Reply Brief — Regional Rail Reorganization Act Cases

INDEX

Page

TABLE OF AUTHORITIES EM sar II

I. THE DECISION OF THE SPECIAI. COURT. 1

II. RESTATEMENT OF THE ISSUES............ 2

III. PLAINTIFFS’ ARGUMENTS CONCERNING

THE TUCKER ACT ARE WITHOUT MERIT. 7

ERE RAS EEE

7

IV. PLAINTIFFS HAVE PROVIDED NO BASIS

FOR AN INJUNCTION TO PREVENT ERO-

SION BEYOND CONSTITUTIONAL LIMITS.. 17

A. Plaintiffs Offer No Justification for Assum-

ing that Conrail Will Fail ‘17

B. Plaintiffs Have Not Shown that They Are

Suffering any Erosion Injury os 22 :

C. It Has Not Been Shown that Erosion Will

Exceed Constitutional Limits .............-. 25

——_—

CONCLUSION 20

Sy PR SEE OR

Il

TABLE OF AUTHORITIES

CASES: ie Page

American President Lines v. Federal Maritime

Board, 133 F. Supp. 100 (D.D.C. 1955), aff’d,

235 F.2d 18 (D.C. Cir. 1956) 11

Brooks-Scanlon Co. Vv. Railroad Commission, 251

U.S. 396 (1920) 17,18

Continental Bank v. Chicago, Rock Island & P. Ry.,

294 U.S. 648 (1985) -................. 18, 27

Eastport Steamship Corp. v. United States, 372

F.2d 1002 (Ct. Cl. 1967) 9, 10

Ecker v. Western P.R.R., 318 U.S. 448 (1943) _...... 28

Eisen V. Eastman, 421 F.2d 560 (2d Cir. 1969) ..... 19

General Telephone Co. Vv. United States, 449 F.2d

846 (5th Cir. 1971) ee TE ee 19

Glidden Co. v. Zdanok, 370 U.S. 5380 (1962) _........ 16

Hooe Vv. United States, 218 U.S. 322 (1910) ......... 10

Hurley Vv. Kincaid, 285 U.S. 95 (1932) _........ 10, 11, 12, 16

™. re Boston & Maine Corp., 484 F.2d 369 (lst

| AME § 1 (- | [epee eee eRe a ae RO EL ae eee ee ee 19, 24

re Chicago, Rock Island & P. Ry., 168 F.2d 587

Pek: ea Sr eee 28

In re New York, N.H. & H.R.R., 304 F. Supp. 1121

CUD. SMS PO hee ee 27

Larson V. Domestic & Foreign Commerce Corp.,

ee Cire Oe ee 11

Lynch Vv. United States, 292 U.S. 571 (1984).......... 12

Malone V. Bowdoin, 369 U.S. 643 (1962) 0... 11

Mitchell v. United States, 267 U.S. 341 (1925) ..... 12, 18

New Haven Inclusion Cases, 399 U.S. 392

aN ee ee Ae ae 19, 25, 26

Oklahoma Vv. Guy F. Atkinson Co., 313 U.S. 508

Ra) ee etn n cena nee CPO iene 19

Phelps Vv. United States, 274 U.S. 341 (1927) _..... 14

Phillips v. Commissioner, 283 U.S. 589 (1931) _.... 14

Reconstruction Finance Corp. v. Denver & Rio ;

Grande W.R.R., 328 U.S. 495 (1946) -........ 25, 26, 28

Richfield Oil Corp. v. United States, 207 F.2d 864

COUR CIPS 1966) 2 ee a 11

Tempel V. United States, 248 U.S. 121 (1918) ....... 10

ESSER AT ANSE PS FR ENTIRE ener: |

ar RENT nae

Ill

TABLE OF AUTHORITIES—Continued

Page

United States Vv. Causby, 328 U.S. 256 (1946) ...... 10

United States v. Thayer-West Point Hotel Co., 329

RAR CO EE) od tee Ghee he ee Bae 14

Vanston Bondholders Protective Committee v.

Crreen,: SE0- UA. 106 11006) oe 12

Western Vv. McGehee, 202 F. Supp. 287 (D. Md.

BOD Oe ht, tea ee 11

Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S.

OTe: CRN eee ee ep Oe Gd 10, 14

CONSTITUTIONAL PROVISIONS AND :

STATUTES:

U.S. Constitution:

Article I retinas a het ec geet hperun et el Minus guste 10

Amendment I ....... RRS Ee OPERA Ee eA 10

PE an ee se 9,10, 14

Bankruptcy Act:

Section 77, 11 U.S.C. § 206 5, 28

Regional Rail Reorganization Act of 1973:

Pub. L. 93-236, 87 Stat. 985 1, passim

Tucker Act:

28 U.S.C. § 1491 ....4, passim

MISCELLANEOUS:

5 Collier on Bankruptcy {77 (14th ed. rev. J.

Moore 1974) rs 5

Ik 5 6a

ae : i ee

IN THE

Supreme Court of the United States

OCTOBER TERM, 1974

No. 74-167

UNITED S'TATES RAILWAY ASSOCIATION,

Appellant,

V.

CONNECTICUT GENERAL INSURANCE CORPORATION, et all,

os Appellees.

On Appeal from the United States District Court for the

Eastern District of Pennsylvania

REPLY BRIEF OF APPELLANT “

UNITED STATES RAILWAY ASSOCIATION

I. THE DECISION OF THE SPECIAL COURT

On September 30, 1974, the Special Court handed

down its opinion on the appeals from the “180-day deci-

sions” of the Reorganization Courts. It held that the

Rail Act does provide a fair and equitable process for

the reorganization of each debtor railroad. In reaching

this conclusion, the Special Court considered and rejected

\the constitutional challenges presented in these cases.

as |

.

Pe OE en ste ae ee nt

We shall not here restate the many directly relevant

conclusions of that distinguished panel. We emphasize,

however, that there are two important differences be-

tween the Special Court proceedings and these cases.

First, these cases, which involve challenges to the facial

constitutionality of the Act, were decided below on mo-

tions for summary judgment based on a limited set of

stipulations. The ‘“180-day decisions” resulted from plen-

ary proceedings, including live presentation of a great

deal of evidence not of record in these cases. The Special

Court itself emphasized that it had before it a more ade-

quate record than the court below in these cases' and

that the issues could not be resolved “without regard

to the facts.”* Second, while the question before the

Special Court—whether the Act provides a fair and equi-

table process—included the constitutional issues pre-

sented in these cases, the Special Court made it clear

that in its view the statutory “fairness and equity”

standard is higher at critical points than the standard of

bare constitutionality.*

II. RESTATEMENT OF THE ISSUES

Plaintiffs have challenged ihe constitutionality of the

Rail Act on a number of grounds. One, relating to the

alleged lack of an assured remedy for excessive erosion,

was adopted by the court below, and another, relating to

the statute’s alleged lack of uniformity, was adopted in

1In the Matter of Penn Central Transportation Company,

Debtor, et al. (Nos. 74-6 through 74-12), Special Court, Regional

Rail Reorganization Act of 1973 (Slip Opinion, September 30, 1974)

(“Special Court 180-Day Appeals’’) at 33.

2 Id. at 38.

3 Jd. at 39. We do not necessarily agree that in the circumstances

of these cases the term “fair and equitable” imposes a higher

standard than do the constitutional provisions invoked by Plain-

tiffs., The important point is that the Special Court held that the

higher standard was satisfied.

ies |

3

minor part. The other grounds of attack were rejected

as premature but have been renewed before this Court

in further support of the decision under appeal.

All of these challenges, including those held prema-

ture below, have now been decisively rejected by the

Special Court. We submit that this Court also should

reject them and should reverse the decision below.

The question underlying all of these challenges is the

future of the Penn Central. The Plaintiff investors con-

tend that Penn Central is their railroad and Congress

must choose between letting them dismantle it and direct-

ing a Government agency to buy the railroad for cash (at

a price they say must be substantially higher than net

liquidation value). The Special Court answered that con-

tention decisively: ‘Congress did not have to choose

between the Scylla of outright condemnation and subse-

quent nationalization and the Charybdis of a collapse of

rail transportation in the most heavily industralized sec-

tion of the country.” * If a self-sustaining Conrail can be

created out of portions of the railroads now in reor-

ganization, the Penn Central estate can be required to

await Conrail’s creation and to accept Conrail securities

as part of the consideration for the rail properties it

transfers pursuant to the Act, as long as it is assured

of receiving the “constitutional minimum” as determined

by a federal court.

Plaintiffs advance four main arguments for striking

down the Rail Act and forcing Congress, instead, to con-

demn and nationalize the Penn Central system. Each of

these contentions is without merit.

A. First, Plaintiffs contend that Conrail will not in

fact be a “self-sustaining rail service ‘system” as re-

4 Id. at 59.

SIAR SSS CAS POR WAR aE ANCA EN OLR

4

quired by the Rail Act, so the whole enterprise is futile.

Having chosen to proceed by way of motion for summary

judgment without any supporting financial analysis of

Conrail’s prospects, Plaintiffs rest this key contention on

the naked assertion that, on the face of the “Act; Conrail

can be no more than a warmed-over Penn Central.*

This invitation to reject the Final System Plan as un-

workable before it has been written should be declined.

Congress has determined that with new legal and regu-

latory tools which create the capacity to redesign and

reduce the system, together with the more than $2 billion

in financial resources provided in the Rail Act, USRA

can create a self-sustaining private rail system. The Penn

Central Trustees have agreed that the basic concept of

the Rail Act is “sound”.* And, in the most careful ju-

dicial examination yet made of the prospects of Conrail’s

viability, based on a factual record not before this Court,

the Special Court found “a sufficient possibility of the

viability of Conrail that it is not unfair and inequitable

to require [the investors] to await the processes of the

Rail Reorganization Act if a remedy under the Tucker

Act [for any shortfall of the consideration below the

“constitutional minimum’ is ultimately available.” 7

While the merits of that factual conclusion are not before

this Court, the finding leaves no room whatsoever for

Plaintiffs’ contention that, as a matter of law, Conrail

can be found non-viable now on the face of the statute

alone.

* Brief of Appellees Connecticut General Insurance Corp., et al.,

in Nos. 74-165, 74-167, 74-168 (“Brief of Appellees Conn. Gen.”

at 53-54. At the same time, Plaintiffs make the different and in-

compatible argument that Conrail is a new and untested concept

in railroading. Jd. at 55-56.

* Penn Central Trustees’ April 1974 Report, J. Doc. 10 at 4.

* Special Court 180-Day Appeals at 83.

5

B. Plaintiffs next contend that reorganization of a

railroad must be a “voluntary” process, and that the

Rail Act is unconstitutional because they have chosen

not to accept it. They argue that even if Conrail is viable,

and even if the Rail Act assures the Penn Central estate

that it will receive value equal to the “constitutional mini-

mum” in Conrail securities, Government-guaranteed se-

curities, and other consideration, they do not have to

accept that consideration if they would prefer to do some-

thing else with the railroad—either dismantle it or force

its nationalization. These contentions are refuted by the

entire history of Section 77, which

“reflects a public policy that the operation of rail-

roads as sound, economic units should be achieved

for the benefit of the public, regardless of the inter-

ests of creditors and stockholders.” *

As the Special Court concluded, many decisions of this

Court leave

“no doubt that a bankruptcy court can constitu-

tionally be vested with power to resort to its in-

formed judgment in determining what constitutes

satisfaction of the claims of creditors.” *

C. Plaintiffs next contend that even if the end result,

reorganization into Conrail, were constitutional, Congress

cannot “get there from here.” On the one hand, they

claim that too much erosion of pre-bankruptcy claims

will occur even during the very short period of time

Congress has provided for a Final System Plan to be

adopted and for Conrail to begin operations. On the other

hand, they claim that this period must be substantially

lengthened to allow judicial review of the valuation of

the rail properties and the consideration before, rather

*5 Collier on Bankruptcy { 77.02, at 469 (14th ed. rev. J. Moore

1974).

® Special Court 180-Day Appeals at 106.

fe

6

than after, the properties are transferred and Conrail

starts to function. The court below apparently accepted

some part of these contentions, even though it did not

define or quantify any such erosion or determine whether

it exceeded constitutional limits. That court’s ruling can-

not be squared with the well-established principle, also

apparently accepted by the court below, that a reasonable

burden may be imposed on creditors and shareholders

through interim erosion in order to provide an opportunity

to reorganize.

On the basis of “more ample factual records” than

the court below had," the Special Court conducted a com-

plete and penetrating analysis of the likelihood of erosion

of the Penn Central estate. As that analysis cogently

demonstrated, “the erosion likely during the interim pe-

riod has been considerably exaggerated.” " Even if the

Act had not been passed, the chances that Penn Central

would have been able to accomplish large-scale abandon-

ments during the period the Act provides for develop-

ment of a Final System Plan * “would have been exceed-

_ ingly poor.” *

10 Special Court 180-Day Appeals at 33.

11 Id. at 56. See also id. at 107-08 n. 112.

~**On the assumption that Congress does not disapprove the

Final System Plan first submitted and that all other steps under

the Act take the maximum time allowed, 620 days would pass

between enactment of the Rail Act and transfer of rail properties

to Conrail in mid-August 1975. As noted in Brief of Appellee and

Cross-Appellee United States Railway Association in Nos. 74-165

and 74-166 (“Brief of Appellee USRA”) at 3-4 n. 1, USRA has

asked Congress to enact a 120-day extension of the statutory dead-

lines relating to the Final System Plan, and that request is now

_ pending. The Special Court suggested that erosion might become a

more serious question if there were substantial doubts that USRA

will be able to meet its prescribed schedule or that Congress will

accept the first Final System Plan, but it also ruled that the Tucker

Act remedy would save the Act’s constitutionality in that event.

Special Court 180-Day Appeals at 56-57.

18 Special Court 180-Day Appeals at 49.

—_ SOLE RIL IEE LP RLBIOE REG IEE ANI NIGER IY OEE IRE OIE LE ATTA OEE LEY SH AE BES

abs se ie

D. Finally, Plaintiffs contend that if the resources

explicitly provided by the Rail Act are not sufficient to ©

provide the statutorily required “constitutional minimum”

consideration for Penn Central’s properties and for any |

constitutionally compensable erosion, the Rail Act im-

pliedly bars a further remedy under the Tucker Act and :

the result will be a taking of Penn Central’s Broperty | :

for public use for less than just compensation. But, as ©

the Special Court found, the Act cannot fairly be read |

to deny a Tucker Act remedy in such circumstances. Ac- :

cordingly, Plaintiffs’ proper remedy is not a summary —

injunction in advance to protect against the admittedly ©

hypothetical possibility of such a taking, but a Tucker ©

Act suit for just compensation in the Court of Claims ©

if and when facts are established that entitle them to

maintain such a suit."

~]

OEE RAE I a |

III. PLAINTIFFS’ ARGUMENTS CONCERNING THE i

TUCKER ACT ARE WITHOUT MERIT E

Plaintiffs argue that the Rail Act, on its face, will or

may cause a taking of their property for public use

without just compensation. The Government parties urge, -

first, that Plaintiffs have not established and cannot |

establish now that such a taking will occur and, second, —

that in any event the Tucker Act, 28 U.S.C. § 1491, pro-

vides an adequate remedy at law whose availability pre- —

cludes advance injunctive relief. Plaintiffs’ responses have

now been rejected by the Special Court and are without ©

merit.

The Special Court has rejected the argument that Con-

gress intended in the Rail Act to repeal or limit the :

Tucker Act so as to deny a remedy to rail estates for

actions taken pursuant to the Rail Act. The Special Court _

» found

14 See id. at 83-108.

PLP LOE EELS ELE ELIE LLL DI OE ELLIE LE CLI EE LMT SELON TEL EL NE IE 8 Fs SNP: %

8

“no evidence in the text or scheme of the Act that

if Congress had recognized possible constitutional

inadequacy of compensation, it would have preferred

that the Act be struck down, with consequent serious

disarray, rather than that additional monies be ex-

pended to rectify the inadequacy.” *

The New Haven Trustee has explicitly conceded that

“[{t]he RRRA is silent as to any intent of Congress

partially to repeal 28 U.S.C. $1491 in cases arising

@under the RRRA.”* The amici Congressmen agree ex-

@ plicitly that the Rail Act neither repealed the Tucker

9 Act nor “engrafted” it onto the Rail Act.”

The New Haven Trustee’s basic objection to the Tucker

Act remedy is that the “Penn Central Trustees have no

substantive cause of action, under the Tucker Act, for a

taking for which they can invoke the jurisdiction of the

§ Court of Claims... .”* We find this argument hard to

@ understand. The New Haven Trustee has argued here

g and below that the Rail Act will necessarily and un-

avoidably cause a taking of Penn Central’s property for

@ public use without just compensation. We believe that

contention to be wrong, but it certainly states a cause

of action for compensation from the United States under

= the Fifth Amendment.

3 What the New Haven Trustee appears to mean is that,

even though the Tucker Act by its terms gives the Court

15 Special Court 180-Day Appeals at 88.

16 Brief of New Haven Trustee, Appellee, in Nos. 74-165, 74-167,

@ 74-168 (“Brief of Appellee New Haven Trustee”) at 26. He says,

@ further, “The New Haven Trustee has not asserted at any time

% that the jurisdiction of the Court of Claims under 28 U.S.C. § 1491

was impliedly repealed by the RRRA.” Jd. at 41.

4 ‘Brief Amicus Curiae of Certain United States Representatives

Gat 17-22.

4 Brief of Appellee New Haven Trustee at 41 (emphasis in

original).

9

of Claims jurisdiction over “any claim against the United

States founded . . . upon the Constitution,” * that juris-

diction may in fact be invoked only if Congress intended

a compensated taking. He argues that no Tucker Act

remedy is available here because “the RRRA was not in-

tended as an eminent domain statute.” *- The Special

Court rejected this argument,” which is belied by the very

case the New Haven Trustee cites, as well as by estab-

lished legal principles and common sense. The real point

of the long passage quoted by the New Haven Trustee

from Eastport Steamship * is contained in the second-to-

last sentence he quotes: **

“Under Section 1491 what one must always ask

is whether the constitutional clause or the legisla-

tion which the claimant cites can fairly be inter-

preted as mandating compensation by the Federal

Government for the damage sustained.” 872 F.2d

at 1009 (emphasis added).

The Fifth Amendment certainly “mandates” compensation

by the Federal Government for a taking of private prop-

erty for public use.* It is well established and logical

19 28 U.S.C. § 1491.

20 Brief of Appellee New Haven Trustee at 40.

1 Special Court 180-Day Appeals ‘at 85.

*2 Eastport S.S. Corp. v. United States, 372 F.2d 1002 (Ct. Cl.

1967). “h

°° Brief of Appellee New Haven Trustee at 40.

4 Of course, as the amici Congressmen suggest, the Tucker Act

does not “insure the constitutionality of’ [all] potential uncon-

stitutional laws.” Brief at 18, quoted passim by Plaintiffs. For

example, abridgements of First Amendment rights will rarely, if

ever, be compensable in money. Similarly, the Tucker Act is not an

answer to Plaintiffs’ “uniformity” argument, which is adequately

disposed of on other grounds. The Tucker Act does, however,

insulate otherwise authorized federal action from being enjoined

on the ground that the action will or may cause a taking without

' just compensation. In that event, the proper remedy is a suit for

compensation under the Tucker Act, as Hurley v. Kincaid, 285 Ug.

95 (1932), makes clear.

10

that a person may sue in the Court of Claims on the

governmental promise contained in the Fifth Amendment

itself, even where it is clear that Congress intended nei-

ther to take nor to pay. United States v. Causby, 328

U.S. 256 (1946). The Court of Claims therefore specifi-

cally considered and rejected on its merits the argument

that a taking was involved in Eastport Steamship,”

Plaintiffs also invoke Hooe v. United States, 218 U.S.

322 (1910) and Youngstown Sheet & Tube Co. v. Sawyer,

343 U.S. 579 (1952), but the Special Court held that

the argument based on these cases “is without force.”

Special Court 180-Day Appeals at 102 n. 106. Hooe in-

volved the occupation of a building by a federal officer

who had no authority to rent the building. The holding

was simply that the wholly unauthorized actions of that

officer did not render the United States liable for rent.

In Youngstown, this Court expressed doubt, on the basis

of Hooe, that a Tucker Act remedy would be available

for the President’s seizure of steel mills because the issue

on the merits in that case was whether the President’s

actions had been authorized by Congress.”

‘Plaintiffs next suggest that no court other than the

Court of Claims has jurisdiction to make an initial de-

termination of the jurisdiction of the Court of Claims.’

Defendants placed in issue below the assertion that

Plaintiffs are not entitled to equitable relief because,

_ among other reasons, a suit in the Court of Claims is

an adequate remedy at law. Once the court below

reached the merits of that contention, it had to decide it,

*° 372 F.2d at 1011. The Court of Claims ruled on the merits

that a federal agency’s alleged abuse of regulatory authority by

refusing permission to sell a ship did not constitute a taking of

property. Jd.

* Tempel v. United States, 248 U.S. 121 (1918) also lacks rele-

vance here. The holding in that case was that a mere trespass

(“sounding in tort”) was not a compensable taking of property.

*? Brief of Appellee New Haven Trustee at 33-37.

11

as the Supreme Court ruled that the district court

should have decided the adequate-legal-remedy defense

in Hurley v. Kincaid, 285 U.S. 95 (1982).%* The deci-

sion of the court below rejecting that defense is now

before this Court. As the Special Court observed, a

decision by this Court on the merits of the Tucker Act

issue would resolve one of the essential issues squarely

framed by the pleadings in these cases. “(T]he Court

of Claims will abide by [this Court’s] ruling, and it is

immaterial whether such observance would be a matter

of collateral estoppel or respect for a binding prece-

dent.” ”

The New Haven Trustee’s attempt to distinguish Hur-

ley on the ground that it “did not arise in a context

where Congress had specifically provided for another

court to render judgment as to the value of the prop-

erty being taken and the value of the consideration pro-

vided under the law as compensation therefor” is

without merit. Hurley arose because the government

officials declined to proceed by condemnation in the dis-

trict court—certainly “another court”—as required by

the flood-control statute involved in that case. This

Court reversed an injunction that would have required

the officials either to follow the statutory condemnation

procedure or to cease work, and held that the landowner

should have been left to his remedy at law in the Court

of Claims even though that remedy was not contem-

plated by the flood-control statute. —

78 See also Larson v. Domestic & Foreign Commerce Corp., 337.

U.S. 682, 697 n. 18 (1949); Malone v. Bowdoin, 369 U.S. 643, 647

n. 8 (1962); Richfield Oil Corp. v. United States, 207 F.2d 864, 871

(9th Cir. 1953); American President Lines v. Federal Maritime

Board, 133 F. Supp. 100 (D.D.C. 1955), aff’d, 235 F.2d 18 (D.C.

Cir. 1956); Western vy. McGehee, 202 F, Supp. 287 (D. Md. 1962).

*® Special Court 180-Day Appeals at 115.

*” Brief of Appellee New Haven Trustee at 26 (emphasis in

original). :

ro a Ss ese

PETE LPT ay eC ee ee

ST PARI ORI 9,

12

Plaintiffs’ contention that the Rail Act bars a Tucker

Act remedy ultimately rests, as did the decision of the

court below, on the erroneous legal premise that the Rail

Act itself must show a Congressional intent to renew

or revalidate the century-old jurisdiction of the Coun

of Claims. But, as the Special Court said on this v

point, “([pjutting the wrong questions is not likely to

beget right answers even in law.” ** As the Special Court

went on to state, “the true issue is whether there is

sufficient proof that Congress intended [in the Rail Act]

to prevent such recourse,” * a question that the Special

Court throughly and persuasively answered in the nega-

tive. The Special Court found no such intention in the

words of the statute, and it noted that no case had been

wh »>h 9 court hae resorted +p + p Eos

precedent agalnst inferring

uld have meant to bar an adequate remedy

: i a. :

Congress itself directed

FART RIED TAN RR OE

13

balance needed to provide just compensation. Plaintiff

Mitchell initially accepted the full presidential award

but later sued in the Court of Claims for additional

compensation. This Court held that the later suit was

t barred by his earlier acceptance of the award

failure to follow the statutory procedure.

On the merits, Mitchell claimed that he was entitled

to compensation not only for the value of his land but

also for the loss of his corn-growing business. This

Court held that although the “special value of land due

to its adaptability for use in a particular business is an

element which the owner of land is entitled, under the

Fifth Amendment, to have considered in determining the

amount to be paid as just compensation .. ..” id. at 344

yn 10Oss OF business When only the |:

iken. On the assumption that there was no. Fifth

i doentiment right to recover for the loss of the business

h, the Court considered and rejected, in th

14

recognized the difficulties inherent in any judicial valu-

ation, but it held that valuation is a function tradition-

ally assigned to courts and that it is not unfair or in-

equitable to vest this responsibility in the Special Court

and, if necessary, in the Court of Claims.* While it is

obvious that the valuation process will be long,” the

“adequacy” of a legal remedy depends on the alterna

tives. The only alternatives Plaintiffs have suggested to

proceeding under the Rail Act are (1) to leave the credi-

tors alone to dismantle the Penn Central. with highly

Wants to keep in Operation) at values apparently to lx

determined in judicial proceedings. The practic

TE RAD. APPA TH PF GE CLI AG

15

of Claims judgment.** Plaintiffs seek to engender fears

on that seore by suggesting that the judgment might be

“astronomical.” * With respect to the Penn Central,

however, the Special Court concluded that the investors’ 7

erosion claims were “considerably exaggerated.” * It ;

nd that the chances of abandoning substantial amounts

| lines within the planning period established by

ie Act would, even in the absence of the Act, “have

een exceedingly poor.” *° It concluded that, “(bjarring

onomic catastrophe, there is thus little likelihood

‘ing 1975 Penn Central will experience any of

‘tems of erosion we have recognized.” “’ The Spe-

‘rt also squarely ruled that Congress may compel

‘aimants to aecept “Conrail securities, USRA obli-

and other benefits up to their full value and need

eminent domain, with concomitant cash pay-

for any shortfall.” Consequently, in dis-

ie likelihood of any actual money judgment

he United States in the Court of Claims, the

urt noted that “these amounts may be non-

SSSA SURI ER INTEL TITEL MEM IED

NMP ORS,

mpugn the good faith of Congress in sug-

Congress might “allow the processes of the

AEP IMG RRB ARAL

pellee New Haven Trustee at 72-75; Brief of Ap-

1. at 98-101.

rt 180-Day Appeals at 111-12 n. 118.

ee also id. at 107-08 n. 112.

De ae el rs

See also id. at 92 n. 98. ;

n. 98. Earlier, without actually deciding the issue,

ourt had suggested that the rail estates might not

entitled to receive even as much as liquidation value,

neern value of Conrail (plus the USRA ok ‘igations

its) is found to be substantial although below liqui-

at 61-62 n. 61.

i Sk RN ee

16

Act to go forward after a ruling that a remedy under

the Tucker Act applies . . . [and] thereafter fail to

respond.” * On the contrary, “there seems to be no sound

reason why the Court of Claims may not rely on the

good faith of the United States.” ** Nothing in the his-

tory of the Rail Act or the post-enactment statements

of its sponsors suggests that Congress intends such defi-

ance.

Finally, this Court should not, as Plaintiffs and the

Penn Central Trustees suggest, attempt to define and

limit the issues that the Court of Claims might even-

tually have to consider. The range of the issues open to

the Court of Claims will depend on what is decided by

the Special Court and on appeal by this Court in the

valuation proceedings under Section 308. Moreover, the

Penn Central Trustees, who request this Court to narrow

the issues, have no right or need to have this Court, at

this time, rule out defenses that may appear to the Court

of Claims (and to this Court on review of the Court of

Claims) to be just. In particular, the Penn Central

Trustees have no.right to insist that the United States

now waive diligence on their part in pursuing and pre-

serving their claims. As Hurley, supra, makes clear, all

the rail estates need or are entitled to at this time is

assurance that there is a federal court with jurisdiction

to provide an adequate remedy for any constitutional

injury they can prove. When the potential injury is an

inadequately compensated taking, the Tucker Act pro-

vides that assurance.

Id. at 111-12 n. 118.

** Glidden Co. v. Zdanok, 370 U.S. 530, 571 (1962), quoted in

Special Court 180-Day Appeals at 111-12 n. 118.

ry Set eet See ee as pees DRIAL EIT ATED STREE 897y t

17

IV. PLAINTIFFS HAVE PROVIDED NO BASIS FOR

AN INJUNCTION TO PREVENT EROSION BE-

YOND CONSTITUTIONAL LIMITS

Plaintiffs argue that even if a Tucker Act remedy is

available, the likelihood that the Rail Act will cause

erosion beyond constitutional limits is so strong that it

is unconstitutional to require them to suffer this erosion

and take their chances on a Court of Claims remedy

after Rail Act proceedings have run their course. Even

if this were a sound legal theory for seeking an injunc-

tion, the argument fails for lack of proof of its essential

premise.

If a substantial prospect of successful reorganization

exists, a rail estate may be required to suffer uncom-

pensated erosion for the period reasonably necessary to

accomplish the reorganization. Congress has provided

in the Rail Act a means of saving essential Penn Central

rail operations, and Plaintiffs have offered no justifica-

tion for disregarding the prospect that the Act will suc-

ceed in that objective. Therefore, Plaintiffs would be

entitled to injunctive relief only if they could,show a

likelihood that erosion will occur pending the implemen-

tation of the Act and that it will exceed constitutional

limits before the transfers occur under the Final Sys-

tem Plan. They have made neither showing. The re-

markable thing about these cases is that the court below

granted an injunction based on the possibility of uncon-

stitutional erosion even though it did not find that Plain-

tiffs had made either of the showings necessary to sup-

port its order.

A. Plaintiffs Offer No Justification for Assuming that

Conrail Will Fail.

This Court has established two constitutional princi-

ples that frame the erosion issues in this case. Brooks-

Me Tete of: a all

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18

Scanlon * and related cases hold that the owners of a

railroad are entitled to cease operations and liquidate if

the road is unprofitable and has no prospect of being

made profitable. By contrast, Rock Island* and subse-

quent cases under Section 77 make it clear that investors

can be required to continue to devote their property to

public rail use if the railroad can be restored to profita-

bility through reorganization. In the reorganization, pre-

bankruptcy claims may be postponed or eliminated to the

extent necessary to achieve profitability; and the investors

may be required to sustain an economic burden from

interim operations for a period reasonably consumed by

the reorganization process.

Plaintiffs contend that under Brooks-Scanlon the Penn

Central estate cannot be required to continue operations.

They argue that Penn Central has no prospect of suc-

cessful reorganization, either in whole or in part, with

or without the assistance of the Rail Act. Therefore,

they contend, no additional uncompensated erosion may

be required. Since Plaintiffs have sought summary judg-

ment on a record devoid of evidence bearing on Conrail’s

viability, this argument requires them to show that Con-

rail’s doom is plain on. the face of the Rail Act. They

have furnished no grounds for such a conclusion.

Plaintiffs suggest that the burden rested on the Govern-

ment parties (even on Plaintiffs’ motion for summary

judgment) to prove that Conrail will be viable, and that

those parties failed to carry the burden in the court be-

low.** To the contrary, it is commonplace that persons

*6 Brooks-Scanlon Co. v. Railroad Commission, 251 U.S. 396

(1920). ;

** Continental Bank v. Chicago, Rock Island & P. Ry., 294 U.S.

648 (1935).

** Brief of Appellees Conn. Gen. at 53; Brief for Appellee Penn

Central Company in Nos. 74-165, 74-167, 74-168, at 16-17 n. 6

(“Brief for Appellee Penn Central Co.”); see Brief of Appellee

New Haven Trustee at 110.

19

challenging a congressional enactment on the ground that

it violates their constitutional rights bear the burden

of establishing that such a violation will or is likely to

occur. In the railroad reorganization context, the courts

have ruled that the burden of proving that interim opera-

tions would result in an unconstitutional taking of prop-

erty rests on the opponents of continued service. New

Haven Inclusion Cases, 399 U.S. 392, 492-93 (1970);

In re Boston & Maine Corp., 484 F.2d 369, 372-75 (1st

Cir. 1973).

Plaintiffs’ contention that Conrail cannot be viable is a

direct attack on the legislature’s judgment that the Rail

Act offers a feasible solution to the Northeastern rail

crisis. It is beyond dispute that the courts must defer

to the judgment of the legislature on the appropriateness

of legislation and on the likelihood that it will accomplish

its purposes. *® j

Contrary to Plaintiffs’ suggestion,” the court below did

not accept Plaintiffs’ invitation to second-guess the legisla-

tive judgment that a viable Conrail can be created. The

majority held that all issues relating tc the ultimate

transfer of property were premature. Its injunction to

prevent an “erosion taking” was based on the erroneous

legal views that the Special Court may not consider pre-

‘transfer erosion in determining the “constitutional mini-

mum” consideration and that a Tucker Act remedy for

such erosion is barred—views which the Special Court

*° See, e.g., Oklahoma v. Guy F. Atkinson Co., 313 U.S. 508, 527,

533 (1941) (court deferred to Congress’ judgment that proposed

dam would relieve flooding and to Congress’ choice of design) ;

Eisen v. Eastman, 421 F.2d 560, 567 (2d Cir. 1969) (court de-

ferred to legislative judgment that rent control law would relieve,

rather than prolong, housing shortage); General Telephone Co. v.

United States, 449 F.2d 846, 858-59 (5th Cir. 1971) (court de-

ferred to FCC determination that CATV rules would enhance com-

petition in cable TV market).

5°See Brief of Appellees Conn. Gen. at 61; cf. id. at 28, 53;

Brief for Appellee Penn Central Co. at 25-27, 29-30.

ALI EIT OES TEOLE LEGER LIS IPE SEITE ES

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20

itself has since rejected." The court below made no find-

ing that Conrail will not or might not be viable. Judge

Fullam, who concurred below and rendered the Penn

Central 180-Decision since reversed by the Special Court,

expressly held that “it would be both premature and in-

appropriate for this Court to express a judgment as to

Conrail’s prospects for viability.” ** Nor have the Penn

Central Trustees, as some Plaintiffs assert, ever said

“that the hopé of reorganization afforded by the Act upon

its own terms is ephemeral.” ** From the outset, the

Trustees have taken the position that “[t]he basic concept

of the Act is . . . sound” and have agreed with the °

Government parties that the Act should be given a

chance to work as long as a Tucker Act remedy is

available.

The Special Court, in rejecting the “erosion taking”

argument, did analyze Conrail’s prospects for viability

and concluded that those prospects are sufficiently good

that, as long as a Tucker Act remedy is ultimately avail-

able, it is fair to require the investors to await Conrail’s

creation.» While we support that court’s factual con-

clusions, we submit that this Court, lacking the factual

record before the Special Court and not sitting in review

of its decision, should not duplicate the Special Court’s

examination of Conrail’s future. The Special Court

acknowledged that it might be appropriate to defer

to Congress’ judgment that the Rail Act can succeed,

“in the absence of contrary evidence.” * It undertook a

*! Special Court 180-Day Appeals at 56, 83-102.

52 Penn Central 180-Day Decision at 9, JA 124 at 133.

°8 Brief of Appellees Conn. Gen. at 80.

** Penn Central Trustees’ April 1974 Report, J. Doc. 10 at 4.

5° Special Court 180-Day Appeals at 70-83.

Id. at 71. The Special Court said that, absent contrary evi-

dence, the reorganization courts and the Special Court “perhaps

I ITIL FOL L A O RII ng OLAS. GELLER LAL LIYE CLE tl

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21

factual analysis of Conrail’s prospects only because the

opponents of reorganization had submitted affidavit evi-

dence critical of those prospects. There is no such evi-

dence in the record of these cases; by moving for sum-

mary judgment without any evidence at all on Conrail’s

viability, Plaintiffs sought a ruling on the facial con-

stitutionality of the Rail Act. Obviously, nothing on the

face of the Act indicates that USRA’s planning process,

aided by over $2 billion in federal assistance, will fail to

produce a viable Conrail.

Plaintiffs’ argument of last resort is that Conrail must

have little chance of succeeding, because most of Penn

Central’s investors are resisting reorganization under the

Rail Act. That self-fulfilling prediction is irrelevant

as well as misleading. As everyone involved has recog-

nized at one time or another, wholesale liquidation of

Penn Central is not a realistic option. By opposing

reorganization under the Rail Act, Plaintiffs are not

really seeking to be left alone to dismantle the railroad

in the belief that it is worth more dead than alive. Rather,

they seek to prevent reorganization under the Act in the

hope that the Government will then be forced to nationalize

the rail properties, at a price to the Government much

greater than if a reorganization can be successfully ac-

could rely on . . . a presumption” that Conrail will be viable. Jd. at

71. Supporting this presumption are the great care that Congress

devoted and the substantial public resources that Congress provided

in designing a solution to problems revealed in the Penn Central

reorganization (see Brief of Appellant United States Railway Asso-

ciation in No. 74-167, at 23-39), the “exceedingly heavy” practical

compulsion on USRA to design a financially viable system (Special

Court 180-Day Appeals at 71), and the fact that “[a] prime objec-

tive of the Act is to produce operating economies by eliminating

unprofitable and duplicating mileage ....” Id. at 79.

5? See Brief of Appellees Conn. Gen. at 80-81; Brief of Appellee

New Haven Trustee at 87-89; cf. Brief for Appellee Penn Central

Co. at 28.

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complished.™ Accordingly, the preferences of Penn Cen-

tral’s investors have little bearing on whether a viable

Conrail is reasonably possible.

B. Plaintiffs Have Not Shown That They Are Suffering

Any Erosion Injury.

We have contended that it is impossible to tell on the

record in these cases whether any creditor or the share-

holder will be worse off after the Rail Act is implemented

than it would be if Penn Central took any presently

available alternative course of action. Plaintiffs offer no

support for a contrary conclusion.

The court below made no finding of the amount of ero-

sion and did not say that it has or will exceed constitu-

tional limits. Plaintiffs suggest that the lower court was

inexact in its discussion of erosion, and that its findings

merely lack “mathematical precision.” * To the contrary,

the court made no findings at all. After reciting the stip-

ulated income-statement loss figures for past periods and

concluding that the erosion issue is ripe, the court went

on to grant injunctive relief based on the mere possibility

that erosiori beyond constitutional limits might ultimately

be found to have occurred.” In contrast, on the basis

of a “more ample factual record” than the court below

had, the Special Court concluded that for Penn Central

in particular “the erosion likely during the interim period

has been considerably exaggerated,” * that there is “little

°° The New Haven Trustee is explicit in recommending that Con-

rail stock be purchased by USRA with Government-guaranteed

obligations and the resulting cash be used to purchase Penn Central

rail properties in eminent domain proceedings. Brief of Cross-

Appellant New Haven Trustee in No. 74-166, at 89-90. —

°° See Brief of Appellee New Haven Trustee at 12-15, 78, 117.

See also Brief for Appellee Penn Central Co. at 15.

6° JA 9 at 36-40.

*! Special Court 180-Day Appeals at. 33.

*2 Id. at 56; see also id. at 107-08 n. 112.

23

likelihood” that Penn Central will suffer. erosion during

1975,°* and that even if the Rail Act had not been passed

the chances that Penn Central would nevertheless have

been able to accomplish large-scale abandonments by mid-

August 1975 “would have been exceedingly poor.” “

Plaintiffs fail to justify their position that appreciation

in asset values should be ignored in determining whether

the position of the Penn Central estate is improving or

deteriorating. They suggest that increases in asset values

should be disregarded because they are “caused by an

inflationary economy.” However, the ability of the

estate to satisfy claimants will be determined by match-

ing the value of its assets, in dollars, against the

dollar amounts of pre- and , post-bankruptey claims

' against it. That ability will inevitably be affected by the

fact that Penn Central owns physical properties whose

real value may be increasing substantially.” Plaintiffs

suggest that the ruling to that effect in In re Boston &

Maine Corp., 484 F.2d 369, 373 n. 5 (1st Cir. 1973)

is distinguishable because “[t]he point there at issue

was one of standing” to challenge continued operations

pending reorganization. The issue in Boston & Maine

was no more one of “standing” than the issue in these

cases. In both cases, the question is whether parties who

would concededly have standing if they could show any

63 Jd. at 53.

* Id. at 49.

** Brief of Appellees Conn. Gen. at 46. Similar suggestions by

the Penn Central Trustees are answered in detail in Brief of

Appellee USRA at 23-24.

°° As pointed out by the Special Court, there is some evidence

that the liquidation value of Penn Central’s properties (exclud-

ing the “Park Avenue” properties in New York City) may approxi-

mate $3.5 billion, of which over $2.6 billion represents land values

not subject to deterioration in value through continued use. Special

Court 180-Day Appeals at 53-54.

* Brief of Appellees Conn. Gen. at 46.

‘24

injury have established that continued reorganization

proceedings will in fact cause them any harm.

Even if the value of the estate as a whole were de-

clining now, that decline might be more than offset by the

results of successful reorganization under the Act. More-

over, whether any class of claimants would fare better in,

for example; a liquidation beginning now® than in a

reorganization under the Act depends on the status of

that class vis-a-vis other claimants and vis-a-vis the

benefits provided by the Act. Plaintiffs assert that, since

they include both secured and unsecured creditors and

the shareholder of Penn Central, any decline in the value

of the estate must be injuring at least one of them.” That

argument ignores the fact that reorganization under the

Act’ affords a prospect that substantial going-concern

values may be produced and that other benefits may be

conferred on the estate that will benefit the various

claimants in different ways. For example, assuming

that the shareholder’s interest presently has some value,

the $250 million in labor payments authorized by the

Act may benefit it by relieving the estate of labor claims

which would otherwise be incurred on abandonment and

would prime the shareholder’s claims.”

68 As the Special Court noted, immediate liquidation is not really

a possibility because, absent the Rail Act, ICC abandonment author-

ity would have to be obtained before liquidation could begin. The

Special Court concluded that obtaining such authority would prob-

ably take longer than the period prescribed in the Rail Act for im-

plementation of the Final System Plan. Special Court 180-Day

Appeals at 41-49.

* Brief of Appellee New Haven arustes at 85; Brief of Appellees

Conn. Gen. at 34.

7° The Special Court correctly recognized that such benefits may

be taken’into account in determining whether the consideration

which claimar.ts receive for their properties meets the constitutional

minimum. Special Court 180-Day Appeals at 105.

25

C. It Has Not Been Shown That Erosion Will Exceed

Constitutional Limits

Plaintiffs concede that, where there exists a reasonable

prospect of reorganization, some economic burden may be

imposed on claimants while the reorganization is ac-

complished.” As demonstrated in our Brief as Appel-

lant,” the limit of uncompensated erosion can be deter-

mined only by balancing the economic injury to claimants

from continued operations,” the harm to the public that

would result if service were terminated, and the feasi-

bility of possible solutions. The New Haven litigation

demonstrates that such balancing can be done. But the

record in this case contains nothing to suggest that any

injury to claimants will be sufficient to outweigh the

public interest in finding a way to continue Northeast

rail operations under private ownership. Plaintiffs have

produced no legal or factual basis for requiring reorgani-

zation efforts to be abandoned now.

The New Haven Trustee seeks to distinguish this

Court’s prior decisions permitting the imposition of sub-

stantial economic burdens on railroad estates pending

reorganization. He suggests that Denver & Rio Grande ™

was a case in which there was “no erosion” because the

book value of the road’s assets increased during reorgani-

"1 Brief of Appellees Conn. Gen. at 51-52; Brief of Appellee New

Haven Trustee at 95-96; cf. Brief for Appellee Penn Central Co.

at 24-29.

“ 12 Brief of Appellant United States Railway Association in No.

74-167, at 82-97.

* As the Special Court succinctly pointed out, economic injury

from continued operations must “be viewed in a practical frame,

namely, by comparing the prospects afforded by § 304(f) with

those that would have prevailed in its absence.” Special Court

180-Day Appeals at 47.

** Reconstruction Finance Corp. v. Denver & Rio Grande W.R.R.,

328 U.S. 495 (1946).

Sew

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29

‘feree railroads. Rather than prolonging

hich Penn Central will be exposed to ero-

Act may well offer the fastest way to end

Cc.

ning brief we argued that, even if the Rail

a Tucker Act remedy, Plaintiffs were not en-

n injunetion because they failed to establish

ail Act would cause erosion beyond constitu-

. We adhere to that position, but we agree

‘nited States that the Court should reach and

Tucker Act issue.

, the first defense to these actions for declara-

injunctive relief is that, even on their own

about the facts, Plaintiffs have an adequate

law under the Tucker Act. That issue is

squarely before the Court, and we believe the

iid decide it. Only by so doing will this ques-

urt of Claims jurisdiction be definitively re-

in a way that will beyond doubt be binding

e Court of Claims proceeding.

iliar circumstances of these cases, including

lationship between these cases and the Special

sion on the 180-day appeals, also make it ap-

or this Court now to decide this centrai issue.

ss, USRA, the Special Court, the bankruptcy

the trustees of the rail estates to discharge

sibilities in resolving the Northeast rail

a matter of fairness to all interests con-

nitive answer to this question is plainly

BME SEE EH He CRON SINE ERIN NMS PT TRO ER LATED MATEO TIEN TE RRO

ORE PNY

30

CONCLUSION °

Respectfully submitted,

LLoyD N. CUTLER

WILLIAM R. PERLIK

Of Counsel : Louis R. CoHEN

Barry E. CARTER Attorneys for the United States

PAUL C. Hupson Railway Association :

WILLiaM T. LAKE

WILMER, CUTLER & PICKERING

1666 K Street, N.W.

Washington, D.C. 20006

JORDAN Jay HILLMAN

Senior Legal Consultant

United States Railway

Association

2100 Second Street, S.W.

Washington, D.C. 20590

October 10, 1974