Court Opinion

ID: 8898933
Source: CourtListenerOpinion
Date Created: 2022-11-27 00:38:49.249642+00
Date Added: 2024-06-11T17:07:41.655936
License: Public Domain

GIBBONS, Circuit Judge
(concurring and dissenting).
I agree with the majority that the No. 75-1902 (Penn Central) appeal can at this stage be dismissed as moot. But because I cannot agree with the majority’s assumption that the Regional Rail Reorganization Act of 1973 (RRRA), 45 U.S.C. § 701-93, as amended, Pub.L. No. 94-5, 89 Stat. 7 (1975), preserves intact the equitable power vested in the reorganization court by § 77 of the Bankruptcy Act, 11 U.S.C. § 205, to protect the debtor estate from erosion that is not of constitutional dimensions, I cannot join in the balance of the court’s opinion. And because I believe that the majority has erred in holding that the Penn Central and Jersey Central Trustees have a conditional right to repurchase equipment obligations *1355acquired by the United States Railway Association (USRA), I respectfully dissent from the disposition of No. 75-2151 (Penn Central) and No. 75-2031 (Jersey Central).
I am neither unaware of nor insensitive to the plight of the financially beleaguered creditors and bond-holders of both Penn Central and Jersey Central. See, e. g., In re Penn Central Transportation Co. (Columbus Options), 494 F.2d 270 (3d Cir.), cert. denied, 419 U.S. 883, 95 S.Ct. 147, 42 L.Ed.2d 122 (1974). That the estate of a railroad in reorganization must not be uncompensated for an erosion-taking in violation of the fifth amendment is made plain in the decisions of both the Special Court, In re Penn.Central Transportation Co., 384 F.Supp. 895 (Sp.Ct.1974) and the Supreme Court, Regional Rail Reorganization Act Cases, 419 U.S. 102, 95 S.Ct. 335, 42 L.Ed.2d 320 (1974). And whether and under what circumstances and upon what conditions the estate of a railroad in reorganization can be forced to bear operational losses that do not amount to a fifth amendment taking are matters within the prerogative of Congress and not the courts. See generally the New Haven Inclusion Cases, 399 U.S. 392, 90 S.Ct. 2054, 26 L.Ed.2d 691 (1970); Penn-Central Merger and N &W Inclusion Cases, 389 U.S. 486, 88 S.Ct. 602, 19 L.Ed.2d 723 (1968).
It is at this point that the majority and I part company. Judges Hastie and Rosenn agree with Judge Fullam that notwithstanding the Regional Rail Reorganization Act and its 1975 amendments, the reorganization court retains the equitable power to balance the competing interests of the taxpaying public on the one hand and of the debtor estate on the other in determining what form interim federal funding pending takeover by ConRail will take. I (and apparently Judge Whipple) am of the opinion that Congress has in the RRRA stripped the reorganization courts of their powers of equitable oversight, and has given to the Secretary of Transportation discretionary authority to determine how the appropriated funds should be disbursed.
I
Because the RRRA has engendered this controversy, a brief review of its substance and structure is worthwhile. The provisions of the Act as originally enacted are reviewed with characteristic thoroughness in Judge Friendly’s opinion for the Special Court, 384 F.Supp. at 904-10, and Justice Brennan’s opinion for the Supreme Court, 419 U.S. at 109-17, 95 S.Ct. at 342-45, 42 L.Ed.2d at 334-38, and those discussions will be incorporated by reference here. Briefly, the RRRA establishes a United States Railway Association to prepare a “Final System Plan” for restructuring the railroads in reorganization into a “financially self-sustaining rail and express service system.” § 206(a)(1) of the Act, 45 U.S.C. § 716(a)(1). Upon implementation of the Final System Plan designated rail properties will be conveyed to ConRail, a private, nonprofit corporation, established by Congress to acquire and operate the conveyed properties pursuant to the Final System Plan. §§ 301-02 of the Act, 45 U.S.C. §§ 741-42. The properties will be conveyed in exchange for securities of the USRA. § 303 of the Act, 45 U.S.C. § 743.
Recognizing that the railroads in reorganization would require cash assistance in order to continue operations pending implementation of the Final System Plan, Congress authorized $85 million in grant money for the purpose of sustaining interim operations. § 213 of the Act, 45 U.S.C. § 723. Congress also authorized $150 million in expenditures for “the acquisition, maintenance, or improvement” of rail properties to be conveyed under the Final System Plan.
By the beginning of 1975 nearly all § 213 funding had been depleted and, because of defects in draftsmanship, no substantial quantities of § 215 funds had been distributed. To insure a continuation of interim rail operations pending the ConRail takeover, an infusion of new funds was required. Accordingly, Congress passed,the Regional Rail Reorganization Act Amendments of 1975. Section 213 was amended by increasing the amount of direct assistance available under that provision. § 6 of *1356the 1975 Amendments, 89 Stat. 8. More importantly, § 215 was recast to unfreeze the funds authorized thereunder by expanding the uses to which those monies could be put. As amended, § 215(a) provides:
(a) Purposes. — Prior to the date upon which rail properties are conveyed to the Corporation under this chapter, the Secretary, with the approval of the Association, is authorized to enter into agreements with the trustees of the railroads in reorganization in the region (or railroads leased, operated, or controlled by railroads in reorganization)—
(1) to perform the program maintenance on designated rail properties of such railroads until the date rail properties are conveyed under this chapter;
(2) to improve rail properties of such railroads; and
(3) to acquire rail properties for lease or loan to any such railroads until the date such rail properties are conveyed under this chapter, and subsequently for conveyance pursuant to the final system plan, or to acquire interests in such rail properties owned by or leased to any such railroads or in purchase money obligations therefor.
§ 45 U.S.C. § 215(a), as amended, Pub.L.No. 94-5, § 7, 89 Stat. 8.
In its declaration of policy, which serves as a preamble to the substantive provisions of the RRRA, Congress asserted its paramount fiscal purpose to be to provide “necessary federal financial assistance [to the railroads in reorganization] at the lowest possible cost to the general taxpayer.” § 101(b)(6) of the Act, 45 U.S.C. § 701(b)(6). Pursuant to this congressional directive the Secretary of Transportation sought in 1975 to exercise his statutory authority under § 215(a)(3) to purchase maturing equipment obligations of both Penn Central and Jersey Central. Although appropriated but unexpended § 213 funding was available that made such purchases not absolutely necessary, the Secretary realized that § 213 expenditures were unrecoverable grants. To see the railroads in reorganization through the expected year-end cash crisis, the Secretary decided to combine § 213 grants with § 215 expenditures for the improvement of rail properties designated for conveyance to ConRail, and purchases of maturing equipment obligations. Because the government would be entitled to seek an offset of monies expended for the purchase of equipment obligations against compensation ultimately due to the bankrupt railroads upon conveyance of their rail properties, see § 303(c)(l)(A)(i) of the Act, 45 U.S.C. § 743(c)(l)(A)(i), to the extent that monies expended could be recovered, the cost to the taxpayer of maintaining interim rail operations would be minimized.
The Trustees of both the Penn Central and Jersey Central Railroads refused to agree to the purchase of equipment obligations. The Penn Central reorganization court said that in exercising its power of superintendence over the bankrupt estate under § 77, it would not direct the Trustees to enter involuntarily into any such agreement absent affirmative proof that such action was necessary to consummate the Final System Plan. 400 F.Supp. 920, at 922. Because a residuum of § 213 grant money remained unexpended, the court determined that it would not force the Trustees to accede to a method of financing that would further diminish the worth of the debtor estate. Accordingly, Judge Fullam ordered only the conditional sale of equipment obligations to the government. Judge Whipple, in contrast, was of the view that the Jersey Central Trustee’s resistance to the funding scheme impermissibly frustrated the policies of the RRRA. The court therefore ordered the Trustee to enter into the agreement proffered by the Secretary for the purchase of maturing equipment obligations. I would reverse the judgment and order of the Penn Central reorganization court appealed from in No. 75-2151 and affirm the Jersey Central reorganization court in No. 75-2031.
II
Although it is now authoritatively established that the RRRA supplements but does not supersede the provisions of § 77 of the Bankruptcy Act, see Regional Rail Reorga*1357nization Act Cases, supra, 419 U.S. at 109, 95 S.Ct. at 342, 42 L.Ed.2d at 334, Congress has ordained that to the extent that provisions of the two statutes are irreconcilable, the text of the RRRA controls. Section 601(b) of the Act, 45 U.S.C. § 791(b), provides:
“The provisions of the . . . Bankruptcy Act are inapplicable to transactions under this chapter to the extent necessary to formulate and implement the final system plan whenever a provision of any such Act is inconsistent with this chapter.”
It is not the appointed task of this court to exercise discretion and balance equities in the decision-making process where Congress has expressly or by implication decreed that we should not do so. The argument is made that Congress in the RRRA intended to truncate the reorganization court’s equitable power under § 77 to superintend administration of the debtor estate by conferring upon the Secretary and the USRA discretionary authority to determine how appropriated funds should be spent. Our task is confined to determining whether preexisting limitations upon the exercise of that authority (e. g., § 77) survive the RRRA’s enactment, and if so, whether that pcwer is in any way circumscribed by constitutional considerations. We do not sit in judgment on the wisdom of otherwise valid legislation.
A
m considering the question of congressional intent, we can quickly dismiss the Penn Central Trustees’ objection to the Secretary’s general authority to purchase equipment obligations. The RRRA as originally enacted did not in terms authorize such purchases. This omission was corrected with the 1975 amendment to § 215. Although the congressional reports accompanying the 1975 amendments make no reference to the purchase money obligations, the statutory authorization is clear and unambiguous.1
Both the Trustees and Judge Fullam rely heavily upon the following language of revised § 215(a) to support their position opposing the Secretary’s proposed action:
“(a) Purposes. — Prior to the date upon which rail properties are conveyed to the Corporation under this chapter, the Secretary, with the approval of the Association, is authorized to enter into agreements with the trustees of the railroads in reorganization in the region . [to purchase equipment obligations], (emphasis supplied).
It is said that this language merely delineates the Secretary’s power to enter into an agreement for the purchase of equipment obligations with Trustees willing to enter into such a bilateral arrangement. The Trustees argue, however, that § 215(a) does not authorize the Secretary to unilaterally impose a contract upon them. Although in vacuo this would appear to be a plausible interpretation of the statutory language, § 215(a) must be read in conjunction with § 215(b). This latter provision provides:
“(b) Conditions. — Agreements pursuant to subsection (a) of this section shall contain such reasonable terms and conditions as the Secretary may prescribe.” (emphasis supplied).
Section 215(b), in my view, lays to rest the notion that the Trustees of the railroads in reorganization are to be coequal arbiters with the Secretary of the form federal financial assistance is to take, or even that they are to have any say at all. The unmistakable thrust of § 215(b) is to confer upon the Secretary discretionary authority to establish the terms upon which equipment obligations are to be purchased and, by necessary implication, discretion to deter*1358mine who shall be a party to such a contract. This conclusion is inescapable if § 215(a)(3) is viewed as codifying the result in In re Penn Central Transportation Co., 373 F.Supp. 185 (E.D.Pa.1974), appeal dismissed, 508 F.2d 270 (3d Cir. 1975); see note 1 supra.
It seems plain to me that § 215 must be construed as establishing the primacy of the Secretary’s determinations if the RRRA’s articulated purpose of minimizing the cost to the taxpayers of interim assistance is to be realized. As has been noticed above, § 213 allocations are, for all intents and purposes, irretrievable grants to the railroads. Each dollar of funding made available under that section ultimately costs the taxpayers one dollar. Section 303(c)(l)(A)(i) of the Act, 45 U.S.C. § 743(c)(l)(A)(i), however, provides that:
(c) Findings and distribution. — (1) After the rail properties have been conveyed to the Corporation and profitable railroads operating in the region under subsection (b) of this section, .the special court, giving due consideration to the findings contained in the final system plan, shall decide—
(A) whether the transfers or conveyances—
(i) of rail properties of each railroad in reorganization, or of each railroad leased, operated, or controlled by a railroad in reorganization, to the Corporation in exchange for the securities and the other benefits accruing to such railroad as a result of such exchange . are in the public interest and are fair and equitable to the estate of each railroad in reorganization in accordance with the standard of fairness and equity applicable to the approval of a plan of reorganization or a step in such a plan under section 205 of Title II, or fair and equitable to a railroad that is not itself in reorganization but which is leased, operated, or controlled by a railroad in reorganization; (emphasis supplied).
The government in its brief contends that its purchase of the debtors’ maturing equipment obligations can be characterized as an “other benefit accruing to such railroad” within the meaning of § 303(c)(l)(A)(i),2 and hence can be counted as part of the consideration owing to the railroad estates after the conveyance to ConRail of rail properties has been completed. The benefit of these purchases accrues to the railroad upon conveyance of the properties to ConRail. At that time ConRail is required by the RRRA to assume all outstanding obligations of the debtors on rolling stock conveyed under the Final System Plan. § 303(b)(3) of the Act, 45 U.S.C. § 743(b)(3). Included in the obligations assumed by ConRail would be the railroads’ liability to repay USRA for monies expended in acquiring maturing equipment installments. Because the railroads remain in possession of the equipment, its equity is increased by the amount (or some fraction thereof not representing depreciation or interest) of the obligation assumed. To avoid compensating the railroad for equity purchased at the government’s expense, the Special Court will be asked under *1359§ 303(c)(l)(A)(i) to include a set-off against compensation due the conveying railroads some or all amounts spent in acquiring their equipment obligations. Every cent that is recaptured in this fashion represents a return to the taxpayer of money that could not have been recovered utilizing § 213 financing. At first blush, then, the selection of § 215(a)(3) in preference to § 213 financing would seem to advance the congressional policy of minimizing the burden to the taxpayer of maintaining interim rail operations pending implementation of the Final System Plan.
The Trustees argue, however, that this apparent economy is more illusory than real. They point out that § 215(c) authorizes USRA to release ConRail from any § 215 obligations that it may have incurred or acquired. Because the Final System Plan recommends that all but $36 million of the $300 million authorized under § 215 should be forgiven, United States Railway Association, Final System Plan, Vol. 1, at 92 (1975), the purchase of equipment obligations will accomplish no substantial saving for the taxpayer. But I am not prepared to say that the Secretary unreasonably concluded that a saving of this magnitude was not insubstantial and in any event preferable to expenditures no part of which could be recaptured.
Summarizing, I believe that the RRRA, as amended, gives to the Secretary of Transportation broad discretion in selecting the nature of federal financial assistance to the railroads in reorganization under the Act. As long as the Secretary’s decisions are not arbitrary, capricious or otherwise an abuse of discretion, neither the railroads’ Trustees in bankruptcy nor the reorganization courts have any license to resist or obstruct implementation of those determinations. On this record I perceive no basis for denying the Secretary the relief he seeks from the Trustees’ obstinate refusals to enter into agreements for the purchase of equipment obligations. I do not believe that to be entitled to the remedy which he seeks the Secretary is obliged to affirmatively prove that the proposals for financial assistance which he tendered to the Trustees will in fact be more economical (from the perspective of the public fisc) than proposals advanced by the Trustees or the reorganization courts. I am satisfied that the Secretary reasonably could have concluded that his plan was consistent with the congressional mandate. The financing plan which the Secretary seeks, with the assistance of this court, to implement seems to me to be the antithesis of arbitrary and capricious action, including generous allotments of § 213 grant money and § 215(a)(1) and (a)(2) maintenance and improvement money, in addition to smaller sums designated for the purchase of equipment obligations. The proposal demonstrates less a callous disregard for the predicament of the debtors’ creditors than a sensitiveness to the not-inconsiderable congressional dissatisfaction with the preexisting methods of interim financing for the railroads in reorganization — methods which were likened by some pundits to pouring money into a bottomless pit. See, e. g., 121 Cong.Rec.H. 847 (daily ed. Feb. 19, 1975) (remarks of Representative Latta); 121 Cong.Rec.S. 1023 (daily ed. Jan. 28, 1975) (remarks by Senator Brock). Unless to do so would be unconstitutional, I believe that the RRRA requires this court to acquiesce in the Secretary’s exercise of discretion and to order that the Penn Central and Jersey Central Trustees enter into unconditional agreements with the Secretary for the purchase of maturing equipment obligations.
B
In granting the government only a conditional right to purchase maturing equipment obligations, the Penn Central reorganization court indicated its belief that such purchases would be the functional equivalent of a high-priority, interest-free loan that would defer further administration expenses (state and local taxes and leased-line rentals having been previously deferred), and in all probability work an unconstitutional erosion of the debtor estate. 400 F.Supp. at 925-26.
But this erosion will occur only if the maturing installments on the equipment obligations which are deferred are at some *1360later point to be taxed against the debtor estate. Section 303(b)(3) of the RRRA, 45 U.S.C. § 743(b)(3), however, stipulates that ConRail is to assume any outstanding obligations for equipment conveyed to it under the Final System Plan:
Notwithstanding anything to the contrary contained in this Act, if railroad rolling stock is included in the rail properties to be conveyed, such conveyance may only be effected if the profitable railroad operating in the region or the Corporation to whom the conveyance is made assumes all of the obligations under any conditional sale agreement, equipment trust agreement, or lease in respect to such rolling stock and such conveyance is made subject thereto; and the provisions of this chapter shall not affect the title and interests of any lessor, equipment trust trustee, or conditional sale vendee or assignee under such conditional sale agreement, equipment trust agreement or lease under section 205(j) of Title II. (emphasis supplied).
At the very least, this provision must be read as substituting ConRail for the debtor as principal obligor under the conditional sales agreements. By assuming thence-forward the entire obligation ConRail would thus relieve the Trustees of their duty to repay USRA for monies expended in the purchase of the equipment obligations. Although liability on the obligations would carry forward as to ConRail, the direct liability of the debtor estate would be extinguished, and there would be no deferral of administration expenses that would contribute to the erosion of the estate.
The Trustees reply that even if the estate’s primary liability on the obligations is extinguished, it may still be secondarily liable as surety of ConRail’s performance, and that the threat of erosion persists. It is noteworthy, however, that nothing in § 303 or its legislative history suggests that after conveyance the debtor can be held secondarily accountable on the assumed obligation. It is certainly arguable that the debt- or’s liability is at that point wholly expunged by novation. Furthermore, counsel for the government in this case has stipulated that
“USRA and FRA are willing to agree that the Trustees would nevertheless be relieved of any responsibility with respect to the installments acquired by USRA, either as principal obligee [sic] or as surety for Conrail.”
Reply Brief for United States in No. 75-1902 at 13. I question whether an Assistant Attorney General can bind the United States not to pursue a legal remedy against Penn Central, otherwise available to it, by a concession in this litigation. See In re Penn Central Transportation Co., supra, 384 F.Supp. at 939 n.90. Nevertheless, it is far from clear that a railroad in reorganization can legally be held accountable in the event of a ConRail defalcation, and even if it can, it is uncertain that any such liability would be enforced. Perhaps most significantly, it is almost inconceivable that ConRail would default on the payment of the assumed equipment obligations in the first place. These obligations are, after all, for rolling-stock, and as the majority points out, under § 77(j) of the Bankruptcy Act, 11 U.S.C. § 205(j), the title to rolling-stock sold on conditional sales agreements is unaffected by a railroad reorganization proceeding. It is highly improbable that ConRail would ever default on these obligations and risk repossession of essential equipment, even if the debtor estate is held as a surety.
Although I am unable to say with moral certainty that the purchase by USRA of maturing equipment obligations will not lead to a fifth amendment taking from the bankrupt estates, I do not believe that in this case the threat of erosion is sufficiently palpable to warrant judicial interference with the Secretary’s exercise of discretion. And even if it is assumed that such an erosion would occur, I do not believe that creditors would go uncompensated for their loss.
As noted above, § 303(c) of the RRRA, 45 U.S.C. § 743(c), directs the Special Court, after all rail properties included in the Fi*1361nal System Plan have been conveyed, to determine whether the consideration paid to the conveying railroads is “fair and equitable” within the meaning of § 77 of the Bankruptcy Act, 11 U.S.C. § 205. At a minimum, the amount of compensation paid must satisfy the demands of the fifth amendment. If the Special Court determines that the consideration paid is inadequate, it can order ConRail to close the deficiency. § 303(c)(2) of the Act, 45 U.S.C. § 743(c)(2).
If the debtor estate has been subjected to an unconstitutional erosion prior to the time when the Special Court closes the books on the takeover, then that taking will be compensated for in the § 303(c) proceeding in the Special Court. If, however, the putative confiscation occurs after the Special Court has approved the terms of the Con-Rail takeover, then the debtor could still pursue a Tucker Act remedy in the Court of Claims. See Regional Rail Reorganization Act Cases, supra; In re Penn Central Transportation Co. (Special Court), supra. Although I do not expect that recourse to either of these remedies will be required, their very availability fortifies my conviction that the proposed action of the Secretary under review in this case is unfair neither to Penn Central nor to Jersey Central. Accordingly, I would reverse the judgment of the Penn Central Reorganization Court in No. 75-2151 to the extent that it permits the Trustees to repurchase equipment obligations acquired by USRA. I would affirm the judgment of the Jersey Central reorganization court.

. In March, 1973, almost a full year before the 1975 amendments to the RRRA were adopted, the government petitioned Judge Fullam for an order directing the Penn Central Trustees to agree to the purchase of $10.8 million in maturing equipment obligations. The reorganization court granted the government’s petition. In re Penn Central Transp. Co., 373 F.Supp. 185 (E.D.Pa.1974), appeal dismissed, 508 F.2d 270 (3d Cir. 1975). It is likely that this episode influenced Congress to make explicit the Secretary’s authority to enter into, indeed insist upon, such agreements.

. The Senate Report accompanying the legislation said:
Subsection (c)(1) requires the special court, in passing on the fairness and equity of conveyances by railroads in reorganization to the Corporation, to consider not merely the value of the securities received by the railroad but also the other benefits accruing to it as a result of the exchange, especially those benefits accruing to a railroad in reorganization by virtue of its reorganizing under the bill. Such benefit would include, for example, the value of the right to discontinue rail service and abandon rail properties pursuant to section 304 or receive a reasonable rate of return on any rail properties the continued operation which is maintained through a rail service continuation subsidy, the value of an expedited decision on the sale of rail properties to a profitable railroad operating in the region, the value of obtaining freedom from current contractual liabilities, and the value to the estate of each railroad in reorganization of having Government-financed employee protection and severance payments made (under title VI of the bill) to the employees of the railroad who would otherwise have claims against it for such payments.
S.Rep.No.93-601, 93d Cong., 1st Sess., 1973 U.S.Code Cong. & Admin.News 3274-75 (emphasis supplied).