# Appellants Brief — Regional Rail Reorganization Act Cases > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386414_0347%3A09 ## Record - **Collection:** Supreme Court brief - **Document type:** Appellants Brief - **Published:** January 1, 1974 - **Citation:** 419 U.S. 102 ## Text gu She ae oe Supreme Court of the Cnite) westaten as : FILED OCTOBER TERM, 197 betes No. 74—166 AUG 28 1974 REGIONAL RAIL REORGANIZA ’ pone =. -: . = | _ : RICHARD JOYCE SMITH, Trustee of the Property of \ The New York, New Haven and Har! ford | Railroad Company, Debtor, Cross-Appellant —_— v. : Ls} UNITED STATES OF AMERICA, et al., Cross-Appellees ‘ON CROSS-APPEALS FROM THE JUDGMENT OF THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA BRIEF OF CROSS-APPELLANT JOSEPH AUERBACH Of Counsel: 225 Franklin Street Boston, Massachusetts MORRIS RAKER 02110 CHARLES W. MORSE, JR. JAMES WM. MOorE SULLIVAN & WORCESTER 4 225 Franklin Street jy este Boston, Massachusetts 06506 02110 ork, New Haven and Hartford Railroad Company, Debtor i TABLE OF CONTENTS _ Table of Citations ............ 0.2. cece eee ee eee ili £1 LE ORES INMVOMUCION: 5 ci6 onesie sac de ese seenadsnsscesuss l Opinions Below ..............--e-seeeeeee eens 2 3 Jurisdiction .........0..0.0c eee eects eeeee es 3. | Questions Presented ...............-+:: Perr Te 5 Constitutional Provisions and Statutes Involved in This Cross-Appeal ...........20cccceeceeees or or Statement of the Case .............0.cceecesces Summary of Argument .............--..50006: 15 Argument: I. THE COURT BELOW ERRED IN NOT DECIDING WHETHER THE COM- PULSORY CONVEYANCES MANDATED BY THE RRRA VIOLATE THE FIFTH AMENDMENT RIGHTS OF THE NEW HAVEN "TRUSTER: o65cc0s sis sacswnnneus 24 Il. THE COMPULSORY CONVEYANCE PROVISIONS OF THE RRRA VIOLATE THE NEW HAVEN TRUSTEE’S FIFTH AMENDMENT RIGHTS ................ 37 A. Legal and Factual Setting of the RRRA . 37 .B. The Compulsory Conveyance Provisions of the RRRA Involve an Intentional Tak- ing, Not Compensated by Money or its Perfect Equivalent, of the Property of Penn Central in Violation of the ‘ifth Amendment Rights of its Creditors and StOcKOMGGTS aa 6 ses euseccsenesestiass 52 C. The Fifth Amendment Requires that a Railroad in Reorganization, Which Is Un- able to Earn Net Railway Operating In- come and Whose Properties Are Required to Be Continued in Perpetual Public Ser- vice, Be Paid Not Less than the “Highest and Best Use” Value of its Rail Properties 61 D. The RRRA Is Constitutionally Defective in Requiring Payment for Rail Assets in the Form of Securities of Conrail Without Any Provision for a Guarantee that the Value of Such Securities Will Be the Per- fect Monetary Equivalent of the “Highest and Best Use” Value of the Rail Assets .. 69 SOME BLS EDINA LE LE NIELS PEL LS STI ELT I II EADIE IE ct GIT SIR ep SRS CROP eae SO OC eae iieiliieaiiiiniaaiititiae ° ITS E. A Requirement that Rail Properties of Penn Central Be Exchanged for Secunities of Conrail Is a Denial of Constitutional Rights to Dismissal of the Reo anization Proceedings and Termination of Loss Op- EratiONS ....... 2. cece eee eee eee e teens F. Adjudication that the-Compulsory Con- veyance Provisions of the Present RRRA Are Unconstitutional Can and Should Re- sult in a Congressional Enactment Amending the RRRA to Authorize Pay- ment as Required by the Fifth Amend- ment for Penn Central's Rail Properties . Ill. THE PROCEDURES OF THE RRRA OF- FEND PROCEDURAL DUE PROCESS BY MANDATING CONVEYANCE OF RAIL ASSETS PRIOR TO JUDICIAL REVIEW OF THE ADEQUACY OF THE CON- SIDERATION PAID WHERE THERE IS NO POSSIBILITY THAT A COURT MAY SET ASIDE THE CONVEYANCES ....... IV. TO THE EXTENT THAT THE RRRA AMENDS THE SUBSTANTIVE AND PROCEDURAL PROVISIONS OF §77 OF THE BANKRUPTCY ACT, THE RRRA IS A “LAW ON THE SUBJECT OF BANK- RUPTCIES” AND IS VOID FOR WANT OF GEOGRAPHICAL UNIFORMITY .... A. The RRRA Is an Invalid Non-Uniform Statute as Applied to Penn Central, and Creditors of Penn Central Have Standin to Challenge the Lack of Geographica Uniformity .......-0-- eee eee eee eee B. The Court Below Was in Error in Con- cluding that the RRRA’s Defect as Non- Uniform Legislation on the Subject of Bankruptcies Taints Only the Provision Requiring Mandatory Dismissal of §77 Proceedings .....---.++eeseeeeeereees Conclusion ........--ccecre cece ceereeeeeeees Appendix .......-.-0 eee eee re cece eee e te ceces Page 84 88 93 99 99 paiiionemunsie: o 2D PPA LO AR Pe 0 Ps ha Cl PAREN VIAN eM TA PRS EERE AE EEE LOGE Be “ Sime. ill TABLE OF CITATIONS Cases: Almota Farmers Elevator & Warehouse Co. v. United States, 409 U.S. 470 (1973) ........ Ashwander v. Tennessee Valley Authority, 297 U.S. 288 (1936) ........c cess eececcccees Association of Data Processing Service Or- anizations, Inc. v. Camp, 397 U.S. 150 tf.) ) a ae ne ee eee Baltimore &¢ Ohio R.R. v. United States, 298 U.S. B49 CIOSG).. soy 408 oa eoe eestor eeeeaesess Baltimore &@ Ohio R.R. v. United States, 386 U.S. RTD CNGBD) oa exc csc cess ceeensenebasee Brooks-Scanlon Co. v. Railroad Commission, 251 U.S. 396 (1920) .. 2... .0ccce cece eee e eee . Bullock v. Florida ex rel. Railroad Commission, 954 US. 518 (1921) 2. .cccccscccccescces Case v. Los Angeles Lumber Products Co., 308 U.S. 106 (1939) 2.2 oc ccvssasceeesiuesess Central R.R. of New Jersey v. Manufacturers Hanover Trust Co., 421 F. 2d 604 (3d Cir.), cert. denied, 398 -U.S. 949 (1970) .......... Communist Party of the United States v. Sub- versive Activities Control Board, 367 U.S. 1 CTOBLY ccxcnunectteeasceeseesereasn eG Oe Consolidated Rock Products Co. v. Du Bois, 312 US. SIO CGE): aia cn vec ecicc cade deanna Continental Ill. Nat. Bank v. Chicago, R.l. & Pac. Ry., 294 U.S. 648 (1935) .......- 62. ee eee Data Processing Service v. Camp, 397 U.S. 150 (1970). csp ecnsepin sate Peas icee sess vos Eccles v. Peoples Bank, 333 U.S. 426 (1948) ... Ecker v. Western Pacific R.R. Corp., 318 U.S. BAG C1946S) ein oc 66s chvaeen seen see tapess Epperson v. Arkansas, 393 U.S. 97 (1968) ..... Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591 (1944) «2.0... eee eee eee Flast v. Cohen, 392 U.S. 83 (1968) ........... Page 57, 58, 59 ae 28 58 84, 85 32 38 et passim 74 34 32 39, 40, 105 33, 34 91 28, 34 ‘ id A ORES TREN IAL, e ee ee iv Page Group of Institutional Investors v. Chicago, M., StP., & P. R.R., 318 U.S. 523 (1943) ...... 39, 40, 105 Hanover National Bank v. Moyses, 186 U.S. 181 (1902)... cccccccccccccccncceccsccccres 101 In re City, of New York (Fifth Avenue Coach Lines), 18 N.Y. 2d 212, 219 N.E. 2d 410, appeal dismissed sub. nom. Fifth Avenue Coach Lines v. City of New York, 386 U.S. 778 (19GB) oo cccvcccccsccccuvcccsccccsocenes 63 et passim In re New York, N.H. & H. R.R., 289 F. Supp. 451 (D. Conn. 1968) .......----+eeeeeees 40, 64 In re New York, N.H. & H. R.R., 304 F. Supp. 793 (D.Conn. 1969), aff'd in part, rev'd in part, New Haven Inclusion Cases, 399 USS. $92 (1970). ....ccccccccccccccvvcvsccccs 73 In re New York, N.H. & H. R.R. Co., 330 F. rin 131, 150 331 F. — 212 (D. Conn. 1971), rev'd, 457 F. 2d 683 (2d Cir.), cert. denied, 409 U.S. 890 (1972). ....-----0ee 82 In re New York, N.H. & H. R.R., 378 F. 2d 635 (2d Cir. 1967) ....ccceceeceeeereceereees 93 In re New York, Ontario & Western Ry., 171 F. Supp. 634 (S.D.N.Y. 1958) ......--++++- 40 In re Penn Central Transportation Co. (Order No. 124 approving $100 million of Trustees’ Certif- icates), 325 F. Supp. 302 (E.D. Pa. 1971) .. 7,7) In re Penn Central Transportation Co. (Order No. 546, Providing for a Temporary Lien Pending Adjudication of New Haven Trustee's Proo of Claim), 337 F. Supp. 779 (E.D. Pa. 1972) .. 82 In re Penn Central Transportation Co. (Order No. 602), 340 F. Supp. 851 (E.D. Pa. 1972) im- plementing /n re Penn Central Transportation Co. (reversal of Orders Nos. 192 and 193), 454 F. 2d 9 (3d Cir. 1972) ....2.--0e cence eee 90 In re Penn Central nay ryt Co. (Order No. 1137); 355 F. Supp. 1343 (E.D. Pa. 1973) . 8,9 In re Penn Central Transportation Co. (Columbus Option Appeals), 494 F. 2d 270 (3d Cir. 1974), petition for cert. filed, 42 U.S.L.W. 3633 (May 8, 1974), No. 73-1672 ......-- 45, 84 og ULE LON IPI NEY LE * Wie LONG Ciel By tae a SE GAA AAD WM, ina cies OPE LITT ‘ a hhh . bldhnites itil a Ae c a ee ee ee one ree too aT te to te Page In re Penn Central Trans ion Co. (Opinion &¥ Order No. 1507 re Philadelphia Commuter Service) (E.D. Pa. March 18, 1974) ........ «82 In re Penn Central Transportation Co. (Opinion in Support of Order No. 1543) (“120-Day” Findings u §207(b)) (E.D. Pa. May 2, ; 1974) ....ccceceee Spb abvlesaxtest ses 87 In re Penn Central Trans ion Co. (Mem- | orandum in Support of Findings & Order No. (1596 Pursuant to the Second Sentence: of §207(b) of the Regional Rail Reorganization — Act of 1973) (E.D. Pa. July 2, 1974) ....... 18 et passim (E.D. Pa. July 2, 1974) ......- secre eeeeee 59 In re Port Authority Trans-Hudson Corp., 20 N.Y. 2d 457, 231 N.E. 2d 743, cert. denied sub. nom. Port Authority Trans-Hudson coe. v. Hudson Rapid Tubes Corp., 390 U.S. 1002 0.) 63 et passim (19GB). cccccvcvccccccccvccnscescssvdees 19, 26 In re Third Avenue Transit Corp., 198 F. 2d 703 (2d Cir: 1952) on. ccccccccvcscnvccccscqes 84, 85 Investment Co. Institute.v. Camp, 401 U.S. 617 CLOT) br vccsansssscvsessvsvsaers beeeage 34 Joint Anti-Fascist Refugee Committee v. McGrath, $41 UB. 128 CIDG1) nc ccccvccsccsvenes 25, 36 Juilliard v. Greenman, 110 U.S. 421 (1884) ... . 58 Knox v. Lee, 79 U.S. (12 Wall.) 457 (1871) .... 58 Lockerty v. Phillips, 319 U.S. 182 (1943) ...... 26 Louisville Joint Stock Land Bank v. Radford, 295 05.5. S55 (1985) on cic deccsstsevensocgsns 74, 75, 84 Marbury v. Madison, 5 U.S. (1 Cranch) 137 Tl.) Seer errerererer btan apts 98 ee Navigation Co. v. United States, 148 U.S. 312 (1898) ........--eeeeeevees 56, 57, 58 E 5 ’ i ‘ i ¥ j 5 ¥ i i j i bi vcr GB POLY ERAN LLG EET A “a tio ALICE LT LAI LN Me ro te ‘Wd ¥ TOON EE, Ti) sa vi Page New Haven Inclusion Cases, 399 U.S. 392 To ee eee rr reer ae ee 2 et passim Norman v. Baltimore & Ohio R.R., 294 U.S. 240 tear arm yor rr Ty ee eee 6 58 Northern Pacific Ry. v. Boyd, 228 US. 462 CRN rai oo Fakes bi cb e Vetesas ese kee 20, 38, 39 Penn: Central Merger Cases, 389 U.S. 486 (1968) 2 et passim Poe v. Ullman, 367 U.S. 497 (1961) .......... 32, 33 Railroad Commission v. Eastern Texas Railroad, 1,964 US. -79 (IG24) 2.6. cous cbeskageeess 84, 85 Railroad Transfer Service, Inc. v. ‘Caan. 386 OT Oe THEE fa occ cicensisescvecvowss 35, 36 Reconstruction Finance Corp. v. Denver & R.GW. R.R., 328 U.S. 495 (1 cc oc avaksownbbs 39, 69, 95 Roe v. Wade, 410 U.S. 113 (1973) ........-..- . aa Steffel v. Thompson, 42 U.S.L.W. 4357 (U.S., es BO Ce knik nbc bee euekesneeives 34 United Public Workers v. Mitchell, 330 U.S. 75 DL L$ epee MARE a eae OE res rare 32 United States v. Miller, 317 U.S. 369 (1943) ... 56, 58 United States v. Raines, 362 U.S. 17 (1960) .... 101 _ United States v. Reynolds, 397 U.S. 14(1970).., 56, 57, 58 Vanhorne’s Lessee v. Dorrance, 2 Dall. 304 (Cir- outs Cotest Pa. 17TGG) ic coset cccsicavess 59 Vanston Bondholders Protective Committee v. Green, 329'U.S. 156 (1946) .......-..04-- 101 “ At v. Union Central Life Ins. Co., 311 U.S. 273 (1940) ..... Sa Rae ee ey CPE Ee 74, 75 “ee v. Vinton Branch Mountain Trust Bank, OTS BOO CORTE bio i cae ees vires 74, 75 Yakus v. United States, 321 U.S. 414 (1944) ... 26 > ~s ane ae ey Oh gUe GLEN L BLIGE ALMA LIES Se piieiamameaeeaal nee ‘ ito miner tea chan Nn aN taenmNTprER aaeeiemnenNe met vii Administrative Decisions: New York, Ontario ‘and Western Railroad Re- organization, 295 1.C.C. 346 (1956) ....... Penn Central Transportation Company Re- organization, Report on Reorganization Plans, Finance ket No.. 26241 (Sep- ‘ titaber 26, 1973)... ccscscccscccccccvens 9 et passim ; Constitutional Provisions ‘and Statutes: Constitution of the United States: Article I, Sec. 8, Cl. 3 (Commerce Clause) . 4 et passim Article I, Sec. 8, Cl. 4 (Bankruptcy Clause) 4 et passim Article I, Sec. 9, Ch. 7 2... cece cccccvccee 5 RM TE ss a ea vee ehh Chee Shwe 50, 51 Amendment V (Takings and Due Process ‘ Gack cckceusdveeruces sakdaowes 4 et passim Statutes: Bankruptcy Act: Section 24, 11 U.S.C. §47 ...........2.. 51 Section 77, 11 U.S.C. §205 ..........0. 2 et passim CTFIMD) nc crscccceccsenescssevdans 47, 104, 105, 106 BPS foccndeessscbieesaeeeesne? 7 9 i rrr srr rere 9 et passim i, eee PrP eer rrr Chere rere 6 et passim Cee i ale auhneseuew ae skid 44 et passim 9, PROM err ere proce reer ee 44, 108 ‘go weer ee rey er eee rere cri r 47 et passim Chapter X, 11 U.S.C. §§501-676 (suc- OE WSF FOE ns hn chp KeecteeNexs 20, 38, 39 Emergency Price Control Act of 1942, 56 Stat. 23, 50 U.S.C. App. §§901 ef seq. ... 26 Emergency Rail Services Act of 1970, §3, Pig ihe | errr rere 7 Frazier-Lemke Act, 48 Stat. 1289; Amended Frazier-Lemke Act, 49 Stat. ON kel aR us Kode okae sawn beaks 74, 75 Interstate Commerce Act, 49 U.S.C. §§1 ef seq.: fue otis ope endactasseamreaes 42, 86 BEND (2) of the RRRA, requiring conveyance of rail proper- | tes and divestment of the liens of claimants to the Penn Central estate, in advance of judicial de- terminations as to “highest and best use” value of such properties and the equitable equivalent value of the se- } curities and common stock to be exchanged therefor, offend the procedural due process rights of claimants to the Penn Central estate? ] ~ §§206, 207, 208, 209, 303 and 304 of the RRRA void Sas a law, purportedly . on the subject of bankruptcies, ~which is not uniform geographically throughout the ~ United States? PROP TE MOG EOE GE RO I CELE ITIL PE POLIS TOS SESE RST Pee OE Ser Sys Oa 7. Are the compulsory conveyance provisions of=——— 5 . CONSTITUTIONAL PROVISIONS AND STATUTES INVOLVED IN THIS CROSS-APPEAL The constitutional provisions and statutes involved in this cross-appeal include:! Constitution of the United States: Article I, Section 8, Clauses 3 and 4 Article I, Section 9, Clause 7 . Fifth Amendment Statutes of the United States: ‘ Regional Rail Reorganization Act, Public Law 93-236, 45 U.S.C. §§701 et seg. JA 391) Section 77 of the Bankruptcy Act, 11 U.S.C. §205 STATEMENT OF THE CASE Penn Central is the successor to The Pennsylvania Railroad Company and The New York Central Rail- road Company, whose merger was finally approved by this Court in Penn Central Merger Cases, supra.2 As one of the conditions of the merger, the Pennsylvania and New York Central Railroads agreed to purchase the assets of the New Haven, which had been in re- organization under §77 of the Bankruptcy Act since 1961 (United States District Court for the District of Connecticut, No. 30226). Penn and Central effected their merger on February 1, 1968; and New Haven’s 'The text of the Regional Rail Reorganization Act of 1973 is printed in full at JA 391 et seg. The text of pertinent provisions of the United States Constitution and of Section 77 of the Bankruptcy Act is printed in the Appendix hereto at A-1 et seq. 2See also Baltimore & Ohio R.R. v. United States, 386 U.S. 372 (1967), refusing to approve the initial decision of the Interstate Commerce Com- mission (“ICC”) until it afforded adequate protection to certain eastern railroads not to be included in the merger. ALLE RED ARE ERE EY PE AE LIYE TR STR HO eR gas J Leo 6 railroad assets were conveyed to Penn Central on De- cember 31, 1968, by Richard Joyce Smith, Trustee of the New Haven (together with his then co-Trustee), subject to later judicial review of adequacy of the pur- chase price ordered by the ICC. On June 21, 1970, Penn Central filed for re- organization under §77 of the Bankruptcy Act (United States District Court for the Eastern District of Penn- sylvania, Bky. No. 70-347). Eight days later, this Court indicated approval of the terms fixed by the New Ha- ven Reorganization Court (under §77(e) proceedings on New Haven’s plan of reorganization) for sale of New Haven’s assets to Penn Central, but reversed and remanded for further proceedings to consider the ef- fect of Penn Central’s bankruptcy on the value of the Penn Central’s payment, particularly its common stock, included in the consideration. New Haven In- clusion Cases, supra. The early stages of the Penn Central §77 pro- ceedings were devoted to an effort by the Penn Cen- tral Trustees to identify the problems which had to be overcome in order to achieve an earnings-based re- organization as contemplated by §77. The initial cash crisis was temporarily alleviated by orders of the United States District Court for the Eastern District of Pennsylvania, Judge John P. Fullam (“Penn Central Reorganization Court”) permitting deferrals of interest on debt (other than equipment debt), and most leased line rentals and real estate taxes.> In addition, acting ‘Through December 31, 1973, the following amounts had been de- ferred: interest, $104 million; leased line rentals, $101 million; taxes, $241 million. Stipulation as to Factual Matters (printed at JA 317-24; hereinafter ated as “Stip. Fact”), #12, 13, 14. The total of such deferrals was $446 million as of December 31, 1973, and represents a priority ad- ministration daim. This total does not include $57 million of interest on $300 million of notes secured by pledge of Penn Central’s stock interest in Pennsylvania Co., a non-rail subsidiary. If the interest on the notes se- cured by the Pennsylvania Co. stock is included, deferrals amounted to $503 million-as of December 31, 1973. bed BARGE LGM AGEL EEDA RS AES § LMAO I OU RBIS BIR ORL BONA “ 7 pursuant to §77(c)(3), the Penn Central Re- organization Court approved $100 million of Trustees’ Certificates, which in order to be marketable required the guarantee of the United States authorized by §3 of the Emergency Rail Services Act of 1970, 45 U.S.C. §662. A series of, Penn Central Trustees’ Reports dated February 10,4 >,March 22, 1971, September 17, 1971, eer 15, “1972, April 1, 1972, July 1, 1972, October 1, 1972, January 1, 1973, February 1, 1973, and April 3, 1974 disclose the history of the Trustees’ efforts to achieve a private income-based re- organization of Penn Central. The Trustees began by asserting that Penn Central could be reorganized if certain conditions, not within their control, were met.® Subsequent reports spelled out a lack of success in im- plementing these conditions. Finally, in their January 1, 1973 and February 1, 1973 Reports, the Trustees acknowledged that reorganization would not be pos- sible without a/government grant (not merely financial assistance by way of loans or guarantee of borrowings) on the order of $600 million to $800 million. There followed an attempt by the Trustees to im- plement certain crew-consist changes (which had been the subject of exhaustive, but unproductive, pro- ceedings under the Railway Labor Act), that resulted *In re Penn Central Transportation Co. (Order No. 124), 325 F. Supp. 302 (E.D. Pa. 1971). ’These Trustees’ Reports are reproduced as Documents | through 10 in the Joint Documentary Submission in the court below, ten copies of which have been filed with the Clerk of this Court. ®The New Haven Trustee on March 10, 1972 advised the Penn Cen- tral Reorganization Court that in his opinion the Penn Central Trustees’ predictions as to reorganizability of Penn Central on an income basis were unduly optimistic. See Doc. No. 11 in the Joint Documentary Submission. STEMS Bh Siaby. SEO AOA ET ONT TPA aS LSPS SCE TEE SED RET YES AB Snag eaenanen dla "« 8 in a strike on February 8, 1973. Congress responded by enacting Senate Joint Resolution No. 59, which im- posed a 90-day moratorium on both the work-rule changes and the strike.’ Shortly thereafter, acting’ sua sponte, the Penn Cen- tral Reorganization Court entered an opinion and or- der regarding the status of reorganization efforts. /n re Penn Central Transportation Co, 355 F. Supp. 1343 (E.D. Pa. 1973). Judge Fullam concluded as follows: “Whether the constitutional limit [of erosion] has been exceeded depends primarily upon how the re- maining 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. Un- der any view of the matter, i seems clear that the point unconstitutionality is fast approaching, if it has not already arnved. “The essence of §77 of the Bankruptcy Act is that the legal remedies normally jeniiabie to creditors may be held in suspension for a reasonable time in order to permit rehabilitation of the enterprise. Whenever it appears that there is no genuine like- lihood of ultimate: success, the legal and constitutional justification for restraining creditors from exercising their normal remedies disappears. - “It has long been, apparent that the particular prob- lems of Penn Central cannot be completely di- vorced from problems of national transportation mre Railroads are, after all, a regulated industry. owever unappealing nag the notion that a regulated industry can become bankrupt, the Trustees’ efforts td rehabilitate the Debtor are cir- cumscribed by existing statutes and regulations. To the extent that these statutes and regulations .. . preclude the exercise of self-help in achieving prof- 7Public Law 93-5, 87 Stat. 5 (February 9, 1973). Following that re- buke by Congress, the Trustees never again attempted to implement the work-rule changes. itability, the legislative and executive branches of overnment must be looked to for solutions, if so- utions are to be forthcoming. ‘ * * * “The legal and constitutional rights of the parties to this reorganization should be evaluated in the light of whatever changes Congress sees fit to enact. } “By the same token, however, this Court cannot ig- nore the realities of the Debtor’s situation. On the basis of the record to date,.it appears highly doubtful that the Debtor could properly be permitted to continue to operate on its present basis eg October 1, 1973.” Id. at 1344-46 (emphasis added).® There then followed proceedings before the ICC in August, 1973 upon proposed plans of reorganization of Penn Central filed by the New:Haven Trustee and subsequently by the Penn Central Trustees and Penn Central Company. The ICC’s Report dated September 28, 1973 rejected on various grounds all plans submit- ted for the reorganization of Penn Central,? and de- clined to certify to the Reorganization Court any plan of reorganization under §77(d), essentially adopting the position urged by the United States that re- organization of Penn Central had to await a “solution” for the Northeast that would, in turn, require Con- gressional action. ; ®By the time this appeal has been heard, Penn Central will have been “permitted to operate on its present basis” for more than one year beyond the date of “highly doubtful” constitutionality. °The ICC’s Report dated September 28, 1973 is Doc. No. 54 in the Joint Documentary Submission. Extracts from the testimony in the ICC proceedings are set forth in Docs. Nos. 38-53 in the Joint Documentary Submission. See infra, Part II-A, for a detailed discussion of the plans submitted to the ICC under §77(d) and its Report dated September 28, 1973. ¢ b ' on e 4 = f he. SAMO RESTATE CLIO ST ADP MO OPM NE ~ AMET RR COR ry ae SENTERO LIE ROP TES | 10 On October 9, 1973, the New Haven Trustee filed a Motion to dismiss Penn Central’s §77 proceedings pursuant to §77(g), alleging that the point of uncon- stitutional erosion of the Penn Central estate had com- _ menced not later than January 1, 1973.'° _ On January 2, 1974, the RRRA was signed into law by the President.'! On January 25, 1974, the New Haven Trustee filed a complaint asserting that the RRRA was uncon- stitutional on its face and as applied to Penn Central, naming as defendants the United States, United States Railway Association (“USRA”) created pursuant to §201 of the RRRA, and Secretary of Transportation Brinegar (herein referred to collectively as the “Gov- ernmental Defendants”). The action was filed in the United States District Court for the District of Col- umbia. On the same day, other creditors of Penn Cen- tral filed a similar complaint in the United States Dis- trict Court for the Eastern District:of Pennsylvania _ (Connecticut General v.' USRA, Civil Action No. 74-189). _ In order to achieve a single expedited proceeding, the New Haven Trustee consented to a motion of the United States and other Governmental Defendants to transfer Smith v. United States, et al. to the Eastern Dis- trict of Pennsylvania pursuant to 28 U.S.C. §1404(a). A third case, Penn Central Co. v. Brinegar, was also transferred, under §1404(a), from the District of Columbia. | ~ 1Doc: No. 13 in the Joint Documentary Submission. As is noted in greater detail in Part II-A of the Argument, this Motion and a related petition seeking an equity receivership have not been decided. No hear- ing was held on the §77(g) Motion until May 6, 1974. A previously filed petition of the New Haven Trustee, seeking, inter alia, the fixing of a date for termination of operations (Doc. No. 12 in the Joint Documentary Submission), filed on March 16, 1973, was never set down for hearing. ''!Publis Law 93-236, codified as 45 U.S.C. §§701 et seq. Section refer- ences to the RRRA are to the Section numbers in Public Law 93-236, and not to the codification in 45 U.S.C. saelnes ee COD LOLA LALLA ELE ETE, CL SEMA ATA BE Of AEE TTT cel a MEEBSOD he aloes : a ; 4 i Pursuant to 28 U.S.C. §§2282 and 2284, a three- judge district court, consisting of Circuit Judge Rug- gero J. Aldisert and Distria Judges John P. Fullam and Louis C. Bechtle, was constituted to hear all the cases concerning the constitutionality of the RRRA. The Penn Central Trustees, who intervened as de- fendants, answered that the RRRA was constitutional by virtue of the alleged existence of a “Tucker Act remedy” under 28 U.S.C. $1491 to “underwnite” any constitutional deficiency in the RRRA. After joinder of issue, the New Haven Trustee on April 29, 1974 filed a motion for summary judgment as to certain of the legal issues raised by his Com- plaint.'? The Governmental Defendants and the Penn Central Trustees each then filed counter-motions for summary judgment. The factual record was then com- pleted by a Stipulation as to the Record in the Penn Central Reorganization Proceedings, a Stipulation as to Factual Matters, a Joint Documentary Submission, and affidavits of two government witnesses.'* Smith v. United States was then consolidated for purposes of oral argument and disposition on the merits with the Connecticut General and Penn Central Company cases, in which motions for summary judgment head also been filed. The issue before the court below was whether an injunction should issue restraining the enforcement of '2The New Haven Trustee’s Memorandum of Points and Authorities in Support of Motion for Summary Judgment (filed May 2, 1974, E. D. Pa. C. A. No. 74-1107, Doc. No. 4; see JA 258) at pp.1-8 lists the issues included in his motion for summary judgment. 13As noted above, ten copies of the Joint Documentary Submission have been filed with the Clerk of this Court. One of the government's af- fidavits is Doc. No. 61 in the Joint Documentary Submission; the other is reprinted at JA 226-55. The Stipulation as to Factual Matters is printed at JA 317-24. The Stipulation as to the Record is identical to that set forth at JA 197-99. alten IED SPDR 5 eee cot er ee 12 various sections of the RRRA on grounds of re- pugnance to the Constitution. The court below granted, in part, the motion of the New Haven Trustee for summary judgment, and issued an order dated June 25, 1974 (“Order”; JA 82-83) which en- joined defendant USRA from certifying.a final system plan to the Special Court pursuant to §209(c) of the RRRA, and enjoined all defendants from taking any action to enforce the provisions of §304(f) of the RRRA with respect to any abandonment, cessation or reduction of railroad service determined by a court of competent jurisdiction to be necessary for the pres- ervation of rights guaranteed by the Constitution (Or- der, {]1, 2; JA 82). In addition, the court below en- joined all parties “from enforcing, or taking any action to implement, so much of Section 207(b) of the RRRA as purports to require dismissal of pending pro- ceedings for reorganization [of Penn Central] under Section 77 of the Bankruptey Act” (Order, 3; JA 82).'4 Finally, the court below entered a declaratory judgment that §303 of the RRRA is null and void in- sofar as it fails to provide compensation for interim erosion pending final implementation of the final sys- tem plan contemplated by the RRRA and that §304(f) of the RRRA is null and void as violative of the Fifth Amendment to the Constitution insofar as it would re- quire continued operation of rail services at a loss in violation of the constitutional nghts of the owners and creditors of Penn Central (Order, {{J4a, 4b; JA 82-83). The court below also declared a portion of the third sentence of §207(b) of the RRRA to be null and void as violative of Article I, Section 8, Clause 4 of the Con- stitution in that the RRRA is not uniform geographi- This portion of the Order was entered sua sponte as none of the plaintiffs sought this relief. May FOREN F EST ee LINEN ELE DA CROP I ME ENGI NO Sel 13 cally throughout the United States and, to the extent that the RRRA amends §77 of the Bankruptcy Act, it is a law on the subject of bankruptcies within the meaning of Article I, Section 8, Clause 4 (Order, 4c; JA 83). The court below was not unanimous in every re- spect. Circuit Judge Aldisert, who wrote the Opinion of the Court, was joined by District Judge Bechtle in disposing of “plaintiffs’ threshold contention that the possible future conveyance of rail properties to Conrail [Consolidated Rail Corporation] in consideration for Conrail stock and securities constitutes a Fifth Amend- ment taking without payment of just compensation” : (Opinion of the Court; JA 23) by concluding that “we . do not meet these Fifth Amendment questions be- cause we are persuaded that these issues are pre- mature” (Opinion of the Court; JA 23). Judge Fullam concurred in the result, but took the view that certain of the constitutional] issues presented were ripe for ad- judication and should not have been deferred (Con- curring Opinion of Fullam, J., Part I; JA 55-60). The New Haven Trustee as cross-appellant asserts that the court below was in error in finding that it was pre- mature to judge the facial constitutionality of the com- i pulsory conveyance provisions of the RRRA. - 9 Ste PRETO ISS pacers ees matted PORE Bre The court below was also in disagreement as to whether the RRRA was, to the extent it represents a “law on the subject of bankruptcies,” void for want of geographical uniformity under Article I, Section 8, Clause 4 of the Constitution. Judges Fullam and Bechtle so held, but concluded that the only provision in the RRRA that could not be rationalized as being based on Commerce Clause powers was the provision requiring mandatory dismissal of §77 proceedings,'® ISRRRA, §207(b), third sentence, clause (2). + RAR Gath ‘ EPP ON RE Sy PTE b 7 . SEE LLTI PME SNEP EN OROS PERI RTS TET LET TNS ROLES He ee aa alam ve 14 which they. held to be void for lack of geographical uniformity (Concurring Opinion of Fullam, J., Part II; JA 64-65). Judge Aldisert dissented from this con- clusion on the ground that the RRRA is uniform in its application to creditors, and that creditor parties lack standing to assert the constitutional defect of the RRRA’s non-applicability to a debtor railroad located outside the region (JA 26-29). The New Haven Trustee, by this appeal, asserts that the RRRA is void for want of geographical uniformity in a number of respects, including (but not limited to) clause (2) of the third sentence of §207(b), and that, for the reasons set forth in Part II of Judge Fullam’s concurring opinion (for the majority of the court), the New Haven Trustee_ has standing to assert this constitutional defec The United States and the other Governmental De- fendants, and the Penn Central Trustees as inter- vening defendants, each filed appeals to this Court from the Order pursuant to 28 U.S.C. §§1252 and 1253 (docketed as No. 74-167, United States Ry. Ass'n v. Connecticut General Ins. Corp., et al.; No. 74-168, United States, et al. v. Connecticut General Ins. Corp., et al. and No. 74-165, Blanchette, et al. v. Connecticut General Ins. Corp., et al.). The New Haven Trustee filed a cross-ap- peal to this Court (28 U.S.C. §1252) from so much of the Order as denied, in part, his motion for summary judgment (docketed as No. 74-166, Smith v. United States, et al.). Pitas as (Si te i? ae PE ee SE LT eS SUMMARY OF ARGUMENT This cross-appeal challenges the constitutional va- lidity of the compulsory conveyance provisions of the RRRA, an issue which the majority of the court below refused to reach on grounds of alleged prematurity. The RRRA was declared unconstitutional in part by the court below, and the court below enjoined certifi- cation of any “final system plan” by USRA to the Spe- cial Court. This judgment, however, was based solely on the constitutional defect that the RRRA requires Penn Central to sustain enormous operating deficits, and consequent erosion of the estate available to sat- isfy Penn Central claimants, during the period January 1, 1974 to the date when the compulsory conveyances mandated by the RRRA may occur. The RRRA was held unconstitutional in that it failed to make provi- sion for payment to the estate of just compensation in respect of these operating deficits and consequent ero- sion. While the decision below is of some help in pre- venting an unconstitutional taking from being im- plemented, the issues which the court below found to be ripe for adjudication represent, in effect, but the — tip of the iceberg. The issues as to the constitutional defects, both facial and as applied to Penn Central, of the compulsory conveyance provisions of the RRRA are inherently important issues which require con- current resolution. The RRRA was enacted by Congress on January 2, 1974 to deal with the unfortunate fact that the Penn Central System'® and certain smaller railroads in the 6The Penn Central System comprises railroad properties of Penn Central Transportation Company, the Principal Debtor, 15 leased lines of Penn Central which have filed for reorganization under §77 as “Sec- ondary Debtors,” and numerous other railroads controlled by Penn Cen- tral (Penn Central's Form R-! Report for 1973 (Doc. No. 37 in Joint Doc- (footnote continued on next page) LA REN LEA EG PEE SUNSET LOIS PEEL DY MONEE SE } ta | eee | Vie g ae - Northeast-Midwest region"’ are unable to generate op- erating revenues in excess of operating expenses, and hence are unable to achieve any net earnings before fixed charges. _ The Penn Central system, for example, has in- curred deficits of $851,000,000 from the date of its fil- ing (June 21, 1970) through December 31, 1973 (Stip. Fact, §10) and an additional deficit of $103,579,392 during the year 1974 through June 30 (Trustees’ Re- port dated August 5, 1974, Doc. No. 7970). Thus the total deficit of the Penn Central System during four years of operations under §77 is $954,000,000. The basic scheme of the RRRA is to require that all reorganization courts having jurisdiction over railroads in reorganization in the Northeast/Midwest Region is- sue findings and orders (RRRA, §207(b)) as to whether or not such railroad shall be “reorganized” by means of conveyance, free of all existing mortgage (footnote continued from prior page) umentary Submission) lists 44 transportation companies, including the 15 Secondary Debtors, which are directly controlled by Penn Central and more which are indirectly controlled). The 15 Secondary Debtors own {or lease from other railroads) 9,304 route miles of track (46.9% of the 19,853 route miles included in the System). The RRRA subjects the rail properties of all these subsidiary and leased line companies to the com- pulsory conveyance provisions of the Act. See §102(10): “ ‘rail properties’ means assets or rights owned, leased or otherwise controlled by a rail- road. . . .” This Section contains an exception for non-leased, controlled, but less than wholly-owned subsidiaties, which are Class I railroads, thereby excluding from the RRRA the Pittsburgh & Lake Erie Railroad, a 92.6% owned subsidiary of Penn Central. 'TThere are seven Class I railroad systems operating in the North- east/Midwest region of the United States now in reorganization pro- ceedings pursuant to §77 of the Bankruptcy Act: Penn Central, Reading, Central of New Jersey, Lehigh Valley and Ann Arbor (each of which has been found to be non-reorganizable on an income basis under §77); and Ene Lackawanna and Boston & Maine (each of which has been found re- organizable on an income basis under §77 and hence excluded from the RRRA). There is one Class II railroad (defined as a railroad with oper- ating revenues-of less than $5 million) in reorganization, the Lehigh & Hudson River. ERNST G NER WES SAts SSR Pac = SDSS A ee ERT TRESS CUE AS EER e ear ese: 17 liens (§303(b)(2)), of its “designated” rail properties (§206(c)) to Consolidated Rail Corporation (“Conrail”), a nominally private for-profit corporation incor- porated under state law (§301(a)) which, however, is controlled by the United States Government through the device of a statutory provision (§301(d)) which mandates that 8 of the 15 directors of Conrail be gov- ernment officials or persons appointed by the Presi- dent with the advice and consent of the Senate. The “designation” is to be done by a final system plan pre- pared by USRA, a governmental agency specially cre- ated for this purpose (§201), with the assistance of the Rail Services Planning Office of the ICC (§205) pur- suant to statutory goals (§206(a)), factors (§206(b)), and provisions (§§206(c), (d), (e), (f), (g), (h), and (i)). The final system plan is to be adopted within 420 days of enactment (§207(c)), and submitted to Congress for its approval, which will be deemed given if neither house passes a resolution vetoing the plan during a 60-day period (§208(a)). In the event of a Con- gressional veto, it is USRA’s duty to prepare and sub- mit to Congress a revised final system plan (§208(b)), although there is no time limit for it to do so. When, as and if a final system plan becomes “effective” by surviving the Congressional veto under §208(a), it is to be delivered to the Special Court, Regional Rail Re- organization Act (§209(c)), and copies filed with each reorganization court (§209(d)). Within 10 days after certification of the final system plan by USRA to the Special Court, Conrail must deposit with the Special Court the stock and other securities of Conrail and any obligations of USRA designated in the final sys- tem plan (§303(a)(1)). Within 10 days of sugh deposit, the Special Court must order the trustees of the rail- roads (whose courts entered §207(b) orders subjecting ee 18 them to the RRRA) to convey forthwith to Conrail!® the rail properties designated in the final system plan. Only after the conveyances are made and are irre- vocable is there any judicial review (§§303(c) and 303(d)) of the final system plan to assure that it com- ports with the standards of “fairness and equity” de- veloped judicially during the era of equity re- ceiverships and given statutory sanction by §77. The foregoing statutory scheme of the RRRA is re- ferred to in this Brief as the “compulsory conveyance provisions of the RRRA.” This cross-appeal asserts that the compulsory conveyance provisions of the. RRRA are void for repugnance to the Constitution of the United States. This was an issue which the Court below declined to reach on the grounds that the issue was “premature” and not “npe” for decision. It is also an issue, however, which the Penn Central Re- organization Court was required to reach in its §207(b) “180-day” decision; that Court decided in favor of the New Haven Trustee’s position, holding squarely that the RRRA could not be sustained either under the Bankruptcy Clause powers or the Commerce Clause (eminent domain) powers of Congress, and that the RRRA violated the Fifth Amendment rights of se- cured creditor and stockholder claimants to the Penn Central estate. In re Penn Central Tranportation Co. (Memorandum in Support of Findings and Order No. 1596 Pursuant to the Second Sentence of §207(b) of the Regional Rail Reorganization Act of 1973), (E.D. Pa. July 2, 1974) (JA 124-51).'9 That decision has been appealed by the '8Conveyances may also be directed by USRA to be made to “profit- able” railroads operating in the region. A “profitable railroad” means a railroad which is not in recrganization (§102(9)), which in turn is limited to railroads subject to the RRRA (§102(12)). Thus the Erie Lackawanna and Boston & Maine, each in §77 reorganization, are “profitable rail- roads” as defined. 'SHereinafter cited as “Opinion in Support of Order No. 1596.” Sd itn 65D Sev PE NE hy ene a RAIS Bp ARES ES te NBER ALES A SNA BATS i : . 2 EAL BALTES LE BEE ORLY TOIT iG RIE te BS PR EME EHO 8508 BES OUCL ORO 19 United States, USRA and the ICC to the Special Court (where it is docketed as No. 74-8), whose decision thereon will be known before this appeal is heard; however, by reason of the seventh sentence of §207(b), no appeal from the Special Court’s decision will lie to any Court of Appeals, and hence this Court's statutory certiorari jurisdiction under 28 U.S.C. §1254 can not be invoked to review the Special Court’s decision.”° In the Argument section of this Brief, the New Ha- ven Trustee analyzes why the court below was in error in finding the constitutional issue as to compulsory conveyances under the RRRA “premature” and not “ripe” for adjudication. The basic error was the court’s failure to acknowledge the features of the RRRA which will preclude effective judicial review of the same constitutional issues at a later time, namely §209(a) and the last sentence of §303(b)(2). The court below also mis-applied the prior decisions of this Court dealing with when constitutional issues can be avoided by reason of the speculative character of the alleged injury. The New Haven Trustee points out how the RRRA, if the Government Defendants are not ' enjoined from enforcing it, threatens to destroy the collectibility of the sum of $123,809,404 plus interest owed to him by Penn Central under this Court’s de- cision in New Haven Inclusion Cases, supra, and thereby subject the New Haven bondholders (for whom he is a fiduciary) to further diminution in the assets of the New Haven estate available to support their claims to the equivalent of a per-parcel liquidation sale of New 20However, if a party aggrieved by the Special Court's §207(b) de- cision files a petition for certiorari to this Court under 28 U.S.C. §1651 al- leging that the decision gives effect to an unconstitutional enactment of Congress, and that the seventh sentence of §207(b) is itself uncon- stitutional, this Court may have power to issue a wnt “necessary or ap- propriate in aid of [its] junsdiction” directly to the Special Court. 28 U.S.C. §1651. Cf. In re 620 Church Street Bldg. Corp., 299 U.S. 24 (1936). ESERIES LOL ELE LEE LI CLL CLG EDIE IIE BEN >. ee ep E ‘ ~ 20 Haven’s rail assets as of December 31, 1966. New Ha- ven Inclusion Cases, supra at 489-90. In Section II of the Argument, the New Haven — Trustee describes the manner in which the compulsory conveyance provisions of the RRRA violate his Fifth Amendment rights. The legal and factual setting of the RRRA is described, including an historical review of the development of the law in the field of equity re- ceiverships, §77B, Chapter X and §77 of the Bank- ruptcy Act, from Northern Pacific Ry. v. Boyd, 228 U.S. 482 (1913) through the latest definitive decision of this Court, New Haven Inclusion Cases, supra. The factual setting includes the treatment of the New Haven Trustee’s Plan dated June 27, 1973 for reorganization of Penn Central, an admittedly novel but nevertheless serious attempt by private interests to propose a set- tlement with the representatives of the public interest which was designed to permit private claimants to re- ceive fair and equitable value of their claims while al- lowing public-interest claimants to receive securities and common stock of a “core system” made up of Penn Central rail properties comprising 11,000 route miles of mainline and principal feeder lines to be op- erated as a freight-only railroad divested of re- sponsibility for passenger service. The rejection of that plan, first by the United States Departments of Trans- portation and Justice (whose cooperation was es- sential), and then by the ICC by its Report of Sep- tember 28, 1973 (refusing to certify any plan for Penn Central), casts a long shadow on the Government’s principal contention in support of the constitutionality of the RRRA: that Conrail’s operations can be made viable through reduced trackage and divestment of re- sponsibility for passenger train operation. The New Haven Trustee then analyzes the com- pulsory conveyance provisions of the RRRA in terms of the nature and amount of securities of Conrail and obligations of USRA which car be included in a final ERAS Rito La + AER IN RC A i 21 system plan, the limited ability of the Special Court to order additional amounts of the same types of se- curities provided for in the plan, and its authority to issue a deficiency judgment against Conrail, a provi- sion aptly described below as “essentially circuitous.” These features of the statute are then compared to the decisions of this Court in cases where private property ; is taken for a public use under authority of an act of . Congress, which set forth the principle that justcom- | pensation means an amount of money or its perfect equivalent equal to the “highest and best use” value of . the properties taken for public purposes. The dubious constitutionality of Conrail’s acquiring the Boston— Washington corridor properties free of lien in ex- change for securities, and then selling the corridor properties to Amtrak for $500 million as contemplated by §206(c)(1)(C) and §601(d) of the RRRA, is ana- lyzed, and a decision of Judge Fullam, in the §207(b) proceedings of the Secondary Debtors, holding this feature of the RRRA unconstitutional, is noted (JA 153-56). : The brief then discusses the Government's prin- cipal rationale in support of the constitutionality of the compulsory conveyance provisions of the RRRA. The Government contends that if Congress and the gov- ernmental agencies can design a Conrail with some limited prospect of earnings, the capitalized value of those prospective .earnings automatically fixes the value of all-rai! properties to be conveyed to Conrail, and that, based on New Haven Inclusion Cases, supra, there is no constitutional necessity for the value of the securities issued in a reorganization to be equal to the “highest and best use” value of the railroad property conveyed in exchange for such securities. The Gov- ernment further contends that even if the fair capital- ized value of the reasonably projected net earnings of a reorganized company would be substantially less than the liquidation value of the debtor railroad’s rail properties, creditor and stockholder claimants must Nie HERR M ee aN Perey ENNIO PEE ERP RUMSEY OORT AEN EDS wren etn, TETRA PROTEIN WPT eh hie gh), 5 Nat Ov ang, Oe ee erent ee ae 22 nevertheless accept those securities in full satisfaction of their claims. The New Haven Trustee points out that both the opinion of this Court in New Haven In- clusion Cases, supra, and the opinion of the New Haven Reorganization Court, fail to support the Gov- ernment’s principal thesis and, in fact, squarely recog- nize that the claimants to a railroad estate have a nght to realize value not less than the “highest and best use” value of the properties subject to their claims. The brief then discusses the nature of Conrail as a governmentally created and controlled entity, and the distinctions which set the RRRA apart from all prior laws on the subject of bankruptcy. With specific refer- ence to the provisions of §301(d) of the RRRA, the New Haven Trustee points out that Conrail will, for the indefinite future, be wholly controlled by the United States Government, and the owners of 100% of Conrail’s common stock will have absolutely no right to control basic decisions which would affect Conrail’s viability and profitability, and therefore the value of its stock. Accordingly, viewed solely as an ex- ercise of the Bankruptcy Clause power, it is contended that the compulsory conveyance provisions of the RRRA violate substantive due process rights accorded to claimants by the Fifth Amendment. The brief next discusses the contention that the re- quirement that rail properties of Penn Central be ex- changed for securities of Conrail is the practical and legal equivalent of a denial of Penn Central’s con- stitutional rights to dismissal of reorganization pro- ceedings and termination of deficit rail operations. The brief discusses the cases which hold that a com- mon Carrvier’s responsibility for continued public ser- vice is not absolute but is subject to the Fifth Amend- ment right to withdraw the carrier's property from service once it has become clear that there is no rea- sonable expectation of its earning a reasonable return on its investment. ' BE SCRIP NL a a est ” iB ORE AE Lat ORAL Fe AER 23 The New Haven Trustee then analyzes the manner in which public interest goals of the RRRA could be implemented by an amendment to the statute which would cure its constitutional defects. It is suggested that the basic defects of the Act could be cured by having USRA initially subscribe to the capital stock of Conrail and thereby assume the burden of en- trepreneurial risk with respect to the proposition that Conrail’s operations can be so structured as to make Conrail a profitable carrier. In Section III, the New Haven Trustee turns to a discussion of how the procedures of the RRRA offend procedural due process by mandating conveyance of rail assets prior to judicial review of the adequacy of the consideration, particularly when there is no pos- sibility that a court may subsequently set aside the con- veyances upon a finding ie compensation has not been paid. Section IV of the Argument discusses the con- tention that the compulsory conveyance provisions of the RRRA, as an amendment of §77 of the Bank- ruptcy Act, constitute legislation “on the. subject of © bankruptcy” which is void on grounds of lack of geo- graphical uniformity required by Article I, Section 8, Clause 4 of the Constitution. It is asserted that the court below was correct in holding that claimants to the Penn Central estate have standing to challenge the RRRA on grounds of lack of geographical uniformity, but erred in limiting the impact of its holding to a sin- gle provision of the RRRA requiring mandatory dis- missal of §77 proceedings upon a finding that the Act’s processes are not “fair and equitable.” The court’s conclusion that the RRRA adds nothing to the powers of reorganization courts under §77 to impair the obligations of contracts of secured creditors of a railroad is asserted to be in error based on a com- parison of the operative provisions of the RRRA and their asserted counterparts found in §77. a # 4 i a D7 & é e % ¥ fe: £ # a ¥ g , * ae SGOT NY eR a » Ss — 39 flected the accumulated judicial experience of dealing with equity receiverships. Section 77, the Bankruptcy Act provision which has governed railroad reorganization from 1933 until the enactment of the RRRA, while departing in many re- spects from equity receivership and §77B re- organizations, nevertheless involved judicial scrutiny as to whether the standards of the Boyd, Case and Consolidated Rock decisions, supra note 29, were met. Section 77(e) required that before a plan of re- organization could be carried out the judge must find that the plan, certified to the court under §77(d) by the ICC, was “fair and equitable.” Under §77, the ICC and the court could determine that the stockholders of the railroad, or any class of creditors, had no equity and could properly be awarded nothing in the plan. See Ecker v. Western Pacific R.R. Corp., 318 U.S. 448 (1943); Group of Institutional Investors v. Chicago, M., St. P. & P.R.R, 318 U.S. 523 (1943). The 1935 amend- ments to §77 included a “cram-down” exception to the voting: requirement that the plan be approved by at least two-thirds in interest of each class entitled to par- ticipate in the plan. The cram-down exception, which essentially completed a statutory scheme which has re- mained intact until the RRRA, permitted the judge to override the objections of a dissenting class of cred- itors- provided he determined that the plan provided fair and equitable treatment for the interests of those rejecting it and found that “such rejection is not rea- sonably justified.” See Reconstruction Finance Corp. v. Denver & R.G.W. R.R., 328 U.S. 495 (1946). %The words ‘fair and equitable’ . . . are words of art which prior to the advent of §77B [the predecessor of Chapter X] had acquired a fixed meaning through judicial interpretations in the field of equity re- ceivership reorganizations.” Case v. Los Angeles Lumber Products Co., supra, 308 U.S. at 115. CPS oo OTR IIS sash blest, ; : ¥ E a ba * a oy RAO GE TH MBO a ON HR ORE 40 Until the reorganization "proceeding of the. New ‘~ Haven Railroad which commenced in 1961, prior rail- road reorganization cases under equity receiverships and §77 had generally involved debtor corporations which were viable businesses-but were financially em- barrassed in the sense that their operations could not support their existing capital structures. As Judge - Fullam noted in his concurming opinion, “Both §77(e) and the Supreme Court’s pro- nouncements in Consolidated Rock Products, Ecker and /nstitutional Investors cases require that earning ower or income-generatin capacity of the debtor “be the measure of a railroad’s value.’ (JA 68) Except for the happenstance of the Penn Central merger, hereinafter discussed, the New Haven’s re- organization might well have gone the way of the New York, Ontano & Wester Railroad, which ended in a liquidating equity receivership,*! since the ICC and the Court each found that the New Haven had no pos- sibility of achieving profitable status, or even net in- come before fixed charges: “The concept of ‘going concern value’ is fictional as applied to the New Haven because it ignores the Railroad’s long and continuous history of deficit operations.” In re New York, N.H. & H. R.R., 289 F. Supp. 451, 455 (D. Conn. 1968). In the case of the New Haven’s §77 proceedings, a totally fortuitous event emerged to make possible a re- organization plan under §77, rather than dismissal of reorganization proceedings and a liquidating equity re- ceivership: two major, profitable trunk-line carriers, *'See New York, Ontario & Western Reorganization, 295 1.C,C., 346 (1956), in which the railroad was declared unreorganizable by the ICC, leading to a dismissal and liquidation of the enterprise. Seé also Jn re New York, Ontario & Western Ry., 171 F. Supp. 634, 635, 647 (S.D.N.Y. 1958). ai a) on EF AAR RRS ae 41 one operating in the New Haven’s territory, the New York Central Railroad, and the other a connecting car- rier with the New Haven, the Pennsylvania Railroad, petitioned the ICC for authority to merge, thereby opening up the possibility of an inclusion petition by the New Haven Trustee pursuant to §5(2)(d) of the Interstate Commerce Act. What then followed is ~ known to this Court and need not bear repetition. See” Penn Central Merger Cases, supra; New Haven Inclusion Cases, supra3* In relation to an assessment of the RRRA, the most important aspect of the New Haven experience is that the Trustees of the New Haven perceived that the merger of the Pennsylvania and New York Central Railroads offered the possibility of a solution which recognized both the compelling public interest in maintaining rail transportation in Southern New En- gland and the satisfaction, through securities of a (then perceived to be) profitable trunk line railroad system, of the private interest in realizing the equitable equivalent of the highest and best use value of the New Haven’s rail properties. There was thus a voluntary decision and recommendation by the Trust- ees of the New Haven to pursue inclusion in the pro- posed merged Penn Central, and to seek to sell the : New Haven’s rail assets to the merged Penn Central, subject to administrative and judicial determinations as **One aspect of the New Haven situation which does deserve re- petition is the fact that the rights of the New Haven bondholders have now been held in suspension under §77 since July, 1961, and no im- mediate relief is in sight. As Judge Fullam commented in his opinion below: “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 permit 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.” (JA 81). + Fe oe a nae ees ak Se Poe eta Ree eee | ee MM I eT CU De en a a ea ee, ee ORME AMI AEY RAE IR CE DARTS OT EO rg BE EY ™ ¥ 42 to the equivalence of value of the assets and the con- sideration (in the context of a §77 plan of re- organization), as being in the financial self-interest of the claimants to the New Haven estate, as well as in the public interest. The New Haven Bondholders’ rep- resentatives initialiy acquiesced in the concept of in- clusion, although reserving their rights with respect to the adequacy of the consideration. The Bondholders originally opposed consummation of inclusion prior to a final decision as to the consideration (leading to the “Procrustean measures” language by Mr. Justice Fortas in Penn Central Merger Cases, 389 U.S. at 510-11), but later consented to the conveyance of New Haven’s as- sets and divestment of their liens on the basis of as- surance of subsequent judicial review as to the ade- quacy of the consideration. Thus, New Haven Inclusion Cases arose in a procedural context totally at variance with the factual setting of the present case. In the case of Penn Central’s reorganization, there was no possibility of a solution involving voluntary ac- b quisition of the rail assets by another carrier or carrti- ers, since no carrier could afford to assume Penn Cen- tral’s deficits in net railway operating income amounting to some $90 million annually. This, how- ever, did not prevent the private parties in interest from attempting to seek a solution. Particularly signifi- cant in the present contextwas an attempt by the New ; Haven Trustee to achieve an accommodation between i the interests of the public sector in continued rail 4 transportation and the interests of the private creditors \ and stockholders of Penn Central in receiving value equal to their respective equities in an estate whose overall liquidation value is indicated to be upwards of | $4 billion. The New Haven Trustee’s Plan for Re- 4 organization of Penn Central, filed with the ICC on | June 28, 1973, called for expedited action by the ICC under §1(18) of the Interstate Commerce Act to adopt § ¥ ~ 4 po paealiee 43 a “core system” of 11,000 miles, and to approve and certify pursuant to §77(d) a plan under which the rail properties of Penn Central required for the 11,000- mile system would be transferred to a new cor- poration, “Core Railroad;” the Boston-Washington passenger corridor would be operated on the basis of a governmental subsidy providing for a return on in- vestment by a new corporation, “Northeast Railroad,” which would lease trackage rights for which it would pay Core Railroad a fair rental based on the value of the property fairly allocable to passenger operations; non-rail and surplus rail assets would be segregated; and an investment company called Penn Central En- terprises (all of the securities of which would be issued to private creditor and stockholder claimants of Penn Central, in the order of the priority of their claims) would be created to hold all of the non-rail assets of Penn Central, plus all of the stock of Northeast Rail- road, a portion of the stock of the Core Railroad and -all the stock of a liquidating subsidiary to which non- essential rail properties would be conveyed. The New Haven Trustee’s Plan required the United States and other public interest claimants, including labor claimants, to accept senior debt securities, junior se- curities amd common stock of Core Railroad in ex- change for all of their claims. The Plan was not ap- proved by the ICC, which held hearings in August 1973 on the New Haven Trustee’s Plan and two other proposed plans for reorganization submitted to it pur- suant to §77(d).33 The United States Departments of *sThe other plans included a plan filed by the Penn Central Trustees which called! for cessatidty of operation and sale of all rail properties to others, hopefully to public authorities and other railroads interested in operating the properties; and a plan filed by Penn Central Company which contemplated an action against the United States in the Court of Claims under 28 U.S.C. §1491 (“Tucker Act”). The ICC held that the Trustees’ proposed plan was not a “plan” within the meaning of §77(d). The ICC rejected the plan filed by Penn Central Company. eee meh od pe Pe NE 44 Transportation and Justice opposed the New Haven Trustee’s Plan. In a report dated September 28, 1973, the ICC rejected the New Haven Trustee’s Plan on a - number of grounds, but principally that the Gore-Raik.. road would not be economically viable.*4 The efforts represented by the New Haven Trustee’s Plan, the opposition to it of the government and its rejection by the ICC, are significant to the de- cision here. The refusal of the ICC, after objection by the government, to approve a plan calling for an 11,000 mile streamlined “core” freight-only railroad; made up of principal main line and high density feeder routes, as proposed by the New Haven Trustee, must fairly be deemed to cast a long shadow on the underlying theory of the RRRA, which is based on the assumption that Conrail, a freight-only railroad3> made up of the essential or “core” lines of Penn Central and a few other relatively small bankrupt carriers, could be designed so as to be economically viable. In any event, the New Haven Trustee treated the ICC’s rejection of his Plan as dispositive of any private attempt to arrange an accommodation with the public sector. The Plan provided that, if it were not promptly accepted by the ICC, the United States, organized la- bor and the States (in respect of tax claims), whose vol- untary consent thereto was a necessary precondition, the New Haven Trustee would move promptly under §77(g) for dismissal of the §77 proceedings, and, un- der §77(i), for an equity receivership calling for the *As noted above, the ICC's September 28, 1973 Report is Doc. No. 54 in the Joint Documentary Submission. The New Haven Trustee's Plan is described at pp. 27-36; the ICC’s conclusions are set forth at pp. 59-77 and in App. DD. *The RRRA contemplates that Conrail will sell or lease the Wash- ington-Boston passenger corridor to National Railroad Passenger Cor- poration (Amtrak). See §§206(c) (1) (C) and 601 (d) of the RRRA. sor Ne ny ee ay Rw t 2 a ete By PLT ANG Rta. IM SA EP SRT EAE 45 prompt liquidation of Penn Central's rail properties.*¢ The New Haven Trustee accordingly on October 9, 1973 filed his §77(g) Motion to dismiss Penn Central's §77 proceedings.*’ Congress was aware of the pendency of the §77(g) motion while it was considering the RRRA, as evi- denced by the legislative history.** Apparently with the intention of mooting the §77(g) motion, Congress then amended pending bills so as to expand the definition of “railroad in reorganization” (RRRA, §102(12)) to in- clude railroads in equity receiverships.*® Congress also *®A liquidation equity receivership would not, of course, be incon- sistent with a series of sales of rail properties for continued railroad use (at the “highest and best use value”) to public authorities (federal and state) and other railroads (such as che major trunk line carriers in the West and South, as well as the Northeast, which carry substantial Penn Central originated and terminated traffic). *7Doc. No. 13 in the Joint Documentary Submission. The Penn Cen- tral Reorganization Court at first did not hold any hearing on the §77(g) Motion on the ground that it was waiting for a legislative solution. See /n re Penn Central Transportation Company (Columbus Option Appeals), 494 F. 2d 270 (3d Cir. 1974), petition for cert. filed, 42 U.S.L.W. 3633 (May 8, 1974). On May 6, 1974, a hearing was held on the §77(g) Motion, but no decision has been forthcoming. Judge Fullam has stated that he de- liberately deferred action on the §77(g) Motion of the New Haven Trustee: “By a series of actions and inactions which need not be detailed here, this Court held all such proposals in abeyance pending action by Congress on the RRRA.” Opinion in Support of Order No. 1596, supra (JA 131). On August 8, 1974, by Order No. 1648, Judge Fullam ordered the Penn Central Trustees to file a report on September 3, 1974, and called a hearing on September 17, 1974, with respect to the desirability of se- questration of non-rail income for the purpose of paying taxes and other administration expenses now being deferred, and again specifically de- ferred any adjudication of the §77(g) Motion pending said hearing. See, e.g, 119 Cong. Rec. H. 9767 (daily ed. Nov. 8, 1973; remarks of Rep. Shoup, co-sponsor of the Shoup-Adams bill which eventually be- came the House version of the RRRA); 119 Cong. Rec. H. 9731 (daily ed. Nov. 8, 1973; remarks of Rep. Adams relative to the Shoup-Adams bill). Compare §103(11) in “Working Paper No. 1, Rail Services Act of 1973,” dated Nov. 11, 1973: “(11) ‘Railroad in reorganization’ means a railroad which is a debtor in a reorganization proceeding under section 77 of the Bankruptcy Act (11 U.S.C. 205),” with §103(12) in S. 2767, re- ‘ported to the Senate on Dec. 3, 1973, in which the following sentence first appears: “A ‘bankruptcy proceeding’ includes a proceeding pur- suant to section 77 of the Bankruptcy Act (11 U.S.C. 205) or an equity receivership or equivalent proceeding.” oe ee ea ee TREE Jecatinad, \ rc eae a ee Parr ae oot ag. Peeesnnn Hd ire, Sgazenn 46 designed §207(b) in such a way that one of the pos- sible factual foundations for the granting of the §77(g) Motion, that an incume-based reorganization was not possible, would itself trigger compulsory conveyances (RRRA, §207(b), first sentence) rather than a dismissal of the proceedings under §77(g). Subsequently, the Institutional Investors Penn Cen- tral Group and substantially all indenture trustees of Penn Central System bonds petitioned for a prompt “termination of rail operations. This petition was prem- ised on a view that termination of rail operations and sale of rail properties could be achieved even if §77 proceedings continued. A petition was also filed by Penn Central Company, the holding company owning all of Penn Central's stock, fora segregation of non- rail properties from rail properties and cessation of rail operations.*© These petitions, together with the New Haven Trustee’s §77(g) Motion, establish the unanim- ity of substantially all creditor and stockholder parties in the position that deficit rail operations of Penn Cen- tral are constitutionally required to terminate. The relationship between the RRRA and the pend- ing motions to dismiss Penn Central’s §77 proceedings and terminate rail operations is clearly stated by Judge Fullam in his opinion below: “Another aspect. of the RRRA’s impact that war- rants consideration, is the relationship of the avail- ability of the RRRA’s processes to the pending peti- tions to terminate rail services and to dismiss Penn Central’s §77 proceeding. Obviously, the RRRA is an important factor to be anand by the reorganization court in assessing |the] validity of the petitioners’ contentions “The peisions to termimate rail operations were heard by the Re- organization Court on May 6, 1974, together with the hearing on the New Haven Trustee's §77(g) Motion, and remain undecided. As noted above, a hearing has been scheduled for September 17, 1974 with re- spect to the desirability of sequestering non-rail income for the purpose of paying administrative expenses, and Order No. 1648 calling such hearing has specifically deferred adjudication of these petitions and the §77(g) Motion. ie Fgh BS ae Shr 73 = geen : : 4 ste Sete ee ae nee. en a). ee ae Oe Mee creme sf 47 TD TIA Y steer LEE EL TENE apoE TELA, OS AE BENE LOR AY ERG SPIE AGEL FM Ee TES fe on eee | _— Salad 54 The Governmental Defendants likewise relied be- low upon the “Tucker Act remedy,” but with a some- what different emphasis. The Governmental De- fendants argued that if USRA were able to design a final system plan undér which Conrail could be shown to have the potential to earn net income before fixed charges, then the capitalized value of the prospective net earnings (i.e}the value of Conrail common stock and its other securities for purposes of reorganization) would automatically fix the value of the rail properties con- veyed to Conrail. However, recognizing that the value - thus determined for rail properties of the bankrupt: carriers might be far less than the liquidation value of those properties if sold for their highest and best use, the Governmental Defendants argued below that any constitutional “short fall” could be remedied by a suit in the Court of Claims against the United States. The Court below unanimously rejected the “Tucker Act remedy” arguments of both the Penn Central Trustees and the Governmental Defendants. The New Haven Trustee asserts that this disposition was correct, and the point will be fully briefed in his Brief herein as an Appellee. In the instant Brief the New Haven Trustee will assume that the Court below was correct without argument of the question, and that no “Tucker Act remedy” exists for any failure of the stock and other securities of Conrail (including up to $500 million of obligations of USRA if subsequently authorized by Congress under §206(i)) to equal the “highest and best use” value of the Penn Central rail assets designated in a final system plan for conveyance to Conrail. (footnote continued from prior page) no. 12 in E.D.Pa.C.A. No. 74-1107, May 17, 1974) because the United States interposed the defense of sovereign immunity to any declaratory judgment that a “Tucker Act remedy” exists, while at the same time as- serting the affirmative defense of an “adequate remedy at law.” Poe X a9 In. his motion for summary judgment below, the New Haven Trustee alleged that the RRRA constitutes a taking by force of law for a public use of the prop- erty of Penn Central of two types: (a) during the pe- nod from enactment of the RRRA through the date of conveyances under §303(b), as a law requiring that pri- vate property be devoted to public use without the owner being afforded a reasonable expectation of profit or return on his investment;** and (b) upon the happening of the §303(b) conveyances, as a law pro- viding for the taking for public use of (i) the right, title and interest of Penn Central as owner in fee or as to a leasehold estate of the designated rail properties, and (ii) the nght, title and interest of the New Haven Trustee as mortgagee and lienholder. The first type of taking was enjoined by the Court’s order below. The instant cross-appeal deals with the failure of the Court below to enjoin the second type of taking. There is no dispute that, once a §207(b) order com- pelling Penn Central to convey its property were to be entered by the Special Court,*? the RRRA would, by force of law, inexorably require conveyance of desig- nated rail properties of Penn Central to. Conrail in ex- change for the consideration of the types specified in the RRRA. There is also no dispute that the con- sideration specified in the RRRA does not include money. “The Court below granted this portion of the New Haven Trustee's motion for summary judgment. *°As is sought by the United States, USRA, the ICC and the other governmental parties who have filed a joint brief dated August 5, 1974 seeking to reverse Judge Fullam’s Order No. 1596 (Special Coun, Re- gional Rail Reorganization Act, No. 74-8). As noted above, the Penn Central Trustees, although they argue for a “Tucker Act remedy” to save the RRRA, are aligned with the creditors and stockholders of Penn Cen- tral as appellees in support of Order No. 1596 rejecting the RRRA as not being “fair and equitable” to Penn Central. The New Haven Trustee submits that, once a tak- ing of private property is established to have taken place under an Act of Congress, or to be the inevitable consequence of the implementation of such an Act, the implementing legislation must provide for pay- ment to the owners of that property of the “full mon- etary equivalent of the property taken.” Almota Farmers ny Elevator & Warehouse Co. v. United States, 409 U.S. 470, a 473 (1973). See United States v. Reynolds, 397 U.S. 14, ie 16 (1970). In United States v. Miller, 317 U.S. 369, 373 (1943), this Court held: “The Fifth Amendment of the Constitution pro- vides that private property shall not be taken for public use without just compensation. Such com- pensation means the full and perfect equivalent in money of the property taken. The owner is to be ut in as go Cage pecuniarily as he would ave occupied if his property had.not been taken.” : (Footnotes omitted). 5 rureedernanese See also Monongahela Navigation Co. v. United States, 148 U.S: 312, 326 (1893), where it was stated that: “The noun ‘compensation’ [as used in the phrase & ‘just compensation’ in the Fifth Amendment], r standing by itself, carries the idea of an equivalent. - . And this is made emphatic by the adjective ‘just.’ There can, in view of the combination of those two words, be no doubt that the compen- sation must be a full and perfect equivalent for the property taken. . . . This excludes the taking into § account as an element in the compensation of any se *°The full quotation is as follows: 3 “The Fifth Amendment provides that private property shall not be ® taken for public use without ‘just compensation.” ‘And ‘just compen- sation’ means the full monetary equivalent of the property taken. The owner is to be put in the same position monetarily as he would have occupied if his property had not been taken’ United States v. Reynolds, 397 U.S. 14, 16 (footngtes omitted). See also United States v. Miller, 317 U.S. 369, 373.” aoc) meee LEPTIN 57 supposed benefit that the owner may receive in common with all from the public uses to which his private property is appropriated, and leaves it to \ stand as a declaration that no private property shall be appropriated to eget uses unless a full and ex-_ act equivalent for it be returned to the owner.”>! The only question which remains, assuming that the “full monetary equivalent” test must be met, is whether the Congress is free to legislate, in connection with a taking, that something other than money shall be the equivalent of money. In other words, can Con- gress declare, for example; that the stock of Conrail is: to be the legal equivalent of money and, if it does, what is the constitutional effect of that legislative dec- laration? The question was squarely presented in the Monongahela Navigation case, supra, and was squarely answered as follows: “By this legislation Congress seems to have as- sumed the right to determine what shall be the measure of compensation. But this is a judicial, and not a legislative question. The legislature may de- termine what private property is needed for public purposes —that is a question of a political and leg- islative character; but when the taking has been or- dered, then the question of compensation is judi- cial. It does not rest with the public taking the property, through Congress or the legislature, its representative, to say what compensation shall be aid, or even what shall be the rule of compensation. he Constitution has declared that’ just compen- sation shall be paid, and the ascertainment of that *'This holding was cited with approval by this Court in 1970 in United States v. Reynolds, supra, and the Reynolds decision was in turn cited with approval by the Court in 1973 in Almota Farmers Elevator & Ware- house Co. v. United States, supra. Thus there can be no doubt that the Monongahela Navigation decision in 1892 remains the current and author- t itative holding of this Court on the issue. : fo iltnr Ps ® = ™, sf : 5 5 RE ERMES IF LOL EE NIT ROMS titi | a 2 “& * _ 4 58 is a judicial inquiry.” 148 U.S. at 327 (emphasis added).52 . In the compulsory conveyance provisions of the RRRA (particularly §§206(d), 303(b) and 303(c)), Con- gress has specifically legislated the nature and rule of the compensation to be provided to railroads in re- organization for the compulsory “transfers or con- , veyances” of their property. By providing as a limit on, and a test of, “just compensation,” that the Special Court shall decide “fairness and equity” on the basis of solely (i) stock and possibly other securities of Conrail, . , (ii) obligations of USRA not exceeding $500 million principal amount, and (iii) “other [undefined] bene- fits,” Congress is in contravention of the clear holding of the Monongahela Navigation case. There is, in fact, but one medium of exchange which is the “perfect equivalent of the property taken,” namely money prescribed by Congress as legal tender for the payment of all debts, public and pn- vate. While it has the power to declare what “money” is, and what shall be legal tender for payment of pri- vate and public debts, and even to override incon- sistent provisions in private contracts,%3 Congress has no power to declare that something which is not money is, as a matter of law, the perfect equivalent of money. As the Monongahela Navigation, Miller, Reynolds and Almota cases make plain, the law on this subject has not changed since 1795 when it was stated: 52See Baltimore & Ohio R.R. v. United States, 298 U.S. 349,364(1936): “Congress has no power to make final determination of just compen- sation or to prescribe what constitutes due process of law for its ascer- tainment.” (Footnote omitted). The Court citéd with approval the por- tion of the Monongahela Navigation opinion quoted in the text. *SAs to the power of Congress to make Treasury notes legal tender, see Knox v. Lee, 79 U.S. (12 Wall.) 457 (1871) ; Juilliard v. Greenman, 110 U.S. 421 (1884). As to the power of Congress to invalidate gold clauses in private contracts, see Norman v. Baltimore & Ohio R.R., 294 U.S. 240 (1935); and see other “Gold Clause Cases” decided the same day. ESL EAMES DET RI OE FILO SEE IY ETI ANI TO KO MEE MTS UN RY et cy 59 “No just compensation can be made except in money. Money is a common standard, by com- parison with which the value of any thing may be ascertained. It is not only a sign which represents the respective value of commodities, but it is an universal medium, easily portable, liable to little variation, and readily exchanged for any kind of property. Compensation is a recompense in value, a quid pro quo, and must be in money. True it is, that land or any thing else may be a compensation, but then it must be at the election of the party; it cannot be forced upon him. His consent will le- galize the act, and make it valid; nothing short of it will have the effect.” Vanhorne’s Lessee v. Dorrance, 2 Dall. 304, 313 (Circuit Court Pa..1795). These legal precedents establish that the RRRA is unconstitutional on its face and as applied to Penn Central, when considered as an exercise of Congress’ Commerce Clause/eminent domain powers, and re- sults in a permanent taking of the property of Penn Central and the New Haven Trustee without payment of just compensation in legal tender, n violation of the Fifth Amendment. As an eminent domain statute, not even the existence of a “Tucker Act remedy” under 28 U.S.C. §1491 to cover a “short fall” between the con- sideration provided by the Act and the “highest and best use” value of Penn Central’s rail properties would suffice to render the statute constitutional, since claimants of Penn Central are entitled to full payment in money or its perfect equivalent. Almota Farmers El- evator (F Warehouse Co. v. United States, supra, and other cases cited above. Whether or not the stock or other securities of Conrail have demonstrable value, such se- curities are plainly not money or its perfect equivalent. In its Opinion in Support of §207(b) 180-Day Findings in the Secondary Debtor Proceedings (E.D. Pa. July 2, 1974) (JA 153-56), the Penn Central Reorganization - CESAR pes lam 3 a $ é 4 Fd | 3 ~ 60 Court held unconstitutional the provisions of §§206(a)(3) and 601(d) of the RRRA, which require rail properties in the Boston-Washington passenger corridor to be sold or leased by Conrail to National Railroad, Passenger Corporation (Amtrak), following the §303(b)(1) conveyances and the §303(b)(2) di- vestments of liens. The basis of this holding was that the RRRA, at least in this area, clearly involves an ex- ercise of eminent domain powers without provision for payment of just compensation in money. Judge Fullam observed: “A further problem . . . arises in connection ‘with the provisions of the Act dealing with the so-called “northeast corridor” from Boston to Washington. Virtually all of this property is owned by the Sec- ondary Debtors** and leased to Penn Central... . The vernment, in the present Gate has taken the position that Conrail will be able to raise $500 million in cash by acquiring the northeast cor- ridor properties and then selling them to Amtrak pursuant to §601(d) of this Act. While the public purpose of these provisions of the statute is quite clear, the constitutionality of that approach seems par- ticularly dubious. Certainly, if Congress were to give Amtrak the power of eminent domain, Amtrak could properly acquire the corridor properties. But I find it difficult to accept the theory that it is con- stitutionally permissible for the government to achieve that result by means of the RRRA, without providing the present owners of the property with cash or us equivalent.” (JA 155; emphasis added). 7 **The corridor properties owned by the Secondary Debtors are lo- cated between New York City and Washington. Between the New York- Connecticut state line and Providence, R.1., the corridor properties are former New Haven properties which are subject to the New Haven Trustee’s Mortgage and claimed equitable lien. 61 C. The Fifth Amendment Requires that a Railroad in Reorganization, Which Is Unable to Earn Net Railway Operating Income and Whose Properties Are Required to Be Continued in Perpetual Public Service, Be Paid _ Not Less than the “Highest and Best Use” Value of its Rail Properties Aside from Tucker Act remedy considerations,*® the gist of the contentions of the United States and USRA that the processes of the RRRA do not involve an unconstitutional taking of property rests on an as- sumption as to a valuation theory which appears to be a complete misreading of the hoJding of New Haven Inclusion Cases, supra. The point was specifically ad- dressed in a colloquy between counsel representing the United States and USRA and Judge Fullam at the “180-day” hearing on June 10, 1974: THE COURT: “Perhaps it is the ‘lateness of the hour, but it would seem to me one of the factors the Court would certainly have to consider in de- ciding whether this Act provides a fair and equita- ble process would be what the probable outcome or what the possible outcome would be at the yalu- ation stage. : MR. CUTLER: “My difficulty with that is there are so many imponderables involved on both sides of that valuation equation. - “To begin with, if a profitable railroad can be cre- ated, then it may be the only value that these es- tates are entitled to is the capitalized earning power of the profitable railroad. They may not be entitled to liquidation value. So you may not have to add in any other benefits at that point. °°As noted above, the unavailability of a “Tucker Act remedy” is ..ot argued in this Brief but will be & | a a 4 3 RRO MAC TT HEE ML CS 68 compelled to convey to a nominally private (but gov- ernmentally controlled) rail corporation a designated portion of New Haven’s rail properties in exchange for common stock and possibly other securities of this new entity, all without benefit of any “underwnting” to assure that the value of this package of securities was equal to $174,635,899, the amount finally ap- proved as the “highest and best use” value of New Ha- ven’s assets. Moreover, the Government argues that the capitalized value of the earnings predicted to be earned by the buyer of the designated rail properties | determines their value to the seller even though such properties might have a higher value to the seller if sold for non-rail use or if condemned by one or more public authorities. Such an argument confuses the “ap- ples” of the theory of capitalized value in an earnings- based reorganization with the “oranges” of the basic rationale of bankruptcy law, that a debtor's property be applied for the benefit of claimants to its estate. in the order of the pnrionty of their claims. This repre- sents a sharp departure from any prior decision of this Court, including most particularly the New Haven In- clusion Cases, upon which the Government seeks to rely for its theory of valuation. 69 ! D. The RRRA Is Constitutionally Defective in Requiring Payment for Rail Assets in the Form of Securities of Conrail Without Any Provision for a Guarantee that the Value of Such Securities Will Be the Perfect Monetary Equivalent of the “Highest and Best Use” Value of.the Rail Assets This section of the Brief analyzes the nature of Conrail as a governmentally created and controlled en- tity, the facts in the record as to the value of the rail properties comprising Penn Central's System under the “highest and best use” standard of the New Haven Inclusion Cases, and the reasons why securities and common stock of Conrail, plus an amount of gov- ernmentally guaranteed debt instruments not ex- ceeding $500 million, could not be viewed as the per- fect equivalent of the “highest and best use” value of the portion of Penn Central's rail assets to be designa- ted for conveyance to Conrail under the RRRA. Although the compulsory features of the RRRA are sufficient, by themselves, to distinguish the RRRA from any pnor law “on the subject of bankruptcy” heretofore enacted,*? it is the governmental control of Conrail which most clearly marks the RRRA as an ex- ercise of the Commerce Clause/eminent domain pow- ers of Congress. Compulsory conveyance of properties to a governmentally created and controlled cor- It is true, of course, that the “cram-down” feature of §77(e), up- held in the Denver © Rio Grande case, supra, represents an element of ju- dicial compulsion; however, the court in §77(e) is required to find that a plan rejected by a class of creditors “makes adequate provision for fair and equitable treatment for the interests and claims of those rejecting it” and “such rejection is not reasonably justified in the light of the re- spective rights and interests of those rejecting it... .” In the RRRA, by contrast, there is no voting by creditor or stockholder claimants to the railroad’s estate, nor any judicial proceedings to determine that their re- jection of Congress’ plan “is not reasonably justified” in the light of their nghts and interests. e & & 4 a kiigy DiI NOLAN Meee 70 poration is not a feature of any prior “law on the sub- ject of bankruptcies.” The New Haven Trustee has no quarrel with the Congressional decision to place con- trol of Conrail in the hands of tne United States and its agencies in view of the extensive governmental fi- nancial commitment to Conrail. But Conrail will neces- sarily be as much a creature of Congress’ will as are Federal Deposit Insurance Corporation, Securities In- vestors Protection Corporation, and National Railroad Passenger Corporation. These are “nominally” private corporations which, however, serve primarily non-pri- vate purposes. Conrail is simply not fairly char- acteristic of “private enterprise.” It is “government en- terprise” in its creation, financing and control. The “government enterprise” nature of Conrail may be judged by the following legislative history: MR. KUYKENDALL: “Mr. Speaker, is it not true, I will ask the gentleman from Washington (Mr. Ad- ams) that the creditors are of course given protec- tion, and that the Board of Directors, under the control of Government officials, is the owner of the entire block of 100 million shares, whatever it is?” MR. ADAMS: “The gentleman is correct. It is con- trolled by the United States, so long as the Secre- tary determines that there is an amount of obliga- tion funds which the United States might, in any way ever, have anything to do with. “During that penod of time, it is controlled by a board of directors which consists of Government officials.” 119 Cong. Rec. H 11876 (daily ed. De- cember 20, 1973). The provisions vesting control of Conrail in the United States Government are set forth in §301(d) of the RRRA: so long as 50% or more of Conrail’s in- debtedness constitute debts owed to, or guaranteed, by USRA or the United States, eight of the fifteen direc- 71 tors of Conrail will be government officials or persons appointed by the President with the advice and con- sent of the Senate.®° Thus, the owners of 100% of the common stock of Conrail will be effectively without voice, having at best 7 of 15 votes on the Board of Di- rectors. Since management decisions will be vested in the Board of Directors by whatever state law Conrail is incorporated under (§301(b)), the owners of the stock of Conrail can expect that Conrail will be managed in the public interest whenever the public interest con- flicts with the private interests of the stockholders. When the RRRA is viewed solely as a “law on the subject of bankruptcy,” the following factual dis- tinctions set it apart from any pmnior exercise of the Bankruptcy Clause power: (1) the RRRA provides for a type of “reorganization” which does not depend on private claimants to the estate seeking the “‘re- organization” or voting upon it; (2) the “re- organization” is required to be implemented over the unanimous dissent (as exemplified by the present three constitutional complaints before the Court) of the private creditor and stockholder claimants; (3) the “reorganization” does not by its terms insure that pn- vate secured claimants will receive the equitable equiv- alent of a hypothetical foreclosure of their liens, mea- sured by the “highest and best use” value of the properties subject to such liens;®' and (4) the RRRA ‘ ©The 50% test is likely to be met for a considerable period of time if the Conrail’s experience parallels that of Penn Central. Private debt and capital markets have indicated a marked reluctance to lend money to Penn Central except with government guarantees. See Jn re Penn Central Transportation Co. (Opinion in Support of Order No. 124 approving $100 mil- hon of Trustees’ Certificates), 325 F. Supp. 302 (E.D. Pa. 1971). *'The United States and USRA have for the first time contended be- fore the Special Court that: “USRA and this [the Special] Court on review under Section 303(c), (footnote continued on next page) REMI BEALE F NS Det be A IESE: 72 provides that private claimants, in exchange for their legal liens upon tangible physical property, will receive common stock and other secunties of a government- controlled, nominally privately incorporated, cor- poration. The common stock of Conrail has been stripped of all the normal attnbutes of ownership of stock in a private enterprise. Thus the Penn Central claimants, as potential owners of the vast majority of the shares of common stock of Conrail to be jssued, would not have control of the Board of Directors of Conrail, or the night to select its executive officers, or the right to discharge management for incompetence or poor economic performance, or the right to declare dividends when deemed appropnate, or the right to pass on the terms of any debt, or the right to avoid po- litical appointments to a Board whose decisions would entail financial and fiduciary responsibilities, or the nght to sell their stock on the New York Stock Ex- change or possibly other national securities ex- changes,® or the nght to be assured that they could (footnote continued from prior page) are empowered to provide for the issuance of such Conrail debt se- curities as they deem necessary or appropriate — including bonds se- cured by liens on specific properties identical in all security respects to the liens that presently attach.” Bnef of United States, ef al, dated August 5, 1974 (Special Court No. 74-8). While this argument might have some persuasive force if USRA were required by the RRRA to issue fixéd income mortgage bonds secured by first mortgage liens to the. extent of the “highest and best use” value of the rail properties subject to existing mortgage liens divested under §303(b)(1), this is not the case. If USRA designs the final system plan without fixed income mortgage bonds (or if Congress rejects such a pro- posal when the plan is submitted to it under §208), the Special Court will be unable to remedy the deficiency under §303(c)(2)(B) because that sec- tion is expressly limited to “securities of the Corporation. . .as designated in the final system plan.” 6?The provision that a majonty of the directors of Conrail be elected by the Government, leaving only a minonity to be elected by the holders of 100% of the common stock, would violate the New York Stock Ex- change “Policy as to Non-Voting Stock” (New York Stock Exchange, Company Manual, §A-15); see also the rule as to “Unusual Voting Provi- sions” (id). The American Stock Exchange has a similar rule. ix oad. 73 : sell their stock to the United States or one of its agen- cies at the price at which it was valued when it was re- quired to be accepted as “payment” of their claims se- cured by liens on Penn Central's rail properties.®* a In terms of Congressional intent, it is reasonably clear from the legislative history that Congress was motivated almost entirely by a view of the Constitution which proceeds from the premise, in Senator Hartke’s words, that the common stock of Conrail can be - “crammed down” on the creditors, and that “judges _ have ruled that this is fair.” 119 Cong. Rec. S 23783-4 (daily ed. December 21, 1973; remarks during debate on Conference Report accompanying H.R. 9142).% This view seems to stem from a mis-reading of New *’Compare the “underwniting” of the Penn Central Common Stock required by the New Haven Reorganization Coun, In re New York, N.H. SH. R.R, 304 F. Supp. 793 (D. Conn. 1969), aff'd in part, rev'd in part, New Haven Inclusion Cases, supra. \t is of course highly significant that a majonty of this Court in 1970 believed that Judge Anderson’s “under- wniting” concept was a sound and necessary provision to assure the New Haven estate's claimants that they would in fact receive the equitable equivalent of the “highest and best value” of New Haven’s rail proper- ties, and found it necessary to remand the case because the Court per- ceived that the underwriting might well have become unrealistic by vir- tue of Penn Central’s subsequent §77 petition. If the RRRA were to be sustained in this Court, the 1970 decision of this Court remanding the underwriting plan because of its insufficency would be largely mooted since :ne New Haven’s First Mortgage Bondholders would ultimately re- ceive, “it best, non-underwritten stock and securities of Conrail, in ex- chang: for which Conrail would receive the bulk of the New Haven’s as- sets valued at $175 million in 1966 for which payment remains to be made. °*T he entire quotation is as follows: “We are providing that the creditors of this corporation would be re- quired to take common stock in the new quasi-government operation. In other words, they are exchanging their present security interest in the rail properties for common stock in the new corporation. “The railroad properties then become the properties of the new cor- poration free and clear of liens and encumbrances. In other words, the assets are being transferred and the nghts are being changed. The nonrailroad property will remain in the bankruptcy court to be (footnote continued on next page) LA LODE SESE Ea ag poe alle ra —_— RA cei iets IE PRN adic aoe 2 Ee ee ER NE UE ENN ee Roe Re RC TST we Pe ee Ne PB els ata 2 a RSPR ACNE, LEGS AS ABAD ESRD ERY Salih Tt ELPA Mini oA A 74 Haven Inclusion Cases, supra, and Penn Central Merger Cases, supra, since there is no other authority to sup- port it. The Congressional theory underlying Senator Hartke’s thesis must be based on the Bankruptcy Clause, since there are no cases wnich could be read to stand for the proposition that, for example, Congress could flood a farmer’s land as a result of construction of a hydroelectric dam, and require him to accept stock of TVA instead of money for his property. As a “law on the subject of bankruptcy,” however, the RRRA is void as a violation of substantive due pro- cess. It is a deprivation of property without due pro- cess for Congress to divest a creditor of his contractual lien created under state law, and give him in exchange a piece of paper stripped of the normal. attributes of an investment security, no matter what aspects of pro- cedural due process are accorded. The leading cases in which this Court explored the outer limits of Congress’ power to pass laws for the re- lief of debtors from the: claims of their secured cred- itors are the Rock Island® case, and the Radford and the two Wright® cases under the Frazier-Lemke Act and the amended Frazier-Lemke Act. In the Rock Island case, the Court upheld an injunction against fore- (footnote continued from pmor page) dealt with by them. One can talk about what is available if the rail- road is liquidated and put through the wringer, but even then the chances of these creditors getting their money is relatively slim, and this country cannot afford cessation of rail service while the railroads are put through the wnnger. So what, in effect, is called the ‘cram down’ theory forces them to accept this kind of settlement and judges have ruled that this is fair.” (Remarks of Senator Hartke; 119 Cong. Rec. S 23783-4 (daily ed. December 21, 1973); emphasis added). ® Continental Ill. Nat. Bank & Trust Co. v. Chicago, Rl. & Pac. Ry., 294 U.S. 648 (1935). Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555 (1935); Wright v. Vinton Branch Mountain Trust Bank, 300 U.S. 440 (1937); Wright v. Union Central Life Ins. Co., 311 U.S. 273 (1940). LG IE LIED LIL OO RN LOIS LEG LEED ALD BNO OLN LEE SYEI LYNDEN IP. REMI GONE RELL TOPE I NES I 3 a8 ‘. ASR wail NI OIL ELLOS SRE LAISEL IONE EL EL LRLE NN ODED TI VE eB ta ete | 75 closure of a pledge in a §77 case against the con- tention that it represented an impairment of contract in contravention of the.Fifth Amendment. The Court reasoned that “the injunction here goes no further than to delay the enforcement of the contract.” 294 U.S. at 681. In Radford and the two Wright cases, there was no question of a governmental “taking;” the bene- ficiary of both Frazier-Lemke Acts was the debtor- farmer, and there was neither a government con- trolled entity involved nor any “public purpose” other than relief of poverty. The rationale of these four cases is that the Bankruptcy Clause and the Fifth Amendment can together support a law which effects a brief moratorium on foreclosure of a pledge or a mort- gage lien, coupled with an option in the mortgagor at the end of the penod to purchase the mortgagee’s in- terest for cash equal to the appraised value of the prop- erty. This result, it is submitted, is not different from the hypothetical liquidation per-parcel sale value of the New Haven Inclusion Cases. By implication in all four cases (and express holding in Radford), a Bank- ruptcy Clause enactment (not supported by any pos- sible exercise of eminent domain powers), which de- prives a pledgee or mortgagee to a greater extent (such as, for example, divesting his lien and paying him less than appraised value, or not paying him in cash at all but giving him an unsecured or junior obli- gation of the debtor which is not the equitable equiv- alent of his secured claim), is a violation of the Due Process clause of the Fifth Amendment. Thus, §303(b)(2) of the RRRA, by which mortgage liens of creditors are divested prior to any judicial de- termination that the consideration received by the bankrupt debtor upon conveyance of the property is the “fair and equitable” equivalent of the properties valued at their “highest and best use” value, is de- WE SIL IOC Dee 1 Aoagy AETLOX IES er ae ella MOSEL ADA PI LF a ALL ee 76 ficient as Bankruptcy Clause legislation on due process grounds. This is a defect apparent on the face of the RRRA unless it can be reasonably determined that the “highest and best use” value of the designated portion of Penn Central’s rail assets will be $500 million or less, that being the amount of obligations of USRA contingently®’ authorized to be included in a final Sys- tem plan as payment to all estates of railroads in re- organization which convey rail assets under §303(b).®8 Once it is determined that the stock and other se- curities of Conrail are not necessarily equal to the “highest,and best use” value of the rail assets of Penn . Central which would be required to be conveyed un- der a final system plan, and that the §303(c)(2)(C) de- ficiency judgment is “essentially circuitous,” all that re- mains to test the facial constitutionality of the compulsory conveyance provisions of the RRRA is to assess whether and under what circumstances this $500 million of theoretically available debt securities (which might or might not carry the full faith and credit of the United States) would tend to provide the Penn Central estate with a total package of securities which could be said to be the “fair and equitable equivalent” of its rail properties. *’Under RRRA, §206(i), any provision in the final system plan which purports to create a direct obligation of USRA is subject to affirmative approval by a joint resolution of the Congress. As noted above, the $500 million limitation is derived from §210(b). There is no assurance that this $500 million of USRA obligations would carry the guarantee of the United States. Section 210(c) of the RRRA provides: “The Secretary [of Transportation] shall guarantee the payment of principal and interest on all obligations issued by the Asssociation in accordance with this Act and which the Association requests be guar- anteed.” (Emphasis added). *EVen if the full $500 million of government guaranteed USRA ob- ligations is made available in the final system plan, Penn Central's estate would at best receive only a pro-rata portion since the estates of four other Class I railroads and one Class II railroad would be entitled to pro- rata participation. 77 To date no definitive valuation findings relating to the rail assets of Penn Central have been made by ei- ther the ICC (whose jurisdiction in this area is ex- clusive under §77(e)) or by the Penn Central Re- organization Court, nor have any hearings been held at which valuation evidence could be administratively or judicially tested. The lack of definitive valuation proceedings, such as those reviewed by this Court in New Haven Inclusion Cases, is a consequence of the ICC having failed to formulate any plan of reorganization, and its rejection for various reasons of those plans sub- mitted to it. No valuation hearings have been held by the Penn Central Reorganization Court because it has had no plan certified to it by the ICC. Unless the RRRA is held to be unconstitutional, valuation hear- ings will never be held until after the irrevocable con- veyance of Penn Central’s rail properties, free of lien, to Conrail.” The evidence before the Reorganization Court on valuation of Penn Central’s rail properties consisted primarily of a Day & Zimmermann study which had originally been placed in the Penn Centra! Re- organization Library established pursuant to Order No. 1179 and was subsequently, in a revised form, filed with the ICC.”7! The Day & Zimmermann study “ICC Report dated September 28, 1973, supra, Doc. No. 54 in the Joint Documentary Submission. The failure of the RRRA to provide for a definitive hearing on val- uation evidence in connection with fair and equitable findings is indi- cative of the statute's shortcomings under the due process clause of the Fifth Amendment. ™Day & Zimmermann, Inc., “The PCTC Physical Asset Valuation . Study,” April, 1973; Doc. No. 58 in the Joint Documentary Submission; shea». SEPA omer aaey Revised Study, May, 1973, Appendix | to Exhibit T-21 (witness: Carlisle) in ICC Finance Docket No. 26241, /n re Reorganization Proceedings of Penn Central Transportation Co, Doc. No. 40 in the Joint Documentary Sub- mission. The Reorganization Library was established pursuant to peti- tions filed by the New Haven Trustee (see petition dated March 16, 1973; Doc. No. 12 in the Joint Documentary Submission), and Morgan Guaranty Trust Co. wt eee AS Cem te RE A " % —— me ia. | FEEDERS ONES PTL RIE cee a | Pract se ant aac 78 estimates the value as of December 31, 1970 of the physical assets of Penn Central and all its leased lines (exclusive of commercial properties owned by Penn Central and its leased lines in the area of Grand Cen- tral Terminal, New York City, referred to as “Park Av- enue Properties”). The Day & Zimmermann study in- cludes, in part, land not required for rail use, and lines of railroad which: USRA might determine should be abandoned rather than included in a final system plan. It is impossible to know at this time what proportion of the Penn Central rail assets studied by Day & Zim- mermann would be included in a final system plan. See Stip. Fact, 4, 5, 6. It is reasonable and conser- vative to project, however, in terms of the value of all physical assets of Penn Central and its leased lines studied by Day & Zimmermann, that the Penn Central properties designated in a final system plan would be likely to comprise not less than 50% of the total value of the physical assets of the Penn Central System.” “For example, the New Haven Trustee's Plan dated June 27, 1973 for reorganization of Penn Central, submitted to and rejected by the ICC in its September 28, 1973 Repon, called for a reduction in route miles from some 20,000 route miles owned by companies in the Penn Central System, of which some 19,000 miles are now operated, to 11,000 route miles; the 11,000 mile “core system” would have required substantially more than half the total value of the physical assets of the Penn Central System which were included in the valuation study prepared by Day & ‘Zimmermann, As the ICC noted in its Report, the 11,000 mile system was selected by the Penn Central Trustees with the aid of computer projections solely on the basis of maximizing profitability. To the extent that the final system plan were to implement the goals set forth in clauses (2) through (8) of §206(a), and not merely that of clause (1), it is reasonable to anticipate that a final system plan would involve more than 11,000 route miles of rail properties of the Penn Central System. The ICC, in its September 28, 1973 Report, observed: “The size of this reduced core system (which could be a viable sys- tem] will probably lie somewhere between the present (20,000 mile} system and the 11,000-mile and 15,000-mile core systems developed by Wyer [Dick & Co,].” ICC Report, Doc. No. 54 in the Joint Docu- mentary Submission, App. DD, p. 5. Lb BET PD IDOLE AOE eS ee at ee meme, 1 4 , E K 79 Two different approaches to valuation were presented by the Day & Zimmermann study—one based on a continued rail use methodology, and the other based on an assumed liquidation for non-rail use. In the case of the latter methodology, a present value of a projected stream of future liquidation pro- ceeds was also calculated. In summary, the results of the Day & Zimmermann study were as follows: Total Value of Wholly Owned Assets, Penn Central Assumption as to and Leased Lines as of “Highest and Best Use” December 31, 19707° Continued Railroad Use ............... $1 3,585,493,000 Liquidation for Non-Rail Uses: ns Estimated Gross ‘Proceeds of Sales over a Period of Years .....cccccccccese $ 3,532,110,000 Present Value of Estimated Net Pro- ceeds, after deducting interest factor and all se yoo of sale and of pres- ervation of assets pending sale®.... $ 1,995,778,000 7 While the Day & Zimmermann valuations remain to be definitively determined by administrative and ju- dicial proceedings, and they are now some 3-1/2 years out of date, they do provide basic evidence upon Doc. No. 40 in Joint Documentary Submission. “The present value approach results in negative values being as- signed to certain leased lines; for example, New York Connecting R.R. has an assumed negative value of $2,898,000, after deducting $8,844,000 as the net cost of demolishing its bridges and tunnels. This is an aspect of the “scrap value” approach which is totally inconsistent with pres- ervation of an “essential national asset.” Cf. In re Port Authority Trans- Hudson Corp, supra, explained in. New Haven Inclusion Cases, supra, 399 U.S. at 482 n. 80; “The tunnels, which required only $88,000 to be put in working or- der, had cost $32,060,000 to build, and would have cost $400,000,000 to replace; their liquidating value was a negative fig- ure, because of costs that would have been incurred in plugging them up. [Citation omitted]. Because the Port Authority was taking the tunnels for continued operation, the Court of Appeals held that that the proper valuation was depreciated orginal cost plus the value of intangible assets also attributable to the operation as a going concern.” Pein, . 4... EEE LOOPS E EINE AE LL SEL AEE IL LEME IDS A PPOLO LIEN GILG BELLO ECE LHe id RCN a ' II SP al - 80 which the court below could have properly concluded that $500 million of USRA securities, even if autho- nzed under §206(i) by the Congress, would not have the remotest likelihood of equalling payment in full for the “highest and best use” value of the Penn Cen- tral properties likely to be included in the Conrail sys- tem. As Judge Fullam observed in his Opinion in Sup- port of Order No. 1596: ‘ ‘. .. itis dear.on the record in this case that rail as- sets of Penn Central would comprise a very large percentage of the total Conrail system, and there is every reason to suppose that the included proper- ties would be worth considerably more than $500 million. Since no one knows, or can know, at this time, the value of any stock or other securities which Conrail might issue, it would be highly im- prudent to assume that there will be no need to re- sort to the deficiency judgment. Yet obviously, such a judgment would be relatively pointless, serving merely as a further reduction in the value of the common stock.” Opinion in Support of Order No. 1596, supra (JA 137). DM el tulsa A ALN HS bode Mb Se. In fact, even using the discounted scrap value ap- proach of Day & Zimmermann (an approach which the New Haven Trustee contends would be wholly er- roneous under the New Haven Inclusion Cases), and as- suming only 50% of the physical assets of the Penn Central rail system would be incluced in the Conrail system pursuant to the final system plan, one is forced to the conclusion in analyzing the constitutivnal im- pact of the RRRA that in no event could a value for the Penn Central rail assets conveyed to Con-ail be as- sumed to be less than $1 billion.75 REVS Ma ate 9 feet big ORT Pai nia, hb isde CoP WBS Petia While the factual record as to valuatiog of Penn Central's rail prop- erties is not nearly so complete as was the record of the ICC and the New Haven Reorganization Court which was reviewed in New Haven In- clusion Cases, the responsibility for an inadequate record does not belong to the Penn Central claimants since Congress has ordered that an irre. vocable decision to convey or not to convey Penn Central's rail assets to Conrail be made in advance of any valuation hearings. ERRAND FACETS TE EATEN REESE SAACONG IORI LM a aeateSa ae 81 Where a prima facie case shows that the valuation of Penn Central rail assets required to be conveyed under the RRRA must exceed $1 billion, the Government should not be heard to argue that it is premature to judge the constitutionality of a statute which, under the most generous construction, would guarantee the estate of Penn Central (together with the estates of all other railroads whose property is included in the final system plan) at most*the equitable equivalent of $500 million of value in the form of governmental obliga- tions. Since the RRRA provides that reorganization by. conveyance of Penn Central’s rail assets to Conrail is mandatory, unless the RRRA is struck down as uncon- stitutional, or the processes of the RRRA are held not “fair and equitable” by the Special Court, this Court is required by the evidence to decide that the con- sideration afforded by the RRRA is not assured of be- ing the “equitable equivalent” of the “highest and best use” value of Penn Central's designated rail properties. The situation is not essentially different from the de- cision in the New Haven Inclusion Cases where the un- certainty as to the ability of Penn Central to honor the “underwniting” commitment imposed by the New Ha- ven Reorganization Court caused this Court to reverse and remand an otherwise acceptable plan of reorganization: . “The fairness and equity that are the essence of a §77 proceeding forbid our approval of a payment for the transferred New Haven properties that may be worth only a fraction of its purported value. . . . Accordingly, we set aside the order of the Con- necticut District Court insofar as it determines that an intrinsic value of $87.50 inheres in the Penn Central common stock and implements an under- wnitin plan to secure payment of that sum.” /d. at 488-89. *®This Court's remand on the “underwriting” issue has never been implemented; Judge Anderson attempted to implement it by imposing (footnote continued on next page) fe TA Sa RRR 82 Furthermore, in a context of legislation providing for a public authority (Conrail) to acquire and operate the railroad’s properties after divestment of the mort- gage liens,. the Fifth Amendment requires the public authority to pay, in addition to liquidation value, an incremental factor for “assemblage” of a complete transportation facility. Jn re Penn Central Transportation Co. (Opinion and Order No. 1507 re Philadelphia Area Commuter Service) (E.D. Pa. March 18, 1974) (Slip opin- ion, p. 12). See In re Port Authority Trans-Hudson ¢ lorp., supra; In re City of New York (Fifth Avenue Coach Lines), supra. See also Fullam, J., concurring: “As a matter of simple maximization of values, if there is no ‘going concern’ valve in the usual sense, there is no justification for continuing a re- organization praia: [footnote omikedt unless : either or both the following conditions are estab- lished: . . .(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 the values in- % herent in us assemblage as an operating railroad will be : recognized and paid for [citations omitted]” (JA 70- ; 71; emphasis added). , (footnote continued from prior page) an equitable lien on certain properties conveyed by New Haven to Penn Central, and a constructive trust on Grand Central Terminal income, In ; re New York, N.H. & H. R.R., 330 F. Supp. 131, 150, 331 F. Supp. 212 (D. ; Conn. 1971), but this judgment was reversed by the Court of Appeals, i 457 F. 2d 683 (2d Cir.), cert. denied, 409 U.S. 890 (1972) on the juris- 5 dictional grounds that the New Haven Reorganization Court should have ; deferred to the ICC as to the remand issues. The ICC has “reopened” its proceedings in the New Haven matter, and consolidated them with the Penn Centrai reorganization proceedings. Order dated September 13, 1973. Hewever, no further hearings have been set by the ICC on the re- mand issues in spite of the New Haven Trustee’s petition dated Feb. 21, : 1973 «hich urged a prompt determination by the ICC of the remand is- ‘ sues. The Penn Central Reorganization Court, In re Penn Central Trans- : portation Co. (Order No. 546), 337 F. Supp. 779 (E.D. Pa. 1972), declined = to adjudicate the equitable lien and constructive trust issues, but imposed 4 a protective temporary lien “indeterminate in amount and indeterminate 4 in priority” pending adjudication of the New Haven Trustee's proof of claim. + gS SAM ALSIP RT ENE PN LE NES TART IP FS CPA PT OE a SN tO RE _ “ 83 The RRRA violates the due process and takings clauses of the Fifth Amendment by failing to provide compensation to bondholders of Penn Central, in ex- change for divestment of their liens, equal to the “highest and best use” value of their properties, whether that value be determined under either a liq- uidation value approach or a continued rail use ap- proach. No case can be cited where a court has ruled that the result required by the RRRA “is fair,” state- ments in the legislative history by Senator Hartke to the contrary notwithstanding. As Judge Fullam observed in his Opinion in Support of Order No. 1596: “I am satisfied, therefore, that the use of common stock to pay for the rail assets conveyed pursuant to the Final System Plan cannot be justified on the ba- sis of any constitutional doctrine yet announced by the Supreme Court. In my view, the RRRA in its present form does violence to the Constitution, whether considered as a reorganization statute, or as an eminent domain statute, or as a combination of the two.” Opinion in Support of Order No. 1596, su- pra (JA 146). CP re ee LT OP LOR RCT CN Oy eT ay iil poe Se as eee Fe ISS tt RT ENE ee thi Dain 84 E. A Requirement that Rail Properties of Penn Central Be Exchanged for Securities of Conrail Is a Denial of Constitutional Rights to Dismissal of the Reorganization Proceedings and Termination of Loss Operations in the case of a railroad whose rail operations do not produce income in excess of operating expenses, | and have no reasonable present prospect of doing so, the requirement of the RRRA that the railroad ex- change its rail properties principally for common stock of Conrail (plus o [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386414_0347%3A09. Public record. Not legal advice.