judg-
ment would have no finality. Immortal litigation would over.
come mortal man, and the sound principle of fundamental
repose, which underlies res judicata, would be subverted.
United States v. Throckmorton, 98 U.S. 61 (1878).
Starting about forty years ago, this Court rendered a
series of decisions strengthening and expanding the doctrine
of res judicata, particularly, although not exclusively, as ap-
plied to jurisdictional issues. Thus, if a party purports to
appear specially, as did the Penn Central Trustees, in order
to contest jurisdiction over his person, Baldwin v. Iowa State
Traveling Men’s Association, 283 U.S..522 (1931), or to chal-
lenge the court’s jurisdiction of the subject matter, Davis ».
Davis, 305 U.S. 32 (1938), the court has the power to decide
these jurisdictional issues and its determination is not subject
15
ip collateral attack. Even though the court may not have such
- wigdiction of the subject matter as would warrant it to pro-
weed, it has the power to decide whether it has jurisdiction
over the subject matter and its judgment, whether right or
wrong, is not subject to collateral attack. Stoll v. Gottlieb, 305
US. 165 (1938); American Surety Co. v. Baldwin, 287 U.S.
156 (1982); Union Joint Stock Land Bank of Detroit v. Byer-
ly, 310 U.S. 1 (1940). Further, it matters not that its judgment
is rendered under a bankruptcy statute subsequently deter- .
mined to be unconstitutional. Chicot County Drainage District
», Baxter State Bank, 308 U.S. 371 (1940). ‘‘The normal rules
of res judicata and collateral estoppel apply to the decisions
of bankruptcy courts.’’ Katchen v. Landy, 382 U.S. 323, 334
(1966).
As to substantive adjudications, this Court has also
recognized and applied the principle of res judicata to pre-
clude unnecessary, repetitive litigation. Blonder—Tongue
Laboratories v. University of IWinois Foundation, 402 US.
313 (1971) ; Heiser v. Woodruff, 327 U.S. 726 (1946).
Less than ten years ago, in Durfee v. Duke, 375 U.S. 106,
115 (1963), this Court reviewed and reaffirmed the ‘‘rule of
jurisdictional finality.’’ See also Angel v. Bullington, 330 U.S.
183 (1947) ; United States v. United Mine Workers of Ameri-
ca, 330 U.S. 258 (1947).
The fact that the New Haven Trustee filed his proof of
claim in the Penn Central Reorganization Court, as he was
obliged to do by that Court’s bar order, does not vitiate the
subsequent judgments of the New Haven Reorganization
Court rendered after the effective date of the bar order. The
filing of a claim does not carry with it a requirement that it
be adjudged by a reorganization court or that the latter is
the preferred court. See Faust v. Munson Steamship Lines,
299 U.S. 77 (1936) ; Texas v. Donoghue, 302 U.S. 284 (1937) ;
Thompson v. Magnolia Petroleum Co., 309 U.S. 478 (1940) ;
Morris v. Jones, 329 U.S. 545 (1947).
16
This Court should grant the petition to exercise ite‘super.
visory powers over the federal courts and to reassert th
applicability of its decisions forbidding collateral attack and
upholding res judicata. v EE Bee
Il. THE NEW HAVEN REORGANIZATION COURT *
SHOULD BE SUSTAINED ON THE MERITS AS > ..
HAVING CORRECTLY CONSTRUED THE: ."!
INTENTION OF THIS COURT IN THE...
NEW HAVEN INCLUSION CASES.
At issue on the merits in these companion cases is, the
question of what, if any, security is required to be accorded
the New Haven estate to protect its rights to payment for, the
property which it was compelled in the public interest to
convey to Penn Central. This Court has already found the
quantum of payment which is constitutionally required, New
Haven Inclusion Cases, 399 U.S. at 489-490. This question of
security, however, must be resolved before a New Haven re
organization plan can be consummated and its reorganization
proceedings terminated. The resolution of the question is also
vital to the formulation of a feasible reorganization plan for
Penn Central, where the claim made by the New Haven
Trustee is among the largest in amount and most complex in
nature.
If this Court does not grant the instant petition, and
review the merits in the light of its mandate, this question
would remain unresolved indefinitely. The Second Circuit's
decision was expressed to be solely on jurisdictional grounds,
although the court stressed that it did not wish to be thought
to disagree with the New Haven Reorganization Court on the
merits (A19). The reasons why this Court should affirm the
New Haven Reorganization Court on the merits of its find-
ings of an equitable lien and constructive trust are set forth
in detail in the Second Circuit Petition (at pages 17-30) and
incorporated herein.
17
CONCLUSION
For the foregoing reasons, the Court should grant this
petition. ;
Respectfully submitted,
Dated: August 30, 1972
Penn Centra Transportation Company, Desror
Richard Joyce Smith, Trustee of the property of
The New York, New Haven and Hartford
Railroad Company, Debtor
PgrrrionER
v.
George P. Baker, Richard C. Bond, Jervis Langdon, Jr. and
Willard Wirtz, Trustees of the property of
Penn Central Transportation Company, Debtor;
Bankers Trust Company as Mortgage Trustee ; and
Morgan Guaranty Trust Company of New York as
Mortgage Trustee;
REsPoNDENTS
APPENDIX TO
PETITION FOR WRIT OF CERTIORARI BEFORE
JUDGMENT TO THE UNITED STATES COURT OF
APPEALS FOR THE THIRD CIRCUIT
James Wc. Moone
Of Counsel: 54 Meadow Street
F.C New Haven, Connecticut 06506
Soturvan & Worcester Josern AUERBACH
225 Franklin Street 225 Franklin Street
Boston, Massachusetts 02110 Boston, Massachusetts 02110
Dated: August 30, 1972
Bowne of Boston, inc.
Order of U.S.C.A. 3 Dated July 14, 1971
Hearing of July 26, 1971 (Excerpt)
Letter to Judge Fullam From Counsel for Penn. Central
Trustees and New Haven Trustee, Dated October 22,
Letter of Judge Fullam, Dated November 3, 1971
Letter from Counsel for Penn Central Trustees, New
Haven Trusic< znd 4% Bondholders Committee, Dated
Opinion and Order No. 546, Dated December 31, 1971 ..
Opinion of U.S.C.A. 3, Dated January 3, 1972
Order No. 552, Dated January 7, 1972
Motion of New Haven Trustee to Vacate Order No. 296 .
Reply of Trustees to Motion to Vacate Order No. 296 ..
Order No. 565, Dated January 25, 1972
Order of U.S.C.A. 3, Dated January 3, 1972
Bl
In The Auited States District Court
For The
Eastern District of Pennsplbania
In tHe Matrer or
Peww Centra Transportation Company, Desror
In Proceedings for the Reorganization of a Railroad
No. 70-347
CONFIRMING APPOINTMENT OF COVINGTON & BURLING
AS SPECIAL COUNSEL FOR THE TRUSTEES
AND NOW this 14th day of October, 1970, upon con-
sideration of the Petition of the Trustees for the confirma-
tion of the appointment of the firm of Covington & Burling,
of Washington, D.C., as their special counsel for the pur-
pose of representing the estate of the Debtor in the litiga-
tion in connection with the inclusion of the property of The
New York, New Haven and Hartford Railroad Company
in the Debtor, and being satisfied that such attorneys repre-
sent no interest adverse to the Trustees or the estate of the
Debtor, and that their employment would be to the best
interests of the estate of the Debtor, it is ORDERED that:
1. The Trustees’ appointment of the firm of Covington
& Burling, of Washington, D.C., as special counsel, is hereby
confirmed.
2. The Trustees are authorized to compensate the firm
of Covington & Burling, for its services as special counsel,
from the estate of the Debtor in such amounts as may be
approved by the Court from time to time.
Jouw P. Futiam
District Judge
In Proceedings for the Reorganization of a Railroad
No. 70-347
1. There is presently pending litigation involving the
inclusion of the properties of The New York, New Haven
and Hartford Railroad Company into Penn Central Trans-
portation Company arising out of the requirements for such
inclusion in the proceedings in which The Pennsylvania
Railroad Company and The New York Central Railroad
Company were merged.
As a result of the decision of the United States Supreme
Court on June 29, 1970, in the New Haven Inclusion Cases,
399 U.S. 392, it now appears that there will be further pro-
ceedings before the Interstate Commerce Commission and
also further proceedings in the federal courts. Questions
regarding the scope and timing of such proceedings and
their relationship to the reorganization proceedings in this
Court are yet to be determined.
2. Petitioners deem it advisable to appoint special
counsel to represent their interest in the foregoing litigation
and for that purpose have appointed as special counsel, sub-
ject to the approval of this Court, the law firm of Covington
& Burling, 888 Sixteenth Street, N.W., Washington, D.C.
Mr. Cox, of that firm, represented the Debtor in the afore-
B-3
ssid jines before the United States 8 Court
3. It is the opinion of petitioners that the best inter-
ests of the estate of the Debtor will be served by continuity
of counsel in its representation in the matters involved in
the proposed appointment, due to counsel’s experience with
and background in the aforesaid litigation. Mr. Hugh B. Cox
and other members of said firm also represented the Debtor
in the Penn-Central Merger Cases, 389 U.S. 486.
4. For many years, the firm of Covington & Burling
has represented the Debtor and its predecessor, The Penn-
sylvania Railroad Company. To the best of petitioners’
knowledge, based upon specific review of the facts and rep-
resentations of the firm of Covington & Burling, petitioners
are satisfied that said attorneys represent no interest ad-
verse to petitioners or to the estate of the Debtor in the
matter upon which said counsel are to be engaged as pro-
posed herein.
5. In the event of the employment of the firm of Cov-
ington & Burling, as proposed herein, the services to be ren-
dered to petitioners by said special counsel would be services
that would have been required by the Debtor even if it had
not been necessary for it to file its petition for reorganiza-
tion. Said services will not be rendered in or in connection
with the present proceeding for the organization of the
Debtor. Under these circumstances, petitioners are informed
by present counsel for the petitioners, and they therefore
allege, that any payments to be made to said firm for their
services as proposed herein will be subject to the approval
of this Court without necessity for the fixing of any maxi-
mum limits therefor by the Interstate Commerce Commis-
sion pursuant to Section 77 of the Bankruptcy Act.
WHEREFORE, petitioners pray that an order be en-
tered herein:
(1) Confirming the appointment by petitioners of the
firm of Covington & Burling, of Washington, D.C., as their
B-4
special counsel for the purpose of representing the estate of
the Debtor in the litigation in connection with the inclusion
of the property of The New York, New Haven and Hartford
Railroad Company in the Debtor; and
(2) Authorizing petitioners to compensate said spe-
cial counsel for their services, and to reimburse said special
counsel for their expenses in connection therewith, from the
Debtor’s estate, in such amounts as may be approved by the
Court from time to time.
For the Trustees:
By
Jervis Lanepon, Jr.
Rosert W. BLANCHETTE
Counsel for Trustees
Bianx, Rome, Kraus & Comisxy Dated: October , 1970.
Special Counsel for Trustees
VERIFICATION
CoMMONWEALTH OF PENNSYLVANIA }
County or PumapELPHIA f
, being duly sworn, de-
poses and says that he is a Trustee of the property of Penn
Central Transportation Company, Debtor, and is duly
authorized by his fellow Trustees to make the above peti-
tion on their and his behalf, and that the statements con-
tained in said petition are true to the best of his knowledge,
information and belief.
JERVIS LANGDON, JR.
Sworn to and subscribed
before me this 14th day
of October, 1970.
Cuartes E. Casset, Jn.
Notary Public
Philadelphia, Philadelphia County
My Commission Expires July 10, 1971.
B-5
In The Gnited States District Court
Hor The
Eastern District of Bennsploania
In THE MaTTER OF
Penn Centra Transportation Company, DesTor
In Proceedings for the Reorganization of a Railroad
No. 70-347
ORDER NO. 294
AND NOW, this 17th day of June, 1971, upon con-
sideration of the Petition of Trustees on Matters Relating
to New Haven Inclusion, it is ORDERED:
1. That said Petition is hereby set down for hearing
in this Court at 2:15 P.M. on the 21st day of June, 1971, at
the United States District Court House, Ninth and Market
Streets, Philadelphia, Pennsylvania;
2. That a copy of this Order and of the Petition be
served prior to the end of the business day of June 18, 1971
upon Philadelphia counsel for all parties who are custo-
marily notified of hearings in these proceedings; and
3. That telephonic notice of the hearing on the
Trustees’ petition be given forthwith to the New Haven
Trustee and his counsel, to Fidelity and its counsel, to
counsel for the Interstate Commerce Commission and to
the Department of Justice of the United States.
Joun P. Futtam
District Judge
B-6
Eastern Disteiet of Pennsploania
Penn Cenrrat ri ped ‘Geisids Desror _
In Proceedings for the Reorganization of a Railroad
No. 70-347
PETITION OF TRUSTEES ON MATTERS
RELATING TO NEW HAVEN INCLUSION
The Trustees represent:
1. Included in the property of the Debtor are certain
assets formerly owned by The New York, New Haven and
Hartford Railroad Company (New Haven), Debtor in
Proceedings for the Reorganization of a Railroad (No.
30226) in the United States District Court for the District
of Connecticut (New Haven Court). Said assets, together
with other claims and rights asserted by the New Haven,
were transferred to the Debtor as of December 31, 1968,
pursuant to order of the Interstate Commerce Commission
(ICC) and of the New Haven Court. The circumstances of
the transfer are described in, and were the subject of, the
decision of the Supreme Court of the United States in New
Haven Inclusion Cases, 399 U.S. 392 (June 29, 1970).
2. By Order of June 21, 1970 (Order No. 1), this
Court approved as properly filed under Section 77 of the
Bankruptcy Act the petition of the Debtor for reorganiza-
tion under Section 77 of the Bankruptcy Act.
3. By petition dated July 14, 1970, Richard Joyce
Smith, Trustee of the property of the New Haven, sought
leave of this Court to intervene generally as a party herein,
B-7
which petition was granted by Order No. 134 herein dated
January 25, 1971.
4. By petition filed dated July 27, 1970, the Fidelity
Bank, as indenture trustee under the Debtor’s Divisional
First Mortgage securing bonds held by the New Haven
Trustee, sought leave to intervene generally as a party in
this proceeding, which petition was similarly granted by
said Order No. 134. On information and belief, Joseph F.
McDonald was at the time of said petition, and continues
at this time to be, the individual co-trustee under said
mortgage.
5, On August 10, 1970, the New Haven “ourt entered
an Order in the New Haven reorganization proceedings
entitled ‘‘Order for Hearing on Form of Order and Remand
for Further Proceedings in the New Haven Inclusion
Cases.”? A copy of said Order is attached hereto as
Exhibit A.
6. Without prejudice to their right to take such action
as they deemed appropriate in any other court in respect of
any purported exercise of jurisdiction by the New Haven
Court over the Trustees, the Debtor or its property, the
Trustees advised the New Haven Court of their position
with respect to the items contained in paragraph 3 of
said Order of August 10, 1970. Inter alia, the Trustees
took the position that the New Haven Court was without
jurisdiction :
(a) to impose an equitable lien or constructive
trust on, or to determine any questions otherwise
affecting, the former New Haven assets;
(b) to order the Trustees or the Fidelity Bank
and Joseph F. McDonald (referred to hereinafter
collectively as Fidelity), as indenture trustees under
the Debtor’s Divisional.First Mortgage, to pay to the
New Haven Trustee any proceeds of sales or leases of
former New Haven real estate;
B-8
(c) to order the Trustees to pay to the New Haven _
Trustee any income from the so-called “‘Grand Central. ~
Terminal Properties’? (New Haven Inclusion Cases,
supra, 399 U.S. at 438-451).
7. By submission dated as of May 31, 1971, the New »
Haven Trustee filed a proof of claim in these proceedings
pursuant to Order No. 164 of this Court. A copy of said
proof is attached hereto as Exhibit B. The validity of this
claim has not been adjudicated by this Court.
8. By submission dated May 28, 1971, Fidelity filed a
proof of claim in these proceedings pursuant to Order No.
164 of this Court. A copy of said proof is attached hereto
as Exhibit C. The validity of this claim has not been adjudi-
cated by this Court.
9. This Court has full and exclusive jurisdiction over
all the property of the Debtor’s estate, including property
transferred to the Debtor by the New Haven estate on
December 31, 1968. Said jurisdiction includes income de-
rived from said property.
10. This Court has jurisdiction over the New Haven
Trustee and Fidelity.
11. On June 11, 1971, the New Haven Court filed an
opinion entitled ‘‘Memorandum of Decision on Issue of
Equitable Lien and Other Matters Preliminary to Remand
to Interstate Commerce Commission.’’ The June 11 Memo-
randum concludes, inter alia, that the New Haven Court has
jurisdiction to order, and intends to order:
(a) the imposition of an equitable lien, relating
back to December 31, 1968, in favor of the New Haven
estate on all of the former assets transferred by the
New Haven to Penn Central, exclusive of rolling stock
and the New Haven’s one-half interest in the ‘excess
income”’ from the Grand Central Terminal Properties;
B-9
(b) a ‘‘revesting in the New Haven of its trans-
ferred title and rights’’ in the Grand Central Terminal
Properties and the declaration of ‘‘a constructive
trust, in the New Haven’s favor, to the extent of the
capitalized value of one-half of the excess income re-
ceived from the Grand Central [Terminal] proper-
ties’’;
(c) the imposition of a constructive trust in the
amount of $28,438,000 on all of the Grand Central
Terminal Properties as of December 31, 1968;
(d) the imposition of a constructive trust in favor
of the New Haven estate of ‘‘one-half of the excess in-
come’? from ‘‘the actual monies received’’ by the
Trustees on or after July 1, 1971 from the Grand Cen-
tral Terminal Properties ;
(e) ‘immediate payment”’ by the Trustees to the
New Haven Trustee of ‘‘actual monies received’’ by the
Trustees, on or after July 1, 1971, representing one-
half of the ‘‘excess income’’ from the Grand Central
Terminal Properties;
(f) in the event of ‘‘sales or other similar disposi-
tions’? of Grand Central Terminal Properties, ‘‘an
appropriate liquidation of the New Haven’s interest
under the constructive trust’’;
(g) an obligation by the Debtor’s estate in favor
of the New Haven for interest at the appropriate legal
rate from December 31, 1968 on claimed unpaid
amounts resulting from the New Haven Inclusion.
12. The New Haven Court has directed that an order
on its June 11, 1971 Memorandum be settled on or before
10:30 a.m., June 22, 1971.
13. The Trustees are of the opinion, and therefore
B-10 ; x
allege, that implementation of the June 11, 1971 Memoran,
dum, most particularly in respect of the issues
of this Court ; violate the provisions of the Emergency Rail
Services Act of 1970 (Public Law 91-663), pursuant to
which Trustees’ Certificates were issued, as authorized by
Order No. 124 herein ; hinder the ability of the Trustees to
conduct rail operations; and put in jeopardy the ability of
the Debtor to reorganize under Section 77 of the Bank
ruptey Act.
14. The Trustees are of the opinion, and therefore
allege, that current payment by them to the New Haven
Trustee or Fidelity of any monies of the Debtor's estate
would be improper and illegal, unless ordered by this Court,
and would seriously impair their ability to conduct rail
operations.
WHEREFORE, the Trustees pray that orders be
entered herein :
(a) Prescribing the manner of notice of hearing on
this Petition and fixing a time and place therefor ;
(b) Instructing the Trustees to object in the New
Haven Court to the entry of any order on, or imple-
menting, the Memorandum of Decision dated June 11,
1971, on the ground that entry of any such order is
beyond the jurisdiction of the New Haven Court and
would constitute an invasion and usurpation of the
jurisdiction of this Court, and on such other grounds as
to the Trustees shall seem appropriate, and further in-
structing the Trustees that if any such order should be
B-11
entered by the New Haven Court to institute appro-
priate appellate proceedings ;
Debtor's estate except as heretofore or hereafter or-
dered by this Court;
(a) Directing the Trustees not to pay any money,
from any source whatever, to the New Haven Trustee,
or to any other person pursuant to any order on, or
i i the Memorandum of Decision dated
June 11, 1971, pending further order of this Court;
(e) Enjoining the New Haven Trustee, Fidelity,
all other persons claiming interest in the New Haven
estate, the officers, agents, servants, employees and
attorneys of any of them, and all other persons, firms
or corporations, whatsoever and wherever situated, and
whether a party to these proceedings or not, from
taking any action pursuant to said Memorandum of
Decision of the New Haven Court dated June 11, 1971
referred to in Paragraph 11 hereof or pursuant to any
order that may be entered by the New Haven Court on
said Memorandum of Decision to enforce, collect or
cause to be perfected or paid any claim against the
Debtor or its estate arising out of the inclusion of the
New Haven into the Debtor, other than in these pro-
ceedings, until further order of this Court;
(f) Upon such further notice and hearing as this
Court shall deem appropriate, adjudicating the rights
of the Trustees in the properties conveyed to the
Debtor by the New Haven, in the Grand Central Ter-
minal Properties and in the income therefrom ;
B-12
(g) Granting such other and farther relief as this
Court deems appropriate.
CommowwraLtu or PexxsyivaNta
Courrty or Parape.rniu
A. M. SCHOFIELD,
being duly sworn, deposes and says that he is Vice Presi.
dent-Reorganizational Planning for the Trustees of the
property of Penn Central Transportation Company, Debtor,
and is duly authorized by the Trustees to make and verify
the above petition on their behalf, and that the statements
contained in said Petition are true and correct to the best of
his knowledge, information and belief.
Philadelphia County, Philadelphia
My Commission Expires: April 4, 1974.
EXHIBITS A AND B HAVE BEEN OMITTED.
B-13
In The Bnited States Pistrict Court
For The
Eastern District of Pennsplvania
Iw tree Matter oF
Pewx Cewrnat Taaxsrortation Compaxy, Destor
In Proceedings for the Reorganization of a Railroad
No. 70-347
Richard Joyce Smith, Trustee of the property of The
New York, New Haven and Hartford Railroad Company,
Debtor (hereinafter referred to as the “‘New Haven
Trustee’) moves the Court with respect to the petition,
dated June 17, 1971, of the Penn Central Trustees (attached
to the Court’s Order No. 294) on matters relating to New
Haven inclusion, as follows :
1. To dismiss the petition because it fails to state a
claim upon which relief can be granted.
2. To dismiss the petition on the ground that it im-
properly seeks to enjoin the New Haven Trustee and others
from responding to a direction from the United States
District Court for the District of Connecticut to settle
order on or before 10:30 A.M., June 22, 1971 in a proceeding
before that District Court in which the Penn Central
Trustees are parties.
3. To dismiss the petition on the ground that it im-
properly seeks to invoke the equity power of this Court
throwgh the form of a petition for instructions and direc-
tions to the Penn Central Trustees.
B-14
7 To dismiss the petition on the ground that it consti.
tutes an improper collateral attack on the Memorandum of
Decision dated June 11, 1971 of the United States District
Court for the District of Connecticut in circumstances
where orderly means are available which would avoid an
unseemly conflict between federal courts, to secure the most
rapid possible review by the Supreme Court of an order
entered by said District Court in proceedings in which the
Penn Central Trustees are entitled to be heard.
5. To dismiss the petition on the ground that it im-
properly seeks an injunction against the New Haven
Trustee and others from taking an action pursuant to any
order entered by the United States District Court for the
District of Connecticut on said Memorandum of Decision,
at a time when no such order is in existence.
o
Of Counsel: Josern AVERPACH
Attorney for Richard Joyce Smith,
ames Was. Moone Trustee of The New York, New
J 54 Meadow Street Haven and Hartford Railroad
New Haven Company
Boston, Massachusetts 02110
Tate & Exve
2210 Girerd Trust Building
Philadelphia
Pennsylvania 19102
Suuitivan & Worcester
225 Franklin Street
Boston, Massachusetts 02110
Dated : June 21, 1971
B-15
In The Gnited States Bistrict Court
For The
Eastern District of Peansploania
Iw toe Matter oF
Pewnx Cewrnat Trawsrortation Company, Destor
In Proceedings for the Reorganization of a Railroad
No. 70-347
ORDER NO. 296
GRANTING CERTAIN RELIEF TO THE TRUSTEES
RELATING TO NEW HAVEN INCLUSION
AND NOW, this 2ist day of June, 1971, upon con-
sideration of the verified Petition of the Trustees on
Matters Relating to New Haven Inclusion, the record in
these proceedings, the ‘‘ Memorandum of Decision on Issue
of Equitable Lien and Other Matters Preliminary to Re-
mand to Interstate Commerce Commission,’ filed June 11,
1971 (Memorandum Decision) by the United States District
Court for the District of Connecticut (New Haven Court)
in Proceedings for the Reorganization of a Railroad, No.
30226, and upon hearing had this day, it is hereby
ORDERED:
(1) The Trustees, by their counsel, are instructed to
appear before the United States District Court for the
District of Connecticut (New Haven Court) in proceedings
for the reorganization of The New York, New Haven and
Hartford Railroad Company (New Haven), and to present
objections to the entry of any order on, or any implementa-
tion of, the Memorandum Decision which is beyond the
jurisdiction of the New Haven Court or which would inter-
fere with the reorganization of the Debtor herein or the
jurisdiction of this Court with respect thereto and to
B-16
present objections on such other grounds as to the ~ a
or their counsel shall seem appropriate; and the ag
are further instructed to advise the New Haven Court thet
their participation in such proceedings is without prejudice
to the primary jurisdiction of this Court in the reorganizs.
tion of the Debtor ; and the Trustees are instructed to insti-
tute appropriate proceedings in this Court or elsewhere in
aid thereof.
(2) The Trustee of the property of The New York, .
New Haven and Hartford Railroad Company, The Fidelity
Bank, all other persons claiming an interest in the New
Haven estate, the officers, agents, servants, employees and
attorneys of any of them, and all other persons, firms or
whether a party to these proceedings or not, are hereby en-
jomed from taking any action which would enforce, collect
or cause to he perfected or paid any claim against the
Debtor or its estate arising out of the inclusion of the New
Haven into the Debtor, other than in these proceedings, or
Court to deal with properties in its possession or under its
control pending further order of this Court.
(3) The Trustees are directed to continue to devote all
ineome derived from properties formerly owned by the New
Haven and from the so-called ‘‘Grand Central Terminal
Properties’’ to defray current expenses of the Debtor's
estate except as heretofore or hereafter ordered by this
Court.
(4) The Trustees are directed not to pay any money,
from any source whatever, to the New Haven Trustee, or to
any other person pursuant to any order on, or implement-
ing, the Memorandum Decision pending further order of
this Court.
B-17
(5) A hearing is set in this Court at 10:30 a.m. on the
26th day of July, 1971, at the United States Courthouse,
Ninth and Market Streets, Philadelphia, Pennsylvania, at
which time this Court will consider whether it should
adjudicate, and may adjudicate the rights of the Trustees
in the properties conveyed to the Debtor by the Trustees of
The New York, New Haven and Hartford Railroad Com-
pany, in the Grand Central Terminal Properties, and in the
income therefrom, and will determine whether or not to
continue the foregoing relief, and to consider such other or
. further relief as may be required to preserve and effectuate
the jurisdiction of this Court.
(6) The Trustees hereby are directed to give notice
of this hearing by mailing a copy of this order to all persons
who are customarily notified of hearings in these pro-
ceedings.
(7) The injunctive provisions of this order shall ex-
pire at 12 o’clock noon, on July 26, 1971, unless extended by
agreement or by further order of this Court.
Joun P. Fuiuam,
District Judge
A true copy certified to
from the record
Dated June 21st, 1971
Attest: Payiuiis L. Hoo
Deputy Clerk, United States
District Court, Eastern
District of Pennsylvania
B-18
3n The ted tates District Court
For The
Eastern District of Pennsploania
Ix tHe Matrer oF
Penn CentraL Transportation Company
BaNKRUPTCY
No. 70-347
Philadelphia, Pennsylvania
June 21, 1971
Before HON. JOHN P. FULLAM, J.
Craic Winpsorn WALLACE
Official Court Reporter
3051 U.S. Court House
Philadelphia, Pa. 19107
WA 5-480
THE COURT : Good morning.
We will take up first the trustees’ petition relating to
certain labor agreements.
Is there anyone present who has any objection to the
granting of this petition or any position they wish to state
with respect to it?
MR. BULLOCK: I am offering an affidavit of service
in this matter, Your Honor.
THE COURT: All right.
There being no objection, the petition will be granted
in the form of order submitted.
B-20
The petition of the New York State Urban Develop.
MR. McLAUGHLIN: Your Honor, I am Mr Ma
Laughlin from the New York State Urban Development ~~
Corporation, I would like to take the opportunity of pre.
senting to the Court =a
AFTERNOON SESSION
Appearances: (As heretofore noted)
ApprrionaL APPEARANCES:
Bianx, Rome, Kraus & Comisky SuLLIVAN & WORCESTER
sy Eowm P. Rome, Eso., BY JOSEPH AUERBACH, Eso.,
AND Morris Raker, Eso.,
Covincton & BurRLinc AND
sy Cuarces Honsxy, Eso., James Wr_i1am Moone, Eso.,
AND AND
Eowm K. Tayrzon, Eso., Tate & Ervin
Special Counsel to the Trustees, BY Spencer T. Ervin, Jr., Eso.,
Penn Central Transportation for Richard Joyce Smith, Trustee,
Company New York, New Haven &
— oO Hartford Railroad
& FRANKEL
BY Franx M. Jackson, Eso., WruaM NE son, Eso.,
for First National City Bank of for the Department of Justice
New York and the Department of Transportation
THE COURT: Good afternoon, gentlemen and ladies.
The hearing on the petition of the trustees relating to
the New Haven inclusion matters.
Mr. Rome.
MR. ROME: Good afternoon, Your Honor.
Sir, in pursuance of the direction of your Order No.
294, notice was given of this hearing in the manner therein
prescribed and affidavits attesting that fact have been filed
with your clerk.
This matter, sir, comes before you as a result of a series
of instances with which Your Honor is intimately familiar.
B-21
You are aware, of course, sir, that following the deci-
sion of the United States Supreme Court, Judge Anderson
in the New Haven reorganization court issued an order
under date of August 10 of last year, as the result of which
the trustees of Penn Central, as well as other interested
parties, informed Judge Anderson of their respective
positions with regard to the effect of the directive of the
United States Supreme Court with particular reference, as
Judge Anderson set forth in his order, to the problems of
equitable lien and the possibility of requirement that
‘ moneys be paid over as the New Haven trustee was therein
requesting to the New Haven trustee growing out of income
from the Grand Central Terminal properties.
Further Your Honor is aware that recently Judge
Anderson has issued a memorandum of decision following
his consideration of the matters there, and in the conclusion
of that memorandum of decision, Judge Anderson directed
that an order pursuant to his memorandum be settled to-
morrow morning, on or before 10:30 a.m.
Because of the concern which the trustees of the Penn
Central feel growing out of the nature of that memorandum
of decision which imposes an equitable lien on property
theretofore conveyed without lien or encumbrance to Penn
Central, which property the trustees of Penn Central have
been administering during all of these intervening months,
it has been deemed necessary, sir, to apply to Your Honor
for appropriate protection of the status quo pending further
determination by Your Honor with regard to the appro-
priate adjudication to be made of Your Honor’s jurisdiction
and the property that is involved.
We have a form of order which is being submitted to
Your Honor, copies of which have been made available to
all interested counsel here in this room, the purport of
which, sir, is, as I say, a request to Your Honor to maintain
B-22
the status quo, because during all of these intervening
months income has been used by the trustees growing out
of the Grand Central Terminal properties in a particular
fashion as free cash, in effect, for the operating of the
railroad, _
Your Honor is too well aware for me to have to de-
lineate here the impact upon the cash situation of the
debtor, the ability of the trustees to operate the railroad and
to pursue their efforts to reorganize the debtor, if the situa-
titon growing from Judge Andersons opinion remains
without an expression of opinion by Your Honor with re--
gard to the jurisdiction and the effect to be given to that
which has earlier occurred in these proceedings.
-Your Honor, we have taken the liberty of suggesting,
because of the shortness of time that has been at the dis-
posal of the trustees in applying to Your Honor, as the
order in its suggested form sets forth, that Your Honor
might wish to consider setting a further hearing in this
matter, at which time upon further consideration, with an
opportunity for all interested parties to apply to Your
Honor for such modification or suspension of whatever
order Your Honor would issue in the meantime, could be
considered.
Our purpose, sir, is to maintain the status quo, to have
an injunction issued that would prevent any effectuation of
the memorandum of decision or such order as might be
entered hereafter by Judge Anderson until the matter were
the subject of further delineation and consideration in this
court.
No harm in our view is capable of being suffered by...
such a procedure, and we feel it is incumbent by reason of
the shortness of time growing out of the hearing in the New
Haven reorganization court tomorrow to make this applica-
tion to Your Honor.
B-23
THE COURT: I was handed, just before I came into
the room, a motion to dismiss by the New Haven trustee.
I take it that would be appropriate to be considered at this
point.
MR. ROME: Yes, sir.
MR. MOORE: For the purpose of the record, my name
is James William Moore, counsel for Richard Joyce Smith,
trustee of the property of the New York, New Haven &
Hartford Railroad, debtor in reorganization, in the United
- States District Court for the District of Connecticut.
May it please the Court, undoubtedly the New Haven is
an irritant of Penn Central. That phenomenon is not new.
Since the early Roman times when the creditor had the
right to cut up the body of his debtor or sell him into
slavery, there have been very few bankrupts that have been
passionately in love with their creditors, and on this, the
first anniversary of Penn Central’s reorganization, it seems
to me that Penn Central is not too happy with its creditors.
Undoubtedly, Penn Central would like to see all of its
creditors go away, fold up their tents, and silently steal
away.
THE COURT: Do you have any suggestions as to how
that might come to pass?
MR. MOORE: No, Your Honor, but I can tell you with
deference that that is not going to happen, and I would like
to suggest with all due deference that the petition which the
trustees are presenting to this Court is not the way to do it.
The way to determine the New Haven rights is not to
start an unseemly conflict between two United States re-
organization courts.
Let us get on to the United States Supreme Court, and
let us get on as quickly as possible. The trustee for the New
Haven and his counsel will cooperate to the fullest extent
B-24
with anyone who wants to take appellate review of any order
that Judge Anderson may issue tomorrow, and we will go
further than that: We will recommend a stay, a reasonable
stay of any order, until appellate review can be obtained
by the Supreme Court.
Now when Judge Anderson file’ his memorandum of
decision on June 11, the moving hand had writ, and there
is nothing that anyone can do to expunge what he wrote and
the reasoning he made, except, I respectfully urge, that the
Supreme Court is the only court that can dispel the cloud,
and so again I say, let us get on to the Supreme Court where
both sides may determine once ond for all the rights that
the New Haven has in this reorganization.
THE COURT: Of course, doesn’t that assume that the
New Haven court has jurisdiction to determine what rights
the New Haven has in this reorganization?
MR. MOORE: Yes, it does, Your Honor, but the
greatest decisions of the Supreme Court concerning the
power of a court to determine its jurisdiction have come
out of the bankruptcy decisions: Stoll against Gottlieb,
Chico County Drainage District, they all stand for the
proposition that the bankruptcy court’s judgments are
valid until properly set aside in an orderly manner.
Now certainly Judge Anderson had jurisdiction to
settle the remand from the Supreme Court, and even if we
grant he is in error as to many things that he has written in
his memorandum, judicial error is no basis for collateral
attack. If it were, immortal litigation would outlive mortal
man.
There is a proper way to do this, and that is to go and
get this case on the road to the Supreme Court.
THE COURT: In your view, what would be the
Supreme Court's scope of review?
ill
MR. MOORE: The very issue that we are talking about,
sir.
Now, if you let me return for a moment upon the New
Haven as an irritant, it is this: Under modern Section 77
all creditors are irritants, and that is because
today railroads in reorganization are being run for the
public interest, and therein lies a great difference between
railroad reorganization of 30 and 35 years ago and that of
today.
Section 77 was originally enacted to provide a means
for a reorganization of a viable railroad, a railroad that
was making a profit but needed a recapitalization. Reorgani-
zation was for the benefit of the security holders.
Now, how is it today? It is quite different. It is a re-
organization that becomes primarily one for the public
interest.
The New Haven had no net income before fixed charges,
nor does Penn Central, and on its first birthday in re-
organization, it is further encrusted with debt of $100
million of trustees’ certificates, and before the payout is
made about $400 million of extra debt for equipment, and
taxes are accruing.
There is nothing about the situation that appears
promising to me that there will be a reorganization in the
classical sense. Now I hope that I am wrong in that.
THE COURT: And you think that that determination
should be made at this early stage by the New Haven
District Court; is that it?
MR. MOORE: The New Haven court is not deciding
that, Your Honor, but I just want to set this in perspective
to explain why the New Haven is such an irritant to Penn
Central.
B-26
Penn Central would undoubtedly like us to go away.
Now what I am about to say is not intended as a
criticism of anyone but rather it is intended as a remem.
brance of my sins past.
From 1961 to 1968 I continually worried about meeting
New Haven’s payroll, how to scrounge up some extra
money here and there, how to keep the railroad running,
and in whose interest? The public interest.
Finally, Judge Anderson decided that operational
losses had to end by December 31, 1968, and the New Haven
was then included in Penn Central.
I resolved then to try to defend the interests of
creditors of New Haven a little better, as well as I could.
So I am not here today to speak in the public interest
as far «a the New Haven is concerned. As far as we are con-
cerned, the public interest had a long, long ride, and I don’t
want to see the New Haven creditors’ interests further
eroded in the Penn Central reorganization in what is
thought to be for the public interest. The public interest has
already had a free ride in the Penn Central reorganization
for a year, and I am not saying it should cease now, but that
ride should soon come to an end.
Now, let me give you a squint at some of the New
Haven’s problems and the problems of its creditors. There
may be some fat cats around the New Haven estate. In
about ten years I haven't seen them. Instead we have $50-
odd million of administration claims, cities, counties, and
other municipalities with claims for taxes totaling about
$20 million, and some of those tax claims go back before
reorganization. The United States is a creditor for $12%
million of trustee’s certificates and over $600,000 of accrued
interest. Railroads have $10 million or more claims for per
diem, and over $7 million of claims of little guys, not just
little guys but injured little guys, personal injury, and all
of these come before the bondholders, who have been bled
white.
And so you may think that is a long, roundabout way of
trying to offer an excuse for being an irritant in the Penn
Central reorganization, but we have a problem and interest
to protect.
I realize that trustees and others charged with operat-
ing a railroad are apt to think that their highest loyalty is
continuing the railroad. It is a very natural thing to do.
Years ago when railroads were profitable and a strong
monopoly, there were too many in management who said,
“The public be damned.”” Today it is the reverse. The
public says, ‘‘Let the creditors be damned.”’
Accordingly, those in charge of a reorganization don't
want to be bothered with creditors. Creditors should go
away and leave them alone.
I would like to read this statement from Justice
Brandeis’ opinion in the Louisville Joint Stock Plan Bank
v. Radford case, and that was a bankruptcy decision which
dealt with the Frazier-Lempke Act, and he said :
‘For the Fifth Amendment commands that how-
ever great the nation’s need, private property shall not
be thus taken, even for a wholly public use, without just
compensation. If the public interest ~equires and per-
mits the taking of property of individual mortgagees
in order to relieve the necessity of individual mort-
gagors, resort must be had to proceedings by eminent
domain so that through taxation the burden of the relief
afforded in the public interest may be borne by the
public.”
-~s os
B-28 3 . : 9
a.
Ps s &
Now, whether Judge Anderson’s opinion correctly —
x
pointed the way, be that as it may, if the Penn Central coun.
sel differ from it, as, indeed, they have a right to do, as,
indeed, I have an equal right to differ from their view, there
is a well established method of procedure.
Judge Anderson has not entered any order as yet. Coun.
sel for Penn Central trustees may object tomorrow in the
New Haven court to the entry of any order at this time, to
the entry of an order except in some modified form from that
indicated by the opinion, to a stay of the entire order pend-
ing appelate review or to a stay of so much of the order as
might call for payment of any funds, and they or anv other
party may proceed promptly to obtain appellate review by
the Supreme Court.
As I stated earlier, New Haven will cooperate fully in
achieving that objective. I cannot understand why petition-
ers do not proceed in that manner.
There is a million dollars of legal talent behind the
petition that is presented to this court, and yet petitioners
aver that they need instructions from this court to tell them
to object to the New Haven court and to appeal from an
adverse judgment.
Less than six months ago the petitioners filed two briefs.
They totaled 77 pages, and I heard a very eloquent argu-
ment. They knew how to make objections then. For some
reason their legal acumen seems to have left them entirely.
I say with all respect to this million dollars of legal
talent that they ought not to come to a busy chancellor ask-
ing instructions as to whether to make objections and
whether to appeal.
THE COURT: Well, I wonder if I could get back to the
question I asked a while ago. What would the scope of
review be on appeal? Would not the decision of Judge
Anderson reach an appellate court with some presumption
of validity?
MR. MOORE: I don’t think so, your Honor. It is solely
a question of law, I believe. I don’t think there are any real
disputed facts. As I recall, when we argued the case, when
we briefed it, there were no disputed facts.
THE COURT: If it should turn out that the ultimate
decision was that Judge Anderson exceeded his jurisdiction,
‘would not the entire appellate process have been just a
waste of time?
MR. MOORE: Would what, sir?
THE COURT: Would not the entire appellate process
have been simply a waste of time, to get a decision from the
appellate court that Judge Anderson did not have jurisdic-
tion to enter some part of the order?
MR. MOORE: Well, clearly he has jurisdiction on re-
mand from the Supreme Court to do something, and I
would suppose that it would come very clearly, whether he
has construed the Supreme Court’s mandate properly or
improperly.
THE COURT: And if it turns out that he has construed
it improperly, would not a great deal of time have been
wasted in the appellate process?
MR. MOORE: No, I don’t think so, Your Honor. I
believe we could be up there by early fall and I think get a
decision very shortly. You see, we think we have a very
strong opinion from the Supreme Court. Frankly, there
are statements that naturally I would prefer that they went
somewhat differently, and I suspect there are statements
that Penn Central counsel would rather have the other way.
That is what makes a good piece of litigation or a horse race.
THE COURT: Well, my point is, assuming ‘yone
would agree that it is desirable to have determination made
by an appellate court as promptly as practicable f Y
standpoints, wouldn't it be preferable to have that determi.
ae
—;
=
que
>
nation made on the basis of an entire record in both courts
rather than simply go up on appeal from one court? aes
MR. MOORE: Well, I can’t see what other materials
are needed for the record, Your Honor. Could you help me
out a little on that?
THE COURT: Well, to be specific, wouldn’t it be
appropriate that the Supreme Court would have before it
the views of all courts involved rather than simply the
views of one court?
MR. MOORE: Personally I would be very happy that
your views be stated and that they go along, but I don’t
think there are any other facts really, or if there are any
facts, I am sure they must be documentary and could easily
be agreed upon, but I don’t believe there are any disputed
facts in this case on the points in issue.
THE COURT: I would assume there might be some
factual issues with respect to the possible impact of any
order which might be entered tomorrow on the reorganiza-
tion process here.
MR. MOORE: I see no reason why we can't stipulate to
get those facts in the record, too.
I don’t want to be unfair to Penn Central. If it needs
something else to round out this picture, I am perfectly
willing to have that put into the record and get before the
Supreme Court.
Now, getting to this petition, Prayer B is instructing
trustees to object over in New Haven tomorrow if an order
is entered to institute appropriate appellate proceedings.
B-31
THE COURT; You think they would be likely to do
that whether they were instructed to or not.
MR. MOORE: I always thought a country lawyer knew
that much, and I felt they would wander over there without
iustructions. But I have no objection really to telling them
to do it.
But then I look over to E, and as I construe E, I can’t
assist Judge Anderson in settling his order. This million-
dollar group of counsel for Penn Central, they are entitled
to get up and object and argue.
THE COURT: What do you think would be an appro-
priate description for your group of counsel, if we are going
to assign values?
MR. MOORE: Give us three minutes, judge, just
three minutes.
Now, C and D, those are premature at this time. We
ought to see what Judge Anderson does tomorrow. He may
not enter an order covering any of these things, or if he did,
he might grant a stay.
Now, as those are drafted, it would seem to me it would
force us to take appeals from Your Honor’s judgment,
because they say except as heretofore or hereafter ordered
by this court, which would mean if you enter those orders
and we don’t appeal, an appeal goes up from Judge
Anderson’s court to the Supreme Court, later on we are
met with res judicata from this order, even though it is not
consonant with the Supreme Court mandate.
Then drop down to F. Here is relitigation all over again.
Judge Anderson just got through adjudicating these mat-
ters. Maybe he didn’t adjudicate them correctly, but that is
nothing new in the judicial process.
B-32
There is an orderly means of appeal and not collateral
attack, and what that would force us to do is to plead his
judgment here, and then if Your Honor refused to give it
effect, then we would have to take an appeal to the Third
Circuit.
What ought to be certainly avoided are appeals going
to the Second Circuit and to the Supreme Court or to the
Third Circuit and from the Third Circuit to the Supreme
Court. We are having some research done, and I think it is
possible to get to the Supreme Court directly from Judge
Anderson’s opinion without going through the Second Cir-
cuit, but even if we had to go through the Second Circuit,
I think there would be a very good chance of getting the
Supreme Court to grant cert before judgment there, as it
did in the past, because it is really to the interest of all of
us to know what Potter Stewart meant and get on with the
matter that way.
I am beginning to think it won’t happen, but I still
have a little hope that the New Haven will be reorganized
before I answer the call up yonder. But be that as it may,
I think we ought to try to smooth out these jurisdictional
conflicts and get this case to the Supreme Court just as
quickly as possible.
I thank you, Your Honor.
THE COURT: Anyone else on your side of the case?
MR. NELSON: Your Honor, my name is William
Nelson, with the Civil Division of the Department of Jus-
tice. I am representing the Department of Justice and the
Department of Transportation.
In general, we are in agreement with Professor Moore
and the position of the New Haven in this matter.
We are perfectly aware that these are extremely diffi-
cult jurisdictional problems, any time you have two courts
B-33
in a Section 77 proceeding with overlapping jurisdiction,
each having exclusive jurisdiction of the matter.
We think if the New Haven alone were in reorganiza-
tion and the conflict was with the Penn Central, there
would be no question as to their right to adjudicate their
claim against the Penn Central in that proceeding. With
Penn Central in reorganization also, it raises an insoluble
jurisdictional dispute which has to be resolved in one court
or the other.
Judge Anderson had jurisdiction over this matter pre-
viously as it arose through this court up to the Supreme
Court and back to him on remand from the Supreme Court,
and we feel that he has assumed jurisdiction over this
matter, that the very difficult questions that will arise —
THE COURT : Over what matter?
MR. NELSON: Over the question of both the jurisdic-
tion itself and the equitable lien question. I meant the equi-
table lien question, but both questions are very difficult.
THE COURT: What about the direction to pay?
MR. NELSON: Well, that is another entirely separate
question, Your Honor. As you have noted, Professor Moore
is willing to stay that issue.
Over in the New Haven case, now speaking only for the
Civil Division of Justice and not the Department of Trans-
portation, we supported the New Haven on the equitable
lien, but we took no position on the question of the direction
of the payment over, and I am satisfied we would not sup-
port New Haven on the direction of payment over. Whether
we would oppose it I do not know, but that has yet to be
determined.
THE COURT: Well, who is representing the govern-
ment as creditor on the trustees’ certificates in the Penn
Central reorganization?
B-34
MR. NELSON: I am also representing them in that
matter. As you know, there are many different interests,
Antitrust has also been in this matter. I believe they will
not be involved at this stage, but this matter has come on go
quickly, the conflicts and the diversity of interest are enor-
mous. I should point out that the ICC itself has a repre-
sentative here, but they are not taking a position probably
this morning, but over in New Haven ICC, representing the
policy interests of the government, opposed the equitable
lien. The Department of Justice, representing the creditor
interest, which incidentally arose out of an ICC claim, sup-
ported the creditor interest; but all of this is irrelevant to
my basic position here, which is only this:
Lawful opinion and subsequent order of the Court will
come down tomorrow, and it is a very difficult jurisdictional
problem, but the comity among the courts would only be
promoted by obedience of one court to another court’s
order, and in the hasty research I have had a chance to do
since hearing this was coming on, I have found no case in
which one court has authorized another court to disobey an
order of a comparable court, and I don’t believe that juris-
dictionally it should be done here.
I think that it would create an enormous mess and this
same result could be achieved any time the two railroads
in reorganization have claims back and forth against each
other, and I fear that that is going to be more frequent than
it has been in the past.
Thank you, Your Honor.
THE COURT: Thank you for whatever that was.
MR. SCHAEFFER: Your Honor, may it please the
Court, I am John Schaeffer, representing the Fidelity Bank
and Joseph F. McDonald, collectively referred to in the
petition as Fidelity, as indenture trustees, under the Divi-
B-35
sional First Mortgage of Penn Central of December 31,
1968.
Fidelity’s only connection with this matter is that of
trustee under this indenture which gives certain contrac-
tual rights to the Penn Central on the one hand and on the
other side to the New Haven trustee as the owner of all
of the outstanding bonds. So our primary interest, along
with those who have spoken before is one of having the
jurisdictional question adjudicated as expeditiously as
possible.
Fidelity is the one person other than the New Haven
trustee who is specifically named in the petition as an object
of relief or against whom an order should be granted in
this matter.
We are somewhat unable to respond to this, because we
are unable to find anything in the memorandum decision of
Judge Anderson or the summary or in Mr. Rome’s argu-
ment that indicates there is anything Fidelity can do or
will be ordered to do.
In fact, it is my understanding that the equitable lien
would be junior to the mortgage, although even that isn’t
very material since the person claiming the equitable lien
is also the holder of the bonds under the mortgage.
But in view of the remote or undefined at this point
relationship of Fidelity to the transaction, we think the
petitioner is premature in requesting relief against Fidelity
and should be dismissed insofar as it relates to Fidelity.
That is a further point of detail.
We believe that some of the language in Paragraph K
of the prayer for relief and I believe Paragraph 2 of the
proposed order might be capable of an interpretation to the
effect that it supersedes prior orders relating to sales of
property subject to the lien of the mortgage and the applica-
B-36
tion of the proceeds thereof: inns we would like € g
that consideration be given to expressly providing in
order that it is not intended to have such effect, assum
sacl ta the cae.” | os
THE COURT: : Anyone else?
Mr. Rome.
MR. ROME: Sir, we do. not differ with Prefiens ¢
Moore’s view that this is a matter that ultimately will have.
to be passed upon by the United States Supreme Court, and ~
we are equally ready to participate in a cooperative effort
to get it there.
The fact remains, however, that when the matter comes
on to the United States Supreme Court for its review in our
contention and submission clearly that court should have
the views of this court with regard to the tremendously im-
portant problems and questions involved.
There is nothing unusual in the fact that a matter may
go up to the Supreme Court with differing views from
courts of presumed coordinate jurisdiction.
Here we have on the face of it exclusive jurisdiction in
this court of all of the property of the Penn Central, includ-
ing that property which was conveyed to Penn Central free
of any liens several years ago, and now we have what would
appear again on its face to be an intrusion into that exclu-
sive jurisdiction of this court.
It ought not to be a situation in which trustees merely
go in and voice to Judge Anderson tomorrow the kind of
objection which has heretofore been submitted to Judge
Anderson as long ago as August of 1970, thereafter again in
October of 1970, and again at the beginning of this year.
I think that it is obviously of help for Judge Anderson
to be able to have the views of this court voiced through
B-37
instructions to the trustees so that it is not capable of being
said in any: way that that which occurs in the New Haven
reorganization court in a manner of speaking is a self-in-
ficted wound so far as the Penn Central trustees are con-
cerned, because there has been no expression of opinion by
the Penn Central reorganization court. We believe that it is
imperative that there be an opportunity for the New Haven
court to have the benefit of the position of this court.
We recognize that there has not yet been made avail-
_ able to us any suggested form of order that might be sub-
mitted to Judge Anderson by the New Haven trustee. In the
event that form of order in no way were to intrude upon the
exclusive jurisdiction of this court, then we would be able
so to inform Your Honor hereafter in the manner we have
suggested with regard to a subsequent hearing.
But the emergency nature of the situation is such that
it does not permit, we submit, sir, going forward tomorrow
without some official expression of opinion capable of being
voiced to Judge Anderson by the trustees in connection with
the overall situation.
So far as review on appeal is concerned, we think that
when consideration is given to the possibilities and indeed
the dangers of a limitation of review on appeal via man-
damus, it becomes then appropriate and necessary in the
view of the Penn Central trustees, Your Honor, to have this
situation go up in an appropriate, albeit expeditious fashion
that would bring carefully and properly all of the points at
issue before the court.
Additionally, sir, there is one compelling reason why we
feel that the present petition to Your Honor is necessary.
There is no ability on the part of anyone to predict what
other persons may do based upon the memorandum of deci-
sion of Judge Anderson or whatever order he may enter
tomorrow.
B-38
It is possible, as a matter of fact, that some portions of
his order, when entered, may be self-effectuating, and it is,
therefore, incumbent upon the Penn Central trustees to in.
vite Your Honor’s expression of view, so as to maintain the
status quo pending a further opportunity to review that
which Judge Anderson does, indeed, enter by way of order
tomorrow.
In the light of those considerations, there is no un-
seemly conflict between two United States courts. This is
nothing that has been triggered by anything that has been
done in this court. It is a kind of matter where, according to
the representative of the Department of Justice, there is an
overlapping jurisdiction.
We contend that there is an exclusive jurisdiction here
and the matter should go up on review with an appropriate
expression of Your Honor’s views on these compelling
problems.
THE COURT: Anyone else?
MR. BROWN: Your Honor, appearing also for cred-
itors, and I believe the largest group of creditors in this
proceeding, I wish to express complete support of the Penn
Central trustees’ position. It seems to me to be exactly the
position they should take. I see nothing unseemly whatever.
Apparently in this matter of interrelated jurisdictions,
the unseemliness arises only after the first step has been
taken.
I would suggest that there is nothing more appropriate
than for this court to express its views about matters which
lie not between two federal judges, even though the counsel
for one of the parties is saying that he is here representing
a creditor, the New Haven, and, of course, so he is, but
before this court is the problem, the reorganization problem
within the true intent of Section 77, the reorganization
problem of Penn Central, and that raises questions between
creditors as well as questions between this particular cred-
itor and this court.
And so it seems to us entirely appropriate that the
order that has been requested by Your Honor’s trustees
should be entered here and that there should be an expres-
sion by this court which will reach the Supreme Court at or
about the time of the most expeditious arrival of the entire
matter at that body, and, therefore, I wish to commend the
trustees and ask Your Honor to grant the relief which they
seek.
THE COURT: Thank you, sir.
Anyone else?
Anything further, Mr. Moore, Mr. Auerbach?
MR. AUERBACH: No, Your Honor.
THE COURT: As everyone recognizes, the important
thing here is to get all of the related matters decisively
determined as soon as can reasonably be done.
I certainly am very sensitive to the desirability of
avoiding what might appear to be a conflict between courts,
and for that reason my present thinking is that I will not
enjoin the New Haven trustee or anyone else from doing
anything that they see fit to do with respect to the proceed-
ings scheduled tomorrow in New Haven, and I certainly will
not enter any order which by any possible stretch of the
imagination could be interpreted as attempting to enjoin
the entry of any order or attempting to control in any way
the form or order which may be entered.
Nevertheless, it does seem to me that on the basis of
what has been presented that there are many issues here
which at least at first blush do not seem to be within the
power of the New Haven court to decide, but they are just
B40
as necessary for decision as the matters which are clearly
within the jurisdiction of the New Haven court.
This court has no direct concern whatever with the im.
plementation of the Supreme Court's mandate. The only
interest that this court could possibly have in that matter
might be the desirability of not wasting the resources of the
trustees in carrying out steps which turn out to need to be
done over again. But I don’t think that gives this court any
right to comment upon decisions by a court of coordinate
jurisdiction.
I am, however, very much concerned about two features -
One, an attempt to direct the Penn Central trustees to
make immediate payments, which it seems to me is totally
contrary to at least my conception of Section 77 reorganiza-
tion. In short, I don’t think it could properly be held that
merely because a creditor becomes a creditor as a result of
a railroad reorganization proceeding that that necessa nly
confers some absolute priority to be able to collect that claim
in another reorganization proceeding.
But these are all extremely difficult questions, as you
recognize, and it seems to me that the thing to do would be
to enter some kind of order in modified form which will fix
a date for a further hearing in this court at which all parties
can be heard on the merits of the proposed disposition by
this court and that nothing be done by this court in the mean-
time which would even give the appearance of attempting
to interfere with what Judge Anderson may wish to do in
New Haven.
A date which I am prepared to suggest for a farther
hearing in this matter would be July 13. Is there anyone who
has any violent objection to that date?
I see a violent objection rising.
B41
MR. AUERBACH : I don't know how violent it will be,
Your Honor, because I don’t know how we can staff it. I will
not be in the country between July 2 and July 23. Perhaps
we can staff it anyway.
MR. ROME: Your Honor, not on that point, but may I
beg leave to bring to your attention that we have attempted
in our suggested form of order at the bottom of page 2 to
take into account the fact that Your Honor might well wish
not to express injunctive direction to the New Haven trustee
or other persons with regard to further proceedings before
Judge Anderson on any order that he might enter following
his memorandum opinion, and we think that the phrase at
the bottom, ‘‘Except with respect to further proceedings,"
and so on, would cover that.
I wanted simply to have it noted that we were sensitive
ourselves to that facet of the problem.
THE COURT: Yes.
I may say that the other point which I neglected to men-
tion — I mentioned my serious question about the order to
the Penn Central trustees to make immediate payments —
the other aspect of the matter which gives me concern is
that, frankly, it had been my impression and so far still is,
but subject, of course, to change upon persuasion, that the
ultimate treatment of the New Haven as a creditor in the
Penn Central reorganization would be a matter which could
be decided after all parties in interest in the Penn Central
proceeding had an opportunity to be heard, and presumably
in connection with a plan of reorganization of the Penn
Central.
It seems to me that one of the more unfortunate aspects
of this present contretemps is that the Court is, in effect,
pushed into a position of accelerating that determination or
abdicating altogether its right to express any view on that
That to me is the most unfortunate aspect of this whole
matter.
All right, now suppose we leave it this way : I will enter
an order before the end of the day and will try to work out
some convenient date. If counsel can get together on a mn.
tually acceptable date for a future hearing, I will be pleased
to hear from you.
Recess briefly.
In The Anited States District Court
For The
€astern District of Pennsplvania
Iw tas Martrer or
Paws Cuwrnat Transportatiox Company, Destor
In Proceedings for the Reorganization of a Railroad
No. 70-347
ANSWER OF RICHARD JOYCE SMITH, TRUSTEE OF THE
NEW YORK, NEW HAVEN AND HARTFORD RAILROAD
COMPANY TO THE PETITION OF THE TRUSTEES,
DATED JUNE 17, 1971, ON MATTERS RELATING
TO NEW HAVEN INCLUSION
Now comes Richard Joyce Smith, Trustee of the prop-
erty of The New York, New Haven and Hartford Railroad
Company, Debtor in reorganization (the ‘‘New Haven Trus-
tee’’), and, in addition to the Motion to Dismiss filed on
June 21, 1971, answers the Petition of the Trustees of the
Debtor, dated June 17, 1971, on matters relating to New
Haven Inclusion as follows :
1. The allegations contained in paragraphs 1 through
5 of the Petition with respect to the New Haven Trustee are
admitted.
2. The New Haven Trustee denies the allegation con-
tained in the first sentence of paragraph 6 of the Petition
that the participation of the Trustees of the Debtor in the
said proceedings before the New Haven Court was without
prejudice as alleged in the Petition, and the New Haven
Trustee alleges that the Debtor is a party to said proceed-
B44
ings. The Supreme Court has adjudged that the Penn Cen.
tral Transportation Company is a party to the proceedings
in the New Haven Court, New Haven Inclusion Cases, 399
U. 8. 392 at 428 n. 57. The New Haven Trustee alleges that
the Trustees of the Debtor appeared and actively partici-
pated in said proceedings and submitted to the jurisdiction
of the New Haven Court.
The New Haven Trustee denies the allegations con-
tained in the second sentence of paragraph 6 of the Petition
and alleges that the position taken by the Trustees of the
Debtor was as set forth in a Statement of Position, dated
October 20, 1970, filed with the New Haven Court by the
Trustees of the Debtor, a copy of which is attached hereto
as Exhibit A.
3. The allegations contained in paragraph 7 of the
4. The New Haven Trustee alleges that he is without
knowledge or information sufficient to form a belief as to
the truth of the allegations contained in paragraph 8 of the
Petition.
5. The New Haven Trustee denies the allegation con-
tained in paragraph 9 of the Petition that this Court has
exclusive jurisdiction over the property transferred to the
Debtor by the New Haven estate on December 31, 1968 or
the income derived therefrom.
6. The allegations contained in paragraph 10 of the
Petition are admitted.
7. The New Haven Trustee admits the allegation con-
tained in the first sentence of paragraph 11 of the Petition.
The allegations contained in the second sentence of para-
graph 11 are irrelevant, inaccurate and premature, and they
are denied. A correct account of the findings of the New
Haven Court purported to be summarized in paragraph 11
B-45
and of the terms of the order therein anticipated is set forth
in the June 11 Memorandum and in two Orders dated
June 22, 1971, entered by the New Haven Court, copies of
which are attached hereto as Exhibits B, C and D, respec-
tively.
8. The allegation contained in paragraph 12 of the
Petition is admitted.
9. The allegations contained in paragraphs 13 and 14
of the Petition are irrelevant, incorrect and premature, and
they are denied.
On June 22, 1971, following the remand by the Supreme
Court of the New Haven Inclusion Cases, 390 U. S. 392
(1970), to the United States District Court for the District
of Connecticut, in a proceeding in which the Debtor, the
Trustees of the Debtor and the New Haven Trustee were
parties, the United States District Court for the District of
Connecticut entered its judgment (Exhibit C hereto), which
is still in full force and effect. Such judgment is res judicata
as to the matters sought to be adjudicated by the said Peti-
tion of the Trustees of the Debtor.
In seeking injunctive relief, the Petition of the Trustees
of the Debtor constitutes an improper collateral attack upon
the jurisdiction and judgment entered June 22, 1971 of the
United States District Court for the District of Connecticut
(Exhibit C hereto).
In seeking an adjudication of the rights of the Trustees
of the Debtor in the properties conveyed to the Debtor by
the New Haven Railroad, the Petition of the Trustees of the
Debtor constitutes an improper collateral attack upon the
B-46
jurisdiction and judgment of the United States District
Court for the District of Connecticut and compels duplicate
litigation of issues already adjudicated in that Court.
The invocation of the jurisdiction of this Court is pre-
mature in that it improperly and inaccurately anticipates
the entry of the judgment of the United States District
Court for the District of Connecticut.
WHEREFORE, the New Haven Trustee prays that the
Petition be dismissed.
Respectfully submitted,
Richard Joyce Smith, Trustee of The
New York, New Haven and
Hartford Railroad Company
By his attorneys,
Of Counsel: Tate & Exvix
2210 Girard Trust Building
James Wo. Moone Philadelphia, Pennsylvania 19102
54 Meadow Street
New Haven, Connecticut 06506
SULLIVAN & Worcester
225 Franklin Street
Boston, Massachusetts 02110
Dated : July 1, 1971
EXHIBITS A, B, C AND D HAVE BEEN OMITTED.
B47
In The Anited States District Court
For The
Castern District of Pennsylvania
In tHe Matrer or
Pexww Cewrrat Trawsportation Company, Destor
In Proceedings for the Reorganization of a Railroad
No. 70-347
APPEAL OF RICHARD JOYCE SMITH, TRUSTEE OF
NEW YORK, NEW HAVEN AND HARTFORD RAILROAD
COMPANY, FROM ORDER 296
APPLICATION FOR STAY OF ORDER 296 OF
DISTRICT COURT PENDING APPEAL
And Now, this day of June 1971, Richard Joyce
Smith, Trustee, by his attorneys Tate, Diamond, Polsky,
Bauer & Ervin, applies for a stay of Order 296 pending
final determination of the appeal and asserts as grounds
therefor the following:
1. The Petition of The Penn Central Trustees pre-
maturely and inaccurately anticipated the content of a
Judgment of the United States District Court for Connecti-
cut not then entered.
2. Paragraphs 3 and 4 of the Order granted relief to
the Penn Central Trustees with respect to matters which
proved not to be part of the judgment thereafter entered in
the United States District Court for Connecticut. Accord-
ingly, not only was the petition premature, but the relief
granted proved to be academic and improper.
3. The injunction contained in paragraph 2 of the
Order constitutes an improper collateral attack upon the
jurisdiction of the United States District Court for Con-
B-48
necticut, and the matter pending before that court on re" te
mand from the United States Supreme Court. =
4. The Order directing that a hearing be held on July _
26, 1971 at which time this Court ‘‘ Will consider whether it
should adjudicate, and may adjudicate the rights of the
Trustees in the properties conveyed to the Debtor by the
Trustees of the New York, New Haven and Hartford Rail.
road Company, in the Grand Central Terminal Properties,
and in the income therefrom’’, necessarily requires a deter-
mination by this Court of the jurisdiction of the United
States District Court for Connecticut and, accordingly, con.
stitutes an improper collateral attack upon the judgment of
that Court and compels duplicate litigation of issues already
adjudicated by that Court.
5. The injunction improperly restrains the trustee of
the property of the New York, New Haven and Hartford
Railroad Company, Debtor, and his attorneys from carrying
out the judgment and instructions of the court of which they
are duly appointed officers.
6. This court failed to make the findings of fact and to
state its conclusions of law in connection with entry of the
Order, as required by Rule 52(A) of the Federal Rules of
Civil Procedure.
7. This court failed to state its reasons for granting
the injunction contained in paragraph 2 of the Order, and
the injunction is not suficiently specific in its terms, as re-
quired by Rule 65(d) of the Federal Rules of Civil Proce-
dure.
8. The Penn Central trustees introduced no evidence
in support of their petition and, accordingly, made no show-
ing of irreparable injury essential to the entry of an in-
junction.
B-49
9. The order frustrates and bars the New Haven Trus-
tee from carrying out the instructions of the United States
District Court for Connecticut and from taking whatever
steps may be necessary to perfect rights of the New Haven
Estate, imposes the necessity of relitigating matters already
adjudicated, and thus constitutes irreparable harm to the
New Haven Estate.
10. The public interest in judicial economy, finality of
judgment, and seemliness of relations among federal courts
of coordinate jurisdiction compels the conclusion that the
Penn Central Trustees should be required to exercise their
rights, if they so desire, through appropriate appellate re-
view of the judgment of the United States District Court
for Connecticut rather than be permitted to make a col-
lateral attack in this court.
For all of these reasons, the provisions of Order 296
should be stayed pending final determination of the appeal
by Richard Joyce Smith Trustee, from that Order.
Tate, Diamonn, Pousxy, Baver & Ervin
Spencer Ervin, Jr.
W. Bourne RuTHRAUFF
Attorneys for Richard Joyce Smith
2210 Girard Trust Building
Philadelphia, Pennsylvania
Of Counsel:
James Wiri1aM Moone, Esqume
54M. Street
B-50
In The Anited States District Court
For The
€astern District of Pennsylvania
In tHE Marrer oF
Penn CentraL Transportation Company, Destor
In Proceedings for the Reorganization of a Railroad
No. 70-347
MEMORANDUM AND ORDER 312
IN RE
APPLICATION FOR STAY OF
ORDER No. 296
On June 29, 1970, the Supreme Court of the United
States handed down its opinion in the New Haven Inclusion
Cases, 399 U.S. 392 (1970), remanding certain aspects of the
New Haven reorganization case to the reorganization court
(United States District Court for the District of Connecti-
cut), for further proceedings before the Interstate Com-
merce Commission and the appropriate federal courts. On
August 10, 1970, the Connecticut court entered an order
directing various interested parties, including the New
Haven Trustee and the Penn Central, to file written state-
ments of position with respect to six specified subjects, to
be considered by that court in framing its order to carry out
the remand from the Supreme Court.
On June 11, 1971, the Connecticut court filed a ‘‘Memo-
randum of Decision,’’ expressing its conclusions as to the
subjects listed in its earlier order, and as to the nature of
the order which should he entered in remanding the matter
to the Interstate Commerce Commission. Among other
things, the Connecticut court concluded that an equitable
lien should now be imposed upon all tangible assets formerly
B-51
owned by the New Haven railroad and conveyed to the Penn
Central on December 31, 1968, the lien to be retroactive to
that date; that the Penn Central Trustees should be ordered,
commencing July 1, 1971, to pay over currently to the New
Haven Trustee one-half of the net income from the ‘‘Grand
Central Terminal Properties’’ in New York City; and that
certain payments on account, which had been made in the
form of stocks and bonds, in connection with the 1968 con-
veyance, should no longer be regarded as payments on ac-
count, but merely as security for future payment of the
total purchase price. The court scheduled a further hearing
for Tuesday, June 22, 1971, for the formulation and entry
of an order implementing the views expressed in the Memo-
randum of Decision.
Upon learning of then entry of the Memorandum of
Decision above referred to, the Penn Central Trustees peti-
tioned this Court for instructions, and for injunctive relief
against the entry of such an order, to the extent that it might
interfere with the exclusive jurisdiction of this Court or un-
duly hamper this reorganization. After due notice, a hearing
on the Trustees’ petition was held on Monday afternoon,
June 21, 1971. At that hearing, I made it quite clear that,
in order to minimize the likelihood of creating an appear-
ance of unseemly conflict between two courts of coordinate
standing,’ this Court would not attempt in any way to inter-
fere with the scheduled hearing in the Connecticut court the
following day, nor with the entry by that court of whatever
order that court deemed appropriate. However, I concluded
(1) that the implementation of any order requiring the Penn
Central Trustees to make immediate payments, or to se-
quester income, would obviously impinge upon the jurisdic-
tion of this Court and unduly interfere with the reorganiza-
tion of the Debtor, and would, in all probability, ultimately
1 Apart from the question of exclusive jurisdiction under §77, it is signif-
icant that a proof of claim asserting the same issues was filed by the New
Haven Trustee in this Court in May, and is still pending for disposition.
be determined to be beyond the jurisdiction of the Connecti-
cut court; and (2) the implementation of any order impos-
ing an equitable lien would be likely to have similar adverse
consequences, and, at the very least, involved substantial
jurisdictional issues. I determined that a further
should be held in this Court, at which the various
and weighty legal issues could be fully briefed and argued,
so that this Court might make an informed decision as to
the proper course to follow; and that, in the interim, the
status quo should be preserved, vo the extent of preventing
actual interference with the Debtor’s property and the re-
organization process.
Accordingly, Order No. 296 was entered, fixing a date
for further hearing, on July 26, 1971, and temporarily re-
straining the New Haven Trustee and all persons generally
from attempting to enforce payment from the Debtor’s
estate or taking action to enforce any lien thereon, until the
hearing. In reality, this Order did no more than particular-
ize and call attention to the provisions of Order No. 1 in this
proceeding. It is noteworthy that counsel for the New Haven
Trustee stated (transcript p. 2467) that he would recom-
mend a stay of any order which might be entered in the
Connecticut court ‘‘until appellate review can be obtained
by the Supreme Court.’’ Nevertheless, the New Haven Trus-
tee has now filed an application for a stay of Order No. 296.
Since Order No. 296 clearly did not interfere with the June
22 hearing in the Connecticut court, and since it does nothing
more than attempt to preserve the status quo until the hear-
ing in this Court, the present application for a stay is in
reality a request that the Order be vacated, so that steps
can be taken in advance of the July 26 hearing in this Court
to deplete the Debtor’s estate or otherwise interfere with
this reorganization. The application will be denied.
The principal grounds asserted in the application are
that, since the order ultimately entered in the Connecticut
court on June 22 does not direct the Penn Central Trustees
to make immediate payments (as had been intimated in the
Memorandum of Decision of June 11), the restraints of this
Court’s Order No. 296 are unnecessary (‘‘premature, aca-
demic and improper’’). There are at least two answers to
this argument. In the first place, it is far from clear that the
June 22 orders of the Connecticut court would necessarily
be interpreted as limiting in any way the conclusions ex-
pressed in the June 11 ‘‘Memorandum of Decision,’’ which
itself may constitute an order of that court. Paragraph 8 of
the Order of Remand appears to incorporate by reference
the terms of the Memorandum of Decision.
More importantly, the Order of Remand purports to
appropriate for the New Haven Trustee one-half of the ex-
cess income from the Grand Central Terminal properties,
commencing July 1, 1971. The distinction between this pro-
vision and a direction to the Penn Central Trustees to pay,
may prove to be nebulous. Moreover, a separate order was
entered on the same day (Order No. 647) in which the
Connecticut court ‘‘on its own motion’’ appointed an attor-
ney ‘‘as the court’s counsel to take such steps . . . as he may
deem to bo necessary ox agpeepsinte to geessrve the equt-
table en and constructive trust declared by this peurt ..
including, apparently, recordings in four states ‘to be-cload
the title to the property of the Debtor.
I do not profess a complete understanding of all of the
possible ramifications of the June 22 orders, but I am not
persuaded that the status quo would continue undisturbed
in the absence of the restraints imposed by Order No. 296.
It is further suggested that Order No. 296 is invalid
because it does not contain supporting reasons, pursuant to
Federal Rule of Civil Procedure 52(a). Assuming the appli-
cability of this Rule in bankruptcy, I believe the reasons
were adequately expressed of record at the conclusion of the
hearing on June 21.
B54
Finally, it should be noted that there has never been,
by ag -eement of counsel in order to suit the convenience of
New Haven counsel).
AND NOW, this 2nd day of July, 1971, it is ORDERED
that the Application for a Stay of Order No. 296 pending
appeal therefrom is hereby DENIED.
Jou» P. Futtam
District Judge
I» roe Martres oF
Paws Cunreat Transportation Company, Desron
Richard Joyce Smith, Trustee of the Property of
The New York, New Haven, and Hartford
Railroad Company, Debtor,
APPELLANT
v.
George P. Baker, Richard C. Bond,
Jervis Langdon, Jr., and Willard Wirtz,
Trustees of the Property of Penn Central
Transportation Company, Debtor,
APPELLEE
Appgat From THE Ustrep States Distaict Court For THE
Easterns Disrnict or Pew wsyYLvayia
MOTION FOR STAY
PENDING APPEAL
Now comes appellant and moves this court for a stay of
Order No. 296, entered by the United States District Court
for the Eastern District of Pennsylvania in Jn the Matter
of Penn Central Transportation Company, Debtor, No.
70-347, pending the hearing and determination of his appeal
from said Order, which appeal was docketed July 1, 1971.
B-56
Appellant has moved for a stay of said Order in the District
Court, and his motion has been denied. This motion is made
on the following grounds:
1. The Order prematurely and inaccurately antici
pated the content of a judgment of the United States
District Court for the District of Connecticut not then
entered.
2. Paragraphs 3 and 4 of the Order granted relief to
the Penn Central Trustees with respect to matters which
proved not to be part of the judgment thereafter entered
by the United States District Court for the District of Con-
necticut. Accordingly, not only was the Order premature,
but the relief granted proved to be academic and improper.
3. The injunction contained in paragraph 2 of the
Order constitutes an improper collateral attack upon the
jurisdiction of the United States District Court for the
District of Connecticut and the matter pending before that
court on remand from the Supreme Court of the United
States.
4. The injunction improperly restrains the Trustee of
the property of the New York, New Haven and Hartford
Railroad Company, Debtor, and his attorneys from carry-
ing out the judgments and instructions of the Court of which
they are duly appointed officers.
5. The Order directing that a hearing be held on
July 26, 1971 at which time the District Court “will con-
sider whether it should adjudicate, and may adjudicate, the
rights of the [Penn Central] Trustees in the properties con-
veyed to the Debtor by the Trustees of The New York, New
Haven and Hartford Railroad Company, in the Grand Cen-
tral Terminal Properties, and in the income therefrom,”
necessarily requires a determination by the District Court
B-57
below of the jurisdiction of the United States District Court
for the District of Connecticut and, accordingly, constitutes
an improper collateral attack upon the judgment of the
latter Court and compels duplicate litigation of issues al-
ready adjudicated by that Court.
6. The District Court failed to state its reasons for
granting the injunction contained in paragraph 2 of the
Order, and the injunction is not sufficiently specific in its
terms, as required by rule 65(d) of the Federal Rules of
Civil Procedure.
7. The District Court failed to make the findings of
fact and to state its conclusions of law in connection with
entry of the Order, as required by Rule 52(a) of the Federal
Rules of Civil Procedure.
8. No evidence was introduced in the District Court.
Thus, there was no showing of irreparable injury essential
to the entry of an injunction.
9. The Order frustrates and bars the appellant from
carrying out the instructions of the United States District
Court for the District of Connecticut and from taking what-
ever steps may be necessary to perfect the rights of the New
Haven Estate, and compels him to relitigate matters already
adjudicated. The order thus constitutes irreparable harm to
the New Haven Estate.
10. The public interest in judicial economy, finality of
judgments, and seemliness of relations among Federal
courts of co-ordinate jurisdiction compels the conclusion
that the Penn Central Trustees should be required to exer-
cise their rights, if they so desire, through appropriate
appellate review of the order of the United States District
Court for the District of Connecticut rather than be per-
mitted to collaterally attack that order in the District Court
below.
B-58
Appellant requests an opportunity for oral argument
on this motion.
Respectfully submitted,
Rocuarp Jorcs Smrrn
Trustee of The New York, New Haves
and Hartford Railroad Company,
Debtor
Of Counsel:
By his attorneys,
Jams Wm. Moonz
54 Meadow Street
New Haven, Connecticut 06506 Tate & Exvow
2210 Girard Trust Building
SuLLIvaAN & Worcester Philadelphia, Pennsylvania 19102
225 Franklin Street
Boston, Massachusetts 02110
B-59
Bnited States Court of Appeals
For The Third Circuit
No. 71-1582
July 2, 1971
Iw THE Matrer oF
Pews Central Transportation Company, DeBror
Richard Joyce Smith, Trustee of the New York,
New Haven & Hartford Railroad, Appellant
(D. C. No. B-70-347 In Bankruptcy)
Present : Van Dusen and Aldisert, Circuit Judges
1. Appellant’s motion for stay pending appeal of
order No. 296 entered June 21, 1971 by the United States
District Court for the Eastern District of Pennsylvania.
in the above listed for Wednesday, July 14, 1971.
Respectfully,
Clerk
enc.
fm
The foregoing Motion is denied.
By the Court,
Judge
Dated : July 14, 1971
B-60
In The Anited States District Court
For The
€astern District of Pennsylvania
In THE MatTeER oF
Penn Centra Transportation Company, BANKRUPTCY
No. 70-347
Philadelphia, Pennsylvania
July 26, 1971
Before HON. JOHN P. FULLAM, J.
Craig Windsor Wallace
Official Court Reporter
3051 U.S. Court House
Philadelphia, Penna. 19107
WA 5-9480
MR. MOORE: Thank you, sir.
It wasn’t too clear to me, Your Honor, just what issues
would be gone into this morning. May I respectfully ask are
the merits of the equitable lien and the constructive trust
before you, sir, or are you confining this hearing to what
I thought it would be, on the matter of res judicata?
THE COURT: The order which set this date for hear-
ing, in that order I tried to make it clear that I would
consider two things: |
No. 1, whether I should adjudicate the issue, and, sec-
ondly, what that adjudication might be, if I decide that
I should.
The purpose was to telescope both sections of it into
one hearing so that there would not be delay in the event
that it was decided that I should try to adjudicate it. There-
fore, I would suggest that you proceed to express your
views on both, but with no decision as yet as to whether the
Court will make such a decision.
MR. MOORE: Your Honor, I would like to move this
court, one, to sustain respondent’s plea of res judicata ; two,
in the event it instructs the trustees of the debtor to seek
appellate review of the order on remand entered June 22,
1971, the remand order, by the United States District Court
for the District of Connecticut, to instruct the trustees to
limit that review to the merits and otherwise expedite re-
view to the end that the substantive issues encompassed by
the remand order will be determined with finality as soon
as possible; three, to permit expiration of the injunctive
provisions of Order No. 296 herein, in accordance with the
terms thereof, and since Your Honor takes the view that the
merits of the equitable lien and constructive trust are before
the court or at least you want them presented, I respectfully
stand on the merits as set forth in Judge Anderson’s order
of June 22, the order of remand, and for the reasons stated
in his memorandum of decision of June 11.
B-62
1808 Six Penn Center
Philadelphia, Pa. 19104
October 22, 1971
Honorable John P. Fullam
United States District Court for the
Eastern District of Pennsylvania
6049 United States Courthouse
9th and Market Streets
Philadelphia, Pa. 19107
Re: In the matter of Penn Central Transportation
Company, Debtor — Docket Nos. 71-1582 and
71-1734 in the United States Court of Appeals for
the Third Circuit.
Dear Judge Fullam:
The above matters refer to appeals from Your Honor’s
Order No. 296 in the Penn Central Reorganization Proceed-
ings taken respectively by Richard Joyce Smith, the New
Haven Trustee, and The New Haven 4% Bondholder’s
Committee.
On October 21, 1971, upon request of the United States
Court of Appeals for the Third Circuit, per Aldisert,
Gibbons and Rosenn, JJ., Counsel for the New Haven
Trustee and Special Counsel for the Penn Central Trustees
attended a pre-argument conference in appeal No. 71-1582
taken by the New Haven Trustee.
At that time, after a thorough, candid discussion by
the parties, the Panel was of the opinion that certain issues
raised in both appeals concerning the interpretation of
Order No. 296 could be resolved without requiring decision
at this time by the Court of Appeals. Accordingly, the Panel
directed the following without entry of an order:
B-63
1. The argument in No. 71-1582, which had been sched-
uled for October 22, was postponed indefinitely, and without
determination whether the matter eventually would be
heard orally.
2. The Panel also determined to consolidate the appeal
in No. 71-1734 with the appeal in No. 71-1582, and Special
Counsel for the Penn Central Trustees agreed to proceed
without further briefing. It was stipulated that such
consolidation would be without prejudice to the Penn
Central Trustees’ position that said Appellant has no stand-
ing to appeal from Order No. 296.
3. The Panel would have assigned to it, and retain
jurisdiction of, the consolidated appeals.
4. The parties were asked to take up with Your Honor
some of the questions which emerged from the interpreta-
tion of Order No. 296 and, further, t oexplore other areas
of dispute arising from that Order.
5. The Panel directed the parties to advise the Clerk
of the Court of Appeals in writing within 15 days of the
results of the foregoing.
The Panel expressed its hope that the parties would
apply to the United States Court of Appeals for the Second
Circuit for expeditious disposition of the appeals now pend-
ing before that Court from the Order of Remand of the
United States District Court for the District of Connecticut.
The Panel stated that its actions described above do not
imply that the Court of Appeals would defer disposition of
any appeal which may be taken from a decision by Your
Honor on the merits of the questions now pending be-
fore you.
In order to carry out the instructions of the Panel,
and with the hope of narrowing issues in this matter, it is
respectfully requested that Your Honor meet in chambers
B-64
with the parties. Because of the aforementioned consolida-
tion of appeals from Order No. 296, it was suggested that
counsel for the New Haven Bondholders’ Committee ‘be
invited to participate in any such meeting. It was stipulated
that such participation, if any, by counsel for that Commit-
tee, would be without prejudice to the Penn Central Trus-
tees’ position that said Committee has no standing to ap-
peal. Counsel for the New Haven Trustee has reported to
counsel for the Bondholders’ Committee the discussions
held at the conference with the Panel.
The foregoing statements do not purport to summarize
all the views expressed by the Panel, or individual members
thereof. Each of the parties would cover such of these
which appeared pertinent in connection with e ineeting with
Your Honor.
If these suggestions are agreeable to Your Honor,
upon hearing from your Clerk, the undersigned will under-
take to advise the parties.
Respectfully submitted,
Spencrr Ervin,
Counsel for Richard Joyce Smith,
Trustee of the Property of
The New York, New Haven &
Hartford Railroad Company, Debtor
Joun F. DePopesta,
Reorganization Attorney,
Trustees of the Property of
Penn Central Transportation
Company, Debtor
cc; ‘HONORABLE THOMAS QuINN
—— Lester C. MicpAt, Esquire
Hano_p GREENBERG, EsQuimre
B-65
Anited States District Court
November 3, 1971
Josepn AvEnsAcs, Esq. Cuan.es A. Horsxy, Esq.
225 Franklin Street Covington & Burling
Boston, Mass. 888-16th Street, N. W.
Washington, D. C. 20006
James W. Moons, Esq.
4 Meadow Street Joun F. DePonesta, Esq.
New Haven, Conn. Penn Central Transportation
Company
SPENCER Ervin, EsQume 18th floor — Six Penn Center
2210-2 Girard Plaza Philadelphia, Pa. 19103
Philadelphia, Pa. 19102
Brice Ciacett, Esq.
Covington & Burling
888-16th Street, N. W.
Washington, D. C. 20006
Re: Penn Central Transportation Company—New Haven—
Third Circuit Appeals Nos, 71-1582, 71-1734
Gentlemen:
At the conference in chambers held November 1, 1971,
there were three principal areas of activity which the New
Haven Trustee wished to be free to pursue without running
afoul of the restrictions imposed by Order No. 296.
1. To take steps to apply to the United States
Supreme Court for certiorari before judgment of the Sec-
ond Circuit, in the pending appeal from the New Haven
court’s order ;
2. To take the necessary steps to schedule further
proceedings before the I.C.C. in connection with Judge
Anderson’s order of remand ; and
3. To study fully whether all possible steps have been
taken by Mr. Sistare to perfect the ‘‘equitable lien’’ and,
if not, to rectify any omissions in this regard.
B-66
With respect to the first two of these items, the applica-
tion for certiorari and the further proceedings before the
L.C.C., I believe we all were and are agreed that there is
nothing in Qrder No. 296 which would interfere with these
proposed actions. With respect to the third item, there is no
agreement, and I stated that I would advise the parties of
my views today. I now do so.
In my opinion, neither the New Haven Trustee nor his
counsel, nor anyone else acting at their request or sugges-
tion, could take any further action to record or perfect the
recordation of the ‘‘equitable lien’’ without violating Order
No. 296 as it now stands. Accordingly, if these activities
were to be permitted, a modification of Order No. 296 would
be required. It would be necessary for someone to make
application for such amendment, and there would have to be
a hearing at which the views of all interested parties could
be presented.
I believe it would be inappropriate for me to give any
indication of whether such amendment would be approved,
in the absence of a formal application, and without having
heard the views expressed at such a hearing. I do not know
whether your conference with the Third Circuit panel would
justify the conclusion that this issue should be dealt with
somewhat less formally than I have just indicated. But even
if this question could be disposed of informally, I do not
believe I have any jurisdiction to amend Order No. 296
while an appeal is pending.
Very truly yours,
Joun P. Futtam
PF/bjd
November 5, 1971
The Hon. Thomas Quinn
Clerk, U. S. Court of Appeals
for the Third Cireuit
Courthouse, 9th and Chestnut Streets
Philadelphia, Pennsylvania
RE: In the matter of Penn Central Transportation
Company, Debtor — Docket Nos. 71-1582 and
71-1734 in the United States Court of Appeals for
the Third Circuit.
Dear Mr. Quinn:
Reference is made to the letter of October 22, 1971 sent
to The Honorable John P. Fullam, with a copy to you, in
connection with the meeting held October 21, 1971 regarding
procedure in the above matters.
Please find enclosed a copy of the letter dated Novem-
ber 3, 1971 which we have received from Judge Fullam.
It seems to us, in view of Judge Fullam’s letter, and
the discussion which he was good enough to have with us on
November 1, that it would be appropriate to defer for a
reasonable time the assignment of the above appeals for
oral argument.
Very truly yours,
Jouwx F. DePopesta Haro.p GREENBERG
Reorganization Attorney, Cohen, Shapiro, Polisher, Shiekman
Trustees of the Property of and Cohen
Penn Central Transportation Counsel for New Haven 4%
Company, Debtor, Appellee in Bondholders Committee, Appellant
Nos. 71-1734 and 71-1582 in No. 71-1734
November 10, 1971
A. Daniel Fusaro, Esquire
Clerk, United States Court of Appeals
For the Second Circuit
United States Courthouse
Foley Square
New York, New York 10007
Re: In the matter of New York, New Haven and
Hartford Railroad Company — Appeal
Docket Nos. 71-1903, 71-1929 and 71-2024
Dear Mr. Fusaro:
The above-captioned appeals present issues of great
importance which, for the best interest of all parties and of
the public, should be finally resolved at the earliest possible
date.
It presently appears that briefing in these appeals will
be complete on or about December 20, 1971.
A related proceeding is presently pending before the
United States Court of Appeals for the Third Circuit. In a
pre-argument conference in that proceeding held on Octo-
ber 21, 1971, a panel of that Court expressed the hope that
the undersigned would seek all possible expedition of the
instant appeals in this Court.
We therefore respectfully request that the Court sched-
ule argument in the above-captioned appeals as soon as
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possible after the completion of briefing, so that final dispo-
sition of these appeals can be expedited.
do
ec: Thomas Quinn, Esquire
Clerk, U.S. Court of Appeals for the Third Circuit
Yours very truly,
Brice M. Ciaccett
Covington & Burling
888 Sixteenth Street, N.W.
Washington, D.C. 20006
Special Counsel For the
Penn Central Trustees, Appellants.
JosEPH AUERBACH
Sullivan & Worcester
225 Franklin Street
Boston, Massachusetts 02110
Attorney For Richard Joyce Smith,
Trustee of the Property of
The New York, New Haven and
Hartford Railroad Company,
Debtor, Appellee.
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In The Gnited States District Court
For The
Castern District of Pennsylvania
In tHE Martrer oF
Penn Centrat TransporTaTiIoN Company, Desror
In Proceedings for the Reorganization of a Railroad
No. 70-347
{In re: Claim of Richard Joyce 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.
I. Background
On March 6, 1962, the Pennsylvania Railroad Company
and the New York Central Railroad Company made appli-
cation to the Interstate Commerce Commission under Sec-
tion 5(b) of the Interstate Commerce Act (49 U.S.C. §5(b)
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(1) for approval of a proposed merger of the two railroads
into what ultimately became the Penn Central Transporta-
tion Company, the Debtor herein.
On June 26, 1962, the New Haven, then in reorganiza-
tion for the second time in less than 20 years, sought inclu-
sion 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 in-
clusion of the New Haven, on terms to be negotiated by the
parties, subject to the approval of the I.C.C. and the New
Haven reorganization court. 327 ICC 475, 553. It was recog-
nized that any attempt to recapitalize the New Haven and
include it as an operating company would be pointless, in
view of its hopelessly deteriorating financial condition. Ac-
cordingly, the outright sale of the New Haven’s assets was
the method of inclusion selected. This transaction was to
constitute the first step of a two-step reorganization 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-
ceded 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
1 331 ICC 627, 692.
B-72
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
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
I.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 worth between $33,000,000 and $55,000,000 more
than the agreed price, In re New York, N.H. & 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. NV.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). i
On remand, again in a combined proceeding involving
both the merger and the reorganization, the I.C.C. increased
he price by some $37,790,000, but allowed certain further
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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.
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 Cen-
tral should be required to take over the New Haven’s oper-
ations, 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 LC.C.
was paid, subject to adjustment on appeal.
On the second round of appeals, the merger court
generally upheld the LC.C., but made some adjustments
which increased the price by about $990,000. N.Y., N.H. &
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 approved in 1966, in
hearings before the I.C.C. the median projected price of
Penn Central stock was $87.50. By the time of the convey-
ance of the New Haven assets on December 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. Accordingly, in author-
izing the New Haven Trustee to accept 950,000 shares of
Penn Central stock as representing payment of $83,125,000
B-74
of the purchase price, the Connecticut court imposed on
Penn Central an underwriting plan which in effect reqnired
Penn Central to guarantee that the stock would 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
bankruptcy. Eight days later, on June 29, 1970, the Supreme
Court decided the pending appeals. New Haven Inclusion -
Cases, 399 U.S. 392 (1970). The Court (a) affirmed the New
Haven reorganization court’s determination that the cor-
rect price for the New Haven assets was $174,000,000;
(b) vacated that part of the reorganization court’s judg-
ment which set up the underwriting plan; and (c) directed
the merger court to abstain ‘‘pending the further proceed-
ings before the I.C.C. and the reviewing courts under Sec-
tion 77 of the Bankruptcy Act.’’
As can be seen from the foregoing recital, there were
two separate issues involved throughout these proceedings:
the value of the New Haven assets, and the value of the
consideration to be furnished by Penn Central. When the
1.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 in-
crease. 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.
B-75
Ii. 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 conse-
quence 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, 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
and the appropriate federal courts will be necessary to
determine the form that Penn Central’s consideration to
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New Haven should properly take and the status of the
rte Haven estate as a shareholder or creditor of Pem. _
’? [emphasis added]
. immeédiately preceding this language, the Tome
stated (pp. 488-89) :
‘*The fairness and equity that are the essence of a Section
77 proceediig forbid our approval of a payment for the
transferred New Haven properties that may be worth
only a fraction of its purported value. And the same con-
siderations of fairness and equity prevent imposing on
Penn Central the burden of immediate payment in full,
particularly when it is remembered 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 Centrai to pay
to the New Haven estate is based upon the liquidation
value of the seller’s assets, appraised as of December 31,
1966. That price hypothesizes a shutdown 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 in-
equitable to allow Penn Central to take the properties for
any lesser sum. Moreover, we today require a reassess-
ment of the consideration 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 en. 3 6””
[emphasis added]
And finally, there is at least surface inconsistency between
the Court’s language at page 488:
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‘6. . But we cannot avoid the impact of recent events in
assessing the propriety of the decree that [the reorgani-
zation]. court has entered. ...”’
and the express disclaimer set forth in a prefatory footnote
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 opimon was filed shortly
after Penn Central’s bankruptcy, and that the implications
of the bankruptcy had not been briefed or argued, it may
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 possible
way to reconcile these two comments might be to construe
the Supreme Court’s mandate as directing that the under-
writing scheme, or the valuation of the entire package of
consideration, must be reconsidered by reason of the inter-
vening 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 out-
come of its mandated reevaluation, various parties in inter-
est in the Penn Central reorganization proceeding would
still be able to challenge it in this reorganization 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 therefor; (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/
B-78
treatment to be accorded whatever claims emerge from de-
cision of the foregoing issues, in the Penn Central bank-
ruptcy proceeding.
Ill. 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 Connecticut court, gener-
ating 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 purchase price ap-
proved by the Supreme Court the various cash payments
which have been made 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 bal-
ance 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 ‘‘equitable
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 (i.e., $174,-
000,000, less cash payments on account and obligations
assumed, declared the existence of a ‘‘constructive trust’’
in one-half of the income from the Grand Central Terminal
properties in New York, in the sum of $28,000,000; con-
cluded that the 950,000 shares of Penn Central stock and the
Divisional First Mortgage Bonds which were part of the
original purchase price paid in 1968 should now be regarded
2 See: In re N.Y., N.H. © H.R.R., 330 F Supp. 131; 331 F.Supp. 212 (D.
Conn., 1971).
B-79
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 owa motion, des-
ignated a named attorney as the representative of the court
to take immediate steps to record the ‘equitable 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 with them, and designed only to preserve the status
quo pending ultimate resolution of these issues, by pro-
hibiting any attempts to exact payment. An appeal from
this order is now pending before the Court of Appeals for
the Third Circuit.
At the same time, the Trustees filed the present appli-
cation, 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 in-
here 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 controver-
sies, or different aspects of the same controversy, are
properly presented to two courts for decision, it is some-
times 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
ignored, and they cannot be disposed of without
the jurisdictional and other issues presented. The unique
and complex relationship between the two reorganization
proceedings, in try judgment, makes it necessary for both
courts to decide their respective portions of the issues pre-
sented, in the interests of expediting final and conclusive
resolution of all of the issues involved in the entire litiga-
tion. Every reasonable effort should be made, of course, to
nimize diff
As noted above, the Supreme Court held that ‘‘farther
federal courts will be necessary to determine the form that
Penn Central’s consideration to New Haven should prop-
erly take and the status of the New Haven estate as a share-
holder or creditor of Penn Central.’’ From the use of the
plural (‘‘courts’’), and the fact that the Supreme Court
directed 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
remaining open. Nevertheless, it must be recognized that
the litigation in which the opinion was rendered did not
originate in this court, and that the Supreme Court’s man-
date was directed to the Connecticut court. In view of the
language 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,
pursuant 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 respsetive claims and interests’ for purposes of the
reorganization plan. 5 Colker on Bankruptcy, §§77.20, 77.21;
6A Collier on Bankruptcy, §9.02. In carrying out these func-
tions, this court would be bound by principles of res yudtcata
and full faith and credit. To the extent that the judgment of
or by virtue of the Supreme Court’s affirmance shortly after
bankruptey, no question arises. But to the extent that addi-
tional obligations are sought to be imposed, or adcitional
liens created, after Penn Central's bankruptcy, without the
consent or approval of this Court, very serious jurisdic-
tional questions appear. 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
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-
these assets in this court, and made it jurisidictionally 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 sub-
ject themselves to the jurisdiction of the New Haven court,
and thereafter for this court to abstain until final appellate
determination in the Second Cirenit 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, toall ——
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
amore 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 fur-
ther secured claim in the sum of $28,000,000, plus interest
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 Centre! 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.
3 The Trustees did appear in some limited fashion in the Connecticut pro-
ceeding. The extent of this participation and the procedural adequacy of the
proceedings are among the issues now pending on appeal in the Second Circuit. _
* New or additional credit aggregating hundreds of millions of dollars was
extended to Penn Central between December 31, 1968, and the date of bank-
These creditors may be able to establish 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 no* 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.
B-83
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 can be seen as involving the formu-
lation and implementation of a plan of reorganization of the
New Haven, a mandate from the Supreme Court, and litiga-
tion which was pending on the date of Penn Central’s bank-
ruptey, 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 tak-
ing any action which might infringe upon the jurisdiction
of the Connecticut court. However, insofar as new or addi-
tional claims are being asserted therein against the Debtor’s
estate, I am required to decide whether the assertion 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 No. 1 herein.
As between the New Haven Trustee and the Debtor,
these claims, notwithstanding their unusual ramifications,
are 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
proceedings, 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 another 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 opposite. However,
to the extent that it does bear on the present situation, it
lends support to the position of the Penn Central Trustees i
in this case.
Whathie (e‘puesent Ustie Yio vegneded: a é-dmins:
of the exercise of this Court’s discretion as to whether or
not to stay pending litigation in another jurisdiction, or,
independently of the ‘‘stay of suits’’ question, the deter-
mination as to which of two reorganization courts is the
preferable forum, I am constrained to reach the somewhat
uncomfortable conclusion that the ultimate decision depends
to a large extent upon the result which has been or may be
reached in the other jurisdiction. The usual standards to be
applied in this situation—impact on the formulation of a
reorganization plan and the continuance of rail service, ef.
Warren v. Palmer, supra; Gardner v. New Jersey, 329 US.
565 (1947), and impact on this court’s interim administra-
tion of the reorganization proceeding, see Congress of Rail-
way Unions, et al. Appeal, ____ F.2d___ (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 Penn Central’s consideration and the “‘status’’ of the
New Haven would presumably be determined by the Com-
mission simultaneously in both the New Haven reorganiza-
tion proceeding (including the remnants of the merger case)
and in the Penn Central reorganization proceeding. It is
reasonable 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 proceed-
ing. 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 probably be feasible. Moreover, there is every reason
to suppose that the Commission, which is, after all, pri-
marily responsible for the formulation of reorganization
plans, see Group of Institutional Investors v. Chicago, Min-
neapolis, 8t. Paul and P.R. Company, 318 U.S. 523, 544
(1943) ; Reconstruction 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 #
manner which would withstand attack in both courts. As
matters now stand, however (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 proceeding.
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 Trus-
tee’s claim in the reorganization plan of the Penn Central.
However, this assurance can be, and is widely interpreted
by Penn Central creditor groups as being, limited to the
notion that the New Haven Trustee’s ultimate participa-
tion in a reorganized Penn Central would be determined in
the Penn Central reorganization proceeding. The recalcu-
lated 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 reconsideration
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
rolling stock), whether real or personal, thus apparently
even including office furniture and supplies, the interference:
with the orderly process of the reorganization and the oper- eo
ations of the Debtor in the interim is potentially quite sub-
stantial, Farther, obvious difficulties arise with respect te.
that part of the Connecticut court’s order which imposes a
‘‘constructive trust’’ upon substantial amounts of income
now av
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