Opposition Brief — Timpany v. New Jersey

y THe te -~ rt: eeyrehie GOUN, 0. &

LIBRA .. FILED

DEC 7 1973

In Tue

MICHAEL ROBAX, JR..CLERK

Supreme Court of the Unitei-Stater

Ocroser Term, 1973

No. 73-742

R. D. TIMPANY, Trustee in Reorganization of the

Property of the Central Railroad Company of New

Jersey,

Petitioner,

STATE OF NEW JERSEY, COMMONWEALTH OF

PENNSYLVANIA and PENNSYLVANIA PUBLIC

UTILITIES COMMISSION,

Respondents.

On Petition for Writ of Certiorari to the United States

Court of Appeals for the Third Circuit

BRIEF IN OPPOSITION

Grorce F. Kucter, Jr.,

Attorney General of New Jersey,

Attorney for Respondent, State of

New Jersey,

State House Annex,

Trenton, New Jersey 08625.

SrerHen SKILLMAN,

First Assistant Attorney General,

Of Counsel and on the Brief.

Adams Press Corp., 11 Commerce Street, Newark, N. J.—Market

TABLE OF CONTENTS

PAGE

CounTER-STATEMENT OF THE QuESTIONS PRESENTED .... = 1

CounTER-StATEMENT OF THE CaSE 2

Arcument—There is no basis for the Court to grant

a Writ of Certiorari, because the Court of Ap-

peals correctly determined that this case is square-

ly controlled by Palmer v. Massachusetts, 308 U. 8.

79 (1939) and later cases which hold that a rail-

road reorganization court lacks the authority

under § 77 of the Bankruptey Act to circumvent

the procedures established by Congress and state

legislatures with respect to the cessation of rail

services 5

ConcLusion 14

Cases Cited

Colorado v. United States, 271 U. S. 153 (1926).......... 5

Converse v. Massachusetts, 101 F. 2d 48 (2nd Cir.

1939) 6, 11

Fort Smith Light & Traction Co. v. Bourland, 267

U. 8. 330 (1925) 11

Gutierrez v. Waterman Steamship Corp., 373 U. 8.

206 (1963) 10

McGrath v. Christianson, 340 U. S. 162 (1950)............ 10

Neely v. Eby Construction Co., 386 U. S. 317 (1967).. 9,10

New Haven Inclusion Cases, 399 U. 8. 392 (1970)...... 7,8

OT ee ee ee

ii

TABLE OF CONTENTS

PAGE

New York, New Haven and Hartford Railroad Co.,

In re, 289 F. Supp. 451 (D. Conn, 1968).........0...... 8,12

Palmer v. Massachusetts, 308 U. S. 79 (1989)........... 1, 5-8,

10, 11, 13

Smith v. Hoboken Railroad, Warehouse and Steam-

ship Connecting Co., 328 U. 8. 123 (1946)... 7

Thompson v. Texas Mexican R. Co., 328 U. 8. 134

(1946) 7

Wyoming Ry. Co., In re, 94 F. Supp. 371 (D. Wyo.

1950) 8

Statutes Cited

11 U.S.C. (Bankruptey Act):

See. 205 1, 2, 5, 6, 10, 11

See. 205(e), (g) 8

Sec. 205(0) 5

49 U.S.C. (Interstate Commerce Act) :

See. 1(18) 5

See. 13a(1) 5

See. 13a(2) 5

N.J.S.A. 27:1A-24 5

N.J.S.A. 48 :2-24 5

Rules Cited

Federal Rules of Appellate Procedure:

35 3

40

In THe

Supreme Court of the United States

Ocroser Term, 1973

No. 73-742

>

~

R. D. TIMPANY, Trustee in Reorganization of the

Property of the Central Railroad Company of New

Jersey,

Petitioner,

STATE OF NEW JERSEY, COMMONWEALTH OF

PENNSYLVANIA and PENNSYLVANIA PUBLIC

UTILITIES COMMISSION,

Respondents.

On Petition for Writ of Certiorari to the United States

Court of Appeals for the Third Circuit

"“

—_

Counter-Statement of the Questions Presented

1. Does a reorganization court have the power under

§ 77 of the Bankruptcy Act to authorize a railroad in re-

organization to discontinue rail services without first

secking the approval of the appropriate state regulatory

agency or the Interstate Commerce Commission?

9 Ts this case distinguishable from Palmer v. Massa-

chusetts, 308 U. S. 79 (1939) ?

2

Counter-Statement of the Case

On March 22, 1967 the Central Railroad of New Jersey

(hereinafter referred to as the “CNJ”) filed a petition

for reorganization with the United States District Court

for the District of New Jersey under § 77 of the Bank-

ruptey Act (11 U.S.C. § 205).

After the present trustee assumed office in 1971, a plan

for the reorganization of the CNJ, known as the “Blue-

print for Survival”, was proposed. The plan contem-

plated the cessation of CNJ’s operations in Pennsylvania,

but the continuation of services, including passenger op-

erations, within New Jersey.

On Auugst 9, 1971, a plan of reorganization predicated

on the successful implementation of the Blueprint for

Survival was filed with the Interstate Commerce Com-

mission. This plan is still pending before the I.C.C.

The CNJ has now abandoned its operation in Penn-

sylvania but continues to operate vital freight and pas-

senger services within New Jersey. The passenger serv-

ices consist of three separate lines, two of which bring

commuters into the City of Newark. There are approxi-

mately 25,000 to 30,000 riders who use these passenger

services daily.

On November 22, 1972 the trustee in bankruptcy, with-

out having made prior application either to the appro-

priate state regulatory agency or to the I.C.C., filed an

application with the reorganization court for authority

to discontinue all passenger operations of the CNJ (Third

Cireuit Appendix, at 6a to 48a). The petition was brought

on for hearing before the reorganization court only ten

business days after service of the petition upon the State

(Third Circuit Appendix, at la, 146a).

3

At the conclusion of the hearing, the court rendered

an oral opinion granting the trustee’s application for au-

thority to discontinue all passenger service (App. 3a to

10a). This ruling was embodied in Order No. 547 (App.

la to 2a).

The State of New Jersey and the Commonwealth of

Pennsylvania filed separate notices of appeal from this

order to the Third Circuit Court of Appeals, which af-

firmed in a short per curiam opinion (App. 20a to 22a).

The State and Commonwealth then filed petitions for re-

hearing in banc, which were granted (App. 23a to 24a),

and the matter was reargued before the court in banc on

May 23, 1973. The Court of Appeals reversed Order

No. 547 in an opinion holding that the reorganization

court lacked the power to enter an order permitting the

discontinuance of passenger service on the CNJ without

complying with the requirements of federal and state law:

* The statements in the Petition for Writ of Certiorari to the

effect that the trustee was not afforded an adequate opportunity to

present his case to the court in banc are difficult to understand.

Although the court did not request the filing of an answer before

granting the petition for rehearing in banc, Rules 35 and 40 of

the Federal Rules of Appellate Procedure do not require such a

procedure. In this case, the court probably concluded that there

was no need to ask for an answer, because the arguments set forth

in the State’s petition for rehearing were nearly identical to those

in its briefs on the merits. Furthermore, the court in banc heard

oral argument before deciding the case. Finally, it is reasonable to

assume that if the experienced counsel retained by the trustee had

concluded, either after the petition for rehearing was granted or

after the oral argument before the court in banc, that he had been

deprived of an adequate opportunity to present his case, he would

have sought leave to file a supplemental brief. Since he failed to

do this, it is fair to assume that he was satisfied at the time with

the presentation of his case.

4

“[Tj}his Court holds that termination of passenger

service cannot be ordered by the district court

supervising the reorganization of a railroad under

section 77, unless such termination has been ap-

proved by the appropriate agency.” (App. 41a).

The court further noted that its holding

“. .. does not preclude district courts from permit-

ting ailing railroads to terminate services. Rather,

it holds only that the reorganization court require

railroads seeking termination to follow certain pro-

cedures. Adherence to such procedures is not an

exercise in formalism. Rather, such adherence re-

flects two important concerns. First, application

to the appropriate state agency preserves the bal-

ance between federal and state powers in this field.

Second, administrative review assures that an

agency with substantial expertise, be that agency

state or federal, will provide that the appropriate

amalgam of public concern for rail transport and

private rights of property is achieved.” (App. 42a).

The trustee then filed a petition for further rehearing

in banc, raising for the first time the arguments now

primarily relied upon in the Petition for Writ of Certi-

orari. This petition was denied by the Third Cireuit

(App. 6a to 70a).*

*In late October, 1973, the trustee for the CNJ entered into a

passenger subsidy contract with the New Jersey Commuter Op-

erating Agency, subject to the approval of the reorganization court,

for the period from July 1, 1973 to June 30, 1974. The contract,

which provides for an annual subsidy of $7.9 million, contains no

cancellation clause.

5

ARGUMENT

There is no basis for the Court to grant a Writ of

Certiorari, because the Court of Appeals correctly de-

termined that this case is squarely controlled by

Palmer v. Massachusetts, 308 U.S. 79 (1939) and

later cases which hold that a railroad reorganization

court lacks the authority under § 77 of the Bank-

ruptcy Act to circumvent the procedures established

by Congress and state legislatures with respect to

the cessation of rail services.

The reorganization court authorized the trustee of the

CNJ to discontinue all of its passenger operations with-

in the State of New Jersey without seeking the permis-

sion of either any state regulatory agency or the LC.C.*

*In the State of New Jersey, if a passenger subsidy contract

is in effect, an application for any change in service must be made

to the Commuter Operating Agency in the Department of Trans-

portation. N.J.S.A. 27:1A-24. If the expenditure of public funds

is not involved, an application must be made to the Board of Pub-

lic Utility Commissioners. N.J.S.A. 48:2-24.

If a rail line operates from a point in one state to a point in

another state, then the railroad may disregard the requirements

of state law and apply directly to the 1.C.C. for permission to

discontinue the service pursuant to 49 U.S.C. § 13a(1). If a dis-

continuance of service rises to the level of an “abandonment” within

the meaning of § 77(0) of the Bankruptcy Act (11 U.S.C.

§ 205(0)) and § 1(18) of the Interstate Commerce Act (49

U.S.C. § 1(18)), the application also may be made directly to the

LC.C. Colorado v. United States, 271 U.S. 153 (1926). If the

service operates entirely within a single state, then the railroad

may petition the I.C.C. for permission to discontinue the service

only after the state agency has denied such relief pursuant to 49

U.S.C. § 13a(2).

Although there has been some controversy as to which of these

procedures would be applicable, what Palmer holds is that the

reorganization court lacks the authority to override the applicable

administrative procedure, regardless of which one is applicable.

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6

In so doing, as the Court of Appeals properly held, it ex-

ceeded the powers of a reorganization court under § 77

of the Bankruptcy Act as construed in Palmer v. Massa-

chusetts, 308 U. S. 79 (1939).

In Palmer, the Old Colony Railroad in Massachusetts

had suffered nearly $6 million in losses in a two-year

period. This was attributable solely to losses in pas-

senger service, since the freight continued to make money.

The railroad therefore applied to the State Public Util-

ity Commission for permission to discontinue certain

passenger trains. When the Commission failed to issue

a final decision within six months, the railroad petitioned

the reorganization court for permission to discontinue

those services. The reorganization court granted this

relief, concluding that the failure to allow discontinu-

ance “would result in confiscation.” On appeal, the Court

of Appeals reversed this discontinuance order on the

grounds that it was in excess of the reorganization court’s

authority. Converse v. Massachusetts, 101 F. 2d 48 (2nd

Cir. 1939). On appeal this Court affirmed in an opinion

which squarely held that a reorganization court lacks the

power to authorize the discontinuance of rail service with-

out complying with the requirement of applicable state

and federal laws:

“In view of the judicial history of railroad re-

ceiverships and the extent to which § 77 made ju-

dicial action dependent on approval by the Inter-

state Commerce Commission, it would violate the

traditional respect of Congress for local interests

and for the administrative process to imply power

in a single judge to disregard state law over local

activities of a carrier the governance of which

Congress has withheld even from the Interstate

Commerce Commission, except as part of a com-

7

plete plan of reorganization for an insolvent

road.” Palmer v. Massachusetts, 308 U. S. at 88.

Subsequent to Palmer, in cases involving matters with-

in the jurisdiction of the I.C.C., the Court has reaffirmed

its holding that Congress did not confer power on a rail-

road reorganization court to preempt the jurisdiction of

state and federal regulatory agencies with respect to the

cessation of rail service. Smith v. Hoboken Railroad,

Warehouse and Steamship Connecting Co., 328 U. S. 123

(1946); Thompson v. Texas Mexican R. Co., 328 U. S.

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134 (1946). See also New Haven Inclusion Cases, 399 q

U. S. 392 (1970). These later cases have emphasized ‘

that Congress intended the I.C.C. to play the central role t

in railroad reorganizations in order to preserve the na- ;

tion’s rail transportation system. In the New Haven In- :

clusion Cases, supra, the Court said: :

“Central to the statutory objective that the reor- a

ganized company should, if at all possible, emerge 5

as a ‘living, not a dying * * * enterprise’, ... is the &

understanding that ‘a railroad [is] not like an or- ;

dinary insolvent estate.’ Palmer v. Massachusetts, 3

308 U. S., at 86.... To the traditional equity x

jurisdiction of the bankruptcy court, § 77 adds the é

oversight of the Interstate Commerce Commission, a

the agency ‘specially charged with the public in- é.

terest represented by the transportation system.’ e

Ibid. The statute contemplates that ‘[t]he judi- t

cial functions of the bankruptcy court and the ad-

ministrative functions of the Commission [will]

work cooperatively in reorganizations.” Warren v.

Palmer, 310 U. 8S. 182, 188...

“In structuring the cooperative endeavor of

agency and court, Congress ‘placed in the hands of

EPMA ORE DEORE BIRO a

8

the Commission the primary responsibility for the

development of a suitable plan’ for the debtor rail-

road.” 399 U. S. at 431.

Thus, it is the I.C.C., not the reorganization court,

which has been given the primary responsibility to de-

termine which rail services must be continued as part of

a plan of reorganization. If the I.C.C. refuses for any

reason to approve a plan of reorganization, including an

inability to find that the plan “will be compatible with

the public interest,” a reorganization court may dismiss

the reorganization proceedings. 11 U.S.C. § 205(e), (g).

See In re New York, New Haven and Hartford Railroad

Co., 289 F. Supp. 451, 459 (D. Conn. 1968); In re Wy-

oming Ry. Co., 94 F. Supp. 371 (D. Wyo. 1950). Tlow-

ever, the holding of Palmer is that a trustee may not sim-

ply by-pass statutorily prescribed procedures and ask

the reorganization court to take over the functions of

the I.C.C. and state regulatory agencies.

The grounds on which the petitioner attempts to dis-

tinguish Palmer from this case are lacking in substance.

The assertion that Palmer is inapplicable because the

State consented to the reorganization court hearing this

matter is without support in the record. The alleged

statement of the Commissioner of Transportation*® by

* The sole testimony relied upon for this claim is the following

statement by the trustee:

“These discussions continued until mid September. And

in mid September Commissioner Kohl, as I understood him,

suggested that I should go to court. And when I did go

to court on the Wednesday before Thanksgiving, I tried

to call him. I couldn’t reach him and I sent him a letter,

saying: In view of what you said before, I have taken this

action.” (Third Circuit Appendix, at 146a).

PODER LD

9

which the State is claimed to have consented to the pro-

ceedings amounted to nothing more than the familiar, “if

you don’t like our offer, take us to court,” which often

punctuates the unsuccessful termination of negotiations.

Furthermore, the petitioner never advanced the conten-

tion that a waiver of any objection to the jurisdiction of

the reorganization court should be implied from the

Commissioner’s alleged remark either before the reor-

ganization court or in the Court of Appeals, except in

his petition for further rehearing, which was filed after

the Court of Appeals had rendered its final decision.

This not only indicates that the notion the State had

waived its objections to the jurisdiction of the reorgan-

ization court was an afterthought of appellate counsel,

but also, under well established principles governing re-

view by this Court, should preclude the petitioner from

now raising the point. Neely v. Eby Construction Co.,

386 U. S. 317, 330 (1967).

The assertion that the State is barred from objecting

to the lack of jurisdiction of the reorganization court

because the attorney handling the matter failed to raise

the point early enough is similarly lacking in substance.

It is important to note in this connection that the motion

for discontinuance was served upon the State the Wed-

nesday before Thanksgiving, only ten business days be-

fore it was brought on for hearing (Third Cireuit Ap.

pendix, at la, 146a). The motion contained no indica-

tion of any statutory authority for the reorganization

court to grant the relief requested. Furthermore, the

only brief submitted on behalf of the trustee was not

served upon the State until after the hearing on the pe-

tition had begun (Third Circuit Appendix, at 65a). This

procedural blitzkrieg not only stands in striking con.

trast to the careful and deliberate consideration accorded

CADIS LAD Vs Naas I Lice

10

passenger discontinuance applications by the LC.C. and

New Jersey regulatory agencies, but also in fairness

should preclude the trustee from claiming that the citi-

zens of New Jersey may be denied the protection of the

procedures established by Congress and the New Jersey

Legislature for the cessation of passenger services sim-

ply because the attorney handling the matter was not

able to fully research the law before the hearing. More-

over, this contention too was raised for the first time in

the petition for further rehearing im banc and thus

the petitioner should be barred from now raising the

point. Neely v. Eby Construction Co., supra.

In any event, Palmer clearly holds that a railroad re-

organization court lacks the power under § 77 of the

Bankruptcy Act to permit the discontinuance of passeng-

er services, without the trustee first complying with the

applicable requirements of state and federal laws. It is

well established that a challenge to the authority of a

court to entertain jurisdiction over a matter may be

raised at any time. Gutierrez v. Waterman Steamship

Corp., 373 U. S. 206 (1963); McGrath v. Christianson,

340 U. S. 162 (1950). Therefore, even if it could be fair-

ly said, notwithstanding the circumstances described

above, that the State failed to object in a timely fashion

to the lack of authority of the reorganization court to

permit a discontinuance of passenger service on the CNJ,

this would not preclude raising the point on appeal.

Lastly, the petitioner suggests that Palmer is not con-

trolling because the discontinuance order here was based

on a fincing, absent in Palmer, that there had been an

unconstitutional taking of the debtor’s property. In fact,

exactly the opposite is true; whereas the reorganization

court in Palmer expressly found that “failure to grant

11

the relief asked would result in confiscation,” Converse

v. Massachusetts, supra, 101 F. 2d at 50, the findings of

the CNJ reorganization court on this question were,

at best, equivocal. In any event, the holding in Palmer,

reaffirmed by the Court of Appeals opinion herein,* is

that the reorganization court lacks the power to enter-

tain an application for the discontinuance of rail service

even if it is based on allegations of an unconstitutional

taking.

One probable reason for the congressional decision not

to confer this power upon reorganization courts was its

awareness that the mere fact that a railroad has been

losing money, even for a lengthy period of time, does

not necessarily mean that the continuation of its opera-

tions will result in an unconstitutional taking of prop-

erty. Cf. Fort Smith Light & Traction Co. v. Bourland,

267 U. S. 330 (1925). The efforts of the state and fed-

eral agencies may produce a plan by which management

efficiencies, reduction in labor costs, merger with another

railroad, or the discontinuance of certain selected serv-

* The first point of the petition seeks to elevate a single sentence

observation at the conclusion of the Third Circuit opinion, relating

to the findings of the lower court as to the existence of an uncon-

stitutional taking, into the holding of the court, thereby obscuring

the conclusion that Palmer is controlling. The observation was

made as a postscript to the main part of the opinion to show that

the findings of the court below did not provide a proper founda-

tion for the legal arguments advanced by the petitioner. The opin-

ion does not state that a railroad reorganization court, which is a

statutory court, could acquire additional powers beyond those con-

ferred upon it by § 77 of the Bankruptcy Act if such findings had

been made, but only that there was no question before it as to the

constitutionality of § 77 as construed in Palmer.

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12

ices,* may enable a railroad which has long been oper-

ating at a loss to resume profitable operations.** The

complexity of the analysis which must be undertaken be-

fore it can be said that the continuation of rail services

will amount to an unconstitutional taking of property

was well stated by Judge Anderson in his opinion in Jn

re New York, New Haven and Hartford Railroad Com-

pany, supra:

“The extent to which the constitutional minimum

of value of property rights to which the bondhold-

ers are entitled ... may properly be invaded in the

public interest to keep railroad operations going

pending a solution of the problem of reorganiza-

tion, is hardly a matter which can be determined

with mathematical precision. It involves a consid-

eration of the amount and nature of the Railroad’s

obligations, the seriousness of adverse consequences

to the public if service were terminated, the rate

of losses and the feasibility of possible solutions.”

289 F. Supp. at 459.

In declining to grant reorganization courts the power to

allow discontinuances of rail service, Congress no doubt

acted in full realization of the complexity of the consid-

*In fact, after the original decision of the Third Circuit in this

matter, the trustee filed a petition with the New Jersey Commuter

Operating Agency for authority to discontinue passenger service

on the smallest of the CNJ’s three lines, contending that that par-

ticular line operates at a heavy loss and is not required by public

convenience or necessity.

** It is interesting to note in this connection that whereas the

CNJ’s income and expense statements for the first eight months

of 1972 indicated net losses of $6,760,047., the net losses for the

first eight months of this year have been $1,560,322., which is only

one-fourth of what the losses were a year ago.

13

erations that come into play in making such a determina-

tion and the consequent desirability of allowing agencies

with expertise in the field to be given the first opportun-

ity to review an application for such relief.

It is impossible to quarrel with the petitioner’s ob-

servation that “[t]he railroads in the northeast are in

crisis.” (Petition for Writ of Certiorari, p. 11). How-

ever, the solution to this crisis does not lie in the precipi-

tous termination of vital rail services which provide

transportation for commuters into the nation’s major

urban centers. Rather, every effort must be made, either

through greater efficiency in management, appropriate

reductions in the work force and the discontinuance of

unnecessary services by means of consolidation and merg-

er or through the enactment of comprehensive new legis-

lation such as is now under consideration in Congress,

to preserve the vital rail services now being performed

by these railroads. The primary responsibility for pro-

tecting the public interest in rail service has been vested

by existing legislation in the I.C.C. and state regulatory

agencies, and Congress has withheld power from reorgan-

ization courts to circumvent these procedures. This was

the square holding of Palmer v. Massachusetts and there

is therefore no unsettled question of federal law posed by

the petition which would warrant plenary review by the

Court.

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14 |

CONCLUSION

It is respectfully submitted that for the foregoing

reasons the Petition for Writ of Certiorari should be

Respectfully submitted,

Georce F. Kvucter, Jr.,

Attorney General of New Jersey,

Attorney for Respondent, State of

New Jersey.

By: Srernen SkKmiMan,

First Assistant Attorney General.

SrepHen SKILLMAN,

First Assistant Attorney General,

Of Counsel and on the Brief.