Warren E. Burger: -- 915, 916, 917, 920, 921, 1038 and 1057, the New Haven Railroad Inclusion Cases.
Whitney North Seymour: Mr. Chief Justice, may it please the Court.
Warren E. Burger: You may defer a moment if you wish Mr. North Seymour until we see that all counsels are at ease. You may proceed now Mr. Seymour.
Whitney North Seymour: Thank you sir. I am going to open for the appellants on our side. I represent the trustee Manufacturers Hanover Trust Company under the represent the First Mortgage Bonds. I will be followed by Mr. Migdal who represents the Bond Holders Committee and he will be followed Mr. Auerbach who represents the Trustee. A little later on, I'll explain the division of argument after I've gotten started. The bonds outstanding of this Railroad consist of $76 million of first mortgage bonds with about $24 million of accrued interest, and $53 million of second mortgage bonds.
Speaker: I thought there were three classes of bonds? Am I mistaken?
Whitney North Seymour: The Harlem River divisional bond will be paid off so that there is only a permanent two classes.
Speaker: I see.
Whitney North Seymour: The Court already has some familiarity with these matters in the Penn-Central Merger case, the inclusion report of the Commission, which I will have occasionally, refer to was before the Court at the time it decided the Penn-Central Merger case. The New Haven filed a petition for reorganization in the Connecticut District Court in 1961 and that reorganization has continued since. Judge Robert Anderson was in charge of the reorganization from the beginning and continued to be after his appointment to the Court of Appeals. It was -- and is a somewhat unusual type of reorganization from the very beginning because the Railroad had been running deficit since at least 1956. It was apparent that the only way to keep the Railroad running was to have some kind of a merger or sale to another railroad in existence. And during the time of reorganization, that is from 1961 down through the 1968 at which time the Penn Central took over the New Haven and paid over the considerations subject to review of the problem of price. The reorganization had accumulated some $65 million of charges and claims ahead of the bonds as a result of reorganization expenses and borrowings and so on. This process continued, I think there is no dispute because of the determination on the part of a judge and the trustees and the trustees’ counsel and the Commission to keep the Railroad running and a proper feeling on the part of Judge Anderson and the others that New England required the continuation of this Railroad. I think Your Honors are familiar enough with its physical circumstances, so that help me to go into those that runs from Massachusetts, Rhode Island, Connecticut and New York and these both are a railroad which takes commuter traffic and interstate traffic of a more general in character. It's clear I think that from the very beginning, the trustees were seeking to find a railroad with which there might be a merger of the New Haven or an acquisition of the New Haven and that from the very beginning while this search went on, there was no prospect that the road could have been abandoned or liquidated because of the concern of everyone to keep it running. In 1961, the trustees approached the Pennsylvania and the New York Central on behalf of New Haven to see if they were interested in some acquisition and in 1962, they reported that the only salvation for this Railroad was some kind of a merger or acquisition. And in the same month, March 1962, the Pennsylvania and the Central asked approval of their merger under Section 52 of the Commission. In June 1962, the trustees intervened in the merger case to seek inclusion. There were negotiations in 1964 between Penn Central and the trustees which were unknown to the bondholders and which ultimately resulted in an agreement which was disposed for the first time in a report of a Commission Examiner, an agreement under which the merged corporation would acquire the New Haven assets for certain specified considerations. The Commission approved the merger and required Penn Central to include both passenger and freight operations and said in its order, “All upon such fair and equitable term as the parties may agree subject to the approval of a Bankruptcy Court and the Commission.” In October 1966, the trustees and Penn Central filed their agreed purchase agreement as a first step in the plan of reorganization. Hearings before an Examiner followed, report was dispensed with and the matter was submitted directly to the Commission. For some intermediate proceedings and in which arrangements were made for loans to the New Haven and other matters, but I don’t see if they’re relevant to what we are concerned with here and the were cited in the brief and I won’t take time to talk about. There followed the inclusion report of November 1967, which is the report which was before this Court at the time of the Penn-Central Merger, at least this Court knew about it. That report led to the first round of these appellants’ successful applications to the courts below, and both courts below remanded to the Commission. The essence of that inclusion report as far as the New Haven is concerned is that using evaluation as the evaluation date, December 31, 1966, the Commission found net liquidation value of the New Haven assets was a $128.9 million, which had rounded to a $125 million. It found the fair value of the consideration to be paid by the Penn Central under the purchase agreement was a $123.6 million which had rounded to a $125 million so that the consideration and the value of the liquidation value were similar and because of that, equality which it saw in the transaction had held that the transaction met statutory standards and approved it by the appellant. The present appellants petitioned for review and the three-judge court was convened consisting of Judge Friendly and Judge Levet, and Judge Weinfeld from the southern district. By order of May 1968, the court disapproved the inclusion report on the ground that it appeared that the Penn Central should pay an additional sum of $45 to $50 million. I don't think there's any use in going into the items there, they are set forth in our brief on page 15 from Judge Winfield's later dissenting opinion. While the matter was pending before the three-judge court, the Commission submitted the purchase agreement to the reorganization court as step one in the plan of reorganization. In April 1968, the court appointed a former judge of the Court of Appeals in New York Judge John Van Voorhis has a special master that considered the problems that are arising out of the Grand Central Terminal property. We don't say a word about that although Mr. Migdal is going to carry the argument on the point on the matter that it’s still open. Just after the turn of the century, the railroads using Grand Central Terminal came down a great open ditch, which is now Park Avenue and that seemed to kind of a waste of a valuable property. And in the early part of the century it was bridged over to create Park Avenue, and as a result of that and the agreements between the Central and the New Haven, a number of the principal hotels at which we have all to few left were built the Waldorf, the Biltmore, the Commodore, the Roosevelt, the Pan-Am building is older than the Yale Club. The New Haven and Penn Central -- the Central had a sort of a partnership interest in these properties and there was dispute about the nature of that interest and its value. The Commission in its inclusion report stuck a balance between various possibilities and arrive at a figure of $13 million as the figure that should be allowed, but that was evidently too low and Judge Van Voorhis was asked to report his views about the legal relationships. And he upheld the view that there was a partnership interest in connection with the Grand Central properties and ultimately as I will show Your Honors in the remand report the original loss of $13 million was advanced to $28 million so that under the present position of the Commission, the New Haven is entitled to $28 million for its interest. There is no dispute that the value of the property is $227 million so that the Penn Central has acquired a very valuable property for a very small amount.
Potter Stewart: Was Judge Van Voorhis appointed the special master for the purpose only of considering this aspect of the problem?
Whitney North Seymour: Yes, yes. Because of his background in the Court of Appeals --
Potter Stewart: Right.
Whitney North Seymour: He was thought to be a great expert in the New York property problems and so he was --
Potter Stewart: And his jurisdiction was confined only to that?
Whitney North Seymour: That's correct.
Potter Stewart: He's retired in the New York Court of Appeals?
Whitney North Seymour: Yes he is practicing law in New York. The reorganization court like the three-judge court concluded that the allowance by the Commission was inadequate that the undervalued property and he too remanded to the Commission. The three-judge court thought that the amount the Commission should increase its determination value was $45-50 million. Judge Van Voorhis spread was a little wider. He thought it should be $33-55 million. Judge Anderson, I beg your pardon, Judge Anderson. The Commission proceeded the whole expedited hearings and made its remand report on November 25, 1968 and this is the one which these appellants attacked here, and so I will be talking about some phases of that a little later on. The Commission was sustained on some matters by the courts later on. I don't think I need to take any time on that. So what we are going to talk about on our side are those things where the Commission was sustained by division among the judges and those things where the Commission was not sustained -- or was sustained but we think the court was wrong in sustaining it. The effect of the decision on remand was starting with the liquidation value of a $125 million, which the court had found for a $128 million -- 128.9, which the Commission had found on its origin inclusion order and increasing that to a $162.7 million and then immediately retreated by a series of deductions, major deductions from that amount. The most significant and those to which I am going to address myself being to totaling $22 million. One is so called discount for a abandonment delay and the other discount for -- so called discount for bulk sale. And in both this cases, our position is that Judge Anderson and Judge Winfield who dissented below were correct in their view that this discounts were unjustified and that Judge Friendly and Judge Levet were wrong in concluding that they could be justified. And so we shall ask Your Honors to follow the reorganization court on these matters. Our order to about what they were. The first discount, the abandonment delay discount or as in the substantial figure of $15,386,000.00 and this was based upon the theory that beginning in 1967, the New Haven would have had to start abandonment proceeding that that would have taken a year. That in that year, the New Haven would have had been practically as it stand still and although the losses for that year were already charged against the New Haven that the Commission could properly charge it again for up to an additional sum of $15, 386,000.00 and the bulk sale discount was a discount of about $6 million. The Commission held that it could require that the New Haven's properties be sold in bulk at a discount because it had the power to condition the abandonment certificate on a sale in bulk. This abandonment certificate which have had thought would have to be sought, which was never sought and never could have been obtained could be condition on this bulk sale discount. And that was the theory on which the Commission went. They made a few adjustments upward in their remand report, including an addition of sum on the Grand Central Terminal, which I have already referred to. But the net result of their whole operation of finding liquidation value of a $132 million and then making this large deductions was to arrive at a figure of $140.6 million to which it added $5 million additional arriving at a total figure of $145.6 million and then it proceeded to find that the consideration for that, which was largely in stock was worth that amount and therefore it would approve the acquisition at that price. Now taking the figure of that the Commission arrived at that I've just mentioned just so you have a kind of a guide to what it did. Taking the price of Penn Central stock, it brought in the consideration in December 1968 which is the date of the Commission’s remand report, the first mortgage bondholders would have received 24 cents on the capital on a dollar, 18 cents on a dollar if interest is included. You will see at once of course that the expectations of the reviewing courts, the three-judge court that $45-50 million would be added and the reorganization court that $33-55 million would be added as a result of the reconsideration fell far short of achievement. Judge Anderson when the prompt of the remand report came before him approved the immediate transfer of the property, two of the New Haven, two of the Penn Central so that the property would be required before the end of the year having previously ruled that unless there was transaction before the end of the year, the New Haven trans would stop running on January 1, 1969 because the erosion would then gone beyond any possible constitutional limit. And so the transfer took place and from that time on -- remember this was before Your Honors, there was an effort to stop the transfer and the courts below denied a stay and so the transfer proceeded leaving the question of price opened. Now the state of the conflict between the courts below is that as to this abandonment delay discount, Judge Anderson and Judge Winfield thought it was entirely unjustified that it was illegal and erroneous and was not sustained by substantial evidence, Judge Friendly and Judge Levet and the three-judge court affirmed, submitted on the phase of there opinion somewhat reluctantly concluding that it was -- I could not say it was sustained by substantial evidence and they could not say it was irrational, but they did sustain it.
Potter Stewart: Judge Anderson think can precede the three-judge court opinion?
Whitney North Seymour: Yes.
Potter Stewart: By what time (Inaudible)?
Whitney North Seymour: A very short time, about six weeks. So it was before the three-judge court. The division between the courts is the same on bulk sale, the same on the Harlem River and Oak Point yards, which Mr. Migdal is going to talk about and then on the certain adjustments. And then there were some matters on which the courts both disagreed with the position of the appellants here and we are going to present some of those points on argument and some on brief. Mr. Migdal will present following my argument the matter of the Harlem River yards and the matter of the questions on the Grand Central Terminal and on the valuation of the stock. And then we will submit some of the points on briefs because there obviously isn't time to cover all these points. We submit that Judge Anderson and Judge Winfield were clearly right that the abandonment delay was as Judge Anderson said, drag in by the heels for the purpose of reducing the liquidation value that which both courts had formerly held the bondholders were entitled and there isn't any real dispute here that liquidation value is the proper standing. The deduction of $16 million from liquidation value was found by the Commission was more than a departure in the interest of flexibility or as the Commission said a matter of refinement or a matter of pricing out. It really subverted the whole concept of using liquidation value as the standard and there was no justification for it. From the beginning it was perfectly clear that no application to abandon and liquidate would be granted. The three-judge court thought that was clear, the Commission thought that was clear and it's perfectly evident from the whole course of these proceedings that no such application should have been granted -- would have been granted. And the requirement that that hypothetical application should be made that these charges in addition to the losses for 1967 should be pilled on it. Just to reduce the amount the Penn Central had to pay for this property seems to us most unjust and inequitable as Judge Anderson and Judge Winfield viewed it. And I submit that that decision should be reversed. Other details of that, which are in the briefs, it's clear --
Warren E. Burger: Excuse me Mr. Seymour, I suppose the court on that theory pursued your point might have said since it can never be abandoned will just spread this abandonment delay indefinitely.
Whitney North Seymour: Well, if the Commission is permitted to say it would take one year, then I could say it would take two years and they can make an allowance for that. And I submit that it opens an area for perfectly arbitrary conduct and decision, which the court should not permit. If I understood Your Honors correctly, the Commission could then spread it over a period of time so that no liquidation value would be paid. I submit that erosion had reached the outer limits and no further erosion was fairly and properly to be applied.
Warren E. Burger: I am not sure I quite got your point, as long as got you interrupted on the -- on charging New Haven with the losses for the year. And then, I think as you put it superimposing, the one year abandonment delay on top that hypothetical loss.
Whitney North Seymour: Well the New Haven was running in the year 1967 and the New Haven had to use it -- the losses had to absorb the losses for 1967.
Warren E. Burger: But this was a real loss, not a hypothetical?
Whitney North Seymour: That's right, that's right. It had to absorb those losses. Those eroded the values available for the bondholders to the extent of those losses because they were paid off, in some fashion it came ahead of the bondholders. Now in addition to that loss, what the Commission has done is to put $16 million on top of that to deduct from the value of the assets remaining and therefore has piled it on top of the loss, I submit. Now there's some details of that pilling on which there is not time to talk about, but they have made up the $16 million by taking first alleged delays in disposing a property, there was a fair amount of non-railroad property, 1,700 pieces of property in all and it would have been perfectly possible during this year to dispose some of that property. They have added on preservation cause, which are not sustained, we think by the record and they’ve added on taxes which after all would not been added to if some of the property was disposed on a reasonable time. So that if you came to look at whether or not there was substantial evidence to sustain the conclusion as to the amount of this loss, you'd find it wasn’t sustained. But I prefer to grapple with it on the basis that is a matter of law, it was improper for the Commission to apply this hypothetical loss to reduce the minimum value, the liquidation value to which we submit the New Haven was entitled. Now to come to the bulk sale discount, which is in a kind of a curious position. The Commission held that they have power and to condition an abandonment certificate on requiring that the property be sold in bulk and thus they arrive at the bulk sale discount. In the three-judge court, Judge Friendly thought it was the gravest constitutional doubt above the ability of the Commission to condition an abandonment to which they were constitutionally entitled of losing Railroad upon a sale in bulk. And therefore he thought that went beyond their power. So he sustained the decision of the Commission on a wholly different ground than the Commission had taken. He sustained it on the ground that he found evidence in the record by a witness named Simon that if the property was sold, a bulk buyer would have many risks on which he'd want to get a discount. But that wasn't the basis on which the discount was allowed by the Commission. And when Simon's testimony is examined, it is perfectly apparent that he was talking about acquiring this property or such property for development and breaking up in sale, not for bulk use as the Commissions thought it should be without breaking up the Railroad, but breaking it up for development and other purposes. And I submit that the second ground on which the Commission was sustained was erroneous that there is no foundation for the Commissioner’s ruling in this regard. Now my time is --
Byron R. White: Even if not erroneous, you would perhaps have channery problem, wouldn't you?
Whitney North Seymour: Well, certainly. Certainly and I think that that stares the -- really stares the three-judge court decision right in the phase. But let me just add a word about scope of review because my friends in the Government say that it's a -- this is a very simple case in which the only question is scope of review that the three-judge court applied Ecker, that Judge Anderson departed from Ecker. Therefore, you sustained the three-judge court on reversed Judge Anderson. Mr. Auerbach will present the view that may well be that a court in reorganization with its own independent judicial duty is in a somewhat different position and the ordinary reviewing court. But our position basically that whatever the standard we review, it is perfectly clear that there is no substantial evidence to sustain the Commission on this discounts and that with regard to their conclusion, they reach the decision which is unjust and inequitable under the test both of the Commission's statute and of 77 of the Bankruptcy Act. So I would submit to Your Honors that you should affirm Judge Anderson who has lived with this al these years and knows what the discounts were and not pile upon the losses which have taken place through erosion of $65 million, the additional losses which the Commission has imposed upon the New Haven.
Warren E. Burger: Thank you Mr. Seymour. Mr. Migdal.
Lester C. Migdal: Mr. Chief Justice, and may it please the Court. While the Commission has acknowledged that liquidation value was the standard that should be applied with respect to the property of the New Haven. It has failed in several instances to give that liquidation value because it has not understood. But when you go to find liquidation value, what you must find is what the liquidator of that property would receive if he sold it in the method that was best suited to his disposition. That was what was wrong with the bulk sale discount and it is what is wrong with the Harlem River evaluation. And that was the question that Judge Anderson and Judge Winfield address themselves to. What you have in those two yards were simply the question of whether there would or would be not rail service available to the industrial uses of those two yards in the event of liquidation.
Potter Stewart: That's Harlem River and Oak Point yards?
Lester C. Migdal: That's the Harlem River and Oak Point yards?
Potter Stewart: The question is whether or not there would be good rail service available to that market area?
Lester C. Migdal: That's right, Your Honor. That's exactly the point. Now there isn't any question of the two values, of the only two values we need to look at here. That is to say it is either the 18 million or the 22 and a half million because the testimony is the testimony of a same man Mr. McKean and one represents a discount he took on certain liquidation assumptions which were furnished to him and those liquidation assumptions were that all of the electric power would be turned off. There would be no power to the property. Although this was property just adjacent to the Consolidated Edison Power Plant and all the tracks would be torn up. Now I submit that that was not New Haven's best method of liquidation. One other thing is the --
Speaker: Is there any disagreement between you and Mr. Seymour?
Lester C. Migdal: No, Your Honor. There is not. The problem that you face here is what you mean when you say scrap value, what you mean when you say net salvage value. Now, I say that what you mean when you say net salvage value is the best use you can make of it. And in this case, to have torn up the tracks, to have taken out the electric power would first have depreciated its value of the New Haven’s asset and then to have sold the portion of it as junk and the balance of it for whatever you could get for it and no sensible liquidator would have liquidated in that way. And it was for that reason that Judge Winfield and Judge Anderson both said that it was simply impermissible to permit the assumption, the basis here of liquidation to assume that there would be no service available. They were aware that New York City had built a Hunts Point Market and that it had spent a hundred million dollars on that. It was a Food Lifeline in New York. It was being served then by a small piece of track which ran -- if you think of it as running north, it is 3,000 feet between the Harlem River yards up to a point where it meets the Port Morris Branch of Pennsylvania Central which was not liquidated. And thence, the two yards, the Oak Point Yard and the Port Morris Yard being cheek by jowl, there is a switch point there that comes on to the New Haven and it continues on up. In another mile, there is a spare track and that spare track goes another mile with Hunts Point Yards and therefore, they have never seemed that Judge Anderson the possibility. Either for the liquidator would tear up to the track and in that way make it impossible to realize the value he could on the sale of his 136 acres in the Harlem River Yards and in the Oak Point Yards and at the same time make it impossible for New York City to have the rail service that it required. Because most of this -- for 99% of its distance, this came in on Pennsylvania cost and was then switched at the Port Morris yard and then went to Hunts Point.
Speaker: May I ask you Mr. Migdal.
Lester C. Migdal: Yes, Your Honor.
Speaker: Suppose you prepare (Inaudible)?
Lester C. Migdal: I think Your Honor on this point there is no remand to the Commission because I think that record is to perfectly clear that if you find that these yards and that's right. There is one question however that does raise a problem with respect to the remand. In the valuation when the -- when you consider the possibility that the mile and a half of track would be torn up, you then have to consider that on the liquidation hypothesis that that track would continue even if the New Haven for example had to give that track to New York in order to make sure that the traffic continue, then the value of the right of way, which is about $500,000 might have to be subtracted from the 22 and a half million dollars because then you would have valued it twice. However, Judge Anderson clearly felt that there was no danger that New York City would pay a fair price for that right of way in order to preserve the service to the Hunts Point Yards and therefore he did not make that deduction. And we submit that that is so perfectly plain incorrect. That it does not need to be remand again the value of that small piece of right of way which at worst would have been donated to New York City or to the development of the Hunts Point and of the Oak Point and Harlem River yards.
Speaker: What is it, about a mile or so or less?
Lester C. Migdal: It is 3,000 feet from the Harlem River Yards to the Oak Point Yards switch with Penn Central's Port Morris branch, then it runs on another mile until it meets the spare track to the Hunts Point market. In a certain sense, this unwillingness to permit the New Haven its real liquidation value while always ascertaining that liquidation value is what is being granted, the Commission’s treatment of the Grand Central Terminal is another case in point. For there, the New Haven enjoys the right or enjoyed the right until the closing of bringing its trains into the station and that had this partly by charters that which went back to the 1840’s and it had it partly by virtue of agreements, which had made with the Central. Now that right permitted the New Haven to operate its trains into the station and out of all of the terminal properties and here, we are not talking simply about the station income itself. We are talking about all of the Park Avenue properties in all of the area income. By agreement, these were being put into the terminal account and all the expenses were coming out of the terminal account to pay the expenses of both railroads, Central and the New Haven in the station. Now obviously, this income grew as the real estate developed and it has become more profitable. In 1907, this was a pretty remote part of New York City but that change in time. And the result of that was that as the income increased, the difference between the actual expenses and the income from the properties began to disappear and therefore the parties each year have to contribute less and less out of their own pockets in order to meet the expenses of their operations in the terminal and all of the expenses of the property. And there came a time in 1964 and thereafter when in fact there was more income coming in than the total of the expenses both for the fixed charges and taxes on the real estate and the operating cost. Now when that happened, there was excess income. So that a question then arose as to what the division of the excess income should be between the parties so that you've got excess income and terminal income as the way in which I have divided it now for this discussion and I hope that all of that is clear.
Potter Stewart: May I just -- having said that before you proceed so that I can understand, be sure I understand it.
Lester C. Migdal: Yes, Your Honor.
Potter Stewart: Am I correct in my understanding that there is no issue remaining as to the excess income?
Lester C. Migdal: That is correct Your Honor, though I think that it is very important --
Potter Stewart: The issue goes to the $506 million --
Lester C. Migdal: The $5.6 million. Yes, Your Honor.
Potter Stewart: $5.6 million, the capitalization of that.
Lester C. Migdal: That's right Your Honor.
Potter Stewart: The value of -- to the value of that income?
Lester C. Migdal: That is correct Your Honor. And yet it is extremely important understand how the issue with respect to the excess income settle. In the first instance, Central had denied that the New Haven had any right in the income, those properties produced in the event, but the New Haven stopped the operation. Now as a result of that in the negotiations between the trustee and Penn Central, no value was allowed for that and we argue that that was all wrong, it was all wrong because this matter had been the nature of the New Haven's interest studies had been litigated in the New York courts. It had gone all the way to the Court of Appeals and the Court of Appeals had said that the New Haven was in effect an equal partner with the Central in the management of those properties and treated them as joint venture. The Commission however on the first ground gave us this small value of $13 million because it considered that it ought to -- it considered in the first place but there was a great question as to whether it would survive in spite of the rule in the Baltimore case as to whether we have a real interest. And on the second place it considered that it ought to use as either end of the equation 41% on one side because that was our traditional car use in the station. And $5 million which was a certain nuisance value attributable to the claim and it split the difference and came out with $13 million and it was important that at this point, Judge Van Voorhis was named to look into the question because the result of his decision was to declare that the New Haven Railroad was in fact an equal partner and that it was an equal partner in an indefeasible way. And therefore, the New Haven's interest in that excess income, the profits from the operations had to be fully valued and we have to be fully paid. And they say that its declaration that we were an equal partner and that that interest was in fact indefeasible. It is very important for the purpose of understanding what ought to have happened to the $5.6 million. What we had is Penn Central's witnesses themselves testified to was the greatest bargaining history. We had a right to come in to that terminal with our trains and because the terminal income was so great, we did not have to pay for it. And therefore, the question is, why now when that valuable interest is turned over to Penn Central so that Penn Central can perform the service we formally performed and perform it without cost because it’s utilizing the same income. Why should Penn Central not be required to pay for it? Now I must say that if you read Judge Friendly's opinion on this point, you will see on the first round of review, you will see that essentially there was only one ground in spite of all the grounds that I finally talked about. There is only one ground that really determined his decision and that was his view whether if we stop running, if the New Haven stopped operating, whether anybody would acquire our right, whether anybody would be interested in doing that or whether it was so speculative that somebody would acquire that right that we ought not to be paid for it.
Potter Stewart: And that was your answer, at least your first answer is that the Penn Central did acquire your right?
Lester C. Migdal: Yes, Your Honor. But it was inevitable that somebody would acquire it because if nobody would acquire it, then precisely what the Chief Justice adverted to with respect when he spoke to Mr. Seymour would have occurred. This would have gone on until we would have been drained of all equity. On the one hand, we will not permit to stop the operations because it was vital to the public interest. And on the other hand, it was conceived by Judge Friendly that there might not be somebody who would pick up that service and would perform it for its own people. Now that I submit was simply unreasonable.
Potter Stewart: I am not sure I understand then what you -- you're talking about the right to enter the Grand Central station with your train?
Lester C. Migdal: That's right Your Honor.
Potter Stewart: Well I understood that the rational was that even if the States of Connecticut and/or New York or in combination acquired it their bargaining power would be such that they would not pay anything for?
Lester C. Migdal: Your Honor, that we submit would have worked both an inequitable result and an unconstitutional one. To say that --
Potter Stewart: Was I mistaken in the rational?
Lester C. Migdal: I think in part are, Your Honor. But I think that if that was one of the statements made at one point in the case and I think that I must fairly admit it, though I do not think that it was the fundamental one. I think the fundamental point was that it was too speculative that the states would acquire it and therefore to speculative to value that right. And I think that if you look at Judge Friendly’s opinion, you will note that he says that it was possible to conceive of the possibility that the service would only be acquired as far as Woodlawn. And in Woodlawn, those 30,000 daily passengers would be discharged each morning to walk four blocks to the nearest Bronx subway station and then they could find their way to work somehow and then go back in the evening the same way. And I submit that that simply was an impractical solution that Judge Friendly should have noticed from the very beginning and the Commission should have recognized from the very beginning that there was no possibility that that service would cease. New York and Connecticut had testified repeatedly in the train discontinuance case for example. But that was essential to their citizens and that they were prepared to pay for it and to produce it. Now we are here today in a new posture of this case because an authority was formed in fact by the States of New York and Connecticut. They have in fact entered into an agreement with Penn Central to operate bank service. Now --
Warren E. Burger: Before you go on. Could that have been operated by Penn Central without access to the terminal? Could this operation be carried on without access to the terminal, which was the exclusive right of New Haven?
Lester C. Migdal: It could not be operated into the terminal unless there was lease from Penn Central to a new user. Now it was for that reason that we felt that -- and I think that if you look at on earlier case decided in this Court by Judge Cardozo. Judge Cardozo in describing the New Haven's interest there said that it was the value under the agreement of the right to use terminal. But while we did not have the fee, we did have this valuable right. Judge Friendly himself refers to it as a unique right, but he questions what value should be put on it if in the end, we are trying to cease operations and as he says, no one will acquire. Now that we think is where the mistake was. New York and Connecticut --
Potter Stewart: It is not -- it is a mistake. However not -- I mean it's the result however not unique to Judge Friendly the reorganization court, Judge Van Voorhis all agreed, all the judges concerned agreed in describing and attributing no value to this income. Am I mistaken about that?
Lester C. Migdal: Your Honor, I think that in the end-result, you were correct, but I think that --
Potter Stewart: Without attacking Judge Friendly’s reasoning --
Lester C. Migdal: I am attacking Judge Friendly's --
Potter Stewart: -- but the result was reached by all four of the Judge’s concerned the same result.
Lester C. Migdal: I think that that is correct Your Honor, but I would say this, Judge Anderson harbored and still harbors great doubts to the correctness of that result. Judge Anderson always felt that some value should be placed on that and he therefore remanded to the Commission the first time and asked them to find what value if any inhered in the New Haven's right to enter the terminal and to enter the terminal free of cost. Now what the Commission was it referred that Judge Friendly's language and then said on that review, we answer that question by saying that we don’t contemplate either that there is a buyer or that if the states were buy it. Their bargaining power would not be so great, but they could not get this benefit for nothing and we say that where the -- where for a public purpose, a valuable property right such as that is being obtained. Any notion of just compensation requires payment they afford and that to have said, we would simply use our sovereign power to take this valuable right and pay you nothing for it, was to say something which the Commission should not have said and the court should not have sustained.
Potter Stewart: As we're talking about liquidating value. There'd be no need to -- if the property was going to be liquidated, there wouldn't be any New Haven trains entering the station.
Lester C. Migdal: Your Honor --
Potter Stewart: It's a little bit -- I find it little bit of the same inconsistency in this, in your argument that I find in the argument made in the brief and I think so far not argued orally that value should be attributed for going concern value in this case when at the same time you are arguing for liquidating value.
Lester C. Migdal: Your Honor, in this case, in this case it seems to me that we do make that argument for going concern value. But I would say this, under our best method of liquidation, we would not have as Penn Central says on page 98% of its brief, it mustn't assume that the tracks, or assume to have been dismantled and would attract so long the New Haven’s right away torn free use of the terminal can be of no value than the New Haven because that’s not a proper method to liquidate. And I also point to the past case decided in New York where you have the same situation, you have something that was of use, you had a tunnel but the Hudson Manhattan Railroad Company was making no money with it and it was prepared to stop, but the commuters needed the service, the state took the property and when the state took the property, it did not attribute a zero value to it because it had no value in the hands of Hudson Manhattan Railroad Company, it attributed a fair value to it because that’s what the state was using it for. It took it for a purpose, it got the value of that purpose and it attributed. The New York Court of Appeals said it was required to attribute a very large value to that tunnel and they say that there is essentially no difference between our Grand Central situation and the past case. And I can not spend anymore time on the past case, but I do think that a careful reading of that case will show that the circumstances were identical. I should say this, if I could add more word on the Grand Central Terminal's question. I pointed out that there was a question in Judge Friendly's mind as to what value would be put in any event upon the New Haven's right to handle the terminal. How would you value that if New York State did take it over? And I submit that if you look at the briefs filled here by New York and Connecticut, which are filled in composition to our being given any credit for that unique valuable right, but you will see that all that has happened now is that the states in Penn Central are quarreling over the division of the spoils here. Otherwise, New York State and Connecticut would now have no interest in this proceeding and I would suggest to you also that 2.17 million can be derived a reading of those briefs as the minimum value, as the minimum value that needs to be capitalized if the New Haven’s right in the Grand Central terminal properties as equal partner is to be vindicated.
Potter Stewart: Somewhere, the figure $70 million that is a capitalized value --
Lester C. Migdal: That's the capitalized value as far as 5.6 million.
Potter Stewart: And that was the point of Judge Anderson? I beg your pardon?
Lester C. Migdal: That's the capitalized value of 5.6 million at an 8% rate which was the traditional basis that was used in this --
Potter Stewart: That comes to $70 million?
Lester C. Migdal: That would come to 70 million. Now of course on a minimum value basis, it is 2.17 million capitalized --
Potter Stewart: Capitalized --
Lester C. Migdal: We know that because that is what in effect Penn Central is paying to the New Haven in order to give to New York and Connecticut in order to give them free use of the terminal in exchange for something of much greater benefit to them. They are being relieved of the deficits of those operations altogether and New York and Connecticut are also providing a lot of new capital improving the stations and so on. So that what Penn Central has realized out of that free use is something a good deal more than 2.17 million, but that would at least represent a floors to the evaluation of New Haven’s rights.
Potter Stewart: And what is the capitalized value of that income?
Lester C. Migdal: 27 million.
Potter Stewart: $27 million.
Lester C. Migdal: Your Honor, the next point I would like to talk about is the artificial value which the Commission placed on the sales of stock of Penn Central. It must be recalled that with respect to the evaluation of the New Haven property, the property was all calculated on a piece by piece basis. It was estimated how long it would take before you realize those values. They were then discounted back to present value so that you had a current market value as of December 31, 1966 for each of the New Haven’s pieces of property. Now with respect to some of the items, with respect to the bonds for example the Penn Central which was given as consideration for the New Haven, the same method was followed there. It was recognized that a 5% bond with a 25-year maturity would not sell at par and therefore a 15% discount was given in order to fund the market value so that what you have on one side of the equation liquidation value, you would have on the other side of the equation liquidation value and those would meet. But the $83.1 million did not represent liquidation value at any point in this case, it doesn't represent it the day and at no time, not since the liquidation value date until the day could that those 950,000 shares have been liquidated for $83 million. We submit that the right there on which the value of those shares is the same day that all the other property was valued, which was December 31, 1966 and the market value on that date 52 million, but was approximately $50 million and therefore there is a gap of some $33 million. There was some argument that it was reasonable to value the shares as of the closing date because after all that’s when we gave our property up and that is when we receive the property back. But then the shares had a value of $60 million and this was not simply --
Potter Stewart: That was in December of 1968?
Lester C. Migdal: That was in December of 1968. So what you have left is either a gap of $33.million or a gap of $23 million, but you have a very substantial gap. And both courts recognize that that would not work and so Judge Anderson suggested and the three-judge court accepted an underwriting. Judge Anderson had said, well by 1978 probably it will be worth that. And if it's not, then in 1978 Penn Central will pay in cash the difference between the market value and the value that you get by looking at averages for 30 days preceding February 1, 1978. Now we submit that that is entirely inequitable treatment here. We gave up property that had as the Commission said than conservatively than it had a cash value on the day it was valued and had a cash value on the day it was given up. Judge Winfield in the course of argument on this very point, for Judge Winfield agrees with us that the courts have not gone far enough here. Judge Winfield asked the question, was it within the Commission’s power to order that this be paid for in cash. And the answer to that was yes. Now it did not order it be paid in cash, but Judge Winfield's statement that it should have been paid in the cash equivalent we submit is exactly right. If it was thought too burdensome to require Penn Central either to add to its fix charges by issuing bonds or by raising the cash to have Penn Central pay for it shares. That was easily arranged simply by the addition of more shares which would have had no effect on fix charges and would have had the most miniscule effect on the earnings per share because there are 24 million shares of Penn Central outstanding. If therefore could not have been burdensome to Penn Central and yet it would have provided a certain funds here --
Potter Stewart: They're outstanding in the hands of the investing public. Are there a lot of treasury shares or authorized but unissued shares in the Penn Central?
Lester C. Migdal: I am afraid I can't answer the question?
Potter Stewart: And where are these shares going to come from?
Lester C. Migdal: In any event that --
Potter Stewart: You're going to have to use cash to buy them unless they are authorized but unissued or treasury share.
Lester C. Migdal: Your Honor, in the first place, there are shares there which could be issued, but in the second place, there is a procedure by which Penn Central as in this case have a finance docket. Penn Central goes to the Commission and says, “We would like to issue shares in order to meet this obligation.” The Commission in this case did authorized Penn Central to issue the 950,000 shares and could have authorized the issuance of more than 950,000 shares in order to see that what the New Haven received was the equivalent of what it was giving away what seems to us to have been an absolute minimum. But when you are dealing --
Speaker: Has the value per share -- I mean the price market, price per share would have ever gone, ever have been as high as 87.50 during this period?
Lester C. Migdal: Never once, Your Honor. It did 86, but it has actually therein -- it's now I believe at something like 25. If you look at the history from 1962 until now, you will see that it's had a history of being at 14 and climbing up and coming down again. And Penn Central itself acknowledges that it's a very cyclical situation. It talks about the difficulties of starting up a merger and one thing and another but that it seems to us had nothing to do with this case. In this case we were entitled to be paid for in fact it was nothing but a sale the equivalent of what we gave up. Now, I have been handed this morning a chart which I'm afraid I am unable to understand with which I understand the comi -- which I understand will be used in connection with the argument on the stock point. We are asked throughout we had said that what the Commission should do is to give us the additional shares so that would make up the $83 million because there was never any mean to guess as to what the market price would be on the date of closing and it was a guess made by Kirk that the date of closing would be in 1970. That at that time the shares would play between 75 and 100 and splitting that difference 87.5 you have a priced which multiplied by 950,000 shares gave you $83.1 million. None of them guessing was necessary and it was all wrong. We didn't close in 1970. We closed at the end of 1968. The price was not then 87.50. It never reached 87.50. The price then was 63.38. All this guesses were unnecessary because history would have shown the fact would have shown just what the price had to be and it was there that the Commission went wrong. And Judge Winfield has never yet accepted that and has said that it ought to have been remanded to the Commission so that the Commission can provide the cash equivalent. Now we have tried not to interfere with the underwriting formula farther than we had too in order to avoid that remand because this proceeding is going on now for some nine years. The underwriting in a certain sense does ensure if there are some small corrections made to it. It doesn't ensure that we will eventually receive $83.1 million. We have had however in effect just a part payment. That part payment is either $60 million or a $50 million of the $83.1 million and the balance is still to come. We are general creditors in effect for the rest but we have none even a purchased money mortgage with respect to that balance and nobody would have transferred all his real estate here for a part payment without taking back at least the purchase money mortgage. The underwriting provides us no security but that payment will ever be made. And then we say is one of its vices. A second vice that we assigned of the underwriting formula is this. We are now not receiving any income with respect either to the 23 or 33 millions of consideration that we didn't receive and so we have said we ought to be paid interest on that. And that interest when it was required that New York -- when The New Haven was borrowing from Penn Central under the loan loss formula that interest was at the prime rate and we submit that, that's the very least that it ought to be paid on the unpaid portion now. There is one other deficiency in the underwriting and with that correction the bondholders could accept and not insist on the balance of the share. Judge Friendly have -- Judge Anderson have provided us a part of that underwriting formula, that if Penn Central shares traded at 87.50 for a five-day period then the underwriting would terminate and of course we only look for interest up to the point where we couldn’t liquidate and get 83 million. We're not looking for interest rate out to the end of 1978. It just depends on when finally the balance of the payment has been made either because the market has reappraised Penn Central shares or because Penn Central has paid them all. But on that five-day termination of the underwriting, we submit that it's unfair to use so limited a period because you could never sell in the market could never absorbed 950,000 shares at that price simply because it could absorb a normal day’s trading and a five-day trading.
Potter Stewart: Well then and a price could not stay up for five days, if you're right?
Lester C. Migdal: That's right, Your Honor. It would --
Potter Stewart: So that's a self-correcting if you're correct about it.
Lester C. Migdal: If we put them on the market and offered them Your Honor then we would immediately collapse the price account.
Potter Stewart: Right and so the condition wouldn't be met?
Lester C. Migdal: That is correct, Your Honor.
Speaker: Now if you're right in your position that you ought to have security and all the rest, shouldn't the other side of the coin be that you should be obligated to return any excess so that you finally dispose of these shares at above 87.50 a share or do you want the best of both worlds?
Lester C. Migdal: We don't want the best of both worlds, Your Honor. Our answer to that is, that the underwriting formula contemplated, that Penn Central to avoid that could offer to pick up in 50 share blocks and free itself for the underwriting at anytime it cared too by paying the difference between the then market value in 87.50. So that if there was a real likelihood that that -- that the best of that of the other side of the world would possible Penn Central itself by you exercising the option granted in the underwriting could take that and put forth itself (Voice Overlap) that’s right Your Honor, that’s right. There really is no best to both possible worlds here. Your Honor, this brings me to the last point that I would like to discuss and that is the terrible unfairness of the loan loss formula and the way in which it has worked in this case. The loan loss formula, we submit, was simply a formula by which the erosion was permitted to continue. And by making available to The New Haven cash so that it could continue to operated at a deficient not paying its taxes, not paying its per diem charges, not paying its tort claims. The formula was not a formula for the relief of the New Haven. It was formula which imposed for the losses upon the New Haven and inevitably, for as long as we took the money down we had to run the Railroad and we had to lose money. Now when this matter was before the Court the last time, the notion was that we were only going to have a very small loss because the formula would take care of all the New Haven's losses and it was predicted that, that loss would be small. You will recall it was in a descending scale. Penn Central was to contribute a 100% of a first year losses and then 50% and 25% that Mr. Justice Douglas wrote about that in his dissent. Now what has happened is that we did close in the first year and having close in the first year, the losses that were contributed under the Commission formula was only $5 million but the Commission knew one month before it ordered the closing. In November of 1968 when it handed down the remand report that it's guess that those losses would be small and that the $5 million would therefore cover just about all of the New Haven's losses. They knew then that that was untrue that the losses were much, much greater. Nevertheless, in spite of our urging they persisted in saying that was as far as they'd go. Now I submit that if the Commission was right in saying that it was fair for Penn Central to bear a 100% of the first year losses, it should have not withdrawn from that at the point when it found that the losses were larger than they anticipated because it was certainly unfair in the circumstances of this case, where the bondholders were required to absorb $70 million of losses, and I submit to you that the $70 billion was -- $70 millions, I submit to you that that $70 million was $10 million more than the total value with the 950,000 shares we got. We were being eliminated, we were being obliterated here and then the say to that 100% of the losses should be altered in the last year and limited to that $5 million imposing $6 million on the New Haven that was improper.
Joseph Auerbach: Mr. Chief Justice, may it please the Court. The trustee of the New Haven Railroad is here as an appellee respondent, arguing on the side on the appellants because he feels very strongly that in the four areas in which the reorganization court differed with the Commission, the court should be sustained. I would address myself to the question which the Government and Penn Central says is probably the most important question and yet a simple question namely scope of review. The Government says the three-judge court was right, Judge Anderson was wrong on these four points because the Judge Anderson did not review the Commission from the standpoint of the substantial evidence rule whereas the three-judge court did. We don't agree with the Government because while we are satisfied that the three-judge court was bound the substantial evidence rule, we do not think that Judge Anderson as the reorganization court was. The issue is simple in one respect. Both sides cite Ecker versus Western Pacific as the basis for their position. There's no question that Ecker address to self squarely to the division of functions under the Section 77 of the Commission and the reorganization court. There is no question that Ecker establishes that valuation of any property and we don't qualify that is the function of the Commission. The question is however, what is the function of the reorganization court in reviewing that valuation? Is it truly bound by the substantial evidence rule? Our position here is that Ecker doesn't say that. Ecker says the contrary, we think further more it should be not bound by the substantial evidence rule because of the unique statute, the legislative history and the reasons why the function of the reorganization court spelled out in detailed that is in Section 77 (e). Now let me address myself just very briefly at each of these points. In Ecker, the Court said that while the judges not to review valuation as such the judge is to determine with such additional evidence as he deems appropriate this is not a quote but this is my reading of Ecker. The said judicial evidences he deems appropriate whether the Commission in fact did obey the statutory standards. Now why would this be so? Now, this comes, I think fairly from the fact that the statute Section 77 is wholly unique. Under Section 77, you have an intertwining of administrative law and judicial review such as you can't find a parallel at any other statute to my knowledge. In the first place, the background of Section 77 was to find the way of having some method of reorganizing railroads and I'll come back in the moment to the year it was 1933 which it got rid of equity receiverships a as function which took away from the parties who controlled the railroads, the control of the reorganization. At the same time, you had and this is one of the significant background pieces of reason in the statute, you have railroads going under beginning in 1933. You did not have other modes of transportation that were fairly competitive that they should -- may have today. You have the problem of a national interest so concern with saving this railroads and a statute which forbid straight bankruptcy. You have to reorganize. Even today, you can't go into bankruptcy with a railroad. Section 77 is your only remedy and at the top of that you have an agency with a whole history of expertise and evaluation since 1914. It's been evaluating Railroad under Section 19 of the Interstate Commerce Act. I think every railroad in the county, eventually was valued as required of that statute. With that background, the Congress fashion a statute under which the Commission will determine the value of the property because in the public interests that would determine the capitalization. It would determine, what was the possibility of saving the railroad of making it solvent in the future? The Court would determine and this is the essential point here in this interpretation that with independent hearings whether this plan was fair and equitable, and in determining whether it was fair and equitable, the statute clearly contemplates that it would receive additional evidence. I'm not referring to that language in Ecker no, 77 (e) itself contemplates and said so that if the court rejects the plan, it must send it back to the Commission with the evidence which have received. 77 (e) also points out that persons may come before the reorganization court and this is without regard to whether it was before the Commission and introduce their claims for equitable treatment. This brings us really to Mr. Justice Douglas language in the St. Joe case. He said there, the reorganization court function is distinguished from the Commission function and that the Commission is the chief architect under Section 77 (e) and then I think it’s about this shorthand fair in expression is one could imagine because that’s precisely what happens if nobody puts in the plan, the Commission divide it's own plan. While the safeguards in 77 (e) and so far as the Court is concerned but certainly we could not have the Commission both devising its plan and being the reviewing court of its own plan. Now I think the legislative history and I have a very little more time that I can devote to this subject. I think the legislative history which is recited in full in Ecker shows, that at one point Congress in the House, as a matter of fact, Congress decided that the whole power should be vested in the Commission and not in the Court but the Senate wouldn't accept that and we find written into 77 (e) the power of review including independent hearings on the part of the reorganization court. In closing on this point, I would like to bring the attention of the Court that there is no dilemma here between three-judge court and reorganization court under this interpretation of the law, there just isn't any. The three-judge court was clearly bound by the substantial evidence rule and made its findings however right or not with that rule in mind. Judge Anderson recognized that he was subject to Ecker. He did not make his findings contrary to Ecker. He made his findings based on the Section called Methods of Valuation which appear in Ecker. The question whether these two principle discounts for example were proper deductions from the liquidation value. I think, if the Court please, that it's fair to say here that there is every reason to recognize a different rule of review under 77, and I would point out to the Court to hearken back to 1933 for a moment that this is an extremely important question. It was in the last eight and a-half years, not only has the New Haven petitioned in 7, but we've had two more eastern railroads the center of New Jersey and now with Boston and Maine and the question of the impact and the railroad of impact of Section 5 and 77 is not one which can be put on the shelf as being pass off just in this case. Thank you.
Leonard S. Goodman: Mr. Chief Justice, may it please the Court. These cases involved the fairness of a reorganization plan for the New Haven Railroad and at the same time the fairness of the terms where the inclusion of that Railroad into the newly merged Penn Central Railroad. Three organization plan was made possible because of the happenchance that during the course of the New Haven bankruptcy, Penn and New York Central applied for permission to merge. In this merger, the New Haven trustees saw both a threat and an opportunity as their counsel stated to the Court of Appeals for the Second Circuit in 1967. Inclusion in Penn Central, in the view of the trustees afforded the only practicable means for reorganization of the debtor that would be consistent with the best interest of the public and of all parties interested in the debtor's estate. They quickly filed for inclusion in 1962 within three months after Penn and Central asked permission to merge. Under decision of this Court the Commission had no power to force the inclusion. At all stages, the inclusion depended on the volition of the owners of the New Haven for five years until 1967. No bondholder objected to the course being pursued by the trustees and at that time the reorganization court rejected the sole objection presented by the Committee since that objection failed to receive the support of either manufacturers or chase. Now this is been a long and difficult assignment for the Commission. In no reorganization has the process of valuation been more meticulous or more carefully supervised by the courts. The oral hearings in 1967 extended over 37 days in over a period of five months during the period of five months. Further hearings were held before a Special Master of the reorganization court and then more hearings before the Commission on remand of the inclusion report. The entire Commission considered and reconsidered this extensive record in three reports dealing with the valuation. The bondholders’ initial approach before the Commission was to value the New Haven as a freight only railroad. This was not merely in response to evidence presented by Penn Central but rather they apply to the reorganization court for order number 324 in July of 1965 for funds to complete such a study and at the pre-hearing conference in 1966, they announced that “studies are being made with a view to evaluating the railroad as a freight only operation” and the study was in fact presented in the hearings in 1967. It may -- it might have been possible to reorganize a portion of the railroad to provide freight service. It was not explored in any depth by the Commission since the study presented by the bondholders did not project freight only earnings beyond the year 1965. The valuation of the New Haven presented the Commission was a true dilemma. There was no reliable forecast of earnings for the Railroad. As Judge Friendly stated in his first opinion “A fair price for New Haven on the usual basis of capitalization of earnings were thus be negative or at least zero. However, much evidence was presented by the trustees in Penn Central on liquidation value of the railroad.” The Commission turned to that evidence as indeed showing the maximum value of this railroad. Now, we agree of course with counsel for the bondholders that there’s no dispute before this Court as to the applicability of the liquidation value tests. The essential question --
Potter Stewart: That is the liquidation value to what as of December 31, 1966 but discounted over for by reason of the fact that would take at least six years to dispose off the assets, is that it? Plus discounted in your submission by another year because of that year delaying be for the Commission would permit development.
Leonard S. Goodman: Yes those deductions are a part of the {Voice overlap}.
Potter Stewart: (Voice Overlap) the date of liquidation value?
Leonard S. Goodman: The evaluation date is December 31, 1966.
Potter Stewart: And then six years estimated to dispose of it and then you had another year for abandonment, permission abandonment, is that about it? Or by others all along?
Leonard S. Goodman: Well, --
Byron R. White: Plus the bond sales?
Speaker: Oh! Yes that's something else but --
Leonard S. Goodman: These various deductions that you referred to Your Honor do enter into the valuation (Voice overlap).
Speaker: Has a meaning or significance only if you tight it down to a date or dates?
Leonard S. Goodman: Well, this valuation was tied down to December 31, 1966.
Speaker: Yes but not that it could be all liquidated within that 24 hour period?
Leonard S. Goodman: Oh! No, Not at all.
Speaker: What? With six years?
Leonard S. Goodman: The assumption was -- the postulation was that it would take six years to know --
Speaker: Now, six years and then you take a deduction because you say we'll take another year to get permission to abandon?
Leonard S. Goodman: Yes.
Speaker: Alright.
Warren E. Burger: (Inaudible)
Leonard S. Goodman: I see no --
Warren E. Burger: (Inaudible)
Leonard S. Goodman: I see no inconsistency the -- I will come to what the theory of the bulk sale. The -- very briefly, the bulk sale involves a quantification of risk that the appraisals testified to by witnesses presented by the trustees did not take into account. It's a quantification of the overall risk of a liquidation that it would not occur strictly within a six-year period that the effect of New Havens abandonment on the value of real estate in Southern New England should also be taken into account.
Warren E. Burger: (Inaudible)
Leonard S. Goodman: We got both of them here because --
Warren E. Burger: (Inaudible)
Leonard S. Goodman: There is no inconsistency, the phrase bulk sale is a name of the Commission assigned to the quantification of these risks that had an earlier been taken into account.
Warren E. Burger: Are you suggesting that the (Inaudible)?
Leonard S. Goodman: Frankly, Your Honor I'm not familiar with the meaning of determine commerce generally. I know what the meaning was that the Commission was assigned to the term here.
Warren E. Burger: Generally speaking, (Inaudible)?
Leonard S. Goodman: Oh! Well, that in fact occurred. There was a sale in bulk and the removal of these additional risks from the New Haven when the sale actually in fact occurred but that was not an essential ingredient to quantifying that risks that we’re talking about. The Commission assigned the name, the bulk sale discount to a quantification of risks that had not earlier been taken into account and these risks, the Commission found must realistically be taken into account in order to determine the liquidation value of the railroad. But again we come back to the liquidation value of the Railroad. Penn Central's witness Simon listed several different risks. His primary reference was to the inability to forecast that sales would be made strictly with on schedule. There was an additional very large risk on this record. The earlier appraisals had not taken into account, the drastic effect that in abandonment of rail service in New England would have on the real estate market in New England. And the trustee's appraiser himself testified that if this effect would actually be felt in the economy of Southern New England, his appraisals had been overstated and the Commission did not address itself to quantifying any of these unpriced risks until the remand report. The reason for that I will come to. The initial hearings on the terms for the New Haven's inclusion were held in 1967 while the courts review the legality the Penn-Central merger. Now the focus on these 1967 hearings was on an agreement entered into between the trustees and Penn Central under which the New Haven properties and freight operations would be transferred to Penn Central in return for stock, bonds, and cash, and Penn Central's assumption of certain liabilities. The Commission tested this agreed terms first by considering the value of the properties. In the absence of perspective earnings the Commission's valuation proceeded as I've stated on the basis of a liquidation of the New Haven. In the sense, as Judge Friendly noted, the liquidation hypothesis created in never, never land but the need to postulate, a liquidation of a huge railroad serving a large geographic area of heavy population also required the Commission to devote it skills and judgment to a great many complex problems. Now just one example, the witnesses for the trustees presented too widely varying overall appraisals of the New Haven properties on a liquidation basis. One appraisal was assumed a six-year period of liquidation. Another appraisal, assumed a 10-year period of liquidation. Under the 10-year hypothesis, it would cost the estate $17 million more in liquidation expenses to realize the same proceeds as under a six-year hypothesis. And in addition, there will be a longer wait for these proceeds and hence the present worth of the proceeds would be less. Penn Central also presented the 10-year liquidation study. Each study reached the net liquidation value for New Haven of $59.00 less then the trustees’ 10-year study and the 10-year liquidation period consequently would be under either appraisal under this the trustees’ appraisal or Penn Centrals would be many millions of dollars more costly to the estate than a six-year period. One further element here, the trustees’ appraisers tend to support a 10-year period. They uniformly testified that the six-year period was optimistic and on the low-end of a reasonable range of years for such a major undertaking but on the basis of a finding that the bulk of the liquidation could be completed within the period of six years the Commission conservatively adopted the six-year liquidation period. And consequently the much higher liquidation value than under any of the 10 year studies. And another factor, all of the appraisals assumed that the estate could market the properties immediately and did not consider the need for an abandonment certificate on the valuation date. The Commission recognized the need for the certificate but did not reach its value in the inclusion report. Moreover, none of the appraisals price out the overall risks of making this schedule of sales exactly on time for this simply assumed normal marketing conditions the trustee. That's the Commission's first evaluation in the inclusion report omitted major risk factors but in the context of that report the omission made no difference. The Commission reach the value of the consideration Penn Central had agreed to pay for the New Haven properties and if found that that consideration would be at least equivalent to the liquidation value base on the appraisals without the other risk factors taken into account. When the inclusion report was remanded however by both courts, a new context was presented. For now the Commission was making a wholly new determination of price and not merely finding a value that Penn Central had agreed to pay. On the remand, the Commission increased the consideration after revaluing the properties. Bondholder's essential argument before this Court is that the Commission did not increase that valuation and pricing off. But on remand the Commission recognize it would not be a realistic to assume a liquidation could occur without an abandonment certificate issued under Sections 1 (18) and 1 (19) of the Interstate Commerce Act. If New Haven were to go into liquidation, the public would first have to be given the opportunity to be heard. Shippers that use New Haven would have to be heard from. Government agencies will certainly present plans for possible continuation of essential services. What is more than New Haven bondholders themselves had urged this latest 1968 that New Haven could be operated profitably as a freight only railroad, given these positions of all the potential interests in the New Haven abandonment. The Commission could not have assumed in the remand report that in abandonment proceeding would be perfunctory or pro forma. The shipper and governmental interests would have ensured a bitterly thought contest. The Commission's finding that such a proceeding will take at least a year including judicial stays was clearly reasonable and indeed conservative and we submit in the proper exercise this judgment.
Warren E. Burger: Your long past history it was really -- wouldn't it really be thought more as being very conservative? Can you think of any matter of that magnitude that has been completed within one year?
Leonard S. Goodman: None.
Warren E. Burger: Or even two or three? I could take you quite a number of years in the consequent incrimination of the device if someone really set up to keep the pot boiling as it were --
Leonard S. Goodman: If there had in fact been liquidation, it is quite possible as the Commission recognize that the abandonment proceeding would have lasted more than year. The Commission said that if the Government parties requested time to prepare studies, the abandonment proceeding might last two years as Your Honor suggested it might go on more than that but that is not essential here. Regardless of how long it would in fact occur the Commission's -- the Commission postulated about one year and the Commission charge the state for about one year.
Warren E. Burger: Well, do you agree with your friends -- do you agree with the defense made by your friends on the other side of the table that the Commission could never permit the New Haven to stop running? Therefore, any hypothetical period of time for litigating the issue was really a good exercise. But the time lapse would merely be a period within which some other solution in transportation problem would be worked out, is that not realistically correct?
Leonard S. Goodman: Some other solution however Your Honor could have involved liquidation or at least a portion of the New Haven. The bondholders as I suggested have in the past urged that the New Haven could have been reorganized as a freight only railroad that might have allowed for the abandonment of some unneeded facilities. But this all would it have to be explored in the context of the abandonment proceeding that was never held. If it had been held, it could well have taken more one than one year which we strongly urge supports the conservativeness of the Commission's estimate that it would take only one year. In any event, the state under the liquidation hypothesis could not have abandoned and liquidated without have given the public an opportunity to be heard.
Warren E. Burger: Well, it may be helpful to you Mr. Goodman and perhaps to Mr. Cox, when he give us his analysis to indicate to you what gives me some problems and maybe you could clear them up that the Commission seems to have work for the serious of hypothetical situations and projections and then if to mingles with the hypothetical reality is just the high protocol with the which is unknown with the reality which it comes to be known from time to time. And unless I missed something almost invariably, the adjustment of the hypothetical by the real resulted in reduction the purchase price. Now, may have missed some factors, is that analysis correct?
Leonard S. Goodman: Well, I believe Your Honor that there is no mixture of the real hypothetical liquidation hypothesis on prophecies is quite hypothetical. Commission made no finding as to when the liquidation would actually begin. The valuation is as of December 31, 1966 and the effect of deducting from that a one year delay is as Judge Friendly stated to assume that the liquidation could occur January 1, 1968 but that is only the effect of what the Commission has done. There's no finding here that the liquidation would in fact have occurred January 1, 1968. The Commission is merely saying that we cannot reach a liquidation value of this state without considering the fact that it would have taken the state one year to obtain the certificate, the permission in hand to liquidate.
Byron R. White: That would therefore (Inaudible).
Leonard S. Goodman: Well, Your Honor, I understand the arraignment a bit differently. I understand their argument to mean that the Commissioner is bar as a matter of law from considering the need of this state for an abandonment certificate before it can liquidate.
Potter Stewart: How long would it take anything like a year because the New Haven have been studied and restudied in the campus and that they knew the situation, there is an absolute constitutional right to liquidate your opponent say under the decision of this Court --
Leonard S. Goodman: That's true.
Potter Stewart: -- and it was very clear with that because of the deficit written situation of the New Haven there was no question about it that right being exercisable in this case, that’s what I've understand here.
Leonard S. Goodman: That’s true.
Potter Stewart: Well, it's argument to (Inaudible) perhaps I understood.
Leonard S. Goodman: No, that is also Your Honor, a portion of their argument that is the necessary portion of their argument that New Haven have an absolute right on December 31, 1966 to shut down and liquidate the Railroad. We say that this was not permissible assumption that the Railroad could merely shut down without giving the public an opportunity to be heard and that a necessary part of the liquidation value is this cost of the abandonment certificate. If there's no statement, must have in hand before it can begin the liquidation.
Warren E. Burger: Could you -- Wouldn't you know -- well, I'll -- my question then -- it's lunch now. Today counsel, we're altering the schedule a little bit. We're going to allow counsel one hour for lunch. Since you will be occupied for an hour we will not return for an hour.[Laughter]
Leonard S. Goodman: Thank you very much. [Lunch Recess] Mr. Chief Justice, I believe the bondholder attack on the cause of the abandonment proceeding is in effect the demand that Penn Central pay a larger share of the pre-inclusion losses. The Commission treated that claim as a matter separate from the evaluation and did in fact cause Penn Central both to lend $14 million to New Haven in the year 1968 and to pay $48 million of New Haven’s losses. After December 31, 1968, all the losses for Penn Central from the New Haven operation and in fairness we submit Penn Central was not required to do more.
Potter Stewart: Mr. Goodman, on losses prior to when the Penn Central took actually physically took the New Haven over and began to absorb all this losses you’re talking about. How were -- how was the bondholder’s first claim on their -- to their liquidation value lowered or eroded away by operating losses? I doubt to be argued that it is said that some $60 million of value was eroded the way as far as the bondholder's concerned by losses which occurred prior to the time of the transfer.
Leonard S. Goodman: In part, the erosion occurred by the issuance of trustees’ certificates which took priority in the claims.
Potter Stewart: In part but I gather there weren't $60 million from the trustees’ certificate.
Leonard S. Goodman: No, they weren't.
Potter Stewart: Well, how else then. Just by wearing out or something like that or depreciation?
Leonard S. Goodman: No, there were some sales of -- no, there was no -- in so far as this record goes in inflated figure, there is no erosion in the liquidation value anywhere near comparable to $60 million or $70 million.
Potter Stewart: Or to the extent some of these expenses were taken up with some kind of arrangement which involved the prior lien that would be true, wouldn’t it? Some lien prior trustees’ certificate, I suppose were they prior or subject to the lien of abandonment?
Leonard S. Goodman: The only reason I raise the issue of trustees’ certificates is that some of these were issued to Penn Central, for example to cover the $14 million and --
Potter Stewart: Those surely were subsequent to the bondholders in lien?
Leonard S. Goodman: Yes.
Potter Stewart: Then I suppose post payment – postponement of the real estate taxes?
Leonard S. Goodman: Yes, this would also be something prior to their lien but the fact of the matter is that the bondholders are attempting again to mix real world concepts with this hypothetical liquidation and what they are being paid is on the basis of the hypothetical liquidation of the New Haven and the accumulation of these losses has not affected that value anywhere near to the extent of the $60 million.
Hugo L. Black: What is the exact -- as near as you can go, the exact amount involved in this particular losses?
Leonard S. Goodman: Well, Mr. Justice Black it would be in terms of the accumulation of the administration claims. I'm sorry, Your Honor I didn't understand your question then.
Hugo L. Black: What is that?
Leonard S. Goodman: I'm sorry. May -- I may not have understood your question.
Hugo L. Black: Well is the litigation over here involved over some money?
Leonard S. Goodman: Yes.
Hugo L. Black: What's that amount?
Leonard S. Goodman: What is the --?
Hugo L. Black: What's the amount of money actually involved in this lawsuit? How many million?
Speaker: If you add it all up, it could be a $100 million or more?
Leonard S. Goodman: It could easily be a $100 million.
Speaker: If you count $70 million for the Grand Central properties and then another $29 million plus or minus, all over a $100 million? It could, couldn't it? Accumulating all the issue?
Leonard S. Goodman: Quite easily and the free use argument itself amounts to $70 million and --
Hugo L. Black: Who will lose that --
Leonard S. Goodman: Penn Central.
Hugo L. Black: --if you lose?
Leonard S. Goodman: Well, of course Penn Central would be required to pay these additional sums.
Hugo L. Black: To whom?
Leonard S. Goodman: To the New Haven estate.
Hugo L. Black: To the what?
Leonard S. Goodman: To the New Haven estate.
Hugo L. Black: New Haven estate?
Leonard S. Goodman: Yes.
Hugo L. Black: A $100 million?
Leonard S. Goodman: Yes. Of course, --
Hugo L. Black: How much is involved as a whole in the problem?
Speaker: What was the purchase price?
Leonard S. Goodman: Oh! Fix by the Commission. The purchase price fixed by Commission was on the order on $150 million.
Hugo L. Black: Of what?
Leonard S. Goodman: About $150 million.
Hugo L. Black: And the lawsuit at one said claims that it's $100 million sure?
Leonard S. Goodman: Yes.
Hugo L. Black: But who is that?
Leonard S. Goodman: Those are the bondholders.
Hugo L. Black: Just the bondholders.
Leonard S. Goodman: Bondholders of New Haven, yes.
Hugo L. Black: And that's the whole litigation?
Leonard S. Goodman: Yes. Of course our position there is that if the Commission is aired it requires a remand to the Commission.
Hugo L. Black: Are you standing by what the Commission did on? Or we have said attempt?
Leonard S. Goodman: Yes. I would like to say just a word about the bulk sale discount. Relying on the testimony presented by Penn Central in the remand hearings. The Commission found in its remand report that the unpriced risk of a liquidation should be valued at $6.7 million and it therefore deducted this amount in the computation of the liquidation value. Now the bondholders primarily argue here before this Court that the Commission had no rational whatsoever for the bulk sale discount but merely sought to compel it, not it's true that the report refers to the Commission's power to compel the acceptance of some bulk discount to attract a purchaser for continued operation of the Railroad but this was not essential to its decision. The essential basis of its opinion was that bulk sale discount is a reflection of risks that have not already been accounted for in the earlier appraisals and were for the first time quantified in the remand hearings but the Commission stated this quite plainly. The Commission said and I quote “the bondholders will receive the full economic equivalent of the liquidation value of the assets. The discount merely reflects a market appraisal of the risks that the state avoids.” And then two pages later, the Commission added that it wouldn't adopt the Penn Central deduction to “correspond to the risks of a six-year liquidation of the New Haven.” Now Judge Anderson recognized that the essential basis of the Commission's findings was not compulsion. He addressed himself to whether the deduction reflected risks of marketing. But in so doing, he substitutes his own judgment for that of the Commission as to whether the appraisals had accounted for all the risks. Mr. Cox will describe the Simon testimony in greater detail. I simply want to submit that the reorganization court in our view went beyond bounds in substituting its own economic judgment for those the Commission in this proceeding.
Hugo L. Black: Is that have based on a difference in the sum and the determination of facts?
Leonard S. Goodman: In a part it is, yes Your Honor.
Hugo L. Black: How much of it?
Leonard S. Goodman: Well, Judge Anderson seemed to believe that an earlier deduction made by one of the trustee's appraisers had accounted for all of the risks taken into account in this bulk sale deduction. That is a matter of interpretation as to what that witness was talking about, that as witness Maysen presented by the trustees. We showed on brief I believe that that witness was not speaking of the risks that witness Simon was talking about.
Hugo L. Black: How much is the difference between you and Judge Anderson in the question of loans?
Leonard S. Goodman: Well Judge Anderson on this particular item would find --
Hugo L. Black: I'm talking about the whole item, the difference and what claim, what the Commission found and what Judge Anderson found?
Leonard S. Goodman: The difference between Judge Anderson and the Commission is approximately $30 million.
Hugo L. Black: Now, what's the -- is there a legal question to be decided?
Leonard S. Goodman: Well, but there are several legal questions because Judge Anderson would have prohibited the Commission from taking it into account either the cause of abandonment certificate or the cause of these -- of the unpriced risks which the Commission called the bulk sale discount. Mr. Judge Anderson's ruling as a matter of law, the Commission was precluded from taking into account these factors.
Hugo L. Black: Is that a difference in judgment between him and the Commission as to what's the best confers where to do this?
Leonard S. Goodman: I think it is a substitution of judgment, yes.
Byron R. White: Who is going to cover the (Inaudible) the Pennsylvania sought to --
Leonard S. Goodman: I'm coming to that just now. Over half the consideration paid by Penn Central with the New Haven properties wasn't in a form of 956,576 shares of Penn Central common stock, and one of the major questions litigated before the Commission was the value of the stock. The trustees’ bargain, to obtain this stock so as to participate in future increases in stock value as the merger savings were realized. This in turn would permit the widest participation in the reorganization by the New Haven creditors.
Byron R. White: Well, the creditors are going to get on that basis too or just a cash payment?
Leonard S. Goodman: Well, the agreement initially was negotiated by the trustees without the participation of the creditors but now they apparently agreed, the creditors agreed that stock is acceptable to them and they are before this Court asking you that for more stock or for interest on common stock.
Byron R. White: Would you agree that the creditors -- the bondholders were kind of to pull liquidation value of New Haven?
Leonard S. Goodman: As of December 31, 1966, yes.
Byron R. White: On the entire or the half of $145 million on that net?
Leonard S. Goodman: Yes.
Byron R. White: Or they certainly can't get it out to stocks then?
Leonard S. Goodman: Yes they can. They will come to that.
Byron R. White: Well it can't on that day? There isn't any possible way they can get it on the stocks on that day or even with even within a few days after that day?
Leonard S. Goodman: Well the under --
Byron R. White: Why (Inaudible)?
Leonard S. Goodman: They're not entitled to the $145 million in cash in hand.
Byron R. White: Why not?
Leonard S. Goodman: Because they're participating in the reorganization which provides for the creation of an investment company that is to stay in business for seven years and the part of the assets of this investment company is the 950,000 shares which the state wants to keep in hand in order to participate in the increase -- expected increase in that stock. This is part in partial of the reorganization plan.
Byron R. White: So you'd say that, there's value, it should be paid to liquidate the value of security --
Leonard S. Goodman: The present value what they have in hand will be a $145 million.
Byron R. White: So the value on the critical date isn't the 145?
Leonard S. Goodman: The value on the critical date is 140 plus the $5 million of participation in losses and they will realize that $145 million at the conclusion of a 10-year period.
Byron R. White: The value on this is -- will be $145 million within the next 10 years sometime?
Leonard S. Goodman: The value of the -- the value of consideration that they have received is the $145 million that is the present value.
Byron R. White: You couldn’t get it out today.
Leonard S. Goodman: But they have in hand also an underwriting requirement, an obligation of Penn Central to ensure --
Byron R. White: The obligation does't secure within the -- except up to 1978?
Leonard S. Goodman: Well, this is why I have place before the Court two charts in which I attempt to show that the claim that the bondholders have before this Court for additional sums over and above the stock has been fully offset by Penn Central’s underwriting obligation. If the Court will bare with me --
Thurgood Marshall: May I ask you one question before that?
Leonard S. Goodman: Yes, sir.
Thurgood Marshall: What effect if the -- your adversary win in connection with this increase valuation? Will it have on the operation of the new Railroad that has been created by this proceedings?
Leonard S. Goodman: That's a difficult question to answer Your Honor because of --
Thurgood Marshall: Well, have any effect in increasing the value of the stock on which the public must pay rates?
Leonard S. Goodman: It might well increase the costs. For example the Penn Central bonds (Voice overlap).
Thurgood Marshall: If I'm correct. How could you avoid it? Maybe it can but how could it avoid it?
Leonard S. Goodman: It will depend on the form of the consideration as quite likely --
Thurgood Marshall: The consideration is he has Railroad that's going to be running. These people have litigation here with a division of some money suppose to be a part of the value and the stock they had. What effect does that that going to have if the public has to pay rates on the value of the property? What effect do that have on the payment of rate, if any?
Leonard S. Goodman: It would have a very direct effect if the capital costs of the business are increased.
Thurgood Marshall: How much?
Leonard S. Goodman: That's indeterminate, I don't know.
Thurgood Marshall: Well, would it be a hundred -- millions that you said that litigations about?
Leonard S. Goodman: Potentially, that's true.
Thurgood Marshall: What?
Leonard S. Goodman: Potentially, that is true.
Thurgood Marshall: Well, potentially it is true. I'm just asking because I haven't heard yet anyone making a direct positive statement that what's involved in this lawsuit and what it mean to the Railroad and to the public?
Leonard S. Goodman: Well, it's very difficult of value some of this claims being made by the bondholders, we think that --
Thurgood Marshall: Well, will it going to the Railroad value?
Leonard S. Goodman: (Voice overlap) of $100 million.
Thurgood Marshall: Because the result of this litigation if you went on the other side when it show of in the operating cause of the Railroad because of the investment in it.
Leonard S. Goodman: Your Honor, all I can say is that this is possible.
Thurgood Marshall: How is it possible? If you say it's possible then how is it possible and not probable?
Leonard S. Goodman: In the form of the consideration that Penn Central has required to issue increases its capital costs then it could possibly have some effect on --
Thurgood Marshall: Well, somebody is going to have to pay something with the issue if it's not out of the Railroad, who would it come from? You don't handle with millions this way without it affecting something is in norm. I'm simply asking to about what happen? Maybe it's not material, I had an idea. I would like to know something about what's going to happen? If we decided in your favor or if we decided in favor of the other side, are merely adjusting an amount of money as between the bondholders and somebody else or are we adjusting it on a basis that will affect the future operation of this Railroad with the regard to its investment?
Leonard S. Goodman: Your Honor, I believe that it could possibly have and in fact on the public and on the rates to be charged if the price that is increased -- increases in turn the capital cost of Penn Central.
Thurgood Marshall: But it would increase it wouldn't it a $100 million?
Leonard S. Goodman: Quite likely.
Thurgood Marshall: I can. You say quite likely. It increases somebody as over a $100 million if your adversaries win, I understand. Whose target does that going into?
Leonard S. Goodman: Presumably it comes out of Penn Central's pocket and into the pockets of --
Thurgood Marshall: Penn Central Railroad.
Leonard S. Goodman: Yes.
Warren E. Burger: From to that extent, it has a tendency to enlarge ratemaking base, doesn't it? It can have that as you suggested?
Leonard S. Goodman: It doesn't --
Warren E. Burger: It can, I didn't say it would in the full amount of the differential but it can have an impact on the ratemaking base?
Leonard S. Goodman: Yes.
Thurgood Marshall: How? Why wouldn't it? Why do you say should? How can you avoid it? I haven't understood it fully but at least no one has mentioned that part that plays the case at least in the way that I could understand it?
Leonard S. Goodman: It does not occur to me how it could be avoided.
Thurgood Marshall: Is what?
Leonard S. Goodman: I said I do not see how it could be avoided.
Thurgood Marshall: In other words then you think it's going to happen.
Leonard S. Goodman: I think it's quite possible.
Thurgood Marshall: Alright.[Laughter]
Leonard S. Goodman: I should like to refer the Court just one moment to the chart that I placed before it concerning the price of the Penn Central stock. The bondholders concede that the underwriting obligation protects them on the upside. In other words, with this first chart labeled Bondholder Assumption A, where they claim that the stock should be assigned a market value on the closing date of December 31, 1968. They can see that the underwriting protects them between 63 and 3/8 and 87-1/2. They then discount that the person's worth and on the per share basis they claim that this protection is only worth $40. They then would say we are entitled to $10 as the difference. In this process however, they ignored the downside protection which is also accorded by the underwriting obligation. In this instance, the downside protection protects them from a drop in the price from 63 down to the current market value of 25 and below and has a value of at least $22.
Potter Stewart: What's this downside protection?
Leonard S. Goodman: It is Your Honor the time of the closing data in December 31, 1968 when these bondholders accepted the 950,000 shares at 63 and 3/8.
Potter Stewart: Well, they accept this it goes to share.
Leonard S. Goodman: They accept it.
Potter Stewart: And the market value as that date happened to be then in the market?
Leonard S. Goodman: Yes and they accepted a status as an equity holder in Penn Central.
Potter Stewart: Holding 950,000 shares at Penn Central.
Leonard S. Goodman: That's true.
Potter Stewart: Right.
Leonard S. Goodman: And Penn Central therefore discharged this obligation to the estate to the extent of the $63.00. What they were entitled to was something in addition to the $63.00 in order to bring it up to $87.50. But the underwriting obligation doesn’t work entirely that way, it only protects them on the upside. It will also protects them on the downside. If the stock goes below 63, they're still protected by this underwriting obligation.
Potter Stewart: Well, a protection, yes but up to $87.50 a share?
Leonard S. Goodman: Not only up to $87.50 but down below $63.00. If the stock drops below 63 even though that amount has been discharged under the underwriting obligation at Penn Central must make this up in 1978. Therefore, this downside protection below 63 has a substantial present value.
Potter Stewart: Alright.
Leonard S. Goodman: Just one further comment about scope of the judicial review that should apply in these proceedings that will complete it. The closing remarks of Mr. Seymour rule out -- suggest to me that he's asking the Court to rely on the long experience of Judge Anderson with the New Haven estate. Their position on the scope of review also seems to bear on their position that no remand will be needed even if the Commission has erred in its valuation of the Harlem River and Oak Point Yards. However, Section 77 (e) states on its face that the Commission shall determine the value. And valuation is not listed among the determinations to be made by the Court. The valuation is placed by the statute within the primary jurisdiction of the Commission. The Court of Appeals in the Ecker case adopted the present argument of the trustees and it held that the District Court was required to exercise its own independent judgment on questions of value. This Court reversed. This Court held that the District Court’s degree of participation in the reorganization did not include valuation and that Section 77 (e) left the determination of value to the Commission without the necessity of a reexamination by the Court when that determination is reached between material evidence to support the conclusion in accordance with legal standards. But to be sure the reorganization court may receive new evidence but as Mr. Justice Douglas stated in the Group of Investors case beside the same day as Ecker, the part of the District Court to receive additional evidence may aid it in determining whether changed circumstances require that the plan referred -- to be referred back to the Commission for reconsideration. The third item that I distributed to the Court is an extract from hearings on a Bill that was introduced just after the Ecker and Group of Investors cases. That Bill was introduced in the Congress which would -- and would have overturned the decision of this Court in Ecker. The text of the Bill is set forth in that extract as well as a statement of proof by the entire Commission in opposition to the Bill. The Bill was never reported and it died in committee. Thank you.
Warren E. Burger: Thank you, Mr. Goodman. Mr. Cox.
Hugh B. Cox: Chief Justice, may it please the Court. Perhaps it would be useful to the Court if that very beginning I stated my view of exactly the liquidation valuation process of the Commission adopted here because I think it's possible to maybe some confusion as a result of the discussion on specific points. The Court by now understands of course that the New Haven was a hopeless railroad. It has been written with deficits for years and it was a railroad not only with a passenger deficit but with a freight deficit. So, if you value this Railroad on any conventional basis, earnings or goodwill or anything of that kind there would be no value involved. But it was clear to me reviewing courts as I think that my client would have to concede at the estate and the bondholders were entitled to something. They were entitled to a fair value, so that the only standard that the Commission could apply was liquidation value. Now there is an obvious problem there because this Railroad is never going to be liquidated. The Penn Central has been required to take it over and continue the rail operations and to absorb indefinitely the deficits of those operations created.
Potter Stewart: You say Mr. Cox that's the only standard that the Commission could apply, do you mean that's the only constitutional standard or statutory standard or practical standard or what do you mean?
Hugh B. Cox: Well, I will say this that it's the only standard I know of that could give the estate and bondholder anything now.
Potter Stewart: Do you think it's required as a minimal standard by the Fifth Amendment of the Constitution?
Hugh B. Cox: If I would suppose that if it’s not certainly they are entitled to something under the statute before you ever get to the Constitution, you know. And certainly, perhaps by the Constitution if there is a liquidation value that it would say could actually obtain by selling off the Railroad piece by piece I should suppose the statute before you get to the Constitution would say that the Commission should give them something like that.
Potter Stewart: Well, what do you mean something like that?
Hugh B. Cox: Well, Judge Friendly said in his opinion that this gets into an abstract problem which I'd rather not get involve in but Judge Friendly suggested in his opinion that since in this case there was no picking in a real sense and there wasn’t. My client is in the position it's in because it chose to do something and so is the New Haven. Judge Friendly suggested in no circumstances that perhaps the constitutional rule did not apply but to stand this in the fairness standard would require that something like liquidation or approaching liquidation value but the reason I would prefer not to take time to get into this if I may be permitted to say so, Mr. Justice Stewart is because in our view in this case, the Commission gave these people. They believe the value that they would get in this hypothetical liquidation that I'm talking about if the conditions are realistically appraised. So, that whatever the standard is we think the Commission meant and we think that's what the Commission meant to do.
Warren E. Burger: With the misfortunes that you spoke out that were encountered by the New Haven over a long period of time that were well known, Penn Central have encountered to some degree some of these same misfortunes, have they not?
Hugh B. Cox: Oh, yes indeed! But of course, and while they were not in thriving or flourishing condition they were not in any condition as the New Haven. They had net deficits in their railway operating income but particularly the then old Pennsylvania Railroad in some degree that the New York Central had other sources of income which enable them to pay their fixed charges.
Warren E. Burger: Would it be fair to say that this combination of Penn and Central first and now the inclusion of New Haven which was made as one of the conditions is something compelled by the public interest in furtherance of the National Transportation System policy?
Hugh B. Cox: Surely Commission has determined, yes. That’s the -- that was the basis in which the merger of the two lines was approved and also the basis in which they required us the conditions that the New Haven be included.
Warren E. Burger: So, that we have here something of unwilling buyers and perhaps unwilling sellers.
Hugh B. Cox: Well, I should not speak -- wish to speak for anyone except my client but my client did not embrace this opportunity to the edge. Would it preferred not to take the New Haven, they were required to if they wanted the merger but they made that choice. I'm not appealing for sympathy for the Penn Central as such here they did this and they committed themselves to pay whatever the Commission and the courts approved as their term and that’s where we are. Now going back to this liquidation, this hypothetical liquidation, because I think it's important to understand what it involved. It meant really now understand that the Commission had decide, try to decide what prices would be paid by people who were never going to buy the properties that were never be sold. They didn't necessarily assume that it will be broken up, some of it might be sold in place but this whole thing -- valuation was based on the hypothetical sanction of the New Haven which stopped. It would abandon service, would necessarily break up everything. It might try to sell some things in place but it would stop service and its property would be sold off piece meal. Now what, in our view that Commission did in this case and you really need to understand what it did was to have to go back and looked at the way it valued all the different kinds of properties that were involved here. But what it did in this hypothetical liquidation was to try so far as it could to bring that hypothetical liquidation close to what would in fact, have happened if the New Haven had liquidated, had abandoned service and liquidated. Now, that is the basis for the Commission's determination that there should be an allowance for abandonment delaying. It makes that very clear in a passage of pages that occurs in its report about page 146 of that printed volume of the first appendix because the Commission’s view was if you assume there was going to be a liquidation of the New Haven and you have to assume that. If you're going to fix this liquidation value, it's reasonable to say assuming that we will give them a certificate so that they can abandon nevertheless, under the law, and this is true they have to ask us for the certificate. We can't issue it immediately. We're required to give notice to the Governor's state. We're required to give in time to come as they make arguments about how the abandonment should be conditioned or whether the sales should be in placed or as junked, any other problems they present to us, we have to listen to those arguments, hear their evidence and decide it. And we think that it would be reasonable assuming we'll grant a certificate and assuming that the New Haven stops operating trains which the Commission also assumed. We think it would be reasonable to say that that would take a year and that during that year the New Haven would incur some expenses which would affect the liquidation value of the estate. Now, that's what the abandonment allowance delay is about and it's all that it's about. The suggestion that the Commission could prolong it indefinitely I think you can, it seems to me need not obtain this very long.
Potter Stewart: As the point of what it's all about is a year from when?
Hugh B. Cox: Well --
Potter Stewart: But the claim is, as I understand part of the claim of your brothers in opposition is that had they not been had done a primrose path, that's perhaps their own metaphor but had they not been induce into this inclusion business. They would have filed from abandonment years ago back in the middle 60's.
Hugh B. Cox: So, perhaps they would. I don't know but they didn't.
Potter Stewart: Well, they didn't but we're talking about Alice in Wonderland, anyway.
Hugh B. Cox: You're talking about Alice in Wonderland. I think what the Commission really said Mr. Justice Stewart is this. That we have decided that it would take six years, actually to sell a property no matter when you start it. We think they may deserve but my client believes they made a very serious mistake there because that the evidence really required a longer period. But passing that, it said it will take six years to sell the property but before you can start selling it you have to get a certificate. So, that in this, in the real sense in this hypothetical frame, the date doesn't make too much difference. They didn't the first time say six years from so and so would be the liquidation period. They just said six years whenever you started. And what they said, what the Commission seems to me to be finding in the abandonment delay is that in addition to taking six years to sell it, it's going to need another year to get the position to start selling and if you looked at it completely in a hypothetical frame, there’s no doubt they would had to have a certificate. There's no doubt they didn't have one. Now, it's true they say it's unfair to do it this way. You should pretend that we have a certificate because we've been waiting all this time to get in and we've been suffering all these losses. Now Mr. Goodman has just dealt that and he said, I think it's simply an argument about how this pre-inclusion lawsuit should be dealt with. The Commission dealt with that as to the 68th losses and all the courts both courts below sustained it. I would just say this about it then I should like to pass on. They were in an unfortunate position. They bought the head securities and deficit written Railroad and the trustees without any objection from the debtors decided to try to become and be included in the Penn Central and it took a long time when they incurred some losses.
Byron R. White: But all of the losses in fact are prior to the bondholder's interest, aren't they? Would all those operating losses be administrative expenses entitled to prior payment over the bondholders?
Hugh B. Cox: Mr. Justice White I have to answer that question by saying that so far as they issued the trustee’s certificates. I think you have to assume that they are.
Byron R. White: Yes.
Hugh B. Cox: Now, there have been some figures cost about here --
Byron R. White: $60 million.
Hugh B. Cox: -- but I can't analyze those figures because I don't know what they are but it's quite true that any amounts represented by the trustee’s certificates would be ahead of the bondholders and of course, they've been incurring deficits since 1956 quite long and since they -- ever since they've been in receivership. But if you are applying a liquidation stand which requires a hypothetical liquidation and that’s what is giving them out of the Commission’s decision $146 or $150 million when any other way they would get nothing. My suggestion is that it ought to be applied consistently, they've embraced it and they really shouldn't complain on it when it hurts.
Byron R. White: When did the bondholders first voice any objection to inclusion or did they ever?M
Hugh B. Cox: I think the first time they did so was in the spring in 1967. It was not so much in the form of objection to inclusion as it was but it was a suggestion that reorganization proceedings should be terminated.
Byron R. White: Then you should liquidate?
Hugh B. Cox: Liquidate, yes.
Byron R. White: And did they participate in the inclusion proceedings?
Hugh B. Cox: Oh! Yes and I think that it was only one group of them that made the suggestion about not to declare about terminating proceedings but they participated in the inclusion proceedings but largely to in the interest of increasing the price. That's what they're trying to do. And this -- if you begin to look at this problem in terms of who suffered most, you try to decide how this liquidation hypothesis should be applied by appealing to sympathy as they're looking at the merits of the particular methods the court used, I think you then some other considerations to come into play which I would be obliged to mention in the Court. They are Penn Central of course, whatever loss that this people has suffered Penn Central is required to suffer these losses in indefinite future and what is more that is not something.
Byron R. White: Well, unless Mr. Cox they get some -- they abandon some --
Hugh B. Cox: Unless they can get but there's no indication that the Commission is going to allow them to abandon the freight service and nobody knows what will happen on the passenger service. As a matter of fact, since the inclusion they've lost at least they've not received about $4 and a half million that the state used to give the New Haven.
Speaker: I thought the Penn Central agreed to underwrite losses -- certain percentage of losses, 100% the first year, declining scale?
Hugh B. Cox: That was the Commission, yes. That was the Commission --
Speaker: Well they agreed to it, didn't they?
Hugh B. Cox: They agreed to that --
Speaker: And now the Commission lets them out from under that?
Hugh B. Cox: No, Mr. Justice --
Speaker: Or part of that?
Hugh B. Cox: They simply apply the same formula but to one year. See, that formula was assumed that it would be three years before they would be included and there was a maximum under the formula that five --
Speaker: Well, I suppose you can get into big argument about that.
Hugh B. Cox: Yes, as matter of objections but I think the suggestion was left this morning at the Commission modified his formula it didn't really -- It was always a maximum of $5 million a year and that's what the Pennsylvania paid for $68.
Potter Stewart: That is $5 million and $500,000 that was prorated in 1968?
Hugh B. Cox: Yes, prorated over 11 months.
Potter Stewart: That's right.
Hugh B. Cox: Now, I think this -- the thing that the -- the next thing I should like to say something about is the so-called bulk sale discount. I think there's been some confusion about it, too. That determination of the Commission does not assume a bulk sale. It doesn't assume a bulk purchaser, it simply a method that the Commission used based on the testimony of an expert witness. A method that the Commission used to value the real property of the New Haven as of valuation date on the assumption that that real property was going to be sold piece meal over six years. That's all that determination of the Commission’s amounted to was this witness who was an experienced in real estate investor and administrator testified that if he were going to value it, this $3000 parcels of property that the New Haven had as of the valuation date, he would go about it in a particular way and they way he went about it was making some computations about the amount of capital that would be involved in the venture. He said 75% mortgage capital at 9%, 25% equity capital at 15%, and by applying those rates of retiring to the cash flow proceeds using the same appraisals that the New Haven people have made and assuming a six-year liquidation of the same way the New Haven people did. He arrived at a figure which he thought represented the value of that amounts of real property as of the valuation date at the end of 1966. Now, the Commission took his testimony and did a little different way. They took away that average and got 10-1/2% as applied really instead of the 6%. So, what this issue about the bulk sale discount really comes down to is simply a question of whether the Commission should have discounted the real properties of the New Haven for the purpose of determining valuation of the valuation date by 6% as it did the first time or by 10-1/2% as he did the second time on the basis of his testimony.
Byron R. White: Mr. Cox, is it true that the 6% that was originally set as a discount, was that intended to reflect just the value, the translation of the future value to present value?
Hugh B. Cox: That is what was called I believe, Mr. Justice White a money discount. It was based on the prior rate of interest and represented merely the difference between having the money now and having it.
Byron R. White: So, it didn't reflect any uncertainties in --
Hugh B. Cox: No.
Byron R. White: -- the economy or in real estate values or in not being able to sell as soon as you thought or anything like that?
Hugh B. Cox: That's right. That's--
Byron R. White: That's clear.
Hugh B. Cox: Clear on the record and we've developed that in our brief. That was simply 6% represent the difference between having money now and having six years from now.
Potter Stewart: That was just a present value of future money?
Hugh B. Cox: Yes, that's right.
Potter Stewart: But now, we've been introduced two other things i.e. the risk of real estate value is going down particularly which for the betterment and number 2, the power of the Commission to require a sale in bulk is that --
Hugh B. Cox: No, not in my view Mr. Justice Stewart. That's the channery point and I better say something about that now.
Potter Stewart: If that will help so.
Hugh B. Cox: This judgment as I think Mr. Goodman said about how to value properties was essentially a business or economic judgment and what the Commission was saying was we think the best method of determining liquidation value of the real estate or reasonable method is to do it as the way that Mr. Simon’s testimony has demonstrated it could be done. Now, the bondholders argue that as a matter of law, constitutional law, they said they were entitled to have liquidation value determined by a particular method. In other words, they said, the only way you can do it under the Constitution is to take these individual appraisals, put them all together and maybe you can apply the 6% discount but if you do anything beside that you have departed from the constitutional standard. Now, the Commission responded to that argument and that's what all is this discussion is about how and what they could do in the abandonment proceeding the Commission responded to that argument by saying there’s nothing in this broad constitutional purpose in our argument because in some circumstances we could require you to sell them to both purchaser who was going to continue the Railroad operation. Well, I think the worst and Judge Friendly expressed some doubts about the --
Potter Stewart: It's the language that he calls somewhat less than collusive actually.
Hugh B. Cox: Somewhat less than collusive -- it's collusive enough I think when you read the whole thing with a view of determining whether there’s any internal consistency but my position is --
Potter Stewart: But he understood that he attributed toward a different meaning, didn't he?
Hugh B. Cox: He attributed to it --
Potter Stewart: That is i.e. the risk involved.(Voice Overlap)
Hugh B. Cox: He attributes to it the same meaning I'm attributing to it. It was an economic -- it was essentially an economic judgment and didn't depend on legal reason. I think the Commission may have given dubious or more involved answer to this argument and it needed to be given I should thought it could have answered simply by saying that you, you maybe entitled the liquidation value but we're entitled to determine liquidation value by any reasonable method that it has support any evidence and this method does but instead of that the Commission value to this discussion about what it could or could not do in an abandonment proceeding. Now, there's no -- I submit you look at that report and consider that the Commission was dealing with an economic business problem on how to value property and there's no reason to believe that its’ judgment on any economic issue would be a total effective if it we’re told that there may be some doubt or even when it was wrong about the legal answer it gave to the bondholders argument. I think that economic determination can stand on its own foot. This is really stronger case than the Massachusetts Investors Company case was because there they chose the wrong authority or two statutes. Here I think they simply possibly gave the wrong answer to an argument that could have been disposed of on temporary.
Byron R. White: I take it that it's implicit in your argument that it is quite clear that the appraisals they were relying on the expert testimony was the value of the real estate as of when?
Hugh B. Cox: The end of the valuation date, the end of January -- of December 1966.
Byron R. White: 1966.
Hugh B. Cox: Yes.
Byron R. White: And none of the appraisals purported to be made in the light of the liquidation plan that is we predict that this value would be worth this so much in six years.
Hugh B. Cox: Let me tell you how that was done, Mr. Justice White. New Haven first broke to land up in these 3,000 parcels. They then had 3,000 as I understand at separate appraisals made and those appraisals did not take into account the problem of market absorption or how long it would take the ceremony --
Byron R. White: So they didn't -- they didn't purport to include the factors that the Commission has now included.
Hugh B. Cox: That's right.
Byron R. White: They then purported to set at value --
Hugh B. Cox: That is --
Byron R. White: If they were sold December 1966?
Hugh B. Cox: Or sold one it separately at or about that time. I thought they sought some reasonable exposure to market but after the appraisals were made, then a witness of New Haven came along and examined would not make the appraisals but he examined and he said, well, you obviously can't sell all these properties at once. I think it would take at least six years. I think even that witness admitted that was an optimistic estimate and of course my clients said. And one of the New Haven's witnesses said that if you couldn't it in six years. Ten years about that.
Byron R. White: I take it if you have had experts who actually testified what the property would be worth if sold pursuant to this liquidation plan over a period of six years, you might have some problems with the ICC determination.
Hugh B. Cox: Yes, but you didn't have it because these appraisals did not take that into account. This is all and I think you can read our brief on and I don't believe it can really be disputed and be contested. What the head done, the only thing they've done was as to certain specific pieces of property they had applied what was called the cats and dogs discount. They may indulge us as to certain particular parcels. Now, the witness Simon took that into account and he said even with that he would use this method of valuing the property which produced the 10-1/2% discount the Commission used but the cats and dogs discount was confined to certain particular pieces of property which had known infirmities at the time the appraisals were made. It really didn't look to the future risks at all. There are -- the risks of perhaps covering -- appearing to be rather disjointed in this presentation I should now like to touch briefly on some of the points that come up in respect to other aspects of the case one of them being the situation these two yards in the Bronx. I hope that the Court is clear that the question in there is the -- really come to down to appraisal of the evidence over whether some Railroad in the event of the liquidation of the New Haven which served these two New Haven yards and the Bronx. It's those two yards that are in issue. Now, the Commission took an appraisal which was made on the assumption that the New Haven would abandon service. The bondholders say that the Commission was bound to take a higher appraisal which the appraisers said would only apply if you assume that some Railroad other than the New Haven applied or supplied the same service to New Haven supplied so that on a hearing that it became an argument over whether the Penn Central would voluntarily or could be compelled to serve these two yards.
Byron R. White: Is it -- I'm looking at a map on page 511-C of the appendix.
Hugh B. Cox: Yes, I know the map.
Byron R. White: Is that, if I got the right map --
Hugh B. Cox: I think that’s a map if it shows the lines running -- it shows two lines over on the left run down, a little down in Harlem River and yellow line going across.
Byron R. White: Yes, and then it's got blue line going down across the Hell Gate bridge?
Hugh B. Cox: Yes, yes.
Byron R. White: And it's got one going out the Bronx River.
Hugh B. Cox: Yes.
Byron R. White: And goes along a thing kind of a -- well, I would know what color to call that.
Hugh B. Cox: What's that?
Byron R. White: The one going starting out the Bronx River, a short line. Perhaps that's a lot of --
Hugh B. Cox: These two lines over in the left --
Byron R. White: Yes.
Hugh B. Cox: -- are now are all New York Central lines.
Potter Stewart: One's a Harlem division? The other is a Hudson division?
Hugh B. Cox: Yes, that's right. And the yellow line was at New York Central branch which ran down to the former Port Morris Yard in New York Central and then to an interchange point with the New Haven and any traffic that the New York Central moved to this area was -- of to these yards or to the Hunts Point Market was interchanged at this point. Now, the Commission heard this evidence and having heard it found that on all facts that if the New Haven were liquidated which is the hypothesis that we're considering, the Penn Central would not serve these yards and could not be compelled and the reasons that are set forth in our brief at length we think that finding was fully supported by a substantial evidence. I just want to say one word about however to make one point clear. The reorganization court took the view that the Penn Central could be compelled as New Haven were liquidated to serve that market operated by the City of New York. The Commission found to the contrary because that traffic is highly unprofitable but even if that it is assumed and this is the point I'd like to make, even if it's assumed that the Penn Central might serve that Hunts Point Vegetable Market or might be compelled to it doesn’t follow that it would serve either of these other two yards. That's -- their only the evidence showed that on average it were only about 13 cars a day went to those yards to serve them. Penn Central would either have to buy from the New Haven in liquidation or somebody else tracks facilities which would be extremely expansive in view of the fact that the traffic would not be profitable anyway and furthermore the evidence shows that it would incur very substantial operating cost for the purpose of this small volume of profit. Now, as far as the suggestion if they could be compelled to serve them, the Commission disposed to that by examining the facts and saying that there was no evidence of any need for service to these two yards or of that the Hunts Point Market for that matter that would justify requiring service in the public interest and of course the Commission would have to make a contrary finding in order to require our service. So, I think that looking at that whole situation it is quite clear that your mission is determination there which required which is dependent upon evidence as to what the operating conditions were, and also relied to all of the Commission’s own judgment about what the transportation needs were should clearly be sustained. I may add that we point out in our brief that those evidence before the Commission of the New Haven itself sold a large chunk, one of these yards at exactly the square foot price that was in the appraisal the Commission adopted which was 50 cents of square foot lower than the price on the appraisal that the bondholders now say the Commission was required as a matter of law to adopt so that I think it is, if they were, we have a remand on this question that the Commission might have to have another look at the whole question of evaluation. I find my time is nearing the end. I should like to say something about this issue of stock because I think the questions from the bench indicate that there's something that perhaps that should be said about it. The Commission in treating the stock issue picks an inherent value where this stock that is going to be delivered on the closing date.
Byron R. White: What's that, Mr. Cox?
Hugh B. Cox: That was a determination that the stock would have that value in itself even though it might not command a price on the stock market as of the particular date it was equal to value.
Byron R. White: None of the moneylender gives that an inherent value about stocks.
Hugh B. Cox: Well, he has to keep it until he can get it.
Byron R. White: He had to keep it, yes.
Hugh B. Cox: But that was part and parcel of this plan. Now the reason I think if you think about the situation --
Byron R. White: Now, we know this part and parcel of the plan that's what they have been to --
Hugh B. Cox: Well, --
Byron R. White: Either you just wanted their money then --
Hugh B. Cox: Look, Mr. Justice White, they were not going to use this money. That wasn't it and we’re going to put this --
Byron R. White: Who wasn't going to use it?
Hugh B. Cox: The New Haven. They were going to put the stock in an investment company and keep it for seven years and the reason they were going to do that it was because everyone knew that at the beginning of this merger. At the beginning of this merger the market price of the stock wasn't going to reflect what is was really worth over any period of time.
Byron R. White: Are you saying there are stocks from making this claim, is that the basis in what this is all about?
Hugh B. Cox: I'm not arguing a stock owned --
Byron R. White: Well, or whatever you're holding --
Hugh B. Cox: I'm simply saying that the Commission, I'm saying two things. I think the Commission in a transaction of this kind involving a reorganization of Railroad is entitled so long as it has substantial evidence to support it to determine a value of stock that is in inherent rather than a value that is evidenced by a current market quotation. And that is so even if it maybe some time depending upon such --
Potter Stewart: So, you're saying that although you agreed at the outset that either under the Constitution of the statute, they are entitled the liquidation value that you can satisfy that standard by giving it to them any time within ten years?
Hugh B. Cox: I say you can give it to them if they in stock that has an inherent value on that date.
Potter Stewart: Well, so you're saying yes. It answers yes if you can satisfy that standard anytime within ten years?
Hugh B. Cox: They can -- I think it's an essential part of the power the Commission has to have in hearing with the reorganization of this kind because frequently they don’t know what the stock would be worth. In terms by -- judge by stock market quotations, they know what they can determine what's inherent valuing. Now, of course, in the courts below it took care of those problems as --
Byron R. White: Well, do you think they could satisfy liquidation -- the liquidating value standard by giving them money today which will be worth a $145 million 10 years from now?
Hugh B. Cox: No, I don't, Mr. Justice White. Money is different.
Byron R. White: Well, that's what you're saying with the stock within that --
Hugh B. Cox: No.
Byron R. White: We're going to give this some pieces of paper that within 10 years it will be worth $83 million.
Hugh B. Cox: In reorganization, and I think you could find this concept -- in reorganization when you give stock you’re giving what amounts to an equity in a growing concern.
Byron R. White: But supposing they don't want?
Hugh B. Cox: Well, mind you they're not rejecting stock. They want stock.
Byron R. White: Well, they aren't rejecting payment. Would you think they would take if you gave the $83 million in cash, that they would it up rather than she stock?
Hugh B. Cox: I can't answer that question. All I can say is --
Byron R. White: It seems (Inaudible)?
Hugh B. Cox: All I can say is that they have indicated they want stock and some of the bondholders have said that they want more stock than as opposed to bonds.
Byron R. White: Why is it?
Hugh B. Cox: Because they -- as the junior bondholders, they are only hoping this thing as really to have that stock go up in value so that they can have something out of it but --
Byron R. White: You're suggesting that what their claim want to be here is really is it not they want more stock but they really ought to say that they want bonds which bears a rate of interest.
Hugh B. Cox: If that's what they really want, yes and they never have taken that position. This payment of this large amount of the consideration in stock is something that's been in this plan from the very beginning and so far as I know the bondholders have never insisted it more than it should paid in that bond. Now, they have to ask occasional times to make up differences between a market value but the notion of getting a large equity position in this new company has been in this thing from the very beginning and as far as I know it’s not been objected to by anybody.
Byron R. White: Of course, I suppose they suggest this is the only way that they can speak. Nobody could have raised the money to Penn.
Hugh B. Cox: No one could -- the Penn Central wouldn't have that money and they --
Byron R. White: You can't blame that on anyone?
Hugh B. Cox: You can’t blame that on anyone except to possibly Penn Central but the notion, the distinction between a market quotation and inherent value is not a noble distinction in the law. You looked at the valuation cases under the appraisal cases they're infrequent --
Byron R. White: Another matter we're talking about is giving somebody liquidation value and give inherent value?
Hugh B. Cox: Well, they get something that is in a -- I submit it's the worst stuff. Now, they're going to have to wait a little while to get it. They may have to wait seven years. In the meantime, they got an underwriting.
Potter Stewart: Whose idea was the underwriting? Judge Anderson?
Hugh B. Cox: Judge Anderson. It was taken by the --
Potter Stewart: It originated with him, did it?
Hugh B. Cox: Yes, and accepted by the Commission. So that is now --
Potter Stewart: And accepted by the three-judge court.
Hugh B. Cox: And accepted by the three-judge court. Of course, any modifications in that underwriting which they have to go back to the Commission because it involves this problem under Section 28.
Warren E. Burger: One more question is, you have a little time left. I get the feeling that, perhaps this isn't a question. I got a feeling throughout here that the Commission faced with trying to implement the National Transportation Policy with two somewhat distressed railroads already merged and another more distressed railroad tucked on to the program really was confronted with the problem of trying to allocate the deficits if you could call them that. Here's the transportation system that really calls for large subsidies from the state of Federal Government and they aren't available and so they are allocating this burden on the bondholders. Is that a -- Can you point in a minute --
Hugh B. Cox: I don't think --
Warren E. Burger: What's the policy of that?
Hugh B. Cox: I don't think they are allocating any burden on the bondholders. I think they've given the bondholders my judgment more than the bondholders would get if they really broke up this Railroad and sold it. I think the real problem is that the Penn Central has been required to absorb these deficits and pay a price that my client believes is too high for real liquidation value and the end is not going to come -- the effect is not going to stop the equity at Penn Central come. This is going to affect the rate based that caused the ratemaking power of the Commission and the viability and the vitality of Penn Central is that the transportation company and this transportation service that’s available to shippers all over the organized states. That's why the Commission has authority over securities so that the capital structure can't be inflated. Now, at the end of our brief --
Speaker: What's the best thing in the bidding is just give this road to Penn Central for nothing?
Hugh B. Cox: Well, you can't do that of course under the law of the Constitution and you have to give them at least we’re operating on the assumption they have to get the liquidation value. When we think they got it in a little bit more. They got $8 million for a building that’s never going to be built over at Grand Central Terminal, that we think was --
Potter Stewart: That there are rights over the terminal such as, that’s never going to be built?
Hugh B. Cox: Well, it's very doubtful. I say never is too strong a word, I was carried away by the acts of enthusiasm --[Laughter]
Hugh B. Cox: -- there is great doubt that it's going to be built. They got $6 million because the Commission overlooked. They forgot or disregarded the evidence about how the cost of the terminal in the point to the brief.
Thurgood Marshall: May I you asked one question? It may not be relevant. It may not be material. As I understand it’s different where the bondholders would get but some $100 million or $125 million more than the Commission allotted if that’s right on the bond?
Hugh B. Cox: That's right, the figures of --
Thurgood Marshall: Well, whatever it is?
Hugh B. Cox: Whatever it is.
Thurgood Marshall: Now, from whose pocket does that come?
Hugh B. Cox: It comes in the first instance from the Penn Central and ultimately it's going to come from the pockets of the people who pay rates.
Thurgood Marshall: There isn't any doubt about that.
Hugh B. Cox: I just would want to say one thing.
Thurgood Marshall: That's where the litigation is?
Hugh B. Cox: I'm sorry, Mr. Justice.
Thurgood Marshall: The real issue is between the bondholders who claim a certain amount as Penn Central which claims that they are not entitled to them?
Hugh B. Cox: That's right.
Thurgood Marshall: And that's the litigation?
Hugh B. Cox: That's the litigation. I just wish to say the Court on this question, free use of the Grand Central terminal that as we read the briefs in states they make it perfectly clear that they haven't paid Penn Central anything for the use of their making that terminal.
Potter Stewart: Just before you sit down, there have been references throughout the brief to an extent of oral argument that this involves step one of the plan and I think I understand this involves how much is the New Haven and that it got to be paid for its assets. Do I understand then that step two is how those assets are going to be distributed among the various owners?
Hugh B. Cox: That's right. That step provides for the investment company in seven years and how the --
Potter Stewart: That's not asked before you?
Hugh B. Cox: That's not before you now.
Warren E. Burger: Thank You, Mr. Cox. You have sixteen minutes left.
Whitney North Seymour: Thank you Mr. Chief Justice. Mr. Chief Justice and may it please the Court. In that short period I should try to answer some of the questions that I feel either are more -- my adversaries have perhaps not done in clarity just as to.
Byron R. White: The reorganization court modified the underwriting agreement, is that right?
Whitney North Seymour: The reorganization court created the underwriting agreement.
Byron R. White: I know but in this -- its opinion is here for review. They entered some supplementary provisions, didn’t they doubt reorganization court?
Whitney North Seymour: No, Your Honor. The three-judge court made some slight modifications in the reorganization in the underwriting formula provided by Judge Anderson in the reorganization court.
Speaker: In this opinion, that we’re reviewing of the reorganization court it did some embroidery work upon the original underwriting agreement, is that right?
Whitney North Seymour: There never was an underwriting agreement (Voice overlap).
Speaker: Now, upon the provision it created? I beg your pardon?
Whitney North Seymour: There never was an underwriting agreement until Judge Anderson created it. He did that because the $83.1 million was so inadequate to discharge the -- because the 950,000 shares was so inadequate to discharge in obligation of $83.1 million and this was sort of reform movement on his part.
Speaker: If we should approve his ruling on the reorganization court's ruling on the phase of the case, it would not have to go back to the Commission again, would it?
Whitney North Seymour: It would have to go back to the Commission Your Honor if you found -- it would not have to go back if you found that the 950,000 shares with the underwriting was the equivalent of $83.1 million.
Speaker: Right.
Whitney North Seymour: But if you find that it is not then there are several things that are wrong whether those are its fee that provides for interests its fee to provide the security and so on then it must go back. I should like --
Potter Stewart: The reorganization court invented the underwriting agreement.
Whitney North Seymour: That is correct.
Potter Stewart: That was accepted by the Commission in principle and it was accepted by the three-judge statutory court with a couple of minor fair variations.
Whitney North Seymour: Yes, only Judge Winfield decided and said that it's still not provided --
Potter Stewart: (Voice Overlap) He said that there ought to be remanded to the Commission but he was in dissent for either more shares or some other provision that provide the full $83 million?
Whitney North Seymour: Yes, Your Honor.
Potter Stewart: Am I wrong about that?
Whitney North Seymour: No, that's exactly the posture. That's exactly the posture.
Byron R. White: That's what I knew and I take it it's something that it will cost $283 million now?
Whitney North Seymour: Exactly, Your Honor. Nothing more or less but as of the closing date that we take in any amount once we could get them, I would like to say a word and I answer the question that Mr. Justice Black asked and that related to the question of who bore the burden here? Supposed the fact the Court decided that we were supposed to get how a $100 million, is that going to come out of the public's pocket or is that going to come out of Penn Central’s pocket and the answer to that is quite simple. The Commission has the power to make up that $100 million simply in shares of Penn Central. Now, if that happens --
Hugo L. Black: Simply in what?
Whitney North Seymour: Simply by providing the Penn Central pay the difference in shares of Penn Central and if that happens --
Hugo L. Black: If Penn Central pays this one?
Whitney North Seymour: That's right, if Penn Central pay that, now if that happens that will have no effect on the ratemaking function or any other function it will just have an effect on the earnings per share of Penn Central which would be diluted as far as the equity holders of Penn Central were concerned. It would have some modest effect on the equity that they would have because there'd be more shares outstanding than the earnings per share would therefore decline slightly. It would have an immaterial effect therefore on Penn Central stockholders and no effect on the public if the Commission would like it to provide that difference in shares.
Hugo L. Black: But the new Railroad which died out for the burden from a $100 million or whatever that difference is, that it’s had to pay out in some way, it would be a part of its assets, wouldn't it?
Whitney North Seymour: It would be a part of its assets because there is after all --
Hugo L. Black: (Voice Overlap) If it’s entitled to earn commissions or earn rates.
Whitney North Seymour: Your Honor, if on the assumption that it was receiving not $162 million worth of assets but $262 million worth of assets which is why its required to pay another $100 million. There is no injury to Penn Central. It's simply paying exactly for what it's getting.
Hugo L. Black: With no interest, but making to pay $100 million?
Whitney North Seymour: No, simply because all you have done is found that it was underpaying by a $100 million and taking advantage of the $100 million of the New Haven assets.
Hugo L. Black: I understand the other argument. I understand the other argument; the bondholders are entitled to it. But when the bondholders are entitled to it, they have to get it from somebody unless it's manufactured.
Whitney North Seymour: That is true, Your Honor.
Warren E. Burger: Well, yours can be manufactured on account of the -- they would have to put the burden on the Penn Central?
Whitney North Seymour: In the form, Your Honor of shares it would not be a serious burden. It would only be a serious burden. It would be more of a burden obviously if it were in bonds because then there would be an addition to fixed charges. Suppose they have to issue another $100 million worth of bonds. That issue another $100 million worth of bonds then those bonds have a 5% rate Penn Central would have to pay out $5 million a year. Now, that $5 million a year would have the effect on Penn Central’s earnings per share, the 21 cents it will reduce their earnings per share by 21 cents if you gave a whole $100 million in bonds. If on the other hand you gave in shares you would not effect the fixed charges at all because it wouldn’t be a requirement that they pay dividends unless they were earned so the only difference would be as to the extent to which there might be some slight dividend in payment to the extent that you provided the additional conservation.
Byron R. White: But there wouldn't be any impairment on the -- I mean the same rate base would exists?
Whitney North Seymour: If you wish you would share us the same rate base on share --
Byron R. White: The same asset value would go on about balance sheet for which we issue the share in any event.
Whitney North Seymour: Exactly, Your Honor.
Thurgood Marshall: How do you know the same rate base?
Whitney North Seymour: Because it wouldn't affect the fixed debt, Your Honor, all you were doing is honoring the equities structure here and not the debt structure.
Thurgood Marshall: But suppose that the public may be given at least in another way by having the stocks on sales to the workman?
Whitney North Seymour: That might be, Your Honor. I would like to say to Mr. Justice White about the question as to whether these were in fact claims that came ahead. The $60 million were actually claims that came ahead of those the bondholders that they were, all of them claims that came ahead of the bondholders claims, not just the trustee’s certificates but the way in which all of these erosion occur was because the reorganization court enjoined the collection of a lot of obligations that we were running up in the course of that period so that the states were not being paid their taxes though their claims came ahead of us and indeed, the tort claims. People injured on the road during the administration they're still outstanding and the per diem claims. All the railroads who put cars on our line, we have to pay it. We weren't paying but their claims are ahead of ours.
Byron R. White: But how about the --
Whitney North Seymour: Their administration claims that you can find all of that at page 181-A because the Commission itself set it out and put a value on it and made a chart and it appeals on the remand report and it’s at page 181-A of the appendix of decisions of constitutional statutory provisions that were handed up with our briefs.
Potter Stewart: How are the rolling stocks of your Railroad? Where those probably under Philadelphia equipment trust or the equivalent, weren't they?
Whitney North Seymour: Somewhere --
Potter Stewart: Additional sales?
Whitney North Seymour: Some were it would have been repossessed and some have excess value or (Voice overlap).
Potter Stewart: Your assets are primarily real estate?
Whitney North Seymour: That is correct.
Potter Stewart: Because those would be prior claims, wouldn't they? They are all that cars and locomotives that were subject to that sort of a conditional sales or --
Whitney North Seymour: I think that what happened there was that. We have maintained those throughout the administration otherwise, they would have been repossessed.
Potter Stewart: Yes.
Whitney North Seymour: And therefore although they were debts with respect to those Railroad costs those were taken over when the cars were taken over by Penn Central at the closing.
Potter Stewart: I see.
Byron R. White: But if you're --
Potter Stewart: Or else the rolling stock is repossessed?
Whitney North Seymour: Exactly.
William H. Rehnquist: I suppose the delay in consummating the merger and the transfer in terms of liquidation value that probably is not at all negative as far as the bondholders is concerned. I suppose the real estate would sell more in 1970 than in 1960?
Whitney North Seymour: That is exactly right, Your Honor and one of the earlier opinions of Judge Friendly. He had noted that of course if you were going to predicate some kind of delay then you couldn't simply predicate the delay without revaluing the assets and therefore his remand in the first instance was on a very limited ground. He had asked that the remand be on limited ground. It is absolutely unfair however we may entail for the Commission to stand here on the posture and saying that there was a quantifying of risks with respect to that bulk sale. If you read the Commission's report you will see that everything that the Commission has to say about the success under a single title limitations on the right to break up the Railroad. It does, there was no question of quantifying any risks. Mr. Simon did not know for example, whether the appraisals that he was addressing himself to had been made on a very conservative basis or whether they have been made on the generous basis. Now, obviously if you make it on a generous basis then you have got to worry about the possibility of whether it would be completed in six years or what other impacts thereat. Mr. Simon knew nothing about that. What Mr. Simon said and it's quoted at page 29 of our reply brief was, “we are not talking today of about uses but we have been assuming of bulk sale and we have been discussing about the decision which is on Railroad’s hands as to whether or not to go through a retail process themselves.” And he says also, that -- and he said in other places that he himself did not study the appraisals. He simply assumed that they were carefully made. If he didn't know what the Commission in fact said about and that was that they were conservative. They understood the possibility that there was 10-year liquidation study performed with a 7% discount as against the six-year liquidation with the 6% discount and they elected that but you'd have to imagine the most remarkable coincidence that precisely the profit the bulk buyer would require which was computed on the basis of 25% of his own invested capital giving him a profit of 15% and 75% borrowed at a 9% rate would exactly equal the risks which the Commission had somehow overlooked. Obviously, he was not quantifying any of those risks because he didn't know what they were and that kind of coincidence would have been an absolute miracle.
Warren E. Burger: Going back to this real estate evaluation again, to pursue Justice White's point. If the generality of opinion about the real estate value is correct, it does not involve much risk for a buyer to buy real estates in 1970 at 1970 prices for payment on 1978?
Whitney North Seymour: I would think not, Your Honor.
Warren E. Burger: It's the essence of your point on that evaluation of these properties, isn't it?
Whitney North Seymour: Exactly, Your Honor. The inflationary factor alone is going to deprive him of a good deal of a risk.
Warren E. Burger: So, what you're saying is that the Commission forced on the seller all or a very large part of the risks if not all of the risks on that score.
Whitney North Seymour: I believe that that is correct, Your Honor. I believe that my answer however to a question of Mr. Justice Stewart's in the first part was subject to some misinterpretation. My colleagues inform me that it was possible to interpret my answer's meaning but Penn Central have the right to buy in 50,000 share blocks from us and in that way we lost one of the advantages of the underwriting. What I meant was this that at any time they could pay us the difference between what the value of the shares than was at $87.50 and be free of the underwriting. Now, at that point we stood in precisely the same position as anybody else who bought shares of stock. If we were stockholder, if we kept them, we kept them at our own risk. If we sold them, we sold them on our own risk. And there was layer for this way out to avoid our having the best of both possible worlds. In any event, that I would say is this, the underwriting saw the laces. It puts us off so far ahead 1978. It gives us that in such an insecure way. That might be an enormous bill for Penn Central to pay.
Byron R. White: But are you willing to accept stock at all?
Whitney North Seymour: Your Honor, I believe we went into -- I would say that the Commission has the power in such a force sale as this and I would say that this was never a reorganization --
Byron R. White: Why? Can it require you?
Whitney North Seymour: I think it could require us to take stock in all likelihood as long as it was that -- as long as it represented the cash equivalent of what they gave out.
Byron R. White: On that day?
Whitney North Seymour: On that day. I think that that far, its interest in -- that far it had a right to protect the public interest by seeing that it did not so burden Penn Central in the form of a payment. I don't think that it could take anything away from the bondholders so far as constitutional rights were concerned. But so far as protecting Penn Central and the public interest in the form of a payment, as long as it gave us the equivalent of what we were asked, I think to that extent it could decide what the form of the security should be and we never complained about that.
Byron R. White: But you could never sell that as offered for that much on that day, could you?
Whitney North Seymour: No, Your Honor and in our briefs we have pointed out that that was another error that while with respect to our real estate for example, every selling expense was deducted. Brokerage fees, lawyers’ fess, the expensive advertising, and everything else in order to get down to out net salvage value. With respect to the shares at $83.1 million, even then they failed to take it into account our selling expenses as a counter, you know, in order to keep both sides of the equation equitable but they did not do that. On the Harlem River Yards point, I would like to say this. Mr. Cox, it seems to me is still suggesting that we are entitled the liquidation value on something less than our best method of liquidation. Both -- there were two witnesses for Penn Central on the Harlem River Yards and both right on the river. Penn Central witnesses testified that someone would provide service to those yards. This was not something that we have made up. The only question is where it is clear that someone would provide rail service to those yards is there any basis in law for valuing and for finding that liquidation value on something less than fair market value on our best method of liquidation.
Warren E. Burger: Your time is up counsel. We will not to commence the second case for today that was involved splitting the argument and counsel could not possibly finished today so we will arise at this time.