In re New York, New Haven and Hartford Railroad Co.

• Decision Date: 13 August 1968
• Docket Number: Bankruptcy No. 30226.
• Citation: 289 F. Supp. 451
• Parties: In the Matter of the NEW YORK, NEW HAVEN AND HARTFORD RAILROAD COMPANY, Debtor.
• Court: U.S. District Court — District of Connecticut

289 F. Supp. 451

In the Matter of the NEW YORK, NEW HAVEN AND HARTFORD RAILROAD COMPANY, Debtor.

Bankruptcy No. 30226.

United States District Court D. Connecticut.

August 13, 1968.

Migdal, Low, Tenney & Glass, by Lester C. Migdal and Lawrence W. Pollack, New York City, for Bondholders' Committee.

Dewey, Ballantine, Bushby, Palmer & Wood, by Wilkie Bushby and Joseph Schreiber, New York City, for Chase Manhattan Bank.

Simpson, Thacher, & Bartlett, by Albert X. Bader, Jr., Horace J. McAfee, and John J. McGraw, New York City, for Manufacturers Hanover Trust Co.

Carter, Ledyard & Milburn, by Walter A. Kernan and Richard McLaren, New York City, for United States Trust Co. of New York.

Myron S. Isaacs, New York City, and Homer Kripke, Jersey City, N. J., for Oscar Gruss & Son.

Alexander & Green, by J. Kenneth Campbell, New York City, for Erie-Lackawanna Railroad Co.

Robert W. Ginnane, Gen. Counsel and Leonard S. Goodman, Asst. Gen. Counsel, for Interstate Commerce Commission.

Debevoise, Plimpton, Lyons & Gates, by Roswell B. Perkins, Francis T. Plimpton, Robert L. King, Harvey J. Goldschmid, William G. Bardel; and Gerald E. Dwyer, Ulrich Schweitzer, New York City, and Windsor F. Cousins, Philadelphia, Pa., for Pennsylvania New York Central Transportation Co.

Sullivan & Worcester, by Joseph Auerbach, and Morris Raker; Boston, Mass., and Robert M. Peet, New York City, James W. Moore, and Robert W. Blanchette, New Haven, Conn., for Richard Joyce Smith and William J. Kirk.

Louis J. Lefkowitz, Atty. Gen., and Walter J. Myskowski, Washington, D. C., for the State of New York.

Robert K. Killian, Atty. Gen., and Samuel Kanell, Hartford, Conn., for the State of Connecticut.

Elliot L. Richardson, Atty. Gen., and Christopher Armstrong, South Byfield, Mass., for the Commonwealth of Massachusetts.

Herbert F. De Simone, Atty. Gen., and Robert M. Schacht, Providence, R. I., for the State of Rhode Island.

Armistead B. Rood, Providence, R. I., for Boston & Providence R.R. Stockholders Development Group.

MEMORANDUM OF DECISION ON REORGANIZATION PLAN

ANDERSON, Circuit Judge (sitting by designation).

On March 29, 1968, pursuant to §§ 77 (d and e) of the Bankruptcy Act, the Interstate Commerce Commission certified to this court the first step of a plan of reorganization of the Debtor, the New Haven Railroad, which it had approved by its order of November 16, 1967.¹ Shortly thereafter the court gave due notice to all parties in interest of the time within which objections to the plan might be filed and of the date, subsequent thereto, when the parties would be heard for or against "such objections to the plan," and on any claims for equitable treatment. On April 8, 1968 this court appointed the Honorable John Van Voorhis as Special Master, under the authority of § 77(c) (13) of the Bankruptcy Act, to hear and report respecting the New Haven's right, title or interest in the Grand Central Terminal properties. Thereafter Judge Van Voorhis held hearings, took evidence and filed a report on June 18, 1968, and a supplemental report on June 24, 1968. Following preliminary hearings a final hearing was held by this court on July 26, 1968 on the plan and on the reports of the Special Master. All the points raised have been both briefed and orally argued, and the matter is now fully submitted to this, the reorganization court.

In addition to the procedure provided under § 77(e), the First Mortgage 4% Bondholders Committee, The Chase Manhattan Bank, Trustee, Manufacturers Hanover Trust Co., Trustee, United States Trust Co., Trustee, and Oscar Gruss & Son (hereinafter collectively referred to as "the bondholders") appealed to a three-judge court in the Southern District of New York under Title 28 U.S.C. § 2284 on the ground that the terms and conditions of the inclusion of the New Haven in the Penn-Central under the plan were not just and reasonable, or equitable, as required by §§ 5(2) (b) and (d) of the Interstate Commerce Act. That court, consisting of Circuit Judge Friendly and District Judges Weinfeld and Levet, heard the case and later filed its decision July 10, 1968, New York, New Haven and Hartford Railroad Co. v. United States, 289 F.Supp. 418 (S.D.N.Y. 68 Civ. 296). Many of the issues raised in the three-judge court are also before this court and, where the three-judge court did not adopt the position urged by one of the parties, that party has in most instances renewed its claim here by attacking the rationale of the three-judge court in deciding such issues. That court remanded the case to the Commission for further proceedings consistent with its opinion; and, in conformity with the views of all parties, this court likewise refers the proceedings back to the Commission for further action. In so doing this Court intends to leave the Commission the maximum flexibility of decision within the general guidelines set by this court and the three-judge court.

The two principal questions now before the reorganization court are: (1) whether or not the standard of value which the New Haven is entitled to receive for the transfer of its assets to the Penn-Central is its liquidation value as of December 31, 1966 or some other measure of worth, together with the accompanying question of whether the Commission conformed to the proper standard in its order of November 16, 1967; and (2) whether the time is now foreseeable in the near future when the continued deficit operation of the New Haven in the public interest at the expense of the creditors must be held to be a taking of their property without due process or just compensation, in violation of the Fifth Amendment to the Federal Constitution.

Before discussing these major points further mention should be made of the general constitutional principles which bear on their solution. While the power provided under the Bankruptcy Act is broad and ample,² the Constitution places limits on the exercise of that power by both Congress³ and the courts.⁴ The due process clause of the Fifth Amendment, for example, protects the rights of creditors from unlawful invasion by either Congress or the courts.⁵ As the rights of creditors cannot be arbitrarily sacrificed or restricted, the creditors of the New Haven are entitled to a constitutional minimum of value for the property to be sold to the Penn-Central, which, on its part, is entitled to be required to meet only equitable terms. The constitutional and equitable principles, however, are sufficiently flexible that a proper value may be arrived at which is fair to all parties. This court is of the opinion that it faces an even more serious problem which is the continuing and accelerating wasting away of the Debtor's estate through operating losses while the legal processes for determining value go on and the consummation of actual inclusion is deferred.

In expressing its own view concerning the proper standard of valuation it should still be borne in mind that the court does so primarily to furnish a guideline; and in making its own determination the Commission should make all necessary findings relevant, not only to that standard, but also those essential to such other theory of price determination as the Commission may adopt if it is in disagreement with the liquidation measure of valuation. It is the opinion of the court that the Penn-Central should pay to the Trustees of the New Haven at least the liquidation value of the New Haven as of December 31, 1966. This is so not because the Constitution necessarily requires it but because that standard, under the circumstances of this case, is fair both to the creditors and to the Penn-Central.

Some of the parties have asked the court to reject this standard and argue in favor of a "going concern value" while others seek the adoption of a "fair upset value," but these proposed alternatives are wholly inappropriate for the attendant conditions of the present reorganization. The concept of "going concern value" is fictional as applied to the New Haven because it ignores the Railroad's long and continuous history of deficit operations.⁶ Indeed, as later noted herein the New Haven's operations must soon terminate. With regard to "fair upset value" it is difficult to see how, in applying it to the New Haven under the circumstances of the reorganization, it would differ at all from "fair liquidation value." The term "fair upset price" in its ordinary meaning refers to the lowest price which would be accepted for an item offered for sale at an auction. From this beginning it was borrowed and used extensively in equity reorganizations which were designed to recapitalize a viable corporation which had operating income,⁷ and in this connection was used to force minority security holders into accepting the plan. In other instances the upset price was fixed for the purpose of protecting such minority interests. In any event, it was principally used against co-security holders rather than against a third party such as Penn-Central.⁸ In connection with a corporation as moribund as the New Haven, fair upset price is analogous to "fair market" or "liquidation" value, although there is some authority that it may be less, at least where the purchaser is a public authority.⁹

Turning to a somewhat fuller discussion of liquidation value we start with the bondholders argument that the value fixed as of December 31, 1966 must be treated as a fixed and immutable constitutional minimum which cannot be diminished by subsequent deficit operation of the Railroad. Both the Commission and the courts, however, have reiterated in this and in related proceedings that as bondholders of a railroad their interests are subject to such invasion as may be essential to continue the operation of the railroad for a reasonable period of time to provide an opportunity to work out a permanent plan or means of continuing the operation, if possible, to the extent that it is required by the public interest.¹⁰

Throughout the...