Connecticut Gen. Ins. Corp. v. United States Ry. Ass'n

• Decision Date: 25 June 1974
• Docket Number: 74-1107 and 74-1149.,Civ. A. No. 74-189
• Citation: 383 F. Supp. 510
• Parties: CONNECTICUT GENERAL INSURANCE CORPORATION et al., Plaintiffs, v. UNITED STATES RAILWAY ASSOCIATION et al., Defendants, George P. Baker et al., Intervening-Defendants. Richard Joyce SMITH, Trustee of The New York, New Haven and Hartford Railroad Company, Plaintiffs, v. UNITED STATES of America et al., Defendants, George P. Baker et al., Intervening-Defendants. PENN CENTRAL COMPANY, Plaintiff, v. Claude S. BRINEGAR, as Secretary of Transportation of the United States, et al., Defendants, George P. Baker et al., Intervening-Defendants.
• Court: U.S. District Court — Eastern District of Pennsylvania

383 F. Supp. 510

CONNECTICUT GENERAL INSURANCE CORPORATION et al., Plaintiffs, v. UNITED STATES RAILWAY ASSOCIATION et al., Defendants, George P. Baker et al., Intervening-Defendants.

Richard Joyce SMITH, Trustee of The New York, New Haven and Hartford Railroad Company, Plaintiffs, v. UNITED STATES of America et al., Defendants, George P. Baker et al., Intervening-Defendants.

PENN CENTRAL COMPANY, Plaintiff, v. Claude S. BRINEGAR, as Secretary of Transportation of the United States, et al., Defendants, George P. Baker et al., Intervening-Defendants.

Civ. A. Nos. 74-189, 74-1107 and 74-1149.

United States District Court, E. D. Pennsylvania.

June 25, 1974.

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Willkie, Farr & Gallagher by Louis A. Craco, New York City, for Connecticut General Ins. Corp.

Sullivan & Worcester by Joseph Auerbach, Morris Raker, Charles W. Morse, Boston, Mass., and Gratz, Tate, Spiegel, Ervin & Ruthrauff by Wilbur Bourne Ruthrauff, Philadelphia, Pa., for Richard Joyce Smith, Trustee, New York, New Haven & Hartford R. Co.

David Berger, P. A. by David Berger, and Gerald Jay Rodos, Philadelphia, Pa., for Penn Central Co.

James F. Dausch, and Lloyd Cutler, Washington, D. C., for defendants.

Covington & Burling by Charles A. Horsky, Brice M. Clagett, Washington, D. C., Paul R. Duke, John DePodesta, and John B. Rossi, Jr., Philadelphia, Pa., for the Trustees, Penn Central Transportation Co.

Fox, Rothschild, O'Brien & Frankel by Nochem S. Winnet, Philadelphia, Pa., for First Nat. City Bank of New York.

Before ALDISERT, Circuit Judge, and FULLAM and BECHTLE, District Judges.

OPINION OF THE COURT

ALDISERT, Circuit Judge.

These cases present the question whether an injunction should issue restraining the enforcement of certain provisions of the Regional Rail Reorganization Act of 1973, Public Law 93-236, 45 U.S.C. §§ 743, 744, because of constitutional infirmities. Three-judge courts have been convened pursuant to 28 U.S. C. §§ 2282, 2284, and the matters are consolidated for disposition on cross-motions for summary judgment. The Connecticut General plaintiffs are owners of mortgage bonds and are corporate trustees or successor corporate trustees under indentures, mortgages and deeds of trust of the Penn Central Transportation Company and certain of its lease lines which together comprise the "Penn Central System."¹ Plaintiff, Richard Joyce Smith, Trustee of the property of The New York, New Haven and Hartford Railroad Company, Debtor, is the registered holder of divisional mortgage bonds of Penn Central Transportation Company.² These bonds are secured by a divisional mortgage comprising a first lien attaching certain real property, railroad tracks and improvements of the Penn Central Transportation Company. Plaintiff, Penn Central Company, is the owner of 100% of the stock in and is a creditor of the Penn Central Transportation Company, Debtor.

The defendants are the United States Railway Association, a corporate entity established under Section 201 of the Act, 45 U.S.C. § 711; the Secretary of Transportation; the Chairman of the Interstate Commerce Commission; the Secretary of the Treasury; and the United States of America. Penn Central Trustees, Intervening Defendants, are presently operating the Penn Central Railroad under Section 77 of the Bankruptcy Act, 11 U.S.C. § 205, in this court at Bankruptcy No. 70-347.

While plaintiffs challenge the constitutionality of the 1973 Act with a galaxy of arguments, their central contentions may be summarily outlined:

1. The 1973 Act ultimately requires a permanent taking of their property for which they are entitled to be paid in cash instead of stocks and other securities; that the conveyance procedures offend procedural due process; and that a deficiency judgment against Conrail provides no assurance that just compensation would be paid.

2. The 1973 Act violates the geographical uniformity requirement of Article I, Section 8, Clause 4 of the United States Constitution.

3. The 1973 Act effects an interim taking of their property by requiring continued rail operation pending implementation of the Final System Plan.

I.

Before consideration of these contentions, a short summary of the Act is necessary. The judicial panel on multi-district litigation described it as "an heroic attempt" by Congress to solve a complex and deeply rooted problem. Eight major railroads in the Northeast and Midwest are undergoing reorganization pursuant to Section 77 of the Bankruptcy Act. Of these eight, seven are the only Class I railroads, those with $5 million or more of annual revenue, in the United States in reorganization. "Reasons cited for this Northeast railroad crisis were competition from 90 million automobiles and multiple schedules of competitive jet air service which directly competed with passenger transportation. The decline of railroad freight business also diminished the passenger carrying capabilities of the railroads. Traditional railroad freight business was lost to inland waterway operations, pipelines and trucks. Moreover, government policy tended `to favor non-rail transportation and perpetuate a regulatory climate that was hostile to experimentation.' Water, air and highway transportation were successfully aided through public investment, at little or no user cost while railroads had to make such investments on their own."³

Congress first responded to the rail crisis with the Emergency Rail Services Act of 1970, 45 U.S.C. § 661 et seq., authorizing the Secretary of Transportation to guarantee up to one hundred twenty-five million dollars in certificates issued by trustees of railroads in reorganization under Section 77. However, detailed treatment of the railroads' particular difficulties did not emerge until the enactment of the 1973 Act. As stated in the defendants' brief:

The 1973 Act represents Congress' comprehensive response to the long-range problems of railroads that own or operate most of the trackage in the Northeast and Midwest, and which therefore constitute a vital segment of the U.S. railroad system and an important segment of the U.S. economy.

The Act requires the United States Railway Association . . . to design a Final System Plan for reorganized rail services in the Region . . . and provides, among other things, that a new private railroad, the Consolidated Rail Corporation ("Conrail") shall acquire, own and operate rail properties pursuant to the Final System Plan.

(Brief, 10-11.)

Congress also provided in the 1973 Act several kinds of financial assistance, new in form and substantial in amount, each intended to assist in creating and implementing the overall plan for rail transportation service in the Region and the Conrail portion of that plan in particular. Four of these additional resources deserve special mention. (i) Substantial obligational authority is conferred on USRA. To carry out its purposes under the Act (principally to plan the new rail system and to provide part of the consideration for rail properties acquired by Conrail under the Act), USRA is authorized to issue $1.5 billion in securities to be guaranteed by the Secretary of Transportation. Section 210. Of this sum, not more than $1 billion may be issued to Conrail, of which not less than half must be used by Conrail for rail rehabilitation and modernization. Section 210(b). Additional amounts may be issued if approved by joint resolution of Congress. Ibid. (ii) The Secretary of Transportation, with USRA's approval, is authorized to enter into agreement for the acquisition, maintenance or improvement of property that will be in the Final System Plan; for this purpose, the Act provides obligational authority of $150 million. Section 215. (iii) To meet emergency needs pending implementation of the Final System Plan, the Secretary of Transportation is further authorized to make payments not exceeding $85 million to the trustees of railroads in reorganization. Section 213. (iv) Finally, the Secretary of Transportation and the Association may provide subsidies for continuing noneconomic service and loans for the acquisition and modernization of rail properties. Sections 402 and 403.

(Brief, 12-13.)

Section 207(b)⁴ of the Act sets forth the procedure by which a railroad becomes subject to the transfer provisions contained in the Final System Plan. The Section 77 Penn Central reorganization court has already determined that Penn Central is not reorganizable "on an income basis within a reasonable time under section 77 of the Bankruptcy Act." The next step under the Act is the "180-day" determination by that court as to whether "such railroad shall be reorganized by means of transferring some of its rail properties to the Corporation." This hearing was held on June 10, 1974, but no findings have yet been made.

Within 420 days after January 2, 1974, a Final System Plan must be prepared by the executive committee of the Association and submitted for approval by its Board of Directors. Section 207(c). Yet final review of the Plan remains with Congress. Section 208(a). A Special Court has been created to "exercise the powers of a district judge in any judicial district with respect to such proceedings and such powers shall include those of a reorganization court. The special court shall have the power to order the conveyance of rail properties of railroads leased, operated, or controlled by a railroad in reorganization in the region." Section 209(b).⁵

The Association is required to deliver a copy of the Final System Plan to the Special Court. Section 209(c).⁶ Thereafter, the Special Court shall order the trustees to convey to Conrail "forthwith . . . all right, title, and interest in the rail properties. . . ." Section 303(b).⁷

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After the conveyances, the Special Court reviews the terms of the exchange as set forth in the Final System Plan. In remedying any inadequacy of consideration which it finds, that court is permitted to reallocate...