NEW HAVEN INCLUSION CASES*
No. 915
Supreme Court of the United States
Argued March 30, 1970—Decided June 29, 1970
399 U.S. 392
*No. 915, New York, New Haven & Hartford Railroad Co. First Mortgage 4% Bondholders Committee v. United States et al., No. 917, Manufacturers Hanover Trust Co., Trustee v. United States et al., and No. 921, Chase Manhattan Bank, N. A., Trustee v. United States et al., on appeal from the United States District Court for the Southern District of New York. No. 914, New York, New Haven & Hartford Railroad Co. First Mortgage 4% Bondholders Committee v. Smith, Trustee, et al., No. 916, Manufacturers Hanover Trust Co., Trustee v. United States et al., No. 920, Chase Manhattan Bank, N. A., Trustee v. Penn Central Co. et al., No. 1038, Penn Central Co. v. Manufacturers Hanover Trust Co., Trustee, et al., and No. 1057, United States et al. v. New York, New Haven & Hartford Railroad Co. First Mortgage 4% Bondholders Committee et al., on certiorari to the United States Court of Appeals for the Second Circuit in advance of judgment.
MR. JUSTICE STEWART delivered the opinion of the Court.
These cases represent the latest stage 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 Cases, 389 U. S. 486. A con-
†On June 21, 1970, the Penn Central Transportation Company filed a petition for reorganization under § 77 of the Bankruptcy Act,
I
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,
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-
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
“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,
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
“[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 . . . beset 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
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
On October 11, 1965, the New Haven notified the Commission, pursuant to
As 1966 gave way to 1967, the New Haven‘s situation deteriorated still further. As of April 1967 the reorganization court thought “the prospect for the continued operation of the Railroad was very dim.”39 The road lacked even a current expense fund from which to satisfy the “six months” creditors, and the court thought it
As 1967 came to an end, so did the New Haven‘s cash reserve. By August 31 the cash balance fell to $4,500,000—a precarious condition for a company requiring $1,750,000 a week simply to meet current operating expenses.42 The trustees estimated that as of December 31, 1967, the balance would decline to $3,100,000 and two months later would fall to $850,000.43 The New Haven‘s financial position had thus eroded to the point where its shutdown was “imminent. . . .”44
The Commission, as we have noted, authorized the merger of the two roads in 1966. But in so doing, it found that “[w]ithout some radical change in circumstances, even if this merger application were denied, N[ew] H[aven] would face a nearly insuperable task in bringing itself out of bankruptcy.” Merger Report, 327 I. C. C., at 522. The Commission concluded that the proposed Penn-Central combination, “without complete inclusion of N[ew] H[aven], would not be consistent with the public interest. . . .” Id., at 524. Accordingly, it required “all the New Haven railroad to be included in the applicants’ transaction,” and conditioned its approval of the merger upon that inclusion, id., at 524, 527. In so doing, the Commission spelled out Penn
“The Pennsylvania New York Central Transportation Company shall be required to include in the transaction all the New York, New Haven and Hartford Railroad Company . . . upon such fair and equitable terms as the parties may agree subject to the approval of the Bankruptcy Court and the Commission. Within 6 months after the date this report is served, the parties shall file with the Commission for its approval, a plan for such inclusion. In the event the parties are unable to reach an agreement (and subject to approval by the Bankruptcy Court) such inclusion shall be upon such fair and equitable terms and conditions as the Commission may impose.
“Jurisdiction is hereby reserved for such purposes. Consummation of the merger by applicants shall indicate their full and complete assent to these requirements.” 327 I. C. C., at 553.
Condition 16 of the Merger Report reiterated that
“Consummation of the transaction approved herein shall constitute on the part of The Pennsylvania Railroad Company and the New York Central Railroad Company, their successors and assigns, acquiescence in and assent to the conditions stated in this appendix and in the attached report.” Id., at 555.
Having determined to require the inclusion of New Haven in Penn Central as a condition of merger, the Commission remitted the parties to private negotiation of the terms of inclusion. Id., at 527. The New Haven trustees on the one side, and the Pennsylvania and New
they never submitted the Agreement to that court for its approval. Moreover, they had stipulated with Pennsylvania and Central that they would not challenge the terms of the Purchase Agreement. The preliminary memoranda negotiated between the trustees and the two railroads contained a provision, substantially embodied in § 11.7 of the Agreement itself, that New Haven would not make or file
“any further statement, stipulation or other document in the pending Pennsylvania-Central merger proceedings before the I. C. C. . . . , or any judicial review thereof, other than in connection with (a) a position relating to the New Haven taken by any other party . . . ; or (b) a failure of the I. C. C. to find either (i) that the New Haven should be included in such merger or (ii) that jurisdiction is to be retained by the I. C. C. for later determination of any petition by the New Haven for such inclusion, provided, however, that any such statement, stipulation or other document made or filed by the Trustees shall not be inconsistent with the provisions and intent of this Agreement.”
The reorganization court suggested that the bondholders rather than the trustees press for early inclusion due to the impropriety of the trustees’ taking “any action which would be or appear to be a repudiation of [the contract‘s] letter or spirit.” See Erie-Lackawanna R. Co. v. United States, 279 F. Supp., at 333; and see Oscar Gruss & Son v. United States, 261 F. Supp., at 393-394.
On November 16, 1967, the Commission ratified the Purchase Agreement as the basis for the inclusion of New Haven in Penn Central. Pennsylvania R. Co.—Merger—New York Central R. Co., 331 I. C. C. 643 (“Second Supplemental Report“). It looked upon the fact that the parties had been able to reach agreement as an indication that even though the New Haven trustees were selling properties having no value as an operating entity, they nevertheless had enjoyed a degree of bargaining power by virtue of the requirement that Penn Central take in New Haven as a condition of the merger. 331 I. C. C., at 657. “[W]here a transaction is bargained at arm‘s length,” said the Commission, “each side is presumably capable of determining its own best interest, and our primary function is to discover whether the transaction will be in the public interest.” Id., at 656. The Commission then undertook its independent analysis of the value of the New Haven properties. Although the Purchase Agreement “carrie[d] some probative force as to the values of the properties involved, it [was] by no means controlling.” Id., at 657. The Commission must still determine the price “on the basis of all the evidence pertaining thereto, not merely the agreement and supporting evidence.” Id., at 660 n. 12.
Upon its independent review of the record, the Commission found that the asset value of the New Haven properties to be transferred to Penn Central and of the
4. The inclusion litigations. At this juncture the Commission‘s determination of the terms of inclusion was subjected to simultaneous judicial review in two separate forums. On January 23, 1968, eight days after this Court‘s approval of the merger and eight days before the merger itself, the New Haven bondholders commenced five actions in the United States District Court for the Southern District of New York to set aside the Commission‘s order. The three-judge District Court reconvened to hear the actions and shortly thereafter consolidated the five cases into one. On March 29, 1968, the Commission certified the first step of its plan for the reorganization of the New Haven—the sale of its assets to Penn Central—to the reorganization court.47 Pursuant
On July 10, 1968, the three-judge court, following extensive briefing and argument on the numerous issues underlying the price question, found itself unable to agree with the Commission in several major respects. It therefore vacated so much of the Commission‘s order as found the terms of Penn Central‘s acquisition of the New Haven‘s assets to be just and reasonable and remanded the cause for further proceedings. New York, N. H. & H. R. Co., First Mortgage 4% Bondholders’ Committee v. United States, 289 F. Supp. 418. On August 13, 1968, also after extensive briefing and argument, the reorganization court independently returned the Commission‘s plan for further proceedings. In re New York, N. H. & H. R. Co., 289 F. Supp. 451. On the overriding question of price, the two courts were in accord: by fixing the worth of the New Haven at $125,000,000, the Commission had substantially understated the value of the properties to be transferred. The
Meanwhile, the continuing drain on the New Haven‘s dwindling cash reserves called for—and received—drastic action. Upon remanding the Commission‘s proposed plan under
On the remand, the Commission reopened the record for the reception of further evidence and briefing in accordance with the instructions of the two reviewing courts. Its revaluation of the New Haven properties, announced on November 25, 1968, resulted in an increase in total worth of some $37,700,000, yielding a new price of $162,700,000 for the properties to be transferred. Pennsylvania R. Co.—Merger—New York Central R. Co., 334 I. C. C. 25, 53 (“Fourth Supplemental Report“). But the Commission then invoked “other pricing considerations” not taken into account at the time of its prior report. Application of the new considerations effected a reduction of $22,081,000 from the newly calculated asset value, leaving a net value of $140,600,000—$15,600,000 more than the Commission‘s initial estimate, but $17,400,000 less than the lowest range of value suggested by either of the two District Courts. In addition, the Commission required Penn Central to pay $5,000,000 toward the New Haven‘s interim operating expenses and, yielding to the directive of the reorgani-
The Commission certified its revised plan to the reorganization court on December 2, 1968. Within three weeks the bondholders filed their objections. On December 24, 1968, the reorganization court released the assets of the debtor‘s estate to Penn Central without approving the price terms set by the Commission. The court reiterated that failure to include New Haven in Penn Central by January 1, 1969, would result in immediate termination of all New Haven train service. On December 31 the estate transferred its assets to Penn Central.
At once the bondholders pressed for judicial review of the Commission‘s revised evaluation. With their objections to the plan of reorganization already pending before the reorganization court, representatives of holders of the debtor‘s first and refunding mortgage 4% bonds commenced two separate actions against the United States and the Commission before the three-judge District Court in New York. The Manufacturers Hanover Trust Company and the Chase Manhattan Bank, trustees under other mortgage bonds, commenced two more actions against the same defendants.48 The three-judge court consolidated the four cases and granted intervention—to the New Haven trustees as parties plaintiff and to Penn Central, the Commonwealth of Massachusetts, and the
On May 28, 1969, the reorganization court again rejected the plan submitted by the Commission. Although it accepted the Commission‘s determinations on some issues, the court overruled the Commission with respect to its valuation of the New Haven‘s Harlem River and Oak Point freight yards and its added deductions introduced for the first time on the remand. The court also instituted its own “underwriting” plan to ensure equivalent value for the estate with respect to the Penn Central common stock given in partial consideration for the transferred New Haven properties. In re New York, N. H. & H. R. Co., 304 F. Supp. 793. An order implementing decision and remanding to the Commission was entered on July 28, 1969. 304 F. Supp. 1136.
On June 18, 1969, the three-judge court filed its opinion in the bondholders’ action. With one judge in dissent, the court upheld the Commission‘s valuation of the freight yards and its added deductions on the remand. The court also adopted the underwriting plan devised by the reorganization court. New York, N. H. & H. R. Co., First Mortgage 4% Bondholders’ Committee v. United States, 305 F. Supp. 1049. A decree fixing the terms of judgment followed on September 11, 1969.49
With the two District Courts thus in agreement, after two rounds of judicial review, on many of the substantial issues that had come before them, but in disagreement on matters amounting to more than $28,000,000 in value, the bondholders took direct appeals to this Court from the judgment of the three-judge court. They also appealed from the order of the reorganization court to the United States Court of Appeals for the Second Circuit. The United States, the Commission, and Penn Central took no appeals from the decree of the three-judge court but cross-appealed to the Court of Appeals from the order of the reorganization court. The Court of Appeals consolidated the appeals from the reorganization court, and the parties then petitioned this Court to grant certiorari to the Court of Appeals in advance of its judgment, pursuant to
II
We first consider the dual review to which the District Courts in New York and Connecticut subjected the price determinations of the Interstate Commerce Commission. From the outset all the parties in the three-judge court recognized that the pricing questions presented in the litigation there were also destined to come before the reorganization court under
In this ruling the three-judge court was correct. The jurisdiction of the reorganization court was not open to question. Upon its approval of the New Haven‘s petition for reorganization in 1961, that court had acquired “exclusive jurisdiction of the debtor and its property wherever located . . . .”
The United States also sought to avoid duplicate litigation—but by bypassing the New York rather than the Connecticut federal court. In a motion filed shortly
The Government‘s motion to dismiss was opposed by Penn Central, the New Haven trustees, the State of New York, and the bondholders. Significantly, the Commission did not oppose the motion. Indeed, the Commission agreed with the United States that “most (and perhaps all) of the issues raised by the plaintiffs in this three-judge Court will be reviewable by the Reorganization Court,” conceded that “the resulting concurrent jurisdiction is awkward, at least in theory,” and concluded tentatively that “the scope of judicial review . . . in the Reorganization Court would, as a practical matter[,] be the same as in this three-judge Court.” The three-judge court denied the Government‘s motion to dismiss. The bondholders’ actions, the court said, came within the letter of the statutes authorizing review of orders of the Commission. The court conceded there was “an area of overlap” between the work of the New York and Connecticut forums, but thought nothing in
Moreover, at the outset of the litigation, the jurisdiction of neither the New York nor the Connecticut court was “complete.” On the one hand, the reorganization court lacked coercive power over Penn Central: under
Moved largely by the concern that neither court might have jurisdiction over the entire case, the three-judge court was of the opinion that matters should proceed simultaneously in both forums with a view to bringing the
But the circumstances of the case did not inexorably command review in two separate courts. There was no danger that application of the “fair and equitable” test under
Moreover, there was no reason to suppose that the reorganization court would be unable to adjudicate all the questions presented by the terms of the Commission‘s inclusion order. Although the three-judge court expressed concern that certain issues, such as a loss-sharing arrangement during the interim period between merger and inclusion, might not lie within the jurisdiction of the reorganization court, the reorganization court nevertheless reached those issues without, so far as the record discloses, jurisdictional objections from any party.
The three-judge court thus confronted a situation where it was asked to consider the same pricing questions, to be determined by recourse to the same standards of
Surely a vesting of primary jurisdiction in the reorganization court comports with the basic purpose of
But we need not decide the question exclusively on the grounds just set out. For in the circumstances in which the United States presented its motion to dismiss in this case, the course of prior litigation had left the three-judge court virtually nothing to decide. On January 15, 1968, this Court had upheld the validity of the Penn Central merger under
Two weeks later Penn Central merged. At that point the lack of jurisdictional “completeness” in the reorganization court, to which we have earlier referred, was cured; for there now remained no question of Penn Cen-
Prior decisions of other three-judge courts, affirmed by this Court on direct appeal, lend support to the proposition that the three-judge court should have deferred to the reorganization court. In Chicago & N. W. R. Co. v. United States, 52 F. Supp. 65, the debtor railway company brought suit against the Commission in the United States District Court for the Northern District of Illinois, seeking three-judge-court review of a plan of reorganization previously approved by the Commission and the courts. The District Court noted its “limited power” under the statute providing for review by a court of three judges, 52 F. Supp., at 66. It conceded the “seemingly applicable language” of the three-judge-court statute to “any order of the Interstate Commerce Commission,” but held that once the Commission has approved a plan of reorganization under
Even closer in point is a case that arose during the first reorganization of the New Haven Railroad—Group of Boston & Providence R. Corp. Stockholders v. ICC, 133 F. Supp. 488. Shareholders of the Boston & Providence, also undergoing reorganization, sought judicial review before a three-judge court of the Commission‘s refusal to provide joint rates as between New Haven and Boston & Providence—exclusively an Interstate Commerce Act function. See
We therefore hold that the three-judge court here should have granted the Government‘s motion to the extent of deferring to the reorganization court in proceedings ultimately involving only the price to be paid for the assets of the debtor‘s estate.59
III
After 35 years of
In structuring the cooperative endeavor of agency and court, Congress “placed in the hands of the Commission the primary responsibility for the development of a suitable plan” for the debtor railroad. Ecker v. Western Pacific R. Corp., 318 U. S., at 468. As the Court said in Group of Institutional Investors v. Chicago, M., St. P. & P. R. Co., supra, “The ratio of debt to stock, the amount of fixed as distinguished from contingent interest, the kind of capital structure which a particular company needs to survive the vicissitudes of the business cycle—all these have been reserved by Congress for the expert
But the respect given the Commission as draftsman of the plan of reorganization entails no abdication of judicial responsibility for the workings of the administrative agency. As we have had occasion to say in describing other aspects of the Commission‘s work, ” ‘Congress did not purport to transfer its legislative power to
But the reorganization court may also do more. Under
In sum, Congress has confided to the reorganization court the “power to review the plan to determine whether the Commission has followed the statutory mandates . . . and whether the Commission had material evidence to support its conclusions.” Reconstruction Finance Corp. v. Denver & R. G. W. R. Co., 328 U. S. 495, 509; cf. Penn-Central Merger Cases, 389 U. S., at 498-499. In the reorganization court reposes ultimate responsibility for determining that the plan presented to it by the Commission satisfies the “fair and equitable” requirement of
There remains to consider the scope of review in this Court in passing upon the judicial determinations of the reorganization court. That we have granted certiorari to the Court of Appeals in advance of the appellate court‘s judgment does not alter the fact that “our task is limited.” Penn-Central Merger Cases, 389 U. S., at 498. It is not for us to pass upon the myriad factual and legal issues as though we were trying the cases de novo. “It is not enough to reverse the District Court that we might have appraised the facts somewhat differently. If there is warrant for the action of the District Court, our task on review is at an end.” Group of Institutional Investors v. Chicago, M., St. P. & P. R. Co., 318 U. S., at 564.
IV
As we have earlier noted, the purchase and sale negotiated by Pennsylvania, New York Central, and the New
In light of “the chronic deficit character” of the New Haven operation, id., at 658, the reorganization court understandably accepted the liquidation approach to valuation. “The concept of ‘going concern value’ is fictional as applied to the New Haven,” it said, “because it ignores the Railroad‘s long and continuing history of deficit operations.” 289 F. Supp., at 455. (Footnote omitted.)
Before the Commission, the New Haven trustees and Penn Central submitted complete studies of the debtor‘s liquidation value, consisting of current assets, special funds, investments, real estate, and other assets. As the Commission described it, “Liquidation value as used by both the N[ew] H[aven] trustees and Penn-Central [was] the estimated market value that would be realized in a total liquidation, less the cost of dismantling properties and other liquidation costs and after discounting proceeds to present worth.” 331 I. C. C., at 697; cf.
The New Haven study, based on the assets held by the debtor as of December 31, 1965, was made over a nine-month period by persons who, the Commission found, were familiar with the railroad, its operating area, and the nature and condition of its properties. The Penn Central study valued the assets as of December 31, 1966; it was made in under two months by persons less familiar with the railroad. Both studies revealed that nearly half the New Haven‘s asset value consisted of its holdings in real estate. The New Haven study produced a gross value for all assets, exclusive of New Haven‘s interest in the Grand Central Terminal properties, of $230,290,000; the Penn Central study, $150,321,000.
Consistent with the liquidation hypothesis, both New Haven and Penn Central deducted from the gross value of the New Haven assets the expenses that would be incurred if a liquidation in fact took place. These included not only the estimated expenses of sale but, in the case of bridges, trestles, and culverts, removal costs for conversion of the realty to nonrailroad use—costs that often left the assets with a net negative value. The New Haven trustees hypothesized both a six- and a 10-year liquidation period, with expenses for liquidation operations plus taxes and interest aggregating $59,481,000 and $76,847,000, respectively; Penn Central estimated the expenses of a 10-year sale to be $62,172,000. The net liquidation value of the assets was arrived at by deducting the liquidation expenses and certain current assets not to be transferred to Penn Central, along with a further discount to present worth to reflect the hypothesis that receipts would be coming in over a six- or 10-year period.
The Commission concluded that once the New Haven estate embarked on a liquidation sale, it would dispose of the assets as quickly as practicable; the Commission
As we have noted earlier, the reorganization court did not accept the $125,000,000 figure, with a consequent remand and second round of review. The bulk of the Commission‘s valuation has now won the approval of the reorganization court and is not challenged by any of the parties here. There remains in dispute, however, the valuation of several items, aggregating nearly $200,000,000, and it is to those items that we now turn.
1. The Grand Central Terminal properties. By far the largest component in the dispute over the liquidation value of the New Haven is the debtor‘s interest in the Grand Central Terminal properties. This real estate complex consists of several parcels in the area of midtown Manhattan bounded by 42d Street on the south, Madison Avenue on the west, 60th Street on the north, and Lexington Avenue on the east. Included in the properties are the Barclay, Biltmore, Commodore, Roosevelt, and Waldorf-Astoria hotels; the Pan American building as well as other office buildings along Park Avenue; and the Yale Club. The total assessed value of the Grand Central Terminal properties as of 1965 was $227,225,000.
The New Haven railroad acquired the right to run its trains into Manhattan in 1848, when it entered into an agreement for use of the tracks of the predecessor of the New York Central, to extend for the lives of the respec-
In 1903 and 1904 the State of New York enacted further legislation requiring the placement of the railroad tracks below ground through the 15-block stretch north of the present Terminal. It did not take the Central entrepreneurs long to realize that compliance with the legislative edict left the company a vast area of midtown Manhattan suitable for realty development. In 1907 Central entered into the basic contract with New Haven under which the present Grand Central Terminal was built. The 1907 instrument recited that it had become necessary to rebuild the Terminal, including yards and tracks, in order to provide facilities for the proper management and conduct of the two railroads. Central promised to buy needed land and rights-of-way; New Haven, to make payments in connection with the demolition of the old station and the construction of the new. The 1907 agreement further recited that nothing it contained should impair the rights of the parties under the 1848 agreement. It then went on to provide that Central “doth demise, let and lease” the use of the railroad terminal to New Haven in common with Central. “Railroad terminal” was defined to “mean and include the land, and interests in land, and all improvements thereon . . . , and all rights in any ways on which said land may abut . . . .”
Paragraph 4 of the 1907 agreement provided for joint contributions by New Haven and Central to Terminal maintenance and operation, calculated on the parties’ respective car and locomotive usage of the station. The paragraph also obligated New Haven to a minimum
In 1909, Central and New Haven began the joint financing of construction on the property referred to in the 1907 agreement, and in 1913, they entered into a supplemental agreement in order “to express more fully the intent of the parties hereto as to the right of the New Haven Company and the Central Company with respect to the construction, maintenance and use” of the Terminal properties. The supplemental agreement recited that New Haven‘s right of user included “the right . . . to join with . . . Central . . . in the construction, holding, maintenance and leasing of buildings . . . upon the land included within the Railroad Terminal.” The heart of the 1913 amendment was a detailed provision for the sharing and reimbursement of construction and maintenance costs, along with a reaffirmation of the procedure established in ¶ 14 of the 1907 agreement, under which all rentals were to be credited to the Terminal enterprise. In the following years the two parties entered into hundreds of subagreements relating to the leasing, financing, and sharing of rentals from buildings constructed in the Terminal area. Income from the buildings was credited to the fixed charges, and to the maintenance and operation of the Terminal itself.
None of the agreements between Central and New Haven expressly provided for the disposition of “excess income” left over after the satisfaction of the Terminal expenses. For half a century after the 1913 agreement, the “excess income” question was of academic interest only, since expenses annually exceeded revenues. But
When the New Haven trustees first began negotiations with Pennsylvania and Central for the inclusion of the debtor‘s assets in Penn Central, they proposed that New Haven‘s interest in the nonoperating Terminal properties be excluded from the takeover, with final disposition deferred until the outcome of the then-pending litigation. But Central insisted it would not consider inclusion of New Haven in the merger unless it got absolute title to all the Terminal properties. The New Haven trustees thereupon sought the advice of legal counsel. They were told that under the agreements with Central, New Haven not only had no fee or leasehold interest in the properties, but had no rights at all that would survive cessation of its train service in and out of the Terminal other than the reimbursement of monies already advanced toward construction of buildings in the area. Although the New York lawsuit was pending to determine New Haven‘s right to participate in the excess income, the trustees concluded that as an alternative to risking “tremendous expense and long delay” in litigation, 289 F. Supp., at 462, resolution of the inclusion negotiations was of sufficient value to warrant their transferring the debtor‘s interest, whatever it might be, to Penn Central for no consideration whatever in exchange.
From the outset the bondholders dissociated themselves from the trustees on the question of the debtor‘s rights in the Terminal properties. Some of the New Haven creditors claimed the value of those rights to be $20,000,000—the sum of unreimbursed advances for building construction and capital improvements as carried on the New Haven books. Others said it was $50,000,000—the capitalization of one-half the excess in-
In its Second Supplemental Report the Commission eschewed responsibility for determining the legal rights of New Haven in the properties and set out only to value the debtor‘s claim. Confronting the complex legal relationship between Central and New Haven, with the consequent unpredictability of litigation, and unwilling to defer valuation of New Haven‘s interest to the completion of all possible contract actions between the two parties, the Commission set the value of the claim at $13,000,000. It arrived at this figure by taking the average of two unrelated sums: $5,000,000, representing Penn Central‘s estimate of the nuisance value of New Haven‘s claim; and $20,000,000, representing the capitalization of New Haven‘s share of the average of the excess income in 1964 and 1965, based upon its proportional usage of the Terminal.
Faced with the Commission‘s disclaimer of responsibility for resolution of the legal controversy between Central and New Haven, and given the Commission‘s Draconian solution to the question of value, the reorganization court appointed a special master to consider New Haven‘s legal interest in the Terminal properties.61 Based on his
In light of the conclusion that Central and New Haven had embarked on an enterprise akin to a partnership, the Special Master concluded that once the Terminal revenues satisfied expenses, the excess income belonged equally to each of the railroads. In his view, the car-use formula of the 1907 agreement ceased to be effective once revenue met expenses, and the principle of equality be-
In its Fourth Supplemental Report the Commission accepted the determination of the reorganization court that New Haven would have retained a right to one-half the excess income even upon liquidation. 334 I. C. C., at 30-31. Following an extensive consideration of future Terminal expenses and office-building and hotel income, the Commission projected a future excess income of $4,550,000 a year, of which New Haven‘s 50% share, capitalized at 8%, amounted to $28,438,000. 334 I. C. C., at 39. The new figure thus came to more than twice that awarded by the Commission on the first round.
The Commission also complied with the request of the reorganization court that it consider the value of New Haven‘s right of access into the Terminal. The Commission concluded that the right would have no value to New Haven unless a buyer were willing to pay for it; that the only potential buyer in sight was the State of New York, which would not need to bid for use of the Terminal; and, accordingly, that New Haven‘s right of user was valueless. 334 I. C. C., at 32. The bondholders’ claim of value for the right of access, the Commission said, amounted to a demand for one-half of all of the income free of the Terminal expenses. Id., at 32 n. 11. On the second round of review, the reorganization court agreed that the Commission‘s determinations must stand with respect to both the liquidation
Many aspects of the controversy over the Grand Central Terminal properties have now dropped from contention.64 The bondholders no longer claim that New Haven is entitled to one-half the value of the fee. Penn Central no longer claims that its fee ownership of the properties reduced New Haven‘s status to that of a mere grantee retaining only the privilege of entry into the Terminal. All parties accept New Haven‘s right to the capitalized value of one-half the excess income.65 What
remains is the claim of the bondholders that New Haven is entitled to the capitalized value of its share not only of the excess income remaining after satisfaction of the Terminal expenses, but of the basic income meeting the expenses themselves. Yet the central finding of the reorganization court remains unrefuted: that by force of the agreements between New York Central and New Haven, the Terminal income was first to be devoted to meeting Terminal expenses; only then was the residue to become available for distribution to the two railroads. To be sure, the parties customarily referred to their respective shares of the Terminal revenues. But the Special Master found that the Terminal revenues were allocated to Central and New Haven on their respective car-use bases as an accounting convenience. The car-use formula established by the 1907 agreement “resulted, for accounting purposes, in the corresponding proportion of the revenue entering the Terminal Account being treated as the property of each railroad, and in each
The bondholders argue that the basic income of the Terminal could somehow be “freed up” from the obligation to meet Terminal expenses. But the Special Master considered and rejected that theory.
“Both parties . . . committed themselves to pouring these revenues from the entire Grand Central complex into the Terminal Account under paragraph 14 of the Agreement of 1907. The revenues were to enter that account and were to be expended, superior to the individual interests of each railroad, by being applied on payment of the fixed charges and expenses of operation and maintenance of the Terminal. Those revenues were pledged to that purpose regardless of whether New Haven utilized one per cent or fifty per cent of the Terminal‘s passenger facilities, or whether it used any of those facilities at all. It was not contemplated that if either railroad discontinued passenger trains into Grand Central the other would be saddled with the entire expense of a terminal larger than either railroad needed without being credited with these entire revenues from the Grand Central Terminal properties to the extent that they were required to meet expenditures . . . .”
Nevertheless, Chase Manhattan argues that the commitment of revenues is merely a creature of the agreement between Central and New Haven as construed by the Special Master, and that the transfer of New Haven‘s Terminal interests on December 31, 1968 “wiped out” that agreement. “The agreement thereafter was no longer in existence,” says Chase, “and Penn Central now has this [basic] income (both the former New York Central‘s share and the former New Haven‘s share) free and clear of any restriction against its use in any way
The bondholders’ argument must be that entirely apart from the contractual arrangements with Central, New Haven had a valuable right of free access into the Terminal, which Penn Central has now taken over with no compensating payment in exchange. This argument, too, is without merit. It is a misnomer to describe New Haven‘s right of access to the Terminal as “free.” New Haven had a right of entry, rather than a privilege, in the sense that it had access, independently of the consent of the fee owner of the tracks, by force of legislative edict. But the right bestowed by the legislature was conditioned “upon such terms . . . as [have] been or may hereafter be agreed upon by and between” New Haven and Central‘s predecessor. N. Y. Sess. Laws of 1848, c. 143, § 6. Thus the New Haven right of access has never been free from the obligations imposed by the agreements with Central.
The same result is reached if New Haven is deemed to have gone into liquidation. For the bondholders have never shown that anyone would pay a penny for the right to carry on New Haven‘s deficit-ridden Terminal operation. If nobody would pay a liquidating New Haven for the right to lose money, the right is, again,
2. The Bronx freight yards. One of New Haven‘s principal real estate holdings consisted of two freight yards located on some 160 acres in the south Bronx, New York, between the East River on the one side and the Major Deegan Expressway and Bruckner Boulevard on the other. The Harlem River yard occupies nearly 4,000,000 square feet across the East River from Manhattan and Queens; it has been described by a qualified appraiser as “a unique industrial facility that could be well used by any heavy industrial concern.” About a mile north of the Harlem River yard, and connected to it by the existing trackage of New Haven‘s Harlem Division
Two other facilities in the area are worthy of note. The first is the Hunts Point Market, located northeast of the Oak Point yard. The market is a $100,000,000 municipal installation and the central distribution area for the wholesaling of produce for the New York City metropolitan area. It lies on the promontory flanked by the Bronx and East Rivers, and is connected to the New Haven‘s Harlem Division line through a spur track owned by the city. The market is the largest receiver of rail traffic in the area, and plans are under way for further expansion. Fourth Supplemental Report, 334 I. C. C., at 43-44. The second facility is the former Port Morris yard of Penn Central, situated midway between the Harlem River and Oak Point yards and lying athwart the Harlem Division trackage that connects the two New Haven yards. Port Morris is linked by a branch line to Penn Central‘s Harlem Branch division, a principal element in the Penn Central System. An interchange track runs from the Port Morris branch line to the border of the Oak Point yard.
Before the Commission, the parties submitted five different estimates of the value of the Harlem River and Oak Point yards. The bondholders offered the testimony of an appraiser who thought the land would bring $32,000,000 for residential use and $26,000,000 for industrial use; the New Haven trustees offered the testimony of another appraiser who submitted two studies showing $22,650,000 and $18,090,990, both for industrial use; and Penn Central, that of a third appraiser who set the value, again for industrial use, at $15,585,000. In its Second Supplemental Report the Commission accepted the lower of the values proposed by the trustees’ witness—$18,090,990. 331 I. C. C., at 668.
But the fact of the matter was that even on the liquidation hypothesis the New Haven yards did not lack rail connections to Penn Central. Penn Central already had in place a branch line running from its Port Morris yard to its Harlem Branch division. That Port Morris line, along with the interchange track running up to the border of the Oak Point yard and meeting the New Haven‘s line at that point, would have continued in place even upon a liquidation of New Haven. The trustees’ witness acknowledged that in arriving at the lower of his two values for the New Haven yards, he had been unaware of the Penn Central link at Port Morris. Nevertheless, the Commission attributed no significance to the witness’ unawareness of the Port Morris connection, because it concluded that even with the existing link to the New Haven yards, it was “extremely doubtful” that Penn Central would continue to provide service into the area after a New Haven liquidation. Once New Haven vanished, the Commission reasoned, Penn Central would be under no legal obligation to perform switching service beyond its own Port Morris line or to extend its line into the former New Haven yards. And the Commission accepted the testimony of a Penn Central witness that the company would have no economic incentive to provide service, because of the unprofitability of the perishable freight destined for the Hunts Point Market, as well as the absence of necessary track clearances and yard classifying facilities. 334 I. C. C., at 44-45.
“The great bulk of produce for feeding of the millions of residents of metropolitan New York is brought in by rail through these yards to this market and distribution point. To assume that the State and City of New York would stand idly by and permit the life line to its huge and costly enterprise to be cut, just as it is in the midst of planning its necessary enlargement, because it was unwilling or unable effectively to bring pressures to bear or take steps on its own to preserve the connection with Penn Central is absurd . . . .” 304 F. Supp., at 807-808.
The ruling of the reorganization court is, at the least, free from the error that would require us to overturn its judgment on this matter. As the Commission‘s own report makes evident, the agency based its startling conclusion that Penn Central could deny service to the area, not on the facts of record, but in adherence to the untenable assumption that on liquidation New Haven would have uprooted the valuable trackage and electrical facilities already in place. According to the Commission, “[t]he record does not support any finding of substantial need for Penn Central service that would justify the construction by that carrier of the trackage necessary to connect Harlem River and Oak Point yards
3. The added deductions.
On the remand the Commission recalculated the liquidation value of the New Haven, as directed by the reorganization court, and arrived at a new sum of $162,700,000. “A property value of this sort inheres in the assets,” the Commission said, “if we assume that the railroad may immediately shut down and begin a 6-year program of selling off the road parcel-by-parcel, and virtually tie-by-tie.” 334 I. C. C., at 53. But the Commission declined to approve the new figure as the proper liquidation value of the debtor.
“The liquidation value that results in this reopened proceeding exceeds the agreed price [of $125,000,000], obliging us to make a new determi-
nation as to whether the price resulting from such a valuation is fair. “The establishment of liquidation value as a pricing floor on this record must assume that the N[ew] H[aven] may be shut down at once and be liquidated in parcels. Such a pricing theory assumes that the public may be denied an opportunity to be heard. It is wholly inconsistent with the requirement we have imposed on Penn Central to absorb the N[ew] H[aven], which requirement rests entirely upon the public‘s need for a continuing N[ew] H[aven]. Any assumption that N[ew] H[aven] may be shut down and broken up must necessarily permit the conclusion that Penn Central may be relieved of its inclusion obligation. It is inequitable to conceive at the same time both a right in the bondholders to break up the N[ew] H[aven] and an obligation on Penn Central to keep it going. The demands of equity are no more satisfied by conceiving that the bondholders have a constitutional right to shut down the N[ew] H[aven] which is superior to the public‘s right to keep it going.
“The foregoing liquidation value assumes that this Commission has no function under the
Interstate Commerce Act to decide whether public convenience and necessity permit the abandonment of N[ew] H[aven]‘s entire line or portions of it. In view of our often repeated findings that there is a public need for the services of this railroad, there is no warrant for assuming that the creditors may now break up the railroad or devote the properties to another use. The estate is not relieved of its obligation to serve the public. A price that is premised on outright rejection of that obligation is inequitableand awards the estate a windfall that is not supported by any record evidence.” 334 I. C. C., at 54-55.
On the basis of this reasoning, the Commission then proceeded to take into account “other pricing considerations“—costs of liquidation it had not reached in its earlier report because of its conclusion that the $125,000,000 price arrived at by the parties was proper under the
“The alleged right to liquidation values derives from an alleged right to abandon; and there are recognized limitations on the right to abandon that in themselves limit the creditors’ entitlement to the liquidation value we have computed under the court‘s instructions. Under
section 1 (18) of the Interstate Commerce Act , the Commission is empowered to impose reasonable limitations on the abandonment right.” 334 I. C. C., at 57.
The Commission‘s new “pricing considerations” consisted of two elements: a one-year delay the New Haven would have incurred in securing the approval of the Commission and the courts to abandon train operations; and a bulk-sale discount that a purchaser of all the debtor‘s assets, to whom the Commission could order the road to sell, would have commanded. Together the added deductions amounted to $22,081,000.
(a) The one-year delay. The Commission found that an application for a certificate of abandonment, as required by
On review the reorganization court rejected the delay concept, ruling that the added deduction violated the liquidation hypothesis upon which the debtor‘s assets had been valued. Neither the parties nor the Commission had previously postulated the deduction now imposed, because the liquidation hypothesis itself had presupposed a lawful abandonment of service. 304 F. Supp., at 798. That presupposition was rooted in the hard fact that for more than three years prior to December 31, 1966, the New Haven had been kept alive, despite its hopeless financial condition, solely in the name of the public interest and in anticipation of inclusion in Penn Central.
“By late 1963 it was clear to the Trustees of the New Haven and to the Reorganization Court that only two courses were open: the Trustees must press to accomplish the inclusion in a Penn Central merger or they must press for liquidation. The former was obviously in the public interest and the latter was not. The course of inclusion was followed; but because the merger and the reorganization proceedings stretched out far beyond what was originally forecast, the ‘interim’ became seven and a half years; and ‘losses reasonably incident to working out the solution most consistent with the public interest’ eroded the debtor‘s estate in excess of $60 million.
. . . .
“Like Laban of old, the Commission would now require further servitude of the debtor—in this case the creditors. But the duty of the debtor‘s creditors to suffer losses for an interim period has already
been fulfilled and the public interest has already been served to the extent that in fairness and equity the public had any right to demand.” 304 F. Supp., at 800. (Footnote omitted.)
The Commission and Penn Central take issue with the reorganization court‘s disallowance of the deduction for delay. The dispute between them and the bondholders is not, however, broad in concept. It does not draw into question the right of the Commission to insist that New Haven obtain permission to abandon its operations: no one here quarrels with the proposition that in the event of a liquidation, New Haven would have been obliged to obtain a certificate from the Commission pursuant to
Before this Court the Commission and Penn Central urge the view that until the remand the Commission had not taken the delay factor into account. They justify the deduction on the second round as a development of the governing liquidation hypothesis adopted on the first. Once we enter the world of a liquidation that
At once the “refinement” rationale confronts an imposing obstacle raised by the Commission‘s own Second Supplemental Report. That report makes clear that the Commission had the element of delay before it in making its original valuation, but declined to apply any deduction on its account. The Commission considered—and rejected—Penn Central‘s request “that an allowance be made to the earliest date at which a liquidation could reasonably be anticipated for the constant diminution of N[ew] H[aven]‘s assets.” 331 I. C. C., at 698. (Emphasis supplied.) That rejection necessarily implied that the Commission had recognized the cost attributable to the delay occasioned by an abandonment proceeding, but determined not to weigh it in the balance. Thus we deal, not with a delay factor brought to light for the first time on the second round, but with one taken into ac-
The reorganization court rejected the Commission‘s conclusion that the valuation date selected in the Second Supplemental Report—December 31, 1966—represented the date on which New Haven would have sought a certificate of abandonment rather than the date on which the railroad would have commenced its six-year sale. In doing so, the court relied on more than the Commission‘s shift in position between its second and fourth reports. The court rested on its express finding of fact that “but for the adoption by the Trustees of a course to serve the public interest, abandonment proceedings could and would have been commenced in late 1963 and liquidation would have been started, certainly by the valuation date of December 31, 1966.” 304 F. Supp., at 801. That finding comes to us from the federal judge who has presided over the second New Haven reorganization since its inception. “In view of the district judge‘s familiarity with the reorganization, this finding has especial weight with us.” Reconstruction Finance Corp. v. Denver & R. G. W. R. Co., 328 U. S. 495, 533 (1946). Not only are we unable to say the finding is erroneous; we do not see how the record of these proceedings permits any other conclusion.
Indeed, the Commission and Penn Central do not challenge that conclusion. Instead, they seek support for the delay deduction by urging that if confronted with an abandonment application, the Commission would have had to “hear the communities that would be affected by the abandonment. If there is hope of a public takeover of segments, we must allow time for the States and communities to present their plans.” 334 I. C. C., at 58.
“During seven and one-half years, the Federal government, the states, the communities and the public in general were fully informed by the Trustees of the Railroad as to the inability of the New Haven to survive as an independent railroad. And, apart from seeking inclusion in a merged Penn Central, the Trustees were engaging in a holding operation to afford the public bodies, as the real guardians of the public interest, the opportunity to act—to take over or adopt measures to preserve the New Haven transportation system. Response to this was partial tax assistance and, in the latter half of the period, grants which covered about 1/3 of the annual passenger losses. . . . Otherwise nothing has come to the attention of this court, to indicate anything more than a highly speculative prospect, that any or all of the states concerned or their municipalities had the slightest interest in taking over and operating the New Haven or any segment of it.
“In spite of full awareness of the situation of the bankrupt line and with nothing to prevent their doing so, no standby legislation, for use if inclusion of the New Haven by Penn Central fell through, was ever enacted or sought to be passed in seven and one-half years by the Federal Government or by any of the states for the take over and operation of the New Haven freight and passenger system or a segment of it (except for the west-end and the Boston commuter services); nor was any plan ever
filed by the governmental bodies incorporating such take over and operation.” 304 F. Supp., at 800-801.72
“The policy of imposing an interim burden of losses, through its deficit operation, on a railroad in reorganization is to afford a reasonable opportunity to the responsible agencies to arrange the continuation of the railroad‘s operation, but the law does not require the furnishing of two or three or four opportunities. The duty was more than amply fulfilled by the New Haven. The public interest has had one huge bite of the apple; it is not entitled to another.” 304 F. Supp., at 801.
It is argued that the Commission nonetheless should be permitted to tax New Haven with the cost of a one-year delay because in fact the debtor sought no abandonment certificate from the Commission. The Commission and Penn Central attribute this failure to New Haven‘s self-interest. “The fact is,” the Commission said, “that both the creditors and the trustees exercised options, assuming the risks involved therein, and the bondholders may not now be heard to ascribe to someone else the responsibility for the selection of their course of action, or inaction.” 334 I. C. C., at 58. (Footnote omitted.) But the continued operation of the New Haven as a railroad depleted the estate by at least $60,000,000. 304 F. Supp., at 800. We fail to see how the self-interest of either the estate or its creditors was bettered by that operation.
Nor is there any substance to the contention that by failing to press for immediate liquidation of the debtor, the bondholders somehow waived their right to object to the imposition of the deduction for delay. The record that shows the preservation of New Haven in the public interest long after it had ceased to be viable as an independent enterprise demonstrates at the most that the bondholders had resigned themselves to bearing the costs
The New Haven agent assumed that the company would sell off its lots in normal-sized parcels. He gave specific consideration to each part of the railroad‘s property and reached his values on a zone-by-zone basis. He based his estimates of fair market value on his expert judgment, sales in the area, existing tax valuations, and the adaptability of the land to nonrailroad use. He discounted by 50% whenever the New Haven‘s records indicated questionable title; on the six-year liquidation
On the remand, the Commission ordered a further deduction from the liquidation value of the estate, based on a hypothetical sale in bulk of all the New Haven‘s land assets.
“The liquidation value urged by the creditors assumes not only the immediate right to abandon, . . . but also the right to break up the railroad and sell the parcels for their highest and best price. We think such a right may be restricted when a buyer for the entire bulk of the N[ew] H[aven] properties appears who will continue the operation of needed services.” 334 I. C. C., at 60. (Footnote omitted.)
The Commission calculated the deduction on the premise that “[t]he bulk-sale discount merely reflects a market appraisal of the risks that the estate avoids, and the bulk buyer assumes.” Id., at 61. The Commission then credited the evidence that Penn Central had presented through a realty expert with respect to a bulk sale of the New Haven land properties. The expert testified to the premium to be charged by a “single purchaser of property who would, in turn, sell off the property probably to many users and who would obtain his profit by reason of his purchase and resale.” On the basis of this testimony, the Commission found that a bulk buyer would command at least a 10.5% return on his investment, calculated as the sum of a 75% borrowing at 9% and a 25% self-financing at an internal charge of 15%, and that such an investment rate required an additional 4.5% discount of the New Haven land values over and above the 6% by which they had already been
On the second round of review the reorganization court rejected the bulk-sale deduction as “improper and without support in law or reason.” 304 F. Supp., at 805.
“Value, under the circumstances of this case, can only be arrived at through the dismantling of the transportation plant and a piece by piece sale of the properties. It is clear from the record that a market existed for the disposition of the properties on this basis. Their value is the best price the market place will give the seller, less the costs and expenses relevant to the sale . . . . It makes no difference whether the purchaser wants to use the property as is, or to improve and develop it. The question is how much will the market place give for a particular item of property.” Ibid.
The court answered the argument that the discount merely reflected the risk of nonsale that the seller transferred to the bulk buyer by pointing to the Commission‘s prior deduction of over $8,000,000 for that purpose. Moreover, the deduction violated the requirement that the sale price meet the “fair upset” minimum imposed by
Penn Central now protests that the reorganization court has erred in rejecting the bulk-sale discount. It says its expert witness duplicated no discounts previously taken; he proceeded on the basis of all previous deductions. In addition, it is argued, his analysis took into account the problem of market absorption caused by the
We may assume that Penn Central‘s “pricing out” theory is a rational one. But the record demonstrates that the Commission rejected it as insufficient to justify application of the bulk-sale theory. Penn Central‘s analysis, said the Commission,
“overlooks what is necessarily the bondholders’ position—namely that aside from principles of equity and fairness they have a fixed right to sell off N[ew] H[aven] in parcels, so that even a bulk buyer must pay the per-parcel price. Our answer is that we may compel the bulk sale and the bulk sale discount as a condition of an abandonment certificate, and, therefore, as a reduction of the present price.
“. . . We . . . might compel N[ew] H[aven], if it filed for abandonment, to sell in bulk and thereby make a bulk sale price appropriate.” 334 I. C. C., at 61.
The Commission thus ruled that only by assuming an actual buyer in bulk who would take over the New Haven properties for continued railroad operations could it compel the transfer of the real property at the re-
duced price. Far from setting forth a theory of compulsory transfer “completely independent” of a “pricing out” analysis, the Commission concluded that only its power to compel the sale of the real estate to a single buyer for continued operation justified the bulk-sale discount.
We do not consider whether the Commission could lawfully impose such a bulk-transfer obligation on a railroad in liquidation at the cost of reducing the per-parcel valuation of its assets.74 For the record before us is devoid of evidence that a bulk buyer would agree to take over the New Haven properties for continued service at any price. When a railroad has a lengthy history of deficit operations with no prospect of improvement, and a consequent operating value of zero or even a negative figure, the Commission cannot rationally assume that a deus ex machina will emerge to spend millions for the opportunity to lose millions more.
Penn Central‘s witness gave no testimony in support of any such theory. He was a professional developer of real estate, not a railroad operator. And he testified to what extra charges he would levy, after all previous deductions for the costs and risks of sale, to assume the risk of nonsale as well as the entrepreneurial activity of retailing the realty parcels. His testimony established nothing more than that he would not undertake the task
4. The discount of liquidation factors. In its Second Supplemental Report the Commission accepted the projection offered by the New Haven trustees that they could substantially complete a liquidation sale in six years. 331 I. C. C., at 663. Accordingly, the Commission discounted the estimated receipts of sale over the six-year period to reflect their present value—a deduction of $17,563,000. Id., at 661. It did not, however, discount the estimated expenses of liquidation, although these, too, were projected to occur over the six-year period. The reorganization court was of the view that if future receipts were to be discounted to present value, future expenses should likewise be. 289 F. Supp., at 461; cf. id., at 427-428. On the remand the Commission concurred. It noted that the parties were very close in their estimates of the proper discount, and it concluded that $3,800,000 represented the correct figure. Fourth Supplemental Report, 334 I. C. C., at 39-40.
On the second round of review the reorganization court observed that despite three valuation changes netting a $6,600,000 reduction in estimated worth, the Commission had failed to adjust the old, inapplicable discount figure. Accordingly, the court directed the Commission to file “a new formulation and computation of the discount for present value of the New Haven‘s liquidation proceeds, in accordance with generally recognized
In its brief before this Court the Bondholders Committee states that the reorganization court‘s directive resulted from the Commission‘s continued failure to calculate discounts back to present value with respect to four items, three of them to the detriment of New Haven and one to the detriment of Penn Central. The first is the $8,177,633 deducted as the cost of hypothetical forced sales of New Haven realty during the last years of the liquidation. The Commission could have treated the item either as part of the value of the unsold land and then written it off as a cost of sale, with a discount back to present value for both sides of the balance sheet, or as a wash to be eliminated in computing both receipts and expenses. In fact the Commission did neither: it included the figure on both sides of the books, but discounted back only in the asset column. The result, says the Committee, is an error of $2,066,488. A similar shortcoming in determining the liquidation values of road property, such as ties and rails, added another error of $1,474,057. Third, says the Committee, the Commission
The Commission does not dispute that it made the errors as alleged by the Committee. Its sole reply is that the bondholders have waived their claims in this regard by failing to present them to the Commission. Penn Central concedes that “the first two errors asserted by the bondholders represent miscomputations” in Penn Central‘s favor. But it argues that the amount of the fourth error and the existence of the third were the subject of conflicting testimony before the Commission, and it joins in the Commission‘s contention that the bondholders have waived the right to a resolution in their favor by failing to press a timely objection before the Commission when the agency first made its alleged mistakes.
The record demonstrates that the bondholders have the better of this argument. It is undisputed that both the bondholders and Penn Central presented witnesses to the Commission on the remand who agreed that the Commission had erred in its discounts and who differed only in minor amounts. See Fourth Supplemental Report, 334 I. C. C., at 40. But the Commission simply bypassed the agreement, unpersuaded that it had erred
5. The loan-loss formula. In its Second Supplemental Report the Commission, projecting a three-year interim period between merger and inclusion and concluding that a short-term lease would not be appropriate, required Penn Central to extend $25,000,000 in loans to the New Haven in exchange for first-priority trustees’ certificates. 331 I. C. C., at 702-706.75 In addition, it ordered Penn Central to share in New Haven‘s operating losses to the extent of 100% in the first year, 50% in the sec-
The $5,500,000 annual ceiling derived from the assumption, based on calculations provided by the New Haven trustees and accepted by the Commission, that despite the massive cash drain in 1967, future annual New Haven operating losses would be unlikely to exceed $5,400,000 in succeeding years. 331 I. C. C., at 718-719. Coupled with the sliding-scale formula, the annual ceiling thus proposed that Penn Central absorb the entirety of New Haven‘s 1968 cash loss. On the first round the reorganization court expressed the opinion that even with the abrogation of the sliding scale, Penn Central‘s share of that loss “should be a substantial percentage.” 289 F. Supp., at 464.
By the time the parties returned to the Commission on the remand, it was evident that the trustees’ appraisal of their ability to contain the New Haven‘s deficits had been far too optimistic. From February through December 1968, the trustees had already drawn down $14,000,000 of the $25,000,000 loan that was supposed to last for three years; at that rate they would exhaust the loan in another six or seven months. 334 I. C. C., at 72. The cash loss was equally grim: the projected 1968 cash deficit stood at $15,672,000, with an estimated operating deficit of $8,200,000. Despite the $2,800,000 increase in the operating deficit over the trustees’ initial prediction, the Commission adhered to its original ceiling and, pro-
The bondholders now urge that Penn Central be required to bear the entire operating loss from merger to inclusion. New Haven incurred that loss as an independent entity, say the bondholders, only because it remained outside of Penn Central after the merger, at Penn Central‘s request and for Penn Central‘s convenience. It is urged that the Commission‘s ceiling was originally calculated to place the entire loss of the first year on Penn Central, and that the original intention should be carried out.76
Penn Central denies responsibility for the fact that inclusion took place some 11 months after merger rather than along with it, and puts the blame at the door of the bondholders for their litigious insistence upon working out the terms of inclusion prior to the event. It also notes that it has been obliged to take over New Haven less than a year after its own formation, rather than at a later point in the three-year period originally envisaged by the Commission.
While the issue is not free from doubt, we cannot say the reorganization court committed error in letting the Commission‘s action stand. Without ascribing fault to any party, we note the unfairness to the bondholders in requiring them to bear whatever portion of the operating loss Penn Central does not pay due to the inability of Penn Central and the trustees to negotiate an interim lease. On the other hand, there is a countervailing unfairness to Penn Central in requiring it to bear the full burden of New Haven‘s losses while it lacked exclusive and assured control over the operations of the debtor. The $5,000,000 paid by Penn Central is no drop in the bucket; it amounts to 61% of the operating loss as figured by the Commission and nearly one-third of the entire cash loss for the interim period. In no sense did Penn Central‘s contribution represent a payment for assets received; on the liquidation hypothesis, the Commission could rationally have declined to require any payment at all. Chase Manhattan argues that “[e]ither there was no equitable obligation on the part of Penn Central to pay any of the New Haven loss during the period from the date of the Penn Central merger to the date of its acquisition of the New Haven assets or there was an obligation to pay the entire loss.” We cannot agree that the Commission was obliged to adopt such an all-or-nothing approach. Under the circumstances, the Commission‘s final disposition represents a pragmatic compromise of the competing interests, and in the absence of a controlling contrary principle of law we do not disturb the reorganization court‘s acceptance of the Commission‘s judgment.
6. New Haven investments. The Bondholders Committee complains that New Haven has transferred its stock ownership in two concerns—the New York Connecting Railroad and the Railway Express Agency—with no value given in exchange. The Connecting Railroad
In both instances the Commission valued New Haven‘s investment interest on the liquidation hypothesis. A witness presented by the New Haven trustees, whose testimony the Commission accepted, stated that because of Connecting Railroad‘s $18,000,000 funded debt its stock would have no liquidation value whatever. As to the REA, he said that its stock would have little or no value because of pending litigation over a tender offer for the stock77 as well as recent legislation increasing the permissible size and weight of parcel post packages. Second Supplemental Report, 331 I. C. C., at 678.
The Bondholders Committee does not attack the Commission‘s finding of zero value for the Connecting Railroad and REA stock. Instead, the Committee says that if the shares were worthless, the Commission erred in requiring their transfer to Penn Central. Were the stock to have had no value on the liquidation of New Haven, the Committee argues, the reorganization court would, in the absence of bids for the shares, have ordered their distribution to the creditors to do with as they pleased. Accordingly, the Committee calls for the return of the stock to New Haven.
The Committee‘s request overlooks the fact that even though the shares in question might be worthless to a New Haven undergoing liquidation, the Commission could nonetheless order their transfer on the ground of their value to an ongoing Penn Central required to take in New Haven as an operating entity. But entirely apart
7. “Going-concern” value. The bondholders urge that Penn Central should pay an added amount to reflect the “going-concern” value of the New Haven. This sum, it is stressed, would be calculated, not as an alternative to liquidation value, but as a supplement to it. Since it is universally agreed that the New Haven was a losing operation in the form in which Penn Central was obliged to take it over, the bondholders display considerable temerity in pressing for inclusion of what could prove, in an ultimate analysis, to be only a substantial negative figure.79
The Commission rejected the notion that the New Haven had a going-concern value over and above the liquidation value of its physical properties. In the Commission‘s view, the bondholders’ estimate of $55,075,000 for such intangibles as organizational costs was premised on the replacement of a defunct railroad and
The Bondholders Committee concedes that the intangible assets in fact acquired by Penn Central “would be worthless to the New Haven in an assumed liquidation . . . .” That is enough to end the matter. The bondholders are not entitled to treat the New Haven as a liquidating enterprise with respect to certain items and as an operating railroad with respect to others, depending on which approach happens to yield the higher value. Nothing could be more unfair or inequitable to Penn Central than to permit the New Haven bondholders, at its expense, to have the best of both worlds.80
8. The “underwriting” plan for the Penn Central stock. Thus far we have considered the disputes over the valuation of the New Haven assets transferred to Penn Central. We now reach the one issue raised in connection with the consideration given by Penn Central in exchange. The Purchase Agreement negotiated by Pennsylvania and New York Central on the one side and the New Haven trustees on the other provided that Penn Central should pay in part for the New Haven properties with 950,000 shares of its common stock.81 As a New Haven trustee stated, “[O]ne of the principles for which we negotiated at considerable length was that the bulk of
On the first round of review the reorganization court agreed that the $87.50 per share figure represented a fair value for the Penn Central stock, based on the Commission‘s calculation of the estimated future earning power of the new company and the testimony of the New Haven trustee, “a well qualified expert.” The court saw “no reason why recent fluctuations in the market value of these shares should change the disposition of the matter . . . .” 289 F. Supp., at 462.
On the remand, the bondholders challenged the Commission‘s stock valuation. The Commission cursorily rejected the attack on the ground that the bondholders’ witness was unfamiliar with Penn Central‘s operating and financial plans, gave undue weight to extraordinary past expenses, and generally neglected the future prospects of the company. 334 I. C. C., at 68 n. 40.
By the time of the second round of judicial review, inclusion had taken place and the Penn Central had given its consideration in exchange. The bondholders, renewing their charge that the Commission‘s prophecy had been erroneous, pointed to the actual market performance of the stock. As of the inclusion date, December 31, 1968, the market price stood at 63 5/8, more than
On the second round the reorganization court rejected the bondholders’ contention that the Commission had predicted an $87.50 value as of the closing date.
“[T]he Commission, presumably in an effort to assure fairness to Penn Central, did not use the market value of December 31, 1966 or an average of the values at or about December 31, 1968, the actual date of transfer. Instead, it adopted the theory that, after all, the purpose of using stock in payment was to tap the expected future economic benefit of the Penn Central merger which would come to full fruition seven to ten years after its effective date on February 1, 1968, but would be reflected in an upward trend of the stock at the time of closing or transfer of New Haven‘s assets to Penn Central, then estimated to be in 1970.
“[T]he theory of giving recognition to an intrinsic value in the shares, which will be realized when the full economic benefits of the merger have been achieved, not only assists the Penn Central by relieving it of the need to divest itself of a crippling amount of cash, which would be prejudicial to its merger program, but affords the New Haven an opportunity to participate in probable future profits.” 304 F. Supp., at 808-809.
“if at any time the market price of Penn Central common shares reaches and maintains 87 1/2 per share on the New York Stock Exchange for a period of five consecutive days on which the Exchange is open and doing business (not counting days on which the Exchange is closed to trading) between the date of final consummation of the plan of reorganization and February 1, 1978, then and in that event it will be conclusively presumed that Penn Central has, in transferring the shares to the New Haven, made payment of the $83.1 million of the purchase price represented by the shares. If, however, the common shares of Penn Central do not reach and maintain the price as aforesaid, then the value of the shares will be determined by the average of the means between high and low prices of Penn Central shares on the New York Stock Exchange for the 30 business days next preceding February 1, 1978, on which the Exchange is actually operating and there are
sales of Penn Central shares. Penn Central will forthwith become liable to pay in cash to the New Haven, or its successor or successors, the difference between said mean market prices of those 30 days and 87 1/2 for each share . . . .” 304 F. Supp., at 809-810.
The court provided that the benefit of Penn Central‘s underwriting of any difference between the mean market price and 87 1/2 would inure only to the New Haven and would not follow the shares into the hands of third-party buyers.
In addition, the court afforded Penn Central the option of relieving itself of the 1978 underwriting obligation in the following manner:
“The Penn Central is granted an option, operative between the date of final consummation of the plan and February 1, 1978, to discharge its obligation to underwrite and pay the difference between such average market price and the higher 87 1/2 at the end of the ten year period by paying on one or more blocks of 50,000 shares to the New Haven ... the difference between the mean market prices for sales of Penn Central common shares and 87 1/2 per share as of a specific day of sales on the Exchange which shall previously have been designated by Penn Central in a written notice delivered to the New Haven at least 5 days prior to such market date.” Id., at 810.
The underwriting plan of the reorganization court thus combined a series of essential findings and protective features. First, it ratified the Commission‘s determination that intrinsic value rather than market price should guide the appraisal of the worth of the Penn Central common stock; second, it predicted that that intrinsic value would be reflected in a market price of at least
On the basis of the record before the District Court at the time of its order, we would have no hesitancy in accepting its findings, conclusions, and proposed underwriting plan as consistent with the history of the reorganization proceedings and supported by substantial evidence. But we cannot avoid the impact of recent events in assessing the propriety of the decree that that court has entered. See United States v. Aluminum Co. of America, 148 F. 2d 416, 445. And those events make it possible that this aspect of the reorganization court‘s decree may be wholly unrealistic.
The fairness and equity that are the essence of a
Accordingly, we set aside the order of the Connecticut District Court insofar as it determines that an intrinsic value of $87.50 inheres in the Penn Central common stock and implements an underwriting plan to secure payment of that sum. Further proceedings before the Commission and the appropriate federal courts will be necessary to determine the form that Penn Central‘s consideration to New Haven should properly take and the status of the New Haven estate as a shareholder or creditor of Penn Central.
V
We turn finally to the contention of the bondholders that quite apart from the specific items that together go to make up the price to be paid for the New Haven assets, the plan of reorganization itself is not only unfair and inequitable under the Bankruptcy Act but violates the
The purchase price that the Commission and the reorganization court have required Penn Central to pay to the New Haven estate is based upon the liquidation value of the seller‘s assets, appraised as of December 31, 1966. That price hypothesizes a shutdown of New Haven followed by a sell-off of its assets at their highest and best value. In the circumstances of this case, and for the reasons we have already set out at length, we agree with the reorganization court that it would be unfair and inequitable to allow Penn Central to take the properties for any lesser sum. Moreover, we today require a reassessment of the consideration that Penn Central is to give in exchange for those properties. We thereby accord the bondholders the right to a liquidation and a per-parcel sale that is theirs by virtue
But the Bondholders Committee presses another
A
“In view of the history of this deficit operation from the time of the filing of the petition under
§ 77 and even before, the size of the losses, the long period of time necessarily involved in seeking to work out a solution, short of liquidation, through inclusion in the Penn-Central, the present condition of the Railroad and the rate of loss and out-flow of cash in the recent past and in the foreseeable future, this court finds that the continued erosion of the Debtor‘s estate from operational losses after the end of 1968, will clearly constitute a taking of the Debtor‘s property and consequently the interests of the bondholders, without just compensation. It is therefore constitutionally impermissible, and obviously no reorganization plan which calls for such a taking can be approved.” 289 F. Supp., at 459.
We do not doubt that the time consumed in the course of the proceedings in the reorganization court has imposed a substantial loss upon the bondholders. But in the circumstances presented by this litigation we see no constitutional bar to that result. The rights of the bondholders are not absolute. As we have had occasion to say before, security holders
“cannot be called upon to sacrifice their property so that a depression-proof railroad system might be created. But they invested their capital in a pub-
Only two Terms ago, when we last considered the Penn Central merger, we quoted approvingly the Commission‘s statement that “[i]t is a fundamental aspect of our free enterprise economy that private persons assume the risks attached to their investments, and the N[ew] H[aven] creditors can expect no less because the N[ew] H[aven]‘s properties are devoted to a public use.” Penn-Central Merger Cases, 389 U. S., at 510. We added:
“While the rights of the bondholders are entitled to respect, they do not command Procrustean measures. They certainly do not dictate that rail operations vital to the Nation be jettisoned despite the availability of a feasible alternative. The public interest is not merely a pawn to be sacrificed for the strategic purposes or protection of a class of security holders. . . .” Id., at 510-511.
In this context we appraise the bondholders’ claim that the continued operation of the New Haven from the inception of the reorganization proceeding in 1961 to the inclusion in Penn Central in 1968 worked an unconstitutional taking of their property. There is no longer room for dispute that the bondholders will receive the highest and best price for the assets of the debtor as of December 31, 1966. That price of course reflects the depreciation of the properties and the losses incurred in the operation of the railroad from the commencement of reorganization proceedings under
Nor can Penn Central be held liable for the further decline in New Haven‘s value from the valuation date to the actual inclusion. The new company did not even come into existence until midway through that period, and from the point of its own creation until it took in the New Haven, it contributed substantially to recompense the debtor for its operating losses. Moreover, the failure of the bondholders to press for early liquidation of the New Haven meant that their initial application for a dismissal of the reorganization proceedings came just as the objective of salvaging the New Haven appeared possible to achieve. As the reorganization court noted, only two of the several bondholder groups made that initial application; it was not joined by the trustees, nor was it endorsed by other representatives of the bondholders and creditors; and it came just as the Commission was about to certify a feasible plan of reorganization to the court. “To jettison everything achieved and turn back just as a glimmer of light begins to show at the end of a long dark tunnel,” said the court, “not only carries with it an aura of unreality but borders on the fantastic.” In re New York, N. H. & H. R. Co., 281 F. Supp., at 68.
On the other hand, we must also reject any lingering suggestion by Penn Central that the price it must pay for the New Haven assets is unfair in either a statutory or a constitutional sense. At first glance there is a
As the Commission said at the time of its Second Supplemental Report, “Calling upon Penn-Central to pay more than the N[ew] H[aven] is worth as a going concern is not unreasonable within the meaning of
The reorganization court made the point with clarity and force:
“The whole purpose of making the inclusion of the New Haven a condition of the merger was to require Penn-Central, which, in being permitted to merge, was granted the opportunity to realize tremendous economic benefits, to take over and operate
a helplessly sick but still needed railroad, which it could well afford to do. It is part of the price Penn-Central is called upon to pay for the right to merge. The right to merge was granted, the merger has taken place, and the price should be paid.” 289 F. Supp., at 465-466.
For the reasons stated in this opinion, the judgment of the United States District Court for the District of Connecticut, reviewed on writs of certiorari in Nos. 914, 916, 920, 1038, and 1057, is affirmed in part and vacated and remanded in part. The judgment of the United States District Court for the Southern District of New York, appealed from in Nos. 915, 917, and 921, is vacated, and those cases are remanded with instructions to abstain pending the further proceedings before the Interstate Commerce Commission and the reviewing courts under
It is so ordered.
MR. JUSTICE DOUGLAS took no part in the decision of these cases.
MR. JUSTICE MARSHALL and MR. JUSTICE BLACKMUN took no part in the consideration or decision of these cases.
MR. JUSTICE BLACK, with whom MR. JUSTICE HARLAN joins, dissenting.
The central issue in these cases, easily lost I fear in the 98-page opinion of the Court, can in my judgment be briefly and simply stated. After this Court‘s decision in the Penn-Central Merger Cases, 389 U. S. 486, the Interstate Commerce Commission assumed its difficult statutory task of determining the liquidation value of the assets of the New Haven Railroad, a determination which if upheld by the courts would decide the purchase price
“Essentially, we think our disagreements . . . reflect a difference in view concerning how far we are at liberty to substitute our own notions for the decisions the Commission has taken in what we regard as a sincere effort to comply with the tasks both courts assigned it on remand.” 305 F. Supp., at 1065.
I
Both district court decisions are now properly before this Court for our review, and, contrary to the position taken by the Court today, it is my view that the Court has an obligation to pass upon both those judgments, not just one. As the quoted passage from Judge Friendly‘s opinion for the three-judge merger court indicates, the answer to the question whether this Court should follow the three-judge court and sustain the Commission‘s valuation of the New Haven properties turns largely on the proper scope of judicial inquiry into the agency determination. Our previous cases make it clear that the scope of judicial review of the Commission‘s appraisal of such properties is narrowly limited to ensuring that the agency findings are supported by material evidence and consistent with statutory standards. The federal courts, this Court included, should defer whenever possible to Commission expertise on complex questions of valuation. It is my position, elaborated in what follows, that the application of this test to the record before the Commission in these cases can only lead to the conclusion that the Commission did not abuse its discretion in valuing the New Haven and, accordingly, that the three-judge court was correct in sustaining its determinations and the bankruptcy court wrong in rejecting them. The three-judge court‘s excellent opinion is, in my view, compelling support for the idea that a reasonable reviewing court exer-
The Court today reaches conclusions completely at odds with those stated above and affirms the decision of the bankruptcy court. I do not think the Court could reach the result it does but for its mistaken assumption that the bankruptcy court was somehow the more appropriate of the two courts to review the Commission‘s valuation determinations and that, accordingly, the excellent opinion of the three-judge court could be simply ignored on the ground that that court should have abstained in favor of the bankruptcy court. Congress has granted jurisdiction to review the Commission findings to both courts under the peculiar circumstances presented in these cases, and the Court offers only make-weight arguments to support its holding that the three-judge court should have abstained from reaching the valuation questions. In my view, both courts were obligated to fulfill their statutory mandate to review the Commission‘s valuation findings, and this Court has an obligation to treat with equal dignity the decisions of each of those courts. For this reason I cannot agree that the Court is justified in proceeding as if Judge Friendly‘s opinion for the three-judge merger court simply did not exist.
II
On the question of valuing the New Haven‘s assets, the tasks which the three-judge merger court and the bankruptcy court were called upon to perform in these cases were virtually identical, and for both courts that task was a narrowly circumscribed one. The statutes governing review in both courts provide the same flexible standard: under
“The function of valuation thus left to the Commission is the determination of the worth of the property valued, whether stated in dollars, in securities or otherwise. One of the primary objects of the bill was the elimination of obstructive litigation on the issue of valuation and the form finally chosen approached as near to that position as seemed to the draftsmen legally possible. Judicial reexamination was not considered desirable. . . . The language chosen leaves to the Commission, we think, the determination of value without the necessity of a reexamination by the court, when that determination is reached with material evidence to support the conclusion and in accordance with legal standards.” 318 U. S., at 472-473.
See also Reconstruction Finance Corp. v. Denver & R. G. W. R. Co., 328 U. S. 495, 508-509 (1946); Group of Institutional Investors v. Chicago, M., St. P. & P. R. Co., 318 U. S. 523, 536-542 (1943). These cases make it clear that Congress delegated the valuation function to the Commission and that the Commission‘s determinations can be reviewed by the federal courts under
The scope of review of the three-judge merger court under
The reasons compelling such judicial restraint lie not only in the accumulated expertise of the Commission but also in the inherent uncertainty of the valuation process itself. “An intelligent estimate of probable future values . . . , and even indeed of present ones, is at best an approximation. . . . There is left in every case a reasonable margin of fluctuation and uncertainty.” Dayton Power & Light Co. v. Public Utilities Comm‘n, 292 U. S. 290, 310 (1934). These inevitable uncertainties of a complex valuation were greatly magnified in this case, for here the Commission was called upon to determine what values the New Haven properties would have, as the three-judge court put it, in “a liquidation that never happened, that in the world as we know it scarcely could have happened, and that, if it had happened, could have happened in any one of a number of equally imaginary ways. . . .” 305 F. Supp., at 1056. Given the extremely hypothetical context in which the Commission made its determinations, it is impossible for any reviewing court to know if the Commission‘s findings even approximated the true liquidation value of the railroad. Because of this enhanced uncertainty, the area in which the Commission was required to exercise its judgment in this case was unusually wide, and a reviewing court could properly upset its conclusions in only the clearest instances of abuse.
I indicated previously that when these criteria for judicial review are taken into account, it becomes impossible for me to believe that the Commission abused its discretion in deciding as it did the exceedingly complex and difficult valuation issues discussed at length in the Court‘s opinion. The three-judge merger court con-
III
The Court‘s opinion affirming the bankruptcy court attempts to avoid the force of the foregoing considerations by first holding that the three-judge court should have abstained from reaching the valuation issue and then assuming for some reason which is not clear to me that this Court should apply a limited scope of review to the valuation findings of the bankruptcy court rather than to the Commission‘s findings. This approach is, I submit, premised on erroneous assumptions.
A
There can be no question but that under relevant federal statutes both the three-judge merger court and the bankruptcy court had jurisdiction to review the Commission‘s determination of the New Haven‘s liqui-
B
The Court also errs, I think, when it assumes that it should defer to the findings of the bankruptcy court rather than to those of the Commission. The reasoning
“[T]he experience and judgment of the Commission must be relied upon for final determinations of value and of matters affecting the public interest, subject to judicial review to assure compliance with constitutional and statutory requirements.”
To like effect was the conclusion reached in Chicago, R. I. & P. R. Co. v. Fleming, 157 F. 2d 241, 245 (1946), a case following Western Pacific:
“[T]he Commission is allowed wide discretion in reaching its conclusions, and if its findings are supported by substantial evidence and follow
legal standards they must be affirmed by the courts. . . .”
In my opinion these and other cases preclude the notion that the bankruptcy court has special factfinding and interest-weighing functions sufficient to justify this Court‘s viewing it as a quasi-trial court.
Alternatively, the majority‘s position might be that even though the reorganization court had no special review powers, this Court should still give great weight to its conclusions concerning the Commission‘s price determinations. This position might have some force were there grounds for confidence that the bankruptcy court in this case applied the correct scope of review in examining the Commission determinations, but no such grounds for confidence exist here. This Court has an obligation to examine carefully the opinion of the bankruptcy court to determine if that court did in fact apply the correct scope of review. Such an inquiry necessarily involves the Court in determining if the agency‘s decisions are consistent with applicable law and supported by substantial evidence. As I indicated earlier, the record in this case simply does not support the conclusion that the reorganization court stayed within its proper scope of review of the Commission determinations. Since the reorganization court applied the wrong reviewing standard, there is no justification for this Court‘s giving any deference to the valuation determinations of that court.
The Court‘s opinion is thus poised between two equally unsatisfactory alternatives. Its conclusions must either rest on the theory that the reorganization court has extraordinary reviewing powers, a theory which I think is precluded by Western Pacific and the cases which follow it, or the Court must take the position that the reorganization court correctly applied the Western Pacific standard, a conclusion which seems to me untenable in
IV
Today‘s decision will have the effect of greatly burdening the Penn Central by increasing the amount that company owes to the New Haven bondholders by an additional $28,000,000. The imposition of this additional burden can only bring about a further deterioration of the Penn Central‘s already seriously compromised financial position3 and will further reduce the ultimate chances of success of this venture in which the public has a considerable stake. The public interest in these cases certainly lies in establishing and maintaining the Penn Central as a viable private enterprise with reasonable rates and efficient services. Here the Commission had a duty “to plan reorganizations with an eye to the public interest as well as the private welfare of creditors and stockholders.” Reconstruction Finance Corp. v. Denver & R. G. W. R. Co., 328 U. S. 495, 535. See also the Penn-Central Merger Cases, 389 U. S. 486, 510-511. Because Penn Central‘s economic soundness will be vitally affected by the price it has to pay for the New Haven assets, the Commission had an obligation, which I think it fulfilled in these cases, to prevent an overvaluation of the New Haven assets which might unnecessarily jeopardize the newly merged Penn Central system. If the Commission resolved close and fairly debatable issues of valuation in favor of Penn Central rather than the New Haven bondholders, the agency‘s actions were wholly justifiable in terms of its statutory mandate to protect the public. Although the courts must review Commission determina-
For the reasons stated above, I would affirm the judgment of the three-judge merger court on the valuation issue and would reverse the judgment of the bankruptcy court to the extent that it is inconsistent with the three-judge court.
Notes
“Southern New England is a deficit area in terms of food, fuel, and the raw materials for industry. Accordingly, in serving this economy, the New Haven is a short haul railroad with a heavily unbalanced flow of traffic and equipment. As a terminal railroad it faces the constant problems and added costs of switching and deadheading foreign line freight cars to move them back off its own lines. Moreover, as a result of national and regional economic and industrial shifts, New England‘s outbound products have become increasingly high-value and light-weight in character. With the expansion in the region of a modern, comprehensive highway system during the past 20 years, this outbound freight traffic has become especially susceptible to diversion from rail to private and for-hire trucking service.” Interstate Discontinuance Case, 327 I. C. C., at 170.
“No one has contested the forecast of the NH Trustees that their cash will run out at the end of 1967; no one has indicated any probable source of funds for that beleaguered property other than the merged Penn-Central. . . . For our part we are unwilling to take responsibility for such devastating hardship as even a temporary cessation of NH‘s operations would bring to New England and New York and in a lesser degree to other sections of the country when in our view there is no reason why the merger should not proceed; indeed we believe we have no right to do so. . . .” 279 F. Supp., at 355. “[W]ith the situation now so serious, there can hardly be doubt that it is better to accept what is good for the New Haven than permit the patient to die while in quest of the best.” Id., at 335.
By negotiating a purchase and sale of the New Haven assets, the parties to the agreement elected not to attempt a recapitalization of New Haven, an enlarged merger that would bring New Haven into the Penn Central system as a corporate entity, or a lease of the New Haven operating assets. At one point, when it appeared the New Haven might not long survive, the Commission had directed the parties to negotiate a lease to be “immediately available upon consummation of the Penn-Central merger,” but the negotiators reported they were unable to do so and instead suggested various loan-loss formulas. Penn-Central Merger Cases, 389 U. S., at 508; Erie-Lackawanna R. Co. v. United States, 279 F. Supp., at 334; Second Supplemental Report, 331 I. C. C., at 648.
The bondholders were not bound by the trustees’ acceptance of the Purchase Agreement. The trustees acted on behalf of the debtor, subject to the directive of the reorganization court, but
At one point Penn Central claimed that even on the higher of the two appraisals, the record evidence required a downward adjustment of $461,000. The reorganization court made a partial correction to reflect a conceded duplication, but implicitly rejected Penn Central‘s argument as to the balance. Since Penn Central does not press the issue here, we do not consider it.
“The record shows that the public interest has been thus far supported by the creditors of this estate with no substantial participation from the states. . . .
“Far from being indifferent to the public interest, the court has indulged that interest and allowed it to prevail over the creditors’ rights for three and one-half years.
“In spite of this long interval, very little has been produced. Massachusetts never fulfilled its commitment to grant tax relief. New York, by conditioning future tax relief on a commitment by the Trustees to lease new equipment and conduct commutation service at present levels with no assurance that the deficits would be underwritten, has used it as a lash over the back of the debtor to compel it to do the State‘s will at a time when it has not had the strength to do so. Tax relief in Connecticut and Rhode Island was continued, but with a requirement that certain standards of service be met and, accordingly, that the passenger deficits continue to be incurred.
“If the public interest so urgently demands the continuance of the New Haven‘s passenger service, as the States seem suddenly to have discovered, they should have stopped taxing its property a long time ago. Commuters and other passengers demand better equipment and better service; the States insist upon imposing a continuing tax burden—everyone wants to draw the last ounces of blood out of this near corpse; but no one gives it the transfusion it so badly needs. It is now too late in the day to talk about saving the situation with tax relief. As the Railroad has not been able to use its vital cash for taxes, liens have been accumulating ahead of the creditors, forcing them further down the ladder of priorities, and accelerating and compelling the action which the court has taken today. If this tax burden continues to grow and the Railroad is not otherwise relieved, the creditors will be compelled to move for liquidation of the New Haven and the court will have no recourse but to order it. If the states wish essential passenger services continued, an underwriting which goes far beyond tax relief will be necessary.”
It is suggested that with the one-year freeze the delay concept may be viewed as a mere shifting of the valuation date to December 31, 1967. That date, it is said, is as rational as the date originally chosen. And so it may be. But the adjustments in value take into account only the expenses and depreciation attributable to a one-year pause, with no consideration to countervailing income and increases in capital value. The Commission says a comprehensive revaluation of the debtor‘s assets as of December 31, 1967, would produce a much greater loss than the $15,386,000