305 F. Supp. 1049 | S.D.N.Y. | 1969
Lead Opinion
On July 10, 1968, this court vacated “so much of the Commission’s orders of
On the other hand, our hope that the proceedings on remand would be of limited scope has not been realized. Both sides introduced much new evidence on subjects we had not expressly included in our remand, the Remand Report contains much new analysis, and we are confronted with almost as many issues as when the case was previously before us. We intend no criticism of the Commission on this score. While an administrative agency may choose to confine itself to the precise issues remanded, it is not bound to do so but may receive and consider such further evidence as it thinks requisite or desirable for the proper discharge of its duties. See FCC v. Potts-ville Broadcasting Co., 309 U.S. 134, 145, 60 S.Ct. 437, 84 L.Ed. 656 (1940); Fly v. Heitmeyer, 309 U.S. 146, 148, 60 S.Ct. 443, 84 L.Ed. 664 (1940). Moreover, with particular respect to the two large downward adjustments made under the heading “Other Pricing Considerations,” 334 I.C.C. at 53-63, we see no reason for refusing to accept the Commission’s explanation, 334 I.C.C. at 54:
In the inclusion report, we found that the consideration Penn Central had agreed to pay would equal liquidation value there shown, and that made it unnecessary for v. to explore other pricing considerations. The liquidation value that results in this reopened proceeding exceeds the agreed price, obliging v. to make a new determination as to whether the price resulting from such a valuation is fair.
Broadly speaking, what the Commission did in the Remand Report was this: On reexamination it found that if liquidation of NH could have been completed by selling cf. the properties individually in a normal market within six years from the date when a determination to liquidate had been made, the estate would have realized a figure having a present worth of $162.7 million, 334 I.C.C. at 30-53. It next argued that it was not constitutionally required to allow NH this or any other estimate of liquidation value, but only “a fair and equitable price under Section 5 of the Interstate Commerce Act,” 334 I.C.C. at 56. However, it found no need to base its decision on this ground, since it also found that
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’*1053 entitlement to the liquidation value we have computed under the court’s instructions. 334 I.C.C. at 57.
By making two further adjustments to liquidation value, the Commission reached a figure which it considered “a fair price on the current record,” and it is this sum which is before v. for review.
The two adjustments were of $15,386 million for a one-year delay before the start of liquidation due to the need for obtaining a certificate of abandonment, 334 I.C.C. at 58-60,
I. The Scope of Review cmd the Governing Standard
We begin by reiterating the severe limitations on the scope of our review. In our last opinion in this case, 289 F.Supp. at 427, we called attention to what we had said on that subject in the N & W Inclusion Case (Erie-Lackawanna R. Co. v. United States) D.C., 279 F.Supp. 316, 337 (1967), aff’d with minor modifications, 389 U.S. 486, 88 S.Ct. 602, 19 L.Ed.2d 723 (1968). We also cited Mr. Justice Cardozo’s pertinent admonition, “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, 54 S.Ct. 647, 656, 78 L.Ed. 1267 (1934).
When the case was last before us, we noted various faults and fuzzy patches in the Inclusion Report, but the principal ones were what amounted to two arithmetical errors aggregating more than $20 million, 289 F.Supp. at 427-428, 438, and a substantial understatement, stemming from a plain misconception on a matter of law, of the value of NH’s claim to half of the “excess income” from the Grand Central Terminal properties, 289 F.Supp. at 428-430. The arithmetical mistakes could have been corrected without a remand, and it might also have been possible to make our own determination
On this second review we confront once more the question of the proper standard of valuation, which has now been fully discussed by the Commission. 334 I.C.C. 53-57. This matter apart, no significant appeal is made to our authority to interpret the Constitution, statutes, or contracts. There are again a few alleged arithmetical errors, this time relatively minor. But the overwhelming bulk of the attacks concerns the Commission’s economic judgments. With respect to these we must be on guard lest the familiarity about the facts of the case we have somewhat painfully gained should lead v. simply to substitute our views for those of the agency which Congress has appointed.
We begin with a word on whether the Commission was bound to award liquidation value although, like the Commission, we do not find it necessary to decide this. One can scarcely quarrel with the proposition that in general “A fair and equitable price * * * means a price that is fair both to the buyer and to the seller.” 334 I.C.C. at 56. In the Norfolk & Western Inclusion Case, 330 I.C.C. 780, 801 (1967), the first instance in which the Commission was required to prescribe a price, it said:
In the ordinary ease under section 5(2) (d) the acquired line’s maximum commercial value to the acquiring line cannot exceed a price based upon past and foreseeable earnings of the acquired line plus the value of all benefits the acquired line brings to the acquiring line’s system. Moreover, this price is ordinarily the maximum we should expect the acquiring line to pay. It appears that the price, nevertheless, will generally be below book value, and hence it will ordinarily be the minimum price the acquired line will find tolerable.
The prices the Commission set on this basis were later upheld by the Supreme Court, Penn Central Merger and N & W Inclusion Cases, 389 U.S. 486, 524, 88 S.Ct. 602, 19 L.Ed.2d 723 (1968), not simply as against the acquiring line’s contention that they were too high but as against a claim by one of the lines to be acquired that the price, considerably less than current market quotations, was too low.
Here the “past and foreseeable earnings of the acquired line” are huge and increasing deficits — deficits far larger than in 1966 when the Commission required inclusion of NH as a condition of the Penn Central merger, 327 I.C.C. 475, 526-27 (1966). The only “benefit” inclusion of NH is claimed to bring to PC is that the Commission would not have approved the Penn Central merger without it. However, the Commission has rejected the arguments of the NH bondholders based on adding to the value of NH whatever potential savings from the merger are needed to justify a high inclusion price, saying, “This was not the intent of our decision,” 334 I.C.C. at 66, a view we had previously intimated, 289 F.Supp. at 443. There is thus a decided anomaly in the position that, looking only at the words of the statute, the Commission was required to make PC pay a price for NH which is far beyond anything NH is worth to it in an economic sense and which, by hypothesis, it can never realize.
However, we are not so sure now as we formerly were that these precedents necessarily lead to the further conclusion concerning the Commission’s duty here that the NH bondholders would draw from them. The just compensation and due process clauses are triggered only by governmental action. Existence of governmental compulsion was not disputed in any of the cases cited above; it is disputed here, for PC argues that although the bondholders seek compensation for governmental taking of a right to liquidate, they never properly asserted such a right. The NH trustees petitioned for inclusion in PC about three months after the merger application was filed in 1962. The bondholders at first supported this move, and it was not until April 1967, long after the commitment to seeking inclusion was for practical purposes irrevocable, that some of them petitioned to dismiss the reorganization. Judge Anderson denied this, In re New York, N. H. & H. R. R., 281 F.Supp. 65 (D.C.1968), the decision was not appealed, and when immediate inclusion was finally ordered, it was without protest from any party except PC. If we could take all this as indicating that inclusion had in fact been sought solely because the bondholders and the trustees felt it would be more in NH’s interest than abandonment, we would find nothing in § 5(2) (d) or in the Fifth Amendment that would prevent the Commission’s fixing a price considerably short of liquidation value and saying, in effect, “This is all we think it fair for the acquiring road to be required to pay. We see no reason why it should be made to assume the entire cost of keeping alive a carrier whose operations the public will not support. On the other hand, if you [the seller] don’t like it, you are free to refuse and seek the abandonment to which you are entitled.”
On the other hand, the present case may well be one where a volume of history must prevail over a page of logic. Ever since June 1962, when the Trustees petitioned for inclusion of NH if the PC merger was approved, it has become increasingly apparent that this solution was so vastly preferable in the public interest that, as we thought, 289 F.Supp. at 444, and the Commission now has confirmed, 334 I.C.C. at 59, “If the Trustees
Because of the way the Commission has approached the valuation question, we do not feel called upon finally to decide these intriguing issues. The Commission set out to fix a price that would give NH what it thought the estate could realistically hope to achieve on liquidation. If the Commission made demonstrable errors, it is our duty to correct these, hopefully without a still further remand. But, as indicated, we are not required, or indeed permitted, to reexamine every judgment made by the Commission and to substitute our own whenever we think it better. Our function is to determine whether the agency’s conclusions are “equitable and rational,” not “to second-guess each step in the Commission’s process of deliberation.” Penn Central Merger and N & W Inclusion Cases, 389 U.S. 486, 524, 88 S.Ct. 602, 621, 19 L.Ed.2d 723 (1968).
II. The One-Year Delay for an Abandonment Proceeding
At the initial hearings concerning inclusion, the NH trustees submitted estimates of asset values as of the end of 1965, and PC submitted estimates as of the end of 1966. In the Inclusion Report, the Commission by and large accepted the former figures, then adjusted them to the later date, spread them over a six-year estimated liquidation period, and discounted them back to present value. At that stage the Commission was thus assuming a liquidation starting January 1, 1967. The further adjustment in the Remand Report amounts to assuming that the decision to liquidate would have been taken on that date but that liquidation could not begin until a year later because of the necessity for obtaining a certificate of abandonment under § 1 (18). Passing on the reasonableness of such a determination requires a reviewing court to enter a never-never land. The Commission had to estimate the starting date of 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, each based on a different pattern of demands on governmental authority that were never made, and ensuing administrative and judicial proceedings that never occurred.
We find no lack of rationality in the Commission’s view that even if the liquidation decision is assumed to have been taken by the end of 1966, although in fact the bondholders did not apply for dismissal of the reorganization proceedings until the spring of 1967, authority to abandon would not have been granted until a year thereafter, even though we believe, as the Commission may not, that it would have been constitutionally required to issue a certificate of abandonment if inclusion was not a viable alternative. Even in such a case an abandonment proceeding serves the important office of affording persons interested in maintaining the service, here the four states directly concerned, an opportunity to make proposals for acquiring so much of the property as was considered essential. See Palmer v. Massachusetts, 308 U.S. 79, 60 S.Ct. 34, 84 L.Ed. 93 (1939);
We cannot join our brother Weinfeld in reading our previous opinion, 289 F. Supp. at 438, as precluding the Commission from postulating a one-year period after December 31,1966, for an abandonment proceeding. What we rejected was a claim that we should allow for such a delay although the Commission then had not. Moreover, as the Remand Report pointed out, 334 I.C.C. at 58, a principal reason for our ruling was that, as matters then stood, the NH estate would be subject to a portion of operating losses for several years after consummation of the PC merger, whereas that burden has now been limited to eleven months. For whatever importance it may have, we likewise do not read the quotation from p. 5 of the joint brief of the Commission and the United States, cited in footnote 16 of the dissenting opinion, as our brother does. The “directive” was to make “detailed findings regarding the piecemeal liquidation value of the NH assets, as if an abandonment certificate
The NH bondholders argue further that even if the Commission was justified in postulating a one-year delay in starting liquidation, its figures concerning the effect of this contain numerous errors. They say that if the date for starting liquidation is pushed forward a year, all the properties will have to be revalued — presumably upward. PC responds that the failure to revalue has been beneficial to the bondholders, and that in any case far longer gaps between date of valuation and presumed date of sale have previously failed to stir objection. For example, the properties were all valued as of December 31, 1966, even though it was assumed they would not be sold then but over the six years following, and the same figures were also used in the study that assumed a ten-year program of liquidation sales. The bondholders argue also that non-operating property could be sold immediately, to which it is answered that the record affords no indication how much of this there is and that the Commission was warranted in assuming that, with their serious cash stringency, the NH trustees had done about all such selling that they could. The bondholders contend that sales contracts could be made on a contingent basis, that only sales scheduled for the first year would be delayed, and that the preservation costs would be less than estimated, particularly since holders of defaulted equipment obligations would repossess. While these arguments are not without persuasiveness, they are offset by the Commission’s failure to deduct a further year’s depreciation of some $3 million, by the conservativeness of the estimate that one year would suffice for an abandonment proceeding of such magnitude and possible judicial stays, and by the Commission’s choice of January 1, 1968 as the date for beginning liquidation instead of imposing on NH the costs of an additional year’s delay in order to arrive at the possibly more logical starting date of February 1, 1969
Of the many issues in the case, the hypothetical question here posed is least susceptible to scientific determination. We cannot say that, all things considered, the Commission’s basic assumption was irrational or its detailed findings unsupported by substantial evidence.
III. The Bulk-Sale Discount.
At the hearing on remand PC adduced the testimony of Mr. Robert E. Simon, an experienced real estate operator. The burden of this was that the appraisals of the sale of land in some 1700 parcels over a six-year period, discounted merely by 6%, did not reflect certain elements of risk in such an undertaking, notably the likelihood that the liquidation might take longer than estimated and the possibility of an economic downturn, even though the appraisals had substantially marked down land remaining unsold at the end of the fourth year. Mr. Simon thought the proper measure of the value of the land was the price it would command if sold immediately to someone who would assume these risks. Such a person, he testified, would finance 75% of the purchase price by loans, which could not be obtained at less than 9% and
In the course of justifying the deduction, the Commission said, 334 I.C.C at 60, that “the liquidation value urged by the creditors assumes not only the immediate right to abandon * * * but also the right to break v. the railroad and sell the parcels for their highest and best price” and that the latter right “may be restricted when a buyer for the entire bulk of the NH properties appears who will continue the operation of needed services.” We entertain the gravest doubt concerning the legal premise underlying this argument; we would suppose that the constitutional right to abandon operations implies a right to break v. the railroad and sell the parcels for their highest and best prices. Moreover we fail to see the relationship of this argument to Mr. Simon’s testimony, which was not at all concerned with a buyer “who will continue the operation of needed service” but rather with one who would do precisely what the NH estate proposed to do.
However, the Commission also stated, “The bulk-sale discount merely reflects a market appraisal of the risks that the estate avoids, and the bulk buyer assumes,” 334 I.C.C. at 61, and that the discount “fully recognizes, without conceding, NH’s right to abandon and liquidate the estate.” 334 I.C.C. at 63. While the Commission’s language is not pellucid, we read this as saying that the Commission deducted the discount as a proper measure of risks not taken into account by the appraisals and the discount to present value. We cannot find this conclusion to be without rational basis; the Commission was not bound to aecépt the testimony of a witness called by the bondholders that the discount to present worth was all that was needed. In addition to the factors emphasized by Mr. Simon, there is the fact, to which we have referred above, that the appraisals gave no effect to the serious adverse economic consequences from discontinuance of NH’s operations, 331 I.C.C. at 667.
IV. Alleged Errors in Computing the Liquidation Value of NH.
A. Grand Central Terminal Properties.
In our previous opinion we concluded in effect that while no court had ever decided that NH was entitled to receive 50% of the surplus income of the GCT properties regardless of its cessation of operations, its claim to this was “exceedingly strong,” 289 F.Supp. at 431. On remand the Commission made a conscientious effort to appraise the value of this share in surplus income and arrived at a figure of $28.887 million as against its former figure of $13 million and our guess of “at least $25 million,” 289 F.
The largest single item selected by the bondholders for criticism is the failure to credit NH with the value, estimated at $5.6 million annually, of NH’s right to have its share of terminal expenses met by income from GCT properties. There is no question that this constitutes a significant benefit to PC as compared to a situation where the NH estate would share in GCT income and PC would be left with all the expenses — a situation we have previously found not to be within the language of the contracts or the probable intent of the parties, 289 F.Supp. at 430-431. But it does not follow that a capitalization of this amount constitutes an element of liquidation value of NH. Unless someone could be found to take over NH’s operations into GCT, the right to have terminal income applied to expenses could not be sold to anyone even if the anti-assignment clause in the contracts was not the obstacle that it may be. While it may well be that the State of New York would not allow all of NH’s commuter services to disappear, there is no assurance in this respect and still less assurance that the State would operate into GCT if it had to pay the NH estate the full capitalized value of NH’s right to set Terminal income cf. against Terminal expenses. Indeed, the State, if it wished to continue using GCT, might well be able, either through its own bargaining position or the power of the ICC, to obtain a transfer of this right without making any payments to NH that would increase the “liquidation value” of this unique type of asset above the sum that could be realized if the State were not a buyer. 289 F.Supp. at 431. While we do not disagree with the bondholders’ position that a state must pay the salvage value of property of a defunct railroad that it wishes to acquire, what is the “salvage value” of property that cannot be sold to anyone else and is of no value in the owner’s hands? It is true, on the other hand, as we previously noted, 289 F.Supp. at 431, that cessation of all NH operations into GCT might affect the liquidation value of NH’s interest by increasing surplus income by reducing total Terminal expense. But the bondholders offered no evidence on remand what this would be, and there are countervailing factors, such as probable decreases in concession income and expectable inflationary increases in Terminal expense over the years.
We are similarly unconvinced that the Commission acted without substantial evidence in estimating future hotel income at the average shown in the Terminal Account for the years 1964-67. There was a downturn from 1964 through 1966, while 1967 came near (although not v. to) the level of 1964. The figures in the Terminal Account are net of capital expenditures, and a chief claim of the bondholders is that these should have been removed and deduction made only for what would be approprial. under depreciation or retirement accounting. The Terminal Account in this respect only reflects the long-standing practice of the parties, which is embodied in the hotel leases themselves. Beyond this, the Commission was justified in concluding from the absence of any trend in Terminal Account earnings from 1960 to 1967 that the annual capital expenditures on these old hotels, however, described from an accounting standpoint, constituted regularly recurring costs necessary to maintain income rather than likely to increase it. 334 I.C.C. at 36-38.
Another bone of contention, not dealt with in our previous decision, concerns a lease recently negotiated by PC of the air rights over Grand Central Station for the construction of an office building. PC stipulated that if this were built, it would bring an annual income of $2.3 million or under “certain favorable circumstances” $3 million, beginning about 4 years after the commencement of construction. Prior to the completion of construction the annual
The bondholders complain over the failure to take account of any part of the $1 million annual rental during construction and use of the. $2.3 million rather than the $3 million figure thereafter. But, apart from the absence of proof that the latter figure was fairly expect-able, any conservatism on these scores was a reasonable offset for the meagre weight given to the doubt whether the building would be constructed at all. Indeed we consider PC’s grievances with respect to the Tower Building considerably more impressive than the bondholders’. While we would have had no objection if the Commission had handled the matter as our brother Weinfeld ingeniously suggests, we see no basis for compelling this.
The only other item relating to GCT requiring discussion is the Commission’s refusal to require PC to pay NH its share of surplus income for 1967 and 1968. The justifications for this refusal were that to make the payment “would be giving the claim a double value, once as a dollar claim and secondly as the capitalized value of its claim as of December 31,1966”; that the bondholders were in effect seeking to move the valuation date forward; and that in that event the Commission “would also have to make other adjustments, such as depreciation for 1967 and 1968; and such reevaluation of the estate might be quite different from the ultimate liquidation figure we have found.” 334 I.C.C. at 38-39.
Such arguments misconceive the nature of the bondholders’ claim, which is simply that they are entitled to receive whatever their property earned while they still owned it. Only if PC had paid NH for the assets on the valuation date could it properly argue that the bondholders were trying to recover twice by laying claim to the earnings of those assets while they also retained the interest paid on the sum given in exchange for them. When the assets were valued, and what they were valued at, is beside the point.
B. Harlem River and Oak Point Yards.
After careful reexamination the Commission adhered to the $18,090,990 appraisal submitted by the NH Trustees “as representing the value of the yards in the event NH were liquidated and its line of railroad dismantled.” 334 I.C.C; at 41-48. Judge Anderson has sustained the bondholders’ claim for a higher appraisal of $22,650,000, which assumed that all the industries in the two yards would enjoy the present level of rail service. The principal argument for this is founded on the premise that, in the event of liquidation of NH, PC would be obliged to continue service over its Port Morris branch to the Hunts Point Wholesale Market which is located north cf. but not adjacent to, the Oak Point yard. Acceptance of the premise would not necessarily entail the conclusion necessary to compel adoption of the higher figure. The Commission’s evaluation of the probable scope of future rail service to these properties in the event of liquidation of NH lies in an area peculiarly within its expertise, and we decline to disturb it.
C. NH’s interest in the Boston & Providence.
In our previous opinion we held that the liquidation value of NH’s inter
Although we do not question the conceptual soundness of taking market price of securities as a rough guide to asset value, it appears that the $2.3 million figure was not based on the market’s estimate of B & P liquidation value, but on the Commission’s rough guess at it. Boston & Providence R.R. Corp. Reorganization, 327 I.C.C. 10, 20-21 (1966). Furthermore, we cannot find any evidence that the debentures were worth $5 million. In fact, the United States, to which they were pledged during the 1950’s by NH as the sole security for loans that greatly exceeded their face value, agreed to exchange them for NH securities with a face value of $3.5 million, and this plan has been judicially approved as a fair compromise between the face amount of the B & P debentures and the well-supported view that because NH was in fact the primary obligor on the debentures, the obligation was extinguished as soon as NH acquired them in 1954. In re Boston & Providence R.R. Corp., 260 F.Supp. 415, 421-422 (D.Mass. 1966). It also appears that NH in fact did not own the 20,000 shares of B & P stock which the Commission claims for it, but only 16,000, with most of the missing 4,000 being held by the debenture sinking fund. Boston & Providence R.R. Corp. Reorganization, 327 I.C.C. 10, 13 (1966).
If we were to retain the Commission’s approach, while correcting the errors just noted, we would come out with a value for B & P very close to, but slightly below, the $8.1 million of the liquidation study. This study, however, was the result of detailed examination of the B & P properties, its findings have never been seriously disputed, and it would be irrational to make what amounts to a minor adjustment in its findings on the basis of assumed values for stock and securities that are far more speculative than the estimates they would be used to correct. We therefore adhere to our previous determination.
D. Deduction for accrued real estate taxes.
In our last decision we found the Commission had made a double deduction for $16.2 million of accrued real estate taxes on property required to be transferred free of liens by also including these in the assumed expenses of liquidation. 289 F.Supp. at 438. On remand the Commission decided that “the proper treatment of this item is to remove it from the liquidation expenses.” 334 I.C.C. at 40. However, the Commission increased liquidation value by only $14.6 million on the theory that under the NH reorganization plan such taxes are to be paid cf. by notes which the market would discount by 10 to 12 percent. 334 I.C.C. at 41. We see no sufficient
E. Net Additions and Betterments between December 31, 1966 and December 31, 1968.
The bondholders claim that the purchase price should be increased by net increases in NH’s property accounts since the valuation date, December 31, 1966. The Commission contends that the point was not raised before it; the bondholders deny this. We find it unnecessary to pass upon the issue since we are satisfied with the answer made by the Commission and PC on the merits, namely, that acceptance of the bondholders’ contention would require a complete revaluation of the property. Two examples will suffice to illustrate this. Many of the expenditures were improvements to the right of way which, however necessary for continued operation, might add nothing (or even be a negative factor) if the road were to be scrapped. Another is that if an upward allowance were to be made for net additions to the property accounts since December 31, 1966,
F. Failure to reduce discount to present worth to reflect price reductions.
The bondholders contend that the Commission reduced the estimated prices to be obtained for portions of NH’s property, but did not correspondingly reduce the discounts used in determining the present worth of what the NH estate would receive. The logic of this position is apparent, and we shall ask the Commission to take appropriate account of it in the decree to be submitted to us.
V. Loss Sharing
In our previous opinion we accepted “the Commission’s view that it was not bound to require Penn Central to assume all losses of NH subsequent to the Penn Central merger” and held that “the Commission was justified in setting a ceiling on Penn Central’s participation in losses and in providing that it bear only a fractional share.” 289 F.Supp. at 443-444. We disapproved its formula with respect to loss-sharing only because the downward progression of PC’s share in the second and third years might have, and indeed was intended to have, the effect of discouraging the bondholders from pressing legitimate claims, 289 F. Supp. at 444-445. The direction for inclusion of NH on December 31, 1968, eleven months after the PC merger, mooted the question of loss sharing for subsequent years, and the Commission adhered to the portion of its formula requiring PC to absorb all 1968 operating losses v. to a maximum of $5.5 million— or $5 million for the 11 months, 334 I.C.C. at 71-74. In light of the legal
VI. The Consideration Payable by PC
The bondholders make two attacks on the valuation of the consideration payable by PC. One of these is of minor, the other of major significance.
In our previous opinion we recognized the force of the position of the Trustee of the First Mortgage securing the Harlem River Division bonds that these bonds should be accorded special treatment because of their fully secured nature, but considered this to be “a matter better left to the reorganization court.” 289 F.Supp. at 442. That court agreed with the view we had tentatively expressed. 289 F.Supp. at 464. The Commission accordingly directed PC to assume the bonds, and said that the value to NH of having this obligation removed would be $8.9 million. 334 I.C.C. at 70-71. The bondholders say that this figure was derived by simply adding the face value of the principal, which is $6.6 million payable January 1, 1973, to the face value of the accrued interest, which is $2.3 million payable in five equal annual installments between 1969 and 1973, without making any deduction for the delays in payment. We accept this criticism, and direct the Commission to modify its order by calculating an appropriate discount.
A much more important issue is the Commission’s adherence to a valuation of $87.50 per share for PC stock. Although we sustained this in our previous opinion, 289 F.Supp. at 436-437, the market’s evaluation of the stock has drastically changed for the worse since that time. Whereas we noted that while that opinion was being written, PC stock had advanced to $85 per share, and it reached a high of $86.50 on July 14, 1968, it had declined to $69.75 by August 13, 1968, when the reorganization court rendered its decision also sustaining the $87.50 figure, to $63.375 on the dates of the Remand Report and of actual inclusion, and still further thereafter. The decline during the last half of 1968 was the more significant in view of the fact that the Dow-Jones rail average on December 31, 1968, was at approximately the same level as on the date of our decision.
On the heárings on remand the bondholders called an expert witness who testified to a “current investment value” of $65 per share. In a footnote constituting its sole discussion of this important problem, the Commission noted that the witness “was unfamiliar with Penn Central’s operating and financial plans and condition; gave undue weight to extraordinary expenses of the past; and generally neglected the future prospects of the company.” 334 I.C.C. at 68 n. 40.
Our views on this subject parallel those recently expressed by the reorganization court. The NH trustees had asked for inclusion of NH in the PC System. It must have been expected from the outset that a large portion of the purchase price would consist of PC stock and that this would not be immediately sold but rather would be held by the reorganized NH as a major long-term participant in what was expected to be a great and successful railroad system.
We referred in our previous opinion to the “unfortunate” character of “the duplicitous system of review” by this court and the reorganization court. 289 F.Supp. at 424-425 & n. 3. Now this appears all the more unfortunate in light of the different conclusions the two courts have reached on important points. We regret our inability to agree fully with Judge Anderson, for whose views, reflecting years of devoted service to the administration of the NH estate, we entertain the greatest respect. We also regret our inability to accept positions forcefully expressed by our esteemed dissenting colleague. Essentially, we think our disagreements with Judge Anderson and Judge Weinfeld 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. In any event we must decide the case according to our own lights; reconciliation of divergent views will come ultimately in the nation’s highest court, which alone can speak with authority.
The Commission is directed promptly to prepare and serve a proposed decree which, among other things, shall reflect in dollar amounts the changes directed in this opinion. Increases or decreases in the price shall be in approximately the same ratio as the figures for PC stock, PC bonds and cash in the Remand Report, 334 I.C.C. at 71, bear to each other. Other parties may serve counter-proposals within ten days thereafter, and a further five days will be allowed for comments on such counter-proposals.
. This consisted of three items:
Millions
Tear’s added discount $ 7.946
Tear’s preservation costs 4.940
Tear’s real estate taxes 2.500
$15,386
. The Commission observed in the Remand Report:
“Valuation is at best imprecise, involving broad areas of judgment. This is especially so in the case of a bankrupt railroad having no prospect of future income as it is presently operated.” 334 I.C.C. at 54.
. We find little analogy in Tennessee Central Railway Company Abandonment of Operations, 333 I.C.C. 443 (1968), where an abandonment certificate issued in 3% months. An all freight carrier with annual revenues of less than $4,000,000 is scarcely comparable with a passenger and freight carrier with annual revenues exceeding $100,000,000.
. Since inclusion was the alternative to abandonment and liquidation, it would not have been irrational to charge the NH estate with so much delay as would have occurred after the right to inclusion accrued, although not with more.
. See also Exs. NHI 44, pp. 11-12; NHI 97, p. 3; NHI 99, pp. 2-3.
. Except when the issue is first being cf. fered to existing security holders an underwriter, like Mr. Simon’s hypothetical bulk buyer, stands to make a profit from an upturn, in addition to his underwriting fee.
. For the nature of these securities, see 289 F.Supp. at 434-435.
. Similar considerations apply to PC’s contention that the Commission should have credited it with $1.2 million of post-bankruptcy interest on the accrued taxes which the NH estate will not have to pay in reorganization. Nicholas v. United States, 384 U.S. 678, 686, 86 S.Ct. 1674, 16 L.Ed.2d 853 (1966).
. This is an appropriate place to say that we have considered the bondholders’ attacks on the depreciation adjustment for 1966, 334 I.C.C. at 47-50, but find no force in them sufficient to justify a remand. The bulk of the $3,253 million adjustment, $2,367 million, relates to equipment, where depreciation would decrease liquidation value. Such merit as exists in the bondholders’ argument that depreciation would not necessarily affect liquidation value thus applies only to such part of the $866,570 for “Other Property” as related to items like ballast (in contrast to rails and ties) that would not be sold as such.
. This position is illustrated by the proposal of the Trustee under NH’s junior mortgage that the added consideration receivable by NH as a result of departure from the Trustees’ contract should largely take the form of PC stock.
Dissenting Opinion
(dissenting in part):
On the last round, when the Commission found that $125 million was “at least equivalent to the liquidation value” of the New Haven assets,
I recognize, of course, that the scope of review of this Court of the Commission’s order is limited; but I also recognize that the Court’s function in reviewing the Commission’s order is “to guard against the possibility of gross error or unfairness.”
The Reorganization Court and this Court appear in agreement that New Haven is entitled to the fair liquidation val-v. of its assets transferred to Penn Central. My disagreement with my brethren of this Court centers about their acceptance of the Commission’s “other pricing considerations” which result in reducing substantially below liquidation value the amount tp be paid for the New Haven assets.
Deduction for one-year abandonment delay
The history of these proceedings shows that December 31, 1966 was accepted by the parties and the Commission as the date on which a six-year liquidation was hypothesized to commence. The date thus does not represent, as the majority suggest, the date “the liquidation deei
Although the expenses of the six-year liquidation were provided for in the prior report, the Commission did not then include any deduction for abandonment proceeding delay.
Penn Central, in seeking to uphold the Commission, urges that the added cost of delay is merely an “adjustment”
The Commission itself understood the true significance of the December 31, 1966 valuation date, as is evidenced by its brief before v. on this round. “The [remand] report,” it says, “makes detailed findings regarding the piecemeal liquidation value of the NH assets, as if an abandonment certificate were in hand on December 31 1966, in accordance with the directive of the Three-Judge Court.”
In essence, the Commission’s abandonment-delay concept envisions a one-year “freeze” on the New Haven’s liquidation program, while proceedings drag on be
Upon this record, the abandonment delay concept, which deducts $15.386 million from the liquidation value of New Haven assets, is without justification and is not based upon substantial evidence.
Bulk sale concept.
The bulk sale concept, a theory not previously considered by the Commission, is based upon its view 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.”
The Commission, by hypothesizing a forced bulk sale of New Haven’s assets to an entrepreneurial operator based upon his borrowing of 75% of the capital at 9% and earning a 15% return on his equity investment — and then applying a discount factor of 10.5% over the six-year liquidation period — further reduces the amount to be paid to New Haven by $6.695 million.
Although my esteemed colleagues are compelled to “entertain the gravest doubt concerning the legal premise” upon which the Commission postulated its theory, they purport to find justification for its acceptance by culling other statements from the Commission’s report and deducing therefrom what the Commission really intended, to wit, a “discount as a proper measure of risks not taken into account by the appraisals and the discount to present value.” Passing for the moment that this is not at all the theory relied upon by the Commission, which at once raises a question as to whether the agency action can be upheld,
Grand Central Tower Building.
As to the proposed lease of the air rights for the construction of the Tower Building, which if in fact constructed would eventually bring an annual income of $2.3 million, or under “certain favorable circumstances,” $3 million, the Commission, while aware that the prospect of actual construction was speculative, nonetheless concluded “it is probable that the building will eventually be eonstructed * *
Stock valuation.
The Commission valued 950,000 shares of Penn Central stock at $87.50 per share, purportedly worth $83.1 million at the time of inclusion, as part of the consideration to be received by New Haven. The Reorganization Court and this Court agree that by the reality of the market place, “the true appraiser,” the stock is grossly overvalued — at the date of inclusion by some $23 million. The problem admittedly is a difficult one. The Reorganization Court proposes an imaginative solution which is acceptable to my brethren. With the utmost respect to them, I do not believe this is the solution. In my view it is more desirable to remand to the Commission for further consideration and to afford all interested parties an opportunity to submit proposals. The question of the stock valuation appears to have received little or inadequate consideration by the Commission. As my brethren note, the sole discussion of this important problem was a rather cavalier brush-off of the bondholders’ challenge to the Commission’s valuation of the stock at $87.50 per share.
The Commission limits the loss that Penn Central is to bear to $5 million.
Harlem River and Oak Point Yards.
The Commission reaffirmed that its acceptance of the $18.1 million appraisal was based upon the assumption that “NH’s railroad system on liquidation would be entirely dismantled, including the approximately 2 miles of main-line tracks connecting the two yards, which are not immediately adjacent.”
It is regrettable that these proceedings, now pending for more than a decade, cannot be terminated. But the errors in the Commission’s report here under review are so egregious as to leave no alternative other than to remand for further consideration.
. Second Supplemental Report of the Commission on Further Hearing, 331 I.C.C. 643, 697 (1967).
. New York, N.H. & H.R.R. First Mortgage 4% Bondholders Committee v. United States, 289 F.Supp. 418 (S.D.N.Y.1968) (three-judge court) ; In re New York, N.H. & H.R.R., 289 F.Supp. 451 (D.Conn.1968) (reorganization court). This Court’s remand related to the following:
(1) the Commission’s failure to discount New Haven’s liquidation expenses
over the projected six-year liquidation period, 289 F.Supp. at 427-A28;
(2) its miscalculation of New Haven’s right to surplus income from the Grand Central Terminal properties, id. at 428-433;
(3) its ambiguous valuation of the Harlem River and Oak Point freight yards, id. at 433-434;
(4) its erroneous valuation of New Haven’s interest in the Boston & Providence Railroad, id. at 434-435;
(5) its failure to discount the 5% bonds with which Penn Central was to meet its obligations under the Purchase Price Adjustments, id. at 437-438;
(6) its error in deducting from the amount to be paid to New Haven the sum of outstanding real estate tax liens, id. at 438;
(7) its failure to indicate tj)e source of its estimate of 1966 depreciation of New Haven properties, set forth in its brief before v. but not in its Inclusion Report, id. at 438;
(8) its miscalculation of the cost to Penn Central of Penn Central’s 5% bonds, its assumption of New Haven’s obligations under the Boston & Providence mortgage, and its payment under the Purchase Price Adjustments, id. at 439;
(9) the Commission’s failure to take into account a reduction in 1966 New Haven equipment obligations, id. at 439 n. 15;
(10) its conclusion that Penn Central would assume overmortgaged New Haven equipment, id. at 439;
*1066 (11) its failure to include any of Penn Central’s absorption of New Haven’s interim operating losses in the category of the cost of acquisition to Penn Central, id. at 440;
(12) its use of a sliding-scale formula for Penn Central’s interim loss-sharing as a device to curtail litigation by the New Haven bondholders, id. at 444; and
(13) its tendency to “round off” sums, with a consequent loss of some $5.3 million to the New Haven estate, id. at 427.
. Id. at 440.
. Fourth Supplemental Report of the Commission on Reconsideration and Further Hearing, 334 I.C.C. 25, 53, 63 (1968) (“Remand Report”).
. Penn-Central Merger and N & W Inclusion Cases, 389 U.S. 486, 524, 88 S.Ct. 602, 621, 19 L.Ed.2d 723 (1968).
. 334 I.C.C. at 53.
. Id. at 54, 60, 62.
. Id. at 57, 62-63.
. 331 I.C.C. at 662.
. True the states, communities and other interested parties would have been entitled to be heard in opposition to any application, and perhaps the proceeding would have dragged on; but even so, and despite the Commission’s view that Brooks-Scanlon Co. v. R.R. Comm’n, 251 U.S. 398, 40 S.Ct. 183, 64 L.Ed. 323 (1920), has been overruled sub silentio, New Haven could not have been compelled constitutionally, year after year, to absorb the constantly increasing operating losses or its security holders deprived of their right to foreclose their liens. And while one need not quarrel with the Commission’s position that a deficit-ridden railroad has no immediate right to abandon operations and dismantle, this does not mean that the public interest can compel such a railroad to continue its loss operation indefinitely.
. In re New York, N.H. & H.R.R., 304 F.Supp. 793, (D.Conn. May 28, 1969) ; 289 F.Supp. at 456-457.
. Penn Central Answering Brief at 26.
. Joint Brief of the United States and the Interstate Commerce Commission at 5. (emphasis supplied)
. 3311.C.C. at 698.
. 289 F.Supp. at 438-439. The fact, relied upon by Penn Central, that the record contains no evidence to indicate what the added value might be, is hardly the fault of the bondholders. The Commission made clear, both in its Remand Report and in oral argument before us, that it did not regard the question as a matter for evidence. 334 I.C.C. at 29; Minutes of Oral Argument of April 17, 1969, at 139-41.
. 334 I.C.C. at 61.
. Id. at 62.
. 331 I.C.C. at 662.
. SEC v. Chenery Corp., 318 U.S. 80, 94, 63 S.Ct. 454, 87 L.Ed. 626 (1943).
. 334 I.C.C. at 61.
. R-29; T. 29799 et seq.
. 384 I.C.C. at 34.
. The Commission itself, with respect to New Haven’s Bronx freight yards, noted that action by the Planning Commission on a proposed zoning change was too speculative a basis for fixing valuation. 334 I.C.C. at 41; 331 I.C.C. at 668.
. 334 I.C.C. at 68 n. 40.
. Id. at 74.
. 289 F.Supp. at 448-449 (concurring opinion).
. 331 I.C.C. at 712-13.
. 334 I.C.C. at 43.
. Id. at 44.
. T. 28849, 28864.
