Amicus Curiae Brief — Regional Rail Reorganization Act Cases

In THE

Court of the Anited States

OcToser Term, 1974 -§

£4-16 QQNrTED STATES OF AMERICA, ET AL., APPELLANTS, :

: CONNECTICUT GENERAL INSURANCE CORPORATION, ET AL., APPELLEES. :

4 UNITED STATES RAILWAY ASSOCIATION, APPELLANT, :

S v. :

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e CONNECTICUT GENERAL INSURANCE CORPORATION, ET AL., APPELLEES. ]

¢ :

2 ROBERT W. BLANCHETTE. RICHARD C. BOND AND JOHN H. MCARTHUR,

4 AS TRUSTEFS OF THE PROPERTY OF PENN CENTRAL

: TRANSPORTATION COMPANY, DEBTOR, APPELLANTS, :

3 v. , ‘

Es CONNECTICUT GENERAL INSURANCE CORPORATION, ET AL., APPELLEES. e

3 RICHARD JOYCE SMITH, AS TRUSTEE OF THE PROPERTY OF THE NEW YORK, :

4 NEW HAVEN AND HARTFORD RAILWAY COMPANY, DEBTOR, APPELLANT, é

5 UNITED STATES OF AMERICA, ET AL., APPELLEES. E

ON APPEAL FROM THE UNITED STATES DISTRICT COURT ;

POR THE EASTERN DISTRICT OF PENNSYLVANIA :

MOTION FOR LEAVE TO FILE BRIEF ;

AMICUS CURIAE AND BRIEF AMICUS CURIAE :

: JOHN F. DONELAN z

z JOHN K. MASER III :

ROGER K. DAVIS H

914 Washington Building i

Washington, D.C. 20005 i

Of Counsel: : : 2

Counsel for Amicus Curiae, z

a DONELAN, CLEARY The National Industrial Traffic

s AND CALDWELL League %

x 914 Washington Building &

4 Washington, D.C. 20005 §

eh THE CASILLAS PRESS, INC.-1717 K Street, N. W.—Washington, D. C.-223-1220 :

IN THE Z

Supreme Court of the United States 3

Nos. - 9 and i

UNITED STATES OF AMERICA, ET AL., APPELLANTS, :

v.

CONNECTICUT GENERAL INSURANCE CORPORATION, ET AL., APPELLEES. F

UNITED STATES RAILWAY ASSOCIATION, APPELLANT, f

v. 5

CONNECTICUT GENERAL INSURANCE CORPORATION, ET AL., APPELLEES. b

Z

ROBERT W. BLANCHETTE, RICHARD C. BOND AND JOHN H. MCARTHUR, :

AS TRUSTEFS OF THE PROPERTY OF PENN CENTRAL :

TRANSPORTATION COMPANY, DEBTOR, APPELLANTS, ;

Y, -5

E

CONNECTICUT GENERAL INSURANCE CORPORATION, ET AL., APPELLEES. f

RICHARD JOYCE SMITH, AS TRUSTEE OF THE PROPERTY OF THE NEW YORK, E

NEW HAVEN AND HARTFORD RAILWAY COMPANY, DEBTOR, APPELLANT,

v. 3

UNITED STATES OF AMERICA, ET AL., APPELLEES. ¢

ON APPEAL FROM THE UNITED STATES DISTRICT COURT a

POR THE EASTERN DISTRICT OF PENNSYLVANIA 3

MOTION FOR LEAVE TO FILE BRIEF AMICUS CURIAE F

The National Industrial Traffic League hereby respect- :

fully moves for leave to file the attached brief amicus &

curiae in the four related cases set forth above. The F

consent of attorneys for the appellees was requested but :

unanimous consent has been refused. ;

:

ls Sas ute EB, LOM LAI IED OL

2

The interest of the League arises from the fact that it

is the largest diversified shipper organization in the United

States. The members of the League operate industrial

and/or commercial enterprises — large, medium, and small

— and are substantial users of the various modes of for-

hire transportation, including transportation by railroad.

Members of the League have extensively used, and are ex-

tensively using, the transportation services of the rail car- |

riers subject to possible reorganization under the Regional

Rail Reorganization Act of 1973. Thus, the League and

its members have a direct and substantial interest in the

disposition of the instant case.

One of the key factors bearing upon the determination

of the Fifth Amendment issues in these cases is the public

interest underlying the challenged Act. Having reviewed

the treatment of this subject in the District Court, the

League believes that it can provide more complete and

helpful argument to the Court on the relevancy of this

factor to the ultimate decision. Unless the League is per-

mitted to file a brief as amicus curiae, the vitally interest-

ed shipping public, as represented by the League, will have

no opportunity to express its views on the proper resolu-

tion of this issue.

Respectfully submitted,

JOHN F. DONELAN

JOHN K. MASER III

ROGER K. DAVIS

914 Washington Building

Of Counsel: _ Washington, D.C. 20005

DONELAN, CLEARY AND Counsel for Amicus Curiae,

CALDWELL The National Industrial Traffic

914 Washington Building League

Washington, D.C. 20005

August 23, 1974

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TABLE OF CONTENTS

Page

LL SRN RY AE ce |

STATEMENT OF INTEREST =. ae 2

ARGUMENT:

The court below did not give sufficient consideration

to the well-established principle that the rights of

creditors are limited by the interests of the public,

pnd Geneeiads ae BOE CIOIIII wc 4

The public interest in rail reorganization clearly justifies

interim erosion of the assets of creditors and owners . . . 8

ane: Le eee ee er a

TABLE OF AUTHORITIES

(Cases:

Brooks-Scanlon Company v. Railroad Commission,

aoe ce i ek Re 3

Bullock v. Railroad Commission, ’ ;

Oe ik eR ee 3

Continental Illinois Bank & Trust Co. v. Chicago,

Rock Island & Pacific Ry. Co.,

meee i eo 4,5

Hanover National Bank v. Moyses,

Ste Se a a a ee ea Oe

In Re Litigation Under the Regional Rail :

Reorganization Act of 1973, Docket No. :

UP ML Mkt I 8 ce 8

In Re Penn Central Transportation Co., Ae

CR FOR Pai OP TR. 6 a ete ee oe

IY pm ALE LOCOMIA EERE SEE LETS OIBLLOP CELESTE AEE ONT POE IEE IEC

(ii).

New Haven Inclusion Cases,

399 US. 392 (1970)

Penn Central Merger Cases,

389 US. 486(1968) .....

‘Railroad Commission v. Eastern Texas ee

264 US. 79 (1924) . ee

hisonstiialiins Finance Corporation v. Denver & Rio

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

West Coast Hotel v. Parrish,

300 U.S. 379 (1937) '

Constitutional Provisions and Statutes:

US. Constitution:

Amendment V_..

Bankruptcy Act:

Section 77, 11 USC, 6205

Interstate Commerce Act:

Section 1(18), 49 USC. §1(18).

Regional Rail poonenieation / Act of 1973:

87 Stat. 985 :

Legislative Materials:

S. Rep. No. 601, 93rd Congress, 1st Sess. (1973)

a

5,6

11

5,10

passim

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Tye ae nT |

In THE

Supreme Court of the Anited States

OcTOBER TERM, 1974 —

Nos. ; ‘ and

UNITED STATES OF AMERICA, ET AL., APPELLANTS,

v.

CONNECTICUT GENERAL INSURANCE CORPORATION, ET AL., APPELLEES.

°

UNITED STATES RAILWAY ASSOCIATION, APPELLANT,

v.

CONNECTICUT GENERAL INSURANCE CORPORATION, ET AL., APPELLEES.

ROBERT W. BLANCHETTE. RICHARD C. BOND AND JOHN H. MCARTHUR,

AS TRUSTEFS.OF THE PROPERTY OF PENN CENTRAL

TRANSPORTATION COMPANY, DEBTOR, APPELLANTS,

V.

CONNECTICUT GENERAL INSURANCE CORPORATION, ET AL., APPELLEES.

RICHARD JOYCE SMITH, AS TRUSTEE OF THE PROPERTY OF THE NEW YORK,

NEW HAVEN AND HARTFORD RAILWAY COMPANY, DEBTOR, APPELLANT,

v.

UNITED STATES OF AMERICA, ET AL., APPELLEES.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT

POR THE EASTERN DISTRICT OF PENNSYLVANIA

BRIEF AMICUS CURIAE

STATEMENT OF INTEREST

The National Industrial Traffic League (hereinafter re-

ferred to as “the League’’) ‘s the largest organization of

shippers in the United States. Its members operate in-

dustrial and/or commercial enterprises — large, medium,

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and small — and are substantial users of the various modes

of for-hire transportation, including transportation by rail-

road. The League has been in continuous, active existence

for more than sixty-five years. Neither carriers nor their

representatives are eligible for membership in the League.

The interest of the League in these cases arises from the

fact that its members have used, are using, and are plan-

ning to use the services of the Penn Central and the seven

other railroads in the Northeast and Midwest currently sub-

ject to possible reorganization under the Regional Rail Re-

organization Act of 1973.!_ The League actively participated

in the Congressional hearings which preceded enactment

of ‘the latter statute. In providing basic transportation

services to the industrial and commercial shippers of

the nation, the subject railroads act as originating and

delivering carriers and as participating carriers in joint

hauls with other railroads.

The Regional Rail Reorganization Act of 1973 (herein-

after referred to as “‘the Act’) was designed to meet the

threat of cessation or significant curtailment of “essential

rail service that developed with the financial decline and

entry into bankruptcy proceedings of eight major railroads

of the Northeast and Midwest. It appears to the League

that a decision sustaining the unconstitutionality of major

provisions of the Act will insure the termination of some

reorganization proceedings, and the placement of those

railroads in equity receivership for the purposes of liquida-

tion. For instance, among others, the Penn Central has

been determined to be so financially debilitated that reor-

ganization could only be accomplished under the Act. In

1 Public Law 93-236, 87 Stat. 985, 45 U.S.C. $701, ef seq., ap-

proved January 2, 1974.

TERA POLE SEV GP IN TNR I ire STF AEE IE SERB

PSP tee ROAST:

Re Penn Central Transportation Company, (E.D. Pa., 1974),

Slip Opinion, p. 19. Although the approval of the Inter-

state Commerce Commission would be required under Sec-

tion 1(18) of the Interstate Commerce Act, 49 U.S.C. §1-

(18), before rail lines and operations could be abandoned,

the Commission would likely be constitutionally compelled

to authorize large-scale abandonments. Brooks-Scanlon

Company v. Railroad Commission, 251 U.S. 396 (1920);

Bullock v. Railroad Commission of Florida, 254 U.S. 513

(1921); Railroad Commission v. Eastern Texas R.R., 264

U.S. 79 (1924).

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If such disruption or discontinuation of vital rail services

comes about, members of the League will suffer an economic

catastrophe of substantial and incalculable proportions.

Many of these member companies of the League have de-

veloped facilities and planned operations in reliance upon

the availability of public rail service. In man} cases the

very survival of their enterprises will depend upon continued

common carrier rail service. In others, substantial curtail-

ment of rail service will result in drastic and adverse altera-

tion of the structure and strength of their businesses. —

The fact is that altemate modes of transportation are

often non-existent or are simply too uneconomic or im-

practical. Thus, the industrial and commercial shippers of

the nation, represented by the League, have a direct and

substantial interest in the revitalization and continued via- f

bility of the subject railroads under the Regional Rail Re-

organization Act of 1973. ;

SEIS EET PLE PES EE SST AD SAE

SNS TR IY. ath Te

4

ARGUMENT

It is the League’s position that the court below erred

in restraining enforcement of certain provisions of the Act

and declaring Sections 303 and 304(f) null and void as

contravening the Fifth Amendment of the United States

Constitution. Section 304(f) was held violative of the

Fifth Amendment to the extent that it would require con-

tinued operation of rail services at a loss in violation of

the constitutional rights of the owners and creditors of a

railroad. Section 303 was held unconstitutional insofar

as it fails to provide compensation for interim erosion

pending final implementation of the Final System Plan

pursuant to the statute. The League contends that the

Act provides a mechanism for reorganization of railroads

that is consistent with the interests of the public and with

the constitutional rights of owners and creditors.

4

A. The Court below did not give sufficient con-

sideration to the well-established principle that

the rights of creditors are limited by the interests

of the public, and therefore are not absolute.

In the couri ovelow too little consideration was given to

the long-standing principle that the “property” rights of

creditors are subject to the right of the public to make

reasonable efforts to reorganize essential common carrier

rail operations on a profitable basis. The bankruptcy

power directly provides for the adjustment of the respec-

tive rights of embarrassed debtors and their creditors and

it clearly permits impairment of the obligation of contracts.

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

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

National Bank v. Moyses, 186 U.S. 181 (1902). Yet the

Vie SORE DE GLEE II LIL ILE TNL CE IS TRONS TRIOS LE OIE LE ILE OEE TLE EE

Regional Rail Reorganization Act is treated by the Court

below as if the rights of creditors- are absolute.

It is plainly erroneous to argue that rail creditors may

not be forced to accept substantial erosion of their invest-

ment during the pendency of reorganization proceedings.

In Continental Bank v. Chicago, Rock Island & Pacific Ry.,

294 U.S. 648 (1935), this Court held that holders of “‘col-

lateral notes” of the debtor could constitutionally be com-

pelled to accept a decline in their investment while an ef-

fort was made to reorganize the debtor under Section 77

of the Bankruptcy Act, 11 U.S.C. §205.

That this principle relates to substantial as well as minor

losses was made even clearer a decade later in Reconstruc-

tion Finance Corp. v. Denver & Rio Grande Western R.R.,

328 U.S. 495 (1946). In that case this Court upheld a

plan of reorganization despite the fact that junior bond-

holders (1) had lost 90 percent of the value of their claims

during the ten years of reorganization and (2) had over-

whelmingly voted to reject the plan of reorganization. In

unequivocal language this Court declared:

These respondents cannot be called upon to sac-

rifice their property so that a depression-proof

railroad system might be created. But they invest-

ed their capital in a public utility that does owe

an obligation to the public. The Insurance Group

Committee, with fiduciary responsibility to the

myriad holders of policies, and the other investors

or speculators in senior bonds as well as the hold-

ers of General bonds or other investors or specu-

lators in junior security issues, by their entry into

a railroad enterprise assumed the risk that in any

depression or any reorganization the interests of

the public would be considered as well as theirs.

[328 U.S. 535, 536]

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6

In the Penn Central Merger Cases, 389 U.S. 486 (1968),

and the New Haven Inclusion Cases, 399 U.S. 392 (1970),

this Court reaffirmed the relevancy of the public interest

to consideration of the rights of rail creditors. Confronted

in the Penn Central Merger Cases with an argument concern- |

ing the progressive erosion of bondholders’ security, this

Court said:

While the rights of the bondholders are entitled

to respect, they do not command Procrustean

measures. They certainly do not dictate that

rail operations vital to the Nation be jettisoned

despite the availability of a feasible alternative.

The public interest is not merely a pawn to be

sacrificed for the strategic purposes or protec-

tion of a class of security holders whose interests

may or may not be served by the destructive

move. [389 U.S. at 510-511]

More recently, in the New Haven Inclusion Cases, this

Court responded to the pleas of bondholders by repeating

an earlier statement that those who enter into a railroad

enterprise assume the special risk that interests of the

public will be considered along with those of investors in

the event of any depression or reorganization.”

Although prior to this Court’s review of the New Haven

reorganization, the reorganization court had reached the

point where it had decided that operations could not con-

tinue without immediate inclusion in the Penn Central Sys-

tem, 289 F. Supp. 451, at 459, that reorganization court

2 399 U.S. 392, 492, quoting, Reconstruction Finance Corp. v.

Denver & Rio Grande Western R.R., 328 U.S. 495, 535-36.

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also squarely acknowledged the inherent public interest

limitations on the rights of the bondholders:

Both the Commission and the courts, however,

have reiterated in thig and in related proceedings

that as bondholders of a railroad their interests

are subject to such invasion as may be essential

to continue the operation of the railroad for a

reasonable period of time to provide an opportu-

nity to work out a permanent plan or means of

continuing the operation, if possible, to the ex-

tent that it is required by the public interest.

[Id. at 455]

Clearly, the New Haven reorganization court engaged in

the balancing of interests appropriate to such cases. It

should be noted that substantial losses were imposed upon

New Haven creditors before the court, after seven years of

reorganization, concluded that operations would have to

cease unless the merger was consummated shortly there-

after. That reorganization court described the necessary

process as follows:

The extent to which the constitutional minimum

of value of property rights to which the bond-

holders are entitled . . . may properly be invaded

in the public interest to keep railroad operations

going pending a solution of the problem of re-

organization, is hardly a matter which can be de-

termined with mathematical precision. It involves

a consideration of the amount and nature of the

Railroad’s obligations, the seriousness of adverse

consequences to the public if service were termi-

nated, the rate of losses and the feasibility of :

possible solutions. [/d. at 459] ;

8

In the instant cases the court below did not engage in

the appropriate balancing of interests. The only discussion

of the public interest underlying Congress’ action appears

in a brief summary of the Act presented “‘before considera-

tion” of the constitutional claims.? Although the amount

of erosion and the prospects of ultimate profitability are

proper factors in resolving the question of an unconstitu-

tional taking, the public interest should also enter into any

determination of the extent to which erosion is permitted.

Thus, the court below erred in failing duly to examine the

Act in light of both the public interest and the interim

financial interests of rail creditors and owners.

B. The public interest in rail reorganizaton clearly

justifies interim erosion of the assets of creditors

and owners.

The Regional Rail Reorganization Act represents ‘‘an

heroic attempt’”* to salvage the rail services of the insolvent

' railroads of the Midwest and Northeast. It is designed to

reorganize the railroads in this region into an economically

viable system capable of providing adequate and efficient

rail service to the region and the national rail transporta-

tion system.

Congress developed this new expression of the bankruptcy

power because of the compelling public need for continued

rail service. Among the official findings presented in the

Act are the following:

3 Typed Slip Opinion, p. 5.

4 In Re Litigation Under the Regional Rail Reorganization Act

of 1973, Docket No. 166, Opinion and Order dated March 1, 1974,

at 3. (Judicial Panel on Multidistrict Litigation).

REELED. PRLS LIE NELLIS NEY EPO EPEC BALI IIE

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9

(3) The public convenience and necessity re-

quire adequate and efficient rail service in this

DASHA SIAN

ies

region and throughout the Nation to meet the

needs of commerce, the national defense, the

environment, and the service requirements of

passengers, United States mail, shippers, States

and their political subdivisions, and consumers.

(4) Continuation and improvement of essential

rail service in this region is also necessary to

preserve and maintain adequate national rail serv-

ices and an efficient national rail transportation

system.

(5) Rail service and rail transportation offer

economic and environmental advantages with

respect to land use, air pollution, noise levels,

energy efficiency and conservation, resource

allocation, safety, and cost per ton-mile of move-

ment to such extent that the preservation and

maintenance of adequate and efficient rail serv-

ice is in the national interest.

(6) These needs cannot be met without sub-

stantial action by the Federal Government. [Sec-

tion 101(a)]. S

The Senate Commerce Committee’s report portrays even

more graphically the enormous public interest in the pend-

ing reorganizations.» The Committee noted that a shut-

down of the Penn Central alone could “‘produce a decrease

in the rate of economic activity in the region of 5.2%, a

decrease in the entire nation of 4%, and a decrease in the

5 Senate Report No. 93-601, December 3, 1973.

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GNP for the Nation as a whole of 2.7% after the eighth

week of such a shut-down.” Jd. at 7. The Committee

also reported that a study by the Indiana Department of

Commerce predicted that a shut-down of the Penn Central

would produce unemployment in that state of. 24% during

the first month and that a 60-day shut-down would cause

the Indiana industrial economy to suffer a 25% reduction

in capacity. Jd. at 7.

A brief accounting of the role of the insolvent railroads

in the national rail system also offers an indication of the

economic disaster and chaos which would result if their

rail services were discontinued. For instance, the Northeast

railroads receive over 300 cars a day from the State of

Alabama, over 520 a day from the State of Minnesota,

and over 640 cars a day from the State of California.

Cars originating in the Northeast arrive in Texas at the

rate of 679 cars a day, in North Carolina at a rate above

567 cars a day, and in California at a rate above 810 cars

aday. Id. at 8.

Thus, recognizing the necessity of continuing the rail

service of the insolvent railroads, Cong passed the

Regional Rail Reorganization Act of 1973. e Act modi-

fies the procedures and supplements the financial and legal

resources normally available in reorganization under Section

77 of the Bankruptcy Act (11 U.S.C. 8 205). Among other

things, it provides:

(1) expedited procedures for abandoning rail

lines and discontinuing rail services (Section

304);

(2) substantial obligational authority for the

United States Railway Association with provision

for additional amounts upon approval by joint

resolution of Congress (Section 210);

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(3) funding for emergency rail needs pending

implementation of the Final System Plan (Sec-

tion 213); #

(4) subsidies for state and local rail service

(Section 402);

(5) benefits for adversely affected employees

(Section 509).

\

\

The court below failed duly to consider the extent to

which these new legal and financial resources serve the

interests of both creditors and the public. Congress may 3

not have presented an absolute guarantee of future profita- .

bility to creditors but it did provide a reasonable prospect t

of ultimate profitability that constitutionally justifies sub- Vi

stantial interim erosion.

it is appropriate for this Court to give considerable :

weight to Congress’ evaluation of both the public interest +

in continued rail service and the feasibility of the proposed

solution. On matters of public policy Congress is entitled ~

to substantial deference. West Coast Hotel Co. v. Parrish,

300 U.S. 379, 400 (1937).

A A#

The Regional Rail Reorganization Act of 1973 is an

entirely reasonable response to a national crisis. In passing

this statute Congress set forth a comprehensive and consti-

tutional plan for the protection of the public and the equit-

able treatment of creditors and owners.

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CONCLUSION

The judgment of the district court should be reversed, |

the constitutionality of the Act sustained and the cause

remanded.

Respectfully submitted,

JOHN F. DONELAN

JOHN K. MASER Ill

ROGER K. DAVIS

914 Washington Building

Washington, D.C. 20005

Counsel for Amicus Curiae,

The National Industrial Traffic

Of Counsel: League

DONELAN, CLEARY AND CAI DWELL

914 Washington Building

Washington, D.C. 20005

August 23, 1974.

AGLI IOS sk PE RY LR MEL IY LN IO ES