New Haven Inclusion Cases 8212 917, 920 921, 1038 1057

Decision Date29 June 1970
Docket NumberNos. 914,s. 914
Citation90 S.Ct. 2054,26 L.Ed.2d 691,399 U.S. 392
PartiesNEW HAVEN INCLUSION CASES. * —917, 920, 921, 1038, and 1057
CourtU.S. Supreme Court

[Syllabus from pages 392-397 intentionally omitted] Whitney North Seymour, New York City, for Manufacturers Hanover Trust co.

Lester C. Migdal, New York City, for First Mortgage 4% Bondholders Committee.

Joseph Auerbach, Boston, Mass., for Richard Joyce Smith, Trustee of the Property of the New York, New Haven and Hartford Railroad Co., et al.

Leonard S. Goodman, Washington, D.C., for United States and Interstate Commerce Commission.

Hugh B. Cox, Washington, D.C., for Penn Central Co.

Mr. Justice STEWART delivered the opinion of the Court.

These cases represent the latest state 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 and N & W Inclusion Cases, 389 U.S. 486, 88 S.Ct. 602, 19 L.Ed.2d 723. A con- dition 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.*


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.1 The two railroads formally sought permission to merge under the Interstate Commerce Act, 49 U.S.C. § 1 et seq., on March 9, 1962.2 On April 6, 1966, the Commission authorized the merger of the two roads.3 The union of the two carriers was the largest railroad merger in the history of the Nation,4 bringing together the companies that 'dominate rail transportation in the Northeast.'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 $75,000,000.6 The two companies held some $72,000,000 in working capital and $1,242,000,000 in combined investments.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,'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.9

The predicted economies 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.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,11 the Commission issued a modified order author- izing the Penn-Central merger.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.13 On January 15, 1968, this Court affirmed with minor modifications, and thereby sustained the validity of the merger.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.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 establishments.16 In 1964 the railroad employed about 9,800 people and paid them annual wages amounting to $70,000,000.17 About 30,000 commuters used the line every day to reach work in New York City alone.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 well-being of southern New England.' 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.20 It first went into reorganization under § 77 of the Bankruptcy Act, 11 U.S.C. § 205, on October 23, 1935. Due 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.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. 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.23 By 1959 the financial condition of the New Haven was such as to render the chance of surplus earnings 'slight at best.'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.25 By the middle of 1961, current liabilities exceeded current assets by $36,310,000,26 and the company was losing cash at the annual rate of $18,000,000.27

Finally, on July 7, 1961, the New Haven again petitioned for reorganization under § 77 in the United States 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 * * * best 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.'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. 29 The situation did not improve with the passage of time. '(I)n spite of spartan economies and a sizeable reduction in numbers of employees, the costs of operation * * * offset savings and eroded away the accumulated cash.'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 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 * * *.'31

By 1965 it was evident that the New Haven was on the verge of collapse.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.33 In the view of the trustees, New Haven was 'absolutely faced with economic obsolescence if it continues as an independent, short-line, terminal railroad.'34

On October 11, 1965, the New Haven 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, 1966.35 If carried into effect, the proposed discontinuance would have drastically curtailed passenger train service in New York and Massachuetts, and ended it completely in Connecticut and Rhode Island.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.'37 The Commission acceded in part to the trustees' notice of discontinuance,...

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