IN RE NEW YORK, NEW HAVEN & HARTFORD RAILROAD

• Decision Date: 17 March 1972
• Docket Number: No. 372,71-1929,373,Dockets 71-1903,71-2024.,374,372
• Citation: IN RE NEW YORK, NEW HAVEN & HARTFORD RAILROAD, 457 F.2d 683 (2nd Cir. 1972)
• Parties: In the Matter of The NEW YORK, NEW HAVEN AND HARTFORD RAILROAD COMPANY, Debtor.
• Court: U.S. Court of Appeals — Second Circuit

457 F.2d 683 (1972)

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

Nos. 372, 373, 374, Dockets 71-1903, 71-1929, 71-2024.

United States Court of Appeals, Second Circuit.

Argued January 3, 1972.

Decided March 17, 1972.

Charles A. Horsky, Washington, D. C. (Brice M. Clagett, Covington & Burling, Washington, D. C., Edwin K. Taylor, John F. DePodesta, Philadelphia, Pa., on the brief), for appellants Penn Central Trustees.

Shaun S. Sullivan, Wiggin & Dana, New Haven, Conn., for appellant Penn Central Transp. Co.

Edward Roberts, III, New York City (Frank H. Heiss, Robert L. Crawford, Kelley, Drye, Warren, Clark, Carr & Ellis, New York City, on the brief), for appellant Manufacturers Hanover Trust Co., as Mortgage Trustee.

Joseph Auerbach, Boston, Mass. (Morris Raker and Nancy F. Gans, Sullivan & Worcester, Boston, Mass., James W. Moore and Joseph W. Bishop, Jr., New Haven, Conn., on the brief), for appellee Richard Joyce Smith, Trustee of New York, New Haven & Hartford R. Co.

Lawrence W. Iannotti, New Haven, Conn. (Tyler, Cooper, Grant, Bowerman & Keefe, New Haven, Conn, on the brief), for appellee Lawrence W. Iannotti, Successor Trustee under Debtor's First and Refunding Mortgage.

Lester C. Migdal, New York City (Lawrence W. Pollack, Migdal, Low, Tenney & Glass, New York City, on the brief), for appellee New York, New Haven & Hartford R. Co. First Mortgage 4% Bondholders Committee.

Stuart N. Scott, New York City (Joseph Schreiber, Dewey, Ballantine, Bushby, Palmer & Wood, New York City, on the brief), for appellee Chase Manhattan Bank (N.A.) as Trustee under Debtor's General Income Mortgage.

Before LUMBARD, HAYS and MANSFIELD, Circuit Judges.

HAYS, Circuit Judge:

This is an appeal from an order of the United States District Court for the District of Connecticut, 330 F.Supp. 131, declaring an equitable lien on certain property and imposing a constructive trust on income from certain other property transferred by the debtor New York, New Haven and Hartford Railroad (New Haven) to the Penn Central Transportation Company (Penn Central). We reverse on the ground that the district court lacked subject matter jurisdiction under § 77(a) of the Bankruptcy Act, 11 U.S.C. § 205(a) (1970), to issue the order, since the property affected is within the exclusive jurisdiction of another district court.

This appeal involves one more stage in the lengthy and complicated proceedings involving the reorganization of the New Haven, the merger of the Pennsylvania Railroad and the New York Central Railroad to form the Penn Central, the inclusion of the New Haven's lines in the merged Penn Central, and Penn Central's subsequent petition for reorganization. An outline of the various proceedings from 1961 to 1969 is set forth in New Haven Inclusion Cases, 399 U.S. 392, 399-418, 90 S.Ct. 2054, 26 L.Ed.2d 691 (1970). See also Penn-Central Merger and N & W Inclusion Cases, 389 U.S. 486, 88 S.Ct. 602, 19 L.Ed.2d 723 (1968) and Baltimore & Ohio R. R. v. United States, 386 U.S. 372, 87 S.Ct. 1100, 18 L.Ed.2d 159 (1967). For purposes of this appeal, a brief outline of the previous proceedings will suffice.

In July, 1961, New Haven filed a petition for reorganization pursuant to § 77 of the Bankruptcy Act, 11 U.S.C. § 205 (1970), in the United States District Court for the District of Connecticut. The court approved the petition and appointed trustees. In March, 1962 the Pennsylvania and New York Central railroads applied to the Interstate Commerce Commission for permission to merge. In June, 1962 the New Haven trustees filed with the Commission a petition for inclusion in the proposed merged railroad. The Commission has never proposed a reorganization plan for the New Haven itself. In 1966 the Commission approved the merger of the Pennsylvania and New York Central but required as a condition of approval of the merger that the New Haven's lines be included in the merged railway system. The New Haven trustees and representatives of the Pennsylvania and New York Central railroads thereupon entered into a Purchase Agreement, subsequently modified, which provided that all the New Haven assets would be transferred to Penn Central in return for cash, and stock and bonds of Penn Central. The New Haven trustees requested the Connecticut reorganization court to permit them to petition the Commission to require inclusion of the New Haven's lines in the merged rail system on the terms set forth in the Purchase Agreement. The Connecticut reorganization court granted permission, and in 1967 the Commission approved inclusion on the terms provided in the Purchase Agreement. Subsequent litigation dealt with the proper value to be assigned to the New Haven properties. On December 24, 1968, however, because of the precarious financial condition of the New Haven and the imminent termination of its rail service, the Connecticut reorganization court approved the transfer of New Haven's assets to Penn Central, leaving the exact amount and form of consideration to be paid by Penn Central to be settled finally at a later date. Since the Commission conditioned approval of the merger on inclusion of the New Haven, Penn Central, as a result of the merger, consented to be bound by "whatever terms the Connecticut reorganization court might later confirm . . . ." New Haven Inclusion Cases, supra, 399 U.S. at 428, 90 S.Ct. at 2076. However the transfer of New Haven's assets was expressly made "free and clear of all liens, charges and encumbrances."

The decision of the Supreme Court in New Haven Inclusion Cases, handed down on June 29, 1970, upheld the determination of the Connecticut reorganization court that the value of the New Haven property transferred to Penn Central was approximately $174.6 million. Under the Purchase Agreement, an object of which was to assure that the New Haven estate would actually receive full compensation, a portion of the consideration was to be paid to the New Haven estate in the form of Penn Central stock and bonds. Because of mounting financial pressures, however, the market value of Penn Central stock declined drastically from the date of the first negotiations between New Haven and Penn Central representatives and the final inclusion of the New Haven in the merger. See In re New York, N. H. & H. R. R., 304 F.Supp. 793, 808-810 (D.Conn.1969); New York, N. H. & H. R. R. Co. First Mortgage 4% Bondholders' Committee v. United States, 305 F.Supp. 1049, 1064-1065 (S.D.N.Y.1969). See also Pennsylvania Rail-Road Co.—Merger—New York Central Railroad Co. (Fifth Supplemental Report), 334 I.C.C. 528, 532 (1969). The Supreme Court, therefore, while agreeing with the Connecticut reorganization court's valuation, remanded the case for "further proceedings before the Commission and the appropriate federal courts . . . to determine the form that Penn Central's consideration to New Haven should properly take. . . ." New Haven Inclusion Cases, supra, 399 U.S. at 489, 90 S.Ct. at 2108.

On June 21, eight days before the Supreme Court's decision was announced, Penn Central filed a petition for reorganization in the Eastern District of Pennsylvania. The petition was approved the same day and the district court issued an order restraining and enjoining all persons "from interfering with, seizing, converting, appropriating, attaching, garnisheeing, levying upon, or enforcing liens upon, or in any manner whatsoever disturbing any portion of the assets . . . properties or premises belonging to, or in the possession of the Debtor Penn Central . . . and from commencing or continuing any proceeding against the Debtor" with certain exceptions not here relevant.

After receiving the mandate of the Supreme Court, the Connecticut reorganization court did not remand to the Commission for further proceedings. Instead, it ordered, on August 10, 1970, that a hearing be held on the question of whether the court should modify its prior orders with respect to the New Haven assets previously transferred to Penn Central. The Penn Central trustees appointed by the Pennsylvania reorganization court appeared at the hearing, although they were not parties to the New Haven reorganization. After various proceedings extending over approximately ten months, the Connecticut reorganization court issued a decision on June 11, 1971. The court first held, on various grounds, that it had subject matter jurisdiction. Because the decline in the market price of Penn Central stock and Penn Central's pending reorganization had rendered the court's plan for compensation for the New Haven property grossly inequitable, the court declared that, in order to implement the Supreme Court's mandate to compensate fully "the New Haven estate for the balance of the purchase price remaining due and to provide reasonable security for the sum owed,"

"(1) . . . the 956,576 shares of common stock of the Penn Central Company, the parent company, should be treated as collateral security, of indeterminate value, for the balance of the purchase price due by the Penn Central Trustees; it is wholly unrealistic to treat the stock otherwise; (2) that an equitable lien must be declared on all of the former assets transferred by the New Haven to Penn Central, exclusive of (a) rolling stock and (b) the New Haven\'s one-half interest in the excess income from the Grand Central Terminal properties; and (3) that the Penn Central Trustees hold the latter item of property subject to a constructive trust in favor of the New Haven estate."

The reasoning of the district court was that, as the Supreme Court had determined that the New Haven estate had the constitutional right to receive $174.6 million for the assets transferred to the Penn Central, the New Haven estate could not be relegated to the position of a general creditor in the pending Penn Central reorganization.

On June 21, 1971 the Pennsylvania reorganization court issued an order directing the Penn Central trustees to appear...