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

Annotate this Case

U.S. Supreme Court

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

New Haven Inclusion Cases*

Argued March 30, 1970

Decided June 29, 1970.

399 U.S. 392

Syllabus

When this Court sustained the Penn Central merger (389 U.S. 486), it upheld the action of the Interstate Commerce Commission (ICC) in conditioning its approval of the merger on inclusion as an operating entity of the New York, New Haven & Hartford R. Co. (New Haven), whose continued operation the ICC had found to be essential. Since 1961, the New Haven had been under reorganization proceedings under § 77 of the Bankruptcy Act, and was close to financial collapse. The basic issue in these cases concerns the propriety of the financial terms for the inclusion. The ICC had remitted the parties to negotiate the terms of the inclusion, and, after considering their appraisals issued its inclusion report, in which it concluded that the net liquidation value of New Haven's assets (after deducting liquidation expenses and making a discount to present worth on the basis of hypothesized receipts over the six-year period anticipated for liquidation) was $125,000,000, a figure that the ICC found "just and reasonable" as a condition of the merger under § 5 of the Interstate Commerce Act and "fair and equitable" as part of a plan of reorganization under § 77 of the Bankruptcy Act. The New Haven bondholders thereupon commenced litigation for review of the inclusion report (in its aspect as a condition of the merger) in the three-judge District Court for the Southern District of New York,

Page 399 U. S. 393

which was called upon to review the order under § 5 of the Interstate Commerce Act. The ICC certified to the reorganization court in Connecticut the sale of New Haven's assets to Penn Central, and the New Haven bondholders filed their objections in that court. The bondholders' group and the United States each tried to avoid duplicate litigation -- the bondholders by an application in the three-judge court to enjoin the ICC's certification of its plan to the reorganization court (which was denied), and the United States by a motion to dismiss the complaints in the three-judge court (which was also denied). Each court, after hearings, concluded that New Haven's assets had been substantially undervalued, and remanded the case to the ICC. The ICC then revalued New Haven's assets at a higher figure than that first reached, which, after deductions for certain factors not previously considered ("the added deductions"), came to $140,600,000. In addition, the ICC directed Penn Central to pay $5,000,000 toward New Haven's interim operating expenses. The

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reorganization court ordered New Haven's assets transferred to Penn Central, which was done on December 31, 1968. The bondholders filed objections to the revised evaluation with the reorganization court, and brought actions against the United States and the ICC in the three-judge court. The reorganization court rejected the plan, though it accepted some of the ICC's determinations. The three-judge court sustained the plan with modifications. Though the two courts agreed on many substantial issues, the total evaluation reached by the reorganization court exceeded that reached by the three-judge court by $28,000,000. The bondholders appealed directly to this Court from the three-judge court's judgment, and this Court noted probable jurisdiction. The bondholders appealed to the Court of Appeals from the order of the reorganization court; the United States, the ICC, and Penn Central cross-appealed, and this Court granted certiorari in advance of judgment. The disputed items of valuation, plus one issue affecting the consideration given by Penn Central, are as follows: (1) Though the parties have agreed that New Haven, as Penn Central's partner in the development of the Grand Central Terminal Properties, is entitled to the capitalized value of 50% of the "excess income" from those properties, the bondholders claim that no recognition has been given to New Haven's right to have its share of basic Terminal income, used to defray its share of Terminal expenses, for purposes of determining the fair price Penn Central should pay.(2) The New Haven owned two

Page 399 U. S. 394

large freight yards in the Bronx, which service important industrial enterprises in a 160-acre area and a vital municipal food market installation. The reorganization court ruled that the ICC had erred in rejecting an appraisal by a witness premised upon the yards' availability for continued industrial occupancy with existing trackage and electrical facilities, in favor of a lower appraisal based on his assumption that, on New Haven's liquidation, the yards would be stripped of those facilities, depressing the value of the land and necessitating substantial removal expenses. The three-judge court approved the ICC's valuation. (3) The reorganization court rejected, but the three-judge court approved, the added deductions, one made by the ICC in the net liquidation value as an adjustment for the assumed effect of a year's anticipated delay in securing a certificate of abandonment,

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the other that the ICC made on the basis of a hypothetical sale of all New Haven's land assets at a bulk discount. (4) The reorganization court found that the ICC had overstated the discount for the projected six-year liquidation. (5) The ICC ordered Penn Central to assume interim losses during the actual 1 l-month period from merger to inclusion to the extent of a ceiling of $5,000,000 (which constituted about 61% of the total loss). The reorganization court upheld the ICC and dismissed the bondholders' contention that Penn Central bear all operating losses. (6) The bondholders attack the ICC's order that New Haven transfer to Penn Central its ownership of stock, which the ICC found worthless, in two concerns. (7) The bondholders urge that Penn Central should pay an added amount to reflect New Haven's "going concern" value as a supplement to the liquidation value. (8) The New Haven received, in partial payment for the assets transferred to Penn Central, 950,000 shares of Penn Central common stock which were valued at $87.50 per share at the time of the valuation date used by the ICC, but which had declined to $63.38 as of the inclusion date. To remedy

"the unfairness [arising from] the fact that the purchaser is getting assets of sure present value, while the seller is asked to gamble on the future of Penn Central,"

the reorganization court provided for (and the three-judge court adopted) an "underwriting" formula under which Penn Central would be called upon to make up in cash the difference between the market price of Penn Central stock in 1978 and $87.50 per share, unless, before that time, the market price had attained $87.50 for a five-day period. The bondholders contend that this formula fails

Page 399 U. S. 395

to cure the overvaluation. The bondholders also urge that the continued deficit operation of the New Haven from the inception of the reorganization proceeding in 1961 to the inclusion in Penn Central in 1968 resulted in their being deprived of property without just compensation in violation of the Fifth Amendment.

Held:

1. The three-judge court erred in not granting the Government's motion to dismiss to the extent of deferring to the reorganization court in proceedings ultimately involving only the price to be paid for the assets of the debtor's estate. Pp. 399 U. S. 419-430.

(a) The reorganization court, under § 77 of the Bankruptcy Act, and the ICC had full power over the debtor and its property, including the power to formulate and confirm a reorganization plan providing for sale of the debtor's property, and it would have disrupted that plan for the three-judge court to have enjoined certification of the plan by the ICC to the reorganization court. Pp. 399 U. S. 419-421.

(b) Though transfer of the New Haven assets was also a part of the merger under § 5 of the Interstate Commerce Act, and neither court had "complete" jurisdiction when the litigation started, the statutory interrelationship between § 5 and § 77 and the ability of the reorganization court to adjudicate all the inclusion issues made it advisable for the three-judge court to have yielded to the reorganization court, in which primary jurisdiction had vested. Pp. 399 U. S. 423-427.

(c) When the merger occurred and no question remained of Penn Central's obligation to assume the assets of New Haven, the jurisdiction of the reorganization court became "complete," and the three-judge court had virtually nothing to decide. Pp. 399 U. S. 427-428.

2. The reorganization court is empowered by Congress to review the plan to determine whether the ICC has followed the statutory mandate that the plan be "fair and equitable" and whether there was material evidence to support the agency's conclusion. Pp. 399 U. S. 431-435.

3. There was no error in the finding of the reorganization court that, under the contractual arrangements, only after Terminal income had been applied to meeting Terminal expenses would the residue be distributed to the two railroads, and thus the basic income could not be "freed up" from the obligation to meet Terminal expenses. Nor did that court err in concluding

Page 399 U. S. 396

that New Haven's access rights to the Terminal under the agreements were not entitled to recognition in evaluating New Haven's assets, since those rights were more than offset by New Haven's deficit operations which Penn Central assumed. Pp. 399 U. S. 438-451.

4. The ICC's adherence to the lower of an expert witness' two estimates of the valuation of the Bronx freight yards was clearly erroneous, as it was based on the premise that New Haven would dismantle the yards upon liquidation of the rest of the railroad even though Penn Central already had a link by which service to the yards would continue, and implied that a common carrier could deny service to industrial and public activities simply because ownership of adjoining trackage had changed hands. Pp. 399 U. S. 451-457.

5. The reorganization court did not err in disallowing the added deductions. Pp. 399 U. S. 457-473.

(a) The ICC should not have made a deduction for costs that New Haven would incur during the year's period anticipated to obtain approval for abandonment of train operations, since the valuation date (December 31, 1966) represented not the date on which New Haven would have sought a certificate of abandonment, but the date on which it would have commenced its six-year liquidation sale. Moreover, since the interested public bodies have not arranged to continue New Haven's transportation system during the long period New Haven has been in reorganization, there is no justification for assuming that, if confronted with an abandonment application, they would do so now, and that a delay would be necessary for the ICC to hear from those communities. Pp. 399 U. S. 459-466.

(b) The ICC's deduction from the estate's liquidation value, based on a hypothetical sale of all New Haven's land assets in bulk, was properly rejected by the reorganization court, as the ICC had concluded that only its power to compel the sale of the real estate to a single buyer for continued operation justified the bulk sale discount, and there is no evidence in the record that a bulk buyer would agree to take over New Haven properties for continued service at any price. Pp. 399 U. S. 468-473.

6. The adjustment made by the reorganization court in the ICC's erroneous computation of the discount to present values of New Haven's liquidation proceeds over the six-year liquidation period is affirmed as being substantially free from error. Pp. 399 U. S. 473-476.

Page 399 U. S. 397

7. The payment made by Penn Central for New Haven's interim operating losses between the effective date of the merger and the date of inclusion was in accordance with a formula devised by the ICC in its inclusion report that constituted a pragmatic compromise between the competing interests of the Penn Central and the bondholders. The reorganization court's acceptance of that disposition is affirmed. Pp. 399 U. S. 476-479.

8. The argument of the Bondholders Committee that the ICC erred in ordering the transfer to Penn Central of stocks that New Haven held in two concerns, which the ICC found were valueless, is foreclosed by res judicata, since the bondholders had not appealed the order of the reorganization court directing the transfer of New Haven assets. Pp. 399 U. S. 479-481.

9. The bondholders' contention that Penn Central should pay an added amount for New Haven's "going concern" value is without merit, being entirely at odds with the liquidation hypothesis on which appraisal of New Haven's assets was predicated. Pp. 399 U. S. 481-482.

10. The "underwriting plan" of the reorganization court added to the assessment of present worth of the Penn Central stock both a reasonable assurance of realization of such worth and the opportunity of additional gain, and, on the basis of the record before that court at the time of its order, the package constituted full compensation for the assets transferred to Penn Central. In view, however, of the impact of recent events, which make it possible that this aspect of the decree is not realistic, further proceedings will be needed to reassess the consideration that Penn Central must give in exchange for the New Haven properties. Pp. 399 U. S. 483-489.

11. The substantial losses to the bondholders that occurred during the course of the reorganization proceedings did not result in any unconstitutional taking of the property of the bondholders, whose rights are not absolute and who will be receiving the highest and best price for the debtor's assets as of the valuation date. Moreover, the bondholders did not petition the reorganization court to dismiss the proceedings, and thereby permit foreclosure on the mortgage liens, until well after the valuation date. Nor is the price Penn Central must pay unfair in view of the benefits that were anticipated from the merger. Pp. 399 U. S. 489-495.

Nos. 914, 916, 920, 1038, and 1057, 304 F.Supp. 793 and 1136, affirmed in part and vacated and remanded in part; Nos. 915, 917, and 921, 305 F.Supp. 1049, vacated and remanded.

Page 399 U. S. 398

MR. JUSTICE STEWART delivered the opinion of the Court.

These cases represent the latest stage of the litigation arising from the merger of the Pennsylvania and New York Central railroads, which we upheld two Terms ago in the Penn Central Merger Cases,389 U. S. 486. A condition

Page 399 U. S. 399

of that merger was Penn Central's promise to take in the New York, New Haven & Hartford Railroad Company as an operating entity -- a promise that Penn Central fulfilled on December 31, 1968, 11 months after its own formation. The ultimate question presented by the cases now before us is the price Penn Central must pay for the assets of the New Haven.**

I

1. The Penn Central. The proposed combination of the Pennsylvania and New York Central railroads first came under consideration by the parties and the Interstate Commerce Commission more than 12 years ago, a decade prior to its eventual consummation. [Footnote 1] The two railroads formally sought permission to merge under the Interstate Commerce Act, 49 U.S.C. § 1 et seq., on March 9, 1962. [Footnote 2] On April , 1966, the Commission authorized the merger of the two roads. [Footnote 3] The union of the two carriers was the largest railroad merger in the history of the Nation, [Footnote 4] bringing together the companies that "dominate rail transportation in the Northeast." [Footnote 5] In 1965, the component roads enjoyed a total operating revenue in excess of $1,500,000,000 and a net annual income of over $75,000,000. [Footnote 6] The two companies held

Page 399 U. S. 400

some $72,000,000 in working capital and $1,242,000,000 in combined investments. [Footnote 7] With about 19,600 miles of road "sprawling between the Great Lakes on the north . . . and the Ohio and Potomac Rivers on the south," [Footnote 8] Penn Central was, at its inception, nearly twice the size of the next largest railroad system in the East, and three times that of the third largest. [Footnote 9]

The predicted economics effected by the merger were likewise enormous; it was thought that, within about eight years of the combination, they would exceed $80,000,000 annually. [Footnote 10] Those savings represented a value, capitalized at 8%, of $1,000,000,000.

On June 9, 1967, after considerable litigation involving protective conditions for various affected railroad competitors, [Footnote 11] the Commission issued a modified order authorizing

Page 399 U. S. 401

the Penn Central merger. [Footnote 12] On October 19, 1967, a court of three judges, convened in the United States District Court for the Southern District of New York to review the Commission's order pursuant to 28 U.S.C. §§ 1336, 2284, and 2321-2325, upheld the Commission's action. [Footnote 13] On January 15, 1968, this Court affirmed, with minor modifications, and thereby sustained the validity of the merger. [Footnote 14] Two weeks later, on February 1, 1968, Pennsylvania and New York Central merged.

2. The New Haven. The New York, New Haven & Hartford Railroad is now an operating division of the Penn Central system. At the time of the merger, however, it was an independent Class I railroad operating some 1,500 miles of line in the Commonwealth of Massachusetts and the States of Rhode Island, Connecticut, and New York; as such, it was the sixth largest railroad in the northeast region and the largest in New England. [Footnote 15] With an operations area extending from Boston to New York and connecting with nine other Class I railroads, the New Haven served 12 cities of greater than 100,000 population, as well as a number of important defense

Page 399 U. S. 402

establishments. [Footnote 16] In 1964, the railroad employed about 9,800 people and paid them annual wages amounting to $70,000,000. [Footnote 17] About 30,000 commuters used the line every day to reach work in New York City alone. [Footnote 18] As described by the Commission,

"The New Haven has both a large passenger and freight business. It is the fourth largest passenger-carrying railroad in the United States, and has the second highest commuter revenue of all such roads. . . . The volume of its freight business . . . is substantially greater. . . . It is the largest freight railroad in New England, and ranks tenth in freight traffic among all railroads in the eastern district. . . . Its freight service is considered to be of extreme importance to the industrial wellbeing of southern New England. [Footnote 19]"

The financial history of the New Haven was for decades a history of extreme vicissitudes. The company's decline and fall, with passage into, out of, and back into railroad reorganization, have been chronicled elsewhere. [Footnote 20] It first went into reorganization under § 77 of the Bankruptcy Act, 11 U.S.C. § 205, on October 23, 1935. Due

Page 399 U. S. 403

in large measure to the difficulties of including formerly leased lines in the reorganized road, nearly 12 years elapsed from the filing of the debtor's petition in the United States District Court for the District of Connecticut to that court's eventual order approving consummation of the Commission's plan of reorganization. [Footnote 21]

The railroad emerged from reorganization in 1947 with a vastly simplified debt structure in which only the most senior holders of secured interests survived. [Footnote 22] But, in the following years, the financial condition of the company again deteriorated, prompting it to seek at first partial and then total discontinuance of passenger service on the former Old Colony lines in Massachusetts. [Footnote 23] By 1959, the financial condition of the New Haven was such as to render the chance of surplus earnings "slight, at best." [Footnote 24] Through late 1960 and into early 1961, the company's management expended great efforts to stave off bankruptcy by obtaining loans or grants from the Federal and State Governments. [Footnote 25] By the middle of 1961, current liabilities exceeded current assets by $36,310,000, [Footnote 26] and the company was losing cash at the annual rate of $18,000,000. [Footnote 27]

Finally, on July 7, 1961, the New Haven again petitioned for reorganization under § 77 in the United States

Page 399 U. S. 404

District Court for the District of Connecticut, a step that the court was later to find had been far too long delayed:

"[I]n the interest of its creditors, its employees and the public, [the railroad] should have petitioned . . . long before it did. The grave problems which . . . beset the reorganization would have been much less acute and infinitely more manageable if bankruptcy had not been put off until its cash was almost entirely depleted, credit was practically gone, maintenance was down, and, in all other respects, the bottom was out of the barrel. [Footnote 28]"

Immediately upon their taking over the New Haven, the trustees appointed by the reorganization court were obliged to borrow $8,000,000 to meet the payroll. [Footnote 29] The situation did not improve with the passage of time.

"[I]n spite of spartan economics and a sizeable reduction in numbers of employees, the costs of operation . . . offset savings and eroded away the accumulated cash. [Footnote 30]"

On July 6, 1964, the New Haven trustees petitioned the Commission, pursuant to § 13a(2) of the Interstate Commerce Act, 49 U.S.C. § 13a(2), for authority to discontinue suburban passenger train service in the Boston area. There followed a public hearing, an adjournment to afford Massachusetts authorities an opportunity -- ultimately unavailing -- to negotiate a contract with New Haven for continuation of some service, and a motion by the New Haven for expedited disposition

"by reason of the critical nature of New Haven's finances, the irretrievable drain which the operations in question impose upon New Haven's resources, and the increasing adverse effect which New Haven's situation has upon

Page 399 U. S. 405

the public interest and upon New Haven's creditors. . . ."

The Commission granted the trustees' application, concluding that, for a period beginning four years before the 1961 reorganization petition and continuing thereafter, New Haven's financial condition had been "critical" and "drastically weak. . . ." [Footnote 31]

By 1965, it was evident that the New Haven was on the verge of collapse. [Footnote 32] Its year-end current assets amounted to $20,521,000, some $16,685,000 less than current liabilities plus long-term debt payments due within the coming year. The obligations payable after one year totaled $189,042,000. The retained income account showed a deficit of $81,672,000; the working capital account, a deficit of $16,700,000. For the year, the net railway operating income showed a deficit of $16,000,000, with overall net income a deficit only $1,000,000 less. The company was in default in its payments of both principal and interest on its long-term debt. [Footnote 33] In the view of the trustees, New Haven was

Page 399 U. S. 406

"absolutely faced with economic obsolescence if it continues as an independent, short-line, terminal railroad." [Footnote 34]

On October 11, 1965, the New H&en notified the Commission, pursuant to § 13a(1) of the Interstate Commerce Act, 49 U.S.C. § 13a(1), of its intention to discontinue all its interstate passenger trains effective March 1, 1966. [Footnote 35] If carried into effect, the proposed discontinuance would have drastically curtailed passenger train service in New York and Massachusetts, and ended it completely in Connecticut and Rhode Island. [Footnote 36] In the spring of 1966, the Commission, noting that, over an 11-year period, New Haven had experienced "an unending succession of reverses," concluded that

"[t]here now is totally lacking any hope or plan for future survival of this carrier, except that held out by its merger into a trunkline railroad. [Footnote 37]"

The Commission acceded in part to the trustees' notice of discontinuance, but invoked its statutory power to keep many of the trains in operation on the ground that

"passenger as well as freight service by the N[ew] H[aven] is a national necessity, and that termination of either would lead to distress in Connecticut, Massachusetts, and Rhode Island, and would severely damage New York City and the Nation generally. [Footnote 38]"

As 1966 gave way to 1967, the New Haven's situation deteriorated still further. As of April, 1967, the reorganization court thought "the prospect for the continued operation of the Railroad was very dim." [Footnote 39] The road lacked even a current expense fund from which to satisfy the "six months" creditors, and the court thought it

Page 399 U. S. 407

"highly unlikely that there ever will be one." [Footnote 40] In July, 1967, the reorganization court found that the New Haven's situation had become "desperately critical"; its cash depletion was "so serious that, if the present rate of loss continues, there will be insufficient left by late September to meet the payroll of approximately $1,400,000 per week." [Footnote 41]

As 1967 came to an end, so did the New Haven's cash reserve. By August 31, the cash balance fell to $4,500,000 a precarious condition for a company requiring $1,750,000 a week simply to meet current operating expenses. [Footnote 42] The trustees estimated that, as of December 31, 1967, the balance would decline to $3,100,000 and two months later would fall to $850,000. [Footnote 43] The New Haven's financial position had thus eroded to the point where its shutdown was "imminent. . . ." [Footnote 44]

Page 399 U. S. 408

3. The inclusion negotiations. From the outset of the § 77 proceeding in 1961, the trustees of the New Haven and the reorganization court charged with conservation of the debtor's dwindling assets recognized that

"a merger with a large trunk line railroad would be the most promising and feasible means of continuing the viability of the New Haven's transportation system. . . ."

In re New York, N.H. & H. R. Co., 289 F.Supp. 451, 456; cf. 281 F.Supp. 65. After Pennsylvania and New York Central filed their merger application before the Interstate Commerce Commission in 1962, the New Haven trustees sought inclusion in the new company, both by private negotiations with the component roads and by a petition to the Commission filed June 26, 1962. See In re New York, N.H. & H. R. Co., 378 F.2d 635, 636; Merger Report, 327 I.C.C. 475, 480. As the reorganization court said, it was

"apparent that the inclusion of the New Haven in the Penn Central merger was the only salvation for the New Haven as an operating railroad. . . ."

In re New York, N.H. & H. R. Co., 289 F.Supp. at 456; see also In re New York, N.H. & H. R. Co., 304 F.Supp. 793, 800.

The Commission, as we have noted, authorized the merger of the two roads in 1966. But, in so doing, it found that,

"[w]ithout some radical change in circumstances, even if this merger application were denied, N[ew] H[aven] would face a nearly insuperable task in bringing itself out of bankruptcy."

Merger Report, 327 I.C.C. at 522. The Commission concluded that the proposed Penn Central combination, "without complete inclusion of N[ew] H[aven], would not be consistent with the public interest. . . ." Id. at 524. Accordingly, it required "all the New Haven railroad to be included in the applicants' transaction," and conditioned its approval of the merger upon that inclusion, id. at 524, 527. In so doing, the Commission spelled out Penn

Page 399 U. S. 409

Central's obligation toward New Haven in unequivocal language. Condition 8 of the Merger Report stipulated as follows:

"The Pennsylvania New York Central Transportation Company shall be required to include in the transaction all the New York, New Haven and Hartford Railroad Company . . . upon such fair and equitable terms as the parties may agree subject to the approval of the Bankruptcy Court and the Commission. Within 6 months after the date this report is served, the parties shall file with the Commission for its approval, a plan for such inclusion. In the event the parties are unable to reach an agreement (and subject to approval by the Bankruptcy Court), such inclusion shall be upon such fair and equitable terms and conditions as the Commission may impose."

"* * * *"

"Jurisdiction is hereby reserved for such purposes. Consummation of the merger by applicants shall indicate their full and complete assent to these requirements."

327 I.C.C. at 553.

Condition 16 of the Merger Report reiterated that

"Consummation of the transaction approved herein shall constitute on the part of The Pennsylvania Railroad Company and the New York Central Railroad Company, their successors and assigns, acquiescence in and assent to the conditions stated in this appendix and in the attached report."

Id. at 555.

Having determined to require the inclusion of New Haven in Penn Central as a condition of merger, the Commission remitted the parties to private negotiation of the terms of inclusion. Id. at 527. The New Haven trustees on the one side, and the Pennsylvania and New

Page 399 U. S. 410

York Central railroads, on the other, had already been bargaining for some time, having drafted preliminary documents, dated December 22, 1964, and February 5, 1965, that provided for Penn Central's assumption of New Haven's freight operations. Oscar Gruss & Son v. United States, 261 F.Supp. 386, 393; Interstate Discontinuance Case, 327 I.C.C. 151, 175 n. 6. On April 21, 1966, two weeks after the Merger Report, they executed a Purchase Agreement for the transfer of substantially all the New Haven assets to Penn Central. Penn Central Merger Cases, 389 U.S. at 389 U. S. 508; see In re New York, N.H. & H. R. Co., 378 F.2d at 636. [Footnote 45] The Purchase Agreement provided for the transfer of the New Haven properties to Penn Central, with the consideration in exchange to consist in part of cash and in part of stocks and bonds of Penn Central. [Footnote 46]

Page 399 U. S. 411

In September, 1966 the trustees filed a petition with the reorganization court reciting the background of the negotiations with Penn Central, the New Haven's large and growing deficits, and the insufficiency of internally generated cash to meet operating demands. In the trustees' view, inclusion in Penn Central afforded

"the only practicable means for reorganization of the Debtor that is consistent with the best interest of the public and of all parties interested in the Debtor's estate. . . ."

They submitted that operations should continue so long as inclusion was possible, and that the court should grant them leave to press for inclusion on the basis of the Purchase Agreement. In re New York, N.H. & H. R. Co., 378 F.2d at 637. On October 24, 1966, the reorganization

Page 399 U. S. 412

court authorized the trustees to present the Agreement to the Commission, noting that the goal of preserving the New Haven operations "has been the policy from the beginning of these proceedings. . . ." Three days later, the trustees and the Pennsylvania and New York Central railroads petitioned the Commission for approval of the New Haven's inclusion on the terms of the Agreement.

On November 16, 1967, the Commission ratified the Purchase Agreement as the basis for the inclusion of New Haven in Penn Central. Pennsylvania R. Co. -- Merger -- New York Central R. Co., 331 I.C.C. 643 ("Second Supplemental Report"). It looked upon the fact that the parties had been able to reach agreement as an indication that, even though the New Haven trustees were selling properties having no value as an operating entity, they nevertheless had enjoyed a degree of bargaining power by virtue of the requirement that Penn Central take in New Haven as a condition of the merger. 331 I.C.C. at 657. "[W]here a transaction is bargained at arm's length," said the Commission,

"each side is presumably capable of determining its own best interest, and our primary function is to discover whether the transaction will be in the public interest."

Id. at 656. The Commission then undertook its independent analysis of the value of the New Haven properties. Although the Purchase Agreement "carrie[d] some probative force as to the values of the properties involved, it [was] by no means controlling." Id. at 657. The Commission must still determine the price "on the basis of all the evidence pertaining thereto, not merely the agreement and supporting evidence." Id. at 660 n. 12.

Upon its independent review of the record, the Commission found that the asset value of the New Haven properties to be transferred to Penn Central and of the

Page 399 U. S. 413

consideration to be given in exchange was $125,000,000. The Commission concluded that payment of that sum by Penn Central to the New Haven estate would be both "just and reasonable" as a condition of the merger under § 5 of the Interstate Commerce Act, and "fair and equitable" as part of a plan of reorganization under § 77 of the Bankruptcy Act. Unwilling to defer the merger until inclusion could take place, but recognizing that the danger of an end to all New Haven operations was "very real," 331 I.C.C. at 654, the Commission authorized financial aid from Penn Central to prop up the debtor during the interim period between merger and inclusion to ensure New Haven's continued functioning until its acquisition by Penn Central. See Penn Central Merger Cases, 389 U.S. at 389 U. S. 509.

4. The inclusion litigations. At this juncture, the Commission's determination of the terms of inclusion was subjected to simultaneous judicial review in two separate forums. On January 23, 1968, eight days after this Court's approval of the merger and eight days before the merger itself, the New Haven bondholders commenced five actions in the United States District Court for the Southern District of New York to set aside the Commission's order. The three-judge District Court reconvened to hear the actions, and shortly thereafter consolidated the five cases into one. On March 29, 1968, the Commission certified the first step of its plan for the reorganization of the New Haven -- the sale of its assets to Penn Central -- to the reorganization court. [Footnote 47] Pursuant

Page 399 U. S. 414

to § 77(e) of the Bankruptcy Act, 11 U.S.C. § 205(e), the New Haven bondholders filed their objections to the Commission's plan following notice given by the reorganization court. Thus, the identical question of the price Penn Central would have to pay for the New Haven assets came at the same time before the three-judge District Court in New York and the single-judge District Court in Connecticut.

On July 10, 1968, the three-judge court, following extensive briefing and argument on the numerous issues underlying the price question, found itself unable to agree with the Commission in several major respects. It therefore vacated so much of the Commission's order as found the terms of Penn Central's acquisition of the New Haven's assets to be just and reasonable, and remanded the cause for further proceedings. New York, N.H. & H. R. Co., First Mortgage 4% Bondholders' Committee v. United States, 289 F.Supp. 418. On August 13, 1968, also after extensive briefing and argument, the reorganization court independently returned the Commission's plan for further proceedings. In re New York, N.H. H.R. Co., 289 F.Supp. 451. On the overriding question of price, the two courts were in accord: by fixing the worth of the New Haven at $125,000,000, the Commission had substantially understated the value of the properties to be transferred. The

Page 399 U. S. 415

three-judge court estimated the understatement to be on the order of $45,000,000 to $50,000,000; the reorganization court, $33,000,000 to $55,000,000. 289 F.Supp. at 440, 465.

Meanwhile, the continuing drain on the New Haven's dwindling cash reserves called for -- and received -- drastic action. Upon remanding the Commission's proposed plan under § 77, the reorganization court ruled that, unless the Commission ordered inclusion by January 1, 1969, the court would entertain a motion to dismiss the reorganization proceedings, resulting in termination of all the New Haven's train service. 289 F.Supp. at 459. The court recommended that the Commission direct the early inclusion of New Haven with a partial payment of the purchase price, deferring other issues to later resolution. Id. at 466.

On the remand, the Commission reopened the record for the reception of further evidence and briefing in accordance with the instructions of the two reviewing courts. Its revaluation of the New Haven properties, announced on November 25, 1968, resulted in an increase in total worth of some $37,700,000, yielding a new price of $162,700,000 for the properties to be transferred. Pennsylvania R. Co. -- Merger -- New York Central R. Co., 334 I.C.C. 25, 53 ("Fourth Supplemental Report"). But the Commission then invoked "other pricing considerations" not taken into account at the time of its prior report. Application of the new considerations effected a reduction of $22,081,000 from the newly calculated asset value, leaving a net value of $140,600,000 -- $15,600,000 more than the Commission's initial estimate, but $17,400,000 less than the lowest range of value suggested by either of the two District Courts. In addition, the Commission required Penn Central to pay $5,000,000 toward the New Haven's interim operating expenses and, yielding to the directive of the reorganization

Page 399 U. S. 416

court, ordered Penn Central to take over the New Haven properties by January 1, 1969. 334 I.C.C. at 74, 76.

The Commission certified its revised plan to the reorganization court on December 2 1968. Within three weeks, the bondholders filed their objections. On December 24, 1968, the reorganization court released the assets of the debtor's estate to Penn Central without approving the price terms set by the Commission. The court reiterated that failure to include New Haven in Penn Central by January 1, 1969, would result in immediate termination of all New Haven train service. On December 31, the estate transferred its assets to Penn Central.

At once, the bondholders pressed for judicial review of the Commission's revised evaluation. With their objections to the plan of reorganization already pending before the reorganization court, representatives of holders of the debtor's first and refunding mortgage 4% bonds commenced two separate actions against the United States and the Commission before the three-judge District Court in New York. The Manufacturers Hanover Trust Company and the Chase Manhattan Bank, trustees under other mortgage bonds, commenced two more actions against the same defendants. [Footnote 48] The three-judge court consolidated the four cases and granted intervention -- to the New Haven trustees as parties plaintiff and to Penn Central, the Commonwealth of Massachusetts, and the

Page 399 U. S. 417

States of Rhode Island, Connecticut, and New York as parties defendant.

On May 28, 1969, the reorganization court again rejected the plan submitted by the Commission. Although it accepted the Commission's determinations on some issues, the court overruled the Commission with respect to its valuation of the New Haven's Harlem River and Oak Point freight yards and its added deductions introduced for the first time on the remand. The court also instituted its own "underwriting" plan to ensure equivalent value for the estate with respect to the Penn Central common stock given in partial consideration for the transferred New Haven properties. In re New York, N.H. & H. R. Co., 304 F.Supp. 793. An order implementing decision and remanding to the Commission was entered on July 28, 1969. 304 F.Supp. 1136.

On June 18, 1969, the three-judge court filed its opinion in the bondholders' action. With one judge in dissent, the court upheld the Commission's valuation of the freight yards and its added deductions on the remand. The court also adopted the underwriting plan devised by the reorganization court. New York, N.H. & H. R. Co., First Mortgage 4% Bondholders' Committee v. United States, 305 F.Supp. 1049. A decree fixing the terms of judgment followed on September 11, 1969. [Footnote 49]

Page 399 U. S. 418

With the two District Courts thus in agreement, after two rounds of judicial review, on many of the substantial issues that had come before them, but in disagreement on matters amounting to more than $28,000,000 in value, the bondholders took direct appeals to this Court from the judgment of the three-judge court. They also appealed from the order of the reorganization court to the United States Court of Appeals for the Second Circuit. The United States, the Commission, and Penn Central took no appeals from the decree of the three-judge court, but cross-appealed to the Court of Appeals from the order of the reorganization court. The Court of Appeals consolidated the appeals from the reorganization court, and the parties then petitioned this Court to grant certiorari to the Court of Appeals in advance of its judgment, pursuant to 28 U.S.C. §§ 1254(1) and 2101(e), and Rule 20 of this Court. We noted probable jurisdiction of the appeals from the order of the three-judge court, and, with respect to the judgment of the reorganization court, granted certiorari to the Court of Appeals before judgment, accelerating briefing and argument to permit disposition of these cases at the current Term. 396 U. S. 1056. [Footnote 50]

Page 399 U. S. 419

II

We first consider the dual review to which the District Courts in New York and Connecticut subjected the price determinations of the Interstate Commerce Commission. From the outset, all the parties in the three-judge court recognized that the pricing questions presented in the litigation there were also destined to come before the reorganization court under § 77 of the Bankruptcy Act. [Footnote 51] Confronted with the prospect of duplicate litigation, the New Haven bondholders asked the three-judge court to enjoin the Commission's certification of its plan of

Page 399 U. S. 420

reorganization to the District Court in Connecticut. Counsel urged that,

"if such certification is not restrained, the questions presented by the complaint herein under Section 5(2) of the Interstate Commerce Act will also be before the Bankruptcy Court under Section 77 of the Bankruptcy Act. . . ."

The three-judge court denied the bondholders' application for injunctive relief. In its view, "the balance of convenience tilt[ed] heavily in favor of allowing the Connecticut court to proceed to such extent as it is advised," since the grant of such an injunction could delay the reorganization proceedings for a substantial time.

In this ruling, the three-judge court was correct. The jurisdiction of the reorganization court was not open to question. Upon its approval of the New Haven's petition for reorganization in 1961, that court had acquired "exclusive jurisdiction of the debtor and its property, wherever located. . . ." Bankruptcy Act, § 77(a), 11 U.S.C. § 205(a). [Footnote 52] Subject to the court's control, the trustees whom it appointed were empowered "to operate the business of the debtor." Id. § 77(c)(2), 11 U.S.C. § 205(c)(2). They were thus charged with the dual responsibility of conserving the debtor's estate for the benefit of creditors and preserving an ongoing railroad in the public interest. Massachusetts v. Bartlett, 384 F.2d 819, 821, cert. denied, 390 U.S. 1003; 5 Collier on Bankruptcy § 77.02, at 469-470 (14th ed.1969). [Footnote 53]

Page 399 U. S. 421

With these goals in view, the statute bestowed a "broad and general" authority upon both the court and the trustees. Cf. Palmer v. Massachusetts,308 U. S. 79, 308 U. S. 85. The provisions of § 77

"doubtless suffice[d] to confer upon the [reorganization court] power appropriate for adjusting property rights in the railroad debtor's estate and, as to such rights, beyond that, in ordinary bankruptcy proceedings."

Id. at 308 U. S. 85-86; cf. 5 Collier, supra,

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