Appellees Brief — Regional Rail Reorganization Act Cases

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Supreme Court of the Unitei

October Term, 1974

No. 74-165

No. 74-167

No. 74-168

UNITED STATES OF AMERICA, et al.,

Appellants,

Vv.

CONNECTICUT GENERAL INSURANCE

CORPORATION, et al., 4

y~ Appellees.

On APPEAL FROM THE UNITED STATES DisTRICT COURT 4

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

robigs tg Matin ths ana fs ‘ a

BRIEF OF APPELLEES,,

CONNECTICUT GENERAL INSURANCE j

CORPORATION, ET AL. 4

L Louis A. CRAcO

A 1 Chase Manhattan Plaza

* New York, New York 10005 é

4 FREDERIC L. BALLARD ‘

‘ 1035 Land Title Building

% Philadelphia, Pa. 19110 e

..Attorneys for Appellees ¥

3 Of Counsel:

WALTER H. Brown, Jr.

Tuomas L. BRYAN

MICHAEL B. TARGOFF ]

CorNELIusS T. FINNEGAN, III y

REBECCA T. HALBROOK

WILLKIE FarR & ,GALLAGHER

1 Chase Manhattan Plaza

New York, New York 10005

ALAN S. FELLHEIMER

BALLARD, SPAHR, ANDREWS & INGERSOLL

1035 Land Title Building ©

Philadelphia, Pa. 19110

ds Aisa Dy PS ED Saks 3 MRE See ae

bape es in,

September 26, 1974

TABLE OF CONTENTS

PAGE

TOMS OF Antboritias «2... svcccsdevvewcnetssuscess Vv

Ce | Ee Ver ene men iy ie rt 2

ee PCE ET ERTL OP Ce LOTR CTE ELECT Tee 2

Constitutional and Statutory Provisions Involved .. 3

COE: FURIE hi acns inne c bAs ex cvezd tenes sess 4

Statement of the Case

I. Nature of Case and Proceedings Below .... 4

‘II. The Penn Central Reorganization:

Backdrop for the Rail Act ............ 6

III. The Impact of Operations During Reorgani-

zation of the Penn Central Estate ....... 16

IV. Proceedings under the Rail Act ........... 20

Cente WE DUE no sn se Sos span 6h ede onde ons /23

Argument:

I. The Rail Act is Unconstitutional in that It

Requires Mandatory Interim Operations at

Hopeless Losses Without Providing Assur-

ance of a Legal Remedy to Furnish Fair and

Just Compensation for Erosion Beyond Con-

MI TON sik eeicc ik cs deckese tires 33

A. The Act Does Mandate Interim Opera-

tion of the Penn Central System ...... - =

B. Penn Central Interim Operations Im-

pose Enormous Losses, Accumulate Pri-

ority Claims and Cause Erosion of the

Value OF: Tak BRD xaeegeevscicensee 41

1. Post-Bankruptcy Financial Results

through December 31,1973 ........ 41

2. Reasonably Foreseeable Future Fi-

nancial Results after December 31,

WOE His Oia ei kwh vs bck Eas Gadwa oo cs

3. Erosion in the Value of the Estate ..

C. Compulsory Interim Operations are Un-

constitutional in the Absence of Reason-

able Present Assurance of Reorganiza-

bility under the Act or an Assurance of

Just Compensation ..................

1. The Public Interest in Continued

Service Does Not Justify Mandatory,

Uncompensated Interim Operations

2. The Rail Act Does Not Afford Any

Reasonable Prospect of Likely Reor-

nization for the Penn Centra

on of Pn ae

(a) Conrail will not be materially

different from Penn Central ...

(b) Conrail will face the same prob-

lems as Penn Central .........

ene OE WEGNEEED 5. 6s... ee sak

(d) Conrail is an untried concept in

railroad operations ............

(e) The Penn Central Trustees’ via-

bility condition concerning aban-

donments -will not be satisfied ..

(f) The Penn Central Trustees’ via-

; bility condition concerning un-

necessary employees will not be

MINIS fb dhe dhe tiie...

(g) The Penn Central Trustees’ via-

bility condition concerning pas-

— service will not be satis-

Be ECS Or coe on. aan

(h) The Penn Central Trustees’ via-

bility condition concerning traffic

0 revenues will not be satis-

eo SR Ee Pere cane jeep

PAGE

oh)

fe sana

SMe AAS A A PARI: DME BN DEES OIA MAE Rs MEIN J

;

PAGE

3. The Act Provides No Assurance of

Payment for the Taking by Interim

ee oe nn ere ree eee ee 61

(a) Interim payments provided are

inadequate .......---.-eeeeees

(b) The Act fails to provide com-

pensation which is adequate in

medium and amount to assure

fair value for the assets to be

conveyed and still less does it »

provide redress for interim ero-

Ne Pe ee hananean hes 64

(i) Kind and amount of compen-

sation under the Act ...... 66

(ii) Inadequacy of compensa-

tion on any theory of valua-

tiOM |... . ee eee eee eee eens 69

procedures which could assure ‘

the requisite fair value for the

properties conveyed and. compen-

sation for interim erosion ..... 74

D. New Haven Inclusion Cases, 399 U.S. :

392, Does Not Support the Constitution- _ &§

ality of the Rail Act, but Exposes its ‘

Unconstitutionality ...........++++++- 79 ;

II. There is No Adequate Remedy at Law Avail- ;

able to Appellees under the Tucker Act .. 83

A. The Statutory Scheme of the Act on Its

Face Purports to be Exclusive and

Wixhaustive 2.0... 00geceecseecccsenees 85

B. The Legislative History is Consistent

Only With the Exclusion of a Remedy

in the Court of Claims ............---- 9

C. In Light of the History and Language of

the Rail Act, the Tucker Act ‘‘Remedy’’

Cannot Be Adequate ...,.-:+++++rreees 98

II. Injunctive Relief Granted Below was Timely

CONE ons a ok eaeacc

IV. The Order Entered Below may be Sus-

tained on Other Grounds not ee by

We SE Tinos vc cnc

A. The Act Takes Appellees’ Property for

Public Use Without Just Compensation

B. To the Extent the Act is a Bankruptcy

Act, It is Void Because It is not Geo-

graphically Uniform .................

C. The Processes of the Act Deprive Ap-

pellees and the Penn Central Estate of

Due Process of Law

22 22 2 2 FS 0 8 6 0 6 6 tH be

Conclusion

PAGE

102

108

109

112

Table of Authorities

PAGE

CasEs:

Almota Farmers Elev. & Whse. Co. v. United

Waades, M0 UM. GO oo <5 issuscesveseese cs Oe

Altvater v. Freemam, 319 U.S. 359 ......----++-- 83

American Life Ins. Co. v. Stewart, 300 U.S. 203... 101

Armstrong v. United States, 364 U.S. 40. . .27, 48, 110, 112

Atchison, T. & S.F. Ry. v. Public Util. Comm’n,

BOG UE, ONG cic cne nc va ere ce ns ne te rv escsees 27, 49

Bohler v. Callaway, 267 U.S. 479 ........-+++++ 101

Brooks-Scanlon Co. v. Railroad Comm’n, 251 U.S. .

SE oie a 27, 47, 50, 51, 52, 73

Bullock v. Railroad Comm’n, 254 U.S. 513 ....... 50, 51

Central R.R. of N.J. v. Manufacturers Hanover

Trust Co., 421 F.2d 604 (3d Cir. 1970), cert.

denied, 398 U.S. 949 2.0... cece eee e cece ee eees 52

Confederated Bands of Ute Indians v. United

States, 117 Ct. Cl. 433 (1950) ........0- +e eee 99

Consolidated Rock Products Co, v. Dw Bots, 312

a) es re ere 52, 74

Continental Ill. Nat’l Bank & Trust Co. v. Chicago,

RI. & P.Ry., 294 U.S. 648 ...... cece eee eee eee 51, 52

Davis v. Wakelee, 156 U.S. 680 .......-ee serene 101

Delaney v. Carter Oil Co., 174 F.2d 314 (10th Cir.

1949), cert. denied, 338 U.S. 824 .........+.---

Ecker v. Western Pac. R.R., 318 U.S. 448 ....... 52, 74

Glidden Co. v. Zdanok, 370 U.S. 530 ........6-++ 99

Group of Institutional Investors v. Chicago, Mi..,

St. P. d Pac. R.R., 318 U.S. 523 .........6--- 52, 74

Hanover Nat’l Bank v. Moyses, 186 U.S. 181 .... 32, 113

Caszs (Continued) :

PAGE

Harlem Valley tra Ass’n v. Stafford, 360 F.

' Supp. 1057 (S.D.N.Y. 1973), aff’d, No. 73-2496

(24 bets. espe hee, gs, OR 12

| -Head Money Cases, 112 U.S. 580.............. 113, 114

Hurley v. Kincaid, 285 U.8.95 .............._. 100

In re Boston & Maine Corp., 484 F.2d 369 (1st Cir a

teeing: Sige RIPE SSE ci LES eR atl ap cua

In re Central R.R. of N. J., 485 F.2d 208 (3d Cir.

1973), cert. denied, 414 U.S. MOO ots isso: 6

In re City of New York (Fifth Avenue Coach

Lines, Inc.), 18 N.Y.2d 212, 219 N.E.2d 410

(1966), appeal dismissed, 386 U.S. 778 ........ 72

In re New York, N.H. & H.R.R., 289 F. Supp. 451

(D. Conn. 1968)

In re New York, N.H. & H.R.R., 304 F. Supp. 793

(D. Conn. 1969), aff’d in part sub nom. New

‘Haven Inclusion Cases, 399 U.S. 392 .......... 46, 51

In re Penn Central Transp. Co., 355 F. Supp. 1343

(E.D. Pa. 1973)

i Gee Oe rere ee 14

In re Penn Central Transp. Co., 484 F.2d 323 (3d

WO Fo ier ke 9

In re Penn Central Transp. Co., 494 F.2d 270 (3d

Cir.), petition for cert. filed, 42 U.S.L.W. 3633

(U.S. May 8, 1974) (No. 73-1672) (‘Columbus

eas. Oe EE aE, ee ea ae 51, 53

In re Port Authority Trans-Hudson Corp., 20 N.Y.

2d 457, 231 N.E.2d 734 (1967), cert, enied, 390

U.S. 1002 :

Mitte okteee te Lee er rns hae eeaneeea 12

In re Riker Del. Corp., 385 F.2d 124 (3d Cir. 1967) 52,53

In re Third Ave. Transit Corp., 198 F.2d 703 (2d

wo Nie PE AT ee FS i 53

;

Cases (Continued) :

PAGE

Lockerty v. Phillips, 319 U.S. 182 ........--.+-- 108

Louisville Joint Stock Land Bank v. Radford, 295

De a occ cca sa danviucd asin casce 27, 48, 74, 110

Miller v. Schoene, 276 U.S. 272 ......-.++--e00-- 49

Nashville, C., & St. L. Ry. v. Walters, 294 U.S. 405 27, 49

New Haven Inclusion Cases, 399 U.S.

«ee cecs aa cewens 26, 28, 39, 51 et passim

New York, N.H. & H. R.R. First Mtg. 4% Bond-

holders’ Comm. v. United States, 305 F. Supp.

1049 (S.D.N.Y. 1969), vacated on other grounds

sub nom. New Haven Inclusion Cases, 399 U.S.

EE ARES a ae Oe ee rer ee 39, 51

Olson v. United States, 292 U.S. 246 ............. 112

Pennsylvania Coal Co. v. Mahon, 260 U.S. 393.... 50 :

Railroad Comm’n v. Eastern Texas R.R., 264 U.S.

RE oe nse ene es perro ome seseees 50, 51 j

Reconstruction Finance Corp. v. Denver & R. G. W. :

RA., BOR UB. BOG ooo. civ cc este eee vcetenes 51, 61 4

| H

Southern Pacific Co. v. Jensen, 244 U.S. 205 ...... 101 :

Tot v. United States, 319 U.S. 463 .............. 117

Union Pac. R.R. v. Board of County Comm’rs, 247 ;

Re WE ic vic ide ca nkahias ii csane sees assees 101 :

United States v. Cors, 337 U.S. 325 ..... pavbesa’ 49 §&

United States v. Dickinson, 331 U.S. 745 ......... 49 §

United States v. Gainey, 380 U.S. 63 ............ 117

United States v. Miller, 317 U.S. 369 ............ 112

United States v. Reynolds, 397 U.S. 14 .......... 112

United States v. Romano, 382 U.S. 136 ......... 117

at El

Cases (Continued) :

PAGE

— s Lessee v. Dorrance, 2 U.S. (2 Dall.) a

Vlandis v. Kline, 412 U.S, 441.................. 117

Wright v. Union Central Tife Ins. Co., 311 US.

WP Se ss Cole een deg iieh lass GG ee 74

Wright v. Vinton Branch of the Mountain Trust

wm, 1 UR Os, 74

. Youngstown Sheet ¢: Tube Co. v. Sawyer, 343 U.S.

icing IE OO ee ee 83, 84, 100, 101 et passim

ConstituTiIonaL Provisions AND Statutes:

U.S. Constitution:

Art. I, Sec. 8, Clauses 3 and4................. 3

“aceite iew'viv dee. thémegad SPER Te 3, 100

We a 3 et passim

Bankruptey Act:

Section 77, 11 U.S.C. § 205 .............. 4 et passim

Emergency Rail Services Act of 1970:

45 U.S.C. §$§ 661 et ax, oe ee Sie ee ay x

Judicial Code:

EE Noe Po ET OA Oe ae

MUSO SU CR y

PYM BMBE ges esericcskksi y

Pe SIE Wesco sss tees a 2

aS UBL. MIE oes i 2

RO, STUN ae eo i a 2

OO UMM EINE re iio 2

sthictncn cet. cc. MOR ee a ee 99

UMS $9MO yo i 99

PAGE

ConstiruTionaL Provisions anp Statutes (Continued) :

Regional Rail Reorganization Act of 1973:

45 U.S.C. $§ 701-93 ..... he ey aaa 2 et passim

Tucker Act:

98 U.S.C. § 1491 .....0-.e cece eee + +B, 29, 83 et passim

Railway Labor Act:

USC Bee ee

Act of June 28, 1938, 52 Stat. 1209, as amended... 99

Supplemental Appropriation Act of September 27,

Cy ey ae en ee 99

S. J. Res. 59-2, 93d Cong., 1st Sess. (1973) ...... 1

LecisLaTIvVE MATERIALS:

H. R. Rep. No. 93-744, 93d Cong., 1st Sess. (1973) 91, 107

H. R. Rep. No. 93-620, 93d Cong., 1st Sess. (1973) 106, 107

S. Rep. No. 93-601, 93d Cong., Ist Sess. (1973) 76, 91, 107

j 119 Cong. Rec. H11876 et seq. (daily ed. Dee. 20, :

} MTD) eiicc cb bkn carer es caetene tren srvienres 92, 93

119 Cong. Rec. H9730 et seg. (daily ed. Nov. 8,

A WTB). ccsccccdscsPenterssodcvevebesesnseress 93,94 .

| 119 Cong. Ree. $23777 et seq. (daily ed. Dee. 21,

i WTB) iv ccecidcccvennrscresensinsosssvereess 36, 94

Subcommittee Print-H.R. 9142, dated August 2,

1973, with Changes Proposed by Messrs. Shoup 4

: and AGOMIS ... cei dencenccciocsescescecscceres 90

Hearings on S 2188 before the Senate Committee

on Commerce, 93rd Cong., 1st Sess. (Nov. 15,

SA a te og a ares os

Explanation of Legislation Pertaining to the Mid-

west and Northeast Rail Crisis, before the Sen-

ate Committee on Commerce, 93d Cong., Ist

Bean: CANIS) ois ess tees ey pac d sue ve wee ede gl

Oversight Hearings before the Subcommittee on

Transportation and Aeronautics of the House

Committee on Interstate and Foreign Com-

merce, 93d Cong., 2d Sess. (June 14, 1974) ...95, 96,97

MisceLLanzous:

Annual Report of hee Central ‘to the ICC for

1969 (Form A)

Annual Report of Penn Central to the ICC eh

Me MN A 6 0 60 oh gb vice ise ccc cco... 45

Annual Report of Penn Central for 1973 veftewes

eg, EERE ESI IEE TSG, ETE 45

er Oe OE, ood novos locke... 17

hot bl a POSE E a ETAT HA AEE pei 23, 83

| Fed. R. Civ. P. 57

CPVOCOCCEL OHO SEDO 86 016-46 28608 Oo se

Supreme Court of the United States

October Term, 1974

No. 74-165

No. 74-167

No. 74-168

—_— "

Unirep States or Amenica, et al.,

Appellants,

Connecticut GeneraL Insurance Corporation, et al.,

Appellees.

On AppeaL FRoM THE Unrtep States Distrzicr Court ror

THE HAstern District or PENNSYLVANIA

re’

BRIEF OF APPELLEES,

CONNECTICUT GENERAL INSURANCE

CORPORATION, ET AL.

This brief is filed on behalf of Appellees who are owners

of mortgage bonds of Penn Central Transportation Com-

pany (‘‘Penn Central’’) and of certain lessors of leased

lines of Penn Central (‘‘Lessors’’) secured by mortgages

on rail properties of Penn Central and Lessors, and certain

banks which are corporate trustees or successor corporate

trustees under indentures, mortgages or deeds of trust

under which bonds or other debt securities of Penn Central

or a Lessor were issued or secured.’

1 The identity of Appellees and their interests in Penn Central

and Lessors is described at pages 204-05 and 210 of the Joint

Appendix which the parties have lodged with the Court. Reference

to the pages of that Appendix will be prefaced by “JA”. The parties

have also lodged with the Court a Joint Documentary Submission

(Footnote continued)

Opinions Below

The opinions in the District Court, and its order entered

on June 25, 1974, are not yet reported. They are set out in

full in the Joint Appendix at JA 9-83.

Jurisdiction :

This case was brought pursuant to 28 U.S.C. §§ 1331(a),

1337, 2201 and 2202, seeking a declaratory judgment that

the Regional Rail Reorganization Act of 1973, Pub. L. No.

93-236, 87 Stat. 985-1023, 45 U.S.C. §§ 701-93 (the ‘Rail

Act”’ or ‘‘Act’’), is void for repugnance to the Constitution

of the United States and an injunction against the enforce-

ment, operation and execution of the Act insofar as it was

found to be unconstitutional. Two other actions, Smith v.

United States and Penn Central Co. v. Brinegar, originally

brought in the District of Columbia on substantially the

same grounds, were transferred to the Eastern District of

Pennsylvania. The three actions were consolidated for

disposition before a three-judge Court convened ‘pursuant

to 28 U.S.C. §§ 2282 and 2284.

These appeals have been taken from the order of that

Court granting partial summary judgmént to the plaintiffs,

declaring certain portions of the Act to be unconstitutional

and granting certain injunctive relief. The jurisdiction of

this Court has been invoked by Appellants pursuant to

28 U.S.C. §§ 1252 and 1253.

Pursuant to stipulation of all counsel, briefs on the

merits are being filed in advance of the determination of

this Court as to probable jurisdiction, in order to facilitate

an expedited hearing schedule as sought by all parties in a

joint motion previously filed with the Court.

(Continued footnote)

containing other materials which formed a portion of the record

before the Court below, pursuant to stipulation. References to the

items in the Joint Documentary Submission will be prefaced by

“J. Doc. No.” followed by the item number and, where appropriate, a

further internal reference as to the subject matter of the citation.

Constitutional and Statutory Provisions Involved

Article I, Section 8, Clauses 3 and 4, of the United States

Constitution, in pertinent part provide:

‘The Congress shall have power...

To regulate Commerce with foreign Nations and

among the several States ...;

To establish . .. uniform Laws on the subject of

Bankruptcies throughout the United States; . . —

Article I, Section 9, Clause 7, provides:

‘‘No Money shall be drawn from the Treasury

but in Consequence of Appropriations made by

Law;...”’

The Fifth Amendment to the United States Constitu-

tion provides in pertinent part:

‘‘No person... shall be . . . deprived of ...

property, without due process of law; nor shall

private property be taken for public use, without

just compensation.’’

The Rail Act, Pub. L. No. 93-236, 87 Stat. 985, 45 U.S.C.

§§ 701-93, is set forth in full at JA 391-431.

The Tucker Act, as amended, 28 U.S.C. § 1491, provides

in pertinent part:

‘‘The Court of Claims shall have jurisdiction to

render judgment upon any claim against the United

States founded either upon the Constitution, or any

Act of Congress, or any regulation of an executive

department, or upon any express or implied con-

tract with the United States, or for liquidated or

unliquidated damages in cases not sounding in

Questions Presented

1. Was the Court below correct in concluding that the

Rail Act required the Penn Central estate to continue rail

operations at massive and irreversible losses, without as-

surance of adequate compensation, and that the Act in this

respect was repugnant to the Fifth Amendment to the

United States Constitution? —

2. Did the Court below correctly hold that no recourse

pursuant to the Tucker Act exists so as to afford Appellees

an adequate remedy at law for the constitutional deficien-

cies resulting from the operation of the Rail Act?

3. Did the Court below abuse its discretion in issuing

the injunctions contained in its order, or in shaping their

respective terms?

4. Can the result reached by the Court below be sus-

tained on alternative grounds in that:

(a) the Act effects an uncompensated taking of

Appellees’ property;

(b) the Act constitutes a law on the subject of

bankruptcies which is void because, by its terms,

it is not uniform throughout the United States; or

Appellees of their property without due process of

law? :

Statement of the Case

I. Nature of Case and Proceedings Below

During 1974 the financial crisis long impending among

the railroads of the Northeast and Midwest moved swiftly

to a legal climax. In response to the apparent inability

of the seven bankrupt Class I railroads in the region, most

particularly Penn Central, to achieve reorganization under

Section 77 of the Bankruptcy ‘Act, 11 U.S.C. §205 (‘‘Sec-

St FMCG EN Nn) Wa web?

< 5.

tion 77°’), Congress passed and the President signed the

Rail Act, effective on January 2, 1974.

The Act immediately encountered broad-based chal-

lenges, posed by the Penn Central Trustees (the ‘‘Trus-

tees’’) and all classes of its security holders, in proceedings

both under and outside the Act.

Proceeding under Section 207(b) of the Act, although

reserving the rights of all parties to object to its terms,

the Penn Central Reorganization Court held, on May 2,

1974, that Penn Central was not capable of being reorgan-

ized on an income basis within a reasonable time (herein-

after referred to as the ‘‘120-Day Decision’’).’

Also_proceeding under the terms of the Act, with a

similar reservation, the same Court, on July 2, 1974 found

that the Act does not provide a process which would be

fair and equitable to the Penn Central estate (hereinafter

referred to as the ‘‘180-Day Decision’’).* :

‘Meanwhile, the actions from which these appeals have

been generated were commenced by secured creditors, in-

denture trustees, unsecured creditors and the sole stock-

holder of Penn Central. Consolidated for disposition, the

matter came on before the three-judge Court upon motions

and cross-motions for summary judgment. The three-judge

Court had before it, in addition to the papers original:y

filed in the respective plenary actions, a stipulation of

2 Reorganization Court Memorandum and Order No. 1543, May

2, 1974 (JA 84 et seq.). |

8 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, July 2, 1974 (JA 124 et seq.). An

appeal from that determination has been taken to the Special Court

established pursuant to the Act and is, as of the date of this brief,

sub judice. The Act requires the Special Court to decide appeals

within 80 days after-they were noticed so that the Special Court -

must decide the appeal after this brief is submitted but before this -

Court reconvenes. Appellees will, if appropriate, file a supplemental

memorandum relating to the decision of the Special Court.

facts (JA 203-09) and, by agreement of the parties (JA

_ 197-99), specified portions of the record previously devel-

oped in-the Penn Central reorganization proceedings.

The Court below granted plaintiffs’ motions in part,

denied the cross-motions of the defendants and the inter-

vening defendants, filed :‘ §_inions and entered its order

on June 25, 1974. In spec.ued respects, the order. declared

the Act unconstitutional and enjoined its effectuation.

II. The Penn Central Reorganization:

Backdrop for the Rail Act

This litigation arises in the context of complex and

deeply-rooted problems in the transportation system of

the Northeast and Midwest regions of the United States.

The Penn Central system, embracing approximately 19,850

route miles of the rail trackage in that region (JA 212-13),

is at the center of the crisis. Reasons for the declining

prospects of rail transportation in the region abound, but

most certainly they include competition from millions of

automobiles and multiple schedules of competitive jet air

service which have blighted the prospects for railroad

=" vesepassenger transportation while the traditional railroad

freight business has been lost progressively to inland

waterway operations, pipelines and trucks. The crisis has

been aggravated by an accumulation of Government policies

_tending ‘‘to favor non-rail transportation and perpetuate

a regulatory climate that [was] hostile to experimenta-

tion’’.* While the railroads labor under ever increasing

burdens of maintenance and equipment expense, competing

transportation systems relying on water, air and highway

have been the beneficiaries of heavy public investment

* In re Central R.R. of N.J., 485 F. 2d 208, 217 (3d Cir. 1973)

(Aldisert, J., dissenting), cert. denied, 414 U.S. 1131. For a discus-

sion of these subjects in more detail, see Staff Report, “The Penn

Central and Other Railroads,” Senate Committee on Commerce, De-

cember 1972 at 220 et seq.

—

* which have substantially aided their operations at little

or no user cost. .

On June 21, 1970, Penn Central petitioned for reorgan-

‘zation under Section 77 and. shortly thereafter Trustees

‘duly appointed and confirmed began to oversee its reorgan-

ization.

Penn Central had been in severe financial straits for

several years. During the years ended December 31, 1968

and 1969, it had sustained ordinary income losses of

$41,914,598 and $91,631,726, respectively.® After the Trus-

tees took over, the massive losses continued to mount:

ordinary income losses of $179,700,000 were sustained dur-

ing the period from June 21, 1970 to December 31, 1970.°

The Trustees quickly determined that the prospects for

improvement in Penn Central’s operations, absent changes

over which neither they nor the Reorganization Court had

any control, were minimal, and they so reported to the

Court. Prelim. Rep. Concerning Premises for Reorganiza-

tion, Feb. 10, 1971 (J. Doc. No. 1). They specified there

that there could be no hope of profitable operation without

massive increases in freight shipments and revenues and

without fundamental changes in four respects, which came

to be known as the ‘‘eonditions to viability’’: (1) elimina-

tion of passenger service losses; (2) plant rationalization

(primarily through abandonment of excess or uneconomic

lines); (3) more flexible rate and division procedures ; and

(4) elimination of excess labor costs. “The Trustees con-

5 Penn Central Annual Report on Form A to the Interstate Com-

merce Commission (“ICC”) for the year ended December 31, 1969

(includes operations of The New York, New Haven and Hartford

Railroad Company from date of acquisition, December 31, 1968).

6 Finding of Fact No. 4, 120-Day Decision (JA 84, 89-90).

Subsequent citations to such Findings are cited as TF”, See

also Affidavit of Ernest R. Varalli, March 21, 1974 (J. Doc. No. 19)

(hereinafter “Varalli affid.”), Ex. T-1,

cluded their very first report by emphasizing what is still

the heart of the matter:

“‘But the overriding problem of Penn Central

remains—the problem that must be overcome if it

is to stay in the private enterprise system. It is

found in an obligation to perform as a public service

company in certain areas and under certain condi-

tions which simply do-not lend themselves to profit-

able operations, no matter who the operator is,

or how efficient. The only possible remedy here is

for public authority to lend its hand to a speedy

elimination of. the conditions which produce the

losses, or respond with adequate compensation if it

insists upon a continuance of the conditions.” Id.

To date none of the four specified conditions to viability

has been achieved.” The issues presented by this appeal

relate primarily to the constitutional adequacy of the Rail

Act which, as events unfolded, emerged as the response

of the ‘‘public authority”, —

_ The financial crisis continued to deepen. In order to

avert an immediate and severe cash shortage, the Trustees

issued $100 million in Trustees’ Certificates, for which a

federal guaranty was required.® In return for the guaranty,

the Government received a lien ahead of existing creditors

on substantially all of Penn Central’s properties.®

7 120-Day Decision (JA 88). See also 180-Day Decision (JA

126-28).

* Emergency Rail Services Act of 1970, 45 U.S.C. §§ 661 et seg.

® See Order No. 124 (Doc. No. 704). (References to “Doc.

No. —” are to documents of record in the Penn Central reorganiza-

tion proceedings.) $50. million principal amount of the Trustees’

Certificates matures in January 1976 and presumably must be

refunded at that time. See Affidavit of John S. Guest, March 25,

1974 (J. Doc. No. 20) (hereinafter “Guest affid.”) at 9. It presently

appears unlikely that the Trustees will be able to obtain the necessary

financing from private sources.

In addition to the infusion of funds from a new para-

mount lien of that magnitude, the Trustees were required

to, and did: (1) apply to rail operations an aggregate of

$155 million from non-recurring cash items (Stip. No.

11(a), (b),2° JA 206-07; FF 4, JA 89-90; Varalli affid.,

Ex. T-1, J. Doc. No. 19); (2) utilize approximately $157

million of non-rail income for rail operations (Stip. No.

11(e), JA 207) ;* and (3) defer payments of real estate

taxes ($241 million), leased line rentals ($101 million) and

interest on mortgage and collateral trust debt ($104 mil-

- jien) as well as interest on unsecured debt sufficient to

bring the total of all such deferrals to $605 million (Stip.

Nos. 12, 13, 14, JA 207-08; FF 4, JA 89-90; Varalli affid.,

Ex. T-1, J. Doc. No. 19). In addition, the Trustees deferred

some $665 million of expenditures for maintenance of

way. (Affidavit of Clarence E. Jackman, March 25, 1974

(J. Doc. No. 18) (hereinafter ‘‘ Jackman affid.”’?); FF 10,

JA 91-92.)

Notwithstanding the massive proportions of these

measures, taken separately or cumulatively, the Trustees

were barely able to continue operations and were wholly

unable to stem the tide of gigantic operating losses. More-

over, little progress was made in achieving any of the con-

ditions to viability, and the Trustees’ periodic reports on

reorganization matters grew more pessimistic. As they

reported on February 15, 1972:.

“Tf these three changes [plant rationalization,

personnel reduction, passenger service compensa-

10 The parties below have agreed that certain facts set out in a

stipulation dated April 15, 1974 entered in the record below are

deemed to be true. References to “Stip. No. —” are to items of

that stipulation (JA 203-11).

11 Certain other efforts of the Trustees to obtain cash from non-

recurring or non-rail sources were unsuccessful. See, ¢.g., In re

Penn Central Transp. Co., 484 F.2d 323 (3d Cir. 1973), holding

that the sale of major income-producing real estate properties was

inappropriate except as part of a plan of reorganization,

10 bs

tion] were not to be made—or if there were undue

delay in making them—there would not be, in the

judgment of the Trustees, the basis for reorganizing

the Penn Central as a private enterprise. This con-

clusion is based on studies and analyses which show

that maximally effective self-help measures alone—

taken with the most reliable available estimates of

traffic increases in the future—would result in con-

tinued losses during the next four years and would

show only marginal earnings by 1976. That would

be too little and too late—for there would have been

unconscionable and possibly unconstitutional erosion

of the Debtor’s estate in the meantime. This judg-

ment could only be invalidated by an unlikely con-

fluence of favorable developments including a spec-

tacular and sustained increase in revenues far beyond

what is here forecast.’ J. Doc. No. 4 at 2. (Latter

emphasis added.)

The emphasized passage of the report struck for the first

time what was to be the keynote of the reoxganization—and

of this litigation—namely the “‘unconscionable and uncon-

stitutional’’ results of continuing the railroad’s operations.

in the face of intractable losses and erosion.

The Trustees’ attempt to effectuate a traditional in-

come-based reorganization of Central through their

own efforts and with the voluntary cooperation of other _

parties, including governmental authorities, shippers and

labor, proved unavailing. The Trustees recognized this,

and in their January 1, 1973 Report (J. Doc. No. 8 at 1),

publicly avowed that the railroad was not reorganizable in

a traditional sense, announcing that they ‘“‘have concluded *

that without government financial assistance for improve-

ment of the railroad, a reorganization of Penn Central can-

not be achieved in 1976, as they had considered possible. ’’

The financial assistance mentioned was to be used to

improve Penn Central’s plant and provide more serviceable

equipment so that projected traffic increases ‘‘upon which

the reorganization depends’’ could be achieved. The Trus-

tees shortly thereafter told the Court that the amount

needed was between $600 million and $800 million. Trustees’

Report, Feb. 1, 1973 (J. Doc. No. 9) at 2. And the Trustees

again drove home the point:

‘Tt is clear that the status quo will not permit an

income-based reorganization. Indeed, because of

the accumulation of losses and unpaid priority

charges, a continuation of present operations would

do violence to the constitutional prohibition against

the using of private property for a public purpose

without adequate compensation.”’ Id. at 7.

The continued emphasis by the Trustees on the constitu-

tional problems of interim loss operations is noteworthy.

Notwithstanding Penn Central’s deteriorating financial

condition and darkening prospects, the Trustees still at-

tempted to use whatever self-help measures they could in

striving to effectuate the conditions to viability.

Piecemeal abandonments furnished no real response to

the problems of Penn Central. Any significant doubt on that

score was dispelled by studies of the potential viability

of a hypothetical ‘‘core’’? Penn Central system developed

by Wyer, Dick & Co. (‘‘Wyer, Dick’’) for the Trustees.’*

These studies established that even if the most optimistic

12 The studies were introduced into evidence by the Trustees in

the proceedings before the ICC on the plans of reorganization of

Penn Central discussed below. Exhibits introduced in those pro-

ceedings are hereinafter cited as “ICC Ex. —.” Statement of Charles

C. Shannon, ICC Ex. 19. That record (in Fin. Dkt. No. 26241) was

before the Court below in full (JA 199). Portions of that record

have been reproduced in the Joint Documentary Submission lodged

with this Court.

ee.

predicted conditions'® were achieved instantly, including

the instant abandonment of 6,000 route miles (30%) of

trackage and the physical elimination of passenger opera-

tions (as distinct from passenger losses), the remaining

15,000 mile core of the Penn Central system could not

generate income available for fixed charges until 1976,

Nevertheless, in order to mitigate the drain on the

estate, the Trustees filed applications with the ICC to

abandon 3,742 miles of track. As of J uly 1973, when the

ICC ceased processing any abandonment applications be-

cause of the decision in Harlem Valley Transp. Ass’n v.

Stafford, 360 F.Supp. 1057 (S.D.N.Y. 1973), aff’d, No.

73-2496 (2d Cir., June 18, 1974),% only some 1,400 miles

of track had been authorized for abandonment.’* Since

January 2, 1974 the Trustees have requested authoriza-

tion from the United States Railway Association

(‘‘USRA’’) to abandon approximately 1,528 miles of track

under Section 304(b) of the Act (J. Dos, No. 65). USRA

18 The Wyer, Dick studies were based upon projections of the

revenues potentially available to Penn Central for the five-year period

of 1974-1978, made in May 1973 by Temple, Barker & Sloane

(“TBS”), consultants to the Trustees. The projections were criti-

cized as overly optimistic by Mr. Shannon, President of Wyer, Dick

(ICC Ex. 19 at 9-14). The May 1973 projections were, in fact, the

third such forecast made by TBS at the Trustees’ request, and in each

successive forecast the total freight tonnage forecast was revised

downward, Statement of Carl S. Sloane, ICC Ex. 17 (J. Doc. No.

38) at 10. Mr. Sloane also acknowledged that “external factors”

and “present circumstances” rendered the May 1973 forecasts opti-

mistically unreliable. /d. at 20. And Mr. Shannon concluded that

the viability study did not “form the basis for a responsible and

feasible plan of reorganization” because the conditions on which it

was predicated were “unlikely of achievement.” ICC Ex. 19 at 25.

_ 3* There the court held that before any hearing on abandonment

applications could be held, an environmental impact statement must

be issued.

No. 54 at 13) (hereinafter “ICC Report”). é

AAT AISA rt bet man

13 /

responded that no procedures for handling such requests

had yet been determined (J. Doc. No. 66). All such applica-

tions thus landed in administrative limbo. .

_ The Trustees’ efforts to eliminate excess labor costs

met no better success, The Trustees placed great stress

on the multi-million dollar savings to be obtained through

reduction in the number of persons constituting a train

crew. This objective was, and remains, unacceptable to

organized labor. In early 1973, after full compliance

with the procedures of the Railway Labor Act, 45 U.S.C.

§§ 151 et seq., the Trustees unilaterally posted new work

rules designed to reduce crew sizes solely by means of

attrition. A strike ensued which was quickly ended on

February 9, 1973, not by negotiations between the parties,

but by the passage of United States Senate Joint Resolu-

tion 59-2, nullifying the work rule changes and requiring

‘the continuation of the status quo. The Trustees have not

subsequently attempted self-help measures to resolve their

major labor problems.

In the face of the still deepening crisis, and fully aware

of the Trustees’ futile efforts to achieve the conditions of

viability by self-help, the Reorganization Court on March

6, 1973, on its own motion, entered Memorandum and

Order No. 1137 (J. Doc. No. 28) directing the Trustees to

file, not later than July 1, 1973, either a plan of reorganiza-

tion of Penn Central or their proposals for liquidation. The

Court stated:

‘‘Whether the constitutional limit [of interim

erosion] has been exceeded depends primarily upon

how the remaining assets are to, be valued; and this

in turn may well depend upon how those assets are

to be used at the conclusion of this reorganization.

Under any view of the matter, it seems clear that

the point of unconstitutionality is fast approaching,

if it has not already arrived.

‘The essence of §77 of the Bankruptey Act is

that the legal remedies normally available to credi-

tors 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 constitu-

tional justification for restraining creditors from

exercising their normal remedies disappears. . . .

‘[I]t is apparent that the required profitability can-

uot be achieved unless substantel further progress

is made in the immediate\future to meet the con-

ditions upon which the projected profitability is

Based, ;...

* * *

‘*... 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

_ beyond October 1, 1973.’” In re Penn Central Transp.

Co., 355 F.Supp. 1343, 1344-46 (E.D. Pa. 1973).

Again, the emphasis on constitutional problems of con-

tinued operations should be noted.

The Trustees complied with the Court’s directive and

filed a plan of reorganization for Penn Central which,

briefly stated, contemplated the orderly liquidation of Penn

Central’s rail assets and its reorganization around its other

assets,’” The plan was filed with the ICC, as were other

plans proposed by the Next Haven Trustee and Penn Cen-

tral Company, and hearings before the ICC (Fin. Dkt. No.

26241), in which all interested parties participated, con-

**Shortly before the Trustees’ plan was filed, fifteen Lessors

(“Secondary Debtors”) ‘also filed petitions for reorganization under

Section 77 in conjunction with the Penn Central reorganization

proceedings, The Sccondary Debtors own, or themselves lease from

‘others, 9,304 miles (or 46.9% ) of the 19,850 miles of road presently ’

operated by Penn Central (JA 105, 212-13). None of the leases.

with the Secondary Debtors has been affirmed or rejected (JA 105).'

The proposed plan of reorganization also dealt with the Secondary

Debtors, since their fate is inextricably intertwined with that of

Penn Central.

tinued through the summer of 1973. On October 1, 1973,

the ICC issued its ‘‘Preliminary Report”’, holding, inter

alia, that the Trustees’ plan was not ‘‘a plan of reorgan-

ization within the meaning of section 77(b) of the Bank-

ruptey Act’’’’ and refusing to certify it or any other

plan of reorganization to the Reorganization Court for

further consideration. The ICC Report also stated that

further hearings would be held: in-the matter. None was

ever scheduled or held.

Following the refusal of the ICC to certify a plan of

reorganization, the New Haven Trustee, on October 9, 1973,

moved before the .Reorganization Court for dismissal of

the Penn Central reorganization proceedings under Section

77(g) and institution of an equity receivership as con-

templated by Section, 77 (i) (J. Doc. No. 13).**

The Court held a hearing in October 1973 to consider

the implications of the ICC order. At that hearing, the

Under Secretary of Transportation reported to the Court

on the status of the legislative effort (see excerpt at J. Doe.

No. 24) and largely on his representations that adequate

federal assistance was imminent, the Court agreed to bide

its time.” It is fair to conclude that the Reorganization

Court would have reluctantly terminated rail operations

hy the end of 1973 had not the Government held out the

promise that help would be forthcoming.

17 ICC Report (J. Doc, No. 54) at 111.

18 By. petition filed in March, 1973 (J. Doc. No. 12), the New

Haven Trustee had sought, inter alia, the fixing of a date for termi-

nation of operations. The petition was never set down for hearing.

19 After the Act was passed, further petitions were filed by the

Institutional Investors Penn Central Group and certain indenture

trustees on March -7, 1974 seeking termination of rail operations

(Doc. No. 7135) and by Penn Central Company on April 4, 1974

. .secking termination of rail operations and severance of rail proper-

ties from non-rail properties (Doc. No. 7314). These petitions and

the aforementioned motion of the New Haven Trustee have been

briefed and argued to the Reorganization Court and are pending.

‘

CHENERORLTE

Si eee a

PSF CRE RES TES

RET ATR I: PAR MS

During 1973, the financial condition and prospects of

Penn Central continued to worsen: the system lost $189

million from operations in» 1973.7° In early 1974 Penn

Central had approximately $10,800,000 of installment pay-

ments due on equipment obligations which it was unable

to meet and, accordingly, applied {.r an ‘‘emergency’’

grant under Section 213 of the Act (J. Doc. No. 14). How-

ever, the Secretary of Transportation refused to make

an outright grant as apparently called for by the Act but ©

insisted on acquiring a pro tanto interest in the Trus ees’

equity in the equipment involved equivalent to the amount

of the payments made. Notwithstanding outright opposi-

tion to the transaction by some creditor interests and the

position of most others that the transaction was contrary

to the intent of the Act, the Reorganization Court approved

the transaction, stating, “There is no alternative’’ (J.

Doc. Nos. 29, 30). Later, on April 30, 1974, the Secretary

authorized and the Reorganization Court approved an

outright grant of an additional $18,000,000 under Section

213 to stave off yet another cash crisis (J. Doc. No. 31).

Ill. The Impact of Operations During Reorganiza-

tion of the Penn Central Estate

The events described above provide merely a glimpse

of the massive evidence before the Court below document-

ing the inexorable trend in the Penn Central reorganiza-

tion proceedings towards continual and irreversible losses,

the continued dissipation of non-recurring and non-rail

income in non-remunerative rail operations, and the con-

tinued substantial deterioration of plant and equipment.

Nithy

Pc SLM UIE OTe § serrneassrim’ ae

Some specific facts point up the magnitude of this

financial and physical erosion more graphically:

(1) During the period from June 21, 1970 to December

31, 1973, Penn Central’s operations resulted in losses in “%

ordinary income, calculated in accordance with ICC regula-

ple ONG Re Te

20 FF 1, 4, JA 89-90; Varalli affid., J. Doc. No. 19, Ex. T-1.

EERE LE SR ae RLS 3S EOE EI PE ae ea : RPM LEP BLE IOERE a

tions, as follows (FF 1, 4, JA 89-90; Varalli affid., J. Doc.

No. 19, Ex. T-1):

June 21, 1970 to December 31, 1970 .... $179,700,000

Year ended December 31, 1971 ........ 284,500,000

Year ended December 31, 1972 ........ 197,900,000

Year ended December 31, 1973 ........ 189,000,000

TU es on s Ce aaeens Seep $851,100,000

(2) During that period, non-recurring income approxi-

mating $155,300,000 was expended to sustain operations

(FF 3, 4, JA 89-90; Varalli affid., J. Doc. No. 19, Ex. T-1).

(3) The amount set forth in’ (2) above does not in-

clude the additional amount of approximately $28,800,000

received under Section 213 of the Act (see FF 4, JA 90).

(4) During that period, $157,000,000 in non-rail in-

come was utilized in operating Perin Central’s rail proper-

ties (Stip. No. 11(c), JA 207, 211).

(5) During that period, unpaid and deferred real estate

taxes, leased line rentals and interest on debt obligations

aggregated approximately $605,900,000 (FF 2, 4, JA 89-90;

Varalli affid., J. Doc. No. 19, Ex. T-1).

(6) Deferral of maintenance. of _way spread ‘ from

branch, side and yard ee he mainline trackage, and

deterioration of portions of the main line accelerated.

That in turn resulted in, among other things, slow orders

being imposed in 1974 on 8,475 track miles, up from 2,100

track miles in 1970. A total of 6,900 track miles was

classified by the Federal Rail Administration as not being

in adequate condition to meet the minimum standard

for operational track speed of 10 miles per hour (49 C.F.R.

$§ 213 et seg.). The deterioration of the roadway increased

train time, decreased service capacity and depressed the

system revenues still further (FF 7, 8, 9, 10, JA 91-92;

Jackman affid., J. Doc. No. 18, at 3-4).

(7) Even assuming annual expenditures of $225 to $250

million for normalized maintenance of way, an additional

$665 million (in non-inflated dollars) must be expended

to catch up with past deferred maintenance. The amount

of deferred maintenance is so great that it would require

eight years to make up, even if all the money were presently

available (FF 10, JA 91-92; see Jackman affid., J. Doc.

No. 18, at 4).

It cannot be seriously disputed that if Penn Central is

forced to continue operations on the present basis, addi-

tional massive financial losses and deterioration of plant

will result. The Reorganization Court found reasonable—

upon uncontradicted competent expert testimony?!—pro-

jected ordinary income losses for Penn Central in the years

1974-1978 of the following magnitude:

ee $ (237,700,000)

Wee (196,300,000)

og, BE rege Ore (136,000,000)

eased re peers ie (96,000,000)

eo ee ea (56,200,000)

(FF 12-19, JA 92-95; Affidavit of Carl S. Sloane, March 25,

1974 (J. Doe. No. 16) (hereinafter ‘‘Sloane affid.’’) at 7-11;

Varalli affid., J. Doe. No. 19, at 4, Ex. T-2).

*1 This testimony was introduced at the 120-day hearing at which

the United States was represented and had an opportunity to cross-

examine and to offer rebuttal evidence. The Court indicated the

probable availability of portions of the record there made in the

plenary constitutional actions (J. Doc. No. 26 at 11,112). No

contrary evidence was ever tendered by the United States; no appeal

from the 120-Day Decision was taken by the United States: and

inclusion of this evidence in the record below and in the submission

to this Court was agreed to by the Government and USRA (JA

198, item 11; JA 6, item II-1). At no time, therefore, have Appel-

lants in any form attempted to offer any counteivailing evidence as

to Penn Central’s prospects, and the findings of the Reorganization

Court as to the reasonably likely losses, accumulation of priority

claims, and related matters are thus before this Court uncontra-

dicted.

* - « Fe SOSA NF wR SSS pene

19 ~

The foregoing projections are based upon assumed con-

tinued diversion to rail operations of non-rail income. The

magnitude of ordinary income losses reasonably projected

for the same period on a rail-operations-only basis was

found to be as follows:

es §(236,700,000)

ee (206,400,000)

a eere Seer Ta (153,900,000)

WO oe (120,300,000)

SRR oo vis ees (82,300,000)

(FF 24, 25, JA 98-99; Varalli affid., J. Doc. No. 19, Ex. T-3)..

Neither of these projections reflects the further costs

of eliminating deferred maintenance (FF 27, JA 100).

If, on the one hand, such costs—found by the Reorganiza-

tion Court to be reasonably estimated at $665 million over

eight years (FF 10, JA 91-92, n. 2)—were to be charged

against operations, the resultant losses would be corre-

spondingly greater. If, on the other hand, the amounts

necessary to cure deferred maintenance are not-expended,

the physical plant of Penn Central will continue to deteri-

orate, with a resultant loss of traffic and accelerated de-

cline in revenues. (FF 10, 22, JA 91-92, 97; Sloane affid.,

J. Doc. No. 16, at 11.) ‘

It is also reasonable to expect that in the period 1974-

1978, as much as $310,700,000 in local taxes, $137,100,000

in bond interest and $140,000,000 in leased line rentals: will 4

accrue, but not be paid. (FF 23, JA 98; Guest affid., J. 4

Doe. No. 20, at 9-10.) %

In summary, from the inception of the Penn Central re-

organization proceedings, despite substantial efforts by the

Trustees, a traditional income-based reorganization was

never in the cards. It is, of course, now both conceded

(Stip. Nos. 8, 9, JA 206) and finally found (JA 103) that |

such reorganization is not possible. The Trustees realized ~

early that without substantial achievement of objectives

Pak a ee ae sl ae Ni a Ml ak ich

SSE Ronee

not within their control or that of the Reorganization Court

— elimination of plant redundancy (primarily through

major line abandonments), elimination of excess labor, full

reimbursement for passenger service and improvement in

rates and divisions—-Penn Central’s situation was hope-

less. None of those conditions to viability came close to

fruition. The inevitable result was that the financial

prospects of Penn Central deteriorated calamitously.

IV. Proceedings under the Rail Act

By 1973, six Class I roads in the Northeast and Mid-

west, in addition to Penn Central, were seeking reorganiza-

tion under Section 77.** And there was an imminent pos-

sibility that Penn Central or one or more of the other bank- -

rupt lines might be forced to discontinue operations,

whether by reason of lack of cash, physical deterioration

or an.order of a reorganization court to prevent unconsti-

tutional erosion. Congress sought a solution to this crisis

through most of 1973, The result is the Rail Act.

Proceeding under that Act, the Reorganization Court

entered its 120-Day Decision on May 2, 1973 with respect

to both Penn Central (JA 84-103) end the Secondary

Debtors (JA 104-20). As to Penn Central, the Court held,

in accordance with the views expressed by virtually every

participant in the hearings, that Penn Central is not re-

organizable on an income basis within a reasonable time

22 In re Ann Arbor Railroad Company, Bky. No. 4-90833, E.D.

Mich.

In re Boston & Maine Corporation, Bky. No. 70-250-F, D. Mass.

In re Central Railroad Company of New Jersey, No. B401-67,

D. N.J.

In re Erie Lackawanna Railway Company, No. B72-2838, N.D.

Ohio.

In re Lehigh Valley Railroad Company, Bky. No. 79-342, E.D.

Pa.

In re Reading Company, Bky. No. 71-828, E.D. Pa,

21°

under Section 77 within the meaning of Section 207(b) of

the Act (JA 84103). Having so found, the Court con-

sidered it unnecessary to make the public interest determi-

nation contemplated by Section 207 (b).”*

Thereafter, the Reorganization Court, having held full

evidentiary hearings, entered its 180-Day Decision finding

that the Act does not provide a process which is fair and

equitable to the estate of Penn Central in the following

respects (JA 149-51):

‘‘1. The Act requires [Penn Central] to continue

to operate the railroad, for its own account, until

such time as the Final System Plan is implemented.

There is no prospect that such operations can be

conducted, except at huge losses. The Act makes no

provision for compensation to the estate or its cred-

itors for the resulting erosion.

2. The Act does not permit judicial determina-

tions with respect to the values of the properties

to be conveyed, or the value and adequacy of the

consideration to be paid for such properties, in ad-

vance of the conveyance, and the subsequent judicial

~ ‘review of these matters does not affect the finality

of the conveyance.

3. Since USRA, with the approval of Congress,

is to determine the nature of. the consideration to

23 The New Haven Trustee (solely on jurisdictional grounds) and

the Commonwealth of Pennsylvania appealed the 120-Day Decision

to the Special Court, but the appeals were dismissed. Those parties

have also appealed to the Third Circuit Court of Appeals on the

same grounds. The Court may wish to take notice of the fact that

the courts overseeing the reorganizations of the Erie Lackawanna and

the Boston & Maine found that those lines were capable of being

“~~. reorganized on an income ‘basis within a reasonable time under

Section 77 and that the public interest would be better served by

\continuing with such a reorganization. Order No. 234 (Doc. No.

1688) in the Erie Lackawanna proceedings and Memorandum dated

{May 2, 1974 in the Boston & Maine proceedings.

}

‘

be pzid for the transferred assets, and judicial

remedies are limited to reallocation. of the securi-

ties proposed by USRA and the entry of a deficiency

judgment against Conrail, the Act does nut assure

that the [Penn Central] estate will actually receive

the equivalent of the ‘constitutional minimum’ value

of the properties conveyed.

4. It is beyond the power of a reorganization

court, including the Special Court, to order the con-

veyance of properties free and clear of liens in ex-

change for common stock, except perhaps to the

extent that the-sale price exceeds the net liquidation

value of the property conveyed. This is particularly

true where there is no guarantee of the value of the

stock or its future earnings.

5. Implementation of the Final System Plan pur-

suant to the Act cannot be regarded as equivalent

to consummation of a plan of reorganization, or a

step in or part of such a plan of reorganization,

because (a) the conveyances would become irrevoc-

able before there would be any opportunity for par-

ticipation by the estate or its creditors in the valua-

tion process, (b) the conveyances would become

irrevocable in advance of any judicial review of fair-

ness, valuations, ete. ; (c) the conveyances would be-

—eome irrevocable before there could be any determi-

nation of the relative rights of creditors and the

value of their security or their treatment in the . ©.

reorganization process; the creditors would merely “FP

lose their liens on the properties conveyed.

6. Implementation of the Final System Plan ¢an-

not be legally justified as a sale of property by the

Trustees, or as consummation of a reorganization

—y plan, for the reasons specified above. To the extent

that the Act represents an exercise of the power of

eminent domain, it is unfair and inequitable, in that

it does not provide for just compensation in cash or

exe

its equivalent, assured in advance of the conveyance.

There is no other basis upon which the constitutional

validity, or the fairness and equity, of implementa-

tion of the Act can be upheld.

7. Under the provisions of the Act, the only

judicial determinations which can have significant

effect in protecting the rights of the railroad estates

and their creditors must be made at a time when

substantially all of the information pertinent to

those judicial decisions is unknown and unknow-

able.’’**

Summary of Argument

The Court below did not, as Appellants would have

it, launch an indiscriminate and premature attack upon the

Rail Act. Rather, upon a fully developed record,” the

Court found clear and present harm in the impact of certain

provisions of the Act upon constitutionally protected

interests of the plaintiffs. It used its equitable powers to

tailor an injunctive decree to fit tightly the wrongs which

it found. In this it was neither premature nor extravagant ;

it was correct and prudent. Its order is sustainable not only

upon the grounds which it assigned for. its action, but also

upon other grounds which, in the exercise of its judicial

restraint, it declined to reach.

—<—<—<———

24 The Reorganization Court reached the conclusion that the Act

does not provide a process fair and equitable to the estates of the

Secondary Debtors for the same and additional reasons (JA 153-

56).

25 No party has contended that the extensive record contains any

genuine issue of material fact, and all parties proceeded on motions

under Fed. R. Civ. P. 56. The bulk of the record was imported from

the Penn Central reorganization proceedings,” by agreement, and

Judge Fullam, who has supervised that reorganization for over four

years, was a member of the three-judge Court.

RES Pee Re

bak ge Ns

SERRE POLI PREM EENNTTI

The Court below found Section 304(f) of the Act to be

unconstitutional in that it forced interim rail operations

upon Penn Central until a Final System Plan was adopted.

Since these operations were incontrovertibly at massive

losses, the Court found that they posed a serious likelihood

that the bankrupt estate would be unconstitutionally eroded

before a Final System Plan could be effectuated. Holding

that Section 303 of the Act did not assure compensation

for the losses thus incurred, the Court concluded that the

provisions were unconstitutional under the Fifth Amend-

ment. ,

Appellants attack this conclusion upon the grounds that

(a) the Act in their view does not require such continued

interim operations; (b) the impact of compelled operations

under existing financial conditions is not demonstrably con-

fiscatory ; and (c) even if interim operations at a loss were

compelled, such a result is nonetheless constitutionally

permissible because such operations are required by the

public interest.

~The Court below correctly appraised the record as to

the imminence of harm to plaintiffs by virtue of the inexor-

able economic effect of plainly required interim operations,

Given that harm the Court rightly refused to countenance

a new rule of expropriation for ifidustries affected with a

public interest as was implicit in Appellants’ position.

Section 304(f) forbids discontinuance of rail service or

abandonment of lines to any significant degree pending

completion of the Final System Plan. Indeed, that was the

manifest purpose of Section 304(f) as is evident. from its

terms, its legislative history, and from subsequent utter-

ances of its authors directed to those charged with its

administration. The duration of these continued opera-

tions would be a minimum of 17 months and could extend

indefinitely as either USRA requests legislative extensions

of time for its task,?* or as Congress delays adoption of a

Final Systeri~ Plan. During this interval, permissive

abandonments under Section 304(f) could not cure the

effect of massive losses being sustained by the estate, nor

would public groups likely acquiesce in any such abandon-

ment program.

Because Section 304(f) in as many words precludes any

federal court from authorizing abandonment or discontin-

uance of service, the Court below properly recognized that

it had before it the last clear chance to prevent the pro-

cedures of the Act from exacting an unconstitutional toll

of the estate and the claimayits entitled to participate in it.

Upon the record, the interim operations required by the

Act do confront the estate with the unavoidable prospect

of enormous continuing losses and continued accumulation

of huge priority claims. These continuing loss operations

afflict the estate with a demonstrable likelihood of financial

and physical erosion. This conclusion was amply justified

upon an uncontested record of massive deficits in net oper-

ating income, the issuance of Trustees’ Certificates priming

the secured creditors, the aggregating of accrued but un-

paid real estate taxes and leased line rentals, the deploy-

ment ity hopelessly losing operations of non-recurring

income and. of income derived from non-rail enterprises,

and the uncontested likelihood—found as fact by the Re-

organization Court (JA 92-100)—that all these would

26 A postponement of 720 days ‘or presentation to Congress of

the Final System Plan has~now authoritatively been proposed in

§. 4003 introduced by Senators Hartke, Magnuson, Cotton, Pearson

and Beall on September 16, 1974 and that day referred to the Senate

Committee on Commerce, the text of which, with introductory com-

ments by Senator Hartke and supporting letters from the Chairman

of USRA and the Chairman of the ICC, is printed in the Congres-_

sional Record of that date (daily ed.) at $16619-20. The Bill would

extend by 120 days the statutory-deadline for both the preliminary

system plan and the Final System Plan, and would authorize an

increase in USRA’s administrative expenses from $26 million to

$40 million,

26 .

continue at enormous rates, interminably. The finding of

the Reorganization Court.that Penn Central was not

capable of an income-based reorganization set the further

course of the Penn Central reorganization apart from those

reorganization cases which were premised upon a feasible

recapitalization of the debtor railroad so that railway

operating income would adequately support the new capi-

tal structure.

Apart from the fact that the findings of the Reorganiza-

tion Court on such subjects are entitled to special weight,

New Haven Inclusion Cases, 399 U.S. 392, 463, Appellants

are plainly wrong in their contention that erosion does

not pose a demonstrably immediate threat to the Penn

Central estate. Their contention that ‘‘appreciation’’ in

the estate derived from general economic inflation offsets —

its erosion is wrong as a matter of law. Assuming arguendo

that inflation did produce a net increase in the value of the

properties of the estate, the investors in Penn Central

are constitutionally entitled, once there ceases to be a

reasonably likely prospect of reorganization, to place their

funds in appreciating investments which are not sapped

by staggering losses. Further, Appellants’ figures, de-

signed to demonstrate that the erosion has been offset

by asset appreciation, are wholly unreliable. The Court

was correct in recognizing the existence and inevitability

of continued attrition of the estate, and protecting Appel-

lees against its ravages. .

Such compulsory operations to the manifest detriment

of the estate are not constitutionally permissible in the

public interest in the absence of either (a) assurance of

just Cempensation or (b) reasonable present assurance

that the outcome of the procedures under the Rail Act will

produce at least the liquidation values to which the credi-

tors of the estate are presently entitled, plus conpensation

for the erosion they sustain during the course of those

procedures,

Ping ae eae ¥ BT ee ee Pe Ld all

The vice of the Act in this respect is that it compels

interim loss operations without providing either assurance

of compensation or a reasonable present assurance of

reorganizability. That this is done for an ostensible

public purpose merely poses the constitutional question ;

it does not answer it. The Fifth Amendment presumes

that takings are for a public use. It does not excuse the

payment of just compensation on that account; it com-

mands just compensation on that account.

This Court has always recognized the principle that

when public purposes are to be served, in all fairness and

equity the public rather than private parties should bear

the costs. Armstrong v. United States, 364 U.S. 40, 49;

Louisville Joint Stock Land Bank v. Radford, 295 US.

555, 602. The cases have consistently recognized the differ-

ence between the uncompensated abatement of a nuisance

which is permissible, and the uncompensated compulsory

provision of a public good, which is not. Compare Atchison,

T. & S.F. Ry. v. Public Util. Comm’n, 346 U.S. 346, with

Nashville, C., d& St.L. Ry. v. Walters, 294 U.S. 405. This

well-settled distinction is basic to the line of cases, epitom-

ized by Brooks-Scanlon Co. v. Ratlroad Comm’n, 251 U.S.

396, which hold it unconstitutional to compel continued

hopelessly losing rail operations without compensation

upon a claim that such operations are required by the pub-

lic interest. Those cases embody a fundamental principle

of constitutional law, have’ repeatedly been relied upon.

and are not, as Appellants suggest, obsolete.

All the cases in which the doctrine of railroad reorgan-

ization under Section 77 has been developed involved

proceedings in which, by proof or by hypothesis, there

existed a reasonable likelihood that upon recapitalization

the enterprise. could be reorganized and going concern

values, in excess of then present liquidation values, could

£8 ie achieved, Railroad investors do, under those cases,

f ssume the risk that the accomplishment of such a re-

organization may require them to abstain for a reason-

able time from the exercise of creditors’ remedies. These

cases do not stand for the proposition that, after such

reasonable prospect. of reorganization has been extin-

guished, a similar abstention can be forced upon the credi-

tors without just compensation, or that successive ephem-

eral prospects of reorganization can be held out as

justification for indefinite suspension of their rights. See,

e.g., New Haven Inclusion Cases, 399 U.S. at 460-61, 466.

Here, as is apparently conceded (J. Doc. No. 64 at 68-

69), the Rail Act in its terms does not provide adequate

funding to assure just compensation for the interim erosion

Nor, upon the record, can it fairly be said that the Act

holds out sufficient assurance of a reasonably likely re-

organization to have required the Court below to abstain

from granting the relief prayed for. An examination of

the provisions of the Act indicates that its terms are

materially inadequate to compensate for the assets ulti-

mately to be conveyed and, a fortiori, are incapable of

providing assurance of eventual recoupment of erosion

losses. The interim operations are thus required by law

under circumstances that preclude recovery of the values

thereby lost to the estate either by direct compensa-

tion or reasonably foreseeable reorganization. The Court

below correctly branded that result unconstitutional and

enjoined it. Unlike the cramdown provision of Section

77 to which Appellants resort by analogy, no court has the

power under the Act to furnish the requisite assurance

of value, either by interim surveillance of the reorganiza-

tion or by ultimate determination, in advance of consum-

mation of the conveyances, that the Final System Plan

is feasible or that the consideration afforded by the Act

is fair and equitable.

Appellants take misguided comfort from the decision

of this Court in the New Haven Inclusion Cases, 399 U.S.

which the estates are, by its terms, compelled to suffer. |

OOOO

392. Although the New Haven reorganization appears

to have been the model for the Rail Act, the latter radically

differs from.the former in certain material respects which

highlight the unconstitutional impositions of the Act.

Most notably: The compulsory character of the Act con-

trasts with the voluntary nature of the New Haven in-

‘clusion. The absence of any judicial supervision of the

procedures of the Act as they lead to inclusion in the Con-

solidated Rail Corporation created by the Act (‘*Conrail’’)

contrasts with the careful scrutiny accorded the New Haven

| reorganization and the terms of its inclusion in Penn

Central. And the assurance enjoyed by the New Haven

investors (woebegone as it turned out to be) that they

would receive an assured per parcel liquidation value for

their properties when those properties were included in

a mammoth railroad with assets of a value twenty times

larger than the value of the conveyed assets, contrasts

starkly with the legitimate pessimism that must be accorded

the prospect that fair value for the conveyed rail proper-

ties can be eked out of a Conrail which amalgamates

portions of the bankrupt railroads themselves.

II.

The deficiencies of compensation intrinsic to the Act

are not met by any putative remedy at law under the

Tucker Act. | :

Analysis of the Rail Act itself and a fair reading

of its legislative history demonstrate that Congress made

explicit provision ir the Act (a) for a mechanism of com-

pensation that was to satisfy the ‘‘eonstitutional minimum”’

to which the estates were entitled (and thus exhaust any

cause of action which could lie in the Court of Claims)

and (b) for a Special Court in which the valuation and

compensation process was exclusively vested.

TNE

AERTS EPRI EET

wey

Pe a eT en ene ee

— - PRADA OPA A ree ee. Yao

The legislative history and its epilogue show that

Congress affirmatively intended that claimants against

the bankrupt estates not have recourse to the United States

Treasury for redress of any grievances allegedly done

them under the Act. This conclusion is inescapable in the

light of repeated declarations in the conference report,

the reports of Senate and House Committees, and the

statements of the authors and managers of the bill in the

course of debate in both Houses. It is reemphasized further

by the explicit statements of the members of the sponsor-

ing House Committee in oversight hearings conducted

after the Govefffnent and USRA had submitted to the

Court below a brief which held out a Tucker Act remedy

as an adequate remedy for <ny problems of the Act. Lest

any doubt remain about the subject, thirty-seven members

of Congress, ineluding certain sponsors of the Act, have

filed with this Court a brief amicus curiae which concludes

with the categorical observation that if a deficiency judg-

ment against the United States under the Tucker Act

‘‘is necessary to make this Act constitutional, the Act

must fall since the legislative history and the language of

the Act are clear that no deficiency judgment against the

U.S. is authorized by the Act.’’ Brief Amicus Curiae at 22.

All of this makes clear that the Tucker Act is not avail-

able to supplement the constitutional deficiencies of the

Rail Act, as a matter of law. Moreover, the uncertainty

ereated by the explicit declaration of Congress and Con-

gressmen that such recourse would not be tolerated renders

the putative remedy at law inadequate. |

IIT.

The injunctive relief entered below was timely and

proper. It was timely because under the provisions of the

Act imminent constitutional harm threatened . plaintiffs

and there was no other appropriate method of redress,

‘

PEERS BOON Re aN IE eg EE DORR SAI RESIS wm HEE YE TNS SSL NR ND MRD BA CURD A RI OTN FOUL EE ERS I ONE

POON. Sour e. Ree ee en ere tae iain sid . . .

seetaig f

The relief was proper because it was tailored to prevent

only those wrongs which were clearly ripe and went only

so far as necessary to prevent their occurrence. The in-

junctive provisions show, when read together, a compell-

ing and proper concern that the Act ousted the federal

courts from their proper functions of preventing and

curing constitutional violations. Section 304(f), which

provides for continued operations ‘‘notwithstanding’’ any

contrary decree of a federal court, was enjoined only

to the extent it purported to authorize disregard of

such decrees. Section 303, which precludes the Special

Court from refusing te transfer rail assets, irrespective

of the inadequacy of compensation for erosion, was en-

joined only insofar as inadequate compensation ensued

from that mechanistic provision. So much of Section

207(b) as required dismissal of the pending Section 77

proceeding—plainly an in terrorem provision to inhibit

the reorganization courts in the 180-day proceedings—was

excised to abate that threat.

Finally, certification of a Final System Plan was en-

joined, not irrationally, as Appellants suggest, but to

preserve the continuing jurisdiction of the federal courts

over the subject matter. By the terms of Section 303(b) (2)

of the Act, upon certification of a Final System Plan,

the procedures thereafter become mandatory, the harm

is inexorable and ‘‘such conveyances [required by the Final

System Plan] shall not be restrained or enjoined by any

court.’’ The injunction against: certification of a plan

was necessary to prevent ultimate ouster from jurisdic-

§ tion of the federal courts and to protect the enforceabi:ity

$ of the writs already issued.

None of this was an abuse of discretion; it was, instead,

an extraordinarily astute use of discretion in the face of an

‘4 Act posing enormous provocations to the equity jurisdic-

tion of the Court below.

DREISER CRF AURIS, TEER GEO BRO RS

ee ee eee |

PRENSA 8 seis! eae ,

- IV.

The restraint exercised by the Court below is further

illustrated by the fact that it refrained from reaching

several ‘ssues presented to it for decision and decided cer-

tain of the issues which it did dispose of on narrow rather

than broad grounds. Its order is, therefore, sustainable, not

only on the grounds which it assigned, but upon other

grounds as well.

For example: the Act does effect an uncompensated

taking of Appellees’ property by means of compulsory con-

veyances without the just compensation required for such

a taking. The provisions of the Act which the Court below

enjoined were all integral parts of the uncompensated tak-

ing and the writ entered below is justifiable on that alterna-

tive ground. ;

Provisions of the Act, most particularly Sections 207

and 303, amend or supersede Section 77 and significantly

affect the rights of creditors in respect of the bankrupt

estate. They are, consequently, laws on the subject of

bankruptcies, but they.are in terms-applicable only to a

region defined in the Act as embracing seventeen states of

the Northeast and Midwest. They run afoul of the con-

stitutional command that laws on the subject of bankrupt-

cies shall be ‘‘uniform fhroughout the United States.’

Hanover Nat’l Bank v. Moyses, 186 U.S. 181, 188. The coin-

cidence that the only Class I railroads in reorganization

lie within the region does not justify or permit a departure

from well-established rule that a bankruptcy law must

in ter e geographically uniform. The provisions en-

joined below are of this character and the writ enjoining

their enforcement may be sustained on this alternative

ground as well. ’

Finally, the procedures of the Act strip the federal judi-

ciary of its power to exercise an informed discretion over

the fundamental issue of whether the estate and its claim-

ER PSE NETRA IT SINR TBR TS SIRS BLINN ELE EEA REE ETE LD I EI LIENERT EE BES

ants are receiving fair and equitable treatment. At the

only juncture under the Act when the reorganization court

is allowed to make a judgment about the fairness of the

process of the Act, it is disabled by the provisions of the

Act from knowing what the outcome of that process can be.

When the Special Court can know what the outcome of the

Final System Plan may be, it i8 specifically disabled from

doing anything about it. No other court may intervene at

all to protect the estate or its claimants once the Act takes

effect over them. These provisions separately and together

effect a deprivation of the property of Appellees without

the fundamental elements of dae process. . The operative

provisions of the Act that would lead to this result are also

properly enjoined on that basis.

ARGUMENT

The Rail Act is Unconstitutional in that It Requires

Mandatory Interim Operations at Hopeless Losses With-

out Providing Assurance of a Legal Remedy to Furnish

Fair and Just Compensation for Erosion Beyond Con-

stitutional Limits.

The Court below held that Sections 304(f) and 303 of

the Act offend the Fifth Amendment because they compel

Penn Central to continue rail service during the indefinite

period required under the Act to adopt the Final System

Plan, without providing just compensation for the erosion

of the Penn Central estate that the Court below determined

was likely to occur during that interval.

Appellants attack that determination essentially on the

grounds that: (a) such interim operations are not required ;

(b) the impact of such continuing operations at massive

losses is not erosive of the estate; and (c) even if continued

operations were required under conditions that eroded the

ER LLL AI LOLOL LE EOS ETAL RNS SAREE ID Be a a eee - - 4

estate, such a result is constitutionally permissible because

of the public interest character of the railroad industry.

Appellees urge this Court to reject these contentions.

(1) Appellants’ first argument is based upon a labored

reading of the statute designed to suggest that interim op-

erations of Penn Central’s system may not be required at

all. This argument is at odds with the language, policy and

history of the Act, as well as practical considerations which

this Court should not ignore.

(2) Appellants’ second contention asks this Court to

find that all the parties to the reorganization proceeding,

including the Penn Central Trustees, as well as all the

courts which have examined the condition of the estate im

recent months, are irresponsibly wrong in their uniform

view that the massive losses being sustained by the estate

will continue and will erode someone’s interest in the estate

during the interim period. This argument is based upon

an unjustifiable optimism in the face of an appalling finan-

cial picture, and upon a construct of ‘‘erosion’’ which is

: wrong in theory and in fact.

a (3) Finally, Appellants’ third contention either requires

E a blind deference to Congressional hopes that the Act can

create a possibility of successful reorganization where none

before existed, in the teeth of clear evidence to the con-

trary, or invites this Court to announce an unprecedented

rule that industries affected with a public interest may be

: temporarily expropriated without assurance of fair com-

pensation. That argument, however, is unsupported and

unsupportable by evidence in the record or by any prece-

dent or principle of law to which this Court has ever shown

hospitality.

7 ees ene: SBR eC tH ERAN BS OWES WBE AOR A ON PENSE LEAR LINAS, WATTS econ

LLL ALLE LIMES IIL SLL IE BIEL AL, LEGION LOE IOS

A. The Act Does Mandate Interim Operation of the

Penn Central System.

Section -304(f), which the Court. below held required

interim operations, reads in full as follows:

“Interim Abandonment.—After the date of enact-

ment of this Act, no railroad in reorganization may

discontinue service or abandon any line ot railroad

other than in accordance with the provisions of this

Act, unless it is authorized to do so by the Associa-

tion [USRA] and unless no affected State or local or

regional transportation authority reasonably opposes

such action, notwithstanding any provision of any

other Federal law, the constitution or law of any

State, or decision or order of, or the pendency of any

proceeding before any Federal or State court,

agency, or authority.’’

Appellants’ contention that this language can be read to

permit termination of rail operations is unconvincing and

was properly rejected below.

An ultimate purpose of the Act was to obviate any

threat of termination of operations by any railroad in

reorganization until the essential rail properties could be

identified and transferred to Conrail. In service of this

objective, Section 304(f) specifically provides that after

the date of enactment ‘‘no railroad in reorganization may

discontinue service or abandon any line of railroad other

than in accordance with the provisions of this Act .. .”’

unless authorized to do so by USRA and unless there is no

reasonable objection by affected states, localities or regions.

The other provisions of the Act to which Section 304(f)

refers are those governing abandonment of lines which,

pursuant to a Final System Plan, the prior existence of

which their terms assume, are not to be conveyed to Conrail

or to other railroads. That determination, however, cannot

be made until the Final System Pian emerges many months

from now.

ARM PEE i Mis WES BM en ee .

Were not the intention of Congress to preclude abandon-

ments or service discontinuance until implementation of the

Final System Plan—that is, to compel interim operations—

plain enough from the language of Section 304(f), other

Congressional utterances have left the matter well beyond

doubt. Elsewhere in the Act itself, the intention to freeze

operations as they were when the Act became effective

is made equally explicit. Section 213(a), which authorizes

the Secretary of Transportation to make limited payments

to railroads pending the implementation of the Final System

Plan, requires ‘‘that recipients muxt agree to maintain and

provide service at a level no less than that in effect on the

date of enactment of this Act.’’ That provision was in-

voked in connection with the first payment under Section

213 to the Penn Central Trustees, and, over the objection

of creditors, the Trustees entered into an agreement to

maintain such service (J. Doc. No. 14).

Furthermore, the purpose of Section 304(f) was ex-

plicitly adverted to in the course of Senate debate on the

conference bill which became the Rail Act. Under stiff

questioning from Senator Allen, Senator Hartke, its Senate

floor manager, explained:

‘‘Mr. Allen. I understand the Senator to say a

moment ago that there would be no abandonment for

8 months.

‘‘Mr. Hartke. No. I said there would be no aban-

donment in the region while the final system plan is

being formulated.

‘‘Mr. Allen. In other words, there is a morator-

ium on abandonment for 18 months.

‘‘Mr. Hartke. For the region that is correct.

That is absolutely necessary. You cannot let the

lines be abandoned and then try to put them back in

business without a great deal of expense. That is

one of the problems we are faced with.’’ 119 Cong.

Rec. $23783 (daily ed. Dec. 21, 1973) (Emphasis

added). i

GEORGE EAE PEGI GE LICE LL LIES, LN LES, SOE ETE, PEIN ELODIE LES EPR IIE:

—

a aoe

A more explicit refutation of Appellants’ permissive

reading of the Act would be hard to imagine. That this was

the Congressional purpose, however, could come as no sur-

prise to Appellants since they. were forcefully apprised of

that intention by the House manager (and co-author of the

Act) in his letter of April 26, 1974 to the Under Secretary

of Transportation. See Trustees’ Brief, Appendix B, at 7a,

8a. Angered by the prospect that Penn Centra] might be

encouraged by the Department of Transportation to apply

to USRA for the abandonment of ‘‘hopelessly uneconomic

lines,’? Congressman Adams remoastrated in part as fol-

lows:

‘‘The purpose of this letter is to emphasize to

you that such an endeavor by DOT and the Trustees

of the Penn Central would be completely contrary to

the intent of Congresg,in adopting sections 213, 215

and sections 304(f) of the.Regional Rail Reorgani-

zation Act.

* * *

in summary, what I said then, and repeat to you

now, is that our intention was to preserve the status

quo of rail service in the Northeast during that

critical time and to allow full public comment on

abandonment proposals. The purpose of this pro-

cedure was twofold: first, to allow careful study of

the structure of rail service in the Northeast and,

secondarily, to allay public fears regarding whole-

sale abandonments of rail service. .. .

‘‘Therefore, it seems to me that DOT should give

the strictest adherence to Congressional intent in

administering the first stages of the lengthy planning

process which the Act sets forth. To encourage

USRA to allow a series of rail abandonments during

the planning period would be both harmful to co-

operation between Congress and the DOT, and con-

trary to the intention of the Act.’’ (Emphasis

supplied.)

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Therefore the Act in terms accurately expresses the

intention of its authors, articulated before its passage

and since, that there are to be no abandonments of even

‘‘hopelessly uneconcmic lines’’ during the interim plan-

ning process. That process must last-at least 17 months

from the effective date of the Rail Act, and may well

last much longer. Any postponement *’ of the deadlines

set in the Act would necessarily increase the time span

during which interim operations are compelled and erosion

sustained. And, if the Congress reacted unfavorably to

the Final System Plan when first submitted, further delays ©

of unpredictable duration could eventuate while such objec-

tions are compromised.”®

Nor is it persuasive for Appellants to argue that, upon

application to USRA, it may be assumed that authorization

to abandon lines would be forthcoming. In the first. place,

the overwhelming concern of USRA is the present opera-

tion of the lines which are candidates for inclusion in the

Final System Plan; it strains credulity to expect USRA

to authorize abandonment of lines in the absence of a prior

determination that they will be surplus. Secondly, the

right to terminate operations, which is at issue here is

system-wide. The Wyer, Dick feasibility studies show that

27 Such a postponement is now being considered in Congress.

See n. 26 at 25, supra.

28 It is not entirely speculative to believe that such Congressional

objections might well arise. There exists an obvious tension, for

example, between the declared purpose of producing a self-sustaining

rail operation (Rail Act, Section 101(b)(2)), and the provision of

service adequate to meet the needs of the region (Rail Act, Section

101(b)(1)). These competing interests have already emerged as

the preferred positions of different agencies charged with involvement

in the planning process: the Department of Transportation empha-

sizes economic viability and the Rail Services Planning Office.

(“RSPO”) of the ICC, established by the Act, emphasizes maximized

services. Compare, e.g., J. Doc. No. 62 with J. Doc. No. 63. These

tensions will predictably find their way to the floor of Congress as it

considers the Final System Plan in the context of pressure upon those

members whose constituencies stand to lose significant rail service,

ao tem

re So a ee ‘ PRT ret 8 ‘ ‘ PE ae ee

not even the elimination of over 6,000 route-miles of track

combined with other unachievably optimistic preconditions

could produce profitable operations. Whatever slim pos-

sibility there might be for USRA to authorize, with appro-

priate speed, abandonment of a particular segment of ;

potentially surplus line, there is no practical likelihood

that USRA would authorize the termination of service

on the massive scale necessary to abate unconstitutional

erosion of the Penn Central estate. To do so would be

eed

FERS

THRE

tantamount to an abandonment by USRA of its expectation ©

of realizing any plausible Final System Plan. 3

Not only would such abandonments be insufficient to é

stanch the flow of losses, but serious objections could be é

expected from RSPO on the ground that such abandon- “

ments would be inimical to the public interest. These é

objections, together with those expressly contemplated by 4

Section 304(f) from state, local and regional transporta- :

tion authorities, would inevitably delay and might well 5 3

stall altogether any program of abandonments, especially

one sufficiently large to make a dent in the operating losses &

being incurred by the estate.

The fact that USRA itself does not consider Section

304 as an invitation to wholesale abandonments now is

shown by its response to abandonment requests which have

already been_filed by the Penn Central Trustees, to the

effect that USRA had no procedures for processing such

requests (J. Doc. Nos. 65, 66).

It will not do to argue, as Appellants do, that the Penn

Central estate would in any event have to undergo time-

consuming abandonment procedures in the absence of the

Rail Act. Even if such procedures are required the estate

would. nonetheless be ‘‘constitutionally entitled’’ to a cer-

tificate of abandonment from the ICC ‘‘acting with ap-

propriate speed under 4 1(18) of the Interstate Commerce

Act.” New York, N.H. & H.R.R. First Mtg. 4% Bond-

holders’ Comm. v. United States, 305 F. Supp. 1049, 1055

(S.D.N.Y. 1969), vacated on other grounds sub nom. New

Haven Inclusion Cases, 399 U.S. 392. See also New Haven

Inclusion Cases at 459-67.

There exists, then, an explicit statutory command that

interim operations be continued, and the massive losses

that will thereby be sustained cannot be avoided with

appropriate dispatch by recourse to any agency having

authority to excuse the estate from the command of the Act.

To avoid the impact of the plain meaning of Section

304(f), Appellant USRA complains (USRA Brief at 61-66)

that the Court below misread the Act. The section, so goes

the argument, ‘‘could and should have been construed to

conier approval power [with respect to interim abandon-

ments and service discontinuances] only within constitu-

tional limits as the courts may declare them.’’ Jd. at 64.

USRA goes on to argue that ‘‘[a] Reorganization Court

finding it constitutionally necessary to order a discontinu-

ance of service or abandonment of properties would have

as much power both to make this finding and to have the

resulting orders carried out without the injunction issued

by the district court as it‘has in light of the injunction.”’

Id. at 67-68.

USRA’s argument in this regard flies in the face of the

very language of Section 304(f) forbidding any railroad in

reorganization from discontinuing service or abandoning

any line of railroad ‘‘notwithstanding any provision of

any ... decision or order of ... any Federal court.’’ By

the terms of the Act itself the reorganization courts and

all other federal courts, including, presumably, this Court,

are explicitly ousted of their jurisdiction to order discon-

tinuance or abandonment.”® USRA’s argument is tanta-

mount to a contention that the statute can be sustained only

if it means the exact reverse of what it says.*°

29 Indeed, this concern with court-ordered terminations is con-

sistent with the Congressional apprehension over the likelihood of

such an event which stimulated passage of the Act in the first place.

8° The Court below framed its injunction to restrain the enforce-

ment of Section 304(f) only “with respect to any abandonment,

cessation, or reduction of service which has been or may. hereafter

be determined by a court of competent jurisdiction to be necessary

(Footnote continued)

In short, the Act does compel continued loss operations

and its constitutionality must be appraised, as it was below,

in light of that grim fact of life.

B. Penn Central Interim Operations Impose Enormous

Losses, Accumulate Priority Claims and Cause

Erosion of the Value of the Estate.

From inception the Penn Central reorganization pro-

ceedings have had an indisputable history of mammoth and

irreversible losses, extensive accumulation of prior claims

and erosion of the value of the estate. All these are mat-

ters in the record here, as is the fact that similar losses,

accumulations of priority claims and financial and physical

erosion will continue unabated so long as Penn Central is

required to continue rail operations.

1. Post-Bankruptcy Financial Results

through December 31, 1973.

From June 21, 1970 through December 31, 1973, Penn

Central’s ordinary income losses aggregated $851 million

(FF 1, 4, JA 89-90; Varalli affid., J. Doc. No. 19, Ex. T-1).

During this period the growth of priority claims kept

pace with the losses:

(a) Trustees’ Certificates were issued in the

amount of $100 million (FF 3, 4, JA 89-90; Stip.

No. 15, JA 208) ;

(b) Unpaid and accrued taxes accumulated to the

extent of $241 million (JA 37; FF 2, 4, JA 89-90;

Varalli affid., J. Doc. No. 19, Ex. T-1); and

(Continued footnote)

- for the preservation of rights guaranteed by the United States Con-

stitution.” The remedy was couched to excise from the Act language

which otherwise would prevent any judicial recourse by an aggrieved

owner or creditor, the same language which USRA would excise by

creative interpretation. But the language is in the Act, and wrongly

so; the Court in enjoining its enforcement was plainly not precipitous.

See Point III, infra, at 103-04.

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amount of $101 million (JA 37; FF 2, 4, JA 89-90;

Varalli affid., J. Doc. No. 19, Ex. T-1; Stip. No. 13,

JA 208).

These three items of post-bankruptey priority claims

alone total $442 million.

Of equal importance is the source of funds expended

‘and forever lost through their application to deficit rail

operations. In addition to operating funds, other funds

so applied during the period June 21, 1970-December 31,

1973, included non-recurring income in the amount of $155.3

million (including the $100 million in proceeds from Trus-

tees’ Certificates) and approximately $157 million of in-

come from non-rail operations (JA 36-37; FF 3, 4, JA 89-

90; Varalli affid., J. Doe. No. 19, Ex. T-1; Stip. No. 11(a),

(ce), JA 206-07, 211). During this period the Trustees also

. had the benefit of cash available by reason of the deferral

of $104 million of interest on mortgage an2 collateral trust

debt (FF 2, 4, JA 89-90; Varalli affid., J. Doe. No. 19,

Ex. T-1; Stip. No. 14, JA 208). While these amounts are

included in the operating loss figure, they measure the

extent to which the losses were held to even that figure by

draining resources from non-opera‘ing corners of the

enterprise.

2. Reasonably Foreseeable Future Financial

Results after December 31, 1973.

The record here leaves no doubt that similar massive

income losses, accumulations of prior claims and deferrals

will continue so long as rail opérations by Penn Central

are mandated. The Reorganization Court found, on undis-

puted expert evidence, that it is reasonable to project that

during the five-vear period ending December 31, 1978:

(a) Additional ordina:y losses will aggregate

approximately $722.2 million;

(b) Additional accrued but unpaid taxes will

amount to approximately $310.7 million;

LAIR FOIL ON OE LEIS LIM REE See eM POP EO taps GP ee PETTY CLIT a

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ete aa aaa

approximate $140 million; and

(d) Additional unpaid interest will accrue to the

extent of $137.1 million.

(FF 12-20, 23, JA 92-96, 98; Sloane affid., J. Doc.

No. 16, at 7-11; Varalli affid., J. Doe. No. 19, at 4, Ex.

T-2; Guest affid., J. Doe. No, 20, at 9-10.)

On the not necessarily realistic assumption that a Final

System Plan may be implemented toward the end of 1975,

it is instructive that the comparable estimated figures (de-

rived from the same sources) for only the two years 1974

and 1975 are as follows:

(a) Additional ordinary losses will approximate

$434 million;

(b) Additional accrued but unpaid taxes will

amount to approximately $118.2 million ;

_ (e). Additional deferred leased line rentals will

approximate $55.9 million; and

(d) Additional unpaid interest will accrue to the

extent of $164.2 million.

(FF 12-20, 23, JA 92-96, 98; Sloane affid., J. Doe.

No. 16, at 7-11; Varalli affid., J. Doe. No. 19, at 4, Ex.

T-2; Guest affid., J. Doe. No. 20, at 9-10.)

Thus, the combination of financial results found to have

occurred during the reorganization proceedings through

December 31, 1973 with those found to be reasonably ex-

peeted to occur in the next two years (the earliest point in

time at which the effectuation of a Final System Plan could

reasonably be expected) shows the following:

(a) Ordinary losses—-$1.285 billion;

(b) Acerued but unpaid taxes—$359.2 million ;

‘

SRA AARNE ARREARS BM RE ER oe eee

and

(d) Unpaid interest—$268.2 million.

Faced with undisputed evidence of such tremendous

sustained and expected losses and accumulations of prior ‘

claims, the Reorganization Court had no choice but to hold,

as it did, that Penn Central could not be reorganized on an

income basis within a reasonable period of time.

3. Erosion in the Value of the Estate.

The United States alleges that there is no adequate

record evidence of erosion of the value of the estate and

further claims, without citation of authority, that the basis

for evaluating the impact of continuing operations on Penn

Central’s estate is simply a matter of comparing the

amount of accumulated priority claims with the amount

of alleged increases of value of carefully selected assets of

the estate (U.S. Br. at 67-70).

at alin aber,

The contention that the record is bare of adequate evi-

dence to show erosion cannot be supported. There was

abundant evidence before the Court below to justify its con-

clusion that the mounting losses charged to the estate

would imminently harm at the very least some of the

claimants who were plaintiffs in the suits before it.

sell iia ae

Income losses must have an effect on the value of the

estate; obviously funds have been expended in operations

which otherwise would have defrayed obligations accrued

by the Trustees. The diversion of such funds to operations

in order to cover losses of such magnitude necessarily de-

creases the values in the estate available to satisfy claims of

stockholders and creditors by creating accumulations of

post-bankruptcy priority claims.. One index of the effect of

such losses on the value of the estate is the decrease in

stockholders’ equity from approximately $1,500 million at

Peer erty ey ae

Pega NE a SES StU: PARAS are Rae het 2

SERS WEF AE ean RAPP PROPS EY NNER DSN NEN TANNA RT RM NI

— ste Bie

December 31, 1970"! to approximately $684 million at De-

cember 31, 1973.*?

‘Sven this measure of erosion, which shows a decrease

in excess of $800 million in the va'ue of the estate, does -

not fully reflect two important components in any measure

of the extent of erosion. The first is the aggregate amount

of accumulated prior claims, admitted by the United States

to be at least $457 million (U.S. Br. at 67). With post-

bankruptcy income losses of $851 million and $457 million in

admitted post-bankruptcy prior claims, it is inconceivable

that there has! 2n no decrease in the value of the estate

available to claimants, as the United States argues. Sec-

ondly, testing the extent of erosion by the diminution of

stockholders’ equity does not ta*e into account the de-

creases in value of non-depreciable property (such as

track) by reason of inadequate maintenance. The Reor-

ganization Court has found that, even assuming annual

expenditures of $225 to $250 million for normalized main-

tenance of way, an additional $665 million in current dol-

lars must be expended to remedy past deferrals (FF 10,

JA 91-92; see Jackman affid., J. Doc. No. 18, at 4).

USRA argues that inflation in the value of assets may

be used to offset the accumulation of prior administrative

claims** (USRA Br. at 79), and states that ‘‘other courts’’

31 Form A for 1970 (J. Doc. No. 34 at 201).

82 Form R-1 for 1973 (J. Doc. No. 37 at 11).

83 A comparison is noteworthy between portions of Part D of the

Appendix (pp. 67-70) to the United States brief and Part III of the

“Appendix on Fact Issues” (pp. A-14 to A-19) attached to the brief

of Appellants (including the United States and USRA) filed with the

Special Court in connection with their appeals from the 180-Day

Decision.

In both cases, the specified portion of the Appendices represents

an attempt to show that increases in the value of assets of the

estate since bankruptcy offset the accumulation of prior administra-

(Footnote continued)

SERRA EL A CPEB SSR ON TCC RENE SINE MSR OTE NSA ANS SRO ee ted

2 ANG MNE ELAN ADR RARE RENO

ennemenwamemnesene

have so held, citing only a footnote to In re Boston & Maine

Corp., 484 F.2d 369 (1st Cir. 1973). Even that reliance is

misplaced. The cited footnote is merely descriptive of a

particular fact in a particular situation and does not pur-

port to establish a rule of law. The point there at issue

was one of standing to challenge the propriety of continu-

ing the reorganization proceedings where, in that court’s

view, there was ample hope of a successful conclusion.

Moreover, at a time when inflation is so great as to in-

crease asset values to the extent that, as Appellants ap-

pear to claim, huge operating losses and prior claims are

virtually rendered of no‘effect in calculating the value of

the estate, Appellants’ theory becomes particularly inequi-

table, in that claimants are deprived of their right to with-

draw their capital from an enterprise in which the appre-

ciations caused by an inflationary economy are offset by

massive operating losses, and to reinvest in other enter-

prises reflecting such appreciations in value without off-

setting losses. The right to withdraw capital from such

(Continued footnote)

tive claims. Also in both cases the major element of such alleged

increases is “Increases in the Value of the Plant Equipment [sic].”

There, however, the similarity ends. In the brief filed by Appellants

with the Special Court, dated August 5, 1974, the amount of such

increase was alleged to be between $45 and $100 million. On the

other hand, the brief filed by the United States with this Court, on

the basis of the identical record, claims that such increases range

between $85 and $360 million. The increase in figures, which were

inexplicable to begin with, is itself nowhere explained.

In both the brief filed with the Special Court and the brief filed

with this Court, Appellants acknowledge the accumulation of prior

administrative claims in at least the amount of $457 million. In the

Special Court brief the total increase in value of the specified assets

was alleged to be between $227.2 and $314.2 million, resulting in a

showing of acknowledged erosion, in excess of claimed appreciation,

on Appellants’ own basis, of from $142.8 to $229.8 million. This

erosion is 2.5 to 4 times the amount of erosion ($60 million) which

Judge Anderson found impermissible in the New Haven reorgani-

zation proceedings. See In re New York, N.H. & H.R.R., 304

F. Supp. 793, 800 (D. Conn. 1969), aff’d in part sub nom. New

Haven Inclusion Cases, 399 U.S. 392, 466.

ee SPURS eae EAN PS SIE ERE INY

losing investments is, of course, squarely recognized in

_Brooks-Scanlon Co. v. Railroad Comm’n, 251 U.S. 396. And

this conforms to the purpose of a Section 77 reorganiza-

tion, which is to attempt to develop an enterprise which

has going concern valve, not to maintain an irreversibly

losing status quo, offset only by inflationary increases in

asset values.** f

The Court below was, therefore, correct in holding

that continued operations under the Act would foreseeably

threaten the Penn Central estate and its stockholder and

creditors. It was neither premature nor unsound in this

conclusion.

The constitutional significance of such compulsory op-

erations turns on the necessity for and availability of

methods of recouping such losses under the Act. To that

we now tarn.

C. Compulsory Interim Operations are Unconstitu-

tional in the Absence of Reasonable Present As-

surance of Reorganizability under the Act or an

Assurance of Just Compensation.

1. The Public Interest in Continued Service Does Not

Justify Mandatory, Uncompensated Interim Operations.

Appellants urge this Court to reverse, in part upon the

ground that the public interest requires the Penn Central

estate to bear compulsory, uncompensated erosion because

that risk is attached to investments in the railroad in-

dustry by virtue of its.public service character. That

argument extends beyond any limit previously recognized

by this Court the impositions that may be laid upon invest-

34 In arguing that the value of the estate has increased since bank-

ruptcy, the United States also argues (U.S. Br. at 68) that since the

Trustees spent approximately $358 million on track replacement, the

value of the estate must necessarily have been substantially in-

creased. This argument cannot be sustained because (among many

other reasons), as discussed above, the amount of deferred main-

tenance of way greatly exceeds that amount.

. 6-64 y - ty Gate San Hy 4 Ae Res

CO ALET AIT LE ISLE ee a

ree ab

SEN A

ors in an industry affected by the public interest and, as

applied in this case, is unsupportable by principle or prece-

dent. .

The thesis of the proponents of the Act is that continued

operations and submission to the hazards of ultimate con-

veyance are necessary to achieve the continued rail service

that Hongress has declared to be in the public interest (Sec-

tions 101(a), 206(a)). But, as Judge Fullam trenchantly

observed in concurring below, ‘‘the magnitude of the public

interest in continued rail service cannot justify treating’

these rail properties as if they were already public prop-

erty’? (JA 79). .

It is a seminal principle of our constitutional structure

that the public should bear the cost of devoting private

property to public uses. That continued interim opera-

tion to the detriment of the estate may be required by the ~

public interest is the beginning, not the end, of the constitu-

tional inquiry under the Fifth Amendment.

This Court has long recognized the elementary charac-

ter of this principle. It was succinctly framed (per Bran-

deis, J.) in Louisville Joint Stock Land Bank v. Radford,

295 U.S.555, 602:

‘‘For the Fifth Amendment commands that, how-

ever great the Nation’s need, private property shall

not be thus taken even for a wholly public use with-

out just compensation. If the public interest re-

quires, and permits, the taking of property of indi-

vidual mortgagees in order to relieve the necessities

of individual mortgagors, resort must be had to pro-

ceedings by eminent domain; so that, through taxa-

tion, the burden of the relief afforded in the public

interest may be borne by the public.’’

See also Armstrong v. United States, 364 U.S. 40, 49.

The invocation of the public interest so freely employed

by Appellants does not have the talismanic force which

they ascribe to it. Conceding that the rail properties of

the estate are being put to public use, there remains the

question of whether they may be put to that use by govern-

mental compulsion at the cost of their private owners.

The principle that private property may not be put

coercively to public use without compensation has devel- /

oped a doctrinal refinement as this Court has explored the ;

frontier between regulation and takings. The cases read

together seem to hold that the Government, in the exercise

of its police power, may diminish or extinguish the value

of property, without compensation, but within quantitative

limits, in order to abate a nuisance which that property

produces. See, e.g., Atchison, T. dé S.F. Ry. v. Public Util.

Comm’n, 346 U.S. 346 (railroad properly assessed the costs

of removing hazardous grade crossings which it construct-

ed) ; Miller v. Schoene, 276 U.S. 272 (trees may be destroyed

to prevent spread of disease).

PEE eer ee es Tee

There is no suggestion that the Government has set -

about abating a nuisance here; instead it seeks to create ;

an affirmative public advantage. This Court has consis- M4

tently recognized that the compulsory commitment of prop- j

erty interests for the production of a public good is dif-

ferent from the exaction that may be justified in nuisance

abatement cases, and has held that, when property is put 3

by force of law to the production of an affirmative public 4

good, just compensation is required. See, e.g., Nashville, C.,

& St. L. Ry. v. Walters, 294 U.S. 405 (railroad cannot be

required to bear costs of improving traffic flow on adjacent

highway).

Moreover, the ‘‘principle of fairness’’ expressed in the

Fifth Amendment (United States v. Dickinson, 331 U.S.

’ 745, 748), which forms the basis of its ‘‘political ethics’’

(United States v. Cors, 337 U.S. 325, 332), recognizes quan-

titative limits on the exaction that the putative public ~~

interest can compel. The question in such cases, so Justice

Holmes put it, ‘‘narrows itself to the magnitude of the

burden im”osed.’’ Interstate Consol. St. Ry. v. Massachu-

setts, 207 U.S..79, 87. See also Pennsylvania Coal Co. v.

Mahon, 260 U.S. 393, 413, 415.

The Act neither attempts to abate a nuisance created

by Penn Central nor does it impose burdens of inconse-

quential magnitude on the estate. On the contrary, it

imposes enormous economic burdens on the estate of Penn

Central and upon Appellees for the purpose of achieving

outside the ambit of uncompensated regulation tolerated

by the Fifth Amendment. |

This principle has been applied specifically to the com-

pulsory continued operation of losing railroads. Brooks-

Scanlon Co. v. Railroad Comm’n, 251 U.S. 396; Bullock v.

Railroad Comm’n, 254 U.S. 513; Railroad Comm’n v. East-

ern Texas R.R., 264 U.S. 79. These cases all stand for the

proposition that a hopelessly unprofitable railroad enter-

prise cannot be compelled to continue operations in order

to serve an asserted public need, in the absence of compen-

sation, over the objection of its owners and creditors.

‘Appellants’ view of the Brooks-Scanlon line of cases

appears to be somewhat ambivalent. While admitting,

however grudgingly, that Brooks-Scanlon and its progeny

may still be good law, Appellants nevertheless suggest

that the authoritative force of these cases is dissipated

because their constitutional doctrine was announced in the

context of small railroads, prior to the advent of Section

77. The suggestion is plainly frivolous. In the first place,

as- discussed above, the Brooks-Scanlon cases reflect a

fundamental constitutional principle that confiscation of

private property to service affirmative public needs, with-

out compensation, is unfair. The advent of Section 77 did

not and could not alter that constitutional insight.

[

In the second place, the reorganization court in the

New Iiaven case specifically reviewed the validity of the

Brooks-Scanlon line, and, over vigorous objections to its

authority lodged by the ICC, held:

‘‘This court, therefore, concludes that Brooks-

Scanlon and subsequent cases, reaffirming the val-

idity of its holding, are still applicable and determi-

native.’’ In re New York, N.H. & H.R.R., 304 F.

Supp. 793, 804 (D. Conn: 1969).

That opinion of Judge Anderson was reviewed and

quoted extensively with approval by this Court in the

New Haven Inclusion Cases, 399 U.S. 392. See also In

re Penn Central Transp. Co., 494 F.2d 270 (3d Cir.), peti-

tion for cert. filed, 42 U.S.L.W. 3633 (U.S. May 8, 1974)

(No. 73-1672) (‘‘Columbus Options’’); New York, N.H.

& H.R.R. First Mtg. 4% Bondholders’ Comm. v. United

States, 305 F.Supp. 1049, 1055 (S.D.N.Y. 1969). The rule

derived from these cases and the fundamental constitu-

tional concern for fairness which they express is applicable

here. Absent compensation, or ‘‘a reasonable prospect of

profitable operation in the future’’*> (that is, reorganiza-

tion), Appellees may not be forced by law to continue

operations of their lines at relentless losses to serve a

public purpose.

Nor is the Court, in the context of this case, compelled

to choose between the Brooks-Scanlon line of cases and

the line of cases epitomized by Continental Ill. Nat’l Bank

Trust Co. v. Chicago, R.I. & P.Ry., 294 U.S. 648, and

Reconstruction Fimance Corp. v. Denver & R. G. W. R.R.,

328 U.S. 495. In the context of this litigation, these lines

of cases converge.

The Brooks-Scanlon cases unequivocally hold that a

carrier cannot be compelled to carry on its business at a

35 Bullock v. Railroad Comm'n, 254 U.S. 513, 521. Accord,

Railroad Comm'n v. Eastern Texas R.R., 264 U.S. 79, 84.

loss out of concern for the public interest without just

compensation. Here, that is exactly what the Act compels.

Continental Banl:, and other cases like it arising under

Section 77, do, indeed, permit some postponement of a

secured creditor’s remedy of foreclosure of his lien fn the

public interest and in the pursuit of a feasible, fair and

equitable reorganization. All of these cases, however,

proceeded upon the explicit assumption that reorganiza-

tion of the railroad in question was demonstrably feasible.

The cases repeatedly assert that the secured creditor,

though required to postpone his remedy, was at least en-

titled to ‘‘full compensatory treatment’’ for the rights

which he enjoyed. See, e.g., Ecker v. Western Pac: R.R.,

318 U.S. 448, 487; Group of Institutional Investors v.

Chicago, Mil., St. P. & Pac. R.R., 318 U.S. 523, 565-66;

Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510,

528-30. The reorganization cases simply do not stand for

the proposition that a secured creditor may constitutionally

be compelled to stand by while a hopelessly losing rail-

road is the object, for an undetermined period of time,

of attempts at resuscitation which do not furnish a reason-

able likelihood of success, and in any event, make no pro-

vision for the depletion of the value of his lien during

the period of his sufferance.**

86 In working out the balance required by the Brooks-Scanlon

and Continental Bank lines of cases, the lower courts have for years

oceupied themselves with attempts to reconcile in particular cases

the public interest in continued rail operations and the interest of the

estate in avoiding confiscation. From those cases has emerged a set

of standards which, in essence, draws the line between the permissible

postponement of remedies authorized by Continental Bank, and the

confiscation forbidden by Brooks-Scanlon, by ascertaining whether

or not there exists a reasonably likely prospect of reorganization that

will yield going-concern value, in excess of liquidation values, that is,

so long as there exists “a real prospect of compensating advantage

. . . through a successful reorganization.” Central R.R. of N.J. v.

Manufacturers Hanover Trust Co., 421 F.2d 604, 608 (3d Cir.

1970), cert. denied, 398 U.S. 949; In re Riker Del. Corp., 385 F.2d

o (Footnote continued)

KE ARIE He DLLME AE A UOC MEL. EY TI PL OTE

2. The Ratl Act Does Not Afford Any Reasonable Prospect

of Likely Beorganieation for the Penn Central Estate.

Appellants quite clearly have not shown—nor, on the

basis of a scrutiny of the Act in light of the Penn Central

experience, could they possibly have shown—that the Act

furnishes that prospect of feasible reorganizability required

under the cases to warrant continued loss operations of

Penn Central over Appellees’ objections.

On the contrary, a review of the provisions of the Act,

in the context of the record before the Court below, estab-

lishes the futility of pinning the constitutional propriety

of continued operations to the ephemeral prospect of reor-

ganization under the Act. For example:

ene en oF

(a) Conrail will not be materially different from Penn

Central. The addition of the Reading, the Lehigh Valley, |

the Central Railroad of New Jersey and the Ann Arbor, |

four small bankrupt lines, will not materially alter the basic

configuration of Conrail as a Penn Central, merely renamed.

These railroads combined can be expected to contribute

no more than 10% of Conrail’s trackage and revenues.*?

(Continued footnote)

124, 126 (3d Cir. 1967). See also In re Third Ave. Transit

Corp., 198 F.2d 703 (2d Cir. 1952); and Columbus Options. .The

last of these cases specifically addressed the issue, much emphasized

by Appellants here, that the requisite showing of reorganizability can

be presumed, or accepted on the ipse dixit of Congréss, in light of the

Rail Act. The court there specifically rejected the entirely executory

provisions of the Act as an inadequate substitute for a judicial finding

of prospective reorganizability sufficient to require continued absten-

tion on the part of the creditors. Judicial notice of the passage of the

Act, and of its terms, the court held, “cannot serve to enlarge the

power of the reorganization court and the ICC to subject the prop-

erty of secured creditors to a taking while, like Mr. Micawber, they

wait for something to turn up.” 494 F.2d at 283.

** The smaller lines account for about 11% of present trackage

and 8% of present revenue ton-miles. “Rail Service in the Midwest

and Northeast Region”, a Report by the Secretary of Transportation

dated Feb. 1, 1974, submitted pursuant to Section 204 of the Act

(hereinafter “DOT Report”), Vol. I at 7 (J. Doc. No. 62).

SIN RELL LILLIE LION oy OTT ETE LET LOL SISES OTE EIS EN Rata

The new Conrail will, in fact, be nothing but the old bank-

rupt =enn Central with inconsequential bankrupt appen-

dages.

(b) Conrail will face the same problems as Penn Central,

Since Penn Central can be expected to comprise about

90% of the System, Conrail will be facing, to all intents

and purposes, the same problems that the Penn Central

Trustees have fought over the past four years. If anything,

Conrail’s problems will be exacerbated by the laudable but

expensive public service goalr imposed by Section 206(a)

of the Act. The esnflict between these goals and economic

considerations is obvious—and well illustrated by the

Evaluation of the DOT Report prepared by RSPO in which

RSPO says that, at its public hearings: .

‘**Winancial viability’ was criticized again and

again as an improper criterion upon which to base

the decision for continuation of rail service. Rather,

‘public need’ emerged as the more appropriate

benchmark for measuring rail service.’’ J. Doc. No.

63 at. 13. :

No feasibility study for Conrail has ever been published,

and none appears in the legislative history of the Act. Not-

withstanding Appellants’ extended insistence that the Act

is designed to provide ‘‘new solutions’? (USRA Br. at

24-40), the Act does not address itself to such fundamental

problems as shifting industrial trends, changes in fac-

tory locations, and the competitive advantages enjoyed by

_ truckers or the discriminatory division of tariffs—all of

which were cited in the Congressional hearings.** The rea-

son is obvious, There can be no quick and easy solution to

problems of that kind—which is why the Conrail concept

_ had a dubious future from its inception.

38 The absence of any prospect that the Trustees could effect

these “fundamental changes” was specifically referred to by the Re-

organization Court as a basis for its conclusion that the Penn Central

was not reorganizable (JA 88).

Moreover, Conrail is not the concept that Congress

originally envisioned because it can no longer include the

Erie Lackawanna or the Boston & Maine. Whatever dim

prospects Conrail might have had with those lines subject

to the Rail Act faded with their withdrawal. The Erie

carries about twice as much tonnage as Reading, Lehigh and

Jersey Central combined, and the inclusion of Erie would

have increased Conrail’s tonnage by more than 15%.*® The

exclusion of Erie not only deprives Conrail of this tonnage,

bnt leaves Erie in the picture as a competitor battling to .

lure away even more business. .

(d) Gonrail is an untried concept in railroad operations.

Anvellants seem to recognize that Conrail will be little more j

than a reinearn ‘ion of Penn Central. ‘They argue, how-

ever, that the reincarnation will be more lively than the

original because the Act has satisfied the conditions of

viability postulated by the Penn Central Trustees.° In

succeeding paragraphs we will show that the Act cannot,

in fact, satisfy these conditions. However, before proceeding

to that discussion, it is important to note that the Penn

Central viability studies were not projections for a con-

ventional railroad. Quite the contrary, the viability studies

projected a new kind of railroad never before tested in

operation. Neither the Penn Central Trustees nor anyone

else could promise that such a railroad would run at all.

As the Trustees told the Reorganization Court in 1972:

PES PRA PEs oF TIS

ee et ee

‘*It should be understood thai the rail networks

described above are not comparable to any existing

Central. The 11,000 mile road to a great degree, and

the 15,000 mile road to a lesser degree, represent a

39 Statistics taken from the DOT Report (J. Doc. No. 62) Vol. I

at 7.

49 Trustees’ Report of February 15, 1972 (J. Doc. No. 4), re-

capitulated in their Report of January 1, 1973 (J. Doc. No. 8).

72 Ee

new type of transportation system consisting of

main lines and high density feeder lines. The con-

cept requires scattered shippers not located in highly —

(~.” -/*-industrialized “areas to come to the railroad rather

than having the railroad come to them.” (J. Doe.

No. 7, Annex 1 at 1)

It is one thing for the Federal Government to pin its hope

of solving the rail crisis on a new and untried concept of

railroad operation. It is a totally different thing to ask

the Penn Central claimants to accept it as the equivalent

of U.S. dollars.

(e) The Penn Central Trustees’ viability condition con-

cerning abandonments will not be satisfied. The first con-

dition of viability postulated by the Penn Central Trustees

was that the railroad plant be rationalized by eliminating

excess lines. While the new Act might in theory provide a

means for meeting this condition, practical political con-

siderations point in the opposite direction. Local interests

will fight significant abandonment of local lines.*? The

pressures that Congress will be under to expand the Con-

rail system are foreshadowed in the RSPO Evaluation of

the DOT Report (J. Doc. No. 63) at 9-10:

‘‘The DOT Report was seen by the public wit-

nesses as based largely on the premise that if all

lines which do not make a profit are removed, the

rail system will be profitable. At every hearing, the

belief was voiced that the concept of large-scale

abandonment as a cure for the evils of unprofitabil-

ity is the wrong approach, advanced at the wrong

time, and for the wrong reasons.

*. Rail service continuation subsidies under Title IV of the Act

are not a satisfactory answer because (a) the amount authorized

for the federal share is plainly too small and (b) local communities

are hard put to finance their existing services and do not have the

resources to finance their share of rail service, which has not here-

tofore been their responsibility.

URNA NN EI LINE TEE EI LEE A ARE LT L I ELIA EE AIIE

‘*Certainly, it was the possibility of rail service’

discontinuance and abandonment which raised the

. “~— greatest public furor. Witness after witness de-

scribed the adverse economic, social, and environ-

mental impact such actions would have on communi-

ties. It was contended that rail services discontinu-

ance would result in market distortions, economic

depression and social dislocations. Moreover, it was

repeatedly stated that rail discontinuance is incon-

sistent with our national environmental and energy

conservation policies. Decreased rail service would

result in increased truck transport and greater con-

sumption of scarce energy resources, more pollution,

and increased pressures on land use for additional

highway construction. Public sentiment was strong

that these factors must be of primary importance in

determining the final rail plan.’’

ADAM LIST PREBLE SAD ILM OE

AEE Spe HG AT ARIEL RID D SE”

spe epagesne ermocT ac cerns i

G Wet OR 1a dns eeen

More important, the Wyer, Doel studies, completed

after the Trustees first stated their ccaditions of viability,

show that large-scale abandonment of lines is not the pan-

acea proponents of the Act make it out to be. If, as the

Wyer, Dick studies show, a 15,000 mile Penn Central sys-

tem is not viable, it is hardly likely that a similar Conrail

system (made up primarily of Penn Central lines) could be.

(f) The Penn Central Trustees’ viability condition con-

cerning unnecessary employees will not be satisfied. The

Act makes no impact on the Penn Central Trustees’ second

condition, the elimination of unnecessary labor expense.

Appellants stress the acknowledged fact that the Act pro-

vides $250 million for displaced employees, but they ignore

the fact that the Act provides no means to achieve im-

proved productivity by eliminating unnecessary employees.

a ORS ges ae

tats

C8 pgs tm Oe EET 8

OG /ONOOOM PENOLA EMF ONS ER WE TNS Oe

The Penn Central Trustees’ Report of February 15,

1972 (J. Doc. No. 4) sets a goal of eliminating approxi-

mately 9,800 train and engine service employees. Their —

report of July 1, 1972 (J. Doc. No. 6) states that this goal

cannot be achieved except through negotiations with the

affected unions on a national basis. The Act does nothing

to change this situation. Indeed, the DOT Report, after

observing that ‘‘one of the greatest opportunities for in-

creasing productivity is in finding ways to change inflexible

labor rules to permit better utilization of both labor and

capital,’’—precisely the point of the Trustees’ labor condi-

tion—goes on to acknowledge that the Act ‘does not pro-

vide any direct mechanism for making such changes .. .”’

DOT Report (J. Doc. No. 62) at 8.

(g) The Penn Central Trustees’ viability condition con-

cerning passenger service will not be satisfied. The Act

does not satisfy the Penn Central Trustees’ condition of

viability with respect to passenger service. While the Act

may ultimately provide full compensation for passenger

service, it does not satisfy the fundamental assumption

of the Penn Central viability studies that the core rail

system ‘‘will handle freight only and passenger operations

will not constitute a burden in any way. This assumption

goes beyond the concept that passenger service is self-

sustaining; it assumes, in essence, that the passenger

service does not exist.’’#?

Furthermore, the viability studies’ assumptions would

require the provision of a new freight route from Boston

to Washington so as to permit the exclusive use of the

existing corridor for passenger service. The problems in-

herent in attempting to run slow-moving freight trains

and increasingly high speed Metroliners over the same

tracks are reflected in the RSPO recommendation that

USRA: ;

“*. . . should consider alternate means of han-

dling freight traffic now moving over the Northeast

‘2 Trustees’ Report of October 1, 1972 (J. Doc. No. 7) Annex

1, (101; Exhibit T-7 to Affidavit of Nelson A. Sharfman, dated

March 21, 1974 (J. Doc. No. 17).

apy tase

RARE ALLELE SEER By ES Yee EAE FED oy UPR TN RS.

passenger corridor between Boston, New York City,

and’ Washington. The Final System Plan should

include and provide for the improvement of routes

which would make it possible to remove as much

freight traffic as possible from the corridor.’? RSPO

Report (J. Doc. No. 63) at 3.

The Act makes no provision for carrying out this essential

condition.

}

(h) The Penn Central Trustees’ viability condition

concerning traffic and revenues will not be satisfied. The

final, and perhaps most vital, condition of viability postu-

lated by the Penn Central Trustees is the achievement

of the traffic and revenue potentials forecast by Temple,

Barker & Sloane. (See J. Doe. No. 38; FF 12-22, JA 92-

98.) The basic assumptions of the Temple, Barker &

Sloane studies appear in Attachment 4 to the Trustees’

Plan for Reorganization dated April 1, 1972 (J. Doc. No.

5). They include an assumption that Penn Central will

have adequate plant and equipment to carry the forecast

tonnage and to maintain service at or above current levels,

and the assumption that there will be increased prod-

uctivity from manpower, equipment and plant. (See also

FF 13, JA 92-93.) The importance of these factors was

recently emphasized by the Executive Vice President of

Temple, Barker & Sloane thus:

ae ree CE

2 IN eM OME SEATS

‘‘Finally, by way of introduction, it is of critical

importance to note that in our February 1974 fore-

east, TBS is projecting traffic that is potentially

available to Penn Central. As was the case in our

previous three forecasts, the Trustees requested that e

TBS assume in its latest forecast that Penn Central 4

has sufficient plant, equipment and manpower to

provide the quality of service that shippers can

reasonably expect from railroads; and the present

forecast is predicated on this key assumption. In é

the course, however, of developing this latest fore-

cast, evidence was obtained from shippers which

now leads me to state with a reasonable degree of

confidence that the current state of Penn Central’s

plant and equipment will render PC incapable of

fully realizing the potential traffic and revenues

forecast for it.’’**

As noted above, the Act does not provide a mechanism

for increasing manpower productivity to satisfy the

Temple, Barker & Sloane assumptions. Similarly, it does

not provide nearly adequate resources. for rehabilitating

and modernizing Penn Central’s equipment and plant, nor

does it provide any funds for Conrail’s working capital.

The Trustees reported as early as February 1, 1973 (J.

Doe. No. 9) that as much as $800 million would be required

_ for rehabilitation and modernization. That figure has since »

been increased by additional deferred maintenance and in-

flation** and would be further increased by the inclusion

of other bankrupt. lines in the Conrail system. To meet

this need the new Act provides that only $1 billion of

USRA obligations be issued to Conrail, of which only

$500 million must be allocated to rehabilitation and mod-

ernization. The amount is clearly inadequate for Penn

Central alone upon the facts found by the Reorganization

Court (JA 92). What is worse, however, any funds ad-

vanced under these provisions of the Act will apparently

constitute a first lien on the Conrail properties ranking

prior to the claims of the present Penn Central creditors.

It is important to reiterate that Appellants offered no

evidence below to show that Conrail was likely to be viable,

but rested upon the record submitted to the Court and on

the facial terms of the Act.

*8 Sloane affid. (J. Doc. No. 16) at 2. See also FF 22, JA 97-98.

** Jackman affid. (J. Doc. No. 18); FF 10 and footnote thereto,

JA 91-92.

eae PtP IEE PAL Se

The conclusion is inevitable: immediately before the

Act became law there was concededly no light at the end of

the Penn Central tunnel.*® The Reorganization Court,

whose findings on such matters are customarily accorded

great weight here,*® made detailed findings which fleshed

out that bare stipulation and concluded that a railroad of

any configuration that could plausibly be designed from

the Penn Central would not have any reasonable prospect

of viability (JA 92-102) in the absence of special provisions

meeting the Trustees’ conditions which the Act patently

fails to afford.

% ‘

The introduction of Conrail does not change the situa-

tion in any material way. The addition of a few thousand

miles of unprofitable track and the adoption of a hopeful

new name are not enough to alter the outlook for viability.

On the basis of the Act as it now stands, Conrail has no

better prospects.

3. The Act Provides No Assurance of Payment

for the Taking by Interim Erosion.

Congress could have provided for payment of compen-

sation for interim erosion in at least two ways: it could

have provided direct payments to subsidize the losing in-

terim operations or it could have provided that the final

payment for the rail properties compulsorily conveyed to

Conrail include assured compensation for the imposed

interim losses.*7 It did neither. Rather the burden of

interim losses from operating Penn Central for the pub-

lie purpose was left upon the estate and its creditors.

45 See Stip. No. 9, JA 206.

46 See, e.g., New Haven Inclusion Cases, 399 USS. 392, 463;

Reconstruction Finance Corp. v. Denver & R.G.W.R.R., 328 USS.

495, 533.

47 Even this procedure would have required legislative ingenuity,

since the erosion is being felt system-wide, and the conveyances pre-

sumably will be less extensive.

Ree eR CR Nae ais es gat ee a ake Re ae I eg ot

= Te EP OEE:

(a) Interim payments provided are inadequate.

The Act does have provisions which were evidently in-

tended to. relate to interim operations. However, if in

fact these were intended to provide some degree of compen-

sation for burdens of interim operations, they are wholly

inadequate.

Section 213, the only provision of the Act which pro-

vides funds which may be used for operations during the

planning period, authorizes the Secretary of Transporta-

tion to make payments for certain specific purposes:

‘‘{a) Emergency Assistance-—The Secretary is

authorized, pending the implementation of the final

system plan, to pay to the trustees of railroads in

reorganization such sums as are necessary for the

continued provision of essential transportation serv-

ices by such railroads. Such payments shali be made

by the Secretary upon such reasonable terms and

conditions as the Secretary establishes, except that

recipients must agree to maintain and provide

service at a level no less than that in effect on the

date of enactment of this Act.

(b) Authorization for Appropriations.—There

are authorized to be appropriated to the Secretary

for carrying out this section such sums as are nec-

essary, not to exceed $85,000,000, to remain available

until expended.’’

The $85,000,000 is plainly not enough to effect even a

dent in the massive interim losses anticipated for Penn

Central alone, much less for the other bankrupt lines which

might comprise parts of Conrail. The Government was

well aware that Section 213 money would be of no major

significance. John Barnum, Under Secretary of the De-

partment of Transportation, advised the Senate Commerce

Committee that the $85,000,000 was ‘‘merely the amount

PSEA AE. RAYS TOME SEBO EINES LR SPT PES

LMS SME) Bo TERIOR RE Dy SIME ls PENA EGIL

—, BESET WP RES ERR EAGT AHL: AER EINER LITA AIAN LIES IP CSTE

: 63

which we thought should be provided in the form of a

grant to the bankrupt railroads so that they would be able

to meet their payrolls Friday and not run out of cash.” **

And Counsel to the Department of Transportation con-

ceded to the Penn Central Reorganization Court that even

for the purposes intended, the $85,000,000 had been caleu-

lat®d on faulty premises (J. Doc. No. 25).*® |

The second provision in the Act relating to interim

payments is Section 215, which provides funds for the

acquisition, maintenance or improvement of rail properties

to be included under the Final System Plan. However,

that section provides that Conrail need not compensate a

railroad for that portion of the value of rail properties

transferred to it which is attributable to such acquisition,

maintenance or improvement. The section thus does not

so much compensate for interim erosion as it creates a

charge against subsequent compensation. Moreover, the

provision does nothing at all to help with the maintenance

of rail properties which, though required to be kept ‘in

operation under Section 304(f), are not to be included in

the Final System Plan. The section plainly does not con-

stitute any compensation for required interim erosion.

Given the history of Penn Central losses equalling

$851,000,000 for the period June 21, 1970 until December

31, 1973 and the findings of the Reorganization Court that

the losses will continue unabated, the Court below had no

choice but to hold that:

‘‘It becomes quickly apparent that the limited

amounts of these funds—available to railroads in

48 Hearings on S. 2188 before Senate Commerce Comm., 93d

Cong., Ist Sess..at 65 (Nov. 15, 1972).

49 For a further emphatic statement that “the granting of financial

assistance to protect against further erosion of the estate, is not in

accordance with,the purpose for which the funds under § 213 of

the Act have been appropriated, see Letter of Federal Rail Adminis-

trator Ingram to the Trustee of the Central Railroad of New Jersey

(Trustees’ Br., Annex A, at Sa).

PLIES PPLE VOLE PLE LE LOE OL LLL GOO LEE IE SELLE LEE LILLE GPG

PT, NLT LTE ET LI

Re te hae a el

PRETEEN ede: |

reorganization in the region—have not been specially

‘designated to meet challenges of unconstitutional

erosion.’’ (JA 31)

(b) The Act fails to provide compensation which is ade-

quate in medium and amount to assure fair value for the

assets to be conveyed and still less does it provide redress

for interim erosion.*°

The Act neither authorizes the Special Court to provide

recompense, nor requires Conrail or USRA to make direct

payment for interim erosion. The burden of such losses

was specifically left with the bankrupt railroads’ estates.

Appellants, however, claim that the Special Court may

somehow fix the compensation to remedy erosion by includ-

ing such amounts in the ‘‘constitutional minimum”’ to be

provided under Section 303. Upon this basis they then

contend that the Court below was premature and improvi-

dent in concerning itself with the adequacy of the com-

pensatory mechanism set out in Section 303 (see, e.g.,

USRA Brief at 71). The problem with this approach, of

course, lies in the fact that reliance on Section 303 requires

rather than excuses a study of the adequacy of its com-

pensatory mechanism. And that study in turn involves a

consideration of the extent to which those procedures pro-

vide adequate assurance of compensation for the conveyed

rail assets and have the clear potential of yielding values

in excess of the amounts required to meet that cost, so

as to defray the burdens of interim erosion. The Special

Court does not have any method by which it can increase

the amount of compensation available under the Act and

50 The New Haven Trustee has cross-appealed and the Penn

Central Trustees have appealed, inter alia, from so much of the

judgment below as determined (by a 2-1 vote) that the constitutional

challenges to the ultimate conveyance provisions of the Act were

premature. While Appellees here have not joined in those appeals,

they do concur in the arguments expressed at New Haven Trustee’s

Brief at 24-92 and Penn Central Trustees’ Brief at 48-62.

the Final System Plan for the rail assets conveyed. If,

as seems inevitable, the value of the compensation real-

izable under the Act turns out to be less than the fair value

of the assets transferred to Conrail, there will obviously

be no way in which the Special Court can also compensate

the estate for two years’ erosion. Yet that is plainly the

prospect, and the Court below properly and necessarily

reached the issue now.

We therefore turn to an examination of the workings

of Section 303 which, Appellees submit, reveals its inade-

quacy both for the purpose it was ostensibly to serve and

the new assignment which Appellants ask this Court to read

into it.

The Act ultimately requires a non-consensual transfer

of title in the rail assets from the estate of Penn Central

with a simultaneous extinction of liens on those assets.

At no point do any of the relevant parties—Trustees, stock-

holder, secured or unsecured creditors, or reorganization

judge—have any option about the disposition of the prop-

erty once the estate has been committed to the process of

the Act. None of these propositions seems to be, nor can

they be, seriously controverted.

Whether this peculiar process results in a condemnation

under the eminent domain power of Congress or an ex-

change of assets under the bankruptcy power may be hard

to discern. In either case, however, it is constitutionally

indispensible that there be in the process of the Act an

assurance that those whose property is transferred by

virtue of its mandatory terms will be justly compensnvet

for their losses.

Assuming that the Act is not regarded as an exercise

of the power of eminent domain, Section 303 nonetheless

falls far short of meeting the Fifth Amendment requirement

of just compensation. The compensation payable under the

Act is woefully inadequate to equal the constitutional mini-

mum value of the properties to be taken, and the Act

permits Appellees no recourse by which they might re-

cover the amount by which such minimum value exceeds

the amounts payable under the Act. Still less is there any

procedure by which a bill for interim erosion can be added

to the claims against the compensation afforded by the

Act with any hope—let alone assurance—that it could be

paid. In short, the Act would take Appellees’ property in

the interim and ultimately, without assuring them that

just compensation would be paid in all events.

(i) Kind and amount of compensation under the Act.

The Act provides that payment for rail properties conveyed

to Conrail is to consist solely of common stock of Conrail,

other unspecified securities referred to in Section 206(i)

(and, if Congress concurs pursuant to such section, obliga-

tions of USRA not to exceed $500 million, which might be

guaranteed by the United States), and other undefined

‘*benefits’’ accruing to the estate by reason of the transfer.

If the Special Court should determine, pursuant to Section

303 (c), that the value of such consideration is less than

the fair value of the properties conveyed, the only remedies

allowed it by the statute are (a) an order reallocating the

securities issued to the various estates; (b) an order

requiring the provision of additional Conrail securities

designated in the Final System Plan; and (c) an order

entering a deficiency judgment against Conrail.

The common stock of Conrail can have value only

insofar as Conrail will be a viable entity generating income

in excess of costs and fixed charges. In light of the dismal

prognosis for the bankrupt lines, parts of which will ulti-

mately comprise Conrail, in light of the failure of the Act

to deal with the problems which beset Penn Central and

given the public service goals which must be served by

Conrail (Section 206), the common stock will have little, if

any, value. But whatever be the ultimate value of the

common stock, there can be.no dispute that there presently

exists sufficient doubt about that value to require considera-

tion of the other potential sources of compensation avail-

able to the Special Court.

Securities of Conrail other than common stock and

USRA obligations could possibly be included in the

package of compensation to go to the estates of the bank-

rupt railroads. However, even if proper under the Act,”

the addition of such securities to the Conrail mix could not

solve the problem.

Virst, if Conrail issued debt secured by liens on all the

property transferred, the mere existence of these securities

would substantially decrease the intrinsic market value, if

5! Appellees believe, however, that the issuance of a substantial

amount of Conrail secured debt to pay for the rail assets would fly

in the face of the Act’s design for Conrail. Debt secured by liens

on the properties transferred would add nothing to the real value of

Appellees’ compensation unless the debt were senior and carried

adequately secured fixed charges. Appellees cannot regard seriously

any implication by the Government that the Act contemplated that

the USRA obligations (and any other United States debt) ‘would be

junior. (Cf. Rail Act, §211(e)(3) and (f).) Further, use of a

substantial amount of Conrail debt to pay the estates would render

superfluous Section 301(d), which clearly contemplates that the

Government would initially control Conrail because of its debt in-

vestments therein.

Reliance on substantial Conrail debt to pay the estates would

also subvert the Act’s intent that the capital structure of Conrail be

based on pro forma earnings (as constructed by USRA), “including

such debt capitalization as shall be reasonably deemed to conform

to the requirements of the public interest with respect to railroad

debt securities, including the adequacy of fixed charges” (§ 206(e) ).

A Conrail saddled with substantial first priority secured debt could

borrow only with great difficulty, if at all, a burden hardly in the

public interest. Also ignored would be the Act’s intent that securities

issued by Conrail in exchange for the rail properties be such as

“will minimize any actual or potential debt burden on [Conrail]”

(§ 206(i)) and that Conrail adopt and implement employee stock

ownership plans (§ 206(e) (3)), presumably using stock that has

some real value after Conrail issues its securities to pay for the rail

assets,

any, of the common stock.*? Second, it must be assumed —

that such senior securities would carry with them rights to

interest or dividends in order to be marketable ;** however,

payment of interest or dividends would result in a continual

cash drain on Conrail’s resources, thus further reducing

the value of its common stock, Moreover, there could be

no assurance that payments of interest or dividends could

be made. Third, the existence of secured debt on Conrail’s

properties would render further borrowing by Conrail

difficult and expensive, if possible at all. Last, that USRA

may include Conrail debt securities in the Final Systein

Plan does not supply the necessary assurance that the

estate and the creditors will be paid the constitutional

minimum value of the properties conveyed to Conrail, even

assuming such securities could, if included, add value to the

total package.

Finally, the Act provides only one remedy—a deficiency

judgment against Conrail—in the event that the Special

Court finds that Conrail’s securities, as authorized by the

Act and designated in the Final System Plan, cannot pro-

52 If senior securities were issued to investors for cash, rather

than to pay for acquired assets and interim erosion, the reverse

might well be the case in that Conrail would receive funds for

operations and rehabilitation of its. properties, the judicious use of

which could increase Conrail’s earning power thus giving rise to a

concomitant increase in the value of its common stock. This, un-

fortunately, is not the situation hypothesized here. Senior securities

issued in exchange for transferred rail properties would not bring

’ needed operating funds to Conrail, but would only increase its

already difficult task of making ends mect.

53 If the right to receive interest or dividends on the senior

securities should be postponed for a period of years after their

issuance, the value of such securities would ‘have to be severely dis-

counted for purposes of determining the “constitutional minimum.”

If the securities carried no rights to interest or dividends, their value

would not only be greatly discounted, but they would ‘then represent

only a right to foreclose at maturity, in effect, a very expensive

ticket to another Section 77 proceeding. |

vide that requisite value. But the deficiency judgment

must necessarily reduce the value of the common stock, the

inadequacy of which-®equires the entry of the judgment

in the first place. Thus, whether described as ‘essentially

circuitous’ (JA 77) or as a ‘“‘relatively pointless’ (JA

137) remedy, the Conrail deficiency judgment cannot cure

the constitutional inadequacy. No party has presented any

analysis which claims significant value for the judgment or

which otherwise supports a contrary conclusion.

(ii) Inadequacy of compensation on any theory of valua-

tion. USRA is (contingent upon subsequent Congressional

ratification) authorized to provide in the Final System

- Plan for the issuance of up to $500 million of debt obliga-

tions of USRA, which may be guaranteed by the United

States Government, for use by Conrail in paying for rail

assets. Once it is appreciated that the value of the stock

and other securities of Conrail is not necessarily equal to

the value of the rail assets of Penn Central to be conveyed,

and that the deficiency judgment is ‘‘ essentially ¢circuitous,’’

the only remaining test of the constitutional adequacy of |

Section 303 is an assessment as to whether and under what

circumstances this $500 million of theoretically available

debt securities would provide the Penn Central estate

with a total package of securities whose value would equal

the constitutional minimum value of the rail properties

conveyed. Appellees submit that the assessment made by

the Reorganization Court in the 180-Day Decision was cor-

rect: whether the Act be regarded as an eminent domain

statute or as a reorganization statute, its provisions are on

their face incapable of providing compensation equal to the

constitutional minimum value, whatever standard may be

employed to measure that value.

The evidence before the Reorganization Court on valua-

tion of Penn Central’s rail properties consisted primarily

“ih

a Ee ee eee eee ee

of a Day & Zimmermann study filed with the ICC,** which

estimates the value as of December 31, 1970 of the physical

assets of Penn Central and all its leased lines, exclusive

of the Park Avenue properties, and includes, in part, land

not required for rail use and railroad lines which USRA

might determine should be abandoned rather than included

in a Final System Plan. It is, of course, impossible to

show at this time what portion of the assets studied by

Day & Zimmermann would be included in a Final System

Plan. It is reasonable and conservative to project, how-

ever, that in terms of the value of all physical assets of

Penn Central and its leased lines studied by Day & Zim-

mermann, the 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.**

Two different approaches to valuation were presented

by the Day & Zimmermann study, one based on a con-

tinued 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 proceeds was also calculated. In sum-

54 Day & Zimmermann, Inc., “The PCTC Physical Asset Valua-

tion Study,” April, 1973; Revised May 1973 as Appendix 1 to

Exhibit T-21 (witfiess: Carlisle) in ICC Fin. Dkt. No. 26241 (J.

Doc. No. 40).

55 For example, the New Haven Trustee’s Plan of Reorganization,

dated June 27, 1973, submitted to and considered by the ICC in

its September 28, 1973 Report, called for a redu¢tion in route miles

from some 19,000 route miles actually operated now to 11,000 rcute

miles. The 11,000 mile “core system” would Rave required sub-

stantially more than half the total value of the physical assets studied

by Day & Zimmermann.

Moreover, Penn Central comprises over 19,000 9f the aggregate

26,000 route miles in the region potentially coveréd by the Act.

With the Erie and Boston & Maine out of Conrail, it becomes mani-

festly impossible to structure Conrail without at least 50% of

Penn Central.

mary, the results of the Day & Zimmermann study were as

follows:

Total Value of .

Wholly-Owned Assets,

Penn Central and

Assumption as to Leased Lines as of

“Highest and Best Use” December 31, 1970

Continued Railroad Use ............ $13,858,493,000

Liquidation for Non-Rail Uses:

Estimated Gross Proceeds of Sales

over a Period of Years .......... $ 3,532,110,000

Present Value of » Estimated Net

Proceeds, after deducting interest

factor and all expenses of sale and

of preservation of assets pending

DE Ee ea eT ee $ 1,995,778,000°°

These valuations provide substantial evidence®’ upon

which it may properly be concluded that even if all $500

million of USRA securities available for such use were

committed to the Penn Central estate, it would not consti-

tute payment in full for the value of the Penn Central pro-

perties likely to be included in the Conrail system; but

rather that, as the Reorganization Court held, ‘‘. . . there

is every reason to suppose that the included properties

would be worth considerably more than $500 million’’ (JA

137).

56 The present value approach results in negative values being

assigned 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 preservation of an essential national asset.

57 In addition, Penn Central’s Annual Report for 1973, prepared

by Haskins & Sells, certified public accountants (Doc. No. 7813),

shows, as of December 31, 1973, Penn Central’s rail properties to

have a_book value (after depreciation and certain reserves) in ex-

cess of $2.5 billion.

SANTO Da Ca alle

The conclusion that the Act simply does not provide

enough value of any kind to pay the constitutional minimum

value of the conveyed rail assets alone does not at all

depend upon the valuation standard applied. Both the esti-

mated value for continued rail use ($13.5 billion) and the

estimated liquidation value ($3.5 billion) clearly greatly

exceed the value which could be provided by the Act’s com-

pensation mechanisms.** Even the Day & Zimmermann dis-

counted scrap value approach, an approach which Appellees

contend would be wholly erroneous, produces a value of ap-

proximately $1 billion on the assumption that only 50% in

value of the Penn Central assets would be included in the

Final System Plan.

Finally, mention should be made of a novel theory of

valuation which Appellants pressed below and in the Spe-

cial Court, although it does not yet appear in their briefs

here. That is the proposition, unsupported by any au-

thority, that if going concern value based upon earning

capacity is Jess than liquidation value, the latter is no meas-

ure of the ‘‘constitutional minimum.’’ As the Reorganiza-

tion Court noted in the 180-Day Decision, this theory of

valuation appears in the legislative history to be the basic

rationale of the Rail Act:

‘<The legislative history of the Act suggests that

many responsible public officials may be proceeding

on the assumption that the common stock of Conrail

58 Appellees believe that if rail property is mandatorily taken by

the Government for continued rail use, the required just compensa-

tion should include an incremental value in recognition of the unique

and, for practical purposes, irreplaceable character of the assets when

taken for continued use. See Jn re Port Authority Trans-Hudson

Corp., 20 N.Y.2d 457, 231 N.E.2d 734 (1967), cert. denied, 390

U.S. 1002; In re City of New York (Fifth Avenue Coach Lines,

‘Inc.), 18 N.Y.2d 212, 219 N.E.2d 410 (1966), appeal dismissed,

386 U.S. 778. As noted in the text, however, the proper valuation

approach need not be decided here because the Act’s provisions

cannot pass constitutional muster under any approach.

——_— p. spent — x t —

(i.e., the capitalized value of its prospective earn-

ings) necessarily and automatically establishes the

value of the rail assets conveyed to Conrail, even if

those assets had a higher liquidation value, and even

though their value for ‘highest and best use’ might

be much greater.’’ (JA 138)

’

Appellees contend that this position is wrong as a mat-

ter of law. The New Haven Inclusion Cases plainly held

that the bondholders there were receiving a value re“ecting

‘*the highest and best use of their properties’’ (399 U.S. at

482, n. 80), and described that value as being the equivalent

of ‘‘the right to liquidate and a per-parcel sale that is theirs

| by virtue of their mortgage liens’’ (399 U.S. at 489-90).

The Court defended this value against a challenge by Penn

Central predicated on the truism that it was paying liquida-

tion value for property which had a lower (or negative)

going concern value, by noting that the bondholders’ right

to liquidation value derived from their state-created liens

(399 U.S. at 499).

New Haven Inclusion Cases*® thus reinforces the propo-

sition that liquidation is the highest and best use of the

operating property of a hopelessly losing enterprise. This

too stems from the investors’ right to withdraw their

capital from hopelessly non-remunerative use. Brooks-

Scanlon Co. v. Railroad Comm’n, 251 U.S. 396. And that

use then determines the value that must be reflected in any

compelled conveyance.

Appellants’ intimation below that less will suffice,

and the apparent assumption of Congress in the Act that

the ‘‘constitutional minimum’’ can be less than liquidation

value is simply wrong. Of course, to the extent that Appel-

lants .seek. to excuse the absence of assured liquidation

values in the Act on this theory, they implicitly acknowledge

SAREE PLR ALS AEE NIE TENE BELEN LS RMN LL SET EDS NS

Pe PO ERA RPI NE

59 See also In re New York, N.H. & H. R.R., 289 F. Supp.

451, 454-55 (D. Conn. 1968).

RAISER OEE DIERKS Be NaS OP ENS a

_that no surplus over such liquidation value is provided in

the Act to defray the burden of interim erosion.

(ec) The Act fails to provide any procedures which could

assure the requisite fair value for the properties conveyed

and compensation for interim erosion.

This Court has long held that the procedures set out

in Section 77 are constitutional because they provide mech-

anisms by which ‘‘full compensatory treatment’’ can be

accorded claimants against the estate, in order of their

priority. Consolidated Rock Products Co. v. Du Bois, 312

U.S. 510, 528-30; Group of Institutional Investors v. Chi-

cago, Mil., St. P. & Pac. R.R., 318 U.S. 523. Ecker v.

Western Pac. R.R., 318 U.S. 448, 565-66, recognized that

such treatment could not be formulistic, but depended

on the existence of proc

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