Port Authority Trans-Hudson Corp. v. Hudson Rapid Tubes Corp., TRANS-HUDSON

• Decision Date: 31 October 1967
• Docket Number: TRANS-HUDSON
• Citation: 231 N.E.2d 734,285 N.Y.S.2d 24,20 N.Y.2d 457
• Court: New York Court of Appeals Court of Appeals
• Parties: , 231 N.E.2d 734 In the Matter of the PORT AUTHORITYCORPORATION, Respondent-Appellant, Relative to Acquiring Real Property in the State of New York and the State of New Jersey for Hudson Tubes Purposes v. HUDSON RAPID TUBES CORPORATION et al., Appellants-Respondents.

Page 24

285 N.Y.S.2d 24

20 N.Y.2d 457, 231 N.E.2d 734

In the Matter of the PORT AUTHORITY TRANS-HUDSON CORPORATION, Respondent-Appellant, Relative to Acquiring Real Property in the State of New York and the State of New Jersey for Hudson Tubes Purposes v. HUDSON RAPID TUBES CORPORATION et al., Appellants-Respondents.

Court of Appeals of New York.

Oct. 31, 1967.

David W. Peck, Theodore N. Tarlau, L. Robert Driver, Jr., John C. Jaqua, Jr., and Michael A. Cooper, New York City, for appellants-respondents.

Whitney North Seymour, Joseph Lesser, Milton H. Pachter, Robert S. Tobin, John A. Guzzetta, James J. Hagan, Eleanor M. Fox and Nancy M. Clarkson, New York City, for respondent-appellant.

Louis J. Lefkowitz, Atty. Gen., (Julius L. Sackman and Ruth Kessler Toch, Albany, of counsel), for State of New York, amicus curiae.

Arthur J. Sills, Atty. Gen. of New Jersey (David A. Biederman, Newark, N.J., admitted on motion pro hac vice, and Alan B. Handler, Newark, N.J., of counsel), for State of New Jersey, amicus curiae.

KEATING, Judge.

The Hudson Rapid Tubes Corporation and the Hudson and Manhattan Corporation were the owners and operators of an interurban electric railroad system commonly known as the Hudson Tubes. The facility which has been in operation since 1911 carries some 28,000,000 passengers yearly and over 24% Of the daily rush hour commuters between New York City and its New Jersey suburbs.

The Tubes have not, however, achieved the financial success which these figures might indicate. From its inception the Tubes encountered financial difficulty which continually plagued its operation. These difficulties, though initially due to the poor financial structure of the corporation as well as inefficient management, were compounded in recent years by a tremendous decline in the number of commuters as well as increasing labor costs.

The construction of bridges and tunnels opened the gates of New York City to millions of automobile and bus commuters who would otherwise use the Tubes. In addition, improved labor conditions since the 1930's served not only to increase the cost of operating the facility but also contributed to the passenger decline by reducing the work week from 6 to 5 days. All these factors combined accounted for a decline in passengers from 113,142,000 in 1927 to 28,000,000 in 1964.

Moreover, the ready availability of alternative forms of transportation via the tunnels and bridges limited the effectiveness of fare increases in coping with the desperate financial situation brought about by the loss in passenger service and increased labor and maintenance costs.

The situation was such that the corporation which had operated the Tubes was forced into reorganization under the Bankruptcy Act. In this reorganization, completed in 1961, all the shareholder interests, both common and preferred, were wiped out; unsecured creditors were paid in cash at the rate of 10 cents on the dollar and the railroad operation was severed from the building structures in order to prevent the deficits of the former from causing the financial demise of the latter. Under the plan, the building properties were placed in a new entity, the Hudson and Manhattan Corporation, while the railroad operations were to be conducted by a wholly owned subsidiary, the Hudson Rapid Tubes Corporation. The latter was provided with approximately $500,000 in cash, an amount woefully inadequate to meet the long-neglected maintenance needs of the corporation.

Yet, despite its poor financial condition, the Tubes remained an essential public facility, without which the remaining interstate facilities were incapable of transporting the thousands of persons who commuted daily between New York City and New Jersey.

Given the essentiality of this facility and, faced not only with the bleak past but with the dim financial future of the Tubes, the Legislatures of both the States of New York and New Jersey determined that the continued operation of the facility could only be continued under public ownership. Therefore, pursuant to bi-State legislation (L.1962, ch. 209; N.J.L. 1962, ch. 8), the petitioner, Port Authority Trans-Hudson Corporation (PATH), a wholly owned subsidiary of the Port of New York Authority, condemned the property of both the Hudson and Manhattan Corporation and the Hudson Rapid Tubes Corporation.

The Supreme Court (Special Term) made an award of $55,000,000 to the Hudson Rapid Tubes Corporation for its railway property and an award of $17,996,000 to the Hudson and Manhattan Corporation for its buildings. Interest on the Hudson Rapid Tubes award was granted at the rate of 4% Per annum on that portion of the property situated in New York State and at the rate of 6% On the physical assets situated in New Jersey. By stipulation, the railway properties were allocated 65% To New Jersey and 35% To New York. Interest on the award to the Hudson and Manhattan Corporation for its real property was also limited to 4%.

The Appellate Division, two Justices dissenting, modified the award to Hudson Rapid Tubes from $55,000,000 to $3,500,000. The basis of the Appellate Division's ruling was that, because of the poor financial condition of the corporation, there would be no prospective commercial purchasers available on the open market and, therefore, under traditional rules, the only value which the property had to its owners was liquidation or scrap value. The Appellate Division also reduced the rate of interest on the properties situated in New Jersey from 6% To 4%.

The claimant-appellant, Hudson Rapid Tubes Corporation, appeals from the Appellate Division order, alleging that the court erred in predicating its award on salvage or scrap value. It asks us to increase the award to $127,000,000. In addition, it asks reinstatement of Special Term's interest award of 6% On the New Jersey property and, along with its parent, Hudson and Manhattan Corporation, it asks us to strike down as unconstitutional New York's statutory award of 4% Interest as it applies to the New York property for the period after January 1, 1966. ¹

The condemnor, Port Authority Trans-Hudson Corporation, also appeals from so much of the order of the Appellate Division as included in its award $500,000 cash which was not appropriated.

The first and most important issue which must be decided on this appeal is the question of what constitutes just compensation to the owner and operator of an essential public facility when its property is condemned for continued dedication to the same use to which the owner had dedicated the property. It is essential to the resolution of this question to consider first what was actually taken. Special Term divided the property into two classes, the tunnel property and the non-tunnel property.

The tunnel property upon which it placed an evaluation of $30,000,000 included:

(a) Four single-track railway tunnels under the Hudson River, two 6,600 feet long and the other two 6,000 in length--making a total of 25,200 feet, or about 4 3/4 miles of subaqueous tunnels.

(b) Subterranean tunnels or subways, which connect the river tunnels at the railway's terminals--at Church Street and at 33rd Street in Manhattan and at Hoboken and Jersey City--including nine stations which are integral parts of these subway tunnels. The entire railway system measures, as double track, 7.9 miles in length, of which the subterranean tunnels or subways are about 5.4 miles in length.

For this property, which would cost in excess of $400,000,000 to reproduce and would require an expenditure of only $88,000 to put in perfect working order, the Appellate Division awarded virtually nothing, since the property would in liquidation bring at most a nominal sum, if that. ²

The non-tunnel property, for which Special Term awarded $20,000,000 plus an additional increment of $5,000,000 for going concern value, included:

(a) Generally speaking, all the non-tunnel properties, including 223 passenger cars;

(b) the signal system, track and roadbed;

(c) electrical transmission, distribution system, communication system and compressed air system;

(d) structures, including repair shops, electrical substations and surface passenger stations;

(e) emergency fans and blowers, tunnel drainage and sewage ejection systems; and

(f) shop equipment, tools, change booths, turnstiles, etc.

For this non-tunnel property, the Appellate Division awarded approximately $3,000,000. Of this, $1,700,000 covered the cost of recently purchased railroad cars and $1,300,000 the remainder. The Appellate Division also held that, because of the unprofitability of the business enterprise, no separate award for going concern value was justified.

We hold that the Appellate Division erred in its disposition, that its decision, particularly as it relates to the tunnel property, reaches a harsh and unjust result and is neither compelled nor warranted by precedent.

The Appellate Division correctly observed that the traditional rule which has evolved in condemnation cases is that just compensation requires that the property owner be awarded in cash an amount equivalent to the value which the property had in his hands--i.e., the sum of money which he could have realized in an uncoerced sale in the open market to a willing buyer. More precisely stated, the rule is that just compensation requires only that the condemnee be paid for what he has lost and not for what the taker has gained.

A problem like this, however, cannot be dealt with dogmatically. One commentator has described 'value to the taker' as being 'One of the most confusing aspects of the theory of valuation under the law of eminent domain' (1 Orgel, Valuation Under Eminent Domain (2d ed., 1953) p. 351). The decisions are not always helpful. The oft-cited opinions of Mr. Justice Holmes in City of New York v. Sage, 239 U.S. 57, 36 S.Ct. 25, 60 L.Ed. 143 and McGovern v. City of New York, 229 U.S. 363, 33 S.Ct. 876, 57 L.Ed. 1228...