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June 18, 1969

The NEW YORK, NEW HAVEN AND HARTFORD RAILROAD COMPANY, FIRST MORTGAGE 4% BONDHOLDERS' COMMITTEE, the Chase Manhattan Bank, N.A., as Trustee Under the General Income Mortgage of the New York, New Haven and Hartford Railroad Company, Manufacturers Hanover Trust Company, as Trustee of the First and Refunding Mortgage of the New York, New Haven and Hartford Railroad Company, and Oscar Gruss & Son, Plaintiffs,
UNITED STATES of America and Interstate Commerce Commission, Defendants, Penn Central Company, State of New York, and State of Connecticut, Intervening Defendants

The opinion of the court was delivered by: FRIENDLY

On July 10, 1968, this court vacated 'so much of the Commission's orders of November 16, 1967 and March 1, 1968, as finds the acquisition of NH by Penn Central on the terms provided in the Purchase Agreement and the interim loss-sharing and loan arrangements to be just and reasonable' and remanded the cause to the Commission for further consistent proceedings. 289 F.Supp. 418, 448. We urged the Commission and all parties 'to proceed with the utmost expedition' and to hold new testimony to a minimum. By order dated August 13, 1968, Judge Anderson, in the District Court for Connecticut, presiding over NH's reorganization under § 77 of the Bankruptcy Act, made an order similar in tenor. 289 F.Supp. 451. The reorganization court added one highly significant further item a direction that unless the Commission issued an order requiring Penn Central (PC) 'physically to take over and commence operating the New Haven Railroad, not later than January 1, 1969, leaving the price and the other terms of the inclusion to be determined later,' that court would consider itself 'forced to entertain a motion to dismiss the reorganization proceedings' and 'while liquidation will have to await authority to abandon, the trains will stop in January * * *.' 289 F.Supp. at 459. The Commission acted with expedition, rendering its Fourth Supplemental Report (the Remand Report), on December 2, 1968. 334 I.C.C. 25. In response to Judge Anderson's opinion, it ordered PC to take over operation of NH at midnight on December 31, 1968, and to pay the price fixed by the Commission, which would, however, be subject to judicial review. 334 I.C.C. at 74-78. The reorganization court approved this order on December 24, 1968; we denied PC's application to enjoin its execution; and the take-over was effected as scheduled.

On the other hand, our hope that the proceedings on remand would be of limited scope has not been realized. Both sides introduced much new evidence on subjects we had not expressly included in our remand, the Remand Report contains much new analysis, and we are confronted with almost as many issues as when the case was previously before us. We intend no criticism of the Commission on this score. While an administrative agency may choose to confine itself to the precise issues remanded, it is not bound to do so but may receive and consider such further evidence as it thinks requisite or desirable for the proper discharge of its duties. See FCC v. Pottsville Broadcasting Co., 309 U.S. 134, 145, 60 S. Ct. 437, 84 L. Ed. 656 (1940); Fly v. Heitmeyer, 309 U.S. 146, 148, 60 S. Ct. 443, 84 L. Ed. 664 (1940). Moreover, with particular respect to the two large downward adjustments made under the heading 'Other Pricing Considerations,' 334 I.C.C. at 53-63, we see no reason for refusing to accept the Commission's explanation, 334 I.C.C. at 54:

In the inclusion report, we found that the consideration Penn Central had agreed to pay would equal liquidation value there shown, and that made it unnecessary for us to explore other pricing considerations. The liquidation value that results in this reopened proceeding exceeds the agreed price, obliging us to make a new determination as to whether the price resulting from such a valuation is fair.

 Broadly speaking, what the Commission did in the Remand Report was this:

 On reexamination it found that if liquidation of NH could have been completed by selling off the properties individually in a normal market within six years from the date when a determination to liquidate had been made, the estate would have realized a figure having a present worth of $ 162.7 million, 334 I.C.C. at 30-53. It next argued that it was not constitutionally required to allow NH this or any other estimate of liquidation value, but only 'a fair and equitable price under Section 5 of the Interstate Commerce Act,' 334 I.C.C. at 56. However, it found no need to base its decision on this ground, since it also found that

 The alleged right to liquidation values derives from an alleged right to abandon; and there are recognized limitations on the right to abandon that in themselves limit the creditors' entitlement to the liquidation value we have computed under the court's instructions. 334 I.C.C. at 57.

 By making two further adjustments to liquidation value, the Commission reached a figure which it considered 'a fair price on the current record,' and it is this sum which is before us for review.

 The two adjustments were of $ 15.386 million for a one-year delay before the start of liquidation due to the need for obtaining a certificate of abandonment, 334 I.C.C. at 58-60, *fn1" and of $ 6.695 million for the lesser amount that would be realized if the properties were sold at one time as a unit rather than piecemeal over a six-year period, 334 I.C.C. at 60-63. These reductions, aggregating $ 22.081 million, led to a fair purchase price of $ 140.6 million, to which the Commission added $ 5 million as PC's equitable share of NH's losses from February 1, 1968 (the date of the PC merger) to December 31, 1968, 334 I.C.C. 65-71. The parties are in disagreement not only with respect to the propriety of the two large deductions but also concerning countless items of liquidation value and of consideration. We shall not attempt to canvass all these points but will deal with such, quite sufficient in number, as we deem to merit discussion.

 I. The Scope of Review and the Governing Standard

 We begin by reiterating the severe limitations on the scope of our review. In our last opinion in this case, 289 F.Supp. at 427, we called attention to what we had said on that subject in the N & W Inclusion Case (Erie-Lackawanna R. Co. v. United States) D.C., 279 F.Supp. 316, 337 (1967), aff'd with minor modifications, 389 U.S. 486, 88 S. Ct. 602, 19 L. Ed. 2d 723 (1968). We also cited Mr. Justice Cardozo's pertinent admonition, 'An intelligent estimate of probable future values, * * * and even indeed of present ones, is at best an approximation. There is left in every case a reasonable margin of fluctuation and uncertainty.' Dayton Power & Light Co. v. Public Utilities Comm'n, 292 U.S. 290, 310, 54 S. Ct. 647, 656, 78 L. Ed. 1267 (1934). *fn2" Such considerations are peculiarly applicable to a determination so hypothetical as the liquidation value of the New Haven. What that really is, no one ever has known or ever will know, even approximately. The idea of the states of Connecticut and Rhode Island and of a large part of Massachusetts being without rail service is so unthinkable that its consequences on land values are beyond possibility of accurate calculation. When passing on such an issue, it is peculiarly important for a reviewing court to remember that its function is only to make certain that agency actions 'are based upon substantial evidence and to guard against the possibility of gross error or unfairness.' Penn Central Merger and N & W Inclusion Cases, 389 U.S. 486, 524, 88 S. Ct. 602, 621, 19 L. Ed. 2d 723 (1968).

 When the case was last before us, we noted various faults and fuzzy patches in the Inclusion Report, but the principal ones were what amounted to two arithmetical errors aggregating more than $ 20 million, 289 F.Supp. at 427-428, 438, and a substantial understatement, stemming from a plain misconception on a matter of law, of the value of NH's claim to half of the 'excess income' from the Grand Central Terminal Properties, 289 F.Supp. at 428-430. The arithmetical mistakes could have been corrected without a remand, and it might also have been possible to make our own determination with respect to the GCT properties. However, since the Commission had justified its approval of the price fixed in the Purchase Agreement on the basis that it reflected the liquidation value standard for which the NH bondholders were contending, without, however, committing itself to the need for going so high, and we found this factual position was not borne out by the record, we remanded in order to give the agency an opportunity either to revise its results in the light of our finding or, if so advised, to explain why no revision was required. 289 F.Supp. 440-441. We also thought it best that the Commission should undertake the complex task of setting a value on the GCT properties under the legal standards we had laid down with respect to the strength of NH's claims, and, since there was to be a remand in any event, that it should explain certain other obscurities.

 On this second review we confront once more the question of the proper standard of valuation, which has now been fully discussed by the Commission. 334 I.C.C. 53-57. This matter apart, no significant appeal is made to our authority to interpret the Constitution, statutes, or contracts. There are again a few alleged arithmetical errors, this time relatively minor. But the overwhelming bulk of the attacks concerns the Commission's economic judgments. With respect to these we must be on guard lest the familiarity about the facts of the case we have somewhat painfully gained should lead us simply to substitute our views for those of the agency which Congress has appointed.

 We begin with a word on whether the Commission was bound to award liquidation value although, like the Commission, we do not find it necessary to decide this. One can scarcely quarrel with the proposition that in general 'A fair and equitable price * * * means a price that is fair both to the buyer and to the seller.' 334 I.C.C. at 56. In the Norfolk & Western Inclusion Case, 330 I.C.C. 780, 801 (1967), the first instance in which the Commission was required to prescribe a price, it said:

 In the ordinary case under section 5(2)(d) the acquired line's maximum commercial value to the acquiring line cannot exceed a price based upon past and foreseeable earnings of the acquired line plus the value of all benefits the acquired line brings to the acquiring line's system. Moreover, this price is ordinarily the maximum we should expect the acquiring line to pay. It appears that the price, nevertheless, will generally be below book value, and hence it will ordinarily be the minimum price the acquired line will find tolerable.

 The prices the Commission set on this basis were later upheld by the Supreme Court, Penn Central Merger and N & W Inclusion Cases, 389 U.S. 486, 524, 88 S. Ct. 602, 19 L. Ed. 2d 723 (1968), not simply as against the acquiring line's contention that they were too high but as against a claim by one of the lines to be acquired that the price, considerably less than current market quotations, was too low.

 Here the 'past and foreseeable earnings of the acquired line' are huge and increasing deficits -- deficits far larger than in 1966 when the Commission required inclusion of NH as a condition of the Penn Central merger, 327 I.C.C. 475, 526-27 (1966). The only 'benefit' inclusion of NH is claimed to bring to PC is that the Commission would not have approved the Penn Central merger without it. However, the Commission has rejected the arguments of the NH bondholders based on adding to the value of NH whatever potential savings from the merger are needed to justify a high inclusion price, saying, 'This was not the intent of our decision,' 334 I.C.C. at 66, a view we had previously intimated, 289 F.Supp. at 443. There is thus a decided anomaly in the position that, looking only at the words of the statute, the Commission was required to make PC pay a price for NH which is far beyond anything NH is worth to it in an economic sense and which, by hypothesis, it can never realize.

 A more difficult question is whether the Fifth Amendment forbids application of the statute in such a manner as to produce a price less than liquidation value on the facts here presented. When the case was last before us, we indicated tentative agreement with that position. We cited authorities which established in our view that a railroad with no reasonable hope of future earnings, such as NH, had a 'constitutional right * * * to cease operations and liquidate,' 289 F.Supp. 440, since to force operation at a loss 'would be to take its property without the just compensation which is a part of due process of law.' Railroad Commission of State of Texas v. Eastern Texas R.R., 264 U.S. 79, 85, 44 S. Ct. 247, 249, 68 L. Ed. 569 (1924); Bullock v. State of Florida ex rel. Railroad Commission, 254 U.S. 513, 41 S. Ct. 193, 65 L. Ed. 380 (1921); Brooks-Scanlon Co. v. Railroad Commission, 251 U.S. 396, 40 S. Ct. 183, 64 L. Ed. 323 (1920). Despite observations in the Commission's report, 334 I.C.C. at 55-57, we adhere to that view, for reasons fully developed in the recent opinion of the qualification court, subject only to the qualification that liquidation of NH could not commence until the Commission, acting with appropriate speed under § 1(18) of the Interstate Commerce Act, had issued the certificate of abandonment to which NH would have been constitutionally entitled. We believe this position is also supported by two opinions of Mr. Justice Brandeis which we read as declaring that while Congress may in the public interest subject a secured creditor to reasonable delays in realizing on his security, it may not deprive him altogether of his right to sell the res at public auction. Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 55 S. Ct. 854, 79 L. Ed. 1593 (1935); Wright v. Vinton Branch of Mountain Trust Bank, 300 U.S. 440, 57 S. Ct. 556, 81 L. Ed. 736 (1937).

 However, we are not so sure now as we formerly were that these precedents necessarily lead to the further conclusion concerning the Commission's duty here that the NH bondholders would draw from them. The just compensation and due process clauses are triggered only by governmental action. Existence of governmental compulsion was not disputed in any of the cases cited above; it is disputed here, for PC argues that although the bondholders seek compensation for governmental taking of a right to liquidate, they never properly asserted such a right. The NH trustees petitioned for inclusion in PC about three months after the merger application was filed in 1962. The bondholders at first supported this move, and it was not until April 1967, long after the commitment to seeking inclusion was for practical purposes irrevocable, that some of them petitioned to dismiss the reorganization. Judge Anderson denied this, In re New York, N.H. & H.R.R., 281 F.Supp. 65 (D.C.1968), the decision was not appealed, and when immediate inclusion was finally ordered, it was without protest from any party except PC. If we could take all this as indicating that inclusion had in fact been sought solely because the bondholders and the trustees felt it would be more in NH's interest than abandonment, we would find nothing in § 5(2)(d) or in the Fifth Amendment that would prevent the Commission's fixing a price considerably short of liquidation value and ...

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