Court Opinion

ID: 8775535
Source: CourtListenerOpinion
Date Created: 2022-11-26 12:59:47.49443+00
Date Added: 2024-06-11T17:02:31.333448
License: Public Domain

EDWARD WEINFELD, District Judge
(dissenting in part):
On the last round, when the Commission found that $125 million was “at least equivalent to the liquidation value” of the New Haven assets,1 both the Reorganization Court and this Court disagreed with that finding and remanded the matter to the Commission to correct substantial error.2 The Reorganization *1066Court considered that the Commission had understated the value of the New Haven properties by $33 to $55 million ;3 this Court, by $45 to $50 million4 In its latest report, the Commission restored some $37.7 million in value and then reduced that amount by $22.1 million.5 In effect, it gave with one hand and took away with the other. The net result is it has increased the amount to be paid for New Haven’s assets by $15.6 million, despite the Reorganization Court’s then view that any sum below the $33 to $55 million range “would be unfair and inequitable to the creditors * * *." 6
I recognize, of course, that the scope of review of this Court of the Commission’s order is limited; but I also recognize that the Court’s function in reviewing the Commission’s order is “to guard against the possibility of gross error or unfairness.”7 Because I am satisfied that the Commission’s current findings and conclusions lack substantial evidentiary support and contain more than a “possibility” cf. but again are pockmarked with, gross error and unfairness, I respectfully dissent with respect to the matters hereafter discussed.
The Reorganization Court and this Court appear in agreement that New Haven is entitled to the fair liquidation val-v. of its assets transferred to Penn Central. My disagreement with my brethren of this Court centers about their acceptance of the Commission’s “other pricing considerations” which result in reducing substantially below liquidation value the amount tp be paid for the New Haven assets.8 After finding that the liquidation value is $162.7 million, the Commission decides it is not “fair and equitable” for Penn Central to pay this sum to New Haven based upon these “other pricing considerations,” which are: first, a $15.-386 million deduction for a year’s delay that would have ensued had the New Haven applied for a certificate of abandonment ; second, a $6.695 million reduction for a forced bulk sale of the New Haven assets instead of a piecemeal liquidation over a six-year period.9 Each deduction, the Commission says, in effect reflects an application of the liquidation hypothesis. Each is justified by the Commission under its claimed authority to place a limitation on New Haven’s right to abandon operations and to compel the sale of the assets in bulk as if in fact an abandonment had occurred.10 The majority uphold the one-year abandonment delay deduction — which by itself eliminates nearly one-third of the value that we suggested on the remand the Commission restore — on the ground it represents the product of the Commission’s expertise in fleshing out the details of the hypothetical liquidation situation.
Deduction for one-year abandonment delay
The history of these proceedings shows that December 31, 1966 was accepted by the parties and the Commission as the date on which a six-year liquidation was hypothesized to commence. The date thus does not represent, as the majority suggest, the date “the liquidation deei*1067sion is assumed to have been taken.” (emphasis supplied) The abandonment delay concept in practical terms adds another year to the six-year liquidation period.
Although the expenses of the six-year liquidation were provided for in the prior report, the Commission did not then include any deduction for abandonment proceeding delay.11 Support for the Commission’s deduction of $15,386 million based on the added one-year abandonment concept, is claimed because the bondholders failed to apply for a certificate before the spring of 1967 and allegedly waived their right to liquidation value. The record does not support this claim. Always central to the merger was the inclusion of the bankrupt New Haven. Were this not the fact, an abandonment proceeding would have been compelled in the light of the year-by-year losses and the constant erosion of the bankrupt estate, with a favorable determination foreordained.12 The Reorganization Court has fully set forth, in its rejection of the abandonment delay concept, incontrovertible facts that expose the lack of substance to the contention that the failure to apply for a certificate of abandonment before 1967 worked a waiver of the bondholders’ rights to the full liquidation value. Indeed, as Judge Anderson, the one most familiar with these proceedings since their inception, has so convincingly demonstrated, but for Penn Central’s commitment to take over New Haven as an operating entity, and the universal understanding that such would be the ease, abandonment proceedings would have begun and terminated well before the end of 166.13 To suggest otherwise flies in the face of this record.
Penn Central, in seeking to uphold the Commission, urges that the added cost of delay is merely an “adjustment”14 that the Commission did not find necessary to pursue once it set the price stipulated in the Purchase Agreement. The argument for such a delay discount was advanced on the prior round and rejected by this Court. We relied upon the fact that “a considerable portion of the [interim] losses [would] * * * be borne by the NH estate” in rejecting the claim that “before the NH Trustees could even begin a liquidation, lengthy abandonment proceedings would be required, during which large cash losses would be incurred and the property would further depreciate.” 15
The Commission itself understood the true significance of the December 31, 1966 valuation date, as is evidenced by its brief before v. on this round. “The [remand] report,” it says, “makes detailed findings regarding the piecemeal liquidation value of the NH assets, as if an abandonment certificate were in hand on December 31 1966, in accordance with the directive of the Three-Judge Court.”16
In essence, the Commission’s abandonment-delay concept envisions a one-year “freeze” on the New Haven’s liquidation program, while proceedings drag on be*1068fore the Commission and the courts. According to the Commission, the only development during that year would be a further deterioration in the financial status of the New Haven. That was not the Commission’s position on the last round. Then, in observing that a large portion of the New Haven’s assets consisted of land, it said: “We cannot assume that these values will diminish. It is at least as reasonable to presuppose that the values will increase.” 17 That was our position, too. We thought that “[i]f we were to posit a liquidation beginning only some years hence, we could not simply deduct interim cash losses and depreciation but would have to ask the Commission to revalue the assets and this might yield a higher price.”18
Upon this record, the abandonment delay concept, which deducts $15.386 million from the liquidation value of New Haven assets, is without justification and is not based upon substantial evidence.
Bulk sale concept.
The bulk sale concept, a theory not previously considered by the Commission, is based upon its view that “we may compel the bulk sale and the bulk sale discount as a condition of an abandonment certificate, and, therefore, as a reduction of the present price.”19
The Commission, by hypothesizing a forced bulk sale of New Haven’s assets to an entrepreneurial operator based upon his borrowing of 75% of the capital at 9% and earning a 15% return on his equity investment — and then applying a discount factor of 10.5% over the six-year liquidation period — further reduces the amount to be paid to New Haven by $6.695 million.20 This theory deprives the bondholders of the salvage value of their property anticipated under the six-year liquidation program and at once raises constitutional issues. The expenses under the six-year liquidation program, which contemplated the sale of the properties on an individual basis, are $24.149 million, which include not only the cost and expense of a piece-by-piece sale of the assets, but a sum to cover the sale of some of the property below fair market value, as well as the risk of non-sale.21 To make another deduction of more than $6 million under the bulk sale theory is an unwarranted duplication of part of the expense already charged to the New Haven.
Although my esteemed colleagues are compelled to “entertain the gravest doubt concerning the legal premise” upon which the Commission postulated its theory, they purport to find justification for its acceptance by culling other statements from the Commission’s report and deducing therefrom what the Commission really intended, to wit, a “discount as a proper measure of risks not taken into account by the appraisals and the discount to present value.” Passing for the moment that this is not at all the theory relied upon by the Commission, which at once raises a question as to whether the agency action can be upheld,22 the theory, when tested on the basis of what the Commission did, as opposed to what it might have done, is clearly erroneous and cannot prevail. The Commission’s determination rests upon its assumed power to compel the bulk transfer to assure “the continued operation of the property and preservation of its unity.” 23 How*1069ever, the evidence upon which it justified the bulk sale deduction contemplated the sale of the real estate to a private developer who was in no way committed to the “continued operation of the property and preservation of its unity.” 24
Grand Central Tower Building.
As to the proposed lease of the air rights for the construction of the Tower Building, which if in fact constructed would eventually bring an annual income of $2.3 million, or under “certain favorable circumstances,” $3 million, the Commission, while aware that the prospect of actual construction was speculative, nonetheless concluded “it is probable that the building will eventually be eonstructed * * 25 Purportedly it resolved the probability in favor of the bondholders. Whether or not the project goes forward depends upon local action, much of it subject to variant community interests. No one can be certain what action the City Planning Commission, the Landmarks Preservation Commission or other official agencies will take with respect to the proposal.26 The existing heavy density of the area, the excessive land coverage and the already overburdened and inadequate municipal and private facilities there could well lead to a rejection of any zoning variations. Other forces, including representative civic groups whose judgment has in the past carried great weight with official bodies, are also in the picture. With the matter shrouded in much uncertainty and the subject of sharp public controversy, any decision which purports to value New Haven’s interest may work unfairly to Penn Central or New Haven. Until there is further clarification of the future of the Tower Building, I think the situation lends itself to the use of certificates of contingent beneficial interest (CCBI’s). The Commission’s judgment that it is probable that the building will eventually be constructed may prove to be sound; then again, it may not. While I agree with the Commission that it is desirable that the rights of the parties be determined and the issue put to rest, there is at this time lacking a factual basis for a fair and equitable determination, and accordingly the CCBI’s offer a solution to this vexing problem.
Stock valuation.
The Commission valued 950,000 shares of Penn Central stock at $87.50 per share, purportedly worth $83.1 million at the time of inclusion, as part of the consideration to be received by New Haven. The Reorganization Court and this Court agree that by the reality of the market place, “the true appraiser,” the stock is grossly overvalued — at the date of inclusion by some $23 million. The problem admittedly is a difficult one. The Reorganization Court proposes an imaginative solution which is acceptable to my brethren. With the utmost respect to them, I do not believe this is the solution. In my view it is more desirable to remand to the Commission for further consideration and to afford all interested parties an opportunity to submit proposals. The question of the stock valuation appears to have received little or inadequate consideration by the Commission. As my brethren note, the sole discussion of this important problem was a rather cavalier brush-off of the bondholders’ challenge to the Commission’s valuation of the stock at $87.50 per share.27 The New Haven estate is entitled to the equivalent of $83.1 million as part of the purchase price. After hearing the parties upon a remand, the Commission may require the issuance of a larger number of shares or otherwise provide for that sum.
*1070Losses from February 1, 1968 to December 81, 1968, the inclusion date.
The Commission limits the loss that Penn Central is to bear to $5 million.28 Consistent with my view previously expressed, the entire interim operating losses should be borne by Penn Central.29 Its argument that it should not be charged with losses over which it has no control is stripped of much of its force, since it had the opportunity, which it declined for reasons which even the Commission thought unpersuasive, to participate in a joint effort to achieve economies during the interim period.30
Harlem River and Oak Point Yards.
The Commission reaffirmed that its acceptance of the $18.1 million appraisal was based upon the assumption that “NH’s railroad system on liquidation would be entirely dismantled, including the approximately 2 miles of main-line tracks connecting the two yards, which are not immediately adjacent.”31 The Commission’s equivocal statement that “[i]t is extremely doubtful that railroad service would continue to the Harlem River and Oak Point yards if NH’s system were liquidated” is far from persuasive.32 Its finding as to non-operation of the yards made with respect to Penn Central, any existing terminal carrier, a new terminal carrier or the City of New York does not appear to be based upon substantial evidence. It is difficult to agree that an important rail service to industrial users would be terminated and the line dismantled. Nothing in the record supports the Commission’s assumption that the properties would be stripped of their trackage and electricity, both highly desirable industrial features, and the former alone commanding about a 10% premium in Bronx realty values. The Commission’s finding of value of $18.1 million is without substantial evidential support, particularly in the light of the appraiser’s testimony as to the incorrect basis of his lower valuation; at the minimum, the value is the higher of his appraisals, $22.650 million.33
It is regrettable that these proceedings, now pending for more than a decade, cannot be terminated. But the errors in the Commission’s report here under review are so egregious as to leave no alternative other than to remand for further consideration.

. Second Supplemental Report of the Commission on Further Hearing, 331 I.C.C. 643, 697 (1967).

. New York, N.H. & H.R.R. First Mortgage 4% Bondholders Committee v. United States, 289 F.Supp. 418 (S.D.N.Y.1968) (three-judge court) ; In re New York, N.H. & H.R.R., 289 F.Supp. 451 (D.Conn.1968) (reorganization court). This Court’s remand related to the following:
(1) the Commission’s failure to discount New Haven’s liquidation expenses
over the projected six-year liquidation period, 289 F.Supp. at 427-A28;
(2) its miscalculation of New Haven’s right to surplus income from the Grand Central Terminal properties, id. at 428-433;
(3) its ambiguous valuation of the Harlem River and Oak Point freight yards, id. at 433-434;
(4) its erroneous valuation of New Haven’s interest in the Boston & Providence Railroad, id. at 434-435;
(5) its failure to discount the 5% bonds with which Penn Central was to meet its obligations under the Purchase Price Adjustments, id. at 437-438;
(6) its error in deducting from the amount to be paid to New Haven the sum of outstanding real estate tax liens, id. at 438;
(7) its failure to indicate tj)e source of its estimate of 1966 depreciation of New Haven properties, set forth in its brief before v. but not in its Inclusion Report, id. at 438;
(8) its miscalculation of the cost to Penn Central of Penn Central’s 5% bonds, its assumption of New Haven’s obligations under the Boston & Providence mortgage, and its payment under the Purchase Price Adjustments, id. at 439;
(9) the Commission’s failure to take into account a reduction in 1966 New Haven equipment obligations, id. at 439 n. 15;
(10) its conclusion that Penn Central would assume overmortgaged New Haven equipment, id. at 439;
*1066(11) its failure to include any of Penn Central’s absorption of New Haven’s interim operating losses in the category of the cost of acquisition to Penn Central, id. at 440;
(12) its use of a sliding-scale formula for Penn Central’s interim loss-sharing as a device to curtail litigation by the New Haven bondholders, id. at 444; and
(13) its tendency to “round off” sums, with a consequent loss of some $5.3 million to the New Haven estate, id. at 427.

. 289 F.Supp. at 465.

. Id. at 440.

. Fourth Supplemental Report of the Commission on Reconsideration and Further Hearing, 334 I.C.C. 25, 53, 63 (1968) (“Remand Report”).

. 289 F.Supp. at 465.

. Penn-Central Merger and N & W Inclusion Cases, 389 U.S. 486, 524, 88 S.Ct. 602, 621, 19 L.Ed.2d 723 (1968).

. 334 I.C.C. at 53.

. Id. at 54, 60, 62.

. Id. at 57, 62-63.

. 331 I.C.C. at 662.

. True the states, communities and other interested parties would have been entitled to be heard in opposition to any application, and perhaps the proceeding would have dragged on; but even so, and despite the Commission’s view that Brooks-Scanlon Co. v. R.R. Comm’n, 251 U.S. 398, 40 S.Ct. 183, 64 L.Ed. 323 (1920), has been overruled sub silentio, New Haven could not have been compelled constitutionally, year after year, to absorb the constantly increasing operating losses or its security holders deprived of their right to foreclose their liens. And while one need not quarrel with the Commission’s position that a deficit-ridden railroad has no immediate right to abandon operations and dismantle, this does not mean that the public interest can compel such a railroad to continue its loss operation indefinitely.

. In re New York, N.H. & H.R.R., 304 F.Supp. 793, (D.Conn. May 28, 1969) ; 289 F.Supp. at 456-457.

. Penn Central Answering Brief at 26.

. 289 F.Supp. at 438.

. Joint Brief of the United States and the Interstate Commerce Commission at 5. (emphasis supplied)

. 3311.C.C. at 698.

. 289 F.Supp. at 438-439. The fact, relied upon by Penn Central, that the record contains no evidence to indicate what the added value might be, is hardly the fault of the bondholders. The Commission made clear, both in its Remand Report and in oral argument before us, that it did not regard the question as a matter for evidence. 334 I.C.C. at 29; Minutes of Oral Argument of April 17, 1969, at 139-41.

. 334 I.C.C. at 61.

. Id. at 62.

. 331 I.C.C. at 662.

. SEC v. Chenery Corp., 318 U.S. 80, 94, 63 S.Ct. 454, 87 L.Ed. 626 (1943).

. 334 I.C.C. at 61.

. R-29; T. 29799 et seq.

. 384 I.C.C. at 34.

. The Commission itself, with respect to New Haven’s Bronx freight yards, noted that action by the Planning Commission on a proposed zoning change was too speculative a basis for fixing valuation. 334 I.C.C. at 41; 331 I.C.C. at 668.

. 334 I.C.C. at 68 n. 40.

. Id. at 74.

. 289 F.Supp. at 448-449 (concurring opinion).

. 331 I.C.C. at 712-13.

. 334 I.C.C. at 43.

. Id. at 44.

. T. 28849, 28864.