Opposition Brief — North Rockland Central School District v. Consolidated Rail Corp.

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Nos. 94-1776; 94-1787; 94-1789 Yevviona twin

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IN THE

Supreme Court of the Gnited tates

OCTOBER TERM, 1994 =

12 1992

CLERK

NORTH ROCKLAND CENTRAL SCHOOL DISTRICT,

Petitioner,

Vv.

CONSOLIDATED RAIL CORPORATION,

Respondent.

ERIE COUNTY,

Petitioner,

Vv.

CONSOLIDATED RAIL CORPORATION,

Respondent.

STATE BOARD OF EQUALIZATION AND ASSESSMENT

OF THE STATE OF NEW YORK AND DAVID GASKELL,

IN HIS OFFICIAL CAPACITY AS EXECUTIVE DIRECTOR

OF THE DIVISION OF EQUALIZATION AND ASSESSMENT

AND HIS SUCCESSORS IN OFFICE,

Petitioners,

Vv.

CONSOLIDATED RAIL CORPORATION,

Respondent.

On Petitions for Writ of Certiorari to the United

States Court of Appeals for the Second Circuit

CONSOLIDATED BRIEF IN OPPOSITION

GREGORY G. FLETCHER JOHN F. FANSMITH

Counsel of Record Associate General Counsel

BAKER, DONELSON, BEARMAN CONSOLIDATED RAIL

& CALDWELL CORPORATION

20th Floor Two Commerce Square

First Tennessee Building 2001 Market St., Floor 16-A

165 Madison Avenue Philadelphia, PA 19103

Memphis, TN 38103

(901) 526-2000

{additional counsel listed on inside front cover} h ¥%

JAMES W. MCBRIDE JAMES N. BLAIR

BAKER, DONELSON, BEARMAN LOSELLE, GREENWALT, KAPLAN,

& Caldwell BLAIR & ADLER

801 Pennsylvania Ave., N.W. Two Grand Central Tower

Suite 800 42nd Floor

Washington, D.C. 20004 140 East 45th Street

New York, New York 10017

Counsel for Respondent

QUESTIONS PRESENTED

Dissatisfied with the petitioners’ presentation of the

questions presented, respondent states the questions as

follows:

I. Whether a federal court may determine the true

market value of railroad property under U.S.C. §11503 (a

statute which forbids states from taxing rail transportation

property at discriminatory ratios of assessed value to true

market value) based on appraisal methods different from

the state’s "chosen valuation method?"

II. Whether a federal court may certify a

defendants’ class under Fed. R. Civ. Pro. 23(b)(3) where

the class is comprised of more than 700 taxing jurisdictions

(each of which collects property taxes from the same

railroad-taxpayer), where the amount of tax in most

jurisdictions is based on railroad values fixed by a common

State agency, and where the principal dispute involves the

true market value of the railroad’s property and the

validity under federal law of the taxable values

determined by the state agency?

The

‘4

i PERLE CTS SD ie UNE RAE EAC MIS SA Al Rae i BS RR ey By a!

LIST OF PARTIES TO THIS PROCEEDING AND

RULE 29.1 STATEMENT

Petitioners are four co-defendants who have filed

three separate petitions for certiorari: pétitioner in No.

94-1776 is North Rockland Central School District ("North

Rockland"), a tax levying and collecting jurisdiction within

Rockland County, New York; petitioner in No. 94-1787

is Erie County, New York ("Erie County"), a subdivision

of the State of New York and a tax levying and collecting

jurisdiction; and petitioners in No. 94-1789 are the State

Board of Equalization and Assessment of the State of

New York, an agency of the State of New York, and

David Gaskell, the Executive Director of the Division of

Equalization and Assessment (referred to collectively as

the "SBEA").

Respondent in all three cases is the plaintiff below,

Consolidated Rail Corporation ("Conrail"), a wholly-owned

subsidiary of Conrail, Inc., the shares of which are publicly

traded. Subsidiaries and affiliates of Conrail, Inc. and

Consolidated Rail Corporation that are not wholly-owned

are:

Akron & Barberton Belt Railroad Company;

Albany Port Railroad Corporation;

Amtech Logistics Corp.;

Belt Railway Company of Chicago;

Calumet Western Railway Company;

CU Energy Partnership, L-P.;

Indiana Harbor Belt Railroad Company;

Lakefront Dock & Railroad Terminal Company;

Locomotive Management Services;

Nicholas, Fayette & Greenbrier Railroad Company;

Peoria & Pekin Union Railway Company;

Triple Crown Services Company;

TTX Company; and

Railroad Association Insurance, Ltd.

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED .nscccvcccccccsess ili

LIST OF PARTIES TO THIS PROCEEDING .... iv

TABLE. Gi CAG RMTEE cessive sccesecscones vi

TABLE OF AUTHORITIES 2... ccc cscccsvnces Vili

ee GL eT Tere Cre Te TET Tee 3

Bak me errr rrr rT eer rer TTT errr 3

STATUTORY PROVISIONS INVOLVED ...... 4

COUNTERSTATEMENT OF THE CASE ...... 5

1. 49 U.S.C. $11503 and Prior Decisions of

This Court Interpreting It. ......... 5

2. The New York Litigation. ............ 6

REASONS FOR DENYING THE WRIT ....... 11

1. The Petitions Seek Review of an Order

on Appeal From an Interlocutory

oo eee eee ee eee ee See ee ee 11

2. The First Question Presented (Whether

A State’s "Chosen Valuation

Method" Is Subject To Challenge) Is

Not Sufficiently "Clear-cut" And

Informed By The Record To

Warrant Certiorari. ..........+-.-

3. With Regard to the Issue of Class

Certification, No Conflict Exists

Among the Circuit Courts, or

Between the Decisions Below and

the Decisions of This Court. .......

4. The Second Issue Raised By The SBEA

(Whether §11503 Requires A State

To Apply The Same Method Of

Valuing Commercial Industrial

Property As It Uses For Railroads)

Meets None Of The Criteria Of

Supreme Court Rule 10. ........-.

5. The SBEA’s Third Issue (Whether

§11503 Requires A Sales Assessment

Ratio Study) Meets None Of The

Criteria Of Supreme Court Rule

rr er re ee ee ee

No Special Or Important Reasons Exist

For Granting The Writ. ...........

7. The Cost Savings Predicted If Certiorari

Is Granted Are Unlikely. ..........

oi & 6). ¢ | re ee ee

FURS TE be Peds ceeewin chad abi vssa ss 28

TABLE OF AUTHORITIES

Cases Page

Aloha Airlines v. Director of Taxation of Hawaii, 464 U.S.

FE a eke bi hark bho keds eee neks 23

American Construction Co. v. Jacksonville, Tampa & Key

ON My 190 Was Sie CRE) on vnc vcccccasvess 11

Brotherhood of Locomotive Firemen and Enginemen vy.

Bangor & Aroostook R.R., 389 U.S. 327 (1967) .... 11

Burlington Northen R.R. v. Oklahoma Tax Comm’n., 481

Se COTE A a koa eed eee ke ower ons 4,6

Chesapeake Western Ry. v. Forst, 938 F.2d 528, (4th Cir.

1991), cert denied, __ US. __, 112 S.Ct. 1577, 118

Ree ME EUITD 6 5 hha ee eda wb hee ews bees 8

Clinchfield R.R. v. Lynch, 784 F.2d 545

oe in De ETS ETT ee SO EE en:

Hanson v. East Lincoln Township, 814 F.2d 410 (7th Cir.

a Pee eee ere ee ree Pere nmr 20

Matter of Brooklyn Union Gas, 65 N.Y.2d 472, 492

Fe ae Oe EE os 65 49 4550 ok 18

Ogilvie v. State Board of Equalization, 492 F. Supp. 446,

451 (D.N.D. 1980), aff'd, 657 F.2d 204

Ree Ge SEs hee eseo hes oe be eek een oe

People ex rel. Lehigh Valley Ry. v. Harris, 168 Misc. 685, 6

Oy. Ya 796 (Sap. Ce. 1958) ow cc ccc ccc ccees 18

Vii

People ex rel. Lyford v. Allen, 286 App. Div. 621, 146

NM. 2h SCENE «bec ccdecaveneeskvsaeeeaas 18

People ex rel. New York Central R.R. v. Thompson,

156 Misc. 536, 282 N.Y.S. 269 (Sup. Ct. 1935) ..... 18

Randolph Central School District v. Alrich, ___ USS.

113 S. Ce. 440, 121 L.2idk. 2d 359 (1992) .... 2.2000. 12

Richmond Fredericksburg & Potomac R.R. v. Forst, 4 F.3d

re | eee er ee reer ee Te 24

Souther Ry. v. State Board of Equalization, 715 F.2d 522,

523 (11th Cir. 1983) cert. denied, 465 U.S. 1100

SOD Sb c oe ke eee kkd bOcEE NOS POs eee 23

Ticor Title Insurance Co. v. Brown, __ US. , 1148.

em. Be RF eo. | Peer ere 25

United States v. General Motors Corp., 323 U.S. 373,

Se reer reer ee ee ee eee ee 12

Virginia Military Institute v. United States, US ;

113 SCX. 2634, 124 Ls G5 (1999) .w cae seas 11

Statutes and Rules Page

Ce a eo ba Ae eee passim

yA eR err re ere Sa eee ere 5

PG, tae ea i a vo dan ee 0k ae be eee 7

Pi, Bes Ss sO Ab ee ead es been ek es 9, 19, 20

viii

Other Authorities

7 AC. Wright, A. Miller, and M. Cane, Federal Practice

and Procedures, $1775 (2d ed. 1986)............ 20

Newberg on Class Actions, Vol 1, $4.65

(36 OG. TOPE) on ccc cst ences eeuecsesese 19, 20

Nos. 94-1776; 94-1787; 94-1789

IN THE

Supreme Court of the United States

OCTOBER TERM, 1994

NORTH ROCKLAND CENTRAL SCHOOL DISTRICT,

Petitioner,

CONSOLIDATED RAIL CORPORATION,

Respondent.

ERIE COUNTY,

Petitioner,

CONSOLIDATED RAIL CORPORATION,

Respondent.

STATE BOARD OF EQUALIZATION AND ASSESSMENT

OF THE STATE OF NEW YORK AND DAVID GASKELL,

IN HIS OFFICIAL CAPACITY AS EXECUTIVE DIRECTOR

OF THE DIVISION OF EQUALIZATION AND

ASSESSMENT AND HIS SUCCESSORS IN OFFICE,

Petitioners,

CONSOLIDATED RAIL CORPORATION,

Respondent.

CONSOLIDATED BRIEF OF RESPONDENT IN

OPPOSITION TO PETITIONS FOR WRIT OF

CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE SECOND CIRCUIT

OPINIONS BELOW

The opinion of the United States Court of Appeals

for the Second Circuit (reprinted in Appendix A to the

petitions, pp. Al-A27) is reported at 47 F.3d 473. The

oral findings of the United States District Court for the

Southern District of New York, dated January 7, 1994

(reprinted in Appendix A to the petitions, pp. A28-A43)

are unreported; the preliminary injunction order entered

by the district court January 25, 1994 (reprinted in

Appendix A to the petitions, pp. A44-A49) is unreported.

The order of the district court certifying the defendants’

class (reprinted in Appendix A to the petitions, pp. A50-

A54) is unreported.

JURISDICTION

The jurisdictional grounds are adequately stated in

the petitions. The petitions seek review of an

interlocutory order of the Second Circuit affirming the

grant of a preliminary injunction and the certification of

a defendants’ class.

STATUTORY PROVISIONS INVOLVED

This case involves Section 306 of the Railroad

Revitalization and Regulatory Reform Act of 1976, Pub.

L. No. 94-210, 90 Stat. 54 (1976) ("Section 306"), now

codified at 49 U.S.C. §11503.

The language of 49 U.S.C. $11503 as codified

differs from the language of Section 306. The codification

cannot, however, be construed as making any substantive

change to the meaning of Section 306. See, Pub. L. No.

95-473, $3(2), 92 Stat. 1466 (1978); Burlington Northern

R.R. v. Oklahoma Tax Comm’n., 481 U.S. 454, 458 n.1

(1987). Section 306 is reprinted in Appendix A to this

Brief; the provisions of 49 U.S.C. §11503 are reprinted in

Appendix A to the petitions, pp. A55-A57.

a keene ae

Ce a Me et eee ae Reka ek es

COUNTERSTATEMENT OF THE CASE

Dissatisfied with petitioners’ respective statements

of the case, Conrail adopts as its counterstatement the

Second Circuit’s description of the case as set forth in

Appendix A to the petitions, pp. Al through All, and

states the following:

1. 49 U.S.C. §11503 and

Prior Decisions of This Court Interpreting It.

The federal statute at issue in this case, 49 U.S.C.

§11503, prohibits state tax discrimination against interstate

rail carriers and declares certain state conduct - such as

the discriminatory assessment of rail transportation

property for ad valorem tax purposes - an unreasonable

burden on interstate commerce. $11503(c) expressly

confers jurisdiction on federal district courts to grant such

equitable relief as may be necessary to prevent violations

of the Act, notwithstanding 28 U.S.C. $1341, the amount

in controversy or the citizenship of the parties.

The specific subsection at issue, §11503(b)(1),

prohibits a state or its subdivisions from assessing rail

transportation property at a higher ratio of assessed value

to “true market value" than other commercial and

indusirial property in the same assessment jurisdiction. As

is apparent from the statutory formula prescribed by

§11503(b)(1), an unlawful assessment can result from the

overvaluation of railroad property relative to its true

market value; from the underassessment of other

commercial and industrial property relative to its true

market value; or from a combination of both factors.

;

In Burlington Northen R.R. v. Oklahoma Tax

Comm’n., 481 U.S. 454 (1987), this Court reversed a

Tenth Circuit decision which held that a railroad could not

complain under §$11503 of the overvaluation of its

property by state officials absent a "strong showing of

purposeful overvaluation...with discriminatory intent."’

This Court ruled that "in order to compare the actual

assessment ratios [under $11503(b)(1)], it is necessary to

determine what the ‘true market values’ are." 481 U.S. at

461. This Court rejected the proposition that state-

determined values are "not subject to further judicial

scrutiny in the federal courts," 481 U.S. at 462, but

reserved the issue of whether a railroad may "challenge in

the district court the appropriateness of the accounting

methods by which the State determined the railroad’s

value." 481 U.S. at 464 n.5.?

2. The New York Litigation.

In this case, Conrail’s real property was subjected

to ad valorem tax in New York for the 1993 tax year

based on assessed values calculated by the SBEA and

certified by the SBEA to local assessors. The SBEA’s

aggregate assessments of Conrail’s New York property for

the 1993 tax year exceeded those calculated by the SBEA

for 1992 by more than 70%.

' Burlington Northern R.R. v. Oklahoma Tax Comm’n., No. 85-

1657 (10th Cir. May 2, 1986) slip op at 3, rev'd, 481 U.S. 454 (1987).

The only other case to come before this Court under §11503,

Dept. of Rev. of Oregon v. ACF Industries, Inc., __ U.S. __, 114

S.Ct. 843, 127 L.Ed.2d 165 (1992), involved §11503(b)(4), a subsection

not at issue in this case.

In calculating Conrail’s assessments, the SBEA

used a valuation procedure which the SBEA has described

as a "cost approach.”® In essence, the SBEA estimated

the "reproduction cost new less depreciation (RCNLD)"

of Conrail’s track structure and improvements and the

value of Conrail’s land. The SBEA then multiplied these

cost estimates by a statutorily-prescribed "economic

factor’ which reduced the SBEA’s cost estimates to a

"taxable value."®

Based on an independent appraisal which

considered Conrail’s capitalized income, the market value

of Conrail’s debt and equity securities, and the

depreciated historical cost of Conrail’s assets, Conrail filed

this suit alleging that the "true market value" of its real

property in New York was less than half the SBEA’s

estimate of “taxable value," and that the SBEA’s

assessments of Conrail’s property were discriminatory

within the meaning of $11503(b)(1). Conrail sought a

preliminary and permanent injunction prohibiting the

further assessment, levy or collection of the discriminatory

portion of Conrail’s 1993 ad valorem taxes.

In its complaint and motion papers, Conrail sought

preliminary relief under Fed. R. Civ. Pro. 65(d) against

> Brief For Defendants-Appellants before the Second Circuit,

p.6.

* New York Real Property Tax Law (RPTL), §489-hh.

> The SBEA multiplied Conrail’s "taxable value” within each

jurisdiction by the SBEA’s "state equalization rate” to produce

Conrail’s "railroad ceiling” - or its maximum assessed value - within

each jurisdiction. See Affidavit of Peter Mafilios, Nov. 17, 1993, 1919,

20.

the SBEA and all New York assessing, levying or

collecting jurisdictions who had used the SBEA’s "railroad

ceilings” as the basis for taxing Conrail’s rail transportation

property. In the alternative, Conrail sought certification

of a defendants’ class (comprised of the more than 700

New York assessing, levying or collecting jurisdictions to

which Conrail pays ad valorem tax annually) and

requested a preliminary injunction against the class.

Petitioners opposed Conrail’s motion for

preliminary injunction and moved to dismiss on the

ground that the district court had no jurisdiction under

§11503 to consider a challenge to the SBEA’s "chosen

valuation method," and that Conrail was limited merely to

challenging errors in the SBEA’s "application" of its

"chosen valuation method." Petitioners relied on

Chesapeake Western Ry. v. Forst, 938 F.2d 528, (4th Cir.

1991), cert. denied, __ U.S. __, 112 S.Ct. 1577, 118

L.Ed.2d 220 (1992), in which the Fourth Circuit held that

$11503 "does not provide a basis for parties to challenge

a State’s preferred accounting method." Petitioners (other

than the SBEA) also opposed class certification.

The district court below granted Conrail’s motion

for preliminary injunction,® and the Second Circuit

affirmed, declining to follow Chesapeake. The Second

Circuit stated:

The Chesapeake court viewed the method of

appraisal as a matter of state policy that

® The SBEA states in its petition, p.9, that the preliminary

injunction was granted "[wjithout an evidentiary hearing.” This is

true; but no party requested the opportunity to produce live witnesses

and all evidence was submitted on affidavit and counter-affidavit.

;

was beyond the reach of the 4-R Act. We

do not accept that interpretation of the

statute. What the 4-R Act prohibits is

discrimination against railroads in the ratios

of two sets of numbers: assessed values and

true market values of the railroad’s property

vis-a-vis those of other commercial and

industrial properties. To avoid the

prohibited discrimination, the SBEA must

apply the same valuation standards and

methods to the railroad property as are

used on the commercial and industrial

properties to which it is compared. If the

Act were to be interpreted, as defendants

would have it, so that the SBEA could

adopt a special appraisal method for

railroads alone, then the whole

nondiscrimination objective of the statute

could be circumvented.

47 F.3d at 482; App. A to petitions, pp. A19-20.

The district court also certified a defendants’ class

(comprised of all New York assessing, levying or collecting

jurisdictions to which Conrail pays ad valorem tax) under

Fed. R. Civ. Pro. 23(b)(3). Reviewing the certification

order under principles of "pendant appellate jurisdiction,"

the Second Circuit affirmed, holding that the case met

each of the criteria of Fed. R. Civ. Pro. 23(a)(1) through

(a)(4), and that common issues predominated within the

meaning of Rule 23(b)(3).

This case has proceeded through discovery as a

class action for more than fifteen months and no class

member has opted out. Discovery in this case is virtually

complete, except for the exchange of expert witness

reports and the depositions of the parties’ experts. This

case has also been preliminarily consolidated for trial with

a related case involving the 1994 tax year, in which a

preliminary injunction has also issued.’

Consolidated Rail Corporation v. State Board of Equalization

and Assessment of the State of New York, No. 94 Civ. 6764 (CLB),

(S.D.N.Y., complaint filed Sept. 16, 1994).

AAT Set die Ra ARNE bide 4

}

;

REASONS FOR DENYING THE WRIT

1. The Petitions Seek Review of an Order on Appeal

From an Interlocutory Decree.

Generally, this Court will await final judgment in

the lower courts before exercising its certiorari jurisdiction

irrespective of whether the case meets the criteria of

Supreme Court Rule 10.° Virginia Military Institute v.

United States, __ US. , 113 S.Ct. 2431, 2432, 124

L.Ed.2d 651 (1993). Under long-established principles,

this Court will not review an order of the circuit court on

appeal from an interlocutory decree unless certiorari is

"necessary to prevent extraordinary inconvenience and

embarrassment in the conduct of the cause." American

Construction Co. v. Jacksonville, Tampa & Key West Ry.,

148 U.S. 372, 382-385 (1893); see also, Brotherhood of

Locomotive Firemen and Enginemen v. Bangor & Aroostook

RR, 389 US. 327, 328 (1967); generally, R. Stern, E.

Gressman, & S. Shapiro, Supreme Court Practice $4.18, pp.

224-226 (6th Ed. 1986).

The petitions in this case seek review of an

interlocutory order of the Second Circuit affirming the

. Although a conflict exists between the Fourth Circuit’s

decision in Chesapeake and the Second Circuit’s decision here, no

conflict exists between this case and the Ninth Circuit’s decision in

Burlington Northern R.R. v. Dept. of Rev., 23 F.3d 239 (9th Cir. 1994),

despite the SBEA’s assertions to the contrary. (SBEA petition, p.18).

In Burlington Northern, the trial court permitted the railroad to

introduce proof of its true market value by “valuation methods"

different from those used by the state and rejected certain of the

State’s appraisal "methods." Although the district court deferred to

the state’s techniques under Washington’s burden of proof rules, it

did not circumscribe in any way the railroad’s appraisal evidence.

district court’s grant of a preliminary injunction and

certification of a defendants’ class. The decisions of the

courts below are based on a partial record and

preliminary findings of fact, and are not final. This Court

should decline to exercise its jurisdiction to decide the

issues presented until it has had the benefit of a full

evidentiary record, final findings of fact and conclusions of

law by the district court, and final appellate review by the

court of appeals.

2. The First Question Presented (Whether A State’s

"Chosen Valuation Method" Is Subject To Challenge) Is

Not Sufficiently "Clear-cut" And Informed By The Record

To Warrant Certiorari.

Although certiorari may be granted in an

interlocutory case where there exists "an important and

clear-cut issue of law that is fundamental tc the further

conduct of the case," Randolph Central School District v.

Alrich, __ US. , 113 S. Ct. 440, 121 L.Ed.2d 359

(1992); United States v. General Motors Corp., 323 USS.

373, 377 (1945), this is not such a case. The first question

presented, while simply stated, is not sufficiently "clear-

cut" for this Court to make a studied and informed

decision at this stage of the proceedings.

In Burlington Northen R.R. v. Oklahoma Tax

Comm’n., 481 U.S. 454 (1987), this Court held

unequivocally that federal courts have jurisdiction under

§11503 to determine railroad valuation issues. This case

presents the narrower question of wheiher such

jurisdiction is somehow limited by a state’s choice of

railroad valuation "methods." If certiorari is granted,

petitioners will no doubt endorse a_ restrictive

interpretation of federal jurisdiction along the lines of

Chesapeake, notwithstanding Congress’ objectives and the

absence of any language in §11503 which circumscribes

the federal courts’ power to determine "true market

value." Conrail, by contrast, will advocate a plain-

language interpretation of §11503 which allows railroads

to establish the "true market value” of their property by

any valuation technique consistent with generally-accepted

appraisal principles.

To evaluate the parties’ arguments regarding the

proper construction of $11503(b)(1), this Court should

have a clear picture of the purpose and financial theory

underlying the competing "methodologies" involved in this

case, and of the full economic and practical consequences

of foreclosing federal judicial scrutiny of a state’s "chosen

valuation method." The continued efficacy of §11503 as

an anti-discrimination measure may depend on this

Court’s construction, and this Court should not undertake

the analysis without a solid legal and factual predicate.

At this preliminary stage of the proceedings, there

are a number of legal and factual disputes and positional

uncertainties bearing on the question presented, the

existence of which argues forcefully against a grant of

certiorari. These include:

a. What is the reach of the jurisdictional rule

advocated the petitioners? If certiorari is granted,

petitioners apparently will urge upon this Court a variant

of the Chesapeake rule, which precludes federal judicial

scrutiny of a state’s "chosen valuation method" but permits

a railroad to challenge the state’s "application" of its

method. 938 F.2d at 531. However, no lower court has

yet defined what constitutes "methodology" or what

constitutes "application" of methodology.’ In the context

of this case, the SBEA has not yet defined what it means

by its "chosen valuation method," nor defined what it

means by "application." While the basic steps of the

SBEA’s railroad appraisal procedure are well known, it is

not clear which specific steps the SBEA regards as

sacrosanct and which steps are subject to challenge.'°

For example, one of the steps in the SBEA’s

appraisal procedure involves calculation of an "economic

factor," by which the SBEA reduces its estimate of the

railroad’s “reproduction cost new less depreciation” to a

“taxable value." Conrail’s experts have attacked the

economic factor as an arbitrary adjustment that is utterly

meaningless from a market value perspective. Is Conrail

permitted to challenge the SBEA’s economic factor under

the "application" exception to the Chesapeake rule, or is

Conrail foreclosed from any challenge to the SBEA’s

economic factor because it represents the state’s "chosen

valuation method?"

Because there has been no trial, the parameters of

the restrictive rule endorsed by petitioners in theory have

not been defined in practice, nor subjected to lower court

consideration. Without a full factual record, it is

. The Seventh Circuit has described the distinction between

"methodology" and “application of methodology” as "ephemeral."

Burlington Northern R.R. v. James, 911 F.2d 1297, 1301 (8th Cir.

1990).

10 It is not sufficient for the SBEA to claim that every step in

its process of calculating railroad ceilings is "methodology" immune

from challenge. If adopted, such an interpretation would gut

Burlington Northern R.R. v. Oklahoma Tax Comm’n., and require the

federal court merely to accept the state’s appraised value.

je aids Of

Ee ene ew: Dee ee Sor gO Ss en ke es Sr oe ores Stee wen | ns

ee eee

mechan

impossible for any appellate court to determine where the

line between "methodology" and "application" should be

drawn or, for that matter, whether it can or should be

drawn at all.

b. What is the purpose of the valuation procedure

to which the SBEA would require federal courts to defer?

The SBEA itself has taken contradictory positions on this

issue: on the one hand the SBEA asserts that its valuation

procedures are designed to calculate a "partial exemption"

known as the "railroad ceiling," not to “value railroad

property for purposes of a property tax."’’ On the other

hand, the SBEA asserts that its railroad ceilings are

"established by using a standard method of valuation

chosen by the state legislature known as the cost

approach."””

Although the SBEA’s "railroad ceilings" are

indisputably used by local assessors as the basis for

railroad taxes in the vast majority of New York assessing

jurisdictions, the SBEA’s "railroad ceilings” are not based

n "true market value" estimates, nor were they designed

to be. If the SBEA’s method is not intended to reflect or

estimate "true market value,” it will do so only by

coincidence.

It must be emphasized that no witness for the

SBEA (or any other defendant) has yet testified that the

values calculated for Conrail’s property by the SBEA

represent "true market value." Although the SBEA asserts

p.6.

Brief of Defendants-Appellants before the Second Circuit,

12 Ibid.

in its petition, p.8, that "the SBEA calculated the true

market value of Conrail’s property for 1993 as $974

million,” no one from the SBEA has testified that $974

million was a "true market value" estimate for Conrail’s

realty, or that $974 million was intended to represent "true

market value." Indeed, the SBEA employee who

calculated the number expressly disavowed on deposition

any opinion that $974 million represents "true market

value" and described the number instead as, "[T]he

resulting number after applying the economic factor to the

estimated reproduction cost. I would not call it a true

market value."

Thus, this Court should not be asked to foreclose

federal judicial scrutiny of the SBEA’s valuation

procedures until discovery and trial are complete and this

Court knows the real purpose of the SBEA’s procedures.

c. Do the S ’s valuati ocedu e )

with normal railroad appraisal principles, such _ that

reasonably knowledgeable persons would d the result

as_an indicator of "true market value"? No lower court

has ever decided whether, under the Chesapeake rule, a

state’s methodology must bear some relationship to

generally accepted appraisal principles in order to be

immune from challenge.'* Although the SBEA asserts

_ Deposition of Peter Mafilios, Aug. 2, 1994, pp. 100-102.

‘4 In Conrail’s view, even if Chesapeake is correct, the

methodology chosen by the state must at the very least be capable of

determining true market value if correctly applied. If the state does

not even attempt to determine true market value, but rather applies

a mechanistic formula that was never designed to produce an

indicator of true market value, railroads must be able to challenge

that formula in court.

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ON A Dia AD CRO AT te rae Re Hie PARR COME Diath

that its valuation procedures are consistent with normal

appraisal principles,’* its valuation procedures

indisputably resulted in a 70% increase in Conrail’s

assessments in a single year without any significant change

in Conrail’s inventory of property in New York during the

year. If the SBEA’s valuation procedures produced the

correct market value in 1992, how can they produce a

number 70% higher in 1993 and still be correct?!“

Conrail’s experts have also described the SBEA’s

procedures as disconnected from market value and

economically arbitrary. Since the courts below have

addressed this issue in only preliminary fashion, Conrail

respectfully submits that this Court should have the

benefit of a full evidentiary record and the analysis of the

lower courts before deciding it.

d. What are the requirements of New York law

with respect to the valuation of railroad property?

Petitioners make much of the requirements of New York

law regarding the valuation of railroad real property and

'3 Brief of Defendants-Appellants before the Second Circuit,

p.6.

'4 The SBEA asserts in its petition, p.10, that the district court

"implicitly affirmed the correctness of the state’s chosen valuation

method” by basing its 1993 injunction on the SBEA’s 1992 railroad

ceilings for Conrail. This is incorrect for two reasons: (1) the district

court’s injunction was plainly intended to enjoin the tax windfall to

local jurisdictions resulting from the 70% increase in Conrail’s

assessments between 1992 and 1993, not to "affirm" any method; and

(2) the SBEA’s valuation method changed between 1992 and 1993.

Which "chosen valuation method" did the district court "implicitly

affirm": the SBEA’s 1992 method, or the 1993 method which

produced a 70% increase in assessed value?

assert that New York law "prohibits the use of the ‘unitary

method’ as well as a capitalization and stock and debt

approach to value." (SBEA petition, p.11.) Although

Conrail denies the state’s methods are controlling under

§11503, Conrail also disputes the petitioners’

characterization of New York law.

Before establishment of New York’s "railroad

ceiling" procedure in 1961, reproduction cost was

presumed to be the upper limit of taxable value for

railroad realty. People ex rel. Lyford v. Allen, 286 App.

Div. 621, 146 N.Y.S. 186, 188 (1955). Other evidence of

value was admissible, however, to establish a lower value.

Lyford; People ex rel. Lehigh Valley Ry. v. Harris, 168 Misc.

685, 6 N.Y.S.2d 794 (Sup. Ct. 1938); People ex rel. New

York Central R.R. v. Thompson, 156 Misc. 536, 282 N.Y.S.

269 (Sup. Ct. 1935). Although reproduction cost was

incorporated into the "railroad ceiling" procedure, this

procedure was designed to fix tax limits and does not

purport to estimate "true market value." Because of the

existence of the railroad ceiling procedure, the

“permissible approaches" to valuing railroad real property

from a market value perspective have not been examined

by New York courts for more than 30 years. (The

seminal "specialty property” cases in New York which

approve of reproduction cost, e.g, Matter of Brooklyn

Union Gas, 65 N.Y.2d 472, 492 N.Y.S.2d 598 (1985) do

not involve railroads.)

Contrary to the SBEA’s assertions, certain aspects

of New York’s current "railroad ceiling" procedure do

incorporate "unitary" concepts, such as the SBEA’s use of

uniform data for estimating the cost of track structure

throughout the state and the SBEA’s use of system-wide

earnings to calculate the "economic factor." Furthermore,

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in its own public documents, the SBEA has described its

current system as "duplicative, poorly understood, and

fragmented," and has strongly endorsed a_ unitary

approach to valuing railroad property.'°

All of the foregoing legal and factual subissues

underscore the practical and semantical difficulty of

crafting a jurisdictional rule based on_ perceived

distinctions between "method" and "application of method"

and argue against certiorari at this time.

3. With Regard to the Issue of Class Certification, No

Conflict Exists Among the Circuit Courts, or Between the

Decisions Below and the Decisions of This Court.

Two petitioners, Erie County and North Rockland,

argue that the Second Circuit "erred" in affirming the

district court’s decision to certify a defendants’ class under

Fed. R. Civ. Pro. 23(b)(3). However, these petitioners

merely reargue the merits of the district court’s

certification order and cite no conflict among the circuits

with respect to the appropriateness of a defendants’ class

under Fed. R. Civ. P. 23(b)(3).

The class certification issue is not appropriate for

certiorari because there is no disagreement among the

federal courts (or even the commentators) that a

defendants’ class may be certified under Rule 23(b)(3).

See, eg. Newberg on Class Actions, Vol. 1, §4.66

(3d ed. 1992) and the cases cited therein. While some

courts and commentators have argued that Rule 23(b)(2)

does not allow certification of a defendants’ Class, no

1S SBEA Survey of Railroad and Utility Taxation Among the

States, December 1993.

similar controversy surrounds Rule 23(b)(3). See, e.g., 7A

C. Wright, A. Miller and M. Cane, Federal Practice and

Procedure, §1775 (2d ed. 1986); Newberg on Class Actions,

Vol. 1, $4.65 (3d ed. 1992). Thus, Erie County’s citation

of a Rule 23(b)(2) case for the proposition that the lower

courts are "confused," Hanson v. East Lincoln Township,

814 F.2d 410 (7th Cir. 1987), proceedings deferred, 484 U.S.

1001 (1987), is simply inapposite.

Petitioners argue that New York assessing

jurisdictions "[{act] independently in fixing the assessed

values of Conrail’s taxable properties within [their]

boundaries" and that the district court erred in identifying

questions of law and fact which are common to the

members of the class and which predominate. (Erie

County petition, p.21.) However, the district court

specifically rejected petitioners’ factual premise and held

that the vast majority of New York’s assessing jurisdictions

actually tax Conrail’s property on the basis of taxable

values fixed by the SBEA, not by local assessors. Thus,

although petitioners continue to dispute the facts, they

present no legal issue worthy of certiorari.

4. The Second Issue Raised By The SBEA (Whether

§11503 Requires A State To Apply The Same Method Of

Valuing Commercial and Industrial Property As It Uses

For Railroads) Meets None Of The Criteria Of Supreme

Court Rule 10.

The SBEA presents the question of whether

§11503 “require[s] a state to apply the same method of

valuing other commercial and industrial property as it

applies to rail transportation property." (SBEA petition,

p.i.) This is not an issue insofar as Conrail is concerned,

and is based on a misreading of the Second Circuit’s

opinion.

The Second Circuit’s decision does not "require"

states to value commercial and industrial property in any

particular manner. The Second Circuit merely observes

that, if cost, market and income approaches are used for

commercial and industrial properties to estimate market

value, those approaches should also be considered for

railroad properties. The Second Circuit does not reverse

the $11503 equation as petitioners Suggest, nor require

states to treat commercial and industrial properties in the

same way railroads are treated. As in all §11503 cases,

New York remains free to tax its citizens in any form it

chooses, so long as it does not tax the railroad industry in

a discriminatory manner.

Thus, the SBEA’s second question presented is a

non-issue which merits no consideration by this Court.

5. The SBEA’s Third Issue (Whether §11503 Requires A

Sales Assessment Ratio Study) Meets None Of The

Criteria Of Supreme Court Rule 10.

The SBEA argues that the lower courts erred by

accepting Conrail’s preliminary statistical evidence

regarding the "ratio of assessed value to true market

value" of other commercial and industrial property. The

SBEA asserts that §11503(c) "requires" proof by a

‘random sampling method known as a sales assessment

ratio study," and that Conrail’s evidence was not a sales

assessment ratio study. (SBEA petition, pp. 24-26.)

The SBEA cites no conflict among the decisions of

the lower courts on this evidentiary issue because none

exists. The lower courts have long recognized that, while

§11503(c) expresses an evidentiary preference for the

results of a sales assessment ratio study, courts have wide

discretion to consider other evidence. See, e.g., Clinchfield

R.R. v. Lynch, 784 F.2d 545, 554 (4th Cir. 1986) (personal

property studies); Ogilvie v. State Board of Equalization,

492 F. Supp. 446, 451 (D.N.D. 1980), aff'd, 657 F.2d 204

(10th Cir. 1981) (appraisals of public utilities).

The SBEA’s real complaint is that the district court

accepted Conrail’s statistical evidence, particularly

Conrail’s calculation of the state-wide average level of

assessment for commercial and industrial property (which

was based on the SBEA’s own data). It must be

emphasized, however, that Conrail also introduced

preliminary evidence of pervasive discrimination on a

jurisdiction-by-jurisdiction basis (also using the SBEA’s

commercial and industrial data and_ estimation

procedures). Furthermore, at the trial of this case,

Conrail intends to introduce sales assessment ratio study

analyses of unlawful discrimination on a jurisdiction-by-

jurisdiction basis.

Thus, as the Second Circuit has already held, the

district court did not abuse its discretion in accepting

Conrail’s preliminary statistical proof of the level of.

assessment of other commercial and industrial property,

and the SBEA has presented no ground for certiorari on

this issue.

6. No Special Or Important Reasons Exist For Granting

The Writ.

Petitioners argue this case is important because the

decision below has an "impact on the comity between the

federal courts and state governments that is essential to

the principles of federalism," and the preliminary

injunction has “affected virtually every local municipal

Erie County petition, p. 25.)

As this Court noted in Aloha Airlines v. Director of

Taxation of Hawaii, 464 US. 7, 14 n. 10 (1983),

impairment and disruption of state finances are inevitable

consequences of congressional regulation of state taxation.

As this Court specifically held in Burlington Northern R.R.

v. Oklahoma Tax Comm’n., 481 U.S. at 464, comity and

disruption to local finances are irrelevant considerations

in §11503 cases. See also, Southern Ry. v. State Board of

Equalization, 715 F.2d 522, 523 n.1 (11th Cir. 1983), cert.

denied, 465 U.S. 1100 (1984).

Conrail’s property in New York comprises less than

1% of the taxable value in the vast majority of New York

assessing jurisdictions in which it operates. If a portion of

those taxes is unlawfully exacted, it cannot be collected,

irrespective of good purposes for which it might be used.

7. The Cost Savings Predicted If Certiorari Is Granted

Are Unlikely.

Petitioners assert that immediate review is

necessary to furnish guidance on the further conduct of

the case and to aid them in the selection of valuation

experts. Petitioners argue that, if this Court grants

certiorari and forecloses federal judicial scrutiny of the

16 ‘This is hyperbole; Conrail operates in less than one-third of

the municipal districts of the state leaving more than two-thirds

unaffected by this litigation.

state’s "chosen valuation method," petitioners will be

spared the expense of retaining valuation experts to rebut

the appraisals of Conrail’s experts. (SBEA petition, p.29;

Erie County petition, p.25.)

This argument presupposes that, if this Court

endorses petitioners’ restrictive rule, Conrail’s

overvaluation claim will disappear and obviate the

necessity for any valuation experts. This will not

happen.'’ Although a successful petition by the

defendants might result in fewer factual issues to be tried,

the remaining valuation issues will be substantial and

complex, and valuation experts will still be necessary on

both sides. Thus, the economies petitioners predict are

chimerical.

The real issue raised by this case is what factors

and evidence of "true market value” may the district court

consider in determining the "true market value" of railroad

property. Even the restrictive Chesapeake rule recognizes

that railroads are entitled to produce "independent

evidence" of their true market value, provided the railroad

"limits its evidence to factors that may properly be taken

into account under the State’s chosen methodology."

Richmond Fredericksburg & Potomac R.R. v. Forst, 4 F.3d

244, 250 (4th Cir. 1993) (explaining Chesapeake). Thus,

Conrail intends to introduce expert evidence at trial

regarding the SBEA’s "misapplication" of its own

methodology so there will be sufficient facts on the record

for an appellate court to review the trial court’s decision

17 Unless this Court reverses Burlington Northem RR. v.

Oklahoma Tax Comm’n. ‘and holds that overvaluation claims are not

legally cognizable under §11503, Conrail will be litigating its true

market value in federal court.

On appeal even if this Court eventually decides that

Chesapeake is correct. Since the SBEA and the other

petitioners will likely reject Conrail’s expert testimony on

"misapplication" issues and rely on expert witnesses of

their own, the petitioners will have to pay valuation

experts regardless of the legal framework within which

they testify.

It must be emphasized that petitioners have already

engaged valuation experts familiar with the case. In

opposing Conrail’s application for preliminary injunction

in the 1994 case, petitioners tendered expert witnesses

who use many of the same railroad valuation techniques

advocated by Conrail’s experts. Some of these same

petitioners’ experts have also assisted petitioners’ counsel

in planning and conducting documentary discovery in this

case. Thus, petitioners have already retained experts who

have performed substantial work on this case and, in

seeking certiorari, petitioners simply hope to avoid paying

some of these experts for preparing "true market value"

appraisals. While such cost savings may be of practical

importance to the litigants, they are no reason for granting

certiorari. See, e.g, Ticor Title Insurance Co. v. Brown,

__ US. ___, 114 S. Ct. 1359, 1362, 128 L.Ed.2d 33

(1994).

CONCLUSION

Although 49 U.S.C, §11503 is important legislation,

the principal issue presented by the petitions raises

numerous subsidiary issues of law, of fact, and of

judgment that should be analyzed within the context of a

full record, including final analysis by the courts below.

Denial of the petitions at this stage of the proceedings

does not preclude petitioners from raising these same

issues in a later petition after final judgment. The

petitions should, therefore, be denied.

Respectfully Submitted,

Gregory G. Fletcher

Counsel of Record

Baker, Donelson,

Bearman & Caldwell

20th Floor

First Tennessee Bldg.

165 Madison Avenue

Memphis, TN 38103

(901) 526-2000

James W. McBride

Baker, Donelson,

Bearman & Caldwell

801 Pennsylvania Ave. NW

Suite 800

Washington, D.C. 20004

James N. Blair

Loselle, Greenawalt, Kaplan,

Blair & Adler

Two Grand Central Tower

42nd Floor

140 East 45th Street

New York, New York 10017

John F. Fansmith

Associate General Counsel

Consolidated Rail Corp.

Two Commerce Square

2001 Market Street,

Floor 16-A

Philadelphia, PA 19103

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.