Appendix — Regional Rail Reorganization Act Cases

Supreme Court brief1974

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Text

EN AORN PYRGRH "

. Motion of George P. Baker, Robert W. Blanchette

and Richard C. Bond, as Trustees of the Property

of Penn Central Transportation Company, Debtor,

for leave to intervene, dated April 3, 1974

. Answer of Penn Central Trustees, dated April

3, 1974

Order granting Penn Central Trustees leave to

invervene, dated Mav 3, 1974

. Stipulation of plaintiff and defendants as to fac-

tual matters, dated April 1974

.. Caption of stipulation as to record, noting that

it is identical to item 3h

Caption of affidavit of John W. Ingram, dated

May 23, 1974 (as,amended), noting that it is

identical with item 3m

Motion by plaintiff to strike affidavit of John

W. Ingram, dated June 3, 1974

. Plaintiffs motion for summary judgment, dated

April 29, 1974

Intervenors’ motion for summary judgment,

dated May 10, 1974

. Defendants’ motion for summary judgment,

dated May 24, 1974

. Caption of affidavit of Jerome E. Sharfman,

dated May 10, 1974, together with Exhibit A

thereof, noting that it is not printed but ap-

pears in the Joint Documentary Submission as

Item 60

~ -_=

Papers in Penn Central Co. v. Brinegar, et all,

Docket No. 74-1149:

Docket entries

Complaint, dated January 1974

Answer of all defendants, dated March 6, 1974

Motion of George P. Baker, Robert W. Blanchette

and Richard C. Bond, as Trustees of the Property

of Penn Central Transportation Company, Debtor,

for leave to intervene, dated April 3, 1974

Answer of Penn Central Trustees, dated April

3, 1974

Caption of affidavit of John W. Ingram, dated

May 23, 1974 (as amended), noting that it is

identical with item 3m

Order granting Penn Central Trustees leave to

intervene, dated May 16, 1974

Plaintiff's motion for summary judgment, dated

May 22, 1974

Intervenors’ motion for summary judgment,

dated May 20, 1974

Defendants’ motion for summary judgment,

dated May 31, 1974

Caption of stipulation as to the record, noting

that it is identical to item 3h

Stipulation of plaintiff and defendants as to

factual matters, dated June 4, 1974

hee

Be snicin: Oe

IR IONE DG Te FEC I N

m. Supplementary joint documentary submission of

plaintiff, defendants and intervening defendants,

together with Exhibits A and B, dated May 31,

1974

All notices of appeal

The text of the Regional Rail Reorganization Ac

of 1973

Material From the Record to Be Lodged

With the Clerk in Ten Copies

. All items in joint documentary submission (items

1 through 61 inclusive), except items 32, 33, 59

and 61, which are printed in Joint Appendix

Report of Secretary of Transportation, dated Feb-

ruary 1, 1974, pursuant to Section 204

Report of Rail Services Planning Office (ICC),

dated May 2, 1974, pursuant to Section 205(d)(1)

Transcript of record of 120-day hearing in Penn

Central Transportation Company case, pp. 11,106- .

11,270

Transcript of hearing before 3-judge court on mo-

tions for summary judgment

List of applications for abandonment filed by Penn

Central Transportation Company with the United

States Railway Association

‘ Ce ES

7. Response by United States Railway Association

to abandonment applications.

/s/ Louis A. Craco

Attorney for plaintiffs in

Connecticut General, et al. v. USRA,

Docket No. 74-189

/s/ Joseph Auerbach

Attorney for Richard C. Smith,

plaintiff in Docket No. 74-1107

[s/ David Berger

David Berger, Attorney for

plaintiff Penn Central Company

in Docket No. 74-1149

/s/ William R. Perlik

Attorney for defendant

United States Railway Association

/s/ James F. Dausch

Attomey for defendants Brinegar,

Stafford, Schultz, Interstate Com-

merce Commission and United States

of America

/s/_ Charles A. Horsky

Attorney for intervening defendants

Dated: July 31, 1974

elite cial

20 eRe

cos]

Opinions

United States District Court

for the

Eastern District of Pennsylvania

And Related Opinions

by the

Penn Central Reorganization Court

PIES RIS NES RD PRB yy A RNC RNG Seah RLS

MEY f BERLE DEERE AE LIF le

eke

UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

[Caption omitted in printing]

Before: ALDISERT, Circuit Judge, and FULLAM and

BECHTLE, District Judges.

OPINION OF THE COURT

ALDISERT, Circuit Judge.

These cases present the question whether an injunction

should issue restraining the enforcement of certain provi-

sions of the Regional Rail Reorganization Act of 1973,

Public Law 93-236, 45 U.S.C. 88743-744, because of con-

stitutional infirmities. Three-judge courts have been con-

vened pursuant to 28 U.S.C. 82282, 2284, and the mat-

ters are consolidated for disposition on cross-motions for

summary judgment. The Connecticut General plaintiffs

are owners of mortgage bonds and are corporate trustees

Or successor corporate trustees under indentures, mort-

gages and deeds of trust of the Penn Central Transporta-

tion Company and certain of its lease lines which together

comprise the “Penn Central System.”! Plaintiff, Richard

! The following plaintiffs own the approximate principal amounts

of mortgage bonds of Penn Central and of certain Lessors secured

by mortgages on rail properties and other properties of Penn Cen-

tral and certain Lessors set forth opposite their respective names:

a. Connecticut General Insurance

Corporation . . ... . . . .$ 31,025,000

b. Connecticut Mutual Life

Insurance Company. . . ... . 9,985,000

(Cont'd)

DevE® ied

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Vag ea

Me ati ACARI aR BRET Cs Ree Res

8 Lo BARES SPAT IPA SIE ORE Ne EA aa

Joyce Smith, Trustee of the property of The New York,

New Haven and Hartford Railroad Company, Debtor, is

the registered holder of divisional mortgage bonds of Penn

Central Transportation Company.2 These bonds are se-

cured by a divisional mortgage comprising a first lien at-

taching certain real property, railroad tracks and improve-

ments of the Penn Central Transportation Company.

Plaintiff, Penn Central Company, is the owner of 100%

of the stock in and is a creditor of the Penn Central

Transportation Company, Debtor. .

The defendants are the United States Railway Associa-

tion, a corporate entity established under Section 201 of

the Act, 45 U.S.C. 8711; the Secretary of Transportation;

the Chairman of the Interstate Commerce Commission;

the Secretary of the Treasury; and the United States of

America. Penn Central Trustees, Intervening Defendants,

are presently operating the Penn Central Railroad under

Section 77 of the Bankruptcy Act, 11 U.S.C. 8205, in

this court at Bankruptcy No. 70-347.

(Footnote 1 cont’d)

c. The Equitabie Life Assurance Society

of the United States . . . . . .$147,509,000

d. Metropolitan Life Insurance

Company .... . . . . . 69,687,000

-e. The Prudential Insurance Company

of America... . . . . 35,395,000

2 Plaintiff, Richard Joyce Smith, Trustee of the property of The

New York, New Haven and Hartford Railroad Company, Debtor in

reorganization under Section 77 of the Bankruptcy Act (“New

Haven Trustee” and “New Haven” respectively) is the registered

holder of $34,025,800 principal amount of 5% Divisional Mortgage

Bonds (“Bonds”) of Penn Central Transportation Company, Debtor.

LPR SEO TALLER TRECIRDD CGTO ae |

;

1] . :

While plaintiffs challenge the constitutionality of the

1973 Act with a galaxy of arguments, their central con-

tentions may be summarily outlined:

1. The 1973 Act ultimately requires a permanent

taking of their property for which they are entitled to

be paid in cash instead of stocks and other securities;

that the conveyance procedures offend procedural. due

process; and that a deficiency judgment against Conrail

provides no assurance that\just compensation would be

paid.

2. The 1973 Act violates the geographical uniform-

ity requirement of Article I, Section 8, Clause 4 of the

United States Constitution.

3. The 1973 Act effects an interim taking of their

property by requiring continued rail operation pending

implementation of the Final System Plan.

Before consideration of these contentions, a short sum-

mary of the Act is necessary. The judicial panel on multi-

district litigation described it as “an heroic attempt” by

Congress to solve a complex and deeply rooted problem.

Fight major railroads in the Northeast and Midwest are

undergoing veorganization pursuant to Section 77 of the

Bankruptcy Act. Of these eight, seven are the only Ciass

I railroads, those with $5 million or more of annual rev-

enue, in the United States in reorganization. “Reasons

cited for this [Northeast railroad] crisis were competition

from 90 million automobiles and multiple schedules of

competitive jet air service which directly competed with

passenger transportation. The decline of railroad freight

business also diminished the passenger carrying capabilities

PSAP ERE NOR RE Da pre mgm ns sea Nea a ga

of the railroads. Traditional railroad freight business was

lost to inland water way operations, pipelines and trucks.

Moreover, government policy tended ‘to favor non-rail

transportation and perpetuate a regulatory climate that

[was] hostile to experimentation.’ Water, air and high-

way transportation were successfully aided through public

- investment, at little or no user cost while railroads had

to make such investments on their own.”?

Congress first responded to the rail crisis with the Emer-

gency Rail Services Act of 1970, 45 U.S.C. 8661, ef seq.,

authorizing the Secretary of Transportation to guarantee

up to one hundred twenty-five million dollars in certifi-

cates issued by trustees of railroads in reorganization un-

der Section 77. However,. detailed treatment of the rail-

roads’ particular difficulties did not emerge until the enact-

ment of the 1973 Act. As stated in the defendants’ brief:

The 1973 Act represents Congress’ comprehen-

sive response to the long-range problems of

railroads that own or operate most of the

trackage in the Northeast and Midwest, and

which therefore constitute a vital segment of

the U.S. railroad system and an important

segment of the U.S. economy.

The Act requires the United States Rail-

way Association . . . to design a [ Final System]

[P]lan for reorganized rail services in the Re-

gion . . . and provides, among other things,

3 In re Central Railroad Company of New Jersey, 485 F.2d 208,

217 (Aldisert, J., dissenting) (footnotes omitted), citing, inter alia,

Staff Report, “The Penn Central and Other Railroads,” Senate Com-

mittee on Commerce, December, 1972, at 220-222.

FRE FF EOE Ges ———

Tak aa Ri ee RP 5 eee

POLI DORE ET IE OBS LS EER se

that a new private railroad, the Consolidated

Rail Corporation (“Conrail”) shall acquire,

own and operate rail pr »perties pursuant to

the Final System Plan.

(Brief, 10-11)

Congress also provided in the 1973 Act

several kinds of financial assistance, new in

form and substantial in amount, each in-

tended to assist in creating and implement-

ing the overall plan for rail transportation

‘service in the Region and the Conrail por-

tion of that plan in particular. Four of

these additional resources deserve special

mention. (i) Substantial obligational author-

ity is conferred on USRA. To Carry out its

Purposes under the Act (principally to plan

the new rail system and to provide part of

the consideration for rail properties acquired

by Conrail under the Act), USRA is author-

ized to issue $1.5 billion in securities to be

guaranteed by the Secretary of Transporta-

tion. Section 210. Of this sum, not more

than $1 billion may be issued to Conrail, of

which not less than half must be used by

Conrail for rail rehabilitation and modern-

ization. Section 210(b). Additional amounts

may be issued if approved by joint resolu-

tion of Congress. /d. (ii) The Secretary of

Transportation, with USRA’s approval, is au-

thorized to enter into agreement for the ac-

quisition, maintenance or improvement of

Property that will be in the Final System

Plan; for this purpose, the Act provides ob-

ligational authority of $150 million. Section

of the railroads. Traditional railroad freight business was

lost to inland water way operations, pipelines and trucks.

Moreover, government policy tended ‘to favor non-rail

transportation and perpetuate a regulatory climate that

[was] hostile to experimentation.’ Water, air and high-

way transportation were successfully aided through public

investment, at little or no user cost while railroads had

to make such investments on their own.’

Congress first responded to the rail crisis with the Emer-

gency Rail Services Act of 1970, 45 U.S.C. 8661, ef seq.,

authorizing the Secretary of Transportation to guarantee

up to one hundred twenty-five million dollars in certifi-

cates issued by trustees of railroads in reorganization un-

der Section 77. However, detailed treatment of the rail-

roads’ particular difficulties did not emerge until the enact-

ment of the 1973 Act. As stated in the defendants’ brief:

The 1973 Act represents Congress’ comprehen-

sive response to the long-range problems of

railroads that own or operate most of the

trackage in the Northeast and Midwest, and .

which therefore constitute a vital segment of

the U.S. railroad system and an important

segment of the U.S. economy.

The Act requires the United States Rail-

way Association . . . to design a [ Final System]

[P]lan for reorganized rail services in the Re-

gion . . . and provides, among other things,

3 In re Central Railroad Company of New Jersey, 485 F.2d 208,

"217 (Aldisert, J., dissenting) (footnotes omitted), citing, inter alia,

Staff Report, “The Penn Central and Other Railroads,” Senate Com- ~

mittee on Commerce, December, 1972, at 220-222.

FEMI EPS IV MT OT ANE LT PRIS BONE CS WO POGULPLI IL PS Ty VEY MET ION OEE MIO EM MEL A LENGE LON PO

re AIG BR

iemmemal PAAR AER Dieo abesTedee:

(Brief,

that a new private railroad, the Consolidated

Rail Corporation (“Conrail’”’) shall acquire,

own and operate rail properties pursuant to

the Final System Plan.

10-11)

Congress also provided in the 1973 Act

several kinds of financial assistance, new in

form and substantial in amount, each in-

tended to assist in creating and implement-

ing the overall plan for rail transportation

service in the Region and the Conrail por-

tion of that plan in particular. Four of

these additional resources deserve special

mention. (i) Substantial obligational author- °

ity is conferred on USRA. To carry out its

purposes under the Act (principally to plan

the new rail system and to provide part of

the consideration for rail properties acquired

by Conrail under the Act), USRA is author-

ized to issue $1.5 billion in securities to be

guaranteed by the Secretary of Transporta-

tion. Section 210. Of this sum, not more

than $1 billion may be issued to Conrail, of

which not less than half must be used by

Conrail for rail rehabilitation and modern-

ization. Section 210(b). Additional amounts

may be issued if approved by joint resolu-

tion of Congress. /d. (ii) The Secretary of

Transportation, with USRA’s approval, is au-

thorized to enter into agreement for the ac-

quisition, maintenance or improvement of

property that will be in the Final System

Plan; for this purpose, the Act provides ob-

ligational authority of $150 million. Section

SEES RESTOR ee

215. (iii) To meet emergency needs pending

implementation of the Final System Plan, the

Secretary of Transportation is further author-

ized to make payments not exceeding $85

million to the trustees of railroads in reorgan-

ization. Section 213. (iv) Finally, the Secre-

tary of Transportation and the Association

may provide subsidies for continuing non-

economic service and loans for the acquisition

and modernization of rail properties. Sec-

tions 402 and 403.

(Brief, 12-13).

Section 207(b)* of the Act sets forth the procedure by

which a railroad becomes subject to the transfer provisions

contained in the Final System Plan. The Section 77 Penn

4 SEC. 207

*“* *

| (b) APPROVAL. — Within 120 days after the

| date of enactment of this Act each United States dis-

trict court or other court having jurisdiction over a

railroad in reorganization shall decide whether the

railroad is reorganizable on an income basis within

a reasonable time under section 77 of the Bankruptcy

| Act (11 U.S.C. 205) and that the public interest would

be better served by continuing the present reorganiza-

tion proceedings than by a reorganization under this

Act. Within 60 days after the submission of the te-

port by the Office, under section 205(d\1) of this

: title, on the Secretary’s report on rail services in the

region, each United States district court or other court

having jurisdiction over a railroad in reorganization

shall decide whether or not such railroad shall be

(Cont'd)

yon # wl a a “nt way ——

URN REE RAL LAR LAD BE PELLETS A ALLEN ER EDN L OL LOL TOLMAN POPPA ALANS LYSE 8h “Ahi

Central reorganization court has already determined that

Penn Central is not reorganizable “ton an income basis

within a reasonable time under Section 77 of the Bank-

ruptcy Act.” The next step under the Act is the “180-

day” determination by that court as to whether “such

railroad shall be reorganized by means of transferring

some of its rail properties to the Corporation.” This

hearing was held on June 10, 1974, but no findirigs have

yet been made.

SAS TEEPE Tata ciel

(Footnote 4 cont’d)

reorganized by means of transferring some of its rail

properties to the Corporation pursuant to the provi-

sions of this Act. Because of the strong public inter-

est in the continuance of rail transportation in the

region pursuant to a system plan devised under the

provisions of this Act, each such court shall order

that the reorganization be proceeded with pursuant

to this Act unless it (1) has found that the railroad

is reorganizable on an income basis within a reason-

able time under section 77 of the Bankruptcy Act

(11 U.S.C. 205) and that the public interest would

be better served by such a reorganization than by a

reorganization under this Act, or (2) finds that this

Act does not provide a process which would be fair

and equitable to the estate of the railroad in reor-

ganization in which case it shall dismiss the reorgan-

ization proceeding. If a court does not enter an

order or make a finding as required by this subsec-

tion, the reorganization shall be proceeded with pur-

suant to this Act. An appeal from an order made

under this section may be made only to the special

court. Appeal to the special court shall be taken

within 10 days following entry of an order pursuant

to ths subsection, and the special court shall com-

plete s review and render its decision within 80 days

after such appeal is taken. There shall be no review

of the decision of the speciai court.

EEE, NESSES atch TCR

ARAN GSPN Oe ges a

Within 420 days after January 2, 1974, a Final System

Pian must be prepared by the executive committee of the

Association and submitted for approval by its Board of

Directors. Section 207(c). Yet final review of the Plan

remains with Congress. Section 208(a). A Special Court

has been created to “exercise the powers of a district judge

in any judicial district with respect to such proceedings

and such powers shall include those of a reorganization

court. The Special Court shall have the power to order

the conveyance of rail properties of railroads, leased, op-

erated, or controlled by a railroad in reorganization in the

region.” Section 209(b).5

; The Association is required to deliver a copy of the

Final System Plan to the Special Court. Section 209(c).®

Thereafter, the Special Court shall order the trustees to

5 Members of the Special Court selected by the judicial panel on

: multi-district litigation, as provided by Section 20%b), are Circuit

Judges Henry J. Friendly and Carl McGowan, and District Judge

Roszel C. Thomsen.

; SEC. 209 -.

; ee 2

: (c) Delivery of Plan to Special Court. — Within

5 90 days after its effective date, the Association shall

x deliver a certified copy of the final system plan to

3 the special court and shall certify to the special court —

‘ (1) which rail properties of the respective rail-

. roads in reorganization in the region and of any

; railroad leased, operated, or controlled by such

2 railroads in reorganization are to be transferred

? to the Corporation, in accordance with the final

é system plan;

3 (Cont'd)

EEE ELI UE RYE FE PIE ERTL OS TR CET ELIS ORL NE NSTI OAS ASE AR GG? —

SASSER EEN

convey to

—

Conrail “forthwith . . . all right, title and in-

Epa yiere

terest in the rail properties. . . .” Section 303(b).’

(Feotnote 6 cont'd)

(2) which rail properties of the respective rail-

roads in reorganization in the region or railroads

leased, operated, or controlled by such railroads

in reorganization are to be conveyed to profitable

railroads, in accordance with the final system plan;

(3) the amount, terms, and value of the securi-

ties of the Corporation (including any obligations

of the Association) to be exchanged for those rail

properties to be transferred to the Corporation

pursuant to the final system plan, and as indi-

cated in paragraph (1) of this subsection; and

(4) that the transfer of rail properties in ex-

change for securities of the Corporation (includ-

ing any obligations of the Association) and other

benefits is fair aad equitable and in the public

interest.

SEC. 303. (a) Deposit With Court. —

Within 10 days after delivery of a certified copy

of a final system plan pursuant to section 20%c)

of this Act —

(1) the Corporation, in exchange for the rail

properties of the railroads in reorganization in

the region and of railroads leased, operated, or

controlled by railroads in reorganization in the

region to be transferred to the Corporation,

shall deposit with the special court all of the

stock and other securities of the Corporation ;

and obligations of the Association designated :

in the final system plan to be exchanged for

such rail properties;

(2) each profitable railroad operating in the

region purchasing rail properties from a railroad

in reorganization in the region, or from a rail-

(Cont'd)

. PISS =)

Bs Bd er 3 ct tats et SE ee ene rae oo |

. Dl aes .

RE RRRSE eC

After the conveyance, the Special Court reviews the terms

of the exchange as set forth in the Final System Plan. In

(Footnote 7 cont’d)

road leased, operated, or controlled by a rail-

road in reorganization in the region, as provided

in the final system plan shall deposit with the

5 special court the compensation to be paid for

3 such rail properties.

(b) Conveyance of Rail Properties. — (1) The

special court shall, within 10 days after deposit un-

der subsection (a) of this section of the securities

of the Corporation, obligations of the Association,

and compensation from the profitable railroads op-

erating in the region, order the trustee or trustees

of each railroad in reorganization in the region to

convey forthwith to the Corporation and the respec-

tive profitable railroads operating in the region, all

right, title, and interest in the rail properties of

such railroad in reorganization and shall itself or-

3 der the conveyance of all right, title, and interest

: in the rail properties of any railroad leased, oper-

: ated, or controlled by such railroad in reorganiza-

; tion that are to be conveyed to them under the

final system plan as certified to such court under

section 209(d) of this Act.

(2) All rail properties conveyed to the Corpo-

ration and the respective profitable railroads operat-

ing in the region under this section shall be conveyed

free and clear of any liens or encumbrances, but

subject to such leases and agreements as shall have

previously burdened such properties or bound the

owner or operator thereof in pursuance of an ar-

rangement with any State, or local or regional trans-

portation authority under which financial support

from such State, or local or regional transportation

authority was being provided at the time of enact-

ment of this Act for the continuance of rail passen-

te eek nen At Sa. vey ata Bde LS sis

hI ht RI ede

;

(Cont'd)

remedying any inadequacy of consideration which it finds,

that court is permitted to reallocate Conrail’s securities

(Footnote 7 cont'd)

ger service or any lien or encumbrance of no greater

than 5 years, duration which is necessary for the

contractual performance by any person of duties

related to public health or sanitation. Such con-

veyances shall not be restrained or enjoined by any

court.

(3) Notwithstanding anything to the contrary

contained in this Act, if railroad rolling stock is in-

cluded in the rail properties to be conveyed, such

conveyance may only be effected if the profitable

railroad operating in the region or the Corporation

to whom the conveyance is made assumes all of

the obligations under any conditional sale agree-

ment, equipment trust agreement, or lease in re-

spect to such rolling stock and such conveyance is

made subject thereto; and the provisions of this Act

shall not affect the title and interests of any lessor,

equipment trust trustee, or conditional sale vendee

Or assignee under such conditional sale agreement,

equipment trust agreement or lessee under section

77(j) of the Bankruptcy Act (11 U.S.C. 205(j)).

(4) Notwithstanding anything to the contrary

contained in this Act, if a railroad in reorganization

has leased rail properties from a lessor that is

neither a railroad nor controlled by or affiliated

with a railroad, and such lease has been approved

by the lessee railroad’s reorganization court prior

to the date of enactment of this Act, conveyance

of such lease may only be effected if the Corpora-

tion or the profitable railroad to whom the convey-

ance is made assumes all of the terms and condi-

tions specified in the lease, including the obligation

to pay the specified rent to the non-railroad les-

sor.

(Cont'd)

PETERS CA TREE RO ar Ro a

among the various bankrupt estates, to order the provi-

sion by Conrail of further securities of Conrail or obli-

(Footnote 7 cont’d)

. the rail properties have been conveyed to the

Corporation and profitable railroads operating in

the region under subsection (b) of this section,

the special court, giving due consideration to the

findings contained in the final system plan, shall

decide —

(A) whether the transfers or conveyances —

(i) of rail properties of each railroad

in reorganization, or of each railroad

leased, operated, or controlled by a rail-

road in reorganization, to the Corpora-

tion in exchange for the securities and

other benefits accruing to such railroad

as a result of such exchange, as provided

in the final system plan and this Act,

F and

‘ (ii) of rail properties of each railroad

: “in reorganization, or of each railroad

: leased, operated, or controlled by a rail-

road in reorganization, to a profitable

railroad Operating in the region, in ac-

cordance with the final system plan.

are in the public interest and are fair and equi-

table to the estate of each railroad in reor-

ganization in accordance with the standard

of fairness and equity applicable to the ap-

proval of a plan of reorganization or a step

in such a plan under section 77 of the Bank-

tuptcy Act (11 U.S.C. 205), or fair and equi-

table to a railroad that is not itself in reor-

ganization but which is leased, operated, or

controlled by a railroad in reorganization; and

(Cont'd)

Ben ee

gations of the Association as designated in the Final

System Plan and, ultimately, to enter a deficiency judg-

(Footnote 7 cont'd)

(B) whether the transfers or conveyances

are more fair and equitable than is required

as a constitutional minimum. ,

(2) If the special court finds that the terms

of one or more exchanges for securities and other

benefits are not fair and equitable to an estate of

a railroad in reorganization, or to a railroad leased,

operated, or controlled by a railroad in reorganiza-

tion, which has transferred rail properties pursuant

to the final system plan, it shall —

(A) enter a judgment reallocating the securi-

ties of the Corporation in a fair and equitable

manner if it has not been fairly allocated among

the railroads transferring rail properties to the.

Corporation; and

(B) if the lack of fairness and equity cannot

be completely cured by a reallocation of the

Corporation’s securities, order the Corporation

to provide for the transfer to the railroad of

other securities of the Corporation or obliga-

tions of the Association as designated in the

final system plan in such nature and amount

as would make the exchange or exchanges fair

and equitable; and

be completely cured by reallocation of the Cor-

poration’s securities or by providing for the trans-

fer of other securities of the Corporation or ob-

ligations of the Association as designated in the

final system plan, enter a judgment against the

Corporation.

(3) If the special court finds that the terms of

one or more conveyances of rail properties to a prof-

(Cont'd)

IOS WA tac EES EIR ao LN Babs ie CRNA

-_--

ment against Conrail should these steps prove insufficient

to pay the estates their “constitutional minimum.”

(Footnote 7 cont'd)

itable railroad operating in the region in accordance

with the final system plan are not fair and equitable,

it shall enter a judgment against such profitable rail-

road. If the special court finds that the terms of one

or more conveyances or exchanges for securities or

othef “benefits are fairer and more equitable than is

requireG as a constitutional minimum..then it shall

‘Order the return of any excess securities. obligations,

or compensation to the Corporation or a profitable

railroad so as not to exceed the constitutional mini-

mum standard of fairness and equity.

(4) Upon making the findings referred to in this

subsection. the special court shall order distribution

of the securities, obligations, and compensation de-

posited with it under subsection (b) of this section

to the trustee or trustees of each railroad in reorgan-

ization in the region who conveyed right, title, and

interest in rail properties to the Corporation and the

respective profitable railroads under such subsection.

(d) Appeal. — A finding or determination en-

tered pursuant to subsection (c) of this section may

be appealed directly to the Supreme Court of the

United States in the same manner that an injunction

order may be appealed under section 1253 of title

28. United States Code: Provided. That such ap-

peal is exclusive and shall be filed in the Supreme

Court not more than 5 days after such firiding or

determination is entered by the special court. The

Supreme Court shal] dismiss any such appeal within

7 days after the entry of such an appeal if it deter-

mines that such an appeal would not be in the in-

terest of an expeditious conclusion of the proceed- .

ings and shal] grant the highest priority to the de-

terminauon of any such appeals which 11 determines

not 10 dismiss

We first dispose of plaintiffs’ threshold contention that

the possible future conveyance of rail properties to Con-

rail in consideration for Conrail stock and securities con-

stitutes a Fifth Amendment taking without payment of

just compensation.® Plaintiffs argue that the provision

for compensation for the conveyance of Penn Central

assets renders the Act unconstitutional on its face because

the compensation provided in the Act is not payable in

money or other legal tender, because the purported safety

valve in a deficiency judgment against Conrail provides no

assurance that just compensation will be paid, and because

these procedures offend procedural due process.

We do not meet these Fifth Amendment questions be- ‘

cause we are persuaded that these issues are premature.

“Courts do not review issues, especially constitutional is-

sues, until they have to.” Joint Anti-Fascist Refugee Com-

mittee v. McGrath, 341 U.S. 123, 154-55 (1951) (Frank-

furter, J., concurring). It has been said that a number of

jurisprudential rules underlie this general principle. The

doctrines of “standing”’, “ripeness”, ‘“‘finality” and “moot-

ness” all serve “the primary conception that federal judi-

cial power is to be exercised to strike down legislation

. only at the instance of one who is himself immedi-

ately harmed, or immediately threatened with harm, by

the challenged action.” Poe vy. Ullman, 367 U.S. 497,

503-04 (1961). We believe that the present circumstances

do not present a ripe controversy because the basis of

8 in addition to the mandatory conveyance provision of the Act,

Congress provided that the conveyances be made “free and clear of

any liens and encumbrances” subject to limited exceptions. Section

303( bY 2).

SIGS UNS OT Rar eg

plaintiffs’ complaint depends on the “concurrence of...

contingent events . . . too speculative to warrant anticipa-

tory judicial determinations.” Eccles y. Peoples Bank, 333

U.S. 426, 432-41948).

Before the plaintiffs may be harmed by the mandatory

conveyances, certain contingencies must occur. First, the

Penn Central reorganization court must decide “whether

or not such railroad shall be reorganized by transferring

some of its rail properties to the Corporation pursuant to

the provisions of this Act.” Section 207(b). Although

the court conducted a hearing on June 10, 1974, no find-

ings have been made. Second, the board of directors of

the Association must deliver the Final System Plan adopted

by the Association to both Houses of Congress and to the

Committee on Interstate and Foreign Commerce of the

House of Representatives and the Committee on Commerce

of the Senate for approval. Section 208(a).? Third, after

Congressional approval, the conveyances take place only at

the direction of the Special Court within ten days after de-

posit of the consideration by Conrail. Section 303(b).

SEC. 208(a) GENERAL. — The Board of

Directors of the Association shall deliver the final

system plan adopted by the Association to both

Houses of Congress and to the Committee on In-

terstate and Foreign Commerce of the House of

Representatives and the Committee on Commerce

of the Senate. The final system plan shall be

deemed approved at the end of the first period

of 60 caiendar days of continuous session of Con-

gress after such date of transmittal unless either

the House of Representatives or the Senate passes

a resolution during such period stating that it does

not favor the final system plan.

ELEY SOREL TI IIS OE LEE! IRN ET ION ELA. LIF ENTIAL IL EEL IEE DEE A ELE NEE LOT LIES

MA AAG LI AD LAG EA DIE AEE LAIR SPEIER TEL ON SLES AIEEE TEIN BRITE SBOE a EOIN GAH

Thus, before plaintiffs can be exposed to the alleged

harm, there must be a judicial determination by a Section

77 reorganization court followed first by Congressional ac-

tion, and finally judicial action by the Special Court.

Faced with this triple contingency, the plaintiffs cannot

be said to have been exposed to harm. Until these con-

tingencies occur, only an abstract issue appears; and “‘ab-

stract issues do not invoke the jurisdiction of the courts.

McCohill v. Borough of Fox Chapel, 438 F.2d 213, 215

(3d Cir. 1971). “As is well known, the federal courts es-

tablished pursuant to Article III of the Constitution do

not ‘render advisory opinions.” United Public Workers of

America v. Mitchell, 330 U.S. 75, 89 (1947) (footnote

omitted).

”

We are persuaded that the teachings of Communist Party

of United States v. Subversive Activities Control Board,

367 U.S. 1 (1961), and Albertson v. Subversive Activities

Control Board, 382 U.S. 70 (1965), control the issues —

dealing with the ultimate conveyance of railroad proper-

ties. In Communist Party the Court ruled that the mere

possibility of Section 7(h) of the Subversive Activities

Control Act and a regulation issued thereunder affecting

the officers of the Party was not sufficient to present a

live controversy. “The duties imposed by those provisions

will not arise until and unless the Party fails.to register.

At this time their appearance is wholly contingent and

conjectural.” 367 U.S. at 106. However, when the Party

members subsequently appealed from an order directing

them to register under the Act, the Court ruled in Albert-

son that the claims were ripe for adjudication. Accord-

ingly, we conclude that plaintiffs’ contention that the con-

veyance of the rail properties offends the due process clause

is not ripe for adjudication.

PEELE FEEDER le EBL LEE NARI LECT NL AO EIT ERT BES NINN taste ent aie enn i” |

— hin Las Saad

III.

Article I, Section 8, Clause 4 requires “uniform Laws

on the subject of Bankruptcies throughout the United

States.” Plaintiffs contend that because t

geographically unifo

Bank y. Moyses, 186 U.S. 181 (1902), it is facially un-

only rail properties

“Region” may be de-

tion 206(c)-(d).. By

and midwestern states, the District of Columbia, and cer-

tain portions of contiguous states, !0

The defendants’ gns

far as the Act is an e

is uniform: all Class

wer to these arguments is that, inso-

xercise of the bankruptcy process, it

I railroads in reorganization are in

10 The Act is entitled “Regional Rail Reorganization Act of 1973.”

Section 101(b) states:

(b) PURPOSES. — It is therefore declared to

be the purpose of Congress in this Act to provide

for —

(1) the identification of a rail service system

in the midwest and northeast region which is ade-

quate to meet the needs and service requirements

of this region and of the national rail transporta-

tion system. . . .

nsylvania, Delaware, Maryland, Virginia,

West Virginia, Ohio, Indiana, Michigan, and Illinois; the District of

\ fact located within the defined Region, and there is no

discriminatory treatment of creditors within or without

the Region. Alternatively, defendants contend that the

\ Region was defined for purposes of statutory provisions

based on Congress’ power under the commerce clause, which

is not subject to requirement of uniformity.

'' ‘The court is divided on this issue. Judges Fullam and

Bechtle are of the view that certain provisions of §207(b)

(see ante page 10, n. 4) offend the constitutional require-

ment of uniformity. These provisions mandate dismissal

of the Section 77 proceeding if the procedures of the Act

are rejected. Their analysis and conclusions are set forth

in Part II of Judge Fullam’s separate opinion.

For my part, without reaching defendants’ alternate con-

tention that the Act finds constitutional support under the

commerce clause, I am persuaded that, in the context of °

the circumstances of this case, the Act does not offend

Article I, Section 8, Clause 4.

Hanover Bank instructs that “[t]he laws passed on the

subject [of bankruptcies] must, however, be uniform

throughout the United States, but that uniformity is geo-

graphic and not personal... .” 186 U.S. at 188. We

believe that the Founding Fathers’ requirement of uni-

formity was mandated to prevent Congressional geograph-

ical discrimination of creditors or debtors. But the 1973

Act is geographically uniform with respect to creditors’

claims. No provision of the Act restricts the right of any

creditor wheresoever located to obtain relief because of

regionalism. If there is a facial geographic restriction, it

would apply to regional or non-regional debtor railroads

only. However, that is not this case. We are not con- ,

fronted with 4 proper case or controversy involving a

constitutional challenge to the Act brought by a debtor

‘BAB typa ye Stas

SS ati areg apelin couensi mesg teype eRe PE SOIL LIT é pitts LER" Nie na yecey ey SA eal inate

railroad inside or outside the Region. The challenge is

brought by creditors within the Region whose claims are

treated alike. Accordingly, instructed by the rule of

United States v. Raines, 362 U.S. 17, 21 (1960) that “one

to whom application of a statute is constitutional will not

be heard to attack the statute on the ground that impliedly

it might also be taken as applying to other persons or

other situations in which its application might be uncon-

stitutional’”,!! I do not reach the question of whether the

il The very foundation of the power of the federal

courts to declare Acts of Congress unconstitutional

lies in the power and duty of those courts to de-

cide cases and controversies properly before them.

This was made patent in the first case here exer-

cising that power — “the gravest and most delicate

duty that this Court is called on to perform.”

Marbury v. Madison, 1 Cranch 137, 177-180. This

Court, as is the case with all federal courts, “has

no jurisdiction to pronounce any statute, either of

a State or ‘of the United States, void, because irre-

concilable with the Constitution, except as it is

called upon to adjudge the legal rights of litigants

in actual controversies. In the exercise of that ju-

risdiction, it is bound by two rules, to which it has

rigidly adhered, one, never to anticipate a question

of constitutional law in advance of the necessity of

deciding it; the other never to formulate a rule of

constitutional law broader than is required by the

precise facts to which it is to be applied.” Liver-

pool, New York & Philadelphia S.S. Co. v. Commis-

sioners of Emigration, 113 U.S. 33, 39. Kindred to

these rules is the rule that one to ‘whom application

‘of a statute is constitutional will not be heard to at-

tack the statute on the ground that impliedly it might

also be taken as applying to other persons or other

situations in which its application might be unconsti-

-, tutional. United States v. Wurzbach, 280 US. 396;

Heald v. District of Columbia, 259 US. 114, 123;

(Cont'd)

bai tials ai i Hh FEE LICL DLL OO IGE SLND SE LLIOO SHI Mel POG a YS 8 MEARE TEs RAL AE

“ SOTA ASI AVR PtteA VE Sil

omit

—_— AMARA Ait WLiMy Bn

DOE Le ELAINE CRS OLLI GR

Act may not survive a constitutional attack brought by a

debtor railroad located outside the Region. Thus, I would

hold that as to plaintiff-creditors, the Act does not offend

the uniformity requirements of Article I, Section 8, Clause

(Footnote 11 cont’d)

Yazoo & Mississippi Valley R. Co. v. Jackson Vine-

gar Co., 226 U.S. 217; Collins y. Texas, 223 US.

288, 295-296; New York ex rel. Hatch v. Reardon,

204 US. 152, 160-161. Cf. Voeller v. Neilston Ware-

house Co., 311 US. 531, 537; Carmichael v. South-

em Coal & Cole Co., 301 US. 495, 513; Virginian

R. Co. v. System Federation, 300 US. 515, 558;

Blackmer v. United States, 284 U.S. 421, 442; Rob-

erts & Schaefer Co. v. Emmerson, 271 US. 50, 54-

55; Jeffrey Mfg. Co. v. Blagg, 235 US. 571, 576;

Tyler v. Judges of the Court of Registration, 179 US.

405; Ashwander v. TVA, 297 US. 288, 347-348

(concurring opinion). In Barrows vy. Jackson, 346

US. 249, this Court developed various reasons for

this rule. Very significant is the incontrovertible

Proposition that it “would indeed be undesirable for |

this Court to consider every conceivable situation

which might possibly arise in the application of com-

plex and comprehensive legislation.” Jd. at 256.

The delicate power of pronouncing an Act of Con-

gress unconstitutional is not to be exercised with

reference to hypothetical cases thus imagined. The

Court further pointed to the fact that a limiting

construction could be given to the statute by the

court responsible for its construction if an applica-

tion of doubtful constitutionality were in fact con-

cretely presented. We might add that application

of this rule frees the Court not only from unnec-

essary pronouncement on constitutional issues, but

also from premature interpretations of statutes in

areas where their constitutional application might

be cloudy.

362 US. at 20-22 (footnote omitted).

NEG LOGE ROBE AMEE TERM ISOMER TE SBCA PIIER Ee NW Ye ae a ah al ROE rus

FAs rhea

IV.

Finally plaintiffs contend..that the Act effects a taking

of their property by compelling operation of Penn Central’s

rail properties at an irreversible loss during the period be-

fore adoption of the Final System Plan.!2 They urge that

“the Act is unconstitutional in that 1) it denies them their

present right to terminate their investment in a hopelessly

losing railroad; and 2) it provides no assurance that plain-

tiffs will in all events be paid just compensation on account

of such forced continued operations.”’!3

12 Section 304(f) of the Act provides for interim abandonment

if certain conditions are met:

After the date of enactment of this Act, no rail-

road in reorganization may discontinue service or

abandon any line of railroad other than in accord-

ance with the provisions of this Act, unless it is

authorized to do so by the Association and unless

no affected State or local or regional transporta-

tion authority reasonably opposes such action, not-

withstanding any provision of any other Federal

law, the constitution or law of any State, or decision

or order of, or the pendency of any proceeding before

any Federal or State court, agency, or authority.

At oral argument the Penn Central Trustees ‘represented that

requests for abandonment were filed with the office of the Associ-

ation, but as of June 3, 1974 — over five months after the effec-

tive date of the Act — the office of the Association was not yet

fully functioning.

13 Connecticut General Plaintiffs’ Brief, 30. The Penn Central

Company contends that an unconstitutional taking of the Penn Central

railroad’s’ property occurred on January 2, 1974; that the compul-

sory continuation of operations during the interim period without

payment of just compensation abridges the Fifth Amendment; and

that since the debtor estate is being continually depleted, plaintiff,

as an unsecured creditor, is presently being injured. Penn Central =

Company’s Meinorandum in Support of its Motion for Summary

Judgment, 10-14.

we Vi.

That Congress expected losses during implementation of

the Final System Plan is evidenced by Section 213 which

provides that the Secretary of Transportation may make

payments for certain specific interim losses:

(a) Emergency Assistance. — The Sec-

retary is authorized, pending the implementa-

tion of the final system plan, to pay to the

trustees of railroads in reorganization such

sums as are necessary for the continued pro-

vision of essential transportation services by

such railroads. Such payments shall be made

by the Secretary upon such reasonable terms

and conditions as the Secretary establishes,

except that recipients must agree to maintain

and provide service at a level no less than

that in effect on the date of enactment of

neon,

Rl ar

bl Nae he Ss th es

tn sak ie ete

this Act. 3

(b) Authorization for Appropriations. — ’

There are authorized to be appropriated to /

the Secretary for carrying out this section ;

such sums as are necessary, not to exceed ¢

$85,000,000, to remain available until ex- fe

pended.!4 g

It becomes quickly apparent that the limited amounts [

of these funds — available to railroads in reorganization ;

in the region — have not-béen specially designated to i

meet challenges of unconstitutional erosion. Moreover, 4

the full statutory authorization has not been appropri- &

ated nor is there total agreement between the Secretary e

’ E

14 Significantly there is no explicit reference to the Court of |

Claims. f

of Transportation and the trustees and creditors as to the

nature of the payments to be made under Section 213 and

those to be made under Section 215.45 Congress has only

appropriated $35 million of the $85 million authorized.

By February 19, 1974, a tentative, partial solution was

reached between the trustees and the Secretary as to $10.8

15 * SEC. 215. Prior to the date upon which rail

properties are conveyed to the Corporation under

this Act, the Secretary, with the approval of the

Association, is authorized to enter into agreements

with railroads in reorganization in the region (or

railroads leased, operated, or controlled by rail-

roads in reorganization) for the acquisition, main-

tenance, or improvement of railroad facilities and

equipment necessary to improve property that will

be in the final system plan. Agreements entered

into pursuant to this section shall specifically iden-

tify the type and quality of improvements to be

made pursuant to such agreements. Notwithstand-

ing section 210(b) of this title, the Association shall

issue Obligations under section 210(a) of this title

in an amount sufficient to finance such agreements

and shall require the Corporation to assume any

such obligations. However, the Association may

not issue obligations under this section in an ag-

gregate amount in excess of $150,000,000. The

Secretary may not enter into any agreements un- ,

der this section until he issues regulations setting '

forth procedures and guidelines for the administra-

tion of this section. The Corporation shall not be

required under title III of this Act to compensate

any railroad in reorganization for that portion of

the value of rail properties transferred to it under

this Act which is attributable to the acquisition,

maintenance, or improvement of such properties

under this section. ‘

Gets WOT RSIS ARIE MISE FA RADARS. 5 VLAN A WARES

million, which required approval by the Section 77 reorgan-

ization court. In approving the trustees’ petition the court

observed:

Section 215 of the Act authorizes the advance

of up to $150 million for the purpose of in-

terim acquisition, maintenance and improve-

ment of rail assets which would eventually be

conveyed to the new operating corporation

contemplated by the statute, as part of the

final system plan (increases in value resulting

from such expenditures are not to be re-

flected in the consideration to be paid for

such transfers, and the obligation to repay

is to be assumed by the new corporation).

The Secretary has thus far declined to

approve any grants under §213, and is not if

yet in a position to implement 8215. To 3

meet the present emergency, the Secretary :

is apparently willing to use 8213 funds, but :

not on a grant basis. The proposal contem- 3

plates that, instead of providing funds to the ‘

Trustees to meet operating expenses, the Sec-

retary will, in effect, transfer funds equal to

certain current installments due on equip-

ment, and in return acquire a pro tanto in-

terest in the Trustees’ equity in that equip-

ment. Meanwhile, it is contemplated that e

the. parties will attempt to determine the

extent to which 8215 funds can appropri-

ately be made available to relieve future cash

shortages.

ae YONGE EO PUL RIK Ae SIE TIMBRE HURL

PSS BION CRIS NI IE ee IL IRN TA

A hearing on the Trustees’ petition was

held on February 26, 1974. The creditor in-

terests all expressed, in varying degrees, their

conviction that the proposed financing was

contrary to the intent of the Regional Rail

Reorganization Act of 1973; and also would

violate the constitutional rights of the credi-

tors. The New Haven Trustee flatly opposes

the transaction. Substantially all of the other

creditor interests, and the Trustees, expressed

their willingness to have the ‘Court approve the

transaction, so long as it was clearly under-

stood that this would not create a precedent

for similar approvals in the future, and that all

parties expressly reserved their rights to press .

all constitutional and legal arguments at the

forthcoming hearings on the issues involved in H

8207 of the Reorganization Act and in all

other proceedings involving their rights under,

mons the constitutionality of, the statute.

As all parties recognize, unless these funds

are provided immediately, the Trustees will be {_

forced to default in the payments due on equip-

ment in which they have an equity in excess of E

$70 million. Section 77(j) of the Bankruptcy

Act severely restricts the power of a reorgani-

zation court to preclude equipment creditors

from exercising the rights granted under the fi-

nancing documents. No other source of cash i

to meet these installments has been suggested 4

(and it is difficult to imagine any alternative

source which would not involve repayment,

PEEL ORR RULE PPE 8 ILL RECN EE LR L IE TRING NI EB ADEE Bb ORE GILES ENE ISIN ABE

and thus the same constitutional issues as in

the present proceeding).!®

16 In re Penn Central Transportation Co., Debtor, Memorandum in

Support of Order No. 1480 (March 1, 1974) (pp. 1-3).

Immediately after the enactment of the 1973 Act, the Trustees

applied to the Secretary of Transportation for a grant under Section

213, to meet a projected cash shortfall of approximately $12 million

anticipated to occur by March 1, 1974. There were three difficulties:

(1) the grants were supposed to be made pursuant to regulations pre-

scribed by the Secretary, and the Secretary had not ‘yet prescribed

any regulations; (2) The Act requires, as a condition of any such

grant, that the recipient agree to maintain rail service at the level of 4

January 2, 1974, and there were problems of interpretation on that,

as well as questions about whether the Trustees could make any such i

commitment in good faith, or without violating the constitutional

rights of creditors; and (3) It was the firm position of the Secretary

of Transportation that the preferred vehicle for interim financing

would be loans for capital improvements under Section 215, rather

than grants under Section 213.

te shictichomenycs

There were, however, many problems standing in the way of 4

use of any Section 215 money. (These funds, to be used for capi- :

tal improvements and acquisitions, are in effect loans made to Con-

rail, in advance of its coming into existence.) In addition to the

fact that such capital improvements were to be limited to the rail

Properties which would be designated in the Final System Plan, and

which were therefore not presently identifiable, there would be no

money available under Section 215 until United States Railway As-

sociation had been formed and could issue government-guaranteed

debt securities.

By February 19, 1974, a proposal for a patchwork solution had

been worked out between the Trustees and the Departesent of Trans-

portation. The DOT would put up $10.8 million, by directly meeting

certain installment payments due on equipment, and would be subro-

pro tanto, to the Trustees’ equity in that equipment. In ef.-

fect, th Trustees would sell a part of their equity in certain rail

fe ent to the Department of Transportation, but with the right

LALO LLL INS LEME LLNS LOMO SI NTS NLL EI a EIN Baie Bae

(Cont'd)

Our first responsibility is to determine whether the in-

terim erosion issue is presently ripe for adjudication. The

predicate of this issue is that, absent permissive interim

abandonment, the Act mandates continued operations of.

Penn Central until the Final System Plan is adopted. Plain-

tiffs contend that a compulsory interim operation for a vir-

tually indefinite length of time at large operating losses

continues to erode the Penn Central estate so as to con-

stitute a con ation of the assets without fair and just

compensation} To decide whether this contention presents

a ripe, and therefore justiciable, issue requires an overview

of the Penn Central operations. A statement of opera-

tional losses being sustained by Penn Central, while under

Section 77 reorganization, is revealed in the stipulations

filed by the parties. During the period that began June

21, 1970, until December 31, 1973, Penn Central sus-

tained ordinary net losses in an amount which approxi-

mates $851,000,000.00.!7

(Footnote 16 cont’d)

to redeem it by paying back the money without interest. A hearing

was held on this proposal on February 26, 1974, and the Section 77

reorganization court approved it, over the objections of various credi-

tors, by Order No. 1480. In a Supplemental Memorandum and Order

(No. 1509) the court denied a motion for reconsideration. The orders

are now under appeal.

Thus, of the $35 million thus far appropriated under Section 213

of the Act, $10.8 million has been expended to purchase a part of

Penn Central’s equity in some of its equipment.

17 During this same period, the Penn Central trustees expended in

Operating rail properties approximately $137,500,000 of non-recurring

cash items as follows:

Trustees’ Certificate Drawdowns $ 100,000,000

Tenants Tax Escrow Account 3,100,000

Proceeds from New Haven Property

Sale 9,100,000

(Cont'd)

ERLE SELLE LORE IEE IGE LLC LG SLE ETH LED LALIT LE GIGLI L EOE EN IIIIINE ALOE LIMPED LENS 8 CE

aie ae noe |

Iteis also stipulated that for the two months ended Feb-

ruary 28, 1974, Penn Central had a deficit in net railway

operating income, a deficit in total income, a deficit in

income available for fixed charges and deficit net income,

as those items are determined in accordance with account-

ing regulations of the Interstate Commerce Commission.

As previously stated,.the Penn Central reorganization court

has ruled that the railroad is not “reorganizable on an in-

come basis within a reasonable time under section 77 of

the Bankruptcy Act.”

(Footnote 17 cont'd)

Sale of Freight Cars to P&LE 7,300,000

M.B.T.A. Settlement 9,100,000

Proceeds from sale of stock of

Madison Square Garden Corp. 2,400,000

Proceeds from sale of securities

held in Contingent Compensation

Fund 6,500,000

TOTAL $137,500,000

They expended $2,100,000 in proceeds from sale of mortgaged

properties in connection with the Selkirk Yard improvement and

$15,700,000 in proceeds from the “Agnes” Flood Loan.

They expended in Operating rail properties approximately

$157,000,000 in income derived from Penn Central’s non-rail prop-

erties.

They deferred payment of approximately $241,000,000 in state

and local taxes, of which some $44 million to $48 million is alloca-

ble to the pre-reorganization period. _ These taxes ($241,000,000) are

included in the ordinary net losses. .

They deferred payment of approximately $ 101,000,000 in rentals

on leased line properties. The deferred leased line rentals are included

in thé ordinary net losses.

BRESLIN IEE IM OISE OLN NEI TORE ENS NATIT ON aR al cre ante a ecrey Pe ETERS ae

——

” The book value — and we emphasize that this is not a

market value or liquidated value — of total assets is re-

corded as $4,419,917,759 as of December 31, 1971.!8

The trustees report that as of December 31, 1971, 26,254

claimants filed Proofs of Claim, claiming a gross amount

of $3,348,620,840.'9 Fifty-one secured creditors filed

timely proofs of claim in the amount of $1,062,734,988.

Ten indenture trustees filed claims in the amount of

$963,135,138. Thirty-five individual bondholders claimed

$81,911,646. Six claimants filed claims arising from con-

ditional purchases of equipment and property in the amount

of $17,688,204. An accountants’ report indicates that on

June 21, 1970, the long-term debt in respect of mortgage

bonds and collateral trust bonds, exclusive of railroad

equipment obligations, was $687,692,000.% This, of

course, is only a partial listing of the claims.24 A single

18 annual Report to ICC, 1971, p. 8.

19 Trustees’ Plan for Reorganization, April 1, 1972, Attachment

5, pp. 6-7 (Doc. No. 3033). The trustees estimate an aggregate lia-

bility of $1,583,076,820 from the filed claims.

20 Tbid., at 14-15.

21 In addition to the filed claims there is the matter of priority

claims incurred against the estate during the Section 77 reorganization

proceedings:

E. Growth in priority claims against

the estate.

Deprived of an adequate cash flow, the Penn

Central estate has accumulated substantial priority

claims ahead of all pre-bankruptcy interests. Con-

servatively estimated, these priority claims already

aggregate at least $300 million. On a status quo

(Cont’d)

ER PEDAL LIT ER IP IESE, a i ELLER NTS LENE ENE BLN NL

. —— . a — dic REN RANT TOA UO — :

—————, I VL BETA PM RGR LAO Ld LALLA BREAN SH EAB, Me

unsecured creditor in these proceedings, the Penn Central

Company, claims an approximate amount of $41,800,000.

The Court of Appeals for the Third Circuit suggests:

“If, as some of the reports filed by the trustees suggest,

; it is already clear that such a reorganization is not feasi-

ble,’ then this reorganization is already at the point

where the erosion of the estate in deficit operations must

cease and a liquidation alternative must be considered if

1] See, e.g., Trustees’ Interim Report of Febru-

ary 1, 1973; Memorandum accompanying July 2,

1973 Plan of Reorganization of the Penn Central

Transportation Company and Other Railroad Cor-

porations (June 29, 1973).”22

(Footnote 21 cont’d)

assumption, another $100 million would be added

in 1973. As a result, the value of the estate has

already been substantially eroded and the Trustees

are presently unable to prevent continuing erosion.

In addition to these items, there is a priority charge

of some $200 million a year for interest and amor-

tization of equipment debt and equipment lease ren-

tals which must continue to be serviced out of future

cash resources whether or not such charges are earned.

There is, simply, not enough cash to cope with

continuing claims and to embark upon the capital

improvement programs which would permit a con-

tinuation of service improvements. Not only is the

ability to preserve earning power jeopardized, but

Penn Central’s essential public services cannot be

sustained on this basis.

* * * a e

Trustees’ Interim Report of January 1, 1973, p. 4 (Doc. No. 4911).

22 In the Matter of Penn Central Transportation Co., Debtor, —

(Columbus Option Cases), 494 F.2d 270, 283 (3d Cir. 1974).

ee ee ee nt, ete en

PII ET EEA OE RN NF :

Par cmtes

ph igs ee SS ta a

the secured creditors or other interested parties insist upon

such consideration.”

Over a year ago the Section 77 reorganization Court

warmed: “1. Erosion. While the precise calculations have

not been fully developed, the record justifies the conclusion

that post-reorganization deferrals and unpaid administration

claims have already eroded the Debtor’s estate to the ex-

tent of about $500 million. Whether the constitutional

limit has been exceeded depends primarily upon how the

remaining assets are to be valued; and this in turn may

well depend upon how those assets are to be used at the.

conclusion of this reorganization. Under any view of the

matter, it seems clear that the point of unconstitutional-

ity is fast approaching, if it has not already arrived... .

On the basis of the record to date, it appears highly doubt-

ful that the Debtor could properly be permitted to continue

to operate on its present basis beyond October 1, 1973.”

In re Penn Central Transportation Company, 355 F. Supp.

1343, 1344, 1346 (E.D. Pa. 1973).

Cognizant of massive operational losses of $851,000,000

during the present reorganization proceedings, and cogni-

zant also that unsecured creditor as well as secured cred-

itor interests are squarely before this court, we are per-

suaded that a significant possibility exists that a point of

erosion either has been or may soon be reached so that

it can be said that plaintiffs’ contention of interim uncon-

stitutional taking by continued loss operations is ripe for

adjudication. Having determined that there is a contro-

versy ripe for adjudication, we now examine the merits

of plaintiffs’ contention. |

The defendants acknowledge that if a point is reached

where continued loss operations during the interim amount

———_—_—_ ANTEC, Net OPMAPED HO. rer wm

% .

to an unconstitutional taking,” the Act does not explicitly

provide for the payment of just compensation. They in-

sist, however, that plaintiffs have an implied remedy at law

— a suit in the Court of Claims under the Tucker Act, 28

U.S.C. $1491, for just compensation from the United States.

The Tucker Act confers jurisdiction on the Court of Claims:

to render judgment upon any claim against

the United States founded either upon the

Constitution, or any Act of Congress, or any

regulation or an executive department, or

upon any express or implied contract with

the United States, or for liquidated or un-_

liquidated damages in cases not sounding in

tort.% 7 ;

[T] here are limits beyond which . . . [the] public

interest cannot be served. without violating the con-

stitutional prohibition against appropriation of pri-

vate property for public use without just compen-

sation. New Haven Inclusion Cases, 399 U.S. 392,

90 S. Ct. 2054, 26 L.Ed.2d 691 (1971); cf. Brooks-

Scanlon Co. v. Railroad Commission of Louisiana,

251 US. 396, 40 S. Ct. 183, 64 L.Ed. 323 (1920).

These limitations are measured both in terms of the

amount of erosion of the Dehtor’s estate which can

be permitted to occur before impairing liquidation

value, and in terms of the length of time that is

reasonable for assessing the ultimate prospects of

achieving sufficient profitability to support a valid

recapitalization of the ‘enterprise.

In Re Penn Central Transportation Company, 347 F. Supp. 1346,

1366 (E.D. Pa. 1972).

24 The district courts have concurrent jurisdiction of claims not

exceeding $10,000. 28 U.S.C. $1346.

The applicability of the Tucker Act is vital to the de-

fendants’ position. At oral argument counsel conceded

that if a point was reached at which continued manda-

tory operations created losses of such an amount as to

constitute a Fifth Amendment taking, the operators would

then be entitled to just compensation, and that without

an implied Court of Claims remedy, the 1973 Act would

be unconstitutional as to these plaintiffs.

25 JUDGE ALDISERT: All right now, Mr. Cutler,

assuming an unconstitutional taking by means of con-

tinued interim operation, without a Tucker Act rem-

edy, would the 1973 Act be unconstitutional?

MR. CUTLER: You are saying assuming that

a point might be reached before the consummation

of the new plan in which the constitutionally permis-

sible point of erosion had been reached, before that

could be carried out?

JUDGE ALDISERT: Yes, sir.

MR. CUTLER: And that a Tucker Act rem-

edy was not available?

JUDGE ALDISERT: Yes.

MR. CUTLER: I think I would answer that,

Judge Aldisert, by saying under those circumstances,

Congress would then have decreed a taking by the

provision of this Act for which it had removed any

adequate remedy at law by’ way of the Tucker Act

suit. In that case, the Act as a whole would prob-

ably be unconstitutional. We would agree with that.

We think it would be possible at that point

though to save most of the Act by construing I

think it is 303 where the court is required to trans-

fer the properties before it has passed on the value

of what is to be given in exchange, by construing

that as unconstitutional, that particular provision,

(Cont’d)

RANE —

The defendants concede that the United States, as sov-

ereign, may not be sued without its consent.

terms of its consent to be sued in any court define that

(Footnote 25 cont’d)

and saving the rest of the statute under the severa-

bility clause, which would have the result that the

court could delay the transfer until after it had

passed on the values, and as to erosion, if the in-

terim or the final point, the limit of constitution-

ally permissible erosion, had been reached before

the plan was consummated, then I suppose Judge

Fullam, as the reorganization judge, and the other

judges would be free, since the compulsory trans-

fer would have been struck down as unconstitu-

tional, to terminate the proceedings, if they thought

that was appropriate.

R. 68-69.

Penn Central Trustees have expressed a similar position:

B. Interim Erosion. Moreover, there is the

further objection to the Act already referred to —

the lack of any assurance that the estate will be

compensated for erosion during the many months

which must elapse before Penn Central’s rail prop-

erties are conveyed. Financial erosion — the accu-

mulation of real estate taxes, interest on secured

debt, leased line rentals and a variety of adminis-

trative expenses — continues to accumulate at the

expense of the owners. Physical erosion, as noted

above, is likewise continuing, as the rail properties

of the debtor continue to suffer from inadequate

maintenance.

The Trustees have been advised that a Tucker

Act remedy may be available to them to recover

these erosion losses. The Trustees will attempt to

secure a Supreme Court ruling that, if a constitu-

tionally impermissible level of erosion was reached

(Cont’d)

“(T]he

court’s jurisdiction to entertain the suit.” United States v.

Sherwood, 312 U.S. 584, 586 (1941). Consent to be sued

must be established in an act of Congress, and such an act,

“since it is a relinquishment of a sovereign immunity, must

be strictly interpreted.” Jbid., at 590; see, United States

v. King, 395 U.S. 1, 4 (1969). Specifically defendants.

urge that a statutory grant of consent to a suit against the

United States for any unconstitutional taking by reason of

interim losses is conferred on the Court of Claims by im-

plication because the Regional Rail Reorganization Act of

1973 shows no affirmative Congressional intent to deprive

(Footnote 25 cont'd)

: by January 2, 1974, the date the Act became law,

; a “taking” of Penn Central’s rail properties occurred

] at least by that date, and that a Tucker Act remedy

Q exists for erosion occurring thereafter. Section 304

i (f) of the Act provides that “after the date of en-

’ actment of this Act, no railroad in reorganization

; may discontinue service or abandon any line of rail-

4 road other than in accordance with the provisions of

this Act, * * *”. While the planning agency, the

United States Railway Association, may authorize a~-~~-

service to be discontinued or a iine to be abandoned

(unless local authorities reasonably object), this man-

date by Congress has the effect of requiring Penn

Central to continue operations — notwithstanding

the losses it will incur — until a final system plan

is implemented. Again, however, the Trustees are

advised that unless and until] the Supreme Court has

ruled that the United States can be required to re-

imburse the Penn Central/ estate for its interim

losses, they cannot as fiduciaries rely exclusively on

a Court of Claims recovery

Trustees’ April 3, 1974 Report on

6 (Doc. No. 7304).

spol bie

a a a a ta a M4

eat

that court of its Tucker Act jurisdiction in cases where

claims for unconstitutional takings are made.

The plaintiffs counter with a reference to the legislative

history to demonstrate that there was a specific intention

to limit the obligations of the United States to the express

provisions and explicit limitations contained in the Act.

Thus the issue is joined, and the solution turns on the vex-

ing problem of statutory construction.

We cannot demean the importance of proper statutory

construction in the precise matter at hand. On proper

statutory construction stands or falls the constitutionality

of important provisions of the statutory schema. The de-

fendants, joined by the intervening Penn Central trustees,

mount a formidable argument, reminding us that when.

“the validity of an act of the Congress is drawn in ques-

tion, and . . . a serious doubt of constitutionality is raised,

it is a cardinal principle that . . . [courts] will first ascer-

tain whether a construction of the statute is fairly possi-

ble by which the question may be avoided.” United States

v. Thirty-Seven Photographs, 402 U.S. 363, 369 (1971);

citing Crowell v. Benson, 285 U.S. 22 (1932) (emphasis

supplied). See also, American Communications Assn, C10.

v. Douds, 339 U.S. 382, 407 (1950); United States v. Con-

gress of Industrial Organizations, 335 U.S. 106, 120-21

(1948). The Penn Central trustees emphasize that “the

Act contains no fewer than thirteen provisions repealing

or making inapplicable the provisions of various laws or

excluding the jurisdiction of federal courts on various sub-

jects. Since none of these thirteen provisions excludes a

Tucker Act remedy — although, as plaintiffs themselves

argue, Congress was intensely aware of the possibility of

such a remedy — Congress must be deemed to have de-

liberately rejected the readily available option of including

‘ 3 ,

Aart

be a a

ni ee ee

NANPA AIA Ci CRN ALLE SE HET ONE

such an exclusionary provision in the Act.”6

On their part the plaintiffs also turn to the text of the

Act, describing it as “a preemptive system of judicial par-

ticipation [with] respect to the final system plan. Section

26 Penn Central Trustees’ Brief in Opposition to Plaintiffs’ Mo-

tion for Summary Judgment, p. 6.

The thirteen repealing or jurisdiction-excluding

provisions in the Act are found in Sections 202(a),

205(cK2), 206(d)\(3), 207(b), 20%a), 209(b), 303(b)

(2), 303(d), 304(c), 304(f), 601(aX(2), 601(b) and

601(c).

Sections 202(a)(10) and 205(c2) exempt United

States Railway Association (USRA) and the Rail

Services Planning Office, respectively, from the pro-

visions of Section 3709 of the Revised Statutes, 41

US.C., Section 5. Section 206(d)(3) provides that

certain determinations by USRA and the ICC shall

not be reviewable in any court. Section 207(b) pro-

vides that appeals from orders made under that sub-

section may be taken only to the Special Court,

whose decisions are not subject to further review.

Section 207(b) also in effect repeals part of the ju-

risdiction created by Section 77 of the Bankruptcy

Act by requiring dismissal of Section 77 proceed-

ings in certain circumstances.

Section 209%a) provides that the final system

plan shall become effective after review by Congress

“notwithstanding any other provision of law” and is

“not subject to review by any court except in accord-

ance with this section.”” Here Congress provides that

no court may review the contents of the final system

plan — the document which establishes what railroad

properties shall be taken — and that the plan is to

become effective notwithstanding any other provi-

sions of law. Obviously nothing here purports or

(Cont'd)

CNS PR TS: PETER TRE MARANON ND MEM TSY PH ANN a aE ROR SAMAL CAMO! La RRC IEE Di NSN MALT AA NE

SRB SRC IER, ADTs GR RR a SE Rete MN Lt A

209 mandates the empaneling of the Special Court and the

consolidation before it of ‘all judicial proceedings with re-

spect to the final system plan’. Section 303(c) endows the

(Footnote 26 cont’d)

atempts to exclude a Tucker Act remedy for just

compensation for the properties so taken.

Section 209%(b) authorizes the Judicial Panel on

Multi-District Litigation to create a Special Court and

to consolidate therein all judicial proceedings with re-

spect to the final system plan, and to issue rules for

the conduct of the Panel’s functions. The section

goes on to provide that “no determination by the

panel [on Multi-District Litigation] under this sub-

section may be reviewed in any court.” Here again

Congress demonstrated that it well knew how to ex-

clude jurisdiction of federal courts when it wished

to do so.

Section 303(b)\(2) provides that mandatory

conveyances ordered pursuant to the Act by the

Special Court “shall not be restrained or enjoined

by any court.” Section 303(d) provides that, af-

ter the Special Court enters its orders with respect

to compensation which are authorized by prior

subsections of Section 303, an appeal may be

taken to the Supreme Court and “that such ap-

peal is exclusive.” This makes a single appeal to

the Supreme Court the only means by which in-

terested parties may question whether the Special

Court has properly performed the functions as-

signed to it by Section 303. Since those func-

tions do not include consideration of any ques-

tion whether the compulsory conveyance pursuant

to the Act constitutes a taking of property or

the amount of just compensation due therefor,

section 303(d) in no way attempts to exclude a

Tucker Act remedy for such a taking. To the

contrary, Section 303(d) yet again demonstrates

(Cont'd)

TAS OE RMON

Special Court with the duty to review the consideration to

be received for the properties conveyed and ultimately the

(Footnote 26 cont'd)

that Congress was fully aware of the necessity

of excluding various types of jurisdiction and

did so expressly when it wished to do so.

Section 304(c) provides that railroad aban-

donments permitted under the section may be

made “notwithstanding any provision of the In-

terstate Commerce Act” or of other laws. Sec-

tion 304(f) provides that the inhibition on interim

abandonments imposed by that subsection prevails

“notwithstanding any provision of any other Fed-

eral law, the constitution or law of any State, or

decision or order of, or the pendency of any pro-

ceeding before any Federal or State court, agency,

or authority.”

Section 601(aX(2) provides that “the anti-

trust laws are inapplicable with respect to any

action taken to formulate or implement the final

system plan where such action was in compliance

with the requirements of such plan.” Section

601(b) similarly makes inapplicable the provisions

of the Interstate Commerce Act “whenever a pro-

vision of any such act is inconsistent with this

Act.” And Section 601(c) provides that certain

provisions of the National Environmental Policy

Act of 1969 “shall not apply with respect to any

action taken under authority of this Act before

the effective date of the final system plan.” These

provisions are contained in Title VI of the Act,

in a subtitle headed “Relationship to Other Laws.”

If Congress had wished also to exclude the appli-

eation of the Tucker Act, it obviously would have

added such an exclusion to the very explicit pro-

vision of Section 601 excluding the applicability

of various other laws.”

Ibid., at 6-9 (footnote omitted).

authority under Section 303(c)(2)(C) to enter a deficiency

judgment against Conrail. The exclusive appeal from the

Special Court’s findings is provided in Section 303(d).”2’

The legislative history reveals that Senator Vance Hartke,

who would later be one of the Managers of the bill on the

part of the Senate, observed that if Congress did not act

by providing the creditors with stock in Conrail, “there is

the distinct possibility . . . that a number of these people

could make a claim against the Government which could

be sustained in the Court of Claims.”

Especially significant in the legislative history of the Act

are the remarks recorded during the discussion on the con-

ference report accompanying H.R. 9142 in a colloquy be-

tween two of the “Managers on the Part of the House”:

Mr. [Dan] Kuykendall. “Mr. Speaker,

I would like to ask the gentleman from Wash-

ington one point, and that is the matter of

the deficiency judgment. There was a lot of

colloquy in the original debate which expressed

fears that the Federal. Court had the key to

the Treasury.

“Will the gentleman give us his interpreta-

tion of the guarantees we have to keep that

from happening in the court proceedings?”

Mr. [Brock] Adams. “Mr. Speaker,

there is a definite limitation on the total

amount that can be authorized under this

27 Connecticut General’s Brief, 59-60.

28 119 Cong. Rec. S. 23783-84 (1973).

eure Serco |

bill. Any amounts that go beyond that, or

the shifting of the way in which it is spent,

is to be approved by an Act of Congress,

to be signed by the President... . [I]t

was the clear intent of the managers that

any amount other than common stock [of

Conrail] was to be at the lowest possible

limit to meett the constitutional guarantees.”

* * *

Mr. Kuykendall. ‘There is no way the

Federal Court may assess the taxpayers or

this Congress: on the judgments of the credi-

tors, is that correct?” :

Mr. Adams. “The gentleman is cor-

rect.” post

Mr. Kuykendall. “There is no way

they can assess the Congress for the money?”

Mr. Adams. “The gentleman is cor-

rect.”

We are persuaded that the legislative history supports the

conclusion that Congress intended that financial obligations

be limited to the express terms of the Act. Article I, Sec-.

tion 9, Clause 7 provides that no money shall be drawn

from the Treasury of the United States except in conse-

quence of an appropriation made by law. Section 213(b),

supra, and Section 214™ entitled “Authorization for Ap-

propriations” place an express ceiling on expenditures.

29 119 Cong. Rec. H. 11876 (1973).

30 SEC. 214(a) SECRETARY. — There are

authorized to be appropriated to the Secretary

(Cont'd)

SA ne aa CUESTA OHA BOA NAL ELE ie RIEL i CE LEG (Om AT IOs, ae at

Section 210 describes the maximum obligational authority

of the Association, and the authorization for appropriation

is limited to “such amounts as are necessary to discharge

the obligations of the United States arising under this sec-

tion.” (Emphasis supplied.) Judicial review is delineated

with specificity in Sections 209(a) and 303 with no men-

tion of the Court of Claims.

AER ARNO SEEN INERT UES

(Footnote 30 cont’d)

for purposes of preparing the reports and exer-

cising other functions to be performed by him

under this Act such sums as are necessary not

to exceed $12,500,000, to remain available un-

til expended.

(b) OFFICE. — There are authorized to .

be appropriated to the Commission for the use

of the Office in carrying out its functions un- é

der this Act such sums as are necessary, not to

&xceed $5,000,000, to remain available until ex-

pended. The budget for the Office shall be sub-

mitted by the Commission directly to the Con-

gress and shall not be subject to review of any

kind by any other agency or official of the 4

United States. Moneys appropriated for the Of- oe

fice shall not be withheld by any agency or of-

ficial of the United States or used by the Com-

mission for any purpose other than the use of

the Office. No part of any other moneys ap-

propriated to the Commission shall be withheld

by any other agency or official of the United

States to offset any moneys appropriated pursu-

“ ant to this subsection.

ized to be appropriated to the Association for

purposes of carrying out its administrative ex-

penses under this Act such sums as are neces-

sary, not to exceed $26,000,000, to remain

available until expended.

y" NTE LISE RG

Ape RAN

SD ctr

ERLE ET EIR EO NE

DELLE REY VID OREO TE FIE ERP TONELLI LLIN “A

‘

We were taught by Justice Frankfurter “that the trouble-

some phase of [statutory] construction is the determina-

tion of the extent to which extraneous documentation and

external circumstances may be allowed to infiltrate the text

on the theory that they were part of it, written in ink dis-

cernible to the judicial eye.”2! John Chipman Gray often ~

quoted a sermon by Bishop Hoadley that “{w]hoever hath

an absolute authority to interpret any written or spoken

laws, it is he who is truly the law-giver to all intents and

purposes, and not the person who first wrote or spoke

them.”32

For this court to interpret the Act in a manner contrary

to its explicit terms, contrary to the express representations

of the bill’s managers at the conference committee discus-

sions, and to construe this Act in a manner which will ex-

pose the United States Treasury to presently incalculable,

but, in any event, substantially formidable claims would

be a flagrant violation of the separation of powers doc-

trine. If we did this, the judiciary would truly have be-

come the “law-giver” for substantial federal appropriations;

this in itself would raise serious constitutional problems.

31 Frankfurter, Some Reflections on the Reading of Statutes, 47

COLUM. L. REV. 527, 529 (1947).

Justice Frankfurter also reminded us that “Mr. Justice Holmes

reached meaning easily, as was true of most of his results, with em-

phasis on the language in the totality of the enactment and the felt

reasonableness of the chosen construction. He had a lively aware-

ness that a statute was expressive of purpose and policy, but in his

reading of it he tended to hug the shores of the statute itself, with-

out much reinforcement from without,” supra, at 532.

32 Gray, NATURE AND SOURCES OF THE LAW, 102, 125,

172 (2d Ed. 1921).

paren: PNA NEP PENI en

ail ste et a kaa

To accept the government defendants’ contention would

require judicial legislation on a grand, if not arrogant, écale.

Justice Holmes told us “I recognize without hesitation. that.

judges do and must legislate, but they can do so only in-

terstitially; they are confined from molar to molecular mo-

tions.”33 To read a Tucker Act remedy into the Act would

be a movement of the mass and not simply the particles. .

We simply lack such: power.

Accordingly, we hold that Section 304(f), in requiring

mandatory interim operations without providing a legal

remedy to furnish fair and just compensation for an ero-

sion of property beyond constitutional limits, offends the

Fifth Amendment; that Section 303, the only provision

of the Act pertaining to valuation of ‘the railroad estate,

in failing to provide a remedy for any unconstitutional

erosion caused by mandatory interim operations under

Section 304(f), is also defective; that because the effect

of Section 207(b) precludes a form of liquidation under

Section 77 of the Bankruptcy Act, it is constitutionally |

defective as set forth in Part II of the separate opinion

of Judge Fullam; and that because of these conclusions

the United States Railway Association must be enjoined

from certifying a Final System Plan to the Special Court

pursuant to Section 209(c).

33 Southem Pacific Co. v. Jensen, 244 U.S. 205, 221 (1917)

(Holmes, J., dissenting).

Dasa

An appropriate decree will issue (1) enjoining the United

States Railway Association, the Secretary of Transportation,

the Chairman of the Interstate Commerce Commission, and

the Secretary of the Treasury from enforcing the Regional

Rail. Reorganizational Act’ of 1973 in a manner inconsistent

with this holding and (2) declaring as null and void desig-

nated sections of the Act.

/s/__Ruggero J. Aldisert

Ruggero J. Aldisert

United States Circuit Judge

eee

FULLAM, J.

In view of the number and complexity of the issues

which have been presented in this case, it should occa-

sion little surprise that there is a lack of total agreement :

among judges on all issues. With respect to the issues A

actually decided by the majority, I am in general agree- ;

ment, although to some extent for slightly different rea-

sons. But the majority fails to reach a number of issues

which I feel must be faced, not only because they are

indeed ripe for decision, but because the principal con-

clusion expressed by the majority — that the Regional

Rail Reorganization Act of 1973! is unconstitutional be-

cause it fails to provide compensation for interim erosion f

during the planning period — necessarily depends upon |

an evaluation of the nature and validity of the Act’s pro-

visions concerning Mandatory conveyance of rail proper- —

ties to Conrail. In short, I believe the majority has at-

tempted to isolate an issue which cannot be isolated.

I. Prematurity

Plaintiffs challenge the facial constitutionality of the

Act on a variety of grounds, not all of which are neces-

sarily ripe for decision. In considering which issues must.

be faced at this time, it is important to keep in mind the

distinctions between concepts of standing, ripeness, and

the need for injunctive relief. 4

Unquestionably, one or more of the parties to these

lawsuits have standing to raise every issue which has been

presented. That is, the statuteaffects these parties in

! The Regional Rail Reorganization Act of 1973 is referred to

in this Opinion as the Act, the RRRA, or the statute.

SOS teensy EBLE RED ELG EEE IROL EL EQ AA LINGO ELI WE OLAS ILE | CORINNA Se a IIE AIRC TET eee

wf *

particular, as distinguished from the public at large, in

substantial ways. They thus meet the tests of Associa-

tion of Data Processing Service Organizations, Inc. v. Camp,

397 U.S. 150 (1970), and Flast v. Cohen, 392 U.S. 83

(1968).

The question of whether all of the constitutional issues

are ripe for decision requires us to analyze the inevitabil-

ity of the alleged unconstitutional impact, whereas the

immediacy of the alleged threat bears upon the propriety

of injunctive relief.

By July 1, 1974, each of the reorganization courts will

have made, or failed to make, findings pursuant to 8207(b)

of the Act. Under the statute, the effect of these find-

ings or non-findings (as affirmed or reversed by the Spe-

cial Court within 80 days thereafter) will be either that

the statutory processes will inexorably apply to these es-

tates, or that the 8 77 proceedings will be dismissed. The

plaintiffs assert that the §207(b) proceedings themselves

are unconstitutional on due process grounds. Surely this

‘challenge is now ripe for decision; indeed, the defendants

do not contend otherwise.

As set forth in Judge Aldisert’s scholarly opinion, the

existence and inevitability of staggering losses from con-

tinuing rail operations pose an immediate threat to the

constitutional rights of the owners’ and creditors of the

bankrupt estates. Plaintiffs contend that the effect of

88304(f) and 303 of the Act is to mandate continued loss

operations for an indefinite period without hope of re-

imbursement, in derogation of both the taking and due

process clauses of the Fifth Amendment. Since the ma-

jority has concluded that the ultimate conveyance issues

are not now ripe for decision, the fact 8304(f) has been in

force since January 2, 1974, and.continues to require in-

Se nee il as . seal ee oe ee ee ee

terim operations and losses, undoubtedly makes the in-

terim erosion challenge ripe for decision.

Plaintiffs challenge the entire Act as a violation of

the uniformity requirement of the bankruptcy clause,

Article I, Section 8, Clause 4 of the Constitution. Again,

this issue is undeniably ripe for decision.

Finally, plaintiffs pose a series of challenges to the sta-

tutory provisions which contemplate the mandatory trans-

fers of rail assets to Conrail or to existing solvent car-

riers, at prices to be determined by the Special Court af-

ter the event, and to be paid in the form of a to-be-de-

termined mixture of Conrail securities, undefined “other

benefits,” and possibly a limited amount of guaranteed

obligations of USRA. Whether some or all of these “ulti-

mate conveyance” issues are now ripe for decision is a

more difficult question. Judge Aldisert views the possi-

bility that a conveyance may never take place because

of action taken by the reorganization court under 8207

(b), the Congress, and the Special Court, as rendering in-

appropriate consideration of any of the ultimate convey-

ance issues. For me, the decision of this issue is not so

simple. :

No one doubts, and in fact the parties have stipulated,

that-Penn Central rail properties will be included in the

Final System Plan. Equally certain is the fact that USRA

will deliver to Congress a Final System Plan which is to

become effective 60 session-days thereafter. In order to

prevent the Plan from taking effect, one House of Con-

gress must act affirmatively by passage of a resolution ex-

pressing disapproval of the Plan, §208(a). Section 208(b) makes

it the continuing duty of USRA to present final system plans

to the Congress until one becomes effective. I cannot

equate Congress’ reservation of the right: to veto the first

Final System Plan, or even the second or third, to a sit-

uation in which Congressional action is necessary as a pre-

condition to a Final System Plan becoming effective. I

believe this Court must assume that the Act means what

it says, and that the expressed intent of Congress would

be carried out.

Once a Final System Plan is effective, ie., when the

60-day Congressional action period expires, the Special

Court is required under §303(b) to order conveyance of

the property. There remains no discretionary role to be

played by the Special Court, or any other court, at that

point. Therefore, it is clear that if the reorganization

court does not make §207(b) findings that remove the

railroad from the RRRA, conveyances are certain, save

_ Only amendment or repeal of the RRRA. Of course, the

possibility of future legislative and executive action is al-

ways present during the judicial evaluation of the con-

stitutionality of a statute, and does not render such ad-

judication premature.

The last potential exit would be a finding by the re-

organization court that the RRRA “does not provide a

: process which would be fair and equitable to the estate

: of the railroad in reorganization,” §207(b). In this event,

; there would be no conveyance under the Act. In my

7 view, this possibility does not raise an issue of ripeness,

but rather, a question more akin to abstention.

Under §207(b), the reorganization court will have to

consider at least some of the cluster of discrete issues

concerning the ultimate conveyance provisions of the Act,

including some of the constitutional issues raised by these

cases. This is so because the reorganization court must

consider the RRRA in its entirety in order to ascertain $

whether the process is fair and equitable to the estates.

Moreover, it is highly improbable that a reorganization 3

court could successfully reject the statute as unfair or in- x

. she

——— . BS Faas Pa,

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able

equitable under §207(b) for reasons of less than constitu-

tional magnitude. Indeed, the government’s position at

the June 10 hearing in the reorganization court was that

nothing short of unconstitutionality would justify rejec-

tion of the Act under §207(b). Thus, the issue is essen-

tially whether it is preferable for the three-judge court

to rule on the constitutional issues surrounding the con-

veyance provisions, either directly or in conjunction with

plaintiffs’ due process attack on §207(b), before the re-

organization courts act under §207(b).

The policies embodied in 28 U.S.C. $2282 appear ap-

plicable in this case. Enforcement of major federal legis-

lation is sought to be enjoined. As a practical matter, a

decision by the reorganization court under 8207(b) that a

constitutional infirmity requires the Act to be found not

fair and equitable would be equivalent, for all practical

Purposes, to an injunction that might issue as a result of

this three-judge court litigation; and a contrary decision

would be equivalent to denial of an injunction, It is pref-

erable that the deliberate and collegial judgment of this

three-judge court should determine the constitutionality

of the RRRA’s conveyancing provisions. It is significant

that the government has not contended that the §207(b)

hearings operate to render any of the constitutional claims

premature.

This is not to say that with respect to many of key

constitutional claims the government’s contention that

there is not an adequate factual record for constitutional

adjudication is not sound. Rather, the point is that the

government’s contentions in this regard should be consid-

ered by the Court at this time.

_ Another aspect of the RRRA’s impact that warrants

consideration, is the relationship of the availability of the

. we IRR NAIC ZN: OY NOE a

a le la

sue wil

RRRA’s processes to the pending petitions to terminate

rail services and to dismiss the Penn Central’s § 77 pro-

ceeding. Obviously, the RRRA is an important factor

to be weighed by the reorganization court in assessing

validity of the petitioners’ contentions that operations can

no longer be constitutionally required. This consequence

in and of itself would seem to justify present considera-

tion by this Court of the constitutional issues deferred

by the majority.

Irrespective of the validity of the foregoing observations,

I am satisfied that, in the final analysis, many of the con-

stitutional issues concerning the mandatory conveyance

features of the Act are necessarily ripe for decision at

this time because of their relationship to the issues of in-

terim erosion. While it is not necessary to determine

whether or not the contemplated transfers would amount

to takings in the constitutional sense, requiring advance

assurance of payment in cash or equivalent, I am per-

suaded that the constitutional validity of uncompensated

interim erosion cannot be properly decided except in the

light of the constitutionality of the ultimate result which

implementation of the Act would produce.

Stated otherwise, the fact that the statute does not pro-

vide compensation for interim erosion as such would not

necessarily render the statute unconstitutional if there is.

reasonable present assurance that the end result of the

_ Statutory process would be the receipt of consideration

for the assets and other benefits in amounts equaling at

‘least liquidation value plus interim erosion.?

2 Counsel for the government pressed the point that under the

conveyance provisions the Special Court could include in its valua-

tion of Penn Central’s property an amount sufficient to compen- :

sate the estate for unconstitutional interim erosion. Record 98-99. 7

II. Uniformity

The Act in its entirety is challenged as violative of the

uniformity requirement of Article I, Section 8, Clause 4

of the Constitution. With one minor exception discussed

below, | believe that the Act can (and therefore must)

be construed in such a way as to render it constitutional.

But I reach this result by a somewhat different route

than does Judge Aldisert.

Professor Warren tells us:

. any N..tional law which deals with

inability to pay debts and which is uni-

‘orm throughout the country is a law ‘on

the subject of bankruptcy.’” Charles War-

‘en: Bankruptcy in United States History

‘Harv.U.Press 1935), at p. 8.

For mor

tional BY than half a century, attempts to achieve na-

hes widenkruptcy legislation were severely hampered by

bankrup/Y held belief that the Constitution required that

to all ci{cy litigation must be uniform in its application

eventual2sses (ibid, p. 61). However, the Supreme Court

Hanover'y decided that the requirement was geographical.

Netional Bank v. Moyses, 186 U.S. 181, 190.

It has

., been stated that the uniformity requirement

li. . is wholly satisfied when existing ob-

tigations of a debtor are treated alike by

the bankruptcy administration throughout

“Me country, regardless of the state in

‘hich the bankruptcy court sits.” Vans-

Gy Bondholders Protective Committee v.

‘een, et al., 329 U.S. 156, 172 (Frank-

irter, J., concurring).

ee a

Taken literally, that statement would seem to vindicate

the statute here involved, since this Act unquestionably

permits all claims against the affected bankrupt railroads

to be treated alike, irrespective of the situs of particu-

lar creditors or particular courts. But bankruptcy legis-

lation affects debtors as well as creditors, and it seems

doubtful that the quoted language was intended to sug-

gest that different treatment based upon the geographi-

cal location of the debtor would be permissible under

the uniformity clause.

Da A A, au

The fact is, the Supreme Court has never had occasion

to consider a statute which was not geographically uni-

form. The few reported decisions have all dealt with

variations in state laws respecting property rights (e.g,

exemption), or the application of nationwide standards

to particular factual situations determined by courts. See

Wright v. Vinton Branch of the Mountain Trust Bank of

Roanoke, 300 U.S. 440 (1937).

While Congress’ power to classify debtors is not open

to question at this late date, see In re Baltimore & Ohio

R.R. Co., 29 F.Supp. 608 (D.Md. 1939), ceri. denied

309 U.S. 654 (1940); In re Chicago, Rock Island & Paci-

fic Ry., 72 F.2d 443, 450 (7th Cir. 1934), aff'd 294 US.

648 (1935), that power may not be exercised on the basis

of geography.

I cannot accept the notion that only those debtors not

affected by the statute can have standing to challenge the

lack of geographical uniformity. In my view, every rail- :

road subject to the statute has standing to make that chal- :

lenge, and so do creditors of such railroads. The Penn

Central interests are not complaining that the Act is val-

idly applied to others and not to Penn Central; the con-

tention is that an invalid, non-uniform statute is being

applied to Penn Central.

behg Ra Nioieuirteiat ee

Neither do I accept the government defendants’ argu-

ment that the statute is in fact uniform because all Class

I railroads now in reorganization are located in the region

defined in the statute. The statute is not limited to Class

I railroads, and it is not, apparently, limited to railroads

er were in reorganization on the effective date of the

Act. °

But I do find it possible to uphold the statute as an

exercise of Congress’ powers under the commerce clause.

The essential features of an exercise of the bankruptcy

power are that it deals with adjustment of the respective

rights of embarrassed debtors and their creditors, and that

impairment of the obligation of contracts is permissible.

Continental Illinois Bank & Trust Co. y. Chicago, Rock

Island & Pacific Ry. Co., 294 U.S. 648 (1935); Hanover

National Bank v. Moyses, supra. Stated otherwise, recourse

to the bankruptcy clause to justify Congressional action

is necessary only if that action impairs the obligation of

contracts.

For the most part, the statute under discussion adds

nothing, in that respect, to the powers already granted

to reorganization courts under the geographically uniform

and admittedly valid provisions of 877 of the Bankruptcy

Act. To some extent, those powers are transferred to the

Special Court, but this is surely permissible under Arti-

cle III of the Constitution. The ultimate dispositions of

the respective rights of debtors and creditors are to be

made under 877. Authority to order conveyances free

3 By implication, it appears that the siatute could not affect

a railroad unless it was in reorganization on January 2, 1974, or

entered reorganization within 180 days thereafter. Whether there .

are any railroads in the latter category does not appear.

“3

‘ 4

;

Pid

FE at

OTE LEN, IOI IS NINN RT” PERE aE

EME ARLINE SEL LONI AL Et

and clear of liens, and to “cram down” a plan of reor-

ganization, already exists under 877, and is not newly

created or added by the 1973 Act.

Therefore, in my view, since the principal provisions

of the 1973 Act which depend upon the bankruptcy

power for their validity are merely repetitive of similar

provisions in existing, valid, laws, the statute as a whole

does not violate Article I, Section 8, Clause 4 of the Con-

stitution.

There is, however, one provision of the Act which is

clearly an exercise of Congressional power derived solely

from the bankruptcy clause, and which cannot be found

in existing, uniform, legislation. I refer to the provisions

of §207(b) which mandate dismissal of the 877 proceed-

ing if the procedures of the Act are rejected. At first

blush, this might seem relatively innocuous: Since the

particular debtors have been found to be incapable of re-

organizing “on an income basis” under 877, dismissal of

the 877 proceeding might be thought to follow as a mat-

ter of course.

But ‘a 877 proceeding may properly lead to results other

than a “normal” income-based reorganization of a railroad

as a railroad. The New Haven Inclusion case, 399 US.

392 (1970), stands as a prime example of a type of reor-

ganization designed to produce permanent withdrawal of

the debtor from common carrier operations. There, the

4 As discussed in Part IV, infra, the RRRA does sharply alter

the procedural, and perhaps substantive, foundation upon which

these existing bankruptcy powers have traditionally been exercised.

Although the question is a close one, I have concluded that these

departures are not necessarily a sufficient basis for inealifating the

entire Act on uniformity grounds.

rail assets were disposed of, with a view toward reorganiz-

ing the enterprise as an investment holding company.

The plan of reorganization was approved by the ICC, the

reorganization court, and the Supreme Court.

It thus appears that 877 can be used to produce a form

of liquidation, at least where the plan contemplates that

the bulk of the rail properties will continue to be oper-

ated as a railroad by someone. The provisions of 8207

(b) of the Act seem to preclude that kind of recourse to

877. Since this partial repeal of 877 of the Bankruptcy

Act applies only to debtors in the geographical region

specified in the statute, and since that feature of the Act

is plainly a law “on the subject of bankruptcy,” I am

forced to conclude that the Act is, in that one respect,

violative of Article I, Section 8, Clause 4 of the Consti-

tution. Indeed, it seems probable that that same portion

of $207(b) is vulnerable on due process and equal protec-

tion grounds, and perhaps on the ground of separation of

powers as. well.

III. Underlying Principles and Background

In order to evaluate the constitutional permissibility of

interim erosion in light of the constitutional adequacy of

the end result, it is helpful to review briefly the legal

theories underlying the reorganization provisions of the

Bankruptcy Act, and their application to the Penn Cen-

' tral proceedings apart from, and in relation to, the RRRA

itself.

Reorganization of financially embarrassed debtors pur-

suant to a plan that is feasible, fair and equitable is bene-

ficial to both public and private interests. Underlying the

—*

reorganization process is the simple economic fact that

the intangible values inherent in a going concern will be

lost if individual creditors are completely free to exercise

their rights to foreclose on the physical assets of the en-

terprise. ‘i

“One of the purposes of 877B was to avoid

the consequences to the debtor and credi-

tors of foreclosure, liquidation and forced

sales with their deflationary effects.” Case

v. Los Angeles Lumber Products, 308 U.S.

106, 124 (1939) (Douglas, J.)°

See also R.F.C. v. Denver & Rio Grande Western R.R. Co.,

328 U.S. 495, 508 (1945). If the reduction in values as-

sociated with forced sales can be avoided, and going con-

cern values wholly or partially preserved, many junior in-

terests which would have been wiped out by liquidation

(junior secured, unsecured and equity interests) may par-

‘ticipate in the plan. See generally, Blum, The Law and

Language of Corporate Reorganization, 17 Univ. of Chi-

cago L.R. 565 (1950). The m dit of exchange is, of

course, new corporate securities Of he surviving entity.

Allocation of the new securities poses both practical

and theoretical problems. The theoretical difficulty in-

volves the method of recognizing the respective priorities

of the various claimants. Section 77(e)(1) is the pertinent

statutory provision:

5 $77B was a general corporate reorganization statute enacted in

1934, one year after $77, but superseded in 1938 by Chapter X of

the Chandler Act. .

}

RE WEE NNER IEEE ie MA RO rs

“The judge shall approve the plan if satis-

fied that: (1) It complies with the provisions

of subsection (b) of this section [77], is fair

and equitable, affords due recognition to the

rights of each class of creditors and stockhold-

ers, does not discriminate unfairly in favor of

any class of creditors or stockholders, and will

conform to the requirements of the law of the

land regarding the participation of the various

Classes of creditors and stockholders.”

As Mr. Justice Douglas observed, in Case v. Los Angeles

Lumber Products, supra:

“The words ‘fair and equitable’ . . . are words

of art which, prior to the advent of 877B had

acquired a fixed meaning through judicial in-

terpretation in the field of equity receivership

reorganization.”” 308 U.S. at 115.

The substance of the fair and equitable test is derived

from Northern Pacific Ry. v. Boyd, 228 U.S. 482 (1913),

in which the Supreme Court established what has become

known as the absolute priority rule. Simply put, the ab-

solute priority rule requires that “once a hierarchy of in-

terest is established, each class must receive 100% satisfac-

tion before the next lower class may participate at all.”

Friendly & Tondel, The Relative Treatment of Securities -

in Railroad Reorganizations under $77, 7 Law & Contem-

porary Problems 420, 423 (1940). Yet, claims may be

satisfied in whole or in part by securities of a character

inferior to those originally owned by the claimant, so long

as junior claimants are not permitted to participate unless

and until the senior claimants receive under the plan the

equitable equivalent to their entire panoply of rights un- ©

der their original debt instruments. Consolidated Rock

2Apee,

RYMAN.

Products v. DuBois, 312 U.S. 510 (1941); Ecker v. West-

ern Pacific R.R. Corp., 318 U.S. 448 (1943); Group of

Institutional Investors v. Chicago, Minneapolis, St. Paul &

Pacific RR. Co., 318 U.S. 523 (1943).

Basic to the application of the absolute priority rule is

the valuation of the enterprise and the determination of

value of the security underlying purportedly secured claims.

Both 877(e) and the Supreme Court’s pronouncements in

the Consolidated Rock Products, Ecker, and Institutional

Investors cases require that earning power or income-

generating capacity of the debtor be the measure of a

railroad’s value. Once the earning power has been estab-

lished, the aggregate capitalization of the new capital struc-

ture is derived from the earning power. Although 877

does not contain an explicit requirement that the: reorgan-

ization plan be feasible (in the sense that the new capi-

tal structure is such that a viable entity will survive the —

reorganization process), the Interstate Commerce Commis-

sion’s duty under §77(d) to formulate a plan that is in

tle public interest has been read to include this require-

ment. Group of Institutional Investors v. Chicago, Min-

neapolis, St. Paul & Pacific R.R. Co., 318 U.S. 523, 544-

45 (1943).

Congress has invested the judiciary with powerful tools

for the effectuation of 877 reorganizations. Preservation

of the status quo can be insured by the prudent exercise

of the stay provisions of 877(j). Trustees’ certificates hav-

ing priority over secured debt may be issued pursuant to

$77(c)(3) to obtain interim working capital. Executory

contracts may be rejected by the trustee or in the plan

of reorganization 877(b). Rail and non-rail properties may

be sold free and clear of liens under 877(0) (subject to

the limitation imposed in this Circuit by Jn re Penn Central

samara sete . chenbenin, .Paammes ‘ 4 4

enidineession Co., 458 F.2d 1030 (3d Cir. 1973)). Under

certain circumstances, funds held subject to the liens of mort-

gage indentures may be used for working capital or addi-

tions and betterments to the plant, Central R_R. of New

Jersey v. Manufacturers Hanover Trust Co., 421 F.2d 604

(3d Cir. 1970); In re Third Avenue. Transit Co., 198 F.2d

703 (2d Cir. 1952). And notwithstaiiding lack of majority

support, an approved plan may be confirmed under the

cram-down provision of §77(e), RFC. v. Denver & Rio

Grande Western R.R. Co., 328 U.S. 495 (1946). More-

over, the expertise of the Interstate Commerce Commis-

sion is made an integral part of a 877 reorganization proc-

ess by the assignment to the Commission of the task of

formulating the plan, ascertaining the values of railroad

propers;’, and evaluating the public interest aspects of the

proposed uses of a 877 debtor’s transportation property.

The reorganization process fosters the public interest as

well as the private interests of owners and creditors. The

economic inefficiency of dismantling a potentially produc-

tive enterprise is avoided, and investor confidence is re-

stored. Moreover, 877 is designed to promote the public

interest in preservation of a sound rail transportation sys-

tein. Continental Illinois Bank & Trust Co. v. Chicago,

Rocr: Island & Pacific Ry. Co., 294 U.S. vise 676 hide

The Regional Rail Reorganization Act of 1973 repre-

sents the Congressional response to the unfortunate fact

| that the processes and concepts of 877 outlined above

j proved inadequate to deal with the current plight of rail-

i roads in the Northeast. Section 77 is adequate only when

a railroad’s revenues are, or can reasonably be predicted

to be, in excess of operating expenses. P

Historically, railroad reorganizations have been precipi-

tated by the circumstances that fixed charges were unreal-

istically high in relation to long-term eaming capacity.

The solution was to scale down and stretch out the debt

Structure so that fixed charges could: be met from-net op-

erating revenues without exhausting those revenues.

Penn Central and most of the other bankrupt northeast-

ern carriers do not generate net operating revenues, but in-

- cur large operating deficits. They cannot achieve reorgani-

zation’ on an income basis under 877.

As a matter of simple maximization of values, if there

is no “going concern” value in the usual sense, there is no

justification for continuing a reorganization proceeding,®

the substitution of the Interstate Commerce Commission’s valuation

procedures for the foreclosure sale of the equity receivership as the

mechanism for determining who has an interest in the debtor’s estate.

See generally S.E.C., Report on the Study and Investigation of the

Work, Activities, Personnel and Functions of Protective and Reor-

ganization Committees, Part VIII (1940). But clearly, the $77(e)

procedures are assumed to result in a valuation in excess of that

which would be obtained by the foreclosure sale. As-Mr. Justice

Douglas observed in R.F.C. v. Denver & Rio Grande Western R.R. Co.,

328 U.S. 495, 509 (1946):

“Liquidation in depression periods meant that large

portions of debts, as well as stock interests in the

properties, would be irretrievably lost to the hold-

ers, while reorganization on a: capitalization that

estimated what normal income would support

meant the salvage of sound values. We see no

more constitutional impediment to the elimination

of claims against railroad debtors by the Interstate

Commerce Commission’s determination of values,

; : (Cont’d)

SOPOT ELE ELIAS IE Ieee hi ad re a Ont Oe oe OP aT OS I Oe

NE TE Se

unless either or both of the following conditions are estab-

lished: (1) a reasonable Prospect that, because of stream-

lining, consolidations, and other changes in circumstances,

earning power and profitability can be restored; or (2) a

reasonable prospect that the public need for preserving

the debtor’s railroad is such that it will be appropriated

for public use, and that the values inherent in its assem-

blage as an operating railroad will be recognized and paid

for. Cf. Port Authority Trans, Hudson Corp. v. Hudson

Rapid Tubes, 20 N.Y. 2d 457, 231 N.E. 734, cert. de-

nied 309 U.S. 1002 (1967).

If Penn Central were not a railroad and were being re-

organized under Chapter X, presumably a liquidating plan

of reorganization would be pursued, 6A Collier 4 10.02,

at pp. 421-23, or the proceeding would be converted to

a straight bankruptcy proceeding or dismissed under $236

of the Act. But railroad corporations are not eligible for

relief under the straight bankruptcy provisions. Section

77(g) does permit dismissal of the case, but the implica-

_ tions of such a dismissal are not clear. Presumably, such

a dismissal would be immediately followed «by an equity

receivership and the relatively cumbersome and unsatisfac-

tory liquidation measures available in such a proceeding.

As discussed in Part II of this Opinion, a plan of reor-

ganization providing for the partial or total liquidation of

a §77 debtor’s rail assets might-well be accomplished un-

der 877. The language of 877(b)(5) provides that:

(Footnote 6 cont’d)

with judicial review as to the sufficiency of the

evidence and compliance with statutory standards,

than we do to their elimination by an accepted

bid in a depression market.”

, ~

RRS ortereene tec conten cote ran np seep me

| AEE LAME IIT

BAL eo ge

Lalita sip TAI ay EC AY

Sp ithe eee We as etait BY

72 ’

;

“{The plan may provide for] the sale of all

or any part of the property of the debtor

either subject to or free from any lien at

not less than the fair upset price.”

The New Haven plan can be characterized as a liquidat-

ing type of reorganization plan. However, in its October

1973 report to the Penn Central reorganization court (Doc-

ument No. 6336), the ICC expressed the view that such a

liquidation could not be regarded as a plan of reorganiza-

tion under 877, apparently on the basis of a perceived dif-

ference in the degree of assurance of continued operation

of the railroad by someone.

It is against this background, and in light of the accrued

and continuing post-reorganization losses summarized in

Judge Aldisert’s Opinion, that the provisions of the Act

are to be considered. .

IV. Analysis of the Pertinent Provisions

of the Statute

It is desirable at the outset to atterhpt to- characterize

the Act in terms of some familiar legal model or category.

To the extent that the statute can thus be labeled, e.g., as

a reorganization statute or as an eminent domain statute,

the constitutional implications emerge with reasonable clar-

ity. Unfortunately, the Act does not fit comfortably into

any familiar category. : aS

From the terminology employed in the statute, and much

of the legislative history, it would appear that a reorganiza-

tion-type statute was intended. But on the basis of its to-

tal impact, such a characterization is somewhat misleading.

Perhaps the best description of the essential character of

the statute appears in $207(b):

“Each United States district court or other

court having jurisdiction over a railroad in

reorganization shall decide whether or not

such railroad shall be reorganized by means

of transferring some of its rail properties

to the Corporation pursuant to the provi-

sions of this Act.”

bs Ratt)

It bears emphasis that the Act does not affect the reor-

ganization process of 877 directly. Upon completion of

all of the procedures contemplated by the Act, it will

still be necessary for the parties to the Penn Central pro-

ceeding to complete the process of adjustment of credi-

tors’ claims, and of proposing, processing and consummat-

ing a plan of reorganization that is fair and equitable in

accordance with the requirements of 877. What the Act

does is provide a mechanism for consummating, insofar as

the Debtor’s rail assets are concerned, what would be in

effect a liquidating reorganization plan, if the properties

are transferred to Conrail (and perhaps other solvent rail-

roads) pursuant to the Final System Plan. In connection

with such a partial liquidation scheme, the 877 role of

the Interstate Commerce Commission is largely eliminated,

as is participation and voting by creditors. Essentially,

the Act provides a buyer for some or all of the Debtor’s

rail properties, an expedited mechanism for terminating

rail services over the balance of the Debtor’s properties,

and expedited procedures for achieving the transfer and

sale.

5 SEIN INA OM AOI AER YL, Pe sete ERM

Thus, the Act can be viewed as a reorganization stat-

ute in the se1se that it provides for disposal of some or

all of the Debtor’s rail properties in a manner analogous :

to dispositions authorized by §77(0) of the Bankruptcy =

Act during the course of a reorganization and outside a .

ot ae eae

reorganization plan, or pursuant to §77(b)(S) of the Bank-

ruptcy Act as part of a reorganization plan. The obvious

difference, however, is that under 877(0) a sale must be

found to be “in the interest of the debtor’s estate and of

ultimate reorganization” and the price must be adequate,

and under 877(b)(5) the sale price must be at least equal

to a fair upset price established by the reorganization court.

It is noteworthy that, in the New Haven Inclusion case,

supra, the reorganization court viewed the conveyance of

the New Haven’s properties to Penn Central as having been

made pursuant to 877(b)(5). Although the full price was

not to be finally ascertained until after the conveyance,

a minimum price had been established before the convey-

ance, and the parties were all willing to leave the final

price open for further litigation.

The New Haven Inclusion case is particularly instructive

in another respect: There, a substantial part of the pur-

chase price was to be paid in the form of Penn Central

stock. In order to insure that the New Haven interests

would receive the actual value of the assets conveyed,

Judge Anderson.imposed an underwriting provision which

in effect required a guarantee that the stock. would regain

its previous market value of $87.50 per share at some

time during a ten-year period following the conveyance.

The Supreme Court expressly approved that feature of

the transaction, as of the date of the district court’s de-

cision, but since Penn Central had entered reorganization

shortly before the Supreme Court decided the case, the

Court remanded for further proceedings, stating:

7 In re New York, New Haven & Hartford R.R. Co., 314 F. Supp.

793, 808 (D. Conn. 1969).

ete EOE REN ER ETERS BET RT

SPREE WAT Soir

—

2 “g

~e™gain, this is only a surface similarity. The Act

The fairness and equity that are the essence

- of a 877 proceeding forbid our approval of

a payment for the transferred New Haven

properties that may be worth only a frac-

The de+ion of its purported value... .” 399 US.

mean tlt 488-89.

conside

in some¢ision of the Supreme Court can be fairly read to

It jg 2at, if shares of stock are to constitute part of the

is quite’tion for a sale under 877(b)(5), the issuer must

ered as’ Manner underwrite the value of the stock.

isa, apparent that the approach represented by the Act

oad different from what has heretofore been consid-

ont’ within the ambit of 877(0) or 877(b)(5). Fhe———

aie transaction is initiated by Congress and is to be

all) ented through USRA and Conrail. The value of

stock is to be determined after the conveyance,

At fi railroad must accept the risks of fluctuations in

proach. price (assuming that the stock is marketable at

in the §

suant tc

cured cfSt blush, there is some similarity between the ap-

to relinof the Act, and the treatment accorded claimants

ties of i77 proceeding under a plan of. reorganization. Pur-

subject » such a plan of reorganization, secured and ‘unse-

877(€) Geditors, as well as stockholders, may be required

isfied Wyuish their property rights in. exchange for securi-

are disclnferior character. Such exchanges are, of course,

- But at the absolute priority rule and the standards of

does noONcerning valuation. Claims which cannot be sat-

ithin the framework of the new capital structure

larged.

t operate at the claimant-debtor level, but involves

SELLS SAL RCS Hy OA PES BALA BEDS ae eos: |

SMe PMN Baie

3 Pa a Se eee einen ieee

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the debtor and Conrail. The Conrail securities are to be

issued to the debtor, not to its creditors. The valuation

of the creditors’ security and their treatment under the

plan would not be contemporaneous, or, perhaps, even re-

lated. While an eventual reorganization plan for the rail-

road might provide for a direct pass-through of Conrail

securities to the creditors whose claims were secured by

properties taken by Conrail, that would not be a neces-

sary result. Moreover, the voting rights of Conrail stock-

holders would be so limited that they would have no voice

in management of the enterprise, 8301(d), and, apparently,

the stock would be ineligible for listing on the major ex-

changes.® Thus, it is clear that the Act does not fit com-

fortably within any existing procedure or mechanism under

the Bankruptcy Act.

Finally, it is of course clear that the approach of the

Act does not fit an eminent domain model. It does not

8 In REC. v. Denver & Rio Grande Westem R.R. Co., supra,

the Supreme Court affirmed ‘the district court’s confirmation and

cram down of a plan on a group of junior secured creditors. In

reviewing the dissenter’s contention that the original valuation by

the Interstate Commerce Commission was too low and that, in any

event, subsequent events demonstrated the valuation was too low,

the Court stated that “the unlimited dividends that might be earned

and paid on the common stock in ‘lush years,?” 328 US. at 518,

and the large amount of cash on hand were “gart of the compen-

sation to senior claimants for their loss of tion,” 328 US. 522.

Moreover, the bondholders obtained some control of the corpora-

_ tion by receiving common stock. While the earnings at the time

of the challenge to the plan were substantially in excess of that

envisioned by the Interstate Commerce Commission, the Court ap-

proved the capital structure based on the earning power, in part,

on the theory that the loss of the senior claimants: secured posi-

tion justified receipt of stock which had the possibility of paying

substantial dividends. |

2 Teves § Hoa te ae

BR DDD AY a Rl OS A EAE ATR PDS LAP DEI SENG ELAS i, ole BO

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provide for payment in cash, payment is not assured in

advance of the conveyance, and there is a limit upon the

amount of the consideration.

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There are, however, at least partial resemblances to a

condémnation approach. The conveyances are not volun-

tary, on the part of eithet the purchaser or the seller.

Conrail, although purportedly a private corporation, has

no choice in the matter. The only element of choice,

insofar as the railroad is concerned, is the limited choice

afforded in connection with the 8207(b) findings, and

these are choices of the courts, not of the railroad or its

creditors. From the standpoint of the seller-railroad, there

is no assurance that the price will ever actually be realized.

If the value of Conrail’s stoci:, plus whatever portion of

the $500 million in USRA bonds are included in the con-

sideration mix, is less than the “‘constitutional minimum”

value to which the railroad is entitled, the Special Court

can enter a deficiency judgment against Conrail. But it

seems rather obvious that if the value of Conrail’s stock

is inadequate, a judgment against that same equity would

add nothing, and would be essentially circuitous.

From the standpoint of Conrail, on the other hand, the ?

fact that the price may be fixed at a level greater than

the value produced by capitalizing the projected earnings

of the new venture? is a significant departure from the

normal concept of a private sale. For a private purchaser

would not ordinarily be expected to pay more for a busi-:

ness enterprise than its capitalized earnings.

To summarize, the RRRA represents an amalgam of

sale, reorganization, and eminent domain concepts. Im-

plementation of the Final System Plan would produce

9 See note 6, supra.

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transactions akin to sal2s under 877(0) or 877(b)(5) of the

Bankruptcy Act, but without the safeguards of participa-

tion by the parties or advance judicial scrutiny; sales in

which the price would be paid in a form somewhat like

that encountered in a plan of reorganization. The transac-

tions would somewhat resemble a reorganization in which ~

the “cram down” decision is made by Congress, or at least

virtually compelled by Congress, in advance of formulation

of the plan. And the plain purpose of the entire arrange-

ment would be to insure the continued availability of these

rail properties for use in meeting the public need for con-

tinued rail service, without regard to the wishes of the

present owners of the properties.

The novelty-of the statutory approach does not, of

course, establish its unconstitutionality. In dealing with

problems of this importance and complexity, it is under-

standable that Congress should attempt to apply whatever

legal concepts might prove useful. But merely because it

cain be constitutionally permissible under some circum-

stances to compel creditors in a reorganization plan to be

satisfied with stock in the new enterprise, it does not fol-

low that that result is always permissible. Presumably,

the Fifth Amendment is equally applicable to bankrupts

and non-bankrupts. Thus, if the compulsory character

and public purpose of the Act compel the conclusion that

the Act constitutes an exercise of the eminent domain

power, albeit a slightly indirect one, the use of stock as

the compensation medium is extremely suspect. See,

Nicholas, Eminent Demain 48.2 (3d rev. ed. 1970) and

cases cited therein. Similarly, at least until now, a deci-

sion that a stock distribution was fair and equitable has

always required contemporaneous comparisons between

the value of the creditors’ and stockholders’ claims and

the value of the stock, a weighing of entrepreneurial risks

RAKES PITT AA gM ASS AE LTE mE ed HTM

aon eee

against the prospects for growth. And merely because it

is constitutionally permissible for a reorganization court

to authorize sales of assets free and clear of liens, it does

not follow that such sales may be approved without knowledge

of the purchase price, and without a simultaneous transfer

of existing liens to proceeds having value equivalent to the

assets conveyed. And, of course, the magnitude of the

public interest in continued rail service cannot justify treat-

ing these rail properties as if they were already public

property.

It is apparent that the determination by the Special

Court as to what constitutes the “constitutional minimum”

price for the transferred properties is crucial to the imple-

mentation of the statute. That issue, as such, is not be-

fore this Court and I intimate no view on the merits. But

it is important to note that, no matter how that issue may

ultimately be resolved by the Special Court, the present,

immediate, constitutional obstacle would remain. There

is no assurance that the price fixed by the Special Court

can be paid, under the statutory scheme.

Under any view of the Act, there is at least a distinct

possibility that application of the deficiency judgment me-

chanism will be required; and, as set forth above, that is

an obviously inadequate remedy. It must be assumed that

USRA will strive diligently to comply with the Congres-

sional directive to design both “‘a financially self-sustaining

rail service system” and a “rail service system adequate to

meet the rail transportation needs and service requirements

of the region.” At present, no one knows whether these

somewhat inconsistent goals can be achieved. Congress it-

self has recognized the uncertainty, by retaining the right

to review the plan before it becomes effective. And

of course, even if the Final Plan is designed to show

NON ES ea RR lis

profitability on the basis of pro forma projections, there

can be no assurance that actual results will live up to the

forecasts.

The point is, not that these uncertainties can or should

be eliminated, but that all risks — of the possibility of de-

signing a profitable system, of ultimate profitability, and

of interim losses while the hypotheses are explored — are

imposed upon the debtors and their creditors, who are to

be irretrievably committed to the project in advance, no

matter how it works out.

As discussed in Part I of this Opinion, I agree with the

majority that we need not reach all of the constitutional

implications of the transfer provisions of the RRRA. Spe-

cifically, we. need not now determine whether or not those

transfer provisions amount to an exercise of the power of

eminent domain. But it is impossible to avoid the conclu-

sion that, before the burden of further interim erosion can

constitutionally be imposed upon the railroad and its cred-

itors, there must be greater assurance of a constitutionally

acceptable end result than is provided by this statute.

V. The Tucker Act Remedy

For the reasons. so well stated in the majority Opinion,

I agree that Congress did not intend to™provide for any

compensation to the railroads or their creditors for in-

terim erosion other than that specified in the Act. Whether

this would necessarily preclude a later resort to the Court

of Claims on a constitutional. theory I deem it unnecessary

to decide. I note, however, that the argument of the gov-

ernment defendants in support of such a potential remedy

seems to amount to an assertion that governmental immu-

nity is itself constitutionally suspect.

pe .

EP Raed el ts BSS BSG NE NG SOL WS SOG ENS BS OSS oN EI eae

For present purposes, it suffices to state that the avail-

ability of a Tucker Act remedy is not now sufficiently

assured to justify denial of relief in the present litigation.

Moreover, the adequacy of any such putative remedy, if

it exists, seems highly questionable. I find it difficult to

characterize as due process of law the notion that further

interim erosion can be justified because, if the lengthy

and complex procedures of the Act do. not produce a

constitutionally permissible result, the parties may then

start over again in the Court of Claims. The rights of

the secured creditors of the New Haven, for example,

have already been held in suspension for more than ten

years.

ROGER EPI hanna eon

I concur in the result reached by the majority. I am

authorized to state that Judge Bechtle joins in Part II of

the foregoing Opinion.

/s/ John P. Fullam-

tie

TLE I II TG MEE SM re gS

oe MS ee

m 82

ORDER

“AND NOW, this 25th day of June, 1974, for the rea-

sons set forth in the foregoing opinions, it is ORDERED:

1. That the defendant, United States Railway. Associ-

ation, is enjoined from certifying a Final System Plan to

the Special Court pursuant to Section 209(c) of the Re-

gional Rail Reorganization Act of 1973.

2. That the defendants are enjoined from taking any

action to enforce the provisions of Section 304(f) of the

Regional Rail Reorganization Act of 1973, with respect

to any abandonment, cessation, or reduction of service

which has been or may hereafter be determined by a

court of competent jurisdiction to be necessary for the

preservation of rights guaranteed by the United States

Constitution.

3. That all parties are enjoined from enforcing, or tak-

ing any action to implement, so much of Section 207(b)

of the Regional Rail Reorganization Act of 1973 as pur-

ports to require dismissal of pending proceedings for re-

organization under Section 77 of the Bankruptcy Act.

4. That a declaratory judgment be entered, declaring-__-

a. That Section 303 of the Regional Rail Reorgan-

ization Act of 1973 is null and void as contravening the

Fifth Amendment of the United States Constitution inso-

far as it fails to provide compensation for interim erosion

pending final implementation of the Final System Plan

pursuant to the statute.

b. That Section 304(f) of the Regional Rail Reor-

ganization Act of 1973 is null and void as violative of the

Fifth Amendment of the United States Constitution, to the |

& FELON RTE SMI ROB LRT RRO: UDALL LIE IIS § te NMRA REY FAL DS ea COLE ANS ‘ -

WA MIR SIRI E LIMIT Mihi eR RE TON Ne ANS A MCN

extent that it would require continued operation of rail

services at a loss in violation of the constitutional rights

of the owners and creditors of a railroad.

c. That so much of Section 207(b) of the Regional

Rail Reorganization Act of 1973 as requires reorganization

courts to dismiss pending proceedings under Section 77

of the Bankruptcy Act under the circumstances set forth

in said Section 207(b) is null and void, as violative of

Article I, Section 8, Clause 4 of the Constitution of the

United States.

5. That the respective motions of the plaintiffs for

partial summary judgment are granted in-part, as set forth

above, and in all other respects are denied.

6. That the defendants’ motions for summary judgment

are denied.

/s/ Ruggero J. Aldisert

Ruggero J. Aldisert

/s/ John P. Fullam

John P. Fullam

/s/_ Louis C. Bechtle, J.

Louis C. Bechtle, J.

ear 7) TEPER a Beier eae, ¢ THEY keane rl

TED SEER PRS es Sere te |

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84 , ne

' IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

[caption omitted in printing]

MEMORANDUM AND ORDER NO. 1543,

and FINDINGS PURSUANT TO THE FIRST

SENTENCE OF §207(b) of the Regional Rail

Reorganization Act of 1973 |

FULLAM, J. May 2, 1974

Section 207(b) of the Regional Rail Reorganization Act

of 1973 (hereinafter the “Act’’), provides:

“Within 120 days after the date of enactment

of this.Act, each United States District Court or

other court having jurisdiction over a railroad in

reorganization shall decide whether the railroad

is reorganizable on an income basis within 4 rea-

sonable time under 877 of the Bankruptcy Act

(11 U.S.C. §205) and that the public interest

would be better served by continuing the pres-

ent reorganization proceedings than by a reor-

ganization under this Act... .”

Ahe Debtor is a “railroad in reorganization” as defined in

the Act. The statute became effective January 2, 1974,

which means that the decision as to reorganizability is to

be made not later than May 2, .1974.

By Order No. 1426, this Court directed that a hearing

be held on March 25, 1974, in relation to the decision

required by the quoted language of the statute, and in-

vited all interested parties, at stated times in advance of

the hearing, to specify and brief the legal and factual

WS. ee tee) Ny P PRLS T, SO OE AD Ll SPEDE ELLEN) | DOE PTTL ND ER MLN HO OTT Spat

issues they deemed relevant to the required determination.

In response to this invitation, a wide range of questions

have been briefed and presented, but in view of the fact-

ual record developed at the hearing, not all of these is-

sues need now be discussed.

I. Jurisdictional and Other Preliminary Issues

It is necessary to note at the outset that the constitu-

tionality of the Act is being challenged on a variety of

grounds in other litigation now pending in this District -

and elsewhere.! Many of the same constitutional issues ,

have been raised in the present proceeding. For the most

part, they will not now be considered. Apart from the

. question of whether this Court should attempt to avoid

deciding the constitutional issues, in deference to the three-

judge proceedings, it would seem that these issues can and

should be deferred for consideration in connection with

the findings-contemplated by the second clause of §207

(b) (the so-called “180-day findings’’). -

The only constitutional issues which must be faced now

are those expressing a challenge to the jurisdiction of this

Court to make the findings required by §207(0).

_ The findings contemplated by the first sentence of §207

(b), the so-called ‘“‘120-day” findings, embrace two areas

1 The two cases originally filed in this District are Connecticut

General Insurance Corp., et al. v. United_States Railway Association,

et al., Civil Action No. 74-189, and Manufacturers Hanover Trust

Co. v. United States Railway Association, et al., Civil Action No.

74-332. In both cases, a three-judge court (of which ihe writer is

one member) has been convened, pursuant to 28 U.S.C. 82284. Docu-

ments filed of record in those cases suggest that similar cases pend-

ing in other districts are being transferred to this District pursuant

to 28 U.S.C. $1404.

al ’

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' 86

of inquiry: (1) whether the Debtor “is reorganizable on

an income basis within a reasonable time under §77. . .”

and (2) “[whether] the public interest would be better

served by continuing the present proceedings than by re-

organization under this Act ....” The New Haven Trus-

tee contends that this Court lacks power to make findings

on either subject because there is no “case or controversy”

before the Court; and further argues that making findings

with regard to “the public interest” is not a judicial func-

tion and cannot be delegated to a court, at least in the

absence of adequately defined standards.

A. “Case or Controversy”

I have concluded that a finding on the issue of reor-

ganizability may properly be made by un Article III court.

The reorganization proceeding itself is the “case or con-

troversy”’ which justifies judicial action. While there might

perhaps be some question as to the validity of legislative

intrusion into specific pending litigation by fixing dead-

lines for decision of particular issues (a question which

has not been raised in the present proceeding, and as to

_ which I intimate no view), it is entirely clear that a court

may prorerly comply with such deadlines; its preexisting

jurisdiction would not be impaired.

It is true that the Act does not prescribe procedural

machinery for making the required findings in an adver-

sary setting: there is no petitioner or respondent; indeed,

the Act does not even mandate a hearing. But there is

no requirement tiat the norms of procedural due process

must be disregarded, and they have not been. All par-

ties have been afforded ample opportunity to be heard.

It is also true that the statute provides little or no guid-

ance on the question of the proper allocation of the bur-

den of proof; but that shortcoming is not, in my view,

jurisdictionai. , el

In short, there appears to be no valid reason for reach-

ing any conclusion other than the obvious one, namely,

that a reorganization court does have jurisdiction to make

findings concerning reorganizability of the Debtor.

B. Public Interest

The principal thrust of the New Haven Trustee’s juris-

dictional argument is that a determination as to whether

the public interest would be better served by continuing

the 877 proceeding or by proceeding pursuant to the 1973

Act is essentially legislative in character, and cannot be

delegated to an Article III court. The government and

other parties counter with the argument that the Act it-

self adequately discloses what Congress intended to de-

fine as the public interest, and that all that is required

is performance of the normal judicial function of fact-

finding. .

Unless there is a finding that the Debtor is reorganizable

under 877, there is no necessity for making a public in-

terest comparison under §207(b). Since I have reached

the conclusion that the Debtor is not reorganizable, there

is no present necessity for resolving the second phase of

the jurisdictional argument.

II. Definition of ‘‘Reorganizable on ai: Income

Basis Within a Reasonable Time un:': §77 of

the Bankruptcy Act”

The parties are not in complete agreement as to whether

the standards for determining reorganizabi!ity under the

Act are different from, or identical to, the standards of

Hew Ree eT

Bhp ie Ep ts AGREED

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AMALIE CGI TS OEM

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“~ en ne a eee en eee

877. More importantly, there is lack of agreement as to

what constitutes a valid plan of reorganization under 877.

For example, the New Haven Inclusion Ges 399 US.

392-(1970) recognized as valid a plan of reorganization

in which “the Debtor would first dispose of its rail opera-

tions and then reorganize as a holding company. But

when the Penn Central Trustees filed a erwnnt simi-

lar plan, the ICC purported to hold that it) would not

constitute a plan’ of reorganization under §'77. While this

ruling does not, of course, represent the final word on

the subject, it serves to point up the potential for con-

flicting views.

I find it unnecessary to resolve this doctrinal dispute

» at the present time. For it is at least clear that in adopt-

ing the 1973 Act, Congress was attempting to deal only

with the rail assets of railroads im reorganization, and that,

for purposes of §207(b) only a reorganization of those

rail assets, pursuant to a plan involving continuation of

rail service by the Debtor, would pass muster.

Moreover, I am persuaded that reorganizability must

be determined on the assumption that the existing regu-

latory and operational setting will continue. From the

very inception of these proceedings, it has-been reason-

ably clear that, if certain conditions could. be altered, the

Debtor could be made viable. The needed changes — eli-

mination of plant redundancy, reductions in crew con-

sists, full reimbursement for passenger service, improve-

ment in rates and divisions, and, more recently, substan-

‘tial governmental financial assistance — are not within the

control of the Trustees or this Court, and have not been

realized.

The issue, then, is whether there is now any reason-

able prospect that continuation of the Debtor’s rail

operations under existing constraints will produce enough

net income, soon enough, to support adequately a realis-

tic re-capitalization of the enterprise. Applying the fami-

liar figure of speech, we are concerned with the existence

and relative intensity of the light at the end of the tun-

nel, and also with the length of the tunnel and the fur-

ther burdens involved in traversing it.

Ill. Findings of Fact

1. During the period from the filing of the Debtor’s

reorganization petition on June 21, 1970, to December

31, 1973, the Debtor’s operations have produced losses

in ordinary income, calculated in accordance with ICC

regulations (49 CFR Part 1201, 501-51) totalling $851.1 —

million.

2. The Debtor has been able to continue operations

during this period only by deferring payments of virtually

all real estate taxes, rentals of leased lines, and interest

(including mortgage and collateral trust bonds) other than

equipment obligations.

3. Non-recurring income aggregating $155.3 million

from trustees certificates, sales of real property and equip-

ment, sales of securities, and drawdowns from escrowed

funds, have been utilized to sustain operations.

4. The charts below show the ordinary losses, defer-

rals, and applications of non-recurring income on an an-

nual basis and the detail relating to non-recurring income.

Summary of Financial Results

($. in millions)

Deferred Taxes Non-

. Leased Line Recurring

Ordinary Rents and Sources

Income (Loss) Interest Oblig.* of Cash

June 21 to Dec. 31, 1970 $(179.7) $142.8

Year 1971 (284.5) 163.9 $96.6

Year 1972 (197.9) 156.1 25.0

"Year 1973 (189.0) 143.1 33.7

Total June 21, 1970 to _

December 31, 1973 $(851.1) $605.9 $155.3

*Interest on all debt obligation, secured and unsecured, is included in these figures.

**Does not include approximately $10.7 covered in Order No. 1480 dated

March 1, 1974, regarding D.O.T. and certain equipment obligations.

Detail of Non-Recurring Sources of Cash

Sources 1971 1972 1973

Trustees Certificates Drawdown. $75.0 $25.0

Tenants Tax Escrow Account 3.1

Proceeds from New Haven Property Sale 9.1

Sale of Freight Cars to PALE 7.3 *

Mortgage Trustees Drawdown-Selkirk Improvement 2.1

M.B.T.A. Settlement . $ 9.1

Proceeds from Madison Square Garden 2.4

Proceeds from Sale of Contingent Compensation 6.5

Fund “

“Agnes” Flood Loan 15.7

Total $96.6 $25.0 $33.7

5. The aggregate annual expenditures, including all road

depreciation accounts, for maintenance of way and struc-

tures by the New Haven, New York Central, and Penn-

sylvania Railroads from 1957 to 1968 and the Debtor’s

expenditures since the merger, are reflected below:

ESSE REE se, Pe rei . ll

1957 - $224.75 1966 - $179.73

1958 -- 176.47 1967 - 178.54

1959 - 176.55 1968 - 190.66

1960 - 176.43 1969. - 190.32

1961 - 163.14 - 1970 - 223.82

1962. - 171.47 1971 - 256.46

1964 - = 171.21 1973 - 2559

1965 - 172.47

6. The cost of labor and material utilized in maintenance

of way and structures has risen 113% from 1957 to 1973.

7. Expenditures for maintenance of way and structures

from 1958 until the merger, and to a lesser extent since the

merger, were inadequate to maintain the plant at the level

necessary to accommodate traffic.

8. The initial impact of deferral of maintenance of way

expenditures was on branch, side, and yard trackage. By the

mid-60’s, the deferral of maintenance began to have an im-

pact on main line trackage, and since that time the deteriora-

tion of portions of the main line has accelerated. Foregoing

preventive maintenance has created a situation in which sig-

nificant refurbishing and replacement of materials is now

necessary.

9. In 1970, slow orders had been imposed on 2,100 track

miles. By 1974, slow orders had been imposed on 8,475

track miles. 6,900 track miles within the system are not in

adequate condition to meet the minimum standard imposed

by the Federal Rail Administration for operational train

speeds of 10 miles per hour. 49 CFR 213 et seq.

10. Assuming normalized maintenance of way expendi-

tures of at least $225 to $250 million per annum, an addi-

PT eee hy at NE | ELAS ERIM ENE NGS ARLEN EDs Bree PRE I OE Dee BIB

SP IT SS Rh OO

tional $665 million in present dollars must be expended in

an eight-year period to remedy past deferrals.”

11. Poor condition of the roadway increases train time,

and thereby decreases the service capacity and revenue of

the system.

12. In order to provide an estimate of the future finan-

cial results of the Debtor’s operations, the Trustees’ traffic

consultants, Temple, Barker & Sloan, developed a forecast

of traffic and revenue for 1974 through 1978 (the forecast

period).

% 13. The main assumptions underlying the forecast are as

follows: :

a. Using 1958 as the base year, the national economy will

have an average real rate of growth of 4% per annum during

the forecast period.

b. Rail traffic growth in the eastern district will be less

than the national rail traffic growth rate. The difference be-

tween the eastern district and the national growth rate will

be less than in previous years.

daha SRNR ana ees anc nile ia ae A

c. The Debtor’s rail service will be adequate during the

forecast period to meet the reasonable expectations of its

shippers.

d. The “energy crisis” will improve the competitive posi- .

tion of railroads versus other transportation modes, and im-

2 This figure is derived from Mr. Jackman’s affidavit (Docu-

ment No. 7243) in which he estimated. an 11,000-route mile sys-

tem would require $451 million ($41,000 per route mile) and the

15,000-route mile system would require $567 million ($37,466 per

route mile) to cure past deferrals. A per-route mile cost of $35,000

is applied to an assumed 19,000-route mile system to generate the

estimate of $665 million to cure deferred maintenance throughout

the system.

| cen ek i ‘cite drape Seda

77;

prove the Debtor’s total tonnage carried and commodity mix.

e. Governmental environmental regulations will be altered

to permit utilities and industry to increase their use of coal.

f. Coal traffic will increase 31% from 1973 to 1978, with

coal traffic in 1978 comprising 31% of the Debtor’s traf-

fic as compared to 28% of the Debtor’s traffic in 1973.

g. Higher fuel costs after 1974 will be covered by im-

mediate tate surcharges or increases; or, stated another

way, the 1975-78 figures show no incremental cost for

fuel and no additional revenue from rate increases to

cover that cost.

h. Rate increases adequate to cover increased unit

costs (increased costs less saving from higher productiv-

ity) will be effective on July 1 of the year succeeding

the cost increases. °

14.. The 1973 estimated actual tonnage for the Debtor

was 276.9 million tons. A tonnage increase of 3.68% per

year over the 1973 estimated actual tonnage is predicted

as follows: ©

(millions of tons)

1974 : 282.1

1975 - 293.8

1976 - 305.3

1977 - 316.0

1978 - 327.9

15. In accord with the methed set out_below, the

traffic forecast was utilized to generate a net revenue fore-

-cast in current dollars.

a. Unit revenues derived from a model based on 1972

data with certain adjustments to reflect 1973 data were

ELLE ELIE ELD Es am

BA mB eo mes

applied to the projected tonnage in each commodity cate-

gory to generate estimated gross revenue in 1972 dollars.

b. Gross revenue was adjusted to a net revenue figure

by application of a .047 facto: to reflect revenues received

c. Net revenues in 1972 dollars were then converted

into current dollars for the forecast period by determin-

ing the increase cost due to inflation as offset by product-

ivity increases. Revenue was then adjusted in accord with

the rate increases assumptions indicated in Finding 13(h).

d. No reduction in.tonnage was made to reflect pos-

sible shipper reaction to rate increases. —

16. Revenue in current dollars is forecasted to be:

(in millions)

ij 1974 - 1,879.2

‘ 1975 - 2,069.4

1976 - —~ 2,258.2

1977 . 2,435.5

1978 - 2,637.3

17. Fifty-five percent of the increased revenue is at-

tributable to rate increases and 45% to increased traffic,

changes in commodity mix, and changes in unit revenue.

Ch Wal hai eb aR eihieiseah

18. Below is the forecasted income statement for the

Debtor premised on the traffic and revenue forecast with

certain assumptions for cost increases.

| POT. 2g. GOBBEDI OLE OLE LOS LLL OG OG IOLA DIOP LOA ODS AT. IEE IOP LEE ALE GEE IPE APY

(dollars in millions)

1974 1975 1976 1977 1978

Operating Revenues

Freight $1,879.2 $2,069.3 $2,258.2 $2,435.5 $2,637.3

All other 289.3 303.9 322.0 340.0 360.0

Total 2,168.5 2,373.2 2,580.2 2,775.5 2,997.3

Operating Costs 2,309.7 2,491.6 2,651.6 2,815.7 3,001.7

Net Rwy. Oper. Inc. (141.2) (118.4) (71.4) (40.2) (4.4)

Other Income 62.2 74.2 82.0 88.5 90.4

Misc. Deductions 21.2 20.2 20.2 20.2 20.2

Inc. Avail for Fx.Chgs (100.2) (64.4) (9.6) 28.1 65.8

Fixed Charges 137.5 131.9 126.4 124.1 122.0

Ordinary Income $ (237.7) $ (196.3) $ (136.0)$ (96.0) $ (56.2)

Average Numberof 79,325 79,325 79,325 79,325 79,325

Employees

Tons handled (Mil.) 282.1 293.8 305.3 3160 327.9

Operating Ratio (%) 82.99 81.16 79.49 78.51 77.45 |

19. The ordinary income loss for 1976, ’77 and ’78 as

shown in Finding 18 is overstated because the revenue’ pro-

jections therein utilized did not reflect rate increases| to

. cover increased fuel cost in 1977-78, whereas the operat-

ing cost projections do contain increased fuel costs. The

substantial increment in the “Other Income” account

shown in Finding 18 is attributable to yearly increases in

the proceeds of property sales ($6.7 million in 1974 com-

pared with $30 million in 1978).

20. The chert below shows the projected cash posi-

tion resulting from operations consistent with the income

statement shown 1n Finding 18.

LE LIES PLAID A SIVA EELS EN EO et SSLTSLE, RE A IAPR LF EEE TR I

A OE 18 a OB A BIO PA Ely 0

Source and Application of Funds

(dollars in millions)

Source 1974 1975 = 1976 1977, «1978

Ordinary income (Loss) $ (237.7) $(196.3) $(136.0) $ (96.0) $( 56.2)

Adjustments to Earnings:

Taxes-Accrued $8.5 60.5 . 62.5 644 66.8

-Paid (.4) (.4) (4) (4) (.4)

Interest Accrued - 108.3 102.8 97.4 95.1 93.0

Paid - (23.0) (23.9) (18.4) (16.1) (14.1)

L.L.Rts.-Accrued E 29.0 28.9 28.9 28.9 28.9

-Paid (1.0) (1.0). (1.0) (1.0) (1.0)

Depreciation ai 83 ° si2 79.3 17.4

Other ~ (12. ) _(20.0) (26.1) _ (30.7) __ (30.7)

Total Adjustments __ 244.5 _230.2 224.2 219.5 _ 219.9

. Cash from Operations 6.8 33.9 88.2 123.5 163.7

Other Sources:

Proceeds from Sale of

Salvage 15.1 16.2 17.3 18.5 19.8

Total Sources __ 21.9 _ 50.1 *_105.5 _ 142.0 183.5

Application .

Capital Program —Equip. 5.0 11.7 12.4 13.2 14.0

—Road 20.0 30.0 31.9 33.8 35.9

Debt Retirement 39.1 42.3 87.4 35.0 33.6

Amtrak 6.0 - - os “

Total Application 70.1 84.0 131.7 82.0 83.5

Net Incr. (Decr.) in Cash (48.2) (33.9) (26.2) 60.0 100.0

Beginning Cash 40.2 (8.0) (41.9) _ (68.1) (8.1)

Ending Cash (8.0) (41.9) (68.1) (8.1) 91.9

Emp. Withheld Taxes Incl.

Above 9.0 9.5 10.0 10.5 11.0

Ending Cash Avail for Oper. $ (17.0) $(51.4) $ (78.1) $ (18.6) $ 80.9

21. The cash forecast for 1974 is as follows:

(dollars in millions) ~

Month Ending Cash

Balance Available

for Operations?

March 1974 $ (8.8)

April (4.7)

May (2.0)

June 4.9

July (5.4)

August (28.4)

September (19.4)

October (22.8)

November (25.8)

December (170)

NOTE: 1. Assumes SEPTA payments in April, August and Decem-

ber of $4 million each.

2. Assumes increase AMTRAK reimbursement of $1.3 mil-

lion per month commencing May 1974.

3. Cash balances reflect approximately $10.7 million in

equipment obligations assumed by the D.O.T.

4. Does not include effect of recent F.R.A. order regarding

maintenance standards.

22. The revenue forecast and projections derived therefrom

are overstated because of the assumption that the Debtor will

be able to provide adequate service to its shippers. Findings

8-13 indicate that the physical condition of the system is not

such that the service level will meet the

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