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
brk:
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,
brk:
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, � 77.11, at 498-499.
Together, the court and the Commission "unquestionably" had "full
and complete power not only over the debtor and its property, but
also, as a corollary, over any rights that [might] be asserted
against it."
Callaway v. Benton, 336 U.
S. 132,
336 U. S. 147.
[
Footnote 54] One such power
was precisely that which the Commission was about to propose that
the reorganization court exercise -- the power to confirm a plan of
reorganization providing for "the sale of all . . . of the property
of the debtor. . . ." Bankruptcy Act, § 77(b)(5), 11 U.S.C. §
205(b)(5). To that end, the Commission was required to certify its
proposal to the court as a prerequisite to judicial approval. §
77(d), 11 U.S.C. § 205(d). Injunctive intervention by the
three-judge court would thus have disrupted an essential statutory
phase of the New Haven reorganization.
The United States also sought to avoid duplicate litigation --
but by bypassing the New York, rather than the Connecticut federal
court. In a motion filed shortly
Page 399 U. S. 422
after the commencement of the New Haven bondholders' suit in the
three-judge court, the Government moved to dismiss the complaints
for lack of subject matter jurisdiction. In support of the motion,
it was argued that (1) until the Commission certified the terms of
inclusion to the reorganization court, Condition 8, under which
Penn Central had pledged to take in New Haven, was not satisfied,
and the Commission's order was not yet reviewable; (2) by virtue of
the § 77 aspects of the case, the reorganization court had
exclusive jurisdiction over the pricing questions sought to be
presented to the three-judge court, and (3) even on the assumption
that the three-judge court had jurisdiction, it should stay its
hand as a matter of equity to avoid an unnecessary interference
with the proceedings before the reorganization court.
The Government's motion to dismiss was opposed by Penn Central,
the New Haven trustees, the State of New York, and the bondholders.
Significantly, the Commission did not oppose the motion. Indeed,
the Commission agreed with the United States that "most (and
perhaps all) of the issues raised by the plaintiffs in this
three-judge Court will be reviewable by the Reorganization Court,"
conceded that "the resulting concurrent jurisdiction is awkward, at
least in theory," and concluded tentatively that "the scope of
judicial review . . . in the Reorganization Court would, as a
practical matter[,] be the same as in this three-judge Court." The
three-judge court denied the Government's motion to dismiss. The
bondholders' actions, the court said, came within the letter of the
statutes authorizing review of orders of the Commission. The court
conceded there was "an area of overlap" between the work of the New
York and Connecticut forums, but thought nothing in § 77 or
decisional law superseded that dual arrangement.
See 289
F. Supp. at 424 n. 3.
Page 399 U. S. 423
The three-judge court correctly observed that, in ordering New
Haven's inclusion in Penn Central the Commission had properly
exercised its authority under both § 5 of the Interstate Commerce
Act and § 77 of the Bankruptcy Act. The fact that the New Haven was
in reorganization under the Bankruptcy Act did not preclude the
Commission from exercising its statutory power, in passing on the
merger application of two railroads, to require the inclusion of a
third. Interstate Commerce Act, § 5(2)(d), 49 U.S.C. § 5(2)(d).
[
Footnote 55] "The
Commission can undoubtedly carry on § 5 proceedings simultaneously
with § 77 reorganization proceedings. . . ."
Callaway v.
Benton, 336 U.S. at
336 U. S. 140.
Here, the transfer of the New Haven assets was as much a part of a
merger under § 5 as it was a plan of reorganization under § 77.
Moreover, at the outset of the litigation, the jurisdiction of
neither the New York nor the Connecticut court was "complete." On
the one hand, the reorganization court lacked coercive power over
Penn Central: under § 77, it could neither approve nor disapprove
the merger
qua merger, and it could not compel Penn
Central to purchase the New Haven assets. So far as § 77 was
concerned, Penn Central stood in the position of a potential
purchaser, willing, but not obliged, to buy the New Haven
properties.
Cf. Callaway v. Benton, 336 U.S. at
336 U. S. 137;
Group of Institutional Investors v. Chicago, M., St. P. &
P. R. Co., 318 U. S. 523,
Page 399 U. S. 424
318 U. S. 550;
Old Colony Bondholders v. New York, N.H. & H. R. Co.,
161 F.2d 413, 434 n. 5 (Frank, J., dissenting),
cert. denied
sub nom. Protective Committee v. New York, N.H. & H. R.
Co., 331 U.S. 858;
In re New York, N.H. & H. R.
Co., 54 F. Supp.
595, 619. On the other hand, the three-judge court could not by
itself effect a conveyance of the New Haven properties to Penn
Central, nor could it compel the debtor's trustees to do so without
the consent of the reorganization court.
Moved largely by the concern that neither court might have
jurisdiction over the entire case, the three-judge court was of the
opinion that matters should proceed simultaneously in both forums
with a view to bringing the § 5 and § 77 aspects before this Court
at the same time. Given the complexities of the jurisdictional
question and the importance of an expedited determination of the
merits, the three-judge court produced an understandable solution
to the problem insofar as it ensured that the entire case would
come before this Court without the risk that the parties might have
spent an extensive period litigating in the wrong forum.
But the circumstances of the case did not inexorably command
review in two separate courts. There was no danger that application
of the "fair and equitable" test under § 77(e)(1) would yield
results different from those to be produced by the "just and
reasonable" test of § 5(2)(b) for mergers or the "equitable" test
for inclusions under § 5(2)(d).
See Callaway v. Benton,
336 U.S. at
336 U. S. 140.
[
Footnote 56] The
reorganization statute mandates
Page 399 U. S. 425
that any disposition of the debtor's properties must not be
"inconsistent with the provisions and purposes" of the Interstate
Commerce Act, Bankruptcy Act, § 77(f), 11 U.S.C. § 205(f), and "the
requisite findings under the two acts are equivalent."
In re
Chicago, R.I. & P. R. Co., 168 F.2d 587, 594,
cert.
denied sub nom. Texas v. Brown, 335 U.S. 855. This Court has
stressed that § 77 incorporates the elements of § 5,
St. Joe
Paper Co. v. Atlantic Coast Line R. Co., 347 U.
S. 298,
347 U. S. 310,
and we have ruled that, where the Commission proposes a merger as
part of a § 77 plan of reorganization, it must act "in accordance
with all the requirements and restrictions applicable to mergers"
under the Interstate Commerce Act,
id. at
347 U. S. 309;
cf. Ecker v. Western Pacific R. Co., 318 U.
S. 448,
318 U. S. 481;
New England Coal & Coke Co. v. Rutland R. Co., 143
F.2d 179, 186. Here, the Commission had demonstrated its awareness
of the statutory interrelationship, specifically devising inclusion
terms under § 5 to satisfy the requirements of § 77.
Second
Supplemental Report, 331 I.C.C. at 654.
Moreover, there was no reason to suppose that the reorganization
court would be unable to adjudicate all the questions presented by
the terms of the Commission's inclusion order. Although the
three-judge court expressed concern that certain issues, such as a
loss-sharing arrangement during the interim period between merger
and inclusion, might not lie within the jurisdiction of the
reorganization court, the reorganization court nevertheless reached
those issues without, so far as the record discloses,
jurisdictional objections from any party.
The three-judge court thus confronted a situation where it was
asked to consider the same pricing questions, to be determined by
recourse to the same standards of
Page 399 U. S. 426
review, as the reorganization court. "[N]ot only would it . . .
involve . . . a duplication of labor to [accept] . . .
jurisdiction, but it might" -- and, in fact, did -- "result . . .
in contradictory rulings upon the same issue[s]."
Palmer v.
Warren, 108 F.2d 164, 167,
aff'd, 310 U. S. 310 U.S.
132. In these circumstances, the three-judge court might well have
stayed its hand under the traditional principle that "the court
first taking over the
res draws to itself power to
determine all claims upon it."
Palmer v. Warren, supra; cf.
Oklahoma v. Texas, 258 U. S. 574,
258 U. S. 581;
Palmer v. Texas, 212 U. S. 118,
212 U. S. 126,
212 U. S. 129;
Wabash R. Co. v. Adelbert College, 208 U. S.
38,
208 U. S. 54;
Farmers' Loan & Trust Co. v. Lake Street Elevated R.
Co., 177 U. S. 51,
177 U. S. 61. We
recognize that that principle has commonly applied in cases where
both courts assert
in rem jurisdiction over the property
in dispute, and that, here, the three-judge court's jurisdiction
was
in personam in character. But the conflict was
nonetheless one
"between two coordinate courts of concurrent, overlapping
jurisdiction, neither belonging to a class which by paramount law
is categorically given a jurisdiction over the particular subject
matter paramount to the jurisdiction of the other."
In re New York, N.H. H.R. Co., 26 F. Supp. 18, 24,
aff'd sub nom. Palmer v. Warren, supra. And, given that
conflict, the three-judge court could have followed the settled
proposition that
"[t]he court which first acquired jurisdiction through
possession of the property is vested, while it holds possession,
with the power to hear and determine all controversies relating
thereto."
Lion Bonding & Surety Co. v. Karatz, 262 U. S.
77,
262 U. S.
89.
Surely, a vesting of primary jurisdiction in the reorganization
court comports with the basic purpose of § 77. Congress enacted
that statute, in part, "to prevent the notorious evils and abuses
of consent receiverships,"
New England Coal & Coke Co. v.
Rutland R. Co., 143
Page 399 U. S. 427
F.2d at 184, of which one of the more egregious was the
requirement of an ancillary filing and order of appointment in the
federal court for every district in which the debtor had property.
See 5 Collier,
supra, � 77.02, at 467. Although,
of course, the jurisdiction of the three-judge court was not
ancillary to that of the reorganization court in a technical sense,
dual review of issues ultimately going only to the valuation of the
debtor's estate would resurrect the discredited practice of the
equity receivership -- it
"would tend greatly to foment conflicts between coordinate
courts and compel creditors, in the protection of their interests,
to ride the circuit, demonstrating the basis of their positions in
successive courts."
In re New York, N.H. & H. R. Co., 26 F. Supp. at
23.
But we need not decide the question exclusively on the grounds
just set out. For, in the circumstances in which the United States
presented its motion to dismiss in this case, the course of prior
litigation had left the three-judge court virtually nothing to
decide. On January 15, 1968, this Court had upheld the validity of
the Penn Central merger under § 5 of the Interstate Commerce Act,
conditioned on the inclusion of New Haven on terms subject to
objections to be "registered and adjudicated in the bankruptcy
court or upon judicial review as provided by law."
Penn Central
Merger Cases, 389 U.S. at
389 U. S. 511.
We had permitted a postponement of the inclusion of New Haven on
the basis of Penn Central's acceptance of the inclusion
requirement,
id. at
389 U. S. 509,
and because, by its act of merger, Penn Central would "perforce
accept . . . appropriate conditions respecting the New Haven. . .
."
Id. at
389 U. S.
510.
Two weeks later, Penn Central merged. At that point, the lack of
jurisdictional "completeness" in the reorganization court, to which
we have earlier referred, was cured, for there now remained no
question of Penn Central's
Page 399 U. S. 428
obligation to take over the assets of the New Haven. With Penn
Central having given its irrevocable consent to the inclusion of Nw
Haven by its act of merger, it was evident that whatever terms the
reorganization court might confirm, subject to review on appeal to
the Court of Appeals followed by certiorari here, would bind Penn
Central by virtue of its merger commitment. Of course, the terms of
the inclusion must themselves be "just and reasonable" and
"equitable" under § 5. But those terms now involved only the value
to be accorded the assets transferred, and resolution of that issue
was the essence of the § 77 process.
"The heart of . . . a determination [of the validity of a plan
of reorganization] is a finding of fact . . . as to the value of
the debtor's property."
In re New York, N.H. & H. R. Co., 147 F.2d 40, 49,
cert. denied sub nom. Massachusetts v. New York, N.H. & H.
R. Co., 325 U.S. 884.
See 5 Collier,
supra,
� 77.14, at 538-539;
cf. Consolidated Rock Prods. Co. v. Du
Bois, 312 U. S. 510,
312 U. S.
524-525;
First National Bank v. Flershem,
290 U. S. 504,
290 U. S. 527;
Second Supplemental Report, 331 I.C.C. at 652. In short,
with identical issues before the two courts, with those issues
involving only questions going to the value of a § 77 debtor's
estate, with congruent standards of review, and with the
irrevocable promise of Penn Central to take in New Haven, the
three-judge court should have stayed its hand in the New Haven
bondholders' litigation. [
Footnote 57]
Page 399 U. S. 429
Prior decisions of other three-judge courts, affirmed by this
Court on direct appeal, lend support to the proposition that the
three-judge court should have deferred to the reorganization court.
In
Chicago & N.W. R. Co. v. United
States, 52 F. Supp.
65, the debtor railway company brought suit against the
Commission in the United States District Court for the Northern
District of Illinois, seeking three-judge-court review of a plan of
reorganization previously approved by the Commission and the
courts. The District Court noted its "limited power" under the
statute providing for review by a court of three judges, 52 F.
Supp. at 66. It conceded the "seemingly applicable language" of the
three-judge-court statute to "any order of the Interstate Commerce
Commission," but held that, once the Commission has approved a plan
of reorganization under § 77,
"appeal from Commission orders in connection with bankruptcy
proceedings lies only to a district court (of one judge) sitting in
bankruptcy, not to a district court (of three judges) assembled
under the Urgent Deficiencies Act."
Id. at 67. [
Footnote
58] On direct appeal, this Court summarily affirmed the
District Court's judgment. 320 U.S. 718.
Even closer in point is a case that arose during the first
reorganization of the New Haven Railroad --
Group of Boston
& Providence R. Corp. Stockholders v. ICC, 133 F. Supp.
488. Shareholders of the Boston & Providence, also undergoing
reorganization, sought judicial review before a three-judge court
of the Commission's refusal to provide joint rates a between New
Haven and Boston & Providence -- exclusively an Interstate
Commerce Act function.
See Act, §§ 1(4), 15(6), 49
Page 399 U. S. 430
U.S.C. §§ 1(4), 15(b). The court held that to grant the
shareholders the ruling they sought would contravene the revenue
allocation formula already adopted by the New Haven's
reorganization court and affirmed by the Court of Appeals and the
Supreme Court. The three-judge court accepted the view of the
Commission that,
"so long as the Boston & Providence lines are operated by
the New Haven as lessee for the account of the lessor . . . , the
Connecticut district court . . . has exclusive jurisdiction to pass
on the accounting for such operation."
"133 F. Supp. at 493. Again, this Court summarily affirmed.
Boston & Providence R. Corp. Stockholders v. New York, N.H.
& H. R. Co., 350 U.S. 926."
We therefore hold that the three-judge court here should have
granted the Government's motion 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. [
Footnote 59]
Page 399 U. S. 431
III
In turning to the judgment of the reorganization court, we first
review the standards under which that court passed upon the
Commission's rulings.
After 35 years of § 77, as amended, it is unnecessary to
recanvass the two basic objectives of the statute -- the
conservation of the debtor's assets for the benefit of creditors
and the preservation of an ongoing railroad in the public interest.
See generally 5 Collier,
supra, �77.02, at
469-470. Central to the statutory objective that the reorganized
company should, if at all possible, emerge as a "living, not a
dying . . . , enterprise,"
Van Schaick v. McCarthy, 116
F.2d 987, 993, is the understanding that "a railroad [is] not like
an ordinary insolvent estate."
Palmer v. Massachusetts,
308 U.S. at
308 U. S. 86.
(Footnote omitted.) To the traditional equity jurisdiction of the
bankruptcy court, § 77 adds the oversight of the Interstate
Commerce Commission, the agency "specially charged with the public
interest represented by the transportation system."
Ibid.
The statute contemplates that
"[t]he judicial functions of the bankruptcy court and the
administrative functions of the Commission [will] work
cooperatively in reorganizations."
Warren v. Palmer, 310 U. S. 132,
310 U. S. 138.
(Footnote omitted.)
In structuring the cooperative endeavor of agency and court,
Congress "placed in the hands of the Commission the primary
responsibility for the development of a suitable plan" for the
debtor railroad.
Ecker v. Western Pacific R. Co., 318 U.S.
at
318 U. S. 468.
As the Court said in
Group of Institutional Investors v.
Chicago, M., St. P. & P. R. Co., supra,
"The ratio of debt to stock, the amount of fixed, as
distinguished from contingent, interest, the kind of capital
structure which a particular company needs to survive the
vicissitudes of the business cycle -- all these have been reserved
by Congress for the expert
Page 399 U. S. 432
judgment and opinion of the Commission, which the courts must
respect."
318 U.S. at
318 U. S. 545.
See also In re New York, N.H. & H. R.
Co., 54 F. Supp.
595, 604. In the development of the plan of reorganization, §
77 also has accorded the Commission primary responsibility for
determining wherein lies the "public interest," which does not
refer generally to matters of public concern apart from the public
interest in the maintenance of an adequate rail transportation
system,
cf. United States v. Lowden, 308 U.
S. 225,
308 U. S. 230,
but includes, "in a more restricted sense,"
ibid., concern
for "the amount and character of the capitalization of the
reorganized corporation,"
Ecker v. Western Pacific R. Co.,
318 U.S. at
318 U. S.
473-474;
cf. Massachusetts v. Bartlett, 384
F.2d at 821, as well as the "adequacy of transportation service, .
. . its essential conditions of economy and efficiency, and . . .
appropriate provision and best use of transportation facilities."
Texas v. United States, 292 U. S. 522,
292 U. S. 531;
New York Central Securities Corp. v. United States,
287 U. S. 12,
287 U. S. 25. As
is clear from the legislative history and § 77 itself, the
deference to the Commission as initiator of the plan of
reorganization stems from the
"recognition by everyone of the advantages of utilizing the
facilities of the Commission for investigation into the many-sided
problems of transportation service, finance and public interest
involved in even minor railroad reorganizations and utilizing the
Commission's experience in these fields for the appraisals of
values and the development of a plan of reorganization, fair to the
public, creditors and stockholders."
Ecker v. Western Pacific R. Co., 318 U.S. at
318 U. S. 468.
(Footnote omitted.) But the respect given the Commission as
draftsman of the plan of reorganization entails no abdication of
judicial responsibility for the workings of the administrative
agency. As we have had occasion to say in describing other aspects
of the Commission's work, "
Congress did not purport to transfer
its legislative power to
Page 399 U. S.
433
the unbounded discretion of the regulatory body.'"
Burlington Truck Lines, Inc. v. United States,
371 U. S. 156,
371 U. S. 167.
Far from displacing the judicial function, § 77 strikes a "balance
between the power of the Commission and that of the court."
Ecker v. Western Pacific R. Co., supra, at 318 U. S. 468.
The chancellor remains "a necessary and important factor in
railroad reorganization"; the statutory objective is "attained only
through properly coordinated action between the Commission and the
court." Id. at 318 U. S.
474-475. (Footnote omitted.) It remains for the
reorganization court to ascertain that the Commission
"has given consideration to each element of value concerned in
its over-all appraisal, and has not wrongly decided legal questions
involved in the problems of valuation and of allotment of
equivalent securities. . . ."
Old Colony Bondholders v. New York, N.H. & H. R.
Co., 161 F.2d at 420.
But the reorganization court may also do more. Under §
77(c)(13), 11 U.S.C. § 205(c)(13), the court, on its own motion,
may refer matters to a special master for the hearing of such
evidence as the court may desire -- a provision which permits the
"building up of a group of men [entirely apart from the Commission]
thoroughly informed in railroad reorganization matters." H.R.Rep.
No. 1897, 72d Cong., 2d Sess., 6 (1933). And, under § 77(e), 11
U.S.C. § 205(e), the court may itself hold hearings upon the
Commission's certification of its plan of reorganization, at which
the court is empowered to take evidence beyond that received by the
Commission -- a supplementary power, unknown to conventional
judicial review but deemed essential to the reorganization court's
exercise of its extraordinary "cram down" powers. [
Footnote 60]
See S.Rep. No. 1336,
74th Cong., 1st Sess., 3
Page 399 U. S. 434
(1935); H.R.Rep. No. 1283, 74th Cong., 1st Sess., 3 (1935). The
statutory authority to appoint special masters and to hold
evidentiary hearings reflects the unique powers possessed by the
reorganization court in passing upon the Commission's proposed plan
of reorganization. In sum, Congress has confided to the
reorganization court the
"power to review the plan to determine whether the Commission
has followed the statutory mandates . . . and whether the
Commission had material evidence to support its conclusions."
Reconstruction Finance Corp. v. Denver & R. G. W. R.
Co., 328 U. S. 495,
328 U. S. 509;
cf. Penn Central Merger Cases, 389 U.S. at
389 U. S.
498-499. In the reorganization court reposes ultimate
responsibility for determining that the plan presented to it by the
Commission satisfies the "fair and equitable" requirement of § 77.
See In re New York, N.H. & H. R. Co., 16 F. Supp.
504, 507. And at the heart of that determination, as we have
already noted, is the valuation of the debtor's property. Here, as
elsewhere in the reorganization proceedings, the court must look to
the conclusion recommended by the Commission.
See Ecker v.
Western Pacific R. Co., 318 U.S. at
318 U. S.
47-4273;
cf. Freeman v. Mulcahy, 250 F.2d 463,
472-473,
cert. denied sub nom. Boston & Providence R. Co.
v. New York,
Page 399 U. S. 435
N.H. & H.R. Co., 356 U.S. 939;
In re New York,
N.H. & H. R. Co., 54 F. Supp.
595, 600. And often the Commission's conclusion will entail
less a statement of mathematical certainty than an estimate of what
the market will say when it speaks to the subject. "But that
estimate must be based on an informed judgment which embraces all .
. . relevant . . . facts. . . ."
Consolidated Rock Prods. Co.
v. Du Bois, 312 U.S. at
312 U. S.
526.
"The judicial function is to see to it that the Commission's
'estimate' is not a mere 'guess,' but rests upon an informed
judgment based upon an appraisal of all . . . relevant . . . facts
. . . , and is not at variance with the statutory command."
Freeman v. Mulcahy, 250 F.2d at 473. In performing that
function, the court must proceed with awareness that its review of
the Commission's conclusion on valuation, as with every other
important determination that the court is to make, calls for an
"
informed, independent judgment'" of its own. Consolidated
Rock Prods. Co. v. Du Bois, 312 U.S. at 312 U. S. 520;
National Surety Co. v. Coriell, 289 U.
S. 426, 289 U. S.
436.
There remains to consider the scope of review in this Court in
passing upon the judicial determinations of the reorganization
court. That we have granted certiorari to the Court of Appeals in
advance of the appellate court's judgment does not alter the fact
that "our task is limited."
Penn Central Merger Cases, 389
U.S. at
389 U. S. 498.
It is not for us to pass upon the myriad factual and legal issues
as though we were trying the cases
de novo.
"It is not enough to reverse the District Court that we might
have appraised the facts somewhat differently. If there is warrant
for the action of the District Court, our task on review is at an
end."
Group of Institutional Investors v. Chicago, M., St. P.
& P. R. Co., 318 U.S. at
318 U. S.
564.
IV
As we have earlier noted, the purchase and sale negotiated by
Pennsylvania, New York Central, and the New
Page 399 U. S. 436
Haven trustees rested upon the estimated liquidation value of
the New Haven properties to be transferred, rather than the earning
power of the New Haven as an operating entity.
Second
Supplemental Report, 331 I.C.C. at 657. The parties to the
Purchase Agreement thus gave recognition to the reality of New
Haven's desperate financial situation, as well as to the power of
the reorganization court to order the sale of the debtor's
properties at not less than the "fair upset" price under § 77(b)(5)
of the Bankruptcy Act. In approving the negotiators' approach to
the price question, the Commission observed that asset value,
rather than earning power, was the primary determinant, because New
Haven had "long been dry of earning power." 331 I.C.C. at 657. "If
there is one thing on this record that is clear and undeniable,"
the Commission concluded, "it is that N[ew] H[aven] has neither
earning power nor the prospect of earning power."
Id. at
687.
In light of "the chronic deficit character" of the New Haven
operation,
id. at 658, the reorganization court
understandably accepted the liquidation approach to valuation. "The
concept of
going concern value' is fictional as applied to the
New Haven," it said, "because it ignores the Railroad's long and
continuing history of deficit operations." 289 F. Supp. at 455.
(Footnote omitted.)
Before the Commission, the New Haven trustees and Penn Central
submitted complete studies of the debtor's liquidation value,
consisting of current assets, special funds, investments, real
estate, and other assets. As the Commission described it,
"Liquidation value as used by both the N[ew] H[aven] trustees
and Penn Central [was] the estimated market value that would be
realized in a total liquidation, less the cost of dismantling
properties and other liquidation costs and after discounting
proceeds to present worth."
331 I.C.C. at 697;
cf.
Page 399 U. S. 437
In re New York, N.H. & H. R. Co., 304 F. Supp. at
797-798. The New Haven study, based on the assets held by the
debtor as of December 31, 1965, was made over a nine-month period
by persons who, the Commission found, were familiar with the
railroad, its operating area, and the nature and condition of its
properties. The Penn Central study valued the assets as of December
31, 1986; it was made in under two months by persons less familiar
with the railroad. Both studies revealed that nearly half the New
Haven's asset value consisted of its holdings in real estate. The
New Haven study produced a gross value for all assets, exclusive of
New Haven's interest in the Grand Central Terminal properties, of
$230,290,000; the Penn Central study, $150,321,000.
Consistent with the liquidation hypothesis, both New Haven and
Penn Central deducted from the gross value of the New Haven assets
the expenses that would be incurred if a liquidation in fact took
place. These included not only the estimated expenses of sale, but,
in the case of bridges, trestles, and culverts, removal costs for
conversion of the realty to nonrailroad use -- costs that often
left the assets with a net negative value. The New Haven trustees
hypothesized both a six- and a 10-year liquidation period, with
expenses for liquidation operations plus taxes and interest
aggregating $59,481,000 and $76,847,000, respectively; Penn Central
estimated the expenses of a 10-year sale to be $62,172,000. The net
liquidation value of the assets was arrived at by deducting the
liquidation expenses and certain current assets not to be
transferred to Penn Central, along with a further discount to
present worth to reflect the hypothesis that receipts would be
coming in over a six- or 10-year period. The Commission concluded
that, once the New Haven estate embarked on a liquidation sale, it
would dispose of the assets as quickly as practicable; the
Commission
Page 399 U. S. 438
accordingly found that "the bulk of the liquidation could be
completed within a period of 6 years." 331 I.C.C. at 663. The
Commission also concluded that the 6% discount rate employed by New
Haven, and challenged as too low by Penn Central, was offset by the
conservative valuation of the assets themselves.
Id. at
664. The Commission's ultimate finding was that the liquidation
value of the New Haven assets to be conveyed to Penn Central "is
about $125 million as of December 31, 1966."
Id. at
688.
As we have noted earlier, the reorganization court did not
accept the $125,000,000 figure, with a consequent remand and second
round of review. The bulk of the Commission's valuation has now won
the approval of the reorganization court, and is not challenged by
any of the parties here. There remains in dispute, however, the
valuation of several items, aggregating nearly $200,000,000, and it
is to those items that we now turn.
1.
The Grand Central Terminal properties. By far the
largest component in the dispute over the liquidation value of the
New Haven is the debtor's interest in the Grand Central Terminal
properties. This real estate complex consists of several parcels in
the area of midtown Manhattan bounded by 42d Street on the south,
Madison Avenue on the west, 60th Street on the north, and Lexington
Avenue on the east. Included in the properties are the Barclay,
Biltmore, Commodore, Roosevelt, and Waldorf-Astoria hotels; the Pan
American building, as well as other office buildings along Park
Avenue, and the Yale Club. The total assessed value of the Grand
Central Terminal properties as of 1965 was $227,225,000.
The New Haven railroad acquired the right to run its trains into
Manhattan in 1848, when it entered into an agreement for use of the
tracks of the predecessor of the New York Central, to extend for
the lives of the respective
Page 399 U. S. 439
charters of the two companies. In 1848, New Haven also acquired
an easement over the tracks by legislation of the State of New
York.
See New York, N.H. & H. R. Co. v. ICC, 55 F.2d
1028, 1030. The 1848 agreement underlay various subsequent
contracts in the 1870's, '80's, and '90's between the New York
Central and the New Haven.
In 1903 and 1904, the State of New York enacted further
legislation requiring the placement of the railroad tracks below
ground through the 15-block stretch north of the present Terminal.
It did not take the Central entrepreneurs long to realize that
compliance with the legislative edict left the company a vast area
of midtown Manhattan suitable for realty development. In 1907,
Central entered into the basic contract with New Haven under which
the present Grand Central Terminal was built. The 1907 instrument
recited that it had become necessary to rebuild the Terminal,
including yards and tracks, in order to provide facilities for the
proper management and conduct of the two railroads. Central
promised to buy needed land and rights-of-way, New Haven to make
payments in connection with the demolition of the old station and
the construction of the new. The 1907 agreement further recited
that nothing it contained should impair the rights of the parties
under the 1848 agreement. It then went on to provide that Central
"doth demise, let and lease" the use of the railroad terminal to
New Haven in common with Central. "Railroad terminal" was defined
to
"mean and include the land, and interests in land, and all
improvements thereon . . . , and all rights in any ways on which
said land may abut. . . ."
Paragraph 4 of the 1907 agreement provided for joint
contributions by New Haven and Central to Terminal maintenance and
operation, calculated on the parties' respective car and locomotive
usage of the station. The paragraph also obligated New Haven to a
minimum
Page 399 U. S. 440
annual payment of $160,179.92 without regard to the percentage
of its use of the Terminal. In addition, � 14 of the agreement
stipulated that the manager of the enterprise should credit all
rentals and other compensation received from the railroad terminal
to "the fixed charges or to the cost of maintenance and operation
of the said Railroad Terminal, as the same may be applicable."
In 1909, Central and New Haven began the joint financing of
construction on the property referred to in the 1907 agreement,
and, in 1913, they entered into a supplemental agreement in
order
"to express more fully the intent of the parties hereto as to
the right of the New Haven Company and the Central Company with
respect to the construction, maintenance and use"
of the Terminal properties. The supplemental agreement recited
that New Haven's right of user included
"the right . . . to join with . . . Central . . . in the
construction, holding, maintenance and leasing of buildings . . .
upon the land included within the Railroad Terminal."
The heart of the 1913 amendment was a detailed provision for the
sharing and reimbursement of construction and maintenance costs,
along with a reaffirmation of the procedure established in �14 of
the 1907 agreement, under which all rentals were to be credited to
the Terminal enterprise. In the following years, the two parties
entered into hundreds of subagreements relating to the leasing,
financing, and sharing of rentals from buildings constructed in the
Terminal area. Income from the buildings was credited to the fixed
charges, and to the maintenance and operation of the Terminal
itself.
None of the agreements between Central and New Haven expressly
provided for the disposition of "excess income" left over after the
satisfaction of the Terminal expenses. For half a century after the
1913 agreement, the "excess income" question was of academic
interest only, since expenses annually exceeded revenues. But
Page 399 U. S. 441
in 1964, and in each succeeding year, the accounts showed excess
income. New Haven demanded part of it, and Central refused. The
trustees then brought a contract action in the New York Supreme
Court to protect New Haven's interest in the income.
When the New Haven trustees first began negotiations with
Pennsylvania and Central for the inclusion of the debtor's assets
in Penn Central, they proposed that New Haven's interest in the
nonoperating Terminal properties be excluded from the takeover,
with final disposition deferred until the outcome of the
then-pending litigation. But Central insisted it would not consider
inclusion of New Haven in the merger unless it got absolute title
to all the Terminal properties. The New Haven trustees thereupon
sought the advice of legal counsel. They were told that, under the
agreements with Central, New Haven not only had no fee or leasehold
interest in the properties, but had no rights at all that would
survive cessation of its train service in and out of the Terminal
other than the reimbursement of monies already advanced toward
construction of buildings in the area. Although the New York
lawsuit was pending to determine New Haven's right to participate
in the excess income, the trustees concluded that, as an
alternative to risking "tremendous expense and long delay" in
litigation, 289 F. Supp. at 462, resolution of the inclusion
negotiations was of sufficient value to warrant their transferring
the debtor's interest, whatever it might be, to Penn Central for no
consideration whatever in exchange.
From the outset, the bondholders dissociated themselves from the
trustees on the question of the debtor's rights in the Terminal
properties. Some of the New Haven creditors claimed the value of
those rights to be $20,000,000 -- the sum of unreimbursed advances
for building construction and capital improvements as carried on
the New Haven books. Others said it was $50,000,000 -- the
capitalization of one-half the excess income
Page 399 U. S. 442
at 5%. Still others argued for one-half the value of the fee
itself -- nearly $115,000,000.
In its Second Supplemental Report, the Commission eschewed
responsibility for determining the legal rights of New Haven in the
properties, and set out only to value the debtor's claim.
Confronting the complex legal relationship between Central and New
Haven, with the consequent unpredictability of litigation, and
unwilling to defer valuation of New Haven's interest to the
completion of all possible contract actions between the two
parties, the Commission set the value of the claim at $13,000,000.
It arrived at this figure by taking the average of two unrelated
sums: $5,000,000, representing Penn Central's estimate of the
nuisance value of New Haven's claim, and $20,000,000, representing
the capitalization of New Haven's share of the average of the
excess income in 1964 and 1965, based upon its proportional usage
of the Terminal.
Faced with the Commission's disclaimer of responsibility for
resolution of the legal controversy between Central and New Haven,
and given the Commission's Draconian solution to the question of
value, the reorganization court appointed a special master to
consider New Haven's legal interest in the Terminal properties.
[
Footnote 61] Based on
his
Page 399 U. S. 443
study of the complex contractual relations between the two
parties, of which we have touched above only on the salient
features, the Special Master concluded that Central and New Haven
had entered into a "joint venture or partnership . . . of some
kind." The Special Master dismissed as untenable both Central's
argument that, by virtue of its sole ownership of the fee, it would
acquire full right, title, and interest in the Terminal properties
upon the cessation of New Haven's train service, and the
bondholders' argument that, as a partner, the debtor had an
undivided one-half interest in the fee. In 1907, when the parties
entered into the basic agreement, Central had had title to the
realty, and New Haven had had a perpetual right to the use of the
tracks by force of state legislation. New Haven thus had "not come
to the bargaining table in 1907 in the posture of a supplicant."
The two railroads together had joined in the design and
construction of a Terminal complex greater than either needed for
its own requirements; they had undertaken a "major real estate
development to extend over a period of many years", and, to those
ends, they had provided for a sharing of the Terminal expenses on
the basis of their respective car usage, along with a committal of
Terminal revenues to the operation of the project. As the Special
Master put it,
"There can be no question that, by mutual agreement, these
revenues from all of the Grand Central Terminal properties were
pooled to apply on the fixed charges and maintenance and
operational costs of the Terminal."
In light of the conclusion that Central and New Haven had
embarked on an enterprise akin to a partnership, the Special Master
concluded that, once the Terminal revenues satisfied expenses, the
excess income belonged equally to each of the railroads. In his
view, the car-use formula of the 1907 agreement ceased to be
effective once revenue met expenses, and the principle of equality
between
Page 399 U. S. 444
partners took its place. The Special Master noted that the
parties had not expressly dealt with the question whether New
Haven's interest in the properties would end if New Haven ceased to
use the Terminal. But he concluded that, in such an event, New
Haven would still be entitled to half of the excess income; that
right "would not and could not be terminated by the mere
discontinuance of [New Haven] passenger service into and out of the
Terminal." [
Footnote 62]
Page 399 U. S. 445
On the first round of review, the reorganization court accepted
the Special Master's report and incorporated it by reference in its
own opinion. The court therefore remanded the matter to the
Commission with instructions to value New Haven's one-half interest
in the Terminal's future excess income. In addition, the court
requested the Commission to
"consider and make findings as to what value, if any, attaches
to New Haven's present right to share in the income for the purpose
of defraying its cost of operating in and out of the terminal."
289 F. Supp. at 463.
In its Fourth Supplemental Report, the Commission accepted the
determination of the reorganization court that New Haven would have
retained a right to one-half the excess income even upon
liquidation. 334 I.C.C. at 30-31. Following an extensive
consideration of future Terminal expenses and office-building and
hotel income, the Commission projected a future excess income of
$4,550,000 a year, of which New Haven's 50% share, capitalized at
8%, amounted to $28,438,000. 334 I.C.C. at 39. The new figure thus
came to more than twice that awarded by the Commission on the first
round.
The Commission also complied with the request of the
reorganization court that it consider the value of New Haven's
right of access into the Terminal. The Commission concluded that
the right would have no value to New Haven unless a buyer were
willing to pay for it; that the only potential buyer in sight was
the State of New York, which would not need to bid for use of the
Terminal; and, accordingly, that New Haven's right of user was
valueless. 334 I.C.C. at 32. The bondholders' claim of value for
the right of access, the Commission said, amounted to a demand for
one-half of all of the income free of the Terminal expenses.
Id. at 32 n. 11. On the second round of review, the
reorganization court agreed that the Commission's determinations
must stand with respect to both the liquidation
Page 399 U. S. 446
value of New Haven's interest in the Terminal properties and its
right of free access into the station. [
Footnote 63]
Many aspects of the controversy over the Grand Central Terminal
properties have now dropped from contention. [
Footnote 64] The bondholders no longer claim
that New Haven is entitled to one-half the value of the fee. Penn
Central no longer claims that its fee ownership of the properties
reduced New Haven's status to that of a mere grantee retaining only
the privilege of entry into the Terminal. All parties accept New
Haven's right to the capitalized value of one-half the excess
income. [
Footnote 65]
What
Page 399 U. S. 447
remains is the claim of the bondholders that New Haven is
entitled to the capitalized value of its share not only of the
excess income remaining after satisfaction of the Terminal
expenses, but of the basic income meeting the expenses themselves.
Yet the central finding of the reorganization court remains
unrefuted: that, by force of the agreements between New York
Central and New Haven, the Terminal income was first to be devoted
to meeting Terminal expenses; only then was the residue to become
available for distribution to the two railroads. To be sure, the
parties customarily referred to their respective shares of the
Terminal revenues. But the Special Master found that the Terminal
revenues were allocated to Central and New Haven on their
respective car-use bases as an accounting convenience. The car-use
formula established by the 1907 agreement
"resulted, for accounting purposes, in the corresponding
proportion of the revenue entering the Terminal Account being
treated as the property of each railroad, and in each
Page 399 U. S. 448
railroad's being relieved
pro tanto from the amount of
its liability to meet the charges. . . ."
The bondholders argue that the basic income of the Terminal
could somehow be "freed up" from the obligation to meet Terminal
expenses. But the Special Master considered and rejected that
theory.
"Both parties . . . committed themselves to pouring these
revenues from the entire Grand Central complex into the Terminal
Account under paragraph 14 of the Agreement of 1907. The revenues
were to enter that account, and were to be expended, superior to
the individual interests of each railroad, by being applied on
payment of the fixed charges and expenses of operation and
maintenance of the Terminal. Those revenues were pledged to that
purpose regardless of whether New Haven utilized one percent or
fifty percent of the Terminal's passenger facilities or whether it
used any of those facilities at all. It was not contemplated that,
if either railroad discontinued passenger trains into Grand
Central, the other would be saddled with the entire expense of a
terminal larger than either railroad needed without being credited
with these entire revenues from the Grand Central Terminal
properties to the extent that they were required to meet
expenditures. . . ."
Nevertheless, Chase Manhattan argues that the commitment of
revenues is merely a creature of the agreement between Central and
New Haven as construed by the Special Master, and that the transfer
of New Haven's Terminal interests on December 31, 1968 "wiped out"
that agreement. "The agreement thereafter was no longer in
existence," says Chase,
"and Penn Central now has this [basic] income (both the former
New York Central's share and the former New Haven's share) free and
clear of any restriction against its use in any way
Page 399 U. S. 449
Penn Central sees fit."
Stated in this fashion, the argument is self-defeating: since
New Haven's right to the basic income derives solely from its
agreement with Central, a "wiping out" of that agreement
necessarily leaves New Haven without the right, as well as without
the obligation. But, more importantly, it simply is not true that
Penn Central now has New Haven's former share in such income
without "any restriction of any kind. . . ." Penn Central also has
New Haven's loss operations into and out of the Terminal, and it
must meet the expenses occasioned by those operations from some
source. Since, by definition, New Haven's share of the basic income
was, as an accounting matter, equal to its share of the Terminal
expenses, by its 1968 transfer, it has merely surrendered an amount
equal to its gain: it has given up its share of the income pledged
to the costs of operations at the Terminal, but it has relieved
itself of the obligation to meet those costs. By the same token,
Penn Central has gained New Haven's share of income, but with the
matching loss of New Haven's expenses.
The bondholders' argument must be that, entirely apart from the
contractual arrangements with Central, New Haven had a valuable
right of free access into the Terminal, which Penn Central has now
taken over with no compensating payment in exchange. This argument,
too, is without merit. It is a misnomer to describe New Haven's
right of access to the Terminal as "free." New Haven had a right of
entry, rather than a privilege, in the sense that it had access,
independently of the consent of the fee owner of the tracks, by
force of legislative edict. But the right bestowed by the
legislature was conditioned "upon such terms. . . as [have] been or
may hereafter be agreed upon by and between" New Haven and
Central's predecessor. N.Y.Sess.Laws of 1848, c. 143, § 6. Thus,
the New Haven right of access has never been free from the
obligations imposed by the agreements with Central.
Page 399 U. S. 450
But, even if the access right were "free" in the sense that it
could survive elimination of New Haven's agreements with Central,
we agree with the reorganization court that the Commission
correctly concluded it would have no value. And that is the case
whether the right is deemed transferred to Penn Central, as in
fact, it was, on the date of inclusion, or whether, consistent with
the liquidation hypothesis on which the parties valued New Haven's
other assets, it is deemed to have been offered for sale to a third
party upon New Haven's cessation of operations. In the former
event, the analysis pertinent to New Haven's contract rights
applies with equal force. Penn Central has, in fact, succeeded to
New Haven's right of access, but it has also succeeded to New
Haven's deficit operations. Conversely, New Haven has given up a
right of entry in exchange for relief from the obligation to
provide train service at the station. Indeed, to the extent that
the expenses generated by New Haven's use of the Terminal exceeded
the revenues attributable to that activity, Penn Central has lost,
and New Haven gained, on their exchange. [
Footnote 66]
The same result is reached if New Haven is deemed to have gone
into liquidation. For the bondholders have never shown that anyone
would pay a penny for the right to carry on New Haven's
deficit-ridden Terminal operation. If nobody would pay a
liquidating New Haven for the right to lose money, the right is,
again,
Page 399 U. S. 451
worthless. The Commission found that the only potential buyer
would be the State of New York, moving to preserve the commuter
service in the public interest. 334 I.C.C. at 32. Whether the State
would have to pay Penn Central for the use of Penn Central's tracks
and its share of Terminal expenses is not before us. On the
liquidation hypothesis, the State would not have to pay Penn
Central for New Haven's right of access, for Penn Central would not
own it. And the State's paying New Haven depends on at least four
independent contingencies: whether New Haven's right of access
would survive liquidation; whether the right would exclude the
power of Central to bestow a similar access right on a third party
while New Haven's own went unused; whether, under the agreement
with Central, the right would be capable of assignment, and whether
the State, if required to pay New Haven anything to enter the
Terminal, would choose, instead, to operate the commuter trains
only to subway connections in the Bronx, rather than all the way
into Manhattan. We agree with the Commission and the reorganization
court that these imponderables render the value of New Haven's
right of access so speculative as to defy reasoned attribution of
any value to it.
2.
The Bronx freight yards. One of New Haven's
principal real estate holdings consisted of two freight yards
located on some 160 acres in the south Bronx, New York, between the
East River, on the one side, and the Major Deegan Expressway and
Bruckner Boulevard, on the other. The Harlem River yard occupies
nearly 4,000,000 square feet across the East River from Manhattan
and Queens; it has been described by a qualified appraiser as "a
unique industrial facility that could be well used by any heavy
industrial concern." About a mile north of the Harlem River yard,
and connected to it by the existing trackage of New Haven's Harlem
Division
Page 399 U. S. 452
line, lies the Oak Point yard, characterized by the appraiser as
"one of the most desirable industrial facilities in New York
City."
Two other facilities in the area are worthy of note. The first
is the Hunts Point Market, located northeast of the Oak Point yard.
The market is a $100,000,000 municipal installation, and the
central distribution area for the wholesaling of produce for the
New York City metropolitan area. It lies on the promontory flanked
by the Bronx and East Rivers, and is connected to the New Haven's
Harlem Division line through a spur track owned by the city. The
market is the largest receiver of rail traffic in the area, and
plans are under way for further expansion. Fourth Supplemental
Report, 334 I.C.C. at 434. The second facility is the former Port
Morris yard of Penn Central, situated midway between the Harlem
River and Oak Point yards and lying athwart the Harlem Division
trackage that connects the two New Haven yards. Port Morris is
linked by a branch line to Penn Central's Harlem Branch division, a
principal element in the Penn Central System. An interchange track
runs from the Port Morris branch line to the border of the Oak
Point yard.
Before the Commission, the parties submitted five different
estimates of the value of the Harlem River and Oak Point yards. The
bondholders offered the testimony of an appraiser who thought the
land would bring $32,000,000 for residential use and $26,000,000
for industrial use; the New Haven trustees offered the testimony of
another appraiser who submitted two studies showing $22,650,000 and
$18,090,990, both for industrial use, and Penn Central, that of a
third appraiser who set the value, again for industrial use, at
$15,585,000. In its Second Supplemental Report the Commission
accepted the lower of the values proposed by the trustees' witness
-- $18,090,990. 331 I.C.C. at 668.
Page 399 U. S. 453
On the first round of judicial review, the reorganization court
thought that, on the present record, "there was substantial
evidence to support the Commission's valuation, and not enough to
show that it was unfair or inequitable," but concluded that a
clarification of the basis of the Commission's valuation was
desirable. 289 F. Supp. at 464. On the remand, controversy centered
on the alternative appraisals offered by the trustees' witness. It
soon became evident that, in valuing the freight yards, the
Commission had pursued the liquidation hypothesis with a vengeance.
The higher appraisal of the trustees' witness had rested on the
premise that, upon cessation of New Haven operations, the Bronx
yards would be available for continued industrial occupancy, with
existing trackage and electrical facilities left in place. The
presence of such facilities commanded at least a 10% premium in
Bronx realty values. The witness' second appraisal had assumed
that, upon liquidation, New Haven would strip the yards of these
facilities, thereby depressing the value of the land and incurring
substantial costs of removal. 334 I.C.C. at 42. Adoption of that
assumption resulted in the loss of over $4,000,000 in value.
[
Footnote 67]
Page 399 U. S. 454
In its Fourth Supplemental Report, the Commission adhered to its
acceptance of the lower of the witness' two estimates, reiterating
its reliance upon the liquidation premise. That premise justified
the assumption that New Haven would dismantle the yards once the
rest of the railroad was scrapped, since, with no link to Penn
Central, the yards would have no value either as operating
facilities or for industrial use with railroad connections.
But the fact of the matter was that, even on the liquidation
hypothesis, the New Haven yards did not lack rail connections to
Penn Central. Penn Central already had in place a branch line
running from its Port Morris yard to its Harlem Branch division.
That Port Morris line, along with the interchange track running up
to the border of the Oak Point yard and meeting the New Haven's
line at that point, would have continued in place even upon a
liquidation of New Haven. The trustees' witness acknowledged that,
in arriving at the lower of his two values for the New Haven yards,
he had been unaware of the Penn Central link at Port Morris.
Nevertheless, the Commission attributed no significance to the
witness' unawareness of the Port Morris connection, because it
concluded that, even with the existing link to the New Haven yards,
it was "extremely doubtful" that Penn Central would continue to
provide service into the area after a New Haven liquidation. Once
New Haven vanished, the Commission reasoned, Penn Central would be
under no legal obligation to perform switching service beyond its
own Port Morris line or to extend its line into the former New
Haven yards. And the Commission accepted the testimony of a Penn
Central witness that the company would have no economic incentive
to provide service, because of the unprofitability of the
perishable freight destined for the Hunts Point Market, as well as
the absence of necessary track clearances and yard classifying
facilities. 334 I.C.C. at 445.
Page 399 U. S. 455
On the second round of review, the reorganization court ruled
that the Commission had erred in rejecting the higher of the
witness' two appraisals. "It is undisputed that the Port Morris
branch was and is there and operating, and Penn Central has not
been authorized to abandon it." 304 F. Supp. at 807. The court
overruled the Commission's determination that Penn Central would
cease to provide service not only to the industrial enterprises in
the 160-acre area of the two yards, but to the Hunts Point Market
as well.
"The great bulk of produce for feeding of the millions of
residents of metropolitan New York is brought in by rail through
these yards to this market and distribution point. To assume that
the State and City of New York would stand idly by and permit the
life line to its huge and costly enterprise to be cut, just as it
is in the midst of planning its necessary enlargement, because it
was unwilling or unable effectively to bring pressures to bear or
take steps on its own to preserve the connection with Penn Central
is absurd. . . ."
304 F. Supp. at 807-808.
The ruling of the reorganization court is, at the least, free
from the error that would require us to overturn its judgment on
this matter. As the Commission's own report makes evident, the
agency based its startling conclusion that Penn Central could deny
service to the area not on the facts of record, but in adherence to
the untenable assumption that, on liquidation, New Haven would have
uprooted the valuable trackage and electrical facilities already in
place. According to the Commission,
"[t]he record does not support any finding of substantial need
for Penn Central service that would justify the construction by
that carrier of the trackage necessary to connect Harlem River and
Oak Point yards
Page 399 U. S. 456
and the latter yard and Hunts Point,
if N[ew] H[aven] were
to be liquidated."
334 I.C.C. at 47. (Emphasis supplied.) Of course, we may assume
that Penn Central could not be forced to buy land and build track
to provide service into areas, noncontiguous to its rail system, to
which it did not hold itself out as a common carrier. But it is a
far cry from that proposition to the statement that a common
carrier could deny service to industrial and public activities
simply because ownership of adjoining trackage had changed hands.
[
Footnote 68] The record
facts are that the trackage the Commission said Penn Central would
have to construct is already in place, connecting the two yards and
the market. [
Footnote 69]
The Commission nonetheless continued to presuppose the removal of
the New Haven's rail facilities. "On this record," the Commission
reiterated,
"
and the assumption of N[ew] H[aven]'s liquidation and the
dismantling of its system, Penn Central would not serve, and
could not be compelled to serve, the Harlem River or Oak Point
industries, or the Hunts Point Market."
334 I.C.C. at 47. (Emphasis supplied.) There is not a shred of
record evidence to support the Commission's assumption as applied
to the New Haven yards. It is not rational
Page 399 U. S. 457
to suppose that the managers of the hypothetical liquidation
sale, devoted to obtaining the highest possible price for the
assets of the debtor, would have ignored the best use of the yard
facilities and stripped them of more than $4,000,000 in value.
[
Footnote 70]
3.
The added deductions. On the remand, the Commission
recalculated the liquidation value of the New Haven, as directed by
the reorganization court, and arrived at a new sum of $162,700,000.
"A property value of this sort inheres in the assets," the
Commission said,
"if we assume that the railroad may immediately shut down and
begin a 6-year program of selling off the road parcel-by-parcel,
and virtually tie-by-tie."
334 I.C.C. at 53. But the Commission declined to approve the new
figure as the proper liquidation value of the debtor.
"The liquidation value that results in this reopened proceeding
exceeds the agreed price [of $125,000,000], obliging us to make a
new determination
Page 399 U. S. 458
as to whether the price resulting from such a valuation is
fair."
"The establishment of liquidation value as a pricing floor on
this record must assume that the N[ew] H[aven] may be shut down at
once and be liquidated in parcels. Such a pricing theory assumes
that the public may be denied an opportunity to be heard. It is
wholly inconsistent with the requirement we have imposed on Penn
Central to absorb the N[ew] H[aven], which requirement rests
entirely upon the public's need for a continuing N[ew] H[aven]. Any
assumption that N[ew] H[aven] may be shut down and broken up must
necessarily permit the conclusion that Penn Central may be relieved
of its inclusion obligation. It is inequitable to conceive at the
same time both a right in the bondholders to break up the N[ew]
H[aven] and an obligation on Penn Central to keep it going. The
demands of equity are no more satisfied by conceiving that the
bondholders have a constitutional right to shut down the N[ew]
H[aven] which is superior to the public's right to keep it
going."
"The foregoing liquidation value assumes that this Commission
has no function under the Interstate Commerce Act to decide whether
public convenience and necessity permit the abandonment of N[ew]
H[aven]'s entire line or portions of it. In view of our often
repeated findings that there is a public need for the services of
this railroad, there is no warrant for assuming that the creditors
may now break up the railroad or devote the properties to another
use. The estate is not relieved of its obligation to serve the
public. A price that is premised on outright rejection of that
obligation is inequitable,
Page 399 U. S. 459
and awards the estate a windfall that is not supported by any
record evidence."
334 I.C.C. at 54-55.
On the basis of this reasoning, the Commission then proceeded to
take into account "other pricing considerations" -- costs of
liquidation it had not reached in its earlier report because of its
conclusion that the $125,000,000 price arrived at by the parties
was proper under the Interstate Commerce and Bankruptcy Acts.
"The alleged right to liquidation values derives from an alleged
right to abandon, and there are recognized limitations on the right
to abandon that, in themselves, limit the creditors' entitlement to
the liquidation value we have computed under the court's
instructions. Under section 1(18) of the Interstate Commerce Act,
the Commission is empowered to impose reasonable limitations on the
abandonment right."
334 I.C.C. at 57.
The Commission's new "pricing considerations" consisted of two
elements: a one-year delay the New Haven would have incurred in
securing the approval of the Commission and the courts to abandon
train operations and a bulk-sale discount that a purchaser of all
the debtor's assets, to whom the Commission could order the road to
sell, would have commanded. Together, the added deductions amounted
to $22,081,000.
(a)
The one-year delay. The Commission found that an
application for a certificate of abandonment, as required by §
1(18) of the Interstate Commerce Act, would have precipitated a
lengthy process of administrative action and judicial review
resulting in at least a one-year delay in the commencement of
actual liquidation operations. The Commission assumed that the
year's delay would have occasioned a freeze on liquidation
activity, following which the sell-off would have proceeded
Page 399 U. S. 460
as projected in the Second Supplemental Report. The abandonment
delay, the Commission found, would have added costs of $4,940,000
in preserving the assets of the estate, $2,500,000 in real estate
taxes, and $7,946,000 in a discount of the sale receipts back to
present worth.
On review, the reorganization court rejected the delay concept,
ruling that the added deduction violated the liquidation hypothesis
upon which the debtor's assets had been valued. Neither the parties
nor the Commission had previously postulated the deduction now
imposed, because the liquidation hypothesis itself had presupposed
a lawful abandonment of service. 304 F. Supp. at 798. That
presupposition was rooted in the hard fact that, for more than
three years prior to December 31, 1966, the New Haven had been kept
alive, despite its hopeless financial condition, solely in the name
of the public interest and in anticipation of inclusion in Penn
Central.
"By late 1963, it was clear to the Trustees of the New Haven and
to the Reorganization Court that only two courses were open: the
Trustees must press to accomplish the inclusion in a Penn Central
merger or they must press for liquidation. The former was obviously
in the public interest, and the latter was not. The course of
inclusion was followed; but, because the merger and the
reorganization proceedings stretched out far beyond what was
originally forecast, the 'interim' became seven and a half years,
and 'losses reasonably incident to working out the solution most
consistent with the public interest' eroded the debtor's estate in
excess of $60 million."
"
* * * *"
"Like Laban of old, the Commission would now require further
servitude of the debtor -- in this case, the creditors. But the
duty of the debtor's creditors to suffer losses for an interim
period has already
Page 399 U. S. 461
been fulfilled, and the public interest has already been served
to the extent that, in fairness and equity, the public had any
right to demand."
304 F. Supp. at 800. (Footnote omitted.)
The Commission and Penn Central take issue with the
reorganization court's disallowance of the deduction for delay. The
dispute between them and the bondholders is not, however, broad in
concept. It does not draw into question the right of the Commission
to insist that New Haven obtain permission to abandon its
operations: no one here quarrels with the proposition that, in the
event of a liquidation, New Haven would have been obliged to obtain
a certificate from the Commission pursuant to § 1(18) of the
Interstate Commerce Act. The parties agree that, since a delay
occasioned by abandonment proceedings before the Commission,
followed by judicial review, inheres in the liquidation process,
the Commission may exercise its expertise in gauging the extent and
expense of such a delay, and Penn Central need not pay for the
consequent diminution in the value of the assets of the debtor. The
dispute is, rather, a narrow one. It is simply whether, in the
circumstances of this case, the valuation initially arrived at by
the Commission already presupposed that the debtor had a
certificate of abandonment in hand, so that assignment of a cost
attributable to that factor amounts to an unwarranted double
deduction.
Before this Court, the Commission and Penn Central urge the view
that, until the remand, the Commission had not taken the delay
factor into account. They justify the deduction on the second round
as a development of the governing liquidation hypothesis adopted on
the first. Once we enter the world of a liquidation that
Page 399 U. S. 462
never occurred, they say, the Commission is more competent than
the courts to project incidental costs and delays. On the remand,
the Commission merely refined the liquidation approach to reflect
added expenses not initially considered because of the fairness of
the price arrived at by the parties. The new price ordered by the
courts compelled reexamination of the elements of liquidation, of
which abandonment delay is surely one. And when it comes to
predicting the likelihood of delay in passing on an application for
a certificate of abandonment, the Commission is, as Penn Central
puts it, "a uniquely qualified finder of fact. . . ." [
Footnote 71]
At once, the "refinement" rationale confronts an imposing
obstacle raised by the Commission's own Second Supplemental Report.
That report makes clear that the Commission had the element of
delay before it in making its original valuation, but declined to
apply any deduction on its account. The Commission considered --
and rejected -- Penn Central's request
"that an allowance be made
to the earliest date at which a
liquidation could reasonably be anticipated for the constant
diminution of N[ew] H[aven]'s assets."
331 I.C.C. at 698. (Emphasis supplied.) That rejection
necessarily implied that the Commission had recognized the cost
attributable to the delay occasioned by an abandonment proceeding,
but determined not to weigh it in the balance. Thus, we deal not
with a delay factor brought to light for the first time on the
second round, but with one taken into account
Page 399 U. S. 463
now even though deliberately excluded before. Justification, if
any there be, must begin with the realization that the Commission
changed its mind in mid-stream.
The reorganization court rejected the Commission's conclusion
that the valuation date selected in the Second Supplemental Report
-- December 31, 1966 -- represented the date on which New Haven
would have sought a certificate of abandonment, rather than the
date on which the railroad would have commenced its six-year sale.
In doing so, the court relied on more than the Commission's shift
in position between its second and fourth reports. The court rested
on its express finding of fact that, "but for the adoption by the
Trustees of a course to serve the public interest, abandonment
proceedings could and would have been commenced in late 1963, and
liquidation would have been started, certainly by the valuation
date of December 31, 1966." 304 F. Supp. at 801. That finding comes
to us from the federal judge who has presided over the second New
Haven reorganization since its inception. "In view of the district
judge's familiarity with the reorganization, this finding has
especial weight with us."
Reconstruction Finance Corp. v.
Denver & R. G. W. R. Co., 328 U.
S. 495,
328 U. S. 533.
Not only are we unable to say the finding is erroneous; we do not
see how the record of these proceedings permits any other
conclusion.
Indeed, the Commission and Penn Central do not challenge that
conclusion. Instead, they seek support for the delay deduction by
urging that, if confronted with an abandonment application, the
Commission would have had to
"hear the communities that would be affected by the abandonment.
If there is hope of a public takeover of segments, we must allow
time for the States and communities to present their plans."
334 I.C.C. at 58.
Page 399 U. S. 464
But, apart from the fact that this Court itself once
characterized the notion that the affected States or the Federal
Government might take over the road and its operations as "sheer
speculation,"
Penn Central Merger Cases, 389 U.S. at
389 U. S. 507,
the reorganization court specifically rejected the Commission's
argument.
"During seven and one-half years, the Federal government, the
states, the communities and the public in general were fully
informed by the Trustees of the Railroad as to the inability of the
New Haven to survive as an independent railroad. And, apart from
seeking inclusion in a merged Penn Central, the Trustees were
engaging in a holding operation to afford the public bodies, as the
real guardians of the public interest, the opportunity to act -- to
take over or adopt measures to preserve the New Haven
transportation system. Response to this was partial tax assistance
and, in the latter half of the period, grants which covered about
l/8 of the annual passenger losses. . . . Otherwise, nothing has
come to the attention of this court to indicate anything more than
a highly speculative prospect that any or all of the states
concerned or their municipalities had the slightest interest in
taking over and operating the New Haven or any segment of it."
"In spite of full awareness of the situation of the bankrupt
line, and with nothing to prevent their doing so, no standby
legislation, for use if inclusion of the New Haven by Penn Central
fell through, was ever enacted or sought to be passed in seven and
one-half years by the Federal Government or by any of the states
for the takeover and operation of the New Haven freight and
passenger system or a segment of it (except for the west-end and
the Boston commuter services); nor was any plan ever
Page 399 U. S. 465
filed by the governmental bodies incorporating such takeover and
operation."
304 F. Supp. at 800-801. [
Footnote 72]
Page 399 U. S. 466
We think the reorganization court was entirely correct in
concluding that:
"The policy of imposing an interim burden of losses, through its
deficit operation, on a railroad in reorganization is to afford a
reasonable opportunity to the responsible agencies to arrange the
continuation of the railroad's operation, but the law does not
require the furnishing of two or three or four opportunities. The
duty was more than amply fulfilled by the New Haven. The public
interest has had one huge bite of the apple; it is not entitled to
another."
304 F. Supp. at 801.
It is argued that the Commission nonetheless should be permitted
to tax New Haven with the cost of a one-year delay because, in
fact, the debtor sought no abandonment certificate from the
Commission. The Commission and Penn Central attribute this failure
to New Haven's self-interest. "The fact is," the Commission
said,
"that both the creditors and the trustees exercised options,
assuming the risks involved therein, and the bondholders may not
now be heard to ascribe to someone else the responsibility for the
selection of their course of action, or inaction."
334 I.C.C. at 58. (Footnote omitted.) But the continued
operation of the New Haven as a railroad depleted the estate by at
least $60,000,000. 304 F. Supp. at 800. We fail to see how the
self-interest of either the estate or its creditors was bettered by
that operation.
Nor is there any substance to the contention that, by failing to
press for immediate liquidation of the debtor, the bondholders
somehow waived their right to object to the imposition of the
deduction for delay. The record that shows the preservation of New
Haven in the public interest long after it had ceased to be viable
as an independent enterprise demonstrates, at the most, that the
bondholders had resigned themselves to bearing the costs
Page 399 U. S. 467
of interim operations pending inclusion in Penn Central. It
contains no support for the proposition that they consented to the
imposition of more than $1,5,000,000 in
hypothetical costs
on top of the tens of millions in
actual costs they were
forced to bear. As the reorganization court put it, "[S]uch a
second round of loss, superimposed on the first, like Pelion on
Ossa, is as unfair and inequitable as can be imagined. . . ." 304
F. Supp. at 801. It cannot be sustained under any construction of
the Bankruptcy Act. [
Footnote
73]
Page 399 U. S. 468
(b)
The bulk-sale discount. New Haven's land holdings
consisted of over 25,000 acres located along its rights-of-way in
four States. In its Second Supplemental Report, the Commission
accepted the New Haven trustees' appraisal of the realty. The New
Haven analysis was prepared by the company's general real estate
agent, who relied in some instances on the studies of outside
appraisers. The agent drew on a fund of actual experience, for the
New Haven had long had a real estate department engaged in the
disposition of nonoperating properties. From the inception of the
New Haven trusteeship through November, 1966, that department had
completed 853 separate realty sales for a gross consideration of
some $13,00,000. The Commission found that the large volume of past
sales provided a "firm base" for the New Haven estimate. 331 I.C.C.
at 667. The New Haven agent assumed that the company would sell off
its lots in normal-sized parcels. He gave specific consideration to
each part of the railroad's property, and reached his values on a
zone-by-zone basis. He based his estimates of fair market value on
his expert judgment, sales in the area, existing tax valuations,
and the adaptability of the land to nonrailroad use. He discounted
by 50% whenever the New Haven's records indicated questionable
title; on the six-year liquidation
Page 399 U. S. 469
hypothesis, he deducted $15,971,000 as the cost of operating the
New Haven realty department, and, on the further assumption that
the debtor would have to sell some of the property during the final
year at vastly reduced prices, he made a further deduction of
$8,178,000.
On the remand, the Commission ordered a further deduction from
the liquidation value of the estate based on a hypothetical sale in
bulk of all the New Haven's land assets.
"The liquidation value urged by the creditors assumes not only
the immediate right to abandon, . . . but also the right to break
up the railroad and sell the parcels for their highest and best
price. We think such a right may be restricted when a buyer for the
entire bulk of the N[ew] H[aven] properties appears who will
continue the operation of needed services."
334 I.C.C. at 60. (Footnote omitted.) The Commission calculated
the deduction on the premise that "[t]he bulk-sale discount merely
reflects a market appraisal of the risks that the estate avoids,
and the bulk buyer assumes."
Id. at 61. The Commission
then credited the evidence that Penn Central had presented through
a realty expert with respect to a bulk sale of the New Haven land
properties. The expert testified to the premium to be charged by
a
"single purchaser of property who would, in turn, sell off the
property, probably to many users, and who would obtain his profit
by reason of its purchase and resale."
On the basis of this testimony, the Commission found that a bulk
buyer would command at least a 10.5% return on his investment,
calculated as the sum of a 75% borrowing at 9% and a 25%
self-financing at an internal charge of 15%, and that such an
investment rate required an additional 4.5% discount of the New
Haven land values over and above the 6% by which they had already
been
Page 399 U. S. 470
reduced. This bulk-sale discount resulted in a further
diminution of $6,695,000 in the valuation of the New Haven assets.
334 I.C.C. at 6142.
On the second round of review, the reorganization court rejected
the bulk-sale deduction as "improper and without support in law or
reason." 304 F. Supp. at 805.
"Value, under the circumstances of this case, can only be
arrived at through the dismantling of the transportation plant and
a piece by piece sale of the properties. It is clear from the
record that a market existed for the disposition of the properties
on this basis. Their value is the best price the market place will
give the seller, less the costs and expenses relevant to the sale.
. . . It makes no difference whether the purchaser wants to use the
property as is or to improve and develop it. The question is how
much will the market place give for a particular item of
property."
Ibid. The court answered the argument that the discount
merely reflected the risk of nonsale that the seller transferred to
the bulk buyer by pointing to the Commission's prior deduction of
over $8,000,000 for that purpose. Moreover, the deduction violated
the requirement that the sale price meet the "fair upset" minimum
imposed by § 77(b)(5) of the Bankruptcy Act.
"That lowest price is what the market would pay, which is
implicit in the standard used here,
i.e., fair liquidation
value. Neither a trustee nor an equity receiver could, with the
court's approval, sell for less."
304 F. Supp. at 806.
Penn Central now protests that the reorganization court has
erred in rejecting the bulk-sale discount. It says its expert
witness duplicated no discounts previously taken; he proceeded on
the basis of all previous deductions. In addition, it is argued,
his analysis took into account the problem of market absorption
caused by the
Page 399 U. S. 471
mass marketing of some 1,700 sale parcels and the risk of
further depression of land values occasioned by cessation of New
Haven's operations -- factors not considered by New Haven's
witness. The hypothetical bulk sale, Penn Central says, was merely
a construct for quantifying the risks that New Haven itself would
have assumed in undertaking the sale of its realty; it afforded a
means to determine "the minimum rates of return necessary to
attract capital to the business of owning and disposing of the New
Haven's land." Penn Central insists that the bulk-sale analysis
thus constituted a "pricing out" of an additional cost of
liquidation; it was "simply an analytical device for approximating
risks that would occur if the land were retailed over time as
promptly as possible. . . ."
We may assume that Penn Central's "pricing out" theory is a
rational one. But the record demonstrates that the Commission
rejected it as insufficient to justify application of the bulk-sale
theory. Penn Central's analysis, said the Commission,
"overlooks what is necessarily the bondholders' position --
namely that, aside from principles of equity and fairness, they
have a fixed right to sell off N[ew] H[aven] in parcels, so that
even a bulk buyer must pay the per-parcel price. Our answer is that
we may compel the bulk sale and the bulk sale discount as a
condition of an abandonment certificate, and, therefore, as a
reduction of the present price."
". . . We . . . might compel N[ew] H[aven], if it filed for
abandonment, to sell in bulk, and thereby make a bulk sale price
appropriate."
334 I.C.C. at 61. The Commission thus ruled that only by
assuming an actual buyer in bulk who would take over the New Haven
properties for continued railroad operations could it compel the
transfer of the real property at the reduced
Page 399 U. S. 472
price. Far from setting forth a theory of compulsory transfer
"completely independent" of a "pricing out" analysis, the
Commission 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.
We do not consider whether the Commission could lawfully impose
such a bulk-transfer obligation on a railroad in liquidation at the
cost of reducing the per-parcel valuation of its assets. [
Footnote 74] For the record before
us is devoid of evidence that a bulk buyer would agree to take over
the New Haven properties for continued service at any price. When a
railroad has a lengthy history of deficit operations with no
prospect of improvement, and a consequent operating value of zero
or even a negative figure, the Commission cannot rationally assume
that a
deus ex machina will emerge to spend millions for
the opportunity to lose millions more.
Penn Central's witness gave no testimony in support of any such
theory. He was a professional developer of real estate, not a
railroad operator. And he testified to what extra charges he would
levy, after all previous deductions for the costs and risks of
sale, to assume the risk of nonsale as well as the entrepreneurial
activity of retailing the realty parcels. His testimony established
nothing more than that he would not undertake the task
Page 399 U. S. 473
of per-parcel sales that New Haven had assumed unless the
company paid him a handsome fee. The Commission could hardly have
compelled the New Haven trustees to turn over the assets of the
debtor to such an entrepreneur, who would, on his own testimony,
have proceeded himself to do just what the Commission said it was
empowered to forbid the bondholders to do -- dismantle the estate,
rid himself of railroad-connected assets, and devote his talents to
the disposition of the realty.
4.
The discount of liquidation factors. In its Second
Supplemental Report, the Commission accepted the projection offered
by the New Haven trustees that they could substantially complete a
liquidation sale in six years. 331 I.C.C. at 663. Accordingly, the
Commission discounted the estimated receipts of sale over the
six-year period to reflect their present value -- a deduction of
$17,563,000.
Id. at 661. It did not, however, discount the
estimated expenses of liquidation, although these, too, were
projected to occur over the six-year period. The reorganization
court was of the view that, if future receipts were to be
discounted to present value, future expenses should likewise be.
289 F. Supp. at 461;
cf. id. at 427-428. On the remand,
the Commission concurred. It noted that the parties were very close
in their estimates of the proper discount, and it concluded that
$3,800,000 represented the correct figure. Fourth Supplemental
Report, 334 I.C.C. at 39-40.
On the second round of review, the reorganization court observed
that, despite three valuation changes netting a $6,600,000
reduction in estimated worth, the Commission had failed to adjust
the old, inapplicable discount figure. Accordingly, the court
directed the Commission to file
"a new formulation and computation of the discount for present
value of the New Haven's liquidation proceeds, in accordance with
generally recognized
Page 399 U. S. 474
accounting principles and based upon the changes made in
valuation items through and including those stated in the present
opinion."
304 F. Supp. at 810-811. The court added that the Commission
could submit its new formulation and computation in the form of a
letter or short brief, and afforded other parties in interest one
week to file their comments, as well as any formulations and
computations of their own, also in a letter or brief. In accordance
with this directive of the court, the Commission submitted its new
calculations, and the bondholders replied. In its order adjudging
the price to be paid, the reorganization court ruled that
"[t]he sum of $2,415,899 should be added to liquidation value
inasmuch as it was improperly deducted in applying the discount to
present value found by the Commission. . . ."
304 F. Supp. 1136, 1137.
In its brief before this Court, the Bondholders Committee states
that the reorganization court's directive resulted from the
Commission's continued failure to calculate discounts back to
present value with respect to four items, three of them to the
detriment of New Haven and one to the detriment of Penn Central.
The first is the $8,177,633 deducted as the cost of hypothetical
forced sales of New Haven realty during the last years of the
liquidation. The Commission could have treated the item either as
part of the value of the unsold land and then written it off as a
cost of sale, with a discount back to present value for both sides
of the balance sheet, or as a wash to be eliminated in computing
both receipts and expenses. In fact, the Commission did neither: it
included the figure on both sides of the books, but discounted back
only in the asset column. The result, says the Committee, is an
error of $2,066,488. A similar shortcoming in determining the
liquidation values of road property, such as ties and rails, added
another error of $1,474,057. Third, says the Committee, the
Commission
Page 399 U. S. 475
erroneously spread the sale of certain realty over the full
six-year period when the undisputed evidence showed that New Haven
could sell the land in 12 to 18 months; this resulted in an
overstatement of $118,000 in the discount attributable to the net
proceeds. Finally, the Commission assumed that New Haven could sell
off $47,121,400 in equipment, investments, and materials during the
first year of the liquidation, but failed to spread the assumed
receipts over the entirety of that year, with a consequent
understatement of $1,372,646 in the applicable discount. A netting
of the four items, together with an added correction of $130,000
made by the Commission, results in the $2,415,899 adjustment
ordered by the reorganization court.
The Commission does not dispute that it made the errors as
alleged by the Committee. Its sole reply is that the bondholders
have waived their claims in this regard by failing to present them
to the Commission. Penn Central concedes that "the first two errors
asserted by the bondholders represent miscomputations" in Penn
Central's favor. But it argues that the amount of the fourth error
and the existence of the third were the subject of conflicting
testimony before the Commission, and it joins in the Commission's
contention that the bondholders have waived the right to a
resolution in their favor by failing to press a timely objection
before the Commission when the agency first made its alleged
mistakes.
The record demonstrates that the bondholders have the better of
this argument. It is undisputed that both the bondholders and Penn
Central presented witnesses to the Commission on the remand who
agreed that the Commission had erred in its discounts and who
differed only in minor amounts.
See Fourth Supplemental
Report, 334 I.C.C. at 40. But the Commission simply bypassed
the agreement, unpersuaded that it had erred
Page 399 U. S. 476
in its prior opinion.
Id. at n. 17. The bondholders
then carried the persistent discounting error to the reorganization
court on the second round, and won corrective relief. The
submission of proposed adjustments by way of a letter was not, as
is suggested, an untimely filing of claims, but a proper
presentation pursuant to the instruction of the court -- an
instruction made necessary by the Commission's failure to
straighten out the discounts after two rounds of hearings and
reports, with errors that the bondholders, on one side, and Penn
Central, on the other, now frankly concede aggregate over
$5,000,000. Of the four items advanced by the Committee, only the
third is subject to any real doubt, and that $118,000 item can
hardly be considered a substantial sum in the context of these
cases. A further remand to the Commission to resolve the accuracy
of such a figure would serve no useful purpose at this stage of the
litigation. The reorganization court resolved the controversy in
favor of the bondholders following extensive oral argument on the
issue. We affirm its judgment on these issues as free from that
degree of error that would require us to overturn its finding.
5.
The loan-loss formula. In its Second Supplemental
Report, the Commission, projecting a three-year interim period
between merger and inclusion and, concluding that a short-term
lease would not be appropriate, required Penn Central to extend
$25,000,000 in loans to the New Haven in exchange for first
priority trustees' certificates. 331 I.C.C. at 702-706. [
Footnote 75] In addition, it ordered
Penn Central to share in New Haven's operating losses to the extent
of 100% in the first year, 50% in the second,
Page 399 U. S. 477
and 25% in the third, not to exceed $5,500,000 in any one year.
Id. at 718-719. On the first round of judicial review, the
sliding-scale aspect of the formula was disapproved as an improper
deterrent to the bondholders' assertion of their legal rights, 289
F. Supp. at 444, pursuant to the suggestion of MR. JUSTICE DOUGLAS
at an earlier stage of the proceedings,
see Penn Central Merger
Cases, 389 U.S. at
389 U. S.
557-558 (separate opinion), and, on the remand, the
Commission abandoned it. 334 I.C.C. at 71-72.
The $5,500,000 annual ceiling derived from the assumption, based
on calculations provided by the New Haven trustees and accepted by
the Commission, that, despite the massive cash drain in 1967,
future annual New Haven operating losses would be unlikely to
exceed $5,400,000 in succeeding years. 331 I.C.C. at 718-719.
Coupled with the sliding-scale formula, the annual ceiling thus
proposed that Penn Central absorb the entirety of New Haven's 1968
cash loss. On the first round, the reorganization court expressed
the opinion that, even with the abrogation of the sliding scale,
Penn Central's share of that loss "should be a substantial
percentage." 289 F. Supp. at 464.
By the time the parties returned to the Commission on the
remand, it was evident that the trustees' appraisal of their
ability to contain the New Haven's deficits had been far too
optimistic. From February through December, 1968, the trustees had
already drawn down $14,000,000 of the $25,000,000 loan that was
supposed to last for three years; at that rate, they would exhaust
the loan in another six or seven months. 334 I.C.C. at 72. The cash
loss was equally grim: the projected 1968 cash deficit stood at
$15,672,000, with an estimated operating deficit of $8,200,000.
Despite the $2,800,000 increase in the operating deficit over the
trustees' initial prediction, the Commission adhered to its
original ceiling and, prorating
Page 399 U. S. 478
over the 11-month period from merger to inclusion, required Penn
Central to pay $5,000,000. 334 I.C.C. at 74. On the second round of
review, the reorganization court affirmed without discussion.
The bondholders now urge that Penn Central be required to bear
the entire operating loss from merger to inclusion. New Haven
incurred that loss as an independent entity, say the bondholders,
only because it remained outside of Penn Central after the merger,
at Penn Central's request and for Penn Central's convenience. It is
urged that the Commission's ceiling was originally calculated to
place the entire loss of the first year on Penn Central, and that
the original intention should be carried out. [
Footnote 76]
Penn Central denies responsibility for the fact that inclusion
took place some 11 months after merger, rather than along with it,
and puts the blame at the door of the bondholders for their
litigious insistence upon working out the terms of inclusion prior
to the event. It also notes that it has been obliged to take over
New Haven less than a year after its own formation, rather than at
a later point in the three-year period originally envisaged by the
Commission.
Page 399 U. S. 479
While the issue is not free from doubt, we cannot say the
reorganization court committed error in letting the Commission's
action stand. Without ascribing fault to any party, we note the
unfairness to the bondholders in requiring them to bear whatever
portion of the operating loss Penn Central does not pay due to the
inability of Penn Central and the trustees to negotiate an interim
lease. On the other hand, there is a countervailing unfairness to
Penn Central in requiring it to bear the full burden of New Haven's
losses while it lacked exclusive and assured control over the
operations of the debtor. The $5,000,000 paid by Penn Central is no
drop in the bucket; it amounts to 61% of the operating loss as
figured by the Commission, and nearly one-third of the entire cash
loss for the interim period. In no sense did Penn Central's
contribution represent a payment for assets received; on the
liquidation hypothesis, the Commission could rationally have
declined to require any payment at all. Chase Manhattan argues
that
"[e]ither there was no equitable obligation on the part of Penn
Central to pay any of the New Haven loss during the period from the
date of the Penn Central merger to the date of its acquisition of
the New Haven assets, or there was an obligation to pay the entire
loss."
We cannot agree that the Commission was obliged to adopt such an
all-or-nothing approach. Under the circumstances, the Commission's
final disposition represents a pragmatic compromise of the
competing interests, and, in the absence of a controlling contrary
principle of law, we do not disturb the reorganization court's
acceptance of the Commission's judgment.
6.
New Haven investments. The Bondholders Committee
complains that New Haven has transferred its stock ownership in two
concerns -- the New York Connecting Railroad and the Railway
Express Agency -- with no value given in exchange. The Connecting
Railroad
Page 399 U. S. 480
was owned jointly by New Haven and Penn Central on a 50-50
basis,
Fourth Supplemental Report, 334 I.C.C. at 44 n. 20,
and is now presumably a wholly owned subsidiary of the merged
company. REA is owned by various railroads; at the time of
inclusion, New Haven held about 4.5% of the outstanding stock.
In both instances the Commission valued New Haven's investment
interest on the liquidation hypothesis. A witness presented by the
New Haven trustees, whose testimony the Commission accepted, stated
that, because of Connecting Railroad's $18,000,000 funded debt, its
stock would have no liquidation value whatever. As to the REA, he
said that its stock would have little or no value, because, of
pending litigation over a tender offer for the stock, [
Footnote 77] as well as recent
legislation increasing the permissible size and weight of parcel
post packages.
Second Supplemental Report, 331 I.C.C. at
678.
The Bondholders Committee does not attack the Commission's
finding of zero value for the Connecting Railroad and REA stock.
Instead, the Committee says that, if the shares were worthless, the
Commission erred in requiring their transfer to Penn Central. Were
the stock to have had no value on the liquidation of New Haven, the
Committee argues, the reorganization court would, in the absence of
bids for the shares, have ordered their distribution to the
creditors to do with as they pleased. Accordingly, the Committee
calls for the return of the stock to New Haven.
The Committee's request overlooks the fact that, even though the
shares in question might be worthless to a New Haven undergoing
liquidation, the Commission could nonetheless order their transfer
on the ground of their value to an ongoing Penn Central required to
take in New Haven as an operating entity. But, entirely apart
Page 399 U. S. 481
from that consideration, and without pausing to assess the
correctness of the zero valuation placed on the stock, we agree
with Penn Central that the Committee's request for the return of
the stock is foreclosed by
res judicata. For the Committee
-- as well as all the other bondholders -- took no appeal from the
order of the reorganization court directing the transfer of the New
Haven assets subject to a later determination of value. [
Footnote 78]
7.
"Going concern" value. The bondholders urge that
Penn Central should pay an added amount to reflect the "going
concern" value of the New Haven. This sum, it is stressed, would be
calculated not as an alternative to liquidation value, but as a
supplement to it. Since it is universally agreed that the New Haven
was a losing operation in the form in which Penn Central was
obliged to take it over, the bondholders display considerable
temerity in pressing for inclusion of what could prove, in an
ultimate analysis, to be only a substantial negative figure.
[
Footnote 79]
The Commission rejected the notion that the New Haven had a
going concern value over and above the liquidation value of its
physical properties. In the Commission's view, the bondholders'
estimate of $55,075,000 for such intangibles as organizational
costs was premised on the replacement of a defunct railroad and
Page 399 U. S. 482
overlooked the probability that no one would ever have rebuilt
the New Haven in its present form. More fundamentally, the
Commission correctly repudiated the claims based on going concern
value as antithetical to the liquidation hypothesis on which the
appraisal of the New Haven's assets had proceeded. As the
Commission said,
"It is not realistic to assume that a potential buyer would pay
the liquidated value of the N[ew] H[aven] assets and then pay
additional amounts representing elements of going concern value in
the face of N[ew] H[aven]'s past deficit operations and its bleak
prospects for the future."
Second Supplemental Report, 331 I.C.C. at 686-687.
The Bondholders Committee concedes that the intangible assets in
fact acquired by Penn Central "would be worthless to the New Haven
in an assumed liquidation. . . ." That is enough to end the matter.
The bondholders are not entitled to treat the New Haven as a
liquidating enterprise with respect to certain items and as an
operating railroad with respect to others, depending on which
approach happens to yield the higher value. Nothing could be more
unfair or inequitable to Penn Central than to permit the New Haven
bondholders, at its expense, to have the best of both worlds.
[
Footnote 80]
Page 399 U. S. 483
8.
The "underwriting" plan for the Penn Central stock.
Thus, far, we have considered the disputes over the valuation of
the New Haven assets transferred to Penn Central. We now reach the
one issue raised in connection with the consideration given by Penn
Central in exchange. The Purchase Agreement negotiated by
Pennsylvania and New York Central, on the one side, and the New
Haven trustees, on the other, provided that Penn Central should pay
in part for the New Haven properties with 950,000 shares of its
common stock. [
Footnote 81]
As a New Haven trustee stated,
"[O]ne of the principles for which we negotiated at considerable
length was that the bulk of
Page 399 U. S. 484
the consideration should be in the form of common stock or,
failing that, should be debt instruments having either conversion
rights or options which would permit the claimants to the New
Haven's Estate to participate in the benefits of the merger."
In confirming the terms of the agreement, the Commission
accepted the testimony of a New Haven trustee that the value of the
stock could range anywhere from $75 to $100 a share on the date of
closing, and that the average, $87.50, represented his estimate of
market value at the time of inclusion. 331 I.C.C. at 688-689. The
Commission adopted the $87.50 per share value placed on the Penn
Central stock by the trustee as reasonable.
Id. at
689-690.
On the first round of review, the reorganization court agreed
that the $87.50 per share figure represented a fair value for the
Penn Central stock, based on the Commission's calculation of the
estimated future earning power of the new company and the testimony
of the New Haven trustee, "a well qualified expert." The court saw
"no reason why recent fluctuations in the market value of these
shares should change the disposition of the matter. . . ." 289 F.
Supp. at 462.
On the remand, the bondholders challenged the Commission's stock
valuation. The Commission cursorily rejected the attack on the
ground that the bondholders' witness was unfamiliar with Penn
Central's operating and financial plans, gave undue weight to
extraordinary past expenses, and generally neglected the future
prospects of the company. 334 I.C.C. at 68 n. 40.
By the time of the second round of judicial review, inclusion
had taken place and the Penn Central had given its consideration in
exchange. The bondholders, renewing their charge that the
Commission's prophecy had been erroneous, pointed to the actual
market performance of the stock. As of the inclusion date, December
31, 1968, the market price stood at 63 3/8, more than
Page 399 U. S. 485
20 points below the Commission's estimated value. If that date
should be thought suspect because of year-end sell-offs, the
bondholders noted that, throughout 1968, the price had fluctuated
between 53 1/2 and 86 1/2, with a mean price between February 1 and
December 31 of 69 1/2. Thus, the bondholders contended, the primary
component of their bundle of consideration had turned out to be
worth anywhere from $17,000,000 to 23,000,000 less than it was
supposed to be.
On the second round, the reorganization court rejected the
bondholders' contention that the Commission had predicted an $87.50
value as of the closing date.
"[T]he Commission, presumably in an effort to assure fairness to
Penn Central, did not use the market value of December 31, 1966, or
an average of the values at or about December 31, 1968, the actual
date of transfer. Instead, it adopted the theory that, after all,
the purpose of using stock in payment was to tap the expected
future economic benefit of the Penn Central merger which would come
to full fruition seven to ten years after its effective date on
February 1, 1968, but would be reflected in an upward trend of the
stock at the time of closing or transfer of New Haven's assets to
Penn Central, then estimated to be in 1970."
"
* * * *"
"[T]he theory of giving recognition to an intrinsic value in the
shares, which will be realized when the full economic benefits of
the merger have been achieved, not only assists the Penn Central by
relieving it of the need to divest itself of a crippling amount of
cash, which would be prejudicial to its merger program, but affords
the New Haven an opportunity to participate in probable future
profits."
304 F. Supp. at 808-809.
Page 399 U. S. 486
The court nonetheless recognized an element of unfairness to the
New Haven bondholders in that the New Haven was compelled to accept
the stock "at a substantial present loss on an assurance of future
gain." As the court put it,
"The nub of the unfairness and inequity is not the 87 1/2 fixed
for present calculations, but the fact that the purchaser is
getting assets of sure present value, while the seller is asked to
gamble for its payment on the future of the Penn Central."
Id. at 809. The court concluded that this did not
necessitate a change in price or an amendment to the valuations
postulated by the Commission.
"To be fair and equitable, however, it does require a
supplemental provision fulfilling the implicit promise by the
purchaser to pay $83.1 million as part of the price for the assets
conveyed."
Accordingly, the court provided that
"if at any time the market price of Penn Central common shares
reaches and maintains 87 1/2 per share on the New York Stock
Exchange for a period of five consecutive days on which the
Exchange is open and doing business (not counting days on which the
Exchange is closed to trading) between the date of final
consummation of the plan of reorganization and February 1, 1978,
then and in that event it will be conclusively presumed that Penn
Central has, in transferring the shares to the New Haven, made
payment of the $83.1 million of the purchase price represented by
the shares. If, however, the common shares of Penn Central do not
reach and maintain the price as aforesaid, then the value of the
shares will be determined by the average of the means between high
and low prices of Penn Central shares on the New York Stock
Exchange for the 30 business days next preceding February 1, 1978,
on which the Exchange is actually operating and there are
Page 399 U. S. 487
sales of Penn Central shares. Penn Central will forthwith become
liable to pay in cash to the New Haven, or its successor or
successors, the difference between said mean market prices of those
30 days and 87 1/2 for each share. . . ."
304 F. Supp. at 809-810. The court provided that the benefit of
Penn Central's underwriting of any difference between the mean
market price and 87 1/2 would inure only to the New Haven, and
would not follow the shares into the hands of third-party
buyers.
In addition, the court afforded Penn Central the option of
relieving itself of the 1978 underwriting obligation in the
following manner:
"The Penn Central is granted an option, operative between the
date of final consummation of the plan and February 1, 1978, to
discharge its obligation to underwrite and pay the difference
between such average market price and the higher 87 1/2 at the end
of the ten-year period by paying on one or more blocks of 50,000
shares to the New Haven . . . the difference between the mean
market prices for sales of Penn Central common shares and 87 1/2
per share as of a specific day of sales on the Exchange which shall
previously have been designated by Penn Central in a written notice
delivered to the New Haven at least 5 days prior to such market
date."
Id. at 810.
The underwriting plan of the reorganization court thus combined
a series of essential findings and protective features. First, it
ratified the Commission's determination that intrinsic value,
rather than market price, should guide the appraisal of the worth
of the Penn Central common stock; second, it predicted that that
intrinsic value would be reflected in a market price of at
least
Page 399 U. S. 488
$87.50 per share by the time Penn Central fully realized the
benefits of its merger; third, it provided that Penn Central would
secure the New Haven estate against the risk that the market price
of its stock would not reflect that minimum intrinsic value within
the first nine years after inclusion, and fourth, it contemplated
that New Haven would be left free to participate in whatever future
appreciations in value Penn Central's stock might enjoy. In sum,
the reorganization court devised a plan that added to its
assessment of present worth both a reasonable assurance of
realization of such worth and the opportunity of additional gain.
In so doing, the reorganization court in effect determined that
postponement of immediate realization of $87.50 per share was
offset by the possibility of even greater future market price of
the stock, and that the package constituted fair compensation for
the assets transferred to Penn Central.
On the basis of the record before the District Court at the time
of its order, we would have no hesitancy in accepting its findings,
conclusions, and proposed underwriting plan as consistent with the
history of the reorganization proceedings and supported by
substantial evidence. But we cannot avoid the impact of recent
events in assessing the propriety of the decree that that court has
entered.
See United States v. Aluminum Co. of America, 148
F.2d 416, 445. And those events make it possible that this aspect
of the reorganization court's decree may be wholly unrealistic.
The fairness and equity that are the essence of a § 77
proceeding forbid our approval of a payment for the transferred New
Haven properties that may be worth only a fraction of its purported
value. And the same considerations of fairness and equity prevent
imposing on Penn Central the burden of immediate payment in full,
particularly when it is remembered that the New Haven bondholders
have never objected to the receipt
Page 399 U. S. 489
of Penn Central stock in exchange for the New Haven assets.
Accordingly, we set aside the order of the Connecticut District
Court insofar as it determines that an intrinsic value of $87.50
inheres in the Penn Central common stock and implements an
underwriting plan to secure payment of that sum. Further
proceedings before the Commission and the appropriate federal
courts will be necessary to determine the form that Penn Central's
consideration to New Haven should properly take and the status of
the New Haven estate as a shareholder or creditor of Penn
Central.
V
We turn finally to the contention of the bondholders that, quite
apart from the specific items that together go to make up the price
to be paid for the New Haven assets, the plan of reorganization
itself is not only unfair and inequitable under the Bankruptcy Act,
but violates the Fifth Amendment as a taking of property without
just compensation.
The purchase price that the Commission and the reorganization
court have required Penn Central to pay to the New Haven estate is
based upon the liquidation value of the seller's assets, appraised
as of December 31, 1966. That price hypothesizes a shutdown of New
Haven followed by a sell-off of its assets at their highest and
best value. In the circumstances of this case, and for the reasons
we have already set out at length, we agree with the reorganization
court that it would be unfair and inequitable to allow Penn Central
to take the properties for any lesser sum. Moreover, we today
require a reassessment of the consideration that Penn Central is to
give in exchange for those properties. We thereby accord the
bondholders the right to a liquidation and a per-parcel sale that
is theirs by virtue
Page 399 U. S. 490
of their mortgage liens. The Bankruptcy Act does not require
that they be given more. Nor is it necessary to consider the
bondholders' claim that anything less than full liquidation value
would amount to an uncompensated taking in violation of the Fifth
Amendment.
But the Bondholders Committee presses another Fifth Amendment
argument. It points to the Commission's own finding that from the
inception of the New Haven reorganization through 1968 the debtor's
estate had amassed more than $70,000,000 in administrative and
prebankruptcy claims that take priority over the bondholders'
liens.
Fourth Supplemental Report, 334 I.C.C. at 126. The
reorganization court itself noted that
"'losses reasonably incident to working out the solution most
consistent with the public interest' [have] eroded the debtor's
estate in excess of $60 million."
304 F. Supp. at 800. (Footnote omitted.) Although the extent to
which the ongoing deficit operation has impaired the bondholders'
security is unclear, it is undeniable that the continued operation
of the railroad into the late 1960's, together with the legal
uncertainties engendered by the doubtful future of the company,
have greatly depressed the value of the bondholders' interests.
Cf. Penn Central Merger Cases, 389 U.S. at
389 U. S. 509.
[
Footnote 82]
A § 77 reorganization court may not, of course, disregard a
claim that injurious consequences will result to a secured creditor
from the suspension of the right to enforce his lien against the
property of a debtor. That claim, however,
"presents a question addressed not to
Page 399 U. S. 491
the power of the court, but to its discretion -- a matter not
subject to the interference of an appellate court unless such
discretion be improvidently exercised."
Continental Illinois National Bank & Trust Co. v.
Chicago, R.I. & P. R. Co., 294 U.
S. 648,
294 U. S. 677.
Here, the reorganization court recognized its duties under the
Bankruptcy Act and the Constitution. In August, 1968, it ruled as
follows:
"In view of the history of this deficit operation from the time
of the filing of the petition under § 77 and even before, the size
of the losses, the long period of time necessarily involved in
seeking to work out a solution, short of liquidation, through
inclusion in the Penn Central, the present condition of the
Railroad and the rate of loss and out-flow of cash in the recent
past and in the foreseeable future, this court finds that the
continued erosion of the Debtor's estate from operational losses
after the end of 1968 will clearly constitute a taking of the
Debtor's property, and consequently the interests of the
bondholders, without just compensation. It is therefore
constitutionally impermissible, and obviously no reorganization
plan which calls for such a taking can be approved."
289 F. Supp. at 459.
We do not doubt that the time consumed in the course of the
proceedings in the reorganization court has imposed a substantial
loss upon the bondholders. But, in the circumstances presented by
this litigation, we see no constitutional bar to that result. The
rights of the bondholders are not absolute. As we have had occasion
to say before, security holders
"cannot be called upon to sacrifice their property so that a
depression-proof railroad system might be created. But they
invested their capital in a public
Page 399 U. S. 492
utility that does owe an obligation to the public. . . . [B]y
their entry into a railroad enterprise, [they] assumed the risk
that, in any depression or any reorganization, the interests of the
public would be considered, as well as theirs."
Reconstruction Finance Corp. v. Denver & R. G. W. R.
Co., 328 U. S. 495,
328 U. S.
535-536. Only two Terms ago, when we last considered the
Penn Central merger, we quoted approvingly the Commission's
statement that
"[i]t is a fundamental aspect of our free enterprise economy
that private persons assume the risks attached to their
investments, and the N[ew] H[aven] creditors can expect no less
because the N[ew] H[aven]'s properties are devoted to a public
use."
Penn Central Merger Cases, 389 U.S. at
389 U. S. 510.
We added:
"While the rights of the bondholders are entitled to respect,
they do not command Procrustean measures. They certainly do not
dictate that rail operations vital to the Nation be jettisoned
despite the availability of a feasible alternative. The public
interest is not merely a pawn to be sacrificed for the strategic
purposes or protection of a class of security holders. . . ."
Id. at
389 U. S.
510-511.
In this context, we appraise the bondholders' claim that the
continued operation of the New Haven from the inception of the
reorganization proceeding in 1961 to the inclusion in Penn Central
in 1968 worked an unconstitutional taking of their property. There
is no longer room for dispute that the bondholders will receive the
highest and best price for the assets of the debtor as of December
31, 1966. That price, of course, reflects the depreciation of the
properties and the losses incurred in the operation of the railroad
from the commencement of reorganization proceedings under § 77 in
the middle of 1961. But the Bondholders Committee does not tell
Page 399 U. S. 493
us what the depreciation and losses attributable to the
pre-valuation period are. Moreover, no bondholder formally
petitioned the reorganization court to dismiss the proceedings, and
thereby permit a foreclosure on the mortgage liens until April 1967
-- well after the 1966 valuation date. [
Footnote 83]
Nor can Penn Central be held liable for the further decline in
New Haven's value from the valuation date to the actual inclusion.
The new company did not even come into existence until midway
through that period, and, from the point of its own creation until
it took in the New Haven, it contributed substantially to
recompense the debtor for its operating losses. Moreover, the
failure of the bondholders to press for early liquidation of the
New Haven meant that their initial application for a dismissal of
the reorganization proceedings came just as the objective of
salvaging the New Haven appeared possible to achieve. As the
reorganization court noted, only two of the several bondholder
groups made that initial application; it was not joined by the
trustees, nor was it endorsed by other representatives of the
bondholders and creditors, and it came just as the Commission was
about to certify a feasible plan of reorganization to the court.
"To jettison everything achieved and turn back just as a glimmer of
light begins to show at the end of a long dark tunnel," said the
court, "not only carries with it an aura of unreality, but borders
on the fantastic."
In re New York, N.H. & H. R. Co.,
281 F. Supp. at 68.
On the other hand, we must also reject any lingering suggestion
by Penn Central that the price it must pay for the New Haven assets
is unfair in either a statutory or a constitutional sense. At first
glance, there is a
Page 399 U. S. 494
seeming anomaly in the requirement that Penn Central pay a
liquidating value for property it must operate at a loss. But it is
not correct to say that New Haven's right to liquidate is
inconsistent with Penn Central's obligation to operate, or that, if
the New Haven's creditors had such a right, Penn Central must have
it as well. The bondholders had the right by force of their
state-created liens under the New Haven's mortgage obligations.
Penn Central had no such right, because its merger was expressly
conditioned on its assumption of responsibility for continued New
Haven service. There was nothing inequitable in an arrangement that
permitted the bondholders to recover the value of their liens on
the property of the debtor at the same time that it required Penn
Central to pay that value in exchange for the nearly $1,000,000,000
worth of benefits that the merger was then anticipated to
produce.
As the Commission said at the time of its Second Supplemental
Report,
"Calling upon Penn Central to pay more than the N[ew] H[aven] is
worth as a going concern is not unreasonable within the meaning of
section 5(2). . . . The Penn Central merger (which will bring
substantial dollar savings to the merger applicants) was approved
with the thought that some of the merger savings would be available
specifically to ward off a liquidation and shutdown of the N[ew]
H[aven] so that adequate transportation service would remain
available to the public which now relies on the N[ew] H[aven]."
331 I.C.C. at 687-688.
The reorganization court made the point with clarity and
force:
"The whole purpose of making the inclusion of the New Haven a
condition of the merger was to require Penn Central, which, in
being permitted to merge, was granted the opportunity to realize
tremendous economic benefits, to take over and operate
Page 399 U. S. 495
a helplessly sick but still needed railroad, which it could well
afford to do. It is part of the price Penn Central is called upon
to pay for the right to merge. The right to merge was granted, the
merger has taken place, and the price should be paid."
289 F. Supp. at 465-466.
For the reasons stated in this opinion, the judgment of the
United States District Court for the District of Connecticut,
reviewed on writs of certiorari in Nos. 914, 916, 920, 1038, and
1057, is affirmed in part and vacated and remanded in part. The
judgment of the United States District Court for the Southern
District of New York, appealed from in Nos. 915, 917, and 921, is
vacated, and those cases are remanded with instructions to abstain
pending the further proceedings before the Interstate Commerce
Commission and the reviewing courts under § 77 of the Bankruptcy
Act.
It is so ordered.
MR. JUSTICE DOUGLAS took no part in the decision of these
cases.
MR. JUSTICE MARSHALL and MR. JUSTICE BLACKMUN took no part in
the consideration or decision of these cases.
* No. 915,
New York, New Haven & Hartford Railroad Co.
First Mortgage 4% Bondholders Committee v. United States, et
al., No. 917,
Manufacturers Hanover Trust Co., Trustee v.
United States, et al., and No. 921,
Chase Manhattan Bank,
N.A. Trustee v. United States, et al., on appeal from the
United States District Court for the Southern District of New York.
No. 911,
New York, New Haven & Hartford Railroad Co. First
Mortgage 4% Bondholders Committee v. Smith, Trustee, et al.,
No. 916,
Manufacturers Hanover Trust Co., Trustee v. United
States, et al., No. 920,
Chase Manhattan Bank, N.A.
Trustee v. Penn Central Co., et al., No. 1038,
Penn
Central Co. v. Manufacturers Hanover Trust Co., Trustee, et
al., and No. 1057,
United States, et al. v. New York, New
Haven & Hartford Railroad Co. First Mortgage 4% Bondholders
Committee, et al., on certiorari to the United States Court of
Appeals for the Second Circuit in advance of judgment.
** On June 21, 1970, the Penn Central Transportation Company
filed a petition for reorganization under § 77 of the Bankruptcy
Act, 11 U.S.C. § 205, in the United States District Court for the
Eastern District of Pennsylvania. Whether the financial obligations
dealt with in the present opinion may become subject to
modification in or because of those proceedings is a question with
which the present opinion in no way deals.
[
Footnote 1]
See Penn-Central Merger Cases, 389 U.S. at
389 U. S. 494;
Baltimore & Ohio R. Co. v. United States, 386 U.
S. 372,
386 U. S.
379.
[
Footnote 2]
Pennsylvania R. Co. -- Merger -- New York Central R.
Co., 327 I.C.C. 475, 479 ("Merger Report").
[
Footnote 3]
Ibid.
[
Footnote 4]
Baltimore & Ohio R. Co. v. United States, 386 U.S.
at
386 U. S.
392.
[
Footnote 5]
Penn-Central Merger Cases, 389 U.S. at
389 U. S.
493.
[
Footnote 6]
Ibid.
[
Footnote 7]
Baltimore & Ohio R. Co. v. United States, 386 U.S.
at
386 U. S.
380.
[
Footnote 8]
Merger Report, 327 I.C.C. at 489.
[
Footnote 9]
Baltimore & Ohio R. Co. v. United States, 386 U.S.
at
386 U. S. 447
(separate opinion of DOUGLAS, J.).
[
Footnote 10]
Penn-Central Merger Cases, 389 U.S. at
389 U. S. 493;
Merger Report, 327 I.C.C. at 501.
[
Footnote 11]
As part of its initial merger order, the Commission had
prescribed special traffic and indemnity provisions for the benefit
of the Delaware & Hudson, Boston & Maine, and
Erie-Lackawanna railroads. The Commission had not yet determined
whether those three "protected carriers" should be included in
either Penn Central or the recently formed Norfolk & Western,
but concluded they required sheltering conditions if they were to
survive the interim period pending decision as to their ultimate
disposition.
Merger Report, 327 I.C.C. at 531-532. On
September 16, 1 1966 following objections to the initial order from
various parties, the Commission abrogated the indemnity provisions
originally prescribed for the protected carriers and announced it
would reconsider its earlier decision, with possible modifications
to be given retroactive effect.
Pennsylvania R. Co. -- Merger
-- New York Central R. Co., 328 I.C.C. 304
("
Reconsideration Report"). On October 4, 1966, a
three-judge District Court in the Southern District of New York
declined, one judge dissenting, to enjoin enforcement of the
Commission's order.
Erie-Lackawanna R. Co. v. United
States, 259 F.
Supp. 964. Later, the District Court denied injunctive relief
sought by bondholders of the New Haven railroad.
Oscar Gruss
& Son v. United States, 261 F.
Supp. 386. On March 27, 1967, this Court reversed and remanded
Erie-Lackawanna with instructions that the Commission
complete its proceedings relating to the protected roads.
Baltimore & Ohio R. Co. v. United States, 386 U.
S. 372. We later vacated and remanded
Oscar
Gruss for reconsideration in light of
Baltimore &
Ohio, 386 U. S. 776.
Ensuing developments are recounted in the text.
[
Footnote 12]
Pennsylvania R. Co. -- Merger -- New York Central R.
Co., 330 I.C.C. 328 ("
First Supplemental
Report").
[
Footnote 13]
Erie-Lackawanna R. Co. v. United States, 279 F.
Supp. 316.
[
Footnote 14]
Penn-Central Merger Cases, 389 U.
S. 486.
[
Footnote 15]
Baltimore & Ohio R. Co. v. United States, 386 U.S.
at
386 U. S. 381;
New York, N.H. & H. R. Co. Trustees Discontinuance of
Passenger Service, 327 I.C.C. 77, 79-80 ("
Suburban
Discontinuance Case").
[
Footnote 16]
New York, N.H. & H. R. Co., Trustees, Discontinuance of
All Interstate Passenger Trains, 327 I.C.C. 151, 163
("
Interstate Discontinuance Case").
[
Footnote 17]
Id. at 163-164.;
[
Footnote 18]
Id. at 169.
[
Footnote 19]
Suburban Discontinuance Case, 327 I.C.C. at 80.
[
Footnote 20]
See generally Baltimore & Ohio R. Co. v. United
States, 386 U.S. at
386 U. S.
452-454 (separate opinion of DOUGLAS, J.); L. Brandeis,
Financial Condition of the New York, New Haven & Hartford
Railroad Company and of the Boston & Maine Railroad (1907); L.
Brandeis, Other People's Money 129-136 (1933); Report of the Joint
New England Railroad Committee to the Governors of the New England
States 53-73 (1923); E. Sunderland, A Brief History of the
Reorganization of The New York, New Haven and Hartford Railroad
Company 1-5 (1948); Capture of the New Haven, Fortune Magazine,
April 1949, p. 86
et seq.
[
Footnote 21]
See In re New York, N.H. & H. R. Co., 169 F.2d 337,
338 n. 6,
cert. denied sub nom. Mulcahy v. New York, N.H. &
H. R. Co., 335 U.S. 867.
[
Footnote 22]
See In re New York, N.H. & H. R. Co., 378 F.2d 635,
640.
[
Footnote 23]
Commission of Department of Public Utilities v. New York,
N.H. & H. R. Co., 178 F.2d 559,
cert. denied, 339
U.S. 943;
In re New York, N.H. & H. R. Co., 163 F.
Supp. 59.
[
Footnote 24]
In re New York, N.H. & H. R. Co., 278 F.
Supp. 592, 606,
aff'd, 405 F.2d 50,
cert. denied
sub nom. Abe Corp. v. Trustees, 394 U.S. 999.
[
Footnote 25]
278 F. Supp. at 606.
[
Footnote 26]
Id. at 601.
[
Footnote 27]
In re New York, N.H. & H. R. Co., 289 F.
Supp. 451, 456;
In re New York, N.H. & H. R. Co.,
281 F. Supp. 65.
[
Footnote 28]
In re New York, N.H. & H. R. Co., 278 F. Supp. at
606.
[
Footnote 29]
In re New York, N.H. & H. R. Co., 405 F.2d at
52.
[
Footnote 30]
In re New York, N.H. & H. R. Co., 281 F. Supp. at
65-66.
[
Footnote 31]
Suburban Discontinuance Case, 37 I.C.C. at 79, 80,
106.
[
Footnote 32]
By this time, the railroad's freight operations were also
operating at deficit levels. The Commission explained this aspect
of the problem as follows:
"Southern New England is a deficit area in terms of food, fuel,
and the raw materials for industry. Accordingly, in serving this
economy, the New Haven is a short haul railroad with a heavily
unbalanced flow of traffic and equipment. As a terminal railroad,
it faces the constant problems and added costs of switching and
deadheading foreign line freight cars to move them back off its own
lines. Moreover, as a result of national and regional economic and
industrial shifts, New England's outbound products have become
increasingly high-value and light-weight in character. With the
expansion in the region of a modern, comprehensive highway system
during the past 20 years, this outbound freight traffic has become
especially susceptible to diversion from rail to private and
for-hire trucking service."
Interstate Discontinuance Case, 327 I.C.C. at 170.
[
Footnote 33]
Id. at 164.
[
Footnote 34]
See id. at 175.
[
Footnote 35]
See Merger Report, 327 I.C.C. at 488.
[
Footnote 36]
Interstate Discontinuance Case, 327 I.C.C. at 152.
[
Footnote 37]
Id. at 172, 173.
[
Footnote 38]
Penn-Central Merger Cases, 389 U.S. at
389 U. S.
507.
[
Footnote 39]
In re New York, N.H. & H. R. Co., 281 F. Supp.
65.
[
Footnote 40]
In re New York, N.H. & N. R. Co., 278 F. Supp. at
602.
[
Footnote 41]
See Erie-Lackawanna R. Co. v. United States, 279 F.
Supp. at 333. The three-judge court, writing in October, 1967,
expressed full agreement with these findings:
"No one has contested the forecast of the NH Trustees that their
cash will run out at the end of 1967; no one has indicated any
probable source of funds for that beleaguered property other than
the merged Penn-Central. . . . For our part, we are unwilling to
take responsibility for such devastating hardship as even a
temporary cessation of NH's operations would bring to New England
and New York and, in a lesser degree, to other sections of the
country when, in our view, there is no reason why the merger should
not proceed; indeed, we believe we have no right to do so. . .
."
279 F. Supp. at 355.
[W]ith the situation now so serious, there can hardly be doubt
that it is better to accept what is good for the New Haven than
permit the patient to die while in quest of the best.
Id. at 335.
[
Footnote 42]
Pennsylvania R. Co. -- Merger -- New York Central R.
Co., 331 I.C.C. 643, 651 ("
Second Supplemental
Report").
[
Footnote 43]
Ibid.
[
Footnote 44]
Id. at 653.
[
Footnote 45]
The transfer was to be free and clear of all liens and
encumbrances, with certain minor exceptions. The liens and
encumbrances would shift to the proceeds of the sale, and thus
remain an obligation of the New Haven estate.
By negotiating a purchase and sale of the New Haven assets, the
parties to the agreement elected not to attempt a recapitalization
of New Haven, an enlarged merger that would bring New Haven into
the Penn Central system as a corporate entity, or a lease of the
New Haven operating assets. At one point, when it appeared the New
Haven might not long survive, the Commission had directed the
parties to negotiate a lease to be "immediately available upon
consummation of the Penn-Central merger," but the negotiators
reported they were unable to do so, and instead suggested various
loan-loss formulas.
Penn-Central Merger Cases, 389 U.S. at
389 U. S. 508;
Erie-Lackawanna R. Co. v. United States, 279 F. Supp. at
334;
Second Supplemental Report, 331 I.C.C. at 648.
[
Footnote 46]
Subsequent modifications to the Agreement were executed October
4, 1966, and December 20, 1967.
The bondholders were not bound by the trustees' acceptance of
the Purchase Agreement. The trustees acted on behalf of the debtor,
subject to the directive of the reorganization court, but they
never submitted the Agreement to that court for its approval.
Moreover, they had stipulated with Pennsylvania and Central that
they would not challenge the terms of the Purchase Agreement. The
preliminary memoranda negotiated between the trustees and the two
railroads contained a provision, substantially embodied in § 11.7
of the Agreement itself, that New Haven would not make or file
"any further statement, stipulation or other document in the
pending Pennsylvania-Central merger proceedings before the I.C.C. .
. . . or any judicial review thereof, other than in connection with
(a) a position relating to the New Haven taken by any other party .
. . , or (b) a failure of the I.C.C. to find either (i) that the
New Haven should be included in such merger or (ii) that
jurisdiction is to be retained by the I.C.C. for later
determination of any petition by the New Haven for such inclusion,
provided, however, that any such statement, stipulation or
other document made or filed by the Trustees shall not be
inconsistent with the provisions and intent of this Agreement."
The reorganization court suggested that the bondholders, rather
than the trustees, press for early inclusion due to the impropriety
of the trustees' taking "any action which would be or appear to be
a repudiation of [the contract's] letter or spirit."
See
Erie-Lackawanna R. Co. v. United States, 279 F. Supp. at 333,
and see Oscar Gruss & Son v. United States, 261 F.
Supp. at 393-394.
[
Footnote 47]
The reorganization court had authorized the New Haven trustees
to pursue a "two-step" plan before the Commission, in which the
debtor's estate would sell its assets to Penn Central and then the
trustees would file a specification of the terms to be accorded the
security holders. In 1967, the Court of Appeals for the Second
Circuit affirmed the District Court's authorization order with
certain modifications not here pertinent, postponing consideration
of the merits of the "two-step" plan because of the prematurity of
the question as then presented.
In re New York, N. N. &
H.R. Co., 378 F.2d 635, 639. Pursuant to the plan of
reorganization, the New Haven is to be reconstituted as a
closed-end, nondiversified management investment company.
See
Pennsylvania R. Co. -- Merger -- New York Central R. Co., 334
I.C.C. 25, 93 ("Fourth Supplemental Report"). The reorganization
court has withheld disposition of the second or "distributive" step
of the plan pending this Court's resolution of the question of
price.
In re New York, N.H. & H. R.
Co., 304 F.
Supp. 1121, 1123-1124.
[
Footnote 48]
The United States Trust Company, as indenture trustee under the
New Haven's Harlem River Division mortgage, had been one of the
bondholder plaintiffs on the first round. At the suggestion of the
reorganization court, 289 F. Supp. at 464, it received recognition
of its secured status on the remand, when the Commission directed
Penn Central to assume the Division bonds. 334 I.C.C. at 70. The
trustee sought no further review.
[
Footnote 49]
In a
Fifth Supplemental Report, decided July 10, 1969,
and modified August 26, 1969, the Commission complied with the
directive of the three-judge court to prepare and serve a proposed
decree reflecting the changes ordered in that court's opinion of
June 18, 1969. After making the required adjustments, the
Commission ordered Penn Central to pay New Haven an additional
$990,000 in stocks, bonds, and cash in the same relative
percentages as provided in the Fourth Supplemental Report. In
addition, the Commission called upon the parties to submit proposed
terms of a detailed decree relating to the underwriting plan
originated by the reorganization court and adopted by the
three-judge court. 334 I.C.C. 528. The order of the Commission
accompanying the
Fifth Supplemental Report does not appear
to have undergone judicial review. At any rate, it is moot in light
of the action we take today with respect to the judgments of the
New York and Connecticut District Courts relating to the Second and
Fourth Supplemental Reports.
[
Footnote 50]
At the same time, we affirmed the judgment of the three-judge
court in No. 919,
Providence & Worcester Co. v. United
States, 396 U. S. 555, and
denied certiorari in No. 918,
Providence & Worcester Co. v.
Smith, 396 U.S. 1062. In these cases, companions to the main
litigation, the Providence & Worcester Company sought plenary
review of the District Courts' orders insofar as they had sustained
the Commission (1) in requiring Penn Central to operate its trains
over the Providence & Worcester tracks as a leased line under
the conditions of a former long-term lease to New Haven, subject to
Penn Central's right to commence an abandonment proceeding before
the Commission under § 1 (18) of the Interstate Commerce Act, 49
U.S.C. § 1 (18), and subject further to Providence &
Worcester's securing a charter revision to eliminate voting
restrictions against Penn Central as a principal shareholder, and
(2) in limiting the liability of Penn Central with respect to
certain claims of Providence & Worcester, both
in rem
and
in personam, arising against the New Haven prior to
the latter's inclusion in Penn Central.
See Manufacturers
Hanover Trust Co. v. United States, 300 F. Supp. 185 (opinion
of three-judge court).
[
Footnote 51]
A similar problem had presented itself in the immediately
preceding round of the litigation arising from the merger. There,
the Commission's order had embraced not only the Penn Central
combination and the takeover of New Haven, but the inclusion of the
"protected carriers" in the Norfolk & Western system as well.
See n 11,
supra. Despite the variety of issues and the number of
parties, the cases eventually came before a single District Court,
and the danger of multiple litigation in six or more different
courts was avoided.
See Erie-Lackawanna R. Co. v. United
States, 279 F. Supp. at 323-3241,
aff'd sub nom.
Penn-Central Merger Cases, 389 U.S. at
389 U. S. 497
n. 2,
389 U. S. 503,
389 U. S. 505
n. 4. Even earlier, when the Commission had first ordered inclusion
of all New Haven service as a condition to the Penn Central merger,
it had pointed out that,
"since New Haven is in bankruptcy, its inclusion will entail
reorganization problems under section 77 of the Bankruptcy Act
which must be resolved in conjunction with any inclusion proceeding
herein."
Merger Report, 327 I.C.C.1 at 525;
see also
id. at 527,
and see Second Supplemental Report, 331
I.C.C. at 652.
[
Footnote 52]
Callaway v. Benton, 336 U. S. 132,
336 U. S. 142;
Meyer v. Fleming, 327 U. S. 161,
327 U. S. 164;
Thompson v. Magnolia Petroleum Co., 309 U.
S. 478,
309 U. S. 483;
Continental Illinois National Bank & Trust Co. v. Chicago,
R. I. & P. R. Co., 294 U. S. 648,
294 U. S. 662;
cf. Ex parte Baldwin, 291 U. S. 610,
291 U. S. 615;
Isaacs v. Hobbs Tie & Timber Co., 282 U.
S. 734,
282 U. S.
737.
[
Footnote 53]
Cf. Continental Illinois National Bank & Trust Co. v.
Chicago, R.I. & P. R. Co., 294 U.S. at
294 U. S. 676;
Van Schaick v. McCarthy, 116 F.2d 987, 992.
[
Footnote 54]
In
Callaway, this Court stressed the control the
reorganization court has over the debtor's property, including any
leasehold estate:
"Clearly, control of the physical property must remain in the
court which has the ultimate responsibility for operating it. And
in order to protect the estate of the debtor from dissipation
through losses suffered in the operation of the lessor's property,
responsibility for the determination of the amount of the losses
and provision for their recoupment from the lessor was properly
lodged in the court supervising the reorganization of the
debtor."
336 U.S. at
336 U. S.
144.
[
Footnote 55]
Section 5(2)(d) provides:
"The Commission shall have authority in the case of a proposed
[merger] transaction under this paragraph involving a railroad or
railroads, as a prerequisite to its approval of the proposed
transaction, to require, upon equitable terms, the inclusion of
another railroad or other railroads in the territory involved, upon
petition by such railroad or railroads requesting such inclusion,
and upon a finding that such inclusion is consistent with the
public interest."
[
Footnote 56]
For the text of § 5(2)(d),
see n 55,
supra. Section 5(2)(b) provide in
pertinent part:
"If the Commission finds that, subject to such terms and
conditions and such modification as it shall find to be just and
reasonable, the proposed [merger] transaction is within the scope
of [an earlier subdivision of the statute] . . . and will be
consistent with the public interest, it shall enter an order
approving and authorizing such transaction, upon the term and
condition, and with the modifications, so found to be just and
reasonable. . . ."
[
Footnote 57]
Such abstention would in no way have limited Penn Central's full
participation in judicial review of the Commission proceedings.
Penn Central came before the reorganization court as a "party in
interest" under § 77(e), and did not oppose the order of the court
making it a party to the proceeding; the company participated fully
in all further hearings in the reorganization court; it took a
protective appeal from the judgment of the court remanding the
matter to the Commission after the first round of review, and it
appealed again from the judgment of the court following the second
round of review. At no time has anyone questioned Penn Central's
status as a party litigant in the reorganization court or
challenged its right to make a full presentation of its case there,
on appeal to the Court of Appeals, or on review by writ of
certiorari in this Court.
[
Footnote 58]
The District Court also relied upon the prior adjudication of
the validity of the plan.
See 52 F. Supp. at 66 n. 1,
67.
[
Footnote 59]
It is noteworthy that, when the Commission drafted the provision
under which Penn Central was obligated to take in New Haven, it
evidently contemplated that review would take place only in the
reorganization court. Condition 8 of the Merger Report, the text of
which is set out in the text above at
399 U. S. 409,
required Penn Central to take in New Haven with terms of inclusion
to be "fair and equitable" -- language peculiar to the Bankruptcy
Act, and instinct with legal significance peculiar to that statute.
See Case v. Los Angeles Lumber Prods. Co., 308 U.
S. 106,
308 U. S.
115-119; Bankruptcy Act, § 77(e)(1), 11 U.S.C. §
205(e)(1). Condition 8 subjected the agreement negotiated by the
parties to "the approval of the Bankruptcy Court and the
Commission." And it also provided, in the event the parties were
unable to agree to the elements of inclusion, for the imposition of
"such fair and equitable terms and conditions as the Commission may
impose, . . . subject to approval by the Bankruptcy Court. . . ."
Repeated references to term of art in bankruptcy law and to the
bankruptcy court cannot be thought to lack meaning. Still less can
we assume that the studied omission of any mention of the
three-judge court was without significance.
[
Footnote 60]
Pursuant to § 77(e), 11 U.S.C. § 205(e),
"the judge shall confirm the plan [of reorganization] if
satisfied that it has been accepted by or on behalf of creditors of
each class to which submission is required . . . holding more than
two-thirds in amount of the total of the allowed claims of such
class which have been reported in said submission as voting on said
plan, and by or on behalf of stockholders of each class to which
submission is required . . . holding more than two-thirds of the
stock of such class which has been reported in said submission as
voting on said plan, and that such acceptances have not been made
or procured by any means forbidden by law:
Provided, That,
if the plan has not been so accepted by the creditors and
stockholders, the judge may nevertheless confirm the plan if he is
satisfied and finds, after hearing, that it makes adequate
provision for fair and equitable treatment for the interests or
claims of those rejecting it; that such rejection is not reasonably
justified in the light of the respective rights and interests of
those rejecting it and all the relevant facts, and that the plan
conforms to the [statutory] requirements. . . ."
[
Footnote 61]
Without pausing to assess the propriety of the method by which
the Commission originally assessed the value of New Haven's
interest in the Terminal properties, we think the reorganization
court was correct in undertaking its own resolution of the
contractual question. The validity of New Haven's claim
"present[ed] a legal question which must necessarily be taken into
account" in determining value.
Old Colony Bondholders v. New
York, N.H. & H. R. Co., 161 F.2d 413, 422,
cert.
denied sub nom. Protective Committee v. New York, N.H. & H. R.
Co., 331 U.S. 858. The legal question was one "to which the
Commission's specialized skill and experience do not extend." 161
F.2d at 429 (L. Hand, J., concurring). The authority of the court
to take further evidence is unquestioned. Bankruptcy Act, §§
77(c)(13), 77(e), 11 U.S.C. §§ 205(c)(13), 205(e).
[
Footnote 62]
In 1912, Central and New Haven had erected the Hotel Biltmore
through a subsidiary, each railroad supplying half the funds, which
were finally reimbursed in 1957. In 1958, Central sought to lease
the Biltmore to a controlled subsidiary over New Haven's objection.
When New Haven refused to sign the lease, Central claimed that New
Haven had broken its agreement, and thereby had forfeited all
interest in that portion of the enterprise. Central brought suit in
New York state court to secure a determination of the parties'
respective interests in the property.
See New York Central R.
Co. v. New York, N.H. & H. R. Co., 24 Misc.2d 414, 208
N.Y.S.2d 605,
aff'd, as modified, 13 App.Div.2d 309, 216
N.Y.S.2d 928,
aff'd per curiam, 11 N.Y.2d 1077, 184 N.E.2d
194. The conclusions of the New York courts paralleled those of the
Special Master. The Supreme Court ruled that New Haven's right to
share in rentals after credits to Terminal expenses survived
reimbursement of its investment, 24 Misc.2d at 428, 208 N.Y.S.2d at
618. The Appellate Division agreed, holding that the parties had,
"in effect, converted themselves into owners of the fee together,"
and that
"the development of the lands over the tracks was but another
step in the joint exploitation of the railroad properties made
possible by the covering of the tracks . . . in which [properties]
each party had a joint interest. . . ."
13 App.Div.2d at 318, 216 N.Y.S.2d at 936. The latter court
rejected the notion that, after paying large sums of money for the
construction of buildings and assuming the risk of loss operations
in the Terminal enterprise, New Haven should have acquired no right
"except the right to join docilely in each of the decisions made by
Central."
Id. at 319, 216 N.Y.S.2d at 937. Although
Central retained sole ownership in the fee, that fee was encumbered
by the rights of New Haven. The Appellate Division concluded that
New Haven's position
vis-a-vis Central could be described
as that of a partner.
Id. at 320, 216 N.Y.S.2d at 937.
[
Footnote 63]
"The Special Master . . . concluded there was no value in the
interest, principally because it is not the kind of interest that
would survive liquidation; nor, if it did, could it be assigned.
Moreover, there was no evidence that the expenses of maintaining
the terminal would be any less. And the idea that the State of New
York, or an interstate authority might pay, directly or indirectly,
some consideration for availing itself of that use is highly
speculative in view of the bargaining positions of the states and
the disposition of the I.C.C. to require Penn Central to furnish
such access free of charge to a state or public authority which
assumed the commuter service, as a condition of Penn Central's
getting rid of that much of the losing and burdensome passenger
service. While mitigation of a burden may, in some circumstances,
furnish a consideration, it is not a measurable one for the purpose
of this issue in the case."
304 F. Supp. at 806.
[
Footnote 64]
At one stage, the litigation over the value of New Haven's
interest in the Terminal properties also involved disputes over
which of four different sets of account books the Commission should
use, the base period from which the Commission might extrapolate
future income and expenses, the rate at which the projected income
flow should be capitalized, and the probable income flow from a new
office building to be constructed on the site of the railroad
station.
[
Footnote 65]
The Bondholders Committee presses its challenge that the
Commission has understated New Haven's share of excess income by
$700,000 a year, with a capitalized loss of $8,750,000 in value.
The challenge is predicated on the claim that the Commission
improperly concluded that future hotel profits would not increase,
but would remain constant. 334 I.C.C. at 38. The reorganization
court upheld the Commission in this regard, 304 F. Supp. at 806. We
do not overturn its judgment on a matter such as this, calling for
an informed prediction of future income, expenses, and the rate of
return on invested capital in a specific business activity uniquely
located in midtown Manhattan.
In addition, it is suggested that, upon a cessation of New Haven
Terminal operations, the costs of maintaining the station would
decrease, with a consequent augmentation in the excess income. Of
course, the station revenues would decrease as well -- perhaps as
much as or more than the expenses. In the absence of any record
evidence on the point, we cannot assume that liquidation would thus
have benefited New Haven.
On the second round of review, the reorganization court ordered
Penn Central to pay New Haven the latter's share of accrued excess
income for 1967 and 1968 as a separate sum apart from the purchase
price. 304 F. Supp. at 806-807. The Bondholders Committee now asks
us to award interest with respect to this payment. The
reorganization court rejected the claim, doubtless because the
uncertainty of New Haven's legal interest in the excess income
precluded a finding that the amount represented a liquidated
obligation owed by New York Central. We agree with the court's
ruling.
[
Footnote 66]
The parties have devoted much discussion to Penn Central's
negotiations with the States of New York and Connecticut for the
transfer of the New Haven commuter service to a public authority.
Manufacturers Hanover says the States have agreed to pay an annual
toll to run the trains into the Terminal, thus demonstrating that
the New Haven right of access does have value; Penn Central claims
the States are to pay only for the use of the tracks, and that it
will give them a right of entry into the Terminal for nothing. Both
sides point to newspaper articles in support of their arguments.
None of this is record evidence, and we do not consider it.
[
Footnote 67]
"An example of the difference in approach in the trustees' two
appraisals is afforded by the so-called REA Building in the Harlem
River yard. This building was specially built for REA Express, with
four tracks running through the center of its ground floor. In the
first, and higher, trustee appraisal, the building was valued at
$675,000 because of these tracks and the railroad service they
provided. In the second, and lower, appraisal, it was assumed that
the tracks were dismantled. This would require reconstruction of
the ground floor. The building would then be suitable only for an
entirely different type of tenant. Without tracks, it would have a
lower rental value. Its appraised value was, therefore, reduced to
$400,000 in the second appraisal. Differences in the values of
various other tenant-occupied buildings in the two yards resulted
from following similar procedures in their appraisals."
334 I.C.C. at 43. (Footnote omitted.)
[
Footnote 68]
Under the Interstate Commerce Act, Penn Central is obliged to
"provide and furnish transportation upon reasonable request
therefor," § 1(4), 49 U.S.C. § 1(4), and to offer switch
connections and cars for traffic to branch lines or private side
track constructed by shippers to connect with the railroad wherever
practicable and justified by the added business, § 1(9), 49 U.S.C.
§ 1(9).
[
Footnote 69]
Penn Central claims it could not provide service to the yards
over the Port Morris branch because of clearance difficulties on
the line. The reorganization court observed that Penn Central's own
evidence largely refuted the contention. This finding of the
District Court, based on its study of the record and its intimate
familiarity with the subject matter, is free from clear error, and
we do not disturb it.
[
Footnote 70]
Penn Central's own witnesses conceded the Port Morris connection
would "doubtless" enable the industries at Harlem River and Oak
Point to continue their rail usage even after a New Haven
liquidation; that someone, whether the City of New York or a third
party, would have to acquire access for rail service to the Hunts
Point Market, and that the only rational way to provide such
service would be to move cars from the Penn Central system via the
Port Morris connection. The Commission itself found that, during a
test month in the summer of 1968, more than 2,300 cars passed from
the Penn Central main lines to the market and yard industries via
the Port Morris connection. 334 I.C.C. at 44.
At one point, Penn Central claimed that, even on the higher of
the two appraisals, the record evidence required a downward
adjustment of $461,000. The reorganization court made a partial
correction to reflect a conceded duplication, but implicitly
rejected Penn Central's argument as to the balance. Since Penn
Central does not press the issue here, we do not consider it.
[
Footnote 71]
The Commission itself justified the refusal of the hearing
examiner to take evidence on the question of delay by saying:
"To the extent that evidence was proffered on the processing
time of possible abandonment proceedings involving N[ew] H[aven],
such matters are within our knowledge, and evidence thereon was
unnecessary."
334 I.C.C. at 29.
[
Footnote 72]
These findings comport with the observations of the
reorganization court in February, 1965, when the trustees sought
permission to discontinue all passenger service:
"The record shows that the public interest has been thus far
supported by the creditors of this estate, with no substantial
participation from the states. . . ."
"
* * * *"
"Far from being indifferent to the public interest, the court
has indulged that interest and allowed it to prevail over the
creditors' rights for three and one-half years."
"In spite of this long interval, very little has been produced.
Massachusetts never fulfilled its commitment to grant tax relief.
New York, by conditioning future tax relief on a commitment by the
Trustees to lease new equipment and conduct commutation service at
present levels with no assurance that the deficits would be
underwritten, has used it as a lash over the back of the debtor to
compel it to do the State's will at a time when it has not had the
strength to do so. Tax relief in Connecticut and Rhode Island was
continued, but with a requirement that certain standards of service
be met and, accordingly, that the passenger deficits continue to be
incurred."
"If the public interest so urgently demands the continuance of
the New Haven's passenger service, as the States seem suddenly to
have discovered, they should have stopped taxing its property a
long time ago. Commuters and other passengers demand better
equipment and better service; the States insist upon imposing a
continuing tax burden -- everyone wants to draw the last ounces of
blood out of this near corpse, but no one gives it the transfusion
it so badly needs. It is now too late in the day to talk about
saving the situation with tax relief. As the Railroad has not been
able to use its vital cash for taxes, liens have been accumulating
ahead of the creditors, forcing them further down the ladder of
priorities, and accelerating and compelling the action which the
court has taken today. If this tax burden continues to grow and the
Railroad is not otherwise relieved, the creditors will be compelled
to move for liquidation of the New Haven, and the court will have
no recourse but to order it. If the states wish essential passenger
services continued, an underwriting which goes far beyond tax
relief will be necessary."
[
Footnote 73]
What we have said disposes of the deduction for delay on the
ground advanced by the reorganization court. Entirely apart from
that explanation, a second line of reasoning leads to the same
result. The delay deduction assumed the postponement of the
commencement of liquidation for one year; the Commission postulated
a one-year freeze prior to the beginning of sale.
See 334
I.C.C. at 60 n. 2. But the Commission thereby assumed that, during
the one-year delay period, nothing would happen; the trustees would
sell no properties and enter into no contingent contract for
disposition of the debtor's assets. Absent Commission explanation,
we cannot assume that the delay would have resulted in so total a
suspension of the sales program during the first year, as well as a
failure of the sale managers to expedite disposition of the
properties, and thereby shorten the contemplated six-year
liquidation period. It is not for us to determine the extent to
which imposition of a one-year pause at the outset would have
enabled the trustees to accelerate the sale in the fifth and sixth
years. But acceptance of the delay deduction in principle would
compel a remand to the Commission for explanation of its tacit
assumptions that the initial year would have been devoid of
activity, and the later years would merely have proceeded as
before.
It is suggested that, with the one-year freeze, the delay
concept may be viewed as a mere shifting of the valuation date to
December 31, 1967. That date, it is said, is as rational as the
date originally chosen. And so it may be. But the adjustments in
value take into account only the expenses and depreciation
attributable to a one-year pause, with no consideration to
countervailing income and increases in capital value. The
Commission says a comprehensive revaluation of the debtor's assets
as of December 31, 1967, would produce a much greater loss than the
$15,386,000 actually deducted. But, in the absence of proof, we
again cannot assume that that would be the case. For authority to
that effect, we need look no further than to the Commission itself,
which, as we have earlier noted, rejected Penn Central's request on
the first round for a further allowance for the "constant
diminution of N[ew] H[aven]'s assets" to reflect the occurrence of
abandonment delay. On that occasion, the Commission noted that "a
large portion of N[ew] H[aven] assets consists of land," and added:
"We cannot assume that these values will diminish. It is at least
as reasonable to presuppose that the values will increase." 331
I.C.C. at 98. If the Commission could not assume diminution in
realty values at the time of the Second Supplemental Report, we do
not see how, without some explanation, it could assume it at the
time of the Fourth.
[
Footnote 74]
The Commission frequently requires an abandoning railroad to
sell its properties in bulk to a party (typically a public
authority) that will undertake continued operation of the service,
but typically sets the sale price at "not less than net salvage
value of the property sought to be acquired."
See, e.g.,
Rutland R. Corp. Abandonment, 317 I.C.C. 393, 425;
Chicago
N. S. & M. R. Abandonment, 317 I.C.C. 191, 200,
aff'd
sub nom. Illinois v. United States, 213 F. Supp.
83,
aff'd per curiam, 373 U.
S. 378;
Fort Dodge, D. M. & S. R. Co.
Abandonment, 312 I.C.C. 708, 712;
Chicago A. & E. R.
Corp. Abandonment, 312 I.C.C. 533 537;
Arkansas & O.
R. Corp. Abandonment, 312 I.C.C. 501, 505.
[
Footnote 75]
In its Fourth Supplemental Report, the Commission provided for
payment of the trustees' certificates by cancellation against the
price adjustments provided for in the Purchase Agreement. 334
I.C.C. at 70.
[
Footnote 76]
In addition, the bondholders contend the calculation of the
operating loss upon which the formula is based is itself unfair.
Chase Manhattan and the Committee say the calculation excludes
items such as rent for leased roads and interest paid during
bankruptcy, aggregating some $2,600,000. The Commission refused to
include such items, because it thought them "more nearly capital
charges, that is, costs of providing the railroad plant. . . ."
Second Supplemental Report, 331 I.C.C. at 718. Chase
Manhattan attacks the Commission's ruling on the ground that New
Haven paid out the monies in question in 1968 only because it had
not yet been included in Penn Central. But the test for an
operating loss, as opposed to a capital charge, is not whether a
cash disbursement took place; the Commission could properly limit
Penn Central's liability to the former category.
[
Footnote 77]
See Denver & R. G. W. R. Co. v. United States,
387 U. S. 485.
[
Footnote 78]
The Bondholders Committee raised the question in its petition
for certiorari whether the reorganization court had erred in its
assignment of zero value to the certificates of contingent
beneficial interest issued in connection with the reorganization of
the Boston & Providence Railroad.
See 304 F. Supp. at
810. The Committee has not revived the issue in its brief, nor has
it responded in its reply brief to the Government's contention that
it has abandoned the claim. Accordingly, we do not consider the
matter further.
[
Footnote 79]
In 1968, the New Haven suffered an estimated operating deficit
of $8,200,00. That figure, capitalized at 8%, amounts to more than
$100,000,000.
[
Footnote 80]
The decisions of the New York state courts relied upon by the
bondholders are inapposite. In
In re City of New
York, 18
N.Y.2d 212, 219 N.E.2d 410,
appeal dismissed sub nom. Fifth
Avenue Coach Lines v. City of New York, 386 U.
S. 778, the city had condemned the Fifth Avenue Coach
lines. The trial court treated the takeover as one of a going
concern, and fixed the award at reproduction cost new less
depreciation. The Court of Appeals agreed that, since Fifth Avenue
had demonstrated a capacity for profitable operations under
reasonable rates, it was entitled to going concern value, but that
the trial court had erred in excluding evidence of value of the
"intangible going concern assets, that is, the component of
value in the business which, in addition to the value of the
tangible assets, reflects an efficient operation."
Id. at 220, 221, 219 N.E.2d at 412, 413. The opinion of
the Court of Appeals does not disclose whether payment of
liquidating value would have yielded a higher price. In
In re
Port Authority Trans-Hudson Corp., 20
N.Y.2d 457, 231 N.E.2d 734,
cert. denied sub nom. Port
Authority Trans-Hudson Corp. v. Hudson Rapid Tubes Corp., 390
U.S. 1002, the Court of Appeals dealt with a public taking of
railroad tunnels under the Hudson River owned by a company in
reorganization and having only a "dim financial future. . . ." 20
N.Y.2d at 465, 231 N.E.2d at 736. The tunnels, which required only
$88,000 to be put in working order, had cost $32,000,000 to build,
and would have cost $400,000,000 to replace; their liquidating
value was a negative figure, because of costs that would have been
incurred in plugging them up.
Id. at 467 and n. 2, 470,
231 N.E.2d at 737 and n. 2, 739. Because the Port Authority was
taking the tunnels for continued operation, the Court of Appeals
held the proper valuation was depreciated original cost plus the
value of intangible assets also attributable to the operation as a
going concern.
Id. at 471-472, 231 N.E.2d at 740. In
neither of these cases did the New York courts require the taking
authorities to pay both an operating and a liquidating value.
Rather, they awarded the owners the value reflecting the highest
and best price for their properties -- precisely the treatment
accorded the New Haven here.
[
Footnote 81]
At the time of the Second Supplemental Report, an issue of
950,000 Penn Central common shares to New Haven would have given
the debtor 4% of the total shareholder equity in the new company.
331 I.C.C. at 689.
[
Footnote 82]
As previously noted, the holders of the Harlem River Division
bonds have received satisfactory security by Penn Central's
assumption of the mortgage.
See n.
48 supra. We are informed that the
right of the holders of the General Income bonds to participate in
the reorganized company depends on the outcome of this litigation.
The holders of the First and Refunding Mortgage bonds stand
somewhere in between.
See 289 F. Supp. at 442 n. 18.
[
Footnote 83]
As late as October, 1966, the reorganization court noted that
the policy of preserving the New Haven as an ongoing railroad "has
been concurred in by the bondholder. . . ."
MR. JUSTICE BLACK, with whom MR. JUSTICE HARLAN joins,
dissenting.
The central issue in these cases, easily lost, I fear, in the
98-page opinion of the Court, can, in my judgment, be briefly and
simply stated. After this Court's decision in the
Penn Central
Merger Cases, 389 U. S. 486, the
Interstate Commerce Commission assumed its difficult statutory task
of determining the liquidation value of the assets of the New Haven
Railroad, a determination which, if upheld by the courts, would
decide the purchase price
Page 399 U. S. 496
Penn Central would have to pay for the bankrupt New Haven. The
Commission made that valuation determination, and the question
before this Court is whether, under the appropriate standards of
court review, the Commission's valuation of the New Haven's
properties should have been sustained or rejected by the reviewing
courts. This question comes here from two federal district courts,
both of which were called upon to review the Commission's valuation
of the New Haven properties, (1) a bankruptcy court convened under
§ 77 of the Bankruptcy Act, 11 U.S.C. § 205, to consider the
reorganization of the New Haven, and (2) a three-judge merger court
convened under 28 U.S.C. §§ 1336(a), 2321-2325, to review the
Commission's merger and inclusion orders. Both district courts had
jurisdiction under these statutes to examine the Commission's
valuation decisions. And the proper scope for each court's review
was the same: were the Commission's findings supported by
substantial evidence and consistent with applicable statutory
requirements? Yet the reception the Commission's determination
received from the two courts on the final round of review was
dramatically different. The bankruptcy court took issue with
several of the Commission's important findings as to the New
Haven's liquidation value and, substituting its own ideas of the
proper method of appraising the railroad's properties, increased by
over $28,000,000 the value the Commission had placed on the assets
of the New Haven.
304 F.
Supp. 793. In sharp contrast, the three-judge merger court
noted the "severe limitations" on the scope of its review of
valuation matters, 305 F. Supp. 1049, 1053, and, after carefully
examining the Commission plan, sustained the agency's
determinations. [
Footnote 2/1]
Judge Friendly, writing for the three-judge
Page 399 U. S. 497
merger court, stated the fundamental reason for that court's
disagreement with the bankruptcy court:
"Essentially, we think our disagreements . . . reflect a
difference in view concerning how far we are at liberty to
substitute our own notions for the decisions the Commission has
taken in what we regard as a sincere effort to comply with the
tasks both courts assigned it on remand."
305 F. Supp. at 1065.
I
Both district court decisions are now properly before this Court
for our review, and, contrary to the position taken by the Court
today, it is my view that the Court has an obligation to pass upon
both those judgments, not just one. As the quoted passage from
Judge Friendly's opinion for the three-judge merger court
indicates, the answer to the question whether this Court should
follow the three-judge court and sustain the Commission's valuation
of the New Haven properties turns largely on the proper scope of
judicial inquiry into the agency determination. Our previous cases
make it clear that the scope of judicial review of the Commission's
appraisal of such properties is narrowly limited to ensuring that
the agency findings are supported by material evidence and
consistent with statutory standards. The federal courts, this Court
included, should defer whenever possible to Commission expertise on
complex questions of valuation. It is my position, elaborated in
what follows, that the application of this test to the record
before the Commission in these cases can only lead to the
conclusion that the Commission did not abuse its discretion in
valuing the New Haven and, accordingly, that the three-judge court
was correct in sustaining its determinations, and the bankruptcy
court wrong in rejecting them. The three-judge court's excellent
opinion is, in my view, compelling support for the idea that a
reasonable reviewing court, exercising
Page 399 U. S. 498
the proper scope of review, would find that the Commission acted
wholly within its discretion. Moreover, I find myself in agreement
with Judge Friendly that the bankruptcy court greatly exceeded its
reviewing authority, and, in so doing, improperly substituted its
own views on valuation for those of the Commission. [
Footnote 2/2]
The Court today reaches conclusions completely at odds with
those stated above, and affirms the decision of the bankruptcy
court. I do not think the Court could reach the result it does but
for its mistaken assumption that the bankruptcy court was somehow
the more appropriate of the two courts to review the Commission's
valuation determinations, and that, accordingly, the excellent
opinion of the three-judge court could be simply ignored on the
ground that that court should have abstained in favor of the
bankruptcy court. Congress has granted jurisdiction to review the
Commission findings to both courts under the peculiar circumstances
presented in these cases, and the Court offers only makeweight
arguments to support its holding that the three-judge court should
have abstained from reaching the valuation questions. In my view,
both courts were obligated to fulfill their statutory mandate to
review the Commission's valuation findings, and this Court has an
obligation to treat with equal dignity the decisions of each of
those courts. For this reason, I cannot agree that the Court is
justified in proceeding as if Judge Friendly's opinion for the
three-judge merger court simply did not exist.
Page 399 U. S. 499
Nor can I accept the Court's position that, in reviewing the
conclusions of the bankruptcy court, it should apply a standard of
review that attaches great weight to the conclusions of that court,
rather than to those of the Commission. Our prior cases indicate
that the correct rule is just the opposite. In sum, the Court first
disposes of the three-judge court's opinion by assuming that that
court should have abstained, and it then adopts a deferential
posture toward the conclusions of the bankruptcy court. In so
doing, the Court clears the way for its affirmance of the
bankruptcy court. The Court's approach and the result it reaches
are intimately related, and I regret that I cannot agree with
either.
II
On the question of valuing the New Haven's assets, the tasks
which the three-judge merger court and the bankruptcy court were
called upon to perform in these cases were virtually identical,
and, for both courts, that task was a narrowly circumscribed one.
The statutes governing review in both courts provide the same
flexible standard: under § 77(e) of the Bankruptcy Act, the
bankruptcy court was to determine if the terms for the sale of the
New Haven's assets were "fair and equitable," and, under §§ 5(2)(b)
and (d) of the Interstate Commerce Act, the three-judge court was
to ensure that the terms of the merger and inclusion were "just and
reasonable" and "equitable." More important, our previous cases
leave no doubt that the two district courts and, accordingly, this
Court, are permitted only a limited scope for their review of the
Commission's valuation findings. In
Ecker v. Western Pacific R.
Co., 318 U. S. 448,
318 U. S. 472,
this Court emphasized that, under § 77(e) of the Bankruptcy Act,
"Valuation is a function limited to the Commission, without the
necessity of approval
Page 399 U. S. 500
by the [bankruptcy] court." The Court elaborated its holding
this way:
"The function of valuation thus left to the Commission is the
determination of the worth of the property valued, whether stated
in dollars, in securities, or otherwise. One of the primary objects
of the bill was the elimination of obstructive litigation on the
issue of valuation and the form finally chosen approached as near
to that position as seemed to the draftsmen legally possible.
Judicial reexamination was not considered desirable. . . . The
language chosen leaves to the Commission, we think, the
determination of value without the necessity of a reexamination by
the court, when that determination is reached with material
evidence to support the conclusion and in accordance with legal
standards."
318 U.S. at
318 U. S.
472-473.
See also Reconstruction Finance Corp. v.
Denver & R. G. W. R. Co., 328 U.
S. 495,
328 U. S.
508-509;
Group of Institutional Investors v.
Chicago, M., St. P. & P. R. Co., 318 U.
S. 523,
318 U. S.
536-542. These cases make it clear that Congress
delegated the valuation function to the Commission, and that the
Commission's determinations can be reviewed by the federal courts
under § 77(e) only to determine whether they are supported by
substantial evidence and conform to the applicable statutory
standards.
The scope of review of the three-judge merger court under § 5 of
the Interstate Commerce Act is virtually identical to that of the
reorganization court under § 77. The function of the three-judge
court is only to determine if the Commission's actions "are based
upon substantial evidence and to guard against the possibility of
gross error or unfairness."
Penn Central Merger Cases,
389 U. S. 486,
389 U. S. 524.
If a court finds the Commission's
Page 399 U. S. 501
"conclusions to be equitable and rational," it should not, as it
seems to me this Court does today, "second-guess each step in the
Commission's process of deliberation."
Ibid.
The reasons compelling such judicial restraint lie not only in
the accumulated expertise of the Commission, but also in the
inherent uncertainty of the valuation process itself.
"An intelligent estimate of probable future values . . . , and
even, indeed, of present ones, is, at best, an approximation. . . .
There is left in every case a reasonable margin of fluctuation and
uncertainty."
Dayton Power & Light Co. v. Public Utilities
Comm'n, 292 U. S. 290,
292 U. S. 310.
These inevitable uncertainties of a complex valuation were greatly
magnified in this case, for here, the Commission was called upon to
determine what values the New Haven properties would have, as the
three-judge court put it, in
"a liquidation that never happened, that, in the world as we
know it, scarcely could have happened, and that, if it had
happened, could have happened in any one of a number of equally
imaginary ways. . . ."
305 F. Supp. at 1066. Given the extremely hypothetical context
in which the Commission made its determinations, it is impossible
for any reviewing court to know if the Commission's findings even
approximated the true liquidation value of the railroad. Because of
this enhanced uncertainty, the area in which the Commission was
required to exercise its judgment in this case was unusually wide,
and a reviewing court could properly upset its conclusions in only
the clearest instances of abuse.
I indicated previously that, when these criteria for judicial
review are taken into account, it becomes impossible for me to
believe that the Commission abused its discretion in deciding, as
it did, the exceedingly complex and difficult valuation issues
discussed at length in the Court's opinion. The three-judge merger
court concluded
Page 399 U. S. 502
that the Commission's findings in this regard were supported by
substantial evidence, and consistent with relevant principles, and,
after reviewing the record and the opinion of the Commission, I
find myself in wholehearted agreement with the three-judge court's
conclusion. Judge Friendly's fine opinion leaves no doubt in my
mind that the court for which he wrote was fully aware of both the
limited scope of its reviewing power and also its obligation within
those limits to scrutinize carefully each of the significant
decisions of the Commission. Thus, the court assumed that, " [i]f
the Commission made demonstrable errors, it is our duty to correct
these . . . ," but, unlike the Court today, it refused "to
reexamine every judgment made by the Commission and to substitute
our own whenever we think it better." 305 F. Supp. at 1056. The
three-judge court's opinion sets out fully and adequately the
reasons why the Commission should be affirmed on each of the
disputed points, and there is nothing to be gained from my
repeating those reasons here.
III
The Court's opinion affirming the bankruptcy court attempts to
avoid the force of the foregoing considerations by first holding
that the three-judge court should have abstained from reaching the
valuation issue and then assuming, for some reason which is not
clear to me, that this Court should apply a limited scope of review
to the valuation findings of the bankruptcy court, rather than to
the Commission's findings. This approach is, I submit, premised on
erroneous assumptions.
A
There can be no question but that, under relevant federal
statutes, both the three-judge merger court and the bankruptcy
court had jurisdiction to review the Commission's determination of
the New Haven's liquidation
Page 399 U. S. 503
value.
See 11 U.S.C. § 205; 28 U.S.C. §§ 1336(a),
2321-2325. The Court today does not really dispute this conclusion,
but argues instead that the bankruptcy court might have had
"primary jurisdiction" to decide the valuation issues, citing to
support this idea several quite inapposite cases dealing with
in rem jurisdiction, and, alternatively, that the
three-judge court should have "abstained" because the only
remaining issue was "the value to be accorded the assets
transferred, and resolution of that issue was the essence of the §
77 process."
Ante at
399 U. S. 428.
Actually, the only "primary jurisdiction" involved here was the
primary jurisdiction of the Commission to decide questions of
valuation. Moreover, the question of the New Haven's value may well
have been central to the § 77 proceedings, but, in ordering the New
Haven's inclusion in Penn Central, the Commission exercised
authority under both § 5 of the Interstate Commerce Act and § 77 of
the Bankruptcy Act. The question of the New Haven's value was
equally central to the requirement under § 5 that the Commission
determine before issuing an inclusion order that the terms of the
inclusion are "equitable." 49 U.S.C. § 5(2)(d). Review of the
Commission's valuation was therefore as appropriate on the merger
and inclusion side as on the bankruptcy side, and the Court's
argument to the contrary is completely conclusory. Accordingly, I
think the three-judge merger court was correct when it decided
that, "unfortunate as the duplicitous system of review may be, we
see no basis on which we can properly decline to exercise the
jurisdiction conferred upon us. . . ."
289 F.
Supp. 418, 425.
B
The Court also errs, I think, when it assumes that it should
defer to the findings of the bankruptcy court, rather than to those
of the Commission. The reasoning
Page 399 U. S. 504
behind this novel approach is never clearly stated. At times,
the Court seems to take the view that the proper role of the
bankruptcy court on valuation questions lies somewhere between that
of a trial court charged with the responsibility of making a fair
estimate of the value of the New Haven properties and an appellate
court whose responsibility is limited to reviewing the Commission's
valuation. The adoption of this hybrid role for the bankruptcy
court is strenuously urged upon us in some of the briefs in this
case. Such a theory arguably justifies a deferential attitude on
the part of this Court toward the reorganization court's
determinations, and also provides at least a partial justification
for the bankruptcy court's
de novo valuation estimates.
However, the notion that the bankruptcy court has special powers in
reviewing Commission valuations and in weighing the public interest
is completely untenable in light of
Western Pacific and
the cases following it. Those cases make it clear that, while the
bankruptcy court does have certain special functions in § 77
reorganizations, the role of the bankruptcy court in the areas of
concern here is simply that of an appellate court. As we said in
Reconstruction Finance Corp. v. Denver & R. G. W. R.
Co., 328 U. S. 495,
328 U. S.
508:
"[T]he experience and judgment of the Commission must be relied
upon for final determinations of value and of matters affecting the
public interest, subject to judicial review to assure compliance
with constitutional and statutory requirements."
To like effect was the conclusion reached in
Chicago, R.I.
& P. R. Co. v. Fleming, 157 F.2d 241, 245, a case
following
Western Pacific:
"[T]he Commission is allowed wide discretion in reaching its
conclusions, and if its findings are supported by substantial
evidence and follow
Page 399 U. S. 505
legal standards, they must be affirmed by the courts. . . ."
In my opinion, these and other cases preclude the notion that
the bankruptcy court has special factfinding and interest-weighing
functions sufficient to justify this Court's viewing it as a
quasi-trial court.
Alternatively, the majority's position might be that, even
though the reorganization court had no special review powers, this
Court should still give great weight to its conclusions concerning
the Commission's price determinations. This position might have
some force were there grounds for confidence that the bankruptcy
court in this case applied the correct scope of review in examining
the Commission determinations, but no such grounds for confidence
exist here. This Court has an obligation to examine carefully the
opinion of the bankruptcy court to determine if that court did in
fact, apply the correct scope of review. Such an inquiry
necessarily involves the Court in determining if the agency's
decisions are consistent with applicable law and supported by
substantial evidence. As I indicated earlier, the record in this
case simply does not support the conclusion that the reorganization
court stayed within its proper scope of review of the Commission
determinations. Since the reorganization court applied the wrong
reviewing standard, there is no justification for this Court's
giving any deference to the valuation determinations of that
court.
The Court's opinion is thus poised between two equally
unsatisfactory alternatives. Its conclusions must either rest on
the theory that the reorganization court has extraordinary
reviewing powers, a theory which I think is precluded by
Western Pacific and the cases which follow it, or the
Court must take the position that the reorganization court
correctly applied the
Western Pacific standard, a
conclusion which seems to me untenable in
Page 399 U. S. 506
light of the record in these cases and the opinion of the
three-judge merger court.
IV
Today's decision will have the effect of greatly burdening the
Penn Central by increasing the amount that company owes to the New
Haven bondholders by an additional $28,000,000. The imposition of
this additional burden can only bring about a further deterioration
of the Penn Central's already seriously compromised financial
position, [
Footnote 2/3] and will
further reduce the ultimate chances of success of this venture in
which the public has a considerable stake. The public interest in
these cases certainly lies in establishing and maintaining the Penn
Central as a viable private enterprise with reasonable rates and
efficient services. Here, the Commission had a duty "to plan
reorganizations with an eye to the public interest, as well as the
private welfare of creditors and stockholders."
Reconstruction
Finance Corp. v. Denver & R. G. W. R. Co., 328 U.
S. 495,
328 U. S. 535.
See also the Penn Central Merger Cases, 389 U.
S. 486,
389 U. S.
510-511. Because Penn Central's economic soundness will
be vitally affected by the price it has to pay for the New Haven
assets, the Commission had an obligation, which I think it
fulfilled in these cases, to prevent an overvaluation of the New
Haven assets which might unnecessarily jeopardize the newly merged
Penn Central system. If the Commission resolved close and fairly
debatable issues of valuation in favor of Penn Central, rather than
the New Haven bondholders, the agency's actions were wholly
justifiable in terms of its statutory mandate to protect the
public. Although the courts must review Commission
determinations
Page 399 U. S. 507
of value to guarantee that those valuations are "fair and
equitable" to the bondholders, that reviewing authority does not
permit a court to substitute its views for those of the Commission.
Judicial review of Commission valuations must be exercised in light
of the fact that
"Congress has entrusted the Commission, not the courts, with the
responsibility of formulating a plan of reorganization which 'will
be compatible with the public interest.' § 77(d)."
Group of Institutional Investors v. Chicago, M., St. P.
& P. R. Co., 318 U. S. 523,
318 U. S. 544.
Here, the Commission struck a balance between public and private
interests that was clearly within its discretion, and I think it is
both improper and unwise for this Court to upset that balance and
place an additional $28,000,000 burden on the Penn Central, a
burden that I fear may ultimately be borne by the consumers of the
Penn Central's services or by the Federal Treasury.
For the reasons stated above, I would affirm the judgment of the
three-judge merger court on the valuation issue, and would reverse
the judgment of the bankruptcy court to the extent that it is
inconsistent with the three-judge court.
[
Footnote 2/1]
The three-judge merger court corrected the Commission's findings
on minor valuation points which are not relevant here. The
Commission has subsequently made findings consistent with the
three-judge court opinion on these questions. 334 I.C.C. 528.
[
Footnote 2/2]
Of course, the bankruptcy court and the three-judge merger court
agreed on many of the issues that were presented to them, some of
which were questions of valuation and some of which were not. Apart
from the question of the underwriting plan,
ante at
399 U. S.
488-489, the Court today affirms both district courts on
those issues on which both agreed, and I concur in that result. I
differ with the Court, however, on it handling of all those
questions of valuation over which the two district courts
disagreed.
[
Footnote 2/3]
As the Court notes in a footnote to its opinion,
ante
at
399 U. S. 399,
the Penn Central Transportation Company has filed a petition for
reorganization under § 77 of the Bankruptcy Act in the United
States District Court for the Eastern District of Pennsylvania.